EX-99 3 exh993a.txt EXHIBIT 99.3 Exhibit 99.3 Video Network Communications, Inc. acquisition of B2BVideo Network Corp. On May 16, 2002, Video Network Communications, Inc. ("VNCI" or the "Company") acquired B2BVideo Network Corp. ("B2BVideo"). As a result of the acquisition, B2BVideo became a wholly-owned subsidiary of the Company. The following consideration was issued in connection with the acquisition: a) B2BVideo's common and preferred shareholders were issued 3,000,000 shares of VNCI common stock; b) Options to purchase B2BVideo Series A Preferred Stock were exchanged for options to purchase 139,123 shares of VNCI common stock; c) Options to purchase 2.75 Units of B2BVideo, each Unit consisting of (A) 50,000 shares of B2BVideo Series B Preferred Stock and (B) warrants to purchase 50,000 shares of B2BVideo's common stock, were exchanged for options to purchase an aggregate of 185,497 shares of VNCI common stock and warrants to purchase 46,374 shares of VNCI common stock; d) Warrants to purchase 3,176,000 shares of B2BVideo common stock issued and outstanding immediately prior to the closing date were exchanged for warrants to purchase 1,165,328 shares of VNCI common stock; e) Warrants to purchase 3,449,000 shares of B2BVideo's common stock which were terminated upon consummation of the merger; f) Holders of senior secured promissory notes of B2BVideo with an aggregate principal balance of $2,500,000 plus accrued interest were exchanged for 4,276,023 shares of VNCI's common stock and; g) Options to purchase 707,925 shares of VNCI's common stock were issued to employees of B2BVideo in exchange for outstanding vested B2BVideo options. These options were 100% vested at the date of issuance. In addition, the Company also entered into a stock purchase agreement with Moneyline Network, LLC ("Moneyline"), a wholly owned subsidiary of Moneyline Telerate Holdings, on May 16, 2002. Pursuant to the stock purchase agreement Moneyline purchased 25,000,000 shares of the Company's common stock (representing approximately 51% of the Company's outstanding common stock after the merger) and warrants to purchase an additional 11,250,000 shares of the Company's common stock, all with an exercise price of $0.60 per share, for aggregate cash consideration of $15,000,000. Simultaneously, certain existing and new investors purchased 7,750,000 newly issued shares of the Company's common stock at $0.60 per share, providing aggregate gross proceeds of $4,650,000 to the Company. Also as part of this agreement, the following took place: a) A payment of $1,100,000 was made to Sanmina Corp. to extinguish a secured promissory note issued to Sanmina by the Company, with an outstanding principal balance of $2,900,000 and accrued interest of $587,145. The Company expects to record an extraordinary gain of $2,387,000 related to the extinguishment of this debt. Such extraordinary gain has not been reflected in the pro forma condensed combining statements of operations; b) A payment to Shaw Pittman LLP, a supplier of the Company, of $250,000 to settle outstanding invoices of $378,000, c) Promissory notes in the principal amount of $3,723,982 and accrued interest of $142,913 were exchanged for 6,444,823 shares of the Company's common stock, The following unaudited pro forma statements of operations for the year ended December 31, 2001 and the three months ended March 31, 2002, give effect to the merger and the related financing as if these had occurred on January 1, 2001. The unaudited pro forma balance sheet as of March 31, 2002 gives effect to the merger and the related financing as if they had occurred on March 31, 2002.
Video Networks Communications, Inc. Unaudited Pro Forma Condensed Combining Balance Sheet As of March 31, 2002 Pro Forma Notes Pro Forma Notes Adjustments - Adjustments - Pro Forma ASSETS VNCI B2B Video Financing Merger Combined ---- --------- ----------------- ----------------- -------------- Current assets: Cash and cash equivalents $ 193,126 $ 127,767 $ 15,000,000 [1] $ 500,000 [10] $ 15,514,780 4,650,000 [2] (1,612,788) [5] (1,100,000) [3] (145,935) [9] (684,602) [4] (1,612,788) [5] 200,000 [7] Accounts receivable, Net 101,875 179,916 281,791 Inventories 1,044,193 531,810 (87,628) [11] 1,488,375 Other current assets 16,820 800,021 -- (708,191) [9] 108,650 ------------ ------------ ------------ ---------- ------------ Total current assets 1,356,014 1,639,514 16,452,610 (2,054,542) 17,393,596 Property and equipment, net 230,316 1,204,500 1,434,816 Trademarks and patents, net 279,313 279,313 Goodwill 9,920,966 [9] 9,920,966 Other assets 8,309 896,760 -- (689,350)[9] 215,719 ------------ ------------ ------------ ------------ ------------ Total Assets $ 1,873,952 $ 3,740,774 $ 16,452,610 $ 7,177,074 $ 29,244,410 ============ ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT) Current liabilities: Accounts payable 2,350,021 961,361 (1,436,441) [4] (145,935) [9] 1,729,006 Deferred revenue 26,872 1,060,772 (1,060,772) [9] 26,872 Accrued liabilities 1,120,105 316,334 (587,145) [3] (66,850) [9] 639,531 (142,913) [6] Due to VNCI 1,160,393 (1,160,393) [9] -- Current portion of notes payable 6,107,380 2,000,000 (2,900,000) [3] (2,000,000) [10] 18,446 (3,723,982) [6] 200,000 [7] 335,048 [8] Current portion of capital lease obligations 19,926 55,249 -- -- 75,175 ------------ ------------ ------------ ------------ ------------ Total current liabilities 9,624,304 5,554,109 (8,255,433) (4,433,950) 2,489,030 Capital lease obligations, less current portion 23,227 -- -- 23,227 Mandatorily Redeemable Preferred Stock: Series B redeemable convertible preferred stock 2,000,000 -- (2,000,000) [9] -- Series A redeemable convertible preferred stock 5,500,000 (5,500,000) [9] -- Shareholders' Equity/(Deficit) Deferred stock-based compensation (166,240) 166,240 [9] -- Common stock 21,336 1,520 250,000 [1] (1,520) [9] 486,044 77,500 [2] 30,000 [9] 64,448 [6] 42,760 [10] Additional paid-in capital 62,436,674 3,475,230 14,750,000 [1] 7,355,317 [9] 93,761,390 4,572,500 [2] (3,475,230) [9] (1,612,788) [5] 2,457,420 [10] 3,802,447 [6] Accumulated deficit (70,231,589) (12,623,845) 2,387,145 [3] (87,628) [11] (67,515,281) (335,048) [8] -- -- 751,839 [4] 12,623,845 [9] -- ------------- ------------ ------------ ------------ ------------ Total stockholders' equity/(deficit) (7,773,579) (9,313,335) 24,708,043 19,111,024 26,732,153 ------------ ------------ ------------ ------------ ------------ Total liabilities stockholders' equity/(deficit) $ 1,873,952 $ 3,740,774 $ 16,452,610 $ 7,177,074 $ 29,244,410 ============ ============ ============ ============ ============
See notes to unaudited pro forma condensed combining financial information
Video Networks Communications, Inc. Unaudited Pro Forma Condensed Combining Statement of Operations For the three months ended March 31, 2002 Pro Forma Pro Forma Notes March 31, 2002 Adjustments Adjustments - Pro Forma VNCI B2B Video - Financing Merger Combined ---- --------- ----------- ------ -------- Revenues: Products $ 316,109 $ 174,367 $ -- $(266,473)[11] $ 224,003 Services 51,337 112,152 -- -- 163,489 ----------- ----------- ----------- --------- ----------- 367,446 286,519 -- (266,473) 387,492 Cost of sales: Products 241,108 198,271 (178,845)[11] 260,534 Services 14,051 259,258 -- -- 273,309 ----------- ----------- ----------- --------- ----------- 255,159 457,529 -- (178,845) 533,843 Gross margin 112,287 (171,010) -- (87,628) (146,351) Operating expenses: Research and development 560,889 484,460 -- -- 1,045,349 Selling, general and administrative 1,341,282 840,185 -- -- 2,181,467 ----------- ----------- ----------- --------- ----------- Total operating expenses 1,902,171 1,324,645 -- -- 3,226,816 Loss from operations (1,789,884) (1,495,655) -- (87,628) (3,373,167) Interest expense, net 769,263 134,289 -- -- 903,552 ----------- ----------- ----------- --------- ----------- Net loss from operations $(2,559,147) $(1,629,944) $ -- $ (87,628) $(4,276,719) =========== =========== =========== ========= =========== Net loss per common share - basic & diluted (1.20) $ (0.09) Weighted average shares outstanding - basic & diluted 2,133,594 39,194,823 7,276,023 48,604,440
See notes to unaudited pro forma condensed combining financial information
Video Networks Communications, Inc. Unaudited Pro Forma Condensed Combining Statement of Operations For the twelve months ended December 31, 2001 Pro Forma Notes Pro Forma Notes December 31, Notes Adjustments- Adjustments- 2001 Pro Forma VNCI B2B Video Financing Merger Combined ---- --------- --------- ------ -------- Revenues: Products $ 3,388,527 $ 40,367 $ -- $ (197,103)[11] $ 3,231,791 Services 9,587,188 26,000 -- -- 9,613,188 ------------ ----------- --------- ------------ ------------ 12,975,715 66,367 -- (197,103) 12,844,979 Cost of sales: Products 5,829,968 430,614 -- (284,365)[11] 5,976,217 Services 5,512,979 223,323 -- -- 5,736,302 ------------ ----------- --------- ------------ ------------ 11,342,947 653,936 -- (284,365) 11,712,518 Gross margin 1,632,768 (587,569) -- 87,262 1,132,461 Operating expenses: Research and development 2,774,336 1,568,758 -- -- 4,343,094 Selling, general and administrative 6,135,632 2,827,578 (751,839)[4] -- 8,211,371 Asset impairment charge 168,728 -- -- -- 168,728 ------------ ----------- --------- ------------ ------------ Total operating expenses 9,078,696 4,396,336 (751,839) -- 12,723,193 Loss from operations (7,445,928) (4,983,905) 751,839 87,262 (11,590,732) Interest expense, net 1,579,037 50,220 1,150,394[12] -- 2,779,651 ------------ ----------- --------- ------------ ------------ Net income/(loss) from operations $ (9,024,965) $(5,034,125) $(398,555) $ 87,262 (14,370,383)[13] ============ =========== ========= ============ =========== Net loss per common share - basic & diluted $ (4.23) $ (0.30) Weighted average shares outstanding - basic & diluted 2,133,594 39,194,823 7,276,023 48,604,440
See notes to unaudited pro forma condensed combining financial information VIDEO NETWORK COMMUNICATIONS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION 1. Basis of Presentation On May 16, 2002, Video Network Communications, Inc. ("VNCI" or the "Company") acquired B2BVideo Network Corp. ("B2BVideo"). As a result of the acquisition, B2BVideo became a wholly-owned subsidiary of the Company (the "Merger"). The following consideration was issued in connection with the acquisition: a) B2BVideo's common and preferred shareholders were issued 3,000,000 shares of VNCI common stock; b) Options to purchase B2BVideo Series A Preferred Stock were exchanged for options to purchase 139,123 shares of VNCI's common stock; c) Options to purchase 2.75 Units of B2BVideo, each Unit consisting of (A) 50,000 shares of B2BVideo Series B Preferred Stock and (B) warrants to purchase 50,000 shares of B2BVideo's common stock, were exchanged for options to purchase an aggregate of 185,497 shares of VNCI common stock and warrants to purchase 46,374 shares of VNCI's common stock; d) Warrants to purchase 3,176,000 shares of B2BVideo common stock issued and outstanding immediately prior to the closing date were exchanged for warrants to purchase 1,165,328 shares of VNCI's common stock (such amounts exclude warrants to purchase 3,449,000 shares of B2BVideo's common stock which were terminated upon consummation of the merger); e) Holders of senior secured promissory notes of B2BVideo with an aggregate principal balance of $2,500,000 plus accrued interest were exchanged for 4,276,023 shares of VNCI's common stock and; f) Options to purchase 707,925 shares of VNCI's common stock were issued to employees of B2BVideo in exchange for outstanding vested B2BVideo options. These options were 100% vested at the date of issuance. In addition, on May 16, 2002 the Company entered into a stock purchase agreement with Moneyline Network, LLC ("Moneyline"), a wholly owned subsidiary of Moneyline Telerate Holdings. Pursuant to the stock purchase agreement Moneyline purchased 25,000,000 shares of the Company's common stock (representing approximately 51% of the Company's outstanding common stock after the merger) and warrants to purchase an additional 11,250,000 shares of the Company's common stock, all with an exercise price of $0.60 per share, for aggregate cash consideration of $15,000,000. Simultaneously, certain existing and new investors purchased 7,750,000 newly issued shares of the Company's common stock at $0.60 per share, providing aggregate gross proceeds of $4,650,000 to the Company. Also as part of this transaction, the following took place: a. A payment of $1,100,000 was made to Sanmina Corp. to extinguish a secured promissory note issued to Sanmina by the Company, with an outstanding principal balance of $2,900,000 and accrued interest of $587,145. The Company expects to record an extraordinary gain of $2,387,000 related to the extinguishment of this debt. Such extraordinary gain has not been reflected in the pro forma condensed combining statements of operations; b. A payment to Shaw Pittman LLP, a supplier of the Company, of $250,000 to settle outstanding invoices of approximately $378,000; c. Promissory notes in the aggregate principal amount of $3,723,982 and accrued interest of $142,913 were exchanged for 6,444,823 shares of the Company's common stock, The accompanying unaudited pro forma financial information is presented for illustrative purposes and is not necessarily indicative of the results of operations that would have been reported if the combination had been completed as presented in the accompanying unaudited pro forma condensed combining balance sheet and statements of operations. The results of operations of B2BVideo will be consolidated with the results of operations of the Company for all periods subsequent to the acquisition date of May 16, 2002. The unaudited pro forma condensed combined financial information presented is based on, and should be read in conjunction with, the historical financial statements and the related notes thereto for both the Company and B2BVideo. The allocation of the purchase price consideration to the assets acquired and liabilities assumed included in the pro forma condensed combined financial information was based upon preliminary estimates of the fair market value of the acquired assets and assumed liabilities. These estimates of fair market value may change based upon completion of the Company's final valuation of the assets and liabilities of B2BVideo. The following table sets forth the components of the purchase price: Common stock issued $ 4,365,614 Options issued to employees 1,666,840 Warrants issued 3,042,362 Options issued to non-employees 810,501 Payments for B2B liabilities 145,935 Estimated transaction costs 1,612,788 ------------- Total purchase price $ 11,644,040 ============= The consideration issued to holders of B2BVideo's equity instruments and debtholders in connection with the acquisition of B2BVideo was valued as follows: a) VNCI Common Stock - The value of VNCI's common stock was determined to be $0.60 per share, the price at which VNCI sold its common stock to Moneyline and certain existing and new investors on May 16, 2002. b) Options issued to B2BVideo employees - All outstanding options held by employees to purchase B2BVideo's common stock have been exchanged for options to purchase 707,925 shares of VNCI's common stock. The options have varying exercise prices and 100% were vested at the date of issuance. The Company valued such stock options using the Black-Scholes option pricing model at $1,666,840. The calculation was based on the following assumptions: Volatility 144% Expected life 3 years Risk free interest rate 3.8% Dividend Rate N/A c) Warrants - Warrants to purchase the Company's common stock issued in connection with the acquisition were also valued using the Black-Scholes option pricing model. The warrants have varying exercise prices. The Company valued such warrants at $3,042,362. The calculation was based on the same assumptions as discussed in b) above. d) Options issued to non-employees - Options to purchase the Company's common stock issued in connection with the acquisition were valued using the Black-Scholes option pricing model. The options have varying exercise prices. The Company valued such options at $810,501. The calculation was based on the same assumptions as discussed in b) above. The following table provides the preliminary estimated fair value of the acquired assets and liabilities assumed based upon B2BVideo's March 31, 2002 balance sheet: Current assets $ 1,431,249 Property and equipment 1,204,500 Other assets 207,410 Liabilities assumed, current (1,120,085) ------------ Fair value of net assets acquired 1,723,074 ----------- Preliminary goodwill 9,920,966 ----------- Total estimated fair value of net assets acquired and recorded goodwill $11,644,040 ============ In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. The provisions of these statements apply to all business combinations initiated after June 30, 2001. Under the provisions of these pronouncements, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Intangible assets with finite lives will be amortized over their useful lives. In accordance with the provisions of SFAS No. 142, the Company will not amortize goodwill and intangible assets with indefinite lives recorded in connection with the acquisition of B2Bvideo. The Company expects to perform an annual impairment test of the goodwill and indefinite lived intangible assets but has not yet determined what effect these tests will have on the results of operations or the financial position of the Company in future periods. 2. Explanation of pro forma adjustments: The accompanying pro forma condensed combining financial statements give effect to the merger and the related financing. The unaudited pro forma statements of operations for the year ended December 31, 2001 and the three months ended March 31, 2002, give effect to the merger and the related financing as if these had occurred on January 1, 2001. The unaudited pro forma balance sheet as of March 31, 2002 gives effect to the merger and the related financing as if they had occurred on March 31, 2002. Balance Sheet Adjustments: A. Related to Financing 1) Sale and issuance to Moneyline of 25,000,000 shares of the Company's common stock and warrants to purchase an additional 11,250,000 shares of the Company's common stock (all with an exercise price of $0.60 per share), for total aggregate cash consideration of $15,000,000. 2) Sale and issuance of 7,750,000 shares of the Company's common stock to certain existing and new investors at a price of $0.60 per share providing aggregate gross proceeds of $4,650,000. 3) Settlement of a secured promissory note issued to Sanmina Corp. in the principal amount of $2,900,000 and accrued interest of $587,145 in return for a payment of $1,100,000 by the Company. 4) Payment of $684,602 to various creditors to settle outstanding payables of $1,436,441, including payment to Shaw Pittman LLP. 5) To reflect estimated costs of the financing primarily comprised of legal, investment banking and accounting fees. Total estimated costs of the financing and acquisition transaction amounted to $3,225,576, of which 50% were allocated to the financing and 50% were allocated to the purchase price of the acquisition. 6) Issuance of 6,444,823 shares of the Company's common stock in exchange for the cancellation of promissory notes with an aggregate principal amount of $3,723,982 and accrued interest of $142,913. 7) Reflects bridge loans of $200,000 made to VNCI subsequent to March 31, 2002 but prior to the financing. As part of the financing and as included in the amounts shown in 6) above, these Bridge notes were converted to common stock of VNCI. 8) Reflects an adjustment of $335,048 for additional interest expense relating to the unamortized value assigned to warrants on previously issued bridge notes, utilizing the Black-Scholes option pricing model. B. Related to Merger 9) Reflects the issuance of 3,000,000 shares of the Company's common stock to purchase all of the outstanding common and preferred stock of B2BVideo; issuance of options to purchase 139,123 shares of the Company's common stock in exchange for options to purchase B2BVideo's Series A Preferred Stock; issuance of 185,497 shares of common stock and warrants to purchase 46,374 shares of common stock in exchange for options to purchase 2.75 Units of B2B Series B Preferred Stock; issuance of 707,925 vested options to purchase the Company's common stock in exchange for vested options held by B2BVideo employees and; the issuance of 1,165,328 warrants to purchase the Company's common stock in exchange for warrants to purchase 6,625,000 shares of B2BVideo common stock. In addition, reflects adjustments to the balance sheet of B2BVideo to reflect the fair value of acquired assets and assumed liabilities, including the payment by VNCI of $145,935 of B2BVideo accounts payable (see note 1). 10) Reflects an additional bridge loan of $500,000 made to B2BVideo subsequent to March 31, 2002, but prior to the acquisition. On completion of the acquisition the holders of senior secured promissory notes with an aggregate principal balance of $2,500,000 and associated accrued interest of approximately $180,000 were converted to 4,276,023 shares of the Company's common stock (see note 1). Income Statement Adjustments: A. Related to Acquisition 11) Reflects the elimination of inter-company profits included in the inventory of B2BVideo at March 31, 2002 upon combination of the financial statements of the Company and B2Bvideo, and related to the sale of equipment by the Company to B2BVideo. 12) Reflects additional interest expense of VNCI of $1,150,394 related to the unamortized value assigned to warrants on previous bridge note issuances. 13) Excludes extraordinary gain on early extinguishment of debt by VNCI of $2,387,000.