-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AdhMCOtHNUkQC0dHuXJCkWkegEwLQHfIVxMFlWr4K2oEx7ikeCuuWNZrSPdiYQCz YC0zHfmdq8m50KiDOF1Dbw== 0000950133-01-501285.txt : 20010522 0000950133-01-501285.hdr.sgml : 20010522 ACCESSION NUMBER: 0000950133-01-501285 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIDEO NETWORK COMMUNICATIONS INC CENTRAL INDEX KEY: 0000944310 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 541707962 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22235 FILM NUMBER: 1645050 BUSINESS ADDRESS: STREET 1: 50 INTERNATIONAL DRIVE CITY: PORTSMOUTH STATE: NH ZIP: 03801 BUSINESS PHONE: 6033346700 MAIL ADDRESS: STREET 1: 50 INTERNATIONAL DRIVE CITY: PORTSMOUTH STATE: NH ZIP: 03801 FORMER COMPANY: FORMER CONFORMED NAME: OBJECTIVE COMMUNICATIONS INC DATE OF NAME CHANGE: 19970122 10QSB 1 w49220e10qsb.txt FORM 10QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 [ ] Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from _________ to ____________ Commission file number 000-22235 ---------- Video Network Communications, Inc. - -------------------------------------------------------------------------------- (Exact Name of Small Business Issuer as Specified in Its Charter) Delaware 54-1707962 -------- ---------- (State or Other (I.R.S. Jurisdiction of Employer Incorporation or Identification Organization) No.) 50 International Drive Portsmouth, NH 03801 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (603) 334-6700 - -------------------------------------------------------------------------------- (Issuer's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of May 12, 2001: 10,667,970 Transitional Small Business Disclosure Format (check one): Yes No X ----- ----- 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VIDEO NETWORK COMMUNICATIONS, INC. BALANCE SHEETS
ASSETS MARCH 31, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents $ 1,169,821 $ 1,660,051 Accounts receivable 2,064,371 3,020,377 Inventories 5,939,109 4,668,938 Other current assets 148,473 42,889 ------------ ------------ Total current assets 9,321,774 9,392,255 Property and equipment, net 624,050 682,815 Trademarks and patents, net 265,290 269,029 Other assets 8,309 8,309 ------------ ------------ $ 10,219,423 $ 10,352,408 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 95,000 $ 29,806 Accounts payable 1,442,810 1,486,949 Deferred revenue 3,331,531 2,623,303 Accrued liabilities 1,665,325 1,645,516 Current portion of notes payable 2,936,931 109,102 Obligations under capital lease, current portion 14,079 7,635 ------------ ------------ Total current liabilities 9,485,676 5,902,311 Notes payable - 2,855,617 Obligations under capital lease 14,757 24,556 Commitments Stockholders' equity: Preferred stock, par value $.01, 2,500,000 shares authorized; -0- issued at March 31, 2001 and December 31, 2000, respectively - - Common stock, par value $.01, 30,000,000 shares authorized; 10,667,970 outstanding at March 31, 2001 and December 31, 2000, respectively 106,680 106,680 Additional paid-in capital 60,054,137 60,110,721 Accumulated deficit (59,441,827) (58,647,477) ------------ ------------ Total stockholders' equity 718,990 1,569,924 ------------ ------------ $ 10,219,423 $ 10,352,408 ============ ============
The accompanying notes are an integral part of these financial statements. 1 3 VIDEO NETWORK COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000 ----------- ----------- Revenues: Products $ 2,084,788 $ 643,046 Services 568,800 10,324 ----------- ----------- 2,653,588 653,370 ----------- ----------- Cost of sales: Products 1,210,987 524,631 Services 45,523 3,097 ----------- ----------- 1,256,510 527,728 ----------- ----------- Gross margin 1,397,078 125,642 ----------- ----------- Operating expenses: Research and development 704,019 940,353 Selling, general and administrative 1,429,582 1,049,564 ----------- ----------- Total operating expenses 2,133,601 1,989,917 ----------- ----------- Loss from operations (736,523) (1,864,275) Interest expense, net 57,827 53,625 ----------- ----------- Net loss $ (794,350) $(1,917,900) =========== =========== Net loss per common share - basic and diluted $ (.07) $ (0.22) =========== =========== Weighted average shares outstanding - basic and diluted 10,667,970 8,848,263 =========== ===========
The accompanying notes are an integral part of these financial statements. 2 4 VIDEO NETWORK COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 2000 ----------- ----------- Cash flows from operating activities: Net loss $ (794,350) $ (1,917,900) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 86,240 186,624 Amortization 5,468 4,834 Interest expense related to issuance of warrants 11,047 12,969 Non-cash compensation expense - 22,446 Reserve for obsolescence - 100,000 Changes in operating assets and liabilities: Accounts receivable 956,006 (301,575) Other current assets (30,584) 18,166 Inventory (1,270,171) 278,666 Accounts payable (44,139) (179,567) Deferred revenue 708,228 987,195 Accrued liabilities 19,809 (163,064) ----------- ----------- Net cash used in operating activities (352,446) (951,206) ----------- ----------- Cash flows from investing activities: Increase in trademarks and patents (1,729) (26,895) Purchase of property and equipment (27,475) (16,543) ----------- ----------- Net cash used in investing activities (29,204) (43,438) ----------- ----------- Cash flows from financing activities: Costs of issuing common stock (56,584) - Repayments of notes payable (48,641) - Proceeds from the exercise of stock options - 251,552 Principal payments on capital leases (3,355) (2,982) ----------- ----------- Net cash (used in) provided by financing activities 108,580) 248,570 ----------- ----------- Net decrease in cash and cash equivalents (490,230) (746,074) Cash and cash equivalents, at beginning of period 1,660,051 2,594,529 ----------- ----------- Cash and cash equivalents, at end of period $ 1,169,821 $ 1,848,455 =========== =========== Supplemental disclosure of non-cash investing and financing activities: See Note 6.
The accompanying notes are an integral part of these financial statements. 3 5 VIDEO NETWORK COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited financial statements of Video Network Communications, Inc. (the "Company") as of March 31, 2001 and for the three months ended March 31, 2001 and 2000 have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such financial statements contain all adjustments consisting only of normal recurring entries, necessary to present fairly the financial position of the Company as of March 31, 2001 and the results of operations for the three months ended March 31, 2001 and 2000. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended and as of December 31, 2000 included in the Video Network Communications, Inc. Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the entire year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. To date, the Company has not generated substantial revenues from the sale of its products and services. The Company recognized $8,769,000 in revenues during the year 2000, and recognized $2,654,000 in revenues during the three months ended March 31, 2001. Through the first quarter of 2001, the Company had suffered recurring losses from operations, and had recurring negative cash flow from operations. At March 31, 2001, the Company had an accumulated deficit of $59,442,000 that, together with its recurring losses from operations and negative cash flow, raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company has required substantial funding through debt and equity financings since its inception to complete its development plans and commence full-scale operations. The Company may require additional cash to fund operations. At March 31, 2001, the Company had approximately $1,170,000 in cash. The Company expects to generate cash from operations during the next twelve months. However, the Company believes that this additional cash together with our existing cash may not be sufficient to fund its operations for that period. Accordingly, the Company anticipates that it may require additional financing to fund operations. The Company has begun discussions with some potential financial investors and strategic partners and is seeking to complete a financing in the near future. The Company intends to continue to fund operations with existing cash and with cash generated from customer payments of accounts receivable until it completes an additional financing. However, the timing and amount of customer payments is uncertain. The Company's ability to complete a financing, the timing of the financing and its terms are subject to a number of conditions, including market conditions, many of which are beyond the Company's control. There can be no assurance that the Company will be able to secure financing or, if obtained, the timing or the terms of any such financing. If the Company does not secure additional financing when needed, it may be forced to consider alternative methods of maximizing stockholder value, which could include a sale of the Company, asset sales, workout alternatives or bankruptcy. 2. NET LOSS PER SHARE The Company computes basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". Net loss per common share is based on the weighted average number of common shares and dilutive common share equivalents outstanding during the periods presented. Basic loss per share is calculated by dividing net income by the weighted average shares outstanding. Diluted loss per share reflects the dilutive effect of stock options and warrants and are presented only if the effect is not anti-dilutive. As the Company incurred losses for all periods, there is no difference between basic and diluted earnings per share. Had options and warrants been included in the computation, shares for the diluted computation would have 4 6 increased by 9,283,849 and 7,634,339 as of March 31, 2001 and 2000, respectively. 3. INCOME TAXES The Company did not record a provision for income taxes for the three months ended March 31, 2001 and 2000 since the Company had a significant net operating loss carryforward available to it at March 31, 2001 and the Company had a net operating loss during the period ending March 31, 2000. The Company recorded a full valuation allowance against the net deferred tax asset generated primarily from its net operating loss carryforwards. 4. INVENTORIES Inventories consisted of the following at:
MARCH 31, DECEMBER 31, 2001 2000 --------------- --------------- (Unaudited) Raw Materials $ 5,598,859 $ 3,788,851 Finished Goods 340,250 880,087 --------------- --------------- $ 5,939,109 $ 4,668,938 =============== ===============
5. DEBT SANMINA NOTE In January 1999, the Company converted outstanding accounts payable to Sanmina Corporation to a $4,300,000 three-year term note accruing interest at 7% per year. In connection with the restructuring of accounts payable balances to a long-term note, the Company issued to Sanmina warrants to purchase 39,286 shares of common stock, with a $19.25 exercise price per share. An independent appraisal assigned a market value of $127,759 to these warrants. The Company has recorded the value of the warrants as a discount against the face amount of the note and will amortize the value of the warrants over the life of the note. In January 2000, the Company defaulted on the interest payment due to Sanmina and did not make subsequent interest and principal payments to Sanmina when due through August 2000. In August 2000, the Company renegotiated the terms of the note to Sanmina. Under the current terms of the note, the Company paid $150,000 on August 25, 2000 and $150,000 in November 2000. The Company is obligated to pay an amount each month equal to a percentage of the accounts receivable that it collected in the previous calendar month, with the percentage ranging from 0% to 5%, based upon the net amount of accounts receivable that we collect, beginning in February 2001. Any principal and accrued interest thereon remaining on the note is due in full on January 12, 2002. The Sanmina note is collateralized by the Company's personal property and certain other assets. At March 31, 2001, the Company owed Sanmina approximately $3.3 million in principal and interest on this note. The Company is in compliance with the terms of this renegotiated note. LEGAL COUNSEL NOTE In January 1999, the Company also converted $375,000 of outstanding accounts payable to legal counsel to a two-year term loan accruing interest at 7% per year. In connection with converting the restructuring of accounts payable balances to a long-term note, the Company issued to legal counsel warrants to purchase 5,714 shares of common stock, with a $18.59 exercise price per share. An independent appraisal assigned a market value of $18,583 to these warrants. The Company has recorded the value of the warrants as a discount against the face amount of the note and will amortize the value of the warrants over the life of the note. Prior to the August 2000 private placement of units, the Company had paid legal counsel $77,874 on the note, but continued to be in default with respect to payments required by the terms of the debt instrument. The note was renegotiated in August 2000 to require the Company to make a payment of approximately $50,000 at the time of the closing of the private placement in August 2000, which the Company did, and to make monthly payments of $20,000 until the balance of the note is fully paid. At March 31, 2001, the Company owed legal counsel approximately $71,000 in principal and interest on this note. 5 7 6. NON-CASH TRANSACTIONS The following non-cash transactions occurred in the periods indicated:
THREE MONTHS ENDED MARCH 31, 2001 2000 ---- ---- (UNAUDITED) (UNAUDITED) Note payable issued to fund prepaid insurance $ 75,000 $ -
7. NEW ACCOUNTING PRONOUNCEMENTS In June 1999, the FASB issued Statement of Financial Accounting Standard ("SFAS") 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133" ("SFAS 137"). SFAS 137 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which was issued in June 1998 and was to be effective previously for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 137 defers the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS 138"). SFAS 138 establishes accounting and reporting standards for a limited number of derivative instruments and hedging activities when implementing SFAS 133. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has adopted SFAS 138 and the adoption had no impact on the Company's results of operations, financial position or cash flows. 8. Subsequent Events The Company has filed a registration statement in accordance with its contractual agreement with the investors in the August 2000 private placement (the "Private Placement") to register the offering and resale of the securities issued in the Private Placement. In connection with the Private Placement, the Company agreed to use its best efforts to have the registration statement declared effective by the Securities and Exchange Commission no later than December 23, 2000. Because the registration statement was not declared effective by December 23, 2000, the Company is required to issue to each investor in the Private Placement and to the placement agent (or its designee), on December 23, 2000 and on the 23rd of each month thereafter until the earlier of the effective date of the registration statement or July 23, 2002, extra warrants to purchase that number of shares of common stock equal to five percent of the number of Warrants purchased by the investor in the Private Placement (and, as to the placement agent or its designee, five percent of the number of Warrants underlying the purchase option issued to the placement agent). The Company was obligated to issue extra warrants to purchase 101,194 shares of its common stock on December 23, 2000 and on each of the first two monthly anniversaries of December 23, 2000 (January 23, and February 23, 2001). In addition, the Company is obligated to issue to each investor in the Private Placement as of each of March 23, 2001, and April 23, 2001, extra warrants to purchase 38,704 shares of common stock. The extra warrants have the same terms as the Warrants. 6 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Quarterly Report on Form 10-QSB, other than historical financial information, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements involve known and unknown risks, uncertainties or other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Factors that might cause such a difference include risks and uncertainties related to our dependence on the emerging market for video broadcast, retrieval and conferencing, development of additional products, protection of our intellectual property, limited marketing experience, limited number of customers, and the need for additional personnel, as well as risks and uncertainties associated with our growth strategy, technological changes and competitive factors affecting us. The most important of these risks are discussed in more detail below under the heading "Risk Factors," and we urge you to read these in their entirety. The following discussion should be read in conjunction with the unaudited financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-QSB. OVERVIEW We reported revenues of $2,654,000 for the quarter ended March 31, 2001, an increase of 306% when compared with revenues reported for the same period in 2000. Our gross margin on total sales for the first quarter of 2001 was 53% of total revenues, compared to a gross margin of 19% of total revenues for the comparable period in 2000. Our operating expenses for the quarter ended March 31, 2001 of $2,134,000 were approximately 7% higher than our operating expenses in the fourth quarter of 2000. We are pleased with our progress in the first quarter of 2001 compared to a year ago and continue to anticipate a strong performance for the business in fiscal year 2001, with targeted revenues in excess of $20 million and what should be our first overall year of profitability. The $2.7 million in revenues reported for this quarter include revenues generated by the continuing deployment of our technology in the education market at several different K-12 school districts, a repeat sale to a premier national law firm, and sales through an active reseller to a new federal government client. Also during the quarter, we invoiced $1.4 million for services that were completed during the quarter. Management had anticipated recognizing these fees as revenues in the first quarter, but a careful review of current revenue recognition guidance suggested that it is more appropriate to reflect the receipt of these funds in a later period. These fees are not reflected in our first quarter results of operations, and we have not yet determined when these receipts will be properly recognized as revenue. During this first quarter, we maintained the focus of our sales initiatives in five vertical markets: healthcare, government, video production and distribution, finance and education. We also had a follow-on order from Greenberg Traurig, a prestigious national law firm well recognized as a leader in utilizing technology to promote efficiency. We believe that we have established reference accounts in the healthcare, government and video production and distribution markets and have made substantial inroads in the education market. Additionally, we have identified a host of potential customers, for whom a video application is mission critical, thus allowing us to further refine our sales focus. We believe the research and development work begun in 1993 has culminated in the creation of a video network system, the VidPhone system, that will become an increasingly important component of the information systems infrastructure of corporations, educational institutions and government agencies in the years ahead. Video Network Communications, Inc. is a Delaware corporation formed in 1993 to design, develop and market full-motion, high resolution, cost-effective video network systems. Users of our VidPhone video network system can view broadcast video, participate in multi-party videoconferences and retrieve stored video on demand from their desktop. Our VidPhone system distributes video to and from desktop and laptop personal computers and conference rooms configured with VidPhone stations, over the same wiring used by the telephone without interfering with normal telephone usage. We believe that the VidPhone system offers greater functionality and compatibility with existing infrastructure and higher quality than other video network or conferencing systems available today. We first introduced our technology and initial products in late 1998, and our products first demonstrated commercial readiness during the first half of 1999. The price for our typical 30-user video network system, including installation, is $130,000, but this price can vary significantly based on configuration options. We believe that we have shown revenue and sales growth over the past year despite limited sales and marketing resources and our unstable financial condition during the period. However, we believe that in order for our company to be successful, we will need to achieve a significantly higher level of sales in a relatively short time, which will require substantially higher sales and marketing expenditures in the future. At this stage of our product's market development, it is difficult for us to predict with accuracy the level of our sales in future periods, or when our marketing initiatives will result in higher sales. We have relatively few customers and individual system purchases normally exceed one hundred thousand dollars. These large individual sales continue to account for a significant 7 9 portion of our revenues. Accordingly, we expect to continue to experience significant, material fluctuations in our revenues on a quarterly basis for the foreseeable future. Our VidPhone enterprise video system utilizes patented technology to distribute TV-quality video, FM-quality stereo audio and data to laptop or personal computers using the telephone wiring connecting telephones to the PBX or CENTREX, bypassing the enterprise's local area network ("LAN"), and, thereby avoiding the issues associated with bandwidth limitations. We believe that bandwidth limitations have been the major impediment to delivering full-motion TV-quality video to the desktop on a cost-effective basis. We are continuing to invest a significant amount of our resources in research and development because we consider the commercialization of our products to be fundamental to our future success. In April 2000, we announced our implementation of Java technology, v2.0, which will enable us to offer customers a platform-independent video network solution. In October 2000, the Company announced the release of its IP/ISDN Gateway, that offers customers the flexibility of using H.323 (IP) and H.320 (ISDN) at their discretion for transporting high quality, on-demand video communications from the desktop across the wide area network. Consistent with the restructuring of our sales and marketing organization that was completed in 2000, we have concentrated our sales and marketing efforts in five vertical markets and we have experienced some success in each of these markets. We have targeted the finance, healthcare, education, video broadcast and production, and government sectors of the market. For the remainder of 2001, we intend to intensify our focus on selling and marketing our video network solutions and continuing product development to meet customer demands for new functionality and to lower the cost of our systems. Specifically, our goals are to (i) significantly enhance our marketing and public relations programs to create better awareness of our products among customers, industry analysts and financial analysts, (ii) develop our direct sales, (iii) continue engineering our video network system to refine and improve its functionality to meet new customer requirements and to lower our costs and the price of our system through improved design, (iv) develop new strategic partnerships committed to marketing our video network system as the video solution of choice to business users, and (v) use our current strategic and reseller arrangements to increase sales of our systems and create brand name recognition of our product. Our ability to meet these objectives is subject to a number of risks and uncertainties, including our ability to develop new strategic relationships with significant potential resellers, our ability to sell and market our product and develop market awareness of our video network system and our ability to obtain financing when required. We plan to continue to subcontract all major manufacturing and production activities for the foreseeable future, but we will continue to retain test and quality assurance functions until all subcontractors are certified with respect to quality. We expect to continue to incur significant operating expenses to support our product development efforts and to enhance our sales and marketing capabilities and organization, but we anticipate that our product development expenditures will be lower than in prior years because we have introduced the commercial version of our video network system. We expect that our results of operations will vary significantly from quarter to quarter for the foreseeable future. We have a limited customer base with several customers providing in excess of 10% of our total revenues. Two customers accounted for 57% and 28% of our total revenues in the first quarter ended March 31, 2001, and four customers accounted for 18%, 15%, 11% and 11%, respectively, of total revenues for the year ended December 31, 2000. Three customers accounted for 41%, 29%, and 11 % of our accounts receivable at March 31, 2001, and three customers accounted for 33%, 32%, and 25%, respectively, of accounts receivable outstanding as of December 31, 2000. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000 Revenues. We recognized $2,654,000 in revenues during the three months ended March 31, 2001 compared to $653,000 in the comparable period in 2000, representing an increase of approximately $2,001,000, or 306%. Of these revenues, $2,085,000 related to product sales in the first three months of 2001 compared to $643,000 recognized in the comparable period of 2000, representing a $1,442,000, or 224%, increase in equipment sales. The increase in equipment sales is due to an increase in both the number of customers and the average order size experienced in the first quarter of 2001 compared to the comparable period of 2000. Revenues related to installation and other services were $569,000 in the first three months of 2001 compared to $10,000 in the comparable period of 2000. Included in service revenues in the first three months of 2001 was $467,000 of management fees. No management fees were recognized in the comparable period of 2000. Eighty five percent of total sales in the first three months of 2001 were from two customers. 8 10 Cost of Sales. Cost of sales for the three months ended March 31, 2001 was $1,257,000. This represents an increase of $729,000 over the $528,000 recorded in the comparable period of 2000. Cost of product sales as a percentage of product sales was approximately 58% and 82% in the three months ending March 31, 2001 and 2000, respectively. Included in the cost of sales in the first quarter of 2000 was a $100,000 charge related to the increase in the inventory obsolescence reserve. There was no similar charge against in the first quarter of 2001. Cost of service sales for the three months ended March 31, 2001 were $46,000 compared to $3,000 in the same period of 2000, and reflect the costs of providing installation and other services. Gross Margin on Sales. Gross margin on total sales was approximately $1,397,000, or 53% of total revenues, for the period ending March 31, 2001 compared to gross margin of $126,000, or 19% of total revenues, for the comparable period in 2000. The gross margin percentage on equipment sales in the first three months of 2001 was 42%, compared to 18% realized on equipment sales in the comparable period of 2000. The lower gross margin experienced in 2000 was attributable to higher discounts offered to a new customer and to the increase in the inventory obsolescence reserve. The gross margin percentage on service revenues for the first three months of 2001 was 92% compared to 70% in the first quarter of 2000. The increase in the gross margin percentage on service revenues is attributable to the management fees earned in the first quarter of 2001. Research and Development. Research and development costs decreased to $704,000 in the three months ended March 31, 2001, compared to $940,000 in the first quarter of 2000, a decrease of $236,000, or 25%. Approximately $22,000 of the reduction resulted from reduced staffing costs as overall staffing in the research and development departments . Depreciation charged to research and development decreased $66,000. Approximately $136,000 of the decrease was due to reduced spending on materials in support of research projects in the first quarter of 2001 compared to the same period in 2000. Selling, General and Administrative Expenses. Selling, general, and administrative expenses increased to $1,430,000 during the three months ended March 31, 2001, from $1,050,000 during the three months ended March 31, 2000, an increase of approximately $380,000 or 36%. Sales and marketing expenses increased approximately $244,000, from $558,000 to $802,000, or 44%, in the first three months of 2001 as compared to the same period of 2000. Approximately $202,000 of this increase was due to higher sales personnel costs and $92,000 in increased marketing personnel costs as staffing in both departments was augmented to strengthen the sales and marketing efforts during 2001. Travel related expenses increased approximately $13,000 and advertising costs increased $10,000. Offsetting these increases were declines in the costs of utilizing outside consultants, $31,000, and deferrals of costs related to trade shows $25,000. Depreciation charged to the sales and marketing departments declined $23,000. Customer support expenses increased from $154,000 to $198,000, an increase of $44,000, or 29%, for the period ending March 31, 2001 compared to the same period of 2000. Increases in salaries, benefits, travel expenses, and materials costs, totaling approximately $60,000, were offset by reductions in deprecation expense and allocations of customer support costs to Cost of sales - services. General and administrative costs increased by approximately $92,000 in the three months ended March 31, 2001 compared to the same period in 2000. Of the increase, $74,000 was related to increased staffing costs and $10,000 was due to higher insurance costs. Net Interest Expense. Net interest expense in the first quarter of 2001 was $58,000, or 7% higher than the $54,000 recorded in the same period of 2000. Interest expense decreased from $78,000 in the first quarter of 2000 to $73,000 in the first quarter of 2001 due to declining balance on the outstanding debt. The interest expense accrues on our notes payable to Sanmina and to our legal counsel, the insurance premium financing notes, and capital lease obligations. Interest income decreased by $9,000 in the first quarter of 2001 compared to the comparable period of 2000 due to the decreased level of average cash balances. Net Loss. As a result of the foregoing factors, the net loss for the period ended March 31, 2001 decreased to $794,000, from $1,918,000 in the comparable period of 2000, a decrease of $1,124,000, or 59%. LIQUIDITY AND CAPITAL RESOURCES We have an accumulated deficit of approximately $59.4 million from our inception through March 31, 2001. We may incur additional operating losses in the future, principally as a result of expenses associated with product development efforts and anticipated sales, 9 11 marketing, and general and administrative expenses, but believe that the Company will achieve profitability in 2001. During the quarter ended March 31, 2001, we satisfied our cash requirements principally from cash generated by operations. We had cash and cash equivalents of $1,170,000 at March 31, 2001 compared to cash and cash equivalents of $1,660,000 at December 31, 2000, a decrease of $490,000. Net cash used in operations during the three months ended March 31, 2001 was approximately $352,000. Inventory increased by approximately $1,270,000 during the three months ended March 31, 2001, due primarily to deferred costs being incurred on several projects, $1,571,000, and other inventory purchases, offset by inventory related to sales during the quarter. Accounts receivable decreased by $956,000 during the three months ended March 31, 2001 as a result of cash received from customers relating to outstanding accounts receivable, offset by new sales during the period. Accounts payable decreased by approximately $44,000 in the three months ended March 31, 2001. Deferred revenue increased by $708,000 due primarily to cash payments received in advance of the services to be performed. Cash used in investing activities was $29,000, consisting of capital spending on property and equipment and increases in capitalized trademark and patent costs. Cash used in financing activities was $109,000 consisting of payments on the principal balances of notes payable, $49,000, payments on capital lease obligations $3,000, and continuing costs associated with efforts to register common stock issued in 2000, $57,000. In January 1999, the Company converted outstanding accounts payable to Sanmina Corporation, to a $4,300,000 three-year term note accruing interest at 7% per year. In connection with the restructuring of accounts payable balances, we also issued to Sanmina warrants to purchase 39,286 shares of common stock, with a $19.25 exercise price per share. An independent appraisal assigned a market value of $127,759 to these warrants. We have recorded the value of the warrants as a discount against the face amount of the note and will amortize the value of the warrants over the life of the note. In January 2000, we defaulted on the interest payment due to Sanmina and did not make subsequent interest and principal payments to Sanmina when due through August 2000. In August 2000, we renegotiated the terms of the note to Sanmina. Under the current terms of the note, we paid $150,000 on August 25, 2000, and $150,000 in November 2000. We are obligated to pay an amount each month equal to a percentage of the accounts receivable that it collected in the previous calendar month, with the percentage ranging from 0% to 5%, based upon the net amount of accounts receivable that we collect, beginning in February 2001. Any principal and accrued interest thereon remaining on the note is due in full on January 12, 2002. The Sanmina note is collateralized by our personal property and certain other assets. At March 31, 2001, we owed Sanmina approximately $3.3 million in principal and interest on this note. We are in compliance with the terms of this renegotiated note. In January 1999, we also converted $375,000 of outstanding accounts payable to legal counsel to a two-year term loan accruing interest at 7% per year. In connection with the restructuring of accounts payable balances, we issued to legal counsel warrants to purchase 5,714 shares of common stock, with a $18.59 exercise price per share. An independent appraisal assigned a market value of $18,583 to these warrants. We have recorded the value of the warrants as a discount against the face amount of the note and will amortize the value of the warrants over the life of the note. Prior to August 2000, we had paid legal counsel $77,874 on the note, but we were in default with respect to payments required by the terms of the debt instrument. The note was renegotiated in August 2000 to require us to make an approximately $50,000 payment at the time of the closing of a private placement in August 2000, which we did, and to make monthly payments of $20,000 until the balance of the note is fully paid. At March 31, 2001, we owed legal counsel approximately $71,000 in principal and interest on this note. We may require additional cash to fund operations. At March 31, 2001, we had approximately $1,170,000 in cash. We expect to generate revenues and cash from operations during the next twelve months. However, we believe that these additional revenues and profits together with our existing cash may not be sufficient to fund its operations for that period. Accordingly, we anticipate that we may require additional financing to fund operations. We have begun discussions with some potential financial investors and strategic partners and we are seeking to complete a financing in the near future. We intend to continue to fund operations with existing cash and with cash generated from customer payments of accounts receivable until we complete an additional financing. However, the timing and amount of customer payments is uncertain. Our ability to complete a financing, the timing of the financing and its terms are subject to a number of conditions, including market conditions, many of which are beyond our control. There can be no assurance that we will be able to secure financing or, if obtained, the timing or the terms of any such financing. If we do not secure additional financing when needed, we may be forced to consider alternative methods of maximizing stockholder value, which could include a sale of the Company, asset sales, workout alternatives or bankruptcy. 10 12 NEW ACCOUNTING PRONOUNCEMENTS In June 1999, the FASB issued Statement of Financial Accounting Standard ("SFAS") 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133" ("SFAS 137"). SFAS 137 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which was issued in June 1998 and was to be effective previously for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 137 defers the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS 138"). SFAS 138 establishes accounting and reporting standards for a limited number of derivative instruments and hedging activities when implementing SFAS 133. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has adopted SFAS 138 and the adoption had no impact on the Company's results of operations, financial position or cash flows. RISK FACTORS RISK FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following are some of the important risks associated with our business and our strategy, which could impact our future financial condition and results of operations. You should read and consider carefully the following risk factors. WE HAVE LOW CASH BALANCES AND LIMITED SOURCES OF FINANCING As described above in "Liquidity and Capital Resources," we may require additional cash to fund our operations. At March 31, 2001, we had cash and cash equivalents totaling only $1,170,000. We have exhausted the net proceeds from our private financing completed in August 2000 and, accordingly, our operating needs are funded principally from the receipt of cash from our operations. However, we believe that future cash from operations together with our existing cash may not be sufficient to fund our operations for the next twelve months. Accordingly, we anticipate that we may require additional financing to fund operations. Although we have begun discussions with some potential financial investors and strategic partners and we are seeking to complete a financing in the near future, we currently have no other sources of financing. While we believe that cash from operations will support our operations for the foreseeable future, the timing and amounts of customer payments is uncertain. Accordingly, the failure to receive timely customer payments when due would continue to have a serious impact on our business for the foreseeable future. If we are unable to raise cash in the near future, or if we fail to timely receive anticipated customer payments, we may be unable to sustain operations. Should cash from operations prove insufficient to fund operations, and should no alternate financing arrangements materialize, we may be forced to consider alternative methods of maximizing stockholder value, which could include a sale of the Company, asset sales, workout alternatives or bankruptcy. We cannot assure you that we will receive the anticipated cash from our operations when required or in a timely manner. WE MAY REQUIRE ADDITIONAL FINANCING Historically, the cash generated from our operations has not been sufficient to fund our business, and we have been dependent on financings to continue operating. Although we believe that cash from operations will support our operations for the foreseeable future, additional future revenues and profits may not be sufficient to fund our operations for the next twelve months. We do not currently have any lines of credit or bank financing, and we do not anticipate having access to bank financing for the foreseeable future. Accordingly, we anticipate that we may require additional debt or equity financing to fund operations in the near future. Our ability to complete a financing, the timing of the financing and its terms are subject to a number of conditions, including market conditions, many of which are beyond our control. There can be no assurance that we will be able to secure financing when needed or at all, or, if obtained, the timing or the terms of any such financing. If we do not secure additional financing when needed, we may be forced to consider alternative methods of maximizing stockholder value, which could include a sale of the Company, asset sales, workout alternatives or bankruptcy. NASDAQ DELISTING The Company's common stock currently is quoted on the Nasdaq SmallCap Market. In order to maintain quotation of the common stock on the Nasdaq SmallCap Market, the Company must maintain certain asset, capitalization or income tests and stock price tests. At December 31, 2000 and March 31, 2001, the Company did not meet all of these requirements. Specifically, at those dates, the 11 13 Company did not have $2,000,000 of net tangible assets. On March 16, 2001, we received a letter from The Nasdaq Stock Market indicating that at December 31, 2000, we failed to meet requirements for listing on the Nasdaq SmallCap Market. We anticipate that the Nasdaq will request that we provide The Nasdaq Stock Market with our specific plan to achieve and sustain compliance with Nasdaq SmallCap Market listing requirements, including the time frame for completion of the plan. Although our plan will demonstrate that we will be able to meet and sustain the requirements for the listing of our securities on The Nasdaq SmallCap Market, including the minimum net tangible assets requirement, we cannot guarantee you that we will be able to do so or that The Nasdaq Stock Market will find the Company's plan and timeframe for achieving compliance acceptable. If the common stock is delisted from quotation on the Nasdaq SmallCap Market, then there could be material adverse consequences for the Company, its results of operations and its financial condition. These consequences include, but are not limited to: - limited availability of market quotations for the Company's common stock; - limited news and analyst coverage of the Company; - adverse affect on the trading market for and market price of the Company's common stock; and - adverse affect on the Company's ability to issue additional securities or secure additional financing in the future. WE HAVE A LIMITED CUSTOMER BASE AND ATTENDANT RISK CONCENTRATION We have a limited customer base with several customers providing in excess of 10% of our total revenues. Two customers accounted for 57% and 28% of our total revenues in the first quarter ended March 31, 2001, and four customers accounted for 18%, 15%, 11% and 11%, respectively, of total revenues for the year ended December 31, 2000. Three customers accounted for 41%, 29%, and 11 % of our accounts receivable at March 31, 2001, and three customers accounted for 33%, 32%, and 25%, respectively, of accounts receivable outstanding as of December 31, 2000. We generally grant uncollateralized credit terms to our customers, and have not experienced any credit-related losses. We anticipate that the concentration of our customer base will continue for the foreseeable future, as we continue to expand our marketing efforts within our vertical target markets. Failure to diversify this customer concentration could result in our inability to continue to generate revenues sufficient to support operations. WE MAY BE UNABLE TO MEET THE PAYMENT SCHEDULE ON NOTES PAYABLE We currently have an outstanding note to a trade creditor, Sanmina Corp., on which the outstanding principal and interest balance was $3,254,000 at March 31, 2001. Under the existing terms of the note, we are obligated to pay Sanmina an amount each month equal to a percentage of the accounts receivable that we collected in the previous calendar month, with the percentage ranging from 0% to 5%, based upon the net amount of accounts receivable that we collect. Any principal and accrued interest thereon remaining on the note is due in full on January 12, 2002. The Sanmina note is secured by our personal property and certain of our other assets. Although we are currently in compliance with the terms of this renegotiated note, we may not be able to continue to meet the payment schedule on this note payable in the future. We also have a note outstanding to our legal counsel for legal fees that were incurred prior to 1999. Under the current terms of the note, we are obligated to pay $20,000 each month until the note is paid in full. At March 31, 2001, we owed our legal counsel approximately $71,000 in principal and interest on this note. We may not be able to continue to meet the payment schedule on this note payable in the future. We cannot assure you that we will be able to make the required principal and interest payments on these notes when due. If we default on these notes, we may lose those assets that serve as security or we may not be able to continue to receive legal services from our attorneys and we could be found liable to pay immediately in one payment all of the aggregate outstanding principal and interest on the notes. CUSTOMERS MAY NOT BUY OUR PRODUCTS DUE TO CONCERNS OVER OUR VIABILITY Due to our recurring losses from operations and lack of cash, some potential customers may decide not to purchase our video network system because of concerns that we may be unable to service, enhance or upgrade the systems. If we are not able to alleviate concerns about our long-term viability, we may not be able to market and sell our video network system successfully and continue operations. WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE We have incurred substantial losses from operations to date and had an accumulated deficit of $59.4 million through March 31, 2001. Our audited financial statements for the year ended and as of December 31, 2000, indicate that there is substantial doubt about our ability to continue as a going concern. 12 14 We recognized $2.7 million in revenues during the first quarter of 2001, $8.8 million in revenues during 2000, $2.4 million in revenues during 1999, and we recognized only $766,000 in revenues from the sale of products during 1998. We did not recognize any revenues in 1997. Accordingly, there is limited historical basis for you to expect that we will be able to realize sufficient operating revenues or profits in the future to support continuing operations. We have a limited backlog for revenue during the next six months of 2001, and we cannot predict with accuracy what our revenues will be in the future. Our ability to generate sales and to recognize operating revenues in the future will depend on a number of factors, certain of which are beyond our control, including: - customer acceptance of products shipped and installed to date and in the future; - our ability to generate new sales of products and secure customer acceptance; and - customer payments. WE HAVE A LIMITED OPERATING HISTORY Although we were incorporated in 1993, we focused on research and development until we shipped our first commercial VidPhone system in the third quarter of 1998. Carl Muscari, our Chairman, President and Chief Executive Officer, joined us in September 1999. In January 2000, we hired Stephen A. LaMarche as Vice President, Sales and Marketing. Because of our limited operating history and the relatively short tenure of several of our key senior managers, you have limited information on which to assess our ability to realize operating revenues or profits in the future. 13 15 WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS EFFECTIVELY We Are Dependent on Resellers. We distribute our products through major sellers of telephony products, system integrators and Value Added Resellers ("VARs"). Currently, we have agreements with approximately twelve resellers. These arrangements are for relatively short contractual periods and may be terminated under certain circumstances. We cannot assure you that we will be able to maintain existing reseller relationships or establish new ones. We compete for relationships against third-party resellers with larger, better-established companies with substantially greater financial resources. If we cannot maintain our current reseller relationships and cannot develop new relationships, we may not be able to sell our video network system. Resellers May Not Be Effective Distributors. Sales to third party resellers are expected to generate a significant part of our future revenues. However, we have sold only a limited number of video network systems and components under our reseller arrangements and to date have recognized minimal revenues from those sales. We currently have limited orders from our resellers for additional sales of VidPhone systems. If our resellers fail to market and sell our products, or our products fail to become an accepted part of the resellers' product offerings, the value of your investment could be reduced. We May Not Be Able To Develop Direct Sales And Marketing Capabilities. We expect to depend on the marketing efforts of our resellers for the foreseeable future. However, we are developing a small direct marketing capability to promote our video network system and to support our resellers. We cannot assure you that we will be able to create awareness of, and demand for, our products through our marketing efforts, or that the development of our direct marketing capabilities will lead to sales of our products and services. If we cannot successfully develop our own sales and marketing capabilities, we may not succeed in building brand-name recognition of the VidPhone system, and we will remain solely dependent on reseller efforts. THE MARKET FOR VIDEO COMMUNICATIONS PRODUCTS MAY NOT DEVELOP The market for video communications products continues to evolve rapidly. As is typical for a new technology, demand for and market acceptance of new products is unpredictable. If the market for video communications products fails to develop or develops more slowly than expected, our business and financial condition could be materially and adversely affected. UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY Our success will depend, in part, on our ability to protect our intellectual property rights to our proprietary hardware products. Toward that end, we rely in part on trademark, copyright and trade secret laws to protect our intellectual property in the U.S. and abroad. The degree of protection provided by patents is uncertain and involves largely unresolved complex legal and factual questions. The process of seeking patent and trademark protection can be long and expensive, and there is no assurance that any pending or future applications will result in patents and/or registered trademarks. Further, although we have some patents on our technology, we cannot assure you that these or any other proprietary rights granted will provide meaningful protection or any commercial advantage to us. We also cannot assure you that claims for infringement will not be asserted or prosecuted against us in the future, although we are not presently aware of any basis for claims. A number of companies have developed and received proprietary rights to technologies that may be competitive with our technologies. Most of these entities are larger and have significantly greater resources than we do. Given the rapid development of technology in the telecommunications industry, we cannot assure you that our products do not or will not infringe upon the proprietary rights of others. WE ARE DEPENDENT ON THIRD PARTIES FOR MANUFACTURING We outsource the manufacturing and assembly of many of the components of our products. We cannot assure you that our subcontractors will continue to perform under our agreements with them or that we will be able to negotiate continuing arrangements with these manufacturers on acceptable terms and conditions, or at all. In particular, our failure to pay these manufacturers when due could affect their willingness to continue working with us. If we cannot maintain relationships with our current subcontractors, we may not be able to find other suitable manufacturers. Any difficulties encountered with these manufacturers could cause product defects and/or delays and cost overruns and may cause us to be unable to fulfill orders on a timely basis. Any of these difficulties could materially and adversely affect us. 14 16 OUR MARKET VALUE IS HIGHLY VOLATILE The market price of our common stock has been highly volatile and may continue to fluctuate in the future. We completed an initial public offering of 295,714 shares of our common stock at a price of $38.50 per share in April 1997. Subsequently, in November 1997 we completed a follow-on public offering of 142,857 shares of common stock at a price of $161.875 per share. In June of 1999, we completed a public offering of 2,300,000 units, each unit consisting of three shares of common stock and two warrants with an exercise price of $4.00. The units were sold at a price of $7.50 per unit. On May 17, 2001, the last sales prices of our common stock and warrants as reported on the Nasdaq SmallCap market was $ 2.03 per share and $.69 per warrant. As a result of our stock price volatility, it is difficult to determine the market value of our company. We have no way of ascertaining the prices of our equity securities in the future. SUBSTANTIAL NUMBERS OF SHARES OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR FUTURE SALE IN THE PUBLIC MARKET We have a substantial number of shares of our common stock, including shares issuable upon exercise of certain outstanding options and warrants, that could soon become available for sale in the public market. We cannot predict the effect that any future sales of shares of common stock, or the availability of such shares for sale, will have on the market price of the common stock from time to time. We believe that sales of substantial numbers of shares of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices of the common stock and our ability to raise capital in the future through the sale of additional securities. Certain shares of our common stock held by existing stockholders constitute "restricted shares" as defined in Rule 144 under the Securities Act. These shares may only be sold if they are registered under the Securities Act or sold under Rule 144 or another exemption from registration under the Securities Act. Sales under Rule 144 are subject to the satisfaction of certain holding periods, volume limitations, manner of sale requirements, and the availability of current public information about us. A substantial portion of all of our restricted shares of common stock either will soon be eligible for sale pursuant to Rule 144 or have been registered under the Securities Act for resale by the holders. This will permit the sale of registered shares of common stock in the open market or in privately negotiated transactions without compliance with the requirements of Rule 144. We are unable to estimate the amount, timing or nature of future sales of outstanding common stock. In addition to the restricted shares of common stock, we have reserved shares of common stock for issuance upon exercise of outstanding warrants and options. Shares of common stock issuable in the future upon exercise of these options and warrants could hinder future financings. In addition, the holders of some of these options and warrants, and the holders of certain restricted shares of common stock, have registration rights, and the sale of shares of common stock upon exercise of those rights or the availability of such shares for sale could adversely affect the market price of our common stock. GOVERNMENT REGULATION Several components of our video network system, including the VidModem and VidPhone Switch, must comply with certain regulations of the Federal Communications Commission ("FCC"). Under FCC regulations, we will be required to follow a verification procedure consisting of a self-certification that the VidModem complies with applicable regulations pertaining to radio frequency devices. A qualified, independent testing facility tested the VidModem, and it was found to comply with FCC regulations. We obtained equipment registrations from the FCC for certain VidPhone system components, including the VidPhone switch that is connected to the public switched telephone network. Although we believe that at present the VidPhone system complies with all applicable government regulations, future government regulations could increase the cost of bringing products to market or adversely affect our ability to market and sell our products and technology. INFLATION The impact of inflation on our business has been insignificant to date, and we believe that it will continue to be insignificant for the foreseeable future. 15 17 PART II ITEM 2. Changes in Securities and Use of Proceeds In accordance with its contractual agreements with the investors in the August 2000 private placement (the "Private Placement"), the Company was obligated to register the offering and resale of the securities issued in the Private Placement and to have the registration statement declared effective by the Securities and Exchange Commission no later than December 23, 2000. The Company filed a registration statement in compliance with its contractual covenant. However, the registration statement has not yet been declared effective by the Securities and Exchange Commission. Because the registration statement was not declared effective by December 23, 2000, the Company is required to issue to each investor in the Private Placement and to the placement agent (or its designee), on December 23, 2000 and on the 23rd of each month thereafter until the earlier of the effective date of the registration statement or July 23, 2002, extra warrants to purchase that number of shares of common stock equal to five percent of the number of Warrants purchased by the investor in the Private Placement (and, as to the placement agent or its designee, five percent of the number of Warrants underlying the purchase option issued to the placement agent). The Company issued to the investors in the Private Placement extra warrants to purchase 101,194 shares of its common stock on January 23, 2001 and on February 23, 2001. The Company also issued to certain investors in the Private Placement extra warrants to purchase 38,704 shares of common stock on March 23, 2001. The Company issued the extra warrants pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. None 11 Statement of Computation of Earnings Per Share. (b) Reports on Form 8-K during the quarter ended March 31, 2001. Current Report on Form 8-K dated March 14, 2001 and filed on March 15, 2001 under Item 7 (Financial Statements and Exhibits) and Item 9 (Regulation FD Disclosure) announcing financial results for the fourth quarter and fiscal year ended December 31, 2000. 16 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Video Network Communications, Inc. By:/s/ CARL MUSCARI ---------------------------------------- Carl Muscari Chairman, President and Chief Executive Officer (duly authorized executive officer) By:/s/ ROBERT EMERY ---------------------------------------- Robert H. Emery Chief Financial Officer Vice President, Administration (principal financial officer) May 21, 2001 17 EX-11 2 w49220ex11.txt STATEMENT OF COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE Information regarding computation of earnings per share is included in Note 2 to Notes to financial statements included elsewhere in this Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001. 18 -----END PRIVACY-ENHANCED MESSAGE-----