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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 30, 2001
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to ______________
Commission File Number: 000-21415
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CUseeMe Networks, Inc.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 04-3151064
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
542 Amherst Street, Nashua, New Hampshire 03063
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(Address of Principal Executive Offices) (Zip Code)
(603) 886-9050
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
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The number of shares of the Registrant's common stock outstanding as of May 7,
2001 was 12,383,880.
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
Page
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PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements...................................... 1
Item 2. Management's Discussion and Analysis...................... 5
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 15
Signatures .......................................................... 16
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THIS QUARTERLY REPORT CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITING THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS,
PERFORMANCE AND ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY THE
FORWARD-LOOKING STATEMENTS, INCLUDING THE FACTORS SET FORTH BELOW IN "ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS--FACTORS THAT MAY AFFECT OUR OPERATING
RESULTS AND STOCK PRICE."
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CUSEEME is our registered trademark, and CUSEEME CONFERENCE SERVER and
CUSEEME WEB are our trademarks. This quarterly report also contains trademarks
and trade names of other companies.
i
PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
CUSEEME NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 30, 2001 December 31, 2000
--------------------- ----------------------
Assets
Current assets:
Cash and cash equivalents $ 9,671 $ 9,343
Investments 178 3,252
Accounts receivable, net 2,596 2,688
Inventories 143 197
Prepaid expenses and other current assets 1,059 949
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Total current assets 13,647 16,429
Property and equipment, net 2,541 2,778
Third party licenses, net 675 785
Purchased Software, net 1,673 1,805
Trademark, net 770 790
Other long term assets 102 113
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Total assets $19,408 $ 22,700
===================== ======================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,658 $ 2,654
Deferred revenue 1,220 903
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Total current liabilities 3,878 3,557
Other long term liabilities 300 300
Stockholders' equity 15,230 18,843
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Total liabilities and stockholders' equity $19,408 $ 22,700
==================== =====================
See Notes to Condensed Consolidated Financial Statements
1
CUSEEME NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
---------------------------------------------
March 30, 2001 March 31, 2000
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Revenues:
Software license fees $ 1,418 $ 3,595
Services and other 463 497
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Total revenues 1,881 4,092
Cost of revenues:
Software license fees 432 694
Services and other 325 298
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Total cost of revenues 757 992
Gross profit 1,124 3,100
Operating expenses:
Sales and marketing 2,082 1,869
Research and development 1,521 1,350
General and administrative 1,206 952
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Total operating expenses 4,809 4,171
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Loss from operations (3,685) (1,071)
Other income (expense):
Interest income (expense), net 145 254
Gain from asset sale to Powerlan - 776
Loss from other than temporary decline in short
term investment (272)
Other, net 22 (15)
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Total other income (expense), net (105) 1,015
-------------------- ---------------------
-------------------- ---------------------
Net loss $ (3,790) $ (56)
==================== =====================
Net loss per share: Basic and diluted $ (0.31) $ (0.00)
Weighted average number of common shares outstanding 12,352,975 12,085,675
==================== =====================
See Notes to Condensed Consolidated Financial Statements
2
CUSEEME NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
---------------------------------------------
March 30, 2001 March 31, 2000
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Operating activities
Net loss $ (3,790) $ (56)
Adjustments to reconcile net loss to net cash used in operating
activities
Bad debt expense 105 15
Depreciation 334 128
Amortization of intangibles 262 352
Amortization of deferred stock compensation - 58
Gain from asset sale of Hosting Connectivity business - (776)
Changes in operating assets and liabilities:
Accounts receivable (13) (948)
Bad dept 105 15
Inventories 54 (131)
Prepaid expenses and other assets (109) (37)
Accounts payable and accrued expenses 24 (180)
Deferred revenue 317 168
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Net cash provided by (used in) operating activities (2,544) (1,407)
Investing activities
Purchase of property and equipment, net (104) (742)
Proceeds received from Hosting Connectivity asset sale 985
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Sale of investments in short term securities 3,003 -
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Net cash provided by (used in) investing activities 2,889 243
Financing activities
Principal payments on long-term debt and third-party licenses (2)
Proceeds from common stock issued upon exercise of stock options 5 667
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Net cash provided by (used in) financing activities 5 665
Currency translation effect on cash and cash equivalents (32) (28)
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Net increase (decrease) in cash and cash equivalents 328 (527)
Cash and cash equivalents at beginning of period 9,343 22,088
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Cash and cash equivalents at end of period $ 9,671 $ 21,561
===================== ====================
Non-cash investing activity: Common stock received as partial $500,000
consideration for Hosting Connectivity asset sale
See Notes to Condensed Consolidated Financial Statements
3
CUSEEME NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 30, 2001
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned foreign subsidiary, CUseeMe Networks, Inc. Europe. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the regulations of the Securities
and Exchange Commission, but omit certain information and footnote disclosure
necessary to present the statements in accordance with accounting principles
generally accepted in the United States. The interim financial information as
of March 30, 2001 and for the three-month periods ended March 30, 2001 and
March 31, 2000 is unaudited and has been prepared on the same basis as the
audited consolidated financial statements. In the opinion of management, such
unaudited information includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the interim
information.
The balance sheet at December 31, 2000 has been derived from the
audited consolidated financial statements at that date but does not include
all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Company's annual report
on Form 10-KSB for the fiscal year ended December 31, 2000. Operating results
for the three-month period ended March 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2001.
NET LOSS PER SHARE
Net loss per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Basic net loss per share is computed based on the weighted average number of
shares of common stock outstanding during the period. Diluted loss per share
does not differ from basic loss per share since potential common shares to be
issued upon the exercise of stock options are anti-dilutive for the periods
presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
ACCOUNTING CHANGE
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133, "Accounting for Derivative Instruments
and Hedging Activities," which requires companies to record derivatives on their
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. As initially issued, SFAS 133 was effective for fiscal years
beginning after June 15, 1999. In July 1999, the FASB issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No 133." SFAS 137 deferred the effective date of SFAS 133
until the first fiscal quarter beginning after June 15, 2000. The Company
adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 and 137 did
not have a material effect on the Company's financial position or results of
operations.
COMPREHENSIVE INCOME
Total comprehensive income was $77,000 for the three months ended March 31,
2000 and $3.6 million for the three months ended March 30, 2001. The variance
between comprehensive loss and the net loss for the three month period ended
March 30, 2001 was driven by the $272,000 other than temporary decline in
short term investments. This was partially offset by foreign currency
translation.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and the related notes appearing elsewhere in this
quarterly report on Form 10-QSB and in our annual report on Form 10-KSB for
the fiscal year ended December 31, 2000. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of a number of factors,
including those set forth below under "Factors That May Affect Future Results
and the Trading Price of Our Common Stock."
OVERVIEW
On March 22, 2001, we entered into a merger agreement with First Virtual
Communications and its subsidiary, FVC Acquisition Corp. In this agreement, the
parties agreed that FVC Acquisition Corp. would merge with and into our company,
and our company would become a wholly owned subsidiary of First Virtual. The
merger is subject to a number of closing conditions, including approval by our
stockholders and by the stockholders of First Virtual. If the merger is
completed, First Virtual will issue approximately 1.254 shares of its common
stock in exchange for each outstanding share of our common stock. The shares
issued by First Virtual would represent approximately 47% of First Virtual's
outstanding shares after completion of the merger. The shares that First Virtual
proposes to issue in this merger are the subject of a registration statement on
Form S-4 filed by First Virtual with the SEC on April 25, 2001.
We develop and market software products that enable voice and video
communications over the Internet and networks based on the Internet Protocol, or
IP. We provide integrated software solutions for large-scale deployments of
voice and video communications to computer desktops. These solutions facilitate
standards-based communications and collaboration, both between individual
participants and among groups of participants, over the Internet, corporate
intranets and virtual private networks.
Our products include: CUseeMe Conference Server, a software-based
multipoint control unit, or MCU, that supports IP-based conferences among
multiple participants; and CUseeMe Pro, our IP-based desktop videoconferencing
client software. In late March 2001, we introduced CUseeMe Videoware, which
provides a rich media communications environment for desktop conferencing that
can be integrated with an enterprise's existing messaging and collaboration
environments such as Microsoft Exchange and Outlook. Our CUseeMe Web software
developer's toolkit, which is also an integrated component of CUseeMe Videoware,
enables web developers to embed interactive voice, video, collaboration and
conference control features into web pages or Internet-based applications. In
order to focus exclusively on these products, we sold the assets of our legacy
connectivity business to Powerlan USA in February 2000.
We derive revenue from the sale of software product licenses and from
related services. Software license fees are derived from licenses for CUseeMe
Pro, CUseeMe Conference Server (and its earlier release, CUseeMe MeetingPoint),
our group conferencing server, and the CUseeMe Web toolkit. Our services revenue
is derived from services relating to CUseeMe Conference Server and consists
principally of post-contract customer support fees.
We recognize revenue in accordance with Statement of Position No. 97-2,
"Software Revenue Recognition," as modified. Software license revenue is
recognized upon receipt of a firm customer order and shipment of the software,
net of allowances for estimated future returns, provided that no significant
obligations remain on our part, the fee is fixed and determinable, and
collection of the related receivable is deemed probable by management. If
conditions for acceptance apply subsequent to delivery, revenue is recognized
upon customer acceptance if such acceptance is not deemed to be perfunctory. In
multiple element arrangements, we use the residual value method in accordance
with SOP 97-2. Service maintenance fees, which generally are payable in advance
and are non-refundable, are recognized ratably over the service period,
typically twelve months. Revenue from training and consulting services is
recognized as services are provided. Software license fees, consulting fees and
training fees that have been prepaid or invoiced but that do not yet qualify for
recognition as revenue under our policy, and prepaid maintenance fees not yet
recognized as revenue, are reflected as deferred revenue.
5
Software development costs meeting recoverability tests are capitalized
under Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
cost of software capitalized is amortized based on its estimated economic
life. The costs incurred between the point at which technological feasibility
is established and general release to the public were not material. As a
result, no software was capitalized in the quarter ended March 30, 2001.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data expressed as
percentages of total revenue for the first fiscal quarters of 2001 and 2000.
Quarter Ended
--------------------------------
March 30, 2001 March 31, 2000
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Revenue:
Software license fees...................................................... 75.4% 87.8%
Services and other......................................................... 24.6 12.2
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Total revenue............................................................ 100.0 100.0
Total cost of revenue......................................................... 40.2 24.2
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Gross margin............................................................... 59.8 75.8
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Operating expenses:
Sales and marketing........................................................ 110.6 45.7
Research and development................................................... 80.9 33.0
General and administrative................................................. 64.1 23.3
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Total operating expenses................................................. 255.6 102.0
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Loss from operations.......................................................... (195.9) (26.2)
Gain from asset sale to Powerlan -- 19.0
Other income (expense), net................................................... (5.6) 5.8
-------- -------
Net loss................................................................. (201.5)% (1.4)%
====== =======
The following table sets forth, for the first fiscal quarters of 2001 and
2000, the cost of software license revenue as percentages of software license
revenue and the cost of services and other revenue as percentages of services
and other revenue.
Fiscal Quarter Ended
--------------------------------
March 30, 2001 March 31, 2000
-------------- --------------
Cost of software license revenue.............................................. 30.5% 19.3%
Cost of services and other revenue............................................ 70.2 60.6
REVENUE
Total revenue was $4.1 million in the quarter ended March 31, 2000 and $1.9
million in the quarter ended March 30, 2001.
Software license revenue decreased 61% from $3.6 million in the quarter
ended March 31, 2000 to $1.4 million in the quarter ended March 30, 2001.
This decrease was composed principally of the following:
o Software license revenue from CUseeMe Pro, including bundled camera
kits, decreased $810,000. We expect to release CUseeMe 5.0, a new
version of our client product, in the second quarter of 2001. As a
result we chose not to restock our resale channel with the
then-current version of CUseeMe Pro in the first quarter of 2001. In
addition, continuing pricing pressures have been reflected by
discounting and rebates in the quarter ended March 30, 2001 and to
date in the quarter ended June 29, 2001.
6
o Software license revenue attributable to CUseeMe Conference Server
decreased by $344,000 as the result of a decrease in the aggregate
number of ports sold.
o The CUseeMe Web toolkit began shipping in the quarter ended March 31,
2000. A total of $800,000, representing 87% of the revenue attributable
to the toolkit in that quarter, was derived from a sale to a single
vendor in the Pacific Rim . No equivalent large toolkit sale was made
in the quarter ended March 30, 2001.
o In the quarter ended March 31, 2000, revenue from our legacy
connectivity product line totaled $101,000. We sold this business line
in February 2000.
Service and other revenue decreased 7% from $497,000 in the quarter ended
March 31, 2000 to $463,000 in the quarter ended March 30, 2001. Maintenance
contract revenue decreased 4% from $324,000 in the quarter ended March 31, 2000
to $312,000 in the quarter ended March 30, 2001. The remaining $22,000 of the
decrease in service and other revenue from the quarter ended March 31, 2000 to
the quarter ended March 30, 2001 was attributable to lower hosting, installation
and training revenue.
Revenue from sales outside the United States comprised 56% of total revenue
in the quarter ended March 31, 2000 and 45% of total revenue in the quarter
ended March 30, 2001. See "Factors that may Affect Our Operating Results or
Stock Price--We face additional risks from our international operations" below.
COST OF REVENUE
Cost of revenue consists principally of royalties and associated
amortization of paid license fees relating to third-party software included in
our products, as well as costs of product media, manuals, packaging materials,
cameras, duplication and shipping. Total cost of revenues decreased 24% from
$992,000 in the quarter ended March 31, 2000 to $757,000 in the quarter ended
March 30, 2001.
Cost of software license revenue decreased 38% from $694,000 in the quarter
ended March 31, 2000 to $432,000 in the quarter ended March 30, 2001. Our
decreased shipments of CUseeMe Pro bundled kits in the quarter ended March 30,
2001 resulted in lower costs, however, price pressures resulting in discounting
and rebates in the quarter ended March 30,2001 had the effect of reducing our
gross margin percentage.
Cost of services and other revenue increased 9% from $298,000 in the
quarter ended March 31, 2000 to $325,000 in the quarter ended March 30, 2001.
The increase in dollar and margin costs resulted primarily from higher technical
support costs in the most recent quarter ended March 30, 2001.We intend to
continue our strategy of improving the features and functionality of our
products, particularly CUseeMe Conference Server and future products
incorporating CUseeMe Conference Server technology, through the incorporation of
third-party software. As a result, our cost of software license revenue as a
percentage of software license revenue may continue to fluctuate in the future.
SALES AND MARKETING
Sales and marketing expense primarily consists of costs associated for
personnel, sales commissions, trade shows, advertising and promotional
materials. Sales and marketing expense increased by 11% from $1.9 million in the
quarter ended March 31, 2000 to $2.1 million in the quarter ended March 30,
2001. This increase was attributable principally to costs of bandwidth and
infrastructure and other expenses incurred in operating our videoconferencing
portal site CUseeMe World. This increase was offset in part by decreased levels
of commissions and contractor expenses, as well as decreased expenditures on
marketing programs and trade shows.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of costs of
personnel, as well as small tools and supplies. Research and development
expense increased by 13% from $1.3 million in the quarter ended March 31,
2000 to $1.5 million in the quarter ended March 30, 2001. This increase was
attributable primarily to increased depreciation and amortization of
purchased computer equipment and increased contractor expense for product
development.
7
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists of costs of administrative,
financial and general management activities, including legal, accounting and
other professional fees. General and administrative expense increased by 27%
from $952,000 in the quarter ended March 31, 2000 to $1.2 million in the quarter
ended March 30, 2001. This increase resulted primarily from increases in
personnel expenses, bad debt and professional accounting fees, offset in part by
a decrease in consulting fees.
OTHER INCOME (EXPENSE), NET
Other income (expense), net decreased from income of $1.0 million in the
quarter ended March 31, 2000 to expense of $105,000 in the quarter ended March
30, 2001. This decrease principally reflected an other then temporary decline in
a short term investment of $272,000, a non recurring gain on sale relating to
the connectivity hosting business to Powerlan USA for $776,000 in the quarter
ended March 31, 2000 and a decrease in interest income from $254,000o in the
quarter ended March 31, 2000 to $145,000 in the quarter ended March 30, 2001 as
the result of lower cash balances.
LIQUIDITY AND CAPITAL RESOURCES
We generated $328,000 in cash in the quarter ended March 30, 2001 and
used cash of $527,000 in the quarter ended March 31, 2000. Cash generated in
the quarter ended March 30, 2001 principally represented $3.3 million from
our investments in short-term securities and an increase in deferred revenue
of $317,000. This effect on cash flow was offset in substantial part by our
net loss of $3.8 million and depreciation and amortization of $596,000. Cash
used in the three months ended March 31, 2000 predominantly comprised of the
net loss of $56,000, an increase in accounts receivables of $933,000,
purchase of property of equipment of $742,000, and $500,000 used in general
operations, offset in large part by the cash generated from the sale of the
connectivity product lines in the amount of $1,000,000, and $667,000 from
stock option exercises.
Our capital expenditures in the quarter ended March 30, 2001 consisted
principally of purchases of computer equipment and software for $82,000. We plan
on investing approximately $650,000 in capital equipment in the last three
fiscal quarters of 2001 to upgrade computer equipment and to build out and
strengthen our information systems infrastructure. Our capital requirements may
vary materially from those we now anticipate, depending on a number of factors
including:
o the level of our research and development activities;
o the rate of market acceptance of our software offerings; and
o the success of our sales, marketing and distribution strategy.
At March 30, 2001, we had cash and cash equivalents of $9.7 million,
short-term investments of $178,000 and working capital of $10.0 million. We
continue to experience a negative cash flow from operations in each fiscal
quarter. We are not currently a party to any bank credit arrangements or other
loan facility. We believe that our current cash, cash equivalents and short-term
investments will be sufficient to fund our operations and capital expenditures
through the fourth quarter of 2001.
We currently expect that the merger contemplated by our merger agreement
with First Virtual Communications and its subsidiary will be completed in
mid-2001. If our stockholders do not approve the merger or if the merger is
not completed for any other reason, we may need to obtain additional
financing by the end of 2001 or earlier, if our current plans and projections
prove to be inaccurate or our expected cash flow proves to be
8
insufficient to fund our operations because of product delays, unanticipated
expenses or other unforeseen difficulties. Our ability to obtain additional
financing will depend on a number of factors, including market conditions, our
operating performance and investor interest. These factors may make the timing,
amount, terms and conditions of any financing unattractive. They may also result
in our incurring additional indebtedness or accepting stockholder dilution. If
adequate funds are not available or are not available on acceptable terms, we
may have to forego strategic acquisitions or investments, defer our development
activities, or delay our introduction of new products and services. Any of these
actions may seriously harm our business and operating results.
INFLATION
Although certain of our expenses increase with general inflation in the
economy, inflation has not had a material effect on our financial condition or
results of operations to date.
FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND STOCK PRICE
WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY INCUR LOSSES IN THE FUTURE. IF
WE DO NOT ACHIEVE AND SUSTAIN PROFITABILITY, OUR FINANCIAL CONDITION AND
STOCK PRICE COULD DECLINE.
We may never generate significant revenue or become profitable. Since inception,
we have incurred significant losses. Our total revenue increased only slightly
from $12.0 million in 1999 to $12.1 million in 2000, while our net loss
increased from $4.8 million in 1999 to $10.2 million in 2000. Our total revenue
decreased 54% from $4.1 million in the first fiscal quarter of 2000 to $1.9
million in the first fiscal quarter of 2001, while our net loss increased from
$56,000 to $3.8 million. At March 30, 2001, we had an accumulated deficit of
$47.7 million.
We have never generated positive cash flow from operations and have relied
principally on private and public sales of equity to fund our operations. Our
negative cash flows from operations totaled $4.2 million in 1999, $8.1 million
in 2000 and $2.8 million in the first fiscal quarter of 2001.
OUR MULTIMEDIA IP-BASED COMMUNICATIONS PRODUCTS AND SERVICES MAY NOT
ACHIEVE BROAD MARKET ACCEPTANCE OR MARKET ACCEPTANCE MAY BE SLOWER THAN
ANTICIPATED.
We anticipate that virtually all of our revenue and growth in the
foreseeable future will come from the sale of the CUseeMe Conference Server and
related products and services. Broad market acceptance of the CUseeMe Conference
Server therefore is critical to our operating success. If sufficient demand for
the CUseeMe Conference Server does not develop, we may not generate sufficient
revenue to offset our costs and we may never become profitable.
OUR QUARTERLY RESULTS MAY FLUCTUATE AND CAUSE THE PRICE OF OUR COMMON STOCK
TO FALL.
Our quarterly revenue and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or public market
analysts, the price of our common stock could fall substantially. Our quarterly
operating results may vary significantly depending on a number of factors, some
of which are outside of our control. These factors include:
o the timing of the introduction or acceptance of new products offered by
us or our competitors;
o changes in demand for Internet services;
o changes in the mix of products sold by us;
o announcements of new products, services or technologies by us or our
competitors that cause customers to defer or cancel purchases of our
products;
o changes in pricing strategies by us or competitors;
o changes in regulations affecting the multimedia group communications
products and services industry; and
o changes in currency exchange rates.
9
As a result of these factors, we may not be able to predict our operating
results accurately. In addition, the CUseeMe Conference Server continues to
undergo long evaluation and sale cycles by potential users. The lengths of these
cycles make it particularly difficult for us to predict the amount and timing of
revenue from this product.
We base our expense levels on our product development plans and our
estimates of future revenue. To a large extent, our expenses are fixed. We may
be unable to adjust our spending in time to compensate for any unexpected
revenue shortfall, thus magnifying the adverse effect of any revenue shortfall.
WE FACE INTENSE COMPETITION FROM OTHER INDUSTRY PARTICIPANTS AND MAY NOT BE
ABLE TO COMPETE EFFECTIVELY.
The market for multimedia group communications products and services is
extremely competitive. Because the barriers to entry in the market are
relatively low and the potential market is large, we expect continued growth in
the industry and the entrance of new competitors in the future. Many of our
current and potential competitors, particularly Microsoft, PictureTel and
Ezenia!, have significantly longer operating histories and significantly greater
managerial, financial, marketing, technical and other competitive resources, as
well as greater name recognition, than we do. As a result, these companies may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements and may be able to devote greater resources to the
promotion and sale of their conferencing products and services. In addition, to
the extent that competitors choose to bundle competing multimedia conferencing
applications with other products, the demand for our products and services might
be substantially reduced.
As a result, we cannot assure you that we will be able to compete
successfully with existing or new competitors in the multimedia group
communications products and services market. We believe that our ability to
compete successfully in this market will depend on a number of factors both
within and outside our control, including:
o the adoption and evolution of industry standards;
o the pricing policies of our competitors and suppliers;
o the timing of the introduction of new software products and services by
us and our competitors; and
o our ability to hire and retain highly qualified employees.
To remain competitive in the multimedia group communications products and
services market, we must continue to invest heavily in research and development
and in sales and marketing. We may not have sufficient resources to make those
investments, or we may not be able to make the technological advances necessary
to continue to be competitive. In addition, current and potential competitors
have established or may establish collaborative relationships among themselves
and with third parties to increase the visibility and utility of their products
and services. Accordingly, it is possible that new competitors or alliances may
emerge and rapidly acquire significant market share, which could have a material
adverse effect on our business.
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A COMPETITIVE LABOR MARKET.
Qualified personnel are in great demand throughout the software and
Internet industries. Our success depends in large part upon our ability to
attract, train, motivate and retain highly skilled employees, particularly sales
and marketing personnel, professional services personnel and software engineers.
If we fail to attract and retain the highly trained technical personnel that are
integral to our sales, professional services and product development teams, the
rate at which we can generate sales and develop new products or services may be
limited. This could have a material adverse effect on our business, operating
results and financial condition.
IF WE LOSE THE SERVICES OF OUR CHIEF EXECUTIVE OFFICER, OUR BUSINESS COULD
SUFFER.
Our future success depends to a significant degree on the skill, experience
and efforts of Killko Caballero, our chief executive officer and president.
Christine J. Cox, our former chief financial officer and vice president of
finance, resigned effective March 30, 2001. We are not seeking a permanent
successor to Ms. Cox, pending our proposed merger with a subsidiary of First
Virtual. Ms. Cox's departure and the loss of any other key member of our
management team could have a material adverse effect on our business.
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WE DEPEND ON THE CONTINUED USE AND EXPANSION OF THE INTERNET.
Our business and revenue depend on the continued use and expansion of the
Internet. A decrease in the demand for Internet services or a reduction in the
currently anticipated growth for Internet services could adversely affect our
future revenue and liquidity. Only recently has the enterprise sector begun
significant use of the Internet and, more recently still, have consumers begun
using the Internet. Use of the Internet has grown dramatically, but we cannot
assure the continued use and expansion of the Internet as a medium for
communications and commerce.
OUR ATTRACTION AND RETENTION OF CUSTOMERS DEPENDS ON OUR ABILITY TO
ANTICIPATE AND ADAPT TO RAPIDLY CHANGING TECHNOLOGY AND ON THE
COMPATIBILITY OF OUR TECHNOLOGY WITH THE TECHNOLOGY OF OTHERS.
The multimedia group communications products market is characterized by
rapid technological change resulting in dynamic customer demands and frequent
new product and service introductions. As a result of these technical
improvements, markets can change rapidly. Our future results will depend in
party on our ability to make timely and cost-effective enhancements and
additions to our products. Our new product introductions such as CUseeMe
Videoware may not achieve market acceptance.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.
Our business could be seriously harmed if we are unable to protect
adequately our proprietary software and our other proprietary intellectual
property rights. We may be unable to deter misappropriation of our proprietary
technology, detect unauthorized use and take appropriate steps to enforce our
intellectual property rights. Our competitors could, without violating our
proprietary rights, develop technologies that are as good or better than our
technology.
Some of our multimedia conferencing products are licensed to customers
under "shrink wrap" licenses included as part of the product packaging. In most
cases our shrink wrap licenses are not negotiated with or signed by individual
licensees. Some of the provisions of our shrink wrap licenses, including
provisions limiting our liability and protecting us against unauthorized use,
copying, transfer and disclosure of the licensed program, may be unenforceable
under the laws of certain jurisdictions. Also, we have delivered technical data
and information relating to CUseeMe Pro and CUseeMe Conference Server to the
United States government, and as a result, the United States government may have
unlimited rights to use the technical data and information or to authorize
others to use the technical data and information. We cannot assure you that the
United States government will not authorize others to use our technical data and
information for purposes competitive with our products. In addition, the laws of
some foreign countries do not protect our proprietary rights to the same extent
as do laws in the United States.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY
COULD PREVENT US FROM OFFERING OUR PRODUCTS OR OTHERWISE HURT OUR BUSINESS
AND OUR FINANCIAL CONDITION.
Because the protection of intellectual property rights is often critically
important to the success of companies in the multimedia conferencing industry,
our competitors or others could assert claims that our technologies infringe
their proprietary rights. From time to time, we have received and may receive in
the future notice of claims of infringement of other parties' proprietary
rights. Many participants in the software industry have an increasing number of
patents and have frequently demonstrated a readiness to commence litigation
based on allegations of patent or other intellectual property infringement. We
may not have the financial resources necessary to pursue any resulting
litigation to a final judgment, and we may not prevail in any litigation. In
defending against such litigation, we could incur significant legal and other
expenses and our management could be distracted from our principal business
operations. If any party making a claim against us were to prevail in litigation
against us, we may have to pay substantial damages. The court could also grant
injunctive or other equitable relief that could prevent us from offering our
products and services without a license or other permission from others, which
may not be available on commercially available terms or at all. Any of these
outcomes could seriously harm our business and our financial condition.
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WE FACE ADDITIONAL RISKS FROM OUR INTERNATIONAL OPERATIONS.
Our international business involves a number of risks that could hurt our
operating results or contribute to fluctuations in those results. Our revenue
from international sales represented 24% of our total revenue in 1999, 41% of
our total revenue in 2000 and 45% of our total revenue in the first fiscal
quarter of 2001. We intend to seek opportunities to expand our product and
service offerings into additional international markets, although we cannot be
certain that we will succeed in developing localized versions of our products
for new international markets or in marketing or distributing products and
services in those markets.
The majority of our international sales are currently denominated in U.S.
dollars, but there can be no assurance that a significantly higher level of
future sales will not be denominated in foreign currencies. To the extent our
sales are denominated in currencies other than U.S. dollars, fluctuations in
exchange rates may render our products less competitive relative to local
product offerings or result in foreign exchange losses. We have no experience in
implementing hedging techniques that might minimize our risks from exchange rate
fluctuations.
Our international business also involves a number of other difficulties and
risks, including risks associated with:
o changing economic conditions in foreign countries;
o export restrictions and export controls relating to technology;
o compliance with existing and changing regulatory requirements;
o tariffs and other trade barriers;
o difficulties in staffing and managing international operations;
o longer payment cycles and problems in collecting accounts receivable;
o software piracy;
o political instability;
o seasonal reductions in business activity in Europe and certain other
parts of the world during the summer months; and
o potentially adverse tax consequences.
OUR SOFTWARE PRODUCTS MAY CONTAIN UNDETECTED DEFECTS.
Software developed by us or developed by others and incorporated by us into
our products may contain significant undetected errors when first released or as
new versions are released. Although we test our software products before
commercial release, we cannot be certain that errors in the products will not be
found after customers begin to use the software. Any defects in our products,
whether offered currently or introduced in the future, may result in significant
decreases in revenue or increases in expenses because of adverse publicity,
reduced orders, product returns, uncollectible accounts receivable, delays in
collecting accounts receivable, and additional and unexpected costs of further
product development to correct the defects.
OUR SUCCESS DEPENDS ON THE PERFORMANCE OF PARTICIPANTS IN OUR DISTRIBUTION
CHANNELS.
We market our group conferencing products by forming channel relationships
in key markets with major distributors. We also license our group conferencing
products to original equipment manufacturers, value-added resellers and
additional distributors for bundling with their products and services. We expect
that our future success will depend in large part upon these original equipment
manufacturers, value-added resellers and distributors. The performance of these
original equipment manufacturers, value-added resellers and distributors is
outside our control, and we are unable to predict the extent to which these
organizations will be successful in marketing and selling our group conferencing
products or products incorporating our group conferencing products. We cannot
assure you that
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we will be successful in establishing relationships with original equipment
manufacturers, value-added resellers and distributors, and if we fail, our
business could be seriously harmed.
Our distributors typically carry the products of some of our competitors.
The distributors have limited capital to invest in inventory, and their
decisions to purchase our products and, in the case of retail stores, to give
them critical shelf space, are partly a function of pricing, terms and special
promotions offered by our competitors, which we cannot predict or control.
We distribute certain of our products directly over the Internet. By
distributing our products over the Internet, we may increase the likelihood of
unauthorized copying and use of our software.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES MAY ADVERSELY AFFECT OUR
BUSINESS.
The application of existing laws to the Internet is uncertain and may take
years to resolve, particularly with respect to property ownership, user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Because the Internet is becoming increasingly popular,
various foreign or domestic governmental bodies may seek to adopt laws and
control use of the Internet. We cannot predict the nature of any such laws.
Legislation could subject us or our customers to potential liability or could
decrease the growth of the Internet, either of which could have an adverse
effect on our business.
THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN EXTREMELY VOLATILE.
The market price of our common stock has been extremely volatile in the
past, and may be expected to be volatile in the future for many reasons,
including:
o actual or anticipated variations in our revenue and operating results;
o announcements of the development of improved technology;
o changes in estimates of our financial performance, or the absence of
coverage, by securities analysts;
o conditions and trends in the Internet and multimedia conferencing
industries;
o adoption of new accounting standards; and
o general market conditions.
Recently the stock markets have experienced extreme price and volume
fluctuations that have dramatically affected the market prices of the stocks of
many technology companies, particularly companies associated with the Internet.
These fluctuations often have been unrelated or disproportionate to the
operating performance of those companies. These factors may adversely affect the
market price of our common stock.
VOLATILITY IN OUR STOCK PRICE MAY LEAD TO LITIGATION AGAINST US.
Stockholders frequently commence securities class action litigation against
a company after a significant decrease in the company's stock price. If our
stock price drops and our stockholders commence litigation against us, we could
incur significant legal and other expenses defending the litigation and our
management could be distracted from our principal business operations. Either of
these outcomes could seriously harm our business.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN ANTI-TAKEOVER AND
INDEMNIFICATION PROVISIONS THAT MAY ADVERSELY AFFECT THE MARKET PRICE OF
OUR STOCK.
Section 203 of the Delaware General Corporation Laws and our charter and
by-laws contain provisions that might enable our management to resist a takeover
of our company. These provisions might discourage, delay or
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prevent a change in the control of our company or a change in our management.
These provisions could also discourage proxy contests and make it more difficult
for you and other stockholders to elect directors and take other corporate
actions. The existence of these provisions could limit the price that investors
might be willing to pay in the future for shares of our common stock.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
10.1(1) Agreement and Plan of Merger and Reorganization, dated as of March 22, 2001, by and among First Virtual
Communications, Inc., FVC Acquisition Corp. and CUseeMe Networks, Inc.
10.26(1) Form of Voting Agreement dated as of March 22, 2001 entered into by First Virtual Communications, Inc.
and each of David O. Bundy, Killko A. Caballero, Joseph Esposito, Jonathan G. Morgan, Robert B. Scott
and Adam Stettner
- ----------------
(1) Incorporated by reference to the current report on Form 8-K that we filed
with the SEC on April 5, 2001.
(b) Reports on Form 8-K
We did not file any current reports on Form 8-K with the SEC during the
fiscal quarter ended March 30, 2001.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of May 14, 2001.
CUseeMe Networks, Inc.
By: /s/ Killko A. Caballero
-------------------------------------------
Killko A. Caballero
Chief Executive Officer and President
By: /s/ Gregory C. Loycano
-------------------------------------------
Gregory C. Loycano
Acting Vice President of Finance and
Controller
(Principal Financial and Accounting Officer)
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