U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
[ ] TRANSITION REPORT UNDER 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.
------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 75-2528700
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer Incorporation
Incorporation or Organization) Identification No.)
17300 DALLAS PARKWAY, SUITE 2000, DALLAS, TX 75248
--------------------------------------------------
(Address of principal executive offices)
972/488-7200
------------
(Issuer's Telephone Number)
Check whether the issuer (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]
No [ ]
As of November 10, 2002, 20,822,847 shares of the Registrant's common stock were
outstanding.
VIEWCAST.COM, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 2001 and
September 30, 2002 (Unaudited).....................................................................3
Consolidated Statements of Operations for the Three and Nine Months
ended September 30, 2001 and 2002 (Unaudited)......................................................4
Consolidated Statement of Stockholders' Deficit for the
Nine Months ended September 30, 2002 (Unaudited)...................................................5
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 2001 and 2002 (Unaudited)............................................................6
Notes to Consolidated Financial Statements............................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................20
Item 4. Controls and Procedures.......................................................................20
PART II. OTHER INFORMATION..............................................................................21
SIGNATURES...............................................................................................23
CERTIFICATIONS...........................................................................................24
2
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 851,464 $ 213,651
Available-for-sale securities 2,417,457 --
Accounts receivable, less allowance for doubtful accounts
of $137,000 and $109,000 at December 31, 2001 and
September 30, 2002, respectively 1,100,867 681,534
Inventory, net 2,675,088 1,770,137
Prepaid expenses 150,643 172,956
------------- -------------
Total current assets 7,195,519 2,838,278
Property and equipment, net 1,069,966 589,462
Software development costs, net 397,227 258,826
Deferred charges 162,237 110,090
Deposits and other assets 46,586 113,458
------------- -------------
Total assets $ 8,871,535 $ 3,910,114
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 469,817 $ 641,878
Accrued compensation 345,128 266,367
Deferred revenue 301,027 224,685
Other accrued liabilities 660,481 587,585
Stockholder line of credit 6,347,223 5,211,754
------------- -------------
Total current liabilities 8,123,676 6,932,269
Long-term debt 950,000 950,000
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $.0001 par value:
Authorized shares - 5,000,000
Series B - issued and outstanding shares - 945,000 and 800,000
at December 31, 2001 and September 30, 2002, respectively 95 80
Series C - issued and outstanding shares - 200,000
at December 31, 2001 and September 30, 2002, respectively 20 20
Common stock, $.0001 par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 18,347,869 and 20,792,311
at December 31, 2001 and September 30, 2002, respectively 1,835 2,080
Additional paid-in capital 55,667,260 55,678,731
Unrealized gain on securities reported at fair value
and accumulated other comprehensive income 524,812 --
Accumulated deficit (56,384,257) (59,641,160)
Treasury stock, 261,497 shares at December 31, 2001 and
September 30, 2002, respectively (11,906) (11,906)
------------- -------------
Total stockholders' equity (deficit) (202,141) (3,972,155)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 8,871,535 $ 3,910,114
============= =============
See accompanying notes.
3
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
NET SALES $ 1,804,669 $ 2,094,407 $ 5,980,645 $ 5,659,818
Cost of goods sold (exclusive of depreciation
and amortization shown separately below) 746,787 898,324 2,527,204 2,569,981
------------ ------------ ------------ ------------
GROSS PROFIT 1,057,882 1,196,083 3,453,441 3,089,837
Operating expenses:
Selling, general and administrative 1,660,742 1,125,731 6,133,540 3,705,331
Research and development 1,067,941 706,788 3,327,171 2,361,703
Restructuring charge 89,494 7,070 126,927 119,343
Depreciation and amortization 239,064 202,339 698,755 642,872
------------ ------------ ------------ ------------
Total operating expenses 3,057,241 2,041,928 10,286,393 6,829,249
------------ ------------ ------------ ------------
OPERATING LOSS (1,999,359) (845,845) (6,832,952) (3,739,412)
Other income (expense):
Dividend and interest income 473 75 31,449 1,724
Interest expense (195,262) (185,624) (452,912) (602,790)
Gain on sale of available-for-sale securities -- -- 47,425 1,071,891
Other (2) (442) (108) 11,684
------------ ------------ ------------ ------------
Total other income (expense) (194,791) (185,991) (374,146) 482,509
------------ ------------ ------------ ------------
NET LOSS $ (2,194,150) $ (1,031,836) $ (7,207,098) $ (3,256,903)
============ ============ ============ ============
NET LOSS PER SHARE: BASIC AND DILUTED $ (0.14) $ (0.06) $ (0.47) $ (0.20)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 17,386,469 20,530,814 17,087,083 19,990,013
============ ============ ============ ============
See accompanying notes.
4
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
SERIES B SERIES C
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2001 945,000 $ 95 200,000 $ 20 18,347,869 $ 1,835
Conversion of Series B convertible
preferred stock to common stock (145,000) (15) -- -- 2,416,666 242
Sale of common stock, employee
stock purchase plan -- -- -- -- 27,776 3
Value of options issued for consulting
services -- -- -- -- -- --
Unrealized loss on securities
reported at fair value -- -- -- -- -- --
Reclassification of unrealized gain on
securities reported at fair value to
realized gain upon disposition -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- --
Comprehensive loss
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2002 800,000 $ 80 200,000 $ 20 20,792,311 $ 2,080
============ ============ ============ ============ ============ ============
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS'
CAPITAL INCOME (LOSS) DEFICIT STOCK EQUITY (DEFICIT)
------------ ------------- ------------ ------------ ----------------
BALANCE, DECEMBER 31, 2001 $ 55,667,260 $ 524,812 $(56,384,257) $ (11,906) $ (202,141)
Conversion of Series B convertible
preferred stock to common stock (227) -- -- -- --
Sale of common stock, employee
stock purchase plan 10,975 -- -- -- 10,978
Value of options issued for consulting
services 723 -- -- -- 723
Unrealized loss on securities
reported at fair value -- (136,837) -- -- (136,837)
Reclassification of unrealized gain on
securities reported at fair value to
realized gain upon disposition -- (441,870) -- -- (441,870)
Foreign currency translation adjustment -- 53,895 -- -- 53,895
Net loss -- -- (3,256,903) -- (3,256,903)
------------
Comprehensive loss (3,781,715)
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2002 $ 55,678,731 $ -- $(59,641,160) $ (11,906) $ (3,972,155)
============ ============ ============ ============ ============
See accompanying notes.
5
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2001 2002
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (7,207,098) $ (3,256,903)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of fixed assets 555,942 504,471
Amortization of software development costs 142,813 138,401
Non-cash charges to interest expense 52,148 52,147
Gain on sale of available-for-sale securities (47,425) (1,071,891)
Gain on disposition of fixed assets -- (2,889)
Foreign currency translation adjustment (15,946) 53,895
Consulting services exchanged for options 9,773 723
Changes in operating assets and liabilities:
Accounts receivable 497,218 419,333
Inventory (566,292) 904,951
Prepaid expenses 34,792 (22,313)
Deposits and other assets 25,716 (66,872)
Accounts payable (343,725) 172,061
Accrued compensation (73,564) (78,761)
Deferred revenue (137,329) (76,342)
Other accrued liabilities 28,633 (72,896)
------------ ------------
Net cash used in operating activities (7,044,344) (2,402,885)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities 208,675 2,910,641
Purchase of property and equipment (292,786) (29,380)
Proceeds on sale of property and equipment -- 8,302
Software development costs (91,727) --
------------ ------------
Net cash provided by (used in) investing activities (175,838) 2,889,563
------------ ------------
FINANCING ACTIVITIES:
Net proceeds (repayments) from shareholder line of credit 3,478,396 (1,135,469)
Net proceeds for the exercise of warrants 24,999 --
Net proceeds for the sale of common stock 66,774 10,978
------------ ------------
Net cash provided by (used in) financing activities 3,570,169 (1,124,491)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,650,013) (637,813)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,898,176 851,464
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 248,163 $ 213,651
============ ============
See accompanying notes.
6
VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of ViewCast.com, Inc. and its wholly-owned subsidiaries,
Osprey Technologies, Inc., VideoWare, Inc. and ViewCast Online Solutions, Inc.
(collectively, the Company or ViewCast). All material inter-company accounts and
transactions have been eliminated in consolidation.
The financial statements have been prepared in accordance with accounting
principals generally accepted in the United States of America for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, as amended, filed with the Securities
and Exchange Commission.
The Company utilizes significant capital to design, develop and
commercialize its products and intends to fund its remaining 2002 and 2003
operating activities and sales growth by utilizing cash contributed from
operations and its available working capital line of credit to the extent
possible. The Company anticipates it will require additional capital during late
2002 or earlier 2003 for working capital to support the expansion of sales
channels and market distribution, to develop and introduce new products and
services, to enhance existing product offerings, to address unanticipated
competitive threats or technical problems, to transition adverse economic
conditions and for acquisition transactions. Although the Company has no firm
arrangements with respect to additional financing, it is currently considering
several proposals by potential investors relating to the issuance of convertible
preferred stock or other equity in exchange for a cash investment in the
Company. The Company has retained an investment-banking firm to assist in market
and strategic alternatives, including divestitures and acquisitions. There can
be no assurance that additional financing will be available to ViewCast on
acceptable terms, or at all. Additional equity financing may involve substantial
dilution to our then existing stockholders. In October 2002, to enhance
financial performance and increase revenue, the Company acquired the assets and
operations of Delta Computec Inc., a provider of professional information
technology and customized network support services to Fortune 500 and Fortune
1000 corporations, mid-sized companies, hospitals, health care facilities and
financial institutions primarily in the Northeast (See Note 9). The Company
intends to actively pursue other such strategic merger and acquisition
activities to the extent possible. In the event we are unable to raise
additional capital or execute other alternatives, we may be required to sell
segments of the business, or substantially reduce or curtail our activities.
Such actions could result in charges that could be material to the ViewCast's
results of operations or financial position.
7
VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. INVENTORY
Inventory consists of the following:
DECEMBER 31, SEPTEMBER 30,
2002 2002
------------ -------------
(UNAUDITED)
Purchased materials $ 749,182 $ 766,522
Finished goods 2,395,473 1,619,647
------------ ------------
Total 3,144,655 2,386,169
Less reserves for obsolete, slow
moving and damaged inventory (469,567) (616,032)
------------ ------------
Net inventory $ 2,675,088 $ 1,770,137
============ ============
3. SHORT-TERM DEBT
Effective May 6, 2002, the Company sold its available-for-sale securities
comprised exclusively of 1,140,310 shares of DynTek, Inc. ("DYTK") common stock
to an entity controlled by a principal shareholder and the Chairman of the Board
of the Company. The price per share of DYTK stock of $2.553 was determined by
negotiations between the parties and represented a premium to the trading value
of DYTK shares on May 6, 2002 of $2.00 per share. The sale agreement also
provides that the Company will share in 50% of any gains realized on the stock
above $4.50 per share through February 14, 2003 net of expenses. Proceeds from
the sale of $2,910,641 were used to make a principal reduction in the Company's
outstanding line-of-credit note balance with the same entity. During the nine
months ended September 30, 2002, ViewCast borrowed $1,775,172 under the terms of
the line of credit financing arrangement and reduced the principal by
$2,910,641, resulting in a net principal note reduction of $1,135,469 during the
nine-month period.
In February 2001, the Company amended the facility to increase the credit
line commitment from $9.0 million to $12.0 million, extend the maturity date of
the agreement to March 15, 2003 and expand the asset base for lending to include
certain marketable securities owned by the Company. The line of credit facility
bears interest at 12% per annum and is secured by all assets of the Company. The
availability of funds under the facility is subject to certain borrowing base
limitations based principally on qualifying accounts receivable and inventory
owned by the Company. At September 30, 2002, the outstanding balance of the note
was $5.2 million. The noteholder has agreed to waive through December 31, 2002
the repayment of any outstanding financing that may be in excess of the monthly
borrowing base. At September 30, 2002, the Company exceeded its borrowing base
on the note by $3.3 million.
4. SHAREHOLDERS' EQUITY
Pursuant to Section 8(b) of the Certificate of Designations of Series B
Convertible Preferred Stock, the Company was required to temporarily lower the
Series B Conversion Price from $3.625 per share to $0.60 per share for a period
of ninety (90) days in conjunction with the issuance of Series C Convertible
Preferred Stock in November of 2001. Notice was given to Preferred B
Stockholders on December 7, 2001 and the temporary Conversion Price Reduction
expired at 5:00 p.m. on March 7, 2002. In March 2002, holders of $1,450,000 of
Series B Convertible Preferred Stock converted their Series B shares into
2,416,666 shares of common stock at $0.60 per share.
8
VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
In January 2002, the Company extended the expiration date of its
outstanding public and public equivalent common stock purchase warrants to
February 3, 2005 from February 3, 2002. Additionally, effective March 1, 2002,
the Company decreased the effective per share exercise price of such warrants
from $4.19 per share of common stock to $1.00 per share of common stock, which
was above the market price at that date. The warrants are redeemable by the
Company under certain conditions. As of September 30, 2002 there were 3,799,680
public and public equivalent warrants outstanding. The reduction of the exercise
price and the extension of the expiration date also apply to the issuance of up
to 122,500 public warrants upon exercise of certain representative warrants.
During the six-month offering period ended March 31, 2002, the Company
received gross proceeds of $10,978 for the sale of 27,776 shares of common stock
to employees pursuant to the Company's Employee Stock Purchase Plan ("ESPP").
The shares were issued in April 2002 and the employee purchase price for the
offering period was $0.3925 per share.
At September 30, 2002, the Company had a consolidated stockholders' deficit
of $3,972,155, and in accordance with Delaware law, was precluded from paying
dividends on its outstanding Series B and Series C convertible preferred stock.
As a result, no preferred stock dividends were declared or paid during the nine
months ended September 30, 2002. The Series B and Series C preferred stock
issues carry cumulative dividends of 8% and 9% per year, respectively, and are
generally payable semi-annually in arrears in cash or common stock of the
Company, at the Company's option. Cumulative dividends on preferred shares in
arrears at September 30, 2002 are approximately: Series B-$319,123, Series
C-$86,795. Holders of Series B and Series C preferred stock have no voting
rights except as required by law.
5. NET LOSS PER SHARE
Basic earnings per share is calculated by dividing net income/loss
applicable to common stockholders by the weighted average number of common
shares outstanding for the period. Since the Company has reported net losses for
the periods presented, the computation of diluted loss per share excludes the
effects of outstanding options, warrants, convertible debt and convertible
preferred stock since their effect is anti-dilutive. The average number of
common equivalent shares excluded from the calculations of diluted net loss per
share was 12,264,353 and 13,903,398 for the three months ended September 30,
2001 and 2002, respectively, and 11,698,046 and 14,595,297 for the nine months
ended September 30, 2001 and 2002, respectively.
Loss per share calculations for the three months and nine months ended
September 30, 2001 and 2002 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Net loss $ (2,194,150) $ (1,031,836) $ (7,207,098) $ (3,256,903)
Preferred dividends and
accretion of issue costs (254,381) (142,857) (756,930) (672,059)
------------ ------------ ------------ ------------
Net loss applicable to
common shareholders $ (2,448,531) $ (1,174,693) $ (7,964,028) $ (3,928,962)
============ ============ ============ ============
Weighted average number
of common shares outstanding 17,386,469 20,530,814 17,087,083 19,990,013
============ ============ ============ ============
Loss per share as reported in the
financial statements: basic and diluted $ (0.14) $ (0.06) $ (0.47) $ (0.20)
============ ============ ============ ============
9
VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. COMPREHENSIVE INCOME
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. 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.
Available-for-sale securities are comprised exclusively of shares of
DynTek, Inc. ("DYTK"), formerly TekInsight.com, Inc., common stock acquired
through a strategic business alliance in September of 1998. Effective May 6,
2002, the Company sold all its available-for-sale securities (1,140,310 DYTK
common shares) to an entity controlled by a principal shareholder and the
Chairman of the Board of the Company. The proceeds of $2,910,641 were used to
make a principal reduction in the line-of-credit note balance with the same
entity. The selling price per share of DYTK stock of $2.553 was determined by
negotiations between the parties and represented a premium to the fair market
trading value of DYTK shares on May 6, 2002 of $2.00 per share (See Note 3).
Other income during the nine months ended September 30, 2002 includes a realized
gain on the exchange transaction of $1,071,891. The quoted market price of TEKS
shares at December 31, 2001 was $2.12.
Components of other comprehensive income (loss) for the three and nine
months ended September 30, 2001 and 2002 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Net Loss $ (2,194,150) $ (1,031,836) $ (7,207,098) $ (3,256,903)
Unrealized gain (loss) on securities
reported at fair value (729,798) -- 1,014,506 (136,837)
Reclassification of unrealized gain on
securities reported at fair value to
realized gain upon disposition -- -- -- (441,870)
Foreign currency translation
adjustment 3,452 58,024 (15,946) 53,895
------------ ------------ ------------ ------------
Comprehensive loss $ (2,920,496) $ (973,812) $ (6,208,538) $ (3,781,715)
============ ============ ============ ============
7. RESTRUCTURING CHARGE
During the quarter and nine months ended September 30, 2002, the Company
incurred restructuring costs of $7,070 and $119,343, respectively, in accordance
with a Board of Director approved plan of restructuring to decrease the
Company's workforce and associated operating expenses. Charges during 2002 are
comprised exclusively of employee severance for personnel reductions made in the
Company's sales, marketing, development and manufacturing departments. At
September 30, 2002, the Company had no accrued restructuring charges.
10
VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting and Standards Board issued
Statements of Financial Accounting Standards No. 146 (SFAS 146), "Accounting for
Costs Associated with Exit or Disposal Activities." The standard requires
companies to recognize costs associated with exit (including restructuring) or
disposal activities at fair value when the related liability is incurred rather
than at the date of a commitment to an exit or disposal plan under current
practice. Costs covered by the standard include certain contract termination
costs, certain employee termination benefits and other costs to consolidate or
close facilities and relocate employees that are associated with an exit
activity or disposal of long-lived assets. The new requirements are effective
prospectively for exit or disposal activities initiated after December 31, 2002.
The adoption of SFAS 146 is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
9. SUBSEQUENT EVENTS
On October 11, 2002, ViewCast completed the acquisition of the assets and
operations of Delta Computec Inc. pursuant to an Asset Purchase Agreement dated
as of May 31, 2002 (the "APA") between Delta Computec Inc. (the "Seller"), a New
York corporation, and its parent and sole shareholder, NQL Inc., a Delaware
corporation. The acquisition assets and operations were assigned to ViewCast's
wholly owned subsidiary named Delta Computec Inc., a Delaware company ("DCi"),
and known as MMAC Communications Corp. at the time of the acquisition.
The combined maximum total consideration to be paid by ViewCast pursuant to
the APA is equal to $2.5 million. ViewCast purchased all of the Seller's assets,
including all of its operating assets, property, contracts and customer lists
for a combination of up to $1 million in cash, issuance of up to 150,000 shares
of Series D Redeemable Convertible Preferred Stock (the "Series D Preferred
Stock"), and the assumption of certain liabilities as outlined in the terms of
the APA established based on arms-length negotiations. The assets acquired
include computers and related equipment used in providing professional
information technology and customized network support services.
On the closing date, ViewCast paid $500,000 in cash and issued 95,500
shares of Series D Preferred Stock. The closing cash payment was funded from an
advance from one of its principal stockholders and Chairman of the Board of
ViewCast, H.T. Ardinger, Jr. Within twenty (20) days of the closing date,
ViewCast has agreed to issue an additional 54,500 shares of Series D Preferred
Stock, subject to adjustments as described in the APA. Two additional cash
payments of up to $250,000 each are to be paid to Seller in the future. The
first payment is due approximately six months and the second payment is due
approximately 12 months after closing, subject to adjustments as described in
the APA, including adjustments related to contract revenue levels achieved by
DCi over six months and twelve months subsequent to the acquisition date.
Each share of Series D Preferred Stock has a stated value of $10.00 with a
conversion option to common stock at $1.50 per share of ViewCast common stock.
The Series D Preferred Stock provides redemption rights for the holders and
ViewCast and other rights as described in the Certificate of Designation of the
Series D Preferred Stock. The Series D Preferred Stock is redeemable at its
stated value at the holders' option upon written notice at any time after
October 11, 2004. The Series D Preferred Stock is redeemable at its stated value
at ViewCast's option upon written notice at any time after October 11, 2005 or
prior to that date if the ViewCast common stock has a market value of $3.75 per
share for ten consecutive trading days. In conjunction with the issuance of the
Series D Preferred Stock, ViewCast and Seller entered into a Registration Rights
Agreement.
On October 11, 2002, part of the acquisition transaction included the
payoff of the Seller's asset based revolving credit facility with Keltic
Financial Partners, LP ("Keltic") by establishing a new asset based revolving
credit facility for a period of one year with Keltic. DCi will utilize the $1.5
million Keltic credit
11
VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
facility for working capital support. The loan interest rate is, at the option
of Keltic, the greater of: (a) the prime rate published in the "Money Rates"
column of The Wall Street Journal from time to time or, in the event that The
Wall Street Journal is not available at any time, such rate published in another
nationally recognized publication as determined by Keltic, plus two hundred
fifty (250) basis points per annum, or (b) seven and one-quarter percent
(7.25%). In addition, ViewCast entered into a Guaranty of Payment and a
Performance and Subordination Agreement with Keltic relating to this facility
plus agreed to provide $350,000 of working capital to DCi within ninety days of
the closing date. The $350,000 working capital commitment was supported by the
issuance to DCi of a stand-by letter of credit from one of ViewCast's principal
stockholders and Chairman of the Board of ViewCast, H.T. Ardinger, Jr.
ViewCast and the Seller had prior to the acquisition entered into a
Reseller Agreement to offer ViewCast products and ancillary services.
12
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
ViewCast.com, Inc., doing business as ViewCast Corporation, ("ViewCast")
develops and markets a variety of products and services that enable networked
video communications. We are a global provider of enterprise-wide, video
communication products for both real-time and on-demand applications. ViewCast
maximizes the value of video through its products and services: Osprey(R) Video
provides the streaming media industry's de facto standard capture cards,
Niagara(TM) provides integrated hardware and software applications for encoding,
streaming and managing rich media content, Viewpoint VBX(TM) Systems deliver a
wide array of video distribution, gatewaying and conferencing solutions for both
digital and analog enterprise video communication, and ViewCast Online 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 video software applications, ViewCast provides
the complete range of video communications solutions.
Our customers acquire ViewCast's video products and services to communicate
over a variety of networks for security, education, training, marketing and
sales, customer service, broadcasting, videoconferencing, financial trading, and
to reduce travel and other costs while increasing productivity. 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 networks, deliver video from web sites, provide interactive video
communication (video conferencing), and distribute video within a network. We
operate in one business segment and market and support our products and services
either directly or through arrangements with leading OEMs, system integrators,
resellers and application developers worldwide.
Some of the statements in this Report on Form 10-Q under "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 to be materially
different from any future 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, the ability
to integrate the assets and operations of DCi into the operations of ViewCast
and other risks detailed in the Annual Report on Form 10-K for the year ended
December 31, 2001, as amended, Form 10-Q for the quarters ended March 31, 2002
and June 30, 2002, 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
13
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
under no duty to update any of the forward-looking statements after the date of
this report to conform such statements to actual results.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 VS. 2001.
NET SALES. Net sales for the three months ended September 30, 2002 increased
16.1% to $2,094,407 from $1,804,669 reported during the same period last year
primarily due to increased sales of Osprey products and Niagara systems, offset
in part by reduced sales of VBX systems. Net sales for the nine months ended
September 30, 2002 declined of 5.4% to $5,659,818 from $5,980,645 reported in
2001, reflecting continued sluggish economic conditions and reduced levels of
technology spending for all the Company's products except Niagara systems.
OSPREY PRODUCT SALES. During the quarter ended September 30, 2002, sales of
Osprey codecs and video capture cards increased 31.4% over 2001 levels and
represented 86.2% of current period revenues. On a regional basis, sales in
North America and Pacific Rim increased 68.0% and 14.8%, respectively, while
sales in Europe declined 26.7% compared to 2001 levels. Current quarter growth
in the North America can be attributed in large part to sales by new U.S.
customers utilizing Osprey products for security and surveillance applications
and to increased e-commerce sales activity from ViewCast's website.
Osprey product sales for the nine months ended September 30, 2002 decreased
7.2% to $4,519,031 from the $4,871,308 reported in 2001 and represented 79.8% of
total current period revenues compared to 81.5% in 2001. During the nine months
ended September 30, 2002, approximately 70% of Osprey sales were generated in
North America and Europe, while approximately 25% of sales were generated in the
Pacific Rim. Although current quarter revenues and unit sales trended upward,
North American and European sales are down year-to-date 15.5% and 22.9%,
respectively over 2001 levels, reflecting the state of current economic
conditions. On the other hand, demand for Osprey products in the Pacific Rim has
steadily increased in the current year reflecting 16.4% growth over 2001 levels.
On a product basis, year-to-date 2002 unit sales of all Osprey product families
decreased, compared to last year, with the exception of the Osprey 210/220
series of products, which have increased 16.8%, over 2001 levels.
In January 2002, ViewCast opened its new e-commerce site featuring the
Osprey streaming/capture cards as well as Osprey SimulStream and Niagara SCX
software products. In addition to the new e-commerce offerings, the site offers
a full range of online order processing and tracking services, technical support
content and easy access to product drivers and upgrades. We believe the
e-commerce site will continue to serve as a complement to our distribution
strategy and make it easier for our customers to purchase our products. The
utilization of e-commerce allows single unit purchases to be made quickly and
easily, thereby providing our resellers more time to deliver the personalized
support necessary for volume purchases. During the quarter and nine months ended
September 30, 2002, e-commerce sales totaled $102,961 and $271,316, respectively
and represented 5.6% and 5.9% of current period revenues, respectively.
In April 2002, ViewCast introduced its new Osprey-540 professional digital
and analog capture card designed specifically for streaming media applications,
and to date has represented approximately 7.7% of Osprey product sales. Building
on the established Osprey-500 series, the Osprey-540 further expands streaming
content creation into the professional media market and offers an array of
inputs, outputs and advanced features that allow streaming to seamlessly
integrate with professional media equipment. The Osprey-540 directly addresses
the needs of professional broadcast facilities, Fortune 1000 enterprises,
entertainment studios and post-production houses. With new product enhancements,
the addition of our e-commerce strategy, and as the economy recovers, we expect
steady to increased subsystem product sales during the fourth quarter of 2002
and first quarter of 2003.
14
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
VIEWPOINT VBX(TM) VIDEO DISTRIBUTION SYSTEM AND NIAGARA(R)
STREAMING/ENCODING SYSTEMS. During the quarter and nine months ended September
30, 2002, combined systems sales totaled $209,496 and $958,513 respectively, and
represented 10.0% and 16.9% of 2002 revenues, respectively. Total system sales
during the three and nine months ended September 30, 2001 were $346,388 and
$853,799, respectively and represented 20.2% and 14.3% of total 2001 revenues,
respectively. Sales of ViewCast's Niagara systems during the nine months ended
September 30, 2002, increased 97.2%, over 2001 levels, reflecting increased
brand awareness of our streaming and encoding servers while Viewpoint VBX
systems sales declined 10.6% over the same period. VBX systems sales have been
impacted by the economic slowdown and postponement of information technology
spending.
In September 2001, ViewCast announced the sales of VBX video distribution
and conferencing systems to HSBC Bank USA through its reseller Delta Computer
Group for video distribution capabilities in HSBC's New York and New Jersey
locations, as well as connectivity to VBX systems in Europe and Hong Kong. In
December 2001, ViewCast sold VBX equipment to Siemens Information and
Communications Group who was chosen to supply a division of The Standard Bank of
South Africa with a fully integrated trading solution incorporating their HiPath
Product suite. VBX System revenues from expansion and follow-on business with
regard its financial services opportunities accounted for $396,000 of revenues
during the nine months ended September 30, 2002 and we expect additional
expansion of these opportunities. We continue to note increasing levels of
interest and activity in both of our system product offerings and are optimistic
that such activity will result in increased demand.
In October 2002, ViewCast acquired the assets and operations of DCi, a
provider of professional information technology and customized network support
services to Fortune 500 and Fortune 1000 corporations, mid-sized companies,
hospitals, health care facilities and financial institutions primarily in the
Northeast. As a reseller for ViewCast's systems products, DCi should contribute
to improving revenues by leveraging their customer base to resell our system
products, by bundling services with hardware and software sales and by the
addition of complementary product offerings. Additionally, DCi will provide
expanded sales channels, enhanced customer support through real-time IT
integration and access to key clients in their vertical markets.
OTHER REVENUES. Other revenues consisting of software maintenance,
training, engineering consulting fees and professional services for the three
and nine months ended September 30, 2002 amounted to $79,408 and $182,274,
respectively and represented 3.8% and 3.2% of current period revenues,
respectively. With the exception of $25,000 of engineering design service
revenue recorded during the current quarter, maintenance, installation and
support services are trending lower in 2002, compared to 2001, in relation to
reduced revenues for the period.
COST OF GOODS SOLD/GROSS MARGINS. Cost of goods as a percentage of sales
for the quarter ended September 30, 2002 was 42.9% compared to 41.4% during the
third quarter of last year and gross profit margins for the corresponding
periods were 57.1% and 58.6%, respectively. The increase in cost of goods sold
and reduced gross margins can be attributed to the additional reserves for
obsolete and slow moving inventory and a lower of cost or market adjustment for
new contract pricing on the Osprey-210 series of products during the quarter.
Cost of goods as a percentage of sales for the nine months ended September
30, 2002 was 45.4% compared to 42.3% during the same period a year ago while
gross profit margins for the corresponding periods were 54.6% and 57.7%,
respectively. The reduced gross margin during the nine months ended September
30, 2002 is attributed to additional inventory reserves and lower cost of market
adjustments (described above), and to additional labor and component charges to
cost of goods sold during January and February of 2002 to implement engineering
changes to optimize inventory mix and to meet demand for certain of its
subsystem products. We anticipate that total consolidated gross margins as a
percentage of total revenues will decline in future periods due to the
acquisition and consolidation of the operations of DCi. Excluding DCi, however,
we expect margins for our Osprey products, Niagara systems and VBX
15
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Systems to remain in the 50% - 56% range during the balance of 2002. Margins
will be affected quarter to quarter by promotional activities, price
adjustments, cost of materials, inventory obsolescence, the introduction of new
products and the relative sales mix between products and services in any one
reporting period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses for the quarter and nine months ended September 30, 2002
were $1,125,731 and $3,705,331, respectively, a decrease of 32.2% and 39.6% from
prior year periods. The decrease reflects workforce reductions and
reorganization efforts, which began in May 2001 through July 2002 to trim
operating expenses in all product groups. During the first nine months of 2002,
sales and sales support expenses decreased 55.1% over last year while finance
and administrative, customer support and marketing expenses decreased 19.4%,
24.1%, and 42.5%, respectively compared to a year ago.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for
three and nine months ended September 30, 2002 totaled $706,788 and $2,361,703,
respectively, a decrease of 33.8% and 29.0% over prior year periods reflecting a
decrease in personnel due to restructuring. In addition, ViewCast incurred
significant prototype development and certification expenses associated with new
Osprey product offerings during the nine months ended September 30, 2001 with
little comparable expense in 2002.
RESTRUCTURING. During the quarter and nine months ended September 30, 2002,
ViewCast incurred restructuring costs of $7,070 and $119,343, respectively, in
accordance with a Board of Director approved plan of restructuring to decrease
its workforce and associated operating expenses. Charges during 2002 are
comprised exclusively of employee severance for personnel reductions made in
ViewCast's sales, marketing, development and manufacturing departments. At
September 30, 2002, the Company had no accrued restructuring charges.
OTHER INCOME (EXPENSE). Total other income (expense) for quarter and nine
months ended September 30, 2002 totaled $(185,991) and $482,509, respectively.
The year-to-date period includes a $1,071,891 gain on exchange of
available-sale-securities for principal reduction in line of credit financing
arrangement, which occurred on May 6, 2002 (See Part 1. Item 1. Financial
Statements, Note 3 and Note 6). Interest expense for the three and nine months
ended September 30, 2002 was $185,624 and $602,790, respectively, representing
interest on ViewCast's line-of-credit financing as well as interest on
ViewCast's long-term debt and amortization of related issue costs. Interest
expense increased 33.1% over 2001 levels largely due to the increased average
balance of its line-of-credit during 2002. Additionally, interest income in the
current periods declined over 2001 levels reflecting reduced earnings on lower
cash and cash equivalents balances compared to 2001.
NET LOSS. Net loss for the three and nine months ended September 30, 2002
was $1,031,836 and $3,256,903, respectively, a 53.0% and 54.8% improvement over
the $2,194,150 and $7,207,098 losses reported in the comparable periods in 2001
due to significantly reduced operating expenses resulting from ViewCast's
restructuring efforts and a $1,071,891 one-time gain on disposition of
available-for-sale securities. These efforts were offset in part by increased
interest expense, reduced sales year-to-date and lower gross margins over 2001
levels.
LIQUIDITY AND CAPITAL RESOURCES
ViewCast's primary sources of funds for conducting its business activities
are derived from sales of its products and from sales of its debt and equity
securities. ViewCast requires working capital primarily to fund operating
losses, increases in inventories and accounts receivable associated with
expected sales growth, development of its products, debt service and for capital
expenditures.
Net cash used in operating activities for the nine months ended September
30, 2002 totaled $2,402,885 due principally to the reported net loss of
$3,256,903 and adjustments for non-cash operating gains and
16
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
expenses of $325,143. These uses were offset by net changes in operating assets
and liabilities of $1,179,161, principally due to increased trade receivable
collections and utilization of inventory on-hand.
Cash generated from investing activities during the nine months ended
September 30, 2002 totaled $2,889,563. Proceeds of $2,910,641 were generated
from the sale of securities, $8,302 proceeds were generated from the disposition
of fixed assets and $23,749 was utilized to purchase fixed assets.
During the nine months ended September 30, 2002, ViewCast's financing
activities utilized cash of $1,070,596 principally due the net repayment of
$1,135,469 of short-term borrowings under the terms of its asset-based lending
line of credit offset in part by proceeds of $10,978 received from the sale of
common stock under the terms of ViewCast's Employee Stock Purchase Plan.
In October 1998, ViewCast entered into a working capital line of credit
financing arrangement with an entity controlled by one of its principal
stockholders, who is currently Chairman of the Board. In February 2001, ViewCast
amended the facility to increase the credit line commitment from $9.0 million to
$12.0 million, extend the maturity date of the agreement to March 15, 2003, and
expand the asset base for lending to include DYTK shares owned by ViewCast. The
availability of funds under this facility is subject to certain borrowing base
limitations based principally on outstanding accounts receivable and inventory
since all DYTK shares were exchanged for reduction in note principal on May 6,
2002. At September 30, 2002, ViewCast had exceeded its borrowing base by $3.3
million and had utilized $5.2 million of the line-of-credit facility. The
noteholder has agreed to waive through December 31, 2002 the repayment of any
outstanding financing that may be in excess of the borrowing base from time to
time. The facility will continue to be utilized for working capital by ViewCast
to the extent possible depending on future levels of accounts receivable and
inventory.
Effective May 6, 2002, ViewCast sold all its available-for-sale securities
comprised exclusively of 1,140,310 shares of DYTK common stock for a $2,910,641.
All proceeds were used to make a principal reduction in its line-of-credit note
balance. The price per share of DYTK stock of $2.553 was determined by
negotiations between the parties and represented a premium to the fair market
trading value of DYTK shares on May 6, 2002 of $2.00 per share. The sale
agreement also provides that ViewCast will share in 50% of any gains realized on
the stock above $4.50 per share through February 14, 2003 net of expenses. The
facility will continue to be utilized for working capital by ViewCast to the
extent possible depending on future levels of accounts receivable and inventory.
During the nine months ended September 30, 2002, ViewCast borrowed $1.8 million
under the terms of the line of credit financing arrangement and reduced the
principal by $2.9 million, resulting in a net principal note reduction of $1.1
million during 2002.
In January 2002, ViewCast extended the expiration date of its outstanding
public and public equivalent common stock purchase warrants to February 3, 2005
from February 3, 2002. Additionally, effective March 1, 2002, ViewCast decreased
the effective exercise price per share of common stock of the warrants from
$4.19 to $1.00. The warrants are redeemable by ViewCast under certain
conditions. As of September 30, 2002, there were 3,799,680 public and public
equivalent warrants outstanding. The exercise price reduction and extension of
the expiration date also applies to the issuance of up to 122,500 public
warrants upon exercise of certain representative warrants.
Pursuant to Section 8(b) of the Certificate of Designations of Series B
Convertible Preferred Stock, ViewCast was required to temporarily lower the
Series B conversion price from $3.625 per share to $0.60 per share for a period
of ninety (90) days in conjunction with the issuance of Series C Convertible
Preferred Stock in November 2001. In March 2002, holders of $1,450,000 of Series
B Convertible Preferred Stock converted their Series B shares into 2,416,666
shares of common stock at $0.60 per share.
At September 30, 2002, ViewCast had a consolidated stockholders' deficit of
$2,972,155, and in accordance with Delaware law, was precluded from paying
dividends on its outstanding Series B and Series C convertible preferred stock.
As a result, no preferred stock dividends were declared or paid during the nine
months ended September 30, 2002. The Series B and Series C preferred stock
issues carry
17
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
cumulative dividends of 8% and 9% per year, respectively, and are generally
payable semi-annually in arrears in cash or common stock of ViewCast, at
ViewCast's option. Cumulative dividends in arrears on preferred shares are
approximately: Series B-$319,123, Series C-$86,795. Holders of Series B and
Series C preferred stock have no voting rights except as required by law.
On October 11, 2002, ViewCast completed the acquisition of the assets and
operations of Delta Computec Inc. pursuant to an Asset Purchase Agreement dated
as of May 31, 2002 (the "APA") between Delta Computec Inc. (the "Seller"), a New
York corporation, and its parent and sole shareholder, NQL Inc., a Delaware
corporation. The acquisition assets and operations were assigned to ViewCast's
wholly owned subsidiary named Delta Computec Inc., a Delaware company ("DCi"),
and known as MMAC Communications Corp. at the time of the acquisition.
DCi is a provider of professional information technology and customized
network support services to Fortune 500 and Fortune 1000 corporations, mid-sized
companies, hospitals, health care facilities and financial institutions
primarily in the Northeast. Management believes that this transaction should
enhance ViewCast's ability to move to profitability and to provide its customers
with innovative products and support. Management believes that DCi should not
only increase ViewCast's revenue through its ongoing operations, it should also
increase current systems revenue by enabling ViewCast to bundle services with
hardware and software. Additionally, DCi should provide expanded sales channels,
enhanced customer support through real-time IT integration and access to key
clients in their vertical markets.
The combined maximum total consideration to be paid by ViewCast pursuant to
the APA is equal to $2.5 million. ViewCast purchased all of the Seller's assets,
including all of its operating assets, property, contracts and customer lists
for a combination of up to $1 million in cash, issuance of up to 150,000 shares
of Series D Redeemable Convertible Preferred Stock (the "Series D Preferred
Stock"), and the assumption of certain liabilities as outlined in the terms of
the APA established based on arms-length negotiations. The assets acquired
include computers and related equipment used in providing professional
information technology and customized network support services.
On the closing date, ViewCast paid $500,000 in cash and issued 95,500
shares of Series D Preferred Stock. The closing cash payment was funded from an
advance from one of its principal stockholders and Chairman of the Board of
ViewCast, H.T. Ardinger, Jr. Within twenty (20) days of the closing date,
ViewCast has agreed to issue an additional 54,500 shares of Series D Preferred
Stock, subject to adjustments as described in the APA. Two additional cash
payments of up to $250,000 each are to be paid to Seller in the future. The
first payment is due approximately six months and the second payment is due
approximately 12 months after closing, subject to adjustments as described in
the APA, including adjustments related to contract revenue levels achieved by
DCi over six months and twelve months subsequent to the acquisition date.
Each share of Series D Preferred Stock has a stated value of $10.00 with a
conversion option to common stock at $1.50 per share of ViewCast common stock.
The Series D Preferred Stock provides redemption rights for the holders and
ViewCast and other rights as described in the Certificate of Designation of the
Series D Preferred Stock. The Series D Preferred Stock is redeemable at its
stated value at the holders' option upon written notice at any time after
October 11, 2004. The Series D Preferred Stock is redeemable at its stated value
at ViewCast's option upon written notice at any time after October 11, 2005 or
prior to that date if the ViewCast common stock has a market value of $3.75 per
share for ten consecutive trading days. In conjunction with the issuance of the
Series D Preferred Stock, ViewCast and Seller entered into a Registration Rights
Agreement.
On October 11, 2002, part of the acquisition transaction included the
payoff of the Seller's asset based revolving credit facility with Keltic
Financial Partners, LP ("Keltic") by establishing a new asset based revolving
credit facility for a period of one year with Keltic. DCi will utilize the $1.5
million Keltic credit facility for working capital support. The loan interest
rate is, at the option of Keltic, the greater of: (a) the prime rate published
in the "Money Rates" column of The Wall Street Journal from time to time or, in
the
18
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
event that The Wall Street Journal is not available at any time, such rate
published in another nationally recognized publication as determined by Keltic,
plus two hundred fifty (250) basis points per annum, or (b) seven and
one-quarter percent (7.25%). In addition, ViewCast entered into a Guaranty of
Payment and a Performance and Subordination Agreement with Keltic relating to
this facility plus agreed to provide $350,000 of working capital to DCi within
ninety days of the closing date. The $350,000 working capital commitment was
supported by the issuance to DCi of a stand-by letter of credit from one of
ViewCast's principal stockholders and Chairman of the Board of ViewCast, H.T.
Ardinger, Jr.
ViewCast and the Seller had prior to the acquisition entered into a
Reseller Agreement to offer ViewCast products and ancillary services.
At September 30, 2002, ViewCast had a working capital deficit of $4,093,991
and cash and cash equivalents of $213,651. ViewCast has experienced an overall
sales decrease of 5.4% during the nine months ended September 30, 2002 compared
to 2001 levels and, while wary of current economic conditions, anticipates that
revenues will increase significantly during fourth quarter of 2002 and 2003 with
the addition of DCi operations. ViewCast plans to improve its working capital
position by increasing sales and lowering operating expenses, by further
acquisitions and/or divestitures of its business segments, by exercise of
warrants, as necessary, and by additional equity financing. ViewCast also
anticipates that losses will continue for the balance of 2002 at a lower level
than 2001, and until such time as total profit margins from the sales of its
products and services exceeds its total development, selling, administrative and
financing costs. ViewCast will continue to monitor and restructure its workforce
and decrease operating expenses. During May 2001 through July 2002, ViewCast has
reorganized its operations, reduced its workforce by 45 individuals and trimmed
other related operating expenses. As a direct result of these measures, ViewCast
has decreased selling, general and administrative expenses by over $2.4 million,
or 39.6%, and development expenses by $965,468, or 29.0%, during nine months
ended September 30, 2002 compared to the same period in 2001. While overall
sales have declined, net loss for the nine months ended September 30, 2002
improved 39.9% over 2001 levels (excluding the effects of the $1,071,891 gain on
sale of securities). ViewCast will remain proactive in managing its operating
expenses.
ViewCast utilizes significant capital to design, develop and commercialize
its products and intends to fund its remaining 2002 and 2003 operating
activities and sales growth by utilizing cash contributed from operations and
its available working capital line of credit to the extent possible. ViewCast
anticipates it will require additional capital during late 2002 or earlier 2003
for working capital to support the expansion of sales channels and market
distribution, to develop and introduce new products and services, to enhance
existing product offerings, to address unanticipated competitive threats or
technical problems, to transition adverse economic conditions, to support newly
acquired DCi operations and for completion of acquisition transactions. Although
ViewCast has no firm arrangements with respect to additional financing, it is
currently considering several proposals by potential investors relating to the
issuance of convertible preferred stock or other equity in exchange for a cash
investment in ViewCast. ViewCast has retained an investment-banking firm to
assist in market and strategic alternatives, including divestitures and
acquisitions. There can be no assurance that additional financing will be
available to ViewCast on acceptable terms, or at all. Additional equity
financing may involve substantial dilution to our then existing stockholders. In
October 2002, to enhance financial performance and increase revenue, the Company
acquired the assets and operations of DCi. The Company intends to actively
pursue other such strategic merger and acquisition activities to the extent
possible. In the event we are unable to raise additional capital or execute
other alternatives, we may be required to sell segments of the business, or
substantially reduce or curtail our activities. Such actions could result in
charges that could be material to the ViewCast's results of operations or
financial position.
At September 30, 2002, ViewCast had no material commitments for capital
expenditures.
19
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In management's opinion, there has been no material change in market risk
since disclosed in Item 7A of ViewCast's Annual Report on Form 10-K, as amended,
for the year ended December 31, 2001
ITEM 4. CONTROLS AND PROCEDURES
Within ninety (90) days prior to the date of this report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the President and Chief Executive Officer ("CEO"), and the
Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and CFO, concluded that
the Company's disclosure controls and procedures were effective in bringing to
their attention material information relating to the Company required to be
included in the Company's periodic SEC filings. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the most recent evaluation
conducted by the CEO and CFO.
20
VIEWCAST.COM, INC. AND SUBSIDIARIES
OTHER INFORMATION
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
(Not Applicable)
Item 2. Changes in Securities
(Not Applicable)
Item 3. Defaults Upon Senior Securities
(Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on September
18, 2002 and the following proposals were submitted to a vote by
proxy of the shareholders of record on July 29, 2002:
Proposal No. 1. To elect the Board of Directors (four directors)
to serve until the next Annual Meeting of Shareholders. The
following persons were nominated for election as directors of the
Company with the following voting results:
Shares
Voted
Shares Against/ Share Broker Total Shares
Director Nominees Voted For Withheld Abstentions Non-votes Results Represented
----------------- ---------- ---------- ----------- ---------- ---------- ------------
H.T. Ardinger, Jr 19,030,522 80,904 -- -- Elected 19,111,426
Joseph Autem 19,030,522 80,904 -- -- Elected 19,111,426
George C. Platt 19,025,982 85,444 -- -- Elected 19,111,426
David A. Dean 19,030,522 80,904 -- -- Elected 19,111,426
Proposal No. 2. Amend ViewCast's Certificate of Incorporation to
increase the number of common shares authorized for issuance from
40,000,000 shares to 100,000,000 shares:
Shares
Voted
Shares Against/ Share Broker Total Shares
Proposal Voted For Withheld Abstentions Non-votes Results Represented
----------------- ---------- ---------- ----------- ---------- ---------- ------------
Increased in
Authorized Shares 18,080,277 997,664 33,485 -- Pass 19,111,426
Proposal No. 3. Amendment to increase shares of common stock
reserved for the Company's 1995 Director Stock Option Plan from
250,000 shares to 500,000 shares:
Shares
Voted
Shares Against/ Share Broker Total Shares
Proposal Voted For Withheld Abstentions Non-votes Results Represented
----------------- ---------- ---------- ----------- ---------- ---------- ------------
Amend 1995
Director Stock
Option Plan 17,440,375 1,505,921 165,130 -- Pass 19,111,426
21
VIEWCAST.COM, INC. AND SUBSIDIARIES
OTHER INFORMATION
Proposal No. 4. To ratify the appointment of Grant Thornton LLP
as the Company's independent public accountants for the year
ending December 31, 2002. Voting results were as follows:
Shares
Voted
Shares Against/ Share Broker Total Shares
Proposal Voted For Withheld Abstentions Non-votes Results Represented
----------------- ---------- ---------- ----------- ---------- ---------- ------------
Grant Thornton,
LLP Ratification 18,950,957 53,924 106,545 -- Pass 19,111,426
Item 5. Other Information
The Company's Chief Executive Officer and Chief Financial Officer
have furnished statements relating to its Form 10-Q for the
quarter ended September 30, 2002 pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002. The statements are attached hereto as Exhibit 99.1.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report:
(See Exhibit Index)
(b) Reports on Form 8-K
(None)
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ViewCast.com, Inc.
------------------
(Registrant)
BY:
Date: November 14, 2002 /s/ Laurie L. Latham
---------------------------
Laurie L. Latham
Chief Financial Officer
Principal Financial Officer
23
CERTIFICATIONS
I, George C. Platt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ViewCast.com,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ George C. Platt
-------------------------------------
George C. Platt
President and Chief Executive Officer
24
I, Laurie L. Latham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ViewCast.com,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Laurie L. Latham
-----------------------------------
Laurie L. Latham
Chief Financial Officer
25
EXHIBIT INDEX
Exhibit
Number
-------
99.1 STATEMENTS FURNISHED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350