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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 0-30903
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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)
411 BOREL AVENUE, 100 SOUTH
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)
------------------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 12, 2002, there were approximately 20,754,000 shares of the
registrant's Common Stock outstanding. The aggregate market value of the voting
stock held by non-affiliates of the registrant, based on the closing sale price
of the Common Stock on June 12, 2002 as reported on the Nasdaq National Market
was approximately $13,369,000. Shares of Common Stock held by each current
executive officer and director have been excluded from this computation in that
such persons may be deemed to be affiliates of the Company. This determination
of affiliate status is not a conclusive determination for other purposes.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the registrant's 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K to the extent stated herein. The Proxy Statement will be filed within 120
days of registrant's fiscal year ended March 31, 2002.
VIRAGE, INC.
INDEX
PAGE
PART I
Item 1. Business.............................................................................................3
Item 2. Properties..........................................................................................25
Item 3. Legal Proceedings...................................................................................26
Item 4. Submission of Matters to a Vote of Security Holders.................................................27
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................29
Item 6. Selected Consolidated Financial Data................................................................30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................................31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........................................42
Item 8. Financial Statements and Supplementary Data.........................................................43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.....................................................................................69
PART III
Item 10. Directors and Executive Officers of the Registrant..................................................69
Item 11. Executive Compensation..............................................................................69
Item 12. Security Ownership of Certain Beneficial Owners and Management......................................69
Item 13. Certain Relationships and Related Transactions......................................................69
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................................70
Signatures..........................................................................................71
2
PART I
This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act"),
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), including statements using terminology such as "can,"
"may," "believe," "designed to," "will," "expect," "plan," "anticipate,"
"estimate," "potential," or "continue," or the negative thereof or other
comparable terminology regarding beliefs, plans, expectations or intentions
regarding the future. Forward-looking statements involve risks and uncertainties
and actual results could differ materially from those discussed in the
forward-looking statements. All forward-looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to the Company as of the date thereof, and the Company assumes no
obligation to update any forward-looking statement or risk factors.
Item 1. Business
Overview
Virage, Inc. is a provider of software products, professional services and
application services that enable owners of rich-media and video assets to more
effectively communicate, manage, retrieve and distribute these rich-media assets
for improved productivity and communication.
Our primary software products are a part of our Video Application Platform
that provides the necessary infrastructure for seamlessly integrating
Internet-ready video into an internal or external website. The Virage Video
Application Platform includes our SmartEncode(TM) products, which encode and
index video within a single automated process, and our server products, which
enable the publishing and distribution of streaming video.
During our fiscal year ended March 31, 2002, we also introduced the
following new software products designed to further our presence in the media
and entertainment, corporate, educational and government marketplaces: VS
Webcasting(TM), which allows corporations to schedule and manage live webcast
events and then easily turn each into a searchable on-demand event; VS
Production(TM), an integrated software solution that automates a customer's
video production process from acquisition to distribution; VS Publishing(TM), a
complete workflow solution that allows media and entertainment companies to turn
their content into compelling rich media programming for the Internet; and VS
Learning(TM) which allows global corporations to use video and other rich media
to build and deliver personalized, on-demand e-learning courses for use in sales
training, product launches, human resources and other professional development.
Owners of rich-media content can leverage our technology and know-how
either by licensing our products and engaging our professional services or by
employing our application services to outsource their needs.
We are based in San Mateo, California. We were founded in April 1994 and
incorporated in Delaware in March 1995. In this report, "Virage," "the Company,"
"our," "us," "we" and similar expressions refer to Virage, Inc. Our principal
executive offices are located at 411 Borel Avenue, 100 South, San Mateo,
California 94402 and our telephone number is (650) 573-3210.
3
Business Background and Strategy
The majority of our revenues are derived from our Video Application
Platform, which is designed to meet the needs of users who have video and
rich-media assets and need to publish, manage and distribute these assets over
the Internet and/or their intranets. These users typically have some in-house
video expertise or are willing to invest in consulting or other resources in
order to use our platform as part of a video and rich-media solution. Revenues
from media and entertainment companies have comprised a substantial portion of
our total revenues followed by revenues from corporate enterprises, government
agencies and educational institutions. We expect that a significant portion of
our revenues will continue to be derived from our SmartEncode and server
products. However, in order to expand the market for our technology and
expertise beyond that for our SmartEncode and server products, we recently have
developed products that work "out-of-the-box" for a specific video or rich-media
application, such as training, communications, video production, or internet
publishing. Our development efforts for these applications focus on functions,
features, and intuitive user interfaces that allow those with little or no video
expertise to implement the intended application quickly and easily. We believe
that successful development and marketing of such application products is
critical to our ability to grow our future sales to a level required for
profitability. There is no guarantee that such new product areas will succeed in
the marketplace. If these new application products do not succeed, we may not be
able to develop a profitable and sustainable business.
We introduced these new application products during the year ended March
31, 2002 which together are designed to further our enterprise strategy and to
provide enhanced solutions to our media and entertainment customers and
corporate enterprise customers. These products include VS Webcasting, VS
Production, VS Publishing and VS Learning. With the exception of VS Production,
we offer our customers the option of running any of these solutions by
leveraging our application services. We believe these offerings are an
important, lower-cost, easily deployable alternative to demonstrate the
functionality and value that our technology and services brings to the customer.
We also believe that these service offerings will help us engage our customers
in longer-term application services contracts for these solutions or in a
comprehensive end-to-end software solution sale.
Our new application products are marketed directly to users such as
executives and managers in sales, marketing, and training positions, in addition
to information technology executives. For example, we can market our VS
Webcasting product to sales executives to assist with new product introductions
and sales force training. The VS Webcasting product can be used for a live event
transmission to a widely distributed field sales force, and also provides an
on-demand playback capability for later viewing or review. An investment in VS
Webcasting can thus save travel time and costs, and allow a sales representative
to review materials or topics of interest whenever he or she needs more
information. We market and sell this product by demonstrating both cost savings
and productivity increases for the users, thus establishing a quantifiable
return on investment.
We are actively marketing our recently introduced application products and
services to new enterprise accounts as well as to our installed base of
enterprise customers that have licensed products from our Video Application
Platform. We have focused our sales force on establishing new relationships and
developing existing relationships by offering entry-level pilots in order to
demonstrate the value proposition that our application products offer. In
addition, we are working with strategic channel partners such as Sony, IBM, and
Sumitomo to extend our sales reach beyond our own sales force.
Products and Services
We are a provider of software products, professional services and
application services that enable owners of rich-media and video assets to more
effectively communicate manage, retrieve and distribute these rich-media assets
for improved productivity and communication.
4
SMARTENCODE AND INDEXING PRODUCTS
VideoLogger(R) and Media Analysis Plug-ins
With a single real-time anlaysis of the video content, our VideoLogger
application generates a rich information index and simultaneously encodes the
video into the selected digital formats. The video index and digital video files
are time synchronized, allowing the index data to reference particular moments
in the video. The indexing process converts video into data that computers can
recognize. The index, or video database, acts like an index found at the back of
a book, allowing pinpoint access into video content. Indexing information can be
derived from automated analysis of the video stream, from external sources of
time-coded data, or from information entered by a user. Our customers can elect
to leverage our media analysis plug-ins in order to automatically extract
information such as a visual storyboard of scene changes, a transcription of
spoken words (via speech recognition), audio classification, closed captioning
or teletext, names of recognized faces and speakers, on-screen text, and time
code. External sources of data could include an "edit decision list" from
non-linear video editing software, a transcript of words spoken, or a real-time
statistics feed from a sports stadium. User entered information can include clip
titles, clip descriptions, categories, clip in and out points, event dates, and
other custom descriptions. The VideoLogger interface allows a customer to
monitor video capture and indexing, control multiple encoders, and create clips
on the fly. Once the index is produced, it can be integrated with a number of
different back-end solutions, including the Virage Solution Server. The Virage
SmartEncode process is available either through the latest release of the Virage
VideoLogger product or in an outsourced fashion through our application
services.
Customers or third-party developers can enhance the SmartEncode process
through the VideoLogger Software Developer Kit (SDK). The VideoLogger SDK
provides developers and systems integrators access to the full range of
VideoLogger functions through a programming interface. This enables reliable
integration into a wide variety of automated workflows and allows developers to
add additional indexing and encoding functionality to VideoLogger as necessary.
Virage ControlCenter(TM)
The Virage ControlCenter product is a powerful workflow application that
remotely schedules, controls, and manages the SmartEncode process for multiple
VideoLoggers from a central console. Capture of the source video signal is the
starting point. Virage software can accept video from a multitude of analog or
digital sources: camera, satellite feed, television, videotape, or digital file.
Capture of multiple video feeds can be automated and managed centrally via
ControlCenter for greater efficiency. For outsourcing needs, Virage production
facilities in the United States and Europe can capture content from a range of
professional and consumer satellites and fiber networks, and from all major tape
formats.
MediaSync(TM)
Our MediaSync product provides a fully integrated, end-to-end solution for
rapidly assembling, synchronizing and publishing streaming video with PowerPoint
slides to a website.
Database Plug-Ins
Virage Database Plug-Ins for Oracle(R) and Informix(R) products help system
integrators build sophisticated video management solutions with the Virage
VideoLogger and relational databases.
5
SERVER PRODUCTS
Virage Solution Server(TM)
The powerful XML-based Virage Solution Server provides a comprehensive
platform for publishing, managing and distributing Virage-enabled content on the
web. The Virage Solution Server hosts the video index generated by the
SmartEncode process. It is designed for high performance and can scale to
enterprise-wide and Internet-wide deployments. The Virage Solution Server
content management capabilities include account setup, deleting or inserting
video assets from the databases, editing existing video assets, and managing
multiple video collections.
The Virage Solution Server is used to publish and distribute content to
video-rich websites. With the Virage Solution Server, a customer can efficiently
publish on-demand video throughout a website, seamlessly integrated with the
existing website look and feel. Sample web templates provide an easy
"out-of-the-box" experience, or customers can develop their own HTML templates
to create search and results pages and player windows tailored to their specific
needs. The Virage Solution Server supports all common streaming formats
including RealVideo, Windows Media, QuickTime, and MPEG. It can also extend the
viewing experience beyond the PC-based Internet to set top boxes, game consoles
and handheld and wireless devices.
Key features of the Virage Solution Server include:
o Search: with Virage Solution Server, content owners can deliver video
content to end-users through well-understood navigation paradigms.
This allows users to quickly find the content of interest;
o Dynamic Publishing: Virage Solution Server can automate the process of
delivering video clips throughout a web site. Content can be
automatically published based on its category or keywords.
o Reporting: daily, weekly and monthly traffic reports provide content
owners with Nielsen-type ratings for published content, with
information on most popular search terms, most accessed clips and best
traffic drivers;
o Content Distribution Network Management: because many content owners
use multiple content distribution networks (CDNs), the Virage Solution
Server provides an abstraction layer to simplify content distribution;
o Personalization: Virage Solution Server provides a range of
capabilities that allow content owners to deploy personalized viewing
experiences;
o Syndication: Because Virage Solution Server separates the content
database from the HTML templates, it allows a single content
collection to be syndicated to multiple sites, each with a unique look
& feel.
Virage Solution Server SDK
The Virage Solution Server Software Developer Kit (SDK) allows developers
and systems integrators to build custom applications on the Virage Solution
Server to suit any publishing environment.
APPLICATION PRODUCTS
VS Webcasting
VS Webcasting allows corporations to schedule and manage live webcast
events--and then turn each quickly and easily into a searchable on-demand event.
VS Webcasting enriches the live experience by integrating streaming video with
slides, documents, surveys and other pertinent online media. At the same time,
it automatically creates a searchable, on-demand presentation that can be
available for review within minutes after an event's conclusion.
6
VS Production
VS Production is an integrated software solution that automates the
professional video production process from acquisition to distribution. By
transforming video into a digital asset that is easy to manage, access, share
and distribute, VS Production helps content owners streamline the process of
producing high-quality video content for on-air, tape or digital distribution.
Built on our award-winning, open platform, VS Production is scalable, reliable
and can integrate into any IT infrastructure.
VS Publishing
VS Publishing is a complete workflow solution that allows media and
entertainment companies to turn their content into compelling rich media
programming for the Internet. With VS Publishing, video can be processed,
assembled, reviewed and published minutes after its creation. Whether content
comes from an archive or direct from on-air production, VS Publishing
streamlines the workflow to the Internet and lets content owners deliver video
where and when it is most valuable to their viewers.
VS Learning
VS Learning provides rich media training and e-learning solutions that
bring subject matter experts face to face with learners anywhere and anytime.
Content authors can assemble video-based training courses quickly and easily
from anywhere in the world. Using VS Learning, global corporations can use video
and other rich media to build and deliver personalized, on-demand e-learning
courses for use in sales training, product launches, human resources and other
professional development. Learners can get pinpoint access to mission-critical
training material--either online or on a CD.
SERVICE OFFERINGS
Software installation and training
License software customers have the option to contract with Virage for
software installation and training support. These services ensure that customers
can get up and running successfully with Virage software as quickly as possible.
These services are typically billed on an hourly or daily basis.
Development and implementation services
Virage offers a variety of professional services aimed at helping customers
to implement, integrate or customize our commercial software. The services
typically consist of implementing our SmartEncode products in a unique
production environment or building specialized plug-ins to our products. We can
also build custom web templates for Virage Solution Server installations and
help with website integration. We offer these services to customers regardless
of whether they license software products, or opt for our application services.
These services are typically billed on an hourly or daily basis, though in some
cases we offer a fixed fee project based upon the size of the project.
SmartEncode services
Instead of purchasing our SmartEncode products, customers can instead
outsource their video processing needs to us. Using our own SmartEncode
products, we process content from a variety of analog or digital sources and
produce multiple formats and bit rates of high quality encoded video along with
a rich video database. Our editorial services include custom headlines,
descriptions, keywords, and other useful information added by our expert content
editors to suit a customer's requirements. We also can transcribe content to
produce an exact text of the speech. We typically bill for such services as a
charge per hour or charge per minute of video processed depending upon the level
of services required. These services are provided out of our production
facilities in the United States and Europe.
7
Application hosting services
Instead of purchasing our server products, customers can instead choose to
have us host the Virage Solution Server and related applications on their
behalf. We host the video information, also known as metadata, and surrounding
application logic while one of our content distribution partners typically hosts
the streaming video files. We provide daily, weekly, and monthly traffic reports
to the content owner. We also provide a secure administration and publishing
interface that provides our customers complete control of how and where their
content gets published. We typically charge a fixed monthly minimum charge for
our application hosting services that increases based upon accesses to our video
database. Our data center provides fault-tolerant servers and 24-by-7 monitoring
to ensure reliable and scalable hosting.
Sales and Marketing
Sales and distribution strategy
We sell our products and application services through a direct sales force
and through indirect distribution channels. We currently target customers in
several markets including media and entertainment companies, corporate
enterprises, government entities and universities. Our sales strategy is to
pursue multiple opportunities for large-scale deployments within each customer
account. We also recently broadened our sales strategies to address common
business user problems in multiple areas of an enterprise. We want to provide
business users with a quick, reliable and scalable solution to their problems
and afford them a definitive return on their investment.
Through our direct sales force in Boston, Chicago, London, Los Angeles,
Miami, New York, San Francisco, Singapore, Atlanta, Houston, and Washington
D.C., we focus on larger customers in North America, Europe, Latin America, and
Asia. Our field representatives sell our products and services to customers who
have been qualified by our telesales personnel. In addition, our direct sales
force manages local relationships with key resellers. Our indirect distribution
channels include major high-technology industry vendors, domestic and
international distributors, system integrators and value-added resellers.
Together, these distributors and value-added resellers accounted for
approximately 31% of total revenues for the year ended March 31, 2002.
Our historically largest reseller recently announced that it is divesting
its business segment in which our products are most complementary. As a result,
we encountered very little channel sales activity from this reseller during the
final fiscal quarter of our fiscal year ended March 31, 2002, particularly in
Europe and Latin America. We believe this factor contributed to our quarterly
decline in total revenues during the fourth fiscal quarter of our fiscal year
ended March 31, 2002. As a result of this channel partner loss, or if we were to
lose one of our channel partners or any of our large channel partners were to
delay or default on obligations under their contracts with us, our future
operating results could be significantly harmed.
Marketing activities
Since our inception, we have invested a substantial percentage of our
revenues in a broad range of marketing activities to generate demand, gain
corporate brand identity and educate the market about our products and services.
These activities have focused primarily on direct marketing, direct mail and
email, seminars, public relations, co-marketing and branding with our major
customer accounts and strategic partners, targeted trade shows, conferences,
speaking engagements, and product information through print collateral and our
Internet site. In addition, we have an established developer relationship
function to encourage independent software developers to develop products and
solutions that are compatible with our products and technologies. Recently, we
have decided to focus a large percentage of our marketing program spending on
webinars, seminars presented over the Internet utilizing our own VS Webcasting
and VS Learning products. We have significantly reduced our spending budgets for
trade shows and public relations in order to fund an increased investment in
these webinars. Should our new focus on webinars fail to attract new customers,
our revenues may be impacted.
8
Customers
Our customers represent large media and entertainment corporations, other
global corporations, educational institutions and government entities. For the
year ended March 31, 2002, one customer accounted for 14% of our total revenues.
No customer accounted for more than 10% of our total revenues for the year ended
March 31, 2001. For the year ended March 31, 2000, two customers accounted for
13% and 10% of our total revenues, respectively.
During the fourth fiscal quarter of our fiscal year ended March 31, 2002,
we completed our application services contract with our largest customer for the
fiscal year ended March 31, 2002. We were unable to reach mutually agreeable
terms for a renewal with this customer and this customer had no obligation to
renew its contract with us. In addition, our historically largest reseller
announced that it is divesting its business segment in which our products are
most complementary. As a result, we encountered very little channel sales
activity from this reseller during the fourth fiscal quarter of our fiscal year
ended March 31, 2002. We believe these two factors contributed to our quarterly
decline in total revenues during the final fiscal quarter of our fiscal year
ended March 31, 2002. As a result of this significant customer loss and channel
partner loss, our future operating results could be significantly harmed. In
addition, if we were to lose one of our other large customers or any of our
large customers were to delay or default on obligations under their contracts
with us, our future operating results could be significantly harmed.
Research and Development
We believe that our future success will depend in part on our ability to
continue to develop new and to enhance existing products and services.
Accordingly, we invest a significant amount of our resources in research and
product development activities. Our research and development expenses totaled
$9,172,000, $9,101,000 and $4,182,000 for the years ended March 31, 2002, 2001
and 2000 respectively. Our recent focus on application product development has
increased the complexity and difficulty of our product development efforts. In
particular, we now have several small application product development teams who
must coordinate their efforts with each other and with the base Video
Application Platform development teams. We have recently hired an R&D executive
and development managers who we believe have stronger experience in managing
such parallel team efforts. Our ability to successfully manage product
development in a more complex environment will be critical to our ability to
execute our product plans and grow our revenues.
Competition
The Internet video and rich-media marketplace is new, rapidly evolving and
intensely competitive. As more companies begin to deploy searchable and
interactive video on the Internet, we expect competition to intensify. We
currently compete directly with other providers in the Internet video
infrastructure and services marketplace including Convera Corporation, Inktomi
Corporation, Sonic Foundry, Inc. and Yahoo! Broadcast Solutions. We may also
compete indirectly with larger system integrators who embed or integrate these
directly competing technologies into their product offerings. It is possible
that we may work with these same larger companies on one customer bid and
compete with them on another. In the future, we may compete with other video
services vendors and searchable video portals. In addition, we may compete with
our current and potential customers who may develop software or perform
application services internally.
9
We believe that the principal competitive factors in our market are:
o video indexing management functionality;
o services experience and expertise;
o demonstrated video technology expertise;
o customer references;
o company reputation;
o ease of installation and use;
o real-time processing capability;
o software reliability and stability;
o scalability;
o pricing;
o customer support; and
o adoption by other customers
We believe we compete favorably with our competitors based on these
factors. However, the market for our products is relatively small today, and
therefore continued success against competitors does not guarantee that we can
grow our business to profitable levels. Our ability to become a profitable and
sustainable business is very dependent on the growth of the Internet and
intranet streaming video business.
Intellectual Property
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of patent, trademark and copyright laws, as well as confidentiality
and license agreements with our employees and others. We actively seek patent
protection for our intellectual property. We have filed 20 U.S. patent
applications on our proprietary technology. Seven patents have been issued by
the Patent and Trademark Office. Our remaining thirteen patent applications are
currently pending. In 1997, we entered into a five-year patent cross-licensing
agreement with IBM, which we renewed in 2002. The terms of this agreement
include our nonexclusive license of IBM's multimedia software patents in return
for an annual fee and a license to IBM of all of our current patents as
described above and any patents that may be issued to us in the future.
We have twenty trademarks, four of which are registered. We seek to avoid
disclosure of our trade secrets by limiting access to our proprietary technology
and restricting access to our source code. Despite these precautions, it may be
possible for unauthorized third parties to copy particular portions of our
technology or reverse engineer or obtain and use information that we regard as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the United States. Our
means of protecting our proprietary rights in the United States or abroad may
not be adequate and competing companies may independently develop similar
technology.
Employees
As of March 31, 2002, we had 157 employees and 3 full-time contractors. Of
our 160 total staff, 28 were employed in services, 45 were employed in
engineering, 57 were employed in sales and marketing, and 30 were employed in
general and administrative positions. None of our employees is subject to a
collective bargaining agreement, and we have never experienced a work stoppage.
We consider our relations with our employees to be good.
10
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 are based upon the best
information we have available, but 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 and our visibility for even the current quarter
is rather limited. 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 such
as the strength of information technology investment. 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 example, during our fiscal fourth quarter ended March 31,
2002, our total revenues were significantly lower than the total revenues that
we forecast and publicly provided to investors and all other parties in January
2002.
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 which we may
need to address with additional sales and marketing expenses, severance for
involuntary reductions in headcount should we determine cost cutting measures
are necessary subsequent to our publicly provided guidance, write-downs of
equipment and/or facilities in the event of unforeseen excess capacity, 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.
We have allocated significant product development, sales and marketing resources
toward the deployment of our new application products and we face a number of
risks that may impede market acceptance of these products and therefore hurt our
financial results.
We have invested significant resources into developing and marketing our
recently introduced application products. We believe that these application
products broaden the value proposition to that of the day-to-day business
software application user and expect to derive future revenues as a result of
these product introductions. The market for these products is in a relatively
early stage. We cannot predict how the market for our applications will develop,
and part of our strategic challenge will be to convince enterprise customers of
the productivity, communications, cost and other benefits of our application
products. Our future revenues and revenue growth rates will depend in large part
on our success in creating market acceptance for these products. 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, sales
and marketing costs, which will hurt our business.
11
In addition, resources may be required to fund development of our
application products' feature-sets beyond what we have planned due to
unanticipated marketplace demands. We may determine that we are unable to fund
these additional feature-sets due to financial constraints and may halt the
development of a product at a stage that the marketplace perceives as immature.
We may also encounter that the marketplace for an application product is not as
robust as we had expected and we may react to this by leaving the development of
a product at an early stage. Either of these product development scenarios may
impede market acceptance of any of our new application products and therefore
hurt our financial results.
Because we have only recently introduced our video software products,
application services and professional services, and because we have just
introduced our new application products, we face a number of risks that may
seriously harm our business.
We incorporated in April 1994 and to date we have generated only limited
revenues. We introduced our first video software products in December 1997, our
application services in May 1999, our professional services in March 2001 and
our application products during the second half of our fiscal year ended March
31, 2002. Because we have a limited operating history with our video software
products, application services, professional services and application products
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:
o expand our customer base;
o increase penetration into key customer accounts;
o maintain our pricing structure;
o develop new video products and application services; and
o 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 significantly decrease
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 and other
entities will use our licensed products, professional services and application
services to catalog, manage, and distribute 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. In addition, we recently
introduced our application products and believe these solutions products broaden
the value proposition of our technology to business software application users
within media and entertainment enterprises, global corporations, educational
institutions and government entities. If the assumptions underlying our business
model are not valid or if we are unable to implement our business plan, our
business will suffer.
The average size of our customer orders has been between $40,000 and $60,000
over the past several quarters. Our sales and marketing costs are a high
percentage of the revenues from our orders, due partly to the expense of
developing leads and relatively long sales cycles involved in selling products
that are not yet considered "mainstream" technology investments. For the year
ended March 31, 2002, our sales and marketing expenses totaled 103% of our total
revenues. We also have recently introduced our new applications products in
hopes of increasing both our revenues and average size of our customers' orders
and these products have pricing models based upon a number of assumptions about
the market for our products. If our assumptions are incorrect or our pricing
does not work as intended, we may not be able to increase the average size of
our customer orders or reduce the costs of selling and marketing for our
products and, therefore, we may not be able to develop a profitable and
sustainable business.
12
We have not been profitable and if we do not achieve profitability, our business
may fail. If we need additional financing we may not obtain the required
financing on favorable terms and conditions.
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 March 31, 2002, we had an accumulated deficit of $88,924,000. We may 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. In addition,
our cash, cash equivalent and short-term investment resources (collectively,
"cash resources") totaled $30,694,000 as of March 31, 2002 and we used
$17,871,000 in our operating activities during the year ended March 31, 2002. We
anticipate that our operating activities will use additional cash resources for
at least the next 12 months. This almost certainly will leave us with a
deteriorated cash position in comparison to our cash position as of March 31,
2002 and this may affect our ability to transact future strategic operating and
investing activities in a timely manner, which may harm our business and cause
our stock price to fall. The current business environment is not conducive to
raising additional financing. If we require additional financing, the terms of
such financing may heavily dilute the ownership interests of current investors,
and cause our stock price to fall significantly or we may not be able to secure
financing upon acceptable terms at all. Accordingly, our stock price is heavily
dependent upon our ability to grow our revenues and manage our costs in order to
preserve cash resources.
Our restructuring efforts may not result in the intended benefits.
During our year ended March 31, 2002, we took steps to better align the
resources required to operate efficiently in the prevailing market. Through
these steps, we reduced our headcount and are attempting to sublease our excess
facility capacity. While we believe that these steps help us achieve greater
operating efficiency, we have no prior history with such measures and the
results of these measures are less than predictable. These measures could
adversely affect our employees that we wish to retain, customers and/or vendors,
which could harm our ability to operate as intended and which would harm our
business.
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. Our operating results have in
past quarters fallen below securities analyst expectations and 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, which makes it difficult for us to predict our revenues
going forward. Our operating expenses may increase and if our revenues and gross
margins do not increase, our business could be seriously harmed. Our operating
expenses may increase from competitive threats in our markets which we may need
to address with additional sales and marketing expenses, severance for
involuntary reductions in headcount should we determine cost cutting measures
are necessary subsequent to our publicly provided guidance, write-downs of
equipment and/or facilities in the event of unforeseen excess capacity, 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, many
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 profit margin would
likely hurt our quarterly operating results.
For our upcoming fiscal year, we plan to invest significantly in developing,
marketing, and selling our new application products. If we are not able to
achieve significant revenue growth from these products, we may not be able to
meet analyst expectations and our stock price may drop significantly.
13
Future sales of stock could affect our stock price.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and in connection with
acquisitions, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate.
Failure to comply with NASDAQ's listing standards could result in our delisting
by NASDAQ from the NASDAQ national market and severely limit the ability to sell
any of our common stock.
Our stock is currently traded on the NASDAQ National Market. Under NASDAQ's
listing maintenance standards, if the closing bid price of our common stock is
under $1.00 per share for 30 consecutive trading days, NASDAQ may choose to
notify us that it may delist our common stock from the NASDAQ National Market.
If the closing bid price of our common stock does not thereafter regain
compliance for a minimum of 10 consecutive trading days during the 90 days
following notification by NASDAQ, NASDAQ may delist our common stock from
trading on the NASDAQ National Market. There can be no assurance that our common
stock will remain eligible for trading on the NASDAQ National Market. If our
stock were delisted, the ability of our stockholders to sell any of our common
stock at all would be severely, if not completely, limited.
Our revenues may be harmed if general economic conditions do not improve.
Our revenues are dependent on the health of the economy and the growth of
our customers and potential future customers. If the economy remains stagnant,
our customers may continue to delay or reduce their spending on our software and
service solutions. When economic conditions weaken, sales cycles for sales of
software products and related services tend to lengthen and companies'
information technology and business unit budgets tend to be reduced. If that
continues to happen, our revenues could suffer and our stock price may decline.
Further, if U.S. or global economic conditions worsen, we may experience a
material adverse impact on our business, operating results, and financial
condition.
Our service revenues and recently introduced VS Production solution product have
substantially lower gross profit margins than our license revenues, and an
increase in service revenues or the VS Production solution products relative to
license revenues could harm our gross margins.
Our service revenues, which includes fees for our application services as
well as professional services such as consulting, implementation, maintenance
and training, were 54%, 45% and 20% of our total revenues for the years ended
March 31, 2002, 2001 and 2000, respectively. In addition, our recently
introduced VS Production solution may contain a hardware element that is
developed, manufactured and marketed by a third-party partner and bundled with
our software and resold by us. Our service revenues have substantially lower
gross profit margins than our license revenues and we expect that our VS
Production solution may also have substantially lower gross profit margins than
our license revenues. Our cost of service revenues for the years ended March 31,
2002, 2001 and 2000 were 95%, 144% and 218%, respectively, of our service
revenues. An increase in the percentage of total revenues represented by service
revenues and/or our VS Production solution could adversely affect our overall
gross profit margins.
14
Service revenues as a percentage of total revenues and cost of service
revenues as a percentage of total revenues have varied significantly from
quarter to quarter due to our relatively early stage of development.
Historically, the relative amount of service revenues as compared to license
revenues has varied based on customer demand for our application services
revenues. Our application services require a relatively fixed level of
investment in staff, facilities and equipment. We typically have operated our
application service business at a loss due to fixed investments that exceeded
actual levels of revenues realized. We have reduced the application service
fixed investments over the past year. However, there is no assurance that the
level of application service revenues in the new fiscal year will allow us to
recover our fixed costs and make a positive gross profit margin. In addition, we
have experienced an increase in the percentage of license customers requesting
professional services as a result of our introduction of professional services
in the fourth quarter of fiscal 2001, which will also impact the relative amount
of service revenues as compared to license revenues. We expect that the amount
and profitability of our professional services will depend in large part on:
o the software solution that has been licensed;
o the complexity of the customers' information technology environments;
o the resources directed by customers to their implementation projects;
o the size and complexity of customer implementations; and
o the extent to which outside consulting organizations provide services
directly to customers.
If our internal professional services organization does not provide
implementation services effectively and according to schedule, our revenues and
profitability would be harmed.
Customers that license our products may require consulting, implementation,
maintenance and training services and obtain them from our internal professional
services, customer support and training organizations. When we provide these
services, we may be required to recognize revenues from the licensing of our
software products as the implementation services are performed or based upon the
completed contract method. If our internal professional services organization
does not effectively implement and support our products or if we are unable to
expand our internal professional services organization as needed to meet our
customers' needs, our ability to sell software, and accordingly our revenues,
will be harmed.
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. In addition, customers may delay payments to us, which may require us
to account for those customers' revenues on a cash basis, rather than accrual
basis, of accounting. 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.
For example, although the Company's mix of license and service revenues
generally varies from quarter to quarter based upon the timing of license
shipments and other factors, our service revenues decreased during the three
months ended September 30, 2001 in comparison to the three months ended June 30,
2001 as a result of reduced revenues from a large application services customer.
This application services customer accounted for approximately 14% of our total
revenues during the year ended March 31, 2002. However, our revenue recognition
policies precluded us from recognizing revenues from this customer in certain
quarters as we did not receive certain payments from this customer that were due
to us. As a result, this customer accounted for 16% of our total revenues during
the three months ended June 30, 2001, less than 5% of our total revenues in the
three months ended September 30, 2001, and 30% of our total revenues in the
three months ended December 31, 2001 (the fiscal quarter in which we received
significant payments from the customer for past services performed in the June
2001 and September 2001 quarters).
15
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 revenues. 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.
In addition, we recently introduced our new application products that are
aimed toward a broadened business user base within our key markets. We are
inexperienced with our sales cycle for these new application products to these
users and we cannot predict how the market for our application products will
develop, and part of our strategic challenge will be to convince these users of
the productivity, communications, cost and other benefits of our application
products. Accordingly, it is likely that delays in our sales cycles with these
application products will occur and this could cause significant variations in
our operating results.
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:
o generate additional revenues from different organizations within our
customers;
o conduct effective marketing and sales programs to acquire new
customers; and
o 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:
o purchase volumes;
o competitive pricing;
o the specific requirements of the order;
o the duration of the licensing arrangement; and
o the level of sales and service support.
16
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.
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 some of our application
services is partly 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. If our consumer-oriented
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.
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 services, our operating results will
suffer.
Historically, a limited number of customers has accounted for a significant
portion of our revenues and revenues from media and entertainment companies have
comprised a substantial portion of our total revenues followed by revenues from
corporate enterprises, government agencies and educational institutions. During
the fourth fiscal quarter of our fiscal year ended March 31, 2002, we completed
our application services contract with our largest customer (a media and
entertainment customer) for the fiscal year ended March 31, 2002. We were unable
to reach mutually agreeable terms for a renewal with this former customer. In
addition, our historically largest reseller (that generally re-sold our products
to media and entertainment enterprises) announced that it is divesting its
business segment in which our products are most complementary. As a result, we
encountered very little channel sales activity from this reseller during the
fourth fiscal quarter of our fiscal year ended March 31, 2002. We believe these
two factors contributed to our quarterly decline in total revenues during the
fourth fiscal quarter of our fiscal year ended March 31, 2002. As a result of
this significant customer loss and channel partner loss, our future operating
results could be significantly harmed. In addition, if we were to lose one of
our other large customers or any of our large customers were to delay or default
on obligations under their contracts with us, our future operating results could
be significantly harmed.
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.
Any failure of our network could lead to significant disruptions in our
application services business that 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:
o human error;
o physical or electronic security breaches;
o computer viruses;
o fire, earthquake, flood and other natural disasters;
o power loss;
o telecommunications failure; and
o sabotage and vandalism.
17
Our failure to protect our network against damage from any of these events
will hurt our business.
We depend on outside third parties to maintain our communications hardware and
perform most of our computer hardware operations and if these third parties'
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 Palo Alto
Internet Exchange in Palo Alto, CA. 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 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. Intense competition in
our industry may 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:
o our technology or systems may become obsolete upon the introduction of
alternative technologies, such as products that better manage and
search video content;
o we could incur substantial costs if we need to modify our products and
services to respond to these alternative technologies;
o 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
o 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.
18
Power outages in California could adversely affect us.
We have significant operations in the state of California and are dependent
on a continuous power supply. California has had energy crises in the past that
resulted in rolling blackouts throughout the state. These rolling blackouts
could have substantially disrupted our operations and have increased our
expenses. California may implement future rolling blackouts should the state
find itself in a similar future energy predicament. If blackouts interrupt our
power supply, we may be temporarily unable to continue operations at our
California facilities. Any such interruption in our ability to continue
operation at our facilities could delay the development of our products and
services and disrupt communications with our customers or other third parties on
which we rely, such as web hosting service providers. Future interruptions could
damage our reputation and could result in lost revenue, either of which could
substantially harm our business and results of operations. Furthermore, there
have been, in the past, shortages in wholesale electricity supplies and this has
caused power prices to increase. If energy prices should increase again in the
future, our operating expenses will likely increase which could have a negative
effect on our operating results, which in turn may cause our stock price to
fall.
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.
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 such as senior development
staff, product marketing staff and sales personnel. The loss of 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.
19
The threat of terrorism and/or other major militaristic related responses
creates a greater amount of instability for global business operations and
should a major catastrophe occur, our business may be harmed.
The worldwide socio-political environment has changed dramatically since
September 11, 2001. Our customers, potential customers and vendors are located
worldwide and generally within major international metropolitan areas. For
example, we have a number of customers located in and around New York City and
their operations have been disrupted in many cases by the events of September
11, 2001. Should a major catastrophe occur within the vicinity of any of our
customers' and/or potential customers' and/or vendors' operations, our
operations may be adversely impacted and our business may be harmed.
In addition, the significant majority of our operations are conducted at
offices within a 60-mile radius of the major metropolitan cities of San
Francisco, New York City, Boston and London. We conduct our business in leased
space that is shared with other tenants and that contain ventilation systems and
postal operations. Our business also requires that certain personnel, including
our officers, travel in order to perform their jobs appropriately. Should a
major catastrophe occur nationally, internationally or in specific cities where
we conduct our operations our business could be harmed. In addition, should a
catastrophe occur related to any of our employees, our business may be harmed.
Our workforce reductions and financial performance may adversely affect the
morale and performance of our personnel we wish to retain and may adversely
affect our ability to hire new personnel.
Our restructuring efforts included reductions in our workforce in order to
reduce costs and bring staffing in line with our anticipated requirements. There
were costs associated with the workforce reductions related to severance and
other employee-related costs, and our realignment plan may yield unanticipated
costs and consequences, such as attrition beyond our planned reduction in staff.
In addition, our common stock has declined in value below the exercise price of
many options granted to employees pursuant to our stock option plans. Thus, the
intended benefits of the stock options granted to our employees, the creation of
performance and retention incentives, may not be realized. In addition,
workforce reductions and management changes create anxiety and uncertainty and
may adversely affect employee morale. As a result, we may lose employees whom we
would prefer to retain. As a result of these factors, our remaining personnel
may seek employment with larger, more established companies or companies they
perceive as having less volatile stock prices. In addition, we may be required
to create additional performance and retention incentives in order to retain
these employees including the granting of additional stock options to these
employees at current prices or issuing incentive cash bonuses. Such incentives
may either dilute our existing stockholder base or result in unforeseen
operating expenses, which may cause our stock price to fall. For example, in
February 2002, we introduced a Voluntary Stock Option Cancellation and Re-grant
Program in which a number of our employees cancelled stock options that had
significantly higher exercise prices in comparison to where our common stock
price currently trades. These employees will receive new options in August 2002
at exercise prices equivalent to our common stock price at that date. This may
cause dilution to our existing stockholder base, which may cause our stock price
to fall. Additionally, the exercise price of the new option could potentially be
higher than the price of the cancelled options, which would render the options
less effective as an incentive for our employees.
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 sales, development, marketing and
administrative personnel 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 particularly given our continued
operating losses and weakening cash position. 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.
20
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, especially in light of the significant headcount reductions we have
made to our business during the year ended March 31, 2002 and may be required to
make in the future. To the extent we acquire other businesses, we would also
need to integrate and assimilate new operations, technologies and personnel.
Failure to manage any growth effectively could hurt our business.
We have leases for our facilities that expire on various dates through 2006 that
we may not be able to fully utilize and this may cause us to incur large
write-offs for excess capacity.
Our principal administrative, research and development, sales, services and
marketing activities are conducted on two leased properties in San Mateo,
California: the first property consists of 21,000 square feet and expires in May
2002 and the second property consists of 48,000 square feet and expires in
September 2006. In addition, we lease a property in New York City for services
and sales under a lease that expires in March 2005, a property near Boston,
Massachusetts where the Company performs research and development under a lease
that expires in June 2003 and a property near London, England where the Company
performs sales, services, marketing and administrative activities and that
expires in February 2004. During the years ended March 31, 2002 and 2001, the
Company was able to sublease its excess capacity at its facilities and received
rental payments from its tenants. Two of the Company's sublease tenants who
accounted for the significant majority of the Company's sublease receipts did
not renew their sublease agreements during the year ended March 31, 2002. The
Company has not been successful in finding any new sublease tenants and,
accordingly, recorded expense of $396,000 during the three months ended March
31, 2002 to account for its on-going, excess operating facilities. Should the
Company continue to have excess operating lease capacity and the Company is
unable to find a sub lessee at a rate equivalent to its operating lease rate,
the Company would be required to record a charge for the rental payments that
the Company owes to its landlord relating to this excess facility capacity. The
Company's management reviews its facility requirements and assesses whether any
excess capacity exists as part of its on-going financial processes.
If demand for our application services decreases, we may not be able to fully
utilize our capacity and this may cause us to incur large charges for excess
capacity.
Our application services use significant capital equipment and other
infrastructure resources that have been purchased and engaged to support its
current customer requirements. Our application services are new and unproven and
revenues and related expenses are difficult to forecast. Customers typically
engage in contracts for our application services for a period of six to twelve
months and no customer has any obligation to renew. During the year ended March
31, 2002, the Company incurred equipment write-downs of $455,000 as a direct
result of a decline in demand for its application services. Should the Company
lose other customers for its application services, the Company may have excess
capacity and be required to record additional charges for excess capital
equipment and/or other infrastructure costs. The Company's management reviews
its capacity requirements and assesses whether any excess capacity exists as
part of its on-going financial processes.
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.
21
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.
Others may bring infringement or other 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:
o cease using key aspects of our technology that incorporate the
challenged intellectual property;
o obtain a license from the holder of the infringed intellectual
property right; and
o 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.
In addition, from time to time, we may become involved in litigation claims
arising from our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a material adverse effect on us. However, we could incur
substantial costs to defend any litigation, which could harm our operations.
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.
22
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.
As we operate internationally, we face significant risks in doing business in
foreign countries.
We are subject to a number of risks associated with international business
activities, including:
o costs of customizing our products and services for foreign countries,
including localization, translation and conversion to international
and other foreign technology standards;
o 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;
o import and export restrictions, tariffs and greater difficulty in
collecting accounts receivable; and
o 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.
23
In addition to the above-stated risks, under the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("FAS 142"), any future goodwill resulting from any
future acquisitions we may undertake will not be amortized but instead reviewed
at least annually for impairment. We will be required to test goodwill for
impairment using the two-step process prescribed in FAS 142. The first step is a
screen for potential impairment, while the second step measures the amount of
impairment, if any. Should we enter into any future acquisition transactions and
general macroeconomic deteriorate subsequent to the acquisition, which affects
our business and operating results over the long-term, and/or should the future
acquisition target not provide the results that are anticipated when the merger
is consummated, we could be required to record accelerated impairment charges
related to goodwill, which could adversely affect our financial results.
We have adopted certain anti-takeover measures that 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.
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 direct competition in the marketplace
comes primarily from Convera Corporation. 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. Furthermore, we may
compete with new or different competitors who sell similar or competing
solutions in the vertical markets applicable to our various solution
applications. 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.
24
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:
o changes in content delivery methods and protocols;
o 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;
o 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;
o the development of relationships by our competitors with companies
that have significant access to or control over the broadband
transmission technology or content; and
o 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.
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.
Item 2. Properties
Our principal administrative, research and development, sales, services and
marketing activities are conducted on two leased properties in San Mateo,
California: the first property consists of 21,000 square feet and expires in May
2002 and the second property consists of 48,000 square feet and expires in
September 2006. In addition, we lease a property in New York City for services
and sales under a lease that expires in March 2005, a property near Boston,
Massachusetts where the Company performs research and development under a lease
that expires in June 2003 and a property near London, England where the Company
performs sales, services, marketing and administrative activities and that
expires in February 2004.
25
Item 3. Legal Proceedings
Beginning on August 22, 2001, purported securities fraud class action
complaints were filed in the United States District Court for the Southern
District of New York. The cases were consolidated and the litigation is now
captioned as In re Virage, Inc. Initial Public Offering Securities Litigation,
Civ. No. 01-7866 (SAS) (S.D.N.Y.), related to In re Initial Public Offering
Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). On or about April 19, 2002,
the plaintiffs electronically served an amended complaint. The amended complaint
is brought purportedly on behalf of all persons who purchased the Company's
common stock from June 28, 2000 through December 6, 2000. It names as defendants
the Company, two of our officers, and several investment banking firms that
served as underwriters of our initial public offering. The complaint alleges
liability under Sections 11 and 15 of the Securities Act of 1933 and Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the
registration statement for the offering did not disclose that: (1) the
underwriters had agreed to allow certain customers to purchase shares in the
offerings in exchange for excess commissions paid to the underwriters; and (2)
the underwriters had arranged for certain customers to purchase additional
shares in the aftermarket at predetermined prices. The amended complaint also
alleges that false analyst reports were issued. No specific damages are claimed.
The Company is aware that similar allegations have been made in other
lawsuits filed in the Southern District of New York challenging over 300 other
initial public offerings and secondary offerings conducted in 1999 and 2000.
Those cases have been consolidated for pretrial purposes before the Honorable
Judge Shira A. Scheindlin. Defendants' time to respond to the complaints has
been stayed pending a plan for further coordination. We believe that the
allegations against our officers and us are without merit, and we intend to
contest them vigorously.
From time to time, the Company may become involved in litigation claims
arising from its ordinary course of business. The Company believes that there
are no claims or actions pending or threatened against it, the ultimate
disposition of which would have a material adverse effect on the Company.
26
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of our fiscal year ended March 31, 2002.
Executive Officers of the Registrant
The following table sets forth certain information regarding our executive
officers as of June 12, 2002:
Name Age Position
---- --- --------
Paul G. Lego............................. 43 President, Chief Executive Officer and Chairman
of the Board of Directors
Alfred J. Castino........................ 50 Chief Financial Officer
Stanford S. Au........................... 39 Vice President, Engineering
David J. Girouard........................ 36 Senior Vice President, Marketing and Corporate
Strategy
Michael H. Lock.......................... 39 Senior Vice President, Worldwide Sales
Frank H. Pao............................. 33 Vice President, Business Affairs
Paul G. Lego, chairman of the board of directors, president and chief
executive officer, joined Virage in January 1996. From January 1995 to January
1996, Mr. Lego was an associate at Sutter Hill Ventures, a venture capital firm.
From June 1988 to December 1994, Mr. Lego was the chief operating officer at
Digidesign, a manufacturer of digital audio recording and editing systems, which
was acquired by Avid Technology in January 1995. Mr. Lego has also held various
marketing, manufacturing and engineering positions with Pyramid Technology
Corporation, the General Electric Company and Digital Equipment Corporation. Mr.
Lego holds a B.S. in electrical engineering from Cornell University and an
M.B.A. from Harvard Business School.
Alfred J. Castino, chief financial officer, joined Virage in January 2000.
From September 1999 to January 2000, Mr. Castino was the chief financial officer
of RightPoint, a marketing software firm that was acquired by E.piphany. From
September 1997 to August 1999, Mr. Castino was employed at PeopleSoft as vice
president of finance and chief accounting officer, as senior vice president of
finance and administration, and chief financial officer. From April 1996 to
September 1997, Mr. Castino was vice president and corporate controller at
Chiron Corporation, a biotechnology company. From August 1989 to March 1996, Mr.
Castino held finance positions at Sun Microsystems including finance director of
United States operations, director of finance and planning for European
operations, and assistant corporate controller. Mr. Castino's prior experience
also includes seven years at Hewlett-Packard Company in various financial
management positions. Mr. Castino is a certified public accountant. Mr. Castino
holds a B.A. in economics from Holy Cross College and an M.B.A. from Stanford
University.
Stanford S. Au, vice president, engineering, joined Virage in January 2002.
Mr. Au came to Virage from AOL-Time Warner's Netscape Communications, where he
held various positions from 1998 to 2002, most recently as vice president and
general manager of AOL's IBPP business unit. Prior to Netscape, he was an
original member of KIVA software's executive staff, which was acquired by
Netscape. Mr. Au has also held various engineering and senior management
positions at Apple Computer, Sun Microsystems, and Hewlett-Packard. Mr. Au holds
a B.S. in electrical engineering and computer science from the University of
California, Berkeley.
David J. Girouard, senior vice president, marketing and corporate strategy,
joined Virage in May 1997. Prior to becoming our senior vice president,
marketing and corporate strategy, Mr. Girouard was our vice president and
general manager, Virage Interactive, and was as a director of product marketing.
From December 1994 to April 1997, Mr. Girouard was a product manager in the
worldwide product marketing group at Apple Computer. Mr. Girouard holds a B.A.
in engineering sciences and a B.E. from Dartmouth College. He also holds an
M.B.A. from the University of Michigan.
27
Michael H. Lock, senior vice president, worldwide sales, joined Virage in
January 2001. Prior to joining Virage, Mr. Lock held various sales and marketing
positions at Oracle Corporation, most recently as Vice President, Sales and
Marketing, from 1996 to 2000. Mr. Lock also has served in a variety of sales,
marketing and general management positions with IBM, Dun and Bradstreet Software
and Drake International. Mr. Lock received a B.S. in Business Administration
from Wilfrid Laurier University in Ontario, Canada.
Frank H. Pao, vice president, business affairs, joined Virage in April
1997. From September 1994 to March 1997, Mr. Pao specialized in intellectual
property and licensing transactions at the law firm of Gray Cary Ware &
Freidenrich. He has also held various engineering positions at Advanced
Cardiovascular Systems and Lawrence Berkeley Laboratories. Mr. Pao holds a B.S.
in bioengineering from the University of California at Berkeley and a J.D. from
Boalt Hall School of Law at the University of California at Berkeley.
28
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Our common stock is listed on the Nasdaq National Market under the
symbol "VRGE".
Following our initial public offering on June 29, 2000, the following high
and low closing sales prices were reported by Nasdaq in each period indicated:
High Low
---- ---
Year Ended March 31, 2002
-------------------------
Fourth quarter $ 3.56 $ 2.00
Third quarter $ 3.47 $ 1.61
Second quarter $ 4.15 $ 1.65
First quarter $ 5.90 $ 1.81
Year Ended March 31, 2001
-------------------------
Fourth quarter $ 7.50 $ 2.00
Third quarter $18.38 $ 4.63
Second quarter $30.63 $10.00
First quarter (from June 29, 2000) $22.00 $14.47
The reported last sale price of our common stock on the Nasdaq National
Market on June 12, 2002 was $1.02. The approximate number of holders of record
of the shares of our common stock was 255 as of June 12, 2002. This number does
not include stockholders whose shares are held in trust by other entities.
Because many of our shares of common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders.
We have not paid any cash dividends on our capital stock. We currently
intend to retain future earnings, if any, to fund the development and growth of
our business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
(b) There has been no change to the disclosure contained in our report on
Form 10-Q for the nine months ended December 31, 2001 regarding the use of
proceeds generated by our initial public offering.
29
Item 6. Selected Consolidated Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Consolidated Financial Statements
and the Notes thereto included elsewhere in this annual report. Historical
results are not necessarily indicative of results that may be expected for any
future period.
Fiscal Years Ended
March 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues:
License revenues ...................................... $ 7,414 $ 6,161 $ 4,188 $ 1,956 $ 1,438
Service revenues ...................................... 9,099 5,136 1,102 253 130
Other revenues ........................................ 232 104 271 1,141 1,134
-------- -------- -------- -------- --------
Total revenues ................................. 16,745 11,401 5,561 3,350 2,702
Cost of revenues:
License revenues ...................................... 705 723 870 397 454
Service revenues ...................................... 8,607 7,381 2,400 426 62
Other revenues ........................................ 153 149 260 859 809
-------- -------- -------- -------- --------
Total cost of revenues ......................... 9,465 8,253 3,530 1,682 1,325
-------- -------- -------- -------- --------
Gross profit ............................................ 7,280 3,148 2,031 1,668 1,377
Operating expenses:
Research and development .............................. 9,172 9,101 4,182 2,325 1,751
Sales and marketing ................................... 17,301 17,129 8,349 4,362 2,810
General and administrative ............................ 4,985 5,298 2,653 1,273 935
Stock-based compensation .............................. 5,113 3,294 1,070 -- --
-------- -------- -------- -------- --------
Total operating expenses ....................... 36,571 34,822 16,254 7,960 5,496
-------- -------- -------- -------- --------
Loss from operations .................................... (29,291) (31,674) (14,223) (6,292) (4,119)
Interest and other income, net .......................... 1,541 2,800 384 123 19
-------- -------- -------- -------- --------
Loss before income taxes ................................ (27,750) (28,874) (13,839) (6,169) (4,100)
Provision for income taxes .............................. -- -- (36) -- --
-------- -------- -------- -------- --------
Net loss ................................................ (27,750) (28,874) (13,875) (6,169) (4,100)
Series E convertible preferred stock
dividend .............................................. -- -- (4,544) -- --
-------- -------- -------- -------- --------
Net loss applicable to common
stockholders .......................................... $(27,750) $(28,874) $(18,419) $ (6,169) $ (4,100)
======== ======== ======== ======== ========
Basic and diluted net loss per share
applicable to common stockholders ..................... $ (1.37) $ (1.88) $ (8.06) $ (3.67) $ (2.84)
======== ======== ======== ======== ========
Shares used in computation of basic and
diluted net loss per share applicable
to common stockholders ................................ 20,327 15,397 2,286 1,679 1,443
March 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments ............ $ 30,694 $ 48,131 $ 10,107 $ 4,357 $ 5,780
Working capital .............................................. 24,077 40,588 8,101 3,879 4,723
Total assets ................................................. 39,552 60,206 18,872 6,605 7,289
Long-term obligations, net of current portion ................ -- -- 83 241 311
Redeemable convertible preferred stock ....................... -- -- 36,995 17,936 12,472
Accumulated deficit .......................................... (88,924) (61,174) (32,300) (13,881) (7,712)
Total stockholders' equity (net capital deficiency) .......... $ 30,059 $ 49,706 $(23,221) $(13,326) $ (7,257)
30
Item 7. Management's Discussion and Analysis of Financial Condition and Re