<PAGE>
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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to________________
Commission file number: 0-26302
VideoLan TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1283466
(State of incorporation) (I.R.S. Employer Identification No.)
100 Mallard Creek Road, Suite 250, Louisville, Kentucky 40207
(Address of principal executive offices) (Zip Code)
502-895-4858
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares Outstanding at March 31, 1997
- ---------------------- --------------------------------------
Common stock, $.01 par value per share 14,050,398
This document contains 17 pages.
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<PAGE>
INDEX
Page
PART I. Financial Information
ITEM 1. Financial Statements
Unaudited Condensed Balance Sheet as of March 31, 1997 3
Unaudited Condensed Statements of Operations for the three
months ended March 31, 1996 and 1997 and for the period
from May 11, 1994 (inception) through March 31, 1997. 4
Unaudited Condensed Statement of Stockholders' Equity for
the Period from January 1, 1997 through March 31, 1997 5
Unaudited Condensed Statements of Cash Flows for the three
months ended March 31, 1996 and 1997 and for the period
from May 11, 1994 (inception) through March 31, 1997. 6
Notes to Unaudited Condensed Financial Statements 7
ITEM 2. Management's Discussion and Analysis or Plan of Operations 12
PART II. Other Information 16
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports
SIGNATURES 17
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VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED BALANCE SHEET
March 31, 1997
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $2,328,190
Restricted cash 18,000
Accounts receivable 223,887
Inventories 720,625
Prepaid expenses and other current assets 175,188
----------
Total Current Assets $3,465,890
Property and equipment, net 515,877
Other assets:
Patent pending or granted 88,226
Restricted cash 72,000
Security deposits 25,782
----------
186,008
----------
$4,167,775
==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 842,406
Capital lease obligations-current 56,195
-----------
Total Current Liabilities $ 898,601
Long term liabilities:
Capital lease obligations-non current 9,496
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value 5,000,000
shares authorized, 5,500 shares issued 55
Common stock, $.01 par value; 20,000,000
shares authorized; 14,050,398 shares
issued and outstanding 140,504
Additional paid-in-capital-Preferred
Stock 4,978,287
Additional paid-in-capital-Common
Stock 16,863,592
Deficit accumulated during the develop-
ment stage (18,722,760)
-----------
Total Stockholders' Equity 3,259,678
------------
$ 4,167,775
============
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VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Period from
May 11, 1994
(Inception)
Three Months Ended through
March 31, March 31,
1996 1997 1997
------- ----------- ------------
Net sales $ -- $ 284,516 $ 662,372
Cost of sales $ -- 153,277 925,675
----------- ----------- -----------
Gross profit -- 131,239 (263,303)
Selling, general and
administrative expenses:
Salaries 488,985 435,884 2,747,212
Compensation expense -- 3,640,855
Payroll taxes 73,466 42,320 331,253
Consulting fees 145,556 134,816 1,504,703
Marketing cost 53,356 18,786 515,150
Professional fees 48,519 142,646 1,116,954
Travel and entertainment 74,902 111,797 1,085,521
Research and development 455,133 516,010 5,669,702
Equipment Expense 20,613 35,423 516,447
Rent 33,930 45,362 335,130
Insurance 45,918 62,199 338,989
Office 39,707 59,942 462,114
Depreciation and
amortization 17,945 34,352 178,591
Stock Administration
Charges 10,061 24,318 105,476
Other 47,691 25,529 203,879
----------- ----------- ------------
Total expenses 1,555,782 1,689,384 18,751,976
Other income (expense)
Interest income 68,485 33,053 338,040
Interest expense (2,357) (2,904) (2,904)
Other Income 2,219 575 (42,617)
----------- ----------- ------------
68,347 30,724 292,519
Net loss $(1,487,435) $(1,527,421) $(18,722,760)
=========== =========== ============
Loss per share $ (0.11) $ (0.11) $ (1.48)
=========== =========== ============
Weighted average common
shares outstanding 13,855,366 14,053,820 12,653,726
=========== =========== ============
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VideoLan Technologies, Inc.
(a development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Additional Additional Accumulated
Common Stock Paid-In Paid-In During Total
Preferred ----------------- Capital Capital Development Stockholders'
Stock Shares Amount Preferred Stock Common Stock Stage Equity
--------- ---------- -------- --------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ............... $ 55 14,046,398 $140,464 $4,978,287 $ 16,859,632 $(17,195,339) $ 4,783,099
Employee stock options exercised ......... 4,000 40 3,960 4,000
Net loss ................................. (1,527,421) $(1,527,421)
--------- ---------- -------- --------------- ------------ ------------- -----------
Balances at March 31, 1997 ............... $ 55 14,050,398 $140,504 $4,978,287 $ 16,863,592 $(18,722,760) $ 3,259,678
========= ========== ======== =============== ============ ============= ===========
</TABLE>
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VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
May 11, 1994
(Inception)
Three Months Ended through
March 31, March 31,
1996 1997 1997
----------- ----------- ------------
Cash flows from operating and
development stage activities:
Net loss ............................ $(1,487,435) $(1,527,421) $(18,722,760)
Adjustments to net loss:
Issuances of common stock for
services rendered ................. 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 ....................... 2,197,780
Depreciation and amortization ....... 17,945 34,352 178,591
Gain on sale of assets .............. 45,411
Increase in accounts receivable ..... (142,645) (223,887)
Increase in notes receivable ........ 33,800
(Increase) decrease in
inventories ....................... (433,348) 65,790 (720,625)
Increase in prepaid expenses
and other current assets .......... (55,972) (110,759) (175,188)
(Increase) decrease in security
deposits .......................... (3,558) 4,425 (25,782)
Increase in accounts payable and
accrued liabilities ............... 261,668 67,281 842,406
----------- ----------- ------------
Net cash used in operating and
development stage activities .... (1,700,700) (1,608,977) (14,049,254)
----------- ----------- ------------
Cash flow from investing activities:
Acquisition of property and
equipment ......................... (42,704) (32,415) (517,366)
Investment in certificate of
deposit ........................... (90,000)
Proceeds from sale of assets ........ 1,730
Patent application costs ............ (40,100) (89,722)
----------- ----------- ------------
Net cash used in investing
activities: (82,804) (32,415) (695,358)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common
stock in private placement ........ 2,655,647
Offering costs ...................... (326,263)
Proceeds from the exercise of stock
options by employees .............. 71,000 4,000 350,900
Proceeds from initial public
offering .......................... 11,500,000
Underwriters' commissions and
expense allowances ................ (1,449,000)
Offering costs ...................... (445,970)
Proceeds from the issuance of
preferred stock in private
placement ......................... 5,500,000
Offering costs ...................... (521,658)
Repayment of capital lease
obligations ....................... (10,712) (19,888) (157,054)
Loans to employees, net ............. (33,800)
Cash overdraft ...................... --
----------- ----------- ------------
Net cash provided (used) by
financing activities: 60,288 (15,888) 17,072,802
----------- ----------- ------------
Increase (decrease) in cash and
cash equivalents: (1,723,216) (1,657,280) 2,328,190
Cash and cash equivalents at
beginning of period ............... 6,508,997 3,985,470 --
----------- ----------- ------------
Cash and cash equivalents at end
of period ......................... $ 4,785,781 $ 2,328,190 $ 2,328,190
=========== =========== ============
Supplemental disclosure of cash flow information: Capital lease
obligations of $21,445 were incurred when the Company entered into new
leases for testing equipment. Interest expense paid in cash was
$2,904.
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VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
VideoLan Technologies, Inc. (the "Company") is a development stage enterprise
established to acquire certain technology and the rights to a U.S. patent
application and several pending foreign patent applications for an analog video
distribution communications system designed to provide real-time, interactive
video to and from a desktop personal computer over local and wide area networks
("VideoLan Technology"). Since inception, the Company has primarily been
engaged in research and development.
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has been in the development stage
since its inception on May 11, 1994, has suffered significant losses and has an
accumulated deficit that raises substantial doubt about its ability to continue
as a going concern. The losses have been funded with resources from bridge loan
financing, proceeds from private placements, and proceeds from an initial
public offering. During October and November of 1996, the Company completed a
$5,500,000 financing through the sale of preferred shares in a Regulation D
private placement. The net proceeds of the private placement after commissions
and offering costs was $4,938,192. Unless income from sales of the VideoLan
VL2000 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's
inability to obtain such financing could have a material adverse effect on the
Company's operations. The Company's ability to continue as a going concern is
dependent upon the success of future sale of the VideoLan VL2000 System and
obtaining additional financing on terms satisfactory to the Company.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
NOTE B-ACQUISITION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Research and Development Costs
Research and development costs are expensed as incurred.
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. Stock options and warrants have not been included
in the calculation as their inclusion would be antidilutive.
3. Cash and Cash Equivalents
The Company considers highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents.
4. Inventories
Inventories consist of the Company's finished products and 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 assembly of certain parts of the product.
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VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
5. Patents Pending or Issued
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. Patents are stated at cost less amortization on the
straight-line method over the estimated useful lives.
6. Property and Equipment
Property and equipment are 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 and 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 and Concentration of Credit Risk
The carrying value of financial instruments potentially subject to valuation
risk, consisting 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.
The Company maintains its cash balances in one financial institution located in
the United States, which at times, may exceed federally insured limits. The
Company has not experienced any losses in such account and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
9. Stock-Based Compensation
Stock-based compensation is accounted for under the intrinsic value based
method as prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees."
10. Interim Financial Statements
The unaudited balance sheet as of March 31, 1997 and the unaudited statements
of operations and cash flows for the three months ended March 31, 1997 and 1996
as well as the period May 11, 1994 (inception) through March 31, 1997 and the
statement of stockholders' equity for the three months ended March 31, 1997
contain all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of the Company's management, necessary to present the
financial position of the Company as of March 31, 1997 and results of
operations and the cash flows for the three months ended March 31, 1997 and
1996, and the period May 11, 1994 (inception) through March 31, 1997.
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VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
NOTE C - RESTRICTED CASH
On April 12, 1996, the Company invested $90,000 in a certificate of deposit at
Bank One as collateral for the lease on their new facility. The certificate of
deposit was scheduled to mature on April 12, 1997 at an annual interest rate of
4.4%. An amendment to the lease adding 3220 square feet to the facility
requires the Company to retain this certificate of deposit as collateral for
the remainder of the lease. It is in the process of being amended.
NOTE D-CAPITAL STOCK TRANSACTIONS
During January, 1997, 4,000 employee stock options were exercised at $1 per
share.
NOTE E-COMMITMENTS AND CONTINGENCIES
Leases
In May 1996, the Company leased a 9,778 square foot facility in Jeffersontown,
Kentucky. The Company relocated the Product Engineering and the Research and
Development Departments from the Corporate Office to this new facility.
On May 15, 1995, the Company entered into a five-year lease agreement for
approximately 6,700 square feet of space in Louisville, Kentucky, at an annual
rental of $102,480. The space is utilized for the corporate and sales offices.
Future minimum lease payments on noncancellable operating leases are as
follows:
Year ending December 31,
1997 $122,706
1998 175,608
1999 179,608
2000 144,908
2001 28,376
--------
$651,206
========
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VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
Patents Pending or Issued
The claims under VideoLan's U.S. Patent application for "bi-directional
transport of video bandwidth signals" have been approved by the U.S. Patent and
Trademark Office. The U.S. Patent (No. 5537142) was issued on July 16, 1996.
The Company's remaining pending international patent applications claim is 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 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.
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.
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. 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.
Litigation
From time to time, the Company is also party to what it believes is routine
litigation and proceedings that may be considered as part of the ordinary
course of its business. Currently, the Company is not aware of any other
current or pending litigation or proceedings that would have a material effect
on the Company's results of operations or financial condition.
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VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
NOTE H-SUBSEQUENT EVENTS
On April 15, 1997, the Company signed a lease to acquire 3,220 feet of
additional space at the 9778 square foot facility in Jeffersontown, KY. The
Company will be relocating the Corporate Offices to this additional space. The
Company intends to find new tenants to take over the current location of the
Corporate offices, releasing VideoLan of any further responsibility. The lease
obligation with the additional space, assuming no release of liability for the
current corporate offices, will be as follows:
1997 99,036
1998 209,072
1999 213,072
2000 179,372
2001 119,592
2002 69,762
=========
$ 889,906
=========
The lease obligation with the additional space, assuming the release of
liability for the current corporate offices as of July 31, 1997, will be as
follows:
1997 56,336
1998 106,592
1999 110,592
2000 119,592
2001 119,592
2002 69,762
=========
$ 582,466
=========
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Introduction
VideoLan Technologies, Inc. (the "Company") is a development stage enterprise
established to acquire certain technology and the rights to a U.S. patent
application and several pending foreign patent applications for an analog video
distribution communications system designed to provide real-time, interactive
video to and from a desktop personal computer over local and wide area networks
("VideoLan Technology"). Since inception, the Company has primarily been
engaged in research and development. On July 16, 1996 the US Patent and
Trademark office issued the Company a patent (No. 5537142) for a bi-directional
transmission of video banded signals, including a switching matrix.
Description of Business
The Company has developed and is engaged in the continuing development of
transport and switch 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"). The Company's initial product is a stand-alone video, voice and data
communications network solution (the "VideoLan System") for the desktop
personal computer ("PC"). The Company's business strategy is to market the
VideoLan System and to develop additional products utilizing its proprietary
technology. Since the Company's technology could be adaptable to additional
applications, including home to home video, voice and data conferencing, it may
undertake other initiatives in the future.
The VideoLan 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 real time 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. The VideoLan 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 System accesses data from a client/server and
transports the data signals, along with the video and voice signals, using the
existing LAN UTP infrastructure. UTP has four pairs of wires (8 individual
wires). The VideoLan 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.
The Company believes that the VideoLan System has a greater array of features
and is simpler and less expensive to install and integrate along side of, and
independent of, the LAN environment than competitive products. It allows more
users simultaneously to access and participate in conferences, using multiple
data and multimedia applications, without compromising the performance of the
LAN or the quality of the signals received. Designed with an open architecture,
the VideoLan System operates on IBM compatible PCs running Microsoft(C)
Windows(TM) operating software, and is capable of being equipped with
application programming interfaces which also adapt to support MacIntosh(TM)
and Unix(TM) software platforms.
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Marketing of the VideoLan System
The Company intends to market the VideoLan System to original
equipment manufacturers("OEMs"), value added resellers("VARs"), systems
integrators and distributors whose markets and market presence will provide
significant sales channels. The Company will also market directly to end users
in targeted niche markets. The Company has completed the initial phase of an
extensive marketing and competitive analysis survey in conjunction with a
leading consulting firm. As a result of the information derived from this
study, the Company has targeted specific vertical markets that should benefit
from its broadband video technology. These markets include telemedicine,
distance learning and high end business applications. As a result of targeting
these markets, the Company has systems presently sold to, or in evaluation at,
a leading technology hospital, a midwestern university and several military
bases. The Company believes that by targeting a broader market than the
traditional desktop video conferencing market, it can better position itself
against the competition. In addition to this traditional market, the Company's
technology provides new opportunities for image file transfer and real time
business applications. These markets provide the greatest opportunity for rapid
growth at sustainable high margins.
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 and or that it can complete development before other
technologies are selected by video services providers.
Revenues.
The Company has engaged in limited marketing of the VideoLan VL2000 System and
is currently beginning to implement its marketing strategy. It was expected
that the Company would have nominal sales for the first and second quarters of
1997 due to publicity problems experienced by the Company during the last half
of 1996. However, the Company had revenues of $284,516 for the three months
ended March 31, 1997. VideoLan had not yet begun shipping its product in the
comparable period of 1996.
Operating Expenses:
Total operating expenses for the three months ended March 31, 1997 were
$1,689,384 as compared with $1,555,782 for the three months ended March 31,
1996.
Salaries and payroll taxes decreased by $84,247 to $478,204 during the
three months ended March 31, 1997 compared to $562,451 in the three months
ended March 31, 1996. As of April 30, 1996 VideoLan had 32 employees. These
employees were engaged in research and development and selling and
administrative capacities. As of April 30, 1997 VideoLan had 42 employees.
These employees are in production, marketing, sales, administration, research
and development, and customer service. The salaries in 1996 represented several
severance payments to terminated employees and therefore were higher even
though there were fewer employees.
Research and development expenses for the year ending March 31, 1997
were $516,010 as compared with $455,133 for the same period in 1996. In 1996
the Research and Development department was developing the original product,
the VL2000. In 1997 the efforts expanded to the development of VideoLan
software and a Gateway. This required additional personnel such as engineers,
programmers, and technicians. It also required additional equipment and
consulting services.
Marketing costs for the three months ended March 31, 1997 were $18,786
as compared with $53,356 for the same period in 1996. The decrease in marketing
cost is a result of the Company discontinuing a contract for public relations
services which was running about $15,000 to $40,000 per month.
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<PAGE>
Consulting and Professional Fees increased $83,387 to $277,462 for the
three month period ending March 31, 1997 from $194,075 for the three month
period ending March 31, 1996. The majority of the increase in this area is due
to legal fees incurred in the process of defending the Company against lawsuits
and legal compliance activities required by a publicly held company.
Travel and Entertainment for the three month period ending March 31,
1997 was $111,797 as compared with $74,902 for the same period in 1996. The
increase in travel and entertainment is mainly due to increase in sales
personnel and the relocation expenses for some key personnel.
Rent and Office expenses for the three months ended March 31, 1997
were $105,304. They increased by $31,667 from $73,637 for the comparable period
in 1996. During 1996, the Company moved its research and development and its
operations departments from the corporate offices to a larger, better equipped
facility. The Company also added an outside sales office in Massachusetts.
Currently, the rent and office expenses include the expenses of three
facilities. The Company has intentions of combining the corporate offices and
the research and development/operations facility in the June of 1997 to
minimize overhead.
Insurance increased by $16,281 from $45,257 for the period ending
March 31, 1996 to $62,199 for the period ending March 31, 1997. The majority of
this increase is due to a significant increase in the officers and directors
insurance coverage to comply with industry standards. An increase in personnel
has also caused increases in health and workers compensation premiums.
Stock administration charges were $24,318 for the period ending March
31, 1997. Stock administration for the three month period ending March 31, 1996
were $10,061.
Other expenses decreased from $47,691 for the three months ended March
31, 1996 to $25,529 for the comparable period in 1997. The significant expenses
in this category are supplies, repairs and maintenance, employee relations and
training, bad debts expense, and other miscellaneous expenses.
Net Loss:
The net loss of the Company for the three months ended March 31, 1997 was
$1,527,421 ($0.11 per share) as compared with $1,487,435 ($0.11 per share) for
the three months ended March 31, 1996. The Company has made nominal sales and
has implemented a rigid budget to cut costs during the first quarter of 1997.
The Company had 15 more employees, 3 more departments, and two more locations
at March 31, 1997 than the Company had at March 31, 1996, yet, only a minor
increase in the net loss of $40,000. The Company expects to incur continuing
losses until significant quantities of the VideoLan VL2000 System are sold
Liquidity and Capital Resources:
Through March 31, 1997, an aggregate of $14,049,254 has been expended in the
operating and development stage activities of the Company, principally for
research and development, salaries and professional fees. An additional
$695,358 has been used primarily to acquire the Company's proprietary
technology, prepare the Company's patent applications and purchase certain
equipment. Additional funds will be necessary to pay for additional engineers,
technical people and increased marketing costs in connection with the sale of
the Company's products.
Through March 31, 1996, the Company financed its operations primarily through
investments by individual investors, a 1995 private placement which raised net
proceeds of approximately $1,900,000, and from its initial public offering
which was completed in August 1995 and generated net proceeds of $9,600,000.
During October and November 1996, the Company completed a $5,500,000 financing
through the sale of convertible preferred shares in a private placement under
Regulation D. The net proceeds of the $5,500,000 private placement after
commissions and offering cost was $4,978,342. The Preferred Stock sold in the
Offering was convertible into Common Stock on or after January 17, 1997 at the
lesser of $4.88
14 of 17
<PAGE>
or the five day average trading price of the Common Stock at the time of
conversion less a discount of between 15% and 20%. The Company may redeem the
Preferred Stock upon conversion under certain circumstances. The Company was
required to register for public resale the Common Stock issuable upon
conversion of the Preferred Stock on or before January 17, 1997, or issue
increasingly higher amounts. The Company is currently in the process of
registering that Common Stock. In connection with the private placement, the
Company issued a warrant to the broker for 6% of the aggregate amount raised at
$4.88 per share.
As of April 30, 1997 the Company's current cash position was $1,795,000. The
Company is utilizing approximately $500,000 of that cash per month for
operating and research and development activities. It is anticipated that the
Company's current cash position will be sufficient to fund the Company's
operations through the second quarter of 1997. The Company is actively seeking
additional financing to fund its activities for the balance of 1997 and into
1998. The Company cannot anticipate what the terms of this additional funding
will be. There can be no assurance that such financing will be available.
Failure to receive such financing would likely require the Company to cease
operations. Even if such financing is obtained, unless and until adequate
income from sales of the Company's initial product which is a stand-alone
video, voice and data communicaitons network solution for the desktop personal
computer is realized, the timing, sufficiency and receipt of which cannot be
predicted, future development and commercialization of the Company's technology
will require the Company to continue to seek further financing in the future.
As of this date, the Company has no long-term debt or material commitments for
capital expenditures.
The Company believes that, during the past year, inflation has not had a
significant impact on the Company's operating results.
15 of 17
<PAGE>
VideoLan Technologies, Inc.
(A Development Stage Enterprise)
Part II: Other Information
ITEM 1. Legal Proceedings
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. 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.
From time to time, the Company is also party to what it
believes is routine litigation and proceedings that may be
considered as part of the ordinary course of its business.
Currently, the Company is not aware of any other current or
pending litigation or proceedings that would have a material
effect on the Company's results of operations or financial
condition.
ITEM 2 Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6 Exhibits and Reports:
(a) Exhibits
Exhibit 99 - Private Securities Reform Act of 1995 Safe
Harbor Compliance Statement for Forward-Looking
Statements
(b) Reports
Current Report on Form 8-K filed on January 29, 1997
Current Report on Form 8-K filed on May 2, 1997
16 of 17
<PAGE>
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VideoLan Technologies, Inc.
Date: May 12, 1997 /s/ Jack Shirman
--------------------------------------
Jack Shirman
Chief Executive Officer
Date: May 12, 1997 /s/ Steven B. Rothenberg
--------------------------------------
Steven B. Rothenberg
Chief Financial and Accounting Officer
17 of 17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 20,185
<SECURITIES> 2,308,005
<RECEIVABLES> 223,887
<ALLOWANCES> 0
<INVENTORY> 720,625
<CURRENT-ASSETS> 3,465,890
<PP&E> 682,553
<DEPRECIATION> 166,657
<TOTAL-ASSETS> 4,167,775
<CURRENT-LIABILITIES> 898,601
<BONDS> 0
0
55
<COMMON> 140,504
<OTHER-SE> 3,119,119
<TOTAL-LIABILITY-AND-EQUITY> 4,167,775
<SALES> 284,516
<TOTAL-REVENUES> 318,145
<CGS> 153,277
<TOTAL-COSTS> 1,842,661
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,904
<INCOME-PRETAX> (1,527,421)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,527,421)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
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<PAGE>
Exhibit 99
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities law
liability in connection with forward-looking statements. VideoLan Technologies,
Inc. ("VideoLan" or the "Company") intends to qualify both its written and oral
forward-looking statements for protection under the Reform Act and any other
similar safe harbor provisions.
Forward-looking statement express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of VideoLan. In addition,
VideoLan undertakes no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events or
changes to future operating results over time.
VideoLan provides the following risk factors disclosure in connection
with its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. The following disclosure supersedes the
comparable disclosure in Exhibit 99 to the Company's Annual Report on Form 10-K
for the year ending December 31,1 996. Important factors currently know to
management that could cause actual results to differ materially from those in
forward-looking statements include the following:
Need For Additional Capital
As of April 30, 1997, the Company's cash position was approximately
$1,795,000. The Company is currently utilizing approximately $500,000 of that
cash per month for operating and research and development activities. It is
anticipated that the Company's current cash position will be sufficient to fund
the Company's operations through the second quarter of 1997. The Company is
actively seeking additional financing to fund its activities for the balance of
1997 and into 1998. The Company cannot anticipate what the terms of this
additional funding will be or whether such financing will be available at all.
Failure to receive such financing will likely require the Company to cease
operations. Even if such financing is obtained, unless and until adequate income
from sales of the Company's initial product which is a stand-alone video, voice
and data communications network solution (the "VideoLan System") for the desktop
personal computer is realized, the timing, sufficiency and receipt of which
cannot be predicted, future development and commercialization of the Company's
technology will require the Company to continue to seek further financing in the
future.
<PAGE>
Losses Since Inception; Expectation of Continuing Losses
The Company has incurred aggregate losses of approximately $18.7
million from inception through March 31, 1997. The Company expects to incur
continuing losses until significant quantities of the VideoLan System are sold.
Lack of Revenues; Dependence on Initial Product
The revenues and profitability of the Company and the future
commercialization of the Company's technology will be dependent upon the success
of the VideoLan System. The Company only recently has begun to receive orders
for the VideoLan System and there can be no assurance that the introduction and
marketing of the VideoLan 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 System, or prevent or create delays in marketing the product.
Uncertain Market Acceptance of Technology; Evolving Industry Standards; Rapid
Technological Changes
The success of the VideoLan System and other products the Company may
develop in the future 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
markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards and frequent new products and product
enhancements. The Company's success in its business will depend upon its
continued ability to enhance the VideoLan System, to introduce new products on a
timely and cost effective basis to meet evolving customer requirements, to
achieve market acceptance for new product offerings and to respond to emerging
industry standards and other technological changes. There can be no assurance
that the Company will be able to respond effectively to technological changes or
new industry standards. Moreover, there can be no assurance that competitors of
the Company will not develop competitive products, or that any such competitive
products will not have an adverse effect upon the Company's operating results.
Lack of Marketing Experience and Reliance on Marketing Partners
The Company presently is beginning to implement its marketing program
for the VideoLan System, has conducted no market studies and has limited
marketing experience, financial resources and marketing personnel. Successful
marketing of the VideoLan System will depend upon the Company's ability to
demonstrate effectively the technological advantages of the VideoLan System to
original equipment manufacturers ("OEMs"), value added resellers ("VARs"),
systems integrators and distributors whose markets and market presence will
provide significant distribution channels,
2
<PAGE>
and targeted distributors and end users in niche markets. The failure of the
Company to establish sufficient distribution channels could have a material
adverse effect on the Company.
In addition, the current market for desktop video conferencing and
distribution 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 distribution arrangements with third parties, the Company will be
dependent largely on such third parties marketing efforts and, in the case of
OEMs and VARs, the popularity and sales of the third parties own products that
integrate the VideoLan System. While the Company believes that marketing the
VideoLan 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 System.
Necessity of Developing New Applications
Even if the VideoLan System is successfully marketed, the Company
anticipates that rapidly changing technology and new entrants into the desktop
video conferencing market could cause, over time, future revenues and
profitability of the VideoLan 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 Protection of Intellectual Property Rights
The Company has been issued a patent in the United States for 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. In addition, an international patent application is pending designating 56
foreign countries as well as the United States. The Company intends to file
future United States 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 the Company's existing patent and future patents, if issued, 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 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
3
<PAGE>
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. There is
currently pending one lawsuit filed against the Company alleging patent
infringement. In the event that the Company's products or technologies are found
to 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 found 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.
Dependence on Suppliers and Third-Party Manufacturers
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 an adverse effect on delivery schedules. In addition, the quality of
the components of the VideoLan 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 production
quantities of the VideoLan 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.
Possible Inability to Successfully Compete
A number of video conferencing and distribution 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 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 such as ADSL digital compression technologies
(technologies that allows digital transmission on unshielded twisted pair copper
wire at various data rates and various distances) are being tested and there can
be no assurance that the Company's
4
<PAGE>
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
The success of the Company is 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.
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"), pursuant to which the FCC repealed its rules
implementing the Cross-Ownership Ban, the statutory ban against telephone
companies providing video programming in their own service areas. As a result of
the Telecom Act, telephone companies now have four avenues for the provision of
video services. Specifically, telephone companies may (1) provide video
programming to subscribers through radio communication, (2) provide video
programming on a common carrier basis, (3) provide video programming as a cable
television system, or (4) provide video programming by means of an "open market
system," a new vehicle for entering the video marketplace, rules for which are
currently being considered by the FCC. 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.
No Intention to Declare or Pay Cash Dividends
The Company does not currently intend to declare or pay any cash
dividends on its common stock (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 dividends and the amounts thereof in
the future 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.
5
<PAGE>
Possibility of Nasdaq Delisting and Decrease in Stock Price
The trading of the Company's stock on the Nasdaq SmallCap Market is
conditioned upon meeting certain asset, capital and surplus, earnings and stock
price tests. The requirements to maintain eligibility on the Nasdaq SmallCap
Market 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. While the Company currently exceeds the
total assets and capital surplus requirements, it may fall below such required
amounts if it does not obtain financing in the near future. The stock price of
the Common Stock currently trades below $1.00. If the Company fails any of these
tests, the Common Stock may be delisted from trading on the Nasdaq SmallCap
Market. Additionally, the National Association of Securities Dealers ("NASD") is
presently considering rules which, if adopted, would result in new minimum
criteria which a company must meet for inclusion in either the Nasdaq Stock
Market or the Small Cap Market. Under the recently proposed rules, companies
will be required to meet higher financial standards and maintain a stock market
price of at least $1.00 per share, or else face automatic termination of their
designation for inclusion in either the Nasdaq Stock Market or Small Cap Market.
While the Common Stock is currently quoted on the Nasdaq Small Cap Market, there
can be no assurance that its designation of inclusion thereon will not be
terminated if the NASD adopts the proposed regulations and the Company's stock
market price is below $1.00 per share.
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 was delisted from trading on
the Nasdaq SmallCap Market and the trading price of the Common Stock were less
than $5.00 per share, the Common Stock 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. Such requirements could severely
limit the liquidity of the Company's securities and the ability of purchasers in
the Offering to sell their securities in the secondary market. Furthermore, as
a result of delisting, a stockholder would likely find it to be more
difficult to dispose of, or to obtain accurate quotations as to the value of,
the Common Stock.
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
6
<PAGE>
time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue 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. The Company currently has 5,000,000 shares
of Series 1996A Convertible Preferred Stock issued and outstanding.
Possible Volatility of Common Stock
Recently, there has been significant volatility in the market prices of
securities of companies in the computer and telecommunications industries,
including the Company. The price at which the Common Stock trades may be
influenced by many factors, including announcements of new legislative proposals
or laws relating to the telecommunications industry, the performance of, and
investor expectations for, the Company, the trading volume in the Common Stock,
and general economic and market conditions. The trading price of the Common
Stock will also be impacted by sales, or the possibility of sales, of the shares
issuable upon the conversion of the Preferred Stock or of any other convertible
securities of the Company issued in the future. There can be no assurance as to
the price at which the Common Stock will trade in the future.
7
