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 September 30, 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.)
11403 Bluegrass Parkway, Suite 400, Louisville, Kentucky 40299
(Address of principal executive offices) (Zip Code)
502-266-0099
(Registrant's telephone number, including area code)
100 Mallard Creek Road, Suite 250, Louisville, Kentucky 40207
(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 September 30, 1997
- - ---------------------- ----------------------------------------
Common stock, $.08 par value per share 2,808,975
This document contains 22 pages.
INDEX
Page
PART I. Financial Information
ITEM 1. Financial Statements
Unaudited Condensed Balance Sheet as of September 30, 1997 3
Unaudited Condensed Statements of Operations for the
three months ended September 30, 1996 and 1997, the nine
months ended September 30, 1996 and 1997, and for the
period from May 11, 1994(Inception) to September 30,
1997. 4
Unaudited Condensed Statement of Stockholders' Equity
for the Period from January 1, 1996 through
September 30, 1997 5
Unaudited Condensed Statements of Cash Flows for the
three months ended September 30, 1996 and 1997, the nine
months ended September 30, 1996 and 1997, and for the
period from May 11, 1994(Inception) to September 30,
1997. 6
Notes to Unaudited Condensed Financial Statements 8
ITEM 2. Management's Discussion and Analysis or Plan of Operations 15
PART II. Other Information 20
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 22
2 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED BALANCE SHEET
September 30, 1997
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 291,780
Accounts receivable 395,703
Inventories 789,631
Prepaid expenses and other current assets 58,500
----------
Total Current Assets $ 1,535,614
Property and equipment, net 580,825
Other assets:
Patent pending or granted 85,236
Restricted Cash 90,000
Goodwill 25,380
Deferred offering cost and issue cost 141,889
Security deposits 25,781
368,286
-----------
$ 2,484,725
===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 549,916
Convertible Debentures 1,079,000
Capital lease obligations-current 28,077
----------
Total Current Liabilities $ 1,656,993
Long term liabilities:
Capital lease obligations-non current 2,994
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value 5,000,000
shares authorized, 4140 shares issued and
outstanding 42
Common stock, $.08 par value; 10,000,000
shares authorized; 2,808,975 shares issued
and outstanding 224,718
Additional paid-in-capital-Preferred stock 3,747,297
Additional paid-in-capital-Common stock 18,921,667
Deficit accumulated during the development
stage (22,068,986)
Total Stockholders' Equity 824,738
-----------
$ 2,484,725
===========
3 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Period from
May 11, 1994
(Inception)
Three Months Ended Nine Months Ended through
September 30, September 30, June 30,
1996 1997 1996 1997 1997
------------ ------------ ------------ ------------ ------------
Net $ 488,947 $ 225,101 $ 488,947 $ 520,822 $ 898,678
Cost of sales 283,444 110,141 283,444 274,292 1,046,690
------------ ------------ ------------ ------------ ------------
Gross profit 205,503 114,960 205,503 246,530 (148,012)
Selling,general and administrative expenses:
Salaries 417,646 494,236 1,397,920 1,366,796 3,678,124
Compensation expense - - 3,640,855
Payroll taxes 43,855 30,006 133,767 103,110 392,043
Consulting fees 47,430 51,757 328,851 256,190 1,626,077
Marketing cost 30,218 47,079 171,523 85,073 581,437
Professional fees 175,923 90,819 340,018 380,245 1,354,553
Travel and entertainment 111,981 136,921 337,001 351,471 1,325,195
Research and development 488,879 292,261 1,343,543 1,280,516 6,434,208
Equipment Expense 121,102 36,064 344,079 89,207 570,231
Rent 52,663 39,191 125,489 134,667 424,435
Insurance 65,465 92,432 153,891 235,941 512,731
Office 60,905 57,892 151,096 168,471 570,643
Depreciation and amortization 33,703 85,351 77,885 156,697 300,936
Stock Administration Charges 29,394 93,391 67,293 143,492 224,650
Penalties on Reg D Registration 355,611 355,611 355,611
Other 73,903 17,903 119,588 63,144 241,494
------------ ------------ ------------ ------------ ------------
Total expenses 1,753,067 1,920,914 5,091,944 5,170,631 22,233,223
Other income (expense)
Interest income(expense)-net 27,194 (9,602) 142,212 43,198 348,185
Other Income (1,971) 6,622 335 7,256 (35,936)
------------ ------------ ------------ ------------ ------------
25,223 (2,980) 142,547 50,454 312,249
Net loss $ (1,522,341) $ (1,808,934) $ (4,743,894) $ (4,873,647) $(22,068,986)
============ ============ ============ ============ ============
Loss per share $ (0.87) $ (0.85) $ (2.73) $ (2.59) $ (13.66)
============ ============ ============ ============ ============
Weighted average common
shares outstanding 1,748,291 2,120,297 1,739,224 1,879,442 1,615,701
============ ============ ============ ============ ============
4 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
September 30, 1997
(Unaudited)
Deficit
Additional Additional Accumulated
Paid-In Paid-In During Total
Preferred Common Stock Capital Capital Development Stockholders'
Stock Shares Amount Preferred Stock Common Stock Stage Equity
--------- --------- ------- --------------- ------------ ------------- -----------
Balance at January 1, 1997 $ 55 1,755,800 $ 140,464 $ 4,978,287 $ 16,859,632 $ (17,195,339) 4,783,099
Employee stock options exercised 500 40 3,960 4,000
Imagelink asset acquisition 500,000 40,000 237,554 227,554
Conversion of preferred stock
into common stock (14) 358,194 28,655 (1,230,990) 1,557,959 355,610
Conversion of debentures into
common stock 194,481 15,558 262,563 278,121
Net loss (4,873,647) (4,873,647)
--------- --------- --------- --------------- ------------ ------------ -----------
Balances at September 30, 1997 $ 41 2,808,975 $ 224,717 $ 3,747,297 $ 18,921,668 $(22,068,986) $ 824,738
========= ========== ========= =============== ============ ============ ==========
5 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
May 11, 1994
(Inception)
Three Months Ended Nine Months Ended through
September 30, September 30, September 30,
1996 1997 1996 1997 1997
------------- ------------- ------------- ------------- -------------
Cash flows from operating and development
stage activities:
Net loss $ (1,522,341) $ (1,808,934) $ (4,743,894) $ (4,873,647) $(22,068,986)
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
Issuances of common stock for Imagelink
Asset Purchase 279,000 279,000 279,000
Issuances of common stock converted from debentures 278,121 278,121 278,121
Issuances of common stock converted from
preferred stock 1,586,615 1,586,615 1,586,615
Preferred stock converted to common stock (1,231,004) (1,231,004) (1,231,004)
Goodwill on Imagelink Asset Purchase (34,862) (34,862) (34,862)
Depreciation and amortization 33,703 85,351 77,885 156,697 300,936
Gain on sale of assets 1,972 1,884 - 45,411
(Increase) decrease in accounts receivable (449,558) (219,122) (449,481) (314,461) (395,703)
Increase in interest receivable - 33,800
Increase in inventories 84,733 (64,267) (536,167) (3,216) (789,631)
(Increase) decrease in prepaid expenses and other
current assets (83,656) 34,014 (119,490) 5,929 (58,500)
Increase in security deposits 19,977 (77,121) 4,425 (25,782)
(Increase) decrease in accounts payable and
accrued liabilities 231,990 (7,719) 286,657 (25,209) 749,916
------------- ------------- ------------- ------------- -------------
Net cash used in operating and development
stage activities (1,683,180) (1,102,807) (5,559,727) (4,171,612) (16,611,889)
------------- ------------- ------------- ------------- ------------
Cash flow from investing activities:
Acquisition of property and equipment (89,596) (84,583) (205,729) (176,423) (661,374)
Acquisition Cost of Imagelink Asset Purchase (1,445) (1,445) (1,445)
Investment in certificate of deposit - (90,000)
Proceeds from sale of assets 1,230 1,730 - 1,730
Patent application costs (1,006) (54,506) - (89,722)
------------- ------------- ------------- ------------- ------------
Net cash used in investing activities: (89,372) (86,028) (258,505) (177,868) (840,811)
------------- ------------- ------------- ------------- ------------
6 of 22
(a development stage enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
May 11, 1994
(Inception)
Three Months Ended Nine Months Ended through
September 30, September 30, September 30,
1996 1997 1996 1997 1997
-------- --------- ---------- -------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock in private placement - 2,655,647
Offering costs (158,805) (1,446) (327,709)
Proceeds from the exercise of stock options by employees 156,901 298,901 4,000 350,900
Proceeds from initial public offering - 11,500,000
Underwriter's commissions and expense allowances - (1,449,000)
Offering costs (186,553) - (445,970)
Proceeds from issuance of convertible debentures 879,000 879,000 879,000
Issue Cost of convertible debentures (164,144) (164,144) (164,144)
Proceeds from issuance of preferred stock in private placement - 5,500,000
Offering costs (7,112) (7,112) (528,770)
Proceeds from notes payable - 331,000
Repayment of notes payable - (331,000)
Repayment of capital lease obligations (45,861) (17,310) (91,013) (54,508) (191,674)
Proceeds from bridge loans - 900,000
Repayment of bridge loans - (900,000)
Loans to employees, net - (33,800)
---------- --------- ---------- ---------- -------------
Net cash provided by financing activities: (47,765) 690,434 21,335 655,790 17,744,480
---------- --------- ---------- ---------- -------------
Increase(decrease) in cash and cash equivalents: (1,820,317) (498,401) (5,796,897) (3,693,690) 291,780
Cash and cash equivalents at beginning of period 2,532,417 790,181 6,508,997 3,985,470 -
---------- --------- ---------- ---------- -------------
Cash and cash equivalents at end of period $ 712,100 $ 291,780 $ 712,100 $ 291,780 $ 291,780
========== ========= ========== ========= =============
Supplemental disclosure of cash flow information: Capital lease obligations of
$9,673 were incurred when the Company entered into new leases for testing
equipment. Interest expense paid in cash was $7,655.
7 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 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. Unless income from the sales of VideoLan's series of products can be
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 the future sale of VideoLan's series of products 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. The weighted average
number of outstanding shares has been restated as though the 1-for-8 reverse
stock split which occurred on September 26, 1997 happened at the inception of
the Company.
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.
8 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 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." Included in these notes to the financial
statements are the pro forma disclosures required by SFAS No. 123, "Accounting
for Stock-Based Compensation," which assumes the fair value based method of
accounting had been adopted.
10. Interim Financial Statements
The unaudited balance sheet as of September 30, 1997 and the unaudited
statements of operations and cash flows for the three months ended September 30,
1997 and 1996, the nine months ended September 30, 1997 and 1996, and the period
May 11, 1994 (inception) through September 30, 1997 and the statement of
stockholders' equity for the nine months ended September 30, 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 September 30, 1997 and results of operations and the cash
flows for the nine months ended September 30, 1997 and 1996, and the period May
11, 1994 (inception) through September 30, 1997.
9 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 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 will mature on April 12, 1998 at an annual interest rate of 4.4%. The
Company is required to reinvest this certificate of deposit as collateral for
the remainder of the lease.
NOTE D-CAPITAL STOCK TRANSACTIONS
COMMON STOCK TRANSACTIONS
Pre-Split
Pre-Split Pre-Split Average Common
Common Common Share Stock
Date Investor Shares Shares Amounts Equity
- - --------------------------------------------------------------------------------------------------------------
6/30/97 Beginning Balance 14,046,398 1,755,800 $ 9.6823 17,000,095
1/12/97 (1) Employee options exercised 4,000 500 8.0000 4,000
7/3/97 (3) Preferred stock conversion 129,143 16,143 3.8475 62,109
7/11/97 (2) Imagelink asset purchase 4,000,000 500,000 0.5551 277,554
7/23/97 (4) Preferred stock conversion 990,552 123,819 4.6970 581,575
7/23/97 (4) Preferred stock conversion 990,552 123,819 4.6970 581,575
7/28/97 (5) Preferred stock conversion 73,659 9,207 6.0449 55,658
8/29/97 (6) Preferred stock conversion 308,032 38,504 4.7105 181,372
8/29/97 (7) Preferred stock conversion 135,715 16,964 3.6116 61,268
9/10/97 (8) Preferred stock conversion 237,895 29,737 2.1205 63,057
9/17/97 (9) 8% Debenture conversion 987,850 123,481 1.5428 190,501
9/26/97 (10) 8% Debenture conversion 567,999 71,000 1.2341 87,620
------------ -----------
9/30/97 Total Outstanding Shares 2,808,974 19,146,385
------------ -----------
1. During January, 1997, 4,000 employee stock options were exercised at $1 per
share.
2. During July 1997, the Company purchased certain assets of Imagelink, Inc.
The purchase consisted of 4,000,000 shares of the Company's stock,
3,000,000 of those shares are subject to automatic cancellation if
aggregate revenues during the 12 months ending July 10, 1998 do not equal
or exceed $12,000,000. The 1,000,000 non-cancelable shares are considered
as consideration of $279,000. The value of the 3,000,000 shares will be
recorded as consideration only when it determined that the revenue target
will be met. The acquisition was accounted for under the purchase method
resulting in goodwill of approximately $34,000.
3. On July 3, 1997, 60 shares of the October, 1997 Regulation D preferred
stock offering were converted to common stock at a conversion rate of $.525
per share (pre-split), 14,857 of the shares issued were due to penalties.
4. On July 23, 1997, 1,000 shares of the October, 1997 Regulation D preferred
stock were converted to common stock at a conversion rate of $.635 per
share (pre-split), 406,300 of the shares issued were due to penalties.
10 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
5. On July 28, 1997, 50 shares of the October, 1997 Regulation D preferred
stock were converted to common stock at a conversion rate of $.82 per share
(pre-split), 12,683 of the shares issued were due to penalties.
6. On August 29, 1997, 150 shares of the October, 1997 Regulation D preferred
stock were converted to common stock at a conversion rate of $.635 per
share (pre-split), 71,812 of the shares issued were due to penalties.
7. On August 29, 1997, 50 shares of the October, 1997 Regulation D preferred
stock were converted to common stock at a conversion rate of $.49 per share
(pre-split), 32,674 of the shares issued were due to penalties.
8. On September 10, 1997, 50 shares of the October, 1997 Regulation D
preferred stock were converted to common stock at a conversion rate of
$.285 per share (pre-split), 62,456 of the shares issued were due to
penalties.
9. On September 17, 1997, $220,000 of the Regulation S 8% Convertible
Debenture was converted to 987,850 shares of common stock at a conversion
rate of $.225 per share (pre-split), 10,072 of these shares were issued due
to accrued interest.
10. On September 26, 1997, $101,000 of the Regulation S 8% Convertible
Debenture was converted to 567,999 shares of common stock at a conversion
rate of $.18 per share (pre-split), 6,888 of these shares were issued due
to accrued interest.
One-for-Eight Reverse Split
On September 26, 1997 the Company did a 1-for-8 reverse split of its common
stock. The weighted average shares of common stock have been restated as though
it had been that way since the inception of the Company.
NOTE E - IMAGELINK ACQUISITION
During July 1997, the Company purchased certain assets of Imagelink, Inc. The
purchase consisted of 4,000,000 shares of the Company's stock, 3,000,000 of
those shares are subject to automatic cancellation if aggregate revenues during
the 12 months ending July 10, 1998 do not equal or exceed $12,000,000. The
1,000,000 non-cancelable shares are considered as consideration of $279,000. The
value of the 3,000,000 shares will be recorded as consideration only when it is
determined that the revenue target will be met. The acquisition was accounted
for under the purchase method resulting in goodwill of approximately $34,000.
NOTE F-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. In June
1997, the Company leased additional space expanding the Jeffersontown facility
by 3220 square feet. The corporate and sales offices have moved into the
additional space.
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 was utilized for the corporate and sales offices.
At this time the Company is seeking new tenants to occupy this location,
releasing VideoLan from any further responsibility for this lease.
11 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Future minimum lease payments on noncancellable operating leases are as follows:
1997 49,518
1998 209,072
1999 213,072
2000 179,372
2001 119,592
2002 69,762
===================
889,906
===================
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 series of VideoLan products 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 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.
12 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Litigation
Two class action lawsuits have been filed against the Company by investors who
purchased the Company's securities. The period covered in the first lawsuit is
from November 7, 1995 through May 28, 1996. The period covered in the second is
from November 7, 1995 through November 14, 1996. The Company believes that the
claims asserted in these lawsuits are without merit, and therefore the Company
intends to vigorously defend them.
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.
Additional Funding
On July 31, 1997 the Company issued a $1,200,000 8% Convertible Debenture due
July 31, 1998 for cash consideration. The Company paid $180,000 in commissions
and finders fees. The purchaser of the debenture has the option to convert all
the principal amount of the Debenture, plus accrued interest, provided the
principal amount is at least $10,000, into Common Stock at any time after
September 10, 1997, at a conversion price for each share of Common Stock is
equal to 80% of the market price on the conversion date. The market price shall
be the average closing bid price of the Common Stock on the five trading days
immediately preceding the conversion date.
On September 24, 1997, the Company issued $200,000 of 4% debentures due
September 24, 1999 convertible into common stock any time after November 8, 1997
at 80% of closing bid price for 5 days preceding the conversion date.
On September 17, 1997, $220,000 of the aforementioned 8% Convertible Debentures
were converted to common stock. On September 26, 199,7 an additional $101,000 of
the 8% debentures were converted to common stock. The balance of the debentures
due as of September 30, was $879,000. The interest accrued on those debentures
for the period ending September 30, 1997 was $11,752.
On October 24, 1997, $250,000 of the $879,000 remaining balance as of September
30,1997 was converted to common stock, leaving a balance due to the investors of
$629,000.
NOTE G- SUBSEQUENT EVENTS
Additional Funding
On November 4, 1997, the Company received additional financing of $200,000 from
the issuance of 8% convertible debentures.
Regulation S 8% Convertible Debentures
On October 24, 1997, $250,000 of the $879,000 remaining balance as of September
30,1997 was converted to common stock, leaving a balance due to the investors of
$629,000.
Regulation D Convertible Preferred Stock
During the period from October 17, 1997 through October 24, 1997, 441 shares of
the Regulation D preferred stock were converted to common stock resulting in the
issuance of approximately 4.5 million shares of common stock.
13 of 22
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Achille Tedesco Named to the Board of Directors
On October 21, 1997 the Company named Achille (AC) Tedesco to the board of
directors. Mr. Tedesco will replace former board member John Glankler, who has
stepped down due to increased responsibilities resulting from his promotion to
partner of the law firm Sebaly, Shillito, & Dyer.
Authorized Shares of Common Stock Raised to 500,000,000
In October of 1997, the majority of the shareholders approved an increase in the
authorized shares of common stock from 10,000,000 shares to 500,000,000 shares.
Due to some conversions of the Regulation S 8% Convertible Debentures and the
Regulation D Convertible Preferred Stock, the number of shares issued and
outstanding as of November 10, 1997 is approximately 40,000,000.
14 of 22
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.
VideoLan's mission is to be the leading supplier of end-to-end high bandwidth
multi-media distribution networking systems, providing cost effective visual
communications solutions via transparent broadband switching and dynamic
gateways to local and worldwide area networks.
Description of Business
VideoLan Technologies, Inc. is a premier developer of video conferencing and
video broadcast solutions based upon its Metallic FiberTM transmission and
broadband switching technology. VideoLan's technology enables broadcast-quality
transport of high-speed, bi-directional, real-time voice, data and video over
existing unshielded twisted pair ("UTP") copper wire infrastructures. 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.
Once the VideoLan System is 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 local area network environment("LAN"), 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.
15 of 22
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
southern 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.
On June 24, 1997 the Company announced its series of new broadband video
communication products, and a price reduction on its existing VL2000 system. The
new products include the VL1000, a campus wide full motion desk-top video
conferencing system; the VL1500, a multi-media desk-top video conferencing
system, including multi-party calling; and the VL3000, a full-featured video
communication exchange system providing desk-top video conferencing for campus
and wide area network applications. The VL3000 will also include multi-user
capability, archiving features, and other high end multi-media features. Each of
the new models are fully inter-operable and upwards compatible.
On October 20, 1997 the Company announced its innovative next generation of
video enterprise exchange products. The newly introduced family of products, the
Visual Xchange System (VXS)(TM), allows users to visually communicate, share
data and have universal access to video resources. The VXS product family is
unique in its ability to integrate any video or visual information source into a
conference, and be fully controllable by the users during conferences. In
addition, the new products offer exceptionally high standards in visual
communication, transmitting NTSC quality video, stereo audio, switch signaling
and point-to-point data.
On October 7, the Company announced it had retained Rourke-MS&L, a Boston-based
public and investor relations firm specializing in the hi-tech industry, to
provide strategic media and IR counsel. Rourke-MS&L is a wholly-owned subsidiary
of Manning, Selvage & Lee, the tenth largest PR/IR agency worldwide. Rourke will
leverage many years of experience in working with hi-tech companies to bring
VideoLan's emerging video technology to the forefront. In addition, the agency
plans to utilize its extensive contacts in the trade and business press, venture
capital markets and the investment and market research analyst communities to
increase awareness of VideoLan.
There can be no assurance that the Company will establish satisfactory
distribution channels for the VideoLan Systems or that the VideoLan Systems 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 Series of products
and is currently beginning to implement its marketing strategy. It was expected
that the Company would have nominal sales through third quarter of 1997 due to
publicity problems experienced by the Company during the last half of 1996.
However, the Company had revenues of $520,822 for the nine months ended
September 30, 1997, as compared to $488,947 in the comparable period of 1996.
16 of 22
Operating Expenses:
Total operating expenses for the nine months ended September 30, 1997 were
$4,784,207 as compared with $5,091,944 for the nine months ended September 30,
1996. Sales increased by $31, 875 in 1997, yet the operating expenses decreased
by $307,737.
Salaries and payroll taxes decreased by $61,781 to $1,531,687 during the
nine months ended September 30, 1997 compared to $1,469,906 in the nine months
ended September 30, 1996. As of October 31, 1996 VideoLan had 42 employees. As
of October 31, 1997 VideoLan had 39 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.
Research and development expenses for the nine month period ending
September 30, 1997 were $1,280,516 as compared with $1,343,543 for the same
period in 1996. The research and development department has been diligently
working during 1997 to release its series of new broadband video communication
products and next generation of video enterprise exchange products, the Visual
Xchange System (VXS)(TM). These projects required additional personnel such as
engineers, programmers, and technicians. They also required additional equipment
and consulting services.
Marketing costs for the nine months ended September 30, 1997 were $85,073
as compared with $171,523 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 during 1996. It is
expected to increase in the last quarter of 1997 and the beginning of 1998. The
Company announced on October 7, that it retained Rourke-MS&L for its public and
investor relations.
Consulting and Professional Fees decreased $32,434 to $636,435 for the nine
month period ending September 30, 1997 from $668,869 for the nine month period
ending September 30, 1996. The majority of the expense 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 nine month period ending September 30,
1997 was $351,471 as compared with $337,001 for the same period in 1996. The
increase in travel and entertainment is mainly due to the increase in sales
activity, as well as, trade shows and investor relations presentations around
the country.
Rent and Office expenses for the nine months ended September 30, 1997 were
$303,138. They increased by $26,553 from $276,585 for the comparable period in
1996. Currently, the rent and office expenses include the expenses for four
facilities. The Company has an outside sales office in Massachusetts. On July
11, 1997 the Company added the Pittsburgh Sales Office through the purchase of
the assets of ImageLink, Inc. The Company combined the corporate offices and the
research and development/operations facility in June of 1997 to minimize
overhead, however, the Company is still responsible for the rent payments for
the former corporate offices until a sublease arrangement can be finalized.
Insurance increased by $82,050 from $153,891 for the period ending
September 30, 1996 to $235,941 for the period ending September 30, 1997. The
majority of this increase is due to a significant increase in the officers and
directors insurance coverage to comply with industry standards.
Stock administration charges were $143,492 for the period ending September
30, 1997, compared with $67,293 for the nine month period ending September 30,
1996. The increase is associated with the increased number of stock transactions
during 1997 and the investor relations efforts.
17 of 22
Penalties on Regulation D registration of preferred stock. 1,360 shares of
Regulation D preferred stock were converted into common stock. There were
penalties associated with these conversions which totaled $355,611.
Other expenses. The significant expenses in this category are supplies,
repairs and maintenance, employee relations and training, bad debts expense, and
other miscellaneous expenses. The decrease in the category is evidence of the
budget efforts made by the Company to reduce and control costs.
Net Loss:
The net loss of the Company for the nine months ended September 30, 1997 was
$4,873,647 ($2.59 per share) as compared with $4,743,894 ($2.73 per share) for
the nine months ended September 30, 1996. The Company has made nominal sales and
implemented a rigid budget to cut costs during the first quarter of 1997. The
increase in net loss was due to the penalties expense of the preferred stock
conversions in the amount of $355,611. The Company expects to incur continuing
losses until significant quantities of the VideoLan Series of products are sold.
Liquidity and Capital Resources:
Through September 30, 1997, an aggregate of $16,611,889 has been expended in the
operating and development stage activities of the Company, principally for
research and development, salaries and professional fees. An additional $840,811
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 September 30, 1997, 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 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 filed an
S-3 Registration Statement with the Securities and Exchange Commission on
September 12, 1997 to register the shares.
On August 1, 1997, the Company completed the first phase for its next financing
requirements. The Company received initial gross proceeds of $1.2 million and is
currently in negotiations for additional funding.
On September 24, 1997, the Company issued $200,000 of 4% debentures due
September 24, 1999 convertible into common stock any time after November 8, 1997
at 80% of closing bid price for 5 days preceding the conversion date.
On November 4, 1997, the Company issued $200,000 of 8% debentures due November
4, 1998, convertible into common stock.
18 of 22
For the past several months, the Company has financed its activities through
several small cash infusions from investors. As of November 4, 1997 the
Company's current cash position was $308,246. The Company is utilizing
approximately $450,000 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 November of 1997. Due to the
acquisition of the ImageLink assets, the Company has been issued a sizable
purchase order. The Company expects a cash flow to materialize from this
purchase order in the next couple of months. 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 or additional interim cash infusions 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 products
are 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.
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.
19 of 22
VideoLan Technologies, Inc.
(A Development Stage Enterprise)
Part II: Other Information
ITEM 1. Legal Proceedings
A class action lawsuit has been filed against the Company by
investors who purchased the Company's securities over a period
beginning November 7, 1995 and ending May 28, 1996. The Company
believes that the claims asserted in the lawsuit are without merit
and therefore the Company intends to vigorously defend the lawsuit.
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
(A) The annual meeting of Stockholders of VideoLan Technologies,
Inc. was held on August 21, 1997.
(B) Director nominees with the four largest amounts of votes were
elected as follows:
(1) ELECTION OF DIRECTORS For Withheld Elected
- - --------------------------------------------------------------------------------
Jack Shirman 12,501,187 182,989 X
Steven B. Rothenberg 12,508,852 175,324 X
Norman Barkeley 12,495,552 188,624 X
John R. Glankler 12,505,552 178,624 X
Vernon Jackson 2,506,979 0
Timothy Hollinder 2,506,979 0
Mendy Erad 2,506,979 0
W.R. Porter 2,506,979 0
20 of 22
VideoLan Technologies, Inc.
(A Development Stage Enterprise)
Part II: Other Information
(C) Certain matters voted upon at the meeting and the votes cast with
respect to such matters are as follows:
Broker
For Against Abstain Non-Votes
------------------------------------------------------------------------------------------
(2) Proposal for amendment to the
Company's certificate of 11,126,216 3,599,890 238,623 226,426
incorporation to cause a
one-for-eight reverse stock split of
the Company's common stock.
(3) Proposal for adoption of the
1997 Employee Stock Purchase Plan. 7,888,893 3,208,999 287,378 3,805,885
(4) Proposal to ratify the
appointment of Grant Thornton LLP as
independent accountants for the
Company for the year ending December 11,901,588 3,089,000 200,567 0
31, 1997.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports:
(a) Exhibits
10.1 Form of 8% Convertible Debenture. (1)
10.2 Form of 4% Convertible Debentures. (2)
10.3 Asset Purchase Agreement, dated July 10, 1997, by and among IL
Acquisition Corp, Video and Communication Solutions, Inc.,
VideoLan Technologies, Inc. GCH Acquisition Partners, Ltd, and
Growth Capital Holdings, Inc. (3)
10.4 Employment agreement between VideoLan Technologies, Inc. and Jack
Shirman
10.5 Employment agreement between VideoLan Technologies, Inc. and
Steve Rothenberg
27.0 Financial Data Schedule
(b) Reports
None
- - ----------
(1) Incorporated by reference to the exhibits to the Form 8-K filed by the
Company on August 13, 1997 (File No. 000-26302).
(2) Incorporated by reference to the exhibits to the on Form 8-K filed by the
Company on September 24, 1997 (File No. 000-26302).
(3) Incorporated by reference to the exhibits to the on Registration Statement
Form S-3 filed by the Company on September 12, 1997. (File No. 333-35521).
21 of 22
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: November 13, 1997 /s/ Jack Shirman
___________________________
Jack Shirman
Chief Executive Officer
Date: November 13, 1997 /s/ Steven B. Rothenberg
___________________________
Steven B. Rothenberg
Chief Financial and Accounting Officer
22 of 22