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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 September 29, 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)
DELAWARE 04-3151064
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 issuer's common stock as of November 10,
2000 was 12,265,818.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets as of September 29, 2000 and
December 31, 1999...................................................... 3
Condensed Consolidated Statements of Operations for the three and nine
months ended September 29, 2000 and October 1, 1999 .................. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 29, 2000 and October 1, 1999.................... 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis .................................. 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................... 18
Signatures..................................................................... 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CUSEEME NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 29, 2000 December 31, 1999
------------------ ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................... $14,938 $22,088
Available-for-sale securities................ 599 --
Accounts receivable, net .................... 2,658 4,159
Inventories ................................. 494 54
Prepaid expenses and other current assets ... 971 317
------- -------
Total current assets ..................... 19,660 26,618
Property and equipment, net ................... 3,010 1,160
Third party licenses, net ..................... 895 560
Purchased Software, net ....................... 1,937 2,533
Trademark, net ................................ 811 871
Goodwill, net ................................. 20 199
Other long term assets ........................ 165 106
------- -------
Total assets ........................... $26,498 $32,047
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses ....... $ 2,115 $ 2,973
Deferred revenue ............................ 801 695
Current portion of long-term debt .......... - 7
------- -------
Total current liabilities .............. 2,916 3,675
Long-term liabilities ........................ 600 600
Stockholders' equity ........................... 22,982 27,772
------- -------
Total liabilities and stockholders'
equity ................................ $26,498 $32,047
======= =======
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees .......... $ 2,072 $ 2,587 $ 7,808 $ 7,125
Services and other ............. 549 322 1,501 864
------------ ------------ ------------ ------------
Total revenues ............ 2,621 2,909 9,309 7,989
------------ ------------ ------------ ------------
Cost of Revenues:
Software license fees .......... 541 524 1,857 1,583
Services and other ............. 477 28 1,087 106
------------ ------------ ------------ ------------
Total cost of revenues ... 1,018 552 2,944 1,689
------------ ------------ ------------ ------------
Gross profit .......................... 1,603 2,357 6,365 6,300
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ............ 2,464 1,887 6,991 5,209
Research and development ....... 1,400 1,100 4,181 3,373
General and administrative ..... 1,117 533 3,199 1,562
------------ ------------ ------------ ------------
Total operating expenses ... 4,981 3,520 14,371 10,144
------------ ------------ ------------ ------------
Loss from operations .................. (3,378) (1,163) (8,006) (3,844)
------------ ------------ ------------ ------------
Other income (expense):
Interest income, net ........... 282 32 912 142
Gain from asset sale to Powerlan -- -- 776 --
Other (expense), net ........... (15) (24) (35) (74)
------------ ------------ ------------ ------------
Total other income, net 267 8 1,653 68
------------ ------------ ------------ ------------
Net loss .............................. $ (3,111) $ (1,155) $ (6,353) $ (3,776)
============ ============ ============ ============
Net loss per share:
Basic: ......................... $ (0.25) $ (0.11) $ (0.52) $ (0.36)
============ ============ ============ ============
Diluted: ....................... $ (0.25) $ (0.11) $ (0.52) $ (0.36)
============ ============ ============ ============
Weighted average number of
common shares outstanding ..... 12,222,151 10,654,947 12,168,920 10,570,482
============ ============ ============ ============
</TABLE>
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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
September 29, October 1,
2000 1999
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ................................................. $ (6,353) $(3,776)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation ......................................... 692 329
Amortization of goodwill and purchased intangibles ... 1,070 948
Amortization of deferred stock compensation .......... 58 --
Gain from asset sale of Hosting Connectivity business (776) --
Changes in operating assets and liabilities:
Accounts receivable .................................. 1,365 (491)
Inventories .......................................... (487) (19)
Prepaid expenses ..................................... (538) 83
Other assets ......................................... (188) 42
Accounts payable ..................................... (89) 18
Accrued expenses and other accrued liabilities ....... (728) (289)
Deferred revenue ..................................... 268 191
-------- -------
Net cash used in operating activities .................... (5,706) (2,964)
INVESTING ACTIVITIES
Purchase of property and equipment, net .................. (2,573) (217)
Purchase of third-party licenses, net .................... (570) --
Proceeds received from asset sale of
Hosting Connectivity business .......................... 985 --
-------- -------
Net cash used in investing activities .................... (2,158) (217)
FINANCING ACTIVITIES
Principal payments on long-term debt ..................... (7) (23)
Proceeds from common stock issued upon
exercise of stock options .............................. 737 204
Proceeds from common stock issued under
Employee Stock Purchase Plan ........................... 73 41
-------- -------
Net cash provided by financing activities ................ 803 222
Currency translation effect on cash and cash equivalents . (89) 51
-------- -------
Net decrease in cash and cash equivalents ................ (7,150) (2,908)
Cash and cash equivalents at beginning of period ......... 22,088 6,421
-------- -------
Cash and cash equivalents at end of period ............... $ 14,938 $ 3,513
======== =======
Non-cash investing activity: common stock received as
partial consideration for asset sale of Hosting
Connectivity business .................................. $ 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)
September 29, 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 the industry's first 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. Our web site is
located at WWW.CUSEEME.COM. CUseeMe Web can be experienced at
WWW.WORLD.CUSEEME.COM. Information contained in our web site is not a part of
this quarterly report.
We are targeting increased distribution of our client software. Targeting
Internet service providers, portal sites, and enterprises, we will sell either a
complete end-to-end solution for Internet communications or Internet
communications services whereby the customer pays a recurring fee to
video/audio-enable and maintain its web site.
On May 8, 2000, we changed our company 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.
REVENUE RECOGNITION
Our revenue is derived from software license fees and fees for services
related to our software products, primarily software maintenance fees. We
recognize revenue in accordance with the provisions of AICPA Statement of
Position No. 97-2, SOFTWARE REVENUE RECOGNITION, as amended.
Software license revenue is 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. Revenue from training and consulting services
is 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 revenue under
our policy, and prepaid maintenance fees not yet recognized as revenue, are
reflected as deferred revenue.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS
QUARTERLY REPORT ON FORM 10-QSB AND IN OUR ANNUAL REPORT ON FORM 10-KSB FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2000. THIS DISCUSSION AND ANALYSIS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND
ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS,
INCLUDING THOSE SET FORTH BELOW UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS
AND THE TRADING PRICE OF OUR COMMON STOCK" AND ELSEWHERE IN THIS QUARTERLY
REPORT.
RESULTS OF OPERATIONS
The following table sets forth line items from our statements of operations
as percentages of total revenue for the periods indicated.
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
--------- ------- --------- -------
Revenues:
Software license fees ............. 79.1% 88.9% 83.9% 89.2%
Services and other ................ 20.9 11.1 16.1 10.8
------ ------ ------ ------
Total revenues .................. 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenues:
Software license fees ............. 20.6 18.0 19.9 19.8
Services and other ................ 18.2 1.0 11.7 1.3
------ ------ ------ ------
Total cost of revenues .......... 38.8 19.0 31.6 21.1
------ ------ ------ ------
Gross profit ......................... 61.2 81.0 68.4 78.9
------ ------ ------ ------
Operating expenses:
Sales and marketing ............... 94.0 64.9 75.1 65.2
Research and development .......... 53.4 37.8 44.9 42.2
General and administrative ........ 42.6 18.3 34.4 19.6
------ ------ ------ ------
Total operating expenses ........ 190.0 121.0 154.4 127.0
------ ------ ------ ------
Loss from operations .................(128.9) (40.0) (86.0) (48.1)
------ ------ ------ ------
Interest income ...................... 10.8 1.1 9.8 1.8
Gain from asset sale ................. -- -- 8.3 --
Other, net ........................... (0.6) 0.8) (0.3) (0.9)
------ ------ ------ ------
Total other income, net ......... 10.2 0.3 17.8 0.9
------ ------ ------ ------
Net loss .............................(118.7%) (39.7%) (68.3%) (47.3%)
====== ====== ====== ======
REVENUES. Total revenues decreased by 10% to $2,621,000 in the three
months ended September 29, 2000 from $2,909,000 in the three months ended
October 1, 1999. Conferencing revenues, which increased 3% over the
comparable quarter in the prior year, were offset by the absence of hosting
connectivity revenues in the current year, due to the sale of our hosting
connectivity business to a third party in February 2000. Hosting connectivity
revenues were $300,000 in the corresponding quarter of the prior year. The
growth in conferencing revenues was primarily due to our CUseeMe Web product,
which began shipping in March 2000. CUseeMe Web revenues for the third
quarter of 2000 totalled $272,000.
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For the nine months ended September 29, 2000, total revenues increased
17% to $9,309,000 as compared with $7,989,000 in the same period in the prior
year. Conferencing revenues increased 39% and hosting connectivity revenues
decreased 93% versus the comparable period in the prior year. The server
portion of conferencing revenues increased 36% to $5,159,000 for the first
nine months of 2000, compared with $3,799,000 in the nine months ended
October 1, 1999. The client portion of conferencing revenues increased 44% to
$3,773,000, compared with $2,626,000 for the nine months ended October 1,
1999. Conferencing server revenues represented 55% of the total revenues in
the nine months ended September 29, 2000, compared with 48% in the comparable
period of the prior year. Revenues from shipment of our CUseeMe Web products
of $1,471,000 in the nine months ended September 29, 2000 were partially
offset by lower hosting connectivity revenues of $101,000 compared with
$1,493,000 in 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. It also includes costs associated with our hosting services
business, including direct labor, overhead, and third-party software licensing
expense, and costs associated with our technical support department.
Cost of revenues was 39% of total revenues in the quarter ended
September 29, 2000 and 19% of total revenues in the quarter ended October 1,
1999. The increase in cost of revenues was largely attributable to technical
support costs of $231,000, or 9% of total revenues, which is now included in
cost of sales as opposed to operating expenses where it traditionally had
been reported. This change reflects the fact that technical support is now
significantly tied to revenues. In prior years, support frequently was
provided for no charge or for freeware product. In addition, $151,000 of the
increase in cost of revenues was due to spending associated with our hosting
services business, which was launched in the second quarter of 2000.
For the nine months ended September 29, 2000, cost of revenues increased
to 32% from 21% in the corresponding period of the prior year. The increase
in cost was attributable to technical support costs of $627,000 and
additional costs of $278,000 relating to our hosting services business. The
increase in cost was partially offset by higher videoconferencing margins of
79% versus 76% in the comparable period of the prior year, driven primarily
by sales of our higher-margin CUseeMe Web client and associated Software
Developers' Kit.
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 31% to $2,464,000 in the quarter ended September 29,
2000 from $1,887,000 in the corresponding period of the prior year. The
quarter-over-quarter increase was due in large part to the allocation of
$544,000 of hosting business expenses related to the operation of our portal
web site, CUseeMe World, and pilot customer support. For the nine months
ended September 29, 2000, sales and marketing expense increased 34% to
6,991,000 from $5,209,000 in the comparable period of the prior year. This
increase was attributable primarily to increased headcount and associated
personnel expenses and marketing programs. Increases in the three and nine
months ended September 29, 2000 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 and related expenditures. Research and
development expense increased by 27% to $1,400,000 in the quarter ended
September 29, 2000 from $1,100,000 in the comparable period in the previous
year. For the nine months ended September 29, 2000, research and development
expenses increased 24% to $4,181,000 from $3,373,000 in the comparable period
of the prior year. Increases in the three and nine months ended September 29,
2000 were predominantly due to additional headcount and associated
compensation expenses.
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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 110% to $1,117,000 from $533,000 in the three month
period ended September 29, 2000. For the nine months ended September 29,
2000, general and administrative expenses increased 105% to 3,199,000 from
$1,562,000 in the corresponding period of the prior year. Increases in the
three and nine months ended September 29, 2000 were due in large part to
headcount additions in our management information systems department, annual
salary increases, and increased recruiting and consulting fees.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 29, 2000, we used cash of
$3,184,000, as compared with $489,000 cash used in the three months ended
October 1, 1999. Cash used in the three months ended September 29, 2000
consisted principally of the net loss of $3,111,000, purchases of property
and equipment of $494,000, purchases of third party licenses in the amount of
$50,000, and an increase in prepaid expenses of $223,000. These amounts were
offset in large part by the non-cash impact of depreciation and amortization
in the amount of $656,000. This compares with $489,000 of cash used in the
same quarter of the prior year, which consisted largely of $1,155,000 in net
loss, offset in large part by the non-cash impact of depreciation and
amortization of $506,000 and a reduction in accounts receivable of $157,000.
For the nine months ended September 29, 2000, we used cash of
$7,150,000, as compared with $2,908,000 cash used in the nine months ended
October 1, 1999. Cash used in the nine months ended September 29, 2000 was
comprised predominantly of the net loss of $6,353,000, purchases of property
and equipment of $2,573,000 and purchases of third party licenses of
$570,000, and the net impact of $397,000 used in operating assets and
liabilities. These amounts were offset in part by the non-cash impact of
depreciation and amortization of $1,820,000 and cash generated from the sale
of the legacy connectivity product line in the amount of $1,000,000. This
compares with $2,908,000 of cash used in the same period of the prior year,
which consisted largely of $3,776,000 in net loss and an increase of accounts
receivables of $491,000, offset in large part by the non-cash impact of
depreciation and amortization of $1,277,000.
In December 1999, we received gross proceeds of $20,000,000 from a
private placement of shares 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.
Our 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.
At September 29, 2000, we had cash and cash equivalents of $14,938,000 and
working capital of $16,744,000. We believe that our current cash and cash
equivalents will be sufficient to fund our operations and capital expenditures
through at least the second 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 financing 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;
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- 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 revenues 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.
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 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 that use qualifies for hedge accounting. SFAS 133 was to be
effective for fiscal years beginning after June 15, 1999. In July 1999, the
FASB issued Statement of Financial Accounting Standards No. 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. We expect that our
adoption of SFAS 133 and SFAS 137 will not 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. Interpretation 44 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. We expect that our
adoption of Interpretation 44 will not have a material impact on our
financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB 101 formalizes positions the
staff of the SEC had expressed in earlier speeches and comment letters. SAB
101 will become effective for us no later than the fourth fiscal quarter of
2000. We are analyzing the impact, if any, that our adherence to SAB 101 will
have on our financial position and results of operations.
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FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON
STOCK.
SOME OF THE INFORMATION IN THIS QUARTERLY REPORT ON FORM 10-QSB 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, $56,000 in the first quarter, and $3.2
million in the second quarter, and $3.1 million in the third quarter of 2000. We
had an accumulated deficit of $33.7 million at December 31, 1999 and an
accumulated deficit of $40.1 million at September 29, 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 revenue 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 revenue from the sale of our
legacy connectivity products business and declines in revenue from CUseeMe in
2000 or in subsequent years.
Our Quarterly Results may Fluctuate and Cause the Price of Our Common Stock to
Fall.
Our quarterly revenue and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenue 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;
- 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;
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- 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 revenue. 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.
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:
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- 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 may Require Additional Capital.
We may need to raise additional capital in order to fund the development
and marketing of our products and services. Our cash and cash equivalents may
provide us with sufficient working capital only through the second fiscal
quarter of 2001. Moreover, our current plans and projections may prove to be
inaccurate or our expected cash flow may prove to be insufficient to fund our
operations through that period 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.
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.
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. The loss of any key member of our management
team could have a material adverse effect on our business.
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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 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 Rely on One Distributor for a Significant Portion of Our Total Revenues.
Sales to Ingram Micro represented 8% of our total revenues in 1999 and
26% of our total revenues 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.
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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 revenues in
1999 and 26% of our total revenues 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;
- 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.
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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,
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.
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;
- 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
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- 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 II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
27.1 Financial Data Schedule for fiscal quarter ended
September 29, 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 November 13, 2000.
CUSEEME NETWORKS, INC.
By: /s/ KILLKO A. CABALLERO
-----------------------------
Chief Executive Officer and
President
By: /s/ CHRISTINE J. COX
-----------------------------
Chief Financial Officer, Vice
President of Finance and Treasurer
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