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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2000
/ / Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to
___________
Commission File Number: 000-21415
CUseeMe Networks, Inc.
(Name of Small Business Issuer as Specified in Its Charter)
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<S> <C>
Delaware 04-3151064
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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542 Amherst Street, Nashua, New Hampshire 03063
(Address of Principal Executive Offices)
(603) 886-9050
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No / /
The number of shares outstanding of the Registrant's common stock as of August
9, 2000 was 12,216,180.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999.................................................. 3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2000 and July 2, 1999 ........................... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and July 2, 1999 ........................... 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis................................... 8
Item 2A.Risk Factors........................................................... 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................... 20
Signatures..................................................................... 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CUSEEME NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
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June 30, 2000 December 31, 1999
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Assets
Current assets:
Cash and cash equivalents ............................... $18,122 $22,088
Available-for-sale securities............................ 795 --
Accounts receivable, net ................................ 3,551 4,159
Inventories ............................................. 362 54
Prepaid expenses and other current assets ............... 875 317
------- -------
Total current assets ....................... 23,705 26,618
Property and equipment, net .................................. 2,805 1,160
Third party licenses, net .................................... 951 560
Purchased software, net ...................................... 2,119 2,533
Trademark, net ............................................... 831 871
Goodwill, net ................................................ 79 199
Other long-term assets ....................................... 165 106
------- -------
Total assets ......................................................... $30,655 $32,047
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses ................... $ 2,993 $ 2,973
Deferred revenue ........................................ 779 695
Current portion of long-term debt ....................... -- 7
------- -------
Total current liabilities .................. 3,772 3,675
Long-term liabilities ........................................ 600 600
Stockholders' equity ......................................... 26,283 27,772
------- -------
Total liabilities and stockholders' equity ........................... $30,655 $32,047
======= =======
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See Notes to Condensed Consolidated Financial Statements.
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CUSEEME NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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Three Months Ended Six Months Ended
---------------------------------- ---------------------------------
June 30, 2000 July 2, 1999 June 30, 2000 July 2, 1999
----------------- ---------------- ---------------- ----------------
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Revenues:
Software license fees $ 2,140 $ 2,352 $ 5,735 $ 4,538
Services and other 455 269 952 542
----------------- ---------------- ---------------- ----------------
Total revenues 2,595 2,621 6,687 5,080
Cost of Revenues:
Software license fees 620 584 1,315 1,060
Services and other 313 39 611 77
----------------- ---------------- ---------------- ----------------
Total cost of
Revenues 933 623 1,926 1,137
Gross profit 1,662 1,998 4,761 3,943
Operating expenses:
Sales and marketing 2,659 1,724 4,528 3,322
Research and development 1,432 1,096 2,781 2,273
General and administrative 1,129 514 2,081 1,029
----------------- ---------------- ---------------- ----------------
Total operating expenses 5,220 3,334 9,390 6,624
----------------- ---------------- ---------------- ----------------
Loss from operations (3,558) (1,336) (4,629) (2,681)
Other income (expense):
Interest income, net 376 41 630 110
Gain from asset sale to Powerlan -- -- 776 --
Other, net (4) (22) (19) (50)
----------------- ---------------- ---------------- ----------------
Total other income, net 372 19 1,387 60
================= ================ ================ ================
Net loss $ (3,186) $ (1,317) $ (3,242) $ (2,621)
================= ================ ================ ================
Net loss per share: Basic: $ (0.26) $ (0.12) $ (0.27) $ (0.25)
================= ================ ================ ================
Diluted: $ (0.26) $ (0.12) $ (0.27) $ (0.25)
================= ================ ================ ================
Weighted average number of common
shares outstanding 12,206,875 10,577,400 12,146,275 10,528,480
================= ================ ================ ================
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See Notes to Condensed Consolidated Financial Statements.
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CUSEEME NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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SIX MONTHS ENDED
-----------------
June 30, 2000 July 2, 1999
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OPERATING ACTIVITIES
Net loss ............................................................. $ (3,242) $(2,621)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation .................................................. 385 226
Amortization of goodwill and purchased intangibles ............ 702 561
Amortization of deferred stock compensation ................... 58 --
Gain from asset sale of hosting connectivity business ......... (776) --
Changes in operating assets and liabilities:
Accounts receivable ..................................... 472 (648)
Inventories ............................................. (355) (24)
Prepaid expenses ........................................ (315) 105
Other assets ............................................ (308) 58
Accounts payable ........................................ 545 4
Accrued expenses and other accrued liabilities .......... (507) (305)
Deferred revenue......................................... 246 160
-------- --------
Net cash used in operating activities ................ ............... (3,095) (2,484)
INVESTING ACTIVITIES
Purchase of property and equipment, net .............................. (2,053) (162)
Purchase of third-party licenses, net ................................ (520) --
Proceeds received from hosting connectivity asset sale ............... 985 --
-------- -------
Net cash used in investing activities ................................ (1,588) (162)
FINANCING ACTIVITIES
Principal payments on long-term debt ................................. (7) (5)
Proceeds from common stock issued upon exercise of stock options ..... 704 144
Proceeds from common stock issued under Employee Stock Purchase Plan.. 74 41
-------- -------
Net cash provided by financing activities ............................ 771 180
Currency translation effect on cash and cash equivalents ............. (54) 47
-------- -------
Net decrease in cash and cash equivalents ............................ (3,966) (2,419)
Cash and cash equivalents at beginning of period ..................... 22,088 6,421
-------- -------
Cash and cash equivalents at end of period ........................... $ 18,122 $ 4,002
======== =======
Non-cash investing activity: common stock received as partial
consideration for hosting connectivity asset sale .................. $ 500 --
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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CUSEEME NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2000
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
We develop software solutions that facilitate worldwide video and
audio communication and data collaboration across the Internet, intranets,
extranets and other networks using the Internet Protocol (IP). Our CUseeMe
Web product provides multipoint video instant messaging over the Internet.
Our CUseeMe Pro and MeetingPoint create a client-server solution that allows
multiple users to participate simultaneously in conferences over the
Internet. ClassPoint is a MeetingPoint add-on that provides a complete
solution for corporate training and distance learning. We support multiple
platforms, including Windows 95, 98 and NT, Sun Solaris, and Red Hat Linux.
On May 8, 2000, we changed our corporate name from White Pine
Software, Inc. to CUseeMe Networks, Inc.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and investments in
high grade commercial paper having maturities of three months or less when
purchased. These investments have been categorized as held to maturity under the
provisions of Statement of Financial Accounting Standards No. 115, ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Accordingly, the balances
are stated at amortized cost, which approximates fair value, because of the
short maturity of these instruments.
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REVENUE RECOGNITION
Our revenues are derived from software license fees and fees for
services related to our software products, primarily software maintenance
fees. We recognize revenues in accordance with the provisions of AICPA
Statement of Position No. 97-2, SOFTWARE REVENUE RECOGNITION, as amended.
Software license revenues are recognized upon our receipt of a firm
customer order and shipment of the software, net of allowances for estimated
future returns, provided that no significant obligations remain on our part
and collection of the related receivable is deemed probable.
Software maintenance fees, which are generally payable in advance
and are non-refundable, are recognized ratably over the period of the
maintenance contract, typically twelve months. Revenues from training and
consulting services are recognized as services are provided.
Software license fees, consulting fees, and training fees that have
been prepaid or invoiced but that do not yet qualify for recognition as
revenues under our policy, and prepaid maintenance fees not yet recognized as
revenues, are reflected as deferred revenues.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS QUARTERLY REPORT CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITING THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE
AND ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY THE
FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THE FACTORS SET FORTH UNDER "ITEM 2A. RISK FACTORS" BELOW.
RESULTS OF OPERATIONS
The following table sets forth line items from our statements of operations
as percentages of total revenues for the three and six months ended June 30,
2000 and July 2, 1999.
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Three Months Ended Six Months Ended
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June 30, July 2, June 30, July 2,
2000 1999 2000 1999
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Revenues:
Software license fees ................. 82.5% 89.7% 85.8% 89.3%
Services and other .................... 17.5 10.3 14.2 10.7
------ ------ ------ ------
Total revenues ................. 100.0 100.0 100.0 100.0
Cost of revenues:
Software license fees ................. 23.9 22.3 19.7 20.9
Services and other .................... 12.1 1.5 9.1 1.5
------ ------ ------ ------
Total cost of revenues ......... 36.0 23.8 28.8 22.4
Gross profit ............................. 64.0 76.2 71.2 77.6
Operating expenses:
Sales and marketing ................... 102.4 65.8 67.7 65.4
Research and development .............. 55.2 41.8 41.6 44.8
General and administrative ............ 43.5 19.6 31.1 20.2
------ ------ ------ ------
Total operating expenses ....... 201.1 127.2 140.4 130.4
------ ------ ------ ------
Loss from operations ..................... (137.1) (51.1) (69.2) (52.8)
Interest income .......................... 14.5 1.6 9.4 2.2
Gain from asset sale ..................... -- -- 11.6 --
Other, net ............................... (0.2) 0.9 (0.3) (1.0)
------ ------ ------ ------
Total other income, net ........ 14.3 0.7 20.7 1.2
------ ------ ------ ------
Net loss ................................. (122.8%) (50.3%) (48.5%) (51.6%)
====== ====== ====== ======
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REVENUES. Total revenues decreased by 1% to $2,595,000 in the three
months ended June 30, 2000 from $2,621,000 in the three months ended July 2,
1999. An increase in conferencing revenues of 34% over the prior year was
offset by the loss of hosting connectivity revenues in the current year, due
to the sale of the hosting connectivity product lines to a third party in
February 2000. Hosting connectivity revenues totalled $659,000 in the
corresponding quarter of prior year. The conferencing revenue growth was
primarily due to (a) a 37% increase in conferencing server revenues, which
grew to $1,549,000 in the three months ended June 30, 2000 from $1,128,000 in
the corresponding quarter of the prior year, and (b) the realization of
$281,000 from our CUseeMe Web product, which was not offered in the prior
period.
For the six months ended June 30, 2000, total revenues increased
32% to $6,687,000 as compared to $5,080,000 in the same period in the prior
year. Conferencing revenues increased 62% and hosting connectivity revenues
decreased 92% versus the comparable period in the prior year. The server
portion of conferencing revenues increased 65% to $3,429,000 from $2,082,000
as compared with the six months ended July 2, 1999, and the client portion
increased 58% to $2,914,000 as compared to $1,840,000 for the six months
ended July 2, 1999. Conferencing server revenues represented 51% of total
revenues in the six months ended June 30, 2000, compared with 41% in the
comparable period of the prior year. Revenues from shipment of our CUseeMe
Web products of $1,199,000 in the six months ended June 30, 2000 were
partially offset by the lower hosting connectivity revenue of $101,000
compared of $1,193,000 for the same period in 1999.
COST OF REVENUES. Cost of revenues consists principally of royalties
and associated amortization of paid license fees relating to third-party
software included in our products, and costs of cameras, product media,
manuals, packaging materials, product localization for international markets,
duplication and shipping.
Cost of revenues was 36% of total revenue in the quarter ended
June 30, 2000 and 24% for the quarter ended July 2, 1999. The increase in
cost was largely attributable to technical support costs of $211,000, or
8%, which is now included in cost of sales as opposed to operating expenses
where it previously was reported. This change is intended to reflect the fact
that technical support is now significantly tied to revenues, compared to prior
years when support was frequently provided for no charge or for freeware
product. The increase in cost was partially offset by higher video
conferencing margins of 77% versus 71% in the comparable period of the prior
year, driven by sales of the CUseeMe Web products.
For the six months ended June 30, 2000, cost of revenues
increased to 29% from 22% in the corresponding period of the prior year. The
increase in cost was attributable to technical support costs of $396,000 and
additional costs of $127,000 relating to the applications service provider
(ASP) business, which was launched in the second quarter of 2000. The
increase in costs was partially offset by higher video conferencing margins
of 79% versus 74% in the comparable period of the prior year, driven by sales
of the higher-margin CUseeMe Web products.
SALES AND MARKETING. Sales and marketing expense consists primarily
of costs associated with sales and marketing personnel, commission expense,
trade shows, advertising and promotional materials. Sales and marketing
expense increased by 54% to $2,659,000 in the quarter ended June 30, 2000
from $1,724,000 in the respective period in the prior year. For the six
months ended June 30, 2000, sales and marketing expenses increased 36% to
$4,528,000 from $3,322,000 in the respective period of the prior year. The
year-over-year increases in sales and marketing expense were driven primarily
by increased headcount and associated expenses, marketing programs, and
commission expense on higher sales volumes. The quarter-over-quarter increase
was due in large part to the allocation of ASP expense related to CUseeMe
World and pilot customer support of $507,000. These increases were partially
offset by the exclusion of technical support expense in 2000.
RESEARCH AND DEVELOPMENT. Research and development expense consists
primarily of costs of personnel. Research and development expense increased
by 31% to $1,432,000 in the quarter ended June 30, 2000 from $1,096,000 in
the comparable period in the previous year. For the six months ended June 30,
2000, research and development expense increased 22% to $2,781,000 from
$2,273,000 in the respective period of the prior year. These year-over-year
increases were due to additional headcount and associated compensation
expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expense
consists of administrative, financial and general management activities,
including legal, accounting and other professional fees. General and
administrative expense increased by 120% to $1,129,000 from $514,000 in the
three month period ended June 30, 2000. For the six months ended June 30,
2000, general and administrative expenses increased 102% to 2,081,000 from
$1,029,000 in the respective period of the prior year. These year-over-year
increases were due to headcount additions in management information systems,
salary adjustments, and increased recruiting and consulting fees.
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LIQUIDITY AND CAPITAL RESOURCES
For the three months ended June 30, 2000, we used cash of
$3,439,000, as compared with $572,000 in the three months ended July 2, 1999.
Cash used in the three months ended June 30, 2000 was comprised predominantly
of the net loss of $3,186,000, the purchase of property and equipment of
$1,307,000, the purchase of third party license of $520,000, and an increase
in prepaid expenses of $317,000, offset in large part by the a reduction of
accounts receivables of $1,405,000, and the non-cash impact of depreciation
and amortization of $604,000. Cash used in the same quarter of the prior year
consisted largely of a net loss of $1,317,000, offset in large part by the
non-cash impact of depreciation and amortization of $396,000, deferred
revenue of $167,000, and proceeds from sales of common stock of $160,000.
For the six months ended June 30, 2000, we used cash of
$3,966,000, as compared with $2,419,000 cash used in the six months ended
July 2, 1999. Cash used in the six months ended June 30, 2000 was comprised
predominantly of the net loss of $3,242,000, the purchase of property and
equipment of $2,053,000, the purchase of third party license of $520,000, and
the gain from sale of hosting connectivity business of $776,000, offset in
large part by the non-cash impact of depreciation and amortization of
$1,087,000, $778,000 from stock option exercise, and cash generated from the
sale of the hosting connectivity product lines in the amount of $1,000,000.
Cash used in the same period of the prior year consisted largely of a net
loss of $2,621,000 and an increase of accounts receivables of $648,000,
offset in large part by the non-cash impact of depreciation and amortization
of $787,000.
The hosting connectivity assets were sold to a third party in
February 2000. Total consideration received in the sale of the hosting
connectivity assets was $1,000,000 in cash and $500,000 in stock. The gain was
partially offset by related transaction costs such as legal and employee-related
expenses.
In December 1999, we received gross proceeds of $20,000,000 from
private placements of our common stock. In four private placements of
$5,000,000 each, CFE, Inc. (a wholly owned subsidiary of General Electric
Capital Corporation), Private Equity Holding (Cayman) Ltd., Altamira
Management Ltd., and Special Situations funds (Special Situations Private
Equity Fund, L.P., Special Situations Cayman Fund, L.P., and Special
Situations Fund III, L.P.) each purchased 325,521 shares at a price of $15.36
per share. The price was based on a 30-day weighted average at the time the
terms were negotiated.
At June 30, 2000, we had cash and cash equivalents of $18,122,000 and
working capital of $19,933,000. We believe that our current cash and cash
equivalents will be sufficient to fund our operations and capital expenditures
through at least the first fiscal quarter of 2001. Thereafter, our liquidity
will be materially dependent on our internally generated funds and our ability
to obtain funds from additional equity or debt financings from external sources.
We continue to experience a negative cash flow from operations in each fiscal
quarter. Our capital requirements may vary materially from those we now
anticipate, depending on a number of factors including:
- the expansion of our facility and service operations center
and related staffing;
- the level of our research and development activities;
- the rate of market acceptance of our software offerings; and
- the success of our sales, marketing and distribution
strategy.
If we do not meet our goals with respect to revenue or if our costs are higher
than anticipated, substantial additional funds may be required.
INFLATION
Although some of our expenses increase with general inflation in the
economy, inflation has not had a material impact on our financial condition or
results of operations to date.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), which requires
companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives are to be accounted for depending on the
use of the derivative and whether the use qualifies for hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. In July
1999, the FASB issued SFAS 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO 133." SFAS 137
deferred the effective date of SFAS 133 until the first fiscal quarter
beginning after June 15, 2000. The adoption of SFAS 133 and SFAS 137 is not
expected to have a material impact on our financial position or results of
operations.
In April 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB No.
25". The Interpretation is applied prospectively to new awards, modifications to
outstanding awards, and changes in employee status on or after July 1, 2000,
except in certain circumstances. The adoption of this Interpretation is not
expected to have a material impact on our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB 101
formalizes positions the staff has expressed in speeches and comment letters.
SAB 101 is effective no later than the fourth fiscal quarter of the fiscal
year beginning after December 15, 1999. We are presently analyzing the
impact, if any, that adherence to SAB 101 will have on our financial position
or results of operations.
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ITEM 2A. RISK FACTORS
SOME OF THE INFORMATION IN THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY
THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "CONTINUE" AND SIMILAR WORDS. YOU SHOULD
READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY (1) DISCUSS OUR
FUTURE EXPECTATIONS, (2) CONTAIN PROJECTIONS OF OUR FUTURE OPERATING RESULTS OR
FINANCIAL CONDITION OR (3) STATE OTHER "FORWARD-LOOKING" INFORMATION. WE BELIEVE
IT IS IMPORTANT TO COMMUNICATE CERTAIN OF OUR EXPECTATIONS TO OUR INVESTORS.
THERE MAY BE EVENTS IN THE FUTURE, HOWEVER, THAT WE ARE NOT ACCURATELY ABLE TO
PREDICT OR OVER WHICH WE HAVE NO CONTROL. THE RISK FACTORS LISTED IN THIS
SECTION, AS WELL AS ANY OTHER CAUTIONARY LANGUAGE IN THIS QUARTERLY REPORT,
PROVIDE EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS WE DESCRIBE IN OUR
FORWARD-LOOKING STATEMENTS. YOU SHOULD BE AWARE THAT THE OCCURRENCE OF ANY OF
THE EVENTS DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS QUARTERLY
REPORT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND MAY NOT BE PROFITABLE IN THE
FUTURE.
We may never generate significant revenue or be profitable. Since we
began operations, we have incurred substantial losses. We incurred net losses
of $8.4 million in 1998, $4.8 million in 1999 and $3.2 million in the first
half of 2000. We had an accumulated deficit of $37.0 million at June 30, 2000.
We expect to incur substantial losses for the foreseeable future, because
we intend to continue investing heavily in the development and marketing of
MeetingPoint and our application hosting services. In February 2000, we
completed the sale of our legacy connectivity products business. In addition,
we expect that revenues from CUseeMe will not increase substantially, and may
decrease, during the foreseeable future. We cannot be certain that sales of
MeetingPoint and application hosting services and other new products and
services will offset lost revenues from the sale of our legacy connectivity
products business and declines in revenues from CUseeMe in 2000 or in later
years.
OUR QUARTERLY RESULTS MAY FLUCTUATE AND CAUSE THE PRICE OF OUR COMMON STOCK TO
FALL.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly
revenues or operating results fall below the expectations of investors or
public market analysts, the price of our common stock could fall
substantially. Our quarterly operating results may vary significantly
depending on a number of factors, some of which are outside of our control.
These factors include:
- the timing of the introduction or acceptance of new products offered by us
or our competitors;
- changes in demand for Internet services;
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- changes in the mix of products sold by us;
- announcements of new products, services or technologies by us or our
competitors that cause customers to defer or cancel purchases of our
products;
- changes in pricing strategies by us or competitors;
- changes in regulations affecting the multimedia conferencing industry; and
- changes in currency exchange rates.
As a result of these factors, we may not be able to predict our operating
results accurately. In addition, MeetingPoint continues to undergo long
evaluation and sale cycles by potential users. The lengths of these cycles make
it particularly difficult for us to predict the amount and timing of revenue
from this product.
We base our expense levels on our product development plans and our
estimates of future revenues. To a large extent, our expenses are fixed. We
may be unable to adjust our spending in time to compensate for any unexpected
revenue shortfall, thus magnifying the adverse effect of any revenue
shortfall.
OUR APPLICATION HOSTING SERVICES MAY NOT ACHIEVE SIGNIFICANT MARKET ACCEPTANCE.
We introduced our application hosting services in the second fiscal quarter
of 2000. Broad acceptance of our application hosting services is critical to our
future success and is subject to a number of significant risks, many of which
are outside of our control. These risks include:
- the ability of our system infrastructure to support large numbers of
concurrent users is unproven;
- corporate users may not be willing to outsource control and management of
their multimedia conferencing to a third party due to possible security,
reliability or other concerns;
- the introduction of competing products and technologies; and
- our dependence on third-party hardware and network providers.
WE FACE INTENSE COMPETITION FROM OTHER INDUSTRY PARTICIPANTS AND MAY NOT BE ABLE
TO COMPETE EFFECTIVELY.
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The market for Internet communications products and services is extremely
competitive. Because the barriers to entry in the market are relatively low and
the potential market is large, we expect continued growth in the industry and
the entrance of new competitors in the future. Many of our current and potential
competitors, particularly Intel, Microsoft, PictureTel and Ezenia!, have
significantly longer operating histories and significantly greater managerial,
financial, marketing, technical and other competitive resources, as well as
greater name recognition, than we do. As a result, these companies may be able
to adapt more quickly to new or emerging technologies and changes in customer
requirements and may be able to devote greater resources to the promotion and
sale of their conferencing products and services. In addition, to the extent
that competitors choose to bundle competing multimedia conferencing applications
with other products, the demand for our products and services might be
substantially reduced.
As a result, we cannot assure you that we will be able to compete
successfully with existing or new competitors in the multimedia conferencing
market. We believe that our ability to compete successfully in this market will
depend on a number of factors both within and outside our control, including:
- the adoption and evolution of industry standards;
- the pricing policies of our competitors and suppliers;
- the timing of the introduction of new software products and services by us
and our competitors; and
- our ability to hire and retain highly qualified employees.
To remain competitive in the multimedia conferencing market, we must
continue to invest heavily in research and development and in sales and
marketing. We may not have sufficient resources to make those investments, or we
may not be able to make the technological advances necessary to continue to be
competitive. In addition, current and potential competitors have established or
may establish collaborative relationships among themselves and with third
parties to increase the visibility and utility of their products and services.
Accordingly, it is possible that new competitors or alliances may emerge and
rapidly acquire significant market share, which could have a material adverse
effect on our business.
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A COMPETITIVE LABOR MARKET.
Qualified personnel are in great demand throughout the software and Internet
industries. Our success depends in large part upon our ability to attract,
train, motivate and retain highly skilled employees, particularly sales and
marketing personnel, professional services personnel and software engineers. If
we fail to attract and retain the highly trained technical personnel that are
integral to our sales, professional services and product development teams, the
rate at which we can generate sales and develop new products or services may be
limited. This could have a material adverse effect on our business, operating
results and financial condition.
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IF WE LOSE THE SERVICES OF OUR CHIEF EXECUTIVE OFFICER OR ANY OTHER KEY MEMBER
OF OUR MANAGEMENT TEAM, OUR BUSINESS COULD SUFFER.
Our future success depends to a significant degree on the skill,
experience and efforts of Killko Caballero, our chief executive officer, and
other key members of our management team. John E. Kelly, our Vice President
of Worldwide Sales and Marketing, resigned on July 28, 2000 and has not yet
been replaced. The loss of any key member of our management team could have a
material adverse effect on our business.
WE RELY ON ONE DISTRIBUTOR FOR A SIGNIFICANT PORTION OF OUR TOTAL REVENUE.
Sales to Ingram Micro represented 8% of our total revenue in 1999 and 26% of
our total revenue in 1998. The loss of, or a significant curtailment of
purchases by, Ingram Micro, including a loss or curtailment due to factors
outside of our control, could have a material adverse effect on our business.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.
Our business could be seriously harmed if we are unable to protect
adequately our proprietary software and our other proprietary intellectual
property rights. We may be unable to deter misappropriation of our proprietary
technology, detect unauthorized use and take appropriate steps to enforce our
intellectual property rights. Our competitors could, without violating our
proprietary rights, develop technologies that are as good or better than our
technology.
Some of our multimedia conferencing products are licensed to customers under
"shrink wrap" licenses included as part of the product packaging. In most cases
our shrink wrap licenses are not negotiated with or signed by individual
licensees. Some of the provisions of our shrink wrap licenses, including
provisions limiting our liability and protecting us against unauthorized use,
copying, transfer and disclosure of the licensed program, may be unenforceable
under the laws of certain jurisdictions. Also, we have delivered technical data
and information relating to CUseeMe and MeetingPoint to the United States
government, and as a result, the United States government may have unlimited
rights to use the technical data and information or to authorize others to use
the technical data and information. We can not assure you that the United States
government will not authorize others to use our technical data and information
for purposes competitive with our products. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent as do
laws in the United States.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD
PREVENT US FROM OFFERING OUR PRODUCTS OR OTHERWISE HURT OUR BUSINESS AND OUR
FINANCIAL CONDITION.
Because the protection of intellectual property rights is often critically
important to the success of companies in the multimedia conferencing industry,
our competitors or others could assert claims that our technologies infringe
their proprietary rights. From time to time, we have received and may receive in
the future notice of claims of infringement of other parties' proprietary
rights. Many participants in the software industry have an increasing number of
patents and have frequently demonstrated a readiness to commence litigation
based on allegations of patent or other intellectual property infringement. For
example, a third party has objected to our use of the name "MeetingPoint." We
may not have the financial resources necessary to pursue any resulting
litigation to a final judgment, and we may not prevail in any litigation. In
defending against such litigation, we could incur significant legal and other
expenses and our management could be distracted from our principal business
operations. If any party making a claim against us were
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to prevail in litigation against us, we may have to pay substantial damages. The
court could also grant injunctive or other equitable relief that could prevent
us from offering our products and services without a license or other permission
from others, which may not be available on commercially available terms or at
all. Any of these outcomes could seriously harm our business and our financial
condition.
WE FACE ADDITIONAL RISKS FROM OUR INTERNATIONAL OPERATIONS.
Our international business involves a number of risks that could hurt our
operating results or contribute to fluctuations in those results. Our revenue
from international sales represented 24% of our total revenue in 1999 and 26% of
our total revenue in 1998. We intend to seek opportunities to expand our product
and service offerings into additional international markets, although we cannot
be certain that we will succeed in developing localized versions of our products
for new international markets or in marketing or distributing products and
services in those markets.
The majority of our international sales are currently denominated in U.S.
dollars, but there can be no assurance that a significantly higher level of
future sales will not be denominated in foreign currencies. To the extent our
sales are denominated in currencies other than U.S. dollars, fluctuations in
exchange rates may render our products less competitive relative to local
product offerings or result in foreign exchange losses. We have no experience in
implementing hedging techniques that might minimize our risks from exchange rate
fluctuations.
Our international business also involves a number of other difficulties and
risks, including risks associated with:
- changing economic conditions in foreign countries;
- export restrictions and export controls relating to technology;
- compliance with existing and changing regulatory requirements;
- tariffs and other trade barriers;
- difficulties in staffing and managing international operations;
- longer payment cycles and problems in collecting accounts receivable;
- software piracy;
- political instability;
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- seasonal reductions in business activity in Europe and certain other parts
of the world during the summer months; and
- potentially adverse tax consequences.
OUR SOFTWARE PRODUCTS MAY CONTAIN UNDETECTED DEFECTS.
Software developed by us or developed by others and incorporated by us into
our products may contain significant undetected errors when first released or as
new versions are released. Although we test our software products before
commercial release, we cannot be certain that errors in the products will not be
found after customers begin to use the software. Any defects in CUseeMe or
MeetingPoint, or any future products, may result in significant decreases in
revenue or increases in expenses because of adverse publicity, reduced orders,
product returns, uncollectible accounts receivable, delays in collecting
accounts receivable, and additional and unexpected costs of further product
development to correct the defects.
OUR SUCCESS DEPENDS ON THE PERFORMANCE OF PARTICIPANTS IN OUR DISTRIBUTION
CHANNELS.
We market our group conferencing products by forming channel relationships
in key markets with major distributors. We also license our group conferencing
products to original equipment manufacturers, value-added resellers and
additional distributors for bundling with their products and services. We expect
that our future success will depend in large part upon these original equipment
manufacturers, value-added resellers and distributors. The performance of these
original equipment manufacturers, value-added resellers and distributors is
outside our control, and we are unable to predict the extent to which these
organizations will be successful in marketing and selling our group conferencing
products or products incorporating our group conferencing products. We cannot
assure you that we will be successful in establishing relationships with
original equipment manufacturers, value-added resellers and distributors, and if
we fail, our business could be seriously harmed.
Our distributors typically carry the products of some of our competitors.
The distributors have limited capital to invest in inventory, and their
decisions to purchase our products and, in the case of retail stores, to give
them critical shelf space, are partly a function of pricing, terms and special
promotions offered by our competitors, which we cannot predict or control.
We distribute certain of our products directly over the Internet. By
distributing our products over the Internet, we may increase the likelihood of
unauthorized copying and use of our software.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES MAY ADVERSELY AFFECT OUR BUSINESS.
The application of existing laws to the Internet is uncertain and may take
years to resolve, particularly with respect to property ownership, user privacy,
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freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Because the Internet is becoming increasingly popular,
various foreign or domestic governmental bodies may seek to adopt laws and
control use of the Internet. We cannot predict the nature of any such laws.
Legislation could subject us or our customers to potential liability or could
decrease the growth of the Internet, either of which could have an adverse
effect on our business.
In March 1996, ACTA, a group of telecommunications common carriers, filed
the ACTA Petition with the FCC, arguing that providers of computer software
products that enable voice transmission over the Internet ("Internet telephone"
services), such as us, are operating as common carriers without complying with
various regulatory requirements and without paying certain charges required by
law. The ACTA Petition argues that the FCC has the authority to regulate both
the Internet and the providers of "Internet telephone" services and requests
that the FCC declare its authority over interstate and international
telecommunications services using the Internet, initiate rulemaking proceedings
to consider rules governing the use of the Internet for the provision of
telecommunications services, and order providers of "Internet telephone"
services software to immediately cease the sale of such software pending such
rulemaking. Certain parties have filed comments with the FCC regarding the ACTA
Petition. We are unable to predict the outcome of this proceeding. In December
1996, the FCC stated that it intended to address the legal questions raised by
the ACTA Petition in a future proceeding but has not yet done so. ACTA has
submitted petitions, similar to its FCC filing, to certain state regulators,
including public service commissions. Any action by the FCC or state regulators
to grant the relief sought by ACTA or otherwise to regulate use of the Internet
as a medium of communication, including any action to permit local exchange
carriers to impose additional charges for connections used for Internet access,
could have a material adverse effect on our business.
WE MAY REQUIRE ADDITIONAL CAPITAL.
We may need to raise additional capital in order to fund the development and
marketing of our products and services. Although we expect our cash and cash
equivalents to provide us with sufficient working capital through at least the
first fiscal quarter of 2001, our current plans and projections may prove to be
inaccurate or our expected cash flow may prove to be insufficient to fund our
operations because of product delays, unanticipated expenses or other unforeseen
difficulties. Our ability to obtain additional financing will depend on a number
of factors, including market conditions, our operating performance and investor
interest. These factors may make the timing, amount, terms and conditions of any
financing unattractive. They may also result in our incurring additional
indebtedness or accepting stockholder dilution. If adequate funds are not
available or are not available on acceptable terms, we may have to forego
strategic acquisitions or investments, defer our development activities, or
delay our introduction of new products and services. Any of these actions may
seriously harm our business and operating results.
THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN EXTREMELY VOLATILE.
The market price of our common stock has been extremely volatile in the
past, and may be expected to be volatile in the future for many reasons,
including:
- actual or anticipated variations in our revenue and operating results;
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- announcements of the development of improved technology;
- changes in estimates of our financial performance, or the absence of
coverage, by securities analysts;
- conditions and trends in the Internet and multimedia conferencing
industries;
- adoption of new accounting standards; and
- general market conditions.
Recently the stock markets have experienced extreme price and volume
fluctuations that have dramatically affected the market prices of the stocks of
many technology companies, particularly companies associated with the Internet.
These fluctuations often have been unrelated or disproportionate to the
operating performance of those companies. These factors may adversely affect the
market price of our common stock.
VOLATILITY IN OUR STOCK PRICE MAY LEAD TO LITIGATION AGAINST US.
Stockholders frequently commence securities class action litigation against
a company after a significant decrease in the company's stock price. If our
stock price drops and our stockholders commence litigation against us, we could
incur significant legal and other expenses defending the litigation and our
management could be distracted from our principal business operations. Either of
these outcomes could seriously harm our business.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN ANTI-TAKEOVER AND INDEMNIFICATION
PROVISIONS THAT MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR STOCK.
Section 203 of the Delaware General Corporation Law and our charter and
by-laws contain provisions that might enable our management to resist a takeover
of our company. These provisions might discourage, delay or prevent a change in
the control of our company or a change in our management. These provisions could
also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors and take other corporate actions. The existence
of these provisions could limit the price that investors might be willing to pay
in the future for shares of our common stock.
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PART 2. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
27.1 Financial Data Schedule for fiscal quarter ended
June 30, 2000
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of August 14, 2000.
CUSEEME NETWORKS, INC.
By: /s/ KILLKO A. CABALLERO
----------------------------------
Killko A. Caballero
Chief Executive Officer and
President (Principal Executive
Officer)
By: /s/ CHRISTINE J. COX
----------------------------------
Christine J. Cox
Chief Financial Officer and
Vice President - Finance
(Principal Financial and
Accounting Officer)
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