<PAGE>
PROSPECTUS Amendment filed pursuant to Rule 424(b)(3)
Registration No. 33-93086
VIDEOLAN TECHNOLOGIES, INC.
3,139,000 SHARES OF COMMON STOCK
(Upon exercise of redeemable common stock warrants)
The 3,139,000 shares of common stock, $0.01 par value per share (the
"Common Stock"), being offered hereby (the "Offering") by VideoLan Technologies,
Inc. (the "Company") are issuable upon exercise of the 3,139,000 outstanding
redeemable common stock warrants (the "Warrants"). Each Warrant entitles the
holder thereof to purchase one share of Common Stock at an exercise price of
$7.00 per share, subject to certain adjustments, at any time until August 10,
2000. The Company may at any time redeem the Warrants, in whole or in part, at
the option of the Company, upon not less than 30 days' notice at a price of $.20
per Warrant, provided that the average of the closing bid prices of Common Stock
is at least 175% of the then current exercise price of the Warrants for 20
consecutive business days ending within 30 days of the date of the notice of
redemption (the "Redemption Date"). If not previously exercised on the
Redemption Date the Warrants may be redeemed for $.20 per Warrant.
The Common Stock and Warrants are listed on the Nasdaq SmallCap Market
under the symbols VLNT and VLNTW. On May 14, 1996, the closing prices for the
Common Stock and the Warrants, as reported by Nasdaq were 15.25 per share and
$11.00 per Warrant.
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 6 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Underwriters
Discounts and
Price to Public Commissions Proceeds to Company(1)
Per Share $7.00 -0- $7.00
Total(2) $21,973,000 -0- $21,973,000
(1) Before deducting expenses payable by the Company estimated at
$65,000.00 or $0.02 per share.
(2) Assumes exercise of all Warrants, as to which there can be no
assurance.
May , 1996
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission ("Commission"). Such reports and other information filed by the
Company with the Commission pursuant to the informational requirements of the
Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, as well as at the following Regional Offices of the Commission:
Northeast (New York) Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048; and Midwest (Chicago) Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed
rates.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended ("Securities Act"),
with respect to the Common Stock offered hereby. This Prospectus omits certain
of the information contained in the Registration Statement pursuant to the rules
and regulations of the Commission. The information so omitted may be obtained
from the principal offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon payment of the fee prescribed or may be examined
there without charge.
ADDENDUM DATED AUGUST 14, 1996 TO PROSPECTUS DATED MAY , 1996
AND FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1996
RECENT DEVELOPMENTS
In June 1996, Datapoint Corporation ("Datapoint") filed a lawsuit
against the Company in the United States District Court for the District of New
Jersey claiming patent infringement, contributory infringement and inducing
infringement. No claims are made in the lawsuit regarding the validity of the
Company's patent. Datapoint, which is currently experiencing financial
difficulties, has made similar claims in lawsuits filed against other
videoconferencing companies. However, to the Company's knowledge, Datapoint has
not obtained a final verdict of infringement against any of these companies nor
have any of these lawsuits resulted in settlements providing for significant
payments to Datapoint. The Company's independent outside patent counsel has
reviewed Datapoint's claims and believes that they are without merit.
Accordingly, management does not believe the lawsuit will have a material
adverse effect on the Company's results of operations or financial condition.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus. An
investment in the Shares offered hereby involves a high degree of risk.
Prospective investors should consider carefully the factors identified under the
heading "Risk Factors."
The Company
The Company has developed and is engaged in the continuing development
of transport and switching and communications products which utilize the
Company's proprietary technology to transmit and receive real time, interactive
video, voice and data signals over two pairs of unshielded twisted pair copper
wire ("UTP copper"). The Company was incorporated in May 1994 as an Ohio
corporation. In August 1995, the state of incorporation was changed to Delaware.
The Company's initial product is a stand-alone video, voice and data
communications network solution (the "VideoLan VL2000 System") for the desktop
personal computer ("PC"). The Company also is attempting to develop its
proprietary technology to enable local telephone exchange carriers, regional
Bell operating companies ("RBOCs") and cable companies to utilize their existing
wiring plants to deliver various interactive video and data services to the home
or business customer.
The VideoLan VL2000 System consists of a package of components
integrated into a local area network ("LAN") or wide area network ("WAN")
environment. Once installed, users at their PCs can initiate and control
multi-party, real time, interactive video, voice and data conferences. Up to
four full motion (30 frames per second) video images can be displayed on the PC
monitor, and multiple data applications can be performed interactively. Users
also can access and control at their PCs the functionality of remote multimedia
devices, such as cameras, video monitors, video cassette recorders ("VCRs") and
laser discs and any other device that can be data controlled. A stand-alone
communications solution, data and applications accessed from a computer, which
connects PCs in the LAN (a "client/server"), are transmitted along with video
and voice signals over a network separate and parallel to the LAN, using
existing LAN UTP copper infrastructure.
Due to its proprietary technology, the Company believes that the
VideoLan VL2000 System has a greater array of features and is simpler and less
expensive to install and integrate into the LAN environment than competitive
products, and allows more users simultaneously to access and participate in
conferences, using multiple multimedia applications, without compromising the
performance of the LAN or the quality of the signals received. Designed with an
open architecture, the VideoLan VL 2000 System operates on IBM compatible PCs
running Microsoft(C) Windows(TM) operating software, and can be equipped with
application programming interfaces which also can be adapted to support
MacIntosh(TM) and Unix(TM) software platforms.
The Company intends to market the VideoLan VL2000 System through
original equipment manufacturers ("OEM"), value added resellers ("VARS"),
systems integrators and distributors whose markets and market presence will
provide significant distribution channels, and through targeted distributors and
directly to users in niche markets particularly suited to the Company's
technology, such as financial markets, telemedicine, high-end business and
educational applications. The Company anticipates that it will subcontract
manufacturing, assembly and field maintenance services. Although it
3
<PAGE>
has received some orders, commercial marketing of the VideoLan VL2000 System is
not expected to commence until the Company is able to establish its sales
channels, and its suppliers are capable of delivering sufficient quantities of
the components of the VideoLan VL2000 System. The Company believes that it will
be able to establish sales channels and secure suppliers capable of delivering
quantities of components sufficient for the commencement of commercial marketing
of the VideoLan VL2000 System during the second half of fiscal year 1996.
The Company is located at 100 Mallard Creek Road, Suite 250,
Louisville, Kentucky 40207. The Company's telephone number is (502) 895-4858.
The Offering
Shares of Common Stock Offered....................... 3,139,000 shares
Shares of Common Stock outstanding
as of May 14, 1996................................... 13,898,498 (1)
Use of Proceeds...................................... Working capital
Nasdaq SmallCap Symbol (2)........................... VLNT
- ---------------
(1) Does not include 1,125,000 shares of Common Stock reserved for issuance
pursuant to outstanding options and 3,139,000 shares of Common Stock
reserved for issuance pursuant to the exercise of outstanding Warrants.
(2) The Common Stock is listed on the Nasdaq SmallCap Market. However,
there can be no assurance that such listing will be maintained.
See "Risk Factors - Possibility of Nasdaq Delisting and Decrease in
Stock Price."
The Company intends to furnish holders of the Common Stock with annual reports
containing financial statements audited by its independent auditors, together
with an opinion thereon expressed by such auditors.
4
<PAGE>
Summary Financial Data
(In thousands, except for per share data)
The summary financial data presented below for the Company and L&LD,
the predecessor of the Company for financial reporting purposes, should be read
in conjunction with the financial statements of the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
L&LD
(Predecessor) Company
-------------- ----------------------------------------
Period from
Period from May 11, 1994
January 1, 994 (Inception) Three Months Ended
through through Year Ended March 31,
May 10, 1994 December 31, 1994 December 31, 1995 1995 1996
-------------- ----------------- ----------------- ----------------------
Statement of Operating Data:
<S> <C> <C> <C> <C> <C>
Net sales......................... $ --- $ --- $ 50 $ --- $ ---
Consulting revenues............... 11 --- --- --- ---
Cost and expenses................. 48 2,331 6,792 1,716 1,487
-------- -------- -------- -------- --------
Net loss.......................... $ (37) $ (2,331) $ (6,742) $ (1,716) $ (1,487)
Net loss per share................ $ (0.21) $ (0.56) $ (0.16) $ (0.11)
Weighted average shares
outstanding..................... 10,968 12,095 10,968 13,855
</TABLE>
<TABLE>
<CAPTION>
December 31
--------------------------------- March 31
1994 1995 1996
-------- -------- -------
Balance Sheet Data:
<S> <C> <C> <C>
Working capital (deficit)......... $ (587) $ 7,139 $ 5,628
Total assets...................... 204 7,900 6,760
Total liabilities................. 686 410 686
Stockholders' equity (deficiency). (482) 7,490 6,074
</TABLE>
5
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD
NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR TOTAL
INVESTMENT. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS.
Development Stage Enterprise; Losses Since Inception; Expectation of Continuing
Losses
The Company is a development stage enterprise and has incurred
aggregate losses of $10,560,658 from inception through March 31, 1996. The
Company expects to incur continuing losses until significant quantities of the
VideoLan VL2000 System are sold.
New Venture; No Prior Operating History; Dependence on Initial Product
Revenue and profitability and future commercialization of the Company's
technology could be dependent upon the success of the VideoLan VL2000 System.
The Company only recently has begun to receive orders for the VideoLan VL2000
System and there can be no assurance that the introduction and marketing of the
VideoLan VL2000 System will be successful, or that the Company will have
significant revenues or profitable operations. In addition, there can be no
assurance that unforeseen technical or other difficulties will not arise which
would interfere with the assembly, manufacture, integration or installation of
the VideoLan VL2000 System, or prevent or create delays in marketing the
product. The Company has engaged in limited field testing of the VideoLan VL2000
System, and there can be no assurance that the product will perform to the
Company's expectations.
Uncertain Market Acceptance of Technology; Risk of Obsolescence
The success of the VideoLan VL2000 System will depend in large part
upon market acceptance of the Company's technology. There can be no assurance
that the Company's technology will be accepted in the marketplace, or will be
perceived as being competitive with other technologies, including technologies
which may be developed. The potential introduction of new technologies could
have a material adverse effect on the Company.
Lack of Marketing Experience and Reliance on Marketing Partners
The Company presently is beginning to implement its marketing program
for the VideoLan VL2000 System, has conducted no market studies and has limited
marketing experience, financial resources and marketing personnel. Successful
marketing of the VideoLan VL2000 System will depend upon the Company's ability
to demonstrate effectively the technological advantages of the VideoLan VL2000
System to OEMs, VARs, systems integrators and distributors whose markets and
market presence will provide significant distribution channels, and targeted
distributors and end users in niche markets. To date, only two distribution
agreements have been entered into by the Company and there can be no assurance
that the Company will enter into any other arrangement or agreement on terms
satisfactory to the Company. The failure of the Company to establish a sales,
marketing or distribution network could have a material adverse effect on the
Company.
6
<PAGE>
In addition, the current market for desktop video conferencing products
is fragmented and growing, and other companies are actively marketing or are
expected to introduce competing products. One or more competitors could
establish significant market share before the Company's distribution channels
and product recognition are established. Also, potential distributors may form
other alliances or may develop competing products.
In the event that the Company ultimately is able to enter into
satisfactory third party distribution arrangements, the Company will be
dependent largely on such third party's marketing efforts and, in the case of
OEMs and VARs, the popularity and sales of the third party's products
integrating the VideoLan VL2000 System. While the Company believes that
marketing the VideoLan VL2000 System through third party distribution channels
will avoid marketing costs and expenses, the Company's revenues will be less
than if it directly marketed the VideoLan VL2000 System.
Necessity of Developing New Applications
Even if the VideoLan VL2000 System is successfully marketed, the
Company anticipates that rapidly changing technology and new entrants into the
desktop video conferencing market could cause, over time, revenues and
profitability of the VideoLan VL2000 System to decline. Therefore, the future
success of the Company could depend upon its ability to develop and successfully
commercialize its technology for other communications applications. The Company
cannot develop all of the potential commercial applications of its technology,
so it intends to target projects it believes have the most potential and which
it can afford. However, there can be no assurance that such projects will be
commercially successful, that the cost will not exceed the financial resources
available to the Company, or that the Company will not abandon projects which do
not meet its expectations.
Uncertain Access to Additional Financing
Unless and until adequate income from sales of the VideoLan VL2000
System is obtained, the timing, sufficiency and receipt of which cannot be
predicted, future development and commercialization of the Company's technology
will depend upon arrangements with third parties to finance research and
development projects, or the Company's ability to obtain other additional
financing on terms satisfactory to the Company. The Company presently has no
arrangements or commitments for external financing. The Company's inability to
obtain such financing could have a material adverse effect on the Company's
operations.
Uncertain Protection of Intellectual Property Rights
The Company has a pending patent application in the United States which
claims an efficient network for the real time, simultaneous, bi-directional
transmission of voice, video, and data among a plurality of users connected to a
plurality of hubs. The claims in such patent application have been allowed and
the Company anticipates that the patent will be issued. In addition, an
international patent application is pending designating 56 foreign countries as
well as the United States. The Company intends to file future U.S. and foreign
patent applications if any patentable inventions are created through continued
development of the Company's technology. No assurance can be given that the
Company will receive patent protection with respect to future patent
applications relating to enhancements of, and new applications for, the
Company's technology. Further, there can be no assurance that, if issued, such
patents will afford protection against competitive products or technologies,
which could be superior to the Company's products or technology. In addition,
enforcement of patent rights could be costly, and
7
<PAGE>
there can be no assurance that the Company would be successful in enforcing such
rights. Further, a successful challenge to a pending or issued patent could
jeopardize the Company's ability to engage in its contemplated business
activities. Therefore, there can be no assurance that the Company's intellectual
property rights are or will be adequately protected, which could have a material
adverse effect on the Company.
Although the Company believes that its products and technologies do not
and will not infringe on patents or other proprietary rights of others, it is
possible that such infringement or violation has occurred or may occur. In the
event that the Company's products or technologies infringe on patents or other
proprietary rights of others, the Company could be required to discontinue the
sale of its products, including the VideoLan VL2000 System, and redesign its
product or obtain licenses. There can be no assurance that the Company would be
able to do so in a timely manner, upon acceptable terms and conditions, or at
all, or that the failure to do any of the foregoing would not have a material
adverse effect on the Company. If any of the Company's products or technologies
are deemed to infringe on patents or other proprietary rights of others, the
Company could, under certain circumstances, become liable for damages, which
could also have a material adverse effect on the Company.
Absence of Manufacturing Capabilities; Dependence on Suppliers and Third-Party
Manufacturers
The Company has no manufacturing capabilities and does not plan to
manufacture the VideoLan VL2000 System or any future products it develops. The
Company has arranged with Plexus Corp. ("Plexus") to assemble and integrate
sub-assemblies manufactured by it and other vendors according to the Company's
specifications. However, the Company and Plexus have not entered into a
contract, and the existing arrangement could be terminated at any time, which
could have a material adverse affect on delivery schedules. In addition, the
quality of the components of the VideoLan VL2000 System and the Company's
ability to meet customers' delivery schedules will be dependent upon the ability
of Plexus and the other vendors to manufacture the components and to integrate
the various sub-assemblies in a timely manner, as well as the timely delivery by
suppliers of raw materials. To date, Plexus has delivered only limited
quantities of the VideoLan VL2000 System to the Company. In the event that
Plexus or any other vendor or supplier fails to deliver quality components or
materials in a timely manner, the Company may not be able to satisfy customer
delivery schedules, which could have a material adverse effect on the Company.
See "Business--Manufacturing."
Possible Inability to Successfully Compete
A number of video conferencing products presently are being marketed,
and new entrants into the market are anticipated. There are and will be numerous
well-established competitors, including joint ventures involving major
communications companies, that possess substantially greater financial,
marketing, personnel and other resources than the Company. There can be no
assurance that the VideoLan VL2000 System will be accepted in the marketplace,
or will be perceived as being competitive with other products, including new
products which may be developed. In addition, there is intense competition among
potential providers to establish video services. Various alternative
technologies are being tested and there can be no assurance that the Company's
technology will be developed for video services before other technologies are
selected or that, if developed, will be preferred over other technologies.
Need for Additional Personnel
8
<PAGE>
The success of the Company is also dependent upon its ability to
hire and retain additional qualified marketing, technical and other
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to hire such additional personnel on
a timely basis or retain such personnel. See "The Company--Employees."
Uncertain Impact of FCC Statutes and Regulations
The Company cannot precisely predict what effect current or future
governmental regulations may have on the Company's products or technology. While
Congress and the Federal Communications Commission (the "FCC") are promoting the
development of a competitive video distribution industry, the enactment or the
interpretation of relevant statutes and administrative rules, regulations,
policies and procedures could have an adverse effect on the industry as a whole,
any one segment thereof, or on the Company in particular.
The Company's potential alliances with telephone companies and cable
companies to develop video services could be affected by the Telecommunications
Act of 1996 (the "Telecom Act"), which instructs the FCC to develop rules by
August 1996 to implement the repeal of the "Cross-Ownership Ban", the statutory
ban against telephone companies providing video programming in their own service
areas. The Telecom Act provides telephone companies with four avenues for the
provision of video services and terminates the Video Dialtone rules previously
enacted by the FCC to permit some video delivery by telephone companies within
their service areas. The U.S. Supreme Court has remanded to a lower court a case
which questioned the constitutionality of the "Cross-Ownership Ban" to determine
whether or not it is moot in light of the Telecom Act. Further proposals for
additional or revised statutes and regulations are considered by Congress and
federal regulatory agencies respectively from time to time. The Company cannot
predict the effect of possible changes in federal regulations, policies or laws
on the business strategy of the Company.
Possibility of Nasdaq Delisting and Decrease in Stock Price
The trading of VideoLan's stock on Nasdaq is conditioned upon meeting
certain asset, capital and surplus, earnings and stock price tests. The
requirements to maintain eligibility on Nasdaq require the Company to maintain
total assets in excess of $2,000,000, capital and surplus in excess of
$1,000,000, and (subject to certain exceptions) a bid price of at least $1.00
per share. If the Company fails any of these tests, the Common Stock and the
Warrants may be delisted from trading on Nasdaq. The effects of delisting
include the limited release of the market prices of the Company's securities and
limited news coverage of the Company. Delisting may restrict investors' interest
in the Company's securities and materially adversely affect the trading market
and prices for such securities and the Company's ability to issue additional
securities or to secure additional financing. In addition to the risk of
volatility of stock prices and possible delisting, low price stocks are subject
to the additional risks of additional federal and state regulatory requirements
and the potential loss of effective trading markets. In particular, if the
Common Stock or Warrants were delisted from trading on Nasdaq and the trading
price of the Common Stock were less than $5.00 per share, the Common Stock and
Warrants could be subject to Rule 15g-9 under the Exchange Act, which, among
other things, requires that broker/dealers satisfy special sales practice
requirements, including making individualized written suitability determinations
and receiving any purchaser's written consent prior to any transaction. In such
case, the Company's securities could also be deemed penny stocks under the
Securities Enforcement and Penny Stock Reform Act of 1990, which would require
additional disclosure in connection with trades in the Company's securities,
including the delivery of a disclosure schedule explaining the nature and risks
of the penny stock market.
9
<PAGE>
Such requirements could severely limit the liquidity of the Company's securities
and the ability of purchasers in this Offering to sell their shares of Common
Stock in the secondary market.
Potential Adverse Impact of Exercise of Warrants and Warrants Outstanding
The Company issued the Warrants to purchase 3,144,000 shares of Common
Stock in connection with its initial public offering in August 1995. Each
Warrant entitles the holder thereof to purchase one share of Common Stock at an
exercise price of $7.00 per share, subject to certain adjustments, at any time
until August 10, 2000, unless previously redeemed. The price that the Company
may receive for the Common Stock issued upon exercise of the Warrants may be
less than the market price for such Common Stock at the time of exercise. In
connection with the initial public offering, the Company also sold to the
underwriter of that offering, Kensington Wells Incorporated (the "Underwriter"),
warrants (the "Underwriter's Warrants") to purchase 250,000 shares. The
Underwriter's Warrants are exercisable for a period of five years from the date
of the initial public offering, at an exercise price of $6.60 per share. As long
as such Warrants and Underwriter's Warrants remain unexercised, the terms under
which the Company could obtain additional capital may be adversely affected.
Moreover, the holders of such Warrants and the Underwriter's Warrants may be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital by a new offering of its securities on
terms more favorable than those provided by such Warrants and Underwriter's
Warrants.
The Underwriter's Warrants and all of the securities underlying the
Underwriter's Warrants were registered in the initial public offering.
Additionally, the Company granted certain registration rights to the holders of
the securities underlying the Underwriter's Warrants, whereby the Company
agreed, subject to certain conditions, to register at its own expense such
underlying securities. If the holders of the Underwriter's Warrants should
exercise their registration rights to effect a distribution of the underlying
securities, the Underwriter, prior to and during such distribution, will be
unable to make a market in the Company's securities and would be required to
comply with other limitations on trading set forth in Rules 10b-2, 10b-6, and
10b-7 promulgated under the Exchange Act. Such rules restrict the solicitation
of purchasers of a security when a person is interested in the distribution of
such security and also limit market making activities by an interested person
until the completion of the distribution. If the Underwriter must cease making a
market, the market and market price for such securities may be adversely
affected and holders of such securities may be unable to sell such securities.
No Intention to Declare or Pay Cash Dividends
The Company does not currently intend to declare or pay any cash
dividends on the Common Stock in the foreseeable future and anticipates that
earnings, if any, will be used to finance the development and expansion of its
business. Any payment of future dividends and the amounts thereof will be
dependent upon the Company's earnings, financial requirements, and other factors
deemed relevant by the Company's Board of Directors, including the Company's
contractual obligations. See "Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Potential Adverse Impact of Preferred Stock on Rights of Common Stockholders
The Company's Certificate of Incorporation authorizes the issuance of
"blank check" preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval, to issue
10
<PAGE>
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Company's Common Stock. In the event of issuance, the preferred stock could
be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company. The possible impact on
takeover attempts could adversely affect the price of the Common Stock. Although
the Company has no present intention to issue any shares of its preferred stock,
there can be no assurance that the Company will not do so in the future. See
"Description of Securities."
Potential Adverse Impact on Market Price of Shares Eligible for Future Sale
Future sales of shares by existing shareholders under Rule 144 or Rule
701 of the Securities Act or following the issuance of shares of Common Stock
upon exercise of options or otherwise could have a negative impact on the market
price of the Common Stock. As of May 14, 1996, approximately 4,269,600 shares of
Common Stock held by existing stockholders who are not subject to lock-up
agreements were eligible for sale to the public. 200,000 shares of Common Stock
are issuable upon the exercise of options and eligible for immediate sale. An
additional 420,000 shares of Common Stock issuable upon the exercise of options
will be eligible for sale (subject to vesting schedules) upon the expected
filing of a registration statement under the Securities Act on or before August
31, 1996. At various times before August 10, 1997, approximately 9,719,898
shares of Common Stock held by existing stockholders will become eligible for
sale the the public under Rule 144. Of this amount, approximately 3,868,367
shares of Common Stock will be eligible for sale on to the public on February
10, 1996 following the expiration of certain lock-up agreements with the
Underwriter. See "Shares Eligible for Future Sale."
PRICE RANGE OF COMMON STOCK AND WARRANTS
The following table sets forth high and low prices for the Company's
Common Stock on Nasdaq. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Quarter Ended Common Stock Warrants
- ------------- ----------------- -----------------
High Low High Low
------ ----- ------ ------
1995
Third quarter $12.00 $6.00 $ 7.87 $1.50
Fourth quarter 47.50 9.87 41.25 6.50
1996
First quarter 38.50 8.75 31.25 5.50
Second quarter
(through May 14) 20.00 14.00 16.00 10.24
11
<PAGE>
On May 14, 1996, the closing sale price for the Common Stock on Nasdaq
was $15.25 per share, and the closing sale price for the Warrants was $11.00 per
Warrant.
As of April 30, 1996, there were approximately 178 registered holders
of record of the Company's Common Stock, which the Company believes represents
more than 2700 beneficial holders (including brokerage firms and other
nominees), and approximately 13 registered holders of the Company's Warrants,
which the Company believes represents 1,894 beneficial holders (including
brokerage firms and other nominees).
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock. The Company
plans to retain any earnings to provide for the development and growth of the
Company.
12
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except for per share data)
The selected financial data for the period January 1, 1994 through May
10, 1994 is derived from the financial statements of the Company's predecessor
for financial reporting purposes. The selected financial data for the period May
11, 1994 (inception) through December 31, 1994 and the year ended December 31,
1995 have been derived from the financial statements of the Company. These
financial statements have been audited by Grant Thornton LLP, the Company's
independent public accountants for such periods. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, including notes
thereto, appearing elsewhere in this Prospectus. The financial data with respect
to the three months ended March 31, 1995 and March 31, 1996 is unaudited;
however, in the opinion of management, such data reflects all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present
the data for such interim periods. Operating results for interim periods are not
necessarily indicative of the results that may be expected for a full year.
<TABLE>
<CAPTION>
L&LD
(Predecessor) Company
-------------- -----------------------------------------
Period from
Period from May 11, 1994
January 1, 994 (Inception) Three Months Ended
through through Year Ended March 31,
May 10, 1994 December 31, 1994 December 31, 1995 1995 1996
-------------- ----------------- ----------------- ----------------------
Statement of Operating Data:
<S> <C> <C> <C> <C> <C>
Net sales......................... $ --- $ --- $ 50 $ --- $ ---
Consulting revenues............... 11 --- --- --- ---
Cost and expenses................. 48 2,331 6,792 1,716 1,487
-------- ----------- --------- --------- --------
Net loss.......................... $ (37) $ (2,331) $ (6,742) $ (1,716) $ (1,487)
Net loss per share................ $ (0.21) $ (0.56) $ (0.16) $ (0.11)
Weighted average shares
outstanding..................... 10,968 12,095 10,968 13,855
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------- March 31
1994 1995 1996
-------- -------- --------
Balance Sheet Data:
<S> <C> <C> <C>
Working capital (deficit)......... $ (587) $ 7,139 $ 5,628
Total assets...................... 204 7,900 6,760
Total liabilities................. 686 410 686
Stockholders' equity (deficiency). (482) 7,490 6,074
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Company Overview
The Company is a development stage enterprise incorporated in Delaware.
The Company is engaged in the continuing development of communications products
which utilize the Company's proprietary technology to transmit and receive real
time, interactive video, voice and data signals over UTP copper, as well as
coaxial cable and fiber with proper interfaces, to and from desktop personal
computers over local and wide area networks. During the second half of fiscal
year 1996, the Company plans to introduce and market the VideoLan VL2000 System,
its first product, through the establishment of distribution channels and direct
sales in certain niche markets. The Company will also continue to develop its
technology to enable local telephone exchange carriers, RBOC's, and cable
companies to provide video services on existing wiring plants.
In August 1995, the Company concluded its initial public offering of
2,875,000 shares, each unit consisting of one share of common stock and one
redeemable common stock purchase warrant exercisable for one share of common
stock at a price of $7.00, subject to certain adjustments based upon
anti-dilution provisions, at any time until August 10, 2000. The net proceeds of
the offering to the Company, after payment of underwriters discounts and
commissions, and other expenses of the offering were approximately $9,600,000.
Management believes that approximately $750,000 of the proceeds of the
offering will be sufficient to accomplish the Company's marketing strategy for
the VideoLan VL2000 System ($212,072 used as of March 31, 1996), since the
Company plans to rely in part on the marketing organizations of the OEM's,
VARS's, systems integrators and distributors through which it intends to sell
the VideoLan VL2000 System. The Company plans to minimize operating expenses by
subcontracting manufacturing, installation and field maintenance services.
Additionally, it is estimated that approximately $3,000,000 of the proceeds of
the offering will be used to purchase inventory ($763,348 used as of March 31,
1996), and approximately $1,500,000 will be used during the next twelve months
to enhance the VideoLan VL2000 System and develop the Company's technology for
video services ($1,445,133 used as of March 31, 1996). Thereafter, the Company
anticipates that cash flow from the sales of the VideoLan VL2000 System and/or
development contracts with RBOC's, cable companies or other third parties will
be required to fund the integration of the Company's technology into existing
RBOC or cable company infrastructures for video services. The availability of
sufficient development funding at the earliest possible time could be a
significant factor in establishing the Company's technology, rather than a
competing technology, in the marketplace. The balance of the IPO proceeds are
being used for general corporate working capital.
There can be no assurance that the Company will establish satisfactory
distribution channels for the VideoLan VL2000 System or that the VideoLan VL2000
System will be accepted in the marketplace. There can also be no assurance that
the Company will enter into satisfactory development contracts for video
services or that it can complete development before other technologies are
selected by video services providers. See "Risk Factors--Lack of Marketing
Experience and Reliance on Marketing Partners" and "Necessity of Developing New
Applications."
14
<PAGE>
Results of Operations
Three Months Ended March 31, 1996 Compared to the Three Months Ended March 31,
1995
Revenues. The Company had no revenues for the periods ended March 31,
1996 or March 31, 1995. The Company has engaged in limited marketing of the
VideoLan VL 2000 System and is currently beginning to implement its marketing
strategy.
Selling, General and Administrative Expenses. Total selling, general
and administrative expenses for the three months ended March 31, 1996 were
$1,555,782, as compared with $1,726,083 in the comparable period of the prior
year. In the first quarter of fiscal year 1995 the Company incurred non cash
compensation expense of $1,125,000 relating to the issuance of common stock to
an employee. Salaries, consulting fees and related payroll taxes increased by
$572,000 to $708,007 in the first quarter of fiscal year 1996, as compared to
$135,945 in the first quarter of fiscal year 1995. Research and development
expenses for the first quarter of 1996 were $455,133, as compared with $245,553
in 1995, and marketing costs were $53,356 in 1996, as compared with $43,332 in
1995.
Net Loss. The net loss of the Company for the three months ended March
31, 1996 was $1,487,435 ($0.11 (per share)), as compared with $1,716,326 ($0.16
(per share)) for the three months ended March 31, 1995. The Company expects to
incur continuing losses until significant quantities of the VideoLan System are
sold.
Fiscal Year Ended December 31, 1995 Compared to the Period May 11, 1994
(Inception) through December 31, 1994
Revenues. The Company had revenues of $50,053 for the fiscal year ended
December 31, 1995. The Company has engaged in limited marketing of the VideoLan
VL2000 System and is planning to implement its marketing strategy during the
second half of fiscal year 1996.
Selling, General and Administrative Expenses. The Company is a
development stage enterprise. Total selling, general and administrative expenses
for the year ended December 31, 1995 were $6,881,715, as compared with
$2,330,934 for 1994. In 1995, there was non cash compensation expense of
$3,233,000 relating to the issuance of stock and stock options to employees and
consultants. Research and development expenses for 1995 increased by $333,842,
to $1,423,916, as compared with 1994 expenses of $1,090,074. Marketing costs for
1995 were $158,716, as compared with $40,074 for 1994.
Net Loss. Net loss of the Company was $6,742,289 ($0.56 (per share))
for the year ended December 31, 1995, of which approximately $0.27 per share was
attributed to non cash compensation expense relating to the issuance of stock
and stock options to employees and consultants. The Company expects to incur
continuing losses until significant quantities of the VideoLan VL2000 System are
sold.
Liquidity and Capital Resources
Through March 31, 1996, an aggregate of $6,795,866 has been expended in
the operating and development stage activities of the Company, principally for
research and development, salaries and professional fees. An additional $358,695
has been used to acquire the Company's proprietary technology, prepare the
Company's patent applications and purchase certain equipment. Additional funds
15
<PAGE>
will be necessary to pay for additional engineers, technical people and
increased marketing costs in connection with the sale of the Company's products.
As of March 31, 1996, the Company has financed its operations primarily
through investments by its founder and individual investors, a private placement
of the Company's Common Stock completed in February of 1995 which raised net
proceeds of approximately $1,900,000, and from the net proceeds of the Initial
Public Offering ("IPO") which was completed in August 1995. The Company expects
that the IPO proceeds will be sufficient to meet the Company's working capital,
marketing, research and development, engineering and inventory requirements for
the balance of 1996. Thereafter, the Company anticipates that sales of the
VideoLan VL2000 System and/or the proceeds of research and development contracts
will be the primary source of working capital.
As of this date, the Company has no material long-term debt or material
commitments for capital expenditures. The Company may need to obtain external
financing as inventory requirements increase. However, there can be no assurance
that such financing will be available, which could materially adversely affect
the Company's business.
The Company believes that, during the past year, inflation has not had
a significant impact on the Company's operating results.
BUSINESS
Background
The emphasis of the Company is the development of products utilizing
the Company's proprietary technology. The Company's first product is the
VideoLan VL2000 System, a stand-alone video, voice and data communications
network for the desktop PC.
Although video conferencing was first introduced at the 1964 New York
World's Fair, the first commercial units, known as conference room-based
systems, were introduced in the late 1970's. These systems used special
dedicated telephone lines, expensive hardware and required trained operators.
Technological improvements and increased production volumes have decreased the
current cost of room-based systems to $15,000 for lower-cost, lower-function
systems and $50,000 for more advanced systems. An estimated 50,000 room-based
systems are in use today.
The Company believes that desktop PC video, voice and data conferencing
systems, first introduced in the early 1990s offer significant advantages over
room-based systems, including lower cost and ease of use. These products also
permit data applications sharing. It is estimated that in excess of 50,000
desktop PC conferencing units were sold as of year end 1995. Industry analysts
estimate that between 2.5 and 5 million desktop units and 250,000 conference
room-based systems will be in use in two years.
The Company believes that the desktop PC video, voice and data
conferencing products presently marketed use transport and switching
technologies which result in a wide range of performance characteristics,
including differences in video and voice quality, real time interactivity, the
ability to run multiple conferences or data applications simultaneously, the
number of users that can participate in a conference, and the degree of control
which the users have over the various elements of the conference.
16
<PAGE>
These products connect desktop PCs through an integrated services digital
network ("ISDN"), a LAN, or a PBX-like hub network in combination with a LAN,
using UTP copper, coaxial cable or fiber as a transmission medium.
ISDN connections require the costly installation of ISDN telephone
lines and hardware to transport the input signals, and can result in tariff
charges for user access, even when the conferencing parties are in the same
building. ISDN connections are not a network solution and not ideal for multiple
users, since additional ISDN lines must be installed to connect each person in a
user group.
LAN connections can transmit only a finite amount of data, and the
transmission of continuous video images uses a substantial portion of this
capacity. Accordingly, LAN connections currently tend to overload the LAN, which
causes data applications to run slower, affecting the conference participants as
well as other users. Therefore, there are limitations on the number of
simultaneous video conferences and data applications which can be used. Most
LANs presently installed use UTP copper infrastructure as a transmission medium.
The installation of fiber improves performance, but not sufficiently to overcome
the limitations of a LAN connection.
Existing PBX-like hub networks transport video and voice signals over a
network separate and parallel to the LAN. These products require the
installation of coaxial cable or fiber as a transmission medium. Data
applications are transmitted through a LAN connection, which could affect the
performance of the LAN.
The VideoLan VL2000 System is a PBX-like hub network, integrated into a
LAN environment, which transports uncompressed real time analog video, voice and
data signals independently of and parallel to the LAN. A communications network
solution, the VideoLan VL2000 System accesses data from a client/server and
transports the data signals, along with the video and voice signals, using the
existing LAN UTP copper infrastructure. UTP copper has four pairs of wires (8
individual wires). The VideoLan VL2000 System transmits video, voice and data
signals over one of the pairs, while real time video, voice and data signals are
received interactively over a second pair. The LAN can use the remaining two
pairs for data only applications.
Business Strategy
The Company's business strategy is to market the VideoLan VL2000 System
and to develop additional products utilizing its proprietary technology,
including video and high bandwidth delivery systems for the telephone and cable
companies ("Telephony Products"). Since the Company's technology could be
adaptable to additional applications, including home to home and business to
business video, voice and data conferencing, it may undertake other initiatives
in the future.
A. Marketing of the VideoLan VL2000 System
The Company intends to sell the VideoLan VL2000 System through OEMs,
VARs, systems integrators and distributors whose markets and market presence
will provide significant sales channels, and to distributors and end users in
targeted niche markets particularly suited to its technology, such as financial
markets, telemedicine, high-end business and educational applications. The
Company anticipates that it will subcontract field maintenance services. The
Company has entered into an arrangement for the manufacture and assembly of
VideoLan VL2000 System components with Plexus Corp ("Plexus"). The VideoLan
VL2000 System components are intended to be sold to OEMs, VARs and systems
17
<PAGE>
integrators for integration into fully configured PC networks and workstations.
The Company does not intend to assemble and market fully configured PC networks
or workstations.
In August 1995 the Company signed a three-year distribution agreement
with Samsung America, Inc. and Samsung Corporation of Korea (collectively,
"Samsung"). Under the terms of the agreement, Samsung will have a three year
exclusive right to sell, service, and distribute the VideoLan VL2000 System in
Korea. In October, 1995, the Company and Samsung signed an addendum to the
agreement whereby Samsung has prospectively agreed to purchase VL2000 Desktop
Multimedia Products and associated peripherals from the Company. Samsung
recently completed uncontrolled product testing in the United States which the
Company believes was successful. The Company anticipates that Samsung will begin
importing the VideoLan VL2000 System in the near future although there can be no
assurance that Samsung will purchase significant quantities of the VideoLan
VL2000 System.
The Company has also entered into a distribution agreement (the "IE
Agreement") with Intelligent Electronics, Inc. ("IE"). Since entering that
agreement, IE has experienced an adverse change in its financial condition and
has shifted its focus away from the distribution of videoconferencing equipment.
As a result, the Company anticipates that the distribution will be made through
IE's VAR network rather than in the manner originally contemplated by the IE
Agreement.
B. Development of Video Distribution and Telephone Products
The Company presently is developing its technology for video delivery
services allowing immediate access in the home to programming selected by
customers from a remote library, or video programming. The Company believes that
local telephone exchange carriers, RBOCs and cable companies could use the
Company's proprietary technology to provide interactive video services by which
voice and data signals would be transmitted over existing infrastructure
connecting telephone facilities or cable companies with residences or businesses
without compromising the quality of the signals received.
The Company intends to enter into arrangements with one or more RBOCs
and cable companies or other large OEMs whose primary market is the RBOCs to
provide interactive video transport. Additional research and development,
presently underway, will be necessary to "scale up" and integrate the Company's
transport and switching technology into the RBOC or cable company environment.
If the integrations are successfully completed, it is anticipated that trials
would be conducted prior to the commencement of commercial service. The Company
has entered into discussions with certain RBOCs or other large OEMs whose
primary market is the RBOCs. Testing of the Company's transmission technology
for conformity with the specifications of the twisted pair infrastructure of one
RBOC has commenced. The Company anticipates that it would be paid a royalty if
commercial service begins based upon user access, and would supply components to
the service providers. There can be no assurance that the Company's technology
will be accepted in the marketplace, or will be perceived as being competitive
with other technologies, including technologies which may be developed.
There can be no assurance that the Company's business strategy will be
successful. In addition, video services may be indirectly subject to significant
governmental regulation.
Attributes of the VideoLan VL2000 System
18
<PAGE>
A basic component of each video, voice and data conferencing system is
a transmission medium capable of transporting video, voice and data signals. One
of the advantages of the VideoLan VL2000 System compared to existing products is
its ability to transport real time, interactive, full motion video (30 frames
per second), voice and data signals over UTP copper. This should significantly
lower the cost and simplify the installation of the VideoLan VL2000 System,
since UTP copper infrastructure exists in most LAN environments. No ISDN
installation and usage costs are incurred and it is not necessary to install
coaxial cable or fiber.
The VideoLan VL2000 System transmits the data signals, along with video
and voice signals, independently of a LAN. Consequently, multiple video
conferencing and data applications can be used simultaneously without
overloading and degrading the performance of the LAN.
In addition, the Company believes that no existing product permits
users to access and control at their PCs remote multimedia devices such as
cameras, video monitors, VCRs and laser disks. The Company also believes that
the VideoLan VL2000 System can transport signals, without degradation, over
longer distances than competitive products, without the need to amplify the
signals which tends to diminish performance and reduce the number of potential
conference participants. However, there can be no assurance that the Company is
aware of all of the other technologies presently under development some of which
could have similar or other attributes. See "Risk Factors -- Uncertain Market
Acceptance of Technology; Risk of Obsolescence."
Operation of the VideoLan VL2000 System
Most LANs presently installed use UTP copper as a transmission medium.
The VideoLan VL2000 System is connected in the LAN environment through the LAN's
existing UTP copper infrastructure. The core of the VideoLan VL2000 System is a
multipoint voice data and video switch (16 users interfaces on switch) (the
"VideoLan Hub"). The VideoLan Hub transmits and routes the video, voice and data
signals over two of the four pairs of wires comprising UTP copper, while the LAN
uses the other two pairs. Therefore, although integrated into the LAN
environment, the VideoLan VL2000 System operates independently of and parallel
to the LAN. Designed with an open architecture, the VideoLan VL2000 System
operates on IBM compatible PCs running Microsoft(C) Windows(TM) operating
software, and can be equipped with application programming interfaces which also
adapt to support MacIntosh(TM) and Unix(TM) software platforms. The VideoLan
VL2000 System presently has sufficient capacity for 128 two person conferences
at one time. All standard video, voice and data source signals can be
transmitted and received.
In order to initiate a conference, a user at his desktop PC sends an
instruction through a proprietary user interface ("UI") to the VideoLan Hub
requesting the VideoLan Hub to distribute the signals to the conference
participants. Data applications and multimedia devices accessed from a
client/server are transported with the video and voice signals over the LAN's
UTP copper infrastructure through the VideoLan Hub, operating as a stand-alone
communications network. Up to four real time full color, full motion (30 frames
per second) images, and multiple real time data and multimedia applications can
be transmitted and controlled interactively by users at their desktop PCs. The
images appear full screen or can be repositioned and reduced by the user so that
data applications can be viewed and manipulated. Images and data can be
selectively transmitted and distributed to the conference participants, and can
be completely different from the real time images and data received. For
example, participants may transmit their own image while substituting another
image on their desktop PC.
19
<PAGE>
The VideoLan VL2000 System can operate inter-building, interstate, or
internationally over a variety of public telecommunications network
architectures, including T1, E1 and ISDN, using codecs (a hardware circuit used
to compress and decompress digitized audio, video or images) and satellite,
microwave or fiber connections.
Each VideoLan Hub connects up to 16 users situated up to 2,000 feet
from the VideoLan Hub. Users connected to one or more VideoLan Hubs can
participate in a conference. Up to four participants at their desktop PCs within
any VideoLan Hub can control the real time, interactive signals transmitted and
received. As a result, those participants can interactively edit a document and
a spreadsheet, and operate one or more multimedia devices. Other participants
can receive the various voice, video and/or data inputs at their desktop PCs, in
any configuration, as determined by the participants transmitting the signals,
but cannot control the functionality.
Marketing and Sales
The Company has engaged in limited marketing of the VideoLan VL2000
System and presently is beginning to implement its marketing strategy.
The Company anticipates that the average retail price of the VideoLan
VL2000 System components will be approximately $4,700 per user. The cost of
integration, installation and operation generally should be significantly lower
than competing products, since neither ISDN lines nor the installation of
coaxial cable or fiber is required.
The Company intends to market the VideoLan VL2000 System principally
through OEMs, VARs, systems integrators and distributors, whose markets and
market presence will provide significant sales channels, and through
distributors and directly to end users in targeted niche markets particularly
suited to its technology, such as telemedicine, high-end business and
educational applications. The Company believes that its marketing partners could
assume a portion of the marketing costs. The Company is now in discussion with
multiple entities to become resellers of the VL2000 products.
Manufacturing
The Company has no manufacturing facilities and does not plan to
manufacture the VideoLan VL2000 System or any future products it may develop.
The VideoLan Hub and UI are comprised primarily of electronic components and
sub-assemblies manufactured to the Company's specifications. Operating and
applications software, which are proprietary or licensed by the Company, will be
installed by the systems integrator.
The Company has entered into an arrangement with Plexus to subcontract
the manufacture and assembly of the VideoLan Hub and UI. The various component
parts and sub-assemblies which comprise the VideoLan VL2000 System will be
purchased from vendors recommended by the Company. After Plexus manufactures and
tests the components, Plexus will deliver them to the Company's assembly
facility in Louisville, Kentucky for additional testing, packaging and shipping.
Patents
The Company has a pending patent application in the United States which
claims an efficient network for the real time, simultaneous, bi-directional
transmission of voice, video, and data among a
20
<PAGE>
plurality of users connected to a plurality of hubs. The claims in such
application have been allowed and the Company anticipates that patent issuance
is imminent. In addition, an international patent application is pending
designating 56 foreign countries including the United States, which claims the
efficient network that was originally claimed in the U.S. patent application,
plus a method for the simultaneous transmission of analog video and digital data
on twisted pair cable, and a method for automatically equalizing a signal sent
over UTP copper.
Patents and patent applications involve complex legal and factual
issues. A number of companies have filed applications for, or have been issued,
patents relating to products or technology that is similar to some of the
products or technology being developed or used by the Company. There can be no
assurance that the Company's patent will afford protection against the
development of similar or related technology by competitors. Although the
Company believes that its VideoLan VL2000 System and technology do not and will
not infringe on patents or proprietary rights of others, it is possible that
such infringement or violation has occurred or may occur, or that others may
infringe on the Company's patents.
The Company also will protect its proprietary intellectual property
rights with confidentiality agreements with its employees, licensees, marketing
partners and vendors. However, there can be no assurance that such rights will
be adequately protected by such agreements. See "Risk Factors--Uncertain
Protection of Intellectual Property Rights."
Research and Development
The Company intends to enter into arrangements with one or more RBOCs
and cable companies to develop video services and transport products. Additional
research and development, presently underway, will be necessary to "scale up"
and integrate the Company's proprietary technology into the RBOC or cable
company environment. If the integrations are successfully completed, it is
anticipated that trials would be conducted prior to the commencement of
commercial service. The Company anticipates that it would be paid a royalty once
commercial service begins based upon user access, and that it would supply
components to the service providers. During 1994 and 1995, the Company spent
$1,090,074 and $1,423,916, respectively, on research and development.
Government Regulation
The VideoLan VL2000 System is not directly subject to federal
regulation; however, products into which it may be integrated are subject to
federal laws relating to radiation and conduction levels to prevent interference
with radio and television communication. The VideoLan VL2000 System has been
tested for compliance with applicable FCC regulations.
The Company's potential alliances with large OEMs that have developed
relationships with telephone companies and cable companies to develop video
services could be affected by the Telecom Act, which instructs the FCC to
develop rules by August 1996 to implement the repeal of the "Cross-Ownership
Ban", the statutory ban against telephone companies providing video programming
in their own service areas. The Telecom Act provides telephone companies with
four avenues for the provision of video services and terminates the Video
Dialtone rules previously enacted by the FCC to permit some video delivery by
telephone companies within their service areas. The U.S. Supreme Court has
remanded to a lower court a case which questioned the constitutionality of the
"Cross-Ownership Ban" to determine whether or not it is moot in light of the
Telecom Act. Further proposals for additional or revised statutes
21
<PAGE>
and regulations are considered by Congress and federal regulatory agencies,
respectively, from time to time. The Company cannot predict the effect of
possible changes in federal regulations, policies or laws on the business
strategy of the Company.
Competition
The market for desktop PC video conferencing products is fragmented. A
number of video conferencing products are being marketed, and new entrants into
the market are anticipated. There are numerous well established competitors,
including joint ventures involving major communications companies that possess
substantially greater financial, personnel and other resources than the Company.
The Company believes that the advantages of the VideoLan VL2000 System
and the technology of the Company are the principal factors differentiating the
VideoLan VL2000 System from competing products and their underlying
technologies. The Company intends to compete by demonstrating the
price/performance advantages of the VideoLan VL2000 System.
Several video services trials are being conducted, including trials by
RBOCs such as Bell Atlantic, NYNEX, Pacific Bell and BellSouth, but the
development of commercial video services is at an early stage.
Employees
As of April 30, 1996, the Company employed 28 persons including
research and development employees, management and administrative employees. As
the Company proceeds with full scale commercial marketing of the VideoLan VL2000
System and continued development of other potential applications of its
technology, the Company will need to employ additional qualified marketing,
technical and other personnel.
Facilities
On May 15, 1995, the Company entered into a five year lease in
Louisville, Kentucky, for approximately 6,700 square feet of space, at an annual
rental of $102,480, effective as of June 1, 1995. The premises consist of
administrative offices and research and development facilities. The Company
believes that this facility will provide adequate capacity for its anticipated
operations for the foreseeable future.
On September 28, 1995, the Company entered into a five-year lease
agreement for approximately 4,600 square feet of space in Louisville, Kentucky
at an annual rental of $26,942. This space was utilized as an assembly facility,
warehouse, and distribution center. However, on April 15, 1996 the Company
entered into a five-year lease agreement to lease 9,778 square feet of space at
a new location in Louisville, Kentucky at an annual rental of $61,128 through
December 1997; $73,128 through August 1999; and $85,128 through April 2001. The
new location will be utilized for engineering and research and development
purposes and will serve as the new assembly facility, warehouse, and
distribution center. The old space will be subleased.
Litigation
The Company is not a party to any material pending litigation.
22
<PAGE>
MANAGEMENT
Directors and Executive Officers
The names of the directors and executive officers of the Company, and
their respective ages and positions with the Company, are as follows:
Name Age Position
Ted Ralston 32 Chairman of the Board and Director
Steven B. Rothenberg 50 Vice President Finance, Chief Financial
Officer,
Treasurer, Secretary and Director
Peter Beck 54 Chief Operating Officer
Howard S. Jacobs 53 Director
Vernon L. Jackson 43 Director
John R. Glankler 38 Director
Richard Dean Jackson 38 Director
Jacques O. de Labry 57 Director
All directors hold office until their successors have been duly elected
and qualified or until their earlier resignation or removal. Directors are
elected annually.
Ted Ralston has been Chairman of the Board and a director of the
Company since its formation in May 1994. Mr. Ralston has been the President of
TC Company, an electronics marketing firm, since 1985.
Vernon L. Jackson has been a director of the Company since June 1994.
He served as President of the Company from May 1994 to January 1996. From March
1990 until May 1994, he was the President and Chief Executive Officer of L&LD,
an engineering consulting firm. From August 1988 to March 1990, he was a Systems
Designer and Consultant with American Telephone and Telegraph Corp., in
Louisville, Kentucky, responsible for designing, installing and maintaining
telephone switching and transport infrastructure. He holds a degree in
Electronics Engineering and Technology from United Electronics Institute. In
addition, he has completed extensive related course work at the University of
Louisville, University of Kentucky, and McKindree College of Illinois.
Steven B. Rothenberg has been Vice President Finance, Chief Financial
Officer and Treasurer of the Company since September 1995. In January 1996, he
was elected to the Board of Directors and as Secretary of the Company. During
the two year period prior to joining the Company, Mr. Rothenberg
23
<PAGE>
was a financial consultant to the telecommunications industry. From 1992 to
1994, Mr. Rothenberg was Chief Financial Officer of H2O Plus, L.P., a specialty
retailer in the cosmetics and skincare business. From 1988 to 1991, Mr.
Rothenberg was Chief Financial Officer of Ellesse USA, a subsidiary of Reebok
International, Ltd. In addition, Mr. Rothenberg has held senior financial
management positions with Warner Communications, Inc., Revlon Inc., and Ernst
and Young, LLP. Mr. Rothenberg received a BS in accounting and finance from The
American University in 1968.
Peter Beck has been the Company's Chief Operating Officer since April
1995. For ten years prior to that time, he was the founder and Chief Executive
Officer of Digital Access Corporation, a telecommunications equipment developer
and manufacturer. Prior to such time, Mr. Beck served as director of business
development planning for MCI Communications, Inc. Mr. Beck received his MBA in
finance from the University of Chicago in 1971 and his BA from Harvard
University in 1964.
Howard S. Jacobs has been a director of the Company since August 1995.
He has been a member of the law firm of Rosenman & Colin LLP, New York, New
York, since March 1994. For more than five years prior to March 1994, Mr. Jacobs
was a member of two other law firms in New York City. Mr. Jacobs is the director
designee of the Underwriter for the Company's initial public offering.
John R. Glankler has been a director of the Company since August 1995.
He has been associated with the law firm of Sebaly, Shillito & Dyer, a Legal
Professional Association, Dayton, Ohio, counsel to the Company, since April 1,
1995. For more than five years prior to April 1995, Mr. Glankler was associated
with another firm in Ohio. Mr. Glankler obtained a BA in economics from Duke
University and a JD from the University of Cincinnati.
Richard Dean Jackson has been a director of the Company since July
1994. He served as Secretary and Executive Vice President from May 22, 1995
until his resignation in December 1995. During 1993 and until May 1994, he was
the Chief Executive Officer of Universal Four-Pair, Inc., a Kentucky
corporation, which had licensed the marketing rights to video conferencing
technology from L&LD, which license was terminated in April 1994. From 1990 to
1992, Mr. Jackson engaged in the practice of law in San Jose, California. He
received a law degree from the Thurgood Marshall School of Law at Texas Southern
University, an MBA in International Trade from Laredo State University, and a BA
from the University of North Carolina, Charlotte.
Jacques O.de Labry has been a director of the Company since April 1996.
Mr.de Labry has been a consultant to the telecommunications industry since 1995.
Previously, Mr. de Labry served as President and Chief Executive of Raynet
International, Inc., a supplier of fiber optic telecommunications systems, from
1988 until the sale of the company in 1995. Mr.de Labry is a director of
Multilink, Inc. Mr. de Labry received a BA from Yale University in 1960.
Board Committees
The Company has a Compensation Committee, a Nominating Committee and an
Audit Committee. The Compensation Committee reviews, analyzes and makes
recommendations to the Board of Directors regarding salaries, incentive
compensation and stock option grants for officers, employees and directors of
the Company. The current members
24
<PAGE>
of the Compensation Committee, formed in January 1996, are Ted Ralston, Steven
B. Rothenberg and John R. Glankler. The Compensation Committee held its first
meeting on April 9, 1996. The Nominating Committee was formed in April 1996. The
current members of the Nominating Committee are Ted Ralston, Howard S. Jacobs
and R. Dean Jackson. This committee's responsibilities include the selection of
potential candidates for director and the recommendation of candidates to the
Board. It also makes recommendations to the Board concerning the structure and
membership of the other Board Committees. The Nominating Committee will consider
nominees for the Board of Directors recommended by stockholders. Directors are
selected on the basis of their demonstrated broad knowledge, experience and
ability in their chosen endeavors and, most importantly, on the basis of their
ability to represent the interests of the stockholders. The Nominating Committee
held its first meeting in April 1996. The Audit Committee reviews the results
and scope of the Company's audits and other services provided by the Company's
independent auditors and approves the selection of the auditors. The current
members of the Audit Committee, appointed in January 1996, are Howard S. Jacobs,
Ted Ralston and John R. Glankler. The Audit Committee held its first meeting on
April 9, 1996.
Executive Compensation
Summary of Compensation in 1995. The following summary compensation
table sets forth information concerning compensation for services in all
capacities awarded to, earned by or paid to the executive officers of the
Company whose salary and bonus exceeded $100,000 during the year ended December
31, 1995 ("Named Executive Officers").
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
Securities
Underlying
Other Annual Options/ All Other
Name and Principal Position Year Salary($) Compensation($) SARs (#) Compensation ($)
--------------------------- ---- --------- --------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Ted Ralston
(CEO and Chairman of
the Board(1)) 1995 75,000 - 100,000(2) 40,000(3)
John E. Haines
(CEO(4)) 1995 67,742 - 250,000(5) 30,000(6)
Vernon L. Jackson
(President(7)) 1995 166,250 - 375,000(8) 0
R. Dean Jackson
(Executive Vice
President(9)) 1995 101,625 - 100,000(10) 0
</TABLE>
(1) Mr. Ralston resigned as CEO on September 1, 1995. He remains Chairman
of the Board.
(2) Reflects options to purchase shares of Common Stock at $2.00 per share
granted on March 1, 1995. These options were not exercisable until the
Company had cumulative net income before income taxes of
25
<PAGE>
$1,000,000. The options were cancelled pursuant to Mr. Ralston's
resignation as CEO on September 1, 1995.
(3) Reflects consulting fees paid to Mr. Ralston for the period September
1, 1995 to December 31, 1995 pursuant to a consulting agreement with
the Company. This consulting agreement requires Mr. Ralston to provide
at least thirty hours of service per week and provides for a monthly
payment to Mr. Ralston of $10,000 in consideration of his performance
of services.
(4) Mr. Haines' employment as CEO ceased in January 1996.
(5) Reflects options to purchase shares of Common Stock at $3.00 per share
granted on August 18, 1995. Such options were exercisable semi-annually
over a 30 month period in five equal installments. Each installment
vested 12 months prior to its exercise date. Options for 100,000 of
these shares were cancelled on May 14, 1996 under a termination and
release agreement between the Company and Mr. Haines.
(6) Reflects consulting fees paid to Mr. Haines for the period June 1,
1995 to August 31, 1995.
(7) Mr. Jackson resigned as President of the Company in January 1996.
Mr. Jackson continues to serve the Company as a director and employee.
(8) Reflects options to purchase shares of Common Stock at $2.00 per share
granted on March 1, 1995. Options for 187,500 shares are not
exercisable until the Company has cumulative net income before income
taxes of $1,000,000. The remaining options for 187,500 shares are not
exercisable until the Company has cumulative net income before income
taxes of $3,000,000.
(9) Mr. Jackson resigned as Executive Vice President in February 1996 to
relocate to San Francisco. He remains affiliated with the Company as a
manufacturers' representative, and also remains a director.
(10) Reflects options to purchase shares of Common Stock at $2.00 per share
granted on March 1, 1995. These options are not exercisable until the
Company has cumulative net income before income taxes of $1,000,000.
These options were cancelled in February 1996 pursuant to Mr. Jackson's
resignation as Executive Vice President.
Stock Options. The following table sets forth certain information
regarding option grants to Named Executive Officers during the year ended
December 31, 1995.
<TABLE>
<CAPTION>
% of Total Options
Granted to
Options Granted Employees in Exercise or Base Price Expiration
Name (#) Fiscal Year ($/sh) Date
- ---- --- ------------ ------- ----
<S> <C> <C> <C> <C>
Ted Ralston 100,000 8.4% 2.00 None(1)
Vernon L. Jackson 375,000 31.4% 2.00 None
R. Dean Jackson 100,000 8.4% 2.00 None(2)
John E. Haines 250,000 20.9% 3.00 3/1/03(3)
</TABLE>
(1) These options were cancelled pursuant to Mr. Ralston's resignation as
CEO on September 1, 1995.
26
<PAGE>
(2) These options were cancelled pursuant to Mr. Jackson's resignation as
Executive Vice President in February 1996.
(3) The terms of these options provided that they were subject to early
termination upon the occurrence of certain events. Options for 100,000
shares were cancelled under a termination and release agreement between
the Company and Mr. Haines dated May 14, 1996. The termination date of
the options for the remaining 150,000 shares was changed to May 14,
2001.
Option Exercises in 1995 and Year-End Option Values
The following table provides information relating to number and value
of stock options held by the Named Executive Officers at December 31, 1995. The
Named Executive Officers did not exercise any stock options during 1995.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SAR In-the-Money Options/SARs At
At FY-End (#) FY-End ($)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ted Ralston 0 0 0 0
Vernon L. Jackson 0 375,000 0 11,859,375
R. Dean Jackson 0 100,000 0 3,162,500
John E. Haines 0 250,000 0 7,656,250
</TABLE>
Employment Agreements
On September 1, 1995, the Company entered into a two-year consulting
agreement with Ted Ralston, the Company's Chairman of the Board. Effective on
the same date, Mr. Ralston resigned as Chief Executive Officer and Treasurer of
the Company, and his previous employment agreement was terminated. Mr. Ralston's
consulting agreement requires him to provide at least 30 hours of service per
week and provides for a monthly payment to Mr. Ralston of $10,000 in
consideration of his performance of services.
On August 17, 1995, the Company entered into a two-year employment
agreement with Vernon L. Jackson to serve as President and Chief Executive
Officer of the Company at an annual salary of $250,000. The agreement requires
Mr. Jackson to devote his full time and attention to the Company. Mr. Jackson's
employment agreement contains a noncompetition provision which prohibits Mr.
Jackson from competing with the Company during the term and for two years
thereafter. Pursuant to the terms of the agreement, termination by the Company
for any reason without cause, would entitle Mr. Jackson to receive his salary
throughout the remaining term or for one year, whichever is longer.
On August 17, 1995, the Company entered into a two-year employment
agreement with R. Dean Jackson to serve as Executive Vice President and
Secretary of the Company at an annual salary of
27
<PAGE>
$125,000. Under the agreement, Mr. Jackson was prohibited from competing with
the Company during the term of the agreement and for two years thereafter.
Pursuant to the terms of the agreement, termination by the Company for any
reason without cause, would entitle Mr. Jackson to receive his salary throughout
the remaining term or for one year, whichever was longer. Effective February 15,
1996, Mr. Jackson resigned as Executive Vice President of the Company. As part
of his settlement agreement with the Company, Mr. Jackson is to receive $125,000
in salary paid over a four-month period.
On September 1, 1995, the Company entered into a two-year employment
agreement with John E. Haines to serve as Chief Executive Officer and a director
of the Company at an annual salary of $187,500. Mr. Haines' employment agreement
also contained a noncompetition provision which prohibited Mr. Haines from
competing with the Company during the term of the agreement and for two years
thereafter. Prior to September 1, 1995, Mr. Haines was providing consulting
services to the Company under a consulting agreement dated June 1, 1995.
Pursuant to the consulting agreement, Mr. Haines was paid $10,000 a month for
services rendered and was granted stock options to purchase 250,000 shares at
$3.00 per share subject to a vesting schedule. Additionally, pursuant to the
terms of the consulting agreement, Mr. Haines could earn an annual bonus up to
$112,500 provided certain sales goals were achieved by the Company.
Mr. Haines resigned as Chief Executive Officer of the Company on
January 17, 1996. On May 14, 1996, Mr. Haines entered into a termination and
release agreement with the Company. Under the terms of this agreement, Mr.
Haines was permitted to retain already vested options for 150,000 shares of
Common Stock granted to him under the consulting agreement. The termination and
release agreement requires the Company to register 50,000 of such shares by June
20, 1996 and grants Mr. Haines certain registration rights with respect to the
remaining 100,000 shares. In addition, Mr. Haines was permitted to continue to
receive compensation at his base salary through the earlier of August 31, 1997
or 90 days after he first sells shares purchased pursuant to the exercise of the
options. The agreement contains certain other provisions regarding
non-competition, non-disclosure of proprietary information and reimbursement of
certain expenses. Upon entering the agreement, Mr. Haines resigned as a director
of the Company.
Compensation of Directors
The Company does not currently compensate directors who are also
executive officers of the Company for service on the Board of Directors. Under
Company policy, each non-employee director of the Company is entitled to
reimbursement of expenses incurred in connection with attending meetings of the
Board. Non-employee directors also receive immediately exercisable options to
purchase 10,000 shares of Common Stock, at the then fair market value, on the
date of their initial election to the Board and on each of the first and second
anniversary dates of their election to the Board, if they are re-elected.
28
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of May 15, 1996 by (i) each person
who is known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock of the Company, (ii) each of the Company's
current directors, (iii) each of the Company's executive officers, and (iv) all
directors and executive officers of the Company as a group. Unless indicated
otherwise, the Company believes that each person named below has the sole power
to vote and dispose of the shares of Common Stock beneficially owned by such
person.
Name Number Percent
---- ------ -------
Ted Ralston(1) 1,389,308 10.0%
Vernon L. Jackson(1) 554,059 4.0%
Steven B. Rothenberg(1) 25,000(2) *
Peter Beck(1) 75,000(3) *
Darrell Griffith(4) 755,000 5.4%
John R. Glankler(5) 35,000(6) *
Howard S. Jacobs(7) 26,400(8) *
R. Dean Jackson(9) 305,000 2.2%
Jacques O. de Labry(10) 10,000(11) *
All directors and
executive officers as a
group (8 persons) 2,419,767 17.1%
- -------------
* Less than 1%
(1) The address of each of Ted Ralston, Vernon L. Jackson, Steven B.
Rothenberg and Peter Beck is 100 Mallard Creek Road, Suite 250,
Louisville, Kentucky 40207.
(2) Represents an option to purchase 25,000 shares of Common Stock which
is presently exercisable.
(3) Represents an option to purchase 75,000 shares of Common Stock which
is presently exercisable.
(4) The address of Mr. Griffith is 1300 Leighton Circle, Louisville,
Kentucky 40222.
(5) The address of Mr. Glankler is 1300 Courthouse Plaza NE, Dayton,
Ohio 45402.
(6) Includes an option to purchase 10,000 shares of Common Stock which is
presently exercisable.
29
<PAGE>
(7) The address of Mr. Jacobs is 575 Madison Avenue, New York, New York
10022.
(8) Mr. Jacobs' wife owns 4,000 shares. Mr. Jacobs disclaims beneficial
ownership of these shares. Includes an option to purchase 10,000
shares of Common Stock which is presently exercisable and warrants to
purchase 8,000 shares of Common Stock which are presently exercisable.
(9) The address of Mr. Jackson is 1388 Gough Street, San Francisco,
California 94109.
(10) The address of Mr. de Labry is 11702 Glen Court Road, Potomac,
Maryland, 20851.
(11) Represents an option to purchase 10,000 shares of Common Stock which
is presently exercisable.
USE OF PROCEEDS
The Company will receive all the net proceeds from the sale of Common
Stock by exercise of the Warrants. Assuming exercise of all Warrants, net
proceeds will be approximately $21,973,000. The Company intends to add all net
proceeds for working capital purposes.
PLAN OF DISTRIBUTION
All of the shares of Common Stock covered by this Prospectus may be
acquired by holders of the Warrants. Such Warrants were issued and sold by the
Company in August 1995 as part of its initial public offering whereby the
Company offered "Units," each consisting of one share of Common Stock and one
Warrant. The Common Stock and the Warrant comprising the Units were detachable
and separately transferable upon issuance.
The Common Stock offered hereby is offered pursuant to the terms and
conditions of an agreement (the "Warrant Agreement") between the Company and
Continental Stock Transfer & Trust Company, as warrant agent (the "Warrant
Agent"), as described below. See "Description of Securities--Redeemable
Warrants." The Company does not intend to use any underwriter, broker or dealer
with respect to the solicitation of exercise of any of the Warrants.
How to Exercise Warrants
Holders of Warrants may exercise them by completing the form of
"Election to Purchase" appearing on the reverse of the Warrant certificate, and
forwarding the completed and duly executed Warrant certificate, together with
the payment provided for therein, to the Warrant Agent. The Warrant Agent's
address and telephone number are: Continental Stock Transfer & Trust Company, 2
Broadway, New York, NY 10004; telephone (212) 509-4000. There are certain
instructions on the reverse of the Warrant certificate; holders should contact
the Warrant Agent in the event they have any further questions. In the event
that the Warrant certificates and payments are not hand delivered to the Warrant
Agent, registered mail or insured overnight delivery are recommended. In the
case of beneficial owners of Warrants who hold in "street name" or "nominee
name," please contact their broker or bank to arrange exercise.
For a holder to exercise the Warrants there must be a current
registration statement in effect with the Commission and qualifications with or
approval from various state securities agencies with respect
30
<PAGE>
to the shares of Common Stock underlying the Warrants, or an opinion of counsel
for the Company that there is an effective exemption from registration. As long
as the Warrants remain outstanding and exercisable, the Company may be required
to file a registration statement with the Commission and have such registration
statement declared effective. There can be no assurance, however, that such
registration statement can be kept current. If a registration statement covering
such shares of Common Stock is not kept current for any reason, or if the shares
underlying the Warrants are not registered in the state in which a holder
resides, the Warrants will not be exercisable and therefore will be deprived of
any value. However, the Company will not be required under the Warrant Agreement
to honor the exercise of the Warrant if, in the opinion of the Board of
Directors upon advice of counsel, the sale of securities upon such exercise
would be unlawful, under federal or state securities laws or otherwise. The
Company has taken action to qualify the sale of Common Stock in certain states
where it has reason to believe that beneficial holders of Warrants reside. The
fact that the Company
has commenced such actions, however, does not mean that it will be able to
successfully qualify the sales of Common Stock. In addition, there are other
states in which shares of Common Stock may be purchased under an exemption from
state securities laws and/or future action by the Company.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 20,000,000 shares of Common Stock,
$0.01 par value per share, and 5,000,000 shares of Preferred Stock, $0.01 par
value per share. As of May 14, 1996, 13,898,498 shares of Common Stock were
outstanding. As of such date, there were 178 holders of record of the
outstanding shares of Common Stock.
The following description of the capital stock of the Company is a
summary and is qualified in its entirety by the provisions of the Company's
Certificate of Incorporation (the "Certificate of Incorporation"), and By-Laws,
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus forms a part.
Common Stock
Holders of Common Stock are entitled to one vote for each share of
Common Stock beneficially owned, on each matter submitted to a vote at a meeting
of stockholders. The Common Stock does not have cumulative voting rights, which
means that the holders of a majority of voting shares for the election of
directors can elect all of the members of the Board of Directors. The Common
Stock has no preemptive rights and no redemption or conversion privileges. The
holders of the outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available at such times and in such amounts as
the Board of Directors may, from time to time, determine, and upon liquidation
and dissolution are entitled to receive all assets available for distribution to
the stockholders. A majority vote of shares represented at a meeting at which a
quorum is present is sufficient for all actions that require the vote of
stockholders. All of the outstanding shares of Common Stock are, and the shares
to be sold by the Company or on exercise of the Warrants will be, when issued
and paid for, fully-paid and nonassessable.
31
<PAGE>
Preferred Stock
Pursuant to the Certificate of Incorporation, the Company is authorized
to issue "blank check" Preferred Stock, which may be issued from time to time in
one or more series upon authorization by the Company's Board of Directors. The
Board of Directors, without further approval of the stockholders,
will be authorized to fix the dividend rights and terms, conversion rights,
voting rights, redemption rights and terms, liquidation preferences, and any
other rights, preferences, privileges and restrictions applicable to each series
of the Preferred Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, adversely affect the voting power of the
holders of Common Stock and, in certain circumstances, make it more difficult
for a third party to gain control of the Company, discourage bids for the
Company's Common Stock at a premium or otherwise adversely affect the market
price of the Common Stock.
Redeemable Warrants
Warrants to purchase an aggregate of 3,144,000 shares of Common Stock
were issued pursuant to the Warrant Agreement. Each Warrant entitles the holder
to purchase, at any time until August 10, 2000 (the "Expiration Date"), one
share of Common Stock at an exercise price of $7.00 per share, subject to
certain adjustments based upon anti-dilution provisions. The Warrants may be
exercised in whole or in part. Unless exercised, the Warrants will automatically
expire on the Expiration Date, unless extended by the Company. The exercise
price of the Warrants and the number of shares of Common Stock issuable upon
exercise of the Warrants are subject to adjustment in certain circumstances,
including the event of a stock dividend, subdivision or combination of the
Common Stock and the issuance of Common Stock or rights, options or warrants to
subscribe for Common Stock at a price per share less than the exercise price of
the Warrants in effect immediately prior to such issuance. As of May 14, 1996,
5,000 Warrants have been exercised.
The Company may at any time redeem the Warrants, in whole or in part,
at the option of the Company, upon not less than 30 days' notice, at a price of
$.20 per Warrant, provided that (i) the average of the closing bid prices of the
Common Stock is at least 175% of the then current exercise price of the Warrants
for 20 consecutive business days ending within 30 days of the date of the notice
of redemption, and (ii) the Company is in compliance with its obligations to
register under the Securities Act the shares of Common Stock issuable on
exercise of the Warrants. If the Company exercises its right to redeem the
Warrants, such Warrants will be exercisable until the close of business on the
date fixed for redemption in such notice. If any Warrant called for redemption
is not exercised by such time, it will cease to be exercisable and the holder
thereof will be entitled only to the redemption price.
Pursuant to the Warrant Agreement, the Company, by notice to the
Warrant Agent, may reduce the exercise price, permanently or for such period as
it may determine, or extend the expiration of the date of the Warrants. The
Warrant Agent is required to send a notice of any such change to each registered
holder of the Warrants.
Limitation of Liability
The Certificate of Incorporation includes a provision which eliminates
the personal liability of the Company's directors and officers for monetary
damages resulting from breaches of their fiduciary duty
32
<PAGE>
of care (provided that such provision does not eliminate liability for breaches
of the duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, violations of Section 174
of the Delaware General Corporation Law, or for any transaction from which the
director derived an improper personal benefit). This provision does not limit or
eliminate the right of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. The Certificate of Incorporation also provides that the
Company shall indemnify
its directors and officers to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary. The Company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. It is the position of the Commission that indemnification for
liabilities under the Securities Act is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
Delaware Anti-Takeover Law
Under Section 203 of the Delaware General Corporation Law (the
"Delaware anti-takeover law"), certain "business combinations" are prohibited
between a Delaware corporation, the stock of which is generally publicly traded
or held of record by more than 2,000 stockholders, and an "interested
stockholder" of such corporation for a three-year period following the date that
such stockholder became an interested stockholder, unless (i) the corporation
has elected in its certificate of incorporation not to be governed by the
Delaware anti-takeover law (the Company has not made such an election), (ii) the
business combination is approved by the board of directors of the corporation
before the other party to the business combination became an interested
stockholder, (iii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by the directors
who are also officers or held in employee benefit plans in which the employees
do not have a confidential right to tender or vote stock held by the plan), or
(iv) the business combination was approved by the board of directors of the
corporation and ratified by 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions involving
the corporation and a person who had not been an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the corporation's directors. The term "business
combination" is defined generally to include mergers or consolidations between a
Delaware corporation and an interested stockholder, transactions with an
interested stockholder involving the assets or stock of the corporation or its
majority-owned subsidiaries, and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as those stockholders who become beneficial owners of 15%
or more of a Delaware corporation's voting stock.
These provisions could delay or frustrate the removal of incumbent
directors or a change in control of the Company. The provisions also could
discourage, impede, or prevent a merger, tender offer or proxy contest, even if
such event would be favorable to the interests of stockholders.
33
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of May 14, 1996, the Company had 13,898,498 shares of Common Stock
outstanding, of which approximately 4,269,600 were freely tradeable without
restriction or registration under the Securities Act, except for shares held by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act.
The remaining 9,719,898 shares of Common Stock outstanding are
"restricted securities" (the "Restricted Shares") within the meaning of Rule 144
under the Securities Act, and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including an exemption contained in Rule 144.
In general, Rule 144 as currently in effect provides that any person
(or persons whose shares are aggregated) who has beneficially owned shares for
at least two years, including persons who may be deemed "affiliates" of the
Company (as defined under the Securities Act), is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (i)
the average weekly trading volume in the Common Stock in the over-the-counter
market during the four calendar weeks preceding the date on which notice of such
sale is filed with the Commission or (ii) 1% of the shares of Common Stock then
outstanding (approximately 138,985 shares on the date of this Prospectus). In
addition, sales under Rule 144 are subject to certain other restrictions
regarding the manner of sale, required notice and availability of current public
information concerning the Company. A person who is not deemed an affiliate of
the Company and who has not been an affiliate for at least three years after the
later of the date the shares were acquired from the Company or the date they
were purchased from an affiliate of the Company, is entitled to sell such shares
under Rule 144(k) immediately without regard to the volume limitations and
current public information requirements described above. Affiliates, including
members of the Board of Directors and executive officers, continue to be subject
to such limitations.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act generally
may be relied upon with respect to the resale of shares originally purchased
from the Company by its employees, directors, officers or consultants prior to
the date the Company become subject to the reporting requirements of the
Exchange Act.
The Company and certain of its stockholders and optionees (who own a
total of approximately 3,868,367 shares of Common Stock have agreed with the
Underwriter that, subject to certain exceptions, they will not offer, sell,
contract to sell, grant any option to purchase, or otherwise dispose of any
shares of Common Stock, or any securities convertible or exercisable or
exchangeable for shares of Common Stock beneficially owned by them until
February 10, 1997 without the prior written consent of the Underwriter (the
"Lock-Up Agreements").
Of the Restricted Shares, approximately 920,700 shares will be eligible
before September 30, 1996 for resale in the public market pursuant to Rule 144.
At various times after September 30, 1996, the remaining 8,799,198 Restricted
Shares will be eligible for immediate sale, subject to compliance with Rule 144,
and, with respect to certain shares, the terms of the Lock-Up Agreements.
As of March 14, 1996, options to purchase a total of approximately
1,245,000 shares of Common Stock were outstanding, some of which were subject to
vesting schedules. 200,000 shares issuable upon exercise of options are eligible
for immediate resale to the public. The Company expects to file one or more
registration statements on Form S-8 under the Securities Act to register
approximately 945,000
34
<PAGE>
shares of Common Stock subject to stock options granted by the Company. The
Company expects to file these registrations statements on or before August 31,
1996. 420,000 shares covered by these registration statements will be
immediately eligible for sale in the public markets upon exercise; options to
purchase approximately 525,000 shares covered by those registration statements
are subject to Lock-Up Agreements.
The holder of 1,143,000 shares of Common Stock is entitled to piggyback
registration rights with respect to 550,000 of his shares. The holders of an
additional 1,468,498 shares of Common Stock received in a private placement by
the Company have unlimited piggyback registration rights for a period of six
years commencing August 10, 1996 and one demand registration right, for a period
of four years commencing August 10, 1996. Holders of an additional 2,373,727
shares of Common Stock have piggyback registration rights and one demand
registration right for 50% of their shares for a five year period commencing
August 10, 1996. Mr. Ted Ralston, Chairman of the Board, is entitled to
piggyback registration rights with respect to up to 200,000 shares of Common
Stock, subject to the consent of the Underwriter. The holders of options to
purchase 60,000 shares of Common Stock have piggyback registration rights for a
period of five years commencing August 10, 1996. Such rights require the
Company, if requested by such holders, to register such shares for sale under
the Securities Act and/or to include such shares in certain registration
statements filed by the Company during the applicable periods. The Company has
also granted the Underwriter certain demand and piggyback registration rights in
connection the Underwriter's Warrants.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by Hirn Doheny & Harper, Louisville, Kentucky.
EXPERTS
The financial statements of the Company for the period May 11, 1994
(inception) through December 31, 1994 and the fiscal year ended December 31,
1995, and the statements of operations and cash flows of the predecessor of the
Company for the period January 1, 1994 through May 10, 1994 have been included
herein and in the Registration Statement of which this Prospectus is a part, in
reliance upon the report of Grant Thornton LLP, independent certified public
accountants, given on the authority of that firm as experts in accounting and
auditing.
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Audited Financial Statements:
Report of Independent Certified Public Accountants......................F-2
Balance Sheet as of December 31, 1995...................................F-3
Statements of Operations for the Company for the period from May 11,
1994 (Inception) through December 31, 1994, the year ended December 31,
1995, and the period from May 11, 1994 (Inception) through December 31,
1995, statement of operations for the Predecessor for the period
January 1, 1994 through May 10, 1994....................................F-4
Statement of Stockholders' Equity for the period from May 11, 1994
(Inception) to December 31, 1994 and the year ended December 31, 1995...F-5
Statements of Cash Flows for the Company for the period from May 11,
1994 (Inception) through December 31, 1994, the year ended December 31,
1995, and the period from May 11, 1994 (Inception) through December 31,
1995, Statement of Cash Flows for the Predecessor for the period
January 1, 1994 through May 10, 1994.....................................F-6
Notes to Financial Statements............................................F-7
Unaudited Condensed Financial Statements:
Unaudited Condensed Balance Sheet as of March 31, 1996...................F-16
Unaudited Condensed Statements of Operations for the Company for the
three months ended March 31, 1995, and the three months ended March 31,
1996, and the period May 11, 1994 (Inception) through March 31, 1996.....F-17
Unaudited Condensed Statement of Stockholders' Equity for the Period
from January 1, 1996 through March 31, 1996..............................F-18
Unaudited Condensed Statements of Cash Flows for the Company, for the
three months ended March 31, 1995, the three months ended March 31,
1996, and the period May 11, 1994 (Inception) through March 31, 1996.....F-19
Notes to Unaudited Condensed Financial Statements........................F-20
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
VIDEOLAN Technologies, Inc.
We have audited the accompanying balance sheet of VIDEOLAN Technologies, Inc. (a
development stage enterprise) as of December 31, 1995, and the related
statements of operations, stockholders' equity and cash flows for the period
May 11, 1994 (Inception) through December 31, 1994, the year ended December 31,
1995 and the period May 11, 1994 (Inception) through December 31, 1995. We have
also audited the statements of operations and cash flows of L&LD Communications
Consultants, Inc. (the "Predecessor") for the period January 1, 1994 through May
10, 1994. These financial statements are the responsibility of VIDEOLAN
Technologies Inc.'s and the Predecessor's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VIDEOLAN Technologies, Inc. (a
development stage enterprise) as of December 31, 1995, and the results of its
operations and its cash flows for the period from May 11, 1994 (Inception)
through December 31, 1994, the year ended December 31, 1995 and the period May
11, 1994 (Inception) through December 31, 1995 and the results of operations and
cash flows of the Predecessor for the period January 1, 1994 through May 10,
1994, in conformity with generally accepted accounting principles.
Grant Thornton LLP
New York, New York
March 8, 1996
F-2
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
BALANCE SHEET
December 31, 1995
<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,508,997
Accounts receivable 24,664
Inventories 820,369
Prepaid expenses and other current assets 158,481
-----------
Total Current Assets $ 7,512,511
Property and equipment, net 293,299
Other assets:
Patent pending applications 35,215
Notes receivable 33,800
Security deposits 25,661
-----------
94,676
-----------
$ 7,900,486
===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 344,842
Capital lease obligations-current 28,214
-----------
Total Current Liabilities $ 373,056
Long term liabilities:
Capital lease obligations-non current 37,238
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value 5,000,000
shares authorized, none issued
Common stock, $.01 par value; 20,000,000 shares
authorized; 13,843,498 shares issued and outstanding 138,435
Additional paid-in-capital 16,424,980
Deficit accumulated during development stage (9,073,223)
-----------
Total Stockholders' Equity $ 7,490,192
-----------
$ 7,900,486
===========
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Predecessor | Company
----------- | ---------------------------------------
| Period from Period from
Period from | May 11, 1994 May 11, 1994
January 1, 1994 | (Inception) Year (Inception)
through | through Ended through
May 10, | December 31, December 31, December 31,
1994 | 1994 1995 1995
---- | ---- ---- ----
<S> <C> | <C> <C> <C>
Net sales $ -- | $ -- $ 50,053 $ 50,053
Consulting revenues 10,591 |
-------- | ----------- ----------- -----------
10,591 | -- 50,053 50,053
|
Cost of sales -- | -- 37,372 37,372
-------- | ----------- ----------- -----------
-- | -- 37,372 37,372
|
Gross profit 10,591 | -- 12,681 12,681
|
Selling, general and |
administrative expenses: |
Salaries 27,400 | 159,438 605,233 764,671
Compensation expense | 21,875 3,233,000 3,254,875
Payroll taxes 2,359 | 31,284 113,430 144,714
Consulting fees | 665,000 206,113 871,113
Marketing cost | 40,074 158,716 198,790
Professional fees | 126,244 313,967 440,211
Travel and entertainment 7,571 | 72,346 396,568 468,914
Research and development | 1,090,074 1,423,916 2,513,990
Equipment rental | 16,305 122,086 138,391
Rent 4,589 | 48,348 70,570 118,918
Insurance 1,347 | 4,684 40,257 44,941
Office | 51,937 123,032 174,969
Depreciation and |
amortization 2,805 | 1,570 31,819 33,389
Other 2,117 | 1,755 43,008 44,763
-------- | ----------- ----------- -----------
Total expenses 48,188 | 2,330,934 6,881,715 9,212,649
|
Other income (expense) |
Interest income | 135,243 135,243
Interest expense | (8,498) (8,498)
-------- | ----------- ----------- -----------
| 126,745 126,745
|
Net loss $(37,597) | $(2,330,934) $(6,742,289) $(9,073,223)
======== | =========== =========== ===========
Loss per share | $ (0.21) $ (0.56) $ (0.78)
======== | =========== =========== ===========
Weighted average common |
shares outstanding | 10,968,498 12,094,868 11,654,850
======== | =========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
Period from May 11, 1994 (Inception) through December 31, 1995
and the year ended December 31, 1995
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During Total
Preferred ---------------------- Paid-in Development Stockholders'
Stock Shares Amount Capital Stage Equity
---- ------ ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Issuance on May 11, 1994 $ 3,677,000 $ 36,770 $ (36,370) $ 400
Issuances of common stock for cash 1,023,000 10,230 394,770 405,000
Issuances of common stock for
services rendered 437,500 4,375 17,500 21,875
Issuances of common stock for cash
and consulting services rendered 950,000 9,500 703,000 712,500
Issuances of common stock for
purchased research and development 2,662,500 26,625 682,500 709,125
Net loss $(2,330,934) (2,330,934)
------------ ------------ --------- ----------- ----------- -----------
Balances at December 31, 1994 8,750,000 87,500 1,761,400 (2,330,934) (482,034)
Issuances of common stock in
private placement 1,468,498 14,685 1,861,799 1,876,484
Issuance of common stock for release
of royalty rights 750,000 7,500 1,117,500 1,125,000
Issuance of common stock through
an initial public offering 2,875,000 28,750 9,576,281 9,605,031
Issuance of stock options to consultants 2,108,000 2,108,000
Net loss (6,742,289) (6,742,289)
------------ ------------ --------- ----------- ----------- -----------
Balances at December 31, 1995 $ 13,843,498 $ 138,435 $16,424,980 $(9,073,223) $ 7,490,192
============ ============ ========= =========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor | Company
--------------- | -----------------------------------------------------
| Period from Period from
Period from | May 11, 1994 May 11, 1994
January 1, 1994 | (Inception) Year (Inception)
through | through Ended through
May 10, | December 31, December 31, December 31,
1994 | 1994 1995 1995
---- | ---- ---- ----
<S> <C> | <C> <C> <C>
Cash flows from operating and development |
stage activities: |
|
Net loss $(37,597) | $(2,330,934) $(6,742,289) $(9,073,223)
Adjustments to net loss: |
Issuances of common stock for services rendered | 21,875 1,125,000 1,146,875
Issuances of common stock for consulting services |
rendered | 665,000 665,000
Issuance of common stock for purchased research |
and development | 709,125 709,125
Issuances of stock options to consultants | 2,108,000 2,108,000
Depreciation and amortization 2,805 | 1,570 31,819 33,389
Increase in accounts receivable 250 | (24,664) (24,664)
Increase in inventories | (820,369) (820,369)
Increase in prepaid expenses and other current assets | (30,192) (128,289) (158,481)
Increase in security deposits | (6,000) (19,661) (25,661)
Increase in accounts payable and accrued liabilities 4,262 | 310,771 34,071 344,842
-------- | ----------- ----------- -----------
Net cash used in operating and development stage |
activities (30,280) | (658,785) (4,436,382) (5,095,167)
-------- | ----------- ----------- -----------
Cash flow from investing activities: |
|
Acquisition of property and equipment | (15,921) (224,845) (240,766)
Patent application costs | (30,129) (5,086) (35,215)
-------- | ----------- ----------- -----------
Net cash used in investing activities: -- | (46,050) (229,931) (275,981)
-------- | ----------- ----------- -----------
Cash flows from financing Activities: |
|
Proceeds from issuance of common stock in |
private placement 15,000 | 452,900 2,202,747 2,655,647
Offering costs | (37,560) (288,703) (326,263)
Proceeds from initial public offering | 11,500,000 11,500,000
Underwriter's commissions and expense allowances | (1,449,000) (1,449,000)
Offering costs | (445,970) (445,970)
Proceeds from notes payable 50,000 | 331,000 331,000
Repayment of notes payable (34,496) | (331,000) (331,000)
Repayment of capital lease obligations | (3,398) (17,071) (20,469)
Proceeds from bridge loans | 900,000 900,000
Repayment of bridge loans | (900,000) (900,000)
Loans to employees, net | (69,110) 35,310 (33,800)
Cash overdraft (52) | 31,003 (31,003) --
-------- | ----------- ----------- -----------
Net cash provided by financing activities: 30,452 | 704,835 11,175,310 11,880,145
-------- | ----------- ----------- -----------
Increase in cash and cash equivalents: 172 | -- 6,508,997 6,508,997
Cash and cash equivalents at beginning of period -- | -- -- --
-------- | ----------- ----------- -----------
Cash and cash equivalents at end of period $ 172 | $ -- $ 6,508,997 $ 6,508,997
======== | =========== =========== ===========
</TABLE>
Supplemental disclosure of cash flow information: Capital lease obligations of
$17,000 and $70,000 were incurred in 1994 and 1995, respectively, when the
Company entered into new leases for computer equipment. Interest expense paid in
cash was $8,498.
See Notes to Financial Statements.
F-6
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE A-DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
VideoLan Technologies, Inc. (the "Company"), formerly known as Triple R
Industries, Inc., is a development stage enterprise incorporated in Ohio in May
1994, to acquire certain technology and the rights to a pending U.S. Patent
application for an analog video distribution communications system designed to
provide real-time, interactive video, to and from a desktop personal computer
("PC") over local and wide area networks ("VideoLan Technology"). Since
inception the Company has primarily been engaged in research and development.
In the course of its development activities, the Company has incurred
significant losses which have been funded with resources from the Chairman,
bridge loan financing, proceeds from a private placement, and proceeds from an
initial public offering.
Unless income from sales of the VideoLan System is obtained, the timing,
sufficiency and receipt of which the Company cannot predict, future development
and commercialization of the Company's technology will depend upon arrangements
with third parties to finance research and development projects, or the
Company's ability to obtain other additional financing on terms satisfactory to
the Company. The Company presently has no formal arrangements or commitments for
external financing. The Company's inability to obtain such financing could have
a material adverse effect on the Company's operations.
On May 23, 1994, the Company acquired the rights to a pending U.S. patent
application from L&LD Communications Consultants, Inc. ("Predecessor" or
"L&LD"), which is the Company's predecessor for financial reporting purposes and
which was formed by Vernon Jackson, a director and stockholder of the Company.
On September 1, 1994, by amendment to its Articles of Incorporation, the
Company changed its name from Triple R Industries, Inc. to VideoLan
Technologies, Inc. Additionally, on October 17, 1994 and February 13, 1995, the
Company amended its articles of incorporation and increased the number of shares
of capital stock authorized to 10,000,000 shares and 11,000,000 shares,
respectively.
Immediately prior to the close of the Company's initial public offering in
August 1995, the Company merged with and into a newly formed Delaware
corporation, VideoLan Technologies, Inc., for the primary purposes of changing
the Company's state of incorporation and increasing the Company's number of
authorized shares. Effective upon the consummation of the initial public
offering, the authorized capital stock of the Company consisted of 5,000,000
shares of preferred stock, $.01 par value per share, none of which is issued and
outstanding, and 20,000,000 shares of common stock, $.01 par value per share, of
which 13,843,498 shares are issued and outstanding.
NOTE B-ACQUISITION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. Acquisition
On May 23, 1994, the Company acquired a pending U.S. patent application and
assumed certain liabilities of L&LD Communications Consultants, Inc.
In connection with this acquisition, the Company purchased a $50,000
cognovit note payable by L&LD to Mr. Ted Ralston, Chairman of the Board of the
Company, and was required to pay lease termination costs of $42,227 to an
unrelated party.
The aforementioned acquisition costs were expensed directly to research and
development costs. The Predecessor ceased operations on the date of acquisition.
F-7
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
The following unaudited pro forma results of operations for the year ended
December 31, 1994 account for the acquisition as if it had occurred on January
1, 1994.
Unaudited Pro Forma Results of Operations
Revenues $ 10,591
===========
Net loss $(2,368,531)
===========
Net loss per common share $ (0.22)
===========
2. Research and Development Costs
Research and development costs are expensed as incurred.
3. Net Loss Per Share of Common Stock
The computation of loss per common share is based on the weighted average
number of outstanding shares. All common stock of the Company issued within one
year of the initial public offering was considered outstanding for all periods
presented. Stock options and warrants have not been included in the calculation
as their inclusion would be antidilutive.
4. Inventories
Inventories consist of the subcomponents necessary to manufacture the
Company's product and are valued at the lower of average actual cost or market.
The Company has entered into an arrangement to subcontract the manufacture,
assembly, testing, and maintenance of the product.
5. Cash Equivalents
Cash equivalents consist of short-term government obligations. These
securities have original maturity dates not exceeding three months. Such
investments are carried at cost which approximates market, and are considered
cash equivalents for purposes of reporting cash flows.
6. Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
respective assets.
7. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
8. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable and accrued liabilities approximate fair value, principally
because of the short maturity of these items.
F-8
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE C-PATENT PENDING APPLICATIONS
Patent pending applications consist of filing fees and certain legal costs
relating to the filing of domestic and international patent applications for the
VideoLan technology. (Reference is made to Notes A, B and J.)
NOTE D-PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 consists of the following:
Estimated
Useful Life
-----------
Furniture and Fixtures $ 8,876 5
Equipment 216,534 5
Leasehold Improvements 101,278 5
---------
326,688
Less: Accumulated Depreciation and
Amortization 33,389
---------
$293,299
=========
NOTE E-CAPITAL LEASE OBLIGATIONS
The Company leases certain computer equipment. Such leases have been
accounted for in accordance with Statement of Financial Accounting Standards No.
13 "Accounting for Leases".
Future minimum lease payments on these capital leases are as follows:
Year Ending December 31,
1996 $ 33,026
1997 31,645
1998 7,956
---------
72,627
Less amount representing interest 7,175
---------
$ 65,452
=========
The carrying value of assets under capital leases was $69,653 at December
31, 1995 and is included in property and equipment. Amortization of these assets
is included in depreciation expense.
F-9
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE F-BRIDGE LOAN FINANCING
In January, 1995 a shareholder provided the Company with a $450,000 bridge
loan to cover working capital needs. There was no written loan agreement and the
loan was without a stated interest rate. The loan was repaid in full out of
proceeds derived in the Company's private placement. (Reference is made to Note
I(7)).
In June, 1995, three individuals loaned an aggregate of $450,000 to the
Company for working capital needs. The loans bore interest at the rate of 10%
per annum. The Company repaid these loans out of the proceeds of the initial
public offering. In connection with the loans, each individual received options
to purchase 20,000 shares of the Common Stock of the Company with an exercise
price of $2.00 per share exercisable immediately and until June 16, 2000. Each
individual is entitled to piggyback registration rights with respect to the
shares underlying the options for a period of five years, commencing one year
after the date of the Company's initial public offering.
NOTE G-INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109
("SFAS No. 109"), "Accounting for Income Taxes," which requires the use of the
asset and liability method of accounting for income taxes. Under this method,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities.
The temporary differences which result in deferred tax assets primarily
consist of compensation deductions and net operating loss carryforwards. The
tax effect of these temporary differences are as follows:
Net operating loss carryforwards and
compensation $ 2,219,000
Valuation allowance (2,219,000)
------------
$ -
============
Due to losses incurred by the Company in the development stage, a full
valuation of the deferred tax asset has been provided because realization of
this future benefit cannot currently be assured. The valuation allowance
increased by $1,151,000 in 1995. The Company's net operating loss carryforwards
of approximately $4,419,000 will begin to expire in 2009, if not utilized. The
Company's ability to utilize net operating losses, incurred prior to its initial
public offering to offset future taxable income is limited due to the change in
control as defined in Internal Revenue Code Section 382.
NOTE H-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 1995 consists
of:
Accounts payable $ 141,730
Accrued professional fees 84,867
Customer security deposits 70,209
Other accrued expenses 48,036
------------
$ 344,842
============
F-10
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE I-CAPITAL STOCK TRANSACTIONS
The following stock transactions have taken place since the Company's
incorporation:
Number of
common shares Average
issued and share Total
outstanding amounts proceeds
- ------------------------------------------------ -------- --------
Date of incorporation(6) 3,677,000 $ 0.0001 $ 400
June 1994 (1) 437,500 .05 21,875
June 1994 (2) 862,500 .05 43,125
June 1994 (6) 150,000 .3333 50,000
July 1994 (6) 150,000 .377 56,500
August 1994 (6) 50,000 .37 18,500
August 1994 (3) 1,800,000 .37 666,000
August 1994 (6) 500,000 .30 150 000
September 14, 1994 (6) 173,000 .7514 130,000
October 7, 1994(7) 950,000 .75 712,500
----------- -----------
Balance at
December 31, 1994 8,750,000 1,848,900
January and
February 1995 (4) 1,468,498 1.50 1,876,484
March, 1995 (5) 750,000 1.50 1,125,000
August, 1995 (8) 2,875,000 4.00 9,605,030
----------- -----------
Balance at December 31, 1995 13,843,498 $14,455,414
=========== ===========
(1) These shares were issued to employees of the Company for services
rendered. The Company has recorded $21,875 as compensation expense.
(2) These shares were issued to two individuals for their release of
certain claims against the Company's technology. The Company has recorded
purchased research and development expenses of $43,125.
(3) These shares were issued to four individuals for their release executed
in settlement of certain claims against the Company's technology. The Company
has recorded purchased research and development expenses of $666,000. As part of
their agreement, the stockholders were additionally granted options to purchase
500,000 shares of stock at $2.00 per share exercisable through August 18, 1995.
In connection with the initial public offering, the Company and four individuals
agreed in July 1995 to terminate these options. In connection with such
termination, the Company agreed to register in the initial public offering an
aggregate of 180,000 shares of common stock owned by the investors and to pay
the investors an aggregate of $175,000.
(4) The Company completed a private placement in February, 1995 whereby the
Company sold 1,468,498 shares of common stock at a purchase price of $1.50 per
share. In connection with the private placement, the placement agent was paid
$286,351 in cash as a commission and as a nonaccountable expense allowance. The
placement agent's fees and certain other expenses of the offering, totaling
$39,912 were recorded as reductions to additional paid-in-capital.
(5) These shares were issued to an employee of the Company as a release for
certain royalty rights. The Company has recorded $1,125,000 as compensation
expense.
(6) These shares were issued for cash.
F-11
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
(7) An individual entered into a stock purchase agreement with the Company
to acquire 950,000 shares of the Company's common stock for $47,500. The
Company has recorded consulting fee expenses of $665,000, which represents the
difference between the fair market value of the aforementioned shares over their
cost.
(8) On August 10, 1995, the Company had an initial public offering of its
securities, which consisted of a total of 2,875,000 units at a price of $4 per
unit. Each unit consisted of one share of $.01 par value common stock and one
redeemable common stock purchase warrant to purchase one share of common stock
at a price of $7 at any time until August 10, 2000. The warrants may be redeemed
in whole or in part, at the option of the Company, for $.20 per warrant, if the
average of the closing bid price of the common stock equals or exceeds 175% of
the exercise price of the warrants for twenty consecutive trading days ending
within thirty days of the notice of redemption.
On closing, the Company received net proceeds of $10,051,000, after
underwriting commissions and expense allowances of $1,449,000. In addition, the
Company incurred other registration costs of $445,970 which have been reflected
as a reduction to additional paid in capital.
In connection with the initial public offering, the underwriters were
issued 250,000 unit purchase warrants to purchase units for $6.60 during the
five year period commencing August 10, 1995.
Stock Option Plan
On March 1, 1995, the Board of Directors of the Company, subject to
shareholder approval, adopted the 1995 Stock Option Plan ("Plan") which provides
for issuances to officers, key employees, directors, advisors, independent
contractors, consultants and such other person as the Board of Directors
believes valuable to the Company nontransferable stock options to purchase up
to 1,000,000 shares of Common Stock. Awards granted under the Plan may be in the
form of incentive stock options ("ISOs") or nonqualified options, both of which
are described under Section 422 of the Internal Revenue Code of 1986. The fair
market value of shares of common stock with respect to which ISOs are granted
during any calendar year may not exceed $100,000. The exercise price per share
for all options granted under the Plan must be at least equal to the fair market
value of a share of common stock on the date of the grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of the
Company's outstanding capital stock, the exercise price per share must equal at
least 110% of the fair market value of a share of the common stock on the date
of the grant. Except with respect to ISOs, the Compensation Committee has the
authority to determine grant recipients, exercise prices, vesting periods and
expiration dates. The plan was approved by the shareholders on July 28, 1995.
Through December 31, 1995, the Company has granted 670,000 nonqualified options
and 95,000 ISO's under the Plan.
Options outstanding
Options -------------------------
available Number Price per
for grant of shares Share
--------- --------- ------------
Balance at January 1, 1995 --- --- ---
Authorized 1,000,000 --- ---
Granted (765,000) 765,000 $2.00-$25.00
------------------------------------
Outstanding at December 31, 1995 235,000 765,000 $2.00-$25.00
====================================
At December 31, 1995, options for 75,000 shares were exercisable at an
exercise price of $2.00 per share.
Grants of 387,500 of options are not exercisable until the Company has
cumulative net income before taxes of $1,000,000. Grants of 187,500 of options
are not exercisable until the Company has cumulative net income before taxes of
$3,000,000. As of February 15, 1996, options to acquire 200,000 shares at $2.00
were canceled.
F-12
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Other Stock Options
In June 1994 the Company issued 250,000 options to employees with an
exercise price of $1.00 per share. Such options are exercisable through December
31, 2000.
In August and October 1995, the Company issued 350,000 and 100,000 stock
options, respectively, to consultants to the Company under contract. The options
all have an exercise price of $3.00 per share and are exercisable over a two and
one half year vesting schedule. In September and December 1995 respectively, the
Company canceled the consulting contracts when these individuals became
employees of the Company. The Company utilized a "Black Scholes" formula to
calculate the fair value of the stock options granted and adjusted the
financial statements in the fourth quarter 1995 to reflect compensation expense
of $2,108,000.
NOTE J-COMMITMENTS AND CONTINGENCIES
Employee Compensation
In July of 1994, the Company entered into a three-year employment agreement
with Remy Fenouil to serve as Director of Research and Development of the
Company at an annual salary of $144,000. Upon completion of the initial public
offering, Mr. Fenouil's salary was increased to $288,000 annually. Mr. Fenouil
is required to devote his full time and attention to the Company.
On April 17, 1995, the Company entered into a three-year employment
agreement with Mr. Peter Beck to serve as Chief Operating Officer at an initial
salary of $60,000 per annum which was raised to $100,000 per annum upon
completion of the initial public offering.
Upon the closing of the initial public offering, the Company signed amended
employment agreements with Vernon Jackson and Richard Dean Jackson to serve as
President and Vice President-Operations, respectively. The terms of each of the
above agreements are for two years. The annual compensation of Mr. Vernon
Jackson is $250,000, the annual compensation for Mr. R. Dean Jackson is
$125,000. The Company also signed an employment agreement with Mr. Ted Ralston
to serve as Chairman of the Board and Chief Executive Officer at an annual
salary of $250,000. Mr. Ralston resigned his position as Chief Executive Officer
on August 31, 1995. This event terminated his employment contract. On September
1, 1995 Mr. Ralston signed a two year consulting contract which requires him to
provide a minimum of thirty hours per week to the Company in the capacity of
Chairman of the Board. His consulting agreement is for two years calling for a
monthly fee of $10,000.
In September and December of 1995, the Company signed employment agreements
with Mr. John Haines, Mr. Steven Rothenberg, and Mr. Mark P. Scott to serve as
Chief Executive Officer, Chief Financial Officer, and Vice President-Business
Development, respectively. The above contracts are for two years, two years and
three years, respectively. The above contracts provide annual salaries for
Haines, Rothenberg, and Scott of $187,500, $145,000, and $125,000, respectively.
All of the above agreements contain noncompetition provisions which
prohibit the employees from competing with the Company during the term of the
agreements and for a period of two years thereafter. The employment agreements
are terminable by the Company at any time for cause, which includes willful
misconduct. Termination of the agreements for any reason without cause, would
entitle Mr. Vernon Jackson and Mr. Dean Jackson the right to receive their
salary throughout the remaining term or for one year, whichever is longer.
Termination of the agreements for any reason without cause, would entitle Mr.
Haines, Mr. Rothenberg, and Mr. Scott the right to receive their salary for the
remaining term, 6 months, and 12 months respectively. (Reference is made to Note
K).
F-13
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Leases
On May 15, 1995, the Company entered into a five-year lease agreement for
approximately 6,700 square feet of space in Louisville, KY at an annual rental
of $102,480. The space will be utilized as an office and a research and
development facility.
On September 28, 1995, the Company entered into a five-year lease agreement
for approximately 4,600 square feet of space in Louisville, KY at an annual
rental of $26,942. The space is being utilized as an assembly facility,
warehouse, and distribution center.
Future minimum lease payments under noncancellable operating leases are as
follows:
Year Ending
December 31,
1996 $129,420
1997 129,420
1998 129,420
1999 129,420
2000 65,150
--------
Total $582,830
========
Rent expense for the year ended December 31, 1995 and for the period May
11, 1994 (Inception) though December 31, 1994 was $70,570 and $48,348
respectively.
Patent Pending Applications
The Company's pending U.S. patent applications and pending international
patent applications claim an efficient network for the real time, simultaneous,
bi-directional transmission of voice, video, and data among a plurality of users
connected to a plurality of hubs.
Patents and patent applications involve complex legal and factual issues. A
number of companies have filed applications for, or have been issued, patents
relating to products or technology that is similar to some of the products or
technology being developed or used by the Company. There can be no assurance
that the Company's patent will afford protection against the development of
similar or related technology by competitors.
Although the Company believes that its VideoLan System and technology do
not and will not infringe on patents or proprietary rights of others, it is
possible that such infringement or violation has occurred or may occur or that
others may infringe on the Company's patents.
In the event that the Company's products or technologies infringe on
patents or other proprietary rights of others, the Company could be required to
discontinue the sale of its products, including the VideoLan System, and
redesign its product or obtain licenses. There can be no assurance that the
Company would be able to do so in a timely manner, upon acceptable terms and
conditions, or at all, or that the failure to do any of the foregoing would not
have a material adverse effect on the Company. If any of the Company's products
or technologies are deemed to infringe on patents or other proprietary rights of
others, the Company could, under certain circumstances, become liable for
damages, which could also have a material adverse effect on the Company.
F-14
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
Distribution Agreements
On November 1, 1994, the Company signed a two-year nonexclusive agreement
with Intellicom Solutions, Inc. (a wholly owned subsidiary of Intelligent
Electronics, Inc.), a distributor of personal computer hardware and related
products. The agreement grants Intellicom the nonexclusive right to purchase the
Company's products (for resale distribution) at a substantial discount, plus
funding from the Company for an Intellicom-based product manager (currently
estimated to be compensated, at $60,000 per annum, including bonuses). There can
be no assurances that Intellicom will purchase significant quantities of the
VideoLan Systems.
In August, 1995, the Company signed a three year distribution agreement
with Samsung America, Inc. and Samsung Corporation of Korea. Under the terms
of the agreement, Samsung will have a three year exclusive right to sell,
service, and distribute the VideoLan System in Korea. In October, 1995, the
Company and Samsung signed an addendum to the agreement whereby Samsung has
prospectively agreed to purchase VL2000 Desktop Multimedia Products and
associated peripherals from the Company. There can be no assurances that
Samsung will purchase significant quantities of the VideoLan System.
NOTE K-SUBSEQUENT EVENTS
On January 17, 1996, Mr. Haines' employment with the Company ceased. The
Company is presently negotiating a separation agreement with Mr. Haines. Mr.
Haines remains a director of the Company.
Effective February 15, 1996, Richard Dean Jackson resigned as Executive
Vice President of the Company. As part of his separation agreement with the
Company, Mr. Jackson is to receive $125,000 paid over a four month period,
commencing March 1996. Mr. Jackson concurrently signed a marketing
representative agreement to serve as a commissioned marketing representative of
the Company. Additionally, he was issued options to acquire 150,000 shares of
the Company's common stock at $12 per share.
NOTE L-ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which gives companies a choice of the method of
accounting used to determine stock-based compensation either by using the
intrinsic value-based method provided by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25") or the fair market
value-based method provided in SFAS No. 123. These accounting standards are
effective for financial statements for fiscal years beginning after December 15,
1995. The Company intends to continue to use the intrinsic value-based method
provided in APB No. 25, to determine stock-based compensation. The sole effect
of the adoption of SFAS No. 123 will be the obligation to comply with the new
disclosure requirements provided thereunder.
F-15
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED BALANCE SHEET
March 31, 1996
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,785,781
Accounts receivable 24,664
Inventories 1,253,717
Prepaid expenses and other current assets 214,453
-------------
Total Current Assets $6,278,615
Property and equipment, net 342,797
Other assets:
Patent pending applications 75,315
Notes receivable 33,800
Security deposits 29,219
-------------
138,334
----------
$6,759,746
==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $606,510
Capital lease obligations-current 44,289
-------------
Total Current Liabilities $ 650,799
Long term liabilties:
Capital lease obligations-non current 35,190
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value 5,000,000
shares authorized, none issued
Common stock, $.01 par value; 20,000,000
shares authorized; 13,884,498 shares
issued and outstanding 138,845
Additional paid-in-capital 16,495,570
Deficit accumulated during development
stage (10,560,658)
-------------
Total Stockholders' Equity 6,073,757
----------
$6,759,746
==========
See Notes to Condensed Financial Statements
F-16
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Period from
11-May-94
Three Months Ended (Inception)
March 31, through
----------------------------- March 31,
1995 1996 1996
--------------------------------------------
Net sales $ -- $ -- 50,053
Cost of sales -- -- 37,372
----------- ----------- ------------
Gross profit -- -- 12,681
Selling, general and administrative
expenses:
Salaries 108,388 488,985 1,253,656
Compensation expense 1,125,000 -- 3,254,875
Payroll taxes 27,557 73,466 218,180
Consulting fees -- 145,556 1,016,669
Marketing cost 43,332 53,355 252,145
Professional fees 32,951 48,519 488,730
Travel and entertainment 64,344 74,902 543,816
Research and development 245,553 455,133 2,969,123
Equipment rental 23,144 20,613 159,004
Rent 14,054 33,930 152,848
Insurance 4,377 45,918 90,859
Office 29,512 39,707 214,676
Depreciation and amortization 2,071 17,945 51,334
Stock Administration Charges 10,061 10,061
Other 5,800 47,692 92,455
----------- ----------- ------------
Total expenses 1,726,083 1,555,782 10,768,431
Other income (expense)
Interest income 9,757 68,485 203,728
Interest expense (2,356) (10,854)
Other Income 2,218 2,218
----------- ----------- ------------
9,757 68,347 195,092
Net loss $(1,716,326) $(1,487,435) $(10,560,658)
=========== =========== ============
Loss per share $ (0.16) $ (0.11) $ (0.88)
=========== =========== ============
Weighted average common shares
outstanding 10,968,498 13,855,366 11,945,063
=========== =========== ============
See Notes to Condensed Financial Statements
F-17
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
Period from January 1, 1996 through March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During Total
Preferred --------------------- Paid-In Development Stockholders'
Stock Shares Amount Capital Stage Equity
--------- ---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 13,843,498 $138,435 $16,424,980 $ (9,073,223) $ 7,490,192
Warrants exercised 5,000 50 34,950 35,000
Employee stock options exercised 36,000 360 35,640 36,000
Net loss (1,487,435) (1,487,435)
--------- ---------- -------- ----------- ------------ -----------
Balances at March 31, 1996 $ 13,884,498 $138,845 $16,495,570 $(10,560,658) $ 6,073,757
========= ========== ======== =========== ============ ===========
</TABLE>
See Notes to Condensed Financial Statements
F-18
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Three Months Ended May 11, 1994
March 31, (Inception)
----------------------------- through
1995 1996 March 31, 1996
----------------------------------------------
Cash flows from operating and
development stage activities:
Net loss $(1,716,326) $(1,487,435) $(10,560,658)
Adjustments to net loss:
Issuances of common stock for
services rendered 1,125,000 1,146,875
Issuances of common stock for
consulting services rendered 665,000
Issuances of common stock for
purchased research and
development 709,125
Issuances of stock options to
consultants 2,108,000
Depreciation and amortization 2,071 17,945 51,334
Increase in accounts receivable (24,664)
Increase in inventories (223,227) (433,348) (1,253,717)
Increase in prepaid expenses
and other current assets (15,172) (55,972) (214,453)
Increase in security deposits (3,558) (29,219)
Increase (decrease) in accounts
payable and accrued liabilities (9,721) 261,668 606,510
----------- ----------- ------------
Net cash used in operating
and development stage
activities (837,375) (1,700,700) (6,795,867)
----------- ----------- ------------
Cash flow from investing
activities:
Acquisition of property and
equipment (14,568) (42,704) (283,470)
Patent application costs (4,452) (40,100) (75,315)
----------- ----------- ------------
Net cash used in investing
activities: (19,020) (82,804) (358,785)
----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from issuance of
common stock in private
placement 2,202,747 2,655,647
Offering costs (288,703) (326,263)
Proceeds from the exercise of
stock options by employees 36,000 36,000
Proceeds from initial public
offering 11,500,000
Underwriter's commissions and
expense allowances (1,449,000)
Offering costs (445,970)
Proceeds from exercise of
common stock warrants 35,000 35,000
Proceeds from notes payable 331,000
Repayment of notes payable (325,000) (331,000)
Repayment of capital lease
obligations (4,299) (10,712) (31,181)
Proceeds from bridge loans 450,000 900,000
Repayment of bridge loans (450,000) (900,000)
Loans to employees, net 35,311 (33,800)
Cash overdraft (31,003) --
----------- ----------- ------------
Net cash provided by
financing activities: 1,589,053 60,288 11,940,433
----------- ----------- ------------
Increase (decrease) in cash and
cash equivalents: 732,658 (1,723,216) 4,785,781
Cash and cash equivalents at
beginning of period -- 6,508,997 --
----------- ----------- ------------
Cash and cash equivalents at
end of period $ 732,658 $ 4,785,781 $ 4,785,781
=========== =========== ============
Supplemental disclosure of cash flow information: Capital lease obligations of
$24,740 were incurred when the Company entered into new leases for computer
equipment. Interest expense paid in cash was $2,356.
See Notes to Condensed Financial Statements
F-19
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
NOTE A-DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
VideoLan Technologies, Inc. (the "Company"), formerly known as Triple R
Industries, Inc., is a development stage enterprise incorporated in Ohio in May
1994, to acquire certain technology and the rights to a pending U.S. Patent
application for an analog video distribution communications system designed to
provide real-time, interactive video, to and from a desktop personal computer
("PC") over local and wide area networks ("VideoLan Technology"). Since
inception the Company has primarily been engaged in research and development.
In the course of its development activities, the Company has incurred
significant losses which have been funded with resources from the Chairman,
bridge loan financing, proceeds from a private placement, and proceeds from an
initial pubic offering.
Unless income from sales of the VideoLan System is obtained, the timing,
sufficiency and receipt of which the Company cannot predict, future development
and commercialization of the Company's technology will depend upon arrangements
with third parties to finance research and development projects, or the
Company's ability to obtain other additional financing on terms satisfactory to
the Company. The Company presently has no formal arrangements or commitments
for external financing. The Company's inability to obtain such financing could
have a material adverse effect on the Company's operations.
On May 23, 1994, the Company acquired the rights to a pending U.S. patent
application from L&LD Communications Consultants, Inc. ("L&LD"), which is the
Company's predecessor for financial reporting purposes and which was formed by
Vernon Jackson, a director and stockholder of the Company.
On September 1, 1994, by amendment to its Articles of Incorporation, the
Company changed its name from Triple R Industries, Inc. to VideoLan
Technologies, Inc.
Immediately prior to the close of the Company's initial public offering in
August 1995, the Company merged with and into a newly formed Delaware
corporation, VideoLan Technologies, Inc., for the primary purposes of changing
the Company's state of incorporation and increasing the Company's number of
authorized shares. Effective upon the consummation of the initial public
offering, the authorized capital stock of the Company consisted of 5,000,000
shares of preferred stock, $.01 par value per share, none of which is issued and
outstanding, and 20,000,000 shares of common stock, $.01 par value per share, of
which 13,884,498 shares are issued and outstanding.
The interim condensed financial statements included herein are unaudited;
however, in the opinion of management, such financial statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
fairly present the financial statements for such interim periods.
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Research and Development Costs
Research and development costs are expensed as incurred.
F-20
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
2. Net Loss Per Share of Common Stock
The computation of loss per common share is based on the weighted average
number of outstanding shares. All common stock of the Company issued within one
year of the initial public offering was considered outstanding for all periods
presented. Stock options and warrants have not been included in the
calculation as their inclusion would be antidilutive.
3. Inventories
Inventories consist of subcomponents necessary to manufacture the Company's
product and are valued at the lower of average actual cost or market. The
Company has entered into an arrangement to subcontract the manufacture,
assembly, testing, and maintenance of the product.
4. Cash Equivalents
Cash equivalents consist of short-term government obligations. These
securities have original maturity dates not exceeding three months. Such
investments are carried at cost which approximates market, and are considered
cash equivalents for purposes of reporting cash flows.
5. Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the respective assets.
6. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
7. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable and accrued liabilities approximate fair value, principally
because of the short maturity of these items.
NOTE C-PATENT PENDING APPLICATIONS
Patent pending applications consist of filing fees and certain legal costs
relating to the filing of domestic and international patent applications for the
VideoLan technology. (Reference is made to Notes A and G.)
F-21
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
NOTE D-PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Estimated
Useful
Life
Furniture and Fixtures $ 14,012 5
Equipment 274,251 5
Leasehold Improvements 105,868 5
--------
394,131
Less: Accumulated Depreciation
and Amortization 51,334
--------
$342,797
========
NOTE E-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consists of:
Accounts payable $490,901
Accrued professional fees 45,400
Customer security deposits 70,209
--------
$606,510
========
NOTE F-CAPITAL STOCK TRANSACTIONS
On January 31, 1996, 5,000 warrants were redeemed for shares of common
stock at $7 per share. During February and March, 1996, 36,000 employee stock
options were exercised at $1 per share.
NOTE G-COMMITMENTS AND CONTINGENCIES
Employee Compensation
On January 17, 1996, Mr. John Haines' employment as CEO of the Company
ceased. The Company is finalizing a separation agreement with Mr. Haines. Once
finalized, Mr. Haines will resign as a director of the Company.
Effective February 15, 1996, Mr. Richard Dean Jackson resigned as Executive
Vice President of the Company. As part of his separation agreement with the
Company, Mr. Jackson is to receive $125,000 paid over a four month period,
commencing March 1996. Mr. Jackson concurrently signed a marketing
representative agreement to serve as a commissioned marketing representative of
the Company. Additionally, he was issued options to acquire 150,000 shares of
the Company's common stock at $12 per share.
F-22
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
Patent Pending Applications
The Company's pending U.S. patent applications and pending international
patent applications claim an efficient network for the real time, simultaneous,
bi-directional transmission of voice, video, and data among a plurality of users
connected to a plurality of hubs.
Patents and patent applications involve complex legal and factual issues.
A number of companies have filed applications for, or have been issued, patents
relating to products or technology that is similar to some of the products or
technology being developed or used by the Company. There can be no assurance
that the Company's patent will afford protection against the development of
similar or related technology by competitors.
Although the Company believes that its VideoLan System and technology do
not and will not infringe on patents or proprietary rights of others, it is
possible that such infringement or violation has occurred or may occur or that
others may infringe on the Company's patents.
In the event that the Company's products or technologies infringe on
patents or other proprietary rights of others, the Company could be required to
discontinue the sale of its products, including the VideoLan System, and
redesign its product or obtain licenses. There can be no assurance that the
Company would be able to do so in a timely manner, upon acceptable terms and
conditions, or at all, or that the failure to do any of the foregoing would not
have a material adverse effect on the Company. If any of the Company's products
or technologies are deemed to infringe on patents or other proprietary rights of
others, the Company could, under certain circumstances, become liable for
damages, which could also have a material adverse effect on the Company.
NOTE H-SUBSEQUENT EVENTS
During May 1996, the Company plans to open a new 9,778 square foot facility
in Jeffersontown, KY. The Company will be relocating the Product Engineering
Department and the Research and Development Department from the Corporate Office
to the new facility. The current manufacturing facility will be relocated to
the new facility. It is the Company's intention to sub lease this existing
manufacturing facility. The minimum annual lease payments under this new lease
are as follows:
1996 $ 40,752
1997 61,128
1998 73,128
1999 77,128
2000 85,128
Thereafter 28,376
--------
$365,640
========
In May 1996, Mr. John Haines entered into a termination and release
agreement relating to his resignation as Chief Executive Officer of the Company
on January 17, 1996. Under the terms of the agreement, Mr. Haines will retain
150,000 vested stock options granted to him under a consulting agreement. The
agreement requires the Company to register 50,000 shares underlying such options
by June 20, 1996 and grants Mr. Haines certain registration rights with respect
to the remaining shares. Additionally, Mr. Haines will continue to receive his
base salary through the latter of August 31, 1997 or ninety days after selling
shares purchased pursuant to the exercise of the options. Upon entering the
agreement, Mr. Haines resigned as a director of the Company.
F-23
<PAGE>
No person has been authorized to give any information or
make any representations not contained in this Prospectus and, if
given or made, such information or representations must not be
relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities other than those to which it
relates or an offer to sell, or a solicitation of an offer to buy
any securities, by any person in any jurisdiction where such
offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information
contained here is correct as of any time subsequent to the date
hereof.
-----------------------
TABLE OF CONTENTS
Page
Available Information 2
Prospectus Summary 3
Risk Factors 6
Price Range of Common Stock and Warrants 11
Dividend Policy 12
Selected Financial Data 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Business 16
Management 22
Principal Stockholders 28
Use of Proceeds 29
Plan of Distribution 29
Description of Securities 30
Shares Eligible for Future Sale 32
Legal Matters 34
Experts 34
Index to Financial Statements 35
-----------------------
3,139,000 Shares
VIDEOLAN TECHNOLOGIES, INC.
-----------------------
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
May , 1996
