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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 MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number 000-23305
FVC.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0357037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3393 OCTAVIUS DRIVE
SANTA CLARA, CA 95054
(Address of principal executive offices)
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(408) 567-7200
(Registrant's telephone number, including area code)
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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 / /
Common Stock, $0.001 par value 16,574,537
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(Class) Outstanding as of March 31, 1999
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FVC.COM, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 1999 and December 31, 1998.................................................... 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998......................................... 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998......................................... 5
Notes to Condensed Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 14
Item 2. Changes in Securities...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........................................ 14
Item 6. Exhibits and Reports on Form 8-K........................................................... 15
SIGNATURES................................................................................................ 16
EXHIBIT INDEX............................................................................................. 17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FVC.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,966 $ 10,315
Short-term investments 15,503 16,433
Accounts receivable, net of allowance of $204 and $168 10,411 11,221
Inventory 9,258 6,053
Prepaid expenses and other current assets 1,423 1,241
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Total current assets 41,561 45,263
Property and equipment, net 2,514 2,400
Other assets 3,336 3,502
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$ 47,411 $ 51,165
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 1,300
Current portion of long-term debt 136 137
Accounts payable 4,927 5,045
Accrued liabilities 1,788 1,937
Deferred revenue 3,542 3,905
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Total current liabilities 10,393 12,324
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Long-term debt, net of current portion 188 228
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Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 10,000,000 shares
authorized; no shares issued or outstanding - -
Common Stock, $.001 par value; 30,000,000 shares authorized;
16,574,537 and 16,389,007 shares issued and outstanding 17 16
Additional paid-in capital 63,028 61,649
Notes receivable from stockholders (427) (502)
Accumulated deficit (25,788) (22,550)
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Total stockholders' equity 36,830 38,613
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$ 47,411 $ 51,165
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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FVC.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1999 1998
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<S> <C> <C>
Revenues $ 8,380 $ 9,042
Cost of revenues 4,726 4,832
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Gross profit 3,654 4,210
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Operating expenses:
Research and development 2,405 1,888
Selling, general and administrative 4,713 2,613
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Total operating expenses 7,118 4,501
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Loss from operations $ (3,464) (291)
Other income (expense), net 226 (201)
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Net loss $ (3,238) $ (492)
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Net loss per share:
Basic $ (0.20) $ (0.13)
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Diluted $ (0.20) $ (0.13)
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Shares used to compute net loss per share:
Basic 16,047 3,718
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-------- --------
Diluted 16,047 3,718
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-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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FVC.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,238) $ (492)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 487 251
Non-cash stock compensation 198 416
Other 41 4
Changes in assets and liabilities:
Accounts receivable 774 (3,301)
Inventory (3,205) 1,491
Prepaid expenses and other assets (205) (318)
Accounts payable (118) (1,991)
Accrued liabilities (149) 225
Deferred revenue (363) (46)
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Net cash used in operating activities (5,778) (3,761)
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Cash flows from investing activities:
Acquisition of property and equipment (417) (491)
Proceeds from sale of short-term investments 930 -
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Net cash provided by (used in) investing activities 513 (491)
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Cash flows from financing activities:
Repayment of notes payable (1,300) -
Borrowings under short-term credit facilities - 2,100
Repayment of long-term debt - (223)
Proceeds from issuance of common stock 1,257 8
Repayment of capital lease obligations (41) (51)
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Net cash provided by (used in) financing activities (84) 1,834
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Net decrease in cash and cash equivalents (5,349) (2,418)
Cash and cash equivalents at beginning of period 10,315 2,500
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Cash and cash equivalents at end of period $ 4,966 $ 82
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Supplemental cash flow information:
Cash paid for interest $ 77 $ 126
Warrants issued in conjunction with debt financing - 563
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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FVC.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented. These consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998. The results of operations for the period ended March 31, 1999 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ending December 31, 1999. The December 31, 1998
balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
2. Inventory
Inventories as of March 31, 1999 and December 31, 1998 were (in thousands):
<TABLE>
<CAPTION>
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March 31, December 31,
1999 1998
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<S> <C> <C>
Raw materials $5,175 $3,176
Finished goods 4,083 2,877
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Total inventory $9,258 $6,053
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</TABLE>
3. Earnings (Loss) Per Share
Basic earnings (loss) per share is based on the weighted average number of
common shares outstanding excluding contingently issuable or returnable shares
such as shares of unvested restricted common stock. Diluted earnings (loss) per
share is based on the weighted-average number of common shares outstanding and
dilutive potential common shares outstanding. As a result of the losses incurred
by the Company for the three months ended March 31, 1999 and 1998, all potential
common shares were anti-dilutive and were excluded from the diluted net loss per
share calculations.
The following table summarizes securities outstanding as of each period end
which were not included in the calculation of diluted net loss per share since
their inclusion would be anti-dilutive (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Unvested restricted common stock 420 961
Preferred stock - 8,040
Preferred stock warrants - 61
Common stock warrants 248 125
Common stock options 4,021 2,388
</TABLE>
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FVC.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unvested restricted common stock represents stock that has been issued but
which is subject to repurchase to the extent the holder does not remain
associated with the Company until such shares are vested. Each share of
preferred stock converted into one share of common stock upon the closing of the
Company's initial public offering in May 1998. The common stock warrants are
exercisable at $8.00 to $13.00 per share and expire at various times from three
to five years following the closing of the Company's initial public offering.
The stock options outstanding at March 31, 1999 and 1998, had a weighted average
exercise price per share of $10.04 and $5.59, respectively, and expire beginning
in July 2001 through February 2009.
4. Comprehensive Loss
Net loss for the periods presented in the statements of operations also
represents the comprehensive loss for such periods.
5. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Under FAS 133, gains or losses resulting from changes in the values of
derivatives are to be reported in the statement of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the derivative must
be highly effective in achieving offsetting changes in fair value or cash flows
of the hedged items during the term of the hedge. The Company is required to
adopt FAS 133 in the first quarter of 2000. To date, the Company has not engaged
in any foreign currency hedging activity and does not expect adoption of this
new standard to have a significant impact on the Company.
6. Litigation
Beginning in April 1999, several purported class action suits were filed in
the U.S. District Court for the Northern District of California alleging
violations of the federal securities laws against the Company and certain of its
officers and directors in connection with the Company's reporting of its
financial results for the period ending December 31, 1998. These actions have
just been commenced, and no trial dates have been set. Accordingly, management
cannot predict with certainty the ultimate resolution of these lawsuits.
However, management believes that the Company has meritorious defenses to these
actions, and the Company intends to defend itself vigorously. In addition, the
Company maintains directors and officers liability insurance coverage that
management believes is applicable to the claims contained in these lawsuits.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of FVC.COM, Inc. (the "Company") should be read in conjunction with
the Condensed Consolidated Financial Statements and the Notes thereto included
in Item 1 of this Form 10-Q.
In addition to the historical information contained in this Item, this Item
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, that involve risks and uncertainties. These
forward-looking statements include, without limitation, statements containing
the words "believes," "anticipates," "expects," and words of similar import.
Such forward-looking statements will have known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others: the Company's
limited operating history and variability of operating results, market
acceptance of video technology, dependence on ATM backbone technology and the
Next Generation Internet, the Company's potential inability to maintain business
relationships with resellers and suppliers, competition in the video networking
industry, the importance of attracting and retaining personnel, management of
the Company's growth, consolidation and cost pressures in the video networking
industry, dependence on key employees, and other risk factors referenced in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
Company assumes no obligation to update any forward-looking statements contained
herein.
OVERVIEW
The Company provides high quality, cost-effective video networking
solutions that integrate video with voice and data over existing network
infrastructures. The Company's products enable end-to-end video in a wide range
of room and desktop environments for video applications such as distance
learning, distance meetings and distance medicine. The Company was incorporated
in California in October 1993 and reincorporated in Delaware in December 1997.
The Company first shipped its video networking products in 1995.
The Company markets its products to business customers, government users
and educational providers through its internal sales force and indirect sales
channels. A large portion of the Company's sales to date have been fulfilled
through the Company's original equipment manufacturers ("OEMs"), including
Nortel Networks. These OEMs either sell and install the Company's products
directly or work with leading systems integrators to sell and install the
Company's products. Systems integrators qualified to sell and install the
Company's products include Bell Atlantic Network Integration, British
Telecommunication plc, Electronic Data Systems, France Telecom, GTE Corporation,
Global Telemedics, Nippon Telephone and Telegraph, IBM, NEC Corporation and
Telstra. Sales through Nortel Networks (including Bay Networks) represented
approximately 24% of the Company's revenues for the three months ended March 31,
1999, and 39% and 64% of the Company's revenues for the years ended December 31,
1998 and 1997, respectively.
In addition to global OEM relationships with Nortel Networks and Lucent
Technologies, the Company maintains a network of distributors in Europe and Asia
licensed to sell its products under the FVC.COM name. During the first quarter
of 1999, the Company opened offices in Japan and Australia. Approximately 18%
and 27% of the Company's revenues were generated from customers outside of North
America during the three months ended March 31, 1999 and 1998, respectively. The
Company expects that direct sales from shipments to customers outside of North
America will continue to represent a significant portion of its future revenues.
In addition, the Company believes that a small portion of its sales through
Nortel Networks and other distribution
8
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partners is sold to international end-users. Revenues from the Company's
international operations are subject to various risks. To date, the Company
has not engaged in any foreign currency hedging activity.
Revenues are recognized upon shipment of product to customers, provided
no significant obligations remain, collectibility is probable and returns are
estimable. Revenues from sales to certain of the Company's resellers are
subject to agreements allowing rights of return. In such cases, the Company
provides reserves for estimated future returns upon revenue recognition. Such
reserves are estimated based upon historical rates of returns and allowances,
reseller inventory levels, the Company's estimates of sell through by
resellers and other related factors. Actual results could differ from these
estimates. In the event of the inability to estimate returns from any
reseller, the Company defers revenue recognition until the reseller has sold
through the products.
Advance payments received from customers and gross margin deferred with
respect to sales to resellers wherein the Company does not have the ability
to estimate returns are recorded as deferred revenue. At March 31, 1999,
deferred revenue was $3.5 million, a significant portion of which related to
approximately $6.0 million of FVC.COM product inventory held at Nortel
Networks, for which the Company will recognize revenue when Nortel has sold
through such inventory because of the Company's inability to estimate returns
associated with such inventory.
Nortel Networks has recently communicated to the Company its desire to
move to a drop ship model, in which case Nortel Networks will not carry any
inventory of the Company's products. The Company's contract with Nortel
Networks expired on May 3, 1999 and the Company is currently actively
negotiating with Nortel Networks the terms of a new contract incorporating
the drop ship model.
The Company has experienced, and will in the future experience,
fluctuations in revenues, gross margins and operating results. There can be
no assurance that revenues will increase on a quarterly basis or at all. The
Company's gross margins have historically fluctuated from period to period
and are expected to continue to fluctuate in the future. Gross margins are
significantly influenced by a variety of factors, including product mix,
percentage of revenues derived from OEMs versus resellers, pricing within the
video networking industry and the prices of significant components used in
the Company's products. Various factors, in addition to those discussed
above, contribute to the fluctuations in revenues, gross margins and
operating results, including but not limited to development of the market for
video networking and for the Company's products, the Company's success in
developing, introducing and shipping new products and product enhancements,
the Company's success in accurately forecasting demand for new orders, and
new product introductions and price reductions by its competitors. Further, a
significant portion of the Company's expenses are fixed in advance. The
Company expects that operating expenses will increase in the future to fund
expanded operations. To the extent these increased expenses are not
accompanied by an increase in revenues, the Company's business, financial
condition and results of operations could be materially adversely affected.
If revenues or gross margins are below Company expectations in any given
period, the Company's inability to adjust operating expenses in response
would adversely affect operating results.
The Company outsources certain functions to independent service
providers. The Company's products are manufactured primarily by Smartflex
Systems, Inc. and accounting and data processing functions are performed by
KPMG Peat Marwick LLP.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's condensed
consolidated statements of operations as a percentage of total revenues for the
periods indicated.
9
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<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
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1999 1998
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<S> <C> <C>
Revenues.............................. 100.0% 100.0%
Cost of revenues...................... 56.4 53.4
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Gross profit..................... 43.6 46.6
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Operating expenses:
Research and development......... 28.7 20.9
Selling, general and administrative 56.2 28.9
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Total operating expenses (1).......... 84.9 49.8
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Loss from operations.................. (41.3) (3.2)
Other income (expense), net........... 2.7 (2.2)
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Net loss.............................. (38.6)% (5.4)%
------- ---------
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</TABLE>
(1) Operating expenses include non-cash stock compensation charges of $198,000
(2.4% of total revenues) and $416,000 (4.6% of total revenues) for the
three months ended March 31, 1999 and 1998, respectively.
REVENUES. Revenues decreased 7% to $8.4 million in the three months ended
March 31, 1999, from $9.0 million in the three months ended March 31, 1998. The
decrease in revenues was primarily due to a decline in sales to Nortel Networks,
which was offset in part by an increase in sales of the Company's products to
other customers as a result of marketing efforts of the Company and its other
strategic partners. Sales through Nortel Networks declined 55% to $2.0 million
in the three months ended March 31, 1999, from $4.4 million in the comparable
1998 period.
GROSS PROFIT. Gross profit consists of revenues less the cost of
revenues, which consists primarily of costs associated with the manufacture
of the Company's products by outside manufacturers and related costs of
freight, inventory obsolescence, royalty and warranty. These manufacturers
procure the majority of materials, except for certain key components which
the Company purchases from third-party vendors.
Gross profit decreased to $3.7 million in the three months ended March
31, 1999, from $4.2 million in the three months ended March 31, 1998,
primarily due to the decrease in revenues in the first quarter of 1999
compared to the quarter ended March 31, 1998. Gross margin (gross profit as a
percentage of revenues) decreased to 43.6% in the three months ended March
31, 1999, from 46.6% in the comparable 1998 period, due primarily to sales
price reductions for certain products and a shift in mix to lower margin
products.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs, costs of contracts and outside consultants,
supplies and material expenses, equipment depreciation and overhead costs.
Research and development expenses increased 27%, to $2.4 million in the three
months ended March 31, 1999, from $1.9 million in the three months ended
March 31, 1998. As a percentage of total revenues, research and development
expenses increased to 28.7% in the three months ended March 31, 1999, from
20.9% in the three months ended March 31, 1998. The increase in dollars was
primarily the result of hiring additional engineers and consultants for
product development, including personnel costs associated with hiring
additional engineers in connection with the acquisition of ICAST Corporation
in August 1998. The increase as a percentage of revenues was due both to
higher spending and the decrease in revenues in the first quarter of 1999
versus the first quarter of 1998. The Company believes that research and
development expenses will continue to increase in absolute dollars for the
foreseeable future. However, such expenses will fluctuate depending on
various factors, including the status of development projects.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses include personnel
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and related overhead costs for sales, marketing, finance, human resources and
general management. Such expenses also include costs of outside contractors,
advertising, trade shows, other marketing and promotional expenses, and
goodwill amortization. Selling, general and administrative expenses increased
80%, to $4.7 million in the three months ended March 31, 1999, from $2.6
million in the three months ended March 31, 1998. As a percentage of total
revenues, selling, general and administrative expenses increased to 56.2% in
the three months ended March 31, 1999, from 28.9% in the three months ended
March 31, 1998. The increase in dollars was the result of the expansion of
the Company's sales and marketing infrastructure, higher marketing costs
associated with advertising and promotional activities, higher legal and
accounting fees associated with the reporting requirements of a publicly held
company, and goodwill amortization associated with the acquisition of ICAST
Corporation. The increase as a percentage of revenues was due both to higher
spending and the decrease in revenues in the first quarter of 1999 versus the
first quarter of 1998. The Company anticipates that selling, general and
administrative expenses will continue to increase in absolute dollars in the
foreseeable future as the Company expands its selling and marketing efforts
and continues to incur the administrative costs associated with being a
publicly held company. The Company also anticipates that selling, general and
administrative expenses will increase due to legal and other expenses to be
incurred by the Company to defend itself against certain class action suits
filed against the Company in April 1999.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists
primarily of interest income earned on short-term investments and cash
balances, offset by interest expense relating to the Company's credit
facilities and long-term debt. Net other income totaled $226,000 in the three
months ended March 31, 1999, compared to net other expense of $201,000 in the
comparable period of 1998. The change was primarily due to interest income
earned on the proceeds from the Company's initial public offering completed
in May 1998 and a reduction in interest expense due to the repayment of
borrowings under short-term credit facilities with proceeds from the initial
public offering.
INCOME TAXES. The Company has incurred losses since inception. No
benefit was recorded for income taxes in either the three months ended March
31, 1999 or 1998, as the Company believes that, based on the history of such
losses and other factors, the weight of available evidence indicates that it
is more likely than not that it will not be able to realize the benefit of
these net operating losses, and thus a full valuation reserve has been
recorded.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through the completion of its initial public offering in
May 1998, the Company financed its operations primarily through private
placements of equity securities and to a lesser extent through certain credit
facilities and long-term debt. As of March 31, 1999, the Company had cash,
cash equivalents and short-term investments of $20.5 million and working
capital of $31.2 million.
During the three months ended March 31, 1999, the Company used $5.8
million of cash in its operating activities primarily to fund a net loss of
$3.2 million and an increase in inventory of $3.2 million. The increase in
inventory resulted from sales being below the Company's expectations during
the quarter ended March 31, 1999. During the three months ended March 31,
1998, the Company used $3.8 million of cash in its operating activities
primarily to fund an increase in accounts receivable of $3.3 million and a
reduction in accounts payable of $2.0 million.
Cash used for investing activities for acquisition of property and
equipment was $417,000 for the three months ended March 31, 1999, compared to
$491,000 for the three months ended March 31, 1998. The capital expenditures
consisted of purchases of computers and related equipment, furniture and
fixtures necessary to support the Company's planned growth. To date the Company
has not made significant outlays for capital
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expenditures because of its strategy to outsource manufacturing and certain
other functions.
Cash used in financing activities was $84,000 for the three months ended
March 31, 1999, compared to cash provided by financing activities of $1.8
million for the three months ended March 31, 1998. Cash used in financing
activities during the first quarter of 1999 included the repayment of $1.3
million of notes payable assumed in connection with the acquisition of ICAST
Corporation in August 1998, which was substantially offset by $1.3 million of
proceeds from the issuance of common stock under the Company's stock plans.
Cash provided by financing activities during the first quarter of 1998 arose
primarily from $2.1 million of borrowings under short-term credit facilities.
The Company has a working capital line of credit agreement with a bank
that provides for borrowings of up to $10 million. Borrowings under the line
of credit are limited to a specified percentage of eligible accounts
receivable and inventory, and are secured by substantially all of the assets
of the Company. Interest on borrowings is set at the bank's prime rate (7.75%
at March 31, 1999). Among other provisions, the Company is required to
maintain certain financial covenants and is prohibited from paying dividends.
The line of credit agreement expires in June 2000. No borrowings were
outstanding under this line at March 31, 1999.
The Company believes that its cash, cash equivalents and short term
investments of $20.5 million at March 31, 1999, together with its existing
line of credit, will provide adequate cash to fund its operations for at
least the next 12 months. Thereafter, if cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
be required to sell additional equity or debt securities or increase its line
of credit. The sale of additional equity or convertible debt securities may
result in additional dilution to the Company's stockholders.
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's information technology hardware, embedded technologies, such as
microprocessors, or software that is date-sensitive may recognize a date
using "00" as the year 1900 rather than the year 2000. Because the Company
uses a significant number of computer software programs and operating systems
in its internal operations, as well as in its products, Year 2000 issues
create certain risks for the Company. If the Company's internal management
information systems do not correctly recognize and process date information
beyond the year 1999, there could be an adverse impact on the Company's
operations. To address these Year 2000 issues, the Company has initiated a
program to evaluate its internal systems. Assessment and remediation are
proceeding in parallel, and the Company currently plans to have changes to
these information systems completed and tested by June 1999. These activities
are intended to encompass all major categories of internal systems used by
the Company. The Company has not yet determined the potential cost of
purchasing, installing, modifying or testing its internal systems.
To assist customers in evaluating their Year 2000 issues, the Company
has begun a program to assess the capability of its current products and
products no longer being produced to handle the Year 2000. Testing has not
yet been completed, but based on preliminary tests, the Company believes that
all current products shipping and older products that are no longer shipping
are "Year 2000 Compliant." It is expected that assessment and remediation
will be on-going throughout 1999, with the goal of appropriately resolving
all material product issues by June 1999. The costs incurred to date related
to these programs have not been material. The costs that will be incurred by
the Company regarding the testing of current or older products for Year 2000
compliance and answering and responding to customer requests related to Year
2000 issues, including both incremental spending and redeployed resources,
have not yet been determined but are currently not expected to be material.
Based on currently available information, the Company does not believe that
the
12
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Year 2000 matters discussed above related to internal systems or products
sold to customers will have a material adverse impact on its financial
condition or overall trends in results of operations; however, it is still
uncertain to what extent the Company may be affected by such matters. In
addition, customers may delay purchase decisions because of uncertainty about
Year 2000 issues.
Except as implied in any limited product warranty, the Company does not
believe it is legally responsible for costs incurred by customers related to
ensuring Year 2000 compliance. Nevertheless, the Company is incurring various
costs to provide customer support and customer satisfaction services
regarding Year 2000 issues and it is anticipated that these expenditures will
continue through calendar year 1999 and thereafter. As used by the Company,
"Year 2000 Compliant" means that when used properly and in conformity with
the product information provided by the Company, and when used with "Year
2000 Compliant" computer systems, the Company's product will accurately
store, display, process, provide, and/or receive data from, into, and between
the twentieth and twenty-first centuries, including leap year calculations,
provided that all other technology used in combination with the Company's
products properly exchanges date data with the Company's products. There can
be no assurance that (i) third party technologies used in combination with
the Company's products will be Year 2000 Compliant and (ii) the Company's
products will not be adversely affected when used with such third party
technologies, nor can the Company represent that any modifications to its
products made by a party other than the Company will be Year 2000 Compliant.
The Company has contacted its key suppliers of goods or services and
other relevant third parties to determine if they are adequately addressing
Year 2000 issues and what might be the possible effects on the Company if
those parties are not adequately prepared for the year 2000. Based on these
inquiries, the Company believes that the majority of its key suppliers of
goods and services are Year 2000 Compliant. However, failure of any key
supplier or other relevant third party to address Year 2000 readiness could
potentially have a material effect on the Company's business, financial
condition and results of operations. The Company has not yet developed a
contingency plan to address situations that may result if its key suppliers
and other relevant third parties are unable to achieve Year 2000 readiness.
There can be no assurance that the Company will be able to develop a
contingency plan to adequately address issues that may arise in the year
2000. The failure of the Company to develop and implement, if necessary, an
appropriate contingency plan could have a material adverse impact on the
operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposures as set forth in its Annual Report on
Form 10-K for the year ended December 31, 1998 have not changed significantly.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Beginning in April 1999, several purported class action suits were filed
in the U.S. District Court for the Northern District of California alleging
violations of the federal securities laws against the Company and certain of
its officers and directors in connection with the Company's reporting of its
financial results for the period ending December 31, 1998. These actions have
just been commenced, and no trial dates have been set. Accordingly,
management cannot predict with certainty the ultimate resolution of these
lawsuits. However, management believes that the Company has meritorious
defenses to these actions, and the Company intends to defend itself
vigorously. In addition, the Company maintains directors and officers
liability insurance coverage that management believes is applicable to the
claims contained in these lawsuits.
ITEM 2. CHANGES IN SECURITIES
In November 1998, in connection with an investment by the Company in
FVC.COM GmbH, the Company issued an option (a "Put Option"), effective
October 1, 2001, to the investors in FVC.COM GmbH, an individual and two
foreign companies (the "Investors"). Pursuant to the Put Option, the Company
granted the Investors the right to require the Company to purchase from the
Investors all shares of FVC.COM GmbH held by the Investors, at a purchase
price determined in accordance with a formula, based upon future revenues and
profits of FVC.COM GmbH, agreed upon by the Company and the Investors. The
Put Option may only be exercised by the Investors if FVC.COM BV, the Dutch
holding company of FVC.COM GmbH, achieves profits for 12 months prior to the
date of exercise of the Put Option. The Put Option was granted in connection
with the Company's purchase of a 20% interest in FVC.COM GmbH for aggregate
consideration of $100,000.
In December 1998, in connection with an investment by the Company in
FVC.COM Nordic, the Company issued an option (a "Put Option"), effective
October 1, 2001, to an investor in FVC.COM Nordic (the "Investor"). Pursuant
to the Put Option, the Company granted the Investor in FVC.COM Nordic the
right to require the Company to purchase from the Investor all shares of
FVC.COM Nordic held by the Investor, at a purchase price determined in
accordance with a formula, based upon future revenues and profits of FVC.COM
Nordic, agreed upon by the Company and the Investor. The Put Option may only
be exercised by the Investor if FVC.COM Nordic achieves profits for the
12 months prior to the exercise of the Put Option. The Put Option was granted
in connection with the Company's purchase of a 19% interest in FVC.COM Nordic
for $102,000.
The issuance of securities in the transactions described above were
deemed to be exempt from registration under the Securities Act of 1933, as
amended, by virtue of Regulation S promulgated thereunder. The purchasers in
each case represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. All
recipients were knowledgeable, sophisticated and experienced in making
investment decisions of this kind and received either adequate information
about the registrant or had access, through employment or other
relationships, to such information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Stockholders held on February 17,
1999, pursuant to the Notice of Special Meeting of Stockholders and Proxy
Statement dated January 4, 1999, the following matter was submitted to the
Company's stockholders. Set forth after the matter presented are the number
of votes for, the number of votes against and the number of abstentions,
respectively:
(1) the approval of the Company's 1997 Equity Incentive Plan, as amended
(8,866,498, 1,431,940 and 13,834).
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- --------------------------------------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation
3.1(i)(2) Certificate of Ownership and Merger, effective
August 3, 1998
3.2(1) Bylaws of the Registrant
4.1(2) Specimen Common Stock Certificate
11.1(3) Statement of Computation of Earnings (Loss) Per
Share
27.1 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1, File No. 333-38755, declared effective on April 29,
1998, incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q on June 10, 1998, incorporated herein by reference.
(3) See Note 3 to Condensed Consolidated Financial Statements.
(b) Reports on Form 8-K
No reports of Form 8-K were filed during the quarter ended March 31,
1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: May 12, 1999 FVC.COM, Inc.
By: /s/ James O. Mitchell
--------------------------------------
James O. Mitchell
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- --------------------------------------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation
3.1(i)(2) Certificate of Ownership and Merger, effective
August 3, 1998
3.2(1) Bylaws of the Registrant
4.1(2) Specimen Common Stock Certificate
11.1(3) Statement of Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1, File No. 333-38755, declared effective on April 29,
1998, incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q on June 10, 1998, incorporated herein by reference.
(3) See Note 3 to Condensed Consolidated Financial Statements.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FVC.COM, INC. FOR THE QUARTER ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,966
<SECURITIES> 0
<RECEIVABLES> 15,707
<ALLOWANCES> 204
<INVENTORY> 10,411
<CURRENT-ASSETS> 41,561
<PP&E> 4,853
<DEPRECIATION> 2,339
<TOTAL-ASSETS> 47,411
<CURRENT-LIABILITIES> 10,393
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 36,813
<TOTAL-LIABILITY-AND-EQUITY> 47,411
<SALES> 8,380
<TOTAL-REVENUES> 8,380
<CGS> 4,726
<TOTAL-COSTS> 11,844
<OTHER-EXPENSES> 7,118
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (3,238)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,238)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
