1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-30903
------------------------
VIRAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3171505
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
177 BOVET ROAD, SUITE 520
SAN MATEO, CALIFORNIA 94402-3116
(650) 573-3210
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
------------------------
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. [X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock,
$0.001 par value, was 20,185,627 as of February 2, 2001.
================================================================================
2
VIRAGE, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -- December 31, 2000 and March 31, 2000 ................... 3
Condensed Consolidated Statements of Operations -- Three and Nine Months Ended
December 31, 2000 and 1999 ................................................................ 4
Condensed Consolidated Statements of Cash Flows -- Nine Months Ended
December 31, 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 ........... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................... 18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................... 31
Item 2. Changes in Securities and Use of Proceeds ....................................................... 31
Item 3. Defaults Upon Senior Securities ................................................................. 31
Item 4. Submission of Matters to a Vote of Security Holders ............................................. 31
Item 5. Other Information ............................................................................... 32
Item 6. Exhibits and Reports on Form 8-K ................................................................ 32
Signature ............................................................................................... 33
2
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIRAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, MARCH 31,
2000 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 19,478 $ 10,107
Short-term investments ........................................ 34,648 --
Accounts receivable, net ...................................... 2,060 1,792
Prepaid expenses and other current assets ..................... 591 1,217
----------- -----------
Total current assets ...................................... 56,777 13,116
Property and equipment, net ..................................... 5,454 2,320
Other assets .................................................... 2,584 3,436
----------- -----------
Total assets .............................................. $ 64,815 $ 18,872
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable .............................................. $ 652 $ 773
Accrued payroll and related expenses .......................... 2,372 659
Accrued expenses .............................................. 3,178 1,769
Deferred revenue .............................................. 2,853 1,656
Current portion of borrowings ................................. -- 158
----------- -----------
Total current liabilities ................................. 9,055 5,015
Long-term portion of borrowings ................................. -- 83
Deferred rent ................................................... 55 --
Redeemable convertible preferred stock .......................... -- 36,995
Stockholders' equity (net capital deficiency):
Common stock .................................................. 20 3
Additional paid-in capital .................................... 120,701 23,671
Deferred compensation ......................................... (10,870) (14,595)
Accumulated deficit ........................................... (54,146) (32,300)
----------- -----------
Total stockholders' equity (net capital deficiency) ...... 55,705 (23,221)
----------- -----------
Total liabilities and stockholders' equity (net
capital deficiency) ..................................... $ 64,815 $ 18,872
=========== ===========
See accompanying notes.
3
4
VIRAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues:
License revenues ............................... $ 1,709 $ 1,184 $ 4,175 $ 3,144
Service revenues ............................... 1,494 291 3,515 578
Other revenues ................................. 65 73 88 165
----------- ----------- ----------- -----------
Total revenues ............................... 3,268 1,548 7,778 3,887
Cost of revenues:
License revenues ............................... 186 321 498 686
Service revenues(1) ............................ 1,989 708 5,251 1,196
Other revenues ................................. 60 74 139 172
----------- ----------- ----------- -----------
Total cost of revenues ....................... 2,235 1,103 5,888 2,054
----------- ----------- ----------- -----------
Gross profit ..................................... 1,033 445 1,890 1,833
Operating expenses:
Research and development(2) .................... 2,284 1,114 6,548 2,654
Sales and marketing(3) ......................... 4,504 1,906 12,742 5,095
General and administrative(4) .................. 1,403 594 3,947 1,566
Stock-based compensation ....................... 817 219 2,509 313
----------- ----------- ----------- -----------
Total operating expenses ..................... 9,008 3,833 25,746 9,628
----------- ----------- ----------- -----------
Loss from operations ............................. (7,975) (3,388) (23,856) (7,795)
Interest and other income, net ................... 971 142 2,010 187
----------- ----------- ----------- -----------
Net loss ......................................... (7,004) (3,246) (21,846) (7,608)
Series E convertible preferred stock
dividend ....................................... -- (4,544) -- (4,544)
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders ................................... $ (7,004) $ (7,790) $ (21,846) $ (12,152)
=========== =========== =========== ===========
Basic and diluted net loss per share
applicable to common stockholders .............. $ (0.35) $ (3.42) $ (1.57) $ (5.69)
=========== =========== =========== ===========
Shares used in computation of basic and
diluted net loss per share
applicable to common stockholders .............. 19,802 2,276 13,893 2,137
=========== =========== =========== ===========
Pro forma basic and diluted net loss
per share applicable to common stockholders .... $ (0.35) $ (0.65) $ (1.25) $ (1.18)
=========== =========== =========== ===========
Shares used to compute pro forma basic
and diluted net loss per share applicable to
common stockholders ............................ 19,802 12,042 17,521 10,325
=========== =========== =========== ===========
(1) Excluding $75 and $227 in amortization of deferred stock-based
compensation for the three and nine months ended December 31, 2000,
respectively ($21 for both the three and nine months ended December 31,
1999).
(2) Excluding $142 and $416 in amortization of deferred stock-based
compensation for the three and nine months ended December 31, 2000,
respectively ($63 and $75 for the three and nine months ended December
31, 1999, respectively).
(3) Excluding $241 and $751 in amortization of deferred stock-based
compensation for the three and nine months ended December 31, 2000,
respectively ($38 and $120 for the three and nine months ended December
31, 1999, respectively).
(4) Excluding $359 and $1,115 in amortization of deferred stock-based
compensation for the three and nine months ended December 31, 2000,
respectively ($97 for both the three and nine months ended December 31,
1999).
See accompanying notes.
4
5
VIRAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
-----------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (21,846) $ (7,608)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................... 1,328 230
Amortization of deferred compensation related to
stock options ............................................. 3,173 631
Amortization of deferred advertising costs and
technology right ......................................... 612 5
Write-off of investment in Scimagix ......................... -- 79
Changes in operating assets and liabilities:
Accounts receivable ....................................... (268) (831)
Prepaid expenses and other current assets ................. 41 (109)
Other assets .............................................. 13 (290)
Accounts payable .......................................... (121) 186
Accrued payroll and related expenses ...................... 1,713 (227)
Accrued expenses .......................................... 1,409 996
Deferred revenue .......................................... 1,197 767
Deferred rent ............................................. 55 --
----------- -----------
Net cash used in operating activities ......................... (12,694) (6,171)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................ (4,462) (1,225)
Purchases of short-term investments ........................... (39,283) --
Sales and maturities of short-term investments ................ 4,635 --
----------- -----------
Net cash used in investing activities ......................... (39,110) (1,225)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit ............................. 806 --
Principal payments on loans and capital leases ................ (1,047) (200)
Proceeds from exercise of stock options, net of
repurchases ................................................. 506 542
Proceeds from issuance of redeemable convertible preferred
stock, net of offering costs ................................ -- 19,059
Proceeds from issuance of common stock, net of
offering costs ............................................. 58,288 --
Proceeds from employee stock purchase plan .................... 497 --
Proceeds from exercise of warrants to purchase
preferred and common stock .................................. 2,125 --
----------- -----------
Net cash provided by financing activities ..................... 61,175 19,401
----------- -----------
Net increase in cash and cash equivalents ..................... 9,371 12,005
Cash and cash equivalents at beginning of period .............. 10,107 4,357
----------- -----------
Cash and cash equivalents at end of period .................... $ 19,478 $ 16,362
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING
AND FINANCING ACTIVITIES:
Conversion of prepaid offering costs to equity at IPO ......... $ 812 $ --
Conversion of redeemable preferred stock to equity at IPO ..... $ 36,995 $ --
Deferred compensation related to stock options ................ $ 70 $ --
Reversal of deferred compensation upon employee
termination ................................................. $ 622 $ --
Series E convertible preferred stock dividend ................. $ -- $ 4,544
Deferred advertising costs .................................... $ -- $ 781
Deferred technology right ..................................... $ -- $ 185
See accompanying notes.
5
6
VIRAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial statements at December 31, 2000 and for the three
and nine months ended December 31, 2000 and 1999 have been included.
The condensed consolidated financial statements include the accounts of
Virage, Inc. (the "Company") and its majority-owned subsidiary, Virage Europe,
Ltd. All significant intercompany balances and transactions have been eliminated
in consolidation.
Results for the three and nine months ended December 31, 2000 are not
necessarily indicative of results for the entire fiscal year or future periods.
These financial statements should be read in conjunction with the consolidated
financial statements and the accompanying notes included in the Company's
Registration Statement on Form S-1 (No. 333-96315), including the related
prospectus dated June 28, 2000 as filed with the United States Securities and
Exchange Commission. The accompanying balance sheet at March 31, 2000 and the
accompanying statements of operations and cash flows for the nine months ended
December 31, 1999 are derived from the Company's audited consolidated financial
statements at those dates.
Revenue Recognition
The Company enters into arrangements for the sale of licenses of software
products and related maintenance contracts and application services offerings;
and also receives revenues under U.S. government agency research grants. Service
revenues include revenues from maintenance contracts and application services.
Other revenues are primarily U.S. government agency research grants.
The Company's revenue recognition policy is in accordance with the American
Institute of Certified Public Accountants, or AICPA's, Statement of Position No.
97-2, or SOP 97-2, "Software Revenue Recognition," as amended by Statement of
Position No. 98-4, "Deferral of the Effective Date of SOP 97-2, "Software
Revenue Recognition, "" or SOP 98-4, and Statement of Position No. 98-9,
"Modification of SOP No. 97-2 with Respect to Certain Transactions" or SOP 98-9.
For each arrangement, the Company determines whether evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection
is probable. If any of these criteria are not met, revenue recognition is
deferred until such time as all of the criteria are met. The Company considers
all arrangements with payment terms extending beyond 12 months and other
arrangements with payment terms longer than normal not to be fixed or
determinable. If collectibility is not considered probable, revenue is
recognized when the fee is collected provided all other criteria are met. No
customer has the right of return.
6
7
VIRAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(UNAUDITED)
Arrangements consisting of license and maintenance. For those contracts that
consist solely of license and maintenance, the Company recognizes license
revenues based upon the residual method after all elements other than
maintenance have been delivered as prescribed by SOP 98-9. The Company
recognizes maintenance revenues over the term of the maintenance contract as
vendor specific objective evidence of fair value for maintenance exists. In
accordance with paragraph ten of SOP 97-2, vendor specific objective evidence of
fair value of maintenance is determined by reference to the price the customer
will be required to pay when it is sold separately (that is, the renewal rate).
Each license agreement offers additional maintenance renewal periods at a stated
price. Maintenance contracts are typically one year in duration. Revenue is
recognized on a per copy basis for licensed software when each copy of the
license requested by the customer is delivered. Revenue is recognized on
licensed software on a per user or per server basis for a fixed fee when the
product master is delivered to the customer. There is no right of return or
price protection for sales to domestic and international distributors, system
integrators, or value added resellers. In situations where the distributor,
integrator or reseller has a purchase order from the end user that is
immediately deliverable, the Company recognizes revenue on shipment to the
distributor, integrator or reseller, if other criteria in SOP 97-2 are met,
since the Company has no risk of concessions. The Company defers revenues on
shipments to distributors, integrators or resellers if the party does not have a
purchase order from an end user that is immediately deliverable or other
criteria in SOP 97-2 are not met. The Company recognizes royalty revenues upon
receipt of the quarterly reports from the vendors.
Application services. Application services revenues consist of set-up fees,
video processing fees and application hosting fees. Set-up fees are recognized
ratably over the contract term, which is generally six to 12 months. The Company
generates video processing fees for each hour of video that a customer deploys.
Processing fees are recognized as encoding, indexing and editorial services are
performed and are based upon hourly rates per hour of video content. Application
hosting fees are generated based on the number of video queries processed,
subject in some cases to monthly minimums and maximums. The Company recognizes
revenues on transaction fees that are subject to monthly minimums based on the
greater of actual transaction fees or the monthly minimum, and monthly maximums
based on the lesser of actual transaction fees or the monthly maximum, since the
Company has no further obligations, the payment terms are normal and each month
is a separate measurement period.
Other revenues. Other revenues consist primarily of U.S. government agency
research grants that are best effort arrangements. The software-development
arrangements are within the scope of the FASB's Statement of Financial
Accounting Standards No. 68, "Research and Development Arrangements". As the
financial risks associated with the software-development arrangement rests
solely with the U.S. government agency, the Company recognizes revenues as the
services are performed. The cost of these services are included in cost of other
revenues. The Company's contractual obligations are to provide the required
level of effort (hours), technical reports, and funds and man-hour expenditure
reports.
Use of Estimates
The preparation of the accompanying unaudited condensed consolidated
financial statements requires management to make estimates and assumptions that
effect the amounts reported in these financial statements. Actual results could
differ from those estimates.
7
8
VIRAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(UNAUDITED)
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with an original maturity at the time of purchase of over three months are
classified as short-term investments regardless of maturity date, as all such
instruments are classified as available-for-sale and can be readily liquidated
to meet current operational needs. At December 31, 2000, all of the Company's
total cash equivalents and short-term investments were classified as
available-for-sale and consisted of obligations issued by U.S. government
agencies and multinational corporations, maturing within one year.
Comprehensive Net Loss
The Company has had no other comprehensive income (loss), and consequently,
net loss equals total comprehensive net loss for the three and nine months ended
December 31, 2000 and 1999.
Net Loss Per Share Applicable to Common Stockholders
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding. Options, warrants, restricted stock and
preferred stock were not included in the computation of diluted net loss per
share because the effect would be antidilutive.
Pro forma basic and diluted net loss per share have been computed as
described above and also give effect, even if antidilutive, to common equivalent
shares from preferred stock as if such conversion had occurred on April 1, 1999,
or at the date of original issuance, if later.
8
9
VIRAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(UNAUDITED)
The following table presents the computation of basic and diluted and pro
forma basic and diluted net loss per share applicable to common stockholders (in
thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders ............................. $ (7,004) $ (7,790) $ (21,846) $ (12,152)
=========== =========== =========== ===========
Weighted-average shares of common
stock outstanding ........................ 20,147 2,717 14,307 2,543
Less weighted-average shares of
common stock subject to repurchase ....... (345) (441) (414) (406)
----------- ----------- ----------- -----------
Weighted-average shares used in
computation of basic and diluted net
loss per share applicable to common
shareholders ............................. 19,802 2,276 13,893 2,137
=========== =========== =========== ===========
Basic and diluted net loss per share
applicable to common stockholders ........ $ (0.35) $ (3.42) $ (1.57) $ (5.69)
=========== =========== =========== ===========
Shares used in computation of basic and
diluted net loss per share applicable
to common stockholders ................... 19,802 2,276 13,893 2,137
Pro forma adjustment to reflect
weighted-average effect of the
assumed conversion of
convertible preferred stock .............. -- 9,766 3,628 8,188
----------- ----------- ----------- -----------
Shares used in computing pro forma
and diluted net loss per share
applicable to common stockholders ....... 19,802 12,042 17,521 10,325
=========== =========== =========== ===========
Pro forma basic and diluted net
loss per share applicable to common
stockholders ............................. $ (0.35) $ (0.65) $ (1.25) $ (1.18)
=========== =========== =========== ===========
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be required to
implement FAS 133 at the beginning of fiscal 2002. Because the Company does not
currently hold any derivative instruments and does not engage in hedging
activities, the Company does not expect that the adoption of FAS 133 will have a
material impact on its financial position, results of operations or cash flows.
9
10
VIRAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(UNAUDITED)
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in the financial statements of public companies. SAB 101B delayed the
effective date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999 (the fourth quarter of fiscal
2001 for the Company). For companies adopting SAB 101 subsequent to the first
quarter, financial information for prior quarters would be restated with
cumulative effect adjustment reflected in the first quarter in accordance with
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements." In subsequent periods, registrants should disclose the amount of
revenue, if material, recognized in those periods that were included in the
cumulative effect adjustment. The Company is reviewing the guidance of SAB 101
and currently believes that its revenue recognition policy is consistent with
the guidance of SAB 101.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 became
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 has not had a material impact on the Company's financial
position or results of operations.
2. STOCKHOLDERS' EQUITY
Initial Public Offering and Amended and Restated Certificate of Incorporation
In July 2000, the Company completed its initial public offering and issued
3,500,000 shares of its common stock to the public at a price of $11.00 per
share. The Company received net proceeds of $34,105,000 in cash after deducting
the underwriters' commissions and approximately $1,700,000 of offering costs
($812,000 of which had been paid by the Company as of March 31, 2000). The
Company's underwriters also exercised their over-allotment option to purchase an
additional 525,000 shares of the Company's common stock at a price of $11.00 per
share resulting in an additional $5,371,000 of net proceeds to the Company.
In addition, the Company amended the conversion terms of its redeemable
convertible preferred stock by reducing the automatic conversion price per share
to $8.00 per share from $11.152 per share. All outstanding shares of redeemable
convertible preferred stock were converted into an aggregate of 10,369,451
shares of common stock at the closing of the Company's public offering.
Common Stock Purchase Agreement
In July 2000, the Company completed an $18,000,000 common stock purchase
agreement with certain private investors concurrent with its initial public
offering.
Reverse Stock Split
The Company's stockholders approved a 1-for-2 reverse stock split of the
Company's preferred and common stock which took place and became effective just
prior to the consummation of the Company's initial public offering in July 2000.
All share data has been restated to reflect the reverse stock split.
10
11
VIRAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(UNAUDITED)
Stockholder Rights Plan
In November 2000, the Company adopted a Stockholder Rights Plan (the
"Plan") designed to enable all stockholders to realize the full value of their
investment and to provide for fair and equal treatment for all stockholders in
the event that an unsolicited attempt is made to acquire the Company. Under the
Plan, stockholders received one Right to purchase one one-thousandth of a share
of a new series of Preferred Stock for each outstanding share of Common Stock
held of record at the close of business on December 5, 2000 at $100.00 per
Right, when someone acquires 15 percent or more of the Company's Common Stock or
announces a tender offer which could result in such person owning 15 percent or
more of the Common Stock. Each one one-thousandth of a share of the new
Preferred Stock has terms designed to make it substantially the economic
equivalent of one share of Common Stock. Prior to someone acquiring 15 percent,
the Rights can be redeemed for $0.001 each by action of the Board of Directors.
Under certain circumstances, if someone acquires 15 percent or more of the
Common Stock, the Rights permit the stockholders other than the acquiror to
purchase the Company's Common Stock having a market value of twice the exercise
price of the Rights, in lieu of the Preferred Stock. Alternatively, when the
Rights become exercisable, the Board of Directors may authorize the issuance of
one share of Common Stock in exchange for each Right that is then exercisable.
In addition, in the event of certain business combinations, the Rights permit
the purchase of the Common Stock of an acquiror at a 50 percent discount. Rights
held by the acquiror will become null and void in both cases. The Rights expire
on November 7, 2010.
Warrants
In December 2000, the Company entered into a services agreement with a
customer and issued an immediately exercisable, non-forfeitable warrant to
purchase 200,000 shares of common stock at $5.50 per share. The warrant expires
in December 31, 2003. The value of the warrant was estimated to be $648,000 and
was based upon a Black-Scholes valuation model with the following assumptions:
risk free interest rate of 7.0%, no dividend yield, volatility of 90%, expected
life of 3 years, exercise price of $5.50 and fair value of $5.38. The non-cash
amortization of the warrant's value will be recorded against revenues as
revenues from services are recognized over the one-year services agreement.
There was no amortization of the warrant's value for the three or nine months
ended December 31, 2000.
3. SEGMENT REPORTING
The Company has two reportable segments: the sale of software and related
software support services including revenues from U.S. government agencies
("software") and the sale of its application services which includes set-up
fees, video processing fees, and application hosting fees ("application
services") . The Company's Chief Operating Decision Maker ("CODM") is the
Company's Chief Executive Officer who evaluates performance and allocates
resources based upon total revenues and gross profit (loss). Discreet financial
information for each segment's profit and loss and each segment's total assets
is not provided to the Company's CODM, nor is it tracked by the Company.
11
12
VIRAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(UNAUDITED)
Information on the Company's reportable segments for the three and nine
months ended December 31, 2000 and 1999 are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
SOFTWARE:
Total revenues ............ $ 2,276 $ 1,460 $ 5,397 $ 3,753
Total cost of revenues .... 380 523 990 1,222
----------- ----------- ----------- -----------
Gross profit .............. $ 1,896 $ 937 $ 4,407 $ 2,531
=========== =========== =========== ===========
APPLICATION SERVICES:
Total revenues ............ $ 992 $ 88 $ 2,381 $ 134
Total cost of revenues .... 1,855 580 4,898 832
----------- ----------- ----------- -----------
Gross loss ................ $ (863) $ (492) $ (2,517) $ (698)
=========== =========== =========== ===========
12
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the condensed consolidated
financial statements and related notes contained herein and the information
contained in our Registration Statement on Form S-1 (No. 333-96315), including
the related prospectus dated June 28, 2000 as filed with the United States
Securities and Exchange Commission. This discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. We may identify these statements by the use of words
such as "believe", "expect", "anticipate", "intend", "plan" and similar
expressions. These forward-looking statements involve several risks and
uncertainties. Our actual results may differ materially from those set forth in
these forward-looking statements as a result of a number of factors, including
those described under the caption "Risk Factors" herein and in our Registration
Statement on Form S-1 (No. 333-96315), including the related prospectus dated
June 28, 2000 as filed with the United States Securities and Exchange
Commission. These forward-looking statements speak only as of the date of this
quarterly report, and we caution you not to rely on these statements without
also considering the risks and uncertainties associated with these statements
and our business as addressed elsewhere in this quarterly report and in our
Registration Statement on Form S-1 (No. 333-96315), including the related
prospectus dated June 28, 2000 as filed with the United States Securities and
Exchange Commission.
OVERVIEW
Virage provides software products and application services that enable video
for strategic online applications. Depending on their particular needs and
resources, video content owners may elect either to license our software
products or to subscribe to our application services. Our customers include
media and entertainment companies, other corporations, government agencies and
educational institutions.
REVENUE RECOGNITION
We enter into arrangements for the sale of licenses of software products and
related maintenance contracts and application services offerings; and we receive
revenues under U.S. government agency research grants. Service revenues include
revenues from maintenance contracts and application services. Other revenues are
primarily U.S. government agency research grants.
Our revenue recognition policy is in accordance with the American Institute
of Certified Public Accountants, or AICPA's, Statement of Position No. 97-2, or
SOP 97-2, "Software Revenue Recognition," as amended by Statement of Position
No. 98-4, "Deferral of the Effective Date of SOP 97-2, "Software Revenue
Recognition, "" or SOP 98-4, and Statement of Position No. 98-9, "Modification
of SOP No. 97-2 with Respect to Certain Transactions" or SOP 98-9. For each
arrangement, we determine whether evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable, and collection is probable. If
any of these criteria are not met, revenue recognition is deferred until such
time as all of the criteria are met. We consider all arrangements with payment
terms extending beyond 12 months and other arrangements with payment terms
longer than normal not to be fixed or determinable. If collectibility is not
considered probable, revenue is recognized when the fee is collected provided
all other criteria are met. No customer has the right of return.
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Arrangements consisting of license and maintenance. For those contracts that
consist solely of license and maintenance, we recognize license revenues based
upon the residual method after all elements other than maintenance have been
delivered as prescribed by SOP 98-9. We recognize maintenance revenues over the
term of the maintenance contract as vendor specific objective evidence of fair
value for maintenance exists. In accordance with paragraph ten of SOP 97-2,
vendor specific objective evidence of fair value of maintenance is determined by
reference to the price the customer will be required to pay when it is sold
separately (that is, the renewal rate). Each license agreement offers additional
maintenance renewal periods at a stated price. Maintenance contracts are
typically one year in duration. Revenue is recognized on a per copy basis for
licensed software when each copy of the license requested by the customer is
delivered. Revenue is recognized on licensed software on a per user or per
server basis for a fixed fee when the product master is delivered to the
customer. There is no right of return or price protection for sales to domestic
and international distributors, system integrators, or value added resellers. In
situations where the distributor, integrator or reseller has a purchase order
from the end user that is immediately deliverable, we recognize revenue on
shipment to the distributor, integrator or reseller, if other criteria in SOP
97-2 are met, since we have no risk of concessions. We defer revenues on
shipments to distributors, integrators or resellers if the party does not have a
purchase order from an end user that is immediately deliverable or other
criteria in SOP 97-2 are not met. We recognize royalty revenues upon receipt of
the quarterly reports from the vendors.
Application services. Our application services revenues consist of set-up
fees, video processing fees and application hosting fees. Set-up fees are
recognized ratably over the contract term, which is generally six to 12 months.
We generate video processing fees for each hour of video that a customer
deploys. Processing fees are recognized as encoding, indexing and editorial
services are performed and are based upon hourly rates per hour of video
content. We generate application hosting fees based on the number of video
queries processed, subject in some cases to monthly minimums and maximums. We
recognize revenues on transaction fees that are subject to monthly minimums
based on the greater of actual transaction fees or the monthly minimum, and
monthly maximums based on the lesser of actual transaction fees or the monthly
maximum, since we have no further obligations, the payment terms are normal and
each month is a separate measurement period.
Other revenues. Other revenues consist primarily of U.S. government agency
research grants that are best effort arrangements. The software-development
arrangements are within the scope of the FASB's Statement of Financial
Accounting Standards No. 68, "Research and Development Arrangements". As the
financial risks associated with the software-development arrangement rests
solely with the U.S. government agency, we are recognizing revenues as the
services are performed. The cost of these services are included in cost of other
revenues. Our contractual obligation is to provide the required level of effort
(hours), technical reports, and funds and man-hour expenditure reports.
Cost of license revenues consist primarily of royalty fees for third-party
software products integrated into our products. Our cost of service revenues
includes personnel expenses, related overhead, communication expenses and
capital depreciation costs for maintenance and support activities and
application services. Our cost of other revenues includes engineering personnel
expenses and related overhead for custom engineering and government projects.
We incurred net losses of $7,004,000 and $21,846,000 during the three and
nine months ended December 31, 2000, respectively. As of December 31, 2000, we
had an accumulated deficit of $54,146,000. We expect to continue to incur
operating losses for the foreseeable future. In view of the rapidly changing
nature of our market and our limited operating history, we believe that
period-to-period comparisons of our revenues and other operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Our historic revenue growth rates are not necessarily sustainable
or indicative of our future growth.
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RESULTS OF OPERATIONS
The following table sets forth consolidated financial data for the periods
indicated, expressed as a percentage of total revenues.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues:
License revenues ....................... 52% 76% 54% 81%
Service revenues ....................... 46 19 45 15
Other revenues ......................... 2 5 1 4
----------- ----------- ----------- -----------
Total revenues ....................... 100 100 100 100
Cost of revenues:
License revenues ....................... 5 21 6 18
Service revenues ....................... 61 46 68 31
Other revenues ......................... 2 5 2 4
----------- ----------- ----------- -----------
Total cost of revenues ............... 68 72 76 53
----------- ----------- ----------- -----------
Gross profit ............................. 32 28 24 47
Operating expenses:
Research and development ............... 70 72 84 69
Sales and marketing .................... 138 123 164 131
General and administrative ............. 43 38 51 40
Stock-based compensation ............... 25 14 32 8
----------- ----------- ----------- -----------
Total operating expenses ............. 276 247 331 248
----------- ----------- ----------- -----------
Loss from operations ..................... (244) (219) (307) (201)
Interest and other income, net ........... 30 9 26 5
----------- ----------- ----------- -----------
Net loss ................................. (214) (210) (281) (196)
Series E convertible preferred stock
dividend ............................... -- (293) -- (117)
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders ........................... (214)% (503)% (281)% (313)%
=========== =========== =========== ===========
THREE AND NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
Total Revenues. Total revenues increased 111% to $3,268,000 for the three
months ended December 31, 2000 from $1,548,000 for the three months ended
December 31, 1999. Total revenues increased 100% to $7,778,000 for the nine
months ended December 31, 2000 from $3,887,000 for the nine months ended
December 31, 1999. These increases were a result of increases in license and
service revenues, slightly offset by a decrease in other revenues. International
revenues increased to $1,230,000, or 38% of total revenues, for the three months
ended December 31, 2000 from $357,000, or 23% of total revenues, for the three
months ended December 31, 1999. International revenues increased to $2,265,000,
or 29% of total revenues, for the nine months ended December 31, 2000 from
$963,000, or 25% of total revenues, for the nine months ended December 31, 1999.
Sales to one customer, who is a reseller of our products, accounted for 16% of
total revenues for the three months ended December 31, 2000 while sales to a
separate customer accounted for 12% of total revenues for the three months ended
December 31, 1999. Sales to two customers each accounted for 16% and 15%,
respectively, of total revenues for the nine months ended December 31, 1999 (no
customer constituted more than 10% of total revenues for the nine months ended
December 31, 2000). Sales to agencies of the U.S. government accounted for 18%
and 22% of total revenues for the three and nine months ended December 31, 1999,
respectively (less than 10% for the three and nine months ended December 31,
2000).
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License revenues increased to $1,709,000 for the three months ended December
31, 2000 from $1,184,000 for the three months ended December 31, 1999, an
increase of $525,000. License revenues increased to $4,175,000 for the nine
months ended December 31, 2000 from $3,144,000 for the nine months ended
December 31, 1999, an increase of $1,031,000. These increases were primarily a
result of the introduction of new product lines and the expansion of our
domestic and international sales and marketing operations.
Service revenues increased to $1,494,000 for the three months ended December
31, 2000 from $291,000 for the three months ended December 31, 1999, an increase
of $1,203,000. Service revenues increased to $3,515,000 for the nine months
ended December 31, 2000 from $578,000 for the nine months ended December 31,
1999, an increase of $2,937,000. This growth was due to the growth of our
application services offering.
Other revenues decreased to $65,000 and $88,000 for the three and nine months
ended December 31, 2000, respectively, from $73,000 and $165,000 for the three
and nine months ended December 31, 1999, respectively, decreases of $8,000 and
$77,000, respectively. These decreases were attributable to a smaller amount of
government research project work in comparison to the same periods of the prior
year.
Total Cost of Revenues. Total cost of revenues increased to $2,235,000, or
68% of total revenues, for the three months ended December 31, 2000 from
$1,103,000, or 72% of total revenues, for the three months ended December 31,
1999. Total cost of revenues increased to $5,888,000, or 76% of total revenues,
for the nine months ended December 31, 2000 from $2,054,000, or 53% of total
revenues, for the nine months ended December 31, 1999. These increases in total
cost of revenues were primarily due to increases in the cost of service
revenues, particularly the costs of our application services.
Cost of license revenues decreased to $186,000, or 11% of license revenues,
for the three months ended December 31, 2000 from $321,000, or 27% of license
revenues, for the three months ended December 31, 1999. For the nine months
ended December 31, 2000, cost of license revenues decreased to $498,000, or 12%
of license revenues, from $686,000, or 22% of license revenues, during the same
period in the prior year. These decreases were primarily a result of an
amendment of an existing technology license agreement that lowered the amount of
our royalty obligations.
Cost of service revenues increased to $1,989,000, or 133% of service revenues
for the three months ended December 31, 2000 from $708,000, or 243% of service
revenues, for the three months ended December 31, 1999. For the nine months
ended December 31, 2000, cost of service revenues were $5,251,000, or 149% of
service revenues, versus $1,196,000, or 207% of service revenues, for the nine
months ended December 31, 1999. These increases in absolute dollars were due to
expenditures for the development of application services. We expect the cost of
service revenues to increase substantially and margins on our service revenues
to remain negative for the foreseeable future as we expand our application
services and worldwide support capabilities.
Cost of other revenues decreased to $60,000 and $139,000, or 92% and 158% of
other revenues, for the three and nine months ended December 31, 2000 from
$74,000 and $172,000, or 101% and 104% of other revenues, for the three and nine
months ended December 31, 1999. These decreases in absolute dollars are
primarily a result of fewer hours spent on government projects during the three
and nine months ended December 31, 2000.
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Research and Development Expenses. Research and development expenses consist
primarily of personnel and related costs for our development efforts. Research
and development expenses increased to $2,284,000, or 70% of total revenues, for
the three months ended December 31, 2000 from $1,114,000, or 72% of total
revenues, for the three months ended December 31, 1999. For the nine months
ended December 31, 2000, research and development expenses were $6,548,000, or
84% of total revenues, versus $2,654,000, or 69% of total revenues, for the nine
months ended December 31, 1999. These increases in absolute dollars were due to
increases in our research and development staff. We expect research and
development expenses to increase for the foreseeable future as we believe that
significant product development expenditures are essential for us to maintain
and enhance our market position. To date, we have not capitalized any software
development costs pursuant to Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed" (FAS 86) as costs incurred pursuant to FAS 86 have been
insignificant.
Sales and Marketing Expenses. Sales and marketing expenses consist of
personnel and related costs for our direct sales force, pre-sales support and
marketing staff, and marketing programs including trade shows and advertising.
Sales and marketing expenses increased to $4,504,000, or 138% of total revenues,
for the three months ended December 31, 2000 from $1,906,000, or 123% of total
revenues, for the three months ended December 31, 1999. For the nine months
ended December 31, 2000, sales and marketing expenses increased to $12,742,000,
or 164% of total revenues, from $5,095,000, or 131% of total revenues, for the
nine months ended December 31, 1999. These increases in were due to growth in
our sales and marketing personnel and increased expenses incurred in connection
with trade shows and additional marketing programs. The increase in our sales
and marketing staff related to the opening of new sales offices in the United
States and in Europe. We expect sales and marketing expenses to increase
substantially for the foreseeable future as we hire additional sales and
marketing personnel, increase spending on advertising and marketing programs,
and expand our operations in North America and internationally.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including finance, accounting, legal, human resources, facilities and
information system expenses not allocated to other departments, as well as the
costs of our external audit firm and our outside legal counsel. General and
administrative expenses increased to $1,403,000, or 43% of total revenues, for
the three months ended December 31, 2000 from $594,000, or 38% of total
revenues, for the three months ended December 31, 1999. General and
administrative expenses increased to $3,947,000, or 51% of total revenues, for
the nine months ended December 31, 2000 from $1,566,000, or 40% of total
revenues, for the nine months ended December 31, 1999. These increases were
primarily due to an increase in our general and administrative headcount and
additional costs that we have incurred as a newly public company. We expect
general and administrative expenses to increase for the foreseeable future as we
hire additional general and administrative personnel and enhance our information
systems to support our expected growth.
Stock-Based Compensation Expense. Stock-based compensation expense represents
the amortization of deferred compensation (calculated as the difference between
the exercise price of stock options granted to our employees and the then deemed
fair value of our common stock) for stock options granted to our employees. We
recognized stock-based compensation expense of $817,000 and $219,000 for the
three months ended December 31, 2000 and 1999, respectively. For the nine months
ended December 31, 2000, we recognized stock-based compensation expense of
$2,509,000 as compared to $313,000 for the nine months ended December 31, 1999.
Interest and Other Income, Net. Interest and other income, net, includes
interest income from cash, cash equivalents and short-term investments, offset
primarily by interest on capital leases and bank debt. Interest and other
income, net, increased to $971,000 and $2,010,000 for the three and nine months
ended December 31, 2000, respectively, from $142,000 and $187,000 for the three
and nine months ended December 31, 1999. These increases were due to interest
income from increased cash and short-term investments balances.
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Provision for Income Taxes. We have not recorded a provision for federal and
state or foreign income taxes, except for insignificant current foreign and
state franchise taxes, for the three and nine months ended December 31, 2000 or
1999 because we have experienced net losses since inception, which have resulted
in deferred tax assets. We have recorded a valuation allowance for the entire
deferred tax asset as a result of uncertainties regarding the realization of the
asset balance through future taxable profits.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had cash, cash equivalents and short-term
investments of $54,126,000, an increase of $44,019,000 from March 31, 2000 and
our working capital, defined as current assets less current liabilities, was
$47,722,000, an increase of $39,621,000 in working capital from March 31, 2000.
The increase in our working capital is primarily attributable to cash generated
from financing activities including our private placement, our initial public
offering and exercise of our underwriters' over-allotment option (IPO), the
exercise of warrants, and the issuance of stock under our employee stock plans,
resulting in $60,604,000 of net proceeds to us during the nine months ended
December 31, 2000.
Our operating activities resulted in net cash outflows of $12,694,000 and
$6,171,000 for the nine months ended December 31, 2000 and 1999, respectively.
The cash used in these periods was primarily attributable to net losses
applicable to common stockholders of $21,846,000 and $12,152,000 in the nine
months ended December 31, 2000 and 1999, respectively.
Investing activities resulted in cash outflows of $39,110,000 and $1,225,000
for the nine months ended December 31, 2000 and 1999, respectively. These
expenditures were primarily for the purchase of short-term investments during
the nine months ended December 31, 2000 and for the purchases of computer
hardware and software and furniture and fixtures during the nine months ended
December 31, 2000 and 1999. We expect that capital expenditures will continue to
increase to the extent we increase our headcount and expand our operations.
Financing activities provided net cash inflows of $61,175,000 and $19,401,000
during the nine months ended December 31, 2000 and 1999, respectively, primarily
as a result of sales of our preferred and common stock (including our IPO in
fiscal 2001).
We anticipate that our current cash, cash equivalents and available credit
facilities will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, we
may need to raise additional funds in future periods through public or private
financings, or other sources, to fund our operations and potential acquisitions,
if any, until we achieve profitability, if ever. We may not be able to obtain
adequate or favorable financing when necessary to fund our business. Failure to
raise capital when needed could harm our business. If we raise additional funds
through the issuance of equity securities, the percentage of ownership of our
stockholders would be reduced. Furthermore, these equity securities might have
rights, preferences or privileges senior to our common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risk disclosures as set forth in our Registration Statement on
Form S-1 (No. 333-96315), including the related prospectus dated June 28, 2000
as filed with the United States Securities and Exchange Commission, as amended,
have not changed significantly.
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RISK FACTORS
The occurrence of any of the following risks could materially and adversely
affect our business, financial condition and operating results. In this case,
the trading price of our common stock could decline and you might lose all or
part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR REVENUE, COST OF SALES, AND EXPENSE FORECASTS WERE ONLY RECENTLY INTRODUCED
TO THE PUBLIC AND THERE ARE A NUMBER OF RISKS THAT MAKE IT DIFFICULT FOR US TO
FORESEE OR ACCURATELY EVALUATE FACTORS THAT MAY IMPACT SUCH FORECASTS.
We have limited visibility into future demand, and our limited operating
history makes it difficult for us to foresee or accurately evaluate factors that
may impact such future demand. Visibility over potential sales is typically
limited to the current quarter. In order to provide a revenue forecast for the
current quarter, we must make assumptions about conversion of these potential
sales into current quarter revenues. Such assumptions may be materially
incorrect due to competition for the customer order including pricing pressures,
sales execution issues, customer selection criteria or length of the customer
selection cycle, the failure of sales contracts to meet our revenue recognition
criteria, our inability to hire and retain qualified personnel, our inability to
develop new markets in Europe or Asia, and other factors that may be beyond our
control. In addition, we are reliant on third party resellers for a significant
portion of our license revenues, and we have limited visibility into the status
of orders from such third parties.
For quarters beyond the current quarter, we have very limited visibility into
potential sales opportunities, and thus we have a lower confidence level in any
revenue forecast or forward-looking guidance. In developing a revenue forecast
for such quarters, we assess any customer indications about future demand,
general industry trends, marketing lead development activities, productivity
goals for the sales force and expected growth in sales personnel, and any demand
for products that we may have.
Our cost of sales and expense forecasts are based upon our budgets and
spending forecasts for each area of the Company. Circumstances we may not
foresee could increase cost and expense levels beyond the levels forecasted.
Such circumstances may include competitive threats in our markets for which we
may need to address with additional sales and marketing expenses, legal claims,
employee turnover, additional royalty expenses should we lose a source of
current technology, losses of key management personnel, unknown defects in our
products, and other factors we cannot foresee.
In addition, our business is also subject to other risks detailed in our
filings with the Securities and Exchange Commission, including our S-1 and 10-Q
filings, and as are described below.
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BECAUSE WE HAVE ONLY RECENTLY INTRODUCED OUR VIDEO SOFTWARE PRODUCTS AND
APPLICATION SERVICES, WE FACE A NUMBER OF RISKS WHICH MAY SERIOUSLY HARM OUR
BUSINESS.
We incorporated in April 1994 and to date we have generated only limited
revenues. Most of our revenues were generated in the last six quarters. We
introduced our first video software products in December 1997, and our
application services in May 1999. Because we have a limited operating history
with our video software products and application services and because our
revenue sources may continue to shift as our business develops, you must
consider the risks and difficulties that we may encounter when making your
investment decision. These risks include our ability to:
- expand our customer base;
- increase penetration into key customer accounts;
- maintain our pricing structure;
- develop new video products and application services; and
- adapt our products and services to meet changes in the Internet video
infrastructure marketplace.
If we do not successfully address these risks, our business will be seriously
harmed.
OUR BUSINESS MODEL IS UNPROVEN AND MAY FAIL, WHICH MAY DECREASE SIGNIFICANTLY
THE MARKET PRICE OF OUR COMMON STOCK.
We do not know whether our business model and strategy will be successful.
Our business model is based on the premise that content providers will use our
licensed products and application services to catalog, manage and distribute
their video content over the Internet and intranets. Our potential customers may
elect to rely on their internal resources or on lower priced products and
services that do not offer the full range of functionality offered by our
products and services. If the assumptions underlying our business model are not
valid or if we are unable to implement our business plan, our business will
suffer.
WE HAVE NOT BEEN PROFITABLE AND IF WE DO NOT ACHIEVE PROFITABILITY, OUR BUSINESS
MAY FAIL.
We have experienced operating losses in each quarterly and annual period
since we were formed and we expect to incur significant losses in the future. As
of December 31, 2000, we had an accumulated deficit of $54,146,000. We expect to
continue to incur increasing research and development, sales and marketing and
general and administrative expenses. Accordingly, our failure to increase our
revenues significantly or improve our gross margins will harm our business. Even
if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future. If our revenues grow
more slowly than we anticipate, if our gross margins do not improve, or if our
operating expenses exceed our expectations, our operating results will suffer
and our stock price may fall.
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OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied significantly in the past and are
likely to vary significantly in the future. We believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of future performance. If securities analysts follow
our stock, our operating results will likely fall below their expectations in
some future quarter or quarters. Our failure to meet these expectations would
likely cause the market price of our common stock to decline.
Our quarterly revenues depend on a number of factors, many of which are
beyond our control and which makes it difficult for us to predict our revenues
going forward. We plan to increase our operating expenses and if our revenues
and gross margins do not increase, our business could be seriously harmed. We
plan to increase our operating expenses to expand our sales and marketing
operations, fund greater levels of research and development, expand our
application services and develop our internal organization. Many of these
expenditures are planned or committed in advance in anticipation of future
revenues, and if our revenues in a particular quarter are lower than we
anticipate, we may be unable to reduce spending in that quarter. As a result,
any shortfall in revenues or a failure to improve gross margins would likely
hurt our quarterly operating results.
THE FAILURE OF ANY SIGNIFICANT FUTURE CONTRACTS TO MEET OUR POLICIES FOR
RECOGNIZING REVENUE MAY PREVENT US FROM ACHIEVING OUR REVENUE OBJECTIVES FOR A
QUARTER OR A FISCAL YEAR, WHICH WOULD HURT OUR OPERATING RESULTS.
Our sales contracts are typically based upon standard agreements that meet
our revenue recognition policies. However, our future sales may include site
licenses, consulting services or other transactions with customers who may
negotiate special terms and conditions that are not part of our standard sales
contracts. If these special terms and conditions cause sales under these
contracts to not qualify under our revenue recognition policies, we would defer
revenues to future periods, which may hurt our reported operating results and
cause our stock price to fall.
THE LENGTH OF OUR SALES AND DEPLOYMENT CYCLE IS UNCERTAIN, WHICH MAY CAUSE OUR
REVENUES AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER.
During our sales cycle, we spend considerable time and expense providing
information to prospective customers about the use and benefits of our products
and services without generating corresponding revenue. Our expense levels are
relatively fixed in the short term and based in part on our expectations of
future revenues. Therefore, any delay in our sales cycle could cause significant
variations in our operating results, particularly because a relatively small
number of customer orders represent a large portion of our revenues.
Some of our largest sources of revenues are government entities and large
corporations that often require long testing and approval processes before
making a decision to license our products. In general, the process of entering
into a licensing arrangement with a potential customer may involve lengthy
negotiations. As a result, our sales cycle has been and may continue to be
unpredictable. In the past, our sales cycle has ranged from one to 12 months.
Our sales cycle is also subject to delays as a result of customer-specific
factors over which we have little or no control, including budgetary constraints
and internal approval procedures. In addition, because our technology must often
be integrated with the products and services of other vendors, there may be a
significant delay between the use of our software and services in a pilot system
and our customers' volume deployment of our products and services.
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IF OUR CUSTOMERS FAIL TO GENERATE TRAFFIC ON THE VIDEO-RELATED SECTIONS OF THEIR
INTERNET SITES, OUR RECURRING REVENUES MAY DECREASE, WHICH MAY ADVERSELY AFFECT
OUR BUSINESS AND FINANCIAL RESULTS.
Our ability to achieve recurring revenues from our application services is
largely dependent upon the success of our customers in generating traffic on the
video-related sections of their Internet sites. Generally, we generate recurring
revenue from our application services whenever our customers add more hours of
video to an existing project and with each additional video query on a
customer's site. If our customers do not attract and maintain traffic on
video-related sections of their sites, video queries may decrease and customers
may decide not to add more hours of video to existing projects. This result
would cause revenues from our application services to decrease, which will
prevent us from growing our business.
IF WE FAIL TO INCREASE THE SIZE OF OUR CUSTOMER BASE OR INCREASE OUR REVENUES
WITH OUR EXISTING CUSTOMERS, OUR BUSINESS WILL SUFFER.
Increasing the size of our customer base and increasing the revenues we
generate from our customer base are critical to the success of our business. To
expand our customer base and the revenues we generate from our customers, we
must:
- generate additional revenues from different organizations within our
customers;
- conduct effective marketing and sales programs to acquire new customers;
and
- establish and maintain distribution relationships with value added
resellers and system integrators.
Our failure to achieve one or more of these objectives will hurt our
business.
THE PRICES WE CHARGE FOR OUR PRODUCTS AND SERVICES MAY DECREASE, WHICH WOULD
REDUCE OUR REVENUES AND HARM OUR BUSINESS.
The prices we charge for our products and services may decrease as a result
of competitive pricing pressures, promotional programs and customers who
negotiate price reductions. For example, some of our competitors have provided
their services without charge in order to gain market share or new customers and
key accounts. The prices at which we sell and license our products and services
to our customers depend on many factors, including:
- purchase volumes;
- competitive pricing;
- the specific requirements of the order;
- the duration of the licensing arrangement; and
- the level of sales and service support.
If we are unable to sell our products or services at acceptable prices
relative to our costs, or if we fail to develop and introduce on a timely basis
new products and services from which we can derive additional revenues, our
financial results will suffer.
WE RELY ON, AND EXPECT TO CONTINUE TO RELY ON, A LIMITED NUMBER OF CUSTOMERS FOR
A SIGNIFICANT PORTION OF OUR REVENUES AND IF ANY OF THESE CUSTOMERS STOPS
LICENSING OUR SOFTWARE OR PURCHASING OUR PRODUCTS AND SERVICES, OUR OPERATING
RESULTS WILL SUFFER.
Historically, a limited number of customers has accounted for a significant
portion of our revenues. We anticipate that our operating results in any given
period will continue to depend to a significant extent upon revenues from a
small number of customers. We cannot be certain that we will retain our current
customers or that we will be able to recruit additional or replacement
customers. If we were to lose one or more customers, our operating results could
be significantly harmed.
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ANY FAILURE OF OUR NETWORK COULD LEAD TO SIGNIFICANT DISRUPTIONS IN OUR
APPLICATION SERVICES BUSINESS WHICH COULD DAMAGE OUR REPUTATION, REDUCE OUR
REVENUES OR OTHERWISE HARM OUR BUSINESS.
Our application services business is dependent upon providing our customers
with fast, efficient and reliable services. To meet our customers' requirements,
we must protect our network against damage from, among other things:
- human error;
- physical or electronic security breaches;
- computer viruses;
- fire, earthquake, flood and other natural disasters;
- power loss;
- telecommunications failure; and
- sabotage and vandalism.
Our failure to protect our network against damage from any of these events
will hurt our business.
WE DEPEND ON AN OUTSIDE THIRD PARTY TO MAINTAIN OUR COMMUNICATIONS HARDWARE AND
PERFORM MOST OF OUR COMPUTER HARDWARE OPERATIONS AND IF THIS THIRD PARTY'S
HARDWARE AND OPERATIONS FAIL, OUR REPUTATION AND BUSINESS WILL SUFFER.
We have communications hardware and computer hardware operations located at
Exodus Communications' facility in Santa Clara, California and at AboveNet
Communications' facility in New York City. We do not have complete backup
systems for these operations. A problem with, or failure of, our communications
hardware or operations could result in interruptions or increases in response
times on the Internet sites of our customers. Furthermore, if these third party
partners fail to adequately maintain or operate our communications hardware or
do not perform our computer hardware operations adequately, our services to our
customers may not be available. We have experienced system failures in the past.
Other outages or system failures may occur. Any disruptions could damage our
reputation, reduce our revenues or otherwise harm our business. Our insurance
policies may not adequately compensate us for any losses that may occur due to
any failures or interruptions in our systems.
IF WE ARE UNABLE TO PERFORM OR SCALE OUR CAPACITY SUFFICIENTLY AS DEMAND FOR OUR
SERVICES INCREASES, WE MAY LOSE CUSTOMERS WHICH WOULD BE DETRIMENTAL TO OUR
BUSINESS.
We cannot be certain that if we increase our customers we will be able to
correspondingly increase our personnel and to perform our application services
at satisfactory levels. Certain customer contracts contain cash penalty
provisions in the event that we do not perform our application services at
satisfactory levels and such penalty provisions will reduce our revenues and
harm our business. In addition, our application services may need to accommodate
an increasing volume of traffic. If we are not able to expand our internal
operations to accommodate such an increase in traffic, our customers' Internet
sites may in the future experience slower response times or outages. If we
cannot adequately handle a significant increase in customers or customers'
traffic, we may lose customers or fail to gain new ones, which may reduce our
revenues and harm our business.
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IF WE DO NOT SUCCESSFULLY DEVELOP NEW PRODUCTS AND SERVICES TO RESPOND TO RAPID
MARKET CHANGES DUE TO CHANGING TECHNOLOGY AND EVOLVING INDUSTRY STANDARDS, OUR
BUSINESS WILL BE HARMED.
The market for our products and services is characterized by rapidly changing
technology, evolving industry standards, frequent new product and service
introductions and changes in customer demands. The recent growth of video on the
Internet and intense competition in our industry exacerbate these market
characteristics. Our future success will depend to a substantial degree on our
ability to offer products and services that incorporate leading technology, and
respond to technological advances and emerging industry standards and practices
on a timely and cost-effective basis. To succeed, we must anticipate and adapt
to customer requirements in an effective and timely manner, and offer products
and services that meet customer demands. If we fail to do so, our products and
services will not achieve widespread market acceptance, and we may not generate
significant revenues to offset our development costs, which will hurt our
business.
The development of new or enhanced products and services is a complex and
uncertain process that requires the accurate anticipation of technological and
market trends. We may experience design, manufacturing, marketing and other
technological difficulties that could delay our ability to respond to
technological changes, evolving industry standards, competitive developments or
customer requirements. You should additionally be aware that:
- our technology or systems may become obsolete upon the introduction of
alternative technologies, such as products that better manage and search
video content;
- we could incur substantial costs if we need to modify our products and
services to respond to these alternative technologies;
- we may not have sufficient resources to develop or acquire new
technologies or to introduce new products or services capable of competing
with future technologies; and
- when introducing new or enhanced products or services, we may be unable to
manage effectively the transition from older products and services and
ensure that we can deliver products and services to meet anticipated
customer demand.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES, AND THE LOSS OF OR OUR
INABILITY TO MAINTAIN THESE LICENSES COULD RESULT IN INCREASED COSTS OR DELAY
SALES OF OUR PRODUCTS.
We license technology from third parties, including software that is
integrated with internally-developed software and used in our products to
perform key functions. We anticipate that we will continue to license technology
from third parties in the future. This software may not continue to be available
on commercially reasonable terms, if at all. Although we do not believe that we
are substantially dependent on any licensed technology, some of the software we
license from third parties could be difficult for us to replace. The loss of any
of these technology licenses could result in delays in the licensing of our
products until equivalent technology, if available, is developed or identified,
licensed and integrated. The use of additional third-party software would
require us to negotiate license agreements with other parties, which could
result in higher royalty payments and a loss of product differentiation. In
addition, the effective implementation of our products depends upon the
successful operation of third-party licensed products in conjunction with our
products, and therefore any undetected errors in these licensed products could
prevent the implementation or impair the functionality of our products, delay
new product introductions and/or damage our reputation.
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IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL, OUR BUSINESS MAY BE HARMED.
Our future success depends to a significant extent on the continued services
of our senior management and other key personnel, and particularly Paul Lego,
our Chief Executive Officer. The loss of either this individual or other key
employees would likely have an adverse effect on our business. We do not have
employment agreements with most of our senior management team. If one or more of
our senior management team were to resign, the loss could result in loss of
sales, delays in new product development and diversion of management resources.
BECAUSE COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN PERSONNEL, WHICH COULD IMPACT THE DEVELOPMENT AND ACCEPTANCE
OF OUR PRODUCTS AND SERVICES.
We expect that we will need to hire additional personnel in all functional
areas in the foreseeable future. Competition for personnel throughout our
industry is intense. We may be unable to attract or assimilate other
highly-qualified employees in the future. We have in the past experienced, and
we expect to continue to experience, difficulty in hiring highly-skilled
employees with appropriate qualifications. In addition, new hires frequently
require extensive training before they achieve desired levels of productivity.
Some members of our existing management team have been employed at Virage for
less than one year. We may fail to attract and retain qualified personnel, which
could have a negative impact on our business.
FAILURE TO PROPERLY MANAGE OUR POTENTIAL GROWTH WOULD BE DETRIMENTAL TO OUR
BUSINESS.
Any growth in our operations will place a significant strain on our
resources. As part of this growth, we will have to implement new operational and
financial systems, procedures and controls to expand, train and manage our
employee base and to maintain close coordination among our technical,
accounting, finance, marketing, sales and editorial staffs. We will also need to
continue to attract, retain and integrate personnel in all aspects of our
operations. To the extent we acquire other businesses, we will also need to
integrate and assimilate new operations, technologies and personnel. Failure to
manage our growth effectively could hurt our business.
DEFECTS IN OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND FOR OUR PRODUCTS WHICH
MAY CAUSE OUR STOCK PRICE TO FALL.
Our software products are complex and may contain errors that may be detected
at any point in the life of the product. We cannot assure you that, despite
testing by us and our current and potential customers, errors will not be found
in new products or releases after shipment, resulting in loss of revenues, delay
in market acceptance and sales, diversion of development resources, injury to
our reputation or increased service and warranty costs. If any of these were to
occur, our business would be adversely affected and our stock price could fall.
Because our products are generally used in systems with other vendors'
products, they must integrate successfully with these existing systems. System
errors, whether caused by our products or those of another vendor, could
adversely affect the market acceptance of our products, and any necessary
revisions could cause us to incur significant expenses.
WE COULD BE SUBJECT TO LIABILITY CLAIMS AND NEGATIVE PUBLICITY IF OUR CUSTOMERS'
SYSTEMS, INFORMATION OR VIDEO CONTENT IS DAMAGED THROUGH THE USE OF OUR PRODUCTS
OR OUR APPLICATION SERVICES.
If our customers' systems, information or video content is damaged by
software errors, product design defects or use of our application services, our
business may be harmed. In addition, these errors or defects may cause severe
customer service and public relations problems. Errors, bugs, viruses or
misimplementation of our products or services may cause liability claims and
negative publicity ultimately resulting in the loss of market acceptance of our
products and services. Our agreements with customers that attempt to limit our
exposure to liability claims may not be enforceable in jurisdictions where we
operate.
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OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME CONSUMING
AND EXPENSIVE FOR US TO DEFEND.
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
conduct our business. These companies could assert, and it may be found, that
our technologies infringe their proprietary rights. We could incur substantial
costs to defend any litigation, and intellectual property litigation could force
us to do one or more of the following:
- cease using key aspects of our technology that incorporate the challenged
intellectual property;
- obtain a license from the holder of the infringed intellectual property
right; and
- redesign some or all of our products.
From time to time, we have received notices claiming that our technology
infringes patents held by third parties. In the event any such a claim is
successful and we are unable to license the infringed technology on commercially
reasonable terms, our business and operating results would be significantly
harmed.
IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR COMPETITORS
MAY GAIN ACCESS TO OUR TECHNOLOGY, AND WE MAY LOSE CUSTOMERS.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. We seek to protect our software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. Our proprietary rights may not prove viable or of value in the
future since the validity, enforceability and type of protection of proprietary
rights in Internet-related industries are uncertain and still evolving.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult, and while we are unable to determine the extent to
which piracy of our software or code exists, software piracy can be expected to
be a persistent problem. We license our proprietary rights to third parties, and
these licensees may not abide by our compliance and quality control guidelines
or they may take actions that would materially adversely affect us. In addition,
the laws of some foreign countries do not protect our proprietary rights to as
great an extent as do the laws of the United States, and effective patent,
copyright, trademark and trade secret protection may not be available in these
foreign jurisdictions. To date, we have not sought patent protection of our
proprietary rights in any foreign jurisdiction. Our efforts to protect our
intellectual property rights through patent, copyright, trademark and trade
secret laws may not be effective to prevent misappropriation of our technology,
or may not prevent the development and design by others of products or
technologies similar to or competitive with those developed by us. Our failure
or inability to protect our proprietary rights could harm our business.
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AS WE EXPAND OUR OPERATIONS INTERNATIONALLY, WE WILL FACE SIGNIFICANT RISKS IN
DOING BUSINESS IN FOREIGN COUNTRIES.
As we expand our operations internationally, we will be subject to a number
of risks associated with international business activities, including:
- costs of customizing our products and services for foreign countries,
including localization, translation and conversion to international and
other foreign technology standards;
- compliance with multiple, conflicting and changing governmental laws and
regulations, including changes in regulatory requirements that may limit
our ability to sell our products and services in particular countries;
- import and export restrictions, tariffs and greater difficulty in
collecting accounts receivable; and
- foreign currency-related risks if a significant portion of our revenues
become denominated in foreign currencies.
FAILURE TO INCREASE OUR BRAND AWARENESS AMONG CONTENT OWNERS COULD LIMIT OUR
ABILITY TO COMPETE EFFECTIVELY.
We believe that establishing and maintaining a strong brand name is important
to the success of our business. Competitive pressures may require us to increase
our expenses to promote our brand name, and the benefits associated with brand
creation may not outweigh the risks and costs associated with brand name
establishment. Our failure to develop a strong brand name or the incurrence of
excessive costs associated with establishing our brand name, may harm our
business.
WE MAY NEED TO MAKE ACQUISITIONS OR FORM STRATEGIC ALLIANCES OR PARTNERSHIPS IN
ORDER TO REMAIN COMPETITIVE IN OUR MARKET, AND POTENTIAL FUTURE ACQUISITIONS,
STRATEGIC ALLIANCES OR PARTNERSHIPS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS AND DILUTE STOCKHOLDER VALUE.
We may acquire or form strategic alliances or partnerships with other
businesses in the future in order to remain competitive or to acquire new
technologies. As a result of these acquisitions, strategic alliances or
partnerships, we may need to integrate products, technologies, widely dispersed
operations and distinct corporate cultures. The products, services or
technologies of the acquired companies may need to be altered or redesigned in
order to be made compatible with our software products and services, or the
software architecture of our customers. These integration efforts may not
succeed or may distract our management from operating our existing business. Our
failure to successfully manage future acquisitions, strategic alliances or
partnerships could seriously harm our operating results. In addition, our
stockholders would be diluted if we finance the acquisitions, strategic
alliances or partnerships by incurring convertible debt or issuing equity
securities.
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WE HAVE ADOPTED CERTAIN ANTI-TAKEOVER MEASURES WHICH MAY MAKE IT MORE DIFFICULT
FOR A THIRD PARTY TO ACQUIRE US.
Our board of directors has the authority to issue up to 2,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the stockholders. The
rights of the holders of common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of shares of preferred stock, while potentially
providing desirable flexibility in connection with possible acquisitions and for
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock. We have no
present intention to issue shares of preferred stock. Further, on November 8,
2000, our board of directors adopted a preferred stock purchase rights plan
intended to guard against certain takeover tactics. The adoption of this plan
was not in response to any proposal to acquire us, and the board is not aware of
any such effort. The existence of this plan could also have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock. In addition, certain provisions of our certificate of
incorporation may have the effect of delaying or preventing a change of control,
which could adversely affect the market price of our common stock.
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RISKS RELATING TO THE INTERNET VIDEO INFRASTRUCTURE MARKETPLACE
COMPETITION AMONG INTERNET VIDEO INFRASTRUCTURE COMPANIES IS INTENSE. IF WE ARE
UNABLE TO COMPETE SUCCESSFULLY, OUR BUSINESS WILL FAIL.
Competition among Internet video infrastructure companies seeking to attract
new customers is intense and we expect this intensity of competition to increase
in the future. Our competitors vary in size and in the scope and breadth of the
products and services they offer and may have significantly greater financial,
technical and marketing resources. Our current direct competitors include
Convera (an entity formed between the merger of Excalibur Technolories and a
division of Intel) and Mediasite. We may also compete indirectly with system
integrators to the extent they may embed or integrate competing technologies
into their product offerings, and in the future we may compete with video
service providers and searchable video portals. In addition, we may compete with
our current and potential customers who may contemplate developing software or
performing application services internally. Increased competition could result
in price reductions, reduced margins or loss of market share, any of which will
cause our business to suffer.
IF BROADBAND TECHNOLOGY IS NOT ADOPTED OR DEPLOYED AS QUICKLY AS WE EXPECT,
DEMAND FOR OUR PRODUCTS AND SERVICES MAY NOT GROW AS QUICKLY AS ANTICIPATED.
Broadband technology such as digital subscriber lines, commonly referred to
as DSL, and cable modems, which allows video content to be transmitted over the
Internet more quickly than current technologies, has only recently been
developed and is just beginning to be deployed. The growth of our business
depends in part on the broad market acceptance of broadband technology. If the
market does not adopt broadband technology, or adopts it more slowly than we
anticipate, demand for our products and services may not grow as quickly as we
anticipate, which will harm our business.
We depend on the efforts of third parties to develop and provide the
technology for broadband transmission. Even if broadband access becomes widely
available, heavy use of the Internet may negatively impact the quality of media
delivered through broadband connections. If these third parties experience
delays or difficulties establishing the technology to support widespread
broadband transmission, or if heavy usage limits the broadband experience, the
market may not accept our products and services.
Because the anticipated growth of our business depends in part on broadband
transmission infrastructure, we are subject to a number of risks, including:
- changes in content delivery methods and protocols;
- the need for continued development by our customers of compelling content
that takes advantage of broadband access and helps drive market acceptance
of our products and services;
- the emergence of new competitors, including traditional broadcast and
cable television companies, which have significant control over access to
content, substantial resources and established relationships with media
providers;
- the development of relationships by our competitors with companies that
have significant access to or control over the broadband transmission
technology or content; and
- the need to establish new relationships with non-PC based providers of
broadband access, such as providers of television set-top boxes and cable
television.
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GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT OUR GROWTH.
We are not currently subject to direct regulation by any government agency,
other than laws and regulations generally applicable to businesses, although
certain U.S. export controls and import controls of other countries may apply to
our products. While there are currently few laws or regulations that
specifically regulate communications or commerce on the Internet, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted in the U.S. and abroad in the near future
with particular applicability to the Internet. It is possible that governments
will enact legislation that may be applicable to us in areas such as content,
network security, access charges and retransmission activities. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain. The
adoption of new laws or the adaptation of existing laws to the Internet may
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our services, increase the cost of doing business or otherwise hurt
our business.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(c) Recent Sales of Unregistered Securities.
During the three months ended December 31, 2000, Virage, Inc. issued the
following unregistered securities:
In December 2000, we issued an immediately exercisable and
non-forfeitable warrant to Major League Baseball Advanced Media, L.P. to
purchase 200,000 shares of our common stock at $5.50 per share. The
issuance and sale of these shares was intended to be exempt from
registration under the Securities Act of 1933 as amended by virtue of
Section 4(2) thereof. Major League Baseball Advanced Media, L.P.
received adequate information about us.
(d) Use of Proceeds.
On July 5, 2000, we completed a firm commitment underwritten initial
public offering of 3,500,000 shares of our common stock, at a price of
$11.00 per share. Concurrently with our initial public offering, we also
sold 1,696,391 shares of common stock in a private placement at a price
of $11.00 per share. On July 17, 2000, our underwriters exercised their
over-allotment option for 525,000 shares of our common stock at a price
of $11.00 per share. The shares of the common stock sold in the offering
and exercised via our underwriters' over-allotment option were
registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (File No. 333-96315). The Securities
and Exchange Commission declared the Registration Statement effective on
June 28, 2000. The public offering was underwritten by a syndicate of
underwriters led by Credit Suisse First Boston, FleetBoston Robertson
Stephens Inc. and Wit SoundView Corporation, as their representatives.
The initial public offering and private placement resulted in net
proceeds of $57,476,000, after deducting $3,099,000 in underwriting
discounts and commissions and $1,800,000 in costs and expenses related
to the offering. None of the costs and expenses related to the offering
or the private placement were paid directly or indirectly to any
director, officer, general partner of Virage or their associates,
persons owning 10 percent or more of any class of equity securities of
Virage or an affiliate of Virage. Proceeds from the offering and private
placement have been used for general corporate purposes, including
working capital and capital expenditures. The remaining net proceeds
have been invested in cash, cash equivalents and short-term investments.
The use of the proceeds from the offering and private placement does not
represent a material change in the use of proceeds described in our
prospectus.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description of Document
-------------- -----------------------
4.5 Warrant to Purchase Common Stock between Virage and MLB Advanced
Media, L.P., dated December 31, 2000
(b) Reports on Form 8-K
1. Virage filed a current report on Form 8-K dated December 5, 2000
reporting Virage's adoption of a stockholders' rights agreement
and a dividend distribution of one preferred stock purchase
right for each outstanding share of common stock of Virage.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIRAGE, INC.
Date: February 6, 2001 By: /s/ Alfred J. Castino
-------------------------------------
Alfred J. Castino
Vice President, Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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Exhibit Index
Exhibit Number Description of Document
-------------- -----------------------
4.5 Warrant to Purchase Common Stock between Virage and MLB Advanced
Media, L.P., dated December 31, 2000