- ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 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 2 of 17 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 ============ 3 of 17 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 =========== =========== ============ 4 of 17 VideoLan Technologies, Inc. (a development stage enterprise) STATEMENT OF STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 1997 (Unaudited) 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 --------- ---------- -------- --------------- ------------ ------------- ------------ 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 ========= ========== ======== =============== ============ ============= =========== 5 of 17 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. 6 of 17 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. 7 of 17 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. 8 of 17 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 ======== 9 of 17 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. 10 of 17 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 ========= 11 of 17 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. 12 of 17 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. 13 of 17 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 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 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 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