<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
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: 000-23260
GLOBAL VILLAGE COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3095680
(State or other jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
1144 EAST ARQUES AVE.
SUNNYVALE, CA 94086
(Address of principal executive offices, including zip code)
(408) 523-1000
(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 [ ]
--- ---
The number of shares of Common Stock outstanding as of June 30, 1996 was
16,813,846.
================================================================================
<PAGE> 2
GLOBAL VILLAGE COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets
as of June 30, 1996 and March 31, 1996........................3
b) Condensed Consolidated Statements of Operations
for the three months ended June 30, 1996 and 1995.............4
c) Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1996 and 1995.............5
d) Notes to Condensed Consolidated Financial Statements..........6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................20
Item 5. Other Information ................................................20
Item 6. Exhibits and Reports on Form 8-K .................................20
SIGNATURES ..................................................................22
2
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PART 1. Financial Information
ITEM 1. FINANCIAL STATEMENTS
GLOBAL VILLAGE COMMUNICATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30,1996 MARCH 31,1996
------------ -------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and short-term investments $20,602 $37,719
Accounts receivable, net 21,464 15,310
Inventories, net 8,540 6,033
Deferred income taxes 2,384 2,384
Income tax receivable 2,703 --
Other current assets 2,358 2,064
------- -------
Total current assets 58,051 63,510
Property and equipment, net 10,271 10,793
Other assets 2,238 1,374
------- -------
Total assets $70,560 $75,677
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $22,496 $20,627
Accrued and other liabilities 4,332 6,826
Income taxes payable 299 335
------- -------
Total current liabilities 27,127 27,788
Other long term liabilities 44 58
------- -------
Total liabilities 27,171 27,846
Stockholders' equity 43,389 47,831
------- -------
Total liabilities and stockholders' equity $70,560 $75,677
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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GLOBAL VILLAGE COMMUNICATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1996 1995
-------- -------
(unaudited) (unaudited)
<S> <C> <C>
Net revenue $ 30,441 $29,280
Cost of revenue 22,808 16,071
-------- -------
Gross profit 7,633 13,209
-------- -------
Operating Expense
Research and development 3,923 3,338
Marketing and sales 8,077 5,553
General and administrative 1,442 1,879
Loss on investment 2,191 --
-------- -------
Total operating expenses 15,633 10,770
-------- -------
Income (loss) from operations (8,000) 2,439
Other income, net 234 260
-------- -------
Income (loss) before income taxes (7,766) 2,699
Provision for income taxes (2,703) 1,095
-------- -------
Net income (loss) $ (5,063) $ 1,604
======== =======
Net income (loss) per share $ (0.30) $ 0.09
======== =======
Shares used in computing income (loss) per share 16,809 17,873
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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GLOBAL VILLAGE COMMUNICATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------
1996 1995
--------- -------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
<S> <C> <C>
Net income (loss) ($ 5,063) $ 1,604
Adjustment to reconcile net income/(loss) to net cash provided by operating
activities:
Depreciation and amortization 793 643
Write-off GlobalCenter, Inc. investment 2,191 --
Changes in assets and liabilities:
Accounts receivable, net (6,366) (1,178)
Inventories (2,588) (773)
Income tax receivable (2,703) --
Other current assets (475) (566)
Accounts payable 2,137 (984)
Accrued and other liabilities (1,959) 102
Income taxes payable (36) 910
-------- --------
Net cash (used in) operating activities (14,069) (242)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,151) (2,227)
Other assets (28) 303
Purchases of short-term investments (18,596) (1,415)
Proceeds from sales and maturities of short-term investments 31,178 10,647
Investment in Ex Machina (900) --
Investment in GlobalCenter, Inc. (1,547) --
-------- --------
Net cash provided by investing activities 8,956 7,308
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, net (43) 78
Borrowings under notes payable and line of credit -- 180
Proceeds from issuance of Common Stock, net 588 415
-------- --------
Net cash provided by financing activities 545 673
-------- --------
Effect of exchange rate changes on cash and cash equivalents 33 26
-------- --------
Net increase (decrease) in cash and cash equivalents (4,535) 7,765
Cash and cash equivalents at beginning of period 15,900 5,789
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,365 $ 13,554
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 8 $ 18
Income taxes $ 44 $ 185
Non-cash investing and financing activities:
Non-cash net assets contributed to Global Center, Inc. $ 644 $ --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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GLOBAL VILLAGE COMMUNICATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements as of June 30,
1996 and for the three months ended June 30, 1996 and 1995, include all
adjustments (consisting of only normal recurring adjustments) that in the
opinion of management are necessary to present fairly the financial
information set forth therein, in accordance with generally accepted
accounting principles. Certain reclassifications have been made for
consistent presentation. All periods presented have been restated to
include the historical results of KNX Limited which was acquired in
January 1996. As of April 1996, Global Village Communication, Inc. ("the
Company") no longer consolidates the results of GlobalCenter, Inc. The
Company's interim results are subject to fluctuation. As a result, the
Company believes the results of operations for the interim periods are
not necessarily indicative of the results to be expected for any future
period.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share data has been computed using net income
(loss) and the weighted average number of shares of Common Stock and
common equivalent shares from stock options and warrants outstanding
(when dilutive using the treasury stock method).
3. INVENTORIES
(in thousands) June 30, 1996 March 31, 1996
------------- --------------
Purchased parts $ 549 $ 131
Work in process 303 217
Finished goods 7,688 5,685
-------- --------
$ 8,540 $ 6,033
========= =======
4. CASH AND SHORT-TERM INVESTMENTS
Under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company has classified its investments in certain debt
and equity securities as available-for-sale. Such investments are
recorded at fair value, with unrealized gains and losses reported as a
separate component of stockholders' equity. As of June 30, 1996
unrealized gains and losses were not significant.
Short-term investments generally consist of U.S. Treasury Bills,
commercial paper, and municipal bonds with original maturities in excess
of 90 days. At June 30, 1996, all such investments had maturities or
fixed put features of less than one year.
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Available-for-sale securities consisted of the following (in thousands):
June 30, 1996 March 31, 1996
------------- --------------
U.S. Government securities $ 1,075 $ 1,647
Municipal securities 8,162 20,172
-------- --------
$ 9,237 $ 21,819
========= ========
These securities were classified as short-term investments as of June 30,
1996 and March 31, 1996.
5. ACQUISITION OF KNX LIMITED
In January 1996, the Company acquired KNX Limited, a U.K.-based provider
of ISDN remote access products. The transaction was effected through the
exchange of shares of Common Stock of the Company for all outstanding
shares of KNX Limited. In total, the Company issued, or reserved for
issuance on exercise of options, 1,365,951 shares of the Company's Common
Stock. The acquisition of KNX Limited was accounted for using the pooling
of interests method of accounting. Accordingly, all periods presented
have been restated to include the historical results of KNX Limited.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended March 31, 1996. This report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those anticipated in forward-looking
statements as a result of the risk factors and other cautionary disclosures set
forth below and elsewhere in this report.
OVERVIEW
Global Village Communication, Inc. ("Global Village" or the "Company") was
founded in 1989 and is a leader in the design, development and marketing of
easy-to-use integrated communications products and services for users of
personal computers with Windows, Macintosh, OS/2 and DOS operating systems. The
Company's products enable mobile, home office and networked computer users in
small and medium-sized organizations to communicate efficiently with colleagues,
customers and suppliers.
The Company operates three major divisions: the Communications Systems Division,
the Communications Software Division, and the ISDN Division. For the Apple
Macintosh, the Company's products are characterized by a highly integrated,
proprietary software and hardware design which makes computer communications
easy for the average user. For Windows, OS/2 and DOS operating systems, the
Company provides integrated communication software to original equipment
manufacturers (OEMs) such as IBM and Packard Bell, and through other
distribution channels to end users. For high-performance PC and LAN systems in
small offices or branch offices of large organizations, the Company provides
ISDN cards supporting PPP and Multi-link PPP and integration of ISDN/analog
telephone systems.
The Company in the past has experienced and in the future may experience
significant fluctuations in annual and quarterly operating results that may be
caused by many factors including, among others, the introduction or enhancement
of or recalls of products by Apple Computer, Inc. ("Apple"), IBM-compatible
personal computer (PC) manufacturers, the Company or its competitors; the sales
rates of Apple Macintosh personal computers and PCs; product repair/recall
programs initiated by Apple for its Macintosh computers; difficulties and delays
in connection with the integration of the operations of KNX Limited (Global
Village Communication (U.K.), Ltd., or Global Village U.K.); the size and timing
of individual orders; market price reductions; market acceptance of new products
and technology; seasonality of revenues; customer order deferrals and
accelerations in anticipation of new products; changes in the Company's
operating expenses; performance of the Company's distributors and suppliers; mix
of products sold; quality control of the Company's products; and general
economic conditions. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
The industry in which the Company competes generally is subject to short product
life cycles. In this regard, the Company traditionally has experienced a
significant reduction in the average selling prices of its products as the time
from product introduction elapses. In fiscal year 1996, the Company had
instituted significant price reductions with respect to substantially all of its
products and expects that competitive pressures will continue to necessitate
price reductions. In particular, the Company expects increased competition for
its products for the Apple Macintosh family of personal computers to continue as
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<PAGE> 9
competitors introduce modems for the Apple platform. There can be no assurance
that the trend of reduced average selling prices will not accelerate during
fiscal 1997.
The Company therefore expects that revenues and/or gross margins from its
products for the Apple Macintosh family could remain flat or decrease in future
periods, which would have a material adverse effect on the Company's business
and results of operations unless the Company can generate sufficient revenues
and/or gross margins from its Communications Software Division products and
other products to compensate for any shortfall in revenues from its Apple
platform products. However, there can be no assurance that revenues for the
Apple Macintosh platform family will not decline in future periods. Any price
reduction or decrease in sales volume could have a material adverse effect on
the Company's results of operations.
Because the Company generally ships products within a short period after receipt
of an order, the Company typically does not have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter. The Company's expense levels are based in part on its
expectations as to future revenues. Therefore, the Company may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall of demand in relation to the
Company's expectations or any material delay of customer orders would have an
almost immediate adverse impact on the Company's results of operations and
liquidity. Fluctuations in operating results may also result in volatility in
the price of the Company's Common Stock.
To date, a substantial majority of the Company's revenue has been attributable
to sales of its TelePort, PowerPort and OneWorld product lines (all of which are
designed around the Apple Macintosh family of computers), and the Company
expects that sales of these products will account for a majority of its revenue
for the foreseeable future. The Company's future financial performance will
depend in part on the successful development, introduction and customer
acceptance of new and enhanced versions of its TelePort, PowerPort and OneWorld
products as well as the Company's ability to generate increased sales of PC,
ISDN, or other products. Though the Company continually seeks to further enhance
its product offerings and to develop new products, there can be no assurance
that these development efforts will result in enhanced or new products being
introduced on a timely basis, or that any such product enhancements or new
products will achieve market acceptance. In addition, the announcement by the
Company of new products with the potential to replace current products may cause
customers to defer purchasing the Company's current products which could have a
material adverse effect on the Company's results of operations. As a result of
changing technology and market factors, the Company is subject to the risk that
its inventories may rapidly become obsolete or that the Company may carry
quantities of certain products that exceed current or projected demand. While
the Company writes off inventory that it considers to be excessive or obsolete,
there can be no assurance that the Company's recorded allowances for such
write-offs and returns will be adequate, and a material increase in such
write-offs and returns over historical rates would have a material adverse
effect on the Company's results of operations. There can be no assurance that
the Company will be successful in developing new products or enhancing its
current products on a timely basis, or that such new products or product
enhancements will achieve market acceptance.
The Company derived a portion of its revenue from royalties associated with the
bundling of the Company's product with the Apple Macintosh Performa Family of
Products. The Company now sells that bundled product directly to Apple. The
reduction of royalty revenues from the Apple Macintosh Performa products had an
adverse effect on the overall gross margin for the Company in the first quarter
of fiscal 1997. Given the uncertainty surrounding the sale of Macintosh computer
products, there can be no assurance that revenues and gross margins will not
decrease in future periods if the Company is unable to
9
<PAGE> 10
offset reductions of Apple Macintosh related revenues with increased sales of
its PC products and ISDN related products.
The Company is dependent on sole or limited source suppliers for certain key
components used in its products, particularly the modem chip sets designed and
manufactured by AT&T and Rockwell International. The Company has no guaranteed
supply arrangements with its sole or limited source suppliers. The Company at
times in the past has experienced delays in its ability to manufacture
sufficient product to meet demand due to the inability of certain suppliers to
meet the Company's volume and schedule requirements. There can be no assurance
that any sole or limited source supplier will meet the Company's volume and
scheduling requirements in the future. Any failure of such a supplier to meet
such requirements could have a material adverse effect on the Company's business
and results of operations.
The Company continually evaluates potential candidates for acquisitions. Such
candidates are selected based on products or markets which are complementary to
those of the Company. The Company's operations and financial results could be
significantly affected by such an acquisition. There can be no assurance that
any such contemplated acquisition will be consummated.
The following table sets forth, for the periods indicated, the percentage
relationship to net revenue of certain items in the Company's consolidated
statements of operations.
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1996 1995
------- -------
(unaudited) (unaudited)
<S> <C> <C>
Net revenue 100% 100%
Cost of revenue 75% 55%
---- ---
Gross profit 25% 45%
---- ---
Operating Expense
Research and development 13% 11%
Marketing and sales 27% 20%
General and administrative 5% 6%
Loss on investment 7% 0%
---- ---
Total operating expenses 52% 37%
---- ---
Income (loss) from operations (27)% 8%
Other income, net 1% 1%
---- ---
Income (loss) before income taxes (26)% 9%
Provision for income taxes (9)% 4%
---- ---
Net income (loss) (17)% 5%
==== ===
</TABLE>
10
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NET REVENUE
Net revenue includes revenue from gross shipment's, licenses and royalties, less
reserves for returns and allowances. Net revenue increased 4% to $30.4 million
for the first quarter of fiscal 1997 from $29.3 million for the first quarter of
fiscal 1996. The current quarter's revenues were effected by Apple Computer's
repair program for the Macintosh PowerBook 5300 and 190 models. The
aforementioned repair program was effectively a recall of defective Apple
Macintosh computers. The impact of the repair was that it significantly reduced
the number of Apple computers that would be available for bundling with the
Company's products. The Global Village product most impacted by Apple's repair
program were the PowerPort PC cards.
International revenue decreased to $5.8 million or 19% of net revenues for the
first quarter of fiscal 1997 compared to $9.4 million or 32% for the first
quarter of fiscal 1996. The decrease in international net revenues is primarily
attributable to the decrease in the Company's sales to the Asia region. There
can be no assurance that the Company will be able to maintain or increase
international demand for the Company's products or that the Company's
distributors will be able to effectively meet that demand. A majority of the
international revenue is denominated in U.S. dollars. Risks inherent in the
Company's international business activities generally include unexpected changes
in regulatory requirements, tariffs and other trade barriers, costs and risks of
localizing products for foreign countries, longer accounts receivable payment
cycles, difficulties in managing international distributors, potentially adverse
tax consequences, repatriation of earnings, the burdens of complying with a wide
variety of foreign laws and changes in demand resulting from fluctuations in
exchange rates. In addition, the laws of certain foreign countries do not
provide protection for the Company's intellectual property to the same extent as
do the laws of the United States.
Revenue reserves and allowances are established for estimated future returns due
to stock balancing and discontinued and nonsaleable products. There can be no
assurance that the Company's historical experience regarding returns and
allowances will continue.
COST AND EXPENSES
Cost of revenue primarily consists of cost of materials, contract manufacturing
costs, manufacturing overhead expenses, royalty payments, and warranty expenses.
The Company's gross profit as a percentage of net revenue decreased to 25% from
45% for the first quarter of fiscal 1997 and 1996, respectively. The gross
profit decrease was attributable to both minimal revenue produced by the higher
margin products, such as the PowerPort PC cards, which was adversely impacted by
Apple Computer's repair program for the Macintosh PowerBook 5300 and 190 models,
and additional inventory reserves for slow moving products. Gross profit margins
are likely to fluctuate as a result of the sales mix between lower and higher
margin products, the nature and amount of licensing and royalty income, and
changes in distribution channels, as well as changes in component and production
costs and price reductions. In particular, the Company expects that over the
next several quarters, pricing pressures will continue, and new products will be
introduced by the Company's competitors, both of which may have an adverse
effect on the gross margins from the Company's products for Apple platform.
While the Company believes that the gross margin for the second quarter of
fiscal 1997 will be higher than the first quarter, the Company does not expect
gross margins to return to significantly higher historical levels. In order to
maintain margins, the Company will be required to increase sales of its PC and
ISDN products and to continue to introduce new price competitive products for
the Apple platform, and there can be no assurance that the Company will be able
to do so.
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Research and development expenses increased 18% to $3.9 million or 13% of net
revenues in the first quarter of fiscal 1997 from $3.3 million or 11% of net
revenues in the comparable quarter of fiscal 1996. The increase in the first
fiscal quarter of 1997 compared to the same quarter of fiscal 1996 was primarily
attributable to increased personnel-related spending associated with new product
releases and increased investment in the Company's current products. Development
costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, in compliance with SFAS No. 86.
"Accounting for the Costs of Software to be Sold, Leased, or Otherwise
Marketed." Historically, software development has been substantially completed
concurrently with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized to date. The Company believes that
its future success will depend, in large part, on its ability to enhance its
existing product lines and to continue to develop, introduce and deliver new
products in a timely fashion. Accordingly, the Company expects that research and
development expenses will increase in absolute terms and could increase as a
percentage of total net revenue.
Marketing and sales expenses increased by 45% to $8.1 million or 27% of net
revenues in the first quarter of fiscal 1997 compared to $5.6 million or 20% of
net revenues during the same period of fiscal 1996. Quarterly expenses increased
primarily due to an increase in advertising activities associated with the
introduction of the Company's FocalPoint product. The Company intends to
continue to expand its sales and marketing organizations to promote further
market acceptance of its Windows, OS/2, and DOS communications software, and to
promote and support its ISDN product lines as well as continuing sales and
marketing expenditures for the Apple product lines. Accordingly, marketing and
sales expenses are expected to increase in absolute terms and could increase as
a percentage of total net revenue.
General and administrative expenses decreased 23% to $1.4 million in the first
quarter of fiscal 1997 from $1.9 million in fiscal 1996. General and
administrative expenses decreased as a percentage of net revenues to 5% of net
revenues for the first quarter of fiscal 1997 from 6% of net revenues for the
same period of fiscal 1996.
In April 1996, the Company incorporated its Internet Services Division as a
standalone business called GlobalCenter, Inc. At the same time, the Company
announced that UUNET Technologies, Inc., had acquired a 19.9% equity interest in
Global Center, Inc. As a result, the Company no longer has the ability to
exercise significant control over GlobalCenter, Inc. Accordingly, the Company no
longer consolidated the results of GlobalCenter, Inc. and began to account for
its investment using the equity method of accounting. As a result, of the
refinancing and operating performance of GlobalCenter, Inc. during the first
quarter of fiscal 1997, the Company recorded an investment loss of $2.2 million.
Net other income remained relatively flat at $0.2 million for the first fiscal
quarter of 1997 and $.3 million for the first fiscal quarter of 1996. Net other
income represented 1% of net revenues for the first fiscal quarter of both 1997
and 1996.
The Company's effective tax rates for the first quarter of fiscal 1997 and 1996
were 35% and 41%, respectively. The lower effective tax rate for fiscal 1997
compared to 1996 is primarily attributable to the tax effect of decreased
foreign losses without tax benefit and decreased state taxes.
The Company recorded a net loss of ($5.1) million, or ($0.30) per share for the
first quarter of fiscal 1997 compared to net income of $1.6 million, or $0.09
per share for the comparable quarter of fiscal 1996. The Company incurred a net
loss in the current quarter due to the revenue and gross margin shortfall
associated
12
<PAGE> 13
with Apple's announced repair program, and the write-off of $2.2 million
relating to the refinancing of GlobalCenter, Inc.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments totaled $20.6 million at June 30,
1996, representing 29% of total assets. The three month decrease in cash and
short-term investments of $17.1 million was primarily attributable to the
current quarter operating loss, increased accounts receivable days sales
outstanding, investments in Ex Machina, Inc. and GlobalCenter, Inc., and
increased inventories.
At June 30, 1996, the Company had available lines of credit of approximately
$8.0 million under which the Company had no outstanding borrowings. The
Company's lines of credit are due for renewal in the second quarter of fiscal
1997. The Company expects to renew its lines of credit at terms substantially
similar to its current lines. However, there can be no assurance that the
Company will be able to renew its existing lines of credit or obtain substitute
lines on commercially reasonable terms or at all.
The Company does not expect fiscal 1997 capital expenditures to significantly
exceed historical levels.
In July 1996, the Company completed its minority interest investment in Ex
Machina, Inc. by transfering the remaining $3.1 million of the total $4.0
million investment to Ex Machina, Inc.
The Company believes that cash and short-term investments, together with
available credit facilities, will be sufficient to meet the Company's cash
requirements over the next 12 months.
14
<PAGE> 15
RISK FACTORS
In addition to the other information in this Quarterly Report, one should
carefully consider the following factors in evaluating the Company.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The market for personal computer communications products is characterized by
continual change and improvement in hardware and software technology resulting
in short product life cycles. The Company's success will depend on its ability
to enhance its current products, develop new products on a timely and
cost-effective basis that meet changing customer needs and respond to emerging
industry standards and other technological changes. In particular, the Company
must adapt its products to the evolving technological standards of the various
computer platforms and new technical standards resulting from increases in data
transmission speed and wireless communication, as well as new form factors such
as PCMCIA. Any failure by the Company to anticipate or respond adequately to
changes in technology and customer preferences, or any significant delay in
product development or introduction, would have a material adverse effect on the
Company's results of operations. Due in part to the factors described above, the
Company is subject to the risk that its inventories may rapidly become obsolete
or that the Company may carry quantities of certain products that exceed current
or projected demand. While the Company writes off inventory that it considers to
be excessive or obsolete, the Company has both in the past and in the current
quarter recorded inventory write-offs in excess of available reserves. There can
be no assurance that the Company's recorded allowances for such write-offs will
be adequate in the future, and material write-offs could have a material adverse
effect on the Company's results of operations. In addition, products as complex
as those offered by the Company may contain undetected errors or defects when
first introduced or as new versions are released. There can be no assurance that
despite testing by the Company and by current and potential customers, errors
will not be found in new products after commencement of commercial shipments
resulting in a delay in market acceptance or a recall of such products.
DEPENDENCE ON APPLE MACINTOSH FAMILY OF COMPUTER; ADVERSE EFFECT OF REDUCED
APPLE SALES
A substantial majority of the Company's sales to date have been derived from
products designed for use with the Apple Macintosh family of personal computers,
including the Macintosh desktop series of computers and the PowerBook series of
portable computers. Therefore, the Company is substantially dependent of the
sale of Apple Macintosh computers and the development and sale of new Apple
computers. Due to expected continuing pricing pressures and new product
introductions by the Company's competitors, the Company expects that revenues
from its products for the Apple Macintosh family could remain flat or decrease
in future periods, which would have a material adverse effect on the Company's
business and results of operations unless the Company can generate sufficient
revenues from its PC and other products to compensate for any shortfall in
revenues from its Apple products. The market for personal computers is extremely
competitive and rapidly changing. There can be no assurance that personal
computers competing with the Apple Macintosh family of computers will not
displace the Macintosh products or reduce their growth as such personal
computers are enhanced in their functionality, evolve to support technologically
superior applications or otherwise become economically more attractive.
Apple in the past has experienced difficulty in making the transition associated
with the development, manufacturing, marketing, and sale of certain new
computers. In this regard, the Company anticipates that there will be ongoing
transitions within the Apple product line. These transitions will subject the
Company
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<PAGE> 16
to the risks that (i) potential customers will defer purchases of current
products as a result of, among other things, speculation or premature
announcements about new products, discontinuance of product lines or corporate
restructuring; (ii) the products will not be successfully received in the
marketplace; and (iii) Apple will be unable to adequately meet demand for the
new products. The inability of Apple to successfully develop, manufacture,
market, sell or make the transition to new products, including, among others,
new PowerBook products and PowerPC-based computers, would have a material
adverse effect on the Company's results of operations. In addition, sales of the
Company's products in the past have been adversely affected by the announcement
by Apple of new products with the potential to replace existing products. For
example, in the first quarter of fiscal 1997, when Apple announced its repair
program for Macintosh PowerBook 5300 and 190 models, any decrease in the sales
of the Apple Macintosh family of computers, could have an immediate and material
adverse effect on the Company's results of operations.
DEPENDENCE ON RELATIONSHIP WITH APPLE
The Company relies on its working relationship with Apple, which includes
collaborative product development, sharing of information, product sales to
Apple and licensing of Apple technology. Apple is not contractually obligated to
continue such collaborative development or information sharing activities and
could discontinue such activities at any time. In addition, Apple is not
contractually obligated to renew its licenses with the Company or purchase the
Company's products. Apple is collaborating with other vendors of communications
products that compete with the Company's products, and Apple may elect not to
renew its licenses with the Company in the future. The Company's strategy of
developing products compatible with the Macintosh family of products is
substantially dependent on the Company's ability to gain pre-release access to,
and to develop expertise in, current and future Macintosh product developments
by Apple. There can be no assurance that Apple will continue to cooperate with
the Company, and the inability of the Company to maintain and further develop
its relationship with Apple would have a material adverse effect on the
Company's results of operations. There can be no assurance that Apple will not
initiate product repair/recall programs in the future for its Macintosh
computers, which if it did, would have an adverse impact on the revenues of the
Company.
UNCERTAINTIES RELATING TO KNX ACQUISITION
In January 1996, the Company acquired KNX Limited, a U.K.-based provider of ISDN
remote access products, including basic and primary rate ISDN cards for PCs,
laptops and servers. The markets in which KNX and the Company have operated in
the past are significantly different from one another, and the businesses of the
two companies, including research and development, product development, sales
and marketing and other matters, are significantly different as well. Until the
KNX acquisition, the Company's management had no significant experience in the
ISDN marketplace. In addition, KNX's products have focused on PCs, while the
majority of the Company's products historically have been created for Macintosh
computers. The process of integrating the businesses has required and will
continue to require significant management attention, and there can be no
assurance that the Company will be able to successfully integrate the two
businesses. Failure of the Company to properly manage the integration of the two
businesses would have a material adverse effect on the Company's results of
operations.
WIRELESS TECHNOLOGY
In June 1996, the Company announced that it was entering into a licensing
agreement with Ex Machina, Inc. pursuant to which the Company intends to
develop, market and distribute receivers for Ex Machina's AirMedia Live!
network. In July 1996, the Company completed an equity investment of
approximately $4
16
<PAGE> 17
million. The AirMedia Live! network is designed to provide news and electronic
mail alerts directly to PC desktops without requiring an online connection. The
Company has no experience in developing products based on wireless technology
and there can be no assurance that it will be able to successfully develop,
market or distribute such devices.
COMPETITION
The market for the Company's products is intensely competitive and characterized
by rapidly changing technology, evolving industry communication standards and
frequent new product introductions. A number of competitors offer products that
compete with one or more of the Company's products. Other companies in the
personal computer industry, such as modem vendors, remote access server vendors,
communications software vendors, microprocessor and chip set suppliers,
networking equipment suppliers, fax machine manufacturers, personal computer
manufacturers and telecommunications companies could seek to expand their
product offerings by designing and selling products using competitive technology
that could render the Company's products obsolete or have a material adverse
effect on sales of the Company's products.
Apple currently offers products that compete directly or indirectly with the
Company's products and can be expected to introduce additional competitive
products in the future. Apple currently bundles modems and communications
software with some of its computers, and the Company anticipates that Apple will
continue to bundle such products in the future. In addition, Apple may further
enhance communications functionality within its desktop or portable computers.
Any such additional bundling or enhancement by Apple would have a material
adverse effect on the Company's results of operations.
Many of the Company's competitors have substantially greater financial,
technical, sales marketing and other resources, as well as greater name
recognition and a larger customer base, than the Company. In addition, the
market for the Company's products is characterized by significant price
competition, and the Company expects that it will face increasing pricing
pressures from its current competitors. Accordingly, there can be no assurance
that the Company will be able to provide products that compare favorably with
the products of the Company's competitors or that competitive pressures will not
require the Company to further reduce its prices. Any material reduction in the
prices of the Company's products would negatively affect gross profit as a
percentage of net revenue and would require the Company to increase unit sales
in order to maintain net revenue.
Additionally, the ISDN marketplace is much more competitive than the Apple
marketplace, and the Company does not have a proprietary position as it does in
the Apple marketplace. There can be no assurance that the Company will be able
to compete successfully in the ISDN marketplace.
DEPENDENCE ON MANUFACTURERS
The Company's manufacturing operations consist primarily of turnkey managers,
program managers, quality assurance, packaging and shipping personnel. For a
majority of its hardware assemblies, the Company purchases fully manufactured
and tested units from Flextronics Technologies, Inc., a "turnkey" manufacturing
subcontractor. Components and manufacturing services from the Company's
suppliers are obtained on an as-needed basis. The Company believes that there
are a number of alternative contract manufactures that could produce the
Company's products. However, it could take a significant period of time and
result in significant additional expense to qualify an alternative subcontractor
and commence manufacturing in the event of a reduction or interruption of
production. Therefore, the Company is highly
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<PAGE> 18
dependent, on a short-term basis, on its continued relationship with its primary
"turnkey" manufacturing subcontractor and any reduction, interruption or
termination of this relationship could have a material adverse effect on the
operating results of the Company.
RELIANCE ON DISTRIBUTORS
A majority of the Company's net revenue is derived from sales to distributors
that are not under the direct control of the Company. These distributors carry
multiple product lines and could reduce their support of the Company's products
in favor of a competitor's products or for any other reason. The loss of any of
the Company's major distributors would have a material adverse effect on the
Company's results of operations. Under certain conditions, the Company offers
stock balancing and price protection programs to its distributors. Therefore,
the Company is exposed to the risk of product returns from distributors and
direct reseller customers. There can be no assurance that the Company's recorded
allowances for returns will be adequate and a material increase in returns over
historical rates would have a material adverse effect on the Company's results
of operations.
DEPENDENCE ON KEY PERSONNEL; INTEGRATION OF NEW MANAGEMENT
The Company's future success depends to a significant extent on its senior
management and other key employees, including key development personnel. The
loss of the services of any of these individuals or group of individuals could
have a material adverse effect on the Company's results of operations. The
Company has no employment agreements with any of its key employees. The Company
also believes that its future success will depend in large part on its ability
to attract and retain additional key employees. Competition for such personnel
in the computer industry is intense, and there can be no assurance that the
Company will be successful in attracting and retaining such personnel.
The Company recently has experienced significant growth in the number of
employees. This growth has placed substantial demands on the Company. The
Company's ability to assimilate new personnel will be critical to the Company's
performance. The Company will be required to recruit additional key management
personnel, expand its direct sales force, improve its operational and financial
systems, expand its customer support functions and train, motivate and manage
its employees. There can be no assurance that the Company will be able to manage
these changes successfully.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. The Company has no patents or patent applications
pending. The Company seeks to protect its hardware, software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection.
The Company seeks to protect its brand names under trademark and unfair
competition laws. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to as great an extent as do the laws of the United
States. There can be no assurances that the Company's
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<PAGE> 19
means of protecting its proprietary rights will be adequate or that the
company's competitors will not independently develop similar technology.
The Company is aware of products in addition to its own that are marketed under
the trademarks "PowerPort," "TelePort," "GlobalFax", "FocalPoint" and
"OneWorld". The Company also is aware of a company that operates under the name
Global Villages and provides computer-related services. There can be no
assurance that litigation with respect to these trademarks will not be
instituted by any such parties or by others as has occurred with FocalPoint (see
Item 1. Legal Proceedings). If any such litigation were successful, the Company
could be required to pay damages and cease all use of a particular trademark.
There can be no assurance that any loss of the right to use a trademark would
not reduce sales of the Company's products. In any event, even if the Company
were successful in any such litigation, the legal and other costs associated
with such litigation could be substantial. As is customary in the Company's
industry, the Company from time to time receives communications from third
parties asserting that the Company's products infringe, or may infringe, the
proprietary rights of third parties or seeking indemnification against such
infringement. There can be no assurance that any such claims would not result in
protracted and costly litigation.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been volatile and trading
volumes have been relatively low. Factors such as variations in the Company's
revenue, operating results and cash flow and announcements of technological
innovations or price reductions by the Company, its competitors, Apple, PC
manufacturers, or providers of alternative products could cause the market price
of the Company's Common Stock to fluctuate substantially. In addition, the stock
markets have experienced significant price and volume fluctuations that
particularly have affected technology-based companies and resulted in changes in
the market prices of the stocks of many companies that have not been directly
related to the operating performance of those companies. Such broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Director's has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of the Company's Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue shares of Preferred Stock, any such issuance could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. In addition, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which could have the effect of delaying or
preventing a change of control of the Company. Furthermore, certain provision of
the Company's Certificate of Incorporation may have the effect of delaying or
preventing changes in control or management of the Company, which could
adversely affect the market price of the Company's Common Stock.
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<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 24, 1995, a complaint was filed in the Santa Clara County Superior
Court against the Company and certain individuals after plaintiff's employment
with the Company ended, reference is made to Item 3. Legal Proceedings, of the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996.
In July of 1995, both the Company and certain individuals filed their answers to
the complaint, generally denying the allegations against them and raising
numerous affirmative defenses. No trial date has been set.
On April 8, 1996, in response to trademark infringement claims asserted by
Apollo Travel Services Partnership ("Apollo") and Galileo International
Partnership ("Galileo") with respect to Global Village's trademark FocalPoint,
Global Village filed an action in the Northern District of California seeking a
judicial declaration of non-infringement. Apollo and Galileo subsequently filed
a trademark infringement action in the Northern District of Illinois alleging
infringement of their rights in the mark FOCALPOINT. The venue in which this
dispute will be resolved has not, as yet been determined. In August 1996,
hearings are scheduled in both Northern California and Northern Illinois courts.
Litigation is inherently uncertain, and there can be no assurance that the
resolution of the plaintiff's claims or expense associated with the litigation
will not have a material adverse effect on the Company.
ITEM 5. OTHER INFORMATION
In July 1996, the Company completed its investment of approximately $4,000,000
for a minority equity interest in Ex Machina, Inc. Ex Machina, Inc. is a
privately held wireless solutions company that develops and markets products and
services that merge computing and wireless communication technologies.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of Net Income (Loss) Per Share
(b) Reports on Form 8-K
The Company filed a Form 8-K on May 22, 1996. The Company reported on
such form, under Item 5, stating that the Company expected a
significant revenue decline from the prior quarter and a loss for the
quarter.
ITEMS 2, 3, AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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EXHIBIT 11.1
GLOBAL VILLAGE COMMUNICATION, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------
1996 1995
--------- --------
<S> <C> <C>
Net income (loss) $ (5,063) $ 1,604
======== ========
Weighted average share outstanding during the period 16,809 16,167
Common stock equivalents -- 1,706
-------- --------
Shares used in computing net income (loss) per share 16,809 17,873
-------- --------
Net income (loss) per share (1) $ (0.30) $ 0.09
======== ========
</TABLE>
(1) Fully diluted earnings per share have not been presented because the effects
are not material.
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<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Global Village Communication, Inc.
August 5, 1996 /s/ James M. Walker
-------------- ----------------------------------
Date James M. Walker
Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000875983
<NAME> GLOBAL VILLAGE COMMUNICATION, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,365
<SECURITIES> 9,237
<RECEIVABLES> 21,464
<ALLOWANCES> 0
<INVENTORY> 8,540
<CURRENT-ASSETS> 58,051
<PP&E> 16,922
<DEPRECIATION> (6,651)
<TOTAL-ASSETS> 70,560
<CURRENT-LIABILITIES> 27,127
<BONDS> 44
0
0
<COMMON> 43,829
<OTHER-SE> (440)
<TOTAL-LIABILITY-AND-EQUITY> 70,560
<SALES> 28,349
<TOTAL-REVENUES> 30,441
<CGS> 18,700
<TOTAL-COSTS> 22,808
<OTHER-EXPENSES> 15,633
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (7,766)
<INCOME-TAX> (2,703)
<INCOME-CONTINUING> (5,063)
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<NET-INCOME> (5,063)
<EPS-PRIMARY> (.30)
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</TABLE>
