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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM 10-Q
Mark One
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended June 30, 1999.
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From ---------- To ------------ .
Commission file number: 333-71997
WORLDGATE COMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2866697
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(State of Incorporation) (I.R.S. Employer Identification No.)
3190 Tremont Avenue
Trevose, Pennsylvania 19053
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(Address of Principal Executive Offices) (Zip Code)
(215) 354-5100
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of July 31, 1999, there were 21,441,145 shares of common stock, par value
$.01 per share, outstanding.
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WORLDGATE COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements and Supplementary Data ..................... Page 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ Page 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... Page 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................... Page 11
Item 2. Changes in Securities and Use of Proceeds ....................... Page 11
Item 4. Submission of Matters to a Vote of Security Holders ............. Page 12
Item 6. Exhibits and Reports on Form 8-K ................................ Page 12
</TABLE>
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PART I. FINANCIAL INFORMATION
WORLDGATE COMMUNICATIONS, INC.
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,502 $ 128
Restricted cash -- 240
Short - term investments 85,810 --
Accounts receivable, trade 966 572
Inventory 4,956 2,737
Prepaid and other assets 1,260 172
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Total current assets 107,494 3,849
--------- --------
Property and equipment, at cost 1,389 780
less: accumulated depreciation and amortization (239) (137)
--------- --------
Property and equipment, net 1,150 643
Deposits and other 1,127 1,129
--------- --------
Total assets $ 109,771 $ 5,621
--------- --------
--------- --------
LIABILITY AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion, notes payable $ 540 $ 516
Current portion, capital lease 4 4
Accounts payable 3,137 5,166
Accrued expenses 2,049 128
Accrued compensation and benefits 760 1,283
Deferred credits 268 --
--------- --------
Total current liabilities 6,758 7,097
Notes payable 320 596
Capital leases 10 11
--------- --------
Total liabilities 7,088 7,704
--------- --------
Commitments and contingent liabilities
Series A Convertible Mandatory Redeemable Preferred Stock,
$.01 par value, 2,752,111 shares authorized and outstanding
at December 31, 1998 and no shares authorized and
outstanding at June 30, 1999 -- 16,578
Series B Convertible Mandatory Redeemable Preferred Stock,
$.01 par value, 3,270,760 shares authorized and 2,803,031
outstanding at December 31, 1998 and no shares
authorized and outstanding at June 30, 1999 -- 23,569
Series C Convertible Mandatory Redeemable Preferred Stock,
$.01 par value, 3,181,819 shares authorized and
832,277 outstanding at December 31, 1998 and no shares
authorized and outstanding at June 30, 1999 -- 9,129
Warrant for Series B Convertible Mandatory Redeemable
Preferred Stock -- 881
Stockholders' equity (deficit):
Class B common stock, $.01 par value; 27,608,000 shares
authorized, 9,100,801and 21,424,513 shares issued and
outstanding at December 31, 1998 and June 30, 1999,
respectively 214 91
Additional paid-in capital 170,518 --
Warrant for Class B Common Stock 1,911 --
Accumulated deficit (68,786) (51,300)
Unearned stock-based compensation (1,174) (1,031)
--------- --------
Total stockholders' equity (deficit) 102,683 (52,240)
--------- --------
Total liabilities and stockholders' equity (deficit) $ 109,771 $ 5,621
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues $ 741 $ 182 $ 1,290 $ 185
---------- --------- ---------- ---------
Costs and expenses:
Cost of revenues 3,950 1,241 5,783 3,164
Engineering and development 2,434 1,767 4,764 4,053
Sales and marketing 1,893 1,376 3,248 2,557
General and administrative 1,443 843 2,580 1,665
Depreciation and amortization 65 29 102 50
---------- --------- ---------- ---------
Total costs and expenses 9,785 5,256 16,477 11,489
---------- --------- ---------- ---------
Loss from operations (9,044) (5,074) (15,187) (11,304)
Interest and other income, net 986 128 1,024 326
Interest expense 76 26 169 41
---------- --------- ---------- ---------
Loss before extraordinary item (8,134) (4,972) (14,332) (11,019)
Extraordinary item - extinguishment of
debt (1,019) -- (1,019) --
Net loss (9,153) (4,972) (15,351) (11,019)
Accretion on preferred stock (364) (1,409) (2,475) (2,819)
---------- --------- ---------- ---------
Net loss available to common
stockholders $(9,517) $(6,381) $(17,826) $(13,838)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Basic and diluted net loss per common
share *
Loss before extraordinary item $ (0.44) $ (0.70) $ (1.18) $ (1.52)
Extraordinary item (0.05) -- (0.07) --
---------- --------- ---------- ---------
Net loss $ (0.49) $ (0.70) $ (1.25) $ (1.52)
---------- --------- ---------- ---------
Weighted average common shares
outstanding - basic and diluted 19,313,383 9,100,801 14,235,304 9,100,801
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
* For purposes of computing net loss per common share amounts, loss before
extraordinary item and net loss have been reduced by the accretion on preferred
stock.
The accompanying notes are an integral part of these financial statements.
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CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,351) $(11,019)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 102 50
Amortization of deferred compensation 198 72
Amortization of debt issue costs 108 --
Extraordinary loss on early extinguishment of debt 1,019 --
Changes in operating assets and liabilities:
Accounts receivable (394) (171)
Inventories (2,219) (1,529)
Prepaid and other assets (1,086) (273)
Accounts payable (2,029) 869
Accrued expenses 1,921 529
Accrued compensation and benefits (523) (70)
Deferred credits 268 --
--------- --------
Net cash used in operating activities (17,986) (11,542)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (609) (459)
Purchases of short-term investments (133,871) (2,113)
Proceeds from maturities of short-term investments 48,061 10,055
Restricted cash 240 (240)
--------- --------
Net cash (used in) provided by investing activities (86,179) 7,243
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 7,672 142
Proceeds from issuance of common stock 120,750 --
Proceeds from exercise of stock options 43 --
Stock issuance costs (9,574) --
Proceeds from notes payable 6,000 918
Debt issue costs (530) --
Repayments of capital leases and notes payable (5,822) (130)
--------- --------
Net cash provided by financing activities 118,539 930
--------- --------
Net increase (decrease) in cash and cash equivalents 14,374 (3,369)
Cash and cash equivalents, beginning of period 128 4,880
--------- --------
Cash and cash equivalents, end of period $ 14,502 $ 1,511
--------- --------
--------- --------
Noncash investing and financing activities:
Accretion on preferred stock $ 2,475 $ 2,819
Issuance of warrants in connection with financing agreements 1,030 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
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WORLDGATE COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation. The unaudited financial statements of WorldGate
Communications, Inc. (the "Company") for the three and six months ended June 30,
1999 and June 30, 1998, presented herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
for quarterly reports on Form 10-Q. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations.
These financial statements should be read in conjunction with the
financial statements for the year ended December 31, 1998 and the notes thereto
included in the Company's Registration Statement on Form S-1 (No. 333-71997).
The financial information in this Report reflects, in the opinion of
management, all adjustments of a normal recurring nature necessary to present
fairly the results for the interim period. Quarterly operating results may not
be indicative of results which would be expected for the full year. The Company
operates in a single segment.
2. Recent Accounting Pronouncements.
Cost of Computer Software. Effective January 1, 1999, the Company
adopted Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". Under SOP No. 98-1,
the Company capitalizes the cost of internal-use software that has a useful life
in excess of one year. Such costs sometimes include payroll-related costs for
internally developed software. Subsequent additions, modifications or upgrades
to internal-use software are capitalized only to the extent that they allow the
software to perform a task it currently does not perform. Software maintenance
and training costs are expensed in the period in which they are incurred.
3. Inventories. Inventories are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
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<S> <C> <C>
Raw Material $1,950,890 $991,670
Work in Progress 839,634 16,461
Finished Goods 2,165,733 1,728,381
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$4,956,257 $2,736,512
------------- -----------------
------------- -----------------
</TABLE>
Customers held $1,613,150 and $1,264,051 of the Company's finished
goods inventories at June 30, 1999 and December 31, 1998, respectively, for use
in system trials.
4. Financing Agreements. In March 1999, the Company received proceeds of
$911,600 and $4,558,000 through the issuance of $1,000,000 and $5,000,000 of
notes payable with a stated interest rate of 12.48% due September 1999 and
December 1999, respectively. In connection with the issuance of these notes
payable, the holders of the notes received warrants to purchase up to 331,490
shares of common stock at an exercise price of $16.50 per share. The fair value
of the warrants has been accounted for as an additional discount of the notes
payable. These notes payables became immediately due, and were paid, upon the
completion of the Company's initial public offering ("IPO") (see footnote no.
6).
5. Commitments and Contingencies.
Legal. The Company is a party to various legal actions. The Company
does not expect that the ultimate resolution of these legal matters in future
periods will have a material effect on its financial position or cash flows, but
it could have a material effect on its results of operations.
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6. Stockholders' Equity (Deficit).
Initial Public Offering. In April 1999, the Company completed its IPO
of 5,000,000 shares of its common stock at $21.00 per share. The proceeds to the
Company, net of underwriting discounts, commissions and offering expenses were
approximately $96,545,000. In February 1999, the Board of Directors approved a
2-for-3 stock split effective immediately prior to the IPO. All common stock
share data has been retroactively adjusted to reflect this change. Concurrent
with the closing of the IPO, all outstanding shares of the Series C Convertible
Preferred Stock and Series B Convertible Preferred Stock automatically converted
into an equal number of shares of Class B Common Stock, and all outstanding
shares of Series A Convertible Preferred Stock automatically converted into two
shares of Class B Common Stock. All of the outstanding shares of Class B Common
Stock then converted into Class A Common Stock. In May 1999 the Company closed
on the exercise by the underwriters of their over-allotment option to purchase
750,000 additional shares of common stock at $21.00 per share. The proceeds to
the Company, net of underwriting discounts, were approximately $14,648,000. Upon
the completion of the IPO in April 1999, the Company repaid the loans obtained
during March 1999 (see footnote 4). As a result of the repayment of the loans
the Company recognized a loss on the early extinguishment of debt of $1,019,000
in April 1999.
Convertible Mandatory Redeemable Preferred Stock. In January and
February 1999, the Company sold 697,437 shares of Series C Preferred Stock
(convertible into 464,958 shares of common stock, giving effect to a 2-for-3
stock split) at a purchase price of $11.00 per share for approximately
$7,600,000. Upon completion of the IPO these shares were converted into shares
of common stock.
Stock Option Plan. Compensation expense of approximately $340,000 is
being recognized over the four-year vesting period of options which were granted
to employees to acquire 58,600 shares of common stock in January 1999 at below
the estimated fair market value at the time of such grants. Compensation expense
related to these options of approximately $21,000 and $42,000, respectively, was
recognized in the three and six months ended June 30, 1999. Compensation expense
of approximately $78,000 and $156,000, respectively, was recognized in the three
and six months ended June 30, 1999 that related to options granted prior to
January 1, 1999 at less than the fair market value at the time of such grants.
Basic and Diluted EPS. The Company computes net loss per common share
in accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per common
share is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per common share excludes
potential common shares if the effect is antidilutive.
The following table is a reconciliation of the numerators and denominators used
in computing net loss per common share:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE Three months ended June 30 Six months ended June 30
AMOUNTS)
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net loss available to common stockholders:
Loss before extraordinary item $ (8,134) $ (4,972) $ (14,332) $ (11,019)
Accretion on preferred stock (364) (1,409) (2,475) (2,819)
------------ ----------- ------------ -----------
Loss available to common stockholders* (8,498) (6,381) (16,807) (13,838)
Extraordinary item - extinguishment of debt (1,019) -- (1,019) --
------------ ----------- ------------ -----------
Net Loss available to common stockholders* $ (9,517) $ (6,381) $ (17,826) $ (13,838)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Basic and diluted net loss per common share**:
Weighted average shares outstanding 19,313,383 9,100,801 14,235,304 9,100,801
------------ ----------- ------------ -----------
Loss before extraordinary item per share - $ (0.44) $ (0.70) $ (1.18) $ (1.52)
basic and diluted
Extraordinary item - extinguishment of debt (0.05) -- (0.07) --
------------ ----------- ------------ -----------
Net loss per share - basic and diluted $ (0.49) $ (0.70) $ (1.25) $ (1.52)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
* Loss and net loss available to common stockholders is the same for purposes
of calculating basic and diluted loss per common share.
** Basic and diluted loss per common share are equal, since common stock
equivalents are not included, as inclusion of such shares would have an
anti-dilutive effect.
7. Related Party Transactions.
In 1997, the Company entered into an agreement with a cable operator who is
an investor. Revenues recognized from this investor were approximately $213,000
and $644,000, respectively, for the three and six months ended June 30, 1999.
For the three and six months ended June 30, 1998 revenues were $4,000 and
$150,000, respectively. Accounts receivable amounted to approximately $214,000
at June 30, 1999 and $176,000 at December 31, 1998.
In 1997 and 1998, the Company entered into agreements with four
stockholders to provide the Company with engineering and development support. As
a result of these agreements, the Company has expensed approximately $1,338,000
and $1,718,000, respectively, for the three and six months ended June 30, 1999.
For the three and six months ended June 30, 1998, the Company expensed
approximately $324,000 and $608,000, respectively. Accounts payable amounted to
approximately $82,000 as of June 30, 1999 and approximately $41,000 at December
31, 1998. These stockholders are suppliers of technology and components for the
Company's products and services. These agreements provide for licensing of
technology, as well as contracted services, including hardware and software
development, product testing and certification, and the creation and development
of tools and systems to facilitate the Company's engineering efforts. These
agreements do not provide for ongoing royalties, purchase provisions, nor for
any requirement to provide additional funding to the Company. Also, revenues
recognized from stockholders who provide engineering and development support,
for the three and six months ended June 30, 1999 amounted to approximately
$111,000 and $167,000, respectively, from the sale of equipment for use in
certain facilities. There were no revenues recognized from stockholders for the
three and six months ended June 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS.
We and our representatives may from time to time make written or oral
forward-looking statements, including those contained in the foregoing
Management's Discussion and Analysis of Financial Condition and Results of
Operations. In order to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we are hereby identifying
certain important factors which could cause our actual results, performance or
achievement to differ materially from those that may be contained in or implied
by any forward-looking statement made by or on behalf of WorldGate. The factors,
individually or in the aggregate, that could cause such forward-looking
statements not to be realized include, without limitation, the following: (1)
difficulty in developing and implementing marketing and business plans, (2)
continued losses, (3) industry competition factors and other
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uncertainty that a market for the WORLDGATE-SM- Service will develop,
(4) challenges associated with cable operators (including, uncertainty that
they will offer the WORLDGATE Service, inability to predict the manner in
which they will market and price the WORLDGATE Service and existence of
potential conflicts of interests and contractual limitations impeding their
ability to offer the WORLDGATE Service), (5) challenges associated with cable
box manufacturers (including uncertainty that they will support our
technology in their cable boxes, (6) challenges with advertisers and
television programmers (including uncertainties that they will support our
CHANNEL HYPERLINKING-SM- technology), (7) loss of any one of our largest
customers, (8) departure of one or more key persons and (9) other risks
identified in filings with the Securities and Exchange Commission. We caution
you that the foregoing list of important factors is not intended to be, and
is not, exhaustive. We do not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of WorldGate.
Results of Operations:
Three and Six Months Ended June 30, 1999 and June 30, 1998.
Revenues. Revenues increased from $182,000 for the three months ended June
30, 1998 to $741,000 for the three months ended June 30, 1999. Revenues also
increased from $185,000 for the six months ended June 30, 1998 to $1,290,000 for
the six months ended June 30, 1999. Substantially, all revenues continue to be
attributable to the increase in commercial deployments of the WorldGate Service
and cable subscribers subscribing to the WorldGate Service as of June 30,1999.
At June 30, 1998 there was one commercial deployment and no participating
subscribers. As of June 30, 1999 there were 10 commercial deployments, with
approximately 7,300 cable customers subscribing to the WorldGate Service. For
the three and six months ended June 30, 1999 revenues consisted of $716,000 and
$1,245,000, respectively, of headend, keyboard and related product deliveries
and $25,000 and $45,000, respectively, from subscriber fees.
Costs and Expenses.
Cost of Revenues. Cost of revenues consist primarily of
product costs related to initial trials, commercial deployments and WorldGate
modules to be incorporated into the set-top boxes. Cost of revenues for the
three and six months ended June 30, 1999 were $3,950,000 and $5,783,000,
respectively, or approximately 500% of revenues compared to the cost of revenues
of $1,241,000 and $3,164,000, respectively, or approximately 682% and 1710% of
revenues, respectively, for the three and six months ended June 30, 1998. This
reduction in cost of revenues as a percent of revenues is primarily attributable
to the Company's reduction of nearly 40% in unit costs.
Engineering and Development. Engineering and development
expenses primarily consist of the cost of design, programming, testing,
documentation and support of the Company's hardware, software and services.
Engineering and development costs were $2,434,000 and $4,764,000, respectively,
for the three and six months ended June 30, 1999, an increase of approximately
38% and 6%, respectively when compared to $1,767,000 and $4,503,000,
respectively, for the three and six months ended June 30, 1998. The Company
anticipates continued increases in staff and expenditures for new and enhanced
products, software and services.
Sales and Marketing. Sales and marketing costs consist
primarily of compensation, attendance at conferences and trade shows, travel
costs necessary to cover a domestic and international customer market base,
promotions and other marketing programs substantially related to initial trial
installations and commercial deployments. For the three and six months ended
June 30, 1999 sales and marketing expenses were $1,893,000 and $3,248,000,
respectively. This resulted in increases of approximately 38% and 27%,
respectively, when compared to sales and marketing expenses of $1,376,000 and
$2,557,000, respectively, for the three and six months ended June 30, 1998. The
increases were primarily the result of additional trade show costs of $377,000
together with increases in marketing and promotional expenditures which the
Company anticipates will continue to increase with the anticipated growth in the
number of new, and the expansion of existing, commercial
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deployments. Additional increased expenditures are also anticipated for
advertising and other trade promotional activities.
General and Administrative. General and administrative
expenses consist primarily of expenditures for administration, office and
facility operations, finance and general management activities, including legal,
accounting and other professional fees. General and administrative expenses were
$1,443,000 and $2,580,000, respectively, for the three and six months ended June
30, 1999, an increase of approximately 71% and 55%, respectively, when compared
to $843,000 and $1,665,000, respectively, for the same period in 1998. This
increase of $600,000 and $915,000, respectively, was primarily due to a $273,000
placement fee for financing obtained in March 1999, $184,000 of additional
deferred compensation expense related to options previously granted, moving
costs of $237,000 associated with the Company's relocation to larger facilities
in June 1999 and $160,000 of additional legal and insurance costs incurred in
the second quarter of 1999 over the same period in 1998. The Company anticipates
that general and administrative expenses will continue to increase as the
Company hires additional personnel and incurs additional costs related to being
a public company, such as expenses related to directors' and officers'
insurance, investor relations programs and increased professional fees.
Interest and Other Income and Interest Expense. Interest and
other income and interest expense consist of interest earned on cash and cash
equivalents and short-term investments, and interest expense on equipment
financing and short-term debt. Interest and other income increased from $128,000
and $326,000, respectively, for the three and six months ended June 30, 1998 to
$986,000 and $1,024,000, respectively, for the three and six months ended June
30, 1999. During the first six months of 1998 the Company earned interest on the
proceeds of a $19,935,000 private placement that closed on January 23, 1998. In
comparison, during the three and six months ended June 30, 1999, the Company
earned interest on an average cash balance of approximately $83,000,000 and
$42,000,000, respectively, and incurred interest expense related to its
$6,000,000 financing and $1,100,000 equipment financing facility.
Extraordinary Loss. As a result of the early extinguishment in April 1999
of Notes issued by the Company in March 1999 (see footnote no. 4), the Company
recognized a loss of $1,019,000 primarily related to the remaining unamortized
debt discount balance.
Income Taxes. The Company has incurred net operating losses since inception
and accordingly had no income taxes due and has not recorded any income tax
benefit for those losses.
Liquidity and Capital Resources.
As of June 30, 1999, the Company's primary source of liquidity consisted of
cash and debt instruments that are highly liquid, are of high quality investment
grade and predominantly have maturities less than one year with the intent to
make such funds readily available for operating purposes.
At June 30, 1999, the Company had cash and cash equivalents of $14,502,000
(in addition to $85,810,000 in short term investments) as compared to $128,000
at December 31, 1998. Net cash used in operations was $17,986,000 for the six
months ended June 30, 1999, as compared to $11,542,000 used for the same period
in 1998. The increase in net cash use for operations was primarily attributable
to the Company's increased losses in 1999, inventory increases and the advance
payment of engineering and development work.
Net cash provided by financing activities was $118,539,000, and $930,000,
respectively, for the six months ended June 30, 1999 and 1998. This increase
resulted from the Company's initial public offering ("IPO") in April 1999, with
gross proceeds totaling $105,000,000. Approximately $8,455,000 in IPO expenses
incurred were offset against these proceeds.
In May 1999, the Company received additional gross proceeds of $15,750,000
from the underwriters in connection with the exercise of their over-allotment
option granted in the IPO. Offering expenses related to these additional
proceeds were approximately $1,103,000.
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Assuming that there is no significant change in the Company's business, the
Company believes that the proceeds from the IPO will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next twelve months. After these twelve months, we may require additional
funds to support our working capital requirements or for other purposes and may
seek to raise additional funds through public or private equity financing, bank
debt financing, or from other sources. There can be no assurance that this
capital will be available or on terms acceptable to us, if at all.
Y2K Compliance. We continue to assess the Year 2000 readiness of our third-party
supplied software, computer technology and other services. Based upon the
results of this assessment, we will develop and implement, if necessary, a
remediation plan with respect to any third-party software, computer technology
and services which may fail to be Year 2000 compliant. We have assessed our
proprietary software and internal systems and believe them to be Year 2000
compliant. We anticipate that our systems, including components thereof provided
by third-party vendors, will be Year 2000 compliant by the end of 1999. At this
time, the expenses associated with this assessment and potential remediation
plan appear to be minimal as third-party supplied software, computer technology
and other services are assessed for Year 2000 compliance as part of our normal,
on-going, and standard evaluation procedures for all components and software
acquired or developed. The failure of our software and computing systems and our
third-party vendors to be Year 2000 compliant could have a material adverse
effect on us.
Recent Accounting Pronouncements. In March 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 provides, among other things, guidance for
determining whether computer software is for internal use and when the cost
related to such software should be expensed as incurred or capitalized and
amortized. SOP 98-1 is required to be applied prospectively. We adopted SOP 98-1
on January 1, 1999 and do not expect the adoption of SOP 98-1 to have a material
effect on our results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK. Our exposure to market risk related to changes in interest
rates relates primarily to our investment portfolio. We invest in instruments
that meet high credit quality standards, and we limit the amount of credit
exposure to any one issue, issuer and type of investment.
As of June 30, 1999, our investments consisted of $100,208,000 most of
which were cash equivalents having a maturity of less than one year. Due to the
average maturity and conservative nature of our investment portfolio, a sudden
change in interest rates would not have a material effect on the value of the
portfolio. Management estimates that had the average yield of our investments
decreased by 100 basis points, our interest income for the six months ended June
30, 1999 would have decreased by less than $195,000. This estimate assumes that
the decrease occurred on the first day of 1999 and reduced the yield of each
investment instrument by 100 basis points. The impact on our future interest
income of future changes in investment yields will depend largely on the gross
amount of our investments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. There has been no material development in any of the
Legal Proceedings in which the Company is currently a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
UNREGISTERED SALES OF SECURITIES. During the three month period commencing on
April 1, 1999, and ending June 30, 1999, we made the following sales of
unregistered securities:
- 11 -
<PAGE>
Pursuant to our stock option plan, as amended, we granted options to
purchase a total of 8940 shares of common stock to our employees and
consultants at an exercise prices ranging from $21.00 to $27.00 per share. In
granting the options, we relied upon exemptions from registration set forth
in Rule 701 and Section 4(2) of the Securities Act until such time as we
filed a Registration Statement on Form S-8 with respect to such plan.
OUR INITIAL PUBLIC OFFERING/USE OF PROCEEDS.
On April 15, 1999, our Registration Statement on Form S-1 (Commission file
number 333-71997) covering the initial public offering of 5,000,000 shares of
our common stock at $21 per share was declared effective. The offering commenced
on April 15, 1999, and was managed by Gerard Klauer Mattison & Co., Inc.,
Jefferies & Company, Inc. and Janney Montgomery Scott Inc. as representatives of
the several underwriters named in the Registration Statement (the
"Underwriters").
On May 10, 1999, we closed on the Underwriters' exercise of their
over-allotment option to purchase an additional 750,000 shares of our common
stock at the initial public offering price of $21 per share. The total price to
the public for the shares of common stock offered and sold by us was
$120,750,000. The amount of expenses incurred for our account in connection with
the offering are as follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions $8,452,500
Finder's fees --
Expenses paid to or for the Underwriters --
Other expenses $1,106,000
----------
Total expenses $9,558,000
----------
----------
</TABLE>
All of the foregoing expenses were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons owning ten
percent (10%) or more of our common stock; or (iii) our affiliates.
The net proceeds of the offering to us (after deducting the foregoing
expenses) was $111,192,000. From the effective date of the Registration
Statement, the net proceeds have been used for the following purposes:
<TABLE>
<S> <C>
Construction of plant, building and facilities $ --
Purchase and installation of machinery and equipment 39,000
Purchase of real estate
Acquisition of other business (including transaction costs)
Repayment of indebtedness 5,443,000
Working capital 2,710,000
Temporary investments, including cash and cash equivalents 8,000,000
Other purposes (for which at least $100,000 has been used) including:
investments, including debt instruments of the United States Government
and its agencies and in high
quality corporate issuers 95,000,000
------------
$111,192,000
------------
------------
</TABLE>
Except for compensation expenses, all of the foregoing payments were direct
or indirect payments to persons other than (i) directors, officers or their
associates; (ii) persons owning ten percent (10%) or more of the Company's
common stock; or (iii) affiliates of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. NONE
- 12 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1999
/s/ Hal M. Krisbergh
---------------------------------------
Hal M. Krisbergh
President and Chief Executive Officer
/s/ David A. Dill
---------------------------------------
David A. Dill
Chief Financial Officer
- 13 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,502,000
<SECURITIES> 85,810,000
<RECEIVABLES> 966,000
<ALLOWANCES> 0
<INVENTORY> 4,956,000
<CURRENT-ASSETS> 107,494,000
<PP&E> 1,389,000
<DEPRECIATION> 239,000
<TOTAL-ASSETS> 109,771,000
<CURRENT-LIABILITIES> 6,758,000
<BONDS> 330,000
0
0
<COMMON> 214,000
<OTHER-SE> 102,469,000
<TOTAL-LIABILITY-AND-EQUITY> 109,771,000
<SALES> 1,290,000
<TOTAL-REVENUES> 1,290,000
<CGS> 5,783,000
<TOTAL-COSTS> 10,694,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,000
<INCOME-PRETAX> (14,332,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,332,000)<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> (1,019,000)
<CHANGES> 0
<NET-INCOME> (15,351,000)<F1>
<EPS-BASIC> (1.25)
<EPS-DILUTED> (1.25)
<FN>
<F1>For purposes of computing net loss per common share loss before extraordinary
item and net loss have been reduced by the accretion on preferred stock.
</FN>
</TABLE>
