<PAGE>
Prospectus Supplement Filed Pursuant to Rule 424(b)(3)
To Prospectus Dated October 8, 1999 Registration No. 333-87029
755,419 Shares
WorldGate Communications, Inc.
Common Stock
--------------------------------------
This prospectus supplement updates and should be read in conjunction
with the prospectus dated October 8, 1999 which covers shares of our common
stock issuable upon exercise of warrants held by certain selling stockholders
and shares of our common stock held by certain selling stockholders. The
issuance of shares of common stock upon the exercise of the warrants is not
covered by the prospectus, but rather only the resale of those shares.
Quarterly Report on Form 10-Q
This prospectus supplement contains our quarterly report on Form 10-Q
for the fiscal quarter ended September 30, 1999. Our Form 10-Q, which includes
our unaudited consolidated financial statements, supplements the information
contained in the prospectus.
--------------------------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------------------------------
The date of this Prospectus Supplement is November 15, 1999.
<PAGE>
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 September 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.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2866697
--------------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
3190 Tremont Avenue
Trevose, Pennsylvania 19053
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 354-5100
- --------------------------------------------------------------------------------
(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 October 29, 1999, there were 21,442,329 shares of common stock, par value
$.01 per share, outstanding.
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . Page 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . Page 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . Page 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 14
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . Page 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . Page 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . Page 14
</TABLE>
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
WORLDGATE COMMUNICATIONS, INC.
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,677 $ 128
Restricted cash - 240
Short - term investments 58,427 -
Accounts receivable, trade 1,993 572
Inventory 6,000 2,737
Prepaid and other assets 1,842 172
------------------ ------------------
Total current assets 97,939 3,849
------------------ ------------------
Property and equipment, at cost 1,821 780
less: accumulated depreciation and amortization (300) (137)
------------------ ------------------
Property and equipment, net 1,521 643
Deposits and other 1,157 1,129
------------------ ------------------
Total assets $ 100,617 $ 5,621
================== ==================
LIABILITY AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion, notes payable $ 538 $ 516
Current portion, capital lease 5 4
Accounts payable 4,218 5,166
Accrued expenses 1,262 128
Accrued compensation and benefits 1,099 1,283
------------------ ------------------
Total current liabilities 7,122 7,097
Notes payable 191 596
Capital leases 8 11
------------------ ------------------
Total liabilities 7,321 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; no shares authorized and outstanding at
September 30, 1999 (unaudited) - 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; no shares authorized and
outstanding at September 30, 1999 (unaudited) - 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; no shares authorized and outstanding at
September 30, 1999 (unaudited) - 9,129
Warrant for Series B Convertible Mandatory Redeemable Preferred Stock - 881
Stockholders' equity (deficit):
Class B common stock, $.01 par value; 27,680,000 authorized, 9,100,801
shares issued and outstanding at December 31, 1998; no shares issued
and outstanding at September 30, 1999 (unaudited) - 91
Common stock, $.01 par value, 50,000,000 shares authorized, no shares
issued at December 31, 1998; 21,442,079 shares issued and
outstanding at September 30, 1999 (unaudited) 214 -
</TABLE>
- 3 -
<PAGE>
<TABLE>
<S> <C> <C>
Additional paid-in capital 170,561 -
Warrant for Class B Common Stock 1,911 -
Accumulated deficit (78,316) (51,300)
Unearned stock-based compensation (1,074) (1,031)
------------------ ------------------
Total stockholders' equity (deficit) 93,296 (52,240)
------------------ ------------------
Total liabilities and stockholders' equity (deficit) $ 100,617 $ 5,621
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------- --------------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 1,626 $ 369 $ 2,916 $ 554
------------------- --------------------- -------------------- ---------------
Costs and expenses:
Cost of revenues 4,791 1,866 10,574 5,030
Engineering and development 3,664 2,283 8,428 6,336
Sales and marketing 2,300 1,424 5,548 3,981
General and administrative 1,501 830 4,081 2,495
Depreciation and amortization 88 33 190 83
------------------- --------------------- -------------------- ---------------
Total costs and expenses 12,344 6,436 28,821 17,925
------------------- --------------------- -------------------- ---------------
Loss from operations (10,718) (6,067) (25,905) (17,371)
Interest and other income, net 1,220 43 2,244 370
Interest expense 32 32 201 74
------------------- --------------------- -------------------- ---------------
Loss before extraordinary item (9,530) (6,056) (23,862) (17,075)
Extraordinary item - extinguishment of
debt - - (1,019) -
------------------- --------------------- -------------------- ---------------
Net loss (9,530) (6,056) (24,881) (17,075)
Accretion on preferred stock - (1,410) (2,475) (4,229)
------------------- --------------------- -------------------- ---------------
Net loss available to common
stockholders $ (9,530) $ (7,466) $ (27,356) $ (21,304)
=================== ===================== ==================== ===============
Basic and diluted net loss per common
share *
Loss before extraordinary item $ (0.44) $ (0.82) $ (1.58) $ (2.34)
Extraordinary item - - (0.06) -
------------------- --------------------- -------------------- ---------------
Net loss $ (0.44) $ (0.82) $ (1.64) $ (2.34)
=================== ===================== ==================== ===============
Weighted average common shares
outstanding - basic and diluted 21,439,399 9,100,801 16,663,137 9,100,801
=================== ===================== ==================== ===============
</TABLE>
- ---------------
* For purposes of computing net loss per common share amounts, loss before
extraordinary item and net loss have been increased by the accretion on
preferred stock.
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (24,881) $ (17,075)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 190 83
Amortization of deferred compensation 297 126
Amortization of debt issue costs 108 -
Loss on the disposition of fixed assets 20 -
Extraordinary loss on early extinguishment of debt 1,019 -
Changes in operating assets and liabilities:
Accounts receivable (1,421) (354)
Inventories (3,263) (2,951)
Prepaid and other assets (1,698) (1,687)
Accounts payable (948) 1,736
Accrued expenses 1,134 (66)
Accrued compensation and benefits (184) 251
---------------- ---------------
Net cash used in operating activities (29,627) (19,937)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,088) (492)
Purchases of short-term investments (133,871) (2,113)
Proceeds from maturities of short-term investments 75,444 14,551
Restricted cash 240 (240)
---------------- ---------------
Net cash (used in) provided by investing activities (59,275) 11,706
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 7,672 8,267
Proceeds from issuance of common stock 120,750 -
Proceeds from exercise of stock options 91 -
Stock issuance costs (9,580) (173)
Proceeds from notes payable 6,000 938
Debt issue costs (530) -
Repayments of capital leases and notes payable (5,952) (259)
---------------- ---------------
Net cash provided by financing activities 118,451 8,773
---------------- ---------------
Net increase (decrease) in cash 29,549 542
Cash and cash equivalents, beginning of period 128 4,880
---------------- ---------------
Cash and cash equivalents, end of period $ 29,677 $ 5,422
================ ===============
Noncash investing and financing activities:
Accretion on preferred stock $ 2,475 $ 4,229
Issuance of warrants in connection with financing agreements 1,030 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 6 -
<PAGE>
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 nine months ended
September 30, 1999 and September 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.
333-87029).
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>
September 30, 1999 December 31, 1998
-------------------------------- ------------------------------------
<S> <C> <C>
Raw Material $3,045,116 $991,670
Work in Progress 674,237 16,461
Finished Goods 2,280,895 1,728,381
-------------------------------- ------------------------------------
$6,000,248 $2,736,512
================================ ====================================
</TABLE>
Customers and vendors held $1,822,525 and $1,264,051 of the Company's
finished goods inventories at September 30, 1999 and December 31, 1998,
respectively, for use in system trials and product testing.
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 payable 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.
- 7 -
<PAGE>
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 $64,000, respectively, was
recognized in the three and nine months ended September 30, 1999. Compensation
expense of approximately $78,000 and $233,000, respectively, was recognized in
the three and nine months ended September 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.
- 8 -
<PAGE>
The following table is a reconciliation of the numerators and denominators used
in computing net loss per common share:
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net loss available to common stockholders:
Loss before extraordinary item $ (9,530) $ (6,056) $ (23,862) $ (17,075)
Accretion on preferred stock -- (1,410) (2,475) (4,229)
------------ ------------ ------------ ------------
Loss available to common stockholders (9,530) (7,466) (26,337) (21,304)
Extraordinary item - extinguishment of debt -- -- (1,019) --
------------ ------------ ------------ ------------
Net Loss available to common stockholders $ (9,530) $ (7,466) $ (27,356) $ (21,304)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted net loss per common share*:
Weighted average shares outstanding 21,439,399 9,100,801 16,663,137 9,100,801
------------ ------------ ------------ ------------
Loss before extraordinary item per share - $ (0.44) $ (0.82) $ (1.58) $ (2.34)
basic and diluted
Extraordinary item - extinguishment of debt -- -- (0.06) --
------------ ------------ ------------ ------------
Net loss per share - basic and diluted $ (0.44) $ (0.82) $ (1.64) $ (2.34)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
* Basic and diluted loss per common share are equal, because common stock
equivalents are not included, as inclusion of such shares would have an
antidilutive 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 $119,000
and $763,000, respectively, for the three and nine months ended September 30,
1999. For the three and nine months ended September 30, 1998 revenues were
$186,000 and $336,000, respectively. Accounts receivable amounted to
approximately $116,000 at September 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 $879,000
and $2,597,000, respectively, for the three and nine months ended September 30,
1999. For the three and nine months ended September 30, 1998, the Company
expensed approximately $2,447,000 and $3,055,000, respectively. Accounts payable
amounted to approximately $467,000 as of September 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 nine months ended September 30, 1999
amounted to approximately $112,000 and $279,000, respectively, from the sale of
equipment for use in certain facilities. There were no revenues recognized from
these stockholders for the three and nine months ended September 30, 1998.
- 9 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS.
We 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 uncertainty that a market for the WORLDGATESM 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
HYPERLINKINGSM 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 Nine Months Ended September 30, 1999 and September 30, 1998.
Revenues. Revenues increased from $369,000 for the three months ended
September 30, 1998 to $1,626,000 for the three months ended September 30, 1999.
Revenues also increased from $554,000 for the nine months ended September 30,
1998 to $2,916,000 for the nine months ended September 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 September 30,1999. At September 30, 1998 there was one
commercial deployment and no participating subscribers. At September 30, 1999
there were 12 commercial deployments, with approximately 11,400 cable customers
subscribing to the WorldGate Service. For the three and nine months ended
September 30, 1999 revenues consisted primarily of headends, keyboards and
related products.
Costs and Expenses.
Cost of Revenues. Cost of revenues consists primarily of
product costs related to initial trials, commercial deployments and WorldGate
modules to be incorporated into set-top boxes. Cost of revenues for the three
and nine months ended September 30, 1999 were $4,791,000 and $10,574,000,
respectively, or approximately 295% and 363%, respectively, of revenues compared
to the cost of revenues of $1,866,000 and $5,030,000, respectively, or
approximately 506% and 908% of revenues, respectively, for the three and nine
months ended September 30, 1998. This reduction in cost of revenues as a percent
of revenues is primarily attributable to the Company's reduction of unit costs
and the reduced requirement for the WorldGate modules to be incorporated into
set-top box deliveries.
Engineering and Development. Engineering and development
expenses primarily consist of the compensation, cost of design, programming,
testing, documentation and support of the Company's hardware, software and
services. Engineering and development costs were $3,664,000 and $8,428,000,
respectively, for the three and nine months ended September 30, 1999, an
increase of approximately 60% and 33%, respectively, when compared to $2,283,000
and $6,336,000, respectively, for the three and nine months ended
- 10 -
<PAGE>
September 30, 1998. The Company anticipates continued increases in staff and
expenditures for the development of 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 nine months ended
September 30, 1999 sales and marketing expenses were $2,300,000 and $5,548,000,
respectively. This resulted in increases of approximately 62% and 39%,
respectively, when compared to sales and marketing expenses of $1,424,000 and
$3,981,000, respectively, for the three and nine months ended September 30,
1998. The increases were primarily the result of additional trade show costs of
$133,000 and $402,000, respectively, for the three and nine month periods,
together with increases in marketing and promotional expenditures, the Company
anticipates that these expenses will continue to increase with the anticipated
growth in the number of new, and the expansion of existing, commercial
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
$1,501,000 and $4,081,000, respectively, for the three and nine months ended
September 30, 1999, an increase of approximately 81% and 64%, respectively, when
compared to $830,000 and $2,495,000, respectively, for the same period in 1998.
This increase of $671,000 and $1,586,000, respectively, was primarily due to a
$273,000 placement fee for financing obtained in March 1999, $277,000 of
additional deferred compensation expense related to options previously granted,
moving costs of $269,000 associated with the Company's relocation to larger
facilities in June 1999 and $800,000 of additional legal, facility and insurance
costs incurred during the nine months ended September 30, 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 $43,000
and $370,000, respectively, for the three and nine months ended September 30,
1998 to $1,220,000 and $2,244,000, respectively, for the three and nine months
ended September 30, 1999. During the first nine months of 1998 the Company
earned interest on the proceeds of a $19,935,000 private placement with multiple
closings from November 1997 through January 1998. In addition, during the three
months ended September 30, 1999 the company earned interest on the proceeds of
$7,952,000 received during this same three month period that was part of a
$16,827,000 private placement with multiple closings from September 1998 through
February 1999. In comparison, during the three and nine months ended September
30, 1999, the Company earned interest on an average cash balance of
approximately $95,000,000 and $60,000,000, 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.
- 11 -
<PAGE>
As of September 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.
At September 30, 1999, the Company had cash and cash equivalents of
$29,677,000 (in addition to $58,427,000 in short-term investments) as compared
to $128,000 at December 31, 1998. Net cash used in operations was $29,627,000
for the nine months ended September 30, 1999, as compared to $19,937,000 used
for the same period in 1998. The increase in net cash used in operations was
primarily attributable to the Company's increased losses in 1999, inventory
increases, accounts receivable increases and the advance payment of engineering
and development work.
Net cash provided by financing activities was $118,451,000, and $8,773,000,
respectively, for the nine months ended September 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.
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 the twelve month period, 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. Many existing computer programs use only two digits to identify
a year. These programs were designed and developed without addressing the impact
of the upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000.
We use hardware, software and other systems which are either internally
developed or provided by third-party vendors. We recognize the need to ensure
that these hardware, software and systems will not be adversely affected by Year
2000 computer program failures. Accordingly, the evaluation of the potential
impact of the Year 2000 issue is an essential and ongoing project. In this
regard we have established procedures for assessing and managing the associated
risks and costs. These procedures involve three general phases: assessment,
remediation and testing. To date, we have contacted all of our major vendors
concerning their Year 2000 compliance and we have received or are in the process
of obtaining written responses or other assurances from them. Communications to
date from these third parties indicate that they expect, at this time, to be
compliant by the Year 2000, based on their progress to date. We have also
assessed and tested our own internally developed systems and believe them to be
Year 2000 compliant. Our operating systems are Unix based, and because Unix
operating systems represent time as the number of seconds since the 1st of
January 1970, instead of a binary representation of the current year, we believe
that these systems are less likely to be affected by the Year 2000 failures.
Based upon our assessment, remediation and testing procedures performed to date,
we do not believe that the Year 2000 issue will have a material effect on our
products, services or operations. However, notwithstanding these procedures, we
may experience degradation in the performance of our systems, or complete system
failure, if our expectations are not realized or we encounter unforeseen
difficulties. Any performance degradation or system failure, whether of our
internal systems or of the systems of our vendors, likely would have a material
effect on our business, financial condition and results of operations.
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.
- 12 -
<PAGE>
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 September 30, 1999, our investments consisted of $88,104,000 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 nine months ended
September 30, 1999 would have decreased by less than $421,000. 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.
- 13 -
<PAGE>
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.
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 equivalent 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
- 14 -
<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: November 15, 1999
/s/ Hal M. Krisbergh
---------------------------------------
Hal M. Krisbergh
President and Chief Executive Officer
/s/ Christine K. Van Horne
---------------------------------------
Christine K. Van Horne
Authorized Officer and Principal Financial Officer
- 15 -
