<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM
-------------- TO
--------------
Commission file number 000-23305
------------------------
FVC.COM, INC.
(Exact name of registrant in its character)
<TABLE>
<S> <C>
DELAWARE 77-0357037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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 / /
<TABLE>
<S> <C>
Common Stock, $0.001 par value 17,345,388
-------------------------------------------- --------------------------------------------
(Class) Outstanding as of September 30, 2000
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
FVC.COM, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 30,
2000 and December 31, 1999............................. 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2000
and 1999............................................... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999.......... 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............................................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 18
Item 6. Exhibits and Reports on Form 8-K.................. 18
SIGNATURES.................................................. 19
EXHIBIT INDEX............................................... 20
</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,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,101 $ 997
Short-term investments.................................... 28,094 7,824
Accounts receivable, net of allowance of $419 and
$1,269.................................................. 9,497 14,066
Inventory................................................. 8,141 8,104
Prepaid expenses and other current assets................. 1,030 2,866
-------- --------
Total current assets.................................... 47,863 33,857
Property and equipment, net................................. 2,611 2,880
Other assets................................................ 2,733 3,462
-------- --------
$ 53,207 $ 40,199
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... 106 143
Accounts payable.......................................... 4,999 6,968
Accrued liabilities....................................... 4,181 3,123
Deferred revenue.......................................... 738 1,745
-------- --------
Total current liabilities............................... 10,024 11,979
Long-term debt, net of current portion...................... 47 85
Minority interest in consolidated subsidiary................ 457 323
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 5,000,000
shares authorized; 27,437 shares and no shares issued
and outstanding, respectively........................... -- --
Common Stock, $.001 par value; 35,000,000 shares
authorized; 17,345,388 and 16,832,522 shares issued and
outstanding, respectively............................... 17 17
Additional paid-in capital................................ 91,931 65,015
Notes receivable from stockholders........................ (29) (321)
Accumulated other comprehensive income (loss)............. 128 (21)
Accumulated deficit....................................... (49,368) (36,878)
-------- --------
Total stockholders' equity.............................. 42,679 27,812
-------- --------
$ 53,207 $ 40,199
======== ========
</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,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues................................................ $ 9,158 $13,650 $ 30,013 $32,653
Cost of revenues........................................ 5,016 7,061 16,376 17,322
------- ------- -------- -------
Gross profit.......................................... 4,142 6,589 13,637 15,331
------- ------- -------- -------
Operating expenses:
Research and development.............................. 3,302 2,653 9,017 7,591
Selling, general and administrative................... 6,426 5,297 17,774 14,717
------- ------- -------- -------
Total operating expenses............................ 9,728 7,950 26,791 22,308
------- ------- -------- -------
Loss from operations.................................... (5,586) (1,361) (13,154) (6,977)
Other income, net....................................... 474 95 776 463
Minority interest in consolidated subsidiary............ (69) 78 (112) 70
------- ------- -------- -------
Net loss................................................ $(5,181) $(1,188) $(12,490) $(6,444)
======= ======= ======== =======
Basic and diluted net loss per share.................... $ (0.30) $ (0.07) $ (0.73) $ (0.39)
======= ======= ======== =======
Shares used to compute net loss per share:
Basic and diluted..................................... 17,318 16,660 17,166 16,314
======= ======= ======== =======
</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,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(12,490) $ (6,444)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,908 1,554
Non-cash stock compensation............................. 217 395
Other................................................... 134 235
Changes in assets and liabilities:
Accounts receivable..................................... 4,569 (3,126)
Inventory............................................... (37) (7,059)
Prepaid expenses and other assets....................... 1,721 (423)
Accounts payable........................................ (1,969) 454
Accrued liabilities..................................... 1,058 576
Deferred revenue........................................ (1,007) (1,739)
-------- --------
Net cash used in operating activities................. (5,896) (15,576)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (796) (1,873)
Purchase of short term investments........................ (23,738) --
Proceeds from sale of short-term investments.............. 3,760 8,610
-------- --------
Net cash (used in) provided by investing activities... (20,774) 6,737
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable................................ -- (1,300)
Proceeds from issuance of preferred stock, net............ 24,437 --
Proceeds from issuance of common stock, net............... 2,412 1,998
Repayment of capital lease obligations.................... (75) (104)
-------- --------
Net cash provided by financing activities............. 26,774 594
-------- --------
Net increase (decrease) in cash and cash equivalents........ 104 (8,245)
Cash and cash equivalents at beginning of period............ 997 10,315
-------- --------
Cash and cash equivalents at end of period.................. $ 1,101 $ 2,070
======== ========
</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 consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which,
in the opinion of management, are necessary for a fair statement of the
Company's consolidated financial position, results of operations and cash flows
for the periods presented. These condensed 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/A for the year
ended December 31, 1999. The December 31, 1999 condensed consolidated balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. The results of
operations for the period ended September 30, 2000 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending December 31, 2000.
2. INVENTORY
Inventories as of September 30, 2000 and December 31, 1999 were (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Raw materials............................................... $1,511 $2,155
Finished goods.............................................. $6,630 $5,949
------ ------
Total inventory............................................. $8,141 $8,104
====== ======
</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 months and
nine months ended September 30, 2000 and 1999, 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 which were not
included in the calculations of diluted net loss per share for the three months
and nine months ended September 30, 2000 and 1999, since their inclusion would
be anti-dilutive (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Unvested restricted common stock............................ 24 202
Common stock options........................................ 6,562 4,429
Common stock warrants....................................... 1,016 245
Convertible preferred stock................................. 3,430 --
</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
6
<PAGE>
vested. The common stock warrants are exercisable at $7.00 to $12.00 per share
and expire at various times from May 2001 through June 2005. The stock options
outstanding at September 30, 2000, had a weighted average exercise price per
share of $8.38, and expire beginning in April 2001 through September 2010.
Convertible preferred stock represents the number of shares of common stock that
would result if the Series A Preferred Stock was converted at a conversion rate
of $8.00 per share.
4. COMPREHENSIVE LOSS
The Company's comprehensive net loss for the three and nine months ended
September 30, 2000 was $5,053,000 and $12,362,000, respectively. The
comprehensive net loss for the three and nine months ended September 30, 1999
was $1,209,000 and $6,464,000, respectively.
5. LITIGATION
On or about April 9, 1999, several purported class action suits were filed
in the United States District Court for the Northern District of California (the
"Court") 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 ended December 31, 1998. The
Court dismissed these actions without leave to amend on February 14, 2000. The
plaintiffs filed a notice of appeal with the Ninth U.S. Circuit Court of Appeals
on March 29, 2000.
6. ISSUANCE OF CONVERTIBLE PREFERRED STOCK
On June 8, 2000, the Company issued 27,437 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") in a private placement to Vulcan
Ventures Incorporated ("Vulcan") for an aggregate purchase price of $27,437,000.
The Preferred Stock is convertible into 3,429,625 shares of common stock of the
Company. The Company also issued a five-year warrant to Vulcan to purchase
850,000 shares of the Company's common stock at an exercise price of $7.00 per
share. On the date of issuance, the warrant had an approximate fair market value
of $3,700,000, determined using the Black-Scholes pricing model. The aggregate
gross proceeds from the transaction exceed the fair value of the stock and
warrants issued. The warrant provides anti-dilution protection to Vulcan in the
event that the Company issues additional shares of common stock at a price less
than $7.00 per share, subject to certain exceptions.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Under SFAS No. 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. In June 1999, the FASB issued SFAS No. 137, "Deferral of the
Effective Date of FASB Statement Number 133," to defer for one year the
effective date of implementation of SFAS No. 133. SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000, with
earlier application encouraged. To date, the Company has not engaged in any
foreign currency hedging activity and does not expect adoption of this standard
to have a significant impact on the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles ("GAAP") to revenue
7
<PAGE>
recognition in financial statements. In March 2000, the SEC issued SAB 101A that
deferred the Company's required adoption of SAB 101 until the quarter beginning
April 1, 2000. In April 2000, the SEC issued SAB No. 101B that deferred the
Company's required adoption of SAB 101 until the quarter beginning October 1,
2000. As of the filing of the 10-Q, the company has adopted revenue recognition
policies that are in accordance with GAAP and does not believe that the adoption
of SAB 101 will have a material impact on the consolidated financial statements.
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. ("FVC" or the "Company") should be read in
conjunction with the Condensed Consolidated Financial Statements and the Notes
thereto included in Item 1 of this Quarterly Report on 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, as well as those set forth below and other risk factors set forth
below and described in this 10-Q report and in other documents the company files
with the SEC. The Company assumes no obligation to update any forward-looking
statements contained herein.
OVERVIEW
Founded in 1993, FVC.COM, Inc., a Delaware corporation, provides equipment
and services to deliver video applications over broadband communications
networks. The Company combines its expertise in networking systems and real-time
video technology to deliver end-to-end video communications solutions for a wide
range of enterprise video applications, including video calls, video
conferences, video broadcasts and video on demand over converged multi-service
networks. The Company's strategy is to become the leading provider of high
quality, cost-effective, video networking solutions in broadband Internet and
intranet environments for telecommunications carriers and enterprise customers.
With over six years of pioneering work in broadband video, FVC is a leading
provider of video networking hardware, software and services.
Historically, the Company has focused on providing video-networking systems
to the government, education and healthcare markets, both through direct and
indirect sales. FVC's original equipment manufacturer ("OEM") distribution and
system integration partners include Adaptive Broadband, Ameritech (a subsidiary
of SBC Communications Inc.), Alcatel, British Telecommunications plc ("British
Telecom" or "BT"), Cisco Systems, Inc. ("Cisco"), Electronic Data Systems
Corporation ("EDS"), France Telecom S.A. ("France Telecom"), Ideal Technology,
Ingram Micro, Inc. ("Ingram Micro"), International Business Machines Corporation
("IBM"), Nortel Networks Corporation ("Nortel"), Qwest Communications
International, Inc. ("Qwest"), SBC Communications Inc., Shanghai Telecom, and
Verizon Communications ("Verizon").
8
<PAGE>
The Company is leveraging its leadership position in video networking to
capitalize on the rapidly emerging opportunity to provide broadband video
services to the service provider market. The Company intends to address this
opportunity both by providing a full range of video network systems solutions
and through its recently introduced broadband video services offering. To date,
network systems sales announcements by the Company with telecommunications
carriers include expanded customer relationships with Bell Atlantic and British
Telecom, both of which are deploying broadband video services using FVC's
products and solutions. The Company's broadband video services enable
telecommunications carriers to deliver a comprehensive set of video applications
over the carrier's existing broadband networks into conference rooms, as well as
to the users' desktops. These services are delivered through the Company's Video
Operations Center ("VOC") in Santa Clara, California and other locations. The
Company's web-based Click To Meet-TM- software serves as the user interface and
is designed for the end-user's ease-of-use.
The Company markets its products to enterprise customers, which includes
business customers, government users, education and healthcare providers, and to
service providers, which includes telecommunications carriers, regional Bell
operating companies, competitive local exchange carriers and Internet service
providers, through its internal sales force and indirect sales channels. For the
quarter ended September 30, 2000, approximately 80% of the Company's revenues
were from enterprise customers, and 20% from service providers. For the third
quarter of 1999, revenues from enterprise customers and service providers
represented 78% and 22%, respectively, of total revenues. Sales through Nortel
represented less than 10% of the Company's revenues for the nine months ended
September 30, 2000, and 29% of the Company's revenues for the year ended
December 31, 1999.
The Company maintains a network of distributors in Europe and Asia licensed
to sell its products under the FVC.COM name. Approximately 17% and 13% of the
Company's revenues were generated from customers outside of North America during
the three months ended September 30, 2000 and 1999, 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 some of
its distribution partners is sold to international end-users.
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, and currency risks, among others.
In the quarter ended September 30, 2000, the Company introduced Click to
Meet Enterprise, an all-encompassing broadband video networking solution that
enables enterprise users to leverage their converged IP networks for
face-to-face electronic communications. Click to Meet is a complete end-to-end
broadband video solution that gives users point-and-click access to ad-hoc and
scheduled video calls, conferences and date collaboration across many types of
networks, including ATM, IP, PSTN, DAL, Cable Modem and fixed wireless, through
a Web-based video communications portal.
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. These 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, 2000, deferred revenue
totaled $738,000.
9
<PAGE>
The Company has experienced, and is likely to experience in the future,
fluctuations in revenues, gross margins and operating results. Various factors
contribute to the fluctuations in revenues, gross margins and operating results,
including the Company's success in developing and marketing its video services
business and in developing, introducing and shipping new products and product
enhancements, the Company's success in accurately forecasting demand for new
orders (which may have short lead-times before required shipment), product mix,
percentage of revenues derived from OEMs versus distributors or resellers, new
product introductions and price reductions by competitors, the efforts of OEMs,
distributors, resellers, and other third parties on behalf of the Company, the
Company's ability to attract, retain and motivate qualified personnel, the
timing and amount of research and development and selling, general and
administrative expenditures, and general economic conditions. Further, a
significant portion of the Company's expenses is fixed. The Company expects that
operating expenses will increase in the future to fund expanded operations,
including the expansion of the Company's broadband video services to
telecommunications carriers. To the extent these increased expenses are not
accompanied by an increase in revenues or gross margin, as is expected to be the
case as the Company expands its broadband video services business, the Company's
business, financial condition and results of operations would be materially
adversely affected. Due to all the foregoing factors, it is likely that in some
future quarter, the Company's results of operations will be below the
expectations of public market analysts and investors.
The Company out-sources certain functions to independent service providers,
and the majority of the Company's products are assembled and tested by
subcontract manufacturers, the largest subcontract manufacturer being Saturn
Electronics and Engineering, Inc.
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues................................................. 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues......................................... 54.8 51.7 54.6 53.0
----- ----- ----- -----
Gross profit............................................. 45.2 48.3 45.4 47.0
----- ----- ----- -----
Operating expenses:
Research and development................................. 36.1 19.4 30.0 23.2
Selling, general and administrative...................... 70.2 38.8 59.2 45.1
----- ----- ----- -----
Total operating expenses(1).............................. 106.3 58.2 89.2 68.3
----- ----- ----- -----
Loss from operations..................................... (61.0) (10.0) (43.8) (21.4)
----- ----- ----- -----
Other income, net........................................ 5.2 0.7 2.6 1.4
Minority interest in consolidated subsidiary............. (0.8) 0.6 (0.4) 0.2
----- ----- ----- -----
Net loss................................................. (56.6)% (8.7)% (41.6)% (19.7)%
===== ===== ===== =====
</TABLE>
------------------------
(1) Operating expenses include non-cash stock compensation charges of $59,000
(0.6% of total revenues) and $49,000 (0.4% of total revenues) for the three
months ended September 30, 2000 and 1999, respectively, and $217,000 (0.7%
of total revenues) and $395,000 (1.2% of total revenues) for the nine months
ended September 30, 2000 and 1999, respectively.
10
<PAGE>
REVENUES. Revenues were $9.2 million for the three months ended
September 30, 2000, a decrease of 32.9% from the three months ended
September 30, 1999. Revenue for the nine months ended September 30, 2000,
compared to the first nine months of 1999 decreased 8.3%, from $32.7 million to
$30.0 million. The decreases in revenues for both the three month and nine month
periods resulted from lower product shipments to both enterprise customers and
service providers.
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 for the three months ended September 30, 2000, decreased to
45.2%, from 48.3% in the comparable period of 1999. During the nine months ended
September 30, 2000, gross profit declined to 45.4% from 47.0% in the first nine
months of 1999. The decline in gross profit in both the three month and nine
month periods was primarily attributable to the lower overall level of revenues
and due to changes in product mix.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs, costs of contractors and outside consultants,
supplies and materials expenses, equipment depreciation and overhead costs.
Research and development expenses represented 36.1% of revenues in the quarter
ended September 30, 2000, an increase from 19.4% during the quarter ended
September 30, 1999. For the nine months ended September 30, 2000, research and
development expenses represented 30.0% of revenues, compared to 23.2% during the
first nine months of 1999. The increases as a percentage of revenues was due to
the reduction in revenues during both the three and nine month periods of 2000
and due to increases in the dollar level of spending for research and
development activities.
The increases in dollar level of spending in the three and nine month
periods ending September 30, 2000 were $649,000 and $1.4 million, respectively,
compared to the comparable periods of 1999. The increases were primarily
attributable to increases in engineering staff to support new product
development, including activities associated with the Company's Click to Meet
product introduced in February 2000 and other products. 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
(SG&A) expenses include personnel and related overhead costs for sales,
marketing, finance, human resources and general management. SG&A expenses also
include costs of outside contractors, advertising trade shows, other marketing
and promotional expenses, and goodwill amortization. As a percentage of revenue,
SG&A expenses increased to 70.2% during the quarter ended September 30, 2000,
from 38.8% in the quarter ended September 30, 1999, and to 59.2% for the nine
months ended September 30, 2000, from 45.1% in the comparable period of 1999.
The increases were primarily due to an increase in marketing and business
development personnel. The Company anticipates that SG&A expenses will continue
to increase in absolute dollars in the foreseeable future as the Company expands
its sales and marketing efforts.
OTHER INCOME, NET. Other income, 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. The changes in
both the three month and nine month periods ended September 30, 2000, compared
to the comparable periods in 1999, were the result of changes in the average
balances of cash and cash equivalents and short term investments, and the
resulting interest income on those balances.
11
<PAGE>
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. Minority interest reflects
the interest of minority stockholders in the operating results of the Company's
consolidated subsidiary in the United Kingdom. The Company acquired a
controlling interest in this entity in May 1999. For the three month and nine
month periods ended September 30, 2000 and 1999, the amounts reflect the portion
of profits and losses in this subsidiary that were attributable to minority
stockholders.
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, 2000,
the Company had cash and cash equivalents and short-term investments of
$29.2 million and working capital of $37.8 million.
During the nine months ended September 30, 2000, the Company used
$5.9 million in its operating activities. This was comprised of the loss of
$12.5 million and reductions in accounts payable ($2.0 million) and deferred
revenue ($1.0 million), and changes in other asset and liability accounts.
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, prepaid expenses and other assets, and
accounts receivable of $7.1 million, $0.4 million, and $3.1 million,
respectively.
Net cash used in investing activities totaled $20.8 million for the nine
months ended September 30, 2000, primarily $20.0 million in net purchases of
short-term investments and $796,000 used for the acquisition of property and
equipment. Net cash provided by investing activities in the nine months ended
September 30, 1999, was $6.7 million, representing $8.6 million in proceeds from
the sale of short term investments, partially offset by $1.9 million used for
the acquisition of property and equipment.
Cash provided by financing activities was $26.8 million for the nine months
ended September 30, 2000, principally from the net proceeds from the sale of
Series A Convertible Preferred Stock of $24.4 million. Cash provided by
financing activities for the nine months ended September 30, 1999 was $594,000,
reflecting $2.0 million in net proceeds from the issuance of common stock under
the Company's stock plans, partially offset by the repayment $1.3 million in
notes payable assumed in the acquisition of ICAST Corporation in August 1998 and
repayment of capital lease obligations.
The Company believes that its cash and cash equivalents and short-term
investments will provide adequate cash to fund its current operations for at
least the next twelve months.
RISK FACTORS
In addition to the other information provided in this report, the following
risk factors should be considered in evaluating the Company and its business.
LIMITED OPERATING HISTORY; CUMULATIVE LOSSES. The Company has a limited
operating history upon which an evaluation of the Company and its prospects can
be based. The Company was incorporated in October 1993, first shipped its video
networking products in 1995 and first announced its video services business in
1999. The Company's prospects must be considered in light of the risks, expenses
and difficulties encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets and companies
experiencing rapid growth and expansion. To address these risks, the Company
must, among other things, continue to achieve market acceptance for its
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products, maintain technological leadership, respond to evolving markets and
competition, and attract, retain and motivate qualified employees. There can be
no assurance that the Company will be successful in addressing these risks.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced,
and is likely to experience in the future, fluctuations in revenues, gross
margins and operating results. Various factors contribute to the fluctuations in
revenues, gross margins and operating results, including the Company's success
in developing its video services business and in developing, introducing and
shipping new products and product enhancements, the Company's success in
accurately forecasting demand for new orders (which may have short lead-times
before required shipment), product mix, percentage of revenues derived from
OEMs versus distributors or resellers, new product introductions and price
reductions by its competitors, the efforts of OEMs, distributors, resellers, and
other third parties on behalf of the Company, the Company's ability to attract,
retain and motivate qualified personnel, the timing and amount of research and
development and selling, general and administrative expenditures, and general
economic conditions.
Further, a significant portion of the Company's expenses are fixed. The
Company expects that operating expenses will increase in the future to fund
expanded operations, including expansion of the Company's broadband video
services to telecommunications carriers. To the extent these increased expenses
are not accompanied by an increase in revenues or gross margin, as is expected
to be the case as the Company expands its broadband video services business, the
Company's business, financial condition and results of operations would be
materially adversely affected. Due to all the foregoing factors, it is likely
that in some future quarter, the Company's results of operations will be below
the expectations of public market analysts and investors.
MARKET ACCEPTANCE OF VIDEO NETWORKING AND BROADBAND VIDEO SERVICES. The
Company's success depends on the market acceptance of video networking and
broadband video services. Potential end-users must accept video applications as
a viable alternative to face-to-face meetings and conventional classroom based
learning. New applications, such as the use of video in marketing, selling and
manufacturing, are still in the development stage. Additionally, the Company's
broadband video services are still in the development stage. The Company has
only recently entered into its first contracts with telecommunications service
providers to provide broadband video services and does not expect any material
revenues from these services to be generated until the second half of 2001. If
video networking and broadband video services fail to achieve broad commercial
acceptance or such acceptance is delayed, the Company's business, financial
condition and results of operations would be materially adversely affected.
DEPENDENCE ON THIRD PARTY RELATIONSHIPS. The Company currently outsources
the manufacturing of its products. The Company relies on several vendors to
manufacture certain of its products. If one or more of these manufacturers
experiences quality control or other problems, product shipments by the Company
may be delayed. If the Company is required to find replacements for its
manufacturers, such change could result in short-term cost increases and delays
in delivery, which could have a material adverse effect on the Company's
business, financial condition and results of operations. There also can be no
assurance that the Company will be able to continue to negotiate arrangements
with its existing or any future manufacturers on terms favorable to the Company.
The Company currently sells its products through OEMs, distributors and
resellers. The Company's future performance will depend in large part on sales
of its products through these distribution relationships, such as Nortel, Bell
Atlantic and other key partners. However, such past performance should not be
considered a reliable indicator of future performance. Agreements with Nortel
and other distribution partners generally provide for discounts based on the
Company's list prices, and do not require minimum purchases or restrict
development or distribution of competitive products. Therefore, some of the
entities that distribute the Company's products may compete with the Company.
The
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Company also cannot assure that an OEM, distributor or reseller will dedicate
sufficient resources or give sufficient priority to selling the Company's
products. The Company additionally depends on its distribution relationships for
most customer support, and expends significant resources to train its OEMs,
distributors and resellers to support their customers. These entities can
generally terminate the distribution relationship upon 30 days notice for a
material breach. The loss of a distribution relationship or a decline in the
efforts of a material distributor, or loss in business or cancellation of orders
from, significant changes in scheduled deliveries to, or decreases in the prices
of products sold to, any of these distribution relationships, could have a
material adverse effect on the Company's results of operations.
LIMITED NUMBER OF LARGE PROJECTS; LENGTHY SALES AND IMPLEMENTATION
CYCLE. The Company depends on a limited number of large end-user projects for a
majority of its revenues, which has resulted in, and may in the future result
in, significant fluctuations in quarterly revenues. The Company expects that
revenues from the sale of products to large end-users will continue to account
for a significant percentage of its revenues in any particular quarter for the
foreseeable future. Additionally, a significant portion of the Company's sales
of video networking products has historically been to government-related
agencies, such as military and educational institutions, or third parties using
the Company's products on behalf of government agencies. Such government-related
customers are often subject to budgetary pressures and may from time to time
reduce their expenditures and/or cancel orders. The loss of any major customer,
or any reduction or delay in orders by such customer, or the failure of the
Company or its distribution partners to market the Company's products
successfully to new customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Sales of the Company's products require an extended sales effort. The
Company must first train the entities with which it has distribution
relationships to market the Company's products. The period from an initial sales
call to an end-user agreement typically ranges from six to twelve months, and
can be longer. Therefore, the timing of revenues may be unpredictable. This
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; INDUSTRY STANDARDS AND REGULATIONS. Rapid
technological change and evolving industry standards characterize the market for
the Company's products. The Company's success will depend, in part, on its
ability to maintain its technological leadership and enhance and expand its
existing product and services offerings. The Company's success also will depend
in part upon its ability and the ability of its strategic partners to comply
with evolving industry standards. The Company's products must meet a significant
number of domestic and international video, voice and data communications
regulations and standards, some of which are evolving as new technologies are
deployed. The Company's products are currently in compliance with applicable
regulatory requirements. However, as standards evolve, the Company must modify
its products, or develop and support new versions of its products. In addition,
telecommunications service providers require that equipment connected to their
networks comply with their own standards, which may vary from industry
standards.
The Company's ability to compete successfully also is dependent upon the
continued compatibility and interoperability of its products with products and
architectures offered by various vendors. The Company's business, financial
condition and results of operations would be materially adversely affected if it
were unable in a timely manner to comply with evolving industry standards or
address compatibility issues. In addition, from time to time, the Company may
announce new products, capabilities or technologies that have the potential to
replace or shorten the life cycle of the Company's existing product offerings.
The announcement of product enhancements or new product or service offerings
could cause customers to defer purchasing the Company's products. In addition,
the Company has experienced delays in the introduction of new products in the
past and may experience such delays in the future. The failure of the Company to
introduce successfully new products, product enhancements or services, or
customer delays in purchasing products in anticipation of new product
introductions or
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because of changes in industry standards, could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON SUPPLIERS. Several critical components used in the Company's
products, including certain custom and programmable semiconductors are currently
available only from single suppliers. The Company does not have long-term
agreements with these suppliers, and they are not obligated to provide
components to the Company for any specific period, in any specific quantity or
at any specific price, except as may be provided in a particular purchase order.
Qualifying additional suppliers is a time consuming and expensive process, and
there is a greater likelihood of problems arising during a transition period to
a new supplier. There can be no assurance that the existing suppliers will
continue to meet the Company's requirements for these components. Any
interruption in the supply of these components, or the inability of the Company
to procure these components from alternate sources at acceptable prices and
within a reasonable period of time, or any excessive rework costs associated
with defective components or process errors, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company uses a product sales forecast based on anticipated product
orders to determine its components requirements. As a result of the relatively
short lead-time on certain orders, however, this forecast may not be accurate.
Failure of the Company to predict accurately its required quantities of these
components has resulted and could result in the future in shortages of or excess
inventory and higher component costs, as well as cause the Company to delay
shipments of its products in response to orders, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
VOLATILITY OF STOCK PRICE. The Company's stock price, like that of other
technology companies, is subject to significant volatility. If revenues or
earnings in any quarter fail to meet the investment community's expectations,
there could be an immediate impact on the company's stock price and a resulting
securities class action suit. The stock price may also be affected by broader
market trends unrelated to the Company's performance. Past financial performance
should not be considered a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
COMPETITION; INDUSTRY CONSOLIDATION. Many of the Company's actual and
potential competitors have greater name recognition, a larger installed base of
networking products and strong relationships with end users, more extensive
engineering, manufacturing, marketing and distribution capabilities, and greater
financial, technological and personnel resources than the Company. The
networking industry is undergoing a period of consolidation in which companies,
including some of the Company's competitors, are participating in business
combinations, resulting in competitors with larger market shares, customer
bases, sales forces, product offerings and technology and marketing expertise.
In addition, there can be no assurance that products or technologies developed
by others will not render the Company's products and services noncompetitive or
obsolete.
RELIANCE ON INTELLECTUAL PROPERTY. The Company's success and ability to
compete in the video networking industry depends, in part, upon its ability to
protect its proprietary technology and to operate without infringing the
proprietary rights of others. The Company does not rely on patent protection
for, and does not hold, any patents relating to its products, although it is
engaged in preparing patent applications related to its recently developed video
services technology. The Company's adherence to industry-wide technical
standards and specifications may limit the Company's opportunities to provide
proprietary product features. The Company currently licenses certain technology
from third parties and plans to continue to do so in the future. The commercial
success of the Company will depend, in part, on its ability to continue to
obtain licenses to third-party technology for use in its products.
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<PAGE>
The Company currently relies upon a combination of trade secret, copyright
and trademark laws and contractual restrictions to establish and protect
proprietary rights in its products. The Company also enters into confidentiality
and invention assignment agreements with its employees and enters into
non-disclosure agreements with its suppliers, distributors and customers to
limit access to and disclosure of its proprietary information. There can be no
assurance that the pending patent applications will be successful, or that these
statutory and contractual arrangements will be sufficient to deter
misappropriation of the Company's proprietary technologies or that independent
third parties will not develop similar or superior technologies. The development
of alternative technologies by third parties could adversely affect the
competitiveness of the Company's products. In addition, the laws of some foreign
countries do not provide the same degree of protection of the Company's
proprietary information as do the laws of the United States.
The commercial success of the Company also will depend, in part, on the
Company not breaching its current and future licenses of third-party technology
used in certain of the Company's products. The Company is, however, subject to
the risk of litigation alleging infringement of third party intellectual
property rights from both its licensed and proprietary technology. A number of
companies have developed technologies or received patents on technologies that
may be related to or be competitive with the Company's technologies. The Company
has not conducted a patent search relating to the technology used in its
products. In addition, since patent applications in the United States are not
publicly disclosed until the patent issues, applications may have been filed
which, if issued as patents, would relate to the Company's products. Given the
rapid development of technology in the video networking industry, there can be
no assurance that the Company's existing or future products will not infringe
upon the existing or future proprietary rights of others. Also, the Company's
lack of patents may inhibit the Company's ability to negotiate or obtain
licenses from or oppose patents of third parties, if necessary. Further, the
Company is subject to the risk of litigation alleging infringement of third
party intellectual property rights from both its licensed and proprietary
technology. The Company could incur substantial costs in defending itself and
its customers against any such claims, regardless of the merits of such claims.
The Company may be required by contract or by statutory implied warranties to
indemnify its distribution partners and end-users against third-party
infringement claims. Parties making such claims may be able to obtain injunctive
or other equitable relief which could effectively block the Company's ability to
sell its products in the United States and abroad, and could result in an award
of substantial damages. In the event of a successful claim of infringement, the
Company, its customers and end-users may be required to obtain one or more
licenses from third parties. There can be no assurance that the Company or its
customers could obtain necessary licenses from third parties at a reasonable
cost, or at all. The defense of any lawsuit could result in time-consuming and
expensive litigation, damages, license fees, royalty payments and restrictions
on the Company's ability to sell its products, any of which could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN PERSONNEL. The
Company's success is significantly dependent on the contributions of a number of
its key personnel. The loss of the services of any of its key personnel could
have a material adverse effect on the Company. The Company believes that its
future success also will depend upon its ability to attract and retain
additional highly skilled technical, managerial, manufacturing, sales and
marketing personnel. Competition for these personnel is intense. There can be no
assurance that the Company will be able to anticipate accurately, or to obtain,
the personnel that it may require in the future.
CONTROL BY INSIDERS. As of November 10, 2000, the Company's executive
officers, directors and their affiliates beneficially owned approximately
7,600,846 shares or 34.1% of the outstanding shares of the Company's common
stock. As a result, these persons may have the ability to effectively control
the Company and direct its affairs and business, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying,
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deferring or preventing a change in control of the Company, and making certain
transactions more difficult or impossible absent the support of these
stockholders, including proxy contests, mergers involving the Company, tender
offers, open-market purchase programs or other purchases of common stock that
could give stockholders of the Company the opportunity to realize a premium over
the then prevailing market price for shares of common stock.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company
currently anticipates that its available cash resources combined with funds from
the Company's existing line of credit, will be sufficient to meet its presently
anticipated working capital, capital expenditure requirements and general
corporate purposes, including expansion of the Company's broadband video
services, for at least the next 12 months. In the future, the Company may need
to raise additional funds through the issuance of equity securities. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to those of the holders of the
Company's common stock. There can be no assurance that additional financing will
be available when needed on terms favorable to the Company or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may be unable to develop or enhance its services, take advantage of
future opportunities or respond to competitive pressures, which could have a
material adverse effect on the Company's business, financial condition or
operating results.
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, as amended, for the year ended December 31, 1999, have not materially
changed.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about April 9, 1999, several purported class action suits were filed
in the United States District Court for the Northern District of California (the
"Court") 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 ended December 31, 1998. The
Court dismissed these actions without leave to amend on February 14, 2000. The
plaintiffs filed a notice of appeal with the Ninth U.S. Circuit Court of Appeals
on March 29, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation(1)
3.1(i) Certificate of Ownership and Merger, effective August 3,
1998(2)
3.1(ii) Certificate of Designation of Series A Convertible Preferred
Stock(4)
3.2 Amended Bylaws of the Registrant(3)
4.1 Specimen Common Stock Certificate(2)
4.2 Specimen Series A Convertible Preferred Stock Certificate(4)
11.1 Statement of Computation of Earnings (Loss) Per Share(5)
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 amended, as filed on April 29, 1999,
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K, as amended,
for the period ended December 31, 1999, as filed on April 5, 2000,
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2000, as filed on August 14, 2000, incorporated herein
by reference.
(5) See Note 3 to Condensed Consolidated Financial Statements.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Registrant during this period.
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<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.
<TABLE>
<S> <C> <C>
Date: November 14, 2000 FVC.COM, INC.
By: /s/ RANDY ACRES
-----------------------------------------
Randy Acres
CHIEF FINANCIAL OFFICER (DULY AUTHORIZED
OFFICER AND PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation(1)
3.1(i) Certificate of Ownership and Merger, effective August 3,
1998(2)
3.1(ii) Certificate of Designation of Series A Convertible Preferred
Stock(4)
3.2 Amended Bylaws of the Registrant(3)
4.1 Specimen Common Stock Certificate(2)
4.2 Specimen Series A Convertible Preferred Stock Certificate(4)
11.1 Statement of Computation of Earnings (Loss) Per Share(5)
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 amended, as filed on April 29, 1999,
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K, as amended,
for the period ended December 31, 1999, as filed on April 5, 2000,
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2000, as filed on August 14, 2000, incorporated herein
by reference.
(5) See Note 3 to Condensed Consolidated Financial Statements.
20
