<PAGE> 1
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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 SEPTEMBER 30, 1997
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 September 30, 1997 was
16,981,022.
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<PAGE> 2
GLOBAL VILLAGE COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets
as of September 30, 1997 and March 31, 1997 ..................... 3
b) Condensed Consolidated Statements of Operations
for the three and six months ended September 30, 1997 and 1996... 4
c) Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1997 and 1996 ............ 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 ........................................................ 18
Item 2. Changes in Securities .................................................... 18
Item 3. Defaults Upon Senior Securities .......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ...................... 19
Item 5. Other Information ........................................................ 19
Item 6. Exhibits and Reports on Form 8-K ......................................... 20
SIGNATURES ........................................................................... 20
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL VILLAGE COMMUNICATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------- ---------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,022 $ 9,687
Accounts receivable, net 13,070 4,324
Receivable from sale of GlobalCenter, Inc.
investment 3,691 --
Inventories, net 2,285 2,071
Income tax receivable -- 7,665
Other current assets 487 343
------- -------
Total current assets 22,555 24,090
Property and equipment, net 5,374 6,929
Investment in AirMedia, Inc. -- 4,043
Other assets 82 138
------- -------
Total assets $28,011 $35,200
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit borrowings $ -- $ 4,241
Accounts payable 15,048 15,971
Accrued and other liabilities 7,533 7,638
------- -------
Total current liabilities $22,581 27,850
Stockholders' equity 5,430 7,350
------- -------
Total liabilities and stockholders' equity $28,011 $35,200
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
GLOBAL VILLAGE COMMUNICATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- -----------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 17,100 $ 32,298 $ 33,007 $ 60,741
Cost of revenue 12,038 21,762 22,354 43,488
-------- -------- -------- --------
Gross profit 5,062 10,536 10,653 17,253
Operating expenses:
Research and development 2,722 3,082 5,144 6,443
Marketing and sales 3,210 6,048 7,003 13,581
General and administrative 1,043 1,995 2,451 3,366
Loss from investment in GlobalCenter, Inc. -- -- -- 2,191
-------- -------- -------- --------
Total operating expenses 6,975 11,125 14,598 25,581
-------- -------- -------- --------
Loss from operations (1,913) (589) (3,945) (8,328)
Loss on sale of investment in AirMedia, Inc. (2,074) -- (2,074) --
Gain on sale of investment in GlobalCenter, Inc. 3,691 -- 3,691 --
Other income, net 244 323 301 553
-------- -------- -------- --------
Loss before income taxes (52) (266) (2,027) (7,775)
Income tax benefit -- (93) -- (2,796)
-------- -------- -------- --------
Loss from continuing operations (52) (173) (2,027) (4,979)
Discontinued operations:
Loss from discontinued operations -- (1,565) -- (1,822)
Gain on disposal of discontinued
operation, net of taxes -- 2,133 -- 2,133
-------- -------- -------- --------
Net income (loss) $ (52) $ 395 $ (2,027) $ (4,668)
======== ======== ======== ========
Loss per share from continuing operations $ (0.00) $ (0.01) $ (0.12) $ (0.30)
Income per share from discontinued
operations -- 0.03 -- 0.02
-------- -------- -------- --------
Net income (loss) per share $ (0.00) $ 0.02 $ (0.12) $ (0.28)
======== ======== ======== ========
Shares used in computing per share amounts 16,979 17,388 16,935 16,766
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
GLOBAL VILLAGE COMMUNICATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,027) $ (4,668)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 1,775 1,675
Deferred income taxes -- (9,000)
Write-off of GlobalCenter, Inc. investment -- 2,191
Loss from sale of investment in AirMedia, Inc. 2,074 --
Changes in assets and liabilities:
Accounts receivable, net (8,746) (8,266)
Receivable from sale of GlobalCenter, Inc. investment (3,691) --
Inventories (214) 83
Income taxes 7,665 (2,840)
Other current assets (144) (238)
Accounts payable (923) (870)
Accrued and other liabilities (105) (1,079)
-------- --------
Net cash used in operating activities of:
Continuing operations (4,336) (23,012)
Discontinued operations -- 4,515
-------- --------
Net cash used in operating activities (4,336) (18,497)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (220) (1,311)
Other assets 56 (33)
Purchases of short-term investments -- (23,217)
Proceeds from sales and maturities of
short-term investments -- 44,542
Investment in AirMedia, Inc. -- (4,043)
Investment in GlobalCenter, Inc. -- (1,548)
Proceeds from sale of investment in AirMedia, Inc. 1,969 --
-------- --------
Net cash provided by investing activities 1,805 14,390
-------- --------
Cash flows from financing activities:
Repayments under line of credit (4,241) --
Payments on repurchases of Common Stock -- (1,161)
Proceeds from issuance of Common Stock, net 107 447
-------- --------
Net cash used in financing activities (4,134) (714)
-------- --------
Effect of exchange rate changes on cash and cash equivalents -- (247)
-------- --------
Net decrease in cash and cash equivalents (6,665) (5,068)
Cash and cash equivalents at beginning of period 9,687 15,900
-------- --------
Cash and cash equivalents at end of period $ 3,022 $ 10,832
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 133 $ 8
Income taxes $ -- $ 44
Non-cash investing and financing activities:
Non-cash net assets contributed to GlobalCenter, Inc. $ -- $ 643
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
GLOBAL VILLAGE COMMUNICATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements as of September
30, 1997 and for the three and six months ended September 30, 1997 and
1996, 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. These financial statements should
be read in conjunction with the Company's consolidated financial
statements and notes thereto contained in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997.
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 outstanding (when dilutive using the
treasury stock method).
3. INVENTORIES
(in thousands)
<TABLE>
<CAPTION>
September 30, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Purchased parts $ -- $ 199
Work in process 15 369
Finished goods 2,270 1,503
------ ------
$2,285 $2,071
====== ======
</TABLE>
4. LINE OF CREDIT
The Company has a line of credit agreement with a bank which expires in
April 1999. Borrowings under the agreement bear interest at the bank's
prime rate plus 2.5%. The total borrowings are limited to the lesser of
$5,000,000 or 80% of eligible receivables, as defined, and are
collateralized by all of the Company's assets. The agreement contains
various financial covenants and restrictions, including restrictions on
the Company's ability to pay dividends or to effect mergers or
acquisitions. As of September 30, 1997, there were no borrowings under
this line of credit and the Company was in compliance with all covenants
and restrictions.
5. SALE OF INVESTMENTS
In September 1997, the Company agreed to sell its equity stake in
GlobalCenter, Inc. ("GlobalCenter") to an existing shareholder of
GlobalCenter for approximately $3.7 million in cash. As a result, the
Company recorded a gain of $3.7 million, and a receivable from sale of the
investment of $3.7 million, in the second quarter of fiscal 1998. The
Company received cash payment in full for the receivable from sale of the
investment in October 1997.
6
<PAGE> 7
In July 1997, the Company sold substantially all of its investment in
AirMedia, Inc. ("AirMedia") to an existing shareholder of AirMedia for
approximately $2.0 million in cash. As a result, the Company recorded a
loss of $2.1 million on the sale of the investment in AirMedia in the
second quarter of fiscal 1998.
6. DISCONTINUED OPERATIONS
In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue its enterprise network server operation based in the United
Kingdom (formerly, the Company's ISDN Division). The disposition of the
division has been accounted for as a discontinued operation in accordance
with Accounting Principles Board (APB) No. 30 and prior period financial
statements have been restated to reflect the discontinuation of the
enterprise network server operation.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." SFAS No. 128 requires dual presentation of basic earnings per
share ("EPS") and diluted EPS on the face of all statements of operations
issued after December 15, 1997, for all entities with complex capital
structures.
Basic EPS is computed using net earnings divided by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur from common shares issuable
through stock-based compensation including stock options, restricted stock
awards, warrants, and other convertible securities using the treasury
stock method. The Company expects basic EPS for profitable periods will be
higher than primary EPS as previously reported and diluted EPS for
profitable periods will not differ materially from primary EPS as
reported. Computations for loss periods should not change significantly.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It
does not, however, require a specific format for the statement, but
requires the Company to display an amount representing total comprehensive
income for the period in that financial statement. The Company is in the
process of determining its preferred format. This Statement is effective
for fiscal years beginning after December 15, 1997.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement
establishes standards for the manner in which public business enterprises
report information about operating segments in annual financial statements
and requires those enterprises to report selected information about
operating segments in interim financial reports issued to stockholders.
This Statement is effective for financial statements for periods beginning
after December 15, 1997, and the Company has not yet determined the impact
of adopting the additional reporting requirements.
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, 1997. 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") is
a leader in the design, development and marketing of easy-to-use
integrated communications products 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-to
medium-sized organizations to access the Internet and other information
services, connect to a remote organization's internal network, send and
receive faxes and e-mail from their computers and communicate efficiently
with colleagues, customers and suppliers.
Global Village produces modems, telecommunications servers, and
proprietary communications software for both individual users and network
users.
The Company's individual-use system products include TelePort modems for
Macintosh and Windows desktop computer users, PC Card modems (including
PowerPort) for Macintosh PowerBook and Windows portable computer users and
internal modems provided to Apple Computer Inc. ("Apple") on an Original
Equipment Manufacturer ("OEM") basis. The Company's products for Macintosh
and Windows based personal computers are characterized by a highly
integrated, proprietary software and hardware design which makes computer
communications easy for the average user.
The Company's line of network products includes FaxWorks Server NT and
FaxWorks Pro LAN, software for providing fax services to office workgroups
utilizing Windows NT, Windows 3.1, and OS/2 operating systems. The
OneWorld series of telecommunication server systems for Macintosh provides
shared fax, dial-out modem, and remote network access capabilities to
small workgroups.
The Company's core software technologies, FaxWorks communications software
for Windows, OS/2 and DOS operating systems, GlobalFax communications
software for Macintosh systems, and embedded software underlying Global
Village's server systems, provide a consistent, user-friendly interface
across individual and network product lines. For Windows, the Company also
provides integrated communication software to OEMs.
The Company has in the past 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 products by Apple, IBM-compatible personal computer (PC)
manufacturers, the Company or its competitors; customer acceptance of, and
transition to, 56Kbps products, including the Company's 56Kbps product
line; the sales rates of Apple Macintosh personal computers and PCs; the
size and timing of individual orders; market price reductions; product
returns; market acceptance of new products and technology; risks related
to delays in product development; introductions of new technologies or
standards; seasonality of revenues; customer order deferrals,
accelerations, and payments of accounts receivable in anticipation of new
products; changes in the
8
<PAGE> 9
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 an
indication of future performance.
Moreover, the industry in which the Company competes generally is subject
to short product life cycles. In this regard, the Company traditionally
has experienced a reduction in the average selling prices of its products
as the time from product introduction elapses. The Company routinely
institutes significant price reductions and/or rebates with respect to its
products and expects that competitive pressures will continue to
necessitate price reductions. This is illustrated by the decline in the
suggested retail price of the Company's TelePort Platinum product from
$171 to $139 during the 1997 fiscal year. In particular, the Company
expects the trend of reduced average selling prices for its individual use
products to continue during fiscal 1998. There can be no assurance that
the trend of reduced average selling prices will not accelerate during
fiscal 1998.
In May 1996, Apple announced a repair program for its Powerbook 5300 and
190 laptop computers which was effectively a recall of defective Apple
Macintosh computers. As a result of the repair program, the Company
experienced significantly reduced sales of its products. Sales of such
products have not returned to the levels achieved prior to Apple's
announcement and the Company does not believe that it will achieve such
sales levels in the foreseeable future. The Company therefore expects that
revenues and/or gross margins from its products for the Apple Macintosh
family could 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
other products to compensate for any shortfall in revenues from its Apple
platform products. 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 and PowerPort product lines for 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 and PC Card
products (including PowerPort), the Company's ability to successfully
reduce or control various operating expenses as well as the Company's
ability to generate increased sales of products for Windows based
computers, or other products. Though the Company continually seeks to
further enhance its products 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
9
<PAGE> 10
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 has written down inventory that it considers to be excess or
obsolete, there can be no assurance that the Company's write downs will be
adequate, and a material increase in such write downs and returns over
historical rates would have a material adverse effect on the Company's
results of operations and working capital.
The Company's manufacturing operations consist primarily of turnkey
managers, program managers, quality assurance, packaging and shipping
personnel. For substantially all of its hardware assemblies, the Company
purchases fully manufactured and tested units from CMC, a "turnkey"
manufacturing subcontractor. Components and manufacturing services from
the Company's suppliers are obtained on an as-needed basis. To date, the
Company's turnkey manufacturer has provided credit to the Company as part
of its relationship to manufacture the Company's products. While the
Company believes its relationship with its turnkey manufacturer is good,
if such party were to change its policies regarding providing credit to
the Company, the Company could be required to expend additional funds for
the production of its products, which could materially adversely affect
the Company's financial condition. While the Company believes that there
are a number of alternative contract manufacturers that could produce the
Company's products, it could take a significant period of time and result
in significant additional expense to qualify alternative subcontractors
and commence manufacturing in the event of a reduction or interruption of
production. Therefore, the Company is highly dependent on its continued
relationship with its primary "turnkey" manufacturing subcontractor and
any change or reduction or interruption or termination of this
relationship could have a material adverse effect on the operating results
of the Company.
The Company is dependent on sole or limited source suppliers for certain
key components and services used in its products particularly the modem
chip sets designed and manufactured by Rockwell International and Texas
Instruments. 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 and working capital.
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.
10
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<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenue 100 % 100% 100% 100 %
Cost of revenue 70 67 68 72
---- ---- ---- ----
Gross profit 30 33 32 28
Operating expenses:
Research and development 16 10 16 11
Marketing and sales 19 19 21 22
General and administrative 6 6 7 6
Loss from investment in
GlobalCenter, Inc. -- -- -- 3
---- ---- ---- ----
Total operating expenses 41 35 44 42
---- ---- ---- ----
Loss from operations (11) (2) (12) (14)
Loss on sale of investment in AirMedia, Inc. (12) -- (6) --
Gain on sale of investment in
GlobalCenter, Inc. 22 -- 11 --
Other income, net 1 1 1 1
---- ---- ---- ----
Loss before income taxes (0) (1) (6) (13)
Income tax benefit -- -- -- (5)
---- ---- ---- ----
Loss from continuing operations (0) (1) (6) (8)
Discontinued operations:
Loss from discontinued operations -- (5) -- (3)
Gain on disposal of discontinued
operations, net of taxes -- 7 -- 3
---- ---- ---- ----
Net income (loss) (0)% 1% (6)% (8)%
==== ==== ==== ====
</TABLE>
NET REVENUE
Net revenue includes revenue from gross shipments, licenses and royalties,
less reserves for returns and allowances. Net revenue decreased 47% to
$17.1 million for the second quarter of fiscal 1998 from $32.3 million for
the second quarter of fiscal 1997. For the six months ended September 30,
1997, net revenue decreased 46% to $33.0 million compared to $60.7 million
during the same period ended September 30, 1996. The decrease in net
revenue was primarily attributable to two factors. The first was reduced
shipments of TelePort and PowerPort products which were adversely affected
by the effect of continued weakness in the market for Apple Computer
products and the technology transition to 56Kbps modems. Lower unit
shipments of Apple's computers reduced demand for the Company's products.
Second, the Company's OEM business has decreased significantly compared
with the three months and six months ended September 30, 1996 due to a
reduction of Apple OEM business.
International revenue decreased to $1.6 million or 9% of net revenues for
the second quarter of fiscal 1998 compared to $4.1 million or 13% for the
second quarter of fiscal 1997. For the six months ended September 30,
1997, international net revenue totaled $4.1 million or 12% of total net
revenue compared to $7.9 million or 13% of total net revenue for the same
period in the prior year. The decline in international net revenue in both
the three and six month periods of fiscal 1998 was primarily attributable
to the continued weakness in the market for Apple products and the
transition to 56Kbps modems.
Revenue reserves and allowances are established for estimated future
returns due to stock balancing and discontinued and nonsaleable products
based on the Company's past experience and internal forecasts. There can
be no assurance that the Company's historical experience regarding returns
and allowances will continue or that its projections will prove accurate.
If the Company experiences
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<PAGE> 12
returns in excess of its reserves, the Company's results of operations
could be materially, adversely effected.
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 30% for the second quarters of fiscal 1998, from 33%
for the second quarter of fiscal 1997. Gross profit as a percentage of net
revenue increased to 32% for the six month periods ended September 30,
1997, from 28% for the six month period ended September 30, 1996. The
decrease in gross profit margins in the second quarter of fiscal 1998, as
compared to the same period in fiscal 1997, was due primarily to price
reductions in the quarter and an increase in the mix of lower margin OEM
business. The increase in gross profit margin for the six months ended
September 30, 1997, compared to the same period ended September 30, 1996,
was primarily attributable to the adverse revenue impact, in the prior
period, of Apple's repair program for Macintosh 5300 and 190 models and
additional inventory reserves for slow moving products in that period.
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, price reductions and
reserve requirements. In particular, the Company expects that over the
next several quarters, pricing pressures will continue, the mix of
products will change and new products will be introduced by the Company's
competitors, all of which may have an adverse effect on the gross margins
from the Company's products.
Research and development expenses decreased 12% to $2.7 million or 16% of
net revenues for the second quarter of fiscal 1998 from $3.1 million or
10% of net revenues in the comparable quarter of fiscal 1997. For the six
months ended September 30, 1997, research and development expenses
declined 20% to $5.1 million or 16% of net revenues from $6.4 million or
11% in the comparable fiscal 1997 period. The decline in research and
development expenses in the three and six month periods of fiscal 1998 is
primarily related to a reduction in personnel costs and control of
discretionary expenditures.
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.
Marketing and sales expenses decreased 47% to $3.2 million or 19% of net
revenues in the second quarter of fiscal 1998 compared to $6.0 million or
19% of net revenues during the same period of fiscal 1997. For the six
months ended September 30, 1997, marketing and sales expenses decreased
48% to $7.0 million or 21% of net revenues from $13.6 million or 22% of
net revenues for the same period in the prior year. The decline in
marketing and sales expenses in the three and six month periods of fiscal
1998 is primarily related to reduced advertising and promotion expenses
and to a reduction in personnel costs.
General and administrative expenses decreased 48% to $1.0 million or 6% of
net revenues in the second quarter of fiscal 1998 from $2.0 million or 6%
of net revenues in fiscal 1997. For the six months ended September 30,
1997, general and administrative expenses decreased 27% to $2.5 million or
7% of net revenues from $3.4 million or 6% of net revenues for the same
period in the prior year.
12
<PAGE> 13
The decline in general and administrative expenses in the three and six
month periods of fiscal 1998 is primarily related to a reduction in legal
and certain discretionary expenses.
In July 1997, the Company sold substantially all of its investment in
AirMedia, Inc. for approximately $2.0 million in cash and recorded a loss
of $2.1 million on the sale of the investment in AirMedia in the second
quarter of fiscal 1998.
In April 1996, Global Village announced that it had 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 an equity interest in GlobalCenter, Inc. At that time, the
Company no longer had the ability to exercise significant control over
GlobalCenter. Accordingly, the Company no longer consolidated the results
of GlobalCenter and began to account for its investment using the equity
method of accounting. As a result of the refinancing and operating
performance of GlobalCenter during the first quarter of fiscal 1997, the
Company recorded an investment loss of $2.2 million and reduced the book
value of its investment to zero. In December 1996, GlobalCenter entered
into a definitive merger agreement whereby GlobalCenter and Phoenix-based
Primenet Services for the Internet, Inc. merged, reducing the Company's
percentage ownership below 10%. Accordingly, in the third quarter of
fiscal 1997, the Company began accounting for its investment in
GlobalCenter using the cost method of accounting. In September 1997, the
Company agreed to sell its equity stake in GlobalCenter for approximately
$3.7 million in cash and recorded a gain of $3.7 million in the second
quarter of fiscal 1998.
Net other income declined $.1 million to $.2 million for the second
quarter of fiscal 1998 from $.3 million for the second quarter of fiscal
1997. For the six months ended September 30, 1997, net other income was
$.3 million compared to $.6 million for the same period in the prior year.
This decline is primarily attributable to a reduction in interest income.
The Company's effective tax rate for the second quarter of fiscal 1998 was
zero compared to 35% in the second quarter of fiscal 1997. For the six
months ended September 30, 1997, the effective tax rate was zero compared
to 36% for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $3.0 million at September
30, 1997, representing 11% of total assets. The Company's working capital
was approximately zero at September 30, 1997 as compared to a deficit of
$3.8 million at March 31, 1997, an improvement of $3.8 million. The
decrease in working capital deficit was primarily attributable to the sale
of the Company's investments in AirMedia, Inc. and Global Center, Inc.
(see Note 5).
At September 30, 1997, the Company's principal source of liquidity was
$3.0 million in cash and an unused line of credit which allows the Company
to borrow up to the lower of $5.0 million or 80% of eligible accounts
receivable (see Note 4).
The Company does not expect fiscal 1998 capital expenditures to exceed
historical levels and may be reduced. During the past several quarters,
the Company has experienced significant negative cash flows and could do
so in future quarters. The Company currently believes that its existing
cash and funds available under its credit facility will enable the Company
to meet its short-term needs. The preceding are forward-looking
statements. The Company's funding requirements may change at any time due
to various factors, including the Company's relationship with its turnkey
manufacturer, the Company's operating results, the results and timing of
the Company's launch of new products and services, the Company's ability
to reduce or control various operating expenses through cost
13
<PAGE> 14
containment measures or operating reductions, the success of the Company's
marketing efforts, technological advances and competition. In the longer
term, the Company may be required to issue additional debt or equity
securities which could substantially dilute the ownership of existing
stockholders. There can be no assurance that any such funding will be
available on acceptable terms or at all. Any shortfall in funding could
result in the Company having to curtail the introduction or development of
new products, its entry into new markets and its other marketing efforts,
any of which could have a material adverse affect on the Company's
business, financial condition and results of operations.
CERTAIN ADDITIONAL FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
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-down inventory that it considers to be excessive or
obsolete, the Company has in the past recorded inventory write-downs in
excess of available reserves. There can be no assurance that the Company's
recorded allowances for such write-downs will be adequate in the future,
and material write-downs 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.
MARKET ANTICIPATION OF NEW PRODUCTS, NEW TECHNOLOGIES OR STANDARDS,
OR LOWER PRICES
Since the environment in which the Company operates is characterized by
rapid new product and technology introductions and generally falling
prices for existing products, the Company's customers may from time to
time postpone purchases in anticipation of such new product introductions
or lower prices. If such anticipated changes are viewed as significant by
the market, such as the introduction of faster modem technologies, then
this may have the effect of temporarily slowing overall market demand and
negatively impacting the Company's operating results. For example, the
recent industry announcements of modems based on 56Kbps technology may
have caused such an effect in the first six months of fiscal 1998.
Moreover, the existence of two competitive implementations of the new
56Kbps technology, X2 and K56Flex, may have the effect of confusing and
slowing the market. The existence of two competing protocols may result in
customers delaying purchases until a single standard emerges.
Consequently, delays in the market acceptance of new 56Kbps technology
based
14
<PAGE> 15
modems could have a material adverse effect on the Company's business,
financial condition and results of operation.
DEPENDENCE ON APPLE MACINTOSH FAMILY OF COMPUTERS; 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 on the sale of Apple Macintosh computers and the
development and sale of new Apple computers. Due to continued weakness in
demand for Apple products, 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 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 new desktop 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.
DEPENDENCE ON RELATIONSHIP WITH APPLE
The Company relies on its working relationship with Apple, which has
included and 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 has, in the past,
experienced interruptions in the sale of its products to Apple, and there
is no guarantee these sales will continue. 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.
15
<PAGE> 16
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, paging companies 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 could 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.
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 and price protection allowances 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
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 believes that its future success will depend in
large part on its abilities 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
16
<PAGE> 17
personnel. If the Company were to fail to replace or retain its key
employees or attract additional key employees, the Company's results of
operations could be materially adversely effected. The Company has no
employment agreements with any of its key employees.
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 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," "Focal Point"
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. 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.
17
<PAGE> 18
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
18
<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Global Village Communication, Inc. held its annual meeting of Stockholders
on July 31, 1997. The following matters were approved by the stockholders
by the votes indicated:
MATTER:
<TABLE>
<CAPTION>
Total Votes For Total Votes Withheld
ELECTION OF DIRECTORS Each Director From Each Director
------------- ------------------
<S> <C> <C>
Neil Selvin 13,663,829 781,308
Leonard A. Lehmann 13,698,933 746,204
Kevin R. Compton 13,688,483 756,654
Eugene Eidenberg 13,685,988 759,149
Kenneth A. Goldman 13,691,988 753,149
Jeremy Jaech 13,684,038 761,099
</TABLE>
OTHER MATTERS:
<TABLE>
<CAPTION>
Number of Shares
------------------------
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
<S> <C> <C> <C> <C>
To approve an amendment to the
1991 Stock Option Plan to increase
the number of shares of Common
Stock authorized for issuance
thereunder by 500,000 shares. 12,401,164 1,510,261 118,766 414,946
To approve an amendment to the
Employee Stock Purchase Plan to
increase the number of shares of
Common Stock authorized for
issuance thereunder by 100,000
shares. 13,256,448 1,076,336 112,353 --
To ratify the appointment of KPMG
Peat Marwick LLP as independent
auditors of the Company for its
fiscal year ending March 31, 1998. 14,261,516 109,650 73,971 --
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of Net Income (Loss) Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1997.
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.
Date: November 13, 1997 /s/ Neil Selvin
-------------------------------------
President and Chief Executive Officer
Date: November 13, 1997 /s/ Marc E. Linden
--------------------------------------
Senior Vice President Finance
and Business Development;
Chief Financial Officer
20
<PAGE> 21
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
11.1 Computation of Net Income (Loss Per Share
27.1 Financial Data Schedule
<PAGE> 1
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 September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loss from continuing operations $ (52) $ (173) $ (2,027) $ (4,979)
-------- -------- -------- --------
Discontinued Operations:
Loss from discontinued operations -- (1,565) -- (1,822)
Gain on disposal of discontinued operations,
net of taxes -- 2,133 -- 2,133
-------- -------- -------- --------
Net income (loss) $ (52) $ 395 $ (2,027) $ (4,668)
======== ======== ======== ========
Weighted average shares outstanding during the period 16,979 16,734 16,935 16,766
Common stock equivalents -- 654 -- --
-------- -------- -------- --------
16,979 17,388 16,935 16,766
======== ======== ======== ========
Loss per share from continuing operations $ (0.00) $ (0.01) $ (0.12) $ (0.30)
Income per share from discontinued operations -- 0.03 -- 0.02
-------- -------- -------- --------
Net income (loss) per share $ (0.00) $ 0.02 $ (0.12) $ (0.28)
======== ======== ======== ========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,022
<SECURITIES> 0
<RECEIVABLES> 20,010
<ALLOWANCES> (3,249)
<INVENTORY> 2,285
<CURRENT-ASSETS> 22,555
<PP&E> 15,688
<DEPRECIATION> (10,314)
<TOTAL-ASSETS> 28,011
<CURRENT-LIABILITIES> 22,581
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 5,413
<TOTAL-LIABILITY-AND-EQUITY> 28,011
<SALES> 33,007
<TOTAL-REVENUES> 33,007
<CGS> 22,354
<TOTAL-COSTS> 22,354
<OTHER-EXPENSES> 12,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> (2,027)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,027)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,207)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
