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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year from to
Commission File Number 000-22235
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VIDEO NETWORK COMMUNICATIONS, INC.
(Name of Small Business Issuer in Its Charter)
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DELAWARE 54-1707962
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
50 INTERNATIONAL DRIVE, 03801
PORTSMOUTH, NEW HAMPSHIRE (Zip Code)
(Address of Principal Executive Offices)
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(603) 334-6700
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered under Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.01
(TITLE OF CLASS)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $ 2,395,111
The aggregate market value of the voting common equity held by
non-affiliates as of March 17, 2000, was $37,162,973.
The number of shares of the issuer's Common Stock outstanding as of March
17, 2000, was 8,907,970 shares. Transitional Small Business Disclosure Format
(check one): Yes [ ] No [X]
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business.................................................... 3
2. Properties.................................................. 8
3. Legal Proceedings........................................... 9
4. Submission of Matters to a Vote of Security Holders......... 9
PART II
5. Market for Common Equity and Related Stockholder Matter..... 9
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
7. Financial Statements........................................ 21
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 22
PART III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act....................................................... 23
10. Executive Compensation...................................... 25
11. Security Ownership of Certain Beneficial Owners and
Management................................................ 29
12. Certain Relationships and Related Transactions.............. 32
13. Exhibits, List and Reports on Form 8-K...................... 35
14. Signatures.................................................. 38
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PART I
Unless otherwise indicated, all information in this Form 10-KSB gives
effect to a one-for-seven reverse stock split of our common stock effective as
of April 14, 1999. It also gives effect to a change in the Corporation's name to
Video Network Communications, Inc. from Objective Communications, Inc. effective
as of September 9, 1999.
Some of the statements in this Form 10-KSB are "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
involve a number of risks and uncertainties. We have made these statements based
on currently available operating, financial and competitive information.
However, actual results and future events may differ significantly from the
results contemplated in the forward-looking statements because of a number of
factors, including product and technology development, customer and market
acceptance of our product, demand for our product, the impact of competitive
products and pricing, and other risks detailed in this Form 10-KSB and in our
other Securities and Exchange Commission filings.
In this Form 10-KSB, we refer to Video Network Communications, Inc., a
Delaware corporation, as we, the Company, VNCI or Video Network Communications.
ITEM 1. BUSINESS
INTRODUCTION
Video Network Communications is a Delaware corporation formed in 1993 to
design, develop and market full motion, high resolution, cost-effective video
network systems. Users of the VidPhone video network system can view broadcast
video, participate in multi-party video conferences and retrieve stored video on
demand. Our VidPhone system distributes video to and from desktop and laptop
personal computers and conference rooms configured with VidPhone stations, over
the same wiring used by the telephone. We believe that the VidPhone system
offers greater functionality and compatibility with existing infrastructure and
higher quality than other video network or conferencing systems available today.
INDUSTRY BACKGROUND
Business demand for video communications, historically limited primarily to
video conferencing, is driven by the desire to achieve the most effective means
of communication. Information that is exchanged or presented visually, such as
during in-person meetings or video presentations, has a stronger impact on the
end-user than non-visual communication. People cannot always exchange or present
information in person, and technology limitations and cost constraints have
restricted the use of video applications. Consequently, people rely on non-
visual forms of communication, such as telephony, voice mail and e-mail. Recent
video application developments such as targeted broadcasting and conferencing
achieve the effectiveness of face-to-face meetings while retaining the
convenience of a telephone call.
We believe that video networks that fully support video broadcast, video
retrieval and video conferencing applications address many of the communications
requirements of the business community. Video networks can improve worker
productivity by facilitating the efficient exchange of information between
geographically dispersed parties and reducing travel expenses. In addition, they
can enable the use of video material for training and research at the
convenience of the user rather than the presenter and permit businesses to
access business broadcasts, such as CNN, CNNfn and CNBC, at a desktop or laptop
computer. To date, however, infrastructure and transmission constraints, costs
and other limitations have precluded business quality video broadcast, retrieval
and conferencing applications at individual desktops.
Until recently, most video communications systems were boardroom video
conferencing systems. These systems were expensive for most businesses. Even
today, most boardroom video conferencing systems require substantial capital
expenditures and trained personnel for set up and maintenance during video
conferencing calls. Most boardroom systems also do not provide video quality
adequate for video broadcast and retrieval and are limited by distracting
latency transmission delays that result in unsynchronized audio and video. In
addition, these systems normally require the use of the public telephone system
for all video calls, including those within a building or across a small
business campus, thereby incurring telephone usage charges for each call.
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Over the past decade, video conferencing systems have begun to evolve from
high cost, low quality, stand-alone boardroom systems to desktop systems.
However, desktop systems have not been widely adopted. We believe that this is
primarily because most video network systems produce inadequate video quality
for business purposes.
Most desktop video conferencing systems use either dedicated telephone
lines or the local area network ("LAN") to transmit video data. Some desktop
video conferencing systems use dedicated Integrated Services Digital Network
("ISDN") lines to achieve acceptable video quality (384 Kbps) for business
purposes. However, to achieve this quality, a minimum of three dedicated ISDN
lines with six associated telephone numbers must be provided to each desktop.
The installation costs of these additional lines and line use charges render
this approach prohibitively expensive on any significant scale. In addition,
these systems require the installation of either expensive and complex hardware
coder-decoders ("CODECs") in each PC, or software CODECs that render the PC
unavailable for other applications during video conferencing.
Some video conferencing systems attempt to use the LAN rather than
dedicated telephone lines. These are referred to as IP or H.323 systems.
LAN-based systems also require the installation of hardware or software CODECs
in each user's desktop or laptop computer. Data LANs were not designed for
isochronous, i.e., time dependent, data such as video and audio. LANs were
designed to be shared by individuals using the transmission medium for short
periods of time. Most LANs today do not have the bandwidth to accommodate the
volume of data inherent in full-motion video applications. Consequently, even a
single video conference would significantly diminish the capacity of most LANs
to support other users. Information technology managers resist LAN-based video
applications because of the additional volume of data and new infrastructure and
the associated maintenance required to support them. Although high speed
Ethernet and gigabit routing switches may alleviate some of the bandwidth
problems resulting from the transmission of video on the LAN, we believe that
these new technologies do not adequately address the transmission delay problems
plaguing such systems. We do not believe that asynchronous transfer mode ("ATM")
will reach desktop computers due to the high cost.
We do not expect business users to adopt video applications on any
significant scale until video systems are capable of providing cost effective
TV-quality video and FM-quality stereo audio and are cost effective. We believe
that our VidPhone video network meets these requirements because it takes
advantage of existing telephone wiring and supports high quality bi-directional
video and audio, but does not interfere with the existing telephone systems,
LAN-based computer systems or impede the performance of an individual desktop or
laptop computer.
PRODUCTS AND TECHNOLOGY
Our VidPhone system is a full-motion, high resolution, cost-effective video
network system that uses the same wiring as the telephone, which gives it a
competitive cost advantage over other types of video network systems. Users of
the VNCI video distribution system can view broadcast video and participate in
multi-party video conferences from desktop personal computers or conference
rooms.
Our VidPhone system is comprised of the following core components:
VidPhone Switch. The VidPhone switch is the heart of the Video Network
System. The switch (similar to a PBX) is a communications server that uses
VNCI's patented technology to deliver full-motion TV quality video and FM stereo
audio throughout a building or campus -- and does so over the same single
twisted pair of telephone wire that is already part of your telephony
infrastructure without disrupting telephone service.
VidModem. The VidModem connects the desktop and the VidPhone switch using
the existing telephone wiring. The desktop and VidPhone switch versions of
VidModem incorporate the patented VidModem technology that enables distribution
of TV-quality video, FM-quality stereo audio and high speed data over the single
twisted pair of copper wire that connects the telephone to the PBX or CENTREX.
The transmission does not require compression or decompression of data. The
connection is transparent to the telephone and the PBX, so the user also can use
the telephone concurrently with the VidPhone system, and the telephone operates
independent of any video applications.
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VidPhone Station Software. VidPhone station software is the software
platform supporting users of the VidPhone system. It provides an easy-to-use
graphical user interface for all video applications offered by the VidPhone
system and transforms a user's desktop or laptop computer into a VidPhone
station. The user's computer is configured with non-proprietary equipment such
as a microphone, speakers and a camera. VidPhone stations connect to the
VidPhone switch through a VidModem. A VidPhone station user can view broadcast
video participate in video conferences and retrieve stored video. VidPhone
stations may be located up to 1,000 feet from the VidPhone switch when using
category 3 wiring, and up to 2,000 feet when using category 5 wiring. We believe
that most modern business telephone systems use at least category 3 wire.
VidPhone stations do not need a terminal-resident ISDN or ATM CODECs because
they connect directly to the VidPhone switch. VidPhone stations may be easily
and inexpensively modified for conference room systems. The VidPhone system also
supports all video network applications in a large screen multi-party conference
room setting.
VidPhone Remote Terminal. VidPhone remote terminals connect remote users
who are not directly connected to a VidPhone switch through a VidModem to the
VidPhone system. Employees in branch offices, individuals working from home, and
other parties outside a building or business campus are potential users of
VidPhone remote terminals. VidPhone remote terminal users have access to all
video network functions of the VidPhone switch to which they connect; however,
the quality of the video and audio presentation will be limited by the bandwidth
of the external communications connection. VidPhone remote terminal connectivity
may be over a variety of communications circuits, such as single or multi-line
ISDN.
ISDN Gateway. Video Network Communications' ISDN Gateway is a dual port
device that allows VidPhone(R) Station users to call other VidPhone Switches
over the Wide Area Network ("WAN") or other H.320 video conferencing systems. By
leveraging VidPhone(TM) technology VNCI's ISDN Gateway makes it possible for any
VidPhone Station to originate a Wide Area Network call. VidPhone Station users
can place a call directly from their PC without having to go to a designated
ISDN wired meeting room to conduct videoconferences. With the introduction of
the Company's ISDN/IP Gateway anticipated in the second quarter of 2000, users
will be able to call other H.323-based video conferencing systems directly from
their individual desktop.
SYSTEM FUNCTIONALITY
The VidPhone system can support three business video requirements.
Broadcast Video. Sources of broadcast video material include, but are not
limited to, satellite broadcasts, cable television, and narrowcasts over an ATM
network. These sources are connected to the VidPhone switch through a specially
designed circuit card. The user selects the desired broadcast from a menu using
standard point-and-click techniques. The non-blocking architecture of the
VidPhone switch permits multiple users to simultaneously access the same
broadcast video source without degrading system performance.
Video Conferencing. The VidPhone system supports two-way and multi-party
video conferencing. A VidPhone system user can maintain a telephone directory
and contact other VidPhone users using standard point-and-click techniques at
any time without prior coordination.
Retrieval of Stored Video. VidPhone system users can access video material
stored on a variety of different types of devices, such as a video server, a
VCR, and a DVD player. Users access stored video using point-and-click
techniques similar to those used to access broadcast video.
SALES AND MARKETING
Our sales and marketing strategy is to create brand-name recognition of the
VNCI VidPhone System. We actively promote the VidPhone system through various
initiatives including press releases, targeting key media outlets, direct
mailing campaigns, presentations to industry analysts and consultants,
technology announcements, formal product launches, and participation in trade
shows.
Resellers. We market our VidPhone system directly and through telephone
product and service companies, systems integrators and VARs who generally will
market and sell our video network system as an upgrade to their existing
customers' telephone and information systems. We currently have agreements with
more than a dozen
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resellers. In part, our strategy is to capitalize on the drive by some of the
telephone product and service resellers to gain prominence in the corporate
information systems market. The attributes of the VidPhone system enable our
resellers to offer a fully functional video network that competes directly with
video network functions offered by computer and LAN vendors. We believe the
VidPhone system is more attractive to information technology administrators than
LAN-based systems because it does not use LAN bandwidth, compromise LAN
integrity, effect LAN reliability or use significant personal computer
processing power. The VidPhone system architecture also enables information
technology administrators to centrally manage system resources and feature
upgrades. The VidPhone system provides higher quality video and audio than any
LAN-based system currently available.
Telephone product and service providers, systems integrators and VARs offer
sales, service and support and have large customer bases. These distribution
channels have a large existing customer base that is generally receptive to
system upgrades. We have an agreement with Bell Atlantic to market and sell our
video network to the Department of Defense and other governmental agencies and
we are renewing our strategic alliance with Unisys, a major systems integrator
that resells our VidPhone system to the federal government, however, no sales
have been made to date.
We have a limited operating history and, therefore, we do not have any
substantial basis on which to predict our sales cycle. However, we expect that
we will have a relatively long sales cycle for our products, in part because of
our strategy of marketing our VidPhone system through resellers. It takes a
relatively long time for us to establish a relationship with our resellers. It
also takes time for us to familiarize our resellers and their personnel with the
VidPhone system and to train the resellers' sales force. However, we also expect
that the time involved in our sales cycle will decrease after we establish
customer reference accounts, create brand name recognition of the VidPhone
system and have longer, more established relationships with our resellers.
Direct Sales. We have a small internal direct sales force to promote our
VidPhone system, to create reference accounts in major markets, and to support
our third-party resellers. We recently hired a new Vice President Sales and
Marketing and we intend to continue to develop our direct sales force, focusing
on adding a small number of sales people in specific geographic areas to further
our sales and marketing efforts.
Vertical Distribution Channels. We are developing vertical distribution
channels for our VidPhone system. Initially, our sales and marketing efforts
target education, the government and the financial and medical industries. We
are targeting the government sector because it tends to adopt technology early
and has many uses for a video network system. We are targeting the financial,
education and medical industries because these industries have a demonstrated
need to broadcast and distribute video to many users at their desktop computers.
Customer Service and Support. We expect that our resellers will provide
their customers with service and support for the VidPhone system. In addition,
we maintain a customer support department that assists our resellers and
end-user customers with problems related to our video network system, including
the initial installation of the VidPhone system, technical questions, problem
resolution and systems engineering. As our resellers become more familiar with
the VidPhone system, we expect that they will be the primary customer support
for our products to their customers, and that our customer support department
will become a secondary customer support, focusing on providing service
regarding issues like software performance and hardware re-engineering
requirements. We also expect that, in the future, our customer support
department will provide services to our resellers rather than to the end-user
customer.
Training. To promote reseller sales and marketing efforts, as well as
resellers' support for our products, we hold in-depth training programs to
educate our resellers about our products. During 1999, we held training classes
for reseller sales, support and service personnel, both at our facilities and at
our resellers' facilities. We intend to increase the number and availability of
our training programs in the future, which we believe will help build brand
awareness, promote reseller sales and marketing of the VidPhone system, and
improve reseller service and support for our VidPhone systems.
PRODUCT RESEARCH AND DEVELOPMENT
During 1997, our research and development efforts focused on completing the
initial development and production of the VidPhone system. We introduced the
VidPhone system in the fourth quarter of 1997, and we
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made the first shipments of the commercial VidPhone system in the third quarter
of 1998. Since then, our research and development has focused on:
- adding new features to existing product lines requested by our
customers;
- creating new products in response to customer demand;
- adding additional user capacity to the VidPhone system; and
- lowering production costs.
Our engineering staff closely monitors technical developments and works
with our marketing personnel to assess evolving business video network
requirements. We will monitor emerging technologies that support new video
applications for business and tailor our research and development accordingly.
In addition to our internal research and development resources, we engage
contract engineering services when we believe that the use of such services will
be efficient. Research and development efforts target both hardware and software
enhancements to video network capabilities. Our research and development efforts
are complemented by internal quality and assurance procedures.
INTELLECTUAL PROPERTY
Our proprietary VidModem transmission technology, incorporated in our
VidPhone system, is covered by two U.S. patents issued in April 1997 and July
1998. These patents relate to a method and apparatus for transmitting video
information over telephone wiring. Additionally, we have received a notice of
allowance from the Canadian patent office on a Canadian patent application
relating to the VidModem technology, and we expect to receive a Canadian patent
for the technology.
We also are currently prosecuting a patent application covering the
VidPhone system's networking and switching technology, and we have pending
patent applications for a scalable high-speed packet switch and for a U-channel
interface device. We have received a notice of allowance from the U.S. Patent
and Trademark Office for the U-channel interface patent application, and expect
to receive a U.S. patent covering that technology during 2000. We have
additionally received an indication from the U.S. Patent and Trademark Office
that various aspects of the scalable high-speed packet switch are patentable,
and expect to receive another U.S. patent covering that technology during 2000.
Foreign patent applications are also pending for this technology.
We cannot predict when we will receive a dispositive ruling from the U.S.
Patent and Trademark Office concerning these patent applications. We may file
additional patent applications in 2000. The success of our products depends in
part on our continuing ability to obtain and protect patents, licenses and other
intellectual property rights covering our significant hardware and software
products. We have registered the trademarks Video Network Communications,
VidPhone, and VidModem.
The process of seeking patent and trademark protection can be long and
expensive, and there can be no assurance that patents and trademarks will issue
from currently pending or future applications or that any patents or trademarks
that are issued will be of sufficient scope to provide meaningful protection or
any commercial advantage to us.
MANUFACTURING
We outsource the manufacture and assembly of components used in the
VidPhone system. In particular, we outsource the production of the VidPhone
switch to various contract manufacturers. Several manufacturers are producing
smaller sub-assemblies and components for us. We believe we will be able to
continue to outsource production and that there are a number of manufacturers
qualified to produce components of our VidPhone system, because the production
process is relatively routine and does not require any unique expertise.
Although our products incorporate unique, patented technology, we also believe
that all of the components used in our equipment are readily available from
commercial suppliers. As a result, we do not believe that we depend on any
single manufacturer or supplier to a material extent. All products produced by
third-party manufacturers are shipped to us for final assembly, systems
integration and quality assurance testing. We plan to retain test and quality
assurance functions until subcontractors can be certified with respect to
quality. Any difficulties
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encountered with third-party manufacturers could result in product defects,
production delays, cost overruns or the inability to fulfill orders on a timely
basis. Any of these difficulties could have a material adverse effect on us.
COMPETITION
The market for our video network products is new, highly competitive and
rapidly evolving. We believe that the principal competitive factors in the
markets in which we compete are product performance, price and product support.
Our principal competitors in the video network market are Viewcast, FVC.com and
Avistar. We also expect to compete with new entrants in the market and with
providers supporting IP and LAN-based video networks, including Intel,
Microsoft, and Cisco. To date, no desktop system has captured any significant
portion of the potential market.
Our video network system permits users to view broadcast video, participate
in multi-party video conferences and retrieve stored video on demand all from
their individual desktops. As a result, we also compete with companies that
offer video broadcast and video retrieval products. Competitors in the video
broadcast market include cable television and direct satellite broadcast system
providers such as DirecTV, TCI, and News Network Vision.
Virtually all of our competitors have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. We believe that we will be able to
compete effectively against larger companies with substantially greater
resources on the basis of our product's capabilities, our distribution strategy,
and price. We do not believe that LAN-based competitors will be able to provide
two-way business quality video network systems in the foreseeable future. There
can be no assurance, however, that we will be able to compete successfully
against these or future competitors.
GOVERNMENT REGULATION
The Federal Communications Commission ("FCC") regulates the operation of
telecommunications equipment for use in the United States. The VidModem and
VidPhone switch components of the VidPhone system must comply with certain FCC
regulations.
VidModem. The VidModem is a Class A digital device that may be operated
without an individual license. Under FCC regulations, we will be required to
follow a verification procedure consisting of a self-certification that the
radio frequency device complies with applicable regulations. A qualified,
independent testing facility tested the VidModem and it was found to comply with
FCC regulations.
VidPhone. We obtained equipment registration from the FCC for certain
VidPhone system components, including the VidPhone switch, that are connected to
the public switched telephone network.
Future government regulations could increase the cost of bringing products
to market or adversely effect our ability to market and sell our products or
technology.
EMPLOYEES
As of February 29, 2000, we had approximately 44 full time employees and 2
part-time employees. We also use the services of temporary administrative staff,
technical consultants and subcontractors on an as-needed basis. Each employee
and consultant has executed a confidentiality agreement. We have employment
agreements only with James F. Bunker, our Chairman, and Carl Muscari, our
President and Chief Executive Officer.
ITEM 2. PROPERTIES
We lease one facility in Portsmouth, New Hampshire at a current monthly
rental rate of $11.00 per square foot under a lease that expires in March 2008.
Rent on the facility increases over the term of the lease from an initial rate
of $11.00 per square foot to $15.00 per square foot. That facility consists of
approximately 26,000 square feet, of which approximately 13,000 square feet is
office space, approximately 6,500 square feet is a research and development
laboratory, and approximately 6,500 square feet is a production facility used
for equipment assembly and testing, customer support, and training.
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ITEM 3. LEGAL PROCEEDINGS
We are not party to any lawsuits at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock traded on the Nasdaq SmallCap Market from April 3, 1997 to
October 30, 1997 and traded on the Nasdaq National Market from October 31, 1997
to April 30, 1999. As of May 3, 1999, our common stock trades on the Nasdaq
SmallCap Market. The following table sets forth, for the periods indicated, the
range of high and low sales prices per share reported on such quotation systems
as adjusted to reflect the one share for seven shares reverse split in the
common stock that occurred on April 14, 1999.
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AS ADJUSTED
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PERIOD ENDING HIGH LOW
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March 31, 1998.............................................. $173.250 $101.066
June 30, 1998............................................... 141.750 46.375
September 30, 1998.......................................... 67.375 18.375
December 31, 1998........................................... 38.500 12.250
March 31, 1999.............................................. 24.941 5.908
June 30, 1999............................................... 7.658 2.438
September 30, 1999.......................................... 5.469 2.031
December 31, 1999........................................... 4.313 1.625
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At March 17, 2000, the last sale price per share of common stock as
reported on the Nasdaq National Market was $4.250. As of February 11, 2000,
there were approximately 174 holders of record of our common stock.
We have not paid cash dividends on our common stock in the past. We expect
to retain all earnings generated by our operations for the development and
growth of our business, and do not anticipate paying any cash dividends to
holders of our common stock in the foreseeable future. The payment of future
dividends on the common stock and the rate of such dividends, if any, will be
determined by our Board of Directors in light of our earnings, financial
condition, capital requirements and other factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Some of the statements in this Form 10-KSB are "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
involve a number of risks and uncertainties. We have made these statements based
on currently available operating, financial and competitive information.
However, actual results and future events may differ significantly from the
results contemplated in the forward-looking statements because of a number of
factors, including product and technology development, customer and market
acceptance of our product, demand for our product, the impact of competitive
products and pricing, and other risks detailed in this Form 10-KSB and in our
other Securities and Exchange Commission filings.
You should read the following discussion of our operating results in
conjunction with the audited financial statements and notes thereto appearing
elsewhere in this Annual Report on Form 10-KSB.
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OVERVIEW
We design, develop, manufacture, market and sell a real-time video network
system that operates using our proprietary video switch over existing telephone
lines without interfering with normal telephone system functionality. With our
video system users can retrieve stored video from a video server and view video
"on demand," broadcast video to users throughout the video intranet and
participate in interpersonal video communications.
Our video network systems offers television quality video applications
within the video intranet so that voice and video are completely matched, and
also enables video delivery and interpersonal communications to users outside of
the video intranet via the wide area network ("WAN"). We believe that users need
an effective video network solution, and that VNCI video network solutions offer
businesses a high quality, comprehensive and powerful means to deliver video
over the "last mile of the information superhighway."
We are a relatively new company offering a new technology product. We first
introduced our technology and initial products in late 1998 and our products
first demonstrated commercial readiness during the first half of 1999. The price
for our typical 30-user video network system is approximately $132,250 including
installation. We believe that we have shown revenue and sales growth over the
past nine months despite limited sales and marketing resources and our unstable
financial condition during the period. However, we believe that in order for our
company to be successful, we will need to achieve a significantly higher level
of sales in a relatively short time, which may require substantially higher
sales and marketing expenditures in the future. At this time, we do not have the
financial resources to expend on the level of sales and marketing that may be
required to achieve this growth and we are not certain when or whether we will
be able to attain those resources. We do not expect that our revenues will be
sufficient to support the operating expenses necessary to achieve our desired
level of sales growth for the foreseeable future.
We reported revenues of $2,395,000 in 1999, an increase of $1,629,000, or
213%, when compared with revenues reported in 1998. Our total operating expenses
in 1999 of $10,460,000 were approximately $12,285,000, or 54% lower than 1998.
Our revenues in 1999, while significantly higher than in 1998, were
significantly below our internal projections. At this early stage of development
it is difficult for us to predict with accuracy the level of our sales in a
given period, or when our marketing initiatives will result in sales. Each sale
of our equipment continues to account for a significant portion of our revenues.
Accordingly, we expect to continue to experience significant, material
fluctuations in our revenues on a quarterly basis for the foreseeable future. We
believe that our revenues for 1999 are indicative of our early stage of
development rather than of our prospects or strategic position.
We have a limited operating history and, therefore, we do not have any
substantial basis on which to predict our sales cycle. To date, our sales cycle
has been relatively long and we expect that will continue for the foreseeable
future. It takes substantial time for us to establish relationships with our
resellers and potential end-user customers. It also takes time for us to
familiarize our resellers and end-users with our video network system, the
manner in which it operates and its potential uses. In the case of our
resellers, we also have to train their sales forces about our product.
In addition, our video network system is a new technology product. Video is
still a relatively new tool for businesses and is not widely used in e-commerce.
Further, many prospective customers have invested in or used video conferencing
systems and have been disappointed with the voice and video that most existing
systems offer. For most of our potential end-user customers, our video network
system requires a substantial capital investment. Accordingly, we have found
that we need to educate our resellers and prospective end-user customers about
the benefits to business from investing in our video network system and often
need to overcome performance-related concerns about video that our customers may
have.
For all of these reasons, we believe that it takes end-user customers at
least several months to decide to purchase our video network system. We expect
our sales cycle will decrease after we establish customer reference accounts,
create greater brand name recognition of our video network system, and have more
established relationships with resellers. We also believe that if we are able to
make a significant investment in marketing and advertising our video network
system in the future, we would significantly increase sales and revenues. At
this
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time, we do not have the financial resources necessary to invest in the level of
advertising and sales campaigns that we believe would be required to create
strong, consistent market demand for our products.
Although we distribute and sell our products primarily through resellers,
we typically ship our video systems directly to end-user customers and install
them at the customers' locations. Our video network system technology is new and
the purchase of our system requires a significant capital investment. Generally,
our policy is to permit new prospective end-user customers to evaluate our video
network system for 30 to 45 days. After that period, we generally require
customers to pay for the system in full within 30 days, or to return the
product. In some cases, we require a down payment at the time an order is
placed.
Our recent public offering, which took place in the second quarter of 1999,
and our financial restructuring in late 1998 and early 1999 have given us a
foundation on which to build our business. However, we do not anticipate that we
will be able to achieve our desired "break-away" level of performance that would
produce consistent, progressive performance for the foreseeable future. During
this period, we expect that our performance will continue to be volatile, but
that revenues will trend upward.
As part of our sales and marketing ramp-up, we have engaged highly
reputable public relations and marketing communications firms. We have retained
these firms to advertise our video network products to the business community in
an effort to familiarize them with our products and their capabilities. These
firms also will market our video network system to targeted markets including:
education, the financial services industry, medical facilities, legal, and
government markets. We believe that our video network offers unique,
cost-effective benefits and provides an alternative method of providing training
and educational opportunities for these critical targeted markets. In parallel
with these efforts, our management is aggressively recruiting experienced sales
and marketing talent, and continuing to evaluate and develop the effectiveness
of its existing direct sales and reseller organizations. Stephen A. LaMarche was
recruited as our new Vice President Sales and Marketing in December 1999 and
joined the Company in January 2000.
We also believe that partnering with the right strategic partner would help
our video network system achieve greater industry presence and gain recognition
among potential business customers, which we believe could contribute
significantly to our business strategy. We continue exploratory discussions with
Internet content providers, satellite communications companies, and units of
Regional Bell Operating Companies ("RBOCs") regarding possible strategic
relationships to jointly deliver video to the business desktop. These
discussions are preliminary so we cannot predict whether we will be successful
in our efforts to form strategic alliances or, if we form those alliances,
whether the alliances will contribute to our success. However, we believe that
these strategic joint ventures would be an excellent means for us to access an
existing business customer base that seeks a cost effective video solution and,
thus, could provide the best opportunity for us to successfully market and
advertise our video network solutions.
In 2000, we intend to focus on selling and marketing our video network
solutions and continuing product development to meet customer demands for new
functionality and to lower the cost of our systems. Specifically, our goals are
to: (i) develop new strategic partnerships committed to marketing our video
network system as the video solution of choice to business users; (ii) use our
current strategic and reseller arrangements to increase sales of our systems and
create brand name recognition of our product, (iii) significantly enhance our
marketing and public relations programs to create better awareness of our
products among customers, industry analysts and financial analysts, (iv) develop
our direct sales; and (v) continue engineering our video network system to
refine and improve its functionality to meet new customer requirements and to
lower our costs and the price of our system through improved design. Our ability
to meet these objectives is subject to a number of risks and uncertainties,
including our ability to develop new strategic relationships with significant
potential resellers, our ability to sell and market our product and develop
market awareness of our video network system and our ability to obtain financing
when required. We cannot assure you that we will be able to meet these
objectives. We plan to continue to subcontract all major manufacturing and
production activities for the foreseeable future, but we will continue to retain
test and quality assurance functions until all subcontractors are certified with
respect to quality.
We expect to continue to incur significant operating expenses to support
our product development efforts and to enhance our sales and marketing
capabilities and organization, but we anticipate that our product development
expenditures will be lower than in prior years because we have introduced the
commercial version of our video
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network system. We expect that our results of operations will vary significantly
from quarter to quarter for the foreseeable future.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Revenues. We recognized $2,395,000 in revenues during 1999 compared to
$766,000 recognized in 1998. Of these revenues, $1,912,000 related to product
sales in 1999 compared to $766,000 in 1998. The increase in revenues is caused
by an increased number of customers in 1999 compared to 1998 and by the
recognition of revenues on services in 1999. Revenues related to installation
and other services were $483,000 in 1999. We did not recognize any service
revenues in 1998. Revenues earned in 1999 reflected sales of equipment and
related services to approximately one dozen different customers.
Cost of Sales. During 1999, we recognized $2,652,000 in cost of sales, of
which $1,076,000 was related to product sales and $276,000 was related to cost
of providing installation and other services. Also included in the cost of
product sales in 1999 is $1,300,000 of expense related to the increase in the
inventory reserve recorded in the fourth quarter of 1999. This additional
reserve was taken against the value of certain demo equipment, $300,000, and
against potentially excess inventory on hand at December 31, 1999, $1,000,000.
We recognized $545,000 in cost of sales in 1998, entirely related to the product
revenues recognized in that year.
In the fourth quarter of 1999, the Company determined that it was no longer
in the development stage. Accordingly, the addition to the inventory valuation
reserve of $1,300,000 recorded in the forth quarter was recorded against product
cost of sales rather that against research and development, which had been the
policy while in the development stage.
Gross Margin on Sales. Overall gross margin on revenues recognized in 1999
was ($257,000). Of this gross margin, $836,000 was derived from product sales,
and $207,000 was derived from services revenues. Offsetting these gross margins
was a charge of $1,300,000 to cost of sales related to the increase in inventory
valuation reserves. The gross margin percentages achieved for product and
services revenues were 44% and 43%, respectively, after excluding the effect of
increases to inventory valuation reserves. The gross margin on sales recorded in
1998 was $221,000, or a gross margin percentage of 29%, derived entirely from
equipment sales. The increase in the gross margin on product sales is due to the
discontinuance of an inventory pricing program that was conducted in 1998.
Research and Development. Research and development costs decreased
significantly to $4,261,000 in 1999, from $11,488,000 in 1998, representing
decrease of approximately $7,227,000, or 63%. The overall decrease in costs is
primarily a result of our cost-reduction plan implemented in mid-1998.
Approximately $2,191,000 of the reduction resulted from reduced staffing costs
as engineering staffing in the research and development departments declined
from an average of approximately 49 in 1998 to approximately 24 in 1999, a
reduction in engineering support staff of approximately eight, and the reduced
use of contract labor. Recruiting and relocation expenses declined by
approximately $132,000, from approximately $181,000 in 1998 to approximately
$49,000 in 1999. Materials and supplies purchased to support research and
development activities decreased by approximately $2,483,000 relative to 1998.
During the first three quarters 1999 the Company increased the reserve for
excess and obsolete material by $250,000, compared to an increase of $1,061,000
in 1998. As noted above, while the Company was in the development stage, charges
to inventory valuation reserves were charged to research and development. Since
leaving the development stage, charges to these reserves have been charged
against product cost of sales. Decreased use of rented equipment resulted in
approximately $240,000 in cost reductions. Reduced usage of design, consulting,
and testing services also contributed approximately $357,000 to the costs
reductions during 1999, compared to the same period in 1998. In the third
quarter of 1999, the management determined a project to construct certain
testing equipment was no longer necessary. Accordingly, $355,000 of the costs
that had been capitalized relative to that project were charged off. There were
no similar charges in 1998. Allocated costs from service departments were
reduced by approximately $499,000 as research and development benefited by cost
reductions attained in those departments.
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Selling, General and Administrative Expenses. Selling, general, and
administrative expenses decreased to approximately $5,017,000 during 1999, from
approximately $9,015,000 in 1998, a decrease of approximately $3,999,000 or 44%.
The decrease in selling, general and administrative expenses reflects the
results of our cost reduction program implemented in mid-1998.
Sales and marketing expenses decreased approximately $2,783,000 in 1999 as
compared to 1998. Approximately $1,088,000 of this reduction was due to lower
marketing personnel costs, partially offset by an increase of approximately
$147,000 in staffing costs related to sales personnel. Approximately $133,000 of
the decrease was attributable to a reduction in recruiting and relocation
expenses in 1999 relative to 1998. Approximately $532,000 of the reduction was
due to reduced costs associated with advertising and trade-shows. In 1998, the
Company incurred a charge of $133,000 related to the cancellation of plans to
open a new sales office in the Metropolitan Washington, D.C. area. Approximately
$207,000 of the decrease in expenses related to reduced use of uncapitalized
tools and equipment. Approximately $751,000 of the reduction in costs were
related to reduced costs of equipment shipped to demonstration and evaluation
sites in 1999 compared to 1998.
Customer support costs decreased by approximately $437,000 during 1999
compared to 1998. Approximately $178,000 of the decrease was due to lower
staffing costs, $64,000 was due to a decline in travel costs, and $83,000
associated with reduced use of materials and uncapitalized tools and equipment.
Approximately $95,000 of the reduction in customer service costs in 1999 was due
to the allocation of a portion of customer service department costs to cost of
sales-services.
General and administrative costs declined by approximately $779,000 in 1999
compared to 1998. The Company reduced professional services costs by
approximately $270,000 and printing and production costs associated with
production of investor relations materials by $145,000 in 1999 compared to 1998.
Costs of general supplies, printing, and postage were reduced approximately
$67,000. In 1998, the Company recorded a loss of $220,000 related to the
disposal of a leased facility. No similar charge was incurred in 1999.
Offsetting these reductions was an increase in general and administrative
staffing costs of $117,000 and recruiting and relocation expenses of $75,000.
Overall costs allocated to the sales, general and administrative departments
from service departments were reduced by $103,000.
Depreciation and Amortization. Depreciation and amortization decreased to
approximately $1,182,000 during 1999, from $2,241,000 in 1998, a decrease of
approximately $1,059,000, or 47%. We use the accelerated depreciation method for
book purposes and, accordingly, we experience higher levels of depreciation in
the early years of depreciable assets' service lives. Also contributing to the
overall reduction in depreciation expense was the disposition or retirement of
assets held at one of our locations in January 1999.
Net Interest (Income) Expense. We recorded approximately $2,213,000 of net
interest expense in 1999, compared to approximately $120,000 of net interest
income in 1998. Interest expense totaled approximately $2,350,000 during 1999,
compared to approximately $171,000 during 1998. Of the interest expense recorded
in 1999, approximately $1,847,000 was interest expense on the outstanding
unsecured promissory notes with an aggregate principal amount of $2,850,000,
that we issued in a unit offering completed in February of 1999. Included in the
interest expense recorded in connection with the unsecured promissory notes was
approximately $1,270,000 of amortization of debt discount and $472,000 of
amortization of debt issuance costs. These notes were repaid in June 1999. In
addition, we incurred approximately $324,000 in interest expense related to
long-term debt issued in connection with restructured vendor accounts payable
(including $50,000 of amortization of debt discount), $75,000 in interest
incurred on the 5% Convertible Debentures, $60,000 related to overdue vendor
payables balances, and an additional $34,000 related to capital lease
obligations.
We earned approximately $137,000 in interest income during 1999, compared
to $292,000 in interest income during 1998. The interest income recorded in 1999
was earned primarily on the invested proceeds of the public offering of common
stock that we completed in June 1999. We had lower average cash balances during
first half of 1999 available for investment compared to 1998 and accordingly
earned less interest income.
Net Loss. As a result of the foregoing factors, the net loss for 1999
decreased to approximately $12,929,000 from $22,404,000 in 1998, a decrease of
approximately $9,474,000 or 42%.
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COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Revenues. We had $766,000 in revenues in 1998, compared to no revenues in
1997. Revenues are presented net of a $22,000 reserve for returns and
allowances.
Gross Margin on Sales. Cost of sales for 1998 were $545,000, resulting in
a gross margin of $221,000 or approximately 29% of revenues. Cost of sales
includes the costs of materials, labor, and production overhead necessary to
convert purchased components to finished products. In the future, we expect to
lower the costs of production through engineering advances and purchasing
economies, and to increase gross margin while also reducing the cost of the
VidPhone system per user.
Research and Development. Research and development expenses increased
significantly to $11,488,000 in 1998, from $6,219,000 in the prior year, an
increase of $5,269,000, or 85%. Of the increase, $2,342,000 was attributable to
higher staffing costs as we added a significant number of product development
personnel during the first half of 1998. Product development staffing costs
declined during the second half of 1998, as we reduced personnel as part of our
overall cost-reduction plan. Of the overall increase in research and development
costs, $1,705,000 was due to increased materials costs, again primarily in the
first half of 1998. We also incurred approximately $610,000 in additional costs
in 1998 related to the increased use of facilities and information technology,
representing a 139% increase over 1997. In addition, equipment and equipment
rental costs to support research and development increased to $544,000 in 1998,
compared to $187,000 in 1997, an increase of approximately $357,000, or 191%.
Computer and software costs increased to $215,000 in 1998 from $91,000 in 1997,
an increase of $124,000, or 136%.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses increased significantly to $9,015,000 in 1998 from
$4,335,000 in 1997, an increase of $4,680,000, or 108%. Staffing-related costs
increased to $3,798,000 in 1998 from $1,927,000 in 1997, an increase of
$1,871,000, or 97%. Of this increase, $2,075,000 was attributable to additional
sales and marketing staff, offset by a reduction of $204,000 in general and
administrative staffing costs. General and administrative staffing costs
declined in 1998 compared to 1997 because we had a one-time, non-cash
compensation charge of $340,000 in 1997 related to a warrant exchange
transaction. Costs associated with the use of consultants and other professional
services increased during 1998 relative to 1997 by $767,000, or 123%. Of that
increase, $564,000 was attributable to non-cash charges associated with granting
options to an investment banking firm in December 1997. Sales and marketing
costs increased significantly during 1998 compared to 1997 as we introduced the
first commercial version of our VidPhone system. Advertising and promotion
costs, including installations of demonstration equipment at potential customer
or reseller sites and attendance at trade shows (exclusive of travel expenses)
increased to $1,085,000 in 1998, representing an approximately 258% increase
over 1997. In January 1999, we sold furniture and equipment to a third party in
connection with our relinquishment of a lease on excess space in Portsmouth, New
Hampshire. The loss on the sale of this equipment and on the abandonment of
leasehold improvements was an estimated $195,000, which was accrued in 1998. We
did not record any similar charge in 1997. Allocated costs related to facilities
and information technology infrastructure also increased to $580,000 in 1998
from $407,000 in 1997, an increase of $173,000, or 43%. This increase primarily
is due to significantly higher telephone costs in 1998, as we increased the
testing of the VidPhone system over ISDN lines, and higher personnel costs and
uncapitalized equipment in our information technology department. Recruiting and
relocation costs declined in 1998 by approximately $190,000 to approximately
$203,000. The higher level of such costs in 1997 was associated with the move of
the Company's headquarters.
Depreciation and Amortization. Depreciation and amortization increased to
$2,241,000 in 1998 from $829,000 in 1997, an increase of $1,412,000, or 170%.
The $1,616,000 increase in depreciation costs was offset by a $209,000 decrease
in amortization costs. Depreciation increased as a result of the significantly
higher level of depreciable fixed assets in 1998. Amortization decreased because
we amortized $209,000 of capitalized debt issuance costs upon the repayment of
debt paid from the proceeds of our initial public offering in April 1997, but we
did not incur any similar charge in 1998.
Interest Income, Net. We earned $120,000 in net interest income in 1998
compared to incurring $203,000 of net interest expense in 1997. We earned
interest income of $292,000 on invested excess cash during 1998, compared to
interest income of $272,000 in 1997. We paid interest expense of $172,000 in
1998 related to capital
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lease obligations and notes payable, compared to $475,000 in 1997. Of the
interest expense incurred in 1997, $385,000 related to the write-off of
unamortized debt discount representing the fair value of warrants we issued to
holders of notes in connection with a financing completed in November 1996.
Net Loss. Our net loss for 1998 increased by $10.8 million, or 93%, to
$22.4 million, from $11.6 million for 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative losses aggregating approximately $52.1 million
from our inception through December 31, 1999. We expect to incur additional
operating losses for the foreseeable future, principally as a result of the
expected level of our sales and expenses associated with anticipated sales,
marketing, and general and administrative expenses and product development
efforts . During 1999, we satisfied our cash requirements principally from the
approximately $14.1 million in net proceeds received from a public offering of
units in June 1999.
We had cash and cash equivalents of $2,595,000 at December 31, 1999
compared to $8,000 at December 31, 1998, an increase of approximately
$2,587,000. Increases in cash and cash equivalents were primarily the result of
the net proceeds of the June 1999 public offering of units and, to a lesser
extent, cash generated by sales of the VidPhone system during 1999, offset by
cash used in operations during the period.
Net cash used in operations during 1999 was approximately $9,666,000. The
net loss in 1999, reduced by depreciation, amortization, non-cash compensation
and other non-cash charges was approximately $8,997,000. Inventory decreased by
approximately $881,000 during 1999, primarily as a result of sales made during
the year and a $1.6 million charge to the valuation reserve, offset by an
increase of $1.1 million in inventory acquired from Sanmina upon issuance of
long-term debt. Accounts receivable increased by $192,000 during 1999 as a
result of new sales during the period, offset by cash received from customers
relating to outstanding accounts receivable. Accounts payable decreased by
approximately $6,286,000 in 1999 due primarily to the repayment of overdue
balances owed vendors from the proceeds of the public offering competed in June
1999 and to the refinancing of approximately $3,575,000 of accounts payable to
long term debt.
We generated $13,000 in cash from investing activities during 1999. We
generated $85,000 through the sale of certain office furniture and equipment,
primarily to a third-party who assumed a lease on property that we previously
occupied, offset by $72,000 in additional capital equipment.
We generated approximately $12,239,000 in cash from financing activities
during 1999. We received approximately $14,127,000 in net proceeds from the June
1999 public offering of units. The Company issued 2,300,000 units (including the
15% underwriters over-allotment) at $7.50 per unit. Each unit consisted of three
shares of common stock and two warrants to purchase common stock for $4.00 per
share.
In February 1999, the Company issued unsecured promissory notes with a face
value of $2,850,000 and 156,417 shares of common stock in return for net
proceeds of approximately $2,396,000 The net proceeds from the February 1999
private placement provided most of our operating funds during the first nine
months of 1999 until the completion of the public offering. These notes, and the
accrued interest thereon, were repaid in September, using approximately
$2,956,000 of the funds raised in our June 1999 public offering.
We also received $36,000 as an unsecured loan from an employee during 1999.
That note was repaid in September 1999.
In February of 1999, we re-negotiated amounts due to a trade creditor and
our legal counsel and converted $3,575,000 in accounts payable balance to long
term debt. In connection with the re-negotiation of such obligations, in June
1999, Sanmina Corp. one of the companies with which we re-negotiated the terms
of our outstanding obligations, transferred title to us of an additional
$1,100,000 in value of our inventory located at a Sanmina subcontractor. During
1999, we repaid $1,175,000 of the principal amount of the $4,675,000 in long-
term debt incurred in the first half of 1999. In January of 2000, we defaulted
on the interest and subsequent interest and principal payments on these notes.
We are actively re-negotiating these notes and believe that the re-negotiation
will be successful. The can be no guarantee that these re-negotiations will be
successful and should
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we be unable to re-negotiate these notes and the holders were to sue, there
could be a material adverse effect on the financial condition and cash flows of
the Company.
Immediately following the completion of our June 1999 public offering of
units, all of our outstanding shares of our Series B Preferred Stock, and
accreted dividends thereon, automatically converted to 62,162 shares of common
stock using at a conversion price of $19.25 per share.
In accordance with letter agreements dated May 1999 between the Company and
holders of our outstanding 5% subordinated convertible debentures, immediately
following the completion of our June 1999 public offering of units, all of our
outstanding convertible debentures, and interest accrued thereon, automatically
converted to 873,415 shares of common stock at a conversion price of $3.75 per
share.
Also in 1999 we paid an additional $106,000 of other notes payable and
$153,000 in capital lease obligations.
As of December 31, 1999, we had approximately $2,595,000 in cash and cash
equivalents. This had declined to approximately $2,083,000 at March 24, 2000. We
do expect that we will generate revenues from operations during the next twelve
months and we believe these additional revenues will be sufficient to fund our
operations for the foreseeable future. However, we are unable to assure that we
will generate the required revenues from sales during this period and,
therefore, cannot provide you with any assurance as to the additional financial
resources that will be available, if at all, to fund our operations.
Accordingly, we expect that in order to continue operations, we may have to
obtain additional sources of financing. Although we are currently investigating
sources of additional financing, these discussions are at a very preliminary
point, and we do not have any commitments to provide any equity or debt
financing. If we are unable to obtain additional financing when required, we
will need to consider alternatives such as a sale of the company or bankruptcy.
SUBSEQUENT EVENTS
In January 2000, the Company did not make the scheduled interest payments
on its long-term debt held by Sanmina and its legal counsel, as required by the
terms of the two notes. In addition, the Company has not made any of the
required monthly payments of principal and interest on these two notes, which
were required to be paid beginning in February 2000. The Company is in the
process of renegotiating the terms of these two notes. However, to date, the
Company has not reached agreement with either Sanmina or its legal counsel
regarding any such re-negotiation and there can be no assurance that any
restructured debt arrangement will be reached. If the Company is unable to
re-negotiate the terms of either note, it could have a material adverse effect
on the Company.
On December 31, 1999, the Company entered into an Agreement with
b2bvideo.com, Corp., a high technology startup company that intends to provide
aggregated business video content to the business market. The Agreement was to
become effective that day after the closing of b2bvideo.com's proposed private
placement of Series A Preferred Stock in the first quarter of 2000. The
Agreement provides that VNCI receive an equity position in b2bvideo.com in
exchange for favorable purchase terms and conditions regarding technical support
and equipment provided to b2bvideo.com by VNCI. B2bvideo.com's private placement
closed on March 14, 2000. VNCI received one million shares of common stock,
equivalent to an ownership percentage of approximately fourteen and one half
percent (14.5%) on a fully diluted basis on the closing date assuming conversion
of all Series A Preferred Stock. Mr. James F. Bunker, Chairman of the Board of
VNCI and a director of b2bvideo.com participated in the private placement
purchasing less than one percent of the total offering. Ms. Cheryl Snyder, CEO
of b2bvideo.com, is a director of VNCI.
RISK FACTORS THAT MAY EFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following are some of the important risks associated with our business
and our strategy, which could impact our future financial condition and results
of operations. You should read and consider carefully the following risk
factors.
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WE WILL REQUIRE ADDITIONAL FINANCING.
We estimate that our cash on hand and anticipated receipts from operations
will fund operations for the foreseeable future. However, changes in the market
in which we operate, in our business, or in our business plan could increase our
need for additional capital. Our future capital requirements could exceed our
current expectations as a result of increases in the cost of manufacturing and
marketing activities, the size of our research and development programs, the
length of time required to collect accounts receivable, and competing
technological and market developments.
Should we exhaust our current cash, we will need additional cash to
continue operating. To date, the cash generated from operations has not been
sufficient to fund our business and we have been dependent on financings to
continue operating. We expect that we will continue to require outside debt or
equity financing for the foreseeable future. We do not currently have any lines
of credit or bank financing, and we do not anticipate having access to bank
financing for the foreseeable future. We may not be able to raise any additional
money through equity or debt financings on acceptable terms or at all. If we
were to raise additional funds through the issuance of equity or convertible
debt securities, existing investors could be substantially diluted, or we could
issue securities that have preferences and privileges that our outstanding
securities do not have. If we are not able to complete additional financings or
generate funds when capital is needed, we will not be able to continue
operating.
WE MAY BE UNABLE TO MEET THE PAYMENT SCHEDULE ON NOTES PAYABLE
In February of 1999, we re-negotiated amounts due to a trade creditor,
Sanmina Corp., and our legal counsel and converted $3,575,000 in accounts
payable balances to long-term debt. In connection with the re-negotiation of
such obligations, in June 1999, Sanmina transferred to us title to an additional
$1,100,000 in value of our inventory located at a Sanmina subcontractor. In the
first half of 1999, we repaid $1,175,000 of the principal amount of the
$4,675,000 in long-term debt incurred in the first half of 1999. In January
2000, we defaulted on the interest and subsequent interest and principal
payments in these notes. We are currently re-negotiating the repayment terms of
these notes and consider a successful re-negotiation essential to meeting our
business objectives. While we believe we will be successful in the
re-negotiation of the terms of the notes, there can be no assurance that we will
be able to restructure the terms. Failure to re-negotiate the terms of these
notes would have a materially adverse effect on the financial condition and cash
flows of the Company.
CUSTOMERS MAY NOT BUY OUR PRODUCTS DUE TO CONCERNS OVER OUR VIABILITY.
Due to our recurring losses from operations and lack of cash, some
potential customers may decide not to purchase our video network system because
of concerns that we may be unable to service, enhance or upgrade the systems. If
we are not able to alleviate concerns about our long-term viability, we may not
be able to market and sell our video network system successfully and continue
operations.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE.
We have incurred substantial losses from operations to date and had an
accumulated deficit of approximately $52.1 million through December 31, 1999.
Our financial statements for the year ended and as of December 31, 1999, and the
report of our independent accountants on those financial statements, indicate
that there is substantial doubt about our ability to continue as a going
concern. We expect to continue to lose money for the foreseeable future.
We recognized only $766,000 in revenues from the sale of products during
the year 1998, and recognized only $2.4 million in revenues during 1999. We did
not recognize any revenues in 1997. Accordingly, there is no historical basis
for you to expect that we will be able to realize operating revenues or profits
in the future. We have a limited number of orders for delivery early in 2000 and
we cannot predict with accuracy what our revenues will be in the future. Our
ability to recognize operating revenues in the future will depend on a number of
factors, certain of which are beyond our control, including:
- customer acceptance of products shipped and installed to date and in the
future;
- our ability to generate new sales of products and secure customer
acceptance; and
- the timing of customer payments.
17
<PAGE> 18
WE HAVE A LIMITED OPERATING HISTORY.
Although we were incorporated in 1993, we focused on research and
development until we shipped our first commercial products in the third quarter
of 1998. James F. Bunker, our Chairman, has been with us since only July 1998
and Carl Muscari, our President and Chief Executive Officer, joined us in
September 1999. In January 2000, we hired Stephen A. LaMarche as Vice President
Sales and Marketing. Accordingly, we have limited experience managing the
Company since we shipped our first commercial video network system. Because of
our limited operating history, you have limited information on which to assess
our ability to realize operating revenues or profits in the future.
WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS EFFECTIVELY.
We Depend on Our Resellers. We distribute our products primarily through
major sellers of telephony products, system integrators and value-added
resellers (VARs). Currently, we have agreements with approximately one dozen
resellers. These arrangements are for relatively short contractual periods and
may be terminated under certain circumstances. We cannot assure you that we will
be able to maintain existing relationships or establish new relationships. We
compete for relationships with third-party resellers with larger,
better-established companies with substantially greater financial resources. If
we cannot maintain our current reseller relationships and cannot develop new
relationships, we may not be able to sell our video network system.
Resellers May Not Be Effective Distributors. Sales to third-party
resellers are expected to generate a significant part of our future revenues.
However, we have sold only a limited number of video network systems and
components under our reseller arrangements, and to date have recognized minimal
revenues from those sales. We currently have limited orders from our resellers
for additional sales of video network systems. If our resellers fail to market
and sell our products, or our products fail to become an accepted part of the
resellers' product offerings, the value of your investment could be reduced.
We May Not Be Able To Develop Direct Sales and Marketing Capabilities. We
expect to depend on the marketing efforts of our resellers for the foreseeable
future. However, we are also developing a direct marketing and sales capability
to promote our video network system and to support our resellers and end-user
customers. We cannot assure you that we will be able to create awareness of, and
demand for, our products through our marketing efforts, or that the development
of our direct marketing capabilities will lead to sales of our products and
services. If we cannot successfully develop our own sales and marketing
capabilities, we may not succeed in building brand-name recognition of our
system, and we will remain solely dependent on reseller efforts.
THE MARKET FOR VIDEO COMMUNICATIONS PRODUCTS MAY NOT DEVELOP.
The market for video communications products is new and is rapidly
evolving. As is typical for a new technology, demand for and market acceptance
of new products is unpredictable. If the market for video communications
products fails to develop or develops more slowly than expected, our business
and financial condition could be materially and adversely affected.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY.
Our success will depend, in part, on our ability to protect our
intellectual property rights to our proprietary hardware products. Toward that
end, we rely in part on trademark, copyright and trade secret law to protect our
intellectual property in the U.S. and abroad. The degree of protection provided
by patents is uncertain and involves largely unresolved complex legal and
factual questions.
The process of seeking patent and trademark protection can be long and
expensive, and there is no assurance that any pending or future applications
will result in patents and/or registered trademarks. Further, we cannot assure
you that any proprietary rights granted will provide meaningful protection or
any commercial advantage to us. We also cannot assure you that claims for
infringement will not be asserted or prosecuted against us in the future,
although we are not presently aware of any basis for claims. A number of
companies have developed and received proprietary rights to technologies that
may be competitive with our technologies. Most of these entities are larger and
have significantly greater resources than we do. Given the rapid development of
technology in the telecommunications industry, we cannot assure you that our
products do not or will not infringe upon the proprietary rights of others.
18
<PAGE> 19
WE DEPEND ON THIRD-PARTIES FOR MANUFACTURING.
We outsource the manufacturing and assembly of many of the components of
our products. We cannot assure you that our subcontractors will continue to
perform under our agreements with them or that we will be able to negotiate
continuing arrangements with these manufacturers on acceptable terms and
conditions, or at all. In particular, our failure to pay these manufacturers
when due during 1998 and early 1999 could effect their willingness to continue
working with us. If we cannot maintain relationships with our current
subcontractors, we may not be able to find other suitable manufacturers. Any
difficulties encountered with these manufacturers could cause product defects
and/or delays and cost overruns and may cause us to be unable to fulfill orders
on a timely basis. Any of these difficulties could materially and adversely
effect us.
SALES OF A LARGE NUMBER OF SHARES IN THE PUBLIC MARKET COULD REDUCE THE MARKET
PRICE OF OUR EQUITY SECURITIES.
Substantially all of our currently outstanding shares of common stock have
been registered for sale under the Securities Act of 1933, are eligible for sale
under an exemption from the registration requirements or are subject to
registration rights pursuant to which holders may require us to register their
shares in the future. Sales or the expectation of sales of a substantial number
of shares of our common stock in the public market could adversely effect the
prevailing market price of our common stock and other equity securities.
OUR MARKET VALUE IS HIGHLY VOLATILE.
The market price of our common stock has been highly volatile and may
continue to fluctuate in the future. We completed an initial public offering of
295,714 shares of our common stock at a price of $38.50 per share in April 1997.
In November 1997 we completed a second public offering of 142,857 shares of
common stock at a price of $161.875 per share. In June of 1999 we completed a
third public offering of 2,300,000 units, each unit consisting of three shares
of common stock and two warrants with an exercise price of $4.00, at a price of
$7.50 per unit. On March 17, 2000, the last sale price per share of our common
stock as reported on the Nasdaq SmallCap market was $4.250. As a result of our
stock price volatility, it is difficult to determine the market value of our
Company. You cannot be sure how the price of our equity securities might change
in the future.
YEAR 2000
As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk for possible
miscalculations or systems failures causing disruptions in their business
operations. This is commonly known as the Year 2000 (or "Y2K") issue. The Y2K
issue can arise at any point in a company's supply, manufacturing, processing,
distribution, and financial chains.
We have evaluated the impact of the Y2K issue on our operations. We believe
that the VidPhone system is not susceptible to Y2K problems because the VidPhone
system does not contain an internal clock. We also have evaluated whether
equipment and software that we use or that is embedded in the VidPhone system is
Y2K compliant. Through February 2000, we had not experienced any Y2K related
issues with the VidPhone system. If, however, the equipment or software
currently used or produced by us proves to be susceptible to the Y2K issue, we
may incur significant costs to modify, re-program or replace the effected
equipment or software in the future
As of February 29, 2000, we had not experienced any Y2K-related issues with
any of our major suppliers. Future Y2K-related failure of any of our significant
supplier's systems could result in our inability to supply products to our
customers and adversely effect our financial condition, operating results and
cash flow.
We do not expect our potential customers to reduce their capital
expenditure budgets or to defer purchases of the VidPhone system because of
concern about potential Y2K issues. We do not believe that the existence of Y2K
issues with respect to other technologies will materially adversely effect sales
of VidPhone systems.
Our assessment of the impact of Y2K on our operations is based on current
facts. Accordingly, we cannot assure you that there will not be interruptions or
other limitations of financial and operation systems functionality or that we
will not incur greater costs than projected to avoid such interruptions. Our
expectations about future costs associated with the Y2K issue are subject to
certain uncertainties that could cause actual results to have a
19
<PAGE> 20
greater financial impact than currently anticipated. Factors that could
influence the amount and timing of future costs include our success in
identifying Y2K issues, the costs of remediation or avoidance, the costs of
assessing third-party compliance and its impact on our operations, and other
factors. Costs incurred to date have been insignificant. The forward-looking
statements discussed in this section regarding Y2K compliance involve a number
of risks and uncertainties, including those described above, and general
economic conditions, the competitive environment in which we operate, and other
risks and uncertainties identified elsewhere in this Form 10-KSB.
GOVERNMENT REGULATION
Several components of the VidPhone video network system, e.g., the VidModem
and VidPhone Switch, must comply with certain regulations of the Federal
Communications Commission ("FCC"). Under FCC regulations, we will be required to
follow a verification procedure consisting of a self-certification that the
VidModem complies with applicable regulations pertaining to radio frequency
devices. A qualified, independent testing facility tested the VidModem, and it
was found to comply with FCC regulations. We obtained equipment registrations
from the FCC for certain VidPhone system components, including the VidPhone
switch, that are connected to the public switched telephone network.
Although we believe that at present our video network system complies with
all applicable government regulations, future government regulations could
increase the cost of bringing products to market or adversely effect our ability
to market and sell our products and technology.
NEW ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current operations or
other comprehensive income, depending upon whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company anticipates that, due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a material impact on its results of
operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 sets forth guidelines for accounting and disclosures
related to revenue recognition. SAB No. 101 does not require registrants that
have not applied this accounting to restate prior financial statements, provided
they report a change in accounting principle in accordance with Accounting
Principles Board Opinion N. 20, "Accounting Changes," no later than the first
fiscal quarter of the fiscal year beginning after December 15, 1999. In March
2000, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101A, "Amendment: Revenue Recognition in Financial Statements" ("SAB 101A").
SAB 101A delays the implementation of SAB 101 by one quarter ending June 30,
2000 for registrants with fiscal years that begin between December 16, 1999 and
March 15, 2000. The Company anticipates that the adoption of SAB No. 101 will
not have a material impact on its results of operations, financial position or
cash flows.
INFLATION
The impact of inflation on our business has been insignificant to date, and
we believe that it will continue to be insignificant for the foreseeable future.
20
<PAGE> 21
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-1
Balance Sheets as of December 31, 1998 and 1999............. F-2
Statements of Operations for the years ended December 31,
1997, 1998, and 1999...................................... F-3
Statements of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1997, 1998, and 1999......... F-4
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... F-5
Notes to Financial Statements............................... F-6
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Video Network Communications, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Video Network
Communications, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
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 has suffered recurring losses from operations,
has negative cash flows from operations and has an accumulated deficit that
raise substantial doubt about its 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.
Boston, Massachusetts
March 28, 2000
PricewaterhouseCoopers LLP
F-1
<PAGE> 23
VIDEO NETWORK COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 8,532 $ 2,594,529
Account receivable, less allowance for doubtful accounts of
$22,246 and $-0- in 1998 and 1999, respectively........... 184,670 376,580
Inventory................................................... 5,793,801 4,913,115
Other current assets........................................ 250,709 107,379
------------ ------------
Total current assets........................................ 6,237,712 7,991,603
Property and equipment, net................................. 3,096,752 1,304,785
Trademarks and patents, less accumulated amortization of
$22,660 and $37,889 in 1998 and 1999, respectively........ 200,204 234,343
Other assets................................................ 88,321 68,309
------------ ------------
$ 9,622,989 $ 9,599,040
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable............................................... $ 125,543 $ 20,000
Subordinated convertible debentures......................... 3,200,674 --
Accounts payable............................................ 6,748,538 462,065
Deferred revenue............................................ 40,000 28,068
Accrued liabilities......................................... 841,526 858,785
Current portion of long-term debt........................... -- 1,685,536
Obligations under capital lease, current portion............ 187,220 7,798
------------ ------------
Total current liabilities................................... 11,143,501 3,062,252
Long-term debt.............................................. -- 1,717,805
Obligations under capital lease............................. 76,008 37,890
COMMITMENTS (Note 6)
Stockholders' equity (deficit):
Series B Convertible Preferred Stock, par value $.01,
954,545 shares authorized; 209,091 and none issued and
outstanding at December 31, 1998 and 1999, respectively... 1,173,958 --
Common stock, par value $.01, 30,000,000 shares authorized;
820,147 and 8,812,141 issued and outstanding at December
31, 1998 and 1999, respectively........................... 8,201 88,121
Additional paid-in capital.................................. 36,770,004 57,170,884
Accumulated deficit......................................... (39,548,683) (52,477,912)
------------ ------------
Total stockholders' equity (deficit)........................ (1,596,520) 4,781,093
------------ ------------
$9,622,989... $ 9,599,040
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 24
VIDEO NETWORK COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Products...................................... $ -- $ 765,617 $ 1,911,952
Services...................................... -- -- 483,159
------------ ------------ ------------
Total revenues.................................. -- 765,617 2,395,111
------------ ------------ ------------
Cost of sales:
Products...................................... -- 544,853 2,375,590
Services...................................... -- -- 276,074
------------ ------------ ------------
Total cost of sales............................. -- 544,853 2,651,664
------------ ------------ ------------
Gross margin.................................... -- 220,764 (256,553)
------------ ------------ ------------
Operating expenses:
Research and development........................ 6,218,637 11,488,262 4,260,909
Selling, general and administrative............. 4,334,754 9,015,437 5,016,687
Depreciation and amortization................... 829,462 2,240,878 1,182,240
------------ ------------ ------------
Total operating expenses........................ 11,382,853 22,744,577 10,459,836
------------ ------------ ------------
Loss from operations............................ (11,382,853) (22,523,813) (10,716,389)
Interest (income) expense, net.................. 203,441 (120,236) 2,212,840
------------ ------------ ------------
Net loss........................................ (11,586,294) (22,403,577) (12,929,229)
------------ ------------ ------------
Cumulative Series B dividend.................... -- (23,958) (31,675)
------------ ------------ ------------
Net loss attributable to common stockholders.... $(11,586,294) $(22,427,535) $(12,960,904)
============ ============ ============
Net loss per common share -- basic and
diluted....................................... $ (19.90) $ (27.45) $ (2.52)
============ ============ ============
Weighted average shares outstanding -- basic and
diluted....................................... 582,307 816,972 5,152,988
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 25
VIDEO NETWORK COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
ADDITIONAL SERIES B
COMMON PAID-IN CONVERTIBLE ACCUMULATED
SHARES STOCK CAPITAL PREFERRED STOCK DEFICIT TOTAL
--------- ------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.......... 270,939 $2,709 $ 3,387,372 $ -- $(5,164,910) $ (1,774,829)
Issuance of common stock pursuant to
warrant exchange agreement........ 23,610 236 660,832 -- (320,902) 340,166
Reversal of interest expense upon
surrender of Bridge Warrants...... -- -- (201,000) -- -- (201,000)
Shares issued in connection with
initial public offering, net of
expenses.......................... 295,714 2,957 9,349,122 -- -- 9,352,079
Conversion of Redeemable Series A
Convertible Preferred Stock to
common stock...................... 71,429 714 1,809,929 -- -- 1,810,643
Exercise of warrants................ 6,429 64 29,936 -- -- 30,000
Shares issued in connection with
secondary public offering, net of
expenses.......................... 142,857 1,430 20,899,934 -- -- 20,901,364
Interest expense incurred for
issuance of warrants.............. -- -- 73,000 -- (73,000) --
Net loss............................ -- -- -- -- (11,586,294) (11,586,294)
--------- ------- ----------- ----------- ------------ ------------
Balance, December 31, 1997.......... 810,978 8,110 36,009,125 -- (17,145,106) 18,872,129
Exercise of warrants................ 8,839 88 205,849 -- -- 205,937
Exercise of common stock options at
$6.63/share....................... 330 3 15,301 -- -- 15,304
Compensation expense related to
options granted to financial
advisor........................... -- -- 563,687 -- -- 563,687
Issuance of Series B Convertible
Preferred Stock................... -- -- -- 1,150,000 -- 1,150,000
Dividend............................ -- -- (23,958) 23,958 -- --
Net loss............................ -- -- -- -- (22,403,577) (22,403,577)
--------- ------- ----------- ----------- ------------ ------------
Balance, December 31, 1998.......... 820,147 8,201 36,770,004 1,173,958 (39,548,683) (1,596,520)
Issuance of common stock in
connection with issuance of
unsecured promissory notes........ 160,701 1,607 1,275,382 -- -- 1,276,989
Return of shares issued with
unsecured promissory note......... (4,284) (43) (34,743) -- -- (34,786)
Issuance of warrants in connection
with issuance of long-term debt... -- -- 146,342 -- -- 146,342
Shares issued in connection with
public offering, net of
expenses.......................... 6,900,000 69,000 14,057,161 -- -- 14,126,161
Issuance of Underwriter's Option.... -- -- 100 -- -- 100
Conversion of Debentures............ 873,415 8,734 3,266,589 -- -- 3,275,323
Conversion of Series B Convertible
Preferred Stock................... 62,162 622 1,205,011 (1,205,633) -- --
Compensation expense related to
options granted to financial
advisor........................... -- -- 516,713 -- -- 516,713
Dividend............................ -- -- (31,675) 31,675 -- --
Net loss............................ -- -- -- -- (12,929,229) (12,929,229)
--------- ------- ----------- ----------- ------------ ------------
Balance, December 31, 1999.......... 8,812,141 $88,121 $57,170,884 $ -- $(52,477,912) $ 4,781,093
========= ======= =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 26
VIDEO NETWORK COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(11,586,294) $(22,403,577) $(12,929,229)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation..................................... 614,467 2,229,437 1,167,100
Amortization..................................... 214,995 11,440 15,230
Interest expense related to issuance of
warrants....................................... 385,000 -- 49,683
Interest expense related to debentures........... -- 75,674 74,649
Amortization of debt discount.................... -- -- 1,271,070
Amortization of debt issuance costs.............. -- -- 472,313
Non-cash compensation expense.................... 340,166 563,687 516,713
Net loss on sale of fixed assets................. -- -- 10,469
Other non-cash charges........................... -- 18,819 354,992
Changes in operating assets and liabilities:
Accounts receivable, net....................... 84,855 (184,670) (191,910)
Other current assets........................... (496,913) 654,643 114,463
Inventory, net................................. (1,689,140) (4,125,091) 1,980,686
Other assets................................... (87,852) 4,198 2,095
Trademarks and patents......................... (81,202) (103,169) (49,369)
Accounts payable............................... 2,687,285 3,710,956 (2,711,350)
Deferred revenues.............................. 133,180 (93,180) (11,932)
Accrued liabilities............................ 488,642 89,508 198,936
------------ ------------ ------------
Net cash used in operating activities....... (8,992,811) (19,551,325) (9,665,391)
Cash flows from investing activities:
Proceeds from the sale of property and
equipment................................... -- 5,000 84,580
Proceeds from the sale of leasehold
improvements................................ -- 1,470,000 --
Purchase of property and equipment............. (2,036,190) (3,763,231) (71,780)
------------ ------------ ------------
Net cash (used in) provided by investing
activities................................ (2,036,190) (2,288,231) 12,800
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from the issuance of Series A
preferred stock............................. 962,203 -- --
Net proceeds from the issuance of Series B
preferred stock............................. -- 1,150,000 --
Net proceeds from the issuance of common
stock....................................... 30,253,443 -- --
Net proceeds from the issuance of common stock
and warrants................................ -- -- 14,126,161
Net proceeds from the exercise of stock
options..................................... -- 15,304 100
Net proceeds from the exercise of warrants..... 30,000 205,937 --
Net proceeds from the issuance of debentures... -- 3,125,000 --
Net proceeds from the issuance of unsecured
promissory notes and common stock........... -- -- 2,395,604
Repayment of unsecured promissory notes........ -- -- (2,850,000)
Repayments of notes payable.................... (2,300,000) (144,661) (105,543)
Repayment of long-term debt.................... -- -- (1,175,000)
Proceeds from the issuance of notes payable to
related parties............................. -- -- 36,000
Repayment of notes payable to related
parties..................................... (199,000) -- (36,000)
Principal payments on capital leases........... (141,452) (702,926) (152,734)
------------ ------------ ------------
Net cash provided by financing activities... 28,605,194 3,648,654 12,238,588
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... 17,576,193 (18,190,902) 2,585,997
Cash and cash equivalents, at beginning of
year........................................... 623,241 18,199,434 8,532
------------ ------------ ------------
Cash and cash equivalents, at end of year........ $ 18,199,434 $ 8,532 $ 2,594,529
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 27
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Video Network Communications, Inc. is a Delaware corporation formed in 1993
to design, develop and market a full motion, high resolution, cost-effective
video network system. Pursuant to a vote of its stockholders, the Company
changed its name to Video Network Communications, Inc. from Objective
Communications, Inc. effective on September 9, 1999. Users of the VidPhone video
network system can view broadcast video, participate in multi-party video
conferences and retrieve stored video on demand. The VidPhone system distributes
video to and from desktop or laptop personal computers and conference rooms
configured with a VidPhone station, over the same wiring used by the telephone.
To date, the Company has not generated substantial revenues from the sale
of its products and services. The Company did not earn any revenues from the
sale of products or services during 1997, and recognized only $766,000 and
$2,395,000 in revenues from the sale of products and services during 1998 and
1999 respectively. The Company has suffered recurring losses from operations,
has recurring negative cash flow from operations and an accumulated deficit that
raise substantial doubt about its ability to continue as a going concern. The
Financial Statements do not include any adjustments that might result from the
outcome of this uncertainty. The Company has required substantial funding
through debt and equity financings since its inception to complete its
development plans and commence full-scale operations.
At December 31, 1998, the Company had essentially no cash from which to
fund operations. In February 1999, the Company completed a private placement of
$2,850,000 of unsecured promissory notes and 160,701 shares of common stock,
from which the Company received net proceeds of approximately $2,396,000. Before
completing the February 1999 private placement, the Company was able to pay only
those expenses that were essential to continue operations. The Company estimated
that the net proceeds from the private placement would fund operations only
through April 1999. Those net proceeds were not sufficient to fund the continued
development of the VidPhone system or any expansion of the Company's business
operations. As a result of these liquidity problems, the Company did not pay
many of its creditors, including trade creditors, on a timely basis and remains
in default on several notes. Some of these creditors instituted or have
threatened to institute legal proceedings against the Company to obtain
repayment of these debts. The Company is renegotiating two notes representing
virtually the entire total amount of notes outstanding. The Company believes
that it will be able to successfully re-negotiate these notes but there can be
no assurance that it will be able to do so. If the Company is unable to
re-negotiate these notes and the Company's creditors choose to take legal
action, such legal action could have a materially adverse effect on the
Company's ability to continue operations.
In February 1999, the Company announced that it had filed a registration
statement relating to a proposed $15,000,000 underwritten offering of common
stock. In June 1999, the Company completed the proposed public offering of
2,000,000 units and realized approximately $12.1 million in net proceeds from
the offering. Each unit consisted of three shares of common stock and two
warrants to purchase common stock at an exercise price of $4.00 per share. When
issued, the units were evidenced by separate unit certificates and the common
stock and warrants included in the units were not separately transferable.
Subsequently, the warrants were approved for quotation on The Nasdaq SmallCap
Market, and the common stock and warrants included in the units are detachable
and separately transferable. Also in June, the underwriter exercised their 15%
overallotment option and purchased an additional 300,000 units, yielding an
additional approximately $2.0 million in net proceeds to the Company.
Our revenues in 1999, while significantly higher than in 1998, were below
our internal projections. At this stage of development it is difficult for us to
predict with accuracy the level of our sales in a given period, or when our
marketing initiatives will result in sales. Each sale of our equipment continues
to account for a significant portion of our revenues. Accordingly, we expect to
continue to experience significant, material fluctuations in our revenues on a
quarterly basis for the foreseeable future. We believe that our revenues for
1999 are indicative of our stage of development rather than of our prospects or
strategic position. While the Company believes that sales
F-6
<PAGE> 28
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will increase to the degree required for positive cash flow and subsequent
profitability, there can be no guarantee that the Company will achieve positive
cash flow from operations quickly enough to sustain operations without another
round of financing. The Company evaluates alternative sources of financing on a
continuous basis. If the Company is not successful in achieving positive cash
flow, profitability or securing additional financing, the Company will be forced
to consider alternative methods of maximizing shareholder value, which could
include sales of the Company's assets, a sale of the Company, workout
alternatives, or bankruptcy.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
On April 14, 1999, the stockholders of the Company approved a one share for
seven shares reverse stock split of the issued and outstanding common stock,
which was previously approved by the Board of Directors. The reverse stock split
was effected on April 14, 1999. All references throughout these financial
statements to number of shares and per share information have been restated to
reflect this reverse stock split. The number of shares as restated to reflect
the reverse stock split has not been adjusted to give effect to the cashing out
of fractional shares. The Company believes that the cashing out of fractional
share interests will not materially change the number of shares of common stock,
as restated.
During the fourth quarter of 1999, the Company concluded that the criteria
for being considered a development stage enterprise within the meaning of
Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises", no longer applied to the Company by
virtue of the level of sales activity and completion of financings in 1999.
Accordingly, certain information previously required to be disclosed in the
financial statements have been omitted. In addition, charges to the inventory
reserves, which were charged to Research and Development while in the
development stage, are and will be charged to product cost of sales to the
extent that such charges are recorded since leaving the development stage.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and investments with original
maturities of three months or less. Cash and cash equivalents are stated at
cost, which approximates fair value because of the short maturity of these
investments.
REVENUE RECOGNITION
The Company's revenues, consisting principally of sales of the Company's
video network system and related products, are recognized upon delivery to and
acceptance by customers, and collection is reasonably assured. Service revenues
are recognized at the time the services are rendered and the Company has no
significant further obligations to the customer. Revenues from maintenance
contracts are recognized ratably over the term of the contract as services are
performed.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Software development costs are included in research and development and are
expensed as incurred. The accounting for such cost of computer software to be
sold has been insignificant, since the period between achieving technological
feasibility and the general availability of such software has been short.
Accordingly, the Company has not capitalized any software development costs.
F-7
<PAGE> 29
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost The Company uses accelerated
methods of depreciation for book and for tax purposes. The annual provisions for
depreciation have been computed based on the following ranges of estimated
useful lives: computer and lab equipment, 3 to 5 years; computer software, 3
years; furniture and fixtures, 5 years; office equipment, 5 years; and leasehold
improvements over the lesser of 7 years or the term of the lease relating to the
improved asset. Expenditures for maintenance and repairs are charged to expense
as incurred. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income. Assets held under the
construction in progress caption are not depreciated until the asset is
completed and placed in service.
TRADEMARKS AND PATENTS
Trademarks and patents are stated at cost and are amortized on a
straight-line basis over 15 years.
LONG-LIVED ASSETS
The Company periodically evaluates the net realizable value of long-lived
assets, including trademarks and patents and property and equipment, relying on
a number of factors including operating results, business plans, economic
projections and anticipated future cash flows. An impairment in the carrying
value of an asset is recognized when the expected future operating cash flows
derived from the asset is less than its carrying value. In addition, the
Company's evaluation considers non-financial data such as market trends, product
and development cycles, and changes in management's market emphasis.
INVENTORY
Inventory, consisting principally of hardware for the Company's video
networking products, is valued at the lower of cost or market, with the cost
being determined using the FIFO ("first-in, first-out") method of accounting.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company's cash and cash equivalents are held with a
U.S. commercial bank. The Company has not experienced any losses related to its
cash and cash equivalents. The Company generally grants uncollateralized credit
terms to its customers and has not experienced any credit-related losses. Three
customers accounted for 82% of total revenue for the year ended December 31,
1999. Each customer had accounted for more than 10% of total revenue for the
year ended December 31, 1999. These same customers accounted for 100% of gross
accounts receivable at December 31, 1999. Four customers accounted for 81% of
total revenue for the year ended December 31, 1998. Each customer had accounted
for more than 10% of total revenue for the year ended December 31, 1998. Three
customers accounted for 100% of gross accounts receivable at December 31, 1998.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to effect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets and liabilities.
F-8
<PAGE> 30
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER COMMON SHARE
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per Share".
Net loss per common share is based on the weighted average number of common
shares and dilutive common share equivalents outstanding during the periods
presented. Basic earnings (loss) per share are calculated by dividing net income
(loss) by the weighted average shares outstanding. Diluted earnings (loss) per
share reflect the dilutive effect of stock options and warrants and are
presented only if the effect is not anti-dilutive. As the Company incurred
losses for all periods, there is no difference between basic and diluted
earnings per share for any period presented. Had options and warrants been
included in the computation, shares for the diluted computation would have
increased by approximately 397,026 and 6,446,244 as of December 31, 1998 and
1999, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of 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.
FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable and
notes payable approximate fair value because of the relatively short maturity of
those instruments.
STOCK-BASED COMPENSATION
The Company accounts for its options granted to employees and directors in
accordance with APB 25. Accordingly, no compensation expense has been recognized
for the options granted, since the exercise price of the options has been in
excess of or equal to the fair value of the options on the date of grant, as
determined by the Board of Directors. The Company discloses the pro forma net
loss and loss per share in the notes to the financial statements in accordance
with the measurement provisions of Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." See Note
10, Capital Stock Transactions.
SEGMENT INFORMATION
The Company is in one business segment; the design, development, and
marketing of a video network system. The Company follows the requirements of
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information."
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
F-9
<PAGE> 31
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories, net of reserves, consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Raw materials............................................. $5,750,733 $4,355,895
Finished goods............................................ 43,068 557,220
---------- ----------
$5,793,801 $4,913,115
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Computer and laboratory equipment......................... $3,186,976 $3,060,416
Computer software......................................... 368,441 470,426
Leasehold improvements.................................... 787,484 606,912
Furniture and fixtures.................................... 1,148,210 850,432
Office equipment.......................................... 173,333 173,333
Construction in progress.................................. 443,116 --
---------- ----------
6,107,560 5,161,519
Accumulated depreciation.................................. (3,010,808) (3,856,734)
---------- ----------
$3,096,752 $1,304,785
========== ==========
</TABLE>
5. SALE OF LEASEHOLD IMPROVEMENTS
In the fourth quarter of 1997, the Company reached an agreement with the
Pease Development Authority (the "PDA") to enter into a lease agreement for
additional office space and, in exchange for a favorable rental rate, the
Company agreed to fund significant improvements to the facility. Through June
1998 the Company had invested in excess of $1.8 million in improvements to the
new offices. In June 1998, the Company and the PDA modified the previous
agreement in that the PDA agreed to purchase $1,470,000 of the leasehold
improvements in consideration of the Company's agreement to adjust the
previously agreed rental rate to a market rate. In June 1998, the Company
received the proceeds from the sale, less accrued rent, of $83,870.
In the first quarter of 1999, the Company sold certain office furniture,
equipment, and leasehold improvements to a third-party who assumed a lease on
property that the Company previously occupied. The Company received net proceeds
of $81,000 from the asset sale.
F-10
<PAGE> 32
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS
The Company leases office and manufacturing space and miscellaneous office
and testing equipment under various operating and capital leases. Commitments
for minimum rentals under non-cancelable leases at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
2000........................................................ $17,040 $ 315,139
2001........................................................ 17,040 321,350
2002........................................................ 17,040 321,585
2003........................................................ 2,840 328,759
2004........................................................ -- 335,205
Thereafter.................................................. -- 1,176,441
------- ----------
Total minimum lease payments................................ 53,960 $2,798,479
==========
Less amount representing interest........................... (8,272)
-------
Present value of net minimum lease payments................. $45,688
=======
</TABLE>
Property and equipment at year-end include the following amounts for
capitalized leases:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Computer and laboratory equipment......................... $ 407,039 $ --
Furniture and fixtures.................................... 760,041 --
Office equipment.......................................... 64,545 64,545
---------- ----------
1,231,625 64,545
Less: allowance for depreciation.......................... (447,864) (38,727)
---------- ----------
$ 783,761 $ 25,818
========== ==========
</TABLE>
Rent payments made in 1997, 1998, and 1999 were $293,000, $793,000 and
$402,000, respectively.
7. INCOME TAXES
At December 31, 1999, the Company has available net operating loss
carryforwards for federal tax purposes of approximately $45,900,000 that may be
available to offset future federal income tax liabilities and expire at various
dates through 2019. As of December 31, 1999, a valuation allowance of
$18,776,000 has been recorded against total gross deferred tax assets, due to
the uncertainty surrounding their realization in the future. Ownership changes,
as defined in the Internal Revenue Code Section 382, may have limited the amount
of net operating loss carryforwards that can be utilized annually to offset
future taxable income. Subsequent ownership changes could further effect the
limitation in future years.
The Company recognized an effective tax rate of 0%, as compared to the
federal statutory rate at 34%, based upon its current year losses and a full
valuation allowance on its net deferred tax assets.
F-11
<PAGE> 33
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's net deferred tax position and the tax
effects of the temporary differences giving rise to the Company's deferred tax
assets (liabilities) as of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards........................ $ 10,598,000 $ 16,694,000
Accrued liabilities..................................... 158,000 122,000
Reserves................................................ 539,000 1,551,000
Depreciation and amortization........................... 390,000 409,000
------------ ------------
Gross deferred tax asset................................ 11,685,000 18,776,000
Valuation allowance..................................... (11,685,000) (18,776,000)
------------ ------------
Net deferred tax asset.................................. $ -- $ --
============ ============
</TABLE>
8. SUBORDINATED CONVERTIBLE DEBENTURE
In July 1998, the Company completed a private placement of 5% Cumulative
Convertible Debentures due 2003 with certain institutional, affiliated and other
investors, from which it received gross proceeds of approximately $3.125
million. These debentures were senior in right of payment to substantially all
existing and future indebtedness of the Company and the Company's equity
securities. Subject to certain contractual agreements, the holders of the
debentures were entitled to convert the debentures into shares of common stock
at any time. In accordance with letter agreements dated May 1999 between the
Company and the holders of the Company's 5% subordinated convertible debentures,
the convertible debentures, and interest accrued thereon, automatically
converted to 873,415 shares of the Company's common stock at a conversion price
of $3.75 per share on June 18, 1999.
9. LONG TERM DEBT
SANMINA NOTE
In January 1999, the Company converted accounts payable to Sanmina
Corporation of $4,300,000 of which $1,100,000 represented the value of inventory
and materials located at a subcontract manufacturer, to a $4,300,000 three-year
term note accruing interest at 7% per year. In accordance with the terms of the
note, the Company paid Sanmina $1,100,000 in principal on the note in June 1999
and Sanmina transferred to the Company the title to the inventory and materials
located at a Sanmina subcontractor. The note required interest-only payments
during the first year of the note, payable semi-annually, in arrears,
semi-annually, beginning in July 1999. The Company made the first of the
required interest payments, in the third quarter of 1999. After the first year,
the Company is required to amortize and to pay the remaining principal balance
and interest in equal monthly installments over the remaining life of the note.
In connection with the restructuring of the accounts payable balances to a
long-term note, the Company issued to Sanmina warrants to purchase 39,286 shares
of common stock, with a $19.25 exercise price per share. An independent
appraisal assigned a market value of $127,759 to these warrants. The Company has
recorded the value of the warrants as a discount against the face amount of the
note and will amortize the value of the warrants over the life of the note.
Please see Subsequent Events, Note 14.
LEGAL COUNSEL NOTE
In January 1999, the Company also converted $375,000 of outstanding
accounts payable to legal counsel to a two-year term loan accruing interest at
7% per year. In accordance with the terms of the note governing the term loan,
the Company has paid $75,000 of the principal during 1999. Under the terms of
the loan, the Company
F-12
<PAGE> 34
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is obligated to make two semi-annual interest-only payments commencing in July
1999 and February 2000. The first of the required interest payments was made in
the third quarter of 1999. The note also requires the Company to repay the
remaining principal balance and interest accrued on the note in twelve equal
monthly payments beginning in February 2000.
In connection with converting the restructuring of the accounts payable
balances to a long-term note, the Company issued to legal counsel warrants to
purchase 5,714 shares of common stock, with a $18.59 exercise price per share.
An independent appraisal assigned a market value of $18,583 to these warrants.
The Company has recorded the value of the warrants as a discount against the
face amount of the note and will amortize the value of the warrants over the
life of the note.
Please see Subsequent Events, Note 14.
10. CAPITAL STOCK TRANSACTIONS
PRIVATE PLACEMENT OF UNITS
In February 1999, the Company completed a private placement of 28.5 units
of unsecured promissory notes with a principal amount of $2,850,000 and 160,701
shares of common stock, from which the Company received net proceeds of
approximately $2,396,000. The notes accrued interest at 10% per year. Two
principal officers of the Company invested a total of $125,000 in units and were
issued unsecured promissory notes with an aggregate original principal amount of
$125,000, and an aggregate of 4,999 shares of common stock. The full principal
amount of and accrued interest on the unsecured promissory notes, totaling
$2,955,000, was repaid to the note holders in June 1999.
An independent appraisal assigned a market value of $1,305,000 to the
common stock issued in the February 1999 private placement. The Company has
recorded the value of the common stock as a discount against the face amount of
the unsecured promissory notes and amortized the value of the common stock over
the life of the notes. In the quarter ended June 30, 1999, in connection with
the June 1999 unit offering, two participants in the February 1999 private
placement were required to return to the Company a total of 4,284 shares of
common stock, valued at $34,786.
COMMON STOCK
During January 1997, the Company executed a warrant exchange agreement (the
"Exchange Agreement") with investors who purchased shares of common stock and
received warrants through the financial advisory firm during 1995 and 1996. The
purpose of the warrant exchange was to induce such investors to enter into
lock-up arrangements with the Underwriter and into agreements consolidating such
investors' registration rights with those granted by the Company to other
investors, and to provide those investors with the opportunity to invest in the
Company upon terms and conditions that more closely reflect the terms and
conditions upon which the other investors invested in the Company during a
comparable time period. Under the Exchange Agreement, each such investor was
given the opportunity to exchange existing warrants to purchase 714 shares of
common stock at an exercise price of $56.00 per share for new warrants to
purchase 357 shares of common stock an exercise price of $28.00 per share and an
additional 357 newly issued shares of common stock. In addition, in the original
offering, certain investors purchased shares of common stock from Mr. Steven A.
Rogers at a purchase price of $14.00 per share at a time during which other
investors were purchasing shares of common stock from the Company at $42.00 per
share. As part of the warrant exchange, such investors also were required to pay
Mr. Rogers $14.00 per share of common stock purchased from him in the original
offering, so as to cause such transactions to be consummated upon terms and
conditions more closely reflecting market conditions. Mr. Rogers received an
aggregate of $340,166 in the warrant exchange transaction. As a result of the
Exchange Agreement, the Company issued an aggregate of 23,610 shares of common
stock. Of the fair market value of such shares, the Company will reflect a
non-cash compensation expense of $340,166, and the remaining $320,902 will be a
direct charge to
F-13
<PAGE> 35
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equity as a cost of equity financing. Additionally, an aggregate of 49,362
warrants with an exercise price of $56.00 per share were exchanged for 23,610
warrants with an exercise price of $28.00 per share and 2,143 warrants with an
exercise price of $56.00 per share. Further, in connection with the Warrant
Agreement, the Company also exchanged warrants held by the president of the
financial advisory firm to purchase 4,936 warrants to purchase shares of common
stock at an exercise price of $46.20 per share, and 4,936 warrants to purchase
shares of common stock at an exercise price of $61.60 per share, for an
aggregate of 9,872 warrants to purchase shares of common stock at an exercise
price of $28.00 per share. Additionally, the Company exchanged warrants
originally issued to other investors as an inducement to loan funds to the
Company, representing the right to purchase an aggregate of 14,619 shares at an
exercise price of $56.00 per share for warrants to purchase 14,619 shares of
common stock at an exercise price of $28.00 per share. The Company did not
receive any additional cash proceeds as a result of the Exchange Agreement.
During April 1997, the Company issued 295,714 shares of common stock, par
value $.01 for approximately $9.5 million in proceeds, net of underwriting
discounts and commissions and certain other expenses of the offering of $1.9
million. The issuance of these shares was pursuant to an initial public offering
at a price of $38.50 per share. The net proceeds of the initial public offering
were used primarily to repay certain outstanding notes payable and to fund the
continued research and development and the working capital deficiencies of the
Company. In connection with the initial public offering, all of the issued and
outstanding shares of Redeemable Series A Convertible Preferred Stock were
converted into common stock on a one-for-one basis.
In April 1997, in connection with the initial public offering, certain
holders of Bridge Warrants surrendered such warrants to acquire an aggregate of
21,428 shares of common stock with a fair value of $9.38 per warrant, resulting
in a decrease due to reversal of interest expense upon surrender of Bridge
Warrants of $201,000 in stockholders' equity. The surrender and cancellation of
such warrants did not have any other effect on the Bridge Financing, nor did the
Company pay any consideration in connection with such surrender.
On November 5, 1997, the Company completed the offering and sale of 142,857
shares of the Company's common stock at a public offering price of $161.88 per
share, resulting in net proceeds to the Company of approximately $20.9 million
(net of underwriting discounts and commissions and other expenses of the
offering).
In May 1998, the Company's stockholders approved an increase in the total
number of shares of common stock authorized for issuance from 10,000,000 shares
to 30,000,000. The Company filed a Second Amended and Restated Certificate of
Incorporation to effectuate such increase in May 1998.
In February 1999, the Company issued a total of 160,701 shares of its
common stock as part of units issued in a private placement of 28.5 units,
consisting of unsecured promissory notes with a principal amount of $2,850,000
and 160,701 shares of common stock. The Company received net proceeds of
approximately $2,396,000 form the private placement.
In June 1999 the Company completed a public offering of 2,000,000 units and
realized approximately $12.1 million in net proceeds from the offering. Each
unit consisted of three shares of common stock and two warrants to purchase
common stock at an exercise price of $4.00 per share. The warrants are
exercisable in June of 2000, one year from the date of closing of the public
offering. The warrants are callable when they are exercisable and after our
common stock has closed at $8.00 or more for twenty consecutive trading days.
Also in June of 1999, the underwriter exercised the 15% over-allotment option
that the Company had granted to it in connection with the June 1999 public
offering of units. Upon exercise of the option, the underwriter purchased
300,000 units, consisting of 900,000 shares of common stock and 600,000 warrants
to purchase common stock at an exercise price of $4.00 per share. The Company
received net proceeds of $2.0 million from the exercise of the underwriter's
over-allotment option.
F-14
<PAGE> 36
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the number of shares of common stock subject to purchase under
all warrant agreements and related exercise prices as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE
- ---------------- --------------
<S> <C>
60,946 $ 28.00
41,501 $ 23.10
7,467 $ 42.00
2,142 $ 56.00
39,286 $ 19.25
5,714 $ 18.59
4,600,000 $ 4.00
---------
4,757,056
=========
</TABLE>
Of the warrants outstanding as of December 31, 1999, 4,600,000 were not yet
exercisable.
STOCK OPTIONS
On August 3, 1994, the Company granted certain outside directors of the
Company options to purchase 28,568 shares of common stock. These options vest on
the anniversary of the options grant date in accordance with a five-year vesting
schedule, 20% each year. The exercise price is $14.00 per share, which was in
excess of the fair value of the stock on the date of the grant, as determined by
the Board of Directors. As of December 31, 1999, 1,428 of these options had been
exercised and 22,142 of these options were exercisable. The right to exercise
these options terminates ten years from the grant date.
In October 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "1994 Plan") pursuant to which 49,000 shares of common stock are reserved
for issuance. These options vest on the anniversary of the option grant date in
accordance with a vesting schedule ranging from two to five years. The options
granted under this plan are granted at an exercise price per share equal to the
fair value per share of the Company's common stock on the date of grant. As of
December 31, 1999, none of these options had been exercised and 13,933 of these
options were exercisable. The right to exercise these options terminates ten
years from the grant date.
In January 1997, the Board of Directors adopted the 1996 Stock Option Plan
(the "1996 Plan") pursuant to which 64,285 shares of common stock were reserved
for issuance. The Board of Directors, with shareholder approval, authorized the
increase in the number of shares reserved for issuance under the 1996 Plan to
207,142 shares during 1998. The options granted under this plan are granted at
an exercise price per share equal to the fair value per share of the Company's
common stock on the date of grant. As of December 31, 1999, 330 of these options
had been exercised and 30,035 options were exercisable. The right to exercise
these options ranges from five to ten years from the grant date.
In connection with the Company's initial public offering completed in April
1997 (the "IPO"), the Company issued to an investment banking firm options to
purchase 25,714 shares of common stock at an exercise price equal to 165% of the
price of the common stock offered to the public, or $63.525 per share. The right
to exercise these options terminates five years from the grant date.
In December 1997, the Company granted to an investment banking firm options
to purchase 17,857 shares of common stock at an exercise price $96.67 per share,
which was the fair value of the stock on the date of the grant. Since this grant
was for future services to be provided, the related compensation expense, in
accordance with SFAS No. 123, was recorded over two years, the expected term of
services. The compensation expense recorded was $20,355 in 1997, $563,687 in
1998, and $543,332 in 1999. The right to exercise these options terminates five
years from the grant date.
F-15
<PAGE> 37
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 9, 1999, stockholders of VNCI approved the Company's 1999
Stock Incentive Plan (the "Plan"). The Plan authorized the Company to issue
options to employees, directors, consultants and others on up to two million six
hundred and forty thousand (2,640,000) shares of common stock. The Company is
restricted to having two million ten thousand of these issued and outstanding
prior to June 18, 2000 as a result of an agreement with the Company's lead
investment banker on its June 1999 public offering. The Company's 1996 Stock
Incentive Plan closed on that date and no additional grants are available
through the 1996 Stock Incentive Plan or any of the Company's other prior stock
option plans. As of December 31, 1999, none have been exercised and 285,177 were
exercisable.
MICRO ARTS/COLLABORATIVE GRANTS
In December 1999, the Company granted to each of two marketing and public
relations consultants options to purchase 10,000 shares of common stock at an
exercise price of $3.125 per share, which was the fair market value of the
common stock on the date of grant. Since these grants were for future services
to be provided, the related compensation expense will be recognized in future
periods.
Stock option activity during the periods indicated is summarized as
follows:
<TABLE>
<S> <C> <C>
1997
Outstanding at beginning of year............................ 76,142 $ 23.009
Granted..................................................... 95,614 $ 76.531
Forfeited................................................... (1,428) $ 82.075
Exercised................................................... -- --
Outstanding at end of year.................................. 170,328 $ 52.556
Exercisable................................................. 31,228 $ 20.958
Available for grant......................................... 12,957
1998
Outstanding at beginning of year............................ 170,328 $ 52.556
Granted..................................................... 162,100 $ 61.677
Forfeited................................................... (77,104) $ 77.707
Exercised................................................... 330 $ 46.375
Outstanding at end of year.................................. 254,994 $ 50.771
Exercisable................................................. 92,940 $ 43.827
Available for grant......................................... 61,200
1999
Outstanding at beginning of year............................ 254,994 $ 50.771
Granted..................................................... 1,685,212 $ 2.712
Forfeited................................................... (251,018) $ 20.446
Exercised................................................... -- --
Outstanding at end of year.................................. 1,689,188 $ 7.325
Exercisable................................................. 368,714 $ 11.295
Available for grant......................................... 483,500
</TABLE>
F-16
<PAGE> 38
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------------------------
WEIGHTED-AVE.
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING CONTRACTUAL WEIGHTED-AVE. EXERCISABLE WEIGHTED-AVE.
EXERCISE PRICES AS OF 12/31/99 LIFE (YEARS) EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
--------------- -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$2.500-$3.625 1,526,500 5.2 $ 2.667 283,989 $ 2.625
$14.000 22,142 4.6 $14.000 22,142 $14.000
$21.000-$38.500 45,726 6.1 $30.839 26,352 $30.708
$42.875-$63.525 61,251 2.9 $55.181 28,139 $54.065
$80.500-$96.691 33,569 8.2 $94.846 8,092 $96.228
---------- -------
1,689,188 368,714
========== =======
</TABLE>
All stock options granted by the Company from its inception through
December 31, 1999 were granted with an exercise price per share equal to the
fair value of the Company's common stock on the date of grant. In December 1996,
the Company repriced the exercise price of all options previously granted to
$28.00 per share, to reflect an exercise price consistent with the price per
share paid by outside investors of the Series A preferred stock issued in
December of 1996 and January 1997.
In July 1998, the Board approved a repricing plan to reprice employee stock
options under the 1996 Stock Incentive Plan (the "1996 Plan") to restore the
long-term employee retention and performance incentives of the stock options
outstanding. In accordance with the repricing plan, all stock options then held
by current, active full-time employees, with exercise prices above $50.75, or
with vesting periods in excess of three years, were cancelled and replaced by
the same number of options exercisable at $50.75 per share and vesting over a
three-year period. The options were granted at a price equal to the fair market
value of the Company's common stock on the date of the option repricing.
Had compensation expense been determined based on the fair value of the
options at the grant dates consistent with the method of accounting under SFAS
123, the Company's net loss and net loss per share would have increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Net loss attributable to common stockholders
As Reported......................................... $(22,427,535) $(12,960,904)
Pro forma........................................... $(23,994,047) $(13,509,681)
Net loss per common share
As reported, basic and diluted...................... $ (27.45) $ (2.52)
Pro forma, basic and diluted........................ $ (29.37) $ (2.62)
</TABLE>
The fair value of each option granted in 1998 and 1999 was estimated on the
date of grant using the Black-Scholes option-pricing model. The model used the
following weighted-average assumptions for grants during the years ended
December 31, 1998 and 1999: volatility of 95% and 93%, respectively; risk-free
rate of return of 5.4% and 6.0%, respectively; dividend yield of 0% for both
1998 and 1999; and an expected time to exercise of 5.0 years and 4.2 years for
1998 and 1999, respectively.
F-17
<PAGE> 39
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PREFERRED STOCK
Series A Convertible Preferred Stock
On December 9, 1996, the Board of Directors and a majority of the holders
of the outstanding common stock authorized the establishment of 2,500,000 shares
of preferred stock, with a par value of $.01 per share. In December 1996, the
Company authorized the issuance and sale of 500,000 shares of Series A
Convertible Preferred Stock ("Series A") and warrants to purchase 14,284 shares
of common stock for aggregate consideration of $2,000,000. The Series A shares
had liquidation preferences over the common stock and any series of preferred
stock authorized in the future. The holders of Series A shares were entitled to
non-cumulative dividends when dividends are declared on the common stock as
though the Series A shares had been converted to common stock. At any time after
five years following the issuance of the Series A shares, or upon a merger in
which the Company is not the surviving entity, or upon a sale of all or
substantially all of the assets of the Company, at the request of at least 50%
of the holders of Series A shares and given sixty days notice, the Company was
required to redeem all or a portion of the outstanding Series A shares at a
redemption price equal to the amount such holders would be entitled to receive
had they converted the Series A shares into common stock or the liquidation
value of $28.00 per share, whichever was greater. The Series A shares were
convertible to common stock as determined by multiplying the Series A stated
value plus all declared but unpaid dividends by $28.00 and dividing that result
by the conversion price, which as defined by the agreement would not have
exceeded $28.00 per share. The Series A shares would have automatically
converted to shares of common stock upon the consummation of the Company's IPO.
The holders of Series A shares were entitled to vote, with each holder entitled
to the number of votes per share as equal to the number of shares of common
stock into which each share of Series A was then convertible.
The warrants issued in conjunction with the Series A shares had an exercise
price of $28.00 per share. As a fee for the placement of the Series A shares and
related warrants, the underwriting firm received a $140,000 underwriter's
discount and commission in consideration of its services on this transaction.
In December 1996 and January 1997, the Company issued 500,000 Series A
shares and 14,284 warrants for the purchase of common stock and had received
$1.8 million of consideration for the sale of the Series A shares. The Series A
shares were recorded net of the underwriting discount and commission and
approximately $82,000 in the other issuance costs. The 500,000 shares of Series
A shares outstanding at the time of the Initial Offering in April 1997
automatically converted into 71,428 share of common stock on the closing of the
IPO.
5% Cumulative Convertible Series B Preferred Stock
In August 1998, the Company issued to certain unaffiliated investors in a
private placement 209,091 shares of 5% Cumulative Convertible Series B Preferred
Stock, par value $.01 per share (the "Series B Preferred Stock"), and warrants
to purchase an aggregate of 7,467 shares of Common Stock at an exercise price of
$42.00 per share which were valued at $94,000 (the "Series B Warrants"). The
shares of Series B Preferred Stock and the Series B Warrants were issued at a
purchase price of $5.50 per share, resulting in gross proceeds to the Company of
$1.15 million. Dividends accrued on the Series B Preferred stock at 5% annually,
were cumulative, and were payable in additional shares of Series B Preferred
Stock. The Company sold and issued such securities in reliance on an exemption
from registration provided by Section 4(2) of the Securities Act of 1933,
Regulation D and Rule 506.
Shares of Series B Preferred Stock were convertible at any time after the
issuance date and at the option of the holder, into shares of common stock at an
initial conversion rate of $38.50 per share, subject to adjustment in connection
with certain events, including a reclassification, reorganization or exchange of
the Company's Common Stock. The shares of Series B Preferred Stock were subject
to automatic conversion, without further action on the part of the holder or the
Company, if the closing price of the Company's common stock equaled or exceeded
$77.00 per share for 15 consecutive trading days.
F-18
<PAGE> 40
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the private placement by the Company of units completed
in February 1999, the Company entered into a letter agreement with both of the
holders of the Series B Preferred Stock modifying certain terms of those
securities. Specifically, the Company and the holders agreed that: (i) the
holders would not exercise their right to convert the Series B preferred stock
to common stock, or exercise the Series B Warrants for common stock, until the
date on which the Company completed a public or private equity financing with
gross proceeds of not less than $8 million (a "qualified financing"); (ii) upon
the closing of a qualified financing, the stated value of and accrued and unpaid
dividends on the Series B preferred stock will automatically convert into shares
of common stock at a conversion price equal to $19.25 per share, and the
exercise price of Series B Warrants would be reduced to $19.25 per share; (iii)
the anti-dilution provisions of the Series B preferred stock and the Series B
Warrants would not apply to the qualified financing, the 5% Convertible
Debenture conversion, the February 1999 private placement, the conversion of the
Series B preferred stock or the exercise of the Series B Warrants; (iv) the
holders waived and agreed not to exercise any registration rights they may have
as to the common stock issuable upon conversion of the Series B preferred stock
or the exercise of the Series B Warrants in connection with the June 1999 public
offering of units; and (v) the holders would not sell any common stock issuable
upon conversion of the Series B preferred stock for at least six months after
the effectiveness of the registration statement (or up to 24 months, if
necessary to obtain regulatory approval of this offering) filed relating to the
qualified financing.
Immediately following the completion of the public offering of units in
June 1999, all shares of Series B Preferred Stock, and accreted dividends
thereon, automatically converted to 62,162 shares of common stock at a
conversion price of $19.25 per share.
11. NON-CASH TRANSACTIONS
The following non-cash transactions occurred in the periods indicated:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Current asset financed by issuance of note payable... $ -- $ 230,063 $ --
Capital lease obligations............................ 347,950 718,504 --
Return of assets under capital lease in settlement of
obligation......................................... 64,806
Dividend on preferred stock.......................... -- 23,958 31,675
Conversion of preferred stock to common stock........ -- -- 1,205,633
Conversion of subordinated debentures and interest
thereon to common stock............................ -- -- 3,275,323
Reclassification of inventory to fixed assets........ 354,304 32,225 --
Accounts payable transferred to notes payable........ -- 40,141 --
Accounts payable transferred to long term debt....... -- -- 3,575,000
Common stock issued with private placement........... -- -- 1,242,203
Warrants issued with long term debt.................. -- -- 146,342
Inventory financed with long term debt............... -- -- 1,100,000
Equity financing costs in prepaid expenses........... -- -- 28,867
Reduction in accrued liabilities due to sale of
assets............................................. -- -- 181,678
Debt issuance costs in other assets -- net........... -- -- 17,917
Interest Payments.................................... 115,739 94,272 536,983
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company implemented a profit-sharing plan under Section 401(k) of the
Internal Revenue Code (the "Code") covering substantially all employees. The
plan allows employees to make contributions up to the maximum allowed by the
Code. The Company contributes one dollar to an employees account for each two
F-19
<PAGE> 41
VIDEO NETWORK COMMUNICATIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dollars contributed by the employee until the employee's contribution equals 6%
of the employee's annual salary. The Company contributed $183,000 and $31,000 to
employee accounts during 1998 and 1999, respectively.
13. NEW ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current operations or
other comprehensive income, depending upon whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company anticipates that, due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a material impact on its results of
operations, financial position, or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101. "Revenue Recognition in Financial
Statements." SAB No. 101 sets forth guidelines for accounting and disclosures
related to revenue recognition. SAB No. 101 does not require registrants that
have not applied this accounting to restate prior financial statements, provided
they report a change in accounting principle in accordance with Accounting
Principles Board Opinion No. 20, "Accounting Changes," no later than the first
fiscal quarter of the fiscal year beginning after December 15, 1999. In March
2000, the Securities Exchange Commission issued Staff Accounting Bulletin No.
101A, "Amendment: Revenue Recognition in Financial Statement" ("SAB 101A"). SAB
101A delays the implementation date of SAB 101 by one quarter to the quarter
ending June 30, 2000 for registrants with fiscal years that begin between
December 16, 1999 and March 15, 2000. The Company anticipates that the adoption
of SAB No. 101 will not have a material impact on its results of operations,
financial position, or cash flows.
14. SUBSEQUENT EVENTS
In January 2000, the Company did not make the scheduled interest payments
on its long-term debt held by Sanmina and its legal counsel, as required by the
terms of the two notes. In addition, the Company has not made any of the
required monthly payments of principal and interest on these two notes, which
were required to be paid beginning in February 2000. The Company is in the
process of renegotiating the terms of these two notes. However, to date, the
Company has not reached agreement with either Sanmina or its legal counsel
regarding any such re-negotiation and there can be no assurance that any
restructured debt arrangement will be reached. If the Company is unable to
re-negotiate the terms of either note, it could have a material adverse effect
on the Company.
On December 31, 1999, the Company entered into an Agreement with
b2bvideo.com, Corp., a high technology startup company that intends to provide
aggregated business video content to the business market. The Agreement was to
become effective that day after the closing of b2bvideo.com's proposed private
placement of Series A Preferred Stock in the first quarter of 2000. The
Agreement provides that VNCI receive an equity position in b2bvideo.com in
exchange for favorable purchase terms and conditions regarding technical support
and equipment provided to b2bvideo.com by VNCI. B2bvideo.com's private placement
closed on March 14, 2000. VNCI received one million shares of common stock,
equivalent to an ownership percentage of approximately fourteen and one half
percent (14.5%) on a fully diluted basis on the closing date assuming conversion
of all Series A Preferred Stock. Mr. James F. Bunker, Chairman of the Board of
VNCI and a director of b2bvideo.com participated in the private placement
purchasing less than one percent of the total offering. Ms. Cheryl Snyder, CEO
of b2bvideo.com, is a director of VNCI.
F-20
<PAGE> 42
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE> 43
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our current directors and executive officers are set forth below.
Biographical information concerning each of the directors and executive officers
is presented on the following pages. Information is presented as of February 29,
2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mr. Carl Muscari............................. 48 President and Chief Executive Officer
Mr. Roger A. Booker.......................... 45 Vice President, Operations and Engineering
Mr. Robert H. Emery.......................... 55 Chief Financial Officer, Vice President,
Administration and Secretary
Mr. Stephen LaMarche......................... 36 Vice President, Sales and Marketing
Mr. James F. Bunker.......................... 65 Chairman of the Board of Directors
Dr. Eugene R. Cacciamani..................... 63 Director
Mr. Marc S. Cooper........................... 38 Director
Mr. Richard S. Friedland..................... 49 Director
Mr. Steven A. Rogers......................... 47 Director
Ms. Cheryl Snyder............................ 38 Director
</TABLE>
Carl Muscari was named President in September 1999 and was appointed Chief
Executive Officer and elected a director in December 1999. He has more than
fifteen years experience in the leadership of high technology companies. From
February 1996 through July 1998, he served as the President of Acuity Imaging,
LLC, a subsidiary of publicly held Robotic Vision Systems Inc. During his
tenure, the company experienced substantial growth by focusing on major
semiconductor and electronics markets for deployment of machine vision
technology while rapidly developing and acquiring competitive new products. From
February 1992 to January 1996, Mr. Muscari was the President and CEO of Exos
Inc., a privately held, high-tech company that pioneered touch feedback control
technology in PC games. The Company was sold to Microsoft in 1996. Mr. Muscari
holds Engineering degrees from Cornell University and the Massachusetts
Institute of Technology as well as an MBA from the Harvard Business School.
Roger A. Booker has served as Vice President Operations and Engineering
since August 1999. From February 1996 until August 1999, he was Vice President
Operations. From June 1994 to February 1996, Mr. Booker served as the Vice
President, International Development and Operations at Global Partnership, Inc.,
where he directed international development and operations. From February 1990
to June 1994, Mr. Booker also served as the Vice President, Manufacturing
Operations at Cryptek, Inc., an encrypted facsimile machine manufacturer, and
served in the same position at General Kinetics, Inc. until July 1990, when it
acquired Cryptek, Inc., where he was responsible for overseeing operations,
including several acquisitions and divestitures. From August 1986 to February
1990, Mr. Booker was Director of Operations for Magnavox Government and
Industrial Electronics Company, where he managed the development of a new
200,000 square foot manufacturing facility.
Robert H. Emery has served as Chief Financial Officer and Vice President,
Administration and Secretary since mid-December 1999. From December 1966 through
mid-December 1999, he was Vice President, Administration and Finance and
Secretary. He served previously as Vice President, Administration from May 1995
to December 1996. From May 1986 to May 1995, he served as Vice President of
Aries Systems International, Inc., an information services company. From August
1983 to July 1986, Mr. Emery served as the ADP Security Officer for the
military's largest secure computer network. He is a CPA.
Stephen W. LaMarche was named Vice President of Sales and Marketing in
January 2000. Mr. LaMarche brings over thirteen years progressive sales and
sales management experience from start-up to $50 million in revenues at US
TeleCenters, which later merged with View Tech, Inc. He most recently served as
Regional Vice President of Sales of View Tech, Inc. from June 1997 to September
1999. In 1997, he also served as Vice President of Business Development for View
Tech, Inc. From February 1995 to December 1996, he served as
23
<PAGE> 44
Vice President of Video Conferencing and New York Network of US TeleCenters.
From January 1994 to February 1995, he served as Director of Sales focusing on
Large Business, Video Conferencing and the National Account Network of US
TeleCenters. US TeleCenters was in the business of data and voice network
services and related equipment. View Tech, Inc. is in the business of video
conferencing services and equipment. LaMarche holds a B.A. in Economics from
Connecticut College.
James F. Bunker has served as a director since January 1999 and as the
Chairman of the Board of Directors since February 1999. From September 1999
through December 1999 he served as Chief Executive Officer of the Company and
from July 1998 until early September 1999, he also served as our President. From
January 1994 until he joined our Company in July 1998, Mr. Bunker was actively
involved as an outside consultant to high technology companies, advising them
with respect to the development of a business plan, funding, recruiting
management and other key personnel, and serving as an executive member of
management teams. Previously, from 1986 until his retirement at the end of 1993,
Mr. Bunker served in various capacities with General Instrument Corporation,
most recently as the President of the VideoCipher Division of General
Instrument. Mr. Bunker also is a director of ViaSat, Inc., a public satellite
telecommunications company located in Carlsbad, California.
Eugene R. Cacciamani has served as a director since August 1994. Since
1987, Dr. Cacciamani has served as a Senior Vice President of Hughes Network
Systems, Inc., which furnishes private communications networks to business,
government and common carriers. He is responsible for developing new
technologies, systems and businesses, including lead efforts in the Hughes DBS
DirecTV system and the systems design in the ICO global satellite personal
communications systems. Dr. Cacciamani is on the Engineering Advisory Boards at
Union College and The Catholic University of America and serves as an advisor to
Aloha Networks, Inc. and Qwest Communications.
Marc S. Cooper has served as a director of the Company since April 1997.
Mr. Cooper has been a Managing Director of Peter J. Solomon Company since June
1999. Previously, Mr. Cooper served as Vice Chairman of Barington Capital Group,
L.P. responsible for the Syndicate, Investment Banking and Research Departments
from January 1998 to June 1999. From March 1992 until January 1998, Mr. Cooper
served as Executive Vice President, Director of Investment Banking and Research
at Barington. He also serves as a director of Thinking Tools, Inc., a software
developer.
Richard S. Friedland was elected as a director in March 1999. Since October
1997, Mr. Friedland has been actively involved as an investor and consultant to
emerging high technology companies, with a focus on video and communications.
From 1978 to October 1997, Mr. Friedland served in various capacities with
General Instrument Corporation, a provider of systems and equipment to the cable
telephone and telephony industries. Most recently, from September 1995 to
October 1997, he served as Chairman of the Board of Directors and Chief
Executive Officer of General Instrument, and he served as President, Chief
Operating Officer and Director of that company from September 1993 to September
1995. Mr. Friedland also is a director of Premark International, Zilog, Inc. and
Tech-Sym, Inc.
Steven A. Rogers founded Video Network Communications in 1993 and has
served as a director since that time. From July 1998 through July 1999, he
served as our Chief Technology Officer and Vice President, Engineering. He
served as President and Chief Executive Officer from our inception until July
1998. Mr. Rogers has participated in other start-up companies as an executive
officer or founder. From July 1990 to July 1992, he served as a Senior Vice
President of General Kinetics, Inc. where he managed the Cryptek division. In
January 1986, he had founded Cryptek, Inc., an encrypted facsimile machine
manufacturer and, from January 1986 to July 1990, served as its President and
Chief Operating Officer until it was acquired by General Kinetics, Inc. Mr.
Rogers holds four patents and was a nominee for KPMG Peat Marwick's "1990
Entrepreneur of the Year" award.
Cheryl Snyder was elected as a director at the 1999 Annual Meeting of
Stockholders in September 1999. In November, 1999, Ms. Snyder founded
b2bvideo.com Corp., and since November of 1999, she has served as Chief
Executive Officer of that company. b2bvideo.co is a provider of aggregated video
content to the business community. From March 1999 until November 1999, Ms.
Snyder served as the Vice President, Business Development for Opus360, a company
that provide Internet tools and services to support entrepreneurs
24
<PAGE> 45
conducting business using electronic media, and operates the freeagent.com site.
From February 1998 to March 1999, Ms. Snyder was the Vice President, Electronic
Development of Cahners Business Information, a business to business publishing
company that has more than 140 trade magazines and 200 Internet sites. From June
1995 to July 1997, Ms. Snyder was the co-founder, Chief Technology Officer and
Senior Vice President, Marketing and Sales of Intralinks, Inc., a start-up
company developing Internet-based transaction management solutions for the
financial industry. From June 1995 to June 1996, Ms. Snyder was the Vice
President, Network Solutions, for Live Picture, Inc., a company that develops
and markets imaging solutions for companies that work with high resolution
images. From July 1993 to June 1995, Ms. Snyder served as the Director,
Marketing and Sales for Sarnoff Real Time Corporation, a company that developed
and manufactures an interactive digital video file service.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, executive
officers and persons who own more than 10% of a registered class of our equity
securities to file with the Securities and Exchange Commission and the Nasdaq
Stock Market, Inc. initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the Company. In
addition, under Section 16(a), trusts for which a reporting person is a trustee
and a beneficiary (or for which a member of his immediate family is a
beneficiary) may have a separate reporting obligation with regard to ownership
of the common stock and our other equity securities. Such reporting persons are
required by rules of the Securities and Exchange Commission to furnish us with
copies of all Section 16(a) reports they file. In 1998, we received Section
16(a) reports and written representations that certain reports were not
required. Based upon a review of that information, we believe that all members
of the Board of Directors, executive officers and each beneficial owner of more
than 10% of our common stock timely filed all reports required by Section 16(a)
of the Securities Exchange Act of 1934 except that each of the following
directors filed their respective Form 3 one day late: Muscari, Novick and
Snyder.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table lists the cash remuneration paid or accrued during
1999, 1998 and 1997 to the two individuals who served as the Company's Chief
Executive Officer during 1999, and to each of our other executive officers who
were serving as such at the end of 1999, and for one additional individual who
earned more than $100,000 in 1999 but was not serving as an executive officer of
our Company at the end of 1999 (the "Named Executive Officers"). We do not have
any pension or long- term incentive plans, and did not grant any restricted
stock awards, bonus stock awards or stock appreciation rights to any of the
Named Executive Officers during 1999, 1998 or 1997.
25
<PAGE> 46
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------- ---------------------------------
AWARDS PAYOUTS
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------- ---- -------- ------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
James F. Bunker(1)
Chairman, Board of Directors...... 1999 $196,156 $ -0- 200,000 $ -0-
1998 $ 66,991 $ -0- 14,285 $ -0-
Carl Muscari(2)
President and Chief Executive
Officer........................... 1999 $ 44,647 $ -0- 387,500 $ -0-
Roger A. Booker
Vice President and Operations &
Engineering....................... 1999 $130,600 $ -0- 171,428 $ -0-
1998 $140,800 $ -0- 6,428 $ -0-
1997 $105,545 $45,000 5,000 $ -0-
Robert H. Emery
Chief Financial Officer and Vice
President Administration.......... 1999 $120,057 $ -0- 175,000 $ -0-
1998 $140,933 $ -0- 9,285 $ -0-
1997 $138,503 $45,000 5,000 $ -0-
Steven A. Rogers(3)
Chief Technology Officer and Vice
President, Engineering............ 1999 $121,485 $ -0- 0 $65,955
1998 $252,308 $ -0- 9,285 $ -0-
1997 $120,000 $60,000 7,142 $ -0-
</TABLE>
- ---------------
(1) Mr. Bunker joined the Company as President and Chief Executive Officer on
July 13, 1998. He was elected a director in January 1999. He served as our
President and Chief Executive Officer until September 9, 1999. He served as
our Chief Executive Officer until December 29, 1999. He currently serves as
our Chairman of the Board.
(2) Mr. Muscari joined the Company as President on September 9, 1999. He was
elected our Chief Executive Officer and a director on December 29, 1999.
(3) Mr. Rogers served as President and Chief Executive Officer of the Company
from its inception until July 13, 1998. He served as our Chief Technology
Officer and Vice President, Engineering until August 2, 1999. He continues
to serve as a director. The amount shown in the "All Other Compensation"
column represents the amounts paid by the Company to Mr. Rogers in
connection with his departure as an executive officer of the Company. More
information is provided regarding Mr. Rogers' arrangement with the Company
below under the heading "Employment Agreements." The "Payments All Other
Compensation" of $65,955 to Mr. Rogers was paid as part of his severance
arrangement with the Company.
STOCK OPTION GRANTS IN 1999
The following table sets forth certain information about the stock options
that we granted during 1999 to the Named Executive Officers. In 1999, all of the
stock options that we granted were under the 1999 Stock Incentive Plan. As of
the date of this Form 10-KSB, we have not granted any stock appreciation rights
to any Named Executive Officer.
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<PAGE> 47
STOCK OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION
NAME GRANTED EMPLOYEES IN 1999 ($/SH) DATE
- ---- ------------------ ------------------ -------------- ----------
<S> <C> <C> <C> <C>
James F. Bunker..................... 200,000(1) 15.4% $ 2.625 07/12/08
Carl Muscari........................ 387,500(2) 29.8% $ 2.625 09/09/08
Roger A. Booker..................... 1,428(3) 0.1% $17.066 01/04/04
120,000(4) 9.2% $ 2.625 05/27/08
50,000(5) 3.8% $ 3.125 10/01/08
Robert H. Emery..................... 125,000(4) 9.6% $ 2.625 05/27/08
50,000(5) 3.8% $ 3.125 10/01/08
Steven A. Rogers.................... -0- 0.0% N/A 05/27/08
</TABLE>
- ---------------
(1) Options to purchase 155,560 shares vested on September 9, 1999. These
options were transferred by Mr. Bunker to Windsor Roads Limited
Partnership, a family limited partnership of which Mr. Bunker serves as a
trustee. The remaining options to purchase 44,440 shares of common stock
vest ratably on a monthly basis at the rate of options to purchase 4,444
shares per month through September 9, 2000. The vesting of Mr. Bunker's
options will accelerate upon a change in control of our Company.
(2) Mr. Muscari's options vest as follows: Options to purchase 250,000 shares
of common stock vest ratably over a three-year period beginning on December
31, 1999. Options to purchase an additional 50,000 shares of common stock
vest on September 8, 2004, subject to acceleration if the Company achieves
certain established performance criteria. Options to purchase an additional
50,000 shares of common stock vest on September 8, 2004, subject to
acceleration if the price of the Company's common stock achieves a set
price per share for an agreed period. The remaining options to purchase
37,500 shares of common stock vest ratably over a three-year period
beginning on September 8, 2002. The vesting of Mr. Muscari's stock options
also will accelerate upon a change in control of our company.
(3) These options vest ratably over a three-year period, annually on the
anniversary of the date of grant. The vesting of these stock options will
accelerate upon a change in control of our company.
(4) These options vest ratably over a three-year period, annually on December
31, 1999. The vesting of these stock options will accelerate upon a change
in control of our company.
(5) These options vest ratably over a three-year period, annually beginning on
October 1, 2000. The vesting of these stock options will accelerate upon a
change in control of our company.
STOCK OPTION EXERCISES IN 1999
None of our Named Executive Officers exercised any options in 1999. The
following table sets forth the number of shares of common stock underlying
unexercised options held by the Named Executive Officers at December 31, 1999
and the aggregate dollar value of in-the-money unexercised options held at
December 31, 1999.
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<PAGE> 48
AGGREGATED OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS/SARS
DECEMBER 31, 1999 AT DECEMBER 31, 1999
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ------------------------- ----------------------------
<S> <C> <C>
James F. Bunker............................... 199,762/214,285 $47,459/$8,741
Carl Muscari.................................. 66,666/320,834 $18,733/$90,154
Roger A. Booker............................... 48,960/188,069 $11,240/$22,480
Robert H. Emery............................... 54,960/197,713 $11,780/$23,417
Steven A. Rogers.............................. 0/0 $0/$0
</TABLE>
- ---------------
(1) The dollar value of in-the-money, unexercised options at December 31, 1999
was calculated by determining the difference between the fair market value
of the common stock underlying the options and the exercise price per share
of the options at December 31, 1999.
EXECUTIVE EMPLOYMENT CONTRACTS
We entered into an Employment and Consulting Agreement with Mr. Bunker as
of July 13, 1998. The Agreement was for a one-year term, unless earlier
terminated or extended as provided in the Agreement. The Agreement provided that
we would pay Mr. Bunker a base salary of $200,000 per year. Under the Agreement,
we also granted Mr. Bunker stock options to purchase 14,285 shares of common
stock at an exercise price of $38.50 per share, which was the fair market value
of the common stock on the date the options were granted. The options are
subject to certain vesting requirements. In July 1999, we modified this
Agreement. Under the terms of the new modified agreement, Mr. Bunker agreed to
remain a full-time employee until four weeks after we hired a President or when
mutually agreed by Mr. Bunker and the Company. Mr. Bunker remained a full-time
employee, serving as our Chief Executive Officer, until December 29, 1999. The
modification also confirmed that the stock options previously granted to Mr.
Bunker would continue to vest in accordance with their terms notwithstanding the
modification and amendment of the original employment agreement. In the
Employment Agreement modification, we also agreed to grant to Mr. Bunker options
to purchase an additional 200,000 shares of our common stock. We also have a
Confidentiality, Inventions and Noncompetition Agreement with Mr. Bunker.
As of September 9, 1999, we also entered into an Employment Agreement with
Mr. Muscari under which he agrees to serve as our President and Chief Operating
Officer for a term of four years. Under the terms of Mr. Muscari's Employment
Agreement, we agree to pay him an annual minimum base salary of $188,000 per
year, subject to upward adjustment in our Board's discretion. Mr. Muscari is
also entitled to receive, as incentive compensation, a bonus equal to thirty
percent (30%) of his base salary if we achieve profitability for two consecutive
quarters, as reflected in our quarterly or annual reports filed with the
Securities and Exchange Commission. Following the date on which we achieve
profitability for two consecutive quarters, we are obligated to reach an
agreement with Mr. Muscari within 135 days on future annual cash incentive plans
which will offer Mr. Muscari equal or greater incentive compensation payments.
Mr. Muscari is also entitled to three weeks of vacation, expense reimbursement
and to participate in our other benefit and incentive plans for our employees.
We have the right to terminate Mr. Muscari for "cause" at any time during the
term of the Employment Agreement. For purposes of the agreement, "cause" means
the conviction of a felony or crime involving dishonesty or misfeasance that
interferes with our business; any conduct that substantially interferes with or
damages our business, standing or reputation; a material breach by Mr. Muscari
of the Employment Agreement; or a determination by our Board that Mr. Muscari
has engaged in illegal conduct. If we terminate Mr. Muscari for any reason other
than "cause," we are obligated to pay him one year's annual base salary as
severance, plus any bonuses to which he is entitled, payable in a lump sum, to
provide him with medical and other benefits for six months, and to give him six
months in which to exercise any of his vested stock options. We also are
obligated to provide Mr. Muscari with those benefits if he is terminated after a
change in control of our company, as that term is defined in his employment
agreement. We also agree to indemnify Mr. Muscari against certain liabilities
and expenses that he may incur while serving as an officer or director of our
company.
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<PAGE> 49
During 1999, Mr. Rogers terminated his relationship as an officer of the
Company. Mr. Rogers continues to serve as one of our directors. In connection
with Mr. Rogers' departure as an officer, our Employment Agreement with Mr.
Rogers was terminated. We also entered into an agreement with Mr. Rogers
pursuant to which we agreed to pay him nine months of salary, payable over a
period ending in August 2000, and to maintain Mr. Rogers' medical and dental
insurance at our expense until the earlier of August 1, 2000 or the date on
which he secures other such insurance. We also provided Mr. Rogers with certain
releases from claims and liabilities and obtained certain releases from claims
and liabilities from Mr. Rogers.
DIRECTOR COMPENSATION
Through 1999, we reimbursed non-employee directors for expenses incurred in
connection with attending Board and committee meetings, but did not pay
directors any cash compensation for serving in such capacity. In October 1999,
in recognition of certain extraordinary contributions to the Company made by
Marc S. Cooper, Compensation Committee of our Board of Directors authorized us
to pay Mr. Cooper fifty thousand dollars ($50,000). In the future, starting in
March of 2000, the Company intends to pay each director one thousand dollars
($1,000) for each regularly scheduled meeting of the Board that they attend.
Generally, we compensate our directors for serving in such capacity by
granting to them stock options. The Compensation Committee of the Board of
Directors meets annually to determine option grants to directors. In September
1999, we granted options to purchase an aggregate of 165,000 shares of common
stock under the 1999 Stock Incentive Plan to the persons then serving as our
non-employee directors. The options are exercisable for a period of ten years
from the date of grant, have an exercise price of $2.625 per share, which was
the fair market value of the underlying common stock on the date of grant, and
vested fifty percent (50%) on September 9, 1999 and fifty percent (50%) on
September 9, 2000. Option grants to non-employee directors during 1999 were as
follows: Cacciamani -- 45,000, Cooper -- 60,000, Friedland -- 30,000,
Rogers -- 0 and Snyder -- 30,000. As of December 31, 1999, 82,500 of these
options were vested and none had been forfeited.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 24, 2000, by (i) all persons known by
us to beneficially own 5% or more of the outstanding shares of common stock,
(ii) each current director, (iii) each of our executive officers, and (iv) all
of our current directors and executive officers, as a group. Unless otherwise
noted, each stockholder named has sole voting and investment power with respect
to such shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
AMOUNT
AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT(1)
- ------------------------ -------------------- -----------
<S> <C> <C>
5% OR GREATER STOCKHOLDERS(2)
Barry Rubenstein(3)......................................... 768,000 8.6%
Seneca Ventures(4).......................................... 468,000 5.3%
Woodland Venture Fund(5).................................... 573,000 6.4%
Woodland Partners(6)........................................ 573,000 6.4%
The Marilyn and Barry Rubenstein Family Foundation(7)....... 573,000 6.4%
Woodland Services Corp.(8).................................. 573,000 6.4%
DIRECTORS AND EXECUTIVE OFFICERS
Roger A. Booker(9).......................................... 50,357 *
James F. Bunker(10)......................................... 210,320 2.3%
Eugene R. Cacciamani(11).................................... 30,314 *
Marc S. Cooper(12).......................................... 81,976 *
Robert H. Emery(13)......................................... 64,922 *
Richard S. Friedland(14).................................... 15,000 *
Stephen A. LaMarche(15)..................................... 20,500 *
Carl Muscari(16)............................................ 66,666 *
Steven A. Rogers(17)........................................ 150,225 1.7%
</TABLE>
29
<PAGE> 50
<TABLE>
<CAPTION>
AMOUNT
AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT(1)
- ------------------------ -------------------- -----------
<S> <C> <C>
Cheryl Snyder(18)........................................... 15,000 *
All directors and executive officers as a group (9
persons)(19).............................................. 705,280 7.5%
</TABLE>
- ---------------
* Less than one percent
Applicable percentage of ownership as of March 17, 2000 is based on
8,907,970 shares of common stock outstanding. Beneficial ownership is
determined in accordance with rules of the Securities and Exchange
Commission. For each beneficial owner, shares of common stock subject to
options or warrants exercisable within 60 days of March 24, 2000 are deemed
outstanding.
(1) Information regarding ownership of our securities by 5% or greater
stockholders is based on information furnished to us by the holders of such
shares in a Schedule 13G, copies of which are also filed by such holders
with the Securities and Exchange Commission.
(2) Includes (i) 25,000 shares of our common stock issuable upon the exercise
of warrants held by Applewood Associates, L.P., of which Mr. Rubenstein is
a general partner, which are exercisable within 60 days of the date of this
proxy statement; (ii) 162,000 shares of our common stock held by the Barry
Rubenstein Rollover IRA; (iii) 105,000 shares of our common stock owned by
Seneca Ventures, of which Mr. Rubenstein is a general partner; (iv) 150,000
shares of our common stock owned by Woodland Venture Fund, of which Mr.
Rubenstein is a general partner; (v) 150,000 shares of our common stock
owned by Woodland Partners, of which Mr. Rubenstein is a general partner;
and (vi) 6,000 shares of our common stock owned by The Marilyn and Barry
Rubenstein Family Foundation, of which Mr. Rubenstein is a trustee. Mr.
Rubenstein disclaims beneficial ownership of these securities except to the
extent of his equity interest therein. Excludes warrants held that are not
currently exercisable, and that do not become exercisable within 60 days of
the date of this proxy statement.
(3) Includes (i) 162,000 shares of common stock held by the Barry Rubenstein
Rollover IRA; (ii) 105,000 shares of our common stock owned by Seneca
Ventures, as to which Seneca Ventures has sole power to vote and dispose of
such shares; (iii) 150,000 shares of our common stock owned by Woodland
Venture Fund; (iv) 150,000 shares of our common stock owned by Woodland
Partners; and (v) 6,000 shares of our common stock owned by The Marilyn and
Barry Rubenstein Family Foundation. Seneca Ventures disclaims beneficial
ownership of these securities except to the extent of its equity interest
therein. Excludes warrants held that are not currently exercisable, and
that do not become exercisable within 60 days of the date of this proxy
statement.
(4) (4) Includes (i) 162,000 shares of common stock held by the Barry
Rubenstein Rollover IRA; (ii) 105,000 shares of our common stock owned by
Seneca Ventures; (iii) 150,000 shares of our common stock owned by Woodland
Venture Fund, as to which Woodland Venture Fund has sole power to vote and
dispose of such shares; (iv) 150,000 shares of our common stock owned by
Woodland Partners; and (v) 6,000 shares of our common stock owned by The
Marilyn and Barry Rubenstein Family Foundation. Woodland Venture Fund
disclaims beneficial ownership of these securities except to the extent of
its equity interest therein. Excludes warrants held that are not currently
exercisable, and that do not become exercisable within 60 days of the date
of this proxy statement.
(5) Includes (i) 162,000 shares of common stock held by the Barry Rubenstein
Rollover IRA; (ii) 105,000 shares of our common stock owned by Seneca
Ventures; (iii) 150,000 shares of our common stock owned by Woodland
Venture Fund; (iv) 150,000 shares of our common stock owned by Woodland
Partners, as to which Woodland Partners has sole power to vote and dispose
of such shares; and (v) 6,000 shares of our common stock owned by The
Marilyn and Barry Rubenstein Family Foundation. Woodland Partners disclaims
beneficial ownership of these securities except to the extent of its equity
interest therein. Excludes warrants held that are not currently
exercisable, and that do not become exercisable within 60 days of the date
of this proxy statement.
(6) Includes (i) 162,000 shares of common stock held by the Barry Rubenstein
Rollover IRA; (ii) 105,000 shares of our common stock owned by Seneca
Ventures; (iii) 150,000 shares of our common stock owned by
30
<PAGE> 51
Woodland Venture Fund; (iv) 150,000 shares of our common stock owned by
Woodland Partners; and (v) 6,000 shares of our common stock owned by The
Marilyn and Barry Rubenstein Family Foundation, as to which the Foundation
has sole power to vote and dispose of such shares. The Marilyn and Barry
Rubenstein Family Foundation disclaims beneficial ownership of these
securities except to the extent of its equity interest therein. Excludes
warrants held that are not currently exercisable, and that do not become
exercisable within 60 days of the date of this proxy statement.
(7) Includes (i) 162,000 shares of common stock held by the Barry Rubenstein
Rollover IRA; (ii) 105,000 shares of our common stock owned by Seneca
Ventures; (iii) 150,000 shares of our common stock owned by Woodland
Venture Fund; (iv) 150,000 shares of our common stock owned by Woodland
Partners; and (v) 6,000 shares of our common stock owned by The Marilyn and
Barry Rubenstein Family Foundation. Woodland Services Corp. disclaims
beneficial ownership of these securities except to the extent of its equity
interest therein. Excludes warrants held that are not currently
exercisable, and that do not become exercisable within 60 days of the date
of this proxy statement.
(8) The address of Mr. Booker is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Includes 48,960
shares of common stock issuable upon exercise of options.
(9) The address of Mr. Bunker is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Includes 199,762
shares of common stock that may be acquired upon exercise of outstanding
options.
(10) The address of Dr. Cacciamani is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Includes 27,489
shares of common stock issuable upon exercise of options.
(11) The address of Mr. Cooper is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Includes 25,714
shares and 17,857 shares of common stock that may be acquired upon exercise
of options held by Barington Capital Group, L.P. ("Barington") that are
currently exercisable. Also includes 31,418 shares of common stock issuable
upon the exercise of options held by Mr. Cooper that are currently
exercisable. We granted Barington an option to purchase 25,714 shares of
our common stock in connection with our initial public offering in April
1997 and an option to purchase 17,857 shares of our common stock in
December 1997 as compensation for investment banking services. The latter
option vests over two years. Mr. Cooper was the Vice Chairman of Barington.
Mr. Cooper also is a stockholder in LNA Capital Corp., the corporate
general partner of Barington. Includes options to acquire 3,857 shares of
common stock which Cross Connect, L.L.C. has the right to acquire from
Barington under certain conditions. Cross Connect, L.L.C. is not affiliated
with Barington or Mr. Cooper, and Mr. Cooper disclaims beneficial ownership
of the 3,857 shares of common stock that may be acquired upon exercise of
such options.
(12) The address of Mr. Emery is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Includes 833 shares
of common stock issuable upon exercise of warrants and 54,960 shares of
common stock issuable upon exercise of options.
(13) The address of Mr. Friedland is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Consists of 15,000
shares of common stock issuable upon exercise of options.
(14) The address of Mr. LaMarche is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Consists of 20,500
shares of common stock issuable upon exercise of options.
(15) The address of Mr. Muscari is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Consists of 66,666
shares of common stock issuable upon exercise of options.
(16) The address of Mr. Rogers is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. All of the shares of
common stock owned by Mr. Rogers are pledged to Merrill
31
<PAGE> 52
Lynch Credit Corporation to secure certain obligations. Includes 2,380
shares of common stock issuable upon exercise of warrants and 15,000 shares
of common stock issuable upon exercise of options.
(17) The address of Ms. Snyder is c/o Video Network Communications, Inc., 50
International Drive, Portsmouth, New Hampshire 03801. Consists of 15,000
shares of common stock issuable upon exercise of options.
(18) Includes 538,326 shares of common stock issuable to executive officers and
directors upon exercise of options and 3,213 shares of common stock
issuable to executive officers and directors upon exercise of outstanding
warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY LOANS
The following is a description of loan transactions of $60,000 or more
between Video Network Communications and its directors, executive officers and
5% or greater stockholders (or members of their families) during 1998 or 1999.
On January 8, 1999, a limited partnership controlled by Mr. Bunker made a
loan to us to permit us to continue operations. The principal amount of the loan
made by Mr. Bunker was $100,000. The principal amount of the loan was converted
into units in our February 1999 private placement of units consisting of
promissory notes and shares of common stock. The purchase of securities made by
Mr. Bunker in the February 1999 private placement was made on the same terms and
conditions as unaffiliated third parties purchasing units in the offering,
except that Mr. Bunker received 3,571 shares of common stock and unaffiliated
investors investing a comparable amount of money received 5,714 shares of common
stock. We used a portion of the net proceeds from our June 1999 public offering
of units to repay in full the notes issued in the February 1999 private
placement, including the note held by Mr. Bunker.
Mr. Bunker voluntarily deferred the payment of his salary from November 9,
1998, through the date on which our June 1999 public offering of units,
consisting of three shares of common stock and two redeemable common stock
purchasing warrants closed. Mr. Bunker's deferred salary has been repaid in
full.
In February 1999, we completed a private placement of 28.5 units of
unsecured promissory notes with a principal amount of $2,850,000 and 160,701
shares of common stock, from which we received net proceeds of approximately
$2,393,000. The notes accrued interest at 10% per year. The principal and
accrued interest on the notes were payable at the earlier of 1) February 2000,
2) the closing date of the Company's then proposed public offering, or 3) one of
several specified events. Two principal officers of the Company, Mr. Bunker and
Mr. Emery, invested $100,000 and $25,000 in units, respectively, and were issued
unsecured promissory notes for $100,000 and $25,000 principal amount,
respectively, and shares of our common stock. These notes were paid in full at
the closing of our Company's public offering of units in June 1999.
EQUITY TRANSACTIONS
The following is a description of equity transactions between us and our
directors, executive officers and 5% or greater stockholders (or members of
their families) during 1998 or 1999.
Barington Capital Group, L.P.
We have agreed to use our best efforts (including the solicitation of
proxies, if necessary) to elect one designee of Barington to the Board of
Directors until April 8, 2002. Mr. Cooper has served as a director since April
1997 and was elected pursuant to this agreement. Mr. Cooper currently is a
member of the Audit Committee of the Board of Directors.
In July 1998, we issued $3,125,000 aggregate principal amount of
convertible debentures in a private placement. Directors and executive officers
purchased an aggregate of $315,000 aggregate original principal amount of
convertible debentures. The purchasers included Mr. Cooper, who purchased
$25,000 original principal amount of convertible debentures. In addition, other
principals and employees of Barington purchased in the aggregate $135,000
original principal amount of convertible debentures. The convertible debentures
32
<PAGE> 53
automatically converted to common stock in June 1999 upon the completion of the
our public offering of units at a conversion price of $3.75 per share of common
stock.
Issuance of 5% Convertible Debentures Due 2003
As described above, in July 1998, we issued $3,125,000 aggregate principal
amount of convertible debentures. $2,500,000 aggregate original principal amount
of convertible debentures were purchased by certain institutional investors (the
"Institutional Investors") and $625,000 aggregate original principal amount of
convertible debentures were purchased by certain directors and executive
officers of, and outside consultants to, the Company. Messrs. Kendall, Cooper,
Liebhaber and Dr. Cacciamani, then directors of the Company, and Messrs. Bunker,
Booker and Emery and Ms. Murphy, then executive officers of the Company,
purchased convertible debentures in the offering. Following the issuance of the
convertible debentures, the following persons held beneficially the principal
amount of debentures indicated: Mr. Bunker -- $25,000; Mr. Booker -- $5,000; Mr.
Emery -- $25,000; Ms. Murphy -- $25,000; Mr. Kendall -- $100,000; Dr. Cacciamani
- -- $10,000; Mr. Cooper -- $25,000; and Mr. Liebhaber -- $100,000. The offering,
issuance and sale of the convertible debentures to certain directors and
executive officers was a condition precedent to the consummation of the
financing with the Institutional Investors.
It was a condition precedent to the consummation of the February 1999
private placement, that we enter into an agreement with the holders of the
convertible debentures, including the directors and executive officers indicated
above, amending certain terms of those securities. In the letter agreements,
each of the holders of the convertible debentures agreed that: (i) it would not
exercise its right to convert the convertible debentures to common stock until
the date on which a public or private equity financing with gross proceeds to us
of not less than $8 million (a "qualified financing") is completed; (ii) upon
the closing of a qualified financing, the principal amount of and accrued and
unpaid interest on the convertible debentures will automatically convert into
the securities issued in the qualified financing at a conversion price equal to
the lesser of (A) $2.50 per share, or (B) 75% of the price at which the
securities are sold in the qualified financing and that the anti-dilution
provisions of the convertible debentures would be inapplicable to the
conversion; and (iii) it waived any default by us with respect to our obligation
to register or maintain the effectiveness of a registration statement for the
shares of common stock issuable upon conversion of the convertible debentures.
The holders of the convertible debentures also agreed to hold the shares of
common stock issued upon conversion of the convertible debentures for at least
12 months following the effective date of our registration statement that
relates to the qualified financing. We agreed to include the shares of common
stock issuable upon conversion of the convertible debentures in the registration
statement filed with the SEC relating to the qualified financing. The
convertible debentures automatically converted to common stock in June 1999
immediately following the closing of our public offering of units at a
conversion price of $3.75 per share of common stock .
Private Placement of Units.
In February 1999, we completed a private placement of 28.5 units of
unsecured promissory notes with a principal amount of $2,850,000 and 160,701
shares of common stock, from which we received net proceeds of approximately
$2,393,000. The notes accrued interest at 10% per year. The principal and
accrued interest were payable at the earlier of 1) February 2000, 2) the closing
date of a proposed public offering of securities, or 3) one of several specified
events. Two principal officers of the Company, Mr. Bunker and Mr. Emery,
invested $100,000 and $25,000 in units, respectively, and were issued unsecured
promissory notes for $100,000 and $25,000 principal amount, respectively, and
3,571 and 1,428 shares of our common stock. The notes were repaid in full at the
closing of our public offering of units in June 1999.
We believe that all of the above transactions were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties
and all of the transactions since our initial public offering were approved by
at least a majority of our Board of Directors, including a majority of the
disinterested members of the Board of Directors. All future transactions between
us and any of our officers, directors and principal stockholders and their
affiliates will be approved by at least a majority of the Board of Directors,
including a majority of the disinterested members of the Board of Directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
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<PAGE> 54
Strategic Partnership.
On December 31, 1999, the Company entered into an Agreement with
b2bvideo.com, Corp., a high technology startup company that intends to provide
aggregated business video content to the business market. The Agreement was to
become effective that day after the closing of b2bvideo.com's proposed private
placement of Series A Preferred Stock in the first quarter of 2000. The
Agreement provides that VNCI receive an equity position in b2bvideo.com in
exchange for favorable purchase terms and conditions regarding technical support
and equipment provided to b2bvideo.com by VNCI. B2bvideo.com's private placement
closed on March 14, 2000. VNCI received one million shares of common stock,
equivalent to an ownership percentage of approximately fourteen and one half
percent (14.5%) on a fully diluted basis on the closing date assuming conversion
of all Series A Preferred Stock. Mr. James F. Bunker, Chairman of the Board of
VNCI and a director of b2bvideo.com participated in the private placement
purchasing less than one percent of the total offering. Ms. Cheryl Snyder, CEO
of b2bvideo.com, is a director of VNCI.
34
<PAGE> 55
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith or are incorporated herein by
reference, as indicated.
3.1 Third Amended and Restated Certificate of Incorporation of the
Registrant (Incorporated by reference to Exhibit 3.1 forming a part
of Amendment No. 1 to the Registrant's Registration Statement on
Form SB-2 (File No. 333-72429) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended
(the "1999 SB-2")).
3.2 Amended and Restated Bylaws of the Registrant (Incorporated by
reference to Exhibit 3.2 to the Registrant's Registration Statement
on Form SB-2 (File No. 333-20625) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended
(the "1997 SB-2")).
3.3 Certificate of Designations of the Series B 5% Cumulative
Convertible Preferred Stock of the Registrant (Incorporated by
reference to Exhibit 4.10 forming a part of Amendment No. 1 to the
Registrant's Registration Statement on Form S-3 (File No.
333-62971) filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "1998 S-3")).
4.1 Form of Warrant for the purchase of shares of common stock, issued
in connection with the private placement of $2,000,000 aggregate
principal amount of Bridge Notes (Incorporated by reference to
Exhibit 3.4 to the 1997 SB-2).
4.2 Form of Warrant for the purchase of shares of common stock, issued
in connection with the private placement of units in June 1995 and
August 1996 (Incorporated by reference to Exhibit 3.5 to the 1997
SB-2).
4.3 Form of Warrants for the purchase of 100,000 shares of common
stock, issued in connection with the private placement of Series A
Convertible Preferred Stock and warrants in December 1996 and
January 1997 (Incorporated by reference to Exhibit 3.7 to the 1997
SB-2).
4.4 Form of Option for the purchase of 180,000 shares of common stock
issued to Barington Capital Group, L.P. (Incorporated by reference
to Exhibit 3.8 to the 1997 SB-2).
4.5 Specimen certificate evidencing shares of common stock of the
Registrant (Incorporated by reference to Exhibit 4.2 forming a part
of Amendment No. 2 to the 1997 SB-2).
4.6 Form of 5% Convertible Debentures due 2003 of the Registrant
(Incorporated by reference to Exhibits 4.3 and 4.4 forming a part
of the Registrant's Current Report on Form 8-K dated July 1, 1998
and filed July 16, 1998 with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended (the "July
8-K")).
4.7 Form of Warrants to be issued upon redemption of the 5% Cumulative
Convertible Debentures due 2003 of the Registrant (Incorporated by
reference to Exhibit 4.5 forming a part of the July 8-K).
4.8 Specimen certificate evidencing shares of the Series B 5%
Cumulative Convertible Preferred Stock of the Registrant
(Incorporated by reference to Exhibit 4.9 forming a part of the
1998 S-3).
4.9 Form of Warrant issued in connection with the Series B 5%
Cumulative Convertible Preferred Stock of the Registrant
(Incorporated by reference to Exhibit 4.11 forming a part of the
1998 S-3).
4.10 Form of Senior Note issued to Sanmina Corporation by the Registrant
with a principal amount of $4,300,000 (Incorporated by reference to
Exhibit 4.10 forming a part of the Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1998 (the "1998 Form
10-KSB")).
4.11 Form of Note issued to Shaw Pittman Potts & Trowbridge by the
Registrant with a principal amount of $375,000 (Incorporated by
reference to Exhibit 4.11 forming a part of the 1998 Form 10-KSB).
4.12 Form of Warrant for the purchase of 275,000 shares of common stock
issued to Sanmina Corporation (Incorporated by reference to Exhibit
4.12 forming a part of the 1998 Form 10-KSB).
35
<PAGE> 56
4.13 Form of Warrant for the purchase of 40,000 shares of common stock
issued to Shaw Pittman Potts & Trowbridge (Incorporated by
reference to Exhibit 4.13 forming a part of the 1998 Form 10-KSB).
4.14 Form of Unsecured Promissory Note, issued on February 4, 1999 to
various subscribers in a private placement (Incorporated by
reference to Exhibit 4.14 forming a part of the 1999 SB-2).
10.1* 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.1
forming a part of the 1997 SB-2).
10.2* 1996 Stock Incentive Plan (Incorporated by reference to Exhibit
10.2 forming a part of the 1997 SB-2).
10.3 Form of Consulting Agreement by and between the Registrant and
Barington Capital Group, L.P. (Incorporated by reference to Exhibit
No. 10.4 forming a part of the 1997 SB-2).
10.4 Letter Agreement, dated October 7, 1996, between Barington Capital
Group and the Registrant (Incorporated by reference to Exhibit No.
10.5 forming a part of Amendment No. 2 to the 1997 SB-2).
10.5 Letter Agreement, dated December 5, 1995, by and among PVR
Securities, Inc., the Registrant, Steven A. Rogers and John B.
Torkelsen (Incorporated by reference to Exhibit No. 10.6 forming a
part of Amendment No. 2 to the 1997 SB-2).
10.6 Form of Stock Option Agreement, dated December 18, 1997, by and
between the Registrant and Barington Capital Group, L.P.
(Incorporated by reference to Exhibit 10.8 forming a part of the
Registrant's Annual Report on Form 10-KSB, as amended, for the year
ended December 31, 1997).
10.7 Subscription Agreement, dated as of July 1, 1998, by and among the
Registrant and certain Institutional Investors (Incorporated by
reference to Exhibit 4.1 forming a part of the July 8-K).
10.8 Subscription Agreement, dated as of July 8, 1998, by and among the
Registrant and certain Investors (Incorporated by reference to
Exhibit 4.2 forming a part of the July 8-K).
10.9 Strategic Alliance and Marketing Agreement between the Registrant
and Unisys Corporation, dated October 22, 1998 (Incorporated by
reference to Exhibit 10.9 forming a part of the 1998 Form 10-KSB).
10.10 Letter of Intent, dated January 14, 1999, between Southeast
Research Partners, Inc. and the Registrant (Incorporated by
reference to Exhibit 10.10 forming a part of the 1999 SB-2).
10.11 Agency Agreement, dated as of January 25, 1999, between Southeast
Research Partners, Inc. and the Registrant (Incorporated by
reference to Exhibit 10.11 forming a part of the 1999 SB-2).
10.12 Form of Subscription Agreement, dated January 25, 1999, between the
Registrant and certain Investors (Incorporated by reference to
Exhibit 10.12 forming a part of the 1999 SB-2).
10.13* Employment Agreement, dated July 13, 1998, between the Registrant
and James F. Bunker (Incorporated by reference to Exhibit 10.13
forming a part of the 1999 Form SB-2).
10.14* Employment Agreement between the Registrant and Steven A. Rogers
(Incorporated by reference to Exhibit 10.3 forming part of Amendment
No. 2 to the 1997 SB-2).
10.15 Letter Agreement, dated January 12, 1999, between the Registrant
and Sanmina Corporation (Incorporated by Reference to Exhibit 10.15
forming a part of the 1998 Form 10-KSB)).
10.16 Letter Agreement, dated January 21, 1999, between the Registrant
and Shaw Pittman Potts & Trowbridge (Incorporated by reference to
Exhibit 10.16 forming a part of the 1998 Form 10-KSB).
10.17 Form of Letter Agreement between the Registrant and the holders of
the Series B 5% Convertible Cumulative Preferred Stock
(Incorporated by reference to Exhibit 10.17 forming a part of the
1998 Form 10-KSB).
36
<PAGE> 57
10.18 Form of Letter Agreement between the Registrant and the holders of
5% Convertible Debentures due 2003 (Incorporated by reference to
Exhibit 10.18 forming a part of the 1998 Form 10-KSB).
10.19+ Amendment to Employment and Consulting Agreement dated September 9,
1999, between the Registrant and James F. Bunker.
11+ Statement re: computation of per share earnings.
21+ Subsidiaries of the Registrant.
23+ Consent of PricewaterhouseCoopers LLP.
- ---------------
* Management contract or compensatory plan or arrangement.
+ Filed Herewith.
(b) Reports on Form 8-K:
None.
37
<PAGE> 58
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunder
duly authorized.
Date: March 30, 2000
VIDEO NETWORK COMMUNICATIONS, INC.
(Registrant)
/s/ CARL MUSCARI
By:
--------------------------------------
Carl Muscari
President and Chief Executive
Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and as
of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ CARL MUSCARI President and Chief Executive March 30, 2000
- --------------------------------------------- Officer
Carl Muscari
/s/ ROBERT H. EMERY Vice President of Administration March 30, 2000
- --------------------------------------------- and Finance and Secretary
Robert H. Emery
Chairman of the Board of Directors March 30, 2000
- ---------------------------------------------
James F. Bunker
/s/ EUGENE R. CACCIAMANI Director March 30, 2000
- ---------------------------------------------
Eugene R. Cacciamani
/s/ MARC S. COOPER Director March 30, 2000
- ---------------------------------------------
Marc S. Cooper
/s/ RICHARD S. FRIEDLAND Director March 30, 2000
- ---------------------------------------------
Richard S. Friedland
/s/ STEVEN A. ROGERS Director March 30, 2000
- ---------------------------------------------
Steven A. Rogers
/s/ CHERYL SNYDER Director March 30, 2000
- ---------------------------------------------
Cheryl Snyder
</TABLE>
38
<PAGE> 1
EXHIBIT 10.19
AMENDMENT TO EMPLOYMENT AND CONSULTING AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AND CONSULTING AGREEMENT (the "Amendment")
is entered into as of the 9th day of September, 1999 by and between Video
Network Communications, Inc., a Delaware corporation (previously known as
Objective Communications, and referred to in this Amendment as the "Corporation"
or "Employer"), and James F. Bunker (the "Employee") and, to the extent
expressly set forth in this Amendment, amends, modifies and supersedes the
Employment and Consulting Agreement dated July 13, 1998 by and between the
Employer and the Employee (the "Employment Agreement").
WHEREAS, the Employee is currently employed as the President and the
Chief Executive Officer of the Employer pursuant to the Employment Agreement;
WHEREAS, the parties wish to amend, modify and supersede certain terms
and conditions set forth in the Employment Agreement as specifically set forth
in this Amendment to change certain of the terms and conditions upon which the
Employee will continue to be employed by the Employer; and
WHEREAS, the terms and conditions of the Employment Agreement shall
continue in full force and effect except as expressly amended, modified and
superseded in this Amendment.
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
agree as follows:
1. Effectiveness of Amendment; Term of Employment.
(a) This parties agree that this Amendment shall be effective as of
July 13th, 1999; provided, however, that Employee agrees to continue to work for
Employer on a full-time basis as set forth in the Employment Agreement until the
date that is four weeks after a new President is retained by the Employer (or
such date and time as may be mutually agreeable to Employee and Employer, as
shall be evidenced by Employee continuing to work for Employer on a full-time
basis). During the time that Employee continues to work for the Employer
on a full-time basis, he shall be paid his full annual salary as set forth in
the Employment Agreement. On the date that is four weeks after the new
President begins work with the Company (or on such date and time as may be
mutually agreeable to Employer and Employee), then the Employee's title, scope
of duties, time commitment and salary automatically shall be adjusted in
accordance with the terms of this Amendment for the remaining term of this
Amendment.
(b) Section 1 of the Employment Agreement is expressly amended to
change the term of the Employment Agreement to end on the date that is one year
from the effective date of this Amendment, unless earlier terminated as set
forth in this Amendment. At the completion of the initial term, the term of this
Agreement maybe extended for additional successive one-month periods, with the
mutual agreement of the Employer and the Employee.
1
<PAGE> 2
(c) The parties agree that Section 1(c) of the Employment Agreement
is deleted in its entirety and shall be of no further force and effect. The
stock options previously granted to the Employee pursuant to the Employment
Agreement shall continue to vest during the Term of the Employment Agreement as
extended and modified by this Amendment. If the Employer terminates the
Employment Agreement prior to the date on which the stock options originally
granted under the Employment Agreement fully vest, as a result of the
termination of the Employee's employment by the Employer without "cause" (as
defined in the Employment Agreement), then the vesting of the options previously
granted under the Employment Agreement shall accelerate and shall be fully
vested without further action on the part of the Employer or the Employee on the
date that is the day immediately prior to the date of termination of the
Employee's employment. If the Employee is terminated from employment by the
Corporation for "cause" or voluntarily terminates his employment under the
Employment Agreement during the Term other than with the consent of a majority
of the Board, then, at such time further vesting of the options granted under
the Employment Agreement shall immediately cease, the Employee shall forego any
rights to such unvested options and the Employee shall not be entitled to
exercise any unvested stock options.
2. Title; Duties. Effective as of the date on which the Corporation
hires a new Chief Operating Officer and President (the "Amendment Effective
Date"), the Employee's title and responsibilities shall change and Employee
shall serve as the Chief Executive Officer of the Corporation. To the extent
Employee also serves as a director of the Corporation, he also agrees to serve
as the Chairman of the Board of Directors if elected as such by the Board of
Directors of the Corporation (the "Board"). Effective on the Amendment Effective
Date, the Employee shall be responsible for the supervising and directing the
business plan and strategic management of the Corporation and for its overall
direction.
3. Extent of Services; Scope of Authority. Section 3 of the
Employment Agreement is expressly modified and amended as hereinafter set forth.
Effective on the Amendment Effective Date, and during the remaining term of the
Employment Agreement, the Employee agrees to devote not less than two full
business days per week to the performance of his duties under the Employment
Agreement as modified by this Amendment, on a cumulative basis, during normal
business days and hours. The Corporation acknowledges that the Employee will be
taking several extended vacations during the remaining term of this Agreement.
4. Base Salary; Stock Options.
(a) Section 4 of the Employment Agreement is hereby modified and
amended as hereinafter set forth in this Section 4.
(b) Effective on the Amendment Effective Date, the Employee's base
salary shall be changed to an annual base salary of $80,000, payable in
accordance with the Employer's regular payroll policies, subject to such annual
increases, if any, as may be approved by the Board.
(c) On the date of the next annual meeting of stockholders, Employer
shall grant to Employee or Employee's designee non-qualified stock options to
purchase 200,000 shares of common stock, par value $.01 per share (the "Common
Stock"), of the Corporation, with an exercise price per share equal to the fair
market value of the Common Stock on the date of grant.
2
<PAGE> 3
These options shall be in addition to any other stock options previously granted
by the Employer to the Employee. The options shall vest over the same period as
the options originally granted to Employee under the Employment Agreement. In
other words, the stock options shall vest over a two-year period beginning on
July 13, 1998, the date of the Employment Agreement, as follows: one-half (or
options to purchase 100,000 shares of Common Stock) became vested on January 13,
1999, and the remainder of the options (or options to purchase 100,000 shares of
Common Stock) vest ratably, on a monthly basis, over the period commencing
January 13, 1999 and ending on July 13, 2000. If the Employee is terminated from
employment by the Corporation for "cause" or voluntarily terminates his
employment under the Employment Agreement during the Term other than with the
consent of a majority of the Board, then, at such time further vesting of the
options granted under this Amendment shall immediately cease, the Employee shall
forego any rights to such unvested options and the Employee shall not be
entitled to exercise any unvested stock options. If the Employer terminates the
Employment Agreement prior to the date on which the stock options granted under
this Amendment fully vest as a result of the termination of the Employee's
employment by the Employer without "cause" (as defined in the Employment
Agreement), then the vesting of the options granted under this Amendment shall
accelerate and such options shall be fully vested without further action on the
part of the Employer or Employee on the date that is the day immediately prior
to the date of the Employee's termination. The options also shall be subject to
such other conditions as may be approved by the Board or the Compensation
Committee of the Corporation approving the grant of such stock options and set
forth in the Stock Option Agreement relating to such options.
(c) In the event that, during the Term of the Employment
Agreement, there occurs a "change in control" (as hereinafter defined) of the
Employer, then upon the consummation of a change in control the options granted
under this Amendment shall automatically and without further action on the part
of the Employer or Employee vest and shall not be subject to any further vesting
requirements; provided that (i) the Employee is employed by or providing
consulting services to the Employer at the time the change in control is
consummated, or (ii) the Employee's employment or any consulting has been
terminated by the Employer other than for "cause." For purposes of this
Amendment, the term "change in control" shall have the meaning set forth in the
Employment Agreement.
7. Miscellaneous. Section 11(c) of the Employment Agreement is
amended to include a reference to this Amendment as part of the agreements that
constitute the entire agreement between the parties relating to the subject
matter of the Employment Agreement or the Confidentiality Agreement.
8. Full Force and Effect of Employment Agreement. Except to the
extent expressly modified, amended and/or superseded in this Amendment, the
provisions of the Employment Agreement shall remain in full force and effect. In
particular and without limiting the foregoing, Employee agrees to continue to be
bound by the Confidentiality, Inventions and Noncompetition clause set forth in
the Employment Agreement, and Employer agrees to continue to indemnify the
Employee as set forth in the Employment Agreement.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
EMPLOYER EMPLOYEE
OBJECTIVE COMMUNICATIONS, INC.
By: /s/ Robert Emery /s/ James F. Bunker
-------------------------------------- ------------------------------
Name: Robert Emery James F. Bunker
Title: Vice President Administration
and Finance
Address: 50 International Drive Address: Zero Old Penzance Road
Portsmouth, New Hampshire 03801 Rockport, Massachusetts 01966
4
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Information regarding the computation of per share earnings is presented in the
notes to the Registrant's financial statements included in this Form 10-KSB.
28
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
None
<PAGE> 1
EXHIBIT 23
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (File No. 333-62971) and Form S-8 (File Nos. 333-49763,
333-49765 and 333-95799) of Video Network Communications, Inc. of our report
dated March 28, 2000 relating to the financial statements, which appears in this
Form 10-KSB.
PricewaterCoopers LLP
Boston, Massachusetts
March 29, 2000
