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UNITED STATES
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 DECEMBER 31, 2000
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COMMISSION FILE NUMBER 000-23305
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FIRST VIRTUAL COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 77-0357037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
3393 OCTAVIUS DRIVE, SANTA CLARA, CA 95054
(Address of principal executive (Zip code)
offices)
(408) 567-7200
(Registrant's Telephone Number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value
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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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.
As of February 28, 2001 there were 17,447,112 shares of the registrant's
Common Stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on February 28, 2001) was approximately
$19,000,000. Shares of the registrant's Common Stock held by each executive
officer, director and holder of five percent or more of the registrant's Common
Stock outstanding as of February 28, 2001 have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
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DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the registrant's definitive proxy statement for the
2001 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED IN THIS REPORT, THIS
REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT") THAT
INVOLVE RISKS AND UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," ANTICIPATES,"
"EXPECTS," AND WORDS OF SIMILAR IMPORT. SUCH FORWARD-LOOKING STATEMENTS WILL
HAVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS,
TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE RISK FACTORS SET FORTH BELOW, UNDER "OVERVIEW," "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS FORM 10-K. THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
OVERVIEW
Founded in 1993, First Virtual Communications, Inc., a Delaware corporation
("First Virtual Communications" or the "Company"), is a leader in rich media
communications solutions, providing systems and services that enable system
integrators and service providers to deliver an integrated suite of
collaboration applications to their enterprise customers. First Virtual
Communications also delivers solutions directly to corporate and public sector
enterprises. The Company's flagship product, Click to Meet-TM-, is a high
quality, face-to-face communications platform for e-collaboration designed to
seamlessly integrate video and audio telephony, data collaboration, and
streaming across IP, ISDN, DSL, and ATM networks. Click to Meet provides an
optimal platform for delivering a new generation of video enabled B2B web
applications, for commerce, distance learning, telemedicine, federal and state
governments, and the judiciary.
With over seven years of pioneering work in broadband video, First Virtual
Communications is a leading provider of video networking hardware, software and
services. Historically, the Company has focused on providing video networking
systems to the government, education and healthcare markets, both through direct
and indirect sales. First Virtual Communications' strategic partners include
Accord, Adaptive Broadband, Alcatel, Ameritech, AT&T, British Telecommunications
plc, Cisco Systems, Inc., China Telecom, CUseeMe Networks, EDS, Ezenia!, France
Telecom, Ideal Technology Solutions, Nortel Networks, Polycom, Qwest
Communications, SBC Communications Inc., Shanghai Telecom, Telstra, Verizon
Communications, and other leading companies worldwide.
The Company is leveraging its leadership position in broadband video
networking to capitalize on the rapidly emerging opportunity in rich media
communications. The Company addresses this opportunity by providing a full range
of products and integration services aimed at delivering a centralized and
simplified management platform, that will address video and audio telephony,
data collaboration, and streaming over various network topologies. These
platforms are targeted at service providers as well as the corporate enterprise.
The Company's management team brings significant networking and technology
industry experience to First Virtual Communications and was substantially
strengthened during 2000. During the past year, Ralph Ungermann (Founder and
Chairman of the Board) assumed the additional responsibility of Chief Executive
Officer. The Company added a new Chief Marketing Officer, Ruth Cox, a new Chief
Financial Officer, Randy Acres, and a new Executive Vice President of
Operations, James Griffin.
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INDUSTRY BACKGROUND
In recent years, Internet infrastructure has evolved to meet the
requirements of new and emerging Internet applications, such as the integration
of voice and data. Until recently, however, the technologies employed in the
Internet infrastructure were unable to differentiate between data transmission
bursts and video streams. Therefore, the Internet was unable to support high
quality video networking applications. These hindrances have historically
limited an end user's ability to deploy and utilize interactive applications
that simultaneously involve data and high quality video applications. Over the
past year, however, the acceleration of the following four key market drivers
has significantly enhanced the opportunity for the Company's products and
services.
- PROLIFERATION OF RICH MEDIA COMMUNICATIONS. Defined as communications that
include more than one media type (such as video or audio telephony,
streaming or data collaboration), rich media is a burgeoning field that
combines the attributes of the Internet, television, and radio into one
medium. According to First Albany, a financial analysis firm, the rich
media market is expected to grow to $34 billion by 2004 (Compound Annual
Growth Rate of 53%). Rich media is being deployed in a wide variety of
scenarios and improves the effectiveness of collaboration, training,
advertising, sales and marketing functions, online services and self help
applications. Companies using rich media communications should achieve
cost reductions in the form of improved productivity, reduced expenses,
reduced customer contact and support requirements, and reduced customer
response errors.
- DECLINE IN PRICE OF BROADBAND ACCESS. Companies are now able to purchase
broadband access to the Internet at a fraction of the cost compared to one
year ago. Since rich media communications generally require higher
bandwidth, the cost of the bandwidth is now less of a barrier. As a result
more companies are embracing rich media communications.
- PROLIFERATION OF BROADBAND NETWORKS. According to Ryan, Hankin & Kent, a
market research and consulting firm, Internet and other traffic
requirements will increase by over 4,000% between 1999 and 2003. Because
of this great increase in network capacity, telecommunications carriers
are moving rapidly to exploit the plentiful and inexpensive bandwidth of
their networks by adding video services to existing voice and data
offerings. In addition to increased quality, video transmission over
broadband networks costs a fraction of transmission over traditional ISDN
networks. According to our estimates, telecommunications carriers realize
transmission cost savings of up to 70% to 80%, based on the lower cost of
using a broadband network compared to the higher costs of using ISDN
connections. As a result, carriers now have greater ability to offer
customers bandwidth-intensive applications such as videoconferencing,
video broadcast and video on demand.
- DECLINE IN COST OF DESKTOP VIDEO ENDPOINTS. Over the past year, a number
of companies introduced consumer-grade desktop video cameras for less than
$100 each, and some companies have introduced professional grade desktop
video cameras for less than $1,000 each. As with other communications
products--such as cellular phones, which were prohibitively expensive at
the time of their introduction, but which dropped in price and increased
in functionality over time--the reduction in price and increase in
functionality in desktop video endpoints also is driving demand for video
applications.
THE COMPANY'S PRODUCTS AND TECHNOLOGY
The Company is a leading worldwide provider of simple, integrated rich media
communications solutions for enterprises and service providers. The Company
offers a broad range of internally developed products (hardware and software)
and integrates them with a wide variety of third party products to deliver a
comprehensive rich media solution to our customers.
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PRODUCTS
- CLICK TO MEET--Providing turnkey, rich media communications systems and
services, Click to Meet enables organizations to leverage their converged
broadband networks for face-to-face e-collaboration. Using Click to Meet,
organizations can enhance existing processes with two-way video, streaming
and Web collaboration thereby reducing travel costs, improving
productivity, and preserving long distance business relationships. Click
to Meet is a complete end-to-end broadband video solution that gives users
point-and-click access to ad-hoc and scheduled video calls, streams,
conferences and data collaboration across many types of networks,
including IP, ATM, ISDN, and DSL, through a web-based video communications
portal.
- INTERACTIVE VIDEO PRODUCTS--First Virtual Communications manufactures a
range of products that deliver rich media communications over broadband
networks, including:
- A video interface unit that converts ISDN-based video room systems and
desktops to run over ATM networks at rates up to T1 speeds;
- A scalable video gateway that inter-connects IP, ISDN and ATM;
- H.321 (ATM) and H.323 (IP) room and desktop systems;
- An inexpensive software-based H.323 two-way video player;
- A range of ATM and IP multi-point conference bridges, provided through
technology partnerships with other leading companies; and
- A flexible MPEG-2 video room system that supports the most demanding
distance learning and telemedicine video calls.
- STREAMING AND BROADCAST PRODUCTS--First Virtual Communications
manufactures a family of scalable broadband video storage servers,
broadcast servers and video kiosks for ATM environments that deliver
MPEG-1 and MPEG-2 video streams. First Virtual Communications also
manufactures flexible streaming servers for IP networks that support
MPEG-1 and lower bit rates.
- BROADBAND ACCESS DEVICES--First Virtual Communications' multi-service
access switch is an integral component of most enterprise video
deployments, providing specific optimizations for delivering video over
ATM according to ATM Quality of Service (QoS) standards. First Virtual
Communications' access switch offers a broad range of LAN and WAN
interface options, making it the most cost-effective solution for
multi-service branch office access.
PROFESSIONAL SERVICES
Always on the leading edge of advanced Internet technologies, First Virtual
Communications applies the highest possible level of professionalism to project
design, implementation and support. The Company's Professional Services
Organization (PSO) plays a critical role, offering project management, project
coordination, implementation design and engineering, quality control and
training groups.
THE COMPANY'S STRATEGY
PROVIDE THE APPLICATIONS THAT FACILITATE INTEGRATION OF MULTIPLE RICH MEDIA
COMMUNICATION PRODUCTS AND NETWORKS
Since its inception, the Company has developed a leadership position in
broadband video networking, especially over ATM. The Company's solutions include
multi-point videoconferencing and streaming. The Company is now focused on
bringing products to market that cover all broadband network types, particularly
IP, ISDN, ATM, and DSL. The Company is leveraging its video networking
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expertise to create products that seamlessly integrate across network standards,
alleviating the burden of integration from the customer.
The Company is extending its expertise into rich media communications so
that multiple products can be launched and controlled from the same web-based
browser that controls the application. Integrated products include video
telephony, audio telephony, video and audio streaming, and data collaboration.
MAKE PRODUCTS SIMPLE TO DEPLOY, SUPPORT, AND USE
Historically, the interfaces used to place a videoconferencing call have
been proprietary and difficult to use, requiring the user to manually input a
variety of complex and indiscernible information about the call, including such
variables as network type, transmission speed and connection bandwidth. The
development of web-based user interfaces allows for the point and click
simplicity of a typical web-based browser. This simplifies the process and
allows rich media communications to be initiated with a single click on a
directory name, similar to the simple user experience of sending an email.
INTEGRATE BEST OF BREED PRODUCTS THROUGH OPEN SYSTEMS AND STANDARDS
A complete rich media communications solution could consist of the
integration of many different products. While it is not the intention of the
Company to develop and manufacture all of these products, the Company's strategy
is to partner with the industry leaders who deliver the best of breed products.
The Company has an open platform, providing support for integration into other
solutions. The Company thus adds value through the development of its own
products, as well as through integration with existing third-party products.
EXPLOIT LARGE UNDER-SERVED MARKET OPPORTUNITY
Massive infrastructure upgrades by carriers and corporations are being
driven by the growing need for bigger pipes to carry data applications, and, in
particular, Internet access. Established telecommunications and networking
companies have yet to develop a high level of expertise in broadband video
networking to service the corporate market. The Company believes that rich media
applications will benefit from the build-out of broadband data networks and that
these applications are likely to become a strategic revenue source for carriers,
as voice and data increasingly become commodity services. Due to its extensive
experience with broadband video networking, the Company believes that it is
well-positioned to capitalize on this opportunity.
EXPAND DEPLOYMENT OF IP-BASED VIDEO NETWORKING PRODUCTS
In order to capitalize on the overall growth in the networking market and
the trend towards the deployment of end-to-end IP networks, the Company has
expanded its product development focus into the IP environment. In 1998, First
Virtual Communications introduced one of the first IP to ISDN to ATM gateways
and an IP-based product for video streaming and video-on-demand. The Company's
current and future product development plans reflect an increased emphasis on
IP-based products. Click to Meet is an IP-centric rich media communications
platform.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company believes that two significant growth areas for its rich media
products and services are service providers and enterprises. The Company's
products take advantage of broadband networks being implemented in these
environments to achieve high quality video transmission and provide a simple,
integrated rich media communications portal.
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The Company markets its products to business customers, government users and
educational providers through its internal sales force and indirect sales
channels. The Company's internal sales force uses the Company's video technology
to directly qualify and stimulate end-user demand, as well as to manage the
Company's strategic relationships with Value Added Resellers (VARs) and systems
integrators. A significant portion of the Company's sales to date have been
fulfilled through the Company's original equipment manufacturers (OEMs),
including Nortel Networks. Sales through Nortel Networks (including Bay
Networks) represented approximately 6% of the Company's total sales in 2000, 29%
in 1999 and 39% in 1998. OEM's either sell and install the Company's products
directly or work with leading system integrators to sell and install the
Company's products. Systems integrators qualified to sell and install the
Company's products include Verizon, BT, EDS, France Telecom, Global Telemedics,
IBM, SBC Communications, Clover, and Telindus.
The Company has international offices in the United Kingdom, France,
Germany, and Italy. First Virtual Communications also has authorized resellers
in Finland, Hong Kong, The People's Republic of China, Saudi Arabia, and the
Netherlands. For the years ended December 31, 2000, 1999 and 1998, approximately
12%, 14% and 21%, respectively, of the Company's sales were generated from
customers outside of the United States.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has recognized that a strong technical base
is essential to its long-term success and has made a substantial investment in
research and development. To date, the Company has aggressively brought a wide
range of products into the marketplace. The Company intends to continue to make
substantial investments in product development and to participate in the
development of industry standards. The Company monitors changing customer needs
and works closely with its OEM partners, end-user customers and market research
organizations to track changes in the marketplace, including emerging industry
standards in both networking and video. The Company intends to maintain its
product development focus on products for the two-way video broadband networking
market.
The Company's research and development expenditures totaled $12.5 million,
$10.2 million, and $9.5 million for the years ended December 31, 2000, 1999 and
1998, respectively. The Company performs its research and product development
activities primarily at its headquarters in Santa Clara. During the past year,
the Company also opened a research and development center in India, which the
Company believes will improve the time-to-market of new products.
COMPETITION
The rich media communications industry is extremely competitive. There are
multiple companies that have separate offerings for video telephony, audio
telephony, data collaboration, and streaming. While there is no one competitor
that currently offers all aspects of a rich media solution in an integrated
platform, the Company believes that several companies are developing such
products. These competitors include PictureTel/1414c, Polycom/Accord, WireOne,
RADVision, and Genesys.
The Company faces competition from companies that have products in related
areas. The Company could encounter new competition if companies that distribute
the Company's products, or whose interactive video equipment is used together
with the Company's products, develop or acquire video networking technologies or
products.
In order to compete effectively, the Company must offer an end-to-end
solution, provide high-performance products and services that comply with
applicable standards and are easy to use, and expand its product distribution
channels domestically and internationally. In addition, the Company expects
price competition to escalate in the rich media communications industry which
may force the Company in the future to lower product prices on a regular basis
and add new products and features
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without increasing prices. The Company may not be able to compete successfully
in such a price competitive environment.
MANUFACTURING
The Company uses third-party manufacturers to perform materials planning,
production scheduling, mechanical assembly, board testing, system integration,
burn-in, final system testing and distribution of its products to customers. The
Company's operations staff develops manufacturing strategies and qualifies
manufacturing processes and suppliers. The Company and its contract
manufacturers work together to reduce manufacturing costs and to resolve quality
control issues. The Company's manufacturing strategy enables it to leverage the
manufacturing capabilities of its third-party manufacturers, while allowing the
Company to focus on its core competencies of rapid product development and
deployment. If one or more of the Company's manufacturers experiences quality or
other problems, product shipments by the Company may be delayed. If the Company
is required to replace its manufacturers, such a change could result in
short-term cost increases and delays in delivery that could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's supply chain, including reserve inventory buffer stock
of critical components, may not be sufficient to meet increases in demand
occurring simultaneously with delayed deliveries from manufacturers. The Company
may not be able to negotiate acceptable arrangements with its existing or future
manufacturers, or negotiate arrangements that will be on terms favorable to the
Company.
EMPLOYEES
As of February 28, 2001, the Company employed 148 individuals full-time. In
addition, the Company employs a number of temporary, contract employees. The
Company's employees are not represented by a collective bargaining agreement and
the Company believes its relationships with its employees are good.
RISK FACTORS
In addition to the other information provided in this report, the following
risk factors should be considered in evaluating the Company and its business.
LIMITED OPERATING HISTORY; CUMULATIVE LOSSES
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company was incorporated in
October 1993, first shipped its video networking products in 1995 and first
announced its video services business in 1999. The Company's prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies in their early stage of development, particularly companies in new and
rapidly evolving markets and companies experiencing rapid growth and expansion.
To address these risks, the Company must, among other things, continue to
achieve market acceptance for its products, maintain technological leadership,
respond to evolving markets and competition, and attract, retain and motivate
qualified employees. The Company may not be successful in addressing these
risks. The Company has incurred operating losses in each quarter since it
commenced operations. The Company expects to continue to devote substantial
resources to expand our research and development and sales and marketing
activities. As a result, the Company expects that it will incur operating losses
for the foreseeable future.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced, and is likely to experience in the future,
fluctuations in revenues, gross margins and operating results. Various factors
contribute to the fluctuations in revenues, gross
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margins and operating results, including the Company's success in developing its
rich media business and in developing, introducing and shipping new products and
product enhancements, the Company's success in accurately forecasting demand for
new orders, which may have short lead-times before required shipment, product
mix, percentage of revenues derived from OEM's, versus distributors or
resellers, new product introductions and price reductions by its competitors,
the efforts of OEM's, distributors, resellers, and other third parties on behalf
of the Company, the Company's ability to attract, retain and motivate qualified
personnel, the timing and amount of research and development and selling,
general and administrative expenditures, and general economic conditions.
Further, a significant portion of the Company's expenses are fixed. The Company
expects that operating expenses will increase in the future to fund expanded
operations. To the extent these increased expenses are not accompanied by an
increase in revenues or gross margin, the Company's business, financial
condition and results of operations would be materially adversely affected. Due
to all the foregoing factors, it is likely that in some future quarter, as in
past quarters, the Company's results of operations will be below the
expectations of public market analysts and investors.
MARKET ACCEPTANCE OF RICH MEDIA AND BROADBAND VIDEO SERVICES
The Company's success depends on the market acceptance of rich media and
broadband video services. Potential end-users must accept video applications as
a viable alternative to face-to-face meetings and conventional classroom based
learning. New applications, such as the use of video in marketing, selling and
manufacturing, are still in the development stage. The Company has only recently
entered into its first contracts with telecommunications service providers to
provide broadband video services and does not expect any material revenues from
these services to be generated until the second half of 2001. If rich media and
broadband video services fail to achieve broad commercial acceptance or such
acceptance is delayed, the Company's business, financial condition and results
of operations would be materially adversely affected.
DEPENDENCE ON THIRD PARTY RELATIONSHIPS
The Company currently outsources the manufacturing of its products. The
Company relies on several vendors to manufacture certain of its products. If one
or more of these manufacturers experiences quality control or other problems,
product shipments by the Company may be delayed. If the Company is required to
find replacements for its manufacturers, this could result in short-term cost
increases and delays in delivery, which could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company may not be able to continue to negotiate arrangements with its existing
or any future manufacturers on terms favorable to the Company. The Company
currently sells its products through OEMs, distributors and resellers. The
Company's future performance will depend in large part on sales of its products
through these distribution relationships, such as SBC Communications, Verizon
and other key partners. However, such past performance should not be considered
a reliable indicator of future performance. Agreements with distribution
partners generally provide for discounts based on the Company's list prices, and
do not require minimum purchases or restrict development or distribution of
competitive products. Therefore, some of the entities that distribute the
Company's products may compete with the Company. The Company also cannot assure
that an OEM, distributor or reseller will dedicate sufficient resources or give
sufficient priority to selling the Company's products. The Company additionally
depends on its distribution relationships for most customer support, and expends
significant resources to train its OEMs, distributors and resellers to support
their customers. These entities can generally terminate the distribution
relationship upon 30 days notice for a material breach. The loss of a
distribution relationship or a decline in the efforts of a material distributor,
or loss in business or cancellation of orders from, significant changes in
scheduled deliveries to, or decreases in the prices of products sold to, any of
these distribution relationships, could have a material adverse effect on the
Company's results of operations.
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LIMITED NUMBER OF LARGE PROJECTS; LENGTHY SALES AND IMPLEMENTATION CYCLE
The Company depends on a limited number of large end-user projects for a
majority of its revenues, which has resulted in, and may in the future result
in, significant fluctuations in quarterly revenues. The Company expects that
revenues from the sale of products to large end-users will continue to account
for a significant percentage of its revenues in any particular quarter for the
foreseeable future. Additionally, a significant portion of the Company's sales
of video networking products has historically been to government-related
agencies, such as military and educational institutions, or third parties using
the Company's products on behalf of government agencies. Such government-related
customers are often subject to budgetary pressures and may from time to time
reduce their expenditures and/or cancel orders. The loss of any major customer,
or any reduction or delay in orders by such customer, or the failure of the
Company or its distribution partners to market the Company's products
successfully to new customers could have a material adverse effect on the
Company's business, financial condition and results of operations. Sales of the
Company's products require an extended sales effort. The Company must first
train the entities with which it has distribution relationships to market the
Company's products. The period from an initial sales call to an end-user
agreement typically ranges from six to twelve months, and can be longer.
Therefore, the timing of revenues may be unpredictable. This could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RAPID TECHNOLOGICAL CHANGE; INDUSTRY STANDARDS AND REGULATIONS
Rapid technological change and evolving industry standards characterize the
market for the Company's products. The Company's success will depend, in part,
on its ability to maintain its technological leadership and enhance and expand
its existing product and services offerings. The Company's success also will
depend in part upon its ability and the ability of its strategic partners to
comply with evolving industry standards. The Company's products must meet a
significant number of domestic and international video, voice and data
communications regulations and standards, some of which are evolving as new
technologies are deployed. The Company's products are currently in compliance
with applicable regulatory requirements. However, as standards evolve, the
Company must modify its products, or develop and support new versions of its
products. In addition, telecommunications service providers require that
equipment connected to their networks comply with their own standards, which may
vary from industry standards.
The Company's ability to compete successfully also is dependent upon the
continued compatibility and interoperability of its products with products and
architectures offered by various vendors. The Company's business, financial
condition and results of operations would be materially adversely affected if it
were unable in a timely manner to comply with evolving industry standards or to
address compatibility issues. In addition, from time to time, the Company may
announce new products, capabilities or technologies that have the potential to
replace or shorten the life cycle of the Company's existing product offerings.
The announcement of product enhancements or new product or service offerings
could cause customers to defer purchasing the Company's products. In addition,
the Company has experienced delays in the introduction of new products in the
past and may experience such delays in the future. The failure of the Company to
introduce successfully new products, product enhancements or services, or
customer delays in purchasing products in anticipation of new product
introductions or because of changes in industry standards, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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DEPENDENCE ON SUPPLIERS
Several critical components used in the Company's products, including
certain custom and programmable semiconductors are currently available only from
single suppliers. The Company does not have long-term agreements with these
suppliers, and they are not obligated to provide components to the Company for
any specific period, in any specific quantity or at any specific price, except
as may be provided in a particular purchase order. Qualifying additional
suppliers is a time consuming and expensive process, and there is a greater
likelihood of problems arising during a transition period to a new supplier.
There can be no assurance that the existing suppliers will continue to meet the
Company's requirements for these components. Any interruption in the supply of
these components, or the inability of the Company to procure these components
from alternate sources at acceptable prices and within a reasonable period of
time, or any excessive rework costs associated with defective components or
process errors, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company uses a product sales forecast based on anticipated product
orders to determine its components requirements. As a result of the relatively
short lead-time on certain orders, however, this forecast may not be accurate.
Failure of the Company to predict accurately its required quantities of these
components has resulted and could result in the future in shortages of or excess
inventory and higher component costs, as well as cause the Company to delay
shipments of its products in response to orders, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
VOLATILITY OF STOCK PRICE
The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenues or earnings in any quarter fail
to meet the investment community's expectations, as they have at times in the
past, there could be an immediate impact on the company's stock price and a
resulting securities class action suit. The stock price may also be affected by
broader market trends unrelated to the Company's performance. Past financial
performance should not be considered a reliable indicator of future performance,
and investors should not use historical trends to anticipate results or trends
in future periods.
COMPETITION; INDUSTRY CONSOLIDATION
Many of the Company's actual and potential competitors have greater name
recognition, a larger installed base of networking products and strong
relationships with end users, more extensive engineering, manufacturing,
marketing and distribution capabilities, and greater financial, technological
and personnel resources than the Company. The networking industry is undergoing
a period of consolidation in which companies, including some of the Company's
competitors, are participating in business combinations, resulting in
competitors with larger market shares, customer bases, sales forces, product
offerings and technology and marketing expertise. In addition, there can be no
assurance that products or technologies developed by others will not render the
Company's products and services noncompetitive or obsolete.
RELIANCE ON INTELLECTUAL PROPERTY
The Company's success and ability to compete in the video networking
industry depends, in part, upon its ability to protect its proprietary
technology and to operate without infringing the proprietary rights of others.
The Company does not rely on patent protection for, and does not hold, any
patents relating to its products, although it has filed one patent application
related to its recently developed video services technology. The Company's
adherence to industry-wide technical standards and specifications may limit the
Company's opportunities to provide proprietary product features. The
10
Company currently licenses certain technology from third parties and plans to
continue to do so in the future. The commercial success of the Company will
depend, in part, on its ability to continue to obtain licenses to third-party
technology for use in its products. The Company relies upon a combination of
trade secret, copyright and trademark laws and contractual restrictions to
establish and protect proprietary rights in its products. The Company also
enters into confidentiality and invention assignment agreements with its
employees and enters into non-disclosure agreements with its suppliers,
distributors and customers to limit access to and disclosure of its proprietary
information. There can be no assurance that the pending patent applications will
be successful, or that these statutory and contractual arrangements will be
sufficient to deter misappropriation of the Company's proprietary technologies
or that independent third parties will not develop similar or superior
technologies. The development of alternative technologies by third parties could
adversely affect the competitiveness of the Company's products. In addition, the
laws of some foreign countries do not provide the same degree of protection of
the Company's proprietary information as do the laws of the United States. The
commercial success of the Company also will depend, in part, on the Company not
breaching its current and future licenses of third-party technology used in
certain of the Company's products. The Company is, however, subject to the risk
of litigation alleging infringement of third party intellectual property rights
from both its licensed and proprietary technology. A number of companies have
developed technologies or received patents on technologies that may be related
to or be competitive with the Company's technologies. The Company has not
conducted a patent search relating to the technology used in its products. In
addition, since patent applications in the United States are not publicly
disclosed until the patent issues, applications may have been filed which, if
issued as patents, would relate to the Company's products. Given the rapid
development of technology in the video networking industry, there can be no
assurance that the Company's existing or future products will not infringe upon
the existing or future proprietary rights of others. Also, the Company's lack of
patents may inhibit the Company's ability to negotiate or obtain licenses from
or oppose patents of third parties, if necessary. Further, the Company is
subject to the risk of litigation alleging infringement of third party
intellectual property rights from both its licensed and proprietary technology.
The Company could incur substantial costs in defending itself and its customers
against any such claims, regardless of the merits of such claims. The Company
may be required by contract or by statutory implied warranties to indemnify its
distribution partners and end-users against third-party infringement claims.
Parties making such claims may be able to obtain injunctive or other equitable
relief which could effectively block the Company's ability to sell its products
in the United States and abroad, and could result in an award of substantial
damages. In the event of a successful claim of infringement, the Company, its
customers and end-users may be required to obtain one or more licenses from
third parties. There can be no assurance that the Company or its customers could
obtain necessary licenses from third parties at a reasonable cost, or at all.
The defense of any lawsuit could result in time-consuming and expensive
litigation, damages, license fees, royalty payments and restrictions on the
Company's ability to sell its products, any of which could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN PERSONNEL
The Company's success is significantly dependent on the contributions of a
number of its key personnel. The loss of the services of any of its key
personnel could have a material adverse effect on the Company. The Company
believes that its future success also will depend upon its ability to attract
and retain additional highly skilled technical, managerial, manufacturing, sales
and marketing personnel. Competition for these personnel is intense. The Company
may not be able to anticipate accurately, or to obtain, the personnel that it
may require in the future.
11
CONTROL BY INSIDERS
As of February 28, 2001, the Company's executive officers, directors and
their affiliates beneficially owned approximately 7,428,874 shares, or 33%, of
the outstanding shares of the Company's Common Stock, including securities owned
by such persons or entities that are convertible into the Company's Common
Stock. As a result, these persons may have the ability to effectively control
the Company and direct its affairs and business, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying, deferring or preventing a
change in control of the Company, and making certain transactions more difficult
or impossible absent the support of these stockholders, including proxy
contests, mergers involving the Company, tender offers, open-market purchase
programs or other purchases of Common Stock that could give stockholders of the
Company the opportunity to realize a premium over the then prevailing market
price for shares of Common Stock.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources combined
with funds from the Company's existing line of credit, will be sufficient to
meet its presently anticipated working capital, capital expenditure requirements
and general corporate purposes for the next 12 months. In the future, the
Company may need to raise additional funds through the issuance of equity
securities. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will be
reduced, stockholders may experience additional dilution, or such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. Additional financing may not be available
when needed or on terms favorable to the Company or at all. If adequate funds
are not available or are not available on acceptable terms, the Company may be
unable to develop or enhance its services, take advantage of future
opportunities or respond to competitive pressures, which could have a material
adverse effect on the Company's business, financial condition or operating
results.
ITEM 2. PROPERTIES.
The Company is headquartered in Santa Clara, California, where it leases
approximately 48,000 square feet of space that houses administrative, sales and
marketing, customer service, operations and product development activities. The
space is occupied pursuant to an operating lease that expires in 2009.
Additionally, the Company has rental agreements for small sales offices in the
United States, Europe and Asia. Rental expense under these facility leases for
the year ended December 31, 2000 was approximately $1.2 million. The Company
believes that its existing facilities are adequate to meet current needs.
ITEM 3. LEGAL PROCEEDINGS.
On or about April 9, 1999, several purported class action suits were filed
in the United States District Court for the Northern District of California (the
"Court") alleging violations of the federal securities laws against the Company
and certain of its officers and directors in connection with the Company's
reporting of its financial results for the period ended December 31, 1998. The
Court dismissed these actions without leave to amend on February 14, 2000. The
plaintiffs filed a notice of appeal with the Ninth U.S. Circuit Court of Appeals
on March 29, 2000. The appeal has been fully briefed by all parties and no date
for oral argument has yet been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "FVCX." The following table sets forth, for the periods indicated, the
high and low sale price per share of the Common Stock on the Nasdaq National
Market.
HIGH LOW
------------- ----------
1999
First Quarter............................................. $15 3/8 $10
Second Quarter............................................ $13 3/4 $3 3/4
Third Quarter............................................. $15 5/16 $6
Fourth Quarter............................................ $15 15/16 $9
2000
First Quarter............................................. $25 3/5 $8
Second Quarter............................................ $17 9/10 $4 1/4
Third Quarter............................................. $8 2/5 $4 1/2
Fourth Quarter............................................ $5 1/2 $ 7/10
As of February 28, 2001, there were approximately 194 holders of record of
the Company's Common Stock. On February 28, 2001, the last sale price reported
on the Nasdaq National Market System for the Company's Common Stock was $1.4062
per share.
The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain any future earnings to support operations
and to finance the growth and development of the Company's business and does not
anticipate paying cash dividends for the foreseeable future.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary selected historical data of the Company
as of and for each of the five years in the period ended December 31, 2000.
YEAR ENDED DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues...................................... $ 40,011 $ 45,700 $37,251 $18,771 $12,093
Cost of revenues.............................. 22,831 28,851 19,220 10,466 6,547
-------- -------- ------- ------- -------
Gross profit................................ 17,180 16,849 18,031 8,305 5,546
-------- -------- ------- ------- -------
Operating expenses:
Research and development.................... 12,517 10,170 9,463 5,420 2,930
Selling, general and administrative......... 24,507 21,633 11,878 6,997 4,886
Acquired in-process research and
development............................... -- -- 4,664 -- --
-------- -------- ------- ------- -------
Total operating expenses (1).............. 37,024 31,803 26,005 12,417 7,816
-------- -------- ------- ------- -------
Operating loss................................ (19,844) (14,954) (7,974) (4,112) (2,270)
Other income (expense), net................... 1,187 646 (42) (216) 27
Minority interest in consolidated
subsidiary.................................. (130) (20) -- -- --
-------- -------- ------- ------- -------
Net loss...................................... $(18,787) $(14,328) $(8,016) $(4,328) $(2,243)
======== ======== ======= ======= =======
Net loss per share:
Basic and diluted (2)....................... $ (1.09) $ (0.87) $ (0.69) $ (1.44) $ (1.14)
Shares used to compute net loss per share:
Basic and diluted (2)....................... 17,205 16,433 11,541 3,012 1,974
DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
Cash, cash equivalents and short-term
investments.............................. $ 23,928 $ 8,821 $ 26,748 $ 2,500 $ 676
Working capital............................ 31,729 21,878 32,939 1,891 1,046
Total assets............................... 46,941 40,199 51,165 11,104 5,432
Total debt................................. 119 228 1,665 3,466 1,312
Accumulated deficit........................ (55,665) (36,878) (22,550) (14,534) (10,206)
Total stockholders' equity................. 36,730 27,812 38,613 1,909 2,074
- ------------------------
(1) Operating expenses included non-cash employee stock compensation charges of
$267,000, $493,000, $1.2 million, $1.1 million, and $339,000 for the years
ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
(2) See Note 1 to the consolidated financial statements for an explanation of
the computation of net loss per share.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the company should be read in conjunction with the financial
statements and the notes thereto included in Item 8 of this Form 10-K. In
addition to the historical information contained in this item, this item
contains forward looking statements within the meaning of Section 27(a) of the
Securities Act and Section 21(e) of the Exchange Act that involved risks and
uncertainties. These forward looking statements include, without limitation,
statements containing the words "believe," "anticipates," "expects," and words
of similar import. Such forward looking statements will have known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievement of the company, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. Such factors include, among others,
the risk factors set forth above in "business/overview," "business/risk
factors," the risk factors set forth in this item and elsewhere in this
Form 10-K. The Company assumes no obligation to update any forward looking
statements contained herein.
OVERVIEW
The Company provides equipment and services that enable the delivery of
video applications over broadband communications networks. The Company was
incorporated in California in October 1993 and reincorporated in Delaware in
December 1997. The Company first shipped its video networking products in 1995
and announced its video services product offering in September 1999.
The Company's revenues in 2000 resulted from the sale of video networking
systems and services to enterprise customers and to telecommunications service
providers. The Company's internal sales force qualifies and stimulates end-user
demand, and manages the Company's strategic relationships with its distribution
partners, including OEMs, VARs and systems integrators. In 2000, more than 43%
of the Company's revenue was derived through its distribution partners,
including EDS, Verizon, Avaya, Williams Communications, Dataserv, AT&T, Clover
Technologies and Total Systems Integration. In 1999, more than 75% of the
Company's revenue was derived through its distribution partners, including
Ameritech (a subsidiary of SBC Communications, Inc.), Bell Atlantic, BT, Cisco,
EDS, France Telecom, Ingram Micro, IBM, Nortel, Qwest and Telstra. In 2000, the
Company recorded $40.0 million in net revenues, a decrease of 12% compared to
the previous year.
The Company maintains sales offices in the United Kingdom, France, Germany,
and Italy, and distributes its products under the FVC.COM name in both Europe
and Asia through resellers and distributors in more than 25 countries. For the
years ended December 31, 2000, 1999 and 1998, approximately 12%, 14% and 21%,
respectively, of the Company's sales were generated from customers outside of
the United States. The Company expects that sales from shipments to customers
outside of the United States will continue to represent a significant portion of
its future revenues. In addition, the Company believes that a small portion of
its sales through OEMs, resellers and integrators are ultimately sold to
international end-users. Revenues from the Company's international operations
are subject to various risks. To date, the Company has not engaged in any
foreign currency hedging activity.
Revenues are recognized upon shipment of products to customers, provided no
significant obligations remain, collectibility is probable and returns are
estimable. Revenues from sales to certain of the Company's resellers are subject
to agreements allowing rights of return and price protection. In these cases,
the Company provides reserves for estimated future returns and allowances upon
revenue recognition. These reserves are estimated based upon historical rates of
returns and allowances, reseller inventory levels, the Company's estimates of
sell through by resellers and other related factors. Actual results could differ
from these estimates. In the event of the inability to estimate returns from any
15
reseller, the Company defers revenue recognition until the reseller has sold the
products to the end-user.
Advance payments received from customers and gross margin deferred with
respect to sales to resellers wherein the Company does not have the ability to
estimate returns are recorded as deferred revenue. At December 31, 2000,
deferred revenue was $1.1 million, primarily contracts for support and
maintenance.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's Consolidated
Statements of Operations as a percentage of total revenues for the periods
indicated. The data set forth below should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto.
YEAR ENDED DECEMBER 31
------------------------------------
2000 1999 1998
-------- -------- --------
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................ 57.1% 63.1% 51.6%
----- ----- -----
Gross profit.............................................. 42.9% 36.9% 48.4%
----- ----- -----
Operating expenses:
Research and development.................................. 31.3% 22.3% 25.4%
Selling, general and administrative....................... 61.2% 47.3% 31.9%
Acquired in-process research and development.............. 0.0% 0.0% 12.5%
----- ----- -----
Total operating expenses (1)............................ 92.5% 69.6% 69.8%
----- ----- -----
Operating loss.............................................. (49.6)% (32.7)% (21.4)%
Other income (expense), net................................. 2.7% 1.3% (0.1)%
----- ----- -----
Net loss.................................................... (46.9)% (31.4)% (21.5)%
===== ===== =====
REVENUES. Revenues decreased by $5.7 million, or 12%, to $40.0 million in
2000, from $45.7 million in 1999. Revenue from enterprise customers during the
year ended December 31, 2000 declined by $6.3 million, to $31.1 million,
principally due to lower sales of the Company's legacy ATM products. This
decline was partially offset by an increase in revenue from service providers to
$8.9 million, compared to $8.3 million in 1999. This increase was the result of
action taken by the Company to establish service providers as a meaningful
channel for sales of the Company's products. In 1999, revenue increased by
$8.4 million, compared to $37.3 million in 1998, primarily as a result of strong
demand for the Company's products and the establishment of the service provider
channel.
GROSS PROFIT. Gross profit consists of revenues less the cost of revenues,
which includes the costs associated with the manufacture of the Company's
products by outside manufacturers and related costs of freight, inventory
obsolescence, royalty and warranty. These manufacturers procure the majority of
materials, except for certain key components that the Company purchases from
third-party vendors.
For the year ending December 31, 2000, gross profit increased by
$0.3 million to $17.2 million, or 43% of net revenue, compared to
$16.8 million, or 37% of net revenue, in the previous year. In 2000, the Company
recorded charges to cost of revenues totaling $2.4 million related to inventory
valuation adjustments for certain products. Excluding this charge from the 2000
results, gross profit increased by $2.7 million.
In 1999, gross profit decreased by $1.2 million to $16.8 million, or 37% of
net revenue, from $18.0 million, or 48% of net revenue, in 1998. In 1999, the
Company recorded charges totaling $5.0 million to cost of revenues inventory
valuation adjustment for certain products and product returns reserves related
to certain international resellers. Excluding the charge recorded in 1999, gross
margins
16
increased by $3.8 million to $21.9 million or 48% of revenue, compared to the
gross profit rate recorded in 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs, cost of contractors and outside consultants,
supplies and material expenses, equipment depreciation and overhead costs.
Research and development expenses increased to $12.5 million in 2000, an
increase of 23% over the $10.2 million recorded in 1999 and an increase of 32%,
or $3.1 million, compared to 1998. As a percentage of total revenues, research
and development expenses increased to 31.3% in 2000, from 22.3% in 1999 and
25.4% in 1998. The increases in absolute dollars were principally due to the
hiring of additional engineers and consultants for product development,
including the start up of a new software development organization in Hyderabad,
India in the third quarter of 2000, and activities associated with the Company's
Click to Meet-TM- product introduced in February 2000. The increase in research
and development expenses as a percentage of revenues was due to relatively lower
sales compared to research and development expenses. The Company believes that
research and development expenses will continue to increase in absolute dollars
for the foreseeable future. However, these expenses will fluctuate depending on
various factors, including the number and types of development projects.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses (SG&A) include personnel and related overhead costs for sales,
marketing, finance, human resources and general management. These expenses also
include costs of outside contractors, advertising, trade shows and other
marketing and promotional expenses. SG&A increased 13.3% in 2000, to
$24.5 million, from $21.6 million in 1999 and $11.9 million in 1998. As a
percentage of total revenues, SG&A was 61.2% in 2000, compared to 47.3% in 1999
and 31.9% in 1998. The increase in absolute dollars in 2000 over 1999 and 1999
over 1998 was the result of the expansion of the Company's sales and marketing
infrastructure, as well as higher marketing costs associated with advertising
and promotional activities, and higher selling costs in 2000 and 1999. The
increase in 1999 compared to 1998 also included a charge of $1.2 million to
increase the provision for bad debts, related to certain international
customers. SG&A includes non-cash compensation charges relating to the Company's
employee stock plans of $267,000 in 2000, $493,000 in 1999, and $589,000 in
1998. The increase in SG&A as a percentage of revenues in 2000 compared to 1999
and 1999 compared to 1998 reflected expense increases that exceeded the rate of
revenue growth, including increased spending in administrative functions and
spending associated with activities in international markets.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In August 1998, the Company
acquired ICAST Corporation, a developer of software designed for Internet and
intranet broadcasting of real-time video, audio and data. The purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values at the date of acquisition as determined by an
independent appraisal. The acquired in-process research and development
represents the estimated fair market value, using a risk-adjusted income
approach, of specifically identified technologies which had not reached
technological feasibility and had no alternative future uses.
The purchase price, including liabilities assumed of $1.8 million,
aggregated approximately $7.6 million, of which $4.7 million was allocated to
acquired in-process research and development.
At the time of the acquisition, ICAST was a privately held, development
stage company involved in research and development of a low-bit rate software
product designed for Internet and intranet broadcasting of real-time video,
audio and data. The value assigned to in-process research and development was
based on this research project for which technological feasibility had not been
established. The value was determined by estimating the expected cash flows from
this project once commercially viable, discounting the net cash flows back to
their present value and then applying a percentage of completion.
17
The percentage of completion for this project was determined by comparing
both effort expended and research and development costs incurred as of
August 1998, to the remaining effort to be expended and research and development
costs to be incurred, based on management's estimates, to bring the project to
technological feasibility. Based on these comparisons, management estimated the
project to be approximately 83% complete as of the date of acquisition. The
project was substantially completed in December 1998. The effort and costs
required to complete the project approximated the estimates made by management
at the date of acquisition.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily
of interest expense relating to the Company's credit facilities and long-term
debt, offset in part by interest income earned on short term investments and
cash balances. Other income, net totaled $1.2 million in 2000 and $0.6 million
in 1999 and other net (expense) was $42,000 in 1998.
The increase in other income, net in 2000 from 1999 was primarily the result
of interest income from the higher average cash balances in 2000 compared to
1999. The change from 1999 to 1998 was primarily due to reduced interest expense
on short-term borrowings.
INCOME TAXES. As of December 31, 2000, the Company had net operating loss
carry-forwards for federal tax purposes of approximately $45.9 million. These
carry-forwards, if not utilized to offset future taxable income, will expire at
various dates beginning in 2013. In addition, under the Tax Reform Act of 1986,
the amount of the benefit that can be carried forward may be limited in certain
circumstances, including, but not limited to, a cumulative stock ownership
change of more than 50% over a three year period, as defined. No benefit has
been recorded for income taxes for any of the periods presented as the Company
believes that, based on the history of such losses and other factors, the weight
of available evidence indicates that it will not be able to realize the benefit
of these net operating losses. Thus, a full valuation reserve has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through the completion of its initial public offering in
May 1998, the Company financed its operations primarily through private
placements of equity securities and to a lesser extent through certain credit
facilities and long-term debt.
On June 8, 2000, the Company issued 27,437 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") in a private placement to Vulcan
Ventures Incorporated ("Vulcan") for an aggregate purchase price of $27,437,000.
The Preferred Stock is convertible into 3,429,625 shares of Common Stock of the
Company. The Company also issued a five-year warrant to Vulcan to purchase
850,000 shares of Common Stock at $7.00 per share. On the date of issuance, the
warrant had an approximate fair market value of $3,700,000 determined using the
Black-Scholes pricing model. The warrant provides anti-dilution protection to
Vulcan, including protection in the event the Company issues additional shares
of Common Stock at a price less than $7.00 per share, subject to certain
exceptions. After fees and expenses, the net proceeds of this issuance of
Preferred Stock was $24.2 million.
As of December 31, 2000, the Company had cash, cash equivalents and
short-term investments of $23.9 million and working capital of $31.7 million.
The Company has used cash in its operating activities primarily to fund
losses incurred through December 31, 2000 and to finance its working capital
needs.
Cash used in operating activities totaled $10.6 million in 2000, reflecting
the net loss of $18.8 million and an increase in accounts payable of
$1.8 million, offset in part by reductions of $1.2 million in inventory,
$2.3 million in other current assets, and $3.6 million in accounts receivable.
Cash used in operating activities totaled $16.5 million in 1999, reflecting the
net loss of $14.3 million
18
and net increases in both inventory and accounts receivable associated with the
increase in business activity level in 1999 compared to 1998.
Cash used in investment activities totaled $17.0 million in 2000, primarily
due to purchases of short-term investments of $15.9 million and the acquisition
of property and equipment of $1.3 million. Capital expenditures declined from
$2.0 million in 1999 to $1.3 million in 2000, and consisted of purchases of
computers and related equipment, furniture and fixtures necessary to support the
Company's growth. To date, the Company has not made significant outlays for
capital expenditures because of its strategy to outsource manufacturing and
certain other functions. Cash provided by investment activities totaled
$6.0 million in 1999, primarily the proceeds from the sale of short-term
investments of $8.6 million partially offset by the acquisition of property and
equipment of $2.0 million. Capital expenditures in 1999 were at the same level
as 1998, and consisted of purchases of computers and related equipment,
furniture and fixtures necessary to support the Company's growth.
Cash provided by financing activities was $27.0 million in 2000, and
consisted principally of $24.3 million in proceeds from the issuance of
preferred stock and $3.0 million from the issuance of Common Stock. Cash
provided by financing activities was $1.1 million in 1999, and consisted
principally of $2.6 million in proceeds from the sale of common stock through
the Company's stock option and stock purchase plans, offset in part by the
repayment of $1.3 million in notes payable that were assumed by the Company in
the acquisition of ICAST in August 1998.
The Company believes that its cash, cash equivalents and short term
investments of $23.9 million at December 31, 2000, together with existing
sources of liquidity, will provide adequate cash to fund its current operations
for the next 12 months.
On March 22, 2001, the Company and CUseeMe Networks, Inc. (CUseeMe) entered
into an Agreement and Plan of Merger and Reorganization. The Company expects to
issue in the merger shares of its Common Stock that will represent approximately
47% of the outstanding shares of the combined company at an exchange ratio of
1.254.
However, in order to aggressively pursue business opportunities in the rich
media communications business and to have increased flexibility to take
advantage of other business opportunities that are not yet known, the Company
may be required to seek equity investments from strategic partners and potential
strategic partners in the future. Should the Company sell additional equity, the
sale may result in dilution to the Company's current stockholders. Should the
Company be unsuccessful in its efforts to raise equity from strategic partners,
it may seek additional capital from the public and/or private equity markets
that will likely result in dilution of the Company's current stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of December 31, 2000, the Company held a total of $23.9 million of cash,
cash equivalents and short-term investments. These securities, which consist
primarily of U.S. government securities, municipal notes and corporate bonds,
are subject to interest rate risk and will decline in value if market interest
rates increase. If market interest rates were to increase immediately and
uniformly by ten percent from levels as of December 31, 2000, the decline in
fair value of the portfolio would not be material.
The Company transacts substantially all of its operations in United States
dollars and therefore is not subject to fluctuations in foreign exchange rates.
Accordingly, the Company currently does not use derivative financial
instruments. The Company has no fixed rate obligations except for capitalized
leases of approximately $119,000. As such, the Company is not subject to an
adverse material impact from changes in interest rates.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements and Notes thereto appear
beginning at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in the Company's independent accountants during the
three most recent fiscal years.
PART III
CERTAIN INFORMATION REQUIRED IN PART III OF THIS REPORT IS INCORPORATED BY
REFERENCE TO THE COMPANY'S PROXY STATEMENT (THE "PROXY STATEMENT") FOR THE
COMPANY'S 2000 ANNUAL MEETING OF STOCKHOLDERS. THE PROXY STATEMENT WILL BE FILED
WITH THE SEC IN ACCORDANCE WITH REGULATION 14A UNDER THE EXCHANGE ACT NO LATER
THAN APRIL 30, 2001.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors: The information concerning the Company's
directors and nominees is incorporated by reference from the section entitled
"Proposal I: Election of Directors" in the Proxy Statement.
(b) Identification of Executive Officers: The information concerning the
Company's Executive Officers is incorporated by reference from the section
entitled "Management" in the Proxy Statement.
(c) Compliance with Section 16(a) of the Exchange Act: The information
required by this item is incorporated by reference from the section entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECTION 16A BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information required by this item is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section entitled "Certain Relationships and Related Transactions" in the Proxy
Statement.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS
The consolidated financial statements required by this item are submitted in
a separate section beginning on page F-1 of this report.
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets at December 31, 2000 and 1999... F-2
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2000............... F-3
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 2000..... F-4
Consolidated Statements of Cash Flows for each of the three
years for the period ended December 31, 2000.............. F-5
Notes to Consolidated Financial Statements.................. F-6
Quarterly Summary (unaudited)............................... F-22
2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because the information required to be set forth
therein is not applicable or is included in the financial statements or notes
thereto.
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- ------------------------------------------------------------
2.1 Agreement and Plan of Merger and Reorganization among the
Registrant, FVC Acquisition Corp., ICAST Corporation and
Certain Shareholders of ICAST Corporation, dated as of
July 30, 1998 (1)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (2)
3.2 Certificate of Ownership and Merger, effective August 3,
1998 (3)
3.3 Certificate of Designation of Series A Convertible Preferred
Stock (5)
3.3 Bylaws of the Registrant (2)
4.1 Specimen Common Stock Certificate (3)
4.2 Specimen Series A Convertible Preferred Stock Certificate
(5)
*10.1 1997 Equity Incentive Plan (6)
*10.4 1997 Employee Stock Purchase Plan (2)
*10.5 Form of 1997 Employee Stock Purchase Plan Offering (2)
*10.6 1997 Non-Employee Directors' Stock Option Plan (6)
*10.8 Executive Officers' Change of Control Plan (4)
*10.9 Non-Employee Directors' Change of Control Plan (4)
*10.10 1999 Equity Incentive Plan (6)
21
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- ------------------------------------------------------------
*10.12 Form of Indemnification Agreement between the Registrant and
its directors and executive officers (2)
10.13 Amended and Restated Investors' Rights Agreement, dated as
of April 1, 1998, among the Registrant and the investors
named therein (2)
10.14 Lease Agreement between the Registrant and John Arrillaga,
or his successor Trustee, UTA 7/20/77, dated July 19, 1995
(the "Lease Agreement") (2)
10.15 Amendment No. 1 to the Lease Agreement, dated November 7,
1997 (2)
10.16 Amendment No. 4 to the Lease Agreement, dated February 4,
1999 (4)
10.17 Loan and Security Agreement between the Registrant and
Silicon Valley Bank ("SVB"), dated July 3, 1996 (2)
10.18 Amendment to Loan and Security Agreement between the
Registrant and SVB, dated June 10, 1998 (3)
10.19 Loan Modification Agreement between the Registrant and SVB,
dated as of March 10,
2000 (7)
10.20 Master Lease Agreement between the Registrant and Comdisco,
Inc. ("Comdisco"), dated April 30, 1997 (2)
10.21 Subordinated Loan and Security Agreement between the
Registrant and Comdisco, dated April 30, 1997 (2)
10.25 Development and License Agreement between the Registrant and
Advanced Telecommunications Modules Limited, dated
February 25, 1994, as amended (2)
10.27 Technology Licensing Agreement between IBM Corporation and
the Registrant, dated October 16, 1997 (2)
10.28 Warrant issued to SVB, dated April 11, 1997 (2)
10.29 Subordinated Loan and Security Agreement between the
Registrant and Comdisco, dated October 23, 1997 (2)
10.30 Lease Agreement between the Registrant and John Arrillaga,
or his successor Trustee, UTA 7/20/77, dated November 7,
1997 (2)
10.31 Letter Agreement between IBM Corporation and the Registrant,
dated February 8, 1998 (2)
10.33 Amended and Restated Promissory Note, dated December 16,
1998, issued in favor of the Registrant by Allwyn Sequeira
(4)
10.34 Second Amended and Restated Promissory Note, dated
April 21, 2000, issued in favor of the Registrant by
Allwyn Sequeira.
10.35 Letter Agreement between Registrant and Allwyn Sequiera,
dated October 10, 2000.
10.36 Stock Purchase Agreement, dated June 8, 2000, between the
Company and Vulcan Ventures Incorporated (5)
10.37 Warrant to Purchase 850,000 of the Company's Common Stock,
dated June 8, 2000, issued by the Company to Vulcan
Ventures Incorporated (5)
10.38 Registration Rights Agreement, dated June 8, 2000, between
the Company and Vulcan Ventures Incorporated (5)
**10.39....... Video Services Agreement dated May 8, 2000, between the
Company and Qwest Communications Corporation (5)
22
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- ------------------------------------------------------------
11.1 Statement of Computation of Earnings (Loss) Per Share (8)
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (included on signature page)
- ------------------------
NOTES TO EXHIBITS
* Management contract or compensatory plan or arrangement.
** Confidential Treatment has been granted with respect to certain portions of
this Exhibit.
(1) Filed as exhibit 2.1 to the Company's Current Report on Form 8-K filed on
September 15, 1998 (File No. 000-23305).
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1, as
amended (File No. 333-38755).
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed on
June 10, 1998 (File No. 000-23305).
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K filed on
April 15, 1999 (File No. 333-72533).
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed on
August 14, 2000 (File No. 000-23305).
(6) Filed as an exhibit to the Company's Registration Statement on Form S-8
filed on July 17, 2000 (File No. 333-4159).
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K filed on
March 30, 2000 (File No. 333-72533).
(8) See Note 1 to the consolidated financial statements.
(B) REPORTS ON FORM 8-K
None.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 30th day of March 2001.
FIRST VIRTUAL COMMUNICATIONS, INC.,
By: /s/ RALPH UNGERMANN
---------------------------------------------------
Ralph Ungermann
CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ralph K. Ungermann and Randy Acres, his
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all 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 such
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
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all such attorneys-in-fact
and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.:
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board of Directors,
/s/ RALPH UNGERMANN President and Chief Executive
--------------------------------- Officer (Principal Executive March 30, 2001
Ralph Ungermann Officer)
/s/ RANDY ACRES Vice President, Finance and Chief
--------------------------------- Financial Officer (Principal March 30, 2001
Randy Acres Financial and Accounting Officer)
/s/ EDWARD HARRIS
--------------------------------- Director March 30, 2001
Edward Harris
/s/ DAVID A. NORMAN
--------------------------------- Director March 30, 2001
David A. Norman
/s/ ROBERT WILMOT
--------------------------------- Director March 30, 2001
Robert Wilmot
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of First Virtual Communications, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 21, present fairly, in all material
respects, the financial position of First Virtual Communications Inc. (formerly
FVC.COM, Inc.), and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
January 23, 2001, except for Note 11 for
which the date is March 14, 2001
and Note 13 for which the
date is March 22, 2001
F-1
FIRST VIRTUAL COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 198 $ 997
Short-term investments.................................... 23,730 7,824
Accounts receivable, net of allowances of $470 and
$1,269.................................................. 9,937 14,066
Inventory................................................. 6,912 8,104
Prepaids and other current assets......................... 871 2,866
-------- --------
Total current assets.................................... 41,648 33,857
Property and equipment, net................................. 2,815 2,880
Other assets................................................ 2,478 3,462
-------- --------
$ 46,941 $ 40,199
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 80 $ 143
Accounts payable.......................................... 5,122 6,968
Accrued liabilities....................................... 3,574 3,123
Deferred revenue.......................................... 1,143 1,745
-------- --------
Total current liabilities............................... 9,919 11,979
Long-term debt, net of current portion...................... 39 85
Minority interest in consolidated subsidiaries.............. 253 323
Commitments and contingencies (notes 9 and 12)
Stockholders' equity:
Convertible preferred stock, $.001 par value; 5,000,000
shares authorized; 27,437 shares issued and outstanding
at December 31, 2000.................................... -- --
Common stock, $.001 par value; 35,000,000 shares
authorized; 17,334,189 and 16,832,522 shares issued and
outstanding, respectively............................... 17 17
Additional paid-in capital................................ 92,168 65,015
Notes receivable from stockholders........................ -- (321)
Accumulated other comprehensive income (loss)............. 210 (21)
Accumulated deficit....................................... (55,665) (36,878)
-------- --------
Total stockholders' equity.............................. 36,730 27,812
-------- --------
$ 46,941 $ 40,199
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
FIRST VIRTUAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues.................................................... $ 40,011 $ 45,700 $37,251
Cost of revenues............................................ 22,831 28,851 19,220
-------- -------- -------
Gross profit.............................................. 17,180 16,849 18,031
-------- -------- -------
Operating expenses:
Research and development.................................. 12,517 10,170 9,463
Selling, general and administrative....................... 24,507 21,633 11,878
Acquired in-process research and development.............. -- -- 4,664
-------- -------- -------
Total operating expenses................................ 37,024 31,803 26,005
-------- -------- -------
Operating loss.............................................. (19,844) (14,954) (7,974)
Other income (expense), net................................. 1,187 646 (42)
Minority interest in consolidated subsidiaries.............. (130) (20) --
-------- -------- -------
Net loss.................................................... $(18,787) $(14,328) $(8,016)
======== ======== =======
Basic and diluted net loss per share........................ $ (1.09) $ (0.87) $ (0.69)
Shares used to compute basic and diluted net loss per
share..................................................... 17,205 16,433 11,541
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FIRST VIRTUAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTES RECEIVABLE CUMULATIVE
--------------------- --------------------- PAID-IN FROM TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS ADJUSTMENT
---------- -------- ---------- -------- ---------- ---------------- -----------
BALANCE AT DECEMBER 31, 1997.......... 8,040,153 $ 8 4,824,684 $ 5 $17,267 $(837) --
Issuance of common stock in initial
public offering, net................ -- -- 3,132,000 3 36,072 --
Conversion of preferred stock into
common stock upon initial public
offering............................ (8,040,153) (8) 8,040,153 8 -- --
Issuance of common stock and other
equity instruments for business
acquisition......................... -- -- 401,389 -- 5,179 --
Exercise of stock options............. -- -- 194,133 -- 815 --
Issuance (repurchase) of common stock,
net................................. -- -- (203,352) -- (147) 335
Stock compensation charges............ -- -- -- -- 2,463 --
Net loss.............................. -- -- -- -- -- --
---------- --- ---------- --- ------- ----- ----
BALANCE AT DECEMBER 31, 1998.......... -- -- 16,389,007 16 61,649 (502) --
Issuance of common stock under stock
option plans and related benefits... 409,494 1 2,090 --
Issuance of common stock, net......... 34,021 -- 491 181
Issuance of warrants for business
acquisition......................... -- -- 292 --
Stock compensation charges............ -- -- 493 --
Cumulative translation adjustment..... -- -- -- -- -- -- (21)
Net loss.............................. -- -- -- -- -- --
---------- --- ---------- --- ------- ----- ----
BALANCE AT DECEMBER 31, 1999.......... -- -- 16,832,522 17 65,015 (321) (21)
Issuance of Series A Preferred Stock
and warrant......................... 27,437 -- -- -- 24,282
Issuance of common stock under stock
option plans and related benefits... -- -- 564,143 -- 2,952 -- --
Issuance (repurchase) of common stock,
net................................. -- (62,476) -- (348) 321 --
Stock compensation charges............ 267
Cumulative translation adjustment..... 231
Net loss..............................
---------- --- ---------- --- ------- ----- ----
BALANCE AT DECEMBER 31, 2000.......... 27,437 $-- 17,334,189 $17 $92,168 $ -- $210
========== === ========== === ======= ===== ====
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
BALANCE AT DECEMBER 31, 1997.......... $(14,534) $ 1,909
Issuance of common stock in initial
public offering, net................ -- 36,075
Conversion of preferred stock into
common stock upon initial public
offering............................ -- --
Issuance of common stock and other
equity instruments for business
acquisition......................... -- 5,179
Exercise of stock options............. -- 815
Issuance (repurchase) of common stock,
net................................. -- 188
Stock compensation charges............ -- 2,463
Net loss.............................. (8,016) (8,016)
-------- --------
BALANCE AT DECEMBER 31, 1998.......... (22,550) 38,613
Issuance of common stock under stock
option plans and related benefits... -- 2,091
Issuance of common stock, net......... -- 672
Issuance of warrants for business
acquisition......................... -- 292
Stock compensation charges............ -- 493
Cumulative translation adjustment..... -- (21)
Net loss.............................. (14,328) (14,328)
-------- --------
BALANCE AT DECEMBER 31, 1999.......... (36,878) 27,812
Issuance of Series A Preferred Stock
and warrant......................... 24,282
Issuance of common stock under stock
option plans and related benefits... -- 2,952
Issuance (repurchase) of common stock,
net................................. -- (27)
Stock compensation charges............ 267
Cumulative translation adjustment..... 231
Net loss.............................. (18,787) (18,787)
-------- --------
BALANCE AT DECEMBER 31, 2000.......... $(55,665) $ 36,730
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FIRST VIRTUAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(18,787) $(14,328) $ (8,016)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 2,156 2,118 1,961
Provision for doubtful accounts......................... 524 1,201 136
Stock compensation...................................... 267 493 1,250
Acquired in-process research and development............ -- -- 4,664
Provision for inventory................................. -- 4,200 --
Other................................................... 161 306 (44)
Changes in assets and liabilities net of effects of
acquisitions
Accounts receivable................................... 3,605 (3,546) (8,727)
Inventory............................................. 1,192 (6,751) (1,839)
Prepaid expenses and other assets..................... 2,259 (1,144) (1,308)
Accounts payable...................................... (1,846) 1,923 843
Accrued liabilities................................... 451 1,186 468
Deferred revenue...................................... (602) (2,160) 3,643
-------- -------- --------
Net cash used in operating activities............... (10,620) (16,502) (6,969)
-------- -------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash received........... -- (750) (360)
Acquisition of property and equipment..................... (1,371) (2,000) (1,987)
Purchase of short-term investments, net................... (15,906) 8,609 (16,433)
Repayment of shareholder notes receivable................. 321 181 --
-------- -------- --------
Net cash (used in) provided by investing
activities.......................................... (16,956) 6,040 (18,780)
-------- -------- --------
Cash flows from financing activities:
Borrowings under short-term credit facilities............. -- -- 3,600
Repayment of short-term credit facilities................. -- -- (4,905)
Repayment of long-term debt and notes payable............. -- (1,300) (2,015)
Proceeds from issuance of stock, net...................... 26,886 2,581 37,078
Repayment of capital lease obligations.................... (109) (137) (194)
-------- -------- --------
Net cash provided by financiing activities.......... 26,777 1,144 33,564
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (799) (9,318) 7,815
Cash and cash equivalents at beginning of period............ 997 10,315 2,500
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 198 $ 997 $ 10,315
======== ======== ========
Supplemental cash flow information:
Cash paid for interest.................................... $ 32 $ 54 $ 206
Equipment acquired under capital lease obligations........ -- -- 203
Issuance of options and warrants.......................... 593 70 1,213
Common stock issued and options and warrants issued or
assumed in connection with acquisitions................. -- 292 5,179
Debt assumed in connection with acquisition of ICAST...... -- -- 1,300
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES.
THE COMPANY
First Virtual Communications, Inc. (the "Company") was incorporated in
California under the name First Virtual Corporation in October 1993 and
subsequently reincorporated in Delaware in December 1997. In July 1998, the
Company changed its name to FVC.COM, Inc., and on February 5, 2001 the Company
changed its name to First Virtual Communications, Inc. The Company provides
systems and services that enable system integrators and service providers to
deliver an integrated suite of video collaboration applications to their
enterprise customers. The Company sells its products worldwide through original
equipment manufacturers ("OEM partners"), distributors and resellers.
The Company has one reporting segment based on its management structure.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated. Investments in entities of which the Company owns between
20% and 50% and on which the Company has the ability to exercise significant
influence but not control are accounted for under the equity method.
Minority interest reflects the interest of minority shareholders in the
operating results of consolidated subsidiaries.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents and those with maturities
greater than three months are considered short-term investments. The Company has
classified all short-term investments as available-for-sale. Short-term
investments held at December 31, 2000 and 1999 have been presented at cost,
which approximated fair value.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. During the quarter ended December 31, 1999, the
Company recorded inventory related charges of $5.0 million. The majority of
these charges related to the write down of inventories for certain excess and
obsolete products and to record physical inventory adjustments. The charge has
been included in cost of revenues.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets, generally
three years. Leasehold improvements are amortized using
F-6
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES.
(CONTINUED)
the straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term. When property or equipment is retired or
otherwise disposed of, the Company removes the asset and accumulated
depreciation from its records and recognizes any related gain or loss in the
determination of income.
GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill, representing the excess of purchase price and acquisition costs
over the fair value of net assets of businesses acquired, and other purchased
intangibles are amortized on a straight-line basis over the estimated economic
lives, which range from four to five years. Amortization expense relating to
goodwill and other intangible assets was $720,000 for 2000 and $601,000 for
1999.
IMPAIRMENT OF LONG-TERM ASSETS
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of long-term assets, including intangible
assets, may not be recoverable. When such events or changes in circumstances are
present, the Company assesses the recoverability of long-term assets by
determining whether the carrying value of such assets will be recovered through
undiscounted expected future cash flows. If the total of future cash flows is
less than the carrying amount of these assets, the Company recognizes an
impairment loss based on the excess of the carrying amount over the fair value
of the assets.
REVENUE RECOGNITION
Revenues are recognized upon shipment of product to customers, provided no
significant obligations remain, collectibility is probable and returns are
estimable. Revenues from sales to certain of the Company's resellers are subject
to agreements allowing rights of return and price protection. In such cases, the
Company provides reserves for estimated future returns and credits for price
protection upon revenue recognition. Such reserves are estimated based on
historical rates of return and allowances, reseller inventory levels, the
Company's estimates of expected sell through by resellers and other related
factors. Actual results could differ from these estimates. In the event of
inability to estimate returns from any reseller, the Company defers revenue
recognition until the reseller has sold through the products.
Advance payments received from customers and gross margin deferred with
respect to sales to resellers wherein the Company does not have the ability to
estimate returns are recorded as deferred revenue.
The Company on occasion receives nonrecurring engineering funding for
development projects. Revenues from such funding are recognized over the term of
the respective contract using the percentage of completion method. Amounts
received under such projects have not been material to date.
A provision is made upon revenue recognition for the estimated cost to
repair or replace products under warranty arrangements. The Company provides a
limited amount of telephone technical support to customers. These activities are
generally considered insignificant customer support obligations and related
costs are accrued upon revenue recognition.
F-7
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES.
(CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the product are capitalized, if material. To date, all software
development costs have been expensed as incurred.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
thereof. Options and warrants granted to non-employees are accounted for using
the fair value method prescribed by Statement of Financial Accounting Standards
No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation." The Company also
has adopted the disclosure only provisions of FAS 123.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach. The
asset and liability approach requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of currently enacted tax law; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
EARNINGS PER SHARE
Basic earnings (loss) per share is based on the weighted-average number of
common shares outstanding excluding contingently issuable or returnable shares,
such as shares of unvested restricted common stock. Diluted earnings (loss) per
share is based on the weighted-average number of common shares outstanding and
dilutive potential common shares outstanding. As a result of the losses incurred
by the Company during 2000, 1999 and 1998, all potential common shares were
anti-dilutive and excluded from the diluted net loss per share calculations.
The following table summarizes securities outstanding as of each period end
which were not included in the calculation of diluted net loss per share since
their inclusion would be anti-dilutive:
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Unvested restricted common stock............................ 4 56 492
Series A Convertible Preferred stock........................ 27 -- --
Stock purchase warrants..................................... 1,016 307 290
Stock options............................................... 6,594 4,729 3,322
F-8
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES.
(CONTINUED)
Unvested restricted common stock represents stock that has been issued but
which is subject to repurchase to the extent the holder does not remain
associated with the Company until such shares are vested.
CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC DISTRIBUTION OF REVENUES
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and accounts receivable. The Company invests its excess
cash in a variety of financial instruments such as U.S. government securities,
municipal notes and corporate bonds. The Company, by policy, limits the amount
of credit exposure to any one financial institution or commercial issuer, and
restricts the placement of funds to financial institutions evaluated as highly
credit-worthy. The Company sells its products to original equipment
manufacturers, distributors, value-added resellers and end-user customers
throughout the world. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company provides an allowance for uncollectible accounts
receivable based upon the expected collectibility of such receivables. For the
years ended December 31, 2000, 1999, and 1998, the allowance for doubtful
accounts was increased for additions of $524,000, $1,201,000 and $136,000
respectively, and reduced for bad debt write-offs of $1,323,000, $100,000 and
$183,000, respectively.
In 2000, 1999, and 1998 revenues from one customer represented 9%, 29% and
39%, respectively, of total revenues, and a second customer represented 10% of
total revenues in 1999.
The following table summarizes the percentage of total revenues by
geographic area based on the destination of the related shipments:
YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
United States............................................... 88% 86% 79%
Asia........................................................ 7% 5% 9%
Europe...................................................... 5% 9% 12%
--- --- ---
Total..................................................... 100% 100% 100%
=== === ===
At December 31, 2000, outstanding receivables from one customer represented
13% of accounts receivable. At December 31, 1999, outstanding receivables from
two customers represented 14% and 13% of accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments
and other current assets and liabilities such as accounts receivable, accounts
payable and accrued liabilities, as presented in the consolidated financial
statements, approximate fair value because of their short maturities. The
recorded amount of long-term debt approximates fair value as the actual interest
rates approximate current competitive rates.
F-9
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES.
(CONTINUED)
COMPREHENSIVE INCOME (LOSS)
Under Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"), the Company is required to report
comprehensive income, which includes the company's net income, as well as
changes in equity from other sources. FAS 130 requires that comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements that constitute a full set of financial
statements. The adoption of this standard has not resulted in a material effect
on the Company's consolidated financial statements. The Company's reported net
loss approximated its comprehensive net loss for 2000, 1999 and 1998.
The following table represents the calculation of comprehensive income as
required by FAS 130. The components of comprehensive income are as follows:
YEAR ENDED
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Net loss................................................. $(18,787,000) $(14,328,000)
Cumulative translation adjustment...................... 231,000 (21,000)
------------ ------------
Total comprehensive income............................... $(18,556,000) $(14,349,000)
============ ============
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no impact on previously reported
results of operations or stockholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Under SFAS No. 133, gains or losses resulting from
changes in the values of derivatives are to be reported in the statement of
operations or as a deferred item, depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. In June 1999, the FASB issued SFAS No. 137, "Deferral of the
Effective Date of FASB Statement Number 133," to defer for one year the
effective date of implementation of SFAS No. 133. SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000, with
earlier application encouraged. To date, the Company has not engaged in any
foreign currency hedging activity and does not expect the adoption of this new
standard in the first quarter of 2001 to have a significant impact on the
Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles ("GAAP") to revenue recognition in financial
statements. In March 2000, the SEC issued SAB 101A which deferred the
F-10
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES.
(CONTINUED)
Company's required adoption of SAB 101 until the quarter beginning October 1,
2000. The adoption of SAB 101 did not have a material impact on the Company's
reported results of operations.
DEPENDENCE ON SUPPLIERS
The Company's ability to timely deliver its products is dependent upon the
availability of quality components and subsystems used in these products. The
Company depends in part upon subcontractors to manufacture, assemble and deliver
certain items in a timely and satisfactory manner. The Company obtains certain
components and subsystems from single or a limited number of sources. A
significant interruption in the delivery of such items could have a material
adverse effect on the Company's consolidated financial condition and results of
operations.
NOTE 2--ACQUISITION OF ICAST CORPORATION
In August 1998, the Company acquired ICAST Corporation, ("ICAST"). Since its
inception, ICAST developed software designed for Internet and intranet
broadcasting of real-time video, audio and data. The Company acquired all of the
outstanding stock of ICAST in exchange for 401,389 shares of First Virtual
Communications, Inc. common stock, a cash payment of $327,000 and the assumption
of certain outstanding ICAST stock options, warrants and debt. The transaction
was accounted for as a purchase; accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based upon their estimated fair
market values at the date of acquisition as determined by an independent
appraisal. The acquired in-process research and development represents the
estimated fair market value, using a risk-adjusted income approach, of
specifically identified technologies which had not reached technological
feasibility and had no alternative future uses.
IN-PROCESS RESEARCH AND DEVELOPMENT
The purchase price, including liabilities assumed of $1.8 million,
aggregated approximately $7.6 million, of which $4.7 million was allocated to
acquired in-process research and development.
At the time of the acquisition, ICAST was a privately held, development
stage company involved in research and development of a low-bit rate software
product designed for Internet and intranet broadcasting of real-time video,
audio and data. The value assigned to in-process research and development was
based on this research project for which technological feasibility had not been
established. The value was determined by estimating the expected cash flows from
this project once commercially viable, discounting the net cash flows back to
their present value and then applying a percentage of completion.
The percentage of completion for this project was determined by comparing
both effort expended and research and development costs incurred as of
August 1998, to the remaining effort to be expended and research and development
costs to be incurred, based on management's estimates, to bring the project to
technological feasibility. Based on these comparisons management estimated the
project to be approximately 83% complete as of the date of acquisition. The
project was substantially completed in December 1998. The effort and costs
required to complete the project approximated the estimates made by management
at the date of acquisition.
The following pro forma information reflects the results of operations for
the year ended December 31, 1998. as if the acquisition of ICAST Corporation had
occurred as of the beginning of the
F-11
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITION OF ICAST CORPORATION (CONTINUED)
period presented, after giving effect to certain pro forma adjustments, and
excludes the charge relating to IPR&D. These pro-forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what operating results would have been had the acquisition actually taken place
as of the beginning of such period or what operating results may occur in the
future.
YEAR ENDED
DECEMBER 31,
1998
---------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues.................................................... $37,495
Net loss.................................................... (5,406)
Net loss per share.......................................... (0.46)
NOTE 3--ACQUISITION OF BUSINESSES
In May 1999, the Company acquired a controlling interest in a United Kingdom
based entity which has been a distributor of the Company's products in the
United Kingdom and the Middle East. The Company acquired 52% of the outstanding
stock of a newly incorporated holding company that owns 100% of the shares of
this entity, in exchange for a cash payment of $750,000. The transaction was
accounted for as a purchase; accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed based upon their estimated fair
market values at the date of acquisition. Goodwill of $360,000 arising from the
acquisition is being amortized over its estimated useful life of five years.
In December 1999, the Company acquired an entity in the Netherlands that has
been a distributor of the Company's products in Germany and Italy. The Company
acquired 80% of the outstanding stock it did not already own in exchange for
warrants valued at $292,000. The warrants give the holders the right to purchase
61,666 shares of the Company's common stock at a price of $12 per share. The
transaction was accounted for as a purchase; accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values at the date of acquisition. Goodwill of $275,000
arising from the acquisition is being amortized over its estimated useful life
of five years.
NOTE 4--INITIAL PUBLIC OFFERING
In May 1998, the Company completed its initial public offering whereby the
Company sold 3,132,000 shares of its common stock to the public at a price of
$13 per share. The Company received $36.1 million of cash, net of underwriting
discounts, commissions and other offering costs. In addition, each outstanding
share of convertible preferred stock was automatically converted into one share
of common stock (see Note 10). The Company used $6.9 million of the net proceeds
from its initial public offering to repay outstanding indebtedness, including
$2.3 million for borrowings under its working capital line of credit and
$2.6 million for the outstanding balance of a loan from Hambrecht & Quist
Guaranty Finance, LLC (see Note 6).
F-12
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--BALANCE SHEET COMPONENTS
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Inventory:
Raw materials............................................. $ 1,553 $ 2,155
Finished goods............................................ 5,359 5,949
------- -------
$ 6,912 $ 8,104
======= =======
Prepaid expenses and other current assets
Prepaid expenses.......................................... $ 304 $ 758
Other receivables......................................... 567 2,108
------- -------
$ 871 $ 2,866
======= =======
Property and equipment:
Computers and equipment................................... $ 4,968 $ 4,788
Furniture and fixtures.................................... 1,103 1,241
Leasehold improvements.................................... 269 346
------- -------
6,340 6,375
Less accumulated depreciation and amortization............ (3,525) (3,495)
------- -------
$ 2,815 $ 2,880
======= =======
Other assets
Goodwill and intangible assets............................ 1,913 2,459
Other..................................................... 565 1,003
------- -------
$ 2,478 $ 3,462
======= =======
Accrued liabilities:
Accrued employee compensation............................. $ 2,013 $ 1,149
Accrued warranty.......................................... 578 329
Other..................................................... 983 1,645
------- -------
$ 3,574 $ 3,123
======= =======
As of December 31, 2000 and 1999, property and equipment recorded under
capital leases, consisting primarily of computers and equipment, totaled
approximately $1,053,000, with related accumulated amortization of approximately
$991,000 and $847,000, respectively.
NOTE 6--CREDIT FACILITIES AND NOTES PAYABLE
In February 1998, the Company entered into a transaction with Hambrecht &
Quist Guaranty Finance, LLC ("Guaranty Finance"), whereby Guaranty Finance would
loan the Company up to $5 million. Under related agreements which were executed
on March 12, 1998 and subsequently amended on April 24, 1998, (i) Guaranty
Finance agreed to lend the Company up to $5 million at an interest rate of 12%
per annum, $1.1 million of which was loaned to the Company in March 1998 and
$1.5 million of which was loaned to the Company in April 1998 (the "Loan") and
(ii) Guaranty Finance purchased from the Company for $1,250 a warrant to
purchase 125,000 shares of the Company's common stock at a per share purchase
price equal to the initial public offering price of
F-13
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--CREDIT FACILITIES AND NOTES PAYABLE (CONTINUED)
$13.00. The warrant, which was exercisable through March 1, 2003, was net
exercised in March 2000, pursuant to which the Company issued 55,961 shares of
common stock to Guaranty Finance. The fair value of this warrant was estimated
to be approximately $563,000 using the Black-Scholes model and was expensed as
an additional cost of financing in 1998. The Company also paid a $100,000 fee to
Guaranty Finance in consideration for entering into the Loan. This financing
agreement expired on December 31, 1998.
In connection with the ICAST acquisition, the Company assumed various notes
payable aggregating $1.3 million. The notes bore interest at 6% per annum and
were repaid in the first quarter of 1999.
NOTE 7--LONG-TERM DEBT
Long-term debt comprises:
DECEMBER 31,
----------------------
2000 1999
-------- --------
(IN THOUSANDS)
Capitalized lease obligations............................... $119 $ 228
Less current portion........................................ (80) (143)
---- -----
$ 39 $ 85
==== =====
NOTE 8--INCOME TAXES
No provision or benefit for income taxes has been recognized for any of the
periods presented as the Company has incurred net operating losses for income
tax purposes and had no carryback potential.
Deferred tax assets consist of:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Net operating loss carryforwards............................ $ 15,415 $ 8,013
Tax credits................................................. 2,015 2,507
Accruals and reserves....................................... 2,205 4,251
-------- --------
Total deferred tax assets................................... 19,635 14,771
Less valuation allowance.................................... (19,635) (14,771)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
Based on a number of factors, including the lack of a history of profits and
the fact that the Company competes in a developing market that is characterized
by rapidly changing technology, management believes that the weight of available
evidence indicates that it is more likely than not that the company will not be
able to realize its deferred tax assets and thus a full valuation allowance has
been provided at December 31, 2000 and 1999.
F-14
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
At December 31, 2000, the Company had net operating loss carry forwards of
approximately $45.9 million and $16.0 million for federal and state
jurisdictions, respectively, available to reduce future taxable income.
Approximately $5.4 million of the federal net operating loss carry forwards
resulted from the Company's acquisition of ICAST Corporation. The federal net
operating loss carry forwards expire from 2013 through 2020 and the state net
operating loss carryforwards expire from 2000 through 2005.
Under the Tax Reform Act of 1986, the amount of the benefit from net
operating losses that can be carried forward may be limited in certain
circumstances including, but not limited to, a cumulative stock ownership change
of more than 50% over a three year period, as defined. As a result of the
ownership change that occurred upon the Company's acquisition of ICAST,
utilization of the net operating loss carry forwards related to ICAST is limited
to approximately $350,000 per year.
NOTE 9--COMMITMENTS
LEASES
The Company leases its facility under noncancelable operating lease
agreements that expire in 2009. In addition, the Company leases certain
equipment under long-term lease agreements that are classified as capital
leases. These capital leases terminate at various dates through 2002. Future
minimum lease payments under all noncancelable operating and capital leases as
of December 31, 2000 are as follows (in thousands):
OPERATING CAPITAL
LEASES LEASES
--------- --------
Year ending December 31,
2001...................................................... $ 1,451 114
2002...................................................... 1,498 9
2003...................................................... 1,518 --
2004...................................................... 1,545 --
2005...................................................... 1,574 --
Thereafter................................................ 6,079 --
------- ---
Total minimum lease payments.............................. $13,665 123
=======
Less amount representing interest......................... (4)
---
Present value of capital lease obligations................ 119
Less current portion...................................... (80)
---
Lease obligations, long-term.............................. $39
===
Rent expense under operating leases for the years ended December 31, 2000,
1999 and 1998, was approximately $1,233,000, $1,103,000 and $583,000,
respectively.
NOTE 10--CONVERTIBLE PREFERRED STOCK
At December 31, 1999, the Company had authorized 5,000,000 shares of
undesignated convertible preferred stock. Prior to completion of the Company's
initial public offering, the Company had authorized 10,000,000 shares of
preferred stock, of which 8,040,153 shares were issued and outstanding.
F-15
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--CONVERTIBLE PREFERRED STOCK (CONTINUED)
Each Preferred Share was converted into one share of common stock upon
completion of the Company's initial public offering in May 1998.
On June 8, 2000, the Company issued 27,437 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") in a private placement to Vulcan
Ventures Incorporated ("Vulcan") for an aggregate purchase price of $27,437,000.
The Preferred Stock is convertible into 3,429,625 shares of common stock of the
Company, subject to adjustment for dilution in the event the Company completes
an offering of common stock, subject to certain exceptions, at a price less than
$8.00 per share. The Company also issued a five-year warrant to Vulcan to
purchase 850,000 shares of common stock at $7.00 per share. On the date of
issuance, the warrant had an approximate fair market value of $3,700,000
determined using the Black-Scholes pricing model. The warrant provides
anti-dilution protection to Vulcan, including protection in the event the
Company issues additional shares of common stock, subject to certain exceptions,
at a price less than $7.00 per share. Each share of Preferred Stock has voting
rights equal to an equivalent number of shares of common stock into which it is
convertible and votes together as one class with the common stock, unless
otherwise specified in the Company's Certificate of Incorporation. The holder of
the Preferred Stock has dividend rights on parity with the common stock. Each
share of Preferred Stock has a liquidation preference of $1,000 per share. The
Company must obtain approval from a majority of the holders of the Preferred
Stock in order to alter the Certificate of Incorporation if such alteration
would adversely affect the Preferred Stock and for certain other matters.
WARRANTS
In 1997, the Company issued warrants to purchase 60,936 shares of its
Series D preferred stock at $8.00 per share in conjunction with certain
financing arrangements. The warrants were exercisable immediately and were to
expire at various times from 3 to 4.3 years following the closing of the
Company's initial public offering. Upon closing of the offering in May 1998, the
warrants converted to warrants to purchase the same number of shares of the
Company's common stock at an exercise price of $8.00 per share. As of
December 31, 2000 and 1999, no warrants had been exercised. The aggregate value
of these warrants was estimated by the Company, using the Black-Scholes model,
at approximately $233,000 and was expensed as an additional cost of financing
over the term of the related outstanding borrowings.
NOTE 11--STOCK PLANS
1997 EQUITY INCENTIVE PLAN
In October 1997, the Board of Directors and stockholders approved the
consolidation and restatement of the Company's 1993 Employee, Consultant and
Director Stock Purchase Plan (the "1993 Plan") and the 1996 Stock Option Plans
(the "1996 Plans") into the 1997 Equity Incentive Plan (the "1997 Plan") which
became effective upon the closing of the Company's initial public offering. The
1997 Plan is intended to serve as the successor equity incentive program to the
1993 Plan and the 1996 Plans (the "Predecessor Plans"). Outstanding options and
stock purchase awards under the Predecessor Plans were incorporated into the
1997 Plan upon effectiveness of the initial public offering. The incorporated
options and stock purchase awards will continue to be governed by their existing
terms which are essentially the same as similar awards granted under the 1997
Plan described below. Under the 1997 Plan, as amended, an aggregate of 5,875,000
shares of common stock are authorized to be
F-16
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK PLANS (CONTINUED)
issued pursuant to stock awards. As of December 31, 2000, 1,956,486 shares of
common stock pursuant to awards under the 1997 Plan are available for future
grant.
The 1997 Plan provides for the grant of stock options, stock purchase awards
and stock bonuses to employees, directors and consultants. Options granted under
the 1997 Plan are for periods not to exceed ten years, and must be issued at
prices not less than 100% and 85%, for incentive and nonqualified stock options,
respectively, of the fair market value of the stock on the date of grant.
Incentive stock options granted to stockholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years and must be issued at
prices not less than 110% of the fair market value of the stock on the date of
grant. Options granted under the 1997 Plan are exercisable at such time and
under such conditions as determined by the Board of Directors, and generally
vest over four years.
Restricted stock purchase awards under the 1997 Plan are to be issued at a
price not less than 85% of the fair market value of the stock on the date of
grant. Restricted stock purchase awards may be accompanied by a repurchase
option in favor of the Company in accordance with a vesting schedule and at a
price determined by the Board of Directors. Shares subject to stock awards that
have expired or otherwise terminated shall again become available for the grant
of awards under the 1997 Plan, including shares subject to currently outstanding
options and restricted stock issued under the 1993 Plan and the 1996 Plans. As
of December 31, 2000 and 1999, a total of 3,699 and 148,824, respectively, of
unvested shares of common stock were outstanding subject to repurchase by the
Company at a repurchase price equal to the original issuance price of such
shares.
1999 EQUITY INCENTIVE PLAN
In April 1999, the Board of Directors approved the 1999 Equity Incentive
Plan (the "1999 Plan"). Under the 1999 Plan, as amended through January 2001, an
aggregate of 6,000,000 shares of common stock are authorized to be issued
pursuant to stock awards. As of December 31, 2000, 125,662 shares of common
stock pursuant to awards under the 1999 Plan are available for future grant.
The 1999 Plan provides for the grant of nonqualified stock options, stock
purchase awards and stock bonuses to selected employees, directors and
consultants. Options granted under the 1999 Plan are for periods not to exceed
ten years, and must be issued at prices not less than 85% of the fair market
value of the stock on the date of grant. Options granted under the 1999 Plan are
exercisable at such time and under such conditions as determined by the Board of
Directors, and generally vest over four years.
Restricted stock purchase awards under the 1999 Plan are to be issued at a
price determined by the Board of Directors. Restricted stock purchase awards may
be accompanied by a repurchase option in favor of the Company in accordance with
a vesting schedule and at a price determined by the Board of Directors. Shares
subject to stock awards that have expired or otherwise terminated shall again
become available for the grant of awards under the 1999 Plan. As of
December 31, 2000, no unvested shares of common stock was subject to repurchase
by the Company under the plan.
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1997, the Company's Board of Directors approved the 1997
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Under the
Directors' Plan, 350,000 shares of the
F-17
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK PLANS (CONTINUED)
company's common stock are reserved for issuance thereunder. In March 2001,
subject to stockholder approval, the Board of Directors authorized a 350,000
share increase in the number of shares of common stock available for issuance
under the Directors' Stock Option Plan. As of December 31, 2000, 80,000 shares
of common stock pursuant to awards under the Directors' Plan are available for
future grant.
The Directors' Plan provides for the grant of options to purchase 30,000
shares of common stock to each director who is not also an employee of the
Company (a "Non-Employee Director") upon initial election to the Board of
Directors and subsequent automatic grants of options to purchase 10,000 shares
of common stock on each anniversary of a previous grant. In March 2001, the
Board of Directors also authorized, subject to stockholder approval, the
issuance under the Directors' Plan of 10,000 shares annually to each
Non-Employee Director for service on each committee of the Board, including the
Audit Compensation and Nominating Committees. The options vest over a five-year
period commencing on the date of grant, with 10% of the shares vesting six
months following the date of grant and the remaining 90% vesting on a daily
ratable basis thereafter.
A summary of option activity under the 1999 Plan, the 1997 Plan and the
Directors' Plan follows:
WEIGHTED
SHARES SUBJECT AVERAGE
TO OPTIONS EXERCISE
OUTSTANDING PRICE
-------------- --------
(IN THOUSANDS)
Balance at December 31, 1997................................ 2,129 $ 5.71
Granted..................................................... 2,449 11.03
Exercised................................................... (194) 4.20
Cancelled................................................... (1,062) 10.12
------
Balance at December 31, 1998................................ 3,322 8.30
Granted..................................................... 2,666 10.74
Exercised................................................... (409) 5.63
Cancelled................................................... (850) 9.95
------
Balance at December 31, 1999................................ 4,729 9.61
Granted..................................................... 5,240 7.48
Exercised................................................... (392) 6.41
Cancelled................................................... (2,983) 10.70
------
Balance at December 31, 2000................................ 6,594 7.62
======
With respect to certain options and restricted stock granted in 1996 and
1997, the Company has recognized a compensation charge of approximately
$2.1 million. Further, in early February 1998, after considering various factors
including the input provided by the Company's investment bankers, the Board of
Directors of the Company approved a plan under which 499,500 options previously
granted at prices of $10.20 and $11.00 to employees (excluding officers) were
exchanged for options at $8.50 per share, which the Board concluded was the fair
value of the Company's common stock at that time. The Company is recognizing a
compensation charge of approximately $1.3 million with respect to the 499,500
repriced stock options and 278,000 additional stock options granted in early
February 1998 at $8.50 per share, computed based on a deemed value of $10.20 per
share of common stock. The charges
F-18
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK PLANS (CONTINUED)
referred to above are being amortized over the vesting period of the awards,
which is generally five years. The Company recognized $267,000, $493,000, and
$1,250,000 of said charges as compensation expense during the years ended
December 31, 2000, 1999 and 1998, respectively. The future compensation charges
are subject to reduction for any employee who terminates employment prior to the
expiration of such employee's option vesting period, and aggregated
approximately $128,000 at December 31, 2000.
Significant option groups outstanding at December 31, 2000 and related
weighted average exercise price and contractual life information are as follows:
OPTIONS OUTSTANDING
--------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE WEIGHTED ------------------------------
REMAINING AVERAGE WEIGHTED
NUMBER CONTRACTUAL EXERCISE NUMBER AVERAGE
RANGE OF OUTSTANDING LIFE (IN PRICE EXERCISABLE PRICE
EXERCISE PRICES (IN THOUSANDS) YEARS) (PER SHARE) (IN THOUSANDS) (PER SHARE)
- --------------- --------------- ----------- ------------ --------------- ------------
$ 0.34-$ 2.91........ 805 5.89 $ 2.51 372 $ 2.70
$ 3.25-$ 5.19........ 947 9.13 4.93 162 4.67
$ 5.25-$ 5.50........ 1,661 9.61 5.49 23 5.37
$ 5.56-$ 6.63........ 748 9.05 5.86 156 5.93
$ 6.69-$10.00........ 676 8.03 8.82 259 9.18
$10.20-$13.31........ 987 8.41 12.22 352 11.92
$13.44-$19.00........ 625 8.45 14.58 259 14.28
$19.88-$19.88........ 15 9.24 19.88 3 19.88
$19.94-$19.94........ 129 9.20 19.94 23 19.94
$22.75-$22.75........ 1 9.19 22.75 -- 22.75
- --------------------- ----- ---- ------ ----- ------
$ 0.34-$22.75........ 6,594 8.56 $ 7.62 1,609 $ 8.45
===================== ===== ==== ====== ===== ======
PRO FORMA DISCLOSURES
Had compensation cost for the Company's stock option plans been determined
based on the value of such options at the grant dates as prescribed by FAS 123,
the Company's pro forma net loss and net loss per share would have been:
YEARS ENDED DECEMBER 31, 2000 1999 1998
- ------------------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
As reported:
Net loss............................................. $(18,787) $(14,328) $ (8,016)
Net loss per share (basic and diluted)............... $ (1.09) $ (0.87) $ (0.69)
Pro forma:
Net loss............................................. $(27,685) $(22,385) $(10,247)
Net loss per share (basic and diluted)............... $ (1.61) $ (1.36) $ (0.89)
The weighted-average estimated grant-date fair value of options granted
under the Company's various stock option plans during 2000, 1999 and 1998 was
$5.23, $7.50 and $4.03, respectively. For the years ended December 31, 2000,
1999 and 1998, the fair value of each option on the date of grant was
F-19
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK PLANS (CONTINUED)
determined using the Black-Scholes model with the following assumptions: no
annual dividend yield for any period; expected volatility of 70%, 70% and 50%,
respectively; risk-free annual interest rates of 5%, 5% and 4.17%, respectively;
and an expected option term of 5, 4 and 2.98 years, respectively.
1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Stock Purchase Plan (the "Purchase Plan") was approved by
the Board of Directors and stockholders in October 1997 and became effective
upon the closing of the initial public offering. Under the Purchase Plan a total
of 350,000 shares of common stock have been reserved for issuance to
participating employees who meet eligibility requirements. In March 2001,
subject to stockholder approval, the Board of Directors authorized a 1,000,000
share increase in the number of shares of Common Stock available for issuance
under the Purchase Plan. As of December 31, 2000, 63,486 shares of common stock
are available for future issuance under the Purchase Plan.
The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of an employee's base
compensation, including commissions, bonuses and overtime, at a price equal to
85% of the fair value of the common stock at the beginning of each offering
period or the end of the purchase period, whichever is lower. The initial
purchase period commenced on April 29, 1998. As of December 31, 1998, no shares
had been issued under the Purchase Plan. During 2000 and 1999, the Company
issued 172,077 and 59,601 shares of common stock, respectively, under the
Purchase Plan for aggregate proceeds of approximately $438,000 and $400,000,
respectively. Compensation cost (included in pro forma net loss and net loss per
share amounts only) for the years ended December 31, 2000, 1999 and 1998, for
the grant date fair value, as defined by SFAS 123, of the purchase rights
granted under the Purchase Plan was calculated using the Black-Scholes model
with the following assumptions: no annual dividend yield for any year; expected
volatility of 70%, 70% and 50%, respectively; risk-free annual interest rates of
5%, 5% and 5.38%, respectively; and expected terms of 1, 1 and 0.67 year,
respectively. The pro forma SFAS 123 disclosures include compensation expense
for purchase rights granted during 2000, 1999 and 1998. The weighted average
estimated grant date fair value for purchase rights granted under the Purchase
Plan during 2000, 1999 and 1998 was $5.05, $4.48 and $4.26, respectively.
NOTE 12--LITIGATION
Beginning in April 1999, several purported class action suits were filed in
the U.S. District Court for the Northern District of California (the "Court")
alleging violations of the federal securities laws against the Company and
certain of its officers and directors in connection with the Company's reporting
of its financial results for the period ended December 31, 1998.
In July 1999, the Court entered orders consolidating all existing class
actions into a single action and appointing a lead plaintiff and lead
plaintiff's co-counsel. A consolidated amended complaint was filed in
September 1999 and the Company and the individual defendants filed a motion to
dismiss the complaint on October 8, 1999.
On February 14, 2000, the Court granted the Company's motion to dismiss the
lawsuit without leave to amend. The plaintiffs filed a notice of appeal with the
Ninth U.S. Circuit Court of Appeals on March 29, 2000. The appeal has been fully
briefed by all parties and no date for oral argument has yet been set.
F-20
FIRST VIRTUAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--SUBSEQUENT EVENTS
On March 22, 2001, the Company, FVC Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of FVC ("Merger Sub"), and CUseeMe
Networks, Inc., a Delaware corporation ("CUseeMe") entered into an Agreement and
Plan of Merger and Reorganization, dated as of March 22, 2001 (the "Merger
Agreement"), pursuant to which Merger Sub agreed to merge with and into CUseeMe
(the "Merger"). Upon consummation of the Merger, Merger Sub will cease to exist,
and CUseeMe will become a wholly owned subsidiary of FVC.
The Company expects to issue in the Merger shares of its common stock which
will represent approximately 47% of the outstanding shares of common stock of
the combined company at an exchange ratio of 1.254. In connection with the
Merger Agreement, certain stockholders of the Company and CUseeMe, respectively,
entered into Voting Agreements whereby they agreed to vote for the approval of
the merger.
F-21
QUARTERLY SUMMARY
(UNAUDITED)
THREE MONTHS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000
Revenues.......................................... $10,083 $10,772 $ 9,158 $ 9,998
Cost of revenues.................................. 5,550 5,810 5,016 6,455
Loss from operations.............................. (3,992) (3,576) (5,586) (6,690)
Net loss.......................................... (3,974) (3,335) (5,181) (6,297)
Basic and diluted earnings per share.............. (0.23) (0.19) (0.30) (0.36)
Shares used to compute net loss per share......... 16,970 17,244 17,318 17,337
Non-recurring charge:
Included in cost of revenues related to inventory
valuation....................................... $ -- $ -- $ -- $ 850
1999
Revenues.......................................... $ 8,380 $10,624 $13,650 $13,046
Cost of revenues.................................. 4,726 5,537 7,061 11,527
Loss from operations.............................. (3,464) (2,153) (1,361) (7,976)
Net loss.......................................... (3,238) (2,018) (1,188) (7,884)
Basic and diluted earnings per share.............. (0.20) (0.12) (0.07) (0.47)
Shares used to compute net loss per share......... 16,047 16,235 16,660 16,792
Non-recurring charges:
Included in cost of revenues related to inventory
valuation and product returns................... $ -- $ -- $ -- $ 5,105
Included in selling, general and administrative
expenses related to bad debt reserves for
certain international resellers................. $ -- $ -- $ -- $ 1,225
F-22