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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER:
DECEMBER 31, 1999 000-27871
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GRIC COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0368092
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1421 MCCARTHY BLVD., MILPITAS, CALIFORNIA 95035
(Address of principal executive offices)
(408) 955-1920
(Registrant's telephone number, including area code)
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Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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 February 29, 2000, 19,233,979 shares of Common Stock of Registrant
were outstanding. The aggregate market value of the shares held by
non-affiliates of the Registrant (based upon the closing price of the
Registrant's Common Stock on February 29, 2000 of $70.13 per share) was
approximately $1.35 billion.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED PURSUANT TO
REGULATION 14A PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES EXCHANGE ACT OF 1934, WHICH IS ANTICIPATED TO BE FILED WITHIN
120 DAYS AFTER THE END OF THE REGISTRANT'S FISCAL YEAR ENDED DECEMBER 31, 1999,
ARE INCORPORATED BY REFERENCE IN PART III HEREOF.
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GRIC COMMUNICATIONS, INC.
1999 FORM 10K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 20
Item 3 Legal Proceedings........................................... 20
Item 4 Submission of Matters to a Vote of Security Holders......... 20
Item 4A Executive Officers.......................................... 21
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 23
Item 6 Selected Financial Data..................................... 25
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
Item 7A Qualitative and Quantitative Disclosures About Market
Risk........................................................ 39
Item 8 Financial Statements and Supplementary Data................. 40
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 42
Item 11 Executive Compensation...................................... 42
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 42
Item 13 Certain Relationships and Related Transactions.............. 42
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 43
Signatures............................................................ 46
Financial Statements.................................................. 48
Exhibits.............................................................. 66
2
PART I
ITEM 1. BUSINESS
WE MAKE MANY STATEMENTS IN THIS REPORT, SUCH AS STATEMENTS REGARDING OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHERS, THAT ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE EXCHANGE ACT. WE MAY IDENTIFY THESE STATEMENTS BY THE
USE OF THE FUTURE TENSE OR WORDS SUCH AS "BELIEVE," "ANTICIPATE," "INTEND,"
"MAY," "EXPECT," "ESTIMATE," "WILL," "CONTINUE," "PLAN" AND SIMILAR EXPRESSIONS.
THESE FORWARD-LOOKING STATEMENTS INVOLVE SEVERAL RISKS AND UNCERTAINTIES. YOU
SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY, BECAUSE THEY DISCUSS
OUR EXPECTATIONS ABOUT OUR FUTURE PERFORMANCE, CONTAIN PROJECTIONS OF OUR FUTURE
OPERATING RESULTS AND OUR FUTURE FINANCIAL CONDITION, OR STATE OTHER
"FORWARD-LOOKING" INFORMATION. THERE MAY BE EVENTS IN THE FUTURE, HOWEVER, THAT
WE ARE NOT ABLE TO PREDICT OR OVER WHICH WE HAVE NO CONTROL. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE WE DISCUSS IN
"FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS REPORT. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS REPORT, AND WE
CAUTION YOU NOT TO RELY ON THESE STATEMENTS WITHOUT ALSO CONSIDERING THE RISKS
AND UNCERTAINTIES ASSOCIATED WITH THESE STATEMENTS AND OUR BUSINESS THAT ARE
ADDRESSED IN THIS REPORT.
OVERVIEW
We provide services and software that enable our customers to offer
Internet-based products and services, such as Internet telephony and Internet
roaming, to their end users worldwide. Our customers include telecommunications
companies, Internet service providers and newly-emerging communications service
providers. We provide our services and software through a global network of our
customers that we call the GRIC Alliance. We created this alliance by forming
contractual relationships with our customers that allow them to share their
communications networks. We use our internally-developed software, which we call
GRIC Convergent Services Platform or GRIC CSP, to manage this shared network of
our customers and to provide settlement services. As a settlement services
clearinghouse we have established common technical, service and payment
standards to settle charges that our customers incur when their end users access
the networks of other GRIC Alliance members. These end users access these
networks in order to initiate Internet communications, such as Internet roaming
and Internet telephony. Internet roaming is a method by which end users access
the Internet using the network facilities of a provider other than the Internet
service provider with which they have established an access account. Internet
telephony is a method of transmitting telephone calls over the Internet rather
than through traditional telephone networks.
As of December 31, 1999, the GRIC Alliance included the communications
networks of over 350 GRIC Alliance members and Internet access points located in
over 150 countries. By joining the GRIC Alliance, members allow their end users
to access a global network consisting of the local, regional and international
networks of the GRIC Alliance members. Through our strategic relationships with
Internet telephony equipment vendors, such as Lucent Technologies and Cisco
Systems, we help ensure that members can readily adopt and deploy new technology
across the networks in the GRIC Alliance. Current members of the GRIC Alliance
include America Online, Belgacom, NEC Biglobe, Chunghwa Telecom, Fujitsu Nifty,
HKNet, Itochu, MindSpring, Net Vision, NTT Communications, Singapore
Telecommunications, Sony Communication Network Corporation, Telekom Malaysia,
Telstra's On Australia subsidiary and U-NET.
Our GRIC Convergent Services Platform operates on several different
combinations of software and computer and network hardware. We use GRIC CSP to
deliver services to our customers. Those services make it possible for our
customers to manage and settle Internet-based transactions, identify and
authorize end users to conduct those transactions, and determine preferred
routing for Internet-based communications. GRIC CSP is designed to facilitate
the introduction, deployment and
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management of new Internet-based services on a global scale across the multiple
networks that constitute the GRIC Alliance.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET-BASED SERVICES MARKET
Improvements in technology, the efficiency of Internet-based communications,
global deregulation of the communications industry and the convergence of the
Internet-based communications and traditional telecommunications markets all
have combined to create significant new opportunities for providers of
Internet-based services including the opportunity to address the large and
growing telecommunications market. TeleGeography, a market research firm,
estimates the amount of international long distance traffic is expected to grow
from approximately 94 billion minutes in 1998 to approximately 143 billion
minutes in 2001.
The convergence of the Internet-based communications and traditional
telecommunications markets is gaining momentum because technological
improvements have recently made it more practical to utilize Internet protocol
technology for telephone connections, particularly international calls, and not
just to transmit data over the Internet. It is now possible to transmit
phone-to-phone calls over Internet-based networks with quality approaching that
of traditional, switch-based voice networks.
Transmitting voice over the Internet, also known as Internet telephony,
presents a significant opportunity because it allows telecommunications
providers to bypass incumbent long distance telephone tariff and rate structures
and greatly reduces the cost of connecting international calls. Internet
telephony is also more cost-effective and efficient than traditional switched
telephony because Internet-based networks allow voice and data calls to be
pooled, enabling telecommunications providers to carry more calls over lines
with the same amount of bandwidth. As a result of these factors, Internet
telephony is expected to capture an increasing share of the international long
distance telephone market. According to International Data Corporation, voice
minutes transmitted over Internet-based networks are expected to increase from
300 million minutes in 1998 to 135 billion minutes in 2004.
Demand for a wide variety of other Internet-based communications services,
such as Internet roaming, is also expected to increase. Internet roaming enables
end users to access the Internet by using the network facilities and services of
a provider other than their "home provider" or provider with whom they have an
Internet access account. This demand for Internet roaming services is being
driven by a number of factors, including the rapid growth of Internet users
worldwide, the increase in global consumer and business travel and the
prevalence of e-mail as a medium for the exchange of information. According to
the Yankee Group, the worldwide market for remote access services, including
Internet roaming, will increase from approximately $430 million in 1998 to
approximately $1.98 billion in 2002.
Finally, we believe demand for all Internet-based services, including
Internet telephony and Internet roaming, will increase as a result of
deregulation in global telecommunications markets. Global deregulation has also
compelled communications service providers to offer additional services as a
means to differentiate themselves from their competitors and to generate
increased revenues.
CHALLENGES ASSOCIATED WITH PROVIDING INTERNET-BASED COMMUNICATIONS SERVICES
In order for providers of communications services to offer Internet-based
communications services on a commercial basis, a number of needs must be met.
ACCESS TO GLOBAL INTERNET-BASED NETWORK. Access to, or ownership of, an
Internet-based network with Internet access points around the world is required
to enable the global delivery of multiple Internet-based services. The capital
and lead time required for any one service provider to establish such a global
network can be significant. Legal and regulatory impediments can create further
barriers.
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Therefore, many individual providers must partner and share networks with
multiple providers in order to enable a broad range of Internet-based services
on a global basis.
NUMEROUS GLOBAL RELATIONSHIPS. As more service providers attempt to provide
global services, the number and complexity of relationships among such providers
will likely increase. Establishing the necessary contracts, service and payment
standards, cross-marketing rights and access rights can be a costly and time
consuming process.
INTERNET COMMUNICATIONS INFRASTRUCTURE. Traditional telecommunications
companies require software, hardware and network management solutions, known as
Operations Support System solutions, to enable them to provide their services.
The market for Operations Support System solutions in the telecommunications
industry is large and is currently addressed by numerous vendors. We believe
that as Internet communications services become more widespread and continue to
converge with traditional telecommunication services, a similar need for an
Internet Operations Support System infrastructure is emerging. We believe this
Internet communications infrastructure will need to include the following key
functions:
- CONFIGURATION--assigning a user name and password to establish a person's
account;
- PROVISIONING--designating one or more Internet-based services that a
person is authorized to use once an account is established;
- AUTHENTICATION--determining whether a person is authorized to use a
particular service and then connecting that person to the appropriate
authorized service;
- ROUTE ORIGINATION AND TERMINATION--determining the appropriate network
routing of an Internet connection, including the point from which it is
initiated and the point it is received, based on applicable cost and
quality of service parameters;
- TRACKING--monitoring each end user's individual Internet communication and
service quality and collecting the corresponding accounting data necessary
to bill customers; and
- CLEARINGHOUSE SETTLEMENT--billing and collecting amounts owed by one
communications service provider whose end users access a second provider's
facilities or services, and paying that second provider for that access.
Settlement becomes more complex as the number of parties involved
increases, because all parties must agree on common rules for settlement
and payment. A settlement clearinghouse is important because it
establishes these common rules and provides settlement services.
Until recently no single company has had the combined expertise as an
infrastructure and service provider to successfully address each of these
challenges.
THE GRIC SOLUTION
We are a leading provider of Internet-based communications infrastructure
products and services, including settlement services, that enable
telecommunications service providers, Internet service providers, and
newly-emerging communications providers to offer Internet-based products and
services to their customers worldwide. Our Internet-based platform consists of a
global network, our GRIC CSP software and the GRIC Alliance. We use this
Internet-based platform to offer transaction management and settlement services
to our customers. Our combination of software, network infrastructure and
business relationships allows our customers to provide to their end users, on a
global basis, Internet-based services such as global Internet roaming, including
secure corporate remote access capability, and Internet telephony, including
voice, fax and prepaid capabilities. As a settlement services clearinghouse
managing a global alliance, we establish critical business relationships and
processes and implement common technical, service and payment standards needed
to enable our customers to provide services through a shared global network.
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Our infrastructure platform enhances our customers' service offerings and
end user relationships in several ways:
- ENABLES BUNDLING OF MULTIPLE INTERNET-BASED SERVICES. Our solution enables
new Internet-based communications services, either alone or in bundled
offerings, such as global Internet roaming, including secure corporate
remote access capability, and Internet telephony. We believe the ability
to bundle services will also allow our customers to more easily cross-sell
other Internet-based services to each end user and reduce end user
turnover.
- PROVIDES A GLOBAL NETWORK TO EXPAND GEOGRAPHIC REACH. Each of our
customers gains an immediate global presence for the benefit of its end
users. By accessing an existing network, each customer avoids the cost and
time required to negotiate, build and maintain its own network of
relationships, becoming a global service provider through the GRIC
Alliance.
- LOWERS COSTS. Our customers can gain a competitive advantage or maintain
competitive parity by expanding their end user service offerings without
incurring the substantial capital investments and operating costs that
would otherwise be required to build and deploy their own global
Internet-based multiple-service network.
- FACILITATES COMMUNICATION AMONG MANY NETWORKS. We have designed our
software, structured our business and formed the GRIC Alliance to allow
our customers, the members of the GRIC Alliance, to share their network
facilities. Our technical, service and payment standards facilitate this
network sharing by enhancing business and technical interoperability.
Utilizing our GRIC CSP software, we administer and monitor the GRIC Alliance
network and provide transaction management and settlement services to our
customers. We believe GRIC CSP benefits our customers in the following ways:
- PROVIDES FUNCTIONALITY NECESSARY TO MANAGE A GLOBAL NETWORK. GRIC CSP
provides configuration, authentication, route origination and termination,
tracking, and settlement services, which are essential to integrate the
dispersed networks of the GRIC Alliance members into a global
interconnected network which we manage.
- SUPPORTS EFFICIENT BILLING AND TRANSACTION MANAGEMENT. By tracking usage
data through the networks in the GRIC Alliance, we use GRIC CSP to provide
the information necessary for our members to bill their end users with the
convenience of a single bill.
- FACILITATES ADDITION OF NEW INTERNET-BASED SERVICES. GRIC CSP is designed
to enable the introduction of new Internet-based services. This ensures
that our customers can develop and quickly deploy new service offerings to
their end users.
STRATEGY
Our goal is to become the preferred global provider of Internet-based
communications infrastructure and clearinghouse services. In order to achieve
this goal, we intend to:
- CONTINUE TO ADD GRIC ALLIANCE MEMBERS. We believe that the benefits of the
GRIC Alliance increase as the number and quality of GRIC Alliance members
increase. Accordingly, we will continue to focus our efforts on
identifying new GRIC Alliance members with attributes that enhance the
GRIC Alliance, such as extensive network facilities, a diverse array of
Internet-based service offerings and large subscriber bases, particularly
those with a high percentage of roaming and telephony subscribers.
- CROSS-SELL TO GRIC ALLIANCE MEMBERS. We intend to focus on opportunities
to cross-sell our products and services to GRIC Alliance members that do
not currently offer the full range of services that we enable. We are well
positioned for such cross-selling because our infrastructure readily
enables and supports the delivery of bundled and new Internet-based
services. Our existing Internet telephony infrastructure should make it
easier for us to offer new Internet
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telephony services, such as personal computer-to-telephone, video
conferencing and collaboration, as they become available.
- ENHANCE OUR TECHNOLOGY LEADERSHIP. We intend to continue to enhance our
technology leadership by devoting significant resources to developing GRIC
CSP's features and functionality, enhancing our existing Internet-based
service offerings and introducing new Internet-based services. We expect
that new enhancements of GRIC CSP will offer integration with third party
provisioning and billing systems and the ability to allow future
proprietary and third party Internet-based services to operate on the GRIC
CSP platform. We also plan to increase functionality of GRIC CSP to enable
it to operate with a greater range of computing devices as well as
offering fault tolerance, remote network management capabilities and
improved scalability.
- PROMOTE THE ADOPTION OF GRIC CSP. We intend to encourage the adoption of
GRIC CSP as the preferred platform worldwide for delivery of multiple
Internet-based services. We expect this to lead to increased settlement
revenues. In addition to continuing to use GRIC CSP to manage the GRIC
Alliance and provide our settlement services, we intend to license future
versions of GRIC CSP directly to our customers. By licensing to our
customers an enhanced GRIC CSP solution with a broader range of
functionality, we hope to enable them to provide better service to their
customers and to increase their transaction volume. We plan to create and
market a software developer kit for GRIC CSP. Future GRIC CSP-compatible
Internet-based services may include e-commerce, personal
computer-to-telephone, unified messaging, multimedia, wireless and
customer management software and services.
- LEVERAGE STRATEGIC RELATIONSHIPS. To expand our sales channels we intend
to leverage the capabilities, resources, expertise and market presence of
our customers and strategic partners through joint marketing and original
equipment manufacturer arrangements. For example, we intend to bundle our
products and services with the offerings of hardware vendors such as Cisco
Systems, Hewlett-Packard Company and Lucent Technologies, or integrate
GRIC CSP with third-party billing, Internet telephony or e-commerce
software solutions. We also intend to work with system integrators, who
could integrate GRIC CSP into a complete Internet communications solution,
and network computer system vendors, who could serve as an original
equipment manufacturer or sales channel to deliver settlement services to
corporate enterprises and large organizations.
- INCREASE TRANSACTION-BASED REVENUE. By supporting and promoting the
development of new Internet-based products and services, we expect to
facilitate the growth of Internet transactions generated by our customers.
We intend to adopt flexible pricing models to include transaction-based
fees and transaction revenue sharing. For example, we are designing GRIC
CSP to enable settlement of e-commerce micropayments, so as to allow
content providers who operate Internet Web sites to charge very small
amounts for Web site services and collect these charges using our
clearinghouse service.
PRODUCTS AND SERVICES
OVERVIEW
Our products and services enable our customers to offer multiple
Internet-based services, such as global Internet roaming and Internet telephony,
to their customers worldwide. Our infrastructure includes our GRIC CSP software,
our worldwide managed network and the GRIC Alliance. The GRIC Alliance functions
because its members generally operate in accordance with technical, quality,
payment and business rules and procedures that we establish and implement
through contracts and our role as a global settlement services clearinghouse. In
addition to enabling our customers to expand their service offerings to include
multiple Internet-based services, we also provide comprehensive clearinghouse
services to our customers.
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The table below summarizes our current products and services.
INTERNET-BASED SERVICE GRIC PRODUCTS AND SERVICES FEATURES
Global Internet Roaming - GRICtraveler software - Over 4,000 Internet access points in over 150 countries
- GRICdial - Worldwide private backbone network for enhanced quality
- Settlement services of service
- Easy to use
- Automatic update feature
- Network quality monitored by dialer software and 24x7
network
- Secure corporate remote access
Internet Telephony - GRICphone service - Allows phone-to-phone Internet telephony, including
- GRICprepaid software voice and prepaid
- Settlement services - Provides worldwide termination
- Supports Lucent and Cisco gateways
- Worldwide private backbone network for enhanced quality
of service
- Network quality monitored by our 24x7 network operations
center
GLOBAL INTERNET ROAMING
We enable our customers to offer global Internet roaming through the
combination of our GRICtraveler, GRICdial and GRIC CSP software. Our global
Internet roaming solution allows our customers to provide their end users with
low cost access to the Internet throughout the world by dialing a local number,
thereby eliminating the need for costly international calls to their "home"
Internet service provider.
GRICTRAVELER. Our GRICtraveler software normally resides on our customer's
server and enables the customer to provide global Internet roaming to end users
who have installed GRICdial software. We can also host the GRICtraveler software
at our facilities, enabling a customer to offer global Internet roaming to its
end users as a virtual service provider. GRICtraveler authenticates end users'
access to the networks included in the GRIC Alliance, enables access to services
offered by other GRIC Alliance members and sends a record of the transaction to
our central clearinghouse server for settlement. Settlement records may be
reviewed by our customers at any time using our Web site.
GRICDIAL. After our customers' end users install our GRICdial software on
their computer, they are able to use the global Internet roaming service to
access the Internet through the networks included in the GRIC Alliance. GRICdial
can be customized for branding purposes, which benefits our customers by
allowing them to create special or premium-rate access services. Three steps are
needed to access the Internet using our roaming product:
LAUNCH GRICdial, which automatically updates an electronic phone book of
available Internet access points to ensure the most current listing;
CHOOSE an Internet access point by entering the country and city and
selecting among the phone numbers listed by GRICdial or automatically using
a number that has been previously bookmarked; and
CONNECT and be authenticated using the name and password information
previously stored in GRICdial.
Secure corporate remote access provides a business traveler with an
integrated solution for secure remote access to his or her corporate network
through a public Internet connection. We enable our customers to offer this
service through a combination of our GRICtraveler and GRICdial software as well
as third-party virtual private networking software. Our GRICdial software is
compatible with and launches a variety of industry-leading, third-party virtual
private networking software.
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INTERNET TELEPHONY
Our Internet telephony services enable our customers to offer their end
users low-cost, high quality, Internet-based phone calls.
GRICPHONE. Our GRICphone is a phone-to-phone Internet telephony service
enabling phone calls to be made across the Internet to many locations throughout
the world. Generally, end users make an Internet telephony call in the same way
as they would make a traditional telephone call. GRICphone requires our
customers to operate an Internet telephony gateway from GRIC-compatible vendors,
which currently are Cisco Systems and Lucent Technologies. Our GRIC CSP software
and these Internet telephony gateways handle authentication, routing of phone
calls based on quality of service and cost parameters, and settlement services.
Our customers may elect to originate or terminate calls, select the countries to
which calls may be made and offer different quality of service levels. To help
ensure the quality of our Internet telephony service, we operate a worldwide,
private asynchronous transfer mode network over which calls can be routed.
GRICPREPAID. GRICprepaid software enables our customers to offer prepaid
Internet telephony services to their end users. The convenience to end users and
the reduced collection risk for customers have made prepaid services
increasingly popular. Utilizing our GRICprepaid software together with an
Internet telephony gateway from a GRIC-supported vendor, our customers can
immediately enter the prepaid telecommunications market at a fraction of the
cost associated with traditional prepaid telephony systems and offer their end
users access to our existing international Internet telephony network.
Additional functions allow our customers to perform administrative tasks such as
monitoring balances, increasing balances or changing the status of accounts.
CLEARINGHOUSE SETTLEMENT SERVICES
The combination of our clearinghouse settlement services and GRIC CSP
software establishes critical business relationships and processes needed to
enable our customers to provide services through a shared global network. We
generate settlement revenues when we act as a clearinghouse by providing
settlement services to customers whose end users initiate Internet roaming
services or originate Internet telephony communications. For each global
Internet roaming transaction, we use GRIC CSP to track the usage, collect the
amount that a roamer's "home" service provider owes us, pay the appropriate
amount to the service provider enabling local access, and provide the underlying
usage data to our customer to enable billing of its end user. For each Internet
telephony call, we use GRIC CSP to monitor usage, settle the amounts owed for
use of the networks available through the GRIC Alliance between participating
customers and provide the underlying usage data to facilitate our customer's
billing of its end user.
FUTURE PRODUCTS AND SERVICES
We intend to make significant investments to enhance GRIC CSP and to develop
and market other products and services. However, we cannot assure you that we
will be able to successfully develop or implement any new or enhanced product or
service in the future, and we may offer new products not listed below.
GRIC CSP AS A LICENSED PRODUCT. We currently use GRIC CSP internally to
administer and monitor the networks included in the GRIC Alliance. However, we
are developing an enhanced version of GRIC CSP that we expect to license
directly to our customers. We expect to offer our next generation of GRIC CSP
software in three editions:
- We are designing one edition to be offered to our current installed base
of GRIC Alliance members to support both global Internet roaming and
Internet telephony, as well as future Internet-based services. This
edition will add significant features and functionality over our
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current GRIC CSP software, including enhanced scalability, extensibility,
portability, security and remote network management capabilities, fault
tolerance, and integration with third-party provisioning and billing
systems. Two important benefits of this edition are the ability to update
GRIC CSP features remotely to ease network administration and allow future
proprietary and third-party Internet-based services to operate on and plug
into GRIC CSP so that they can be deployed throughout an existing
marketing channel-the GRIC Alliance. Given the substantially increased
functionality to be offered by this edition, we believe our customers will
view GRIC CSP as a flexible platform for quickly adding and bundling new
Internet-based services for use by their end users.
- We intend to license a GRIC CSP software development kit to independent
software vendors and hardware companies that wish to develop new or
improve existing Internet-based services to be deployed throughout the
GRIC Alliance. This software development kit will consist of documentation
and software tools, bundled with consulting and training. We expect that
third party developers will enhance the value of GRIC CSP by increasing
the number of available Internet-based services, making it a more
attractive and widely adopted platform for GRIC Alliance members.
- We intend to license a third edition of GRIC CSP that will enable large
service providers, principally telecommunications companies, to use GRIC
CSP to provide Internet-based services and clearinghouse services within
their own network domain. We are designing this edition of GRIC CSP to
allow us and our customers to partition the networks included in the GRIC
Alliance into multiple sub-networks. We intend to continue to provide
settlement services as a clearinghouse and to track and price transactions
among and between these sub-networks and to allocate payments among
multiple parties.
E-COMMERCE. We intend to enhance our GRIC CSP software capability to enable
us to provide clearinghouse services for e-commerce transactions. We believe
that this will be attractive to e-commerce companies in a variety of settings,
including high volume settlement of business-to-business transactions among more
than two parties and settling of micro-payments, which are typically very small,
high volume payments for products and services offered over a Web site.
PERSONAL COMPUTER-TO-PHONE, UNIFIED MESSAGING AND OTHER INTERNET-BASED
SERVICES. We intend to partner with leading hardware and software vendors to
facilitate the development of other new GRIC CSP-compatible Internet-based
services, which may include personal computer-to-telephone, unified messaging,
call center, multimedia, wireless and customer management solutions.
OUR INTERNET-BASED TECHNOLOGY AND COMMUNICATIONS INFRASTRUCTURE
Our Internet-based infrastructure consists of a worldwide managed network,
distributed software and the GRIC Alliance. Using this infrastructure, we
provide settlement services for, and enable our customers to offer, multiple
Internet-based services.
GRIC CONVERGENT SERVICES PLATFORM
GRIC CSP currently consists of software that we use to manage and operate
the networks included in the GRIC Alliance, provide settlement services, and
enable our customers to offer Internet-based communications services to their
end users. GRIC CSP's capabilities and features fall into the following three
categories:
OPERATIONS. GRIC CSP provides the functionality to support our network
operation by providing:
- AUTHENTICATION. GRIC CSP determines whether a user is permitted to use a
particular service, based upon that user's name and password.
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- TRACKING. GRIC CSP monitors each end user's individual service transaction
and service quality, collects the corresponding accounting data necessary
to bill customers and forwards it to our central settlement server.
- ROUTE ORIGINATION AND TERMINATION. For Internet telephony, GRIC CSP helps
locate and process the information that an Internet telephony gateway
needs to route an Internet communication over the network of GRIC Alliance
members for the lowest cost and desired quality of service.
- CLEARINGHOUSE AND SETTLEMENT. GRIC CSP currently provides the
functionality that we need to settle charges through our central
clearinghouse server.
CONFIGURATION. These services perform functions such as defining
subscribers and their account information and defining the use, configuration
and provisioning of Internet-based services such as global Internet roaming,
including secure corporate remote access and Internet telephony.
ARCHITECTURE. We have designed GRIC CSP to support a distributed network
architecture, which means the servers and software are located around the globe.
GRIC CSP supports several widely-adopted Internet protocols, which enable our
customers and their end users to transfer information across our customers'
network boundaries in a reliable manner without sacrificing the security of our
customers' networks. GRIC CSP supports the Open Standards Protocol, which is a
specification designed to facilitate inter-domain communications for future
Internet telephony architectures, and which we use to facilitate the interface
between GRIC CSP and Internet telephony gateways and gatekeepers. We believe our
adoption of this standard will facilitate compliance with new Internet telephony
standards in the future.
GRIC ALLIANCE
As of December 31, 1999, the GRIC Alliance included the communications
networks of over 350 GRIC Alliance members and Internet access points located in
over 150 countries. GRIC Alliance members that connect their networks to the
GRIC Alliance enable their end users to access the networks of other members.
Current members of the GRIC Alliance include America Online, Belgacom, NEC
Biglobe, Chunghwa Telecom, Fujitsu Nifty, HKNet, Itochu, MindSpring, Net Vision,
NTT Communications, Singapore Telecommunications, Sony Communication Network
Corporation, Telekom Malaysia, Telstra's On Australia subsidiary and U-NET.
OUR PHYSICAL NETWORK
The following is a summary of the primary components of our physical
network:
- our central clearinghouse, phone-book and network management servers in
Milpitas, California;
- our regionally distributed servers and Internet routing equipment in Los
Angeles, New York, San Jose, Washington, D.C., London and Singapore;
- Lucent Technologies and Cisco Systems Internet routing equipment owned
either by us or our customers, through which we have the capability to
terminate calls globally; and
- our worldwide private asynchronous transfer mode-based network, which we
use to maintain quality of service for Internet telephony calls. This
network has hubs in Los Angeles, New York, London and Singapore that are
connected by leased lines.
To ensure the quality of our network, we monitor the performance of each
Internet access point. This information enables us to identify the highest
quality Internet access points, update routes and remove poor quality Internet
access points from the electronic phone book contained in GRICdial and from the
network.
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Prior to permitting new customers to enter the GRIC Alliance, we evaluate
the quality of their Internet telephony capabilities to help ensure call
quality. Routing tables are established that facilitate routing of Internet
telephony calls through the public Internet, our worldwide, private asynchronous
transfer mode-based network or traditional switch-based phone networks depending
on our customer's desired call quality. We monitor our network 24 hours-a-day,
seven days-a-week using a Hewlett-Packard OpenView system. Additionally, each
new GRIC Alliance member desiring to provide Internet telephony agrees to
maintain specified quality levels for that service.
STRATEGIC RELATIONSHIPS
While we have no material agreements with Lucent Technologies or Cisco
Systems, we work with both these companies in order to promote our settlement
services and software.
LUCENT TECHNOLOGIES. We have been enabling Internet telephony service over
the networks included in the GRIC Alliance with Lucent Technologies ITS-SP
gateways since 1997. These Lucent Technologies ITS-SP gateways are configured to
interface with our GRIC CSP software. We believe the deployment of more than 200
Internet telephony gateways owned either by our GRIC Alliance members or by us
makes the GRIC Alliance one of the largest alliance networks of Lucent
Technologies ITS-SP gateways in the world. Our GRIC prepaid software has been
available on the Lucent Technologies ITS-SP gateway since February 1999. We
co-market and recruit customers for the GRIC Alliance with the Lucent
Technologies sales force.
CISCO SYSTEMS. Working together with Cisco Systems, we have developed
standards-based inter-domain settlement software, based on the widely supported
standard known as Open Settlement Protocol, which is used to enable Cisco
Systems' AS5300 Internet telephony gateways and 36xx series gatekeepers to
interface with our GRIC CSP software. During February 2000 we placed Cisco
Systems Internet telephony gateways into production as part of the GRICphone
network. These gateways are configured to interface with our GRIC CSP software.
In many instances, our customers are able to utilize their existing Cisco
Systems equipment, such as routers and gateways, to support Internet telephony
through inexpensive hardware and software upgrades. This upgrade path enables
these customers to reduce the cycle time involved in initiating new Internet
telephony services. We are involved in joint sales and marketing activities with
the Cisco Systems sales force.
CUSTOMERS
Our typical customers are service providers that benefit from a global
multi-service network built over an Internet-based infrastructure for providing
and managing Internet-based services. As of December 31, 1999, the GRIC Alliance
comprised over 350 members. World Access Telecommunications accounted for
approximately 16% of our revenues during calendar year 1999. No single customer
accounted for 10% or more of our revenues in 1998.
SALES, MARKETING AND CUSTOMER SERVICE AND SUPPORT
SALES
Our sales strategy is to pursue targeted accounts both directly through our
internal sales force and indirectly through our strategic partners. To date, we
have targeted our sales efforts at medium and large Internet service providers,
Internet divisions of traditional telecommunications providers and other
providers of Internet-based services. In many instances, we have initially
established a customer relationship based on our Internet roaming capabilities
and subsequently sold additional value-added services, such as Internet
telephony and prepaid Internet telephony services. As our service offerings have
expanded, we have broadened our sales focus to include regional and emerging
telephone companies and telecommunications providers.
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We maintain direct sales personnel domestically in our Milpitas, California
headquarters, Florida, Texas and Virginia, and internationally in China, France,
Germany, Jordan, Malaysia, Singapore, South Korea and Taiwan. The direct sales
force is organized into individual regional account teams, which include both
sales representatives and systems and marketing engineers. As of December 31,
1999, our direct sales force comprised 30 individuals. We intend to increase the
size of our direct sales force and establish additional sales offices
domestically and internationally.
We complement our direct sales force with value-added resellers, systems
integrators, and hardware and software developers such as Lucent Technologies
and Cisco Systems. These parties provide a global extension of our direct sales
force and serve as a source of leads and referrals.
We also maintain an extensive Web site which, among other things, provides
information to prospective customers and affiliates concerning the technical and
other requirements for becoming a member of the GRIC Alliance.
MARKETING
Our marketing programs are targeted at providers of Internet-based services
and are currently focused on creating awareness of, and generating interest in,
GRIC CSP and our services. We engage in a variety of marketing activities,
including:
- conducting direct mailings and ongoing public relations campaigns;
- conducting seminars;
- creating and placing advertisements;
- managing and maintaining our Web site; and
- establishing and maintaining close relationships with recognized industry
analysts.
We are an active participant in technology-related conferences and
demonstrate our products at trade shows targeted at providers of Internet-based
services. We also focus on a range of joint marketing strategies and programs
with our partners in order to leverage their existing strategic relationships
and resources.
CUSTOMER SERVICE AND SUPPORT
We believe that customer service and support are critical to maintaining
existing customer relationships and developing relationships with new customers.
Our customer service group performs pre-sales support, product installation and
customization, technical support and consulting services, customer training and
product maintenance. Through our network operation centers in California,
Malaysia and France, we have established a globally distributed sales and
support capability that provides support coverage 24 hours-a-day, seven
days-a-week.
RESEARCH AND DEVELOPMENT
Our research and development efforts are currently focused on improving the
functionality and performance of our existing products and developing new
products, such as a stand-alone, separately licensable version of GRIC CSP. We
obtain extensive product development input from our customers and monitor our
customers' needs and changes in the marketplace. We are currently working on key
areas such as electronic commerce and the interoperability of our products with
those of other vendors. In addition, we are developing improved network
management capabilities and enhanced end users features.
We believe our success will depend, in part, on our ability to develop and
introduce new products and enhancements to our existing products. In the past we
have made, and intend to continue to make,
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significant investments in research and development. Our research and
development expenditures were approximately $8.1 million in 1999, $5.1 million
in 1998, $2.3 million in 1997 and $1.0 million in 1996. If we are unable to
develop new products or enhancements to existing products on a timely basis, or
if the new products or enhancements fail to achieve market acceptance, our
business, prospects and results of operations will suffer.
COMPETITION
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing, primarily on the basis of the following factors:
- breadth of geographic presence;
- availability and breadth of Internet-based communications services;
- ease of integration;
- ability to offer turnkey solutions;
- price;
- performance;
- flexibility;
- customer service;
- scalability;
- reliability; and
- network quality and capacity.
There are low barriers to entry to new or existing businesses seeking to
offer services on the Internet. As a result, our business environment is
intensely competitive, highly fragmented and rapidly changing. Competition can
come from many sources and may be focused on different segments of our business.
We presently compete directly with iPass in the market for Internet roaming and
related settlement services and iPass has formed a competing alliance. Providers
of Internet telephony services such as iBasis (formerly VIP Calling) and ITXC
compete with our Internet telephony services. Transnexus offers a clearinghouse
service for Internet telephony that supports the Open Standards Protocol.
Potential competitors to future stand-alone GRIC CSP products include operations
support system vendors, such as CAP Gemini, EDS and Lucent Technologies. AT&T
and other large telecommunications companies, such as MCI Worldcom, may compete,
or have the ability and resources to compete, in each of our markets, including
by offering clearinghouse and roaming services. Some companies, such as AT&T,
may in the future develop an intelligent platform network that competes with
existing or planned future versions of our GRIC CSP software.
Other companies specialize only in a single Internet-based service, such as
Internet roaming or Internet telephony. While we believe that the multi-service
nature of our product offering may give us a competitive advantage in general,
the narrower focus of these competing companies may give them the ability to
compete more effectively in the market for their respective individual products
and services.
The long distance telephony market and the Internet telephony market are
highly competitive. There are several large and numerous small competitors, and
we expect to face continuing competition for Internet telephony based on price
and service offerings from existing competitors and new market entrants in the
future. Our competitors in these markets include major and emerging
telecommunications carriers in the United States and foreign telecommunications
carriers. These include AT&T Global Clearinghouse, iBasis and ITXC, which
compete in both the business and retail segments, and other Internet telephony
service providers which currently focus only on a retail
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customer base. In addition, companies currently in related markets have begun to
enter the Internet telephony market.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
have. In addition, a number of these competitors may merge or form strategic
partnerships. As a result, certain of these competitors may be able to offer, or
bring to market earlier, products or services that are superior to our own in
terms of features, quality, pricing or other factors. Our failure to compete
successfully in any of the markets in which we compete could have a material
adverse effect on our business, prospects, results of operations or financial
condition or on the price of our common stock.
GOVERNMENT REGULATION
We are not currently subject to federal or state telecommunications common
carrier regulation, and we do not believe that we are subject to local
regulation or laws or regulations applicable to access to or commerce on the
Internet or use of the Internet to provide telephone service, other than
regulations applicable to businesses generally.
REGULATION OF INTERNET TELEPHONY
The use of the Internet to provide telephone service is a recent market
development. We are currently aware of no domestic and few foreign laws or
regulations that prohibit voice communications over the Internet.
UNITED STATES. We believe that, under United States law, the
Internet-related services that we provide constitute information services and
are not regulated as telecommunications services and therefore are not currently
actively regulated by the Federal Communications Commission, or any state
agencies charged with regulating telecommunications carriers. We cannot assure
you that Internet-related services will not be actively regulated in the future.
Several efforts have been made in the U.S. to enact federal legislation that
would either regulate or exempt from regulation services provided over the
Internet. Increased regulation of the Internet generally may slow our growth,
particularly if other countries also impose regulations. Such regulation could
materially adversely affect our business, prospects, operating results and
financial condition.
Recently, the FCC has considered whether to impose surcharges or other
common carrier regulations upon certain providers of Internet telephony,
primarily those that, unlike us, provide Internet telephony services to end
users located within the U.S. While the FCC has presently decided that
information service providers, including Internet telephony providers, are not
telecommunications carriers, various companies have challenged that decision.
Congressional dissatisfaction with FCC conclusions could result in legislation
requiring that the FCC impose greater or lesser regulation, which in turn could
materially adversely affect our business, financial condition, operating results
and future prospects. On April 10, 1998, the FCC issued a report to Congress
discussing the implementation of certain universal service provisions contained
in 1996 amendments to the Communications Act of 1934. In the report, the FCC
indicated that it would examine the question of whether certain forms of
phone-to-phone Internet protocol telephony are information services, which are
exempt from Universal Service Fund contribution requirements, or
telecommunications services, which must make these contributions. The FCC noted
that it did not have, as of the date of the report, an adequate record on which
to make a definitive pronouncement, but that the record suggested that certain
forms of phone-to-phone Internet telephony appear to have the same functionality
as non-Internet protocol telecommunications services and lack the
characteristics that would render them classified as information services, which
are exempt from Universal Service Fund contribution requirements. The FCC
previously has expressly found that at least one kind of data communications
service using the frame relay protocol should be regulated as a basic
telecommunications service. This means that any
15
service provider that is providing voice over frame relay service could be
classified as a telecommunications common carrier and therefore subject to
regulation, including being required to contribute to universal service
subsidies. The FCC has not expressly made any similar regulatory determination
with respect to transmissions made over asynchronous transfer mode protocols.
Additionally, to the present time, transmission services provided over leased
lines that are "contaminated" with true information services have been
categorized by the FCC as unregulated. Any determination by the FCC that the
simple transmission of voice over asynchronous transfer mode or Internet
protocols constitutes a basic telecommunications service similar to frame relay
could affect the regulatory treatment of our customers, particularly customers
that operate their own transmission facilities. A determination by the FCC that
we or any of our customers should be regulated as telecommunications service
providers could materially affect the way we conduct our business.
On February 25, 1999, the FCC ruled that telephone traffic bound for
Internet service providers is predominantly "interstate" traffic that is subject
to federal jurisdiction and is not "local" traffic for which reciprocal
compensation between local exchange carriers is mandatory under the
Communications Act. Incumbent local exchange carriers, also known as "ILECs,"
have since argued on this basis that Internet service providers should be
required to pay the same kinds of access charges that are presently applied to
traditional-style interstate voice telephone services. However, having found
that most Internet service-bound traffic is jurisdictionally interstate, the FCC
has clarified that its jurisdictional determination does not preclude states
from continuing to apply local service tariffs to calls made by end users to
Internet service providers, or from determining that reciprocal compensation
must still be paid pursuant to interconnection agreements between incumbent and
competitive local exchange carriers. The FCC emphasized that its finding that
dial-up calls to Internet service providers are subject to federal jurisdiction
did not compel it to hold that dial-up calls to Internet service providers must
be federally tariffed. On March 24, 2000, the United States Court of Appeals for
the D.C. Circuit vacated and remanded the FCC's ruling, indicating that internal
dial-up traffic may be simultaneously "local" for reciprocal compensation
purposes and "interstate" for jurisdictional purposes. We cannot foresee the
ultimate consequences of this decision for our business. The FCC has continued
to make statements supporting the continued treatment of Internet-related
services as "unregulated" information services. However, the FCC is continuing
to examine these issues, and expanded reliance on Internet-protocol or
Internet-based services by traditional telephone carriers may result in changes
to FCC policies in the future.
If the FCC were to determine that Internet-based telephony services are
subject to FCC regulations as telecommunications services, the FCC could require
providers of Internet telephony services to be subject to traditional common
carrier regulation, make contributions to the Universal Service Fund or pay
access charges. It is also possible that the FCC may adopt a regulatory
framework other than traditional common carrier regulation that would apply to
Internet telephony providers. Any FCC regulatory regime could materially
adversely affect our business, prospects, operating results and financial
condition to the extent that it would negatively affect the cost of doing
business over the Internet or otherwise slow the growth of the Internet.
The FCC has the jurisdiction to determine that enhanced services, such as
Internet services, should be treated as unregulated information services. To the
extent that the Internet telephony services provided by our customers are
inseparable from other Internet services, they are subject exclusively to
federal jurisdiction. Consequently, currently, state regulatory authorities may
not assert jurisdiction to regulate the provision of such intrastate Internet
telephony services. In the event FCC policies change, however or to the extent
that phone-to-phone Internet telephony is separable from other Internet services
state authorities may assert jurisdiction to regulate intrastate Internet
telephony.
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INTERNATIONAL. The regulatory treatment of Internet telephony outside of
the U.S. varies widely from country to country. A number of countries that
currently prohibit competition in the provision of voice telephony also prohibit
Internet telephony. Other countries permit but regulate Internet telephony. Some
countries will evaluate proposed Internet telephony service on a case-by-case
basis and determine whether it should be regulated, for example, as a voice
service or as another telecommunications service. In many countries, Internet
telephony has not yet been addressed by legislation. Increased regulation of the
Internet or Internet telephony providers or the prohibition of or significant
restrictions upon Internet telephony in one or more countries could materially
adversely affect our business, prospects, operating results and financial
condition.
The European Union regulatory regime, for example, distinguishes between
voice telephony services and other telecommunications services. In Services
Directive 90/388/EEC, issued in 1990, the European Commission required its
Member States to allow competition for all telecommunications services except
voice telephony and certain other services. The Services Directive was amended
in 1996 by Commission Directive 96/19/EC, which required the liberalization of
all telecommunications services, including voice telephony, by January 1, 1998.
In addition, Services Directive 96/19/EC held that services other than voice
telephony could be subjected to no more than a general authorization or
declaration procedure. In contrast, voice telephony may be subject to individual
licenses. For purposes of these Services Directives, "voice telephony" is
defined as the commercial provision for the public of the direct transport and
switching of speech in real time between public switch network termination
points.
On January 10, 1998, the European Commission issued a communication that
addressed whether Internet telephony was voice telephony and thus subject to
regulation by the Member States. Consistent with its earlier directives, the
European Commission stated that Internet telephony could properly be considered
voice telephony, and thus subject to regulation by the Member States, only if
all elements of its "voice telephony" definition were met. In this January 1998
communication, the European Commission concluded that no form of Internet
telephony currently meets the definition of "voice telephony." The European
Commission stated that only phone-to-phone communications reasonably could be
considered voice telephony and that, at present, even phone-to-phone Internet
telephony does not meet all elements of its voice telephony definition.
Therefore, the European Commission concluded that voice over Internet services
cannot "for the time being" be classified as "voice telephony."
Under the European Commission's analysis, Internet telephony must be
permitted and providers of Internet telephony should be subjected to no more
than a general authorization or declaration requirement by the Member States.
However, in practice more stringent regulatory requirements may be imposed by
individual Member States, since European Commission communications, unlike
directives, are not binding on the Member States. The Member States therefore
are not obligated to reach the same conclusions as the European Commission on
this subject so long as they adhere to the definition of "voice telephony" in
the Services Directive. In fact, some countries have moved forward through
national regulatory procedures to adopt an individual licensing requirement for
certain types of Internet telephony providers. In Germany the national regulator
has looked at Internet telephony providers on an individual basis and has found
that several of them meet the "real time" standard and required them to obtain
an individual license. The United Kingdom has not formally pronounced Internet
telephony as voice telephony however in the context of international voice
resale, the Department of Trade and Industry recommends that providers obtain an
individual resale license. Finally, France has taken comments on a consultation
document concerning the regulation of Internet telephony, although no formal
decision or regulation has been released. Thus, services provided over our
global network could be deemed voice telephony subject to heightened regulation
by one or more European Union Member States. Our failure or the failure of any
of our customers or affiliates to obtain any necessary authorizations could have
a material adverse effect on our business, prospects, operating results and
financial condition. Moreover, the European Commission is continuing to
17
examine the regulatory treatment of Internet telephony in inquiries on
convergence of telecommunications and information services technologies.
As our services are made available in foreign countries, and as we
facilitate sales by our customers and affiliates to end users located in foreign
countries, these countries may claim that we or our customers are required to
qualify to do business in the particular foreign country, that we are otherwise
subject to regulation, including requirements to obtain authorization, or that
we or our customers are prohibited in all cases from conducting business as
currently conducted in that foreign country. Our failure to qualify as a foreign
corporation in a jurisdiction in which we are required to do so or to comply
with foreign laws and regulations could subject us to taxes and penalties or
preclude us from, or limit our ability in, enforcing contracts in these
jurisdictions, which could materially adversely affect our business, prospects,
operating results and financial condition.
Our customers and affiliates may also currently be, or in the future may
become, subject to requirements to qualify to do business in a particular
foreign country, to comply with regulations, including requirements to obtain
authorization, or to cease from conducting their business as conducted in that
foreign country. We cannot be certain that our customers and affiliates are
currently in compliance with any of these requirements, will be able to comply
with any of these requirements, or will continue in compliance with any of these
requirements. The failure of our customers and affiliates to comply with these
requirements could materially adversely affect our business, prospects,
operating results and financial condition.
OTHER REGULATIONS AFFECTING THE INTERNET
UNITED STATES. Congress has adopted legislation that regulates certain
aspects of the Internet, including intellectual property protection and child
protection. In addition, Congress and other federal entities are considering
other legislative and regulatory proposals that would further regulate the
Internet. Congress is, for example, currently considering legislation on a wide
range of issues including Internet spamming, privacy, gambling, pornography,
taxes, Internet fraud, privacy and digital signatures. Various states have
adopted and are considering Internet-related legislation. Increased U.S.
regulation of the Internet may slow our growth, particularly if other
governments follow suit, which may negatively impact the cost of doing business
over the Internet and materially adversely affect our business, prospects,
results of operations and financial condition.
INTERNATIONAL. The European Union has also enacted several directives
relating to the Internet. The European Union has, for example, adopted a
directive that imposes restrictions on the collection and use of personal data.
Under the directive, citizens of the European Union are guaranteed rights to
access their data, rights to know where the data originated, rights to have
inaccurate data rectified, rights to recourse in the event of unlawful
processing and rights to withhold permission to use their data for direct
marketing. Individual Member States laws implementing the directive could, among
other things, affect U.S. companies that collect information on the Internet
from individuals in Member States, including subscribing and billing
information, for transmission to the United States, and will impose restrictions
that are more stringent than current Internet privacy standards in the U.S. In
particular, companies with offices located in European Union countries will not
be allowed to send personal information to countries that do not maintain
adequate standards of privacy. Although we do not engage in the collection of
data for purposes other than routing our services and billing for our services,
the directive is broad and the European Union privacy standards are stringent.
Accordingly, the potential effect on us is uncertain.
In response to the European Union directive, the U.S. has negotiated with
the European Union to establish certain "Safe Harbor" principles which will
provide companies operating in the U.S. that choose to adhere to them a
presumption of adequate protection of privacy. These Safe Harbor
18
principles, which are expected to receive formal European approval and be
implemented in early April 2000, include requirements, for example, that the
host of a web site or other providers of information services and collectors of
personal data, including billing and collection data, establish certain
procedures to disclose and provide notice to users of privacy and security
policies, obtain consent from users for certain collection and use of
information and provide users with the ability to access, correct and delete
personal information that is being stored. The principles also include
enforcement and redress provisions. The U.S. information services industry has
advocated, and the Safe Harbor rule reflects, that the principles may be
implemented through self-regulation and industry self-certification. In the
future, however, the requirements embodied in the principles may become
mandatory under U.S. law. Additionally, the European Union directive
requirements are likely to be supplemented in the U.S. by other state and
federal privacy legislation. In conducting our business internationally, we must
comply with similar privacy and data protection rules in all countries in which
we do business. Any such requirements may adversely affect our ability to
collect demographic and personal information from users, which could have an
adverse effect on our ability to provide targeted advertisements. Although we
will endeavor to meet the requirements of the European Union directive and any
U.S. regulations, we cannot guarantee that adequacy of our compliance will not
be subject to challenge.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret
protection, nondisclosure agreements and licensing restrictions and arrangements
to establish and protect our proprietary rights. We cannot assure you that these
forms of protection will be effective. We have been issued United States Patent
Number 5,898,780 dated April 27, 1999 for "Method and Apparatus for Authorizing
Remote Internet Access," and have three other U.S. patents pending relating to
Internet telephony, Internet settlement and Internet route termination. We
cannot assure you that patents will issue from the pending applications or, if
any patents are issued, that they will be sufficiently broad to protect our
technology adequately. We have a number of trademarks and trademark applications
and use copyright and trade secret protection to protect our software and other
original works.
We enter into confidentiality and proprietary information and invention
agreements with our customers, employees and consultants, and control access to
and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy, reverse engineer or otherwise obtain and use our
products or technology or otherwise appropriate our proprietary network
information. Monitoring unauthorized use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent misappropriation of
our technology. The laws of some foreign countries do not protect our
proprietary rights to as great an extent as the laws of the United States, and
many United States companies have encountered substantial infringement problems
in these countries, some of which are countries in which we operate.
From time to time, third parties may assert exclusive patent, copyright,
trademark and other intellectual property rights to technologies and may assert
claims or initiate litigation against us or our manufacturers, suppliers or
customers with respect to existing or future products or services. We have not
conducted an exhaustive search of patents issued to others. Because of the
number of patents issued and patent applications filed relating to the
transmission of voice over packet-switched networks, current or potential
customers, competitors and other third parties may have filed, or may file
applications for, or may have received or in the future receive, patents or
obtain additional intellectual property rights relating to materials or
processes that we use or intend to use. If these third-party patents or other
proprietary rights have been or are issued, or are otherwise asserted by third
parties, the holders of these patents or other proprietary rights may bring
infringement claims against us. Furthermore, former employers of our current or
future employees may assert that our employees have improperly disclosed
confidential or proprietary information to us. We may in the future initiate
claims
19
or litigation against third parties for infringement of our proprietary rights
or to determine the scope and validity of our proprietary rights and the rights
of others. Any of these claims, with or without merit, may be time-consuming,
may result in costly litigation, may divert technical and management personnel,
or may require us to develop non-infringing technology, which may be costly and
time consuming. Alternatively, others may claim that we infringe their
intellectual property rights, and we may be required to obtain a license or
royalty agreement from those parties claiming the infringement. We cannot assure
you that any license or royalty agreement would be available. The terms of any
license or royalty agreement that is available may be very unfavorable to us. In
addition, an adverse ruling could result in substantial damages or the issuance
of an injunction against us requiring that we cease development and withdraw
some products and services from the marketplace. Limitations on our ability to
market our products and services, and delays and costs associated with monetary
damages and redesigns in compliance with an adverse judgment or settlement,
could seriously harm our business, prospects, results of operations and
financial condition.
TRADEMARKS
GRIC is our registered trademark and GRIC Alliance, GRIC Network, GRIC
Alliance Network, Global Reach Internet Connection, GRICprepaid, GRICtraveler,
GRICphone, GRICfax, GRIC CSP, GRIC Convergent Services Platform, the GRIC logo
and "Technology that brings intelligence to the Internet" are our trademarks.
EMPLOYEES
As of December 31, 1999, we had 170 employees. Our future performance
depends, in significant part, on our ability to retain existing personnel in key
areas such as engineering, technical support, sales and senior management who
are in high demand. None of our employees is subject to a collective bargaining
agreement, nor have we experienced work stoppage. We consider our relationships
with our employees to be good.
ITEM 2. PROPERTIES
We occupy approximately 31,000 square feet of space in Milpitas, California
under a lease that expires in February 2003. We also lease sales and support
offices in China, France, Japan, Malaysia, Singapore, South Korea and Taiwan. In
the event that existing facilities are not adequate for our needs, we anticipate
that additional facilities will be available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims arising in
the ordinary course of business. The Company's management does not expect that
the results in any of these legal proceedings will have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1999.
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ITEM 4A. EXECUTIVE OFFICERS
The following table sets forth information with respect to persons who
served as an executive officer as of December 31, 1999.
NAME AGE POSITION
- ---- -------- --------
Roger Peirce.............................. 58 Chairman
Dr. Hong Chen............................. 37 President, Chief Executive Officer and
Director
Lynn Y. Liu............................... 41 Senior Vice President, Corporate
Development and Director
Joseph M. Zaelit.......................... 54 Senior Vice President, Finance and
Administration and Chief Financial Officer
Philip M. Sakakihara...................... 56 Senior Vice President, Engineering and
Network Operations
Kristin L. Steinmetz...................... 40 Senior Vice President, Marketing and
Business Development
Christophe J. Culine...................... 35 Regional President, Europe, Americas and
Africa
David L. Teichmann........................ 44 Vice President, General Counsel and
Secretary
Barron B. Cox............................. 46 Vice President, Human Resources
ROGER L. PEIRCE has served as our Chairman since July 1999 and as a director
since March 1998. From August 1998 to March 1999, Mr. Peirce was Chairman and
Chief Executive Officer of U.S. Wireless Data, a wireless point-of-sale services
provider. From January 1994 to June 1998, he was Group President of Merchant
Services for First Data Corp., a credit card processing services company. From
1981 to January 1994, he held various positions at VISA International, a credit
card company, most recently as Chief Operating Officer. Mr. Peirce holds a B.A.
degree in Mathematics from San Jose State University.
DR. HONG CHEN, one of our co-founders, has served as our Chief Executive
Officer since our inception in February 1994 and as our President since
July 1999. Dr. Chen also served as Chairman from February 1994 to July 1999 and
continues to serve as a director. From February 1993 to February 1994, Dr. Chen
was Senior Consultant with TRW Financial Systems, a systems integrator.
Dr. Chen also serves as a technical advisory board member for the Industry
Technology Research Institute in Taiwan. Dr. Chen holds a B.S. degree in
Computer Science from Xian Jiaotong University and M.S. and Ph.D degrees in
Computer Science from State University of New York at Stony Brook. Dr. Chen is
married to Ms. Liu.
LYNN Y. LIU, one of our co-founders, has served as our Senior Vice
President, Corporate Development since January 2000, as Regional President, Asia
Pacific from December 1998 to December 1999 and as a director since our
inception in February 1994. From our inception to November 1998, she was our
Chief Operating Officer and Executive Vice President responsible for product
management, network operations and engineering. From October 1991 to
October 1994, she held the positions of architect and engineering manager at
MARCorp, a multimedia library software company. Ms. Liu holds a B.S. degree in
Library Science from National Taiwan University and an M.S. degree in Computer
Science from State University of New York at Stony Brook. Ms. Liu is married to
Dr. Chen.
JOSEPH M. ZAELIT has served as our Senior Vice President, Finance and
Administration and Chief Financial Officer since January 1999. From August 1993
to June 1998, he was employed by VeriFone, Inc., a manufacturer of electronic
payment equipment, most recently as Senior Vice President, Finance and
Administration and Chief Financial Officer. From 1973 to 1993, Mr. Zaelit held a
variety of senior financial positions at Hewlett-Packard Company, most recently
as Corporate
21
Treasury Manager. Mr. Zaelit holds a B.S. degree in Accounting and an M.B.A.
degree, each from the University of Utah, and is a Certified Public Accountant
in California.
PHILIP M. SAKAKIHARA has served as our Senior Vice President, Engineering
and Network Operations since December 1998. From December 1995 to
November 1998, he was Vice President, Engineering and Worldwide Support for
Prism Solutions, Inc., an enterprise software solutions company. From July 1994
to December 1995, he was Vice President, Engineering for Viewstar Corporation,
an enterprise software solutions company. From May 1972 to July 1994,
Mr. Sakakihara held various senior engineering and management positions with
Hewlett-Packard Company, including General Manager of the Distributed Computing
Products Operation. Mr. Sakakihara holds a B.S. degree in Applied Mathematics
from San Jose State University and an M.S. degree in Applied Mathematics from
Santa Clara University.
KRISTIN L. STEINMETZ has served as our Senior Vice President, Marketing and
Business Development since July 1999. From June 1991 to July 1999, she served in
various positions at AT&T Corporation, a global telecommunications company, most
recently as Vice President of Global Services, Consumer Marketing Vice President
and Director of Strategy and Business Planning. From 1989 to 1991, she held the
position of Senior Management Consultant at Edgar, Dunn and Company, a
consulting firm. Ms. Steinmetz holds a B.A. degree in Zoology from the
University of California at Berkeley and an M.B.A. degree from Cornell
University.
CHRISTOPHE J. CULINE has served as our Regional President, Europe, Americas
and Africa since December 1998. From September 1996 to November 1998, he was our
Vice President, Worldwide Sales. From April 1991 to August 1996, Mr. Culine held
various positions, including Vice President, Worldwide Sales and Vice President,
European Sales, with NCD Software, a wholly-owned subsidiary of NCD Corporation,
an Internet software company. Mr. Culine holds a diploma from EUDIL (the
University of Lille) in France.
DAVID L. TEICHMANN has served as our Vice President, General Counsel and
Secretary since July 1998. From October 1993 to July 1998, he served in various
positions at Sybase, Inc., a software company, including Vice President,
International Law as well as Director of European Legal Affairs based out of
Sybase's Netherlands headquarters. From March 1989 to October 1993,
Mr. Teichmann was Assistant General Counsel handling legal matters in
Asia-Pacific, Japan, Canada and Latin America for Tandem Computers Corporation,
a computer company. Mr. Teichmann holds a B.A. degree in Political Science from
Trinity College, an M.A.L.D. degree in Law & Diplomacy from the Fletcher School
of Law & Diplomacy and a J.D. degree from the University of Hawaii School of
Law.
BARRON B. COX has served as our Vice President, Human Resources since
August 1999. From May 1999 to July 1999, Mr. Cox served as our Senior Director
of Human Resources. From September 1997 to April 1999, he was Vice President of
Human Resources at Prism Solutions. From 1993 to 1997, he was Director of Human
Resources at Scios, Inc., a biopharmaceutical company. From 1988 to 1993,
Mr. Cox held various positions at Apple Computer's Enterprise Systems Division,
most recently as its Director of Human Resources. From 1984 to 1988, Mr. Cox
served in various human resources positions at Digital Equipment Corporation.
Mr. Cox holds a B.S. degree in Political Science from Northeastern University.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock is traded on The Nasdaq National Market under the
symbol "GRIC." The following table sets forth the range of the high and low
closing sale prices by quarter as reported on the Nasdaq National Market since
December 15, 1999, the date our common stock commenced public trading.
HIGH LOW
-------- --------
FISCAL YEAR ENDED DECEMBER 31, 1999:
Fourth Quarter (since December 15, 1999).................... $27.13 $19.06
On December 31, 1999, there were approximately 142 stockholders of record of
the Company's common stock.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The Company
intends to retain its earnings for use in its business and, therefore, does not
anticipate paying any cash dividends on the common stock.
RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth information regarding all securities of the
Company sold by the Company from January 1, 1999 to December 31, 1999.
References to warrants below assume the full exercise of all warrants. Preferred
stock numbers are presented on an as converted to common stock basis and reflect
the Company's reincorporation into Delaware.
AGGREGATE
NUMBER OF PURCHASE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SECURITIES PRICE CONSIDERATION
- ------------------- --------------- ----------------------- ---------- ------------ -------------
Employee option 1/1/99-12/31/99 Common Stock 375,733 $610,042 Cash
exercises, as a group
Various purchasers(1) 1/31/99 1998 bridge loans 250,010 $2,800,125 Cash
convertible into Series
D Preferred Stock(2)
Various purchasers(1) 4/99 1999 bridge loans 1,846,468 $12,925,293 Cash
convertible into
Series D Preferred
Stock(2)
Various purchasers(1) 4/99 Series D Preferred 672,328 $0 N/A
Stock(3)
Various purchasers(1) 4/99-6/99 Series D Preferred 1,821,428 $12,750,000 Cash
Stock
Various purchasers(1) 12/14/99 Warrants to purchase 223,206 $1,562,442 Cash
Series D Preferred
Stock(4)
Nokia Holdings, Inc. 11/12/99 Series E Preferred 600,240 $6,000,000 Cash
Stock
- --------------------------
(1) Each purchaser was a sophisticated investor with access to all relevant
information necessary to evaluate the investment and represented to the
Company that the shares were being acquired for investment.
23
(2) The 1998 and 1999 bridge loans convertible into Series D Preferred Stock
were converted at $11.20 per share and at $7.00 per share, respectively.
(3) Additional shares issued in connection with the repricing of the Series D
Preferred Stock from $11.20 per share to $7.00 per share on April 1999.
(4) Each warrant for Series D Preferred Stock was exercised at $7.00 per share.
All sales of common stock made pursuant to the exercise of stock options
granted under the stock option plans of the Company or its predecessors were
made pursuant to the exemption from the registration requirements of the
Securities Act afforded by Rule 701 promulgated under the Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. The securities were
sold to a limited number of people with no general solicitation or advertising.
The purchasers were sophisticated investors with access to all relevant
information necessary to evaluate the investment and who represented to the
issuer that the shares were being acquired for investment.
USE OF PROCEEDS
On December 14, 1999, a registration statement on Form S-1 (No. 333-87497)
was declared effective by the SEC, pursuant to which 5,290,000 shares of our
common stock were offered and sold for our account at a price of $14.00 per
share, generating gross proceeds of approximately $74.0 million. Each
outstanding share of preferred stock was automatically converted into one share
of common stock upon the closing of the initial public offering. The managing
underwriters were CIBC World Markets, U.S. Bancorp Piper Jaffray and Prudential
Volpe Technology.
In connection with the offering, we incurred $5.2 million in underwriting
discounts and commissions, and $2.0 million in other related expenses. The net
proceeds from the offering, after deducting the foregoing expenses, were
$66.8 million.
24
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENT OF INCOME DATA
The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statements of Operations Data:
Revenues:
Settlement............................................ $ -- $ -- $ 254 $ 1,666 $ 7,962
Software and other.................................... -- 403 1,280 883 1,659
------ ------- ------- -------- --------
Net revenues........................................ -- 403 1,534 2,549 9,621
Costs and expenses:
Cost of settlement revenues........................... -- -- 156 1,444 6,980
Cost of software and other revenues................... -- -- 708 982 118
Network and operations................................ -- -- 837 1,117 3,054
Research and development.............................. -- 998 2,314 5,080 8,128
Sales and marketing................................... -- 49 3,723 6,373 8,682
General and administrative............................ -- 391 2,002 3,540 4,967
Other operating expenses (expense reversals).......... -- -- -- 1,500 (925)
Amortization of stock-based compensation.............. -- -- -- -- 300
------ ------- ------- -------- --------
Total costs and expenses............................ -- 1,438 9,740 20,036 31,304
------ ------- ------- -------- --------
Operating loss.......................................... -- (1,035) (8,206) (17,487) (21,683)
Interest income and other, net.......................... -- 104 79 192 519
Interest expense........................................ -- -- -- (575) (1,332)
------ ------- ------- -------- --------
Loss from continuing operations before income taxes..... -- (931) (8,127) (17,870) (22,496)
Provision for income taxes from continuing operations... -- -- 59 32 70
------ ------- ------- -------- --------
Net loss from continuing operations..................... -- (931) (8,186) (17,902) (22,566)
------ ------- ------- -------- --------
Discontinued operations:
Loss from discontinued operations....................... (726) (1,683) (774) -- --
Gain on disposal of discontinued operations............. -- -- 5,118 -- --
------ ------- ------- -------- --------
Net loss................................................ $ (726) $(2,614) $(3,842) $(17,902) $(22,566)
====== ======= ======= ======== ========
Basic and diluted net loss per share from continuing
operations............................................ $ -- $ (0.52) $ (4.42) $ (9.19) $ (7.95)
====== ======= ======= ======== ========
Basic and diluted net loss per share.................... $(0.36) $ (1.46) $ (2.08) $ (9.19) $ (7.95)
====== ======= ======= ======== ========
Shares used to compute basic and diluted net loss per
share................................................. 1,998 1,789 1,851 1,948 2,837
====== ======= ======= ======== ========
CONSOLIDATED BALANCE SHEET DATA
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
Net assets of discontinued operations..................... $3,100 $1,563 $ -- $ -- $ --
Total assets.............................................. 3,100 5,796 9,855 4,740 85,377
Long-term debt and capital lease obligations, less current
portion................................................. -- -- 19 1,069 1,147
Redeemable convertible preferred stock.................... 3,888 8,590 8,590 8,590 --
Total stockholders' equity (deficit)...................... 3,100 (3,402) 61 (14,806) 75,853
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE SELECTED
CONSOLIDATED FINANCIAL INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES APPEARING ELSEWHERE IN THIS FORM 10-K. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS REPORT.
OVERVIEW
We provide services and software that enable our customers to offer
Internet-based products and services. Our customers include telecommunications
companies, Internet service providers and newly-emerging communication service
providers.
Settlement revenues are generated when we provide settlement services to
customers whose end users initiate Internet communications. For each global
Internet roaming transaction, we use our software to track the usage, collect
the amount that a roamer's "home" service provider owes us, pay the appropriate
amount to the service provider enabling local access, and provide the underlying
usage data to our customer to enable billing of its end user. For each Internet
telephony call, we use our software to track the usage, settle the amounts owed
to GRIC and owed by GRIC as a result of the transaction, and provide the
underlying usage data to our customers to enable billing of their end users.
We have incurred substantial losses since our inception as a result of
expenses associated with building our GRIC Alliance and related network
infrastructure and developing our software products. As of December 31, 1999, we
had an accumulated deficit of approximately $47.7 million. We anticipate that
our operating expenses will increase substantially in the future as we continue
to expand our network and develop our software products. Accordingly, we expect
to incur additional losses for the foreseeable future, and we cannot assure you
that we will achieve or sustain profitability. See "Factors That May Affect
Future Results--We have not been profitable to date, we may never be profitable
and we anticipate continued losses for the foreseeable future."
From our inception until 1997 we were both an Internet service provider in
Northern California and an independent software developer for the Internet
service provider community. In 1997, we sold our local Internet service provider
business and related assets. Operations through 1997 that related to our
Internet service provider business are reflected as discontinued operations. We
first recognized clearinghouse settlement revenues in 1997, and since 1998 we
have derived our revenues primarily from clearinghouse settlement services.
Our business model has evolved in the course of our development and we
believe that period-to-period comparisons of our operating results should not be
relied upon as indicative of future performance. Our future prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in new and rapidly evolving markets. See "Factors That May Affect Future
Results--Our operating history is more limited than that of many other
companies, so you may find it difficult to evaluate our business in making an
investment decision."
26
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Total revenues increased 277.4% to $9.6 million during 1999 from
$2.5 million in 1998. Both settlement revenues and software, hardware and
maintenance and services revenues grew significantly during 1999.
SETTLEMENT REVENUES. Settlement revenues increased to $8.0 million in 1999
from $1.7 million in the prior year, an increase of 377.9%. This increase
reflects higher volumes of both Internet roaming and Internet telephony
transactions. We expect settlement revenues from Internet telephony to increase
in the future at a faster rate than revenues from Internet roaming.
SOFTWARE AND OTHER REVENUES. Software, hardware and maintenance and
services revenues increased to $1.7 million in 1999 from $883,000 during 1998,
representing an increase of 87.9%. This increase is primarily due to higher
sales of our prepaid Internet telephony software and related maintenance and
services, which we introduced in February 1999, and higher sales of our Internet
roaming software and related maintenance and services, offset by a reduction of
hardware sales, which we discontinued in June 1999.
COSTS AND EXPENSES
COST OF SETTLEMENT REVENUES. Cost of settlement revenues represents the
amounts we pay to access the Internet for Internet roaming services for our
customers, and to terminate Internet telephony services for our customers. Cost
of settlement revenues increased to $7.0 million in 1999 from $1.4 million in
1998, representing an increase of 383.4%. The increase was due to higher sales
volumes in our Internet roaming and Internet telephony services.
COST OF SOFTWARE AND OTHER REVENUES. Cost of software, hardware and
maintenance and services revenues represents license fees for third-party
software that is incorporated into our software products, and the cost of
Internet telephony equipment. Cost of software, hardware and maintenance and
services revenues decreased to $118,000 in 1999 from $1.0 million for 1998, a
decrease of 88.0%. This decrease is primarily attributable to our decision to no
longer resell certain software and hardware products.
NETWORK AND OPERATIONS. Network and operations expenses include salaries,
benefits, allocated facility and management information systems costs, costs of
co-location of network equipment and leased telecommunication lines, and
depreciation on network equipment. Network and operations expenses increased to
$3.1 million in 1999 from $1.1 million in the prior year, representing an
increase of 173.4%. This increase was due to higher business activity and higher
costs associated with the expansion of our customer support and network
operation centers to a 24 hours-a-day, seven days-a-week basis. We expect that
network and operations expenses will continue to increase in absolute dollars as
we expand our network infrastructure to meet anticipated increases in
transaction processing volume.
RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries, benefits and recruiting costs of employees and outside consultants,
quality assurance, allocated facility, management information systems and
depreciation costs. Research and development increased $3.0 million to
$8.1 million in 1999 from $5.1 million in 1998, representing an increase of
60.0%. This increase was primarily due to the continuing development of our GRIC
CSP software. To date, all software development costs have been expensed in the
period incurred. We believe that continued investment in research and
development is critical to achieving our strategic objectives, and we expect
that research and development expenses will increase significantly in absolute
dollars in the future.
27
SALES AND MARKETING. Sales and marketing expenses include salaries,
benefits and commissions earned by sales and marketing personnel, allocated
facility, management information systems and depreciation costs, cost for
marketing and promotional programs, and costs associated with our domestic and
international sales offices. Sales and marketing expenses increased to
$8.7 million in 1999 from $6.4 million during 1998, representing an increase of
36.2%. This increase reflects the hiring of additional personnel to expand the
geographic coverage of, and to support, Internet telephony, which was introduced
in the fourth quarter of 1998. We expect that sales and marketing expenses will
increase significantly in absolute dollars in the future as we seek to expand
our customer base and increase brand awareness.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
general corporate and facility costs as well as salary, benefits and related
costs for executive, finance, legal, administrative, human resources and
management information systems functions, as well as provisions for
uncollectible receivables. General and administrative expenses increased to
$5.0 million for 1999 from $3.5 million for 1998, representing an increase of
40.3%. This increase reflects the hiring of additional personnel, including key
executives, to provide the infrastructure to support future growth. We expect
that general and administrative expenses will continue to increase in absolute
dollars in the future as a result of the continued expansion of our
administrative staff and the expenses associated with becoming a public company,
including annual and other public reporting costs, directors' and officers'
liability insurance, investor relations programs and professional services fees.
OTHER OPERATING EXPENSES (EXPENSE REVERSALS). Other operating expenses
(expense reversals) of $925,000 reflects a reduction of a previously expensed
commitment to purchase software, as a result of the completion of a settlement
agreement with the software vendor. The previous expense was recorded in the
fourth quarter of 1998 when we determined that the software product was not
salable and expensed $1.5 million.
AMORTIZATION OF STOCK-BASED COMPENSATION. Some stock options granted during
the last 12 months are considered compensatory, as the estimated fair value for
accounting purposes was greater than the stock exercise price as determined by
the board of directors on the date of grant. As a result, we have recorded
expenses of $300,000 for 1999 relating to the amortization of deferred
compensation expense and had an aggregate of $1.5 million of deferred
compensation remaining to be amortized. Deferred compensation is amortized on a
straight-line basis over the vesting period of the options. We expect
amortization of approximately $427,000 in each of fiscal 2000, 2001 and 2002 and
$198,000 in fiscal 2003.
INTEREST INCOME AND OTHER, NET
Interest income and other, net primarily represents interest income on cash
balances. Interest income and other, net increased to $519,000 for 1999 from
$192,000 in 1998, an increase of 170.3%. This increase was primarily due to
higher average cash balances during 1999.
INTEREST EXPENSE
Interest expense consists of amortization of the fair value of warrants
issued in connection with our financing activities and interest expense
associated with capital leases and bridge financing. Interest expense increased
to $1.3 million for 1999 from $575,000 for 1998.
INCOME TAXES
The provision for income taxes consists of foreign taxes. FASB Statement
No. 109 provides for the recognition of deferred tax assets if realization of
these assets is more likely than not. Based upon the weight of available
evidence, which includes the Company's historical operating performance and the
28
reported cumulative net losses in all prior years, the Company has provided a
full valuation allowance against its net deferred tax assets. We intend to
evaluate the ability to realize the deferred tax assets on a quarterly basis.
EARNINGS PER SHARE
Earnings per share was impacted as a result of our initial public offering,
which was completed in December 1999. We issued 5.3 million shares relating to
the initial public offering, diluting the value of shares previously held. In
addition, 11.5 million preferred shares were converted to common stock. Both of
these events will be fully realized in future results, whereas, due to their
timing, their weighted share impact was only partially recognized in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased to $2.5 million in 1998 from $1.5 million in 1997,
an increase of 66.2%.
SETTLEMENT REVENUES. Settlement revenues increased to $1.7 million in 1998
from $254,000 in 1997, an increase of 555.9% due to higher volumes of
transactions.
SOFTWARE AND OTHER REVENUES. Software, hardware and maintenance and
services revenues decreased to $883,000 in 1998 from $1.3 million in 1997, a
decrease of 31.0%. The decrease was primarily attributable to our decision no
longer to sell certain customized software, which was partially offset by an
increase in sales of telecommunications equipment.
COSTS AND EXPENSES
COST OF SETTLEMENT REVENUES. Cost of settlement revenues increased to
$1.4 million in 1998 from $156,000 in 1997, an increase of 825.6% due to higher
volumes of transactions, primarily for Internet roaming.
COST OF SOFTWARE AND OTHER REVENUES. The cost of software, hardware and
maintenance and services revenues increased to $982,000 in 1998 from $708,000 in
1997, an increase of 38.7%. The increase was primarily due to costs related to
Internet telephony hardware.
NETWORK AND OPERATIONS. Network and operations expenses increased to
$1.1 million in 1998 from $837,000 in 1997, an increase of 33.5%. The increase
was due to an expansion of our network operations centers.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$5.1 million in 1998 from $2.3 million in 1997, an increase of 119.5%. The
increase was primarily due to increased spending on development of our GRIC CSP
software.
SALES AND MARKETING. Sales and marketing expenses increased to
$6.4 million in 1998 from $3.7 million in 1997, an increase of 71.2%. This
increase was a result of the costs of establishing and expanding our sales and
marketing departments.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $3.5 million in 1998 from $2.0 million in 1997, an increase of 76.8%. This
increase was primarily due to the recruiting and hiring of additional personnel,
including key executives.
OTHER OPERATING EXPENSES (EXPENSE REVERSALS). Other operating expenses
(expense reversals) of $1.5 million reflects a charge for a commitment to
purchase software that we do not expect to utilize. In the fourth quarter of
1998, we determined that a recently delivered software product from a third
party was not salable and accordingly we expensed the contractual minimum
purchase commitment.
29
INTEREST INCOME AND OTHER, NET
Interest income and other, net, increased to $192,000 in 1998 from $79,000
in 1997, an increase of 143.0%. This fluctuation was due to changes in our
average cash balances during the year.
INTEREST EXPENSE
Interest expense of $575,000 in 1998 primarily represents amortization of
warrants. We had no interest expense in 1997.
INCOME TAXES
Income taxes decreased to $32,000 in 1998 from $59,000 in 1997, representing
a decrease of 45.8%. Based upon the weight of available evidence, which includes
the Company's historical operating performance and the reported cumulative net
losses in all prior years, the Company has provided a full valuation allowance
against its net deferred tax assets.
DISCONTINUED OPERATIONS
In 1997, we sold our interest in our Internet service provider business and
related assets that we operated as a separate segment of the business. The sale
had been accounted for as discontinued operations. During 1997, losses from
discontinued operations were $774,000 and the gain on disposal of this operation
was $5.1 million.
LIQUIDITY AND CAPITAL RESOURCES
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 8,481 $ 1,362 $ 64,655
Net cash used in operating activities....................... (6,815) (12,806) (18,737)
Net cash provided by (used in) investing activities......... 4,649 (2,283) (16,330)
Net cash provided by financing activities................... 7,305 7,970 98,360
OPERATING ACTIVITIES. Net cash used in operating activities was
$18.7 million during the year ended December 31, 1999, $12.8 million in 1998 and
$6.8 million in 1997. Net cash used in operating activities in 1999, 1998 and
1997 was primarily a result of net operating losses.
INVESTING ACTIVITIES. Net cash used in investing activities was
$16.3 million for the year ended December 31, 1999 and $2.3 million in 1998. Our
recent investing activities have consisted primarily of purchases of short-term
investments arising from the funds received from the initial public offering.
Other uses of cash in investing activities consisted of purchases of computer
hardware relating to the network infrastructure and computer hardware and
software for our increasing employee base. Net cash provided by investing
activities totaled $4.6 million in 1997 primarily due to the sale of our
interest in our Internet service provider business and related assets that we
operated as a separate segment of the business. We expect that capital
expenditures will increase due to continued expansion of our network
infrastructure as well as our increasing employee base.
FINANCING ACTIVITIES. Net cash provided by financing activities was
$98.4 million in 1999, $8.0 million in 1998 and $7.3 million in 1997. In 1999,
we completed our initial public offering, which raised $66.8 million net of
costs. In 1998 and 1997, we had funded our operations primarily through private
placement of our convertible preferred stock. We also financed our operations
through equipment promissory notes.
30
COMMITMENTS. We lease all of our facilities under operating leases that
expire at various dates through 2003. As of December 31, 1999, we had
$3.2 million in future operating lease commitments and $1.7 million of capital
lease obligations and equipment promissory notes. In the future we expect to
continue to finance the acquisition of computer and network equipment through
additional capital lease arrangements.
SUMMARY OF LIQUIDITY. We believe that the existing cash, cash equivalents
and short-term investments, in addition to funds available under existing credit
facilities, will be sufficient to meet our working capital requirements for the
foreseeable future. However, the risk factors discussed in item 7 could
adversely affect our cash position. We may require additional funds to support
our working capital requirements or for other purposes and may seek to raise
these additional funds through public or private debt or equity financing or
from other sources.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as "derivatives") and for hedging
activities. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. As the Company does not currently engage in
derivatives or hedging transactions, there would be no current impact to the
Company's results of operations, financial position, or cash flows upon the
adoption of SFAS 133.
In December 1999, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company has not yet determined the impact of adopting SAB 101 on its
financial statements.
YEAR 2000 COMPLIANCE
In our recent filings with the Commission, we discussed the nature and
progress of our plans to become year 2000 compliant. In late 1999, we completed
our remediation and testing of systems. As a result of those planning and
implementation efforts, we experienced no significant disruptions in mission
critical information technology systems and other internal operating systems.
Costs directly associated with our year 2000 compliance efforts were not
material. We are not aware of any material problems with our software products
or internal operating systems resulting from year 2000 issues, and we have not
received notice of any material year 2000 compliance issues from our external
vendors. However, there can be no assurance that residual year 2000 problems
will not materially adversely effect our results of operations, cash flows or
financial position in a particular period.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the information in this Annual Report on Form 10-K, the
following should be considered in evaluating GRIC and our business.
OUR OPERATING HISTORY IS MORE LIMITED THAN THAT OF MANY OTHER COMPANIES, SO YOU
MAY FIND IT DIFFICULT TO EVALUATE OUR BUSINESS IN MAKING AN INVESTMENT DECISION.
We have limited experience in developing and providing our products and
services. Since our inception, we have had limited revenues from our current
Internet-based communications software products and services, and have never
generated revenues from licensing our GRIC Convergent Services Platform
software, or GRIC CSP software, as a separately licensed product. Many members
of
31
our senior management team and other employees have worked with us for only a
short period of time. Consequently, we have not demonstrated that our business
can succeed.
WE HAVE NOT BEEN PROFITABLE TO DATE, WE MAY NEVER BE PROFITABLE AND WE
ANTICIPATE CONTINUED LOSSES FOR THE FORESEEABLE FUTURE.
To date, we have not been profitable. We cannot assure you that we will ever
achieve or sustain profitability. We reported operating losses of $22.6 million
for 1999, $17.9 million for 1998 and $8.2 million for 1997. As of December 31,
1999, our accumulated deficit was $47.7 million. We expect to incur operating
losses for the foreseeable future. In particular, we expect to continue to
invest heavily in research and development and sales and marketing, and we
expect to face pressure to adopt new pricing arrangements, including volume
discounts, that may lower our gross margins. If revenues do not meet levels we
anticipate, or if our costs and expenses exceed our expectations, we will
continue to sustain losses, and our business and the price of our common stock
may be harmed.
IF WE FAIL TO DEVELOP GRIC CSP SOFTWARE PRODUCTS OR WE OR OTHERS FAIL TO DEVISE
AN APPROPRIATE PRICING MODEL FOR THESE PRODUCTS, WE ARE UNLIKELY TO ACHIEVE OUR
REVENUE GOALS.
Our future growth and profitability, if any, depend, to a great extent, on
our being able to develop and market future versions of our GRIC CSP software
that can be licensed to current and potential customers as a separate product.
This is a complex, long-term development effort in a rapidly changing and
competitive arena. We may not be able to complete the effort successfully or in
a timely fashion, particularly given our lack of experience in development
projects of this magnitude.
Even if we succeed in developing future versions of our GRIC CSP software,
we do not know whether they will achieve market acceptance at all or, if they
do, that they will support the pricing levels or generate the revenues we
anticipate. We have not yet established pricing for any GRIC CSP software
products or related services. We have limited experience with the
transaction-based revenue models that we hope to use with our GRIC CSP software.
If we fail to establish a pricing model acceptable to our customers, our GRIC
CSP software products will not be commercially successful. Further, we do not
know whether third-party developers of Internet communications applications will
be willing to develop new applications that interface with our GRIC CSP software
platform, or that we will be able to develop any applications of this type
ourselves. If no such applications are developed, our GRIC CSP software will not
achieve market acceptance. These uncertainties make it difficult to make any
judgment about our future business prospects.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN AND INCREASE OUR CUSTOMER BASE.
Our goal of achieving profitability depends on our ability to maintain and
expand our customer base. However, our customers are generally free to use
competing products and services, and the costs of switching are low, so we could
face significant customer losses. Our customers are generally not obligated to
generate minimum revenues, and some generate very little revenue for us. These
factors make it difficult to anticipate what our future revenues from existing
customers will be. In addition, our success depends on our ability to expand our
customer base. World Access Telecommunications accounted for approximately 16%
of our total revenues for 1999. If we lose any significant customer or are
unable to expand our customer base and to increase our average revenues per
customer, our business will be harmed.
WE DEPEND ON OUR CUSTOMERS TO MARKET NEW INTERNET-BASED SERVICES TO THEIR END
USERS, SO OUR REVENUES DEPEND ON THE ACTIVITIES OF OTHERS AND THE MARKET
ACCEPTANCE OF THOSE NEW SERVICES.
Our business depends on the efforts and success of our customers in
marketing Internet-based services to their end users. Our ability to promote
those services is limited. Many Internet-based
32
services, such as Internet telephony, are new and have not achieved widespread
acceptance in the marketplace. As a result, our customers may be reluctant to
promote these services until they gain greater commercial acceptance, which may
never occur. If our customers fail to market Internet-based services
effectively, for any reason, our revenues would be reduced.
WE FACE SIGNIFICANT COMPETITION IN THE MARKETS IN WHICH WE OPERATE, INCLUDING
COMPETITION FROM LARGE TELEPHONE COMPANIES, WHICH COULD MAKE IT MORE DIFFICULT
FOR US TO SUCCEED.
There are low barriers to entry by new or existing businesses seeking to
offer services on the Internet. As a result, our business environment is
intensely competitive, highly fragmented and rapidly changing. Competition can
come from many sources and may be focused on different segments of our business.
For example, we compete directly with iPass in the market for Internet roaming
and related settlement services, and iPass has a network that competes with the
GRIC Alliance. Our competitor, Transnexus, offers a clearinghouse service for
Internet telephony and, like us, their service operates in multiple hardware and
software environments. Providers of Internet telephony services, such as iBasis
(formerly VIP Calling) and ITXC, compete with our Internet telephony offerings.
Potential competitors to future stand-alone products based on GRIC CSP software
may include independent software vendors and vendors of operations support
system software, such as CAP Gemini, EDS and Lucent Technologies. Large
telephone companies such as AT&T and MCI Worldcom have the ability and resources
to compete in any or all of our markets or future markets if they choose to do
so.
Many of our competitors have substantially greater resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships in the industry than we have. Any of these competitors
may combine or form strategic partnerships, gaining competitive advantages as a
result. Our competitors may be able to develop and market products and services
that are superior to our own in terms of features, quality, pricing or other
factors. In that event, our products and services may not achieve the market
acceptance necessary for us to achieve success.
IF WE ARE UNABLE TO MANAGE RAPID GROWTH, THE GRIC ALLIANCE AND OUR PRODUCT
DEVELOPMENT EFFORTS EFFECTIVELY, OUR BUSINESS AND THE PRICE OF OUR STOCK WILL BE
HARMED.
In recent periods, rapid growth of the GRIC Alliance and acceleration of our
product development efforts have strained our network operations, product
development and other managerial, operating and financial resources. We expect
these strains to continue if we continue our growth, and our financial
performance and our ability to compete effectively will depend, in part, on our
ability to manage any future growth effectively. To that end, we must:
- manage our research and development efforts;
- expand the capacity, scalability and performance of our network and
software infrastructure;
- develop our administrative, accounting and management information systems
and controls;
- improve coordination among our engineering, accounting, finance, marketing
and operations personnel; and
- hire and train additional qualified personnel.
We may not be able to accomplish these tasks, which would harm our business
and the price of our stock.
INTERNET TELEPHONY HAS NOT ACHIEVED, AND MAY NEVER ACHIEVE, WIDESPREAD MARKET
ACCEPTANCE.
Using Internet telephony for voice traffic may never achieve widespread
acceptance. The Internet telephony market is relatively new; less than 1% of all
voice calls worldwide are currently transmitted over Internet-based networks. We
expect both telecommunications companies and telephone users to
33
resist changing to Internet-based telephony unless it offers clear benefits.
Historically, the sound quality of Internet telephone calls has been poor. Due
to capacity constraints on the Internet over which Internet telephone calls
travel, callers sometimes experience transmission delays or transmission errors.
If Internet telephone calls do not achieve commercial acceptance at all or as
soon as anticipated, our efforts to increase our Internet telephone call
business, which is key to our business strategy, could suffer.
THE SUCCESS OF OUR INTERNET TELEPHONY BUSINESS DEPENDS ON RELATIONSHIPS WITH
THIRD PARTIES, WHICH MAY BE DIFFICULT TO ESTABLISH AND MAINTAIN.
The development of our Internet telephony business will depend on our
ability to establish and maintain strategic relationships with technology
leaders. For example, we must maintain compatibility of our products with the
Internet telephony equipment of Lucent Technologies and Cisco Systems since they
are currently the most significant manufacturers of Internet telephony
equipment. We must also remain compliant with industry standards set by third
parties. Further, to increase traffic for our Internet telephony service, we
must continue to make arrangements with third parties to originate and terminate
customer calls and to expand our network. If we fail to develop and maintain
relationships of this sort, we will be unable to increase our Internet telephony
business, which is key to our business strategy.
WE EXPECT THE PRICING ADVANTAGE OF INTERNET TELEPHONY TO DECLINE, WHICH WOULD
HAMPER OUR EFFORTS TO EXPAND THIS KEY COMPONENT OF OUR BUSINESS.
Today, Internet telephony generally enjoys a price advantage over
traditional international long distance rates. We expect this price differential
to decline, and it may decline more rapidly than we expect. If prices of
traditional international long distance calls decline to a point where Internet
telephony no longer offers a price advantage, Internet telephony will lose an
important competitive advantage and the prospects for this key component of our
business will decline.
OUR INTERNET TELEPHONY REVENUE IS CONCENTRATED IN ONLY A SMALL NUMBER OF
CUSTOMERS, THE LOSS OF ANY ONE OF WHICH COULD HARM OUR REVENUES AND
PROFITABILITY.
Only a small number of customers have end users that originate or terminate
Internet telephone calls using our Internet telephony services. The loss of any
of these customers could have a material adverse effect on our Internet
telephony business because it would be difficult to replace that business. Any
future growth depends in large part on our ability to establish relationships
with new customers wishing to originate or terminate Internet telephone calls.
OUR CUSTOMERS REQUIRE A HIGH DEGREE OF RELIABILITY IN THE DELIVERY OF OUR
SERVICES, AND IF WE CANNOT MEET THEIR EXPECTATIONS FOR ANY REASON, DEMAND FOR
OUR PRODUCTS AND SERVICES WILL SUFFER.
Our success depends in large part on our ability to assure generally
error-free clearinghouse services, uninterrupted operation of our network and
software infrastructure, and a satisfactory experience for our customers' end
users when they use Internet-based communications services. To achieve these
objectives, we depend on the quality, performance and scalability of our
products and services, the responsiveness of our technical support and the
capacity, reliability and security of our network operations. We also depend on
third parties over which we have no control. For example, our ability to serve
approximately 150 countries is based solely on our network access agreement with
one service provider and on that service provider's ability to provide reliable
Internet access points in those countries. In the past, we have experienced
problems due to our inability to detect system malfunctions and due to errors in
collecting or processing account usage and settlement data. Due to the high
level of performance required for critical communications traffic, any failure
to deliver a satisfactory experience to end users, whether or not caused by our
own failures, and any failure to provide accurate
34
settlement data in connection with acting as a clearinghouse, could reduce
demand for our products and services.
AS A CLEARINGHOUSE, WE HAVE GREATER COLLECTION RISKS THAN MOST COMPANIES.
Difficulties in collecting accounts receivable will harm our financial
results, and this collection risk is inherently greater for us as a
clearinghouse service provider because we are obligated to pay amounts owed to
each customer whether or not we have collected all the amounts due to us from
other customers. In addition, if end users or unauthorized third parties engage
in unauthorized or otherwise fraudulent roaming or telephony activity, we may
face difficulty collecting the resulting accounts receivable. If we are not able
to manage this problem, our financial results will suffer.
IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS AND SERVICES, WE WILL BE
LESS LIKELY TO ATTRACT OR RETAIN CUSTOMERS.
We expect the market for Internet communications products and services to
continue to change rapidly. To succeed, we will be required to adapt to those
changes by improving and enhancing our existing products and services, and
developing and introducing new products and services. We have not demonstrated
that we can consistently develop and market product enhancements and new
products or services on a timely or on a cost-effective basis. On several
occasions, we have altered the course of our product development efforts or
discontinued products after their introduction, which has resulted in delays and
increased research and development expenses. If we fail to produce
technologically competitive products and services in a cost-effective manner and
on a timely basis, our business will be harmed.
OUR OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO PREDICT, SO WE MAY FAIL TO
SATISFY THE EXPECTATIONS OF INVESTORS OR MARKET ANALYSTS AND OUR STOCK PRICE MAY
DECLINE.
Our quarterly operating results have fluctuated in the past, and we expect
them to continue to fluctuate in the future. Factors that cause these
fluctuations, many of which are beyond our control, include:
- the volume of transaction-based revenues;
- management of growth;
- the rate at which customers use our services;
- our dependence on the timely and successful launch of future products,
including future versions of our stand-alone GRIC CSP software products;
- the mix of services used by our customers' end users;
- economic conditions specific to the Internet, as well as general economic
and market conditions;
- our ability to avoid problems in managing the GRIC Alliance network;
- intense competition;
- our ability to collect accounts receivable; and
- the domestic and international regulatory environment.
35
Business models relying on the Internet to provide Internet-based
communications services are still evolving. As a result, we believe that
period-to-period comparisons of our historical operating results are not
meaningful. Additionally, if our operating results in one or more quarters do
not meet or exceed securities analysts' or market expectations, the price of our
common stock is likely to decline.
OUR LONG SALES CYCLE MAKES IT PARTICULARLY DIFFICULT FOR US TO FORECAST
REVENUES, REQUIRES US TO INCUR HIGH COSTS OF SALES, AND AGGRAVATES FLUCTUATIONS
IN QUARTERLY FINANCIAL RESULTS.
Our business is characterized by a long sales cycle between the time a
potential customer is contacted and a new customer relationship is established,
and between the time the new customer is won and when we begin to realize
significant transaction-based revenues. In part this is because the markets for
Internet-based communications services are new and demand is uncertain. This
makes it difficult for us to predict future revenues. In addition, we incur
substantial sales costs before we win a customer or recognize any related
revenues, which increases the volatility of our results because we may have high
costs without associated offsetting revenues.
BECAUSE MUCH OF OUR BUSINESS IS INTERNATIONAL, WE ENCOUNTER SPECIAL PAYMENT AND
REGULATORY DIFFICULTIES, WHICH MAY REDUCE OUR PROFITABILITY AND HARM THE PRICE
OF OUR COMMON STOCK.
Because we generate most of our revenues from business conducted
internationally, we are subject to special risks. Those risks include:
- longer payment cycles for foreign customers, including delays due to
currency controls and fluctuations;
- negative impacts of changes in foreign currency exchange rates;
- potentially high taxes in foreign countries;
- difficulties complying with a variety of foreign laws, trade standards and
tariffs and of overcoming trade barriers; and
- difficulties complying with telecommunications and other Internet-related
regulations in many foreign jurisdictions.
We are also exposed to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships. Any of
these factors may reduce our profitability and harm the price of our common
stock.
WE NEED TO HIRE AND RETAIN QUALIFIED PERSONNEL TO SUSTAIN THE GROWTH OF OUR
BUSINESS, WHICH IS PARTICULARLY DIFFICULT FOR US BECAUSE WE COMPETE WITH OTHER
INTERNET-RELATED COMPANIES IN THE SAN FRANCISCO BAY AREA WHERE WE ARE BASED.
Our future success depends, in part, on the continued service of our key
executive, management and technical personnel, many of whom we hired only
recently, and our ability to attract new skilled employees. From time to time we
have experienced difficulty in hiring and retaining highly skilled employees,
and we expect to continue to experience this sort of difficulty. Competition for
employees in our industry is intense, particularly in the San Francisco Bay area
where we are located, and we have experienced significant attrition. Declines in
the market price of our common stock could also hurt employee morale and
retention. If we are not able to retain our key employees or to attract,
assimilate or retain other highly qualified employees in the future, our
business could be harmed because our growth might be slowed or executive
leadership might be disrupted.
36
LITIGATION ARISING OUT OF INTELLECTUAL PROPERTY INFRINGEMENT OR OTHER COMMERCIAL
DISPUTES COULD BE EXPENSIVE AND DISRUPT OUR BUSINESS.
We cannot be certain that our products do not, or will not, infringe upon
patents, trademarks, copyrights or other intellectual property rights held by
third parties. See "Business--Intellectual Property." In addition, since we rely
on third parties to help us develop, market and support our product and service
offerings, we cannot assure you that litigation will not arise from disputes
involving those third parties. From time to time we have been, and we expect to
continue to be, parties to disputes with these third parties. We may incur
substantial expenses in defending against these claims, regardless of their
merit. Successful claims against us may result in substantial monetary
liability, significantly impact our results of operations in one or more
quarters or materially disrupt the conduct of our business.
WE ANTICIPATE THE NEED FOR ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND GROWTH;
IF FINANCING IS NOT AVAILABLE ON ACCEPTABLE TERMS, OUR ABILITY TO SUCCEED WILL
BE HAMPERED.
We expect to be required to raise additional capital to fund our operations,
to finance investments in the equipment and corporate infrastructure needed for
the expansion of our network, to enhance and expand the range of products and
services we offer and to respond to competitive pressures and perceived
opportunities. To date, our cash flow from operations has not been sufficient to
cover our expenses and capital needs, and we cannot assure you that it will be
sufficient in the future. We also cannot assure you that any financing will be
available on terms favorable to us or at all. If adequate funds are not
available on acceptable terms or at all, we may be forced to curtail or cease
our operations.
OUR EXECUTIVE OFFICERS AND DIRECTORS HOLD A SIGNIFICANT PERCENTAGE OF OUR STOCK
AND WILL BE ABLE TO CONTROL MATTERS REQUIRING STOCKHOLDER APPROVAL.
As of December 31, 1999, our executive officers and directors and their
affiliated entities owned approximately 32.9% of our outstanding common stock.
Accordingly, these stockholders, acting together, will have a substantial
influence on all matters requiring approval by our stockholders, including the
election of directors and the approval of significant corporate transactions.
This concentration could also have the effect of delaying or preventing a change
in control of our company.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE A TAKEOVER AND DEPRESS OUR STOCK PRICE.
Provisions of our certificate of incorporation, bylaws and Delaware law make
it difficult for a third party to acquire us, despite the possible benefit to
our stockholders, and this may potentially lower the price of our common stock.
These provisions of our certificate of incorporation and bylaws:
- authorize the board to issue preferred stock without stockholder approval;
- prohibit cumulative voting in the election of directors;
- limit the persons who may call special meetings of stockholders; and
- establish advance notice requirements for nominations for the election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
In addition, we may adopt a shareholder rights plan, or "poison pill," and
we have elected to remain subject to the anti-takeover provisions of the
Delaware General Corporation Law. These factors may discourage takeover
attempts.
37
OUR STOCK PRICE MAY BE VOLATILE WHICH COULD LEAD TO LOSSES BY INVESTORS WHICH
COULD LEAD TO SHAREHOLDER LAWSUITS.
The stock market frequently experiences extreme price and volume
fluctuations. In particular, the market prices of the securities of
Internet-related companies have been especially volatile recently, and often
these fluctuations have been unrelated or disproportionate to operating
performance. This increases the risk that if you wish to sell our stock the
market price may be lower than the price at which you may have purchased our
stock. If the market value of our stock experiences adverse fluctuations and we
become involved in class actions lawsuits by security holders, we could incur
substantial legal costs and management's attention could be diverted, to the
detriment of our operations and results.
We expect the market price for our common stock to continue to be subject to
wide fluctuations as a result of factors including:
- quarterly variations in our operating results;
- announcements of technological innovations by us or our competitors;
- announcements of new products or services by us or our competitors;
- investor perception of us, the market for Internet-based communications
services or the Internet in general;
- changes in financial estimates by securities analysts; and
- general economic and market conditions.
In addition, the market price of our common stock could decrease as a result
of sales of substantial amounts of common stock in the public market or the
perception that substantial sales could occur. On June 12, 2000, approximately
12,277,294 shares become eligible for public sale when lockup agreements in
connection with our initial public offerings are due to expire.
FUTURE DEVELOPMENTS IN INTERNET-BASED COMMUNICATIONS SERVICES, WHICH ARE
CRITICAL TO OUR SUCCESS, ARE UNCERTAIN.
For us to increase our revenues, the Internet must be validated as an
effective medium for the delivery of Internet roaming, Internet telephony and
other Internet-based communications services. The infrastructure of the public
Internet may not be able to support increased demands placed on it, and the
performance of the Internet may be adversely affected. Our business will be
harmed if the Internet does not continue to grow as a telecommunications medium,
and that growth may be inhibited by factors such as:
- unreliability of the Internet infrastructure;
- inability of vendors to develop Internet networking equipment that offers
telecommunications-grade communications services over the Internet;
- security concerns;
- new regulatory requirements;
- inconsistent quality of service; and
- lack of availability of cost-effective service.
38
SECURITY CONCERNS MAY DETER THE USE OF THE INTERNET FOR INTERNET-BASED
COMMUNICATIONS WHICH WOULD REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES.
The secure transmission of confidential information over public networks is
a significant barrier to widespread adoption of electronic commerce and
communications. The Internet is a public network and information is sent over
this network from many sources. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments could result in
compromised security on our network or the networks of others. If any
well-publicized compromises of confidential information were to occur, it could
reduce demand for Internet-based communications and our products and services.
U.S. OR FOREIGN GOVERNMENTAL REGULATIONS REGARDING INTERNET TELEPHONY OR THE
INTERNET GENERALLY MAY BE ENACTED, WHICH COULD IMPEDE OUR BUSINESS.
To date, governmental laws and regulations applicable to access to or
commerce on the Internet or use of the Internet to provide telephone service
have not materially restricted use of the Internet in our markets. However, the
legal and regulatory environment that pertains to the Internet is uncertain and
may change. See "Business--Government Regulation." For example, the Federal
Communications Commission has at times considered proposals to impose surcharges
or other common carrier regulations upon direct providers of Internet telephony
to end users located within the U.S. It is also possible that the FCC may adopt
a regulatory framework, other than traditional common carrier regulation, that
would apply to Internet telephony providers. In addition, Congress and other
federal entities have adopted or are considering other legislative and
regulatory proposals that would further regulate the Internet. Further, a number
of foreign countries prohibit Internet telephony or permit but regulate Internet
telephony. Other foreign countries have considered or are considering whether to
regulate Internet telephony. The European Union has also enacted several
directives relating to the Internet, including one which affects U.S. companies
that collect or transmit information over the Internet from individuals in
European Union Member States. New domestic or foreign taxes could also be
adopted that would apply to the delivery or use of communications services over
the Internet. Uncertainty about and adoption of new regulations could increase
our costs of doing business, or prevent us from delivering our products and
services over the Internet or significantly slow the growth of the Internet.
This could delay growth in demand for our products and services and harm our
business.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
FOREIGN CURRENCY RISK. We have limited exposure to financial market risks,
including changes in foreign currency exchange rates and interest rates.
Although we have foreign operations in Europe and Asia, to date, our exposure to
foreign currency fluctuations has not been significant.
INTEREST RATE RISK. The Company's exposure to interest rate risk relates
primarily to its investment portfolio and debt obligations. Interest rate risk
occurs when the Company cannot hold a purchased investment to its maturity. The
Company limits the weighted-average maturity of its investment portfolio to
90 days. The Company has the intent to hold its securities until maturity and,
therefore, does not expect to recognize an adverse impact on income or cash
flows, although there can be no assurance of this. The Company has established
policies and business practices regarding its investment portfolio to preserve
principal while obtaining reasonable rates of return without significantly
increasing risk. The Company places investments with high credit quality issuers
according to the Company's investment policy. We do not use derivative financial
instruments in our investment portfolio. All investments are carried at cost,
which approximates market value. Due to the short-term nature of our investments
and the immaterial amount of our debt obligation, we believe that there is no
material exposure to interest fluctuation. Therefore, no accompanying table has
been provided.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANNUAL FINANCIAL STATEMENTS
Our financial statements required by this item are submitted as a separate
section of this Form 10-K--"Financial Statements." See Item 14 for a listing of
the financial statements provided.
The following table sets forth certain unaudited condensed consolidated
statement of operations data for each quarter of 1998 and 1999. This data has
been derived from unaudited condensed consolidated financial statements and, in
the opinion of management, include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the information when
read in conjunction with the consolidated financial statements and notes
thereto. Our quarterly results have in the past been and may in the future be
subject to significant fluctuations. As a result, we believe that results of
operations for interim periods should not be relied upon as an indication of the
results to be expected in future periods.
QUARTERS ENDED
---------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT 30, DEC 31, MARCH 31, JUNE 30, SEPT 30, DEC 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
Total revenues................ $ 460 $ 479 $ 774 $ 836 $ 1,167 $ 1,791 $ 2,479 $ 4,184
Cost of revenues.............. 259 351 751 1,065 656 942 1,827 3,673
Net loss...................... (3,018) (3,761) (4,234) (6,889) (4,460) (5,384) (5,443) (7,279)
Basic and diluted net loss per
share....................... (1.56) (1.93) (2.16) (3.51) (2.27) (2.65) (2.68) (1.37)
Shares used to compute basic
and diluted net loss per
share....................... 1,930 1,944 1,957 1,962 1,967 2,033 2,028 5,320
Our quarterly operating results have fluctuated significantly in the past,
and will continue to fluctuate in the future, as a result of a number of
factors, many of which are outside our control. These factors include:
- changes in the number of the GRIC Alliance members;
- our ability to establish and maintain relationships with service providers
and strategic partners;
- the demand for our products and services;
- software defects and other product quality problems;
- the size and timing of specific sales;
- the length of our sales cycles;
- budgeting cycles of our customers;
- the delay of customer purchases caused by the announcement of new hardware
or software platforms;
- the level of product and price competition;
- changes in our pricing policies;
- the timing and market acceptance of our new product and service
introductions and enhancements;
- our ability to hire, train and retain sales and consulting personnel to
meet demand;
- personnel changes;
40
- the mix of international and domestic revenues;
- changes in our sales force incentives;
- changes in our strategy; and
- general domestic and international economic and political conditions.
We have in the past experienced delays in the planned release dates of new
software products or upgrades, have discovered software defects in new products
after their introduction and have discontinued products after introduction. We
cannot assure you that new products or upgrades will be released according to
schedule or that, when released, they will not contain defects or be
discontinued. Any of these situations could result in adverse publicity, loss of
revenues, delay in market acceptance or claims by customers brought against us,
any of which could have a material adverse effect on our business, results of
operations and financial condition.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will furnish to the Securities and Exchange Commission a
definitive Proxy Statement (the "Proxy Statement") not later than 120 days after
the close of the fiscal year ended December 31, 1999. The information required
by this item is incorporated herein by reference to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Proxy Statement.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The following are filed as part of this Annual Report on Form 10-K:
- Report of Independent Auditors
- Consolidated Balance Sheets as of December 31, 1999 and 1998
- Consolidated Statements of Operations for the years ended December
31, 1999, 1998 and 1997
- Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit) for the years ended December 31,
1999, 1998 and 1997
- Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997
- Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule for the years ended
December 31, 1999, 1998 and 1997 should be read in conjunction with the
consolidated financial statements of GRIC Communications, Inc. filed as
part of this Annual Report on Form 10-K:
- Schedule II--Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since they
are either not required, not applicable, or because the information
required is included in the consolidated financial statements or the
notes thereto.
3. EXHIBITS
The following exhibits are filed as a part of this report:
INCORPORATED BY REFERENCE
EXHIBIT ------------------------------ FILED
NUMBER EXHIBIT TITLE FORM DATE NUMBER HEREWITH
- --------------------- ---------------------------------------------------- -------- -------- -------- --------
1.01 Form of Underwriting Agreement. S-1 9/21/99 1.01
3.01 The Registrant's Certificate of Incorporation. S-1 9/21/99 3.01
3.02 The Registrant's First Amended and Restated Bylaws. S-1 9/21/99 3.02
3.03 The Registrant's First Amended and Restated S-1 9/21/99 3.03
Certificate of Incorporation.
3.04 The Registrant's Second Amended and Restated S-1 9/21/99 3.04
Certificate of Incorporation.
4.01 Form of specimen certificate for the Registrant's S-1 9/21/99 4.01
common stock.
4.02 Fifth Amended and Restated Registration Rights S-1 9/21/99 4.02
Agreement, dated November 12, 1999, among Registrant
and the security holders listed in the agreement.
5.01 Opinion of Fenwick & West LLP regarding the legality S-1 9/21/99 5.01
of the shares of common stock being registered.
43
INCORPORATED BY REFERENCE
EXHIBIT ------------------------------ FILED
NUMBER EXHIBIT TITLE FORM DATE NUMBER HEREWITH
- --------------------- ---------------------------------------------------- -------- -------- -------- --------
10.01 Form of Indemnification Agreement between the S-1 9/21/99 10.01
Registrant and each of its directors and executive
officers.
10.02* Employee Agreement effective March 1, 1994 between S-1 9/21/99 10.02
Aimnet Corporation and Dr. Hong Chen.
10.03* Employee Agreement effective March 1, 1994 between S-1 9/21/99 10.03
Aimnet Corporation and Lynn Y. Liu.
10.04* Offer letter dated August 21, 1996 to Christophe J. S-1 9/21/99 10.04
Culine.
10.05* Offer letter dated June 8, 1998 to David L. S-1 9/21/99 10.05
Teichmann.
10.06* Offer letter dated October 15, 1998 to Phillip M. S-1 9/21/99 10.06
Sakakihara.
10.07* Offer letter dated January 15, 1999 to Joseph M. S-1 9/21/99 10.07
Zaelit.
10.08* Offer letter dated May 11, 1999 to Barron B. Cox. S-1 9/21/99 10.08
10.09* Offer letter dated July 28, 1999 to Kristin L. S-1 9/21/99 10.09
Steinmetz.
10.10* Offer letter dated July 22, 1999 to Roger L. Peirce. S-1 9/21/99 10.10
10.11* Aimnet Corporation 1995 Stock Option Plan. S-1 9/21/99 10.11
10.12* GRIC Communications, Inc. (formerly Aimquest S-1 9/21/99 10.12
Corporation) 1997 Stock Option Plan.
10.13* 1999 Equity Incentive Plan. S-1 9/21/99 10.13
10.14* 1999 Employee Stock Purchase Plan. S-1 9/21/99 10.14
10.15 Restricted Stock Purchase Agreement dated July 1997 S-1 9/21/99 10.15
between Aimquest Corporation and Stanley J.
Meresman.
10.16 Warrant to purchase common stock issued to America S-1 9/21/99 10.16
Online, Inc. dated as of November 12, 1998.
10.17 Warrant to purchase Series D Preferred Stock issued S-1 9/21/99 10.17
to Silicon Valley Bank dated as of December 31,
1998.
10.18 Warrant to purchase Series D Preferred Stock issued S-1 9/21/99 10.18
to Silicon Valley Bank dated as of November 5, 1998.
10.19 Warrant to purchase Series D Preferred Stock issued S-1 9/21/99 10.19
to Phoenix Leasing Incorporated dated as of August
10, 1998.
10.20 Warrant to purchase Series D Preferred Stock issued S-1 9/21/99 10.20
to Robert A. Kingsbook dated as of August 10, 1998.
10.21 Loan and Security Agreement dated November 5, 1998 S-1 9/21/99 10.21
between the Registrant and Silicon Valley Bank,
together with Intellectual Property Agreement dated
November 5, 1998.
10.22 Senior Loan and Security Agreement dated August 10, S-1 9/21/99 10.22
1998 between the Registrant and Phoenix Leasing
Incorporated, together with a form of Senior Secured
Promissory Note.
44
INCORPORATED BY REFERENCE
EXHIBIT ------------------------------ FILED
NUMBER EXHIBIT TITLE FORM DATE NUMBER HEREWITH
- --------------------- ---------------------------------------------------- -------- -------- -------- --------
10.23 Lease dated January 6, 1998 among the Registrant, S-1 9/21/99 10.23
John Arrillaga Survivor's Trust and Richard T. Peery
Separate Property Trust.
10.24 Agreement dated August 3, 1999 between the S-1 9/21/99 10.24
Registrant and Singapore Telecommunications Ltd.
21.01 Subsidiaries of the Company. X
23.01 Consent of Independent Auditors. X
24.01 Power of Attorney (see page 46). X
27.01 Financial Data Schedule. X
- ------------------------
* Management contract, compensatory plan or arrangement.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
March 29, 2000 GRIC COMMUNICATIONS, INC.
By: /s/ DR. HONG CHEN
-----------------------------------------
Dr. Hong Chen
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph M. Zaelit and David L. Teichmann, jointly
and severally, his attorneys-in-fact, each with the power of substitution for
him or her and in such person's name, place and stead, in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or either if them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934 this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROGER L. PEIRCE
------------------------------------ Chairman March 29, 2000
Roger L. Peirce
PRINCIPAL EXECUTIVE OFFICER:
/s/ DR. HONG CHEN
------------------------------------ President, Chief Executive Officer March 29, 2000
Dr. Hong Chen and Director
PRINCIPAL FINANCIAL OFFICER:
/s/ JOSEPH M. ZAELIT Senior Vice President, Finance and
------------------------------------ Administration and Chief March 29, 2000
Joseph M. Zaelit Financial Officer
/s/ KIM S. SILVERMAN PRINCIPAL ACCOUNTING OFFICER:
------------------------------------
Kim S. Silverman Corporate Controller March 29, 2000
46
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LYNN Y. LIU
------------------------------------ Senior Vice President, Corporate March 29, 2000
Lynn Y. Liu Development and Director
/s/ DR. TA-LIN HSU
------------------------------------ Director March 29, 2000
Dr. Ta-Lin Hsu
/s/ DR. YEN-SON (PAUL) HUANG
------------------------------------ Director March 29, 2000
Dr. Yen-Son (Paul) Huang
/s/ KHENG NAM LEE
------------------------------------ Director March 29, 2000
Kheng Nam Lee
------------------------------------ Director
Jozef Lernout
/s/ STANLEY J. MERESMAN
------------------------------------ Director March 29, 2000
Stanley J. Meresman
47
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
GRIC Communications, Inc.
We have audited the accompanying consolidated balance sheets of GRIC
Communications, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of GRIC
Communications, Inc. at December 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
January 24, 2000
48
GRIC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
-------------------
1998 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,362 $ 64,655
Short-term investments.................................... -- 13,030
Accounts receivable, net of allowances of $384 and $701 at
December 31, 1998 and 1999, respectively................ 750 2,596
Other current assets...................................... 266 401
-------- --------
Total current assets........................................ 2,378 80,682
Property and equipment, net................................. 2,055 4,404
Other assets................................................ 307 291
-------- --------
$ 4,740 $ 85,377
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,975 $ 5,302
Accrued compensation and benefits......................... 881 1,620
Other current liabilities................................. 595 829
Current portion of long-term debt and capital lease
obligations ($2,700 in stockholder notes at December 31,
1998--see Note 5)....................................... 4,436 626
-------- --------
Total current liabilities................................... 9,887 8,377
Long-term debt and capital lease obligations................ 1,069 1,147
Commitments and contingencies
Redeemable convertible preferred stock, $0.001 par value:
6,025 and no shares authorized at December 31, 1998 and
1999, respectively; 5,213 and no shares issued and
outstanding at December 31, 1998 and 1999, respectively
(aggregate liquidation preference $0)................... 8,590 --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value; 1,190 and
no shares authorized at December 31, 1998 and 1999,
respectively; 871 and no shares issued and outstanding
at December 31, 1998 and 1999, respectively............. -- --
Preferred stock, none and 5,000 shares authorized at
December 31, 1998 and 1999, respectively; no shares
issued and outstanding.................................. -- --
Common stock, $0.001 par value; 10,714 and 50,000 shares
authorized; 1,981 and 19,162 shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 2 19
Additional paid-in capital................................ 10,370 125,057
Deferred stock-based compensation......................... -- (1,479)
Accumulated deficit....................................... (25,178) (47,744)
-------- --------
Total stockholders' equity (deficit).................... (14,806) 75,853
-------- --------
Total liabilities and stockholders' equity (deficit).... $ 4,740 $ 85,377
======== ========
See accompanying notes
49
GRIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Revenues:
Settlement................................................ $ 254 $ 1,666 $ 7,962
Software.................................................. 719 186 760
Hardware.................................................. 226 416 169
Maintenance and services.................................. 335 281 730
------- -------- --------
Total Revenues.......................................... 1,534 2,549 9,621
Costs and Expenses:
Cost of settlement revenues............................... 156 1,444 6,980
Cost of software revenues................................. 458 251 12
Cost of hardware revenues................................. 250 588 52
Cost of maintenance and services revenue.................. -- 143 54
Network and operations(1)................................. 837 1,117 3,054
Research and development(2)............................... 2,314 5,080 8,128
Sales and marketing(3).................................... 3,723 6,373 8,682
General and administrative(4)............................. 2,002 3,540 4,967
Other operating expenses (expense reversals).............. -- 1,500 (925)
Amortization of stock-based compensation.................. -- -- 300
------- -------- --------
Total costs and expenses................................ 9,740 20,036 31,304
------- -------- --------
Operating loss.............................................. (8,206) (17,487) (21,683)
Interest income and other, net.............................. 79 192 519
Interest expense............................................ -- (575) (1,332)
------- -------- --------
Loss from continuing operations before income taxes......... (8,127) (17,870) (22,496)
Provision for income taxes from continuing operations....... 59 32 70
------- -------- --------
Net loss from continuing operations......................... (8,186) (17,902) (22,566)
Discontinued operations:
Loss from discontinued operations......................... (774) -- --
Gain on disposal of discontinued operations............... 5,118 -- --
------- -------- --------
Net loss.................................................... $(3,842) $(17,902) $(22,566)
======= ======== ========
Basic and diluted net loss per share from continuing
operations................................................ $ (4.42) $ (9.19) $ (7.95)
======= ======== ========
Basic and diluted net loss per share........................ $ (2.08) $ (9.19) $ (7.95)
======= ======== ========
Shares used to compute basic and diluted net loss per
share..................................................... 1,851 1,948 2,837
======= ======== ========
- ------------------------
(1) Excludes $5 related to amortization of stock based compensation in 1999
(2) Excludes $114 related to amortization of stock based compensation in 1999
(3) Excludes $44 related to amortization of stock based compensation in 1999
(4) Excludes $137 related to amortization of stock based compensation in 1999
See accompanying notes.
50
GRIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
----------------------------------------------------
SERIES A SERIES B SERIES C
------------------- ------------------- --------
SHARES AMOUNT SHARES AMOUNT SHARES
-------- -------- -------- -------- --------
Balance at December
31, 1996........... 1,214 $ 680 2,311 $ 3,208 1,688
Issuance of Series
D convertible
preferred stock
to investors for
cash and
cancellation of
notes payable at
$16.80 per
share........... -- -- -- -- --
Issuance of common
stock upon
exercise of
employee stock
options for
cash............ -- -- -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- --
------ ----- ------ ------- ------
Balance at December
31, 1997........... 1,214 680 2,311 3,208 1,688
Issuance of Series
D convertible
preferred stock
to adjust the
cost of
previously
issued shares
from $16.80 to
$11.20 per
share........... -- -- -- -- --
Issuance of Series
D convertible
preferred stock
to investors for
cash and
cancellation of
notes payable at
$11.20 per
share, net of
issuance costs
of $15.......... -- -- -- -- --
Issuance of common
stock upon
exercise of
employee stock
options for
cash............ -- -- -- -- --
Issuance of Series
D warrants and
common stock
warrants........ -- -- -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- --
------ ----- ------ ------- ------
Balance at December
31, 1998........... 1,214 680 2,311 3,208 1,688
Conversion of 1998
bridge financing
to Series D
convertible
preferred stock
at $7.00 per
share........... -- -- -- -- --
Issuance of Series
D convertible
preferred stock
to adjust the
cost of
previously
issued shares
from $11.20 to
$7.00 per
share........... -- -- -- -- --
Issuance of Series
D convertible
preferred stock
at $7.00 per
share, net of
issuance costs
of $326......... -- -- -- -- --
Issuance of Series
D warrants...... -- -- -- -- --
Issuance of common
stock upon
exercise of
employee stock
options for
cash............ -- -- -- -- --
Warrant
revaluation..... -- -- -- -- --
Deferred
stock-based
compensation.... -- -- -- -- --
Amortization of
stock-based
compensation.... -- -- -- -- --
Issuance of Series
E convertible
preferred stock
at $10.00 per
share, net of
issuance costs
of $10.......... -- -- -- -- --
Issuance of common
stock to
previous board
member.......... -- -- -- -- --
Exercise of
warrants........ -- -- -- -- --
Conversion of
preferred stock
to common
stock........... (1,214) (680) (2,311) (3,208) (1,688)
Initial public
offering of
common shares,
net of issuance
costs of
$7,212.......... -- -- -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- --
------ ----- ------ ------- ------
Balance at December
31, 1999........... -- $ -- -- $ -- --
====== ===== ====== ======= ======
REDEEMABLE CONVERTIBLE PREFERRED STOCK STOCKHOLDER'S EQUITY (DEFICIT)
------------------------------ ---------------------------------------------
SERIES D SERIES E
CONVERTIBLE CONVERTIBLE
SERIES C
-------- ------------------- --------------------- ---------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- ---------- -------- ----------
Balance at December
31, 1996........... $ 4,702 5,213 $ 8,590 -- $ -- -- $ --
Issuance of Series
D convertible
preferred stock
to investors for
cash and
cancellation of
notes payable at
$16.80 per
share........... -- -- -- 432 -- -- --
Issuance of common
stock upon
exercise of
employee stock
options for
cash............ -- -- -- -- -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- --
------- ------ ------- ------ ---------- ---- ----------
Balance at December
31, 1997........... 4,702 5,213 8,590 432 -- -- --
Issuance of Series
D convertible
preferred stock
to adjust the
cost of
previously
issued shares
from $16.80 to
$11.20 per
share........... -- -- -- 216 -- -- --
Issuance of Series
D convertible
preferred stock
to investors for
cash and
cancellation of
notes payable at
$11.20 per
share, net of
issuance costs
of $15.......... -- -- -- 223 -- -- --
Issuance of common
stock upon
exercise of
employee stock
options for
cash............ -- -- -- -- -- -- --
Issuance of Series
D warrants and
common stock
warrants........ -- -- -- -- -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- --
------- ------ ------- ------ ---------- ---- ----------
Balance at December
31, 1998........... 4,702 5,213 8,590 871 -- -- --
Conversion of 1998
bridge financing
to Series D
convertible
preferred stock
at $7.00 per
share........... -- -- -- 250 -- -- --
Issuance of Series
D convertible
preferred stock
to adjust the
cost of
previously
issued shares
from $11.20 to
$7.00 per
share........... -- -- -- 672 1 -- --
Issuance of Series
D convertible
preferred stock
at $7.00 per
share, net of
issuance costs
of $326......... -- -- -- 3,668 4 -- --
Issuance of Series
D warrants...... -- -- -- -- -- -- --
Issuance of common
stock upon
exercise of
employee stock
options for
cash............ -- -- -- -- -- -- --
Warrant
revaluation..... -- -- -- -- -- -- --
Deferred
stock-based
compensation.... -- -- -- -- -- -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- -- --
Issuance of Series
E convertible
preferred stock
at $10.00 per
share, net of
issuance costs
of $10.......... -- -- -- -- -- 600 1
Issuance of common
stock to
previous board
member.......... -- -- -- -- -- -- --
Exercise of
warrants........ -- -- -- 223 -- -- --
Conversion of
preferred stock
to common
stock........... (4,702) (5,213) (8,590) (5,684) (5) (600) (1)
Initial public
offering of
common shares,
net of issuance
costs of
$7,212.......... -- -- -- -- -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- --
------- ------ ------- ------ ---------- ---- ----------
Balance at December
31, 1999........... $ -- -- $ -- -- $ -- -- $ --
======= ====== ======= ====== ========== ==== ==========
STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL DEFERRED TOTAL
------------------- PAID-IN STOCK-BASED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
-------- -------- ---------- ------------- ------------ ----------------
Balance at December
31, 1996........... 1,791 $ 2 $ 30 $ -- $ (3,434) $ (3,402)
Issuance of Series
D convertible
preferred stock
to investors for
cash and
cancellation of
notes payable at
$16.80 per
share........... -- -- 7,250 -- -- 7,250
Issuance of common
stock upon
exercise of
employee stock
options for
cash............ 161 -- 55 -- -- 55
Net loss and
comprehensive
loss............ -- -- -- -- (3,842) (3,842)
------ --- -------- ------- -------- --------
Balance at December
31, 1997........... 1,952 2 7,335 -- (7,276) 61
Issuance of Series
D convertible
preferred stock
to adjust the
cost of
previously
issued shares
from $16.80 to
$11.20 per
share........... -- -- -- -- -- --
Issuance of Series
D convertible
preferred stock
to investors for
cash and
cancellation of
notes payable at
$11.20 per
share, net of
issuance costs
of $15.......... -- -- 2,486 -- -- 2,486
Issuance of common
stock upon
exercise of
employee stock
options for
cash............ 29 -- 13 -- -- 13
Issuance of Series
D warrants and
common stock
warrants........ -- -- 536 -- -- 536
Net loss and
comprehensive
loss............ -- -- -- -- (17,902) (17,902)
------ --- -------- ------- -------- --------
Balance at December
31, 1998........... 1,981 2 10,370 -- (25,178) (14,806)
Conversion of 1998
bridge financing
to Series D
convertible
preferred stock
at $7.00 per
share........... -- -- 2,801 -- -- 2,801
Issuance of Series
D convertible
preferred stock
to adjust the
cost of
previously
issued shares
from $11.20 to
$7.00 per
share........... -- -- (1) -- -- --
Issuance of Series
D convertible
preferred stock
at $7.00 per
share, net of
issuance costs
of $326......... -- -- 25,345 -- -- 25,349
Issuance of Series
D warrants...... -- -- 689 -- -- 689
Issuance of common
stock upon
exercise of
employee stock
options for
cash............ 376 -- 610 -- -- 610
Warrant
revaluation..... -- -- 327 -- -- 327
Deferred
stock-based
compensation.... -- -- 1,779 (1,779) -- --
Amortization of
stock-based
compensation.... -- -- -- 300 -- 300
Issuance of Series
E convertible
preferred stock
at $10.00 per
share, net of
issuance costs
of $10.......... -- 5,989 -- -- 5,990
Issuance of common
stock to
previous board
member.......... 18 -- 150 -- -- 150
Exercise of
warrants........ -- -- 1,562 -- -- 1,562
Conversion of
preferred stock
to common
stock........... 11,497 12 8,584 -- -- 8,590
Initial public
offering of
common shares,
net of issuance
costs of
$7,212.......... 5,290 5 66,852 -- -- 66,857
Net loss and
comprehensive
loss............ -- -- -- -- (22,566) (22,566)
------ --- -------- ------- -------- --------
Balance at December
31, 1999........... 19,162 $19 $125,057 $(1,479) $(47,744) $ 75,853
====== === ======== ======= ======== ========
See accompanying notes
51
GRIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(3,842) $(17,902) $(22,566)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization of property and
equipment............................................. 272 1,006 1,807
Amortization of stock-based compensation................ -- -- 300
Gain on sale of discontinued operations................. (5,118) -- --
Noncash interest expense................................ -- -- 275
Noncash issuance of stock............................... -- -- 150
Noncash warrant expenses--preferred stock............... -- 408 926
Noncash warrant expenses--common stock.................. -- 1 115
Net changes in assets and liabilities:
Accounts receivable..................................... (210) (355) (1,846)
Other current assets.................................... (103) (118) (192)
Other assets............................................ (53) (127) (10)
Net assets relating to discontinued operations.......... 1,236 -- --
Accounts payable........................................ 500 3,305 1,327
Accrued compensation and benefits....................... 312 536 739
Other current liabilities............................... 171 425 234
Other long-term liabilities............................. 20 15 4
------- -------- --------
Net cash used by operating activities................. (6,815) (12,806) (18,737)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investments............... -- -- (13,030)
Capital expenditures...................................... (797) (2,283) (3,300)
Proceeds from sale of discontinued operations............. 5,446 -- --
------- -------- --------
Net cash provided by (used in) investing activities... 4,649 (2,283) (16,330)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt............................ -- 5,753 --
Payment of debt........................................... -- (282) (1,833)
Proceeds from sales of preferred stock.................... 7,250 2,486 31,164
Proceeds from sales of common stock, net.................. 55 13 67,467
Proceeds from exercise of preferred stock warrants........ -- -- 1,562
------- -------- --------
Net cash provided by financing activities............. 7,305 7,970 98,360
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 5,139 (7,119) 63,293
Cash and cash equivalents at beginning of year.............. 3,342 8,481 1,362
------- -------- --------
Cash and cash equivalents at end of year.................... $ 8,481 $ 1,362 $ 64,655
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................... 9 7 1
Interest paid............................................. -- 165 229
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Conversion of 1999 bridge notes interest into Series D
preferred stock......................................... -- -- 175
Conversion of 1998 bridge notes principal and interest
into Series D preferred stock........................... -- -- 2,801
Purchase of equipment under capital leases................ -- -- 800
See accompanying notes
52
GRIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
GRIC Communications, Inc. ("GRIC" or the "Company") is a global provider of
Internet-based products and services that enable telecommunication companies,
Internet service providers, and emerging telecommunications service providers,
to offer Internet-based products and services, such as Internet roaming and
Internet telephony, to their end users worldwide.
GRIC's predecessor corporation, incorporated in California in 1994, was both
an Internet service provider in Northern California and an independent software
provider for the Internet service provider community. In 1997, the local
Internet service provider business and related assets were sold. Operations
through 1997 related to the Internet service provider business are reflected as
discontinued operations. The Company first recognized clearinghouse settlement
revenues in 1997, and since then the Company has derived revenues primarily from
clearinghouse settlement services and software licenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include all the accounts of GRIC and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
In September 1999, the Board of Directors approved the Company's
reincorporation in the state of Delaware and an associated exchange of shares of
common stock and preferred stock in the state of California predecessor for
shares of common stock and preferred stock in the Delaware corporation that had
the effect of a 1-for-2.8 reverse stock split.
On December 14, 1999, the Company completed an initial public offering of
its shares pursuant to which it issued 5,290,000 common shares for approximately
$66.8 million, net of costs. Upon the closing of the initial public offering,
each outstanding share of preferred stock was converted into common stock on a
one-for-one share basis.
DISCONTINUED OPERATIONS
In May 1997, the Company sold a 55% interest in its local Internet access
service provider subsidiary, Aimnet, in exchange for approximately $2,004,000 in
cash and, in September 1997, it sold the remaining 45% for approximately
$3,442,000 in cash. Aimnet operated as a separate segment of the business as an
Internet service provider and its operations have been accounted for as
discontinued operations. Revenues earned by Aimnet were approximately $1,632,000
for the year ended December 31, 1997.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FOREIGN CURRENCY REMEASUREMENT
Adjustments resulting from the process of remeasurement into U.S. dollars of
the foreign currency financial statements of the Company's wholly-owned foreign
subsidiaries, for which the U.S. dollar is the functional currency, are included
in operations and have not been material.
53
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
Cash equivalents consist of certificates of deposits, money market funds and
commercial paper with maturities of 90 days or less at the date of purchase.
Cash and cash equivalents are carried at cost which approximates market value.
SHORT-TERM INVESTMENTS
The Company's policy is to invest in various short-term instruments with
investment grade credit ratings. Investments with contractual maturities greater
than one year are considered short-term since they are classified as
available-for-sale in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115").
The cost of securities sold is based on the specific identification method.
Any realized gains or losses and declines in value, judged to be
other-than-temporary, are included in interest income and other. The Company
includes unrealized gains or losses in comprehensive income in stockholders'
equity, if material. At December 31, 1999, there was no significant difference
between the fair market value and the underlying cost of such investments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, short-term investments
and accounts receivable. The Company maintains its cash and cash equivalents and
short-term investments principally in domestic financial institutions of high
credit standing. The Company is exposed to credit risks in the event of default
by these institutions to the extent of the amount recorded on the balance sheet.
The credit risk in the Company's accounts receivable is mitigated by the
Company's credit evaluation process. The Company generally does not require
collateral and maintains adequate reserves for potential credit losses.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives of the respective assets, generally the
shorter of the lease term or two to three years.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after
December 15, 1997. The Company adopted SFAS 130 in the year ended December 31,
1998. The Company had no items of other comprehensive income to report in any of
the years presented.
REVENUE RECOGNITION
The Company derives revenues primarily from settlement services it provides
to customers through its network. The Company also derives revenues from
licenses of software to customers seeking to offer Internet roaming and Internet
telephony services to their end users, and from sales of maintenance and support
services and hardware.
Settlement revenues are generated when customers' end users initiate
Internet roaming services or originate Internet telephony communications. Cost
of settlement revenues represents the amounts paid
54
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to access our customers' networks for the completion of services provided. The
Company recognizes roaming services revenue and related costs at the time
services are rendered to users. The Company has minimum purchase commitments
with some alliance members that it expects to utilize, provided the supplier
maintains the required pricing under the contract. In addition, the Company
bears the risk of loss related to collection for services.
Software and other revenues consist primarily of revenues from software
licenses and to a lesser extent from related services, maintenance and support
and hardware sales. In accordance with Statement of Position (SOP 97-2),
Software Revenue Recognition, revenue earned on software arrangements involving
multiple elements is required to be allocated to each element based upon the
relative fair values of the elements. Software revenues consist of license
revenues which are recognized upon the delivery of application products,
provided no significant vendor obligation or contingencies remain, and
collection of the receivable is probable, or where the license is for enabling
software, ratably over the contractual services period as enabling licenses have
not been sold separately. Maintenance and support service includes technical
support, consulting, installation and training services. Revenue allocated to
maintenance is recognized ratably over the maintenance term and revenue
allocated to training and other service elements is recognized as the services
are performed. Hardware revenue related to telephony gateways, internet dialers
and fax cards is recognized upon shipment of the equipment.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred until technological
feasibility has been established. To date, the Company's service offerings have
been available for general release concurrent with the establishment of
technological feasibility and, accordingly, no development costs have been
capitalized.
ADVERTISING EXPENSES
Advertising expenditures are charged to expense as incurred and were not
material for any of the periods presented.
STOCK-BASED COMPENSATION
The Company has elected to account for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), using an intrinsic value approach to
measure compensation expense, if any. Appropriate disclosures using a fair-value
based method, as provided by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), are also
reflected in the accompanying notes to the consolidated financial statements.
Options issued to non-employees are accounted for in accordance with SFAS 123
using a fair value approach.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"), which provides for the establishment of deferred tax assets and
liabilities based on the difference between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
55
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Basic net loss per share and diluted net loss per share are presented in
conformity with the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") for
all years presented.
In accordance with SFAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period. Potentially dilutive securities have been excluded from the
computation of basic and diluted net loss per share, as their effect is
antidilutive.
Weighted-average options outstanding to purchase approximately 1.5 million,
420,000 and 384,000 shares of common stock for the years ended December 31,
1997, December 31, 1998 and December 31, 1999, respectively, were not included
in the computation of diluted net loss per share because the effect would be
antidilutive. Such securities, had they been dilutive, would have been included
in the computation of diluted net loss per share using the treasury stock
method.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as "derivatives") and for hedging
activities. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. As the Company does not currently engage in
derivatives or hedging transactions, there would be no current impact to the
Company's results of operations, financial position, or cash flows upon the
adoption of SFAS 133.
In December 1999, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statement"
("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company has not yet determined the impact of adopting SAB 101 on its
financial statements.
3. INVESTMENTS
The following is a summary of the Company's investments.
DECEMBER 31, 1999
-----------------
(IN THOUSANDS)
Money market funds.......................................... $ 10,465
Commercial paper............................................ 36,048
Certificates of deposits.................................... 10,504
Floating rate municipal bonds............................... 13,030
--------
Total cash equivalents and short-term investments......... 70,047
Less cash equivalents....................................... (57,017)
--------
Total short-term investments.............................. $ 13,030
========
The above amounts are stated at cost. Unrealized gains or losses are
immaterial at December 31, 1999. There are no realized gains or losses from sale
of available-for-sale securities for the year ended December 31, 1999. The
Company had no investments at December 31, 1998.
56
3. INVESTMENTS (CONTINUED)
The amortized costs of investments by contractual maturity at December 31,
1999 were as follows:
AVAILABLE FOR SALE
------------------
AMORTIZED
COST
------------------
(IN THOUSANDS)
Due in 1 year or less....................................... $ --
Due after 25 years.......................................... 13,030
-------
$13,030
=======
4. PROPERTY AND EQUIPMENT
Property and equipment comprised the following:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Computer hardware........................................... $ 2,141 $ 4,580
Software.................................................... 374 1,132
Office furniture and equipment.............................. 834 929
Leased equipment............................................ -- 800
Leasehold improvements...................................... 46 91
-------- --------
3,395 7,532
Less accumulated depreciation and amortization.............. (1,340) (3,128)
-------- --------
$ 2,055 $ 4,404
======== ========
5. DEBT
BRIDGE LOAN
On November 5, 1998, the Company entered into an agreement with a bank for a
short-term loan of up to $1.5 million with a maturity date of December 31, 1998
(the "Bridge Loan"). On December 31, 1998, this agreement was extended to the
earlier of March 31, 1999 or the sale of preferred stock equal to or greater
than the loan amount. The maximum amount available during the renewal period was
$1.0 million. The interest rate during the initial period was 0.50 percentage
points above the lender's prime rate and the interest rate changed to
1.25 percentage points above the lender's prime rate during the renewal period.
Substantially all of the Company's assets were pledged as collateral for the
Bridge Loan, other than assets held under permitted liens, which included
purchase money liens on equipment incurred for financing of the equipment.
At December 31, 1998, $1.5 million was outstanding under this facility. The
lenders' prime rate at December 31, 1998 was 7.75%. In the first quarter of
1999, the outstanding amount was repaid.
CONVERTIBLE PROMISSORY NOTES
On September 1, 1998, certain stockholders of the Company advanced loans to
the Company totaling $2.7 million in exchange for convertible promissory note
(the "1998 Bridge Financing"). The loans bore interest at 1% above the Bank of
America reference rate and were convertible into shares of Series D convertible
preferred stock at a conversion price of $4.00 per share at the earlier of the
initial closing of the first preferred stock financing following September 1,
1998 and January 31, 1999. The warrants issued in connection with the promissory
notes incorporated antidilution protection.
57
5. DEBT (CONTINUED)
At December 31, 1998, $2.7 million was outstanding under these notes. On
January 31, 1999, $2.7 million in principal and approximately $101,000 in
accrued interest were converted into 250,010 shares of Series D convertible
preferred stock. All preferred stock was converted into common stock on a
one-for-one basis upon completion of the Company's initial public offering.
During the period from January through March 1999, certain stockholders of
the Company and additional third parties advanced loans to the Company totaling
$12.75 million in exchange for convertible promissory notes (the "1999 Bridge
Financing"). The loans bore interest at 1% above the Bank of America reference
rate and, together with interest thereon of approximately $175,000, were
converted into 1,846,468 shares of Series D convertible preferred stock at a
conversion price of $7.00 per share in April 1999. All preferred stock was
converted into common stock on a one-for-one basis upon completion of the
Company's initial public offering.
6. COMMITMENTS AND CONTINGENCIES
GRIC leases all of its facilities under operating leases that expire at
various dates through 2003. The Company also leases certain equipment under
capital lease arrangements and equipment promissory notes. The future minimum
operating lease and capital lease commitments (including equipment promissory
notes) were as follows at December 31, 1999.
OPERATING LEASES CAPITAL LEASES
---------------- --------------
(IN THOUSANDS)
2000............................................ $ 979 $ 762
2001............................................ 980 763
2002............................................ 1,056 436
2003............................................ 176 --
------ ------
$3,191 $1,961
======
Less amounts representing interest.............. 223
------
Present value of future lease payments.......... 1,738
Less current portion............................ 626
------
Long-term portion............................... $1,112
======
Rent expense charged to operations totaled approximately $263,000, $688,000
and $808,000 for the years ended December 31, 1997, 1998, and 1999,
respectively. The cost and accumulated depreciation of assets under capital
lease was $800,000 and $110,000, respectively, at December 31, 1999. In
addition, the Company has collateralized equipment purchased for $1.3 million
under the equipment promissory notes.
During the year ended December 31, 1998, the Company recorded a charge of
$1.5 million related to a commitment to purchase licenses of certain customized
software, as the Company did not anticipate the utilization of the required
volume of purchases. In October 1999, the Company settled with the third party
for approximately $600,000 and recorded the adjustment of $925,000 in the
quarter ended September 30, 1999.
LEGAL MATTERS
The Company is involved in certain claims and legal actions arising in the
normal course of business. Management does not expect that the outcome of these
cases will have a material effect on the Company's financial position or results
of operations.
58
7. INCOME TAXES
The provision for income taxes attributable to continuing operations
consists of foreign income and withholding taxes of approximately $59,000,
$32,000 and $70,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate (35%) to income
before taxes is as follows:
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
Tax at federal statutory rate..................... $(2,844) $(6,255) $(7,874)
Unutilized net operating losses................... 2,844 6,255 7,874
Foreign tax....................................... 59 32 70
------- ------- -------
Total............................................. $ 59 $ 32 $ 70
======= ======= =======
Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards........................ $ 8,912 $14,200
Tax credit carryforwards................................ 400 700
Accruals and reserves not currently deductible.......... 1,210 2,200
------- -------
Total deferred tax assets................................. 10,522 17,100
Valuation allowance....................................... (10,522) (17,100)
------- -------
Net deferred tax assets................................... $ -- $ --
======= =======
SFAS 109 provides for the recognition of deferred tax assets if realization
of such assets is more likely than not. Based upon the weight of available
evidence, which includes the Company's historical operating performance and the
reported cumulative net losses in all prior years, the Company has provided a
full valuation allowance against its net deferred tax assets.
The valuation allowance increased by approximately $7.4 million and
$6.6 million during the years ended December 31, 1998 and 1999, respectively.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state tax purposes of approximately $37.4 million and
$19.2 million, respectively. The Company also had federal and state research and
development tax credit carryforwards of approximately $500,000 and $440,000,
respectively. The federal and state net operating loss carryforwards and tax
credit carryforwards will expire at various dates beginning in 2002 through
2019, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of the net operating loss and
tax credit carryforwards before utilization.
59
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND CONVERTIBLE PREFERRED STOCK
On December 14, 1999, the Company completed an initial public offering of
its shares pursuant to which it issued 5,290,000 common shares for approximately
$66.8 million, net of costs. Upon the closing of the initial public offering,
each outstanding share of preferred stock was converted into common stock on a
one-for-one share basis.
In accordance with the preferred stock rights, all preferred stock
outstanding automatically converted into the conversion price at the time of the
initial public offering. Until the conversion, the Company had convertible
preferred stock that consisted of (i) Series A, B, and C redeemable convertible
preferred stock and (ii) Series D and E convertible preferred stock,
collectively referred to as "convertible preferred stock."
PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized at a par
value of $0.001 per share. In accordance with the terms of the certificate of
incorporation, the Board of Directors is authorized to provide for the issuance
of one or more series of preferred stock, including increases or decreases to
the series. The Board of Directors has the authority to set the rights,
preferences and terms of such shares. As of December 31, 1999, no shares of
preferred stock were issued and outstanding.
CONVERTIBLE PREFERRED STOCK WARRANTS
The Company had previously issued convertible preferred stock warrants. Upon
the effectiveness of the Company's initial public offering, all such warrants
became exercisable as common stock.
In connection with the granting of the Bridge Loan, the Company issued fully
exercisable warrants to purchase 17,724 shares of Series D convertible preferred
stock at $11.20 per share and 1,785 shares of Series D convertible preferred
stock at $7.00 per share. As of December 31, 1999 the warrants are still
outstanding and expire as to 17,724 shares and 1,785 shares in November 2003 and
December 2003, respectively. The warrants were valued utilizing the
Black-Scholes option pricing model, and resulted in a fair market value of $9.30
per share utilizing a volatility factor of 1.02, interest rate of 5.18% and
expected life of 4 years.
In connection with the equipment promissory notes, the Company issued fully
exercisable warrants for the purchase of 10,000 shares of Series D convertible
preferred stock at $7.00 per share. As of December 31, 1999, the warrants are
still outstanding and expire on December 14, 2004. The warrant was valued
utilizing the Black-Scholes option pricing model, and resulted in a fair market
value of $8.34 per share utilizing a volatility factor of 1.02, interest rate of
5.18% and expected life of 9 years.
The Company had recorded approximately $531,000 in 1998 and an additional
$837,000 in 1999 to reflect the fair value of the above warrants, which are
being amortized over the lives of the respective underlying arrangements.
Amortization of approximately $408,000 and $926,000 has been included in the
years ended December 31, 1998 and 1999, respectively. The fair value of the
warrants was calculated using the Black-Scholes option pricing model.
COMMON STOCK WARRANTS
In connection with entering into a roaming agreement with a certain
customer, the Company issued a warrant for the purchase of 102,699 shares of the
Company's common stock at $7.00 per share. As of December 31, 1999, the warrant
was still outstanding and fully exercisable. It will expire on the
60
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
earlier of November 12, 2003 or the first anniversary of the date on which the
roaming agreement with the customer is terminated.
The warrant was valued utilizing the Black-Scholes option pricing model. The
Company was required to reevaluate the warrant fair value for all periods
through September 30, 1999 at which point a final measurement date existed. The
fair value of the warrant at September 30, 1999 was determined to be $184,000
utilizing a volatility of 1.02, interest rate of 5.12% and expected life of
5 years. The fair value of the warrant is being amortized over the life of the
agreement. The Company included an immaterial charge to operations for all
periods presented.
STOCK OPTION PLANS
Effective December 1999, the Company adopted the 1999 Equity Incentive Plan
(the Equity Plan) and reserved 4,500,000 shares for issuance under the Equity
Plan. Each year, beginning in 2001, the aggregate number of shares reserved for
issuance under the Equity Plan will automatically increase by a number of shares
equal to 5% of the Company's outstanding shares at the end of the preceding
year. The Equity Plan provides for the granting of incentive stock options to
employees and nonqualified stock options to employees, officers, consultants,
directors, independent contractors and advisors. Under the Equity Plan, the
Board of Directors determines the term of each award and the award price. In the
case of incentive stock options, the exercise price may be established at an
amount not less than the fair market value at the date of grant, while
nonstatutory stock options may have exercise prices not less than 85% of the
fair market value as of the date of grant. The exercise price of incentive stock
option granted to a 10% shareholder will not be less than 110% of the fair
market value of the shares on the date of grant. Options granted under the
Equity Plan for new employees generally vest with respect to 20% of the shares
ten months after the employee's hire date and the remainder vesting ratably over
the following forty months and options expire no later than ten years from the
date of grant.
In addition, the Company's 1995 Stock Option Plan and the 1997 Stock Option
(the Option Plans), provided for the granting of incentive stock options to
employees and directors and nonqualified stock options to employees,
consultants, and directors. Options outstanding under the Option Plans generally
were governed by the same terms as those under the Equity Plan, except that the
options vest between 48 and 50 months. At the time of the Company's initial
public offering, the Option Plans were terminated such that no new options may
be granted under the Option Plans. Outstanding options at the date of the
initial public offering remain outstanding under their original terms.
EMPLOYEE STOCK PURCHASE PLAN
In September 1999, the Board of Directors approved the adoption of the 1999
Employee Stock Purchase Plan (the Purchase Plan) and reserved 500,000 shares of
the Company's common stock for issuance under the Purchase Plan. The plan was
adopted effective at the time of the initial public offering. Each year,
beginning in 2001, the aggregate number of shares reserved for issuance under
this plan will automatically increase by a number of shares equal to 1% of the
Company's outstanding shares at the end of the preceding year. Under the
Company's Purchase Plan, qualified employees can elect to have between 2 and
15 percent of their annual earnings withheld, subject to maximum purchase
limitations, to purchase the Company's common stock at the end of six-month
enrollment periods. The purchase price of the stock is 85% of the lower of the
fair market value at the beginning of the twenty-four month offering period or
at the end of each six-month purchase period.
61
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the activity of the various option plans is as follows:
OPTIONS OUTSTANDING
---------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
(NUMBER OF SHARES IN
THOUSANDS)
Outstanding at December 31, 1996..................... 614 $0.28
Granted............................................ 465 $1.65
Exercised.......................................... (161) $0.34
Cancelled.......................................... (230) $0.31
------
Outstanding at December 31, 1997..................... 688 $1.20
Granted............................................ 1,383 $2.63
Exercised.......................................... (29) $0.48
Cancelled.......................................... (191) $1.88
------
Outstanding at December 31, 1998..................... 1,851 $2.21
Granted............................................ 2,093 $7.28
Exercised.......................................... (376) $1.62
Cancelled.......................................... (1,162) $3.21
------
Outstanding at December 31, 1999..................... 2,406 $6.22
======
The following tables summarize information about options outstanding and
exercisable under the Company's various option plans at December 31, 1999:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
- --------------------- --------- ----------- -------- --------- --------
(YEARS)
(NUMBER OF SHARES IN THOUSANDS)
$ 0.28 126 6.68 $0.28 92 $0.28
$ 0.70 5 7.53 0.70 3 0.70
$ 1.68-$2.24 227 8.23 2.21 98 2.21
$ 2.80-$8.40 1,423 9.28 4.94 204 3.70
$10.00-$14.00 625 9.87 11.83 38 13.19
----- ---- ----- --- -----
Total 2,406 9.19 $6.22 435 $3.46
===== ==== ===== === =====
Options to purchase 371,000 and 172,000 shares of common stock were
exercisable under the Company's various option plans at December 31, 1998 and
1997, respectively.
In connection with the grant of stock options to employees through
December 31, 1999, the Company recorded deferred compensation of $1,779,000 for
the aggregate differences between the exercise prices of options at their dates
of grant and the deemed fair value for accounting purposes of the common shares
subject to these options. Such amount is included as a reduction of
stockholders' equity and is being amortized on a straight-line basis over the
option vesting periods, which are generally four years. The compensation expense
of $300,000 through December 31, 1999 relates to options awarded to employees in
all operating expense categories.
62
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
SHARES RESERVED
At December 31, 1999, the Company had reserved shares of common stock for
potential future issuance consisting of 132,208 shares upon exercises of
warrants, 4,500,000 shares for exercises under the Equity Plan and 500,000
shares under the Purchase Plan.
STOCK-BASED COMPENSATION
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"), the Company has elected to continue to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations in accounting for its
stock-based awards to employees. Under APB 25, the Company generally recognizes
no compensation expense with respect to such awards.
Pro forma information regarding net income and earnings per share is
required by FASB 123 and has been determined as if the Company had accounted for
awards to employees under the fair value method of FASB 123. The fair value of
stock options under the Equity Plan and stock purchase plan rights under the
Purchase Plan was estimated as of the grant date using the Black-Scholes option
pricing model (the minimum value method through the date of the Company's
initial filing with Securities and Exchange Commission). The Black-Scholes model
was originally developed for use in estimating the fair value of traded options
and requires the input of highly subjective assumptions including expected stock
price volatility. Because the Company's options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
The fair value of stock options granted in fiscal years 1997, 1998 and 1999
were estimated at the date of grant assuming no expected dividends and the
following weighted average assumptions.
STOCK OPTIONS STOCK PURCHASE
------------------------------ --------------
YEARS ENDED DECEMBER 31, 1997 1998 1999 1999
- ------------------------ -------- -------- -------- --------------
Expected Life (years)....................................... 4.5 4.5 3.0 .5
Expected Stock Price Volatility............................. NA NA .23 .85
Risk-Free Interest Rate..................................... 7.5% 7.5% 5.5% 5.5%
As the Company was privately held until December 1999, volatility was not
applicable until filing its Registration Statement. For purposes of pro forma
disclosures, the estimated fair value of stock-based awards is amortized against
pro forma net income over the stock-based awards' vesting period for options and
over the offering period for stock purchases under the Purchase Plan.
The Company's pro forma information is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Pro forma net loss.......................................... $(3,853) $(17,980) $(23,408)
Pro forma basic and diluted net loss per share.............. $ (2.08) $ (9.23) $ (8.25)
Calculated under FASB 123, the weighted-average fair values of the employee
stock options granted during 1997 and 1998 were $0.50 and $0.76 per share,
respectively. The weighted average fair
63
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
value of employee stock options granted during 1999 at, below and above market
value were $5.61, $2.62 and $0.19 per share, respectively. The weighted-average
estimated fair value of shares purchased under the Purchase Plan during 1999 was
$5.26 per share.
Because the valuation of stock compensation incorporating a volatility
factor is significantly higher, the pro forma effect of future stock
compensation will increase in the future.
9. SEGMENT INFORMATION
The Company operates solely in one segment, providing a global network for
Internet service providers and telecommunications companies.
The following is a summary of revenue and long-lived assets by geographical
area for the periods presented:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
Revenue by external customers:
United States............................................. $ 407 $ 640 $4,246
South East Asia........................................... 415 623 1,793
Japan..................................................... 151 454 1,335
Europe.................................................... 193 282 865
China..................................................... 223 212 603
Rest of World............................................. 145 338 779
------ ------ ------
$1,534 $2,549 $9,621
====== ====== ======
Long-lived assets:
United States............................................. $ 705 $1,954 $4,223
Rest of World............................................. 73 101 181
------ ------ ------
$ 778 $2,055 $4,404
====== ====== ======
Revenue by external customer is based on the customer's billing locations.
Long-lived assets are those assets used in each geographic location. For the
year ended December 31, 1999, one customer accounted for 16% of consolidated
revenues. No single customer accounted for 10% of consolidated revenues for the
year ended December 31, 1998. For the year ended December 31, 1997, one customer
accounted for 22% of consolidated revenues.
64
GRIC COMMUNICATIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BEGINNING CHARGED TO DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSE (A) END OF PERIOD
- ----------- --------- ---------- ---------- -------------
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
For the year ended December 31, 1997.............. $ 35 $220 $ 41 $214
For the year ended December 31, 1998.............. 214 406 236 384
For the year ended December 31, 1999.............. 384 730 413 701
- ------------------------
(a) Represents amounts written off net of recoveries.