<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 JUNE 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 16,587,162
- ------------------------------ -------------------------------
(Class) Outstanding as of June 30, 1999
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<PAGE>
FVC.COM, INC.
FORM 10-Q
INDEX
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 1999 and December 31, 1998.................................... 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1999 and 1998................. 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 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 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>
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>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 800 $ 10,315
Short-term investments.............................................. 11,420 16,433
Accounts receivable, net of allowance of $474 and $168.............. 12,599 11,221
Inventory........................................................... 11,981 6,053
Prepaid expenses and other current assets........................... 2,412 1,241
-------- --------
Total current assets............................................ 39,212 45,263
Property and equipment, net.............................................. 2,938 2,400
Other assets............................................................. 3,512 3,502
-------- --------
$ 45,662 $ 51,165
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable....................................................... $ - $ 1,300
Current portion of long-term debt................................... 135 137
Accounts payable.................................................... 5,246 5,045
Accrued liabilities................................................. 2,456 1,937
Deferred revenue.................................................... 2,509 3,905
-------- --------
Total current liabilities....................................... 10,346 12,324
Long-term debt, net of current portion................................... 160 228
Minority interest in consolidated subsidiary ............................ 395 -
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;
16,587,162 and 16,389,007 shares issued and outstanding,
respectively.................................................... 17 16
Additional paid-in capital.......................................... 62,963 61,649
Notes receivable from stockholders.................................. (401) (502)
Cumulative translation adjustment................................... (12) -
Accumulated deficit................................................. (27,806) (22,550)
-------- --------
Total stockholders' equity...................................... 34,761 38,613
-------- --------
$ 45,662 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues.................................... $10,624 $10,991 $19,004 $20,033
Cost of revenues............................ 5,537 5,973 10,263 10,805
------- ------- ------- -------
Gross profit........................... 5,087 5,018 8,741 9,228
------- ------- ------- -------
Operating expenses:
Research and development............... 2,582 1,987 4,987 3,871
Selling, general and administrative.... 4,658 2,730 9,371 5,347
------- ------- ------- -------
Total operating expenses........... 7,240 4,717 14,358 9,218
------- ------- ------- -------
Income (loss) from operations............... (2,153) 301 (5,617) 10
Other income (expense), net................. 142 (180) 368 (381)
Minority interest in consolidated
subsidiary............................. (7) - (7) -
------- ------- ------- -------
Net income (loss)........................... $(2,018) $ 121 $(5,256) $ (371)
------- ------- ------- -------
------- ------- ------- -------
Basic and diluted net income (loss) per
share.................................. $ (0.12) $ 0.01 $ (0.33) $ (0.05)
------- ------- ------- -------
------- ------- ------- -------
Shares used to compute net income (loss) per -
share:
Basic.................................. 16,235 10,597 16,141 7,504
------- ------- ------- -------
------- ------- ------- -------
Diluted................................ 16,235 15,478 16,141 7,504
------- ------- ------- -------
------- ------- ------- -------
</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>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $ (5,256) $ (371)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................... 992 749
Non-cash stock compensation...................................... 246 678
Other............................................................ 431 228
Changes in assets and liabilities:
Accounts receivable.............................................. (1,414) (3,419)
Inventory........................................................ (5,928) 842
Prepaid expenses and other assets................................ (1,470) (378)
Accounts payable................................................. 201 (820)
Accrued liabilities.............................................. 519 234
Deferred revenue................................................. (1,396) (157)
--------- ---------
Net cash used in operating activities....................... (13,075) (2,414)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................................ (1,241) (921)
Proceeds from sale of short-term investments......................... 5,013 -
--------- ---------
Net cash provided by (used in) investing activities......... 3,772 (921)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayment) of notes payable, net......................... (1,300) 3,600
Repayment of short-term credit facilities............................ - (4,906)
Repayment of long-term debt.......................................... - (2,014)
Proceeds from issuance of common stock, net.......................... 1,158 36,299
Repayment of capital lease obligations............................... (70) (110)
--------- ---------
Net cash provided by (used in) financing activities......... (212) 32,869
--------- ---------
Net increase (decrease) in cash and cash equivalents...................... (9,515) 29,534
Cash and cash equivalents at beginning of period.......................... 10,315 2,500
--------- ---------
Cash and cash equivalents at end of period................................ $ 800 $ 32,034
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............................................... $ 77 $ 192
--------- ---------
--------- ---------
Warrants issued in conjunction with debt financing................... $ - $ 1,213
--------- ---------
--------- ---------
</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 June 30,
1999 are not necessarily indicative of the results to be expected for any
subsequent quarter 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. ACQUISITION OF FVC.COM (UK) LTD.
In May 1999, the Company acquired a controlling interest in FVC.COM
(UK) Ltd. Since its inception, FVC.COM (UK) Ltd. has been a distributor of
the Company's products in the United Kingdom and the Middle East. The Company
acquired 52% of the outstanding stock of a newly incorporated holding company
that owns 100% of the shares of FVC.COM (UK) Ltd. in exchange for a cash
payment of $750,000. The transaction was accounted for as a purchase;
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair market values at the date
of acquisition. Goodwill of $360,000 arising from the acquisition is being
amortized over five years.
3. INVENTORY
Inventories as of June 30, 1999 and December 31, 1998 were (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Raw materials........................................... $ 6,788 $ 3,176
Finished goods.......................................... 5,193 2,877
--------- ---------
Total inventory................................ $ 11,981 $ 6,053
--------- ---------
--------- ---------
</TABLE>
4. 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
months ended June 30, 1999 and the six months ended June 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.
6.
<PAGE>
The following table sets forth a reconciliation of the computation
of basic and diluted earnings (loss) per share under the provisions of FAS
128 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss)......................... $ (2,018) $ 121 $ (5,256) $ (371)
--------- --------- --------- --------
--------- --------- --------- --------
Weighted-average common shares
outstanding (excluding unvested
restricted common stock)............... 16,235 10,597 16,141 7,504
Effect of dilutive potential common shares:
Unvested restricted common Stock...... - 866 - -
Convertible preferred stock........... - 2,680 - -
Stock options......................... - 1,301 - -
Warrants.............................. - 34 - -
--------- --------- --------- --------
Weighted-average common shares and
dilutive potential common shares
outstanding............................ 16,235 15,478 16,141 7,504
--------- --------- --------- --------
--------- --------- --------- --------
Earnings (loss) per share:
Basic................................ (0.12) 0.01 (0.33) (0.05)
Diluted.............................. (0.12) 0.01 (0.33) (0.05)
</TABLE>
The following table summarizes securities outstanding at June 30, 1999,
which were not included in the calculations of diluted loss per share for the
three months and six months ended June 30, 1999 since their inclusion would be
anti-dilutive (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
<S> <C>
Unvested restricted common stock 348
Common stock options 554
Common stock warrants 229
</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. 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 on May 4, 1998. The stock options outstanding at June 30,
1999 and 1998 had a weighted average exercise price per share of $9.69 and
$6.28, respectively, and expire beginning in July 2001 through June 2009.
5. COMPREHENSIVE LOSS
Comprehensive loss for the three and six months ended June 30, 1999
was $2,030,000.
7.
<PAGE>
6. 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.
7. 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, appointing a lead plaintiff and lead plaintiff's
co-counsel, and ordering the lead plaintiff to file a consolidated amended
complaint by early September 1999. 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,
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.
8.
<PAGE>
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 37% of the Company's revenues for the six
months ended June 30, 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.
Approximately 11% and 20% of the Company's revenues were generated from
customers outside of North America during the six months ended June 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 May 1999, the Company acquired a controlling interest in FVC.COM
(UK) Ltd. Since its inception, FVC.COM (UK) Ltd. has been a distributor of
the Company's products in the United Kingdom and the Middle East. The Company
acquired 52% of the outstanding stock of a newly incorporated holding company
that owns 100% of the shares of FVC.COM (UK) Ltd. in exchange for a cash
payment of $750,000. The primary motive for the acquisition was to provide
financial resources to FVC.COM (UK) Ltd.'s operations in order to expand the
Company's presence in the United Kingdom and Middle East markets.
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 June
30,1999, deferred revenue was $2.5 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 would not carry any
inventory of the Company's products. The Company's contract with Nortel
Networks expired on May 3, 1999, however, the Company and Nortel are
currently operating under 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
9.
<PAGE>
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 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 52.1 54.3 54.0 53.9
------ ------ ------ ------
Gross profit 47.9 45.7 46.0 46.1
------ ------ ------ ------
Operating expenses:
Research and development 24.3 18.1 26.2 19.3
Selling, general and administrative 43.8 24.8 49.3 26.7
------ ------ ------ ------
Total operating expenses (1) 68.1 42.9 75.5 46.0
------ ------ ------ ------
Income (loss) from operations (20.2) 2.7 (29.5) 0.1
------ ------ ------ ------
Other income (expense), net 1.3 (1.6) 1.9 (1.9)
------ ------ ------ ------
Net income (loss) (18.9)% 1.1% (27.6)% (1.8)%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
(1) Operating expenses include non-cash stock compensation charges of $48,000
(0.5% of total revenues) and $262,000 (2.4% of total revenues) for the
three months ended June 30, 1999 and 1998, respectively, and $246,000 (1.3%
of total revenues) and $678,000 (3.4% of total revenues) for the six months
ended June 30, 1999 and 1998, respectively.
REVENUES. Revenues decreased 4.0% to $10.6 million for the three
months ended June 30, 1999, from $11.0 million for the three months ended
June 30, 1998. Revenues decreased 5.0% to $19.0 million for the six months
ended June 30. 1999, from $20.0 million for the six months ended June 30,
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 44.0% to $6.0 million in the six months ended June 30,1999, from
$10.8 million for 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 $5.1 million for the three months ended
June 30, 1999, from $5.0 million for the three months ended June 30, 1998.
Gross margin (gross profit as a percentage of revenues) increased to 47.9%
for
10.
<PAGE>
the three months ended June 30, 1999, from 45.7% for the three months ended
June 30, 1998. The increase in gross profit and gross margin were due to a
shift in mix to higher margin products.
Gross profit decreased to $8.7 million for the six months ended June
30, 1999, from $9.2 million for the six months ended June 30, 1998, primarily
due to the decrease in revenues for the first six months of 1999 compared to
the six months ended June 30, 1998. Gross margin marginally decreased to
46.0% for the six months ended June 30, 1999, from 46.1% for the six months
ended June 30, 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 increased 30.0% to $2.6 million for the three
months ended June 30, 1999, from $2.0 million for the three months ended June
30, 1998. As a percentage of total revenues, research and development
expenses increased to 24.3% for the three months ended June 30, 1999, from
18.1% for the three months ended June 30, 1998. Research and development
expenses increased 29.0% to $5.0 million for the six months ended June 30,
1999, from $3.9 million for the six months ended June 30, 1998. As a
percentage of total revenues, research and development expenses increased to
26.2% for the six months ended June 30, 1999, from 19.3% for the six months
ended June 30, 1998. The increase in dollars was primarily the result of
hiring additional engineers and consultants for product development. The
increase as a percentage of revenues was due both to higher spending and the
decrease in revenues in the three and six months ended June 30, 1999, versus
the comparable periods 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 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 71.0% to $4.7 million for the
three months ended June 30, 1999, from $2.7 million for the three months
ended June 30, 1998. As a percentage of total revenues, selling, general and
administrative expenses increased to 43.9% for the three months ended June
30, 1999, from 24.8% for the three months ended June 30, 1998. Selling,
general and administrative expenses increased 75.0% to $9.4 million for the
six months ended June 30, 1999, from $5.3 million for the six months ended
June 30, 1998. As a percentage of total revenues, selling, general and
administrative expenses increased to 49.3% for the six months ended June 30,
1999, from 26.7% for the six months ended June 30, 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 acquisitions of ICAST Corporation and FVC.COM (UK) Ltd.
The increase as a percentage of revenues was due both to higher spending and
the decrease in revenues in the three and six months ended June 30, 1999,
versus the comparable periods 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 and May 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 $142,000 for the
three months ended June 30, 1999, compared to net other expense of $180,000
for the three months ended June 30, 1998. Net other income totaled $368,000
for the six months ended June 30, 1999, compared to net other expense of
$381,000 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.
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
11.
<PAGE>
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 June 30, 1999, the
Company had cash, cash equivalents and short-term investments of $12.2
million and working capital of $28.9 million.
During the six months ended June 30, 1999, the Company used $13.1
million of cash in its operating activities, primarily to fund a net loss of
$5.3 million and increases in inventory, prepaid expenses and other assets,
and accounts receivable of $5.9 million, $1.5 million, and $1.4 million,
respectively. The increase in inventory was primarily attributable to sales
being below the Company's expectations during the six months ended June 30,
1999. During the six months ended June 30, 1998, the Company used $2.4
million of cash in its operating activities, primarily to fund an increase in
accounts receivable of $3.4 million offset in part by a decrease in inventory
of $842,000.
Net cash provided by investing activities totaled $3.8 million for
the six months ended June 30, 1999, compared to net cash used in investing
activities of $921,000 for the six months ended June 30, 1998. Cash flow from
investing activities for the six months ended June 30, 1999 consisted of
proceeds from the sale of short term investments of $5.0 million, offset in
part by cash used for the acquisition of property and equipment of $1.2
million. Cash used for investing activities for the acquisition of property
and equipment was $921,000 for the six months ended June 30, 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
expenditures because of its strategy to outsource manufacturing and certain
other functions.
Cash used in financing activities was $212,000 for the six months
ended June 30, 1999, compared to cash provided by financing activities of
$32.9 million for the six months ended June 30, 1998. Cash used in financing
activities during the first six months 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 $1.2 million of
proceeds from the issuance of common stock under the Company's stock plans.
Cash provided by financing activities during the six months ended June 30,
1998 arose primarily from $36.3 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% at
June 30, 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 June 30, 1999.
The Company believes that its cash, cash equivalents and short term
investments of $12.2 million at June 30, 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,
12.
<PAGE>
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 those Year 2000 issues, the Company has
undertaken 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 the end of
the third quarter of 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, but does not expect the cost to be material.
To assist customers in evaluating their Year 2000 issues with
respect to the Company's products, the Company has been assessing the
capability of its current products and products no longer being produced to
be Year 2000 compliant. 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 the
end of the third quarter of 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 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
regarding 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. 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 (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.
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. In
July 1999, the Court entered orders consolidating all existing class actions
into a single action, appointing a lead plaintiff and lead plaintiff's
co-counsel, and ordering the lead plaintiff to file a consolidated amended
complaint by early September 1999. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 2,
1999 (the "Annual Meeting").
The following matters were considered and voted upon at the Annual
Meeting:
The first matter related to the election of two director nominees,
Pier Carlo Falotti and Robert W. Wilmot as directors to serve until the 2002
Annual Meeting of Stockholders. The votes cast for and against such nominees
were as follows:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
------------------------------------------------------------------------------------------------
<S> <C> <C>
Pier Carlo Falotti 10,825,174 685,034
Robert W. Wilmot 11,443,951 66,257
</TABLE>
The second matter related to the approval of an amendment to the
Company's 1997 Employee Stock Purchase Plan to increase the aggregate number
of shares of Common Stock authorized for issuance under such plan by 200,000
shares, to 350,000 shares. 11,275,548 votes were cast for approval and
112,323 votes were cast against approval. There were 18,508 abstentions and
no broker non-votes.
The third matter related to the ratification of the appointment of
PricewaterhouseCoopers LLP as independent accountants of the Company for its
fiscal year ending December 31, 1999. 11,446,738 votes were cast for
ratification and 54,575 votes were cast against ratification. There were
8,895 abstentions and no broker non-votes.
Based on these voting results, each of the directors nominated was
elected and the second and third matters were approved.
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 for the period ended June 30,
1998 as filed on August 11, 1998, incorporated
herein by reference.
(3) See Note 4 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.
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: August 12, 1999 FVC.COM, INC.
By: /s/ Truman Cole
--------------------------------------------
Truman Cole
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
for the period ended June 30, 1998 as filed on August 11, 1998,
incorporated herein by reference.
(3) See Note 4 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 FOR THE SIX MONTHS ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 800
<SECURITIES> 11,420
<RECEIVABLES> 13,073
<ALLOWANCES> 474
<INVENTORY> 11,981
<CURRENT-ASSETS> 39,212
<PP&E> 5,717
<DEPRECIATION> 2,779
<TOTAL-ASSETS> 45,662
<CURRENT-LIABILITIES> 10,346
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 34,744
<TOTAL-LIABILITY-AND-EQUITY> 45,662
<SALES> 10,624
<TOTAL-REVENUES> 10,624
<CGS> 5,537
<TOTAL-COSTS> 12,777
<OTHER-EXPENSES> 7,240
<LOSS-PROVISION> 70
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (2,018)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,018)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,018)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
