1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number:
AVISTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 88-0463156
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
555 TWIN DOLPHIN DRIVE, SUITE 360, REDWOOD SHORES, CA 94065
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (650) 610-2900
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 and Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At March 31, 2001, 25,151,270 shares of common stock of the Registrant were
outstanding.
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AVISTAR COMMUNICATIONS CORPORATION
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................................................ 3
Condensed Consolidated Balance Sheets....................................................... 3
Condensed Combined and Consolidated Statements of Operations................................ 4
Condensed Combined and Consolidated Statements of Cash Flows................................ 5
Condensed Consolidated Statement of Stockholders' Equity.................................... 6
Notes to Condensed Financial Statements..................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................ 25
SIGNATURES............................................................................................ 26
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3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, MARCH 31,
2000 2001
------------ -----------
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents ................................................. $ 21,660 $ 21,198
Accounts receivable, net of allowances for doubtful
accounts of $312 and $277, respectively ................................ 3,712 3,133
Inventories, including inventory shipped to customer
sites, not yet installed of $854 and $240, respectively ................ 2,156 1,593
Prepaid expenses and other current assets ................................. 434 360
-------- --------
Total current assets ................................................... 27,962 26,284
Property and equipment, net .................................................. 83 200
Other assets ................................................................. 258 475
-------- --------
Total assets ........................................................... $ 28,303 $ 26,959
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable .......................................................... $ 2,006 $ 1,781
Deferred revenue and deposits ............................................. 2,126 1,973
Accrued liabilities and other ............................................. 2,407 2,415
-------- --------
Total current liabilities .............................................. 6,539 6,169
-------- --------
Stockholders' equity:
Convertible preferred stock, $0.001 per share par value; 10,000,000
authorized at December 31, 2000 and March 31, 2001,
no shares issued and outstanding at December 31, 2000 and March 31,
2001 ................................................................... -- --
Common stock, $0.001 par value; 250,000,000 shares
authorized at December 31, 2000 and March 31, 2001, 26,266,990 and
26,309,895 shares issued at December 31, 2000
and March 31, 2001, respectively ....................................... 26 26
Treasury common stock, 1,143,625 and 1,158,625 shares at December 31, 2000
and March 31, 2001, respectively ....................................... (1) (1)
Additional paid-in-capital ................................................... 80,145 80,095
Deferred stock compensation .................................................. (1,755) (1,274)
Accumulated deficit .......................................................... (56,651) (58,056)
-------- --------
Total stockholders' equity ............................................. 21,764 20,790
-------- --------
Total liabilities and stockholders' equity ............................. $ 28,303 $ 26,959
======== ========
The accompanying notes are an integral part of these financial statements.
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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
2000 2001
--------- ---------
(unaudited)
Revenue:
Products ............................................. $ 3,190 $ 4,682
Services, maintenance and support .................... 1,136 1,400
-------- --------
Total revenue ...................................... 4,326 6,082
-------- --------
Cost of revenue:
Products ............................................. 1,599 1,838
Services, maintenance and support .................... 520 796
-------- --------
Total cost of revenue .............................. 2,119 2,634
-------- --------
Gross margin ....................................... 2,207 3,448
-------- --------
Operating expenses:
Research and development ............................. 699 1,569
Sales and marketing .................................. 1,135 1,778
General and administrative ........................... 908 1,528
Amortization of deferred stock
compensation * .................................... 579 284
-------- --------
Total operating expenses ........................... 3,321 5,159
-------- --------
Loss from operations ............................... (1,114) (1,711)
-------- --------
Other income (expenses):
Interest expense ..................................... (332) (2)
Interest income ...................................... 67 275
Other ................................................ -- 33
-------- --------
Total other income (expense), net .................. (265) 306
-------- --------
Net loss ................................................... $ (1,379) $ (1,405)
======== ========
Net loss per share - basic and diluted ..................... $ (9.32) $ (0.06)
======== ========
Weighted average shares used in calculating
basic and diluted net loss per share ................. 148 25,150
*Amortization of deferred stock compensation excluded from
the following expenses:
Cost of revenue ...................................... $ 81 $ 42
Research and development ............................. 73 35
Sales and marketing .................................. 410 200
General and administrative ........................... 15 7
-------- --------
$ 579 $ 284
The accompanying notes are an integral part of these financial statements.
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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND CONSOLIDATED STATEMENT OF
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS)
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
2000 2001
--------- ---------
(UNAUDITED)
Cash Flows from Operating Activities:
Net loss .................................................................. $ (1,379) $ (1,405)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................ 39 17
Stock compensation expense, net ......................................... 579 285
Provision for doubtful accounts ......................................... -- (35)
Changes in current assets and liabilities:
Accounts receivable .................................................. (673) 614
Inventories .......................................................... (948) 563
Prepaid expenses and other current assets ............................ (38) 74
Other assets ......................................................... 9 (217)
Accounts payable ..................................................... 697 (225)
Deferred revenue and deposits ........................................ 979 (153)
Accrued liabilities and other ........................................ 574 8
-------- --------
Net cash used in operating activities ..................................... (161) (474)
-------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment ........................................ -- (134)
-------- --------
Cash Flows from Financing Activities:
Net payments under line of credit ......................................... (559) --
Proceeds from issuance of common stock .................................... 42 169
Repurchases of common stock ............................................... -- (23)
-------- --------
Net cash (used in) provided by financing activities ....................... (517) 146
-------- --------
Net decrease in cash and cash equivalents ................................. (678) (462)
Cash and cash equivalents, beginning of period ............................ 6,232 21,660
-------- --------
Cash and cash equivalents, end of period .................................. $ 5,554 $ 21,198
======== ========
Supplemental Cash Flow Information:
Cash paid for interest .................................................... $ 16 $ --
======== ========
The accompanying notes are an integral part of these financial statements.
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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TREASURY STOCK ADDITIONAL
-------------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000................ 26,266,990 $ 26 1,143,625 $(1) $80,145
-------------------------------------------------------------------
Repurchase of common stock - stock buy
back program ............................. -- -- 15,000 -- (23)
-------------------------------------------------------------------
Issuance of common stock per employee stock
purchase plan............................. 22,618 -- -- -- 137
-------------------------------------------------------------------
Issuance of common stock pursuant to
exercise of options....................... 20,287 -- -- -- 13
-------------------------------------------------------------------
Amortization of deferred stock
compensation.............................. -- -- -- -- --
-------------------------------------------------------------------
Reduction for forfeitures of stock options.. -- -- -- -- (197)
-------------------------------------------------------------------
Compensation on options issued to
consultants............................... -- -- -- -- 20
-------------------------------------------------------------------
Net loss.................................... -- -- -- -- --
-------------------------------------------------------------------
Balance at March 31, 2001 (unaudited)....... 26,309,895 $ 26 1,158,625 $(1) $80,095
===================================================================
DEFERRED TOTAL
STOCK ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY (DEFICIT
---------------------------- ----------------
Balance at December 31, 2000................ $(1,755) $(56,651) $21,764
-----------------------------------------------
Repurchase of common stock - stock buy
back program ............................. -- -- (23)
-----------------------------------------------
Issuance of common stock per employee stock
purchase plan............................. -- -- 137
-----------------------------------------------
Issuance of common stock pursuant to
exercise of options....................... -- -- 13
-----------------------------------------------
Amortization of deferred stock
compensation.............................. 310 -- 310
-----------------------------------------------
Reduction for forfeitures of stock options.. 171 -- (26)
-----------------------------------------------
Compensation on options issued to
consultants............................... -- -- 20
-----------------------------------------------
Net loss.................................... -- (1,405) (1,405)
-----------------------------------------------
Balance at March 31, 2001 (unaudited)....... $(1,274) $(58,056) $ 20,790
===============================================
The accompanying notes are an integral part of these financial statements.
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AVISTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS, BASIS OF PRESENTATION AND RISKS AND UNCERTAINTIES
BUSINESS
Avistar Communications Corporation ("Avistar" or the "Company") provides
networked video communications software and hardware products and services.
Avistar's products include applications for interactive video calling, content
creation and publishing, broadcast video and video-on-demand as well as data
sharing, directory services and network management. Avistar designs, markets,
sells, manufactures or assembles and installs and supports its products.
Avistar's real-time and non-real-time products are based upon its architecture
and Video Operating System(TM) platform, which facilitate distribution over
local and wide area networks using telephony or internet services as
appropriate. In addition, Avistar develops, prosecutes, maintains and supports
intellectual property used in the Company's products. Avistar's services include
consulting, implementation, training, maintenance and support.
BASIS OF PRESENTATION
The unaudited balance sheet as of March 31, 2001 presents the consolidated
financial position of Avistar and its two wholly-owned subsidiaries, Avistar
Systems Corporation (ASC) and Collaboration Properties, Inc. (CPI). The
consolidated results are referred to, collectively, as those of Avistar or the
Company in these notes.
The functional currency of ASC's UK subsidiary is the U.S. dollar.
Accordingly, all gains and losses resulting from transactions denominated in
currencies other than the U.S. dollar are included in the statements of
operations. All amounts included herein are unaudited unless otherwise
specified.
RISKS AND UNCERTAINTIES
The markets for the Company's products and services have only recently begun
to develop. Some of the Company's products utilize changing and emerging
technologies. As is typical in industries of this nature, demand and market
acceptance are subject to a high level of uncertainty, particularly when there
are adverse conditions in the economy. Acceptance of the Company's products,
over time, is critical to the Company's success. The Company's prospects must be
evaluated in light of difficulties encountered by it and its competitors in
further developing this evolving marketplace. The Company has generated losses
since inception and had an accumulated deficit of $58 million as of March 31,
2001. The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, including, but not limited to, the current
slowdown in general economic conditions, the use of differing distribution
channels, and the timing of the new product announcements by the Company or its
competitors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
In the opinion of management, the unaudited financial statements furnished
in this report reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
the interim periods covered and of the Company's financial position as of the
interim balance sheet date. The results of operations for the interim periods
are not necessarily indicative of the results for the entire year. These
financial statements should be read in conjunction with the Company's audited
financial statements and the accompanying notes for the year ended December 31,
2000 included in the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission.
CASH AND CASH EQUIVALENTS
The Company considers all investment instruments purchased with an original
maturity of twelve months or less to be cash equivalents. The Company's cash
equivalents at December 31, 2000 and March 31, 2001 consist of money market
funds and short term securities.
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SIGNIFICANT CONCENTRATIONS
A relatively small number of customers have accounted for a significant
percentage of the Company's net sales. Sales to these customers as a percentage
of sales are as follows for the three months ended March 31, 2000 and 2001:
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 2001
--------- --------
(UNAUDITED)
Customer A...................... 17% *
Customer B...................... 18% 29%
Customer C...................... 35% 35%
Customer D...................... 10% *
Customer E...................... * 11%
- ----------
* Less than 10%
Any change in the relationship with these customers could have a potentially
adverse effect on the Company's financial position and/or results of operations.
Management currently anticipates no such change.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables from U.S. and foreign
entities. As of December 31, 2000, approximately 80 % of accounts receivable was
concentrated with four customers. As of March 31, 2001, approximately 72 % of
accounts receivable was concentrated with three customers.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and comprise the following (in thousands):
DECEMBER 31, MARCH 31,
2000 2001
------------ -----------
(UNAUDITED)
Raw materials ........................................ $ 216 $ 182
Work-in-progress ..................................... 88 266
Finished goods ....................................... 998 905
Inventory shipped to customer sites, not yet
installed .......................................... 854 240
------ ------
$2,156 $1,593
====== ======
Inventory shipped to customer sites, not yet installed, represents product
shipped to customer sites pending completion of the installation process by the
Company. As of December 31, 2000 and March 31, 2001, the Company had billed
approximately $2.4 million and $0.5 million to their customers related to these
shipments, but had not recorded the receivable or the revenue as the
installations have not been completed.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards ("SFAS") No. 86 ("SFAS 86"),
"Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," requires the capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of a working model and the point at which the product is ready for
general release have been insignificant. Through March 31, 2001, all research
and development costs have been expensed.
PATENT COSTS
Due to uncertainties about the estimated future economic benefits and lives
of the Company's patents and patent applications, all related outside patent
costs have been expensed as incurred and the Company plans to continue with this
policy in the future. Outside patent costs were approximately $0.1 million for
the three months ended March 31, 2000 and 2001, and are reflected in general and
administrative expenses in the accompanying statements of operations.
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REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's revenue recognition policy is in compliance with Statement of
Position ("SOP") SOP 97-2, "Software Revenue Recognition" (SOP 97-2), SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" (SOP 98-9) and Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements". The Company recognizes revenues
from product sales when all of the following conditions are met: the product has
been shipped, an arrangement exists with the customer at a fixed price and the
Company has the right to invoice the customer, collection of the receivable is
probable and the Company has fulfilled all of its material contractual
obligations to the customer.
The price charged for maintenance is stipulated in the contract and is based
on a percentage of product revenue. Customers have the option to initially
acquire and subsequently renew the maintenance in subsequent periods at the rate
established in the original agreement. Training services are offered
independently from the purchase of product.
When the Company provides installation services, the product and
installation revenues are recognized upon completion of installation and
customer acceptance. When the customer or a third party provides installation
services, the product revenue is recognized upon shipment. Payment for product
sales are due upon shipment. Installation and training services are due upon
provision of services. If payments for systems are received in advance of the
completion of installation, such amounts are recorded as deferred revenue in the
accompanying balance sheets until installation has occurred and the customer has
accepted the product. Revenue from the provision of services, including
training, is recognized as the work is performed. Revenue from maintenance is
offered based on a percentage of product sales and is recognized pro-rata over
the maintenance term, which is typically one year in length. Payments for
services and maintenance made in advance of the provision of services and
maintenance are recorded as deferred revenue.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." As permitted under this standard, the Company applies
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to
Employees" and related interpretations in accounting for its stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities", which
requires companies to record derivative financial instruments on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives are accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. The Company adopted SFAS 133 effective January 1, 2001 in
accordance with SFAS 137. To date, the Company has not entered into any
derivative financial instrument contracts. Thus, the adoption of this Statement
did not have a material impact on the financial position or results of
operations of the Company.
COMPREHENSIVE NET LOSS
The FASB issued SFAS No. 130 ("SFAS 130"), "Reporting Comprehensive Income."
SFAS 130 was adopted by the Company beginning on January 1, 1998. This standard
defines comprehensive income as the changes in equity of an enterprise, except
those resulting from stockholder transactions. Accordingly, comprehensive loss
includes certain changes in equity that are excluded from the net loss. The
comprehensive loss for each of the periods presented equaled the net loss.
3. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases that expire through
2005. The future minimum lease commitments under all leases are as follows (in
thousands):
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
2001....................................... $ 1,133
2002....................................... 1,079
2003....................................... 833
2004....................................... 309
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YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
2005....................................... 276
--------
Total minimum lease payments............... $ 3,630
========
Rent expense under operating leases for the three months ended March 31,
2000 and 2001 was approximately $0.3 million and $0.3 million respectively.
4. OTHER RELATED PARTY TRANSACTIONS
Certain directors with controlling interests in the Company are also the
majority owners of two entities that conducted business with the Company, Vicor,
Inc. ("Vicor") and Western Data Systems of Nevada, Inc. ("WDS"). Descriptions of
certain transactions between the Company and these entities follow.
SUPPORT SERVICES
The Company maintained a support center to handle first level support calls
for WDS in addition to those for the Company. Pursuant to an agreement between
the Company and WDS dated July 1, 1998 the Company charged WDS for its share of
support center costs. For the three months ended March 31, 2000, the Company
received fees of $0.1 million under the agreement. The subsequent reimbursement
from WDS was recorded as a reduction in the costs incurred for the support
center. This agreement was terminated in December 2000.
LEASE
The Company began subleasing office space to Vicor in September 1999. The
Company received approximately $34,000 during each of the three months ended
March 31, 2000 and 2001 from Vicor pursuant to the sublease agreement. The
Company is no longer subleasing office space to Vicor as of March 31, 2001.
REVENUE FROM A RELATED PARTY
UBS Warburg LLC, which is an affiliate of UBS (an approximate 5 %
stockholder during 2000) is also a customer of the Company. Revenue from UBS
Warburg LLC and its affiliates represented approximately 18 % of total revenue
for the three months ended March 31, 2000. Management believes the transactions
with UBS Warburg LLC and its affiliates are at terms comparable to those
provided to unrelated third parties. Since December 31, 2000, UBS Warburg has
held less than 5% of outstanding shares of common stock of the Company.
5. STOCKHOLDERS' EQUITY
DEFERRED STOCK COMPENSATION
In connection with the grant of stock options to purchase shares of common
stock to employees during 1999 the Company recorded deferred compensation of
approximately $2.7 million, representing the difference between the estimated
fair value of the common stock and the aggregate option exercise price of such
options at the date of the grant. In 2000, the Company recorded an additional
$1.7 million in deferred stock compensation, net of forfeitures. This amount is
presented as a reduction of stockholders' equity and is being amortized ratably
over the vesting period of the applicable options (generally four years).
Amortization expense related to deferred stock compensation was approximately
$0.6 million for the three months ended March 31, 2000 and approximately $0.3
million net of forfeitures for the three months ended March 31, 2001.
Compensation expense is decreased in the period of forfeiture for any accrued
but unvested amount arising from the early termination of an option holder's
services.
6. STOCK OPTION PLANS
1997 STOCK OPTION PLAN
In December 1997, the Board established the 1997 Stock Option Plan (the
"1997 Plan") and authorized the issuance of 1,828,602 shares of common stock
thereunder. In December 1999 and May 2000, respectively, the Board authorized an
additional 1,065,625 shares and 100,000 shares to be issued under the 1997 Plan.
In connection with the initial public offering, the Board terminated the 1997
Plan as to future grants effective August 17, 2000. Under the 1997 Plan,
incentive stock options to purchase shares of common stock were granted only to
employees at not less than 100 percent of the fair market value at the grant
date as determined by the Board. Additionally, nonqualified stock options to
purchase shares of common stock were granted to employees and consultants at not
less than 85 percent of the fair market value at the grant date. Options granted
generally had a life of ten years.
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On December 31, 1997, the Company issued options to purchase 1,091,800
shares of common stock, including 631,800 that were fully vested at the grant
date. All other options vested over a four year period, with 25 percent vesting
after one year and the remaining vesting 6.25 percent per quarter. The Company
issued options to purchase approximately 1.2 million common shares in 2000 under
this plan.
2000 STOCK OPTION PLAN
In April 2000, the Board established the 2000 Stock Option Plan (the "2000
Plan"). As of March 31, 2001, 4,004,935 shares of common stock were reserved for
issuance under the 2000 Plan. The term of the options granted under this plan
may not exceed 10 years and in the case of the grantees who own more than 10% of
the Company's outstanding stock at the time of grant, the term of the option may
not exceed 5 years. Options granted under the 2000 Plan vest and become
exercisable as set forth in each option agreement. In the event of a merger or
sale of substantially all assets, these options must be assumed by the successor
and if not assumed, will fully vest. The 2000 Plan will terminate in 2010. The
Company granted options to purchase approximately 0.3 million common shares in
the three month period ending March 31, 2001 under this plan.
2000 DIRECTOR OPTION PLAN
In April 2000, the Company adopted the 2000 Director Option Plan. As of
March 31, 2001, 102,000 shares of common stock were reserved for issuance under
this plan. Options to purchase 12,000 shares were granted in the three month
period ending March 31, 2001 under this plan.
A summary of the 1997 Plan, the 2000 Plan, and the 2000 Directors Option
Plan activity and related information for the three months ended March 31, 2001
follows:
OPTIONS OUTSTANDING
--------------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE SHARES EXERCISE PRICE
--------- --------- --------------
Balance, December 31, 2000............... 4,426,025 3,277,357 $ 8.20
Authorized............................. -- -- --
Granted................................ (270,250) 270,250 4.23
Exercised.............................. -- (20,287) 0.60
Canceled/repurchased................... 277,813 (277,813) 8.43
--------- --------- -------
Balance, March 31, 2001 (unaudited)...... 4,433,588 3,249,507 $ 7.90
========= ========= =======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER NUMBER
OUTSTANDING AT WEIGHTED- WEIGHTED- EXERCISABLE AT WEIGHTED-
RANGE OF MARCH 31, AVERAGE AVERAGE MARCH 31, AVERAGE
EXERCISE PRICES 2001 REMAINING LIFE EXERCISE PRICE 2001 EXERCISE PRICE
--------------- -------------- -------------- -------------- -------------- --------------
$0.25 205,000 6.75 $ 0.25 165,625 $ 0.25
$0.40 - 0.45 12,582 7.49 0.44 6,819 0.44
$0.95 448,225 8.22 0.95 192,222 0.95
$1.66 - 2.45 42,700 9.39 1.78 6,012 1.98
$2.95 - 3.45 119,342 8.72 3.45 37,292 3.45
$3.95 - 4.95 577,658 9.25 4.15 103,713 4.16
$5.13 - 8.50 916,850 9.51 8.22 -- --
$9.35 - 14.00 157,000 4.69 9.56 -- --
$17.25 770,150 9.01 17.25 178,123 17.25
--------- ---- ------ ------- ------
3,249,507 8.72 $ 7.90 689,806 $ 5.61
========= ==== ====== ======= ======
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The Company had 372,346 options outstanding that were exercisable at a
weighted average exercise price of $0.87 per share and as of December 31, 2000.
2000 EMPLOYEE STOCK PURCHASE PLAN
In April 2000, the Company adopted the 2000 Employee Stock Purchase Plan. As
of March 31, 2001 the Company has authorized 2,253,701 shares for issuance under
this plan. A total of 22,618 shares were sold under this plan in the three month
period ended March 31, 2001.
STOCK REPURCHASE PLAN
On March 22, 2001 the Company announced that its Board authorized the
repurchase of up to $2.0 million of its common stock in the open market. During
the quarter ended March 31, 2001, the Company repurchased 15,000 shares at an
aggregate cost of $23,437.
7. NET LOSS PER SHARE
Basic and diluted net loss per share of common stock are presented in
conformity with SFAS No. 128 ("SFAS 128"), "Earnings Per Share," for all periods
presented. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued or granted for nominal consideration prior to
an initial public offering must be included in the calculation of basic and
diluted net loss per share as if such stock had been outstanding for the period
ended March 31, 2000. To date, the Company has had no issuances or grants for
nominal consideration.
In accordance with SFAS 128, basic net loss per share has been computed
using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Diluted net loss per share is
computed on the basis of the weighted average number of shares and common
equivalent shares outstanding during the period. Common equivalent shares result
from the assumed exercise of outstanding stock options that have a dilutive
effect when applying the treasury stock method. The Company has excluded all
convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per share for the three
months ended March 31, 2000 and 2001 because all such securities are
antidilutive. Accordingly, diluted net loss per share approximates basic net
loss per share for all periods presented.
8. SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131 ("SFAS 131"), "Disclosures About
Segments of an Enterprise and Related Information." SFAS 131 was adopted by the
Company in January 1998. SFAS 131 establishes standards for disclosures
regarding operating segments, products and services, geographic areas and major
customers. The Company is organized and operates in two operating segments: (1)
the design, development, manufacturing, sale and marketing of networked video
communications products (ASC) and (2) the development, prosecution, maintenance
and support of the intellectual property used in the Company's products (CPI).
The parent company (ACC) engages in the corporate functions and provides
financing and services to the subsidiaries. Service revenue relates mainly to
the maintenance, training and installation of products and is included in ASC
for purposes of reporting and decision making. The Company's chief decision
maker monitors the Company's operations based upon the information reflected in
the following table:
ASC CPI ACC TOTAL
-------- ------- ------- --------
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2001
Revenue............................ $ 6,082 $ -- $ -- $ 6,082
Gross margin....................... 3,448 -- -- 3,448
Depreciation expense............... (14) (3) -- (17)
Total operating expenses........... (3,738) (304) (1,117) (5,159)
Interest income.................... -- -- 275 275
Interest expense................... (2) -- -- (2)
Net loss........................... (582) (294) (529) (1,405)
Assets............................. 8,695 36 18,228 26,959
THREE MONTHS ENDED MARCH 31, 2000
Revenue............................ $ 4,326 $ -- $ -- $ 4,326
Gross margin....................... 2,207 -- -- 2,207
Depreciation expense............... (35) (4) -- (39)
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ASC CPI ACC TOTAL
-------- ------- ------- --------
(IN THOUSANDS)
Total operating expenses........... (2,299) (443) (579) (3,321)
Interest income.................... 54 13 -- 67
Interest expense................... (269) (63) -- (332)
Net loss........................... (440) (360) (579) (1,379)
Assets............................. 9,800 1,061 1,000 11,861
International revenue, which consists of domestic sales to customers with
operations principally in Western Europe, comprised 42%, and 45% of total
revenue for the three months ended March 31, 2000, and 2001, respectively. For
the three months ended March 31, 2000, and 2001, respectively, international
revenues to customers in the United Kingdom accounted for 20%, and 32% of total
revenues. The Company had no significant long-lived assets in any country other
than in the United States for any period presented.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements.
These statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward
looking statements. These risks and other factors include those listed under
"Factors Affecting Future Operating Results" and elsewhere in this report on
Form 10-Q. In some cases, you can identify forward-looking statements by
terminology such as "may", "will", "should", "expects", "plans", "anticipates",
"believes", "estimates", "predicts", "potential", "continue" or the negative of
these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined under "Risk Factors". These factors may cause our actual results
to differ materially from any forward looking statement.
Although we believe that the expectations reflected in the forward looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these forward
looking statements. We are under no duty to update any of the forward looking
statements after the date of this report on Form 10-Q to conform our prior
statements to actual results.
OVERVIEW
We operate through two segments:
o Avistar Systems Corporation, our wholly owned subsidiary, engages in the
design, development, manufacturing, sale and marketing of networked
video communications products; and
o Collaboration Properties, Inc., our wholly owned subsidiary, engages in
the development, prosecution, maintenance, support and licensing of the
intellectual property used in our system.
Revenue
We derive product revenue principally from the sale and licensing of our
video-enabled networked communications system consisting of a suite of
Avistar-designed software and hardware products, including third party
components. In addition, we derive revenue from fees for installation,
maintenance, support and training services. As a percentage of total revenue,
product revenue was 74% in the three months ended March 31, 2000 and 77% in the
three months ended March 31, 2001. We expect the hardware component of product
revenue as a percentage of total product revenue to decline over time as
technology evolves and we are no longer required to provide as many hardware
products or their component parts.
Revenue from customers outside the United States accounted for 42% of our
revenue in the three months ended March 31, 2000 and 45% of our revenue in the
three months ended March 31, 2001. To date, a significant portion of our revenue
has resulted from sales to a limited number of customers. In the three months
ended March 31, 2000, we recorded revenue of approximately $3.4 million from our
four largest customers and their affiliates, which represented 80% of total
revenue. In the three months ended March 31, 2001, we recorded revenue of
approximately $4.6 million from our three largest customers and their
affiliates, which represented 75% of total revenue. We anticipate that our
revenue and, therefore, our operating results for any given period, will
continue to depend to a significant extent on a limited number of customers. As
a result, loss of any one of these customers would have a significant adverse
impact on our operation.
Cost of Revenue
Our cost of revenue consists primarily of the cost of software and hardware,
including compensation and third party components, the cost of compensation for
installation, maintenance, support and training personnel and other costs
related to facilities and office equipment for professional services, technical
support and training personnel. We recognize product costs and costs of
installation, maintenance, support, and training services as revenue is
recorded. The gross margins on service revenue have been comparable to our
product revenue margins. This is due in part to the fact that a significant
percentage of service revenue is derived from our higher margin maintenance
business. Maintenance has higher margins than other service revenue due to the
recurring nature of maintenance business.
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Operating Expenses
We generally recognize our operating expenses as we incur them in three
operational categories: research and development, sales and marketing and
general and administrative. Our operating expenses also include amortization of
our deferred stock compensation charges related to stock options. These charges
are amortized over the vesting period of the options, generally four years. Our
research and development expenses consist primarily of compensation expenses for
our personnel, patent and licensing costs and, to a minor extent, independent
contractors. We expense all patent and licensing costs. Our sales and marketing
expenses consist primarily of compensation, commission and travel expenses along
with other marketing expenses. Our general and administrative expenses consist
primarily of compensation for our administrative, financial, and contractual
personnel and a number of non-allocable costs, including professional fees,
legal fees, accounting fees and provisions for allowance for doubtful accounts.
We allocate the total cost of overhead and facilities to each of the
functional areas that use overhead and facilities based upon the number of
employees assigned to each of these areas. These allocated charges include
facilities rent and utilities and depreciation expense for property and
equipment.
The non-cash deferred stock compensation charge related to stock options
represents the difference between the exercise price of options granted to
acquire our shares of common stock during the period and the deemed fair value
for financial reporting purposes of our shares of common stock on the
measurement date, which is the same as the date of grant of those options. Based
on the outstanding options at December 31, 2000, we anticipate recording charges
of $1.1 million in 2001, $0.6 million in 2002 and $0.1 million in 2003 to record
the remainder of the costs associated with these grants.
Interest Income and Expenses
We generate interest income by investing our cash balances. At March 31,
2001, we had no short-term or long-term debt.
Income Taxes
We have made no provision for and have received no benefit from U.S. Federal
income taxes for any period due to our operating losses. As of December 31,
2000, we had $3.9 million of net operating loss carry-forwards for federal
income tax purposes, which expire beginning on various dates through the year
2020. Our use of these net operating losses may be limited in future periods. We
have recorded no tax benefits for these losses.
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RESULTS OF OPERATIONS
The following table sets forth data expressed as a percentage of total
revenue for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 2001
------- ------
Revenue:
Product............................................................ 73.7% 77.0%
Services, maintenance and support.................................. 26.3 23.0
----- -----
Total revenue.............................................. 100.0 100.0
----- -----
Cost of revenue:
Product............................................................ 37.0 30.2
Services, maintenance and support.................................. 12.0 13.1
----- -----
Total cost of revenue...................................... 49.0 43.3
----- -----
Gross margin......................................................... 51.0 56.7
Operating expenses:
Research and development........................................... 16.2 25.8
Sales and marketing................................................ 26.2 29.2
General and administrative......................................... 21.0 25.1
Amortization of deferred stock compensation........................ 13.4 4.7
----- -----
Total operating expenses................................... 76.8 84.8
----- -----
Loss from operations................................................. (25.8) (28.1)
----- -----
Other (expense) income:
Interest expense................................................... (7.7) --
Interest income.................................................... 1.6 4.5
Other.............................................................. -- 0.5
----- -----
Total other (expense) income............................... (6.1) 5.0
----- -----
Net loss............................................................. (31.9)% (23.1)%
===== =====
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
Revenue
Total revenue increased by 41% from $4.3 million in the three months ended
March 31, 2000 to $6.1 million in the three months ended March 31, 2001. The
increases were due primarily to increased product and services sales to an
increased customer base. Product sales increased by 47% from $3.2 to $4.7
million reflecting our growing business. Similarly, our services revenues
increased by 23% from $1.1 million to $1.4 million. For the three months ended
March 31, 2001, revenue from three customers accounted for 75% of total
revenues. The level of sales to any customer may vary from quarter to quarter.
We expect that there will continue to be significant customer concentration in
future quarters. The loss of any one of those customers could have a material
adverse impact on our financial condition or operating results.
Cost of Revenue
Cost of revenue increased by 24% from $2.1 million in the three months ended
March 31, 2000 to $2.6 million in the three months ended March 31, 2001. Cost of
revenues increased due to higher product revenue. In addition, the Company
increased personnel in its manufacturing and services organizations to support
higher sales volumes.
Gross Margin
Gross margin increased from 51% in the three months ended March 31, 2000 to
57% in the three months ended March 31, 2001. This increase was primarily due to
lower product component costs negotiated from vendors and economies of scale
achieved in the service organization that have supported higher service
revenues.
Operating Expenses
Research and development. Research and development expenses increased by
124% from $0.7 million in the three months ended March 31, 2000 to $1.6 million
in the three months ended March 31, 2001. The increase was due to increased
costs due to significant
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increases in personnel and personnel related expenses. Research and development
personnel increased by 44%, from 18 to 26, between March 31, 2000 and March 31,
2001. The increase in research and development expenses was also due to
increased prototype and development expenses, reflecting increased costs for new
product development and enhancements to existing products.
Sales and marketing. Sales and marketing expenses increased by 57% from $1.1
million in the three months ended March 31, 2000 to $1.8 million in the three
months ended March 31, 2001. These increases were due to increased personnel and
personnel related costs due to the hiring of additional sales and marketing
personnel, higher sales commission expenses and higher marketing program costs.
Sales and marketing personnel increased by 26%, from 14 to 24, between March 31,
2000 and March 31, 2001.
General and administrative. General and administrative expenses increased by
68% from $0.9 million in the three months ended March 31, 2000 to $1.5 million
in the three months ended March 31, 2001. These increases were a result of
hiring additional personnel to support an increased scale of operations and an
increase in outside professional services expenses related to the costs of being
a public company.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation decreased by 51% from $0.6 million in the three months ended March
31, 2000 to $0.3 million in the three months ended March 31, 2001. The decrease
was due to the timing on vesting of options as well as forfeitures of stock
options by terminated employees.
Other Expenses, Net
Other expenses, net decreased by 215% from other expense of $(0.3) million
in the three months ended March 31, 2000 to other income of $0.3 million in the
three months ended March 31, 2001 due to lower interest expenses due to the
retirement of debt and higher interest income as a result of an increased
balance of cash, cash equivalents, and short term investments resulting from our
initial public offering in August 2000.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $21.7 million as of December 31, 2000
and $21.2 million as of March 31, 2001. Our operating activities resulted in net
cash outflows of $0.2 million in the three months ended March 31, 2000 and $0.5
million in the three months ended March 31, 2001. For the three months ended
March 31, 2001 the total net cash flow of $0.5 million resulted from net cash
provided by financing activities of $0.1 million, net cash used in investing of
$0.1 million, and net cash used in operations of $0.5 million. The net cash used
in operations included a net loss of $1.4 million, a decrease in accounts
receivable of $0.6 million, a decrease in inventories of $0.6 million, a
decrease in prepaid expenses and other current assets of $0.1 million, partially
offset by the amortization of stock compensation expense of $0.3 million, a
decrease in accounts payable of $0.2 million and a decrease in deferred revenue
of $0.2 million. The decrease in accounts receivable was due to improved
collections performance during the quarter. The decrease in inventories in the
quarter was the result of a reduced rate of purchases from our vendors in
response to less visibility of customer orders.
For the three months ended March 31, 2000, the net cash outflow from
operating activities of $0.2 million resulted from a net loss of $1.4 million,
an increase in accounts receivable of $0.7 million and an increase in
inventories of $0.9 million, partially offset by amortization of deferred
compensation of $0.6 million. Cash flows used in financing activities of $0.5
million consisted mainly of payments under a line of credit from a financial
institution, which was retired using the proceeds from a portion of a $4.0
million, one-year line of credit with another financial institution in June
2000. The second line of credit was repaid in December 2000 and was accordingly
terminated.
We had expenditures for property and equipment of $0.1 million which were
capitalized in the three months ended March 31, 2001.
We believe that existing cash and cash equivalents will be sufficient to
meet our working capital and capital expenditure requirements for at least the
next twelve months. If our cash and cash equivalents are not sufficient to meet
our working capital and capital expenditure requirements for the next twelve
months, we may be forced to engage in equity financing, which could dilute the
per share value of our common stock, or debt financing on terms that could
restrict our ability to make capital expenditures or incur additional
indebtedness, which could impede our ability to achieve our business plan.
Additionally, we may need to raise additional funds to effect a more rapid
expansion, including significant increases in personnel and office facilities,
to develop new systems, to enhance our existing system or to respond to
competitive pressures. We cannot assure
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you that alternative or additional financing will be available to us on
favorable terms or at all or that any such financing will not dilute your
ownership interest in our company.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, which requires companies to
record derivative financial instruments on the balance sheet as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. We adopted SFAS 133
effective January 1, 2001 in accordance with SFAS 137. To date, we have not
entered into any derivative financial instrument contracts. Thus, the adoption
of this statement did not have a material impact on our financial condition or
results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
YOU MAY HAVE DIFFICULTY EVALUATING OUR BUSINESS AND OPERATING RESULTS BECAUSE WE
ARE STILL IN THE EARLY STAGES OF DEVELOPMENT.
Although we commenced operations in November 1993, the first two and a half
years of our operations were primarily dedicated to research and development. We
did not begin delivering our initial two-way video calling and data sharing
applications until mid-1996, and we did not release our full product suite,
including video-publishing, one-way broadcast viewing and video-on-demand, until
the third quarter of 1998. Because we have only recently begun to offer our full
system and services, it may be difficult for you to evaluate our historical
performance and project our future operating results.
In addition, as an early stage company in an industry with rapidly changing
technology, we face numerous risks and uncertainties associated with our need to
grow and develop as discussed in more detail below. If we are unsuccessful in
addressing these risks, sales of our system and services, as well as our ability
to maintain or increase our customer base, will be substantially diminished.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND MAY NOT BE PROFITABLE IN THE
FUTURE.
We incurred a net loss of $1.4 million for the three months ended March 31,
2001, $4.7 million for 2000 and $6.4 million in 1999. Our accumulated deficit as
of March 31, 2001 was $58.1 million. Our revenue may not continue to increase or
even remain at its current level; in addition, we expect our operating expenses
to increase significantly as we develop and expand our business. As a result, to
become profitable, we will need to increase our revenue by increasing sales to
existing customers and by attracting additional customers. If our expenses
increase more rapidly than our revenue, we may never become profitable.
Furthermore, we will recognize significant additional charges relating to
non-cash compensation in connection with options that we granted in 1999 and
2000. These additional charges will further decrease our ability to become
profitable.
We cannot predict whether or when we will become profitable. If we do become
profitable, we may not be able to sustain or increase profitability on a
quarterly or annual basis. In addition, if we fail to reach profitability or to
sustain or grow our profits within the time frame expected by investors, the
market price of our common stock may fall.
OUR LENGTHY SALES CYCLE TO ACQUIRE NEW CUSTOMERS OR LARGE FOLLOW-ON ORDERS MAY
CAUSE OUR QUARTERLY OPERATING RESULTS TO VARY SIGNIFICANTLY AND MAKE IT MORE
DIFFICULT TO FORECAST OUR REVENUE.
We have generally experienced a product sales cycle of four to nine months
for new customers or large follow-on orders due to the time needed to educate
potential customers about the uses and benefits of our system and the
significant investment decisions that our prospective customers must make when
they decide to buy our system. Many of our prospective customers have neither
budgeted expenses for networked video communications systems nor personnel
specifically dedicated to the procurement, installation or support of these
systems. As a result, our customers spend a substantial amount of time before
purchasing our system performing internal reviews and obtaining capital
expenditure approvals.
Our lengthy sales cycle is one of the factors that has caused, and may in
the future continue to cause, our operating results to vary significantly from
quarter to quarter. This makes it difficult for us to forecast revenue and could
cause volatility in the market price of our common stock. A lost or delayed
order could result in lower revenue than expected in a particular quarter.
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SINCE A MAJORITY OF OUR REVENUE HAS COME FROM FOLLOW-ON ORDERS, OUR FINANCIAL
PERFORMANCE COULD BE HARMED IF WE FAIL TO OBTAIN FOLLOW-ON ORDERS IN THE FUTURE.
Our customers typically place limited initial orders for our networked video
communications system, which allows them to evaluate its usefulness and value.
Our future financial performance will depend on our ability to secure follow-on
orders from existing customers. Our strategy is to pursue additional and larger
follow-on orders after these initial orders. Revenue generated from follow-on
orders accounted for approximately 89% and 94% of our revenue in the three
months ended March 31, 2000 and 2001, respectively. Our future financial
performance depends on successful initial installations of our system which in
turn lead to follow-on orders. If our system does not meet the needs and
expectations of customers who order our system, we may not be able to generate
follow-on orders.
BECAUSE WE DEPEND ON A FEW CUSTOMERS FOR A MAJORITY OF OUR REVENUE, THE LOSS OF
ONE OR MORE OF THEM COULD CAUSE A SIGNIFICANT DECREASE IN OUR REVENUE.
We have historically derived the majority of our revenue from a limited
number of customers, particularly Deutsche Bank, Goldman, Sachs & Co. and UBS
Warburg LLC and their affiliates. These customers collectively accounted for 75%
of our revenue in the three months ended March 31, 2001. We expect to continue
to depend upon a limited number of customers for a substantial portion of our
revenue.
The loss of a major customer or the reduction, delay or cancellation of
orders from one or more of our significant customers could cause our revenue
and, therefore, any profits we may make to decline or our losses to increase.
Because we currently depend on a limited number of customers with lengthy
budgeting cycles and unpredictable buying patterns, our revenue from quarter to
quarter may be volatile. Adverse changes in our revenue or operating results as
a result of these budgeting cycles or any other reduction in capital
expenditures by our large customers could substantially reduce the trading price
of our common stock.
WE MAY NOT BE ABLE TO MODIFY OUR PRODUCTS IN A TIMELY AND COST EFFECTIVE MANNER
TO RESPOND TO TECHNOLOGICAL CHANGE OR TO SHIFTS AWAY FROM THE MICROSOFT
OPERATING SYSTEM.
Future hardware and software platforms embodying new technologies and the
emergence of new industry standards could render our system obsolete or
noncompetitive. The market for our system is characterized by:
o rapid technological change;
o significant development costs;
o frequent new stand-alone introductions;
o changes in the requirements of our customers and their communities of
users; and
o evolving industry standards.
Our system is designed to work with a variety of hardware and software
configurations and data networking infrastructures used by our customers,
including primarily Microsoft Windows NT servers. However, our software may not
operate correctly on other hardware and software platforms and programming
languages, database environments and systems that our customers use. Also, we
must constantly modify and improve our system to keep pace with changes made to
our customers' platforms, data networking infrastructures and their evolving
ability to transport video and other applications. This may result in
uncertainty relating to the timing and nature of our new release announcements,
introductions or modifications, which may cause confusion in the market and
thereby barm our business. If we fail to promptly modify or improve our system
in response to evolving industry standards or customers' demands, our system
could rapidly become obsolete, which would harm our financial condition and
reputation.
IF OUR NETWORKED VIDEO COMMUNICATIONS SYSTEM CANNOT BE DEPLOYED EFFECTIVELY ON A
LARGE SCALE TO MANY USERS ACROSS AN ENTERPRISE, WE MAY LOSE ORDERS AND SUFFER
DECREASED REVENUE.
Our strategy requires that our video-enabled communications network be
highly scalable, or able to accommodate substantial increases in the number of
individuals simultaneously using our system. We are only beginning to deploy
large-scale implementations within organizations and none of these installations
has been operating at any customer site for an extended period of time. If our
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system does not perform adequately when deployed on an increasingly larger
scale, we may lose orders and our revenue may decrease.
DIFFICULTIES IN INSTALLING OUR PRODUCTS COULD HARM OUR REVENUE AND MARGINS.
We recognize revenue upon the installation of our system in those cases
where we are responsible for installation, which often entails working with
sophisticated software and computing and communications systems. If we
experience difficulties with installation or do not meet deadlines in a timely
manner due to delays caused by our customers or ourselves, we could be required
to devote more customer support, technical and other resources to a particular
installation. If new or existing customers have difficulty installing our
products or require significant amounts of our professional services support,
our revenue recognition could be delayed, our costs could increase and our
margins could suffer.
COMPETITION COULD REDUCE OUR MARKET SHARE AND DECREASE OUR REVENUE.
Currently, our competition comes from many other kinds of companies,
including communication equipment providers, integrated solution providers,
broadcast video providers and stand-alone point solution providers. The market
in which we operate is highly competitive and fragmented and we expect
competition to increase significantly in the future. In addition, because our
industry is new and characterized by rapid technological change, evolving user
needs, developing industry standards and protocols and the frequent introduction
of new products and services, it is difficult for us to predict whether or when
new competing technologies or new competitors will enter our market.
We may be required to reduce prices or increase spending in response to
competition in order to retain or attract customers, pursue new market
opportunities or invest in additional research and development efforts. As a
result, our revenue, margins and market share may be harmed. We cannot assure
you that we will be able to compete successfully against current and future
competitors or that competitive pressures faced by us will not harm our
business, financial condition and results of operations.
INFRINGEMENT OF OUR PROPRIETARY RIGHTS COULD AFFECT OUR COMPETITIVE POSITION,
HARM OUR REPUTATION OR COST US MONEY.
We regard our system as open but proprietary. In an effort to protect our
proprietary rights, we rely primarily on a combination of patent, copyright,
trademark and trade secret laws, as well as licensing, non-disclosure and other
agreements with our consultants, suppliers, customers and employees. However,
these laws and agreements provide only limited protection of our proprietary
rights. In addition, we may not have signed agreements in every case, and the
contractual provisions that are in place and the protection they provide may not
provide us with adequate protection in all circumstances. Although we hold
patents and have filed patent applications covering some of the inventions
embodied in our systems, our means of protecting our proprietary rights may not
be adequate. It may be possible for a third party to copy or otherwise obtain
and use our technology without authorization and without our detection. A third
party may also develop similar technology independently without infringing our
patents and copyrights. In addition, the laws of some countries in which we sell
our system may not protect our software and intellectual property rights to the
same extent as the laws of the United States. Unauthorized copying, use or
reverse engineering of our system could harm our business, financial condition
or results of operations.
INFRINGEMENT CLAIMS COULD REQUIRE US TO EXPEND SIGNIFICANT FINANCIAL AND
MANAGERIAL RESOURCES.
A third party could claim that our technology infringes its proprietary
rights. As the number of software systems in our target market increases and the
functionality of these systems overlap, we believe that the number of
infringement suits filed by software developers will increase. Although we have
no knowledge that our system infringes the proprietary rights of any third
parties, we could nevertheless be sued in the future for infringement. Claims of
infringement against us, if successful, could harm us. Defending against any
infringement claims, even those that are not meritorious, could result in the
expenditure of significant financial and managerial resources. In addition, if
we are found liable for infringement, we may have to pay damages or royalties to
a third party and may not be able to continue offering that portion of our
system that is found to be infringing. Redesigning our system components to
avoid any alleged or actual infringement could result in the expenditure of
significant financial and managerial resources and diminish the value of our
system, which could harm our business, financial condition or results of
operations.
OUR SYSTEM COULD HAVE DEFECTS FOR WHICH WE COULD BE HELD LIABLE AND THAT COULD
RESULT IN LOST REVENUE, INCREASED COSTS, LOSS OF OUR CREDIBILITY OR DELAY IN
ACCEPTANCE OF OUR SYSTEM IN THE MARKET.
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Our system may contain errors or defects, especially when new products are
introduced or when new versions are released. Despite internal system testing,
we have in the past discovered software errors in some of the versions of our
system after their introduction. Errors in new systems or versions could be
found after commencement of commercial shipments, and this could result in
additional development costs, diversion of technical and other resources from
our other development efforts or the loss of credibility with current or future
customers. Any of these events could result in a loss of revenue or a delay in
market acceptance of our system and could harm our reputation.
In addition, we have warranted to some of our customers that our software is
free of viruses. If a virus infects a customer's computer software, the customer
could assert claims against us, which, regardless of their merits, could be
costly to defend and could require us to pay damages and harm our reputation.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability and certain
contract claims. Our license agreements also typically limit a customer's entire
remedy to either a refund of the price paid or modification of our system to
satisfy our warranty. However, these provisions vary as to their terms and may
not be effective under the laws of some jurisdictions. Although we maintain
product liability insurance coverage, we cannot assure you that such coverage
will be adequate and a product liability, warranty or other claim could harm our
business, financial condition and/or results of operations. Performance
interruptions at a customer's site could negatively affect demand for our system
or give rise to claims against us.
The third party software we license with our system may also contain errors
or defects for which we do not maintain insurance. Typically our license
agreements transfer any warranty from the third party to our customers to the
extent permitted. Product liability, warranty or other claims brought against us
with respect to such warranties could, regardless of their merits, harm our
business, financial condition or results of operation.
GENERAL ECONOMIC CONDITIONS MAY REDUCE OUR REVENUES AND HARM OUR BUSINESS.
As our business has grown, we have become increasingly subject to adverse
changes in general economic conditions, which can result in reductions in
capital expenditures by our end-user customers, longer sales cycles, deferral or
delay of purchase commitments for our products and increased price competition.
Although these factors have not materially impacted us in recent years, if the
current economic slowdown continues or worsens, these factors could adversely
affect our business and results of operations.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below one and
one-half percent, the State of California has on some occasions implemented, and
may in the future continue to implement, rolling blackouts throughout the state.
We currently do not have backup generators or alternate sources of power in the
event of a blackout, and our current insurance does not provide coverage for any
damages we or our customers may suffer as a result of any interruption in our
power supply. If blackouts interrupt our ability to continue operations at our
facilities, then our reputation could be damaged, our ability to retain existing
customers could be harmed and we could fail to obtain new customers. These
interruptions could also result in lost revenue, any of which could
substantially harm our business and results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996 by
the California state government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over the past
year. If wholesale prices continue to increase, our operating expenses will
likely increase, as our primary North American facilities are located in
California. Some of our component suppliers are also located in California.
While our orders from our suppliers have not been affected by power failure to
date, the continuance of blackouts may affect our suppliers' ability to
manufacture our products and meet scheduled delivery needs.
THE LOSS OF ANY OF OUR OUTSIDE CONTRACT MANUFACTURERS OR THIRD PARTY EQUIPMENT
SUPPLIERS THAT PRODUCE KEY COMPONENTS OF OUR SYSTEM COULD SIGNIFICANTLY DISRUPT
OUR MANUFACTURING PROCESS.
We depend on outside contract manufacturers to produce components of our
systems. Most of our compression and decompression product, or gateway, is
currently supplied by a single source, Tandberg, Inc. In addition, we depend on
various third party suppliers
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for the cameras, microphones, speakers and monitors that we install at desktops
and in conference rooms as a part of each video communications network system.
Our reliance on these third parties involves a number of risks, including:
o the possible unavailability of critical services and components on a
timely basis, on commercially reasonable terms or at all;
o if the components necessary for our system were to become unavailable,
the need to qualify new or alternative components for our use or
reconfigure our system and manufacturing process could be lengthy and
expensive;
o the likelihood that, if particular components are not available, we
would suffer an interruption in the manufacture and shipment of our
systems until these components or alternatives become available;
o reduced control by us over the quality and cost of our system and over
our ability to respond to unanticipated changes and increases in
customer orders; and
o the possible unavailability of, or interruption in, access to some
technologies.
If these manufacturers or suppliers cease to provide us with the assistance or
the components necessary for the operation of our business, we may not be able
to identify alternate sources in a timely fashion. Any transition to alternate
manufacturers or suppliers would likely result in operational problems and
increased expenses and could cause delays in the shipment of, or limit our
ability to provide our products. In the case of the gateway component, we
believe the delay could be several months or more. We cannot assure you that we
would be able to enter into agreements with new manufacturers or suppliers on
commercially reasonable terms or at all. Any disruptions in product flow may
limit our revenue, seriously harm our competitive position and result in
additional costs or cancellation of orders by our customers.
OUR MARKET IS IN AN EARLY STAGE OF DEVELOPMENT, AND OUR SYSTEM MAY NOT BE
ADOPTED.
Our ability to achieve profitability depends in large part on the widespread
adoption by end users of networked video communications systems. If the market
for our system fails to grow or grows more slowly than we anticipate, we may not
be able to increase revenue or achieve profitability. The market for our system
is relatively new and rapidly evolving. We will have to devote substantial
resources to educating prospective customers about the uses and benefits of our
system. Our efforts to educate potential customers may not result in our system
achieving market acceptance. In addition, businesses that have invested
substantial resources in video products may be reluctant or slow to adopt our
system. Similarly, customers using existing information systems in which they
have made significant investments may refuse to adopt our system if they
perceive that our offerings will not complement their existing systems.
Consequently, the conversion from dependence on traditional methods of
communication to the extensive use of video networking may not occur as rapidly
as we expect .
IF WE DO NOT MAINTAIN AND IMPROVE OUR CURRENT NETWORKED VIDEO COMMUNICATIONS
SYSTEM AND DEVELOP NEW SYSTEMS, APPLICATIONS AND FEATURES, OUR FUTURE BUSINESS
PROSPECTS MAY SUFFER.
We believe that our future business prospects depend in large part on our
ability to maintain and improve our current system and to develop new systems,
applications and features on a timely basis. Our system will have to achieve
additional market acceptance, maintain technological competitiveness and meet an
expanding range of customer requirements. As a result of the complexities
inherent in our system, major new releases, applications and system features
require long development and testing periods. We may not be successful in
developing and marketing, on a timely and cost effective basis, new releases,
applications or features that respond to technological change, evolving industry
standards and protocols or customer requirements. Significant delays or problems
in the installation or implementation of new releases of our system could harm
our business, financial condition and results of operations.
IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES FORCE AND DISTRIBUTION CHANNELS, OUR
BUSINESS WILL SUFFER.
To increase our revenue, we must increase the size of our direct sales force
and add indirect distribution channels, such as systems integrators or
value-added resellers, or effect sales through our customers. Our inability to
increase our direct sales force and to add indirect distribution channels may
limit our future revenue growth and harm our future operating results. As of
March 31, 2001, our sales force consisted of 16 professionals. We expect to
substantially increase the size of our sales force over the next twelve months.
However, there is intense competition for sales personnel in the communications
marketplace and we cannot assure you that we will
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be successful in attracting, integrating, motivating and retaining new sales
personnel. Furthermore, it can take several months before a new hire becomes a
productive member of our sales force. The failure of new salespeople to develop
the necessary skills in a timely manner could reduce our revenue growth.
WE MAY NOT BE ABLE TO RETAIN OUR EXISTING KEY PERSONNEL, OR HIRE AND RETAIN THE
ADDITIONAL PERSONNEL THAT WE NEED TO SUSTAIN AND GROW OUR BUSINESS.
We depend on the continued services of our executive officers and other key
personnel. We do not carry any key man life insurance. The loss of the services
of any of our executive officers or key personnel could harm our business,
financial condition and results of operations.
As of March 31, 2001, we had 105 employees, up from 80 employees as of March
31, 2000. We expect to hire a significant number of new employees in the future
to support our business. If we are unable to manage our growth effectively, our
business, financial condition and results of operations could be harmed.
In addition, we need to attract and retain highly skilled technical and
managerial personnel for whom there is intense competition. We have had some
difficulty hiring highly skilled technical people due to the high market demand
for their services. If we are unable to attract and retain qualified technical
and managerial personnel, our results of operations could suffer and we may
never achieve profitability.
OUR PLANS CALL FOR US TO GROW RAPIDLY, AND OUR INABILITY TO MANAGE THIS GROWTH
COULD HARM OUR BUSINESS.
We have rapidly and significantly expanded our operations and expect to
continue to do so. This growth has placed, and is expected to continue to place,
a significant strain on our managerial, operational and financial resources and
information systems. Failure to manage our growth effectively will harm our
business, financial condition and operating results. Furthermore, in order to
remain competitive or to expand our business, we may find it necessary or
desirable to acquire other businesses, products or technologies. If we identify
an appropriate acquisition candidate, we may not be able to negotiate the terms
of the acquisition successfully, to finance the acquisition or to integrate the
acquired businesses, products or technologies into our existing business and
operations. In addition, completing a potential acquisition and integrating an
acquired business may strain our resources and require significant management
time.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO POTENTIAL TARIFFS AND OTHER TRADE
BARRIERS, UNEXPECTED CHANGES IN FOREIGN REGULATORY REQUIREMENTS AND LAWS AND
ECONOMIC AND POLITICAL INSTABILITY AS WELL AS OTHER RISKS THAT COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
We intend to expand our international business in Western Europe and enter
additional international markets. Expansion will require significant management
attention and financial resources as we establish additional foreign operations,
hire additional personnel and establish indirect distribution channels. Revenue
from this international expansion may be inadequate to cover the related
expenses.
Other risks we may encounter in conducting international business activities
generally could include the following:
o tariffs and other trade barriers;
o unexpected changes in foreign regulatory requirements and laws;
o economic and political instability;
o increased risk of infringement claims;
o restrictions on the repatriation of funds;
o potentially adverse tax consequences;
o timing, cost and potential difficulty of adapting our system to the
local language standards in those foreign countries that do not use the
English alphabet;
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o fluctuations in foreign currencies; and
o limitations in communications infrastructures in some foreign countries.
IF OUR CUSTOMERS DO NOT PERCEIVE OUR SYSTEM OR SERVICES TO BE EFFECTIVE OR OF
HIGH QUALITY, OUR BRAND AND NAME RECOGNITION WOULD SUFFER.
We believe that establishing and maintaining brand and name recognition is
critical for attracting and expanding our targeted customer base. We also
believe that the importance of reputation and name recognition will increase as
competition in our market increases. Promotion and enhancement of our name will
depend on the success of our marketing efforts and on our ability to continue to
provide high quality systems and services, neither of which can be assured. If
our customers do not perceive our system or services to be effective or of high
quality, our brand and name recognition will suffer, which would harm our
business.
OUR STOCK HAS BEEN AND WILL LIKELY CONTINUE TO BE SUBJECT TO SUBSTANTIAL PRICE
AND VOLUME FLUCTUATIONS DUE TO A NUMBER OF FACTORS, MANY OF WHICH WILL BE BEYOND
OUR CONTROL, THAT MAY PREVENT OUR STOCKHOLDERS FROM RESELLING OUR COMMON STOCK
AT A PROFIT.
The securities markets recently have experienced significant price and
volume fluctuations and the market prices of the securities of technology
companies have been especially volatile. This market volatility, as well as
general economic, market or political conditions could reduce the market price
of our common stock in spite of our operating performance. In addition, our
operating results could be below the expectations of public market analysts and
investors, and in response the market price of our common stock could decrease
significantly. The market price of our common stock ranged from a low of $0.875
to a high of $14.00 during the period from August 17, 2000 to March 31, 2001.
Investors may be unable to resell their shares of our common stock for a profit.
IF OUR SHARE PRICE IS VOLATILE, WE MAY BE THE TARGET OF SECURITIES LITIGATION,
WHICH IS COSTLY AND TIME-CONSUMING TO DEFEND.
In the past, following periods of market volatility in the price of a
company's securities, security holders have often instituted class action
litigation. Many technology companies have been subject to this type of
litigation. If the market value of our common stock experiences adverse
fluctuations and we become involved in this type of litigation, regardless of
the outcome, we could incur substantial legal costs and our management's
attention could be diverted, causing our business, financial condition and
operating results to suffer.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS AND DELAWARE LAW MAY
MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, DESPITE THE POSSIBLE BENEFITS
TO OUR STOCKHOLDERS.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that may inhibit changes in our control that are not approved by our
board of directors. For example, the board of directors has the authority to
issue up to 10,000,000 shares of preferred stock and to determine the terms of
preferred stock, without any further vote or action on the part of the
stockholders.
These provisions may have the effect of delaying, deferring or preventing a
change in our control despite possible benefits to our stockholders, may
discourage bids at a premium over the market price of our common stock and may
adversely affect the market price of our common stock and the voting and other
rights of our stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates. We do
not use derivative financial instruments for speculative or trading purposes. We
do not engage in any foreign currency hedging transactions and therefore, do not
believe we are subject to any significant exchange rate risk. There has not been
a material change in our exposure to interest rate and foreign currency risks
since the date of our annual report on Form 10-K.
CASH AND CASH EQUIVALENTS
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Cash equivalents consist primarily of commercial paper and money market and
municipal bond funds acquired with remaining maturity periods of twelve months
or less and are stated at cost plus accrued interest that approximates market
value. We would not expect our operating results or cash flow to be affected to
any significant degree by the effect of a sudden change in market interest rates
on our investment portfolio.
The following table provides information about the Company's investment
portfolio. For investment securities, the table presents cash and cash
equivalents and related weighted average interest rates by category.
WEIGHTED AVERAGE
AMOUNTS INTEREST RATE
-------------- ----------------
(IN THOUSANDS)
Description
Cash and Equivalents:
Cash.................................................. $ 3,188
Commercial paper...................................... 10,070 5.15%
Other cash equivalents................................ 7,940 5.42%
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Fair Value at March 31, 2000.......................... $ 21,198
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PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVISTAR COMMUNICATIONS CORPORATION
By: /s/ Gerald J. Burnett
-------------------------------------
Gerald J. Burnett
Chief Executive Officer, President and
Chairman (Principal Executive Officer)
By: /s/ R. Stephen Heinrichs
-------------------------------------
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
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