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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000.
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: 0-29020
VIEWCAST.COM, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2528700
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(State of Incorporation) (I.R.S. Employer Identification No.)
2665 Villa Creek Dr., Suite 200, Dallas, TX 75234
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone Number, Including Area Code: 972-488-7200
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Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered:
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Common Stock, $.0001 par value NASDAQ
Redeemable Common Stock Purchase Warrants NASDAQ
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities 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] or No [ ].
Indicate by a check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant as of February 28, 2001 was $16,510,000. As of
February 28, 2001, there were 16,878,971 shares of the Company's common stock
(par value $0.0001) outstanding.
Documents incorporated by reference: Proxy Statement, Part III.
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TABLE OF CONTENTS
ITEM PAGE
NO. PART I NO.
1. Business ................................................................................. 3
2. Properties ............................................................................... 15
3. Legal Proceedings ........................................................................ 15
4. Submission of Matters to a Vote of Security Holders ...................................... 15
PART II
5. Market For Registrant's Common Equity and Related Stockholder Matters .................... 16
6. Selected Financial Data .................................................................. 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................... 18
7A. Quantitative and Qualitative Disclosures About Market Risk ............................... 22
8. Financial Statements and Supplementary Data .............................................. 23
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure .................................................................... 48
PART III
10. Directors and Executive Officers of the Registrant ....................................... 49
11. Executive Compensation ................................................................... 49
12. Security Ownership of Certain Beneficial Owners and Management ........................... 49
13. Certain Relationships and Related Transactions ........................................... 49
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 49
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PART I
ITEM 1. BUSINESS
The statements contained in this Report on Form 10-K and in the Annual
Report that are not purely historical statements are forward-looking statements
within the meaning of Section 21E of the Securities and Exchange Act of 1934,
including statements regarding the Company's expectations, beliefs, hopes,
intentions or strategies regarding the future. These forward-looking statements
involve risks and uncertainties. Our actual results may differ materially form
those indicated in the forward-looking statements. Please see "Special Note
Regarding Forward-Looking Statements" and the factors and risks discussed in
other reports filed from time to time with the Securities and Exchange
Commission.
OVERVIEW
ViewCast.com, Inc., doing business as ViewCast Corporation, ("ViewCast")
develops and markets a variety of products and services that enable video
networked solutions. We are a leading global provider of enterprise-wide,
digital video communication solutions for both real-time and on-demand
applications. ViewCast maximizes the value of video through its vertically
integrated products and services: Osprey(R) Video provides the streaming media
industry's de facto standard capture cards, Niagara(TM) Systems provides
integrated solutions for encoding and streaming of rich media content, Viewpoint
VBX(TM) Systems delivers a wide array of video solutions for both digital and
analog enterprise video communication, and ViewCast Online Solutions provides a
rich media Application Service Provider ("ASP") solution for Business to
Business ("B2B") and media communication needs. From streaming digital video on
the Internet to distribution of broadcast-quality video throughout the corporate
enterprise, plus comprehensive "click, create and view" video software
applications, ViewCast provides the complete range of video solutions.
Our customers acquire ViewCast's products and services to enrich
communications over a network, to increase the compelling nature of marketing
and sales activities, to enhance productivity, to reduce costs and to increase
customer service. Corporations, media organizations, financial institutions,
educational networks, healthcare facilities, and government agencies utilize our
products and services, as do their customers, vendors and others with whom they
may communicate. Our technologies enable users to encode and archive video
content, broadcast video over computer networks (streaming video), deliver video
from web sites (on-demand streaming video), provide interactive video
communication (video conferencing), and distribute video within a network. We
market and support our products and services either directly or through
arrangements with leading OEMs, system integrators, resellers and application
developers worldwide.
As part of our ongoing emphasis on sales, marketing, product development and
strategic planning, John Caulfield has been named corporate vice president and
president of the ViewCast Online Solutions services group. In this newly created
position, Caulfield is responsible for building the ViewCast Online Solutions
business. He joins the other senior executives: President and Chief Executive
Officer George C. Platt, Chief Financial Officer Laurie L. Latham, Senior Vice
President of Sales and Marketing Harry E. Bruner, Vice President/General Manager
of Osprey(R) Technologies Division Neal Page, and Vice President of Operations
David T. Stoner. Our business was established in 1994 and became a public
company in 1997 on the NASDAQ (current symbol "VCST"). We are located in Dallas,
Texas with the Osprey technology office in North Carolina and sales and support
offices in North America and London, UK.
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INDUSTRY BACKGROUND
Technology has merged with current business dynamics creating unprecedented
potential for growth and revenue, an increased likelihood for technology
confusion, and new challenges to compete and sustain position. Within this
environment, we believe businesses will increasingly seek expert support to
reduce technology barriers and to present solutions to their business
challenges. We believe that to meet these business challenges, there will be
increased usage of products and services enabling communication with video and
audio content, also know as "rich media".
Rich media on the web has historically been focused on the movie and
entertainment industry. Although this segment is strong in utilization of rich
media in web based communications, we believe there is tremendous potential in
other segments of the business environment; today only three percent of
companies employ rich media in support of business applications. These
businesses have a story to tell and are in need of dynamic communication
capabilities and increased revenue opportunities utilizing the Internet. Most
have an Internet presence but currently lack some or all of the requirements for
rich media including the ability to create or convert content in a digital media
format, experienced personnel, and the infrastructure to deliver the content. We
believe there is an increasing market opportunity for companies who provide the
expertise, personnel, systems, and solutions for these requirements.
Within the business sector are Click and Mortar divisions of "Old Economy"
companies and Small and Medium Enterprises ("SME") with established Internet
sites. These types of enterprises are likely candidates to incorporate rich
media into their web-based communications. SMEs are particularly attracted to
solutions with low barriers to access - both technology and price. Cahners
In-Stat Group predicts that the domestic software market for SMEs will grow from
$11.2 billion in 2000 to $13.6 billion in 2003. Therefore, an enormous
opportunity exists to deliver, in an ASP model, rich media applications and
solutions that provide B2B customers quick time-to-value from this new
technology.
Video Communications
Video "personalizes" communications over networks, whether it is streaming
video or video conferencing. Video is a component of "rich media", which
includes audio, data, animation and other technologies alone or in combination.
To transmit live video images (which may contain over 90 million bits per second
of data) over communications networks, video content must be digitized and
significantly compressed to fit the capacity of these networks (as low as 28,800
bits per second). As video is compressed, redundant data is eliminated and other
data is "blended" with similar data to preserve the essence of the original
image. The available bandwidth of the network is in inverse proportion to the
video compression required. After transmission, the video image is reconstructed
for display at the receiving end. The quality of the reconstructed video image
is a function of the following:
o the sophistication of the video and audio compression algorithms;
o the capacity a network has to transmit real-time data (bandwidth);
o the power of the video and audio encoding and decoding hardware
(codecs); and
o the speed and power of PCs and workstations.
We believe cost-effective video communication applications and services are
now attainable because the performance, capabilities and cost of these four key
elements have improved significantly.
Video no longer requires special equipment and networks, and can utilize
existing network capabilities and equipment. Networks have been advanced through
the deployment of additional bandwidth by carriers and Internet Service
Providers (ISPs), new network technologies (such as multicast), faster
capabilities to connect to networks (xDSL and cable modem) and lower bandwidth
costs. Cahners In-Stat Group reports that currently 70% of the US workforce has
high-speed Internet access on the job, up from 63% in 1999.
Streaming Video
Streaming video allows both audio and video content to begin playing at the
viewer's computer before the content has been fully received, therefore a viewer
does not have to wait for the full data content file to be downloaded before
hearing and viewing the file.
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Network streaming video makes it possible to put the power and impact of
video communications on most computers. Corporations, schools, government
agencies and healthcare entities are already using streaming video for all kinds
of communications, including training, e-commerce, customer service, marketing,
entertainment and security. Gartner Group, an industry analyst, has predicted
that within the next two years, rich-media management will become a corporate
necessity, and that more than 50% of Web sites will include some streaming media
by 2001.
E-commerce growth has created greater demand for video allowing customers to
"see" a product before purchasing and to enhance online marketing and sales. In
addition, businesses are using rich media to deliver a variety of high quality
radio and TV content, support product sales and improve customer relations with
"video" contact centers, allow investors to view analysts conference
presentations, and support an endless variety of other services and businesses.
According to a Forrester survey, 47% of enterprises plan to start developing
broadband content in the next 12 months. We believe rich media technologies have
elevated the level of e-commerce and enterprise communications.
Content Hosting and Distribution
The advent of the commercial streaming video market has resulted in
specialized businesses that offer substantially improved capabilities to
produce, host, aggregate, and deliver media over the Internet. These businesses
offer services similar to traditional ISPs, but they optimize their network and
services to effectively deliver streaming media data to clients. These providers
are enabling the demand for rich media to be fulfilled.
High traffic media hosting and distribution services are expensive and out
of reach for most individuals and SMEs. Network and hosting needs for this set
of customers differ from that required by large-scale businesses. We believe
this market represents new potential for growth in the streaming video
marketplace.
Videoconferencing and Video Distribution
Over the past decade, videoconferencing has evolved from high-cost,
stand-alone boardroom systems to standards-based desktop systems and set-top
appliances. Customers are seeking solutions and products that complement their
existing systems, interface with a variety of networks and protocols, provide a
method for system management, reduce the effective cost of ownership, and are
upgradeable. We believe the expansion in streaming video has caused a resurgence
of interest in enterprise video distribution and conferencing.
THE VIEWCAST SOLUTION
As a vertically integrated provider, ViewCast provides video and media
solutions to our customers. We provide:
o TECHNOLOGY -- Our technology provides a competitive edge to
differentiate our products from those of our competitors and to increase
our ability to develop customer driven applications.
o PRODUCTS AND APPLICATIONS -- Our products consist of Video Subsystems,
such as capture cards and codecs for encoding, decoding and streaming,
and Video Systems solutions for digital and analog video applications.
We manufacture and distribute worldwide our Osprey(R) capture cards and
codecs, Niagara(TM) Streaming Systems and Viewpoint VBX(TM) Systems.
o EXPERTISE AND SERVICES -- Our comprehensive video expertise enables us
to assist customers in identifying their communication needs and
determine appropriate media mechanisms for their business requirements.
The most significant addition is the ViewCast Online Solutions group
that utilizes our patent pending process to deliver rich media ASP
services. These services are expected to be offered by mid-year in 2001
and provide an avenue for SMEs and other businesses and Internet portals
to establish improved communications and potential new revenue sources
quickly, with low cost and little to no IT requirements. Professional
services will complement our ASP offering and will be provided by both
internal personnel and our channel partners if required by our
customers.
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To successfully implement our solutions, we provide installation, training,
customer service, integration, customization, and contract development. Our
software and firmware integration modules and drivers allow us to integrate our
products and systems into a variety of video communication standards and
software applications. Our products function on several network standards (some
concurrently) and interface with a variety of equipment and PC systems.
THE VIEWCAST STRATEGY
Our objective is to be the premier supplier of products, services and
solutions for networked video applications. ViewCast has tailored its capture
cards and codecs, its video streaming and enterprise systems and its rich media
ASP offering to address the requirements of professional media groups,
businesses and governmental agencies. Key elements of our strategy include:
o LEVERAGE OUR EXPERTISE, DEVELOPMENT AND TECHNOLOGY -- By building
vertically on our core competencies, we maximize our return on
development, increase margins in our product offerings, and address the
essential areas of the growing rich media and streaming market.
Therefore, we believe we are positioned to grow organically with the
market, build market share and add recurring revenues to our top line.
We focus on the core requirements of creating digital media content with
our Osprey capture cards and codecs, add enhanced value in the creating
and distribution of digital media with our Niagara Streaming encoders
and servers, and provide a total solution ASP covering all segments of
creating, managing, distributing and accessing digital media content.
o EXTEND PROFESSIONAL PRODUCT OFFERINGS BUILDING ON OUR LEADERSHIP IN THE
STREAMING VIDEO MARKET -- We have introduced or announced several new
products with the Osprey 500 and Osprey 210/220 capture card and codec
products available during late 2000. The Niagara Streaming Systems and
Osprey 2000 MPEG2 capture card and codec product family will be
available in early 2001. We intend to expand product offerings and add
significant value to the leading networked video applications by
continuing to develop competitive hardware products and providing
world-class software. We believe our recognized technological expertise
will allow us to lead the industry and capture market share.
o PROVIDE RICH MEDIA ASP SERVICE TO BUSINESSES TARGETING SMES, INTERNET
DIVISIONS OF COMPANIES AND PORTALS -- As part of our vertically
integrated solution, we use our expertise, hardware solutions and patent
pending software technology to provide the ViewCast Online Solutions
rich media ASP service. The flexible service is value priced and can
integrate into a customer's Internet site. To reach a large market, the
service will be marketed directly, through our current channels and with
new channels such as content delivery networks ("CDNs"), Internet
service providers ("ISP") and portals. Our development of
YourVideoOnTheWeb(TM) was the precursor for this B2B targeted service.
o EXPAND AND LEVERAGE OUR STRATEGIC PARTNERSHIPS -- We have established
significant industry partnerships with leaders in the networked video
industry. We intend to strengthen these partnerships and continue to
establish new partnerships to enhance endorsements, referrals,
technology, product development, channel distribution, and sales. We
seek companies who can add valuable services or technology to our
offerings with the potential of future co-development, merger with or
acquisition by ViewCast.
o EXPAND SALES, MARKETING, AND CHANNEL DEVELOPMENT EFFORTS -- Critical to
our success is an effective worldwide sales, marketing, and channel
partner program. We are expanding our sales and marketing efforts, both
domestically and internationally, through additional reseller marketing
programs, improved web site communications, focused lead generation and
follow-up programs, developing product/user databases, building brand
identity and increasing channel partners. Our strategy is to utilize a
combination of our direct sales force, resellers, system integrators,
OEMs and custom application developers to distribute our product and
service solutions.
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VIEWCAST PRODUCTS AND SERVICES
We currently provide the following product families:
VIEWCAST SUBSYSTEMS VIEWCAST SYSTEM SOLUTIONS
Osprey(R) video capture cards and codecs Niagara(TM) Streaming Systems
Viewpoint VBX(TM)
We provide the following services:
VIEWCAST ONLINE SOLUTIONS
Rich media ASP services
YourVideoOnTheWeb(TM)
VIEWCAST PRODUCTS
ViewCast offers a broad array of products that can be used to provide
solutions for multiple video communication applications for private and public
sector customers. Our standards-based and multi-standards based products
complement each other and can be used in a variety of ways to best serve our
customers' needs. Our solutions also work within the framework of legacy
systems, and are flexible enough to meet present and future needs. The ViewCast
product family includes the Osprey(R) line of video capture cards and codecs,
the Niagara(TM) Streaming Systems, and the Viewpoint VBX(TM) video distribution
and switching system.
VIDEO SUBSYSTEMS
CAPTURE CARDS, CODECS AND VIDEO PERIPHERAL PRODUCTS. Under the Osprey(R)
brand, we design, develop, manufacture and market standards-based video and
audio capture cards, codecs, and peripheral products for multimedia
applications. During 2000, we developed and launched several new Osprey products
that incorporate features to address the high quality video and audio
requirements of professional videographers working within media, corporate and
governmental enterprises. An additional Osprey product line, the Osprey 2000,
was under development during 2000 and is expected to be introduced in the first
half of 2001. Osprey(R) cards and codecs are sold worldwide through OEMs,
integrators, and a worldwide network of VARs and distributors and recommended by
both Real Networks and Microsoft. This product line includes:
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PRODUCT DESCRIPTION
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OSPREY(R) 50(2) compact and portable USB video capture device
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OSPREY(R) 100 video capture for Windows and Linux operating platforms
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OSPREY(R) 150 video capture for Sun (Solaris UNIX) workstations
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OSPREY(R) 200 audio/video capture for Windows platform
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OSPREY(R) 210/220(1) audio/video capture for Windows platform with improved audio and professional
input and connectors on the 220 version.
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OSPREY(R) 500(1) audio and digital video pre-processing, DV encoding and streaming product
family for Windows Media only; with Microsoft's WM Cap allows capture into
extended AVI format plus capture of uncompressed digital video beyond the 2GB
file limit for full-feature capture and post-production; variety of
professional analog and digital (DV and SDI) inputs/outputs available.
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OSPREY(R) 1000/G2 audio/video codec for Windows platforms and Real Networks G2
encoding hardware.
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OSPREY(R) 1500 audio/video codec with a derivative for Sun workstations (labeled as the
SunVideo Plus by Sun Microsystems)
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OSPREY(R) 2000(2) Capture and codec product family for high quality MPEG 1 & 2 streaming,
transcoding and digital archiving; all versions provide audio/video capture;
MPEG decoding feature effectively allows real-time transcoding and streaming
in one step: variety of professional analog and digital (DV and SDI)
inputs/outputs available
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(1) introduced in 2000 (2) available in 2001
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We believe our Osprey(R) capture cards offer unique advantages to
application developers, integrators and OEMs including a cross-platform API
(application programming interface) available on both Windows and UNIX systems.
These cards are in compliance with most popular industry video standards, and we
provide an expert support and development staff to enable custom development of
required applications.
Our Osprey(R) codecs provide the necessary capability to allow the one-way
transmission of live broadcasts over the Internet and intranets. The codecs
capture, digitize, compress, transmit, receive, decompress and display
full-motion video. The codecs are compatible with multiple video and audio
compression standards and can be used for PCs and workstations that are based on
the standard PCI-bus. Our codecs also support Microsoft's Windows 2000,
WindowsNT and Windows95/98, and Sun's Solaris and UNIX operating systems.
VIDEO SYSTEMS
NIAGARA(TM) STREAMING SYSTEMS. Our new Niagara(TM) Streaming System product
line was designed to expand our streaming systems offerings beyond the deskside
models to meet the requirements of professional streaming media professionals.
The Niagara product line consists of a series of capture/encoding systems and
streaming servers plus accessories and optional software. Niagara Streaming
Systems was announced late in 2000 and introduced early in 2001.
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PRODUCT DESCRIPTION
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NIAGARA 2100 SERIES - RACK MOUNT Single Channel capture/encoders, an Osprey 220 or Osprey 500
DV Pro board, high-speed Pentium III processor, fits EIA
standard 19" rack.
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NIAGARA 3220 SERIES - RACK MOUNT Dual Channel capture/encoders, dual Osprey 220 or Osprey 500
DV Pro boards, high-speed dual Pentium III processors, high
capacity SCA SCSI hot-swap hard drives, fits EIA standard 19"
rack.
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NIAGARA 3200 SERIES - RACK MOUNT Dual Channel streaming servers, high-speed dual Pentium III
processors with Microsoft Windows 2000 Server, high capacity
SCA SCSI hot-swap hard drives, fits EIA standard 19" rack.
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NIAGARA 3400 SERIES - RACK MOUNT Quad Channel capture/encoders, four Osprey 220 or Osprey 500
DV Pro boards, high-speed quad Pentium III processors, high
capacity SCA SCSI hot-swap hard drives, fits EIA standard 19"
rack.
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NIAGARA 2900 SERIES - PORTABLE Single Channel capture/encoders, an Osprey 220 or Osprey 500
DV Pro board, high-speed Pentium III processor, portable
dimensions, weighs 27 lbs, soft carrying case.
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NIAGARA 3900 SERIES - PORTABLE Dual Channel capture/encoders, dual Osprey 220 or Osprey 500
DV Pro boards, high-speed dual Pentium III processors,
portable dimensions, weighs 33 lbs, soft carrying case.
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NIAGARA 2000 SERIES - DESKSIDE Single Channel capture/encoders, an Osprey 220 or Osprey 500
DV Pro board, high-speed Pentium III processor.
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NIAGARA 3000 SERIES - DESKSIDE Dual Channel capture/encoders, dual Osprey 220 or Osprey 500
DV Pro boards, high-speed dual Pentium III processors.
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Key benefits and features of our Niagara Streaming Systems are:
o Quality and Capacity -- All Niagara capture/encoding systems are
configured with Real Networks RealProducer or Microsoft Windows Media
Encoder or both. All Niagara streaming servers are configured with Real
Networks RealServer or Microsoft Windows Media Server or both. Our
Osprey(R) codecs provide the optimal quality encoding and the capacity
to allow multiple streams or multiple bitrates from one Niagara server.
The Osprey 2000 MPEG codec will be a Niagara option available in 2001.
o New Professional Platforms and Configurations -- Our Niagara product
line includes portable field encoders, rack-mounted systems (1RU, 2RU,
and 4RU), and deskside models for the prosumer, corporate, ISP and media
professional. All systems provide a variety of options for professional
audio and video inputs, including DV and SDI.
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o Price Performance -- We believe our Niagara systems deliver quality
performance to our customers at an attractive price point based on the
current market.
o Quick Start to Dependable Streaming -- Niagara systems are fully
optimized and fully configured.
o Added Value Bundling -- Value added packages of additional hardware,
software and applications deliver increased versatility and value to the
marketplace including added storage capacity, control, cataloging,
indexing, mixing and special effects options.
Our Niagara Streaming Systems are designed to simplify the streaming of
video onto networks and from web sites. This product family offers a turnkey
solution combined with capabilities that remove deployment barriers. Niagara
Streaming Systems are fully integrated and optimized for media systems with
pre-configured Osprey(R) video devices, media capture software, and video
encoding and streaming software. Niagara Streaming Systems are distributed
directly or through channels to prosumers and to video professionals in media
and entertainment enterprises, corporations, ISPs, broadband networks, CDNs,
educational institutions and governmental agencies.
VIEWPOINT VBX(TM) SYSTEMS.
Our Viewpoint VBX(TM) enterprise-wide video communication system provides
switching, distribution, conferencing and gateway capabilities between broadband
and narrowband networks and between desktops, conference rooms, and a variety of
video communication resources. The VBX system is a combination of hardware and
software to run and manage the server switch and codec array, plus, for each end
point, a combination of hardware and software to connect and operate the system
for broadcasting, conferencing and monitoring. Benefits of the Viewpoint VBX(TM)
include:
o OPTIMAL VIDEO QUALITY WITHIN THE LOCAL ENTERPRISE - The Viewpoint
VBX(TM)'s enterprise distribution of uncompressed, TV-quality video
provides full resolution, and frame rate video to the desktop or other
viewing device with no compressions artifacts or codec latency.
Regardless of the application, the highest possible video quality is
maintained. The addition of MPEG-2 codecs to the Viewpoint VBX(TM)
extends the TV quality of local VBX communication to multiple sites
outside the enterprise..
o INTERFACE WITH THE MAJOR VIDEO COMMUNICATIONS STANDARDS INCLUDING
INTERNET - The server and codec array support a suite of video
communication standards, including H.323 (video over TCP/IP networks),
MPEG-2, and H.320 (video over ISDN). Users can choose a video quality
and price performance level based on the content and purpose of each
call. The H.323 and MPEG-2 codecs take advantage of the investment in
backbone LAN and WAN networks and the Internet to transport video
without incurring per-minute charges for circuit-switched networks such
as ISDN. The Viewpoint VBX(TM) can be integrated with our Niagara(TM)
Streaming System to enable a supported standards-based video
communication system to originate a streaming video broadcast in either
Real Networks or Microsoft formats.
o DESKTOP INTERFACE WITH INTEGRATED DIRECTORY - Viewpoint VBX(TM)
simplifies video communication by integrating support for multiple
applications and multiple standards into a single platform with a single
user interface. The Viewpoint VBX(TM) system can be used for broadcast
and closed circuit television distribution, security, training, and
video conferencing.
o NEGLIGIBLE LOCAL AREA NETWORK BANDWIDTH IMPACT - Local VBX clients do
not require high bandwidth networks to extend television quality video
to the desktop. Uncompressed, TV-quality video is distributed within the
premise by the Viewpoint VBX(TM) over standard unshielded twisted pair
(UTP) cabling and provides relief to the LAN, using the LAN only for
client-server control.
o BRIDGE BETWEEN LEGACY AND NEW EQUIPMENT - Viewpoint VBX(TM) systems are
compatible with any NTSC or PAL audio and video communication products
from third party vendors. This capability provides a growth path to new
technology.
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Software development kits (SDKs) are available for the Viewpoint VBX(TM),
allowing integrators to customize applications to take advantage of the
Viewpoint VBX(TM) capabilities. Viewpoint VBX(TM) systems are suited for the
implementation of video enabled customer service systems, especially for
Internet e-commerce applications. SNMP support is available for all supported
codecs, enabling network managers to monitor and manage the status of VBX
communication resources using standard network management tools.
VIEWCAST SERVICES
We have recently introduced simple, comprehensive services for creating,
managing, distributing and viewing streaming media. Initially targeted early in
2000 at the consumer market, we have developed a scalable infrastructure for
providing outsourced services for the media and business sectors, which
currently have the broadest deployment of broadband networks and have
potentially the greatest use of rich media communications. In this manner, we
have the capacity to serve millions of businesses utilizing the same
infrastructure to provide outsourced streaming services that we initially
created for consumers. We believe these services round out our full spectrum of
solutions, leveraging our expertise, products, and distribution channels for our
current and future customers.
VIEWCAST ONLINE SOLUTIONS SERVICES -- Previously ViewCast created a
patent-pending process for providing the creation, management, distribution and
viewing of streaming media. Our process is embedded within the various
outsourced service models that we have developed to address the business market
and the one model developed for the consumer market, YourVideoOnTheWeb(TM). We
have developed extensive account management, measurement, and upload
capabilities with a secure database that is optimized for media management and
delivery. This scalable infrastructure provides the foundation for our general
SME, business and media services, the targeted vertical market services, and the
channel services we will be offering and providing in 2001.
BUSINESS RICH MEDIA COMMUNICATION SOLUTIONS - We will first be offering:
o The horizontally targeted service for general use by SMEs, larger
businesses and media enterprises to outsource the challenging aspects of
rich media communication and be able to focus on the use of rich media
for more effective communications for marketing, advertising, investor
relations, CRM, training and education.
o The channel service enables large organizations, such as broadband
networks, CDNs and ISPs, to expand their core business by offering our
services to their current customers, thereby increasing their use of
rich media, to touch multiples of customers in a cost effective manner
and to enter into potential new revenue areas with minimal upfront cost.
Through this service, we have the capacity to report, manage and bill
the end user customers or bill the channel directly.
o The vertical market services for e-recruiting provides video content for
resumes, job postings, corporate overviews and recruiter marketing and
advertising as a plug-in service offered by a variety of online job
boards and HR service providers, corporations, colleges and candidates.
Additional service offerings are under development to address other vertical
markets and applications.
CONSUMER RICH MEDIA COMMUNICATION SOLUTION - YourVideoOnTheWeb(TM) allows
individuals to use camcorders to share video with friends, family and customers
over the Internet. We believe YourVideoOnTheWeb(TM) removes existing barriers
(i.e., price and complexity) to consumer video communication. Our concept
consists of three elements:
o YourVideoOnTheWeb(TM) desktop tools and interface for creation of
digital rich media (the content).
o www.YourVideoOnTheWeb.com Internet Site that manages and distributes the
content.
o YourVideoOnTheWeb(TM) player and templates for viewing the content.
We currently sell this service in the U.S. from our Internet site, but do
not actively market the service. We believe a new strategic alliance or channel
arrangement with a consumer focused company and the eventual increase in
deployment of broadband networks to the consumer will provide additional growth
for this consumer service.
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PROFESSIONAL SERVICES
Our professional services group provides our customers the expertise
necessary to assess their video communication needs and successfully deploy the
infrastructure and systems capable of meeting their requirements. In addition to
providing technical expertise, our expert consultants advise businesses on how
to get the most value from their video communications and provide custom
development of applications, software, hardware and installation to meet the
needs of our customers.
APPLICATIONS
Our product family is designed to meet the three fundamentals of video-based
applications:
o LIVE VIDEO BROADCAST -- One-way, one-to-many broadcast of video, audio
and other data as content is produced;
o STORED VIDEO BROADCAST -- One-way, one-to-many broadcast of video, audio
and other data after content is produced; and
o LIVE INTERACTIVE -- Interactive video/audio communication, with
bi-directional real-time channels (sometimes combined with other data).
A number of these fundamentals are combined utilizing our products to meet
the needs of various communication system requirements.
o VIDEO ON DEMAND (VOD) -- We offer applications that allow stored-video
content to be played back to a user's system in real-time. This entails
compressing a video "clip" and storing it on a server that is available
to the user through the relevant web page.
o VIDEO BROADCASTING -- We offer systems that provide one-way live audio
and motion-video. Our products work in conjunction with web servers and
browser software to establish connections between multiple users and a
broadcast source, allowing businesses to deliver live programs,
commercials and other information over the Internet.
o INTERNET VIDEO CONTACT CENTER -- We offer systems that provide one-way
live video and two-way audio across the Internet. The use of H.323
(video conferencing over TCP/IP networks) as a Viewpoint VBX(TM)
supported video communication standard provides new solutions to
e-commerce by adding the opportunity for customers to access a contact
center through video over the Internet. The Viewpoint VBX(TM)
architecture, in concert with new web-centric software development,
manages Internet video calls in a contact center environment. Viewpoint
VBX(TM) systems support call queuing, transfer, and ad hoc conferencing
necessary for contact center call management. Extensions to our software
development kits include Active Server Page (ASP) technology for web
server integration and call management extensions enabling integration
of Viewpoint VBX(TM) systems within existing contact center call
management software.
o STREAMING VIDEO GATEWAY -- Our Viewpoint VBX(TM) and Niagara(TM)
Streaming encoder systems can be combined to deliver solutions for
origination of streaming video broadcasts. For example, an H.320 codec
combined with a Niagara(TM) Streaming encoder can be configured as a
gateway device, turning any H.320 conferencing system into a web video
broadcast site. Viewpoint VBX(TM) systems can also be used as camera
concentrators, allowing the selection of any connected camera as the
source of a web video broadcast.
o VIDEO PRESENTATIONS OR LIVE VIDEO -- Our products offer businesses or
organizations the opportunity to broadcast live events over enterprise
networks, intranets and the Internet. These events include educational
seminars, management briefings, human resources orientations or breaking
news being created and transmitted by the organization itself or by
outside sources.
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o VIDEOCONFERENCING -- Our products offer the business and institutional
customer a cost-effective and efficient means of establishing an
enterprise-wide videoconferencing system. Our Viewpoint VBX(TM) and
Osprey(R) codecs permit employees, students or other members of an
organization in different offices or geographic locations to communicate
with each other through live video.
o SPECIFIC INDUSTRY APPLICATIONS -- Our products offer a broad array of
applications within specific industries. For instance, in the health and
medical industry, our products allow doctors to collaborate via
videoconferencing, to receive computed tomography (CT) scans,
ultrasounds and other diagnostic tests at locations remote from the
hospital or patient and to take part in educational and training
broadcasts.
o DIGITAL ARCHIVING OF RICH MEDIA -- Video is encoded at the highest
available level to create a master digital file. Then the archival file
can be copied, manipulated, edited and streamed as needed for current
and future purposes.
MARKETING AND SALES
We market our products and services primarily via third-party distribution
channels including, but not limited to, OEMs, resellers and system integrators.
These relationships are non-exclusive and typically require that these resellers
participate in the marketing, installation and technical support of our
products. In addition, we plan to continue to expand our distribution channels
both domestically and internationally.
Our video communication products and services are marketed primarily to
media and entertainment, Internet, corporate, financial, educational,
security/telejustice, healthcare, governmental and network enterprises. In
addition, our products are sold or licensed to integrators and value added
resellers to integrate with their products or services.
We have expanded our marketing efforts to include a direct marketing lead
pre-qualification process. The process is applied to all web site inquires,
trade show leads and 800 call-in requests. By effectively processing incoming
leads into priority classifications, we can most efficiently utilize our sales
efforts.
Our web sites have been redesigned starting with the Osprey(R) products site
and extending next into the ViewCast site. These new sites include a backend
database to track, capture, qualify and distribute contact information to the
sales organization. Through these efforts, the number of qualified leads within
our database is continuing to substantially increase on a weekly basis. This
procedure also provides the means to build an opt-in e-mail list to receive
monthly information from ViewCast.
The new Reseller Marketing program, announced in 2001, enhances our ability
to cover domestic and international geographical territories and market segments
in an efficient and cost-effective manner. This multi-tiered program provides
benefits and rewards to our reseller partners for aggressively marketing
ViewCast products and services. Under the terms of the new reseller program, an
authorized reseller of ViewCast products must meet certain qualifications
regarding its business, personnel, product and market knowledge, and support and
service capabilities. Through this new authorized reseller program, we intend to
expand and enhance channels of distribution that will most effectively place
ViewCast products into the marketplace. The program also allows ViewCast to
provide special promotional incentives to the channel in the form of discounted
product packages bundled with pull-through marketing campaigns.
PRODUCTION AND SUPPLY
We build our current products using contract manufacturers in the U.S and
Asia. Our operations personnel in Dallas, Texas are responsible for parts
planning, procurement, final testing and inspection to quality standards. We
plan for most high-volume production to be handled through large OEMs or
contract manufacturers.
We have been and will continue to be dependent on third parties for the
supply and manufacture of our components and electronic parts, including
standard and custom-designed components. We generally do not maintain supply
agreements with such third parties but instead purchase components and
electronic parts pursuant to purchase orders in the ordinary course of business.
We are substantially dependent on the
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ability of our third-party manufacturers and suppliers to meet our design,
performance and quality specifications.
INSTALLATION, SERVICE AND MAINTENANCE
Most of our products are customer installable. We depend on our resellers to
install and service our products. However, we also maintain a small in-house
technical support group to assist our resellers when required.
We offer limited warranties covering workmanship and materials, during which
period our resellers or ViewCast will replace parts or make repairs. We maintain
an in-house staff of engineering personnel and offer telephone support to assist
resellers and end-users during normal business hours.
In addition, we enter into annual contracts with end-users to provide
software and hardware maintenance on our products.
RESEARCH AND DEVELOPMENT
We continue to focus on research and development activities related to video
communications applications. Our recent development efforts have been devoted to
the design and development of our products and software applications, primarily
in the streaming sector (Niagara(R) Streaming Systems, ViewCast Online Solutions
and our Osprey(R) line of capture cards and codecs). These include media
processing devices (CPUs, DSPs), operating system software, standard computer
I/O interfaces, media devices, media API software, and application software. We
will continue to make investments in core video technology and processing
techniques, focusing on how to best apply the latest advancements in the
industry into commercially viable products. In some cases, strategic
partnerships will be utilized to offset some research and development costs.
Several new products are scheduled for launch in 2001 in the Osprey(R) and
Niagara(TM) product families that will provide new I/O capabilities for
streaming video applications, as well as products utilizing new video
compression formats delivering higher quality video over digital networks. We
believe these products will be competitive and feature unique capabilities that
will enhance leading video applications. We believe these products will keep us
in a leadership position in the marketplace.
We are also focusing on maintaining the Viewpoint VBX(TM) as an
architecturally viable product in the switching, distribution, gateway and
conferencing space, providing specific industry applications, software revisions
and extending support for new codecs.
The Online Solutions group is engaged in the development of a variety of
rich media application services to extend the power of streaming video to
enhance business communication while simplifying and automating the process.
We will continue integration efforts with third party application software
for our products and services. These new software tools are emerging as the
industry continues to grow.
COMPETITION
The market for video communication systems and services is highly
competitive and characterized by the frequent introduction of new products based
upon innovative technologies. We compete with numerous well-established
manufacturers and suppliers of video streaming technologies, videoconferencing,
networking, telecommunications and multimedia products, certain of which
dominate the existing video communications market for such products. In
addition, we are aware of others that are developing, and in some cases have
introduced, new video communications systems.
We are not aware of any direct competitors that compete in all of our
product families and applications. However, among our direct competitors
competing with one or more of our products or applications are Zydacron, Inc.,
VCON, Ltd., Winnov, LP., First Virtual Communications, Picturetel Corp., Video
Network Communications, Inc., Avistar Communications Corp., Pinnacle Systems,
Inc., Tandberg Inc., Polycom,
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Inc. and Loudeye Technologies, Inc. In addition, electronics manufacturers such
as Intel Corp. and Cisco Systems, Inc. actively compete for business in this
market.
PATENTS, COPYRIGHTS, TRADEMARKS AND PROPRIETARY INFORMATION
We hold a U.S. patent covering certain aspects of compressed video and have
a patent pending covering certain aspects of a process to create, manage,
distribute and view streaming video. Although we do not believe these patents or
any other patent is essential to our business operations, we may apply for
additional patents relating to other aspects of our products. We also rely on
copyright laws to protect our software applications, which we consider
proprietary.
We believe that product recognition is an important competitive factor and,
accordingly, we promote the ViewCast(R), Osprey(R), Niagara(TM), ViewCast Online
Solutions(TM), Viewpoint VBX(TM), WorkFone, and YourVideoOnTheWeb(TM) names,
among others, in connection with our marketing activities, and have applied for
or received trademark registration for such names. Our use of these marks may be
subject to challenge by others, which, if successful, could have a material
adverse effect on us.
We also rely on confidentiality agreements with our directors, employees,
consultants and manufacturers and employ various methods to protect the source
codes, concepts, ideas, proprietary know-how and documentation of our
proprietary technology. However, such methods may not afford us complete
protection, and there can be no assurance that others will not independently
develop similar know-how or obtain access to our know-how or software codes,
concepts, ideas and documentation. Furthermore, although we have and expect to
continue to have confidentiality agreements with our directors, employees,
consultants, manufacturers, and appropriate vendors, there can be no assurance
that such arrangements will adequately protect our trade secrets.
We purchase certain components that are incorporated into our products from
third-party suppliers and rely on their assurances that such components do not
infringe on the patents of others. A successful claim against any components
used in our products could affect our ability to manufacture, supply and support
our products. We use commercially reasonable efforts to ensure third-party
supplied components are non-infringing, but there can be no assurances against
future claims.
GOVERNMENT REGULATION
We are subject to Federal Communications Commission regulations relating to
electromagnetic radiation from our products, which impose compliance burdens on
us. In the event we redesign or otherwise modify our products or complete the
development of new products, we will be required to comply with Federal
Communications Commission regulations with respect to such products. Our foreign
markets require us to comply with additional regulatory requirements.
EMPLOYEES
As of February 28, 2001, we had one hundred seven (107) employees, six (6)
of whom are in executive positions, thirty-three (33) of whom are engaged in
engineering, research and development, thirty-five (35) of whom are engaged in
marketing and sales activities, twenty-four (24) of whom are engaged in
operations and nine (9) of whom are in finance and administration. None of our
employees are represented by a labor union. We consider our employee relations
to be satisfactory.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Report on Form 10-K under "Business",
"Management's Discussion and Analysis of Financial Conditions and Results Of
Operations", and elsewhere in the Report constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements include statements regarding ViewCast's expectations, beliefs, hopes,
intentions or strategies regarding the future. These statements involve known
and unknown risks, uncertainties, and other factors that may cause our or our
industry's actual results, levels of activity, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, product demand and market acceptance risks, the impact
of competitive products and pricing, product development, commercialization and
technological difficulties, capacity and supply constraints or difficulties,
general business and economic conditions, the availability of sufficient working
capital, the ability to service our debt, continued significant losses, the
effect of our accounting polices and other risks detailed in the Annual Report
on Form 10-KSB for the year ended December 31, 1999, as amended, the
Registration Statements on Form S-3 filed on April 26, 2000 and June 30, 2000
and other filings with the Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terminology
such as "may", "will", "expects", "should", "anticipates", "believes",
"estimates", "predicts", "plans", "potential", "intends" or "continue" or the
negative of such terms or other comparable terminology.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this report to conform such statements to actual results.
ITEM 2. PROPERTIES
Our executive offices and some of our sales, design and development
activities are located in approximately 21,000 square feet of leased space in
Dallas, Texas. The lease expires in August 2001 and provides for a base annual
rent of $314,790. Our assembly operations are located in approximately 7,760
square feet of leased space in Dallas, Texas. The lease expires in August 2003
and provides for a base annual rent of $63,740. The lease expiring during 2001
will either be extended or new space will be obtained within the same geographic
area.
The Osprey(R) product development activities are located in approximately
11,900 square feet of leased space in Morrisville, North Carolina. The main
lease for approximately 10,000 square feet expires in December 2002 and provides
for a base annual rent of $129,550. The remaining 1,900 square feet expires in
January 2005 and provides for a base annual rent of $23,831.
We also lease office space for domestic sales offices in Fairfax, VA,
Burlingame, CA, Atlanta, GA, Chicago, IL, and Mt. Arlington, NJ and for an
international sales office outside of London. All such leases are on a
month-to-month or an annual lease basis. The Fairfax, VA sales office will not
be extended after the lease expires in March 2001. The remaining sales office
leases provide for a base annual rent of $97,920 for the domestic sales office
and approximately L.84,042 for the international office.
We believe that our facilities are adequate for our current and reasonable
foreseeable future needs and our current facilities can accommodate expansion,
as required.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any litigation that we believe could have a
material adverse effect on our business or us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(None)
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICE RANGE
Our Common Stock is traded on the Nasdaq under the symbol "VCST." Our Public
Warrants are traded on the Nasdaq under the symbol "VCSTW." As of February 28,
2001, there were 16,878,971 shares of Common Stock and 2,616,348 Public Warrants
outstanding. The following table sets forth, for the periods indicated, the high
and low sales prices for the Common Stock and the Public Warrants on the Nasdaq.
These over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission and may not represent actual
transactions. The trading market in our securities may at times be relatively
illiquid due to low trading volume.
COMMON STOCK PUBLIC WARRANTS
----------------------- -----------------------
FISCAL 1998 HIGH LOW HIGH LOW
- ----------- -------- -------- -------- --------
1st Quarter $ 5.00 $ 3.00 $ 1.88 $ 0.88
2nd Quarter 3.81 2.69 1.25 0.66
3rd Quarter 3.50 1.81 0.88 0.34
4th Quarter 3.69 0.88 1.69 0.25
COMMON STOCK PUBLIC WARRANTS
----------------------- -----------------------
FISCAL 1999 HIGH LOW HIGH LOW
- ----------- -------- -------- -------- --------
1st Quarter $ 6.94 $ 2.63 $ 3.69 $ 0.81
2nd Quarter 17.38 4.84 13.38 2.13
3rd Quarter 10.81 5.75 6.50 3.13
4th Quarter 8.38 3.06 5.25 1.81
COMMON STOCK PUBLIC WARRANTS
----------------------- -----------------------
FISCAL 2000 HIGH LOW HIGH LOW
- ----------- -------- -------- -------- --------
1st Quarter $ 8.97 $ 4.03 $ 5.00 $ 2.06
2nd Quarter 7.25 2.25 4.19 1.25
3rd Quarter 4.00 2.00 1.94 1.00
4th Quarter 2.38 0.75 1.13 0.34
On March 27, 2001, the last reported sales prices for the Common Stock and
the Public Warrants as reported on the Nasdaq were $1.00 and $0.625,
respectively.
DIVIDEND POLICY
We have never paid cash dividends on our Common Stock. The Board of
Directors does not anticipate paying cash dividends in the foreseeable future as
it intends to retain future earnings to finance the expansion of our business
and for general corporate purposes. The payment of future cash dividends will
depend on such factors as our earnings levels, anticipated capital requirements,
operating and financial condition, consent from our lenders and other factors
deemed relevant by our Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Managements Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
the Form 10-K. Our historical financial results are not necessarily indicative
of results to be expected for any future period.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS
OF OPERATIONS:
Net sales ................................... $ 1,095,012 $ 3,360,703 $ 8,027,948 $ 7,270,080 $ 10,439,404
Cost of goods sold .......................... 393,918 1,695,922 4,181,128 3,948,377 4,782,130
------------ ------------ ------------ ------------ ------------
Gross profit ................................ 701,094 1,664,781 3,846,820 3,321,703 5,657,274
Operating expenses:
Selling, general and administrative ....... 2,378,653 4,243,485 8,352,476 7,543,409 9,545,307
Research and development .................. 1,997,146 2,740,857 3,090,102 2,930,761 4,003,169
Restructuring charge ...................... -- -- 402,800 -- --
Depreciation and amortization ............. 206,041 309,458 524,427 617,086 753,786
------------ ------------ ------------ ------------ ------------
Total operating expenses .............. 4,581,840 7,293,800 12,369,805 11,091,256 14,302,262
------------ ------------ ------------ ------------ ------------
Operating loss .............................. (3,880,746) (5,629,019) (8,522,985) (7,769,553) (8,644,988)
Other income (expense):
Dividend and interest income .............. 36 63,613 34,117 249,985 354,315
Interest expense .......................... (513,979) (290,492) (877,873) (954,168) (602,558)
Other ..................................... 724 28,493 48 62 4,246
------------ ------------ ------------ ------------ ------------
Total other income (expense) .......... (513,219) (198,386) (843,708) (704,121) (243,997)
------------ ------------ ------------ ------------ ------------
Net loss .................................... $ (4,393,965) $ (5,827,405) $ (9,366,693) $ (8,473,674) $ (8,888,985)
============ ============ ============ ============ ============
Net loss per share - basic and diluted ...... $ (0 91) $ (0 75) $ (1 02) $ (0 71) $ (0 62)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding ................ 4,844,706 7,806,378 9,367,537 13,105,884 15,714,244
============ ============ ============ ============ ============
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
CONSOLIDATED
BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 18,539 $ 3,117,202 $ 439,791 $ 4,315,980 $ 3,898,176
Working capital ............................. (6,407,318) 4,547,850 1,456,778 7,575,154 3,929,039
Total assets ................................ 1,691,258 8,211,415 13,611,590 13,565,382 11,713,579
Long-term debt .............................. -- 5,000,000 1,360,000 -- 950,000
Shareholders' equity ........................ (5,780,830) 1,418,264 4,255,308 9,407,614 5,282,309
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. Actual results may differ materially form those
indicated in the forward-looking statements. Please see the "Special Note
Regarding Forward-Looking Statements" elsewhere in the Report on Form 10-K.
OVERVIEW
ViewCast.com, Inc., doing business as ViewCast Corporation, ("ViewCast")
develops and markets a variety of products and services that enable video
networked solutions. We are a leading global provider of enterprise-wide,
digital video communication solutions for both real-time and on-demand
applications. ViewCast maximizes the value of video through its vertically
integrated products and services: Osprey(R) Video provides the streaming media
industry's de facto standard capture cards, Niagara(TM) Systems provides
integrated solutions for encoding and streaming of rich media content, Viewpoint
VBX(TM) Systems delivers a wide array of video solutions for both digital and
analog enterprise video communication, and ViewCast Online Solutions provides a
rich media Application Service Provider ("ASP") solution for Business to
Business ("B2B") and media communication needs. From streaming digital video on
the Internet to distribution of broadcast-quality video throughout the corporate
enterprise, plus comprehensive "click, create and view" video software
applications, ViewCast provides the complete range of video solutions.
Our customers acquire ViewCast's products and services to enrich
communications over a network, to increase the compelling nature of marketing
and sales activities, to enhance productivity, to reduce costs and to increase
customer service. Corporations, media organizations, financial institutions,
educational networks, healthcare facilities, and government agencies utilize our
products and services, as do their customers, vendors and others with whom they
may communicate. Our technologies enable users to encode and archive video
content, broadcast video over computer networks (streaming video), deliver video
from web sites (on-demand streaming video), provide interactive video
communication (video conferencing), and distribute video within a network. We
market and support our products and services either directly or through
arrangements with leading OEMs, system integrators, resellers and application
developers worldwide.
As part of our ongoing emphasis on sales, marketing, product development and
strategic planning, John Caulfield has been named corporate vice president and
president of the ViewCast Online Solutions services group. In this newly created
position, Caulfield is responsible for building the ViewCast Online Solutions
business. He joins the other senior executives: President and Chief Executive
Officer George C. Platt, Chief Financial Officer Laurie L. Latham, Senior Vice
President of Sales and Marketing Harry E. Bruner, Vice President/General Manager
of Osprey(R) Technologies Division Neal Page, and Vice President of Operations
David T. Stoner.
Our business was established in 1994 and began trading on the Nasdaq Stock
Market (current symbol "VCST") in 1997. We are located in Dallas, Texas with the
Osprey technology office in North Carolina and sales and support offices in
North America and London, UK.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 2000.
Net Sales. Net sales for the year ended December 31, 2000 increased 43.6% to
$10,439,404 from $7,270,080 reported in 1999. The increase is attributed to
growth from our video peripheral and video system products during 2000 compared
to 1999.
During the year ended December 31, 2000, sales of Osprey(R) video peripheral
products increased 48.7% over 1999 and represented 72.0% of total 2000 revenues,
compared to 69.5% of total revenues in 1999. Osprey product sales increased
during 2000 due to continued strong demand for our capture cards and codecs plus
the introduction of the new Osprey 500 product line late in the second quarter.
The Osprey 500 product was co-developed with Microsoft as their first digital
video capture card.
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System sales, which include Niagara(TM) streaming systems and Viewpoint
VBX(TM) video distribution systems, increased 15.0% in 2000 compared to 1999 and
represented approximately 22.6% of total 2000 revenues compared to 28.2% of
total revenues in 1999. The improvement in our system sales is attributed to a
more focused product definition to the marketplace and better sales execution.
During 2000, we released new Viewpoint VBX(TM) product enhancements and targeted
specific vertical markets. We expect additional growth in system sales in 2001
precipitated by the conversion of the streaming systems to its new brand,
Niagara(TM), and the addition of rack mounted and portable streaming systems to
our deskside system offerings.
Other revenue from online services, maintenance and engineering development
fees accounted for the remaining 5.4% of total revenues for 2000.
Cost of Goods Sold. Cost of goods sold increased $833,753 to $4,782,130 for
the year ended December 31, 2000 compared to 1999 primarily due to the increase
in our product sales described above. Our gross profit margin for 2000 was
54.2%, representing an increase from the 45.7% margin reported during 1999.
Gross profit margins showed an increase of approximately 8.5% over 1999 levels
due to improved product designs, manufacturing efficiencies and new product
introductions in our Osprey video peripheral product family. Management expects
profit margins to fluctuate based on product mix, but over extended periods
anticipates its margins will remain in the range of 46% -- 55%.
Selling, General and Administrative Expense. Selling, general, and
administrative expense increased to $9,545,307 for the year ended December 31,
2000 from $7,543,409 reported during 1999 primarily due to increases of our
sales staff and related sales activity costs. Additional marketing and customer
support expenditures contributed to the increase. The increases in sales,
marketing and customer support were partially offset by an overall decrease in
administrative expenses during 2000 over 1999 levels primarily generated by
reduction in bad debt expense.
Research and Development Expense. Research and development expense increased
$1,072,408 or 36.6% to $4,003,169 during 2000 compared to 1999, principally due
to development staff increases and expenses related to new product testing for
the Osprey 500, Osprey 210/220, and VBX Software Version 2.5 released in 2000,
and for the Osprey 2000 and Niagara system product introductions in 2001
Other Income (Expense). For the year ended December 31, 2000, other income
(expense) decreased $460,124 to $243,997, primarily due to the reduction in
amortization of debt issue costs associated with our line of credit financing
consummated in October 1998, which were fully amortized by October 1999. In
addition, we had and increase in interest income generated by higher average
cash and cash equivalent balances during the year. The current year interest
expense includes amortization of debt issue costs and interest expense related
to the issuance of 7% Senior Convertible Debentures on April 28, 2000.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
Net Sales. Net sales for the year ended December 31, 1999 decreased 9.4% to
$7,270,080 from $8,027,948 reported in 1998. The decrease is attributed to a
decline in revenues for our video distribution systems offset in part by
increased revenues for our video peripheral and video streaming products during
1999 compared to 1998.
During the year ended December 31, 1999, sales of Osprey(R) video peripheral
products increased 38.4% over 1998 and represented 69.5% of total 1999 revenues,
compared to 45.5% of total revenues in 1998. Sales of ViewCast(R) video encoder
and video streaming systems represented 7.2% of total revenues since their
launch in the first quarter of 1999. Sales of Viewpoint VBX(TM) video
distribution systems decreased 63.8% in 1999, compared to 1998 and represented
approximately 21% of total 1999 revenues, compared to 52.6% of total revenues in
1998. The decline in Viewpoint VBX(TM) system sales is attributed to a sharp
decrease in sales from two of our largest Viewpoint VBX(TM) resellers, who
changed the strategic focus of their companies, compounded by the loss of sales
representatives and directional leadership during our reorganization efforts.
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Cost of Goods Sold. Cost of goods sold decreased $232,751 to $3,948,377 for
the year ended December 31, 1999 compared to 1998 primarily due to the decrease
in Viewpoint VBX(TM) video distribution sales described above. Our consolidated
gross profit margin for 1999 was 45.7%, representing a slight decline from the
47.9% margin reported during 1998. Excluding a charge of $275,000 to record a
lower of cost or market adjustment to inventory as a result of a new contractual
pricing from one of our major suppliers, gross profit margins showed an increase
of approximately 1.6% over 1998 levels due to improved product designs,
manufacturing efficiencies and direct sales of our Viewpoint VBX(TM) video
systems.
Selling, General and Administrative Expense. Selling, general, and
administrative expense decreased to $7,543,409 for the year ended December 31,
1999 from $8,352,476 reported during 1998 primarily due to our restructuring
efforts instituted in the fourth quarter of 1999 to reduce our sales staff and
sales administrative costs. The savings generated from the reduced sales
expenses during 1999 were offset in part by increases in marketing and customer
support expenditures. Administrative expenses during 1999 increased slightly
over 1998 levels after excluding the effects of a $610,000 bad debt write-off in
1998 that arose when a reseller failed to meet its financial obligations.
Research and Development Expense. Research and development expense decreased
$159,341 or 5.2% to $2,930,761 during 1999 compared to 1998, principally due to
development staff reductions initiated during the fourth quarter of 1998.
Other Income (Expense). For the year ended December 31, 1999, other income
(expense) decreased $139,587 to $704,121, primarily due to an increase in
interest income generated by higher average cash and cash equivalent balances
during the year. Interest expense increased approximately 8.7% over 1998 levels
due principally to the amortization of debt issue costs and interest associated
with our line of credit financing consummated in October 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds for conducting our business activities are from
sales of our products and from the sale of debt and equity securities. We
require liquidity and working capital primarily to fund operating losses,
increases in inventories and accounts receivable associated with sales growth,
development of our products, debt service and for capital expenditures.
Net cash used in operating activities was $7.06 million for the year ended
December 31, 2000 resulting primarily from a net loss of $8.89 million, which
includes non-cash operating expenses of $0.92 million, and an increase in
operating assets and liabilities of $0.91 million during 2000.
Investing activities during 2000 utilized cash of $0.96 million for capital
expenditures for computer equipment, test equipment and software development to
aid in the marketing, development and testing of our products
During the year ended December 31, 2000, financing activities generated cash
in the amount of $7,626,604 resulting principally from our private placement of
7% Senior Convertible Debentures on April 28, 2000 which provided net proceeds
of $3,376,360. During 2000, we also received proceeds of $4,274,255 from the
exercise of options and warrants and utilized cash in the amount of $24,011 to
retire short-term debt. During September through October 2000, holders of
$3,500,000 principal amount of Debentures exchanged their notes for 777,777
shares of our Common Stock at a conversion price of $4.50 per share.
During September of 1998, we entered into a strategic business relationship
with TekInsight.com, Inc. ("TEKS"), formerly Tadeo Holdings, Inc., that involved
a stock purchase agreement whereby we acquired 1,240,310 shares of TEKS common
stock in exchange for 1,000,000 shares of our Common Stock. Because all of the
TEKS shares held by us are available for trading under Rule 144 of the
Securities and Exchange Commission at December 31, 2000, we have presented those
shares at their fair market value on the balance sheet as of December 31, 2000.
The quoted market price of TEKS registered common stock at December 31, 2000 and
March 27, 2001 was $0.88 and $1.36 per share, respectively.
20
21
At December 31, 2000, we had working capital of $3,929,039 compared to
$7,575,154 at December 31, 1999 and cash and cash equivalents of $3,898,176 at
December 31, 2000 compared to $4,315,980 at December 31, 1999. We experienced an
overall increase in sales during 2000 and a slight increase in net loss due to
the increase in operating expenses. While wary of current economic conditions,
we believe that revenues should grow during 2001 when compared to the prior
year, with the introduction of additional products and services. We anticipate
losses will continue during 2001 and until such time as profit margins from the
sales of our products exceed our development, selling, administrative and
financing costs. We expect operating expenses to increase modestly during 2001
in response to increased revenues and new product introductions, thereby
generating improving financial results.
In October of 1998, we entered into a working capital line of credit
financing arrangement for up to $9,000,000 with an entity controlled by one of
our principal stockholders, who is now also our Chairman of the Board. The
availability of funds under this facility is subject to certain borrowing base
limitations based principally on outstanding accounts receivable and inventory.
At December 31, 2000, we had utilized $2.41 million of this facility and may
further utilize the facility to fund future growth. Additionally, during October
2000 and again in February 2001, we amended the working capital facility to
increase the line of credit from $9,000,000 to $12,000,000, to extend the term
until January 31, 2002, or March 15, 2003 in certain circumstances, and to
expand the asset base for lending to include certain marketable securities owned
by us.
Should all the 2,616,348 redeemable public warrants and 1,216,664 redeemable
private warrants outstanding at December 31, 2000, be exercised, our proceeds
would aggregate $17,248,554. Each redeemable warrant entitles the warrant holder
to purchase 1.074 shares of Common Stock for $4.50 resulting in an effective
exercise price of $4.19 per share of Common Stock.
We utilize significant capital to design, develop and commercialize our
products. During 2001, we intend to fund sales growth and related operational
activities by utilizing our working capital line of credit and cash contributed
from operations. We may need additional capital to develop and introduce new
products and services, to enhance existing product offerings, and to address
unanticipated competitive threats, technical problems, economic conditions or
for other requirements. We anticipate that if additional capital is required
such financing may include the issuance of convertible debt, convertible
preferred stock or other equity securities in exchange for a cash investment in
us. There can be no assurance that any such additional financing will be
available to us on acceptable terms, or at all. Additional equity financing may
involve substantial dilution to our then existing stockholders. In the event we
are unable to raise additional capital, we may be required to substantially
reduce or curtail our activities.
At December 31, 2000, we had no material commitments for capital
expenditures.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 is effective for us January 1,
2001. SFAS 133, as amended, requires that all derivative instruments be recorded
on the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and the type of hedge transaction. The ineffective portion of all hedges will be
recognized in earnings. Adoption of this standard is not expected to have a
significant impact on our financial position, results of operations or cash
flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements", as amended by SAB 101A and 101B, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. We adopted SAB 101 in the fourth quarter of 2000. Since
our current revenue recognition policies effectively comply with this guidance,
the adoption of SAB 101 did not have a material impact on our financial
position, results of operations or cash flows.
21
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
All of our sales transactions during 2000 were denominated in U.S. dollars
and the majority of our operations is based in the U.S. and, accordingly, is
also denominated in U.S. dollars. We do have a foreign-based sales office in the
London area where transactions are denominated in the foreign currency. The
impact of fluctuations in the relative value of that currency for 1999 and 2000
was not material.
Our interest income earned on cash and cash equivalents is subject to
interest rate risk from the changes in the general level of U.S. interest rates,
particularly short-term rates.
We hold marketable securities in TEKS that are subject to the market risks
of the public U.S. stock markets, in particular the Nasdaq Stock Market. As of
December 31, 2000, the market value of our TEKS investment was $1,085,271. If
the market price of TEKS common stock decreases, our assets and working capital
may decrease proportionately.
22
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VIEWCAST.COM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ..................................................................... 24
Consolidated Balance Sheets a December 31, 1999 and 2000 ........................................... 25
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 ................................................................. 26
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000 ..................................................... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 ................................................................. 29
Notes to Consolidated Financial Statements ......................................................... 30
23
24
Report of Independent Auditors
The Board of Directors
ViewCast.com, Inc.
We have audited the accompanying consolidated balance sheets of ViewCast.com,
Inc. and subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years ended December 31, 2000. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ViewCast.com, Inc. and subsidiaries at December 31, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
February 27, 2001
24
25
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,315,980 $ 3,898,176
Available-for-sale securities 3,410,853 1,085,271
Accounts receivable, less allowance for doubtful accounts of
$117,000 and $177,000 at December 31, 1999 and 2000, respectively 1,386,395 1,241,784
Inventory 2,526,096 2,942,621
Prepaid expenses 93,598 242,457
------------ ------------
Total current assets 11,732,922 9,410,309
Property and equipment, net 1,338,143 1,504,753
Software development costs, net 429,502 494,447
Deferred charges -- 231,768
Deposits 64,815 72,302
------------ ------------
Total assets $ 13,565,382 $ 11,713,579
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 662,247 $ 1,432,016
Accrued compensation 418,360 462,573
Deferred revenue 270,779 351,659
Other accrued liabilities 392,713 824,195
Shareholder line of credit 2,408,827 2,408,827
Short-term debt, other 4,842 2,000
------------ ------------
Total current liabilities 4,157,768 5,481,270
Long-term debt -- 950,000
Commitments
Stockholders' equity:
Convertible preferred stock, $.0001 par value:
Authorized shares - 5,000,000
Series B - issued and outstanding shares - 945,000 at
December 31, 1999 and 2000 95 95
Common stock, $.0001 par value:
Authorized shares - 40,000,000 at December 31, 1999 and 2000 Issued and
outstanding shares - 14,624,898 and 17,140,468
at December 31, 1999 and 2000, respectively 1,463 1,714
Additional paid-in capital 44,904,140 52,770,321
Unrealized gain (loss) on securities reported at fair value
and accumulated other comprehensive income 1,396,523 (950,229)
Accumulated deficit (36,882,701) (46,527,686)
Treasury stock, 261,497 shares at December 31, 1999 and 2000 (11,906) (11,906)
------------ ------------
Total stockholders' equity 9,407,614 5,282,309
------------ ------------
Total liabilities and stockholders' equity $ 13,565,382 $ 11,713,579
============ ============
See accompanying notes.
25
26
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1999 2000
------------ ------------ ------------
NET SALES $ 8,027,948 $ 7,270,080 $ 10,439,404
Cost of goods sold 4,181,128 3,948,377 4,782,130
------------ ------------ ------------
GROSS PROFIT 3,846,820 3,321,703 5,657,274
Operating expenses:
Selling, general and administrative 8,352,476 7,543,409 9,545,307
Research and development 3,090,102 2,930,761 4,003,169
Restructuring charge 402,800 -- --
Depreciation and amortization 524,427 617,086 753,786
------------ ------------ ------------
Total operating expenses 12,369,805 11,091,256 14,302,262
------------ ------------ ------------
OPERATING LOSS (8,522,985) (7,769,553) (8,644,988)
Other income (expense):
Dividend and interest income 34,117 249,985 354,315
Interest expense (877,873) (954,168) (602,558)
Other 48 62 4,246
------------ ------------ ------------
Total other income (expense) (843,708) (704,121) (243,997)
------------ ------------ ------------
NET LOSS $ (9,366,693) $ (8,473,674) $ (8,888,985)
============ ============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (1.02) $ (0.71) $ (0.62)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 9,367,537 13,105,884 15,714,244
============ ============ ============
See accompanying notes.
26
27
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
CONVERTIBLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 -- $ -- 8,995,455 $ 900 $ 19,628,703
Conversion of long-term debt to
convertible preferred stock - Series A 364,000 36 -- -- 2,903,604
Sale of convertible preferred stock -
Series B 400,000 40 -- -- 3,999,960
Conversion of convertible preferred
stock - Series A to common stock (30,000) (3) 82,770 8 (5)
Common stock issued in exchange
for equity securities -- -- 1,000,000 100 1,999,900
Exercise of options and warrants -- -- 1,043,374 104 2,185,392
Sale of common stock, employee
stock purchase plan -- -- 73,787 7 139,109
Value of options and warrants
issued for consulting services -- -- -- -- 461,851
Warrants issued for inducement
of debt -- -- -- -- 266,000
Accelerated vesting of employee
stock options in connection with
restructuring -- -- -- -- 127,800
Common stock issued for
consulting services -- -- 73,443 7 133,389
Convertible preferred stock
dividends - Series A -- -- 56,145 6 101,715
Net loss and comprehensive loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 734,000 73 11,324,974 1,132 31,947,418
Sale of convertible preferred stock -
Series B, net 545,000 55 -- -- 5,434,291
Conversion of convertible preferred
stock - Series A to common stock (334,000) (33) 921,505 92 (59)
Conversion of 8% convertible notes
to common stock -- -- 317,313 32 1,162,818
Exercise of options and warrants -- -- 1,885,332 189 5,486,491
Value of options and warrants
issued for consulting services -- -- -- -- 65,347
Sale of common stock, employee
stock purchase plan -- -- 44,220 4 99,806
Convertible preferred stock
dividends - Series A and B -- -- 131,554 14 708,028
Unrealized gain on securities reported
at fair value -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
Comprehensive loss
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 945,000 $ 95 14,624,898 $ 1,463 $ 44,904,140
OTHER TOTAL
COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS'
INCOME DEFICIT STOCK EQUITY
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 $ -- $(18,199,433) $ (11,906) $ 1,418,264
Conversion of long-term debt to
convertible preferred stock - Series A -- -- -- 2,903,640
Sale of convertible preferred stock -
Series B -- -- -- 4,000,000
Conversion of convertible preferred
stock - Series A to common stock -- -- -- --
Common stock issued in exchange
for equity securities -- -- -- 2,000,000
Exercise of options and warrants -- -- -- 2,185,496
Sale of common stock, employee
stock purchase plan -- -- -- 139,116
Value of options and warrants
issued for consulting services -- -- -- 461,851
Warrants issued for inducement
of debt -- -- -- 266,000
Accelerated vesting of employee
stock options in connection with
restructuring -- -- -- 127,800
Common stock issued for
consulting services -- -- -- 133,396
Convertible preferred stock
dividends - Series A -- (115,283) -- (13,562)
Net loss and comprehensive loss -- (9,366,693) -- (9,366,693)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 -- (27,681,409) (11,906) 4,255,308
Sale of convertible preferred stock -
Series B, net -- -- -- 5,434,346
Conversion of convertible preferred
stock - Series A to common stock -- -- -- --
Conversion of 8% convertible notes
to common stock -- -- -- 1,162,850
Exercise of options and warrants -- -- -- 5,486,680
Value of options and warrants
issued for consulting services -- -- -- 65,347
Sale of common stock, employee
stock purchase plan -- -- -- 99,810
Convertible preferred stock
dividends - Series A and B -- (727,618) -- (19,576)
Unrealized gain on securities reported
at fair value 1,410,853 -- -- 1,410,853
Foreign currency translation adjustment (14,330) -- -- (14,330)
Net loss -- (8,473,674) -- (8,473,674)
------------
Comprehensive loss (7,077,151)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 $ 1,396,523 $(36,882,701) $ (11,906) $ 9,407,614
See accompanying notes.
27
28
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
CONVERTIBLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
------------ ------------ ------------ ------------ ------------
Exercise of options and warrants -- -- 1,232,077 123 4,108,642
Conversion of 7% convertible
debentures to common stock -- -- 777,777 78 2,585,050
Value of options and warrants
issued for consulting services -- -- -- -- 235,958
Common stock issued for legal
services -- -- 2,500 -- 15,000
Sale of common stock, employee
stock purchase plan -- -- 99,990 10 165,480
Convertible preferred stock
dividends - Series B -- -- 403,226 40 756,051
Unrealized loss on securities
reported at fair value -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
Comprehensive loss
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 945,000 $ 95 17,140,468 $ 1,714 $ 52,770,321
============ ============ ============ ============ ============
OTHER TOTAL
COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS'
INCOME (LOSS) DEFICIT STOCK EQUITY
------------ ------------ ------------ ------------
Exercise of options and warrants -- -- -- 4,108,765
Conversion of 7% convertible
debentures to common stock -- -- -- 2,585,128
Value of options and warrants
issued for consulting services -- -- -- 235,958
Common stock issued for legal
services -- -- -- 15,000
Sale of common stock, employee
stock purchase plan -- -- -- 165,490
Convertible preferred stock
dividends - Series B -- (756,000) -- 91
Unrealized loss on securities
reported at fair value (2,325,582) -- -- (2,325,582)
Foreign currency translation adjustment (21,170) -- -- (21,170)
Net loss -- (8,888,985) -- (8,888,985)
------------
------------
Comprehensive loss (11,235,737)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 $ (950,229) $(46,527,686) $ (11,906) $ 5,282,309
============ ============ ============ ============
See accompanying notes.
28
29
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1998 1999 2000
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $ (9,366,693) $ (8,473,674) $ (8,888,985)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of fixed assets 380,742 496,169 586,344
Amortization of software development costs 143,685 120,917 167,442
Non-cash charges to interest expense 289,885 584,151 134,370
Non-cash charge to restructuring costs 127,800 -- --
Non-cash consulting fees exchanged for options, warrants
and common stock 595,247 65,347 28,588
Changes in operating assets and liabilities:
Accounts receivable (644,553) 453,388 144,611
Inventory (1,348,402) 584,492 (416,525)
Prepaid expenses (15,550) (2,952) (148,859)
Deferred charges (598,132) -- --
Deposits (98,947) 71,123 (7,487)
Accounts payable 2,088,488 (2,185,560) 784,769
Accrued compensation 12,535 92,191 44,213
Accrued restructuring charges 275,000 (275,000) --
Deferred revenue 105,107 112,888 80,880
Other accrued liabilities 131,723 (115,201) 431,573
------------ ------------ ------------
Net cash used in operating activities (7,922,065) (8,471,721) (7,059,066)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (885,350) (452,268) (752,954)
Software development costs (371,323) (118,919) (232,388)
Other -- -- --
------------ ------------ ------------
Net cash used in investing activities (1,256,673) (571,187) (985,342)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net proceeds from convertible preferred stock - Series B 600,000 8,834,346 --
Net proceeds from shareholder line of credit 3,687,513 -- --
Repayment of short-term debt-officer (214,958) (96,285) --
Repayment of shareholder line of credit, net -- (1,278,685) --
Short-term debt, other 104,160 (126,767) (24,011)
Proceeds from exercise of options and warrants 2,185,496 5,486,678 4,108,765
Net proceeds for the issuance of long-term debt -- -- 3,376,360
Net proceeds from sale of common stock and warrants 139,116 99,810 165,490
------------ ------------ ------------
Net cash provided by financing activities 6,501,327 12,919,097 7,626,604
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,677,411) 3,876,189 (417,804)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,117,202 439,791 4,315,980
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 439,791 $ 4,315,980 $ 3,898,176
============ ============ ============
See accompanying notes.
29
30
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
ViewCast.com, Inc. and its wholly-owned subsidiaries, Viewpoint Systems, Inc.,
VideoWare, Inc. and Osprey Technologies, Inc. (collectively, the Company). The
Company operates in one business segment and is engaged in designing, developing
and marketing advanced, standards-based video products and services that enable
real-time and on-demand video communication over the Internet and corporate
networks. The Company's Osprey(R) line of video capture and video
compression-decompression cards, its Viewpoint VBX(TM) video distribution
system, and its Niagara(TM) line of Internet encoding and streaming video
servers deliver business applications to encode and archive video content,
broadcast video over computer networks (streaming video), deliver video from web
sites (on-demand streaming video), provide interactive video communication
(video conferencing), and distribute video within a network. The Company's
Online Solutions division provides a rich media application service provider
solution for business to business and media communication needs. The Company
markets its products and services directly to end-users, through original
equipment manufacturers, value-added resellers and computer system integrators,
worldwide.
The Company utilizes significant capital to design, develop and
commercialize its products. During 2001, the Company expects to fund sales
growth and related operational activities by utilizing its working capital line
of credit and cash contributed from operations. The Company may require
additional capital to develop and introduce new products and services, to
enhance existing product offerings, to address unanticipated competitive
threats, technical problems, adverse economic conditions or for other
requirements. If additional financing is needed, there can be no assurance that
any such additional financing will be available to the Company on acceptable
terms, or at all.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All material inter-company accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
INVENTORY
Inventory consists primarily of purchased electronic components and
computer system products, along with the related documentation manuals and
packaging materials. Inventory is carried at the lower of cost or market, cost
being determined on a standard cost basis, which approximates average cost.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is determined
using the straight-line method over the estimated useful lives, generally three
to five years, of the related assets. Leasehold improvements are amortized over
the lives of the related leases. Expenditures for repairs and maintenance are
charged to operations as incurred; renewals and betterments are capitalized.
30
31
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Costs of developing new software products and substantial enhancements to
existing software products are expensed as incurred until technological
feasibility has been established, after which time additional costs incurred are
capitalized in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." Amortization of capitalized software development costs
begins when products are available for general release to customers, and is
computed using the straight-line method over a period not to exceed three years.
REVENUE RECOGNITION
The Company sells its video communication systems and products and
licensing of related software to original equipment manufacturers, value-added
resellers, system integrators, and occasionally to end-users. Revenue is
generally recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, no significant Company obligations with regard to
implementation remain, fees are fixed or determinable and collectability is
probable. Revenue from services, including maintenance services, is recognized
ratably over the contract period, at the time of performance or upon customer
acceptance, based upon the substance of the arrangement or as defined in the
customer contract. The Company maintains an accrued warranty reserve for
products which are returned defective during the warranty period.
NET LOSS PER SHARE
Basic earnings per share is calculated by dividing net loss by the number
of weighted average common shares outstanding for the period. Since the Company
has reported net losses for all periods presented, the computation of diluted
loss per share excludes the effects of convertible debt, options, and warrants
since their effect is anti-dilutive. (See Note 10.)
Loss per share calculations for the years ended December 31, 1998, 1999 and
2000 are as follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1999 2000
------------ ------------ ------------
Net loss $ (9,366,693) $ (8,473,674) $ (8,888,985)
Preferred dividends and accretion of
issue costs (175,945) (778,381) (819,828)
------------ ------------ ------------
Net loss applicable to common shareholders $ (9,542,638) $ (9,252,055) $ (9,708,813)
============ ============ ============
Weighted average number of common shares
outstanding 9,367,537 13,105,884 15,714,244
============ ============ ============
Loss per share as reported in the financial
statements: basic and diluted $ (1.02) $ (0.71) $ (0.62)
============ ============ ============
31
32
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges at December 31, 2000 consisted of legal, accounting and
lead manager fees and expenses associated with the issuance of $4.45 million
principal amount 7% senior convertible debentures in April 2000. During
September and October of 2000, holders of $3.5 million principal amount of 7%
senior convertible debentures converted their notes to common stock of the
Company and accordingly, a proportionate share of issue costs in the amount
$914,872 was charged against additional paid in capital. During 2000, the
Company incurred total debt issue costs of $1,281,010, and issue costs amortized
to interest expense totaled $134,370.
During 1998 and 1999 the Company amortized deferred charges associated with
the issuance of 8% senior convertible notes in December of 1997, as well as fees
associated with the procurement of a $9 million working capital credit facility
in October of 1998. Deferred charges amortized to interest expense for the years
ended December 31, 1998 and 1999 were $289,885 and $584,151, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of cash, cash equivalents and trade accounts receivable. The
Company invests its cash and cash equivalents with a Texas commercial bank and a
commercial brokerage firm. The brokerage firm maintains accounts in several
banks throughout the country and in government securities. The Company sells its
products and services primarily to distributors and resellers without requiring
collateral; however, the Company routinely assesses the financial condition of
its customers and maintains allowances for anticipated losses. The following
table outlines the number of customers that accounted for more than 10% of
annual sales and receivable balances:
CUSTOMERS EXCEEDING 10% OF
CUSTOMERS EXCEEDING 10% YEAR-END ACCOUNTS RECEIVABLE
OF NET SALES BALANCE
----------------------------- -----------------------------
NUMBER OF COMBINED NUMBER OF COMBINED
YEAR CUSTOMERS PERCENT CUSTOMERS PERCENT
---- ------------ ------------ ------------ ------------
2000 0 0% 2 32%
1999 1 23% 2 54%
1998 3 41% 1 66%
The Company believes it has no significant credit risk in excess of
provided reserves.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes
wherein deferred tax assets and liabilities are determined based upon the
differences between the financial statement and tax bases of assets and
liabilities, as measured by enacted tax rates expected to be in effect when
these differences reverse.
32
33
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1998, and 1999 and 2000 was $353,024, $448,859 and
732,906, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents, accounts receivable, accounts
payable, short-term debt and accrued expenses, approximate fair value due to the
short-term maturities of these instruments. At December 31, 1999 and 2000,
available-for-sale securities consist of the investment in equity securities of
a strategic business alliance partner, and are stated at fair market value as
determined by quoted market prices. Gross unrealized gains (losses), which have
been included as a separate component of stockholders' equity, were $1,410,853
and ($2,325,582) at December 31, 1999 and 2000, respectively. No unrealized
holding gains or losses were included in earnings during the years ended
December 31, 1998, 1999 and 2000 (See Note 5).
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. SFAS 123 defines a fair-value based method of accounting for an
employee stock option or similar equity instrument. As permitted by SFAS 123,
the Company has elected to continue to measure the cost of its stock-based
compensation plans using the intrinsic-value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. See Note 10 to the Consolidated Financial Statements for
additional information concerning stock-based compensation.
SEGMENT REPORTING
Under Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related Information, the Company
operated, for all periods presented, in a single segment.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting
Comprehensive Income, requires that total comprehensive income be disclosed with
equal prominence as net income and earnings per share. Comprehensive income is
defined as changes in stockholders' equity exclusive of transactions with owners
such as capital contributions and dividends.
The Company translates assets and liabilities of its foreign operations,
whose functional currency is the local currency, at year-end exchange rates.
Revenues and expenses are translated at the average rates of exchange prevailing
during the year. Adjustments resulting from translating the financial statements
of foreign operations are accumulated in other comprehensive income, which is
reflected as a separate component of stockholders' equity. Additionally, the
Company classifies equity securities it owns that are free of trading
restrictions or to become free of trading restrictions within one year as
"available for sale". Available for sale securities are carried at fair value
based on quoted market prices and unrealized gains and losses are accumulated in
other comprehensive income, which is a separate component of stockholders'
equity (See Note 5). If a market value adjustment results in a loss of value due
to an other-than-temporary impairment, a loss will be transferred from
accumulated other comprehensive income and charged to other income in the
consolidated statement of operations (See Note 5).
Components of comprehensive of income (loss) for 1998, 1999 and 2000 are as
follows:
33
34
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1999 2000
------------ ------------ ------------
Foreign currency translation
Adjustment $ -- $ (14,330) $ (21,170)
Unrealized gain or (loss) on available
for sale securities $ 1,410,853 $ (2,325,582)
------------ ------------ ------------
Comprehensive income (loss) $ -- $ 1,396,523 $ (2,346,752)
============ ============ ============
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121
(SFAS 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, the Company reviews its long-lived assets
for impairment when events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. This review consists of a
comparison of the carrying value of the asset with the asset's expected future
undiscounted cash flows without interest costs. Estimates of expected future
cash flows represent management's best estimate based on reasonable and
supportable assumptions and projections. If the expected future cash flow
exceeds the carrying value of the asset, no impairment is recognized. If the
carrying value of the asset exceeds the expected future cash flows, impairment
is measured by the excess of the carrying value over the fair value of the
asset. Any impairment provisions recognized are permanent and may not be
restored in the future. Impairment expense of $30,000 was recognized in 1998,
and is included as a component of the 1998 restructuring charge (See Note 3).
The Company recognized no material impairment expense during 1999 and 2000.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 is effective for the Company
January 1, 2001. SFAS 133, as amended, requires that all derivative instruments
be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and the type of hedge transaction. The ineffective portion of all
hedges will be recognized in earnings. Adoption of this standard is not expected
to have a significant impact on the Company's financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements", as amended by SAB 101A and 101B, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Company adopted SAB 101 in the fourth quarter of 2000.
Since the Company's current revenue recognition policies effectively comply with
this guidance, the adoption of SAB 101 did not have a material impact on the
Company's financial position, results of operations or cash flows.
3. BUSINESS RESTRUCTURING
Results of operations for 1998 include charges of $402,800 for resizing and
restructuring the Company's operations and workforce. The charges were recorded
in the fourth quarter of 1998 in accordance with a plan of restructuring
approved by the Company's Board of Directors. Charges included severance costs
for work force reductions of 16 employees including two Executive Officers of
the Company, closure of three sales offices and losses on impairment of certain
assets. Personnel reductions were made in the Company's sales, development and
finance and administration departments in an effort to reduce operating
expenses. No restructuring charges were charged to earnings during 1999 and
2000.
34
35
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INVENTORY
Inventory consists of the following:
DECEMBER 31,
-------------------------
1999 2000
---------- ----------
Purchased materials $ 766,553 $ 793,895
Work in progress -- --
Finished goods 1,759,543 2,148,726
---------- ----------
$2,526,096 $2,942,621
========== ==========
Inventory at December 31, 1999 and 2000 is presented net of reserves of
$346,153 and $283,751 for obsolete, slow moving and damaged inventory.
5. INVESTMENT IN EQUITY SECURITIES
In September 1998, the Company entered into a strategic business alliance
with TEKS that included a stock purchase agreement whereby the Company acquired
1,240,310 shares of TEKS common stock in exchange for 1,000,000 shares of the
Company's common stock. As specified in the purchase agreement, the number of
shares exchanged was determined by dividing $2,000,000 by the average closing
price per share of each company's common stock for the five trading days prior
to September 24, 1998. The shares issued by the Company and TEKS are not
registered under the Securities Act of 1933, as amended, and may not be sold,
transferred or otherwise distributed in the absence of such registration or an
applicable exemption therefrom.
At December 31, 1999 and 2000, all TEKS stock was available for sale within
the next twelve months; and accordingly, was classified as a current asset and
stated at fair market value of $2.75 and $.88 per share, respectively as
determined by quoted market prices. At February 27, 2001, the quoted market
price of TEKS shares was $1.18.
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
DECEMBER 31,
----------------------------
1999 2000
----------- -----------
Computer equipment $ 1,702,786 $ 2,236,447
Software 471,103 561,891
Leasehold improvements 100,779 123,364
Office furniture and equipment 491,227 595,679
----------- -----------
2,765,895 3,517,381
Less accumulated depreciation
and amortization (1,427,752) (2,012,628)
----------- -----------
$ 1,338,143 $ 1,504,753
=========== ===========
35
36
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. SHORT-TERM DEBT
Short-term debt consists of the following:
DECEMBER 31,
-------------------------
1999 2000
---------- ----------
Fully secured $9,000,000 working capital credit
facility payable to a principal shareholder of the
Company, with interest payable monthly at 12% $2,408,827 $2,408,827
Other 4,842 2,000
---------- ----------
$2,413,669 $2,410,827
========== ==========
In October 1998, the Company entered into a working capital line of credit
facility for up to $9 million with an entity controlled by one of its principal
shareholders, H.T. Ardinger, Jr. This one-year, renewable facility bears
interest at 12% per annum and is secured by all assets of the Company. The
availability of funds under this facility is subject to certain borrowing base
limitations based principally on qualifying accounts receivable and inventory. A
portion of the proceeds from this facility was used to retire a Texas commercial
bank line of credit. As an incentive to advance the line of credit, Mr. Ardinger
was issued 200,000 three-year warrants to purchase Company stock at $4.50 per
share. The value of the warrants of $1.33 per share, as determined using the
Black-Scholes option valuation model, was charged to interest expense over the
initial term of the note. On October 17, 2000, the Company renewed the working
capital facility for one year through and until October 22, 2001 inclusive of a
provision for automatic renewal through October 22, 2002.
Interest paid during the years ended December 31, 1998, 1999 and 2000 was
$528,301, $422,169 and $323,021, respectively.
8. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------------------
1999 2000
---------- ----------
Senior 8% convertible notes issued December 9,
1997 due December 2002 with interest payable
semi-annually in arrears $1,360,000 $ --
7% Senior Convertible Debentures due 2004 with
interest payable semi-annually in arrears -- $ 950,000
---------- ----------
$1,360,000 $ 950,000
========== ==========
On December 9, 1997 the Company sold $5,000,000 aggregate principal amount
of 8% senior convertible notes due 2002 (the "Notes") at an initial offering
price of 100% of the principal amount thereof, less 8% gross commission. The
Notes were convertible to common stock of the Company at the initial conversion
price of $4.625 per share. The Notes ranked senior to all existing and future
subordinated obligations and ranked pari passu with all senior indebtedness of
the Company, except to the extent of any collateral securing such debt. Lead
managers in connection with the Notes offering received 108,108 warrants to
purchase Company stock at an exercise price of $4.625 per share. In December
1997, the Company received net proceeds of $4,168,000 from the Notes offering.
36
37
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In August 1998, the Company exchanged $3,640,000 of its 8% senior
convertible notes for 364,000 shares of a newly created Series A convertible
preferred stock. The Series A preferred stock carried a dividend of 8.5% per
year payable in cash or common stock of the Company, at the Company's option,
and was convertible into Common Stock of the Company at a fixed conversion price
of $3.625 per share.
In February through April 1999, holders of $1,360,000 principal amount of
8% convertible notes exchanged their notes for 317,313 shares of common stock of
the Company at conversion prices ranging from of $3.625 to $4.625 per share
completing the exchange of all 8% convertible notes outstanding at December 31,
1998.
On April 28, 2000, the Company sold $4,450,000 aggregate principal amount
of 7% Senior Convertible Debentures Due 2004 (the "Debentures") pursuant to a
placing agreement dated March 28, 2000, and amended on April 28, 2000, by and
among the Company and RP&C International Inc. and RP&C International Limited
(the "Lead Managers") at an initial offering price of 100% of the principal
amount thereof, less 8% gross commission. In addition, the Company issued the
Lead Managers a warrant (the "Warrant") on April 28, 2000, in the name of RP&C
International (Guernsey) Limited, pursuant to Regulation S, to purchase an
aggregate of 89,000 shares of Common Stock, at an exercise price of $5.00 per
share, subject to adjustment in the event of adjustment of the Conversion Price
of the Debentures. The Warrant has a term of five (5) years and may be exercised
as to all or any lesser number of shares of Common Stock covered thereby,
commencing twelve (12) months after the date of issuance.
Unless previously redeemed, the Debentures are convertible into shares of
Common Stock of the Company at the option of the holder at any time at a fixed
conversion price of $5.00 per share of Common Stock, subject to adjustment in
certain circumstances (the "Conversion Price"). Upon voluntary conversion of any
Debenture by its holder, no payment will be made for interest accrued during the
period (i) from the most recent interest payment date preceding the applicable
conversion date, or (ii) from the date of issuance of the Debentures if the
Debenture is converted before the first interest payment (absent default by the
Company, in which event interest shall continue to accrue at a specified default
rate). Debentures which are converted prior to the first interest payment date
of November 1, 2000 will be converted at a ten percent (10%) discount from the
then effective Conversion Price, and Debentures which are converted prior to the
second interest payment date of May 1, 2001 will be converted at a five percent
(5%) discount from the then effective Conversion Price.
During September through October 2000, holders of $3,500,000 principal
amount of the Debentures exchanged their notes for 777,777 shares of common
stock of the Company at a conversion price of $4.50 per share. As an incentive
for early conversion, the Company paid debenture holders $124,530, which amount
has been classified to interest expense.
9. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
SFAS 109 requires a valuation allowance to be recorded when it is "more likely
than not that some portion or all of the deferred tax assets will not be
realized." In the opinion of management, realization of the Company's net
operating loss carryforward is not reasonably assured, and a valuation allowance
of $12,972,000 and $16,181,000 has been provided against deferred tax assets in
excess of deferred tax liabilities in the accompanying consolidated financial
statements at December 31, 1999 and 2000, respectively.
37
38
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of the Company's net deferred taxes are as follows:
DECEMBER 31,
------------------------------
1999 2000
------------ ------------
DEFERRED TAX ASSETS:
Net operating loss carryforward $ 11,830,000 $ 14,762,000
Revenue deferred for financial statements,
recognized for tax 80,000 130,000
Excess of tax over financial statement basis of
patent 30,000 26,000
Accruals deductible for tax purposes when paid 399,000 401,000
Excess of tax over financial statement basis of
software development costs 754,000 968,000
------------ ------------
Total deferred tax assets 13,093,000 16,287,000
Less: valuation allowance (12,972,000) (16,181,000)
------------ ------------
121,000 106,000
DEFERRED TAX LIABILITIES:
Excess of financial statement over tax basis of
of property and equipment 121,000 106,000
------------ ------------
Total deferred tax liabilities 121,000 106,000
============ ============
NET DEFERRED TAXES $ -- $ --
============ ============
A reconciliation between the federal income tax benefit calculated by
applying U.S. federal statutory rates to net loss and the absence of a tax
benefit reported in the accompanying consolidated financial statements is as
follows:
DECEMBER 31,
---------------------------------------------
1998 1999 2000
----------- ----------- -----------
U.S. federal statutory rate applied to pretax loss $(3,185,000) $(2,881,000) $(3,022,000)
State tax net of federal benefit (281,000) (235,000) (260,000)
Change in valuation allowance 2,611,000 3,645,000 3,209,000
Net operating loss carryforward adjustment 734,000 (745,000) --
Other 121,000 216,000 73,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
At December 31, 2000 the Company has federal income tax net operating loss
carryforwards of approximately $39,900,000, which expire as follows:
YEAR
ENDED AMOUNT
----- -----------
2009 $ 2,700,000
2010 4,700,000
2011 4,000,000
2012 5,200,000
2018 7,400,000
2019 7,800,000
2020 8,100,000
38
39
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company is subject to limitations existing under Internal Revenue Code
Section 382 (Change of Control) relating to the availability of the operating
loss carryforward.
No income taxes were paid during the years ended December 31, 1998, 1999
and 2000.
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In August 1998, the Company exchanged $3,640,000 of its 8% senior
convertible notes for 364,000 shares of a newly created Series A convertible
preferred stock. The Series A preferred stock carried a dividend of 8.5% per
year payable in cash or common stock of the Company, at the Company's option,
and was convertible into Common Stock of the Company at a fixed conversion price
of $3.625 per share (subject to certain conditions). In September 1998, holders
of 30,000 shares of Series A preferred stock converted their shares into 82,770
shares of common stock of the Company and in January through August 1999,
holders of 334,000 shares of Series A preferred stock converted their shares
into 921,505 shares of common stock completing the conversion of all outstanding
shares Series A preferred stock.
In December 1998 through February 1999, the Company received net proceeds
of $8,834,346 from the private placement of 945,000 shares of a newly created
Series B convertible preferred stock at $10 per share. Two principal
shareholders of the Company each purchased $4,000,000 of the Series B offering
and other existing shareholders purchased the balance of $1,450,000. The Series
B preferred stock is convertible into common stock of the Company at a fixed
price of $3.625 per share, subject to certain requirements, and carries a
dividend of 8% per year payable in cash or common stock of the Company, at the
Company's option.
Holders of the Series B preferred stock have no voting rights except on
amendments to the Company's Articles of Incorporation to change the authorized
shares, or par value, or to alter or change the powers or preferences of their
respective preferred stock issues.
COMMON STOCK
During 1998 and 1999, the Company issued 59,230 shares of Company common
stock to Series A preferred shareholders of record on December 1, 1998 as
payment of $107,310 of 8.5% accrued dividends from August 17, 1998 through
December 15, 1998. During 1999, the Company issued 2,461 shares of common stock
to Series A preferred shareholders of record on June 1, 1999 as payment of
$21,192 of 8.5% dividends accrued for the six months ended June 15, 1999. Series
A preferred dividends were paid semi-annually on June 15th and December 15th of
each year in cash or, at the option of the Company, in common stock. The common
stock was valued at the average of the market prices for the 20 consecutive
stock exchange business days ending ten stock exchange business days prior to
the dividend payment date. The computed common stock value at December 15, 1998
and June 15, 1998 was $1.81 and $8.61 per share, respectively.
During 1999, the Company issued 34,127 shares of Company common stock to
Series B preferred shareholders of record on June 1, 1999 as payment of $293,841
of 8.0% accrued dividends for the six months ended June 15, 1999. During 1999,
the Company also issued 91,881 shares of common stock to Series B preferred
shareholders of record on December 1, 1999 as payment of $379,035 of 8.0%
dividends accrued for the six months ended December 15, 1999. Series B preferred
dividends are paid semi-annually on June 15th and December 15th of each year in
cash or, at the option of the Company, in common stock. The common stock is
valued at the average of the market prices for the 20 consecutive stock exchange
business days ending ten stock exchange business days prior to the dividend
payment date. The computed common stock value at June 15, 1999 and December 15,
1999 was $8.61 and $4.13 per share, respectively.
39
40
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During 2000, the Company issued 127,097 shares of Company common stock to
Series B preferred shareholders of record on June 1, 2000 as payment of $378,091
of 8.0% accrued dividends for the six months ended June 15, 1999. Also during
2000, the Company issued 276,129 shares of common stock to Series B preferred
shareholders of record on December 1, 2000 as payment of $380,000 of 8.0%
dividends accrued for the six months ended December 15, 1999. The computed
common stock value at June 15, 2000 and December 15, 2000 was $2.97 and $1.37
per share, respectively.
During 1998, the Company received proceeds of $343,225 from the exercise of
343,225 private warrants to purchase 343,225 common shares of the Company at an
exercise price of $1.00 per share.
During 1999, the Company received $1,922,037 from the exercise of 525,791
private and public warrants to purchase 543,710 common shares of the Company at
exercise prices ranging from $3.00 to $4.19 per share.
During 2000, the Company received $3,758,188 from the exercise of 1,097,245
private and public warrants to purchase 1,116,556 common shares of the Company
at exercise prices ranging from $3.00 to $4.50 per share. Additionally, during
August 200, the Company received $2,450 for the partial exercise of 17,500
underwriter warrants to purchase 17,500 public warrants of the Company at an
exercise price of $0.14 per public warrant.
During 1998, the Company received proceeds of $37,275 from the exercise of
66,817 stock options to purchase 66,817 common shares of the Company at exercise
prices ranging fro $0.04 to $3.00 per share.
During 1999, the Company received $3,564,641 from the exercise of 1,333,622
stock options to purchase 1,333,622 common shares of the Company at exercise
prices ranging from $.10 to $5.84 per share.
During 2000, the Company received $348,127 from the exercise of 115,521
stock options to purchase 115,521 common shares of the Company at exercise
prices ranging from $2.06 to $4.63 per share.
During 1998, the Company received $139,117 in proceeds from the sale of
73,787 shares of common stock to employees under the terms of the Company's
Employee Stock Purchase Plan. The employee purchase price for the offering
periods ended April 30, 1998 and October 31, 1998 was $2.62 and $1.50 per share,
respectively.
During 1999, the Company received $99,810 in proceeds from the sale of
44,220 shares of common stock to employees under the terms of the Company's
Employee Stock Purchase Plan. The employee purchase price for the offering
periods ended April 30, 1999 and October 31, 1999 was $1.46 and $3.85 per share,
respectively.
During 2000, the Company received $165,490 in proceeds from the sale of
99,990 shares of common stock to employees under the terms of the Company's
Employee Stock Purchase Plan. The employee purchase price for the offering
periods ended April 30, 2000 and October 31, 2000 was $3.04 and $1.21 per share,
respectively.
During 1998 the Company issued 73,443 shares of common stock to various
consultants in exchange for financial services. The number of common shares
issued was determined by dividing the fair market value of services by an
average of the common stock market prices on the date of issuance. Total value
of the consulting services provided during 1998 amounted to $133,396 and prices
for common stock shares issued ranged from $1.77 to $2.81 per share.
During 2000, the Company issued 2,500 shares of common stock to a law firm
as partial payment for legal services rendered in connection with the Debenture
offering. The number of common shares issued was determined by dividing the fair
market value of services by an average of the common stock market prices on the
date of issuance. The value of legal services was $15,000 and the computed price
was $6.00 per share.
40
41
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In May 1999, the Company registered, in a Registration Statement on Form
S-3, 7,933,463 shares of common stock underlying non-redeemable common stock
purchase warrants and publicly traded redeemable common stock purchase warrants
for offer and sale by the persons holding the warrants. The Company also
registered 290,360 shares of common stock underlying warrants held by Network 1
Financial Securities, Inc. received as compensation for services as managing
underwriter of the Company's initial public offering in 1997, 69,888 shares of
common stock held by RP&C International, Ltd. and 183,108 shares of common stock
underlying redeemable and non-redeemable warrants held by RP&C International and
Rauscher, Pierce & Resfnes. The common stock may be offered by its holders or
their successors in interest from time to time in transactions on the Nasdaq
SmallCap Market ("Nasdaq") or in privately negotiated transactions at current
market prices or at negotiated prices. The Company will not receive the proceeds
of sales of the common stock by its holders, but has received and will receive
proceeds from the exercise of warrants, to the extent they are exercised. See
Warrants below.
In April 2000, the Company registered, in a Registration Statement on Form
S-3, 2,606,896 shares of common stock underlying 945,000 shares of Series B
Convertible Preferred Stock ("Series B Preferred Stock"). Each share of Series B
Preferred Stock is convertible to common stock at a conversion price of $3.625
per share for each $10.00 liquidation value of Series B Preferred Stock. The
Company also registered 126,008 shares of common stock issued as dividends on
the Series B Preferred Stock as well as 40,000 shares of common stock underlying
warrants issued as compensation for services rendered in connection with the
offering of Series B Preferred Stock. The common stock may be offered by its
holders or their successors in interest from time to time in transactions on the
Nasdaq SmallCap Market (Nasdaq) or in privately negotiated transactions at
current market prices or at negotiated prices. ViewCast will not receive any new
proceeds from the conversion of the Series B Preferred Stock to common stock,
but received gross proceeds of $9,450,000 from the issuance of the Series B
Preferred Stock in December 1998 through February 1999. ViewCast will receive
proceeds of up to $145,000 from the exercise of warrants (to the extent the
warrants are exercised).
In June 2000, the Company registered, in a Registration Statement on Form
S-3, (i) up to 1,334,454 shares of common stock and (ii) up to 140,000
Redeemable Common Stock Purchase Warrants ("Public Warrants"). Up to 988,889 of
the shares of common stock are issuable upon conversion of $4,450,000 principal
amount of 7% Senior Convertible Debentures Due 2004. Up to 89,000 of the common
shares are issuable upon exercise of a private warrant to purchase common stock.
The Company offered and sold the Debentures and issued the warrant on April 28,
2000 pursuant to Regulation S under the Securities Act of 1933. The Debentures
are currently convertible and the private warrant becomes exercisable April 28,
2001. Up to 254,065 of the shares of common stock are shares issuable to certain
of the selling securityholders upon exercise of certain Public Warrants and upon
exercise of private warrants. The remaining 2,500 shares of common stock covered
by the Registration Statement are currently issued and outstanding shares. Each
Public Warrant entitles the holder to purchase 1.074 shares of common stock at
$4.50 per share, subject to adjustment under certain circumstances. The Public
Warrants are exercisable at any time through February 3, 2002, unless earlier
redeemed by the Company. The Company may redeem all, but not less than all, of
the Public Warrants, at any time, upon notice of not less than thirty (30) days,
at a price of $.10 per Public Warrant, provided that the per share closing price
or bid quotation of the Company's common stock, as reported on NASDAQ, for any
twenty trading days within a period of thirty consecutive trading days, ending
on the fifth day prior to the day on which the Company gives notice of
redemption, has been at least 150% (currently $6.75, subject to adjustment) of
the initial public offering price per share of our common stock (which was
$4.50). The Public Warrants included in this prospectus are, issuable upon
exercise of certain private warrants.
The common stock and Public Warrants covered by the Registration Statement
may be offered by selling securityholders or their successors in interest from
time to time in transactions on the Nasdaq SmallCap Market (Nasdaq) or in
privately negotiated transactions at current market prices or at negotiated
prices. The Company will not receive any of the proceeds from the sale of
securities by selling securityholders.
In July 1999, stockholders of the Company approved a proposal to increase
the number of authorized shares of common stock of the Company from 30,000,000
shares to 40,000,000 shares.
41
42
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCK OPTION PLANS
In April 1995, the Company adopted its 1995 Stock Plan (the 1995 Stock
Option Plan) under which 2,000,000 shares of the Company's common stock was
reserved for issuance to officers, key employees and consultants of the Company.
The objectives of the stock plan are to attract and retain qualified personnel
for positions of substantial responsibility and to provide additional incentives
to employees and consultants to promote the success of the Company's business.
Options granted under the plan may be incentive stock options or non-qualified
stock options. The plan is administered by the Board of Directors. The options
are granted at the discretion of the Board of Directors at an option price per
share not less than fair market value at the date of grant. In May 1998, July
1999 and August 2000, stockholders of the Company approved proposals to increase
the number of shares available for issuance under the 1995 Stock Plan to
3,900,000, 4,900,000 and 5,900,000, respectively.
In April 1995, the Company also adopted the 1995 Director Option Plan under
which 250,000 shares of the Company's common stock are reserved for issuance to
outside directors of the Company. The objective of the director plan is to
attract and retain qualified personnel for service as outside directors of the
Company and to encourage their continued service to the Board. Only
non-qualified stock options may be granted. Grants under the plan are automatic
and nondiscretionary and are issued at an option price per share not less than
fair market value at the date of grant.
Following is a summary of stock option activity from December 31, 1997
through December 31, 2000:
STOCK OPTIONS
-----------------------------------------------
WEIGHTED-
AVERAGE
NUMBER PRICE PER EXERCISE PRICE
OF SHARES SHARE PER SHARE
------------ ------------- -------------
Outstanding at December 31, 1997 2,737,810 $0.04 - 5.84 $3.27
Granted 1,638,009 2.06 - 4.09 2.69
Exercised 66,817 .04 - 3.00 .56
Canceled/forfeited 654,999 2.06 - 5.84 3.58
------------
Outstanding at December 31, 1998 3,654,003 .10 - 5.84 3.00
Granted 1,002,516 2.77 - 9.00 6.23
Exercised 1,341,622 .10 - 5.84 2.66
Canceled/forfeited 552,984 1.77 - 7.14 3.27
------------
Outstanding at December 31, 1999 2,761,913 1.77 - 9.00 4.33
Granted 935,250 1.25 - 6.59 3.61
Exercised 115,521 2.06 - 4.63 3.01
Canceled/forfeited 278,331 2.06 - 7.14 4.11
------------
Outstanding at December 31, 2000 3,303,311 $1.25 - 9.00 $4.19
============
The weighted-average grant-date fair value of options granted was $2.64,
$4.96 and $3.07 for the years ended December 31, 1998, 1999 and 2000,
respectively.
42
43
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following information applies to options outstanding at December 31,
2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------- -----------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 2000 LIFE PRICE 2000 PRICE
- -------------------- ------------- ------------ ------------ -------------- ------------
$ 1.00 - 2.00 276,050 9.7 $ 1.76 766 $ 1.63
2.01 - 3.00 946,530 5.5 2.71 723,925 2.75
3.01 - 4.00 677,482 5.2 3.44 373,300 3.49
4.01 - 5.00 260,599 5.6 4.54 187,658 4.57
5.01 - 6.00 593,850 7.4 5.41 132,095 5.31
6.01 - 7.00 61,300 8.6 6.14 10,299 6.13
7.01 - 8.00 442,000 8.7 7.10 79,764 7.10
8.01 - 9.00 45,500 8.3 8.83 16,415 8.85
------------ ------------ ------------ ------------ ------------
3,303,311 6.7 $ 4.19 1,524,222 $ 3.70
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
For Stock Based Compensation, requires the disclosure of pro forma net income
and earnings per share information computed as if the Company had accounted for
its employee stock options granted subsequent to December 31, 1994 under the
fair value method set forth in SFAS 123. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions:
1998 1999 2000
-------- -------- --------
Risk-free interest rate 5.35% 5.50% 6.20%
Dividend yield 0% 0% 0%
Volatility factor of the
market price of the
Company's common stock 60% 91% 106%
Expected life of the options
(years) 6.0 6.6 6.4
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimated, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options. In addition, because SFAS 123 is applicable only to
options granted subsequent to December 31, 1994, the pro forma information
presented below is not necessarily indicative of the effects on reported net
income in future years.
43
44
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Pro forma
information for the years ended December 31, 1998, 1999 and 2000 is as follows:
1998 1999 2000
-------------- -------------- --------------
Pro forma net loss $ (10,741,022) $ (10,480,394) $ (11,453,668)
Pro forma net loss per share:
basic and diluted $ (1.15) $ (.80) $ (.62)
EMPLOYEE STOCK PURCHASE PLAN
In May 1995, the Company established an Employee Stock Purchase Plan (ESPP)
to provide employees of the Company with an opportunity to purchase common stock
through payroll deductions. Under the ESPP, 250,000 shares of common stock have
been reserved for issuance, subject to certain antidilution adjustments. The
ESPP is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Internal Revenue Code. In August 2000,
stockholders of the Company approved a proposal to increase the number of shares
available for issuance under the ESPP from 250,000 to 500,000 shares.
Each offering is for a period of six months ending April 30 and November
30. The ESPP terminates in April 2005. Eligible employees may participate in the
ESPP by authorizing payroll deductions during an offering period within a
percentage range determined by the Board of Directors. Initially, the amount of
authorized payroll deductions is not more than ten percent of an employee's cash
compensation during an offering period, but not more than $25,000 per year.
Amounts withheld from payroll are applied at the end of each offering period to
purchase shares of common stock. Participants may withdraw their contributions
at any time before stock is purchased, and in the event of withdrawal such
contributions will be returned to participants. The purchase price of the common
stock is equal to eighty-five percent (85%) of the lower of (i) the market price
of common stock immediately before the beginning of the applicable offering
period or (ii) the market price of common stock at the end of each offering
period. The Company pays all expenses incurred in connection with the
implementation and administration of the ESPP.
WARRANTS
The Company has issued private warrants to purchase common stock of the
Company in connection with the issuance and repayment of certain notes payable,
as inducement for early exercise of private warrants and as compensation for
services rendered by various consultants. Additionally, the Company has issued
public warrants to purchase common stock of the Company in connection with its
initial public offering and concurrent debt retirement and debt for equity
exchange.
44
45
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Following is a summary of warrant activity from December 31, 1997 through
December 31, 2000:
WARRANTS
-----------------------------------------------------------
WEIGHTED-
NUMBER OF EXERCISE AVERAGE
WARRANTS PRICE EXERCISE PRICE
------------- ------------- --------------
Outstanding and exercisable at December 31,
1997 5,271,991 $1.00 - $4.63 $ 3.73
Granted - non-public warrants 1,796,664 3.00 - 4.50 4.24
Exercised 976,557 1.00 - 3.00 2.30
Canceled 23,442 1.00 - 4.50 3.49
-------------
Outstanding at December 31, 1998 6,068,656 1.00 - 4.50 4.12
Granted - non-public warrants 40,000 3.63 3.69
Exercised 525,791 3.00 - 4.19 3.55
Canceled -- -- --
-------------
Outstanding and exercisable
at December 31, 1999 5,582,865 $3.00 - $4.50 $ 4.15
-------------
Granted - non-public warrants 89,000 5.00 5.00
Granted - public warrants 17,500 4.50 4.50
Exercised 1,097,245 3.00 - 4.50 3.43
Canceled 85,333 4.50 4.50
-------------
Outstanding and exercisable
at December 31, 2000 4,506,787 $3.00 - $4.50 $ 4.34
=============
In addition, at December 31, 2000 the Company's IPO representative and
assigns held warrants to purchase 130,000 full units at $6.44 per unit and
17,500 partial units at $6.30 per share, each full unit consisting of one share
of common stock at $6.30 and one public warrant at $0.14. Each Public Warrant,
when exercised, entitles the holder to purchase 1.074 shares of common stock at
$4.50.
At December 31, 2000, the Company had outstanding 2,616,348 redeemable
common stock public warrants that were issued in connection with the Company's
initial public offering, as well as 1,216,664 redeemable private warrants, with
terms similar to the public warrants, that were issued in connection with the
early exercise of private warrants during 1998. When initially issued, each
redeemable warrant entitled the holder to purchase 1.0 share of common stock at
$4.50, subject to adjustment under certain circumstances. In October 1998, the
Company reduced the effective exercise price of its then redeemable warrants
from $4.50 to $4.19 per share of common stock in accordance with the provisions
of its warrant agreements, whereby each redeemable warrant currently entitles
the holder to purchase 1.074 shares for $4.50. Both the public and private
redeemable warrants expire February 4, 2002 and are redeemable by the Company,
upon notice of not less than thirty days, at a price of $.10 per warrant,
provided that the closing price or bid price of the common stock for any twenty
trading days within a period of thirty consecutive trading days ending on the
fifth day prior to the day on which the Company gives notice of redemption has
been at least $6.75 (subject to adjustment under certain circumstances).
At December 31, 1999, the Company also had outstanding 1,506,384
non-redeemable private warrants with exercise prices ranging from $3.00 to $5.50
per share and with varying expiration dates through December 2005.
45
46
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During February 1999, the Company issued 40,000 three-year warrants to
purchase Company common stock at $3.625 per share for services rendered in
connection with its Series B convertible preferred stock offering (see Note 10 -
Preferred Stock).
In April 2000, the Company issued to Lead Managers of the Debentures
offering a warrant to purchase 89,000 shares of Common Stock at an exercise
price of $5.00 per share, subject to adjustment in the event of adjustment of
the Conversion Price of the Debentures. The warrant has a term of five (5) years
and may be exercised as to all or any lesser number of shares of Common Stock
covered thereby, commencing twelve months after the date of issuance.
In August 2000, the Company issued 17,500 Public Warrants upon partial
exercise of representative warrants at an exercise price of $0.14 per warrant.
11. EMPLOYEE BENEFIT PLAN
Effective March 1, 1997, the Company adopted a profit sharing plan pursuant
to Section 401(k) of the Internal Revenue Code whereby participants may elect to
contribute up to twenty percent (20%) of their compensation subject to statutory
limitations. The plan provides for discretionary matching and profit sharing
contributions by the Company. All employees are eligible to participate in the
plan provided they meet minimum age requirement of eighteen. For the years ended
December 31, 1998, 1999 and 2000, the Company made no matching or profit sharing
contributions.
12. COMMITMENTS AND CONTINGENCIES
The Company leases various office and manufacturing space under
non-cancelable operating leases extending through 2004. The Company also leases
certain office and computer equipment under non-cancelable operating leases.
Future minimum operating lease payments with initial or remaining terms of one
year or more are as follows:
OPERATING
LEASES
---------
Year ended December 31:
2001 $ 513,597
2002 210,151
2003 179,467
2004 12,714
---------
Total minimum lease payments $ 915,929
=========
Rent expense was $545,174, $595,169 and $774,531 for the years ended
December 31, 1998, 1999 and 2000, respectively.
In September 1999, the Company entered into an employment contract with its
newly appointed Chief Executive Officer for an initial term of 18 months that
provides for a minimum annual salary and incentives based generally on the
Company's performance.
46
47
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. RELATED PARTY TRANSACTIONS
During 1998 and 1999, the Company paid consulting fees to its Chairman and
acting Chief Executive Officer of the Company in the amount of $48,000 and
$147,000, respectively until his resignation in September of 1999.
In June and July of 1998, the Company received $1,849,998 in gross proceeds
from the exercise of 616,666 warrants to purchase Company common stock at $3.00
per share from three principal shareholders. As an incentive for early exercise,
shareholders were issued 1,233,332 warrants to purchase Company stock at $4.50
per share. The warrants will expire in February 2002 and have exercise price
adjustment terms identical to the public warrants issued in connection with
Company's initial public offering.
In November 1998, the Company entered into a working capital line of credit
facility for up to $9 million with a partnership controlled by one of its
principal shareholders and now Chairman of the Board of the Company. The
one-year, renewable facility, bears interest at 12% per annum and is secured by
all assets of the Company (See Note 7). During 1999 and 2000, the Company paid
interest of $389,943 and $289,123, respectively to the partnership.
In December 1998 through February 1999, the Company received $9.45 million
in gross proceeds from the sale of 945,000 shares of a newly created Series B
convertible preferred stock at $10 per share. Two principal shareholders of the
Company purchased $4,000,000 each and other existing shareholders purchased the
balance of $1.45 million. The Series B preferred stock is convertible into
common stock of the Company at a fixed price of $3.625 per share, subject to
certain requirements, and carries a dividend of 8% per year payable in cash or
common stock of the Company, at the Company's option.
During 1999, the Company received $2,129,207 proceeds from the exercise of
802,549 stock options by officers and directors of the Company at exercise
prices ranging from $.20 to $4.03 per share.
During February 2000, the Company received $390,000 proceeds from the
exercise of 130,000 private warrants by Mr. Ardinger, Chairman of the Board of
the Company, at an exercise price of $3.00 per share.
14. SUBSEQUENT EVENTS
On February 28, 2001, the Company amended its working capital line of
credit facility with an entity controlled by a principal shareholder and
Chairman of the Board of the Company. The loan agreement was amended to increase
the line credit line commitment from $9,000,000 to $12,000,000, extend the
maturity date to January 31, 2002, or March 15, 2003 in certain circumstances
and expand the asset base for lending to include certain marketable securities
owned by the Company.
To more accurately reflect the Company's expanded business strategies, in
February 2001 the Company made filings to allow it to do business as ViewCast
Corporation.
47
48
VIEWCAST.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------ ------------ ------------ ------------
1999:
Net sales ........................................ $ 2,014,164 $ 2,219,826 $ 1,046,292 $ 1,989,798
Gross profit ..................................... 965,699 1,062,042 367,817 926,145
Net loss ......................................... (2,101,720) (1,724,973) (2,635,820) (2,011,161)
Net loss per share - basic and diluted ........... $ (0.20) $ (0.15) $ (0.21) $ (0.15)
============ ============ ============ ============
2000:
Net sales ........................................ $ 1,936,658 $ 2,360,138 $ 3,492,744 $ 2,649,864
Gross profit ..................................... 1,069,947 1,213,647 1,848,954 1,524,726
Net loss ......................................... (2,070,584) (2,449,920) (2,084,673) (2,283,808)
Net loss per share - basic and diluted ........... $ (0.15) $ (0.17) $ (0.14) $ (0.15)
============ ============ ============ ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements concerning any matter of accounting
principle or financial statement disclosure between the Company and its
independent auditors.
48
49
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to
disclosure in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
See Exhibit index.
b.) Reports on Form 8-K
No reports were filed on Form 8-K during the fourth quarter of 2000.
49
50
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date ViewCast.com, Inc.
March 29, 2001 By: /s/ Laurie L. Latham
----------------------------------------------------
Laurie L. Latham
Chief Financial Officer and Senior Vice President
of Finance and Administration
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date ViewCast.com, Inc.
March 29, 2001 By: /s/ H.T. Ardinger, Jr.
----------------------------------------------------
H.T. Ardinger, Jr.
Director and Chairman of the Board
March 29, 2001 By: /s/ George C. Platt
----------------------------------------------------
George C. Platt
Director, President and Chief Executive Officer
March 29, 2001 By: /s/ Laurie L. Latham
----------------------------------------------------
Laurie L. Latham
Chief Financial Officer and Senior Vice President
of Finance and Administration
March 29, 2001 By: /s/ Joseph W. Autem
----------------------------------------------------
Joseph W. Autem
Director
March 29, 2001 By: /s/ David A. Dean
----------------------------------------------------
David A. Dean
Director
March 29, 2001 By: /s/ David C. Tucker
----------------------------------------------------
David C. Tucker
Director
50
51
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 Agreement and Plan of Merger and Reorganization(1)
3(a) Certificate of Incorporation(1)
3(b) Amendment to Certificate of Incorporation(1)
3(c) Restated By-Laws(3)
3(d) Certificate of Designations of Series B Convertible Preferred Stock(4)
4(a) Form of Common Stock Certificate(1)
4(b) Form of Warrant Certificate(1)
4(c) Form of Warrant Agreement between ViewCast and Continental Stock Transfer & Trust Company(1)
4(d) Form of Representative's Warrant Agreement(1)
4(e) Form of Trust Indenture - $5,000,000 8% Senior Convertible Notes Due 2002(2)
4(f) Form of Lead Managers Warrant Agreement(2)
5(a) Form of Opinion of Thacher Proffit Wood as to the legality of securities being registered.
9(a) Voting Trust Agreement between Robert M. Sterling, Jr. and Thomas E. Brown(1)
9(b) Voting Trust Agreement between Robert P. Bernardi and Richard Bernardi(1)
9(c) Form of Lock-Up Agreement(1)
9(d) Lock-Up Agreement with Robert Sterling Trust(1)
9(e) Lock-Up Agreement with Robert Bernardi Trust(1)
9(f) Lock-Up Agreement with Michael Nissenbaum(1)
10(a) Modified Employment Agreement between ViewCast and Glenn A. Norem(1)
10(b) Modified Consulting Agreement between ViewCast and Sterling Capital Group Inc.(1)
10(c) Form of Indemnification Agreement between ViewCast and Executive Officers and Directors(1)
10(d) 1995 Stock Option Plan(1)
10(e) 1994 Stock Option Plan(1)
10(f) 1993 Viewpoint Stock Plan(1)
l0(g) 1995 Director Option Plan(1)
10(h) Lease Agreement between ViewCast and Metro Squared, L P(1)
51
52
10(i) Employee Stock Purchase Plan(1)
l0(j) Licensing Agreement between ViewCast and Boca Research, Inc.(1)
10(k) Agreement between ViewCast and Unisys(TM)(1)
10(l) Employment Agreement between ViewCast and Philip M. Colquhoun(1)
10(m) Employment Agreement between ViewCast and William S. Leftwich(1)
10(n) Employment Agreement between ViewCast and David T. Stoner(1)
10(o) Employment Agreement between ViewCast and Neal Page(1)
10(p) Employment Agreement between ViewCast and A. David Boomstein(1)
10(r) Lease between ViewCast and Burlingame Home Office, Inc.(1)
10(s) Lease between ViewCast and Family Funds Partnership(1)
10(t) Agreement between ViewCast and Catalyst Financial Corporation(1)
10(u) Promissory Note by ViewCast payable to Robert Rubin dated September 5, 1996.(1)
10(v) Promissory Note by ViewCast payable to M. Douglas Adkins dated November 15, 1996.(1)
10(w) Promissory Note by ViewCast payable to H.T. Ardinger dated November 15, 1996.(1)
10(x) Promissory Note by ViewCast payable to H.T. Ardinger dated January 15, 1997.(1)
10(y) Promissory Note by ViewCast payable to Adkins Family Partnership, Ltd. dated January 15, 1997.(1)
10(z) Lease between ViewCast and the Air Force Association.(2)
10(aa) Lease between ViewCast and Airport Boulevard Partners, LLC.(2)
10(bb) Stock Purchase Agreement between ViewCast and Tadeo Holdings, Inc.(5)
10(cc) Working Capital Line of Credit Loan Agreement between ViewCast and the Ardinger Family Partnership, Ltd.(5)
21 List of Subsidiaries of ViewCast.(1)
23 Consent of Ernst & Young LLP
(1) Incorporated by reference to the Registration Statement on Form SB-2
and all amendments thereto as declared effective on February 4, 1997.
(2) Incorporated by reference to Form 10-KSB/A filed April 15, 1998.
(3) Incorporated by reference to Form 10-QSB filed November 13, 1998
(4) Incorporated by reference to Form 8-K filed March 15, 1999.
(5) Incorporated by reference to Form 10-KSB filed March 26, 1999.
52
53
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
VIEWCAST.COM, INC. AND SUBSIDIARIES
- --------------------------------------------- ------------ ------------------------------ ------------ --------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------- ------------ ------------------------------ ------------ --------------
ADDITIONS
------------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER ACCOUNTS- DEDUCTIONS- BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- --------------------------------------------- ------------ ------------ --------------- ------------ --------------
YEAR ENDED DECEMBER 31, 2000
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts $ 117,000 $ 87,000 $ -- $ 27,000(1) $ 177,000
YEAR ENDED DECEMBER 31, 1999
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts $ 823,000 $ 146,000 $ -- $ 852,000(1) $ 117,000
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts $ 65,000 $ 771,000 $ -- $ 13,000(1) $ 823,000
(1) Uncollectible accounts written off, net of recoveries.
53