<PAGE>
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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 SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission file number 000-23305
FVC.COM, INC.
(Exact name of registrant in its character)
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)
(408) 567-7200
(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 / /
Common Stock, $0.001 par value 16,729,594
- --------------------------------------- -----------------------------------
(Class) Outstanding as of September 30, 1999
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<PAGE>
FVC.COM, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PART 1. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 30, 1999 and December 31, 1998.................................. 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1999 and 1998.............. 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 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 6. Exhibits and Reports on Form 8-K............................................. 15
SIGNATURES...................................................................................... 16
EXHIBIT INDEX................................................................................... 17
</TABLE>
2.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FVC.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 2,070 $10,315
Short-term investments.............................................. 7,823 16,433
Accounts receivable, net of allowance of $454 and $168.............. 14,347 11,221
Inventory........................................................... 13,112 6,053
Prepaid expenses and other current assets........................... 1,258 1,241
------------- ------------
Total current assets............................................ 38,610 45,263
Property and equipment, net.............................................. 3,161 2,400
Other assets............................................................. 3,466 3,502
------------- ------------
$ 45,237 $ 51,165
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable....................................................... $ - $ 1,300
Current portion of long-term debt................................... 136 137
Accounts payable.................................................... 5,501 5,045
Accrued liabilities................................................. 2,513 1,937
Deferred revenue.................................................... 2,166 3,905
------------- ------------
Total current liabilities....................................... 10,316 12,324
Long-term debt, net of current portion................................... 125 228
Minority interest in consolidated subsidiary ............................ 235 -
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding..................... - -
Common Stock, $.001 par value; 35,000,000 shares authorized; 16,729,594
and 16,389,007 shares issued and outstanding, respectively...... 17 16
Additional paid-in capital.......................................... 63,861 61,649
Notes receivable from stockholders.................................. (322) (502)
Accumulated deficit................................................. (28,994) (22,550)
------------- ------------
Total stockholders' equity...................................... 34,562 38,613
------------- ------------
$ 45,237 $ 51,165
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3.
<PAGE>
FVC.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues.................................... $13,650 $12,022 $32,653 $32,055
Cost of revenues............................ 7,061 6,042 17,322 16,847
-------------- -------------- -------------- -------------
Gross profit........................... 6,589 5,980 15,331 15,208
-------------- -------------- -------------- -------------
Operating expenses:
Research and development............... 2,653 2,791 7,591 6,666
Selling, general and administrative.... 5,297 3,208 14,717 8,551
Acquired in-process research and development - 4,664 - 4,664
-------------- -------------- -------------- -------------
Total operating expenses........... 7,950 10,663 22,308 19,881
-------------- -------------- -------------- -------------
Loss from operations........................ (1,361) (4,683) (6,977) (4,673)
Other income (expense), net................. 95 200 463 (181)
Minority interest in consolidated subsidiary 78 - 70 -
-------------- -------------- -------------- -------------
Net loss.................................... $ (1,188) $(4,483) $ (6,444) $ (4,854)
============== ============== ============== =============
Basic and diluted net loss per share........ $ (0.07) $ (0.29) $ (0.39) $ (0.48)
============== ============== ============== =============
Shares used to compute net loss per share:
Basic.................................. 16,660 15,355 16,314 10,120
============== ============== ============== =============
Diluted................................ 16,660 15,355 16,314 10,120
============== ============== ============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4.
<PAGE>
FVC.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1999 1998
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $ (6,444) $ (4,854)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................... 1,554 1,218
Non-cash stock compensation...................................... 395 891
Acquired in-process research and development..................... - 4,664
Other............................................................ 235 144
Changes in assets and liabilities:
Accounts receivable.............................................. (3,126) (4,653)
Inventory........................................................ (7,059) 474
Prepaid expenses and other assets................................ (423) (1,376)
Accounts payable................................................. 454 (1,241)
Accrued liabilities.............................................. 576 337
Deferred revenue................................................. (1,739) (109)
--------------- -------------
Net cash used in operating activities....................... (15,576) (4,505)
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of ICAST Corporation, net of cash received............... - (360)
Acquisition of property and equipment ............................... (1,873) (1,434)
Proceeds from sale of short-term investments......................... 8,610 -
--------------- -------------
Net cash provided by (used in) investing activities......... 6,737 (1,794)
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable, net...................................... (1,300) -
Borrowings under short-term credit facilities........................ - 3,600
Repayment of short-term credit facilities............................ - (4,906)
Repayment of long-term debt.......................................... - (2,014)
Proceeds from issuance of common stock, net.......................... 1,998 36,713
Repayment of capital lease obligations............................... (104) (137)
--------------- -------------
Net cash provided by financing activities................... 594 33,256
--------------- -------------
Net increase (decrease) in cash and cash equivalents...................... (8,245) 26,957
Cash and cash equivalents at beginning of period.......................... 10,315 2,500
--------------- -------------
Cash and cash equivalents at end of period................................ $ 2,070 $ 29,457
=============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............................................... $ 91 $ 185
=============== =============
Warrants issued in conjunction with debt financing................... - $ 1213
=============== =============
Common stock issued and options and warrants assumed in - $ 5,179
=============== =============
Connection with acquisition of ICAST Corporation
===============================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5.
<PAGE>
FVC.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed 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 September
30, 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 September 30, 1999 and December 31, 1998 were (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials..................... $ 7,212 $ 3,176
Finished goods.................... 5,900 2,877
------------- ------------
Total inventory.......... $ 13,112 $ 6,053
============= ============
</TABLE>
3. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed in accordance with Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128").
FAS 128 requires the Company to report both basic earnings (loss) per share,
which 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, and diluted earnings (loss) per share,
which 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
month and the nine month periods ended September 30, 1999 and 1998, all
potential common shares were anti-dilutive and were excluded from the diluted
net loss per share calculations for such periods.
The following table summarizes securities outstanding at September
30, 1999, which were not included in the calculations of diluted loss per
share for the three months and nine months ended September 30, 1999 since
their inclusion would be anti-dilutive (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1999 1998
------ ------
<S> <C> <C>
Unvested restricted common stock 202 641
Common stock options 4,429 3,408
Common stock warrants 245 290
</TABLE>
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. 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 on May 4, 1998. The stock options outstanding at
6.
<PAGE>
September 30, 1999 and 1998 had a weighted average exercise price per share
of $7.66 and $7.80, respectively, and expire beginning in
[July 2001 through June 2009].
4. COMPREHENSIVE LOSS
The 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 2001. 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. In
July 1999, the Court entered orders consolidating all existing class actions
into a single action and appointing a lead plaintiff and lead plaintiff's
co-counsel. A consolidated amended complaint was filed in September 1999 and
the individual defendants filed a motion to dismiss the complaint on October
8, 1999. The motion is scheduled for hearing by the court on January 21,
2000. 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. 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,
including the Company's new broadband video services business, dependence on
ATM and other technologies, 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
7.
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 Data Services, 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 29% of the Company's revenues for the
nine months ended September 30, 1999, and 39% and 64% of the Company's
revenues for the years ended December 31, 1998 and 1997, respectively.
In addition to a global OEM relationship with Nortel Networks, the
Company maintains a network of distributors in Europe and Asia licensed to
sell its products under the FVC.COM name. Approximately 13% and 19% of the
Company's revenues were generated from customers outside of North America
during the nine months ended September 30, 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 partners is sold to
international end-users.
In September 1999, the Company announced its intention of offer
broadband video services to telecommunications carriers. The Company has not
yet entered into any agreements with customers for these services and does
not expect to generate revenues from such services until the year 2000.
Revenues from the Company's international operations are subject to
various risks, including seasonality, longer payment cycles, changes in
regulatory requirements and tariffs, reduced protection of intellectual
property rights, political and economic restraints, among others. 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 September
30, 1999, deferred revenue was $2.1 million, a significant portion of which
related to 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 communicated to the Company its desire to move
to a drop ship model, pursuant to which Nortel Networks will not carry any
inventory of the Company's products. The Company's contract with
8.
<PAGE>
Nortel Networks expired on May 3, 1999, however, the Company and Nortel are
currently operating in accordance with the terms of the expired agreement.
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 and services; the
Company's success in developing, introducing and shipping new products,
including development of products to be offered as part of the Company's
broadband video services business; the Company's success in accurately
forecasting demand for new orders, and new product introductions and price
reductions by 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 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 51.7 50.3 53.0 52.6
--------- --------- --------- ---------
Gross profit 48.3 49.7 47.0 47.4
--------- --------- --------- ---------
Operating expenses:
Research and development 19.4 23.2 23.2 20.8
Selling, general and administrative 38.8 26.7 45.1 26.7
--------- --------- --------- ---------
Acquired in-process research and -- 38.8 -- 14.5
development --------- --------- --------- ---------
Total operating expenses (1) 58.2 88.7 68.3 62.0
--------- --------- --------- ---------
Income (loss) from operations (10.0) (39.0) (21.4) (14.6)
--------- --------- --------- ---------
Other income (expense), net 0.7 1.7 1.4 (0.6)
Minority interest in consolidated subsidiary 0.6 -- 0.2 --
--------- --------- --------- ---------
Net income (loss) (8.7)% (37.3)% (19.7)% (15.1)%
========= ========= ========= =========
</TABLE>
(1) Operating expenses include non-cash stock compensation charges of $49,000
(0.4% of total revenues) and $212,000 (1.8% of total revenues) for the
three months ended September 30, 1999 and 1998, respectively, and $395,000
(1.2%of total revenues) and $891,000 (2.8% of total revenues) for the nine
months ended September 30, 1999 and 1998, respectively.
9.
<PAGE>
REVENUES. Revenues increased 13.5% to $13.7million for the three
months ended September 30, 1999, from $12.0 million for the three months
ended September 30, 1998. Revenues increased 1.9% to $32.7 million for the
nine months ended September 30, 1999 from $32.1million for the nine months
ended September 30, 1998. The increase in revenues was primarily due to
increased sales of video systems to resellers and integrators serving
customers in the government and education markets and to telecommunications
carriers planning to install systems in order to deliver broadband video
services to their enterprise customers. Sales through Nortel Networks
represented 29% of total revenues in the nine months ended September 30,1999,
compared to 52% of total revenues 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, royalties and warranties. These
manufacturers procure the majority of materials, except for certain key
components which the Company purchases from third-party vendors.
Gross profit increased to $6.6 million for the three months ended
September 30, 1999, from $6.0 million for the three months ended September
30, 1998. Gross margin (gross profit as a percentage of revenues) decreased
to 48.3% for the three months ended September 30, 1999, from 49.7% for the
three months ended September 30, 1998, primarily as a result of changes in
product mix.
Gross profit increased to $15.3 million for the nine months ended
September 30, 1999, from $15.2 million for the nine months ended September
30, 1998 primarily due to the increase in revenues. Gross margin declined
slightly to 47.0% for the nine months ended September 30, 1999, from 47.4%
for the first nine months in 1998.
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 costs decreased slightly to $2.7 million for the
three months ended September 30, 1999, from $2.8 million for the three months
ended September 30, 1998. As a percentage of total revenues, research and
development expenses decreased to 19.4% for the three months ended September
30, 1999, from 23.2% for the three months ended September 30, 1998. The
decline in the percentage of revenue was the result of increased revenue. For
the nine month period ending September 30, 1999, research and development
expenses increased to $7.6 million, from $6.7 million for the nine months
ended September 30, 1998. As a percentage of total revenues, research and
development expenses increased to 23.2% for the nine months ended September
30, 1999, from 20.8% for the first nine months of 1998. The increase in
dollars and as a percentage of revenue during the nine month period ending
September 30, 1999, was primarily the result of increased staffing to support
new products and maintain existing products. The Company believes that
research and development expenses will continue to increase in absolute
dollars for the foreseeable future, including increases associated with
product development for its broadband video services business. 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 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 to $5.3 million for the three
months ended September 30, 1999, from $2.7 million for the three months ended
September 30, 1998. As a percentage of total revenues, selling, general and
administrative expenses increased to 38.8% for the three months ended
September 30, 1999, from 23.2% for the three months ended September 30, 1998,
primarily due to increased staffing and expansion in international markets.
During the nine months ended September 30, 1999 selling, general and
administrative expenses increased to $14.7 million, from $8.6 million for the
comparable period in 1998. As a percentage of total revenues, selling,
general and administrative expenses increased to 45.1% for the nine months
ended September 30, 1999, compared to 26.7% for the first nine months of
1998. The increase in dollars was primarily 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, legal expenses incurred in connection with the class action suit
against the Company and goodwill amortization associated
10.
<PAGE>
with the acquisitions of ICAST Corporation and FVC.COM (UK) Ltd. The increase
as a percentage of revenues was primarily due to higher spending in the nine
month period of 1999. 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.
Selling, general and administrative expenses may also 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 and May 1999.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. During the three
months ended September 30, 1998, the Company recorded $4.7 million in
acquired in-process research and development expenses associated with its
acquisition of ICAST Corporation. No such expenses were recorded in the three
month or nine month periods ended September 30, 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 $95,000 for the three
months ended September 30, 1999, compared to net other income of $200,000 for
the three months ended September 30, 1998. For the nine month period ended
September 30, 1999, net other income totaled $464,000, compared to net other
expense of $181,000 for 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.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. Minority interest
reflects the interest of minority shareholders in the operating results of
consolidated subsidiaries. During the three months and nine months ended
September 30, 1999 the Company recorded losses of $78,000 and $70,000,
respectively, that were attributable to minority shareholders. No minority
interests existed in the previous year.
INCOME TAXES. The Company has incurred losses since inception. No
tax benefit was recorded for any period presented, 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, the Company has financed its operations primarily
through private and public placements of equity securities and to a lesser
extent through certain credit facilities and long-term debt. As of September
30, 1999, the Company had cash, cash equivalents and short-term investments
of $9.9 million and working capital of $28.4 million.
During the nine months ended September 30, 1999, the Company used
$15.6 million of cash in its operating activities, primarily to fund a net
loss of $6.4 million and increases in inventory and accounts receivable of
$7.1 million and $2.4 million, respectively. The increase in inventory was
primarily attributable to the substantial increase in demand for the
Company's products and the limited visibility into the mix and timing of that
growing demand. The increase in receivables was due to the increased revenues
during the three month period ending September 30, 1999. During the nine
months ended September 30, 1998, the Company used $4.5 million of cash in its
operating activities, primarily to fund the operating loss of $4.9 million
and an increase in accounts receivable of $3.4 million, offset in part by
$4.7 million non-cash charges associated with acquired in-process research
and development.
Net cash provided by investing activities totaled $6.7 million for
the nine months ended September 30, 1999, primarily from proceeds from the
sale of short-term investments partially offset by capital additions,
principally building improvements in the Company's California headquarters
facility and computer and related equipment. During the first nine months of
1998, the Company used $1.8 million in investing activities, primarily for
capital additions.
Cash generated by financing activities was $594,000 for the nine
months ended September 30, 1999, primarily from proceeds from the exercise of
employee stock options and purchases under the Company's stock purchase plan,
offset in part by repayment by the Company of notes acquired in the ICAST
acquisition. Cash provided by financing activities
11.
<PAGE>
during the nine months ended September 30, 1998 resulted primarily from $36.7
million of proceeds for the issuance of common stock in the Company's initial
public offering in May 1998, partially offset by the repayment of outstanding
indebtedness.
The Company has a working capital line of credit agreement with a
bank that provides for borrowings of up to $10.0 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
(8 1/4% at September 30, 1999). Among other provisions of the agreement, the
Company is required to maintain certain financial covenants and is prohibited
from paying dividends. The line of credit agreement expires in September
2000. No borrowings were outstanding under this line at September 30, 1999.
The Company believes that its cash, cash equivalents and short-term
investments of $9.9 million at September 30, 1999, together with its existing
line of credit, will provide adequate cash to fund its current 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 dilution to the Company's stockholders.
YEAR 2000 COMPLIANCE
The Company has been assessing its internal systems and its current
products and products that are no longer being produced to determine if they
are "Year 2000 Compliant." 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. Based on these assessments,
the Company believes that all its internal systems, products currently being
produced, and older products that are no longer being produced, are "Year
2000 Compliant." However, there can be no assurance (i) that third party
technologies used in combination with the Company's products will be Year
2000 Compliant and (ii) that 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. Except as implied in any limited
product warrant, 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. It is
anticipated that these expenditures will continue through calendar year 1999
and thereafter.
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 to determine 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 adverse effect on the Company's business,
financial condition and results of operations.
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 materially
changed.
12.
<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. In
July 1999, the Court entered orders consolidating all existing class actions
into a single action and appointing a lead plaintiff and lead plaintiff's
co-counsel. A consolidated amended complaint was filed in September 1999 and
the individual defendants filed a motion to dismiss the complaint on October
8, 1999. The motion is scheduled for hearing by the court on January 21,
2000. 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 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(l) 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 for the period ended September 30, 1998 as filed on
August 11, 1998, incorporated herein by reference.
(3) See Note 3 to Condensed Consolidated Financial Statements.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the period covered by
this report.
13.
<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: November 12, 1999 FVC.COM, INC.
By: /s/ Truman Cole
--------------------------------------
Truman Cole
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
14.
<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
for the period ended September 30, 1998 as filed on August 11,
1998, incorporated herein by reference.
(3) See Note 3 to Condensed Consolidated Financial Statements.
15.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FVC.COM FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,070
<SECURITIES> 7,823
<RECEIVABLES> 14,801
<ALLOWANCES> 454
<INVENTORY> 13,112
<CURRENT-ASSETS> 38,616
<PP&E> 6,309
<DEPRECIATION> 3,748
<TOTAL-ASSETS> 45,237
<CURRENT-LIABILITIES> 10,316
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 34,545
<TOTAL-LIABILITY-AND-EQUITY> 45,237
<SALES> 32,653
<TOTAL-REVENUES> 32,653
<CGS> 17,322
<TOTAL-COSTS> 39,630
<OTHER-EXPENSES> 22,308
<LOSS-PROVISION> 184
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> (6,444)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,444)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,444)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
