UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____ .
Commission File Number: 000-23305
FIRST VIRTUAL COMMUNICATIONS, INC.
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(Exact name of registrant in its Charter)
Delaware 77-0357037
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
303 Twin Dolphin Drive, Sixth Floor
Redwood City, CA 94065
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(Address of principal executive offices)
(650) 801-6500
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(Registrant's telephone number, including area code)
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 [ ] No [X]
Indicate by check mark whether Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 25, 2005, the Company had outstanding 16,613,486 shares of
common stock.
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First Virtual Communications, Inc.
Form 10-QSB
Index
Page
EXPLANATORY NOTE ................................................ 1
PART 1. FINANCIAL INFORMATION.......................................... F-1
Item 1. Financial Statements (unaudited)................................F-1
Condensed Consolidated Balance Sheets at September 30,
2004 and December 31, 2003..................................... F-1
Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 2004 and 2003.... F-2
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2004 and 2003.............. F-3
Notes to Unaudited Condensed Consolidated Financial
Statements..................................................... F-4
Item 2 Management's Discussion and Analysis or Plan of Operations....... 2
Item 3. Controls and Procedures......................................... 18
PART II. OTHER INFORMATION............................................... 18
Item 1. Legal Proceedings............................................... 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 19
Item 3. Defaults upon Senior Securities................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............. 19
Item 5. Other Information............................................... 19
Item 6. Exhibits........................................................ 20
EXPLANATORY NOTE
We are filing this Form 10-QSB for the quarter ended September 30, 2004
simultaneously with our filing of our Forms 10-QSB for the quarters ended March
31 and June 30, 2004.
As previously noted in our Current Reports on Form 8-K as filed on November
19, 2004, in April 2004, the audit committee of our board of directors initiated
a special investigation as a result of the identification by management of
several irregular sales transactions, most of which had occurred in our Asia
operations. The audit committee retained a special independent legal counsel and
though them, independent forensic accountants, to review these transactions. As
a result of the pendency of this investigation, we were unable to complete our
quarterly financial statements for the quarters ended March 31, June 30, and
September 30, 2004, and thus we were unable to release our results and timely
file with the SEC this quarterly report on Form 10-QSB, or the quarterly reports
on Forms 10-QSB for the for the quarters ended March 31 and June 30, 2004.
The special investigation is now complete, and the audit committee
determined that it was necessary to restate our financial results for the years
ended December 31, 2001, 2002, and 2003. We are also now able to file our
quarterly reports on Form 10-QSB for each of the quarters ended March 31, June
30 and September 30, 2004. Due to the timing of our filing of these quarterly
reports, we are including in each of these quarterly reports material
information with regard to our financial condition and our operations subsequent
to the periods covered by the respective quarterly reports.
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
First Virtual Communications, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
September 30, December 31,
2004 2003
--------------- --------------
ASSETS (As Restated)
Current assets:
Cash and cash equivalents $ 2,427 $ 11,562
Short-term investments 90 597
Accounts receivable, net 2,149 2,266
Prepaid and other current assets 1,328 608
--------------- --------------
Total current assets 5,994 15,033
Property and equipment, net 926 974
Other assets 697 751
Intangible assets, net 2,784 3,233
--------------- --------------
$ 10,401 $ 19,991
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,022 $ 900
Current portion of long-term debt 2,500 1,000
Accrued liabilities 5,397 4,268
Deferred revenue 3,398 4,066
--------------- --------------
Total current liabilities 12,317 10,234
Long-term debt, net of current portion -- 1,500
Stockholders' equity:
Convertible Preferred Stock, $.001 par value;
5,000,000 shares authorized; 27,437 shares
issued and outstanding, respectively -- --
Common stock, $.001 par value;
100,000,000 shares authorized;
16,613,486 and 14,523,185 shares
issued and outstanding, respectively 49 47
Additional paid-in capital 133,983 130,280
Accumulated other comprehensive loss (339) (263)
Accumulated deficit (135,609) (121,807)
--------------- --------------
Total stockholders' equity (1,916) 8,257
=============== ==============
$ 10,401 $ 19,991
=============== ==============
See accompanying notes to condensed consolidated financial statements.
F-1
First Virtual Communications, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three months ended Nine months ended
-------------------------------- -------------------------------
September 30, September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
--------------- --------------- -------------- --------------
(As Restated) (As Restated)
Revenue
Software $ 994 $ 3,633 $ 5,791 $ 9,991
Product -- 414 193 1,698
Support service 1,469 1,647 4,484 4,873
--------------- --------------- -------------- --------------
Total revenue 2,463 5,694 10,468 16,562
Cost of revenue
Software 28 238 178 681
Product -- 315 -- 563
Support service 444 529 1,553 1,491
--------------- --------------- -------------- --------------
Total cost of revenue 472 1,082 1,731 2,735
--------------- --------------- -------------- --------------
Gross profit 1,991 4,612 8,737 13,827
--------------- --------------- -------------- --------------
Operating expense:
Research and development 1,557 2,017 5,376 6,899
Sales and marketing 2,294 2,863 8,042 8,234
General and administrative 1,507 1,469 4,524 4,834
Special investigation 1,583 -- 2,392 838
Restructuring and other 274 -- 2,400 --
--------------- --------------- -------------- --------------
Total operating expense 7,215 6,350 22,734 20,805
--------------- --------------- -------------- --------------
Operating loss (5,224) (1,738) (13,997) (6,979)
Other income (expense), net 248 (52) 195 (59)
--------------- --------------- -------------- --------------
Net loss $ (4,976) $ (1,790) $ (13,802) $ (7,038)
=============== =============== ============== ==============
Basic and diluted net loss per share $ (0.31) $ (0.22) $ (0.87) $ (0.87)
=============== =============== ============== ==============
Shares used in computing basic and
diluted net loss per share 16,106 8,136 15,783 8,112
=============== =============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
F-2
First Virtual Communications, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended September 30,
-------------------------------
2004 2003
-------------- --------------
(As Restated)
Cash flows from operating activities:
Net loss $ (13,802) $ (7,038)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 901 1,543
Provision for returns and doubtful accounts (23) 32
Provision for inventory reserve -- 24
Loss on disposal of fixed assets -- 351
Loss on closure of FVC India -- 9
Other (76) (95)
Changes in operating assets and liabilities
Accounts receivable 140 1,208
Inventory -- 589
Prepaid expenses and other assets (538) (343)
Accounts payable 122 212
Accrued liabilities 1,129 (502)
Deferred revenue (668) (136)
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Net cash used in operating activities (12,815) (4,146)
-------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (404) (399)
Acquisition of businesses -- (132)
Sale of short-term investments 507 --
-------------- --------------
Net cash provided by (used in) investing activities 103 (531)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 3,705 62
Payment related to issuance of common stock (128) --
Proceeds from drawdown of term loan 917 3,000
Payment on long term debt (917) (250)
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Net cash provided by financing activities 3,577 2,812
-------------- --------------
Net decrease in cash and cash equivalents (9,135) (1,865)
Cash and cash equivalents at beginning of period 11,562 8,352
-------------- --------------
Cash and cash equivalents at end of period $ 2,427 $ 6,487
============== ==============
See accompanying notes to condensed consolidated financial statements.
F-3
First Virtual Communications, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2004
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Virtual Communications, Inc. (the "Company") has prepared the
accompanying financial data for the quarterly period ended September 30, 2004
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations.
In the opinion of management, the accompanying condensed consolidated
financial statements contain all normal and recurring adjustments necessary to
present fairly the Company's consolidated financial position as of September 30,
2004, consolidated results of operations for the three and nine months ended
September 30, 2004 and 2003, and consolidated cash flow activities for the nine
months ended September 30, 2004 and 2003.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the condensed consolidated financial statements and accompanying notes. Actual
results may differ from those estimates.
The results of operations for the three and nine months ended September 30,
2004 are not necessarily indicative of the results to be expected for the full
year. The information included in this Quarterly Report on Form 10-QSB should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements
and notes thereto included in the Company's 2003 Annual Report on Form 10-K with
special attention as to the restated financial results for 2003, 2002 and 2001
as reported in Form 8-K recently filed with the SEC.
The unaudited condensed consolidated balance sheet at December 31, 2003
that has been derived from the audited consolidated financial statements at that
date does not include all of the information and footnotes required by generally
accepted accounting principles in the United States of America for complete
financial statements.
On June 26, 2003 the Company's Board of Directors approved a 1-for-5
reverse split of the Company's common stock, effective at 5:00 pm EDT on June
27, 2003, with trading commencing on a post-reverse stock split basis on market
open on Monday June 30, 2003. The reverse split was previously approved by the
stockholders at the Company's June 13, 2003 Annual Stockholders Meeting. As of
5:00 pm EDT on June 27, 2003, each five shares of the Company's outstanding
common stock were automatically combined and converted into one share of common
stock. In addition, the Company made adjustments to its outstanding options and
warrants to reflect the reverse stock split. All outstanding common stock and
outstanding option and warrant numbers reflected in this Quarterly Report,
reflect the 1-for-5 reverse stock split.
Bankruptcy
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On January 20, 2005, First Virtual Communications, Inc. filed Chapter 11
reorganization cases for itself and its domestic subsidiary, CUseeMe Networks,
Inc. (collectively, the "Company"), in the United States Bankruptcy Court for
the Northern District of California, San Francisco Division. The Company will
continue to operate its business as "debtors in possession" under the
jurisdiction of the Bankruptcy Court in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The
Company expects to utilize the bankruptcy process to implement a restructuring
transaction that included a sale of certain assets. In addition, the Company
announced an agreement in principle with its bank lender to continue to have
access to working capital during this process. At the present time, the Company
does not anticipate that any distributions will be available to holders of the
Company's equity securities. Accordingly, the Company urges that the appropriate
caution be exercised with respect to existing and future investments in any of
the Company's securities as the value and prospects are highly speculative.
F-4
On August 25, 2005, the Company and the Official Committee of Unsecured
Creditors (the "Committee") jointly filed a plan of reorganization (the "Plan")
and a related disclosure statement with the United Stated Bankruptcy Court for
the Northern District of California, San Francisco Division (the "Bankruptcy
Court"). Copies of the Plan and the Disclosure Statement are attached hereto as
Exhibits 2.1 and 2.2, respectively. The deadline for filing with the Bankruptcy
Court any objection to approval of the Disclosure Statement was September 19,
2005.
On November 14, 2005, the Bankruptcy Court approved the Plan of
Reorganization, which will become effective in December 2005.
Disposition of Assets
- ---------------------
On March 15, 2005, the Company and its wholly owned subsidiary, CUseeMe
Networks, Inc. ("CUseeMe"), completed a sale of substantially all their assets
for $7.15 million in cash plus certain additional consideration under an asset
purchase agreement dated as of February 28, 2005 with RADvision Ltd.
("RADvision"). On March 14, 2005, the United States Bankruptcy Court for the
Northern District of California (the "Bankruptcy Court") had entered an order
("Sale Order") approving the asset purchase agreement, which was the result of a
competitive bidding process conducted by the Company and CUseeMe under the
supervision of the Bankruptcy Court.
Under the sale transaction, RADvision acquired substantially all the
operating assets, intellectual property and customer contracts of the Company
and CUseeMe for $7.15 million in cash and assumption of certain liabilities in
exchange for the purchase of the assets, free and clear of any liens, claims,
and other interests. In accordance with the Sale Order, the Company and CUseeMe
used a portion of the sale proceeds to repay all their outstanding secured
indebtedness and to pay a $150,000 break-up fee under a prior asset purchase
agreement dated as of February 12, 2005 between the Company, CUseeMe, and an
investment partnership led by Millennium Technology Value Partners, L.P., a New
York-based private equity fund, Silicon Valley Bank and Morrison & Foerster LLP.
Under the sale transaction, RADvision committed for any employee of the Company
that RADvision hires, that it would provide the accrued vacation for such person
as part of the compensation package for such person. The Sale Order also
provides for certain employee protections and other benefits, subject to the
consent of the Official Committee of Unsecured Creditors, and certain other
payments associated with the sale transaction. The Company and CUseeMe will use
the remaining sale proceeds to prosecute and conclude their bankruptcy cases.
Appointment of Chief Restructuring Officer
- ------------------------------------------
On June 8, 2005, the Bankruptcy Court entered an order, upon an amended
joint application filed by the Debtors and the Official Committee of Unsecured
Creditors, authorizing and approving the employment of Gregory Sterling as Chief
Restructuring Officer of the Debtors and designating Mr. Sterling as the
individual responsible for the duties of the Debtors as debtors in possession.
The Company previously reported the terms and conditions of Mr. Sterling's
employment in its Form 8-K filed on May 24, 2005.
F-5
Liquidity
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The Company has operated at a loss since its inception and has financed its
operations primarily through private and public placements of equity securities,
revenue from the sale of its products and services and through credit
facilities. The Company expects continued operating losses for the remainder of
2004. Cash and cash equivalents totaled $2.4 million at September 30, 2004. Of
the Company's cash and cash equivalents at September 30, 2004, the entire
balance would be required to support its outstanding loan obligation of $2.5
million to Silicon Valley Bank. The Company has kept Silicon Valley Bank
apprised of the status of its financial condition and financing initiative and
has continued to use its cash and cash equivalents to fund its operations
through the fourth quarter of 2004. At December 31, 2003, the cash resources
available for operations totaled $9.1 million.
During the three months ended September 30, 2004, the Company used an
average of approximately $3.1 million of cash to fund its operating activities.
In August 2004, the Company announced an additional restructuring initiative,
which was completed during the fourth quarter of 2004 and it reduced personnel
and other operating costs worldwide. The Company incurred approximately $400,000
in non-recurring charges in the third and fourth quarters of 2004 related to its
implementation.
In April 2004, the Company received $3.5 million in proceeds from the
exercise of 2.0 million warrants held by investors in the November 2003
financing. Also in April, the Company announced that the audit committee of its
board of directors had initiated a special investigation. The investigation was
completed in November 2004. In connection with the special investigation, the
Company has incurred approximately $3.5 million in legal and accounting fees
through its completion in November 2004, of which $373,000 was paid during the
second quarter and $1.1 million was paid during the third quarter. Repayment of
the outstanding balance is secured by substantially all of the assets of the
Company, and this security interest is junior and subordinated in most respects
to the security interest held by Silicon Valley Bank under the Company's credit
facility with them. Additionally, the Company's directors' and officers'
liability insurance was renewed in April 2004 and the related premium increased
approximately $650,000 above the prior year premium directly resulting from the
special investigation. The annual premium was due in May 2004 and accordingly,
the Company paid $1.2 million in related insurance premiums during the second
quarter.
Additionally, as a result of the special investigation, the Company's
customers have questioned its financial viability, resulting, it believes, in
reduced product sales. In addition, as a result of the restatement of its
financial results, the Company's customers may continue to question its
financial viability and to also question its integrity, which could materially
adversely affect its business, financial condition and results of operations.
The Company cannot determine the extent to which its revenue may be adversely
impacted by the results of the special investigation and the restatement of its
financial results.
F-6
Stock-based compensation
- ------------------------
As of September 30, 2004, the Company maintained stock option plans under
which the Company may could grant incentive stock options and non-qualified
stock options to employees, consultants and non-employee directors. The Company
has chosen to account for those plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations.
The following table illustrates the net loss and net loss per share during
the three and nine months ended September 30, 2004 and 2003 if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30 September 30,
---------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- -------------- -------------
(As Restated) (As Restated)
Net Loss $ (4,976) $ (1,790) $ (13,802) $ (7,038)
------------- ------------- -------------- -------------
Add: Stock-based employee compensation
expense included in reported net income -- -- -- 8
Deduct: Total stock based employee compensation
expense determined pursuant to SFAS 123 (280) (286) (547) (916)
------------- ------------- -------------- -------------
Pro forma net loss $ (5,256) $ (2,076) $ (14,349) $ (7,946)
------------- ------------- -------------- -------------
As reported net loss per share (basic and diluted) $ (0.31) $ (0.22) $ (0.88) $ (0.87)
------------- ------------- -------------- -------------
Pro forma net loss per share (basic and diluted) $ (3.02) $ (3.92) $ (1.09) $ (1.02)
------------- ------------- -------------- -------------
In December 2002, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS 123" (SFAS 148).
This statement amends SFAS 123 to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS 123 to require disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has adopted the annual disclosure provisions of SFAS 148 and adopted the interim
disclosure provisions for financial reports beginning with the quarter ended
December 31, 2002.
The weighted-average estimated grant-date fair value of options granted
under the Company's various stock option plans was $0.92 and $1.85,
respectively, during the three and nine months ended September 30, 2004 and
$0.88 and $0.82, respectively, for the three and nine months ended September 30,
2003. The fair value of each stock option on the date of grant was determined
using the Black-Scholes model with the following assumptions:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------
Risk-free interest rate 3.5% 2.5% 3.0-3.7% 2.5-3.0%
Volatility 235% 113% 138-235% 113%
Option term (in years) 5 5 5 5
Dividend yield 0.0% 0.0% 0.0% 0.0%
F-7
On July 25, 2003, the Company offered a voluntary employee stock option
exchange program to its employees and members of its board of directors. Under
the exchange offer, eligible employees and members of the board of directors had
the opportunity to exchange their outstanding stock options for new options to
be granted under the Company's 1999 Equity Incentive Plan and 1997 Equity
Incentive Plan, pursuant to the terms of the replacement option agreements
between the Company and its employees and members of the board of directors.
Under the exchange offer, all outstanding options were eligible options. The
replacement options represented an option to purchase one share of the Company's
common stock for each option to purchase three shares of the Company's common
stock exchanged; provided, however, that under the exchange offer, options
granted in the six-month period immediately preceding the offer date that were
cancelled due to the participation in the offer were replaced by the same number
of replacement options. The replacement options were granted on the replacement
grant date, February 23, 2004 and had an exercise price per share of $1.83, the
fair market value of the Company's common stock at the close of trading on the
trading day preceding the replacement grant date. The replacement options vest
in equivalent monthly increments over a 24 month period beginning on February
23, 2004. Replacement options granted to employees located outside the United
States were subject to different vesting and other material terms than those
described above.
On May 18, 2004, the Company held its 2004 Annual Meeting of Stockholders,
during which the Company's stockholders approved the Company's 1997 Equity
Incentive Plan, as amended, and the Company's 1997 Non-Employee Directors Stock
Option Plan, as amended.
The amendments to the 1997 Equity Incentive Plan (i) increased the
aggregate number of shares of common stock authorized for issuance under the
plan by 1,900,000 shares, and (ii) increased the maximum number of options that
may be granted under the plan to any person in any calendar year from 100,000 to
1,000,000 for newly hired employees, and from 100,000 to 500,000 for grants to
all other persons.
The amendments to the 1997 Non-Employee Directors Stock Option Plan
increased (i) the aggregate number of shares of common stock authorized for
issuance under the plan by 100,000 shares, (ii) amended the terms pursuant to
which options granted under the plan become exercisable, (iii) shortened the
post-termination exercise period for grants made under the plan from 24 months
to nine months, (iv) increased the initial option grants for directors from
8,000 shares to 16,000 shares, (v) approved a one-time grant of an option to
purchase 8,000 shares for each current non-employee director of the Company,
(vi) approved a grant of an option to purchase 5,000 shares of common stock to
the Chairman of each of the Audit and Compensation Committees of the Board and
to the Chairman of the Board and a grant of 3,000 shares of common stock to the
Chairman of the Nominating and Corporate Governance Committee of the Board, upon
the appointment of a non-employee director as Chairman of the Board and each of
these committees and on each anniversary of such appointment, and (vii) deleted
the current provisions for annual automatic grants to members of the Audit,
Compensation and Nominating Committees of the Board.
Due to the Company's bankruptcy filing in January 2005 and subsequent
November 2005 reorganization approval by the Court, all stock options have
effectively been canceled.
F-8
Concentrations of credit risk
- -----------------------------
Revenue during the three and nine months ended September 30, 2004 and 2003
and accounts receivable as of September 30, 2004 and December 31, 2003 of
customers comprising more than 10% of revenue or receivable are summarized as
follows:
--------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
Revenue:
Company A - 28% 14% 18%
Company B - - 10% -
Company C - - - -
September 30, December 31,
2004 2003
-------------------- --------------------
Accounts receivable:
Company A 56% -
Company C - 12%
Company D - -
Company E - 10%
Recent Issued Accounting Pronouncements
- ---------------------------------------
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
Amendment of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
In Chapter 4 of ARB 43, paragraph five previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and re-handling costs may be so abnormal as to require treatment as
current period charges..." SFAS No. 151 requires that such items be recognized
as current-period charges, regardless of whether they meet the criterion of "so
abnormal" (an undefined term). This pronouncement also requires that allocation
of fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred in years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment,"
which requires that the compensation costs relating to share-based payment
transactions (including the cost of all employee stock options) be recognized in
the financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123-R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No. 123-R replaces SFAS No. 123, and
supersedes APB Opinion No. 25. Small Business Issuers are required to apply SFAS
No. 123-R in the first interim reporting period that begins after December 15,
2005. Thus, the Company's consolidated financial statements will reflect an
expense for (a) all share-based compensation arrangements granted after February
28, 2006 and for any such arrangements that are modified, cancelled, or
repurchased after that date, and (b) the portion of previous share-based awards
for which the requisite service has not been rendered as of that date, based on
the grant-date estimated fair value.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67." The
American Institute of Certified Public Accountants (the "AICPA") concurrently
issued Statement of Position ("SOP") 04-2 entitled "Accounting for Real Estate
Time-Sharing Transactions." SFAS No. 152 amends SFAS No. 66 to reference the
accounting and reporting guidance in SOP 04-2. As amended, SFAS No. 67 states
that its guidance for (a) incidental operations and (b) costs incurred to sell
real estate projects does not apply to real estate time-sharing transactions;
these matters will now be governed by SOP 04-2. SFAS No. 152 and SOP 04-2 are
effective for years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets, and Amendment of APB No. 29, "Accounting for Nonmonetary Transactions."
The amendments made by SFAS No. 153 are based on the principle that exchanges of
nonmonetary assets should be measured using the estimated fair value of the
assets exchanged. SFAS No. 153 eliminates the narrow exception for nonmonetary
exchanges of similar productive assets, and replaces it with a broader exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has "commercial substance" if the future cash flows of the
entity are expected to change significantly as a result of the transaction. This
pronouncement is effective for nonmonetary exchanges in fiscal periods beginning
after June 15, 2005.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20 and FASB Statement No. 3. This
pronouncement applies to all voluntary changes in accounting principle, and
revises the requirements for accounting for and reporting a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle, unless it is
impracticable to do so. This pronouncement also requires that a change in the
method of depreciation, amortization, or depletion for long-lived, non-financial
assets be accounted for as a change in accounting estimate that is effected by a
change in accounting principle. SFAS No. 154 retains many provisions of APB
Opinion 20 without change, including those related to reporting a change in
accounting estimate, a change in the reporting entity, and correction of an
error. The pronouncement also carries forward the provisions of SFAS No. 3 which
govern reporting accounting changes in interim financial statements. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Statement does not change the
transition provisions of any existing accounting pronouncements, including those
that are in a transition phase as of the effective date of SFAS No. 154.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed
by management to have a material impact on the Company's present or future
consolidated financial statements.
NOTE 2 - RESTRUCTURING AND SEVERANCE EXPENSES
The Company recently completed the restructuring of its business announced
in February 2004, which reduced its workforce by approximately 20% to 138
employees, primarily in its United States operations. The reduction in force was
substantially completed in March 2004 and the Company incurred restructuring
charges totaling $700,000 during the three months ended March 31, 2004.
Additionally, the Company incurred approximately $100,000 in additional
restructuring charges during the second quarter to bring the initiative to
completion.
F-9
To further reduce the Company's expenses, on August 11, 2004, the Company
implemented an additional restructuring of its business. In this restructuring,
the Company closed certain offices in Asia and Europe, reduced personnel by
approximately 20% to 100 employees, and reduced professional service costs
worldwide. The Company incurred non-recurring charges of approximately $400,000
as a result of this restructuring that has been recorded in the third and fourth
quarters of 2004. During the three months ended September 30, 2004, the Company
recorded charges of approximately $275,000 and incurred an additional $125,000
during the three months ended December 31, 2004 to bring the initiative to
completion.
There were no restructuring charges recorded during the nine months ended
September 30, 2003.
NOTE 3 - SHORT TERM INVESTMENTS
As of September 30, 2004, all of the Company's short-term investments have
been classified as "available-for-sale securities" and have contractual
maturities of less than one year. Available-for-sale securities were comprised
as follows (in thousands):
September 30, December 31,
------------ ------------
2004 2003
------------ ------------
Corporate notes $ -- $ 508
Equity securities 10 14
Debt securities 80 75
------------ ------------
Total $ 90 $ 597
============ ============
Available-for-sale securities are comprised as follows at September 30,
2004 and December 31, 2003 (in thousands):
Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
September 30, 2004
Corporate notes $ -- $ -- $ -- $ --
Equity securities 164 7 (161) 10
Debt securities 80 -- -- 80
------------ ------------ ------------ ------------
Total $ 244 $ 7 $ (161) $ 90
============ ============ ============ ============
December 31, 2003
Corporate notes $ 508 $ -- $ -- $ 508
Equity securities 164 4 (154) 14
Debt securities 75 -- -- 75
------------ ------------ ------------ ------------
Total $ 747 $ 4 $ (154) $ 597
============ ============ ============ ============
NOTE 4 - INVENTORY
In May 2003 the Company notified its customers that it will no longer offer
legacy ATM hardware products. All remaining hardware inventory has been written
off and the Company intends to dispose of that hardware by the end of 2004.
There was no inventory recorded as of September 30, 2004 and December 31, 2003.
F-10
NOTE 5 - NET LOSS PER SHARE
The Company incurred losses for the three and nine months ended September
30, 2004 and 2003, and as a result all potential common share equivalents were
anti-dilutive and were excluded from the diluted net loss per share calculations
for such periods. The following table summarizes securities outstanding that
were not included in the calculations of diluted net loss per share for the
three and nine months ended September 30, 2004 and 2003, since their inclusion
would be anti-dilutive (in thousands):
At September 30,
-----------------------------
2004 2003
------------- -------------
Common stock options 2,401 2,444
Common stock warrants 3,310 1,486
Convertible preferred stock 1,449 879
The common stock warrants are exercisable at prices of between $1.35 and
$32.65 per share and expire at various times from June 2005 through May 2009.
The stock options outstanding at September 30, 2004 had a weighted average
exercise price per share of $3.76 and expire at various times between May 2006
and September 2014.
NOTE 6 - WARRANTIES
The Company sold software products and related services. The Company
provided for future warranty costs upon product delivery or from the purchase
date. The specific terms and conditions of those warranties vary depending upon
the product sold, the country in which the customers are located and agreements
the Company had with various customers.
Software products generally carry a 90-day warranty on the software media
from the date of delivery or purchase. Otherwise, software products were sold on
an as-is basis. Longer warranty periods may be provided on a
contract-by-contract basis and were limited. Our liability under these
warranties was to replace defective media and in some cases to provide a
corrected copy of any portion of the software found not to be in substantial
compliance with the published specifications in the product documentation. In
such cases, if the Company was unable to make the products conform to published
specifications, the Company could be obligated to refund the amount actually
paid by customers.
Factors that affected our warranty liability included the number of units
sold, historical experience and management's judgment regarding anticipated
rates of warranty claims and cost per claim. We assessed the adequacy of our
recorded warranty liabilities every quarter and made adjustments to the
liability if necessary. The Company went through the transition from being
primarily a hardware-based company to a software-based company, subsequent to
the acquisition of CUseeMe Networks on June 19, 2001, and discontinued offering
hardware to the marketplace other than hardware currently in fully reserved
inventory.
F-11
Changes in our warranty liability, which is included as a component of
"accrued liabilities," during the nine months ended September 30, 2004, were as
follows (in thousands):
Beginning balance as of December 31, 2003.............. $ 123
Reduction to warranty reserve.......................... (123)
---------
Ending balance as of September 30, 2004................ $ --
=========
NOTE 7 - COMPREHENSIVE LOSS
Comprehensive loss is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments and
unrealized gains and losses on marketable securities.
Components of accumulated other comprehensive loss consists of the
following (in thousands):
September 30, December 31,
2004 2003
-------------- -------------
Foreign currency translation.............. $ (185) $ (113)
Unrealized loss on marketable securities,
net of income taxes..................... (154) (150)
-------------- -------------
Accumulated other comprehensive loss, net $ (339) $ (263)
-------------- -------------
Comprehensive losses for the three and nine months ended September 30, 2004
and 2003 were as follows (in thousands):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------- ------------
Net Loss, as reported $ (4,976) $ (1,790) $ (13,802) $ (7,038)
------------ ------------ ------------- ------------
Cumulative translation adjustment -- -- (72) (46)
Unrealized gain (loss) on marketable
securities, net of income taxes (3) -- (5) (7)
------------ ------------ ------------- ------------
Comprehensive loss $ (4,979) $ (1,790) $ (13,879) $ (7,091)
============ ============ ============= ============
There were no tax effects allocated to any components of comprehensive loss
during the nine months ended September 30, 2004 and 2003.
NOTE 8 - SUBSEQUENT EVENTS
The subsequent events listed below must be read in context with the
Company's Chapter 11 filing and reorganization plan discussed in Note 1.
Special investigation of the Audit Committee
- --------------------------------------------
In April 2004, the Company announced that the audit committee of its board
of directors had initiated a special investigation as a result of the
identification by management of several irregular sales transactions, most of
which had occurred in its Asia operations. The audit committee retained a
special independent legal counsel and through them, independent forensic
accountants, to review these transactions.
F-12
The special investigation is now complete. The audit committee determined
that there were sales transactions, mostly in its Asia operations, that included
irregular, undisclosed terms and that this resulted in accounting errors. The
audit committee has determined that these errors, standing alone, would not have
required a restatement of previously issued financial statements due to their
immateriality for reporting purposes. In addition, the audit committee also
identified certain sales transactions unrelated to its Asia operations that were
not appropriately accounted for by the Company, including primarily transactions
with one U.S. customer where revenue was recognized prematurely for certain
sales transactions. The audit committee determined on November 15, 2004 that, as
a result of the errors involving this one U.S. customer, it was necessary to
restate the Company's financial results for the years ended December 31, 2001,
2002 and 2003. Furthermore, the audit committee has determined that while the
Company will not be issuing full restated financial results for the year ended
December 31, 2000, there are revisions to those financial statements which will
impact the restatement for the year ended December 31, 2001 and related interim
periods.
The audit committee determined that revenues related to contracts with one
of its U.S. customers were prematurely recognized in a quarter preceding the
quarter in which the transactions should have been recognized under applicable
revenue recognition rules, American Institute of Certified Public Accountants'
Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition" and
Securities and Exchange Commission Staff Accounting Bulletin 104 (SAB 104),
"Revenue Recognition." Under SOP 97-2 and SAB 104, a requirement for revenue
recognition is the occurrence of acceptance or expiration of the acceptance
period when acceptance criteria are specified. The audit committee's
investigation revealed that the acceptance requirement was not met in the
quarters in which revenue was recognized for certain transactions relating to
purchases of products by the U.S. customer. The audit committee found no
evidence to suggest that the revenues and cash flows associated with the U.S.
customer's contracts were not genuine. The U.S. customer's contracts were valid,
products were delivered, and the Company received cash. The Company performed an
analysis of the extent and quantification of the prematurely recognized revenue,
which forms the basis of the need to restate its financial results for the 2001,
2002 and 2003 fiscal years. Included in the analysis are adjustments made as a
result of the irregularities and errors involving the Asia and other operations
and additional errors noted during the course of the investigation. While these
additional errors and the errors involving the Asia and other operations were
not individually material for reporting purposes and would not have required a
restatement of previously issued financial statements, they are being corrected
as part of the restatement resulting from the adjustments related to the
acceptance provisions with this one U.S. customer.
For purposes of the restatement, the revenue improperly recognized in a
particular quarter is being deferred and recognized in the quarter in which
acceptance requirements were satisfied. For example, if a product sale having a
value of $100 was prematurely recognized in one quarter, the $100 will be
deferred from the revenue in that quarter and then recognized in a later quarter
in which customer acceptance requirements were satisfied. In addition to revenue
shifting between periods, there is a resultant impact on cost of goods sold and
operating expenses. The effects on income taxes, net loss, earnings/loss per
share, total assets, total liabilities, working capital and stockholders' equity
is also being taken into account in the restatement.
Management Changes
- ------------------
On November 18, 2004, the Company announced that effective November 14,
2004, Truman Cole resigned as the Company's vice president and chief financial
officer. Mr. Cole was the Company's principal financial officer and its
principal accounting officer. It also announced that effective November 13,
2004, Andrew Morrison resigned as the Company's corporate controller. While
having resigned, Messrs. Cole and Morrison were retained to assist the Company
as consultants through a transition period. The Company named Gregory Sterling
as its Chief Restructuring Officer as of June 8, 2005.
F-13
Warrant exercises
- -----------------
On May 7, 2004, the Company announced the exercise of warrants by certain
institutional investors and/or their affiliates to purchase an aggregate of 2.0
million shares of the Company's common stock, resulting in the receipt by the
Company of aggregate proceeds of $3.5 million, and the exercise of warrants to
purchase 35,560 shares of its common stock by Silicon Valley Bank on a net
exercise basis, resulting in no proceeds to the Company.
Suspension of registration statements
- -------------------------------------
The Company is party to several registration rights agreements with certain
of its investors which require that the shares sold to these investors be
resalable pursuant to registration statements on file with the SEC. As a result
of the Company's inability to file timely periodic reports on May 17, 2004, it
was forced to suspend the availability of the S-3 registration statements which
the Company had on file with the SEC, as well as the availability of its
registration statements covering the re-sale of stock issued under its equity
incentive plans. The Company continues to have an obligation (subject to certain
exceptions, including suspension of use under specified circumstances and for a
limited period of time) to keep these registration statements effective with
respect to any shares covered thereby until such shares may be sold without
volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act
of 1933, as amended. The Company may be subject to litigation from these
investors for any loss in value of their stock while the registration statements
are suspended and their shares are restricted from sale. Certain of these
agreements also provide for liquidated damages of approximately $85,000 per
month in the event that the shares in question are restricted from sale. As of
December 31, 2004, the Company had accrued $697,000 to cover such liquidated
damages.
On May 7, 2004, the Company notified participants under its employee and
consultant equity incentive plans (the "Plans") of the suspension of the
availability of its Form S-8 registration statements and the use of any
prospectus in connection therewith covering securities issued under the Plans.
During the suspension period, participants have not been able to exercise
options granted or purchase shares under the Plans, or purchase shares or have
payroll deductions made under the Company's 1997 Employee Stock Purchase Plan.
The Nasdaq SmallCap Market
- --------------------------
On August 25, 2004, Nasdaq notified the Company that its securities had
been de-listed for failure to file periodic reports with the SEC.
F-14
Amendment to Silicon Valley Bank Credit Facility and Related Forbearance
- ------------------------------------------------------------------------
The Company became party to a $3 million secured credit facility with
Silicon Valley Bank pursuant to a Loan and Security Agreement dated as of April
3, 2003, as amended by an Amendment to Loan Documents dated as of May 25, 2004
(as amended, the "Loan Agreement"). Upon the effectiveness of this amendment
during the second quarter, it borrowed from Silicon Valley Bank an additional
amount of approximately $917,000, bringing its outstanding principal balance
under the loan to $3.0 million. As a result of the amendment the maturity date
was extended to May 24, 2005, the interest rate was increased to the bank's
prime rate plus 2.5% with a floor at 6.5%, and the minimum cash deposit
requirement of $2.9 million was removed and replaced with a minimum quarterly
net sales revenue covenant and a minimum monthly liquidity covenant. The Company
is also required to keep its primary banking relationship at Silicon Valley Bank
and to keep all but $750,000 of its unrestricted cash and cash equivalents on
deposit with Silicon Valley Bank. Silicon Valley Bank has a security interest in
the Company's deposits as well as in most of its material assets.
As of March 31, 2004 and October 31, 2004, $3.0 million and $2.5 million of
its secured obligations were subject to this credit facility with the bank,
respectively. In addition, the Loan Agreement contains financial and
non-financial covenants, including a monthly liquidity covenant which the
Company had violated as of August 31, 2004.
On September 13, 2004, the Company entered into a Temporary Forbearance
Agreement with Silicon Valley Bank pursuant to which the bank agreed to forbear
from exercising (but not to waive) its rights and remedies against the Company
as a result of its default under the Loan Agreement until September 21, 2004.
On September 29, 2004, the Company entered into an Extension Agreement with
Silicon Valley Bank, effective as of September 13, 2004, in which the date of
expiration of the Temporary Forbearance Agreement was extended through October
4, 2004. Since that time, the Company has continued to have discussions with the
bank regarding its financial situation.
On November 16, 2004, Silicon Valley Bank signed an Amendment and Extension
Agreement with the Company, in which the date of expiration of the Temporary
Forbearance Agreement was extended through November 15, 2004, the maximum amount
of the credit facility pursuant to the Loan Agreement was reduced from $3.0
million to $2.5 million, and the Company agreed that the Loan Agreement would be
amended to require it to direct all of its customers to remit payments to a cash
collateral account controlled by the bank. The Company also agreed to provide
additional weekly financial reporting to the bank.
In consideration of this forbearance, the Company agreed to pay a $100,000
fee to the bank on the earlier to occur of (i) the receipt by it of proceeds for
the issuance of equity securities, (ii) the acceleration of the credit facility,
or (iii) the maturity date of the loan. The Company also agreed to pay a success
fee to the bank of the lesser of an additional $100,000 or 1% of its gross
valuation on the earlier to occur of the closing of any change in control or
equivalent transaction or the maturity date of the loan. In addition, the
Company agreed to re-price an existing warrant held by the bank to purchase
7,218 of its shares of common stock at $2.54 per share to a price of $0.01 per
share.
On December 2004, Silicon Valley Bank signed an Amendment and Extension
Agreement with the Company, in which the date of expiration of the Temporary
Forbearance Agreement was extended through December 2004. In consideration of
this forbearance, the Company agreed to pay a $5,000 fee to the bank.
F-15
As a secured creditor, Silicon Valley Bank was subsequently paid in full on
March 15, 2005 with the completion of the Disposition of Assets.
Services, Payment and Security Agreement Relating to Special Investigation
- --------------------------------------------------------------------------
On August 19, 2004, the Company entered into a Services, Payment and
Security Agreement with the independent legal counsel hired by the audit
committee to conduct the special investigation, including the forensic
accountants and data discovery experts retained by the independent counsel to
assist them with the special investigation. Under the terms of the agreement,
and in consideration of the continued work by these service providers on the
special investigation, the Company acknowledged that approximately $1,548,000
was owed to these service providers as of July 31, 2004 for work previously
performed in the special investigation, agreed to pay $450,000 of this balance
upon entering into the agreement, and agreed to pay the remaining balance owed
on December 31, 2004, which was the earlier of two alternative dates specified
by the agreement. The Company did not pay the service providers on that date and
is in default of the agreement. The Company also agreed to grant to the service
providers a security interest upon substantially all of its assets with respect
to the unpaid balance owed, as well as any fees and costs of the service
providers accruing after July 31, 2004 in the course of finishing the special
investigation. The security interest is subordinated in most respects to the
security interest of Silicon Valley Bank under the Company's credit facility,
but will be pari passu among the service providers. The Company and the service
providers also entered into a Subordination Agreement in favor of Silicon Valley
Bank to further describe their respective rights as to the competing security
interests in the Company's assets.
F-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and the Notes thereto included in
Item 1 of this Quarterly Report on Form 10-Q, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
Company's Amendment No. 1 to Annual Report for the fiscal year ended December
31, 2003 on Form 10-K/A as filed with the SEC simultaneously with this Form
10-Q.
In addition to the historical information contained in this Quarterly
Report, this Quarterly Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. These forward looking statements include, without limitation,
statements containing the words "believes," "anticipates," "expects," "intends"
and words of similar import. Such forward-looking statements will have known and
unknown risks, uncertainties and other factors that may cause the Company's
actual results, performance or achievements, 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: any adverse impact arising from the Company's de-listing from The
Nasdaq SmallCap Market, including any adverse impact on the Company's commercial
relationships, the ability of the Company's stockholders to trade its securities
or the value of such securities; the Company's need to raise additional capital
to fund its operating requirements; any adverse impact arising from the delay in
filing required periodic reports, including the Company's inability to meet the
listing requirements of the OTC Bulletin Board or The Nasdaq SmallCap Market;
any impact of the Company's inability to raise additional operating funds on
favorable terms, or at all; the Company's history of operating losses; the
volatility of the Company's stock price; the risk that sales of the Company's
Click to Meet(TM) and Conference Server(TM) products will not increase or that
new versions will not be released on a timely basis; the risk of undetected
defects or surprisingly costly defects to address in the Company's principal
software products; the Company's variability of operating results; market
acceptance of the Company's web conferencing technology; the Company's potential
inability to maintain business relationships with our integrators, distributors
and suppliers; rapid technological changes in the Company's industry;
competition and consolidation in the Web conferencing industry; the importance
of attracting and retaining personnel; any adverse impact on us from the
resignation of our Chief Financial Officer and Corporate Controller; our ability
to hire a new Chief Financial Officer and a new Corporate Controller; risks
relating to the Company's international operations; the Company's long sales
cycle; the concentration of the Company's revenue at the end of each quarterly
accounting period set forth below in this Quarterly Report on Form 10-QSB, the
Company's Annual Report on Form 10-K for the year ended December 31, 2003 and in
the Company's other public filings with the SEC. First Virtual Communications
assumes no obligation to update any forward-looking statements contained herein.
The Company's expectations and the events, conditions and circumstances on which
these forward-looking statements are based, may change.
First Virtual Communications assumes no obligation to update any
forward-looking statements contained herein. The Company's expectations and the
events, conditions and circumstances on which these forward-looking statements
are based, may change.
OVERVIEW
First Virtual Communications, Inc. was incorporated in California in
October 1993 and reincorporated in Delaware in December 1997. First Virtual
Communications, Inc., along with its subsidiaries (collectively referred to
herein as "we", "us," "our," or the "Company"), delivered integrated, software
technologies for rich media web conferencing and collaboration solutions. We
combined our expertise in networking systems, real-time audio and video
technology, and web-based collaboration to provide integrated voice, video,
data, text and streaming media solutions for a wide range of rich media
enterprise applications, including web conferences, broadcasts, video-on-demand,
videoconferences and video calls over converged multi-service networks.
We derived our revenue primarily through sales to distributors, original
equipment manufacturers, or OEMs, value-added resellers, or VARS, federal
government agencies, enterprise customers and telecommunications service
providers.
2
Our internal sales and marketing force qualified and stimulated end-user
demand, and managed our strategic relationships with our distribution partners,
including OEMs, VARs and systems integrators. At September 30, 2004, Comp View,
Inc. and NEC System Technologies, Inc. accounted for 56% and 11% of total
accounts receivable, respectively. At December 31, 2003, Beijing Thumb Access
Communications, Ltd. and AT&T Corporation accounted for 12% and 10% of total
accounts receivable, respectively. For the three and nine months ended September
30, 2004, Comp View, Inc. and Net One Systems, Inc. accounted for 3% and 18% and
7% and 2% of total revenue, respectively.
We maintained sales offices in the United States, Europe and Asia and
distributed our products through resellers and distributors in more than 25
countries. Our revenue from international sales represented 37% and 30%,
respectively, of our total revenue in the three months ended September 30, 2004
and 2003, and 43%, 37% and 37%, respectively, of our total revenue in the nine
months ended September 30, 2004 and 2003 and the year ended December 31, 2003.
We discontinued selling and supporting our legacy hardware products in May
2003. Revenues in 2004 were derived primarily from our sales and service of two
software products, Click to Meet(TM) and Conference Server(TM). Both of these
products are based on real-time, rich media communications, a new technology
that had not yet achieved widespread industry acceptance. Additionally, major
upgrades to our Click to Meet product were introduced in the second quarter of
2004.
In addition to sales and overhead concerns, we have had unusually high
general and administrative expenses. As noted above and discussed in detail
below, in April 2004 we initiated a special investigation into certain irregular
sales transactions we discovered in Asia. This investigation led to our
inability to file our periodic reports with the SEC in a timely manner, the
de-listing of our common stock from The Nasdaq SmallCap Market, and the
restatement of our financial results for the fiscal years ended December 31,
2001, 2002, and 2003. Although the irregular transactions did not affect our
results of operations for this quarter, the special investigation and its
aftermath led to substantial general and administrative costs in 2004, including
legal and accounting expenses related to the investigation and any U.S. federal
securities class-action litigation brought against us and/or our directors and
officers, legal expenses relating to the registration of our securities, and
premium increases on our directors' and officers' liability insurance policy, as
well as significant liquidity concerns. We took steps to further reduce our
expenses through an additional restructuring initiative, which we announced in
August 2004, as discussed below. Nevertheless, on January 20, 2005, First
Virtual Communications, Inc. filed Chapter 11 reorganization cases for itself
and its domestic subsidiary, CUseeMe Networks, Inc. (collectively, the
"Company"), in the United States Bankruptcy Court for the Northern District of
California, San Francisco Division. The Company will continue to operate its
business as "debtors in possession" under the jurisdiction of the Bankruptcy
Court in accordance with the applicable provisions of the Bankruptcy Code and
orders of the Bankruptcy Court.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to our critical accounting policies and
estimates as disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2003.
3
Results of Operations
- ---------------------
The following table sets forth certain items from our condensed
consolidated statements of operations as a percentage of total revenue for the
periods indicated:
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
(As Restated) (As Restated)
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 19.2% 19.0% 16.5% 16.5%
------------- ------------- ------------- -------------
Gross profit 80.8% 81.0% 83.5% 83.5%
------------- ------------- ------------- -------------
Operating expense:
Research and development 65.2% 35.4% 51.7% 41.7%
Sales and marketing 96.1% 50.3% 77.4% 49.7%
General and administrative 63.1% 25.8% 43.5% 29.2%
Special investigation 66.3% 0.0% 23.0% 5.1%
Restructuring and other 11.5% 0.0% 23.1% 0.0%
------------- ------------- ------------- -------------
Total operating expense 302.2% 111.5% 218.7% 125.6%
------------- ------------- ------------- -------------
Operating loss -221.4% -30.5% -135.2% -42.1%
Other income (expense), net 10.4% -0.9% 1.9% -0.4%
------------- ------------- ------------- -------------
Net loss -211.0% -31.4% -133.3% -42.5%
============= ============= ============= =============
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Revenue
- -------
Revenue was $2.5 million for the three months ended September 30, 2004; a
decrease of 57% from the $5.7 million recorded in the three months ended
September 30, 2003. The following table summarizes the total revenue by
software, hardware and services for the three months ended September 30, 2004
and 2003 (in thousands):
Three Months Ended September 30,
---------------------------------------
2004 2003
---------------- -----------------
(As Restated)
Software $ 994 $ 3,633
Hardware -- 414
Service 1,469 1,647
---------------- -----------------
Total revenue $ 2,463 $ 5,694
================ =================
4
Software revenue consisted of revenue from the sale of software licenses to
use our Click to Meet(TM) and Conference Server software products. Software
revenue decreased $2.6 million to $1.0 million in the three months ended
September 30, 2004, a decrease of 73% from $3.6 million in the same period of
last year. The decrease was primarily due to reduced sales in North America and
intense competition. Software revenue during the three months ended September
30, 2004 in North America, Europe and Asia totaled $0.4 million, $0.1 million
and $04 million, respectively, compared to software revenue during the three
months ended September 30, 2003 of $2.4 million, $0.5 million and $0.8 million
in North America, Europe and Asia, respectively.
Hardware revenue consisted of revenue from the sale of legacy ATM hardware
products, which includes hardware products sourced from third parties and sold
by us. Hardware revenue decreased $414,000 to zero in the three months ended
September 30, 2004, a decrease of 100% from $414,000 in the same period of last
year. These hardware products are no longer part of our core strategy going
forward and accordingly, the decrease was the result of lower demand and lower
average selling prices for hardware-based ATM legacy products. We notified our
customers that, as of May 1, 2003, we no longer offer ATM legacy hardware for
sale other than hardware currently in our fully reserved inventory.
Service revenue consisted primarily of software license subscriptions,
under which our customers receive agreements in which they are entitled to
updates during the term of the subscription, as well as hardware maintenance,
training, installation and consulting revenue. Service revenue related to
hardware maintenance declined to less than 43% of our overall revenue for the
first nine months of 2004 and we expect this number to continue to decline to
zero as we eliminate this business. Service revenue decreased $178,000 to $1.5
million in the three months ended September 30, 2004, a decrease of 11% from
$1.6 million in the three months ended September 30, 2003. The decrease was
primarily due to a reduction from service revenues related to hardware products.
Service revenue in North America, Europe and Asia totaled $1.1 million, $0.2
million and $0.2 million during the three months ended September 30, 2004,
respectively. This is compared to service revenue during the three months ended
September 30, 2003 of $1.2 million, $0.3 million and $0.2 million in North
America, Europe and Asia, respectively.
Cost of Revenue
- ---------------
Cost of revenue consists primarily of costs associated with the purchase of
components from outside manufacturers or the manufacture of our legacy products
by outside manufacturers and related costs of freight, inventory obsolescence,
warranties, product media duplication, manuals and packaging materials,
personnel and facility costs and third-party royalties, which were charged
against income in the period incurred. Total costs of revenue decreased by
$610,000 to $472,000 for the three months ended September 30, 2004, a decrease
of 56% from $1.1 million for the three months ended September 30, 2003. As a
percentage of total revenues, cost of sales remained the same at 19% for the
three months ended September 30, 2004, and 2003. Gross margin represents the
difference between revenue and cost of revenue as a percentage of revenue.
Overall gross margin in the three months ended September 30, 2004 and 2003 and
was 80%.
Cost of software revenue decreased by $211,000 to $28,000 for the three
months ended September 30, 2004, a decrease of 89% from $238,000 for the three
months ended September 30, 2003. The decrease of cost of software revenue in the
first quarter of 2004 was primarily due to lower sales volume and reduced third
party royalty expense. Gross margin on software revenue increased to 97% for the
three months ended September 30, 2004, compared to 93% for the three months
ended September 30, 2003.
5
Cost of hardware revenue decreased by $315,000 to zero for the three months
ended September 30, 2004, a decrease of 100% from $315,000 for the three months
ended September 30, 2003. The decrease was primarily due to the significant drop
in sales volume of our hardware products and a reduction of warranty liability
after we substantially completed our transition out of the sales of our legacy
hardware-based products. We have discontinued offering hardware to our customers
and, as of the end of 2004, we had disposed of the hardware that had previously
been held in our fully reserved inventory. Consistent with the reduction in cost
of hardware, gross margin on hardware revenue increased to 100% for the three
months ended September 30, 2004, from 24% for the three months ended September
30, 2003.
Cost of service revenue decreased by $85,000 to $444,000 for the three
months ended September 30, 2004, a decrease of 16% from $529,000 for the three
months ended September 30, 2003. This decrease was primarily due to a decrease
in personnel related expenses as a result of the Company's restructuring
efforts. The gross margin on service revenue increased to 70% for the three
months ended September 30, 2004, from 68% for the three months ended September
30, 2003, primarily due to the decline in total cost of service.
Research and Development
- ------------------------
Research and development expense consists primarily of personnel costs,
costs of contractors and outside consultants, supplies and materials expenses,
equipment depreciation and overhead costs. Research and development expense
decreased $460,000 to $1.6 million in the three months ended September 30, 2004,
a decrease of 23% from $2.0 million for the three months ended September 30,
2003. The decrease was primarily due to a reduction of $451,000 in personnel
related expense after the Company implemented reductions in force in February
and August 2004, a reduction of $24,000 in allocated facility costs resulting
from the relocation of our headquarters office from Santa Clara to Redwood City
during the second quarter of 2003, and a decrease in depreciation and
amortization expenses of $91,000 resulting from certain research and development
related assets having been fully depreciated, partially offset by an increase of
$87,000 in professional fees. As a percentage of total revenue, research and
development expense increased to 63% for the three months ended September 30,
2004, from 35% for the three months ended September 30, 2003, primarily as a
result of the lower revenues during the three months ended September 30, 2004.
We expect research and development expenses, for the fourth quarter of 2004, as
expressed in absolute dollars, to decrease as a result of continued reductions
in personnel expenses.
Sales and Marketing
- -------------------
Sales and marketing expense includes personnel and related overhead costs
for sales and marketing, costs of outside contractors, advertising, trade shows
and other related marketing and promotional expenses. Sales and marketing
expense decreased $569,000 to $2.3 million for the three months ended September
30, 2004, a decrease of 20% from $2.9 million for the three months ended
September 30, 2003. The decrease was primarily due to a reduction of $747,000 in
personnel related expense after the Company implemented reductions in force in
February and August 2004, partially offset by an increase of $169,000 in
marketing and advertising program expenses and professional service fees to
third parties. As a percentage of total revenue, sales and marketing expense
increased to 93% for the three months ended September 30, 2004, from 50% for the
three months ended September 30, 2003, primarily due to lower revenue during the
three months ended September 30, 2004.
General and Administrative
- --------------------------
General and administrative expense includes personnel and related overhead
costs for finance, human resources, product operations, general management and
the amortization of intangible assets. General and administrative expense
increased $38,000 to $1.5 million for the three months ended September 30, 2004,
a 3% increase from $1.5 million in the three months ended September 30, 2003.
The increase was primarily due to a savings of $252,000 from personnel related
expenses after we implemented reductions in force in February and August 2004,
offset by increase of $98,000 in allocated facility costs resulting from the
relocation of our headquarters office from Santa Clara to Redwood City during
the second quarter of 2003, an increase of $162,000 in directors' and officers'
liability insurance premiums and an increase in legal expense accrual relating
to the special investigation. As a percentage of revenue, general and
administrative expense increased to 61% in the three months ended September 30,
2004, compared to 26% for the three months ended September 30, 2003, primarily
due to lower revenues during the three months ended September 30, 2004.
6
Restructuring and Other
- -----------------------
We recently completed the restructuring of our business announced in
February 2004, which reduced our workforce by approximately 20% to 138
employees, primarily in our United States operations. The reduction in force was
substantially completed in March 2004 and we incurred restructuring charges
totaling $700,000 during the three months ended March 31, 2004. Additionally, we
incurred approximately $100,000 in additional restructuring charges during the
second quarter to bring the initiative to completion.
To further reduce our expenses, on August 11, 2004, we implemented an
additional restructuring of our business. This restructuring focused on the
closure of certain offices in Asia and Europe, the further reduction of
personnel by approximately 20% to 100 employees, and the reduction of
professional service costs worldwide. The restructuring was completed during the
fourth quarter of 2004 and resulted in non-recurring charges of approximately
$400,000 that were recorded in the third and fourth quarters of 2004. During the
three months ended September 30, 2004, we recorded charges of approximately
$275,000 and we incurred an additional $125,000 during three months ended
December 31, 2004 to bring the initiative to completion.
Special Investigation
- ---------------------
In April 2004, we announced that the audit committee of board of directors
had initiated a special investigation as a result of the identification by
management of several irregular sales transactions, most of which had occurred
in our Asia operations. The audit committee retained special independent legal
counsel and through them, independent forensic accountants, to review these
transactions. In connection with the special investigation, we have incurred
approximately $3.5 million in legal and accounting fees through its completion
in November 2004, of which $1.6 and $2.1 million were recorded in the three
month periods ended June 30 and September 30, 2004, respectively, and the
balance will be recorded in the three month period ended December 31, 2004. Of
the fees incurred, $373,000 was paid during the second quarter and $1.1 million
was paid during the third quarter of 2004.
There were no other non-recurring charges for the three months ended
September 30, 2004. In the three months ended September 30, 2003, we incurred
non-recurring charges of $678,000 related to our office relocation and an
additional $160,000 related to the shut down of our operation in India.
Other Income (Expense), Net
- ---------------------------
Other income (expense), net, consists primarily of interest income earned
on short-term investments and cash balances, offset by interest expense relating
to our credit facilities and long-term debt. Other income (expense), net
increased $300,000 to an income of $248,000 for the three months ended September
30, 2004, a significant increase from an expense of ($52,000) for the three
months ended September 30, 2003. The increase was primarily due to the financing
costs related to the credit facility with Silicon Valley Bank during the quarter
and a decline in interest income as a result of lower market interest rates and
lower cash balances.
7
Income Taxes
- ------------
We have incurred losses since our inception. No tax benefit was recorded
for any period presented, as we believe that, based on the history of such
losses and other factors, the weight of available evidence indicates that it is
more likely than not that we will not be able to realize the benefit of these
net operating losses, and thus a full valuation reserve has been recorded.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
Revenue
- -------
Revenue was $10.4 million for the nine months ended September 30, 2004; a
decrease of 38% from the $16.6 million recorded in the nine months ended
September 30, 2003. The following table summarizes the total revenue by
software, hardware and services for the nine months ended September 30, 2004 and
2003 (in thousands):
Nine Months Ended September 30,
---------------------------------------
2004 2003
---------------- -----------------
(As Restated)
Software $ 5,791 $ 9,991
Hardware 193 1,698
Service 4,484 4,873
---------------- -----------------
Total revenue $ 10,468 $ 16,562
================ =================
Software revenue consisted of revenue from the sale of software licenses to
use our Click to Meet(TM) and Conference Server software products. Software
revenue decreased $4.2 million to $5.8 million in the nine months ended
September 30, 2004, a decrease of 42% from $10.0 million in the same period of
last year. The decrease was primarily due to reduced sales in all regions and
intense competition. Software revenue during the nine months ended September 30,
2004 in North America, Europe and Asia totaled $2.7 million, $0.8 million and
$2.2 million, respectively, compared to software revenue during the nine months
ended September 30, 2003 of $5.4 million, $1.7 million and $2.9 million in North
America, Europe and Asia, respectively.
Hardware revenue consisted of revenue from the sale of legacy ATM hardware
products, which includes hardware products sourced from third parties and sold
by us. Hardware revenue decreased $1.5 million to $193,000 in the nine months
ended September 30, 2004, a decrease of 89% from $1.7 million in the same period
of last year. These hardware products are no longer part of our core strategy
going forward and accordingly, the decrease was the result of lower demand and
lower average selling prices for hardware-based ATM legacy products. We notified
our customers that, as of May 1, 2003, we no longer offer ATM legacy hardware
for sale other than hardware currently in our fully reserved inventory.
Service revenue consisted primarily of software license subscriptions,
under which our customers receive agreements in which they are entitled to
updates during the term of the subscription, as well as hardware maintenance,
training, installation and consulting revenue. Service revenue related to
hardware maintenance declined to less than 43% of our overall revenue for the
first nine months of 2004 and we expect this number to continue to decline to
zero as we eliminate this business. Service revenue decreased $0.4 million to
$4.5 million in the nine months ended September 30, 2004, a decrease of 8% from
$4.9 million in the nine months ended September 30, 2003, primarily due to a
reduction from service revenues related to hardware products. Service revenue in
North America, Europe and Asia totaled $3.2 million, $0.7 million and $0.6
million during the nine months ended September 30, 2004, respectively. This is
compared to service revenue during the nine months ended September 30, 2003 of
$3.5 million, $0.7 million and $0.7 million in North America, Europe and Asia,
respectively.
8
We are focusing our core strategy in the future on software and service
revenue. If we are able to sell the remaining portion of our hardware inventory,
hardware revenue would disappear entirely; otherwise we expect it to represent a
negligible portion of our overall revenue in the future, both on an absolute and
relative basis, until it is sold or discarded. We expect that software and
service revenue will account for approximately 75% and 25% of our revenue in the
future, respectively. However, we do not have visibility into the future as to
software and service revenue on an absolute, as opposed to a relative, basis.
Cost of Revenue
- ---------------
Cost of revenue consists primarily of costs associated with the purchase of
components from outside manufacturers or the manufacture of our legacy products
by outside manufacturers and related costs of freight, inventory obsolescence,
warranties, product media duplication, manuals and packaging materials,
personnel and facility costs and third-party royalties, which were charged
against income in the period incurred. Total costs of revenue decreased by $1.0
million to $1.7 million for the nine months ended September 30, 2004, a decrease
of 37% from $2.7 million for the nine months ended September 30, 2003. As a
percentage of total revenues, cost of sales remained stable at 17% for the nine
months ended September 30, 2004, compared to 17% for the nine months ended
September 30, 2003. Gross margin represents the difference between revenue and
cost of revenue as a percentage of revenue. Overall gross margin in the nine
months ended September 30, 2004 remained stable at 83%, compared to 83% in the
comparable period of 2003.
Cost of software revenue decreased by $503,000 to $178,000 for the nine
months ended September 30, 2004, a decrease of 74% from $681,000 for the nine
months ended September 30, 2003. The decrease in cost of software revenue was
primarily due to lower sales volume and reduced third party royalty expense.
Gross margin on software revenue increased to 97% for the nine months ended
September 30, 2004, compared to 93% for the nine months ended September 30,
2003.
Cost of hardware revenue decreased by $563,000 to zero for the nine months
ended September 30, 2004, a decrease of 100% from $563,000 for the nine months
ended September 30, 2003. The decrease was primarily due to the significant drop
in sales volume of our hardware products and a reduction of warranty liability
after we substantially completed our transition out of the sales of our legacy
hardware-based products. We have discontinued offering hardware to our customers
and, as of the end of 2004, we had disposed of the hardware that had previously
been held in our fully reserved inventory. Consistent with the reduction in cost
of hardware, gross margin on hardware revenue increased to 100% for the nine
months ended September 30, 2004, from 67% for the nine months ended September
30, 2003.
Cost of service revenue increased by $62,000 to $1.6 million for the nine
months ended September 30, 2004, an increase of 4% from $1.5 million for the
nine months ended September 30, 2003. This increase was primarily due to an
increase in personnel related expenses as a result of increased employee
headcount needed to support an increased number of customer subscribers to our
service. The gross margin on service revenue increased to 65% for the nine
months ended September 30, 2004, from 69% for the nine months ended September
30, 2003, primarily due to the decline in service revenue and cost of service
revenue remaining fairly constant period over period.
9
Research and Development
- ------------------------
Research and development expense consists primarily of personnel costs,
costs of contractors and outside consultants, supplies and materials expenses,
equipment depreciation and overhead costs. Research and development expense
decreased $1.5 million to $5.4 million in the nine months ended September 30,
2004, a decrease of 22% from $6.9 million for the nine months ended September
30, 2003. The decrease was primarily due to a savings of $1.1 million in
personnel related expense after the Company implemented reductions in force in
February and August 2004, a reduction of $344,000 in allocated facility costs
resulting from the relocation of our headquarters office from Santa Clara to
Redwood City during the second quarter of 2003, and a decrease in depreciation
and amortization expenses of $330,000 resulting from certain research and
development related assets having been fully depreciated, partially offset by an
increase of $165,000 in professional fees. As a percentage of total revenue,
research and development expense increased to 51% for the nine months ended
September 30, 2004, from 42% for the nine months ended September 30, 2003,
primarily as a result of the lower revenues during the nine months ended
September 30, 2004. We expect research and development expenses, for the fourth
quarter of 2004, as expressed in absolute dollars, to decrease from the levels
reported in this Form 10-QSB and the Form 10-QSB for the first and second
quarters of 2004, as a result of continued reductions in personnel expenses.
Sales and Marketing
- -------------------
Sales and marketing expense includes personnel and related overhead costs
for sales and marketing, costs of outside contractors, advertising, trade shows
and other related marketing and promotional expenses. Sales and marketing
expense decreased $0.2 million to $8.0 million for the nine months ended
September 30, 2004, a decrease of 2% from $8.2 million for the nine months ended
September 30, 2003. The decrease was primarily due to a savings of $1.1 million
from personnel related expenses after we implemented reductions in force in
February and August 2004, offset by an increase of $496,000 in marketing and
advertising program expenses and $240,000 in professional service fees to third
parties. As a percentage of total revenue, sales and marketing expense increased
to 77% for the nine months ended September 30, 2004, from 50% for the nine
months ended September 30, 2003, primarily due to lower revenue during the nine
months ended September 30, 2004.
General and Administrative
- --------------------------
General and administrative expense includes personnel and related overhead
costs for finance, human resources, product operations, general management and
the amortization of intangible assets. General and administrative expense
decreased $0.3 million to $4.5 million for the nine months ended September 30,
2004, a 6% decrease from $4.8 million in the nine months ended September 30,
2003. The decrease was primarily due to a savings of $520,000 from personnel
related expenses after we implemented reductions in force in February and August
2004, a savings of $75,000 in allocated facility costs resulting from the
relocation of our headquarters office from Santa Clara to Redwood City during
the second quarter of 2003 and a decrease in depreciation and amortization
expenses of $181,000 resulting from certain assets having been fully
depreciated, partially offset by an increase in legal and accounting accrual
relating to the special investigation and the an increase in our premium for our
directors' and officers' liability insurance. As a percentage of revenue,
general and administrative expense increased to 43% in the nine months ended
September 30, 2004, compared to 29% for the nine months ended September 30,
2003, primarily due to lower revenues during the nine months ended September 30,
2004.
10
Restructuring and Other
- -----------------------
Restructuring and other expense includes expenses related to our
restructuring activities. Restructuring and other expense increased $245,000 to
$1,083,000 for the nine months ended September 30, 2004, a 29% increase from
$838,000 in the nine months ended September 30, 2003. As a percentage of
revenue, restructuring and other expense increased to 23% in the nine months
ended September 30, 2004, compared to 5% for the nine months ended September 30,
2003, primarily due to lower revenues during the nine months ended September 30,
2004.
We recently completed the restructuring of our business announced in
February 2004, which reduced our workforce by approximately 20% to 138
employees, primarily in our United States operations. The reduction in force was
substantially completed in March 2004 and we incurred restructuring charges
totaling $700,000 during the three months ended March 31, 2004. Additionally, we
incurred approximately $100,000 in additional restructuring charges during the
second quarter to bring the initiative to completion.
To further reduce our expenses, on August 11, 2004, we implemented an
additional restructuring of our business. This restructuring focused on the
closure of certain offices in Asia and Europe, the further reduction of
personnel by approximately 20% to 100 employees, and the reduction of
professional service costs worldwide. The restructuring was completed during the
fourth quarter of 2004 and resulted in non-recurring charges of approximately
$400,000 that were recorded in the third and fourth quarters of 2004. During the
three months ended September 30, 2004, we recorded charges of approximately
$275,000 and we incurred an additional $125,000 during three months ended
December 31, 2004 to bring the initiative to completion.
In the nine months ended September 30, 2003, we incurred non-recurring
charges of $678,000 related to our office relocation and an additional $160,000
related to the shut down of our operation in India.
Special Investigation
- ---------------------
In April 2004, we announced that the audit committee of board of directors
had initiated a special investigation as a result of the identification by
management of several irregular sales transactions, most of which had occurred
in our Asia operations. The audit committee retained special independent legal
counsel and through them, independent forensic accountants and data discovery
experts to review these transactions. In connection with the special
investigation, we have incurred approximately $3.5 million in legal and
accounting fees through its completion in November 2004, of which $3.5 million
was recorded in the nine month period ended September 30, 2004, and the balance
will be recorded in the three month period ended December 31, 2004. Of the fees
incurred, $373,000 was paid during the first two quarters of 2004 and $1.1
million was paid during the third quarter of 2004.
Other Income (Expense), Net
- ---------------------------
Other (expense), net, consists primarily of interest income earned on
short-term investments and cash balances, offset by interest expense relating to
our credit facilities and long-term debt. Other income (expense), net increased
$254,000 to an income of $195,000 for the nine months ended September 30, 2004,
a significant increase from an expense of $(59,000) for the nine months ended
September 30, 2003. The increase was primarily due to the financing costs
related to the credit facility with Silicon Valley Bank during the quarter and a
decline in interest income as a result of lower market interest rates and lower
cash balances.
Income Taxes
- ------------
We have incurred losses since our inception. No tax benefit was recorded
for any period presented, as we believe that, based on the history of such
losses and other factors, the weight of available evidence indicates that it is
more likely than not that we will not be able to realize the benefit of these
net operating losses, and thus a full valuation reserve has been recorded.
11
Special investigation of the Audit Committee
- --------------------------------------------
In April 2004, we announced that the audit committee of our board of
directors had initiated a special investigation as a result of the
identification by management of several irregular sales transactions, most of
which had occurred in our Asia operations. The audit committee retained a
special independent legal counsel and through them, independent forensic
accountants, to review these transactions. As a result of the pendency of this
investigation, we were unable to complete our quarterly financial statements for
the quarter covered by this Form 10-QSB and for the quarters ended March 31,
2004 and September 30, 2004, and thus we were unable to release our results and
timely file with the SEC this Form 10-QSB or our quarterly reports for the
second and third quarters of 2004.
The special investigation is now complete. The audit committee determined
that there were sales transactions, mostly in our Asia operations, that included
irregular, undisclosed terms and that this resulted in accounting errors. The
audit committee has determined that these errors, standing alone, would not have
required a restatement of previously issued financial statements due to their
immateriality for reporting purposes. In addition, the audit committee also
identified certain sales transactions unrelated to our Asia operations that were
not appropriately accounted for by us, including primarily transactions with one
U.S. customer where revenue was recognized prematurely for certain sales
transactions. The audit committee determined on November 15, 2004 that, as a
result of the errors involving this one U.S. customer, it will be necessary to
restate our financial results for the years ended December 31, 2001, 2002 and
2003. Furthermore, the audit committee has determined that while we will not be
issuing full restated financial results for the year ended December 31, 2000,
there will be revisions to those financial statements which will impact the
restatement for the year ended December 31, 2001 and related interim periods.
The audit committee determined that revenues related to contracts with one
of our U.S. customers were prematurely recognized in a quarter preceding the
quarter in which the transactions should have been recognized under applicable
revenue recognition rules, American Institute of Certified Public Accountants'
Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition" and
Securities and Exchange Commission Staff Accounting Bulletin 104 (SAB 104),
"Revenue Recognition." Under SOP 97-2 and SAB 104, a requirement for revenue
recognition is the occurrence of acceptance or expiration of the acceptance
period when acceptance criteria are specified. The audit committee's
investigation revealed that the acceptance requirement was not met in the
quarters in which revenue was recognized for certain transactions relating to
purchases of products by the U.S. customer. The audit committee found no
evidence to suggest that the revenues and cash flows associated with the U.S.
customer's contracts were not genuine. The U.S. customer's contracts were valid,
products were delivered, and we received cash. We performed an analysis of the
extent and quantification of the prematurely recognized revenue, which forms the
basis of the need to restate our financial results for the 2001, 2002 and 2003
fiscal years. Included in the analysis are adjustments made as a result of the
irregularities and errors involving the Asia and other operations and additional
errors noted during the course of the investigation. While these additional
errors and the errors involving the Asia and other operations were not
individually material for reporting purposes and would not have required a
restatement of previously issued financial statements, they are being corrected
as part of the restatement resulting from the adjustments related to the
acceptance provisions with this one U.S. customer.
For purposes of the restatement, the revenue improperly recognized in a
particular quarter is being deferred and recognized in the quarter in which
acceptance requirements were satisfied. For example, if a product sale having a
value of $100 was prematurely recognized in one quarter, the $100 will be
deferred from the revenue in that quarter and then recognized in a later quarter
in which customer acceptance requirements were satisfied. In addition to revenue
shifting between periods, there is a resultant impact on cost of goods sold and
operating expenses. The effects on income taxes, net loss, earnings/loss per
share, total assets, total liabilities, working capital and stockholders' equity
is also being taken into account in the restatement.
12
Management changes
- ------------------
On November 18, 2004, we announced that effective November 14, 2004, Truman
Cole resigned as the Company's vice president and chief financial officer. Mr.
Cole was our principal financial officer and our principal accounting officer.
We also announced that effective November 13, 2004, Andrew Morrison resigned as
our corporate controller. While having resigned, Messrs. Cole and Morrison were
retained to assist us as consultants through a transition period. We have not
yet named any individuals to permanently fill the roles previously held by
Messrs. Cole and Morrison. The Company named Gregory Sterling as its Chief
Restructuring Officer as if June 8, 2005.
Warrant exercises
- -----------------
On May 7, 2004, we announced the exercise of warrants by certain
institutional investors and/or their affiliates to purchase an aggregate of 2.0
million shares of our common stock, resulting in the receipt by us of aggregate
proceeds of $3.5 million, and the exercise of warrants to purchase 35,560 shares
of our common stock by Silicon Valley Bank on a net exercise basis, resulting in
no proceeds to us.
Suspension of registration statements
- -------------------------------------
The Company is party to several registration rights agreements with certain
of its investors which require that the shares sold to these investors be
resalable pursuant to registration statements on file with the SEC. As a result
of the Company's inability to file timely periodic reports on May 17, 2004, it
was forced to suspend the availability of these registration statements, as well
as the availability of its registration statements covering the re-sale of stock
issued under its equity incentive plans. The Company continues to have an
obligation (subject to certain exceptions, including suspension of use under
specified circumstances and for a limited period of time) to keep these
registration statements effective with respect to any shares covered thereby
until such shares may be sold without volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act of 1933, as amended. The Company may
be subject to litigation from these investors for any loss in value of their
stock while the registration statements are suspended and their shares are
restricted from sale. Certain of these agreements also provide for liquidated
damages of approximately $85,000 per month in the event that the shares in
question are restricted from sale. As of December 31, 2004, the Company had
accrued $697,000 to cover such liquidated damages.
13
Amendment to Silicon Valley Bank Credit Facility and Related Forbearance
- ------------------------------------------------------------------------
The Company became party to a $3 million secured credit facility with
Silicon Valley Bank pursuant to a Loan and Security Agreement dated as of April
3, 2003, as amended by an Amendment to Loan Documents dated as of May 25, 2004
(as amended, the "Loan Agreement"). Upon the effectiveness of this amendment
during the second quarter, it borrowed from Silicon Valley Bank an additional
amount of approximately $917,000, bringing its outstanding principal balance
under the loan to $3.0 million. As a result of the amendment the maturity date
was extended to May 24, 2005, the interest rate was increased to the bank's
prime rate plus 2.5% with a floor at 6.5%, and the minimum cash deposit
requirement of $2.9 million was removed and replaced with a minimum quarterly
net sales revenue covenant and a minimum monthly liquidity covenant. The Company
is also required to keep its primary banking relationship at Silicon Valley Bank
and to keep all but $750,000 of its unrestricted cash and cash equivalents on
deposit with Silicon Valley Bank. Silicon Valley Bank has a security interest in
the Company's deposits as well as in most of its material assets.
As of March 31, 2004 and October 31, 2004, $3.0 million and $2.5 million of
its secured obligations were subject to this credit facility with the bank,
respectively. In addition, the Loan Agreement contains financial and
non-financial covenants, including a monthly liquidity covenant which the
Company had violated as of August 31, 2004.
On September 13, 2004, the Company entered into a Temporary Forbearance
Agreement with Silicon Valley Bank pursuant to which the bank agreed to forbear
from exercising (but not to waive) its rights and remedies against the Company
as a result of its default under the Loan Agreement until September 21, 2004.
On September 29, 2004, the Company entered into an Extension Agreement with
Silicon Valley Bank, effective as of September 13, 2004, in which the date of
expiration of the Temporary Forbearance Agreement was extended through October
4, 2004.
On November 16, 2004, Silicon Valley Bank signed an Amendment and Extension
Agreement with the Company, in which the date of expiration of the Temporary
Forbearance Agreement was extended through November 15, 2004, the maximum amount
of the credit facility pursuant to the Loan Agreement was reduced from $3.0
million to $2.5 million, and the Company agreed that the Loan Agreement would be
amended to require it to direct all of its customers to remit payments to a cash
collateral account controlled by the bank. The Company also agreed to provide
additional weekly financial reporting to the bank.
In consideration of this forbearance, the Company agreed to pay a $100,000
fee to the bank on the earlier to occur of (i) the receipt by it of proceeds for
the issuance of equity securities, (ii) the acceleration of the credit facility,
or (iii) the maturity date of the loan. The Company also agreed to pay a success
fee to the bank of the lesser of an additional $100,000 or 1% of its gross
valuation on the earlier to occur of the closing of any change in control or
equivalent transaction or the maturity date of the loan. In addition, the
Company agreed to re-price an existing warrant held by the bank to purchase
7,218 of its shares of common stock at $2.54 per share to a price of $0.01 per
share.
On December 2004, Silicon Valley Bank signed an Amendment and Extension
Agreement with the Company, in which the date of expiration of the Temporary
Forbearance Agreement was extended through December 2004. In consideration of
this forbearance, the Company agreed to pay a $5,000 fee to the bank.
As a secured creditor, Silicon Valley Bank was subsequently paid in full on
March 15, 2005 with the completion of the Disposition of Assets.
14
Services, Payment and Security Agreement Relating to Special Investigation
- --------------------------------------------------------------------------
On August 19, 2004, the Company entered into a Services, Payment and
Security Agreement with the independent legal counsel hired by the audit
committee to conduct the special investigation, including the forensic
accountants and data discovery experts retained by the independent counsel to
assist them with the special investigation. Under the terms of the agreement,
and in consideration of the continued work by these service providers on the
special investigation, the Company acknowledged that approximately $1,548,000
was owed to these service providers as of July 31, 2004 for work previously
performed in the special investigation, agreed to pay $450,000 of this balance
upon entering into the agreement, and agreed to pay the remaining balance owed
on December 31, 2004, which was the earlier of two alternative dates specified
by the agreement. The Company did not pay the service providers on that date and
is in default of the agreement. The Company also agreed to grant to the service
providers a security interest upon substantially all of its assets with respect
to the unpaid balance owed, as well as any fees and costs of the service
providers accruing after July 31, 2004 in the course of finishing the special
investigation. The security interest is subordinated in most respects to the
security interest of Silicon Valley Bank under the Company's credit facility,
but will be pari passu among the service providers. The Company and the service
providers also entered into a Subordination Agreement in favor of Silicon Valley
Bank to further describe their respective rights as to the competing security
interests in the Company's assets.
LIQUIDITY AND CAPITAL RESOURCES
We have operated at a loss since our inception and have financed our
operations primary through private and public placements of equity securities,
revenue from the sale of our products and services and through credit
facilities. We expect continued operating losses for the fourth quarter of 2004
and for 2005. Cash and cash equivalents totaled $2.4 million at September 30,
2004. Of our cash and cash equivalents at September 30, 2004, $2.1 million was
expected to support our outstanding obligations to Silicon Valley Bank.
Accordingly, our cash resources available for operations as of September 30,
2004 were $0.3 million. At December 31, 2003, our cash resources available for
operations totaled $9.1 million.
15
We became subject to an arbitration proceeding as a result of actions we
took after our discovery of the irregular transactions which are the subject of
the special investigation discussed elsewhere herein. On September 27, 2004, the
International Court of Arbitration of the International Chamber of Commerce
received a Request for Arbitration from Inter Open International Limited and Ms.
Ratna Widjati Widjaja. We received notice of this Request for Arbitration from
the Secretariat of the International Court of Arbitration on or about October 1,
2004. We acquired FVC.COM (Asia) Limited, a Hong Kong entity, in January 2002
from its shareholders, Inter Open International Limited and Ms. Widjaja. The
principal affiliate of FVC.COM (Asia) Limited, who is the husband of Ms.
Widjaja, became an employee of the Company. In the purchase agreement, we agreed
to pay certain revenue-based consideration to the shareholders following the
acquisition of FVC.COM (Asia) Limited based on our future revenue. Following our
discovery of the irregular transactions, we terminated the employment of the
affiliate and ceased paying consideration in accordance with the terms of the
agreement. The selling shareholders have alleged that termination of the
affiliate deprived them of up to approximately $1 million of potential
revenue-based consideration and are seeking to recover this sum plus interest.
Although we believe that this allegation is without merit, an arbitrator could
determine otherwise. In such case, it is conceivable that an arbitrator could
award significant damages against us for breach of contract, and/or an
employment claim by the affiliate, and we might incur substantial legal costs in
defending the matter(s). We are currently considering whether to pursue claims
against the affiliate.
We became subject to a U.S. federal class-action securities litigation
related to the decline in the value of our common stock. On August 25, 2004, a
complaint was filed in U.S. District Court for the Northern District of
California (Case No. C-04-3585) on behalf of stockholders who purchased our
securities between March 29, 2004 and August 23, 2004. On September 1, 2004, we
were served with the complaint. The complaint alleged that we, along with
certain of our executive officers, violated Section 10(b) of the Securities
Exchange Act of 1934, as amended ("Exchange Act") by artificially inflating our
stock price through materially misleading statements and omissions to the public
and by otherwise engaging in fraud against the plaintiffs. The complaint also
alleged that certain of our executive officers, as controlling persons of First
Virtual Communications, breached Section 20(b) of the Exchange Act by assisting
in the inflation of our stock price through their respective acts and omissions.
Each of the executive officers are party to an indemnification agreement which,
subject to certain exclusions and limitations, we have agreed to advance all
expenses necessary for the defense of such a lawsuit and to reimburse them for
any damages they are required to pay. The complaint seeks unspecified
compensatory damages, as well as costs and expenses of plaintiffs' attorneys in
bringing the action against us. Although our directors' and officers' liability
insurance provides coverage for legal costs as well as any damages incurred in
this litigation, the coverage would be subject to a deductible of $500,000 per
claim, which would be our obligation. This class-action case was dropped in
early 2005 against the Company, but the officers are still defendants.
LIQUIDITY DISCUSSION
Operating Activities
- --------------------
Cash and cash equivalents decreased by $9.1 million during the first nine
months of 2004, from $11.6 million at December 31, 2003 to $2.4 million at
September 30, 2004. By comparison, cash and cash equivalents decreased by $1.9
million during the first nine months of 2003, from $8.4 million at December 31,
2002 to $6.5 million at September 30, 2003. We used cash to fund operating
activities of $12.8 million during the first nine months of 2004 as compared
with $4.1 million during the first nine months of 2003. This use of cash was
primarily due to our net losses during those quarters, adjusted for non-cash
charges, as operating costs, primarily employee and employee related costs,
exceeded the related revenues from the sale of our products and services.
Additionally, we made cash payments related to our 2004 restructuring
initiatives of $1.1 million during the first nine months of 2004. These cash
outflows for operating activities were partially offset by proceeds from the
collection of accounts receivable of $0.1 million during the first nine months
of 2004 and $1.2 million during the first nine months of 2003.
Revenue generated from the sale of our products and services will not
increase to a level that exceeds our expenses and cash flow from operations will
continue to be negatively impacted.
Our primary source of operating cash flow is the collection of accounts
receivable from our customers and the timing of payments to our vendors and
service providers. We measure the effectiveness of our collections efforts by an
analysis of the average number of days our accounts receivable are outstanding.
At September 30, 2004, our average days sales outstanding were 15 days, down
from 63 days at September 30 2003. Collections of accounts receivable and
related days outstanding will fluctuate in future periods due to the timing,
amount of our future revenues, payment terms on customer contracts and the
effectiveness of our collection efforts.
Our operating cash flows will be impacted in the future based on the timing
of payments to our vendors for accounts payable. The timing of cash payments in
future periods may be impacted by the nature of accounts payable arrangements.
16
Investing Activities
- --------------------
We received cash proceeds from investing activities of $103,000 and
$(523,000) during the first nine months of 2004 and 2003, respectively. During
the first nine months of 2003, cash used in investing activities consisted of
$391,000 for the purchase of property and equipment, primarily for the
acquisition of desktop and network infrastructure equipment and short-term
investments in high-grade, low risk instruments, and $132,000 in acquisitions of
businesses. During the first nine months of 2004, cash proceeds were comprised
of $404,000 used for the purchase of property and equipment and short-term
investments, offset by $507,000 in proceeds from the sale of these short-term
investments.
Financing Activities
- --------------------
We received net cash in financing activities of $3.6 million during the
first nine months of 2004 as compared with $2.8 million during the first nine
months of 2003. During the first nine months of 2004, we paid cash of $128,000
related to the issuance of common stock in connection with previous financings,
offset by $3.7 million in proceeds from warrant exercises. Additionally, we paid
$917,000 in principal on the credit facility with Silicon Valley Bank, offset by
the draw down of an identical $917,000 in principal on this facility during this
period. During the first nine months of 2003, we received $3.0 million in
proceeds from financings and an additional $62,000 in proceeds from the issuance
of common stock and paid $250,000 in principal on the credit facility with
Silicon Valley Bank
We have no present understandings, commitments or agreements for any
material acquisitions of, or investments in, other complementary businesses,
products or technologies.
Contractual Obligations
- -----------------------
As of September 30, 2004, our contractual obligations and other commitments
were as follows (in thousands):
- ----------------------------------- --------------- -------------- --------------- --------------- -----------------
Contractual obligation Total Less Than 1 -3 Years 3-5 Years More Than 5 years
One Yea
- ----------------------------------- --------------- -------------- --------------- --------------- -----------------
Principal of short-term debt $ 2,500,000 $ 2,500,000 $ -- $ -- $ --
Operating leases 3,479,342 1,041,216 832,976 837,581 767,568
Other Contracts -- -- -- -- --
--------------- -------------- --------------- --------------- -----------------
Total contractual cash obligation $ 5,979,342 $ 3,541,216 $ 832,976 $ 837,581 $ 767,568
--------------- -------------- --------------- --------------- -----------------
Excluded from the table above are liquidated damages which we may be
subject to in connection with registration rights agreements we entered into
with certain of our investors that require that shares sold to these investors
be resalable pursuant to registration statements on file with the SEC. We were
forced to suspend the availability of these registration statements on May 17,
2004 when we became delinquent in the filing of our periodic reports as a result
of the special investigation described elsewhere in this Quarterly Report.
Certain of these registration rights agreements provide for liquidated damages
in the event that the shares in question are restricted from being resold. We
estimate the amount of liquidated damages we could be liable for to be
approximately $85,000 per month. As of December 31, 2004, we had accrued
$697,000 to cover such liquidated damages. The total obligation is unknown, as
it is based on when our delinquent periodic reports are brought current.
Additionally, it is possible we will able to satisfy these obligations without
using our cash resources.
17
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was not performed under the supervision and with the
participation of our management, including the Chief Restructuring Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-QSB. Officers and management of the Company who may have performed such
evaluation are no longer present or in a capacity to certify. The Company's
Chief Restructuring Officer was not hired until June 8, 2005.
There were no changes in internal control over financial reporting during
the quarter ended March 31, 2004 that affected or were reasonably likely to
affect our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We became subject to an arbitration proceeding as a result of actions we
took after our discovery of the irregular transactions which are the subject of
the special investigation discussed elsewhere herein. On September 27, 2004, the
International Court of Arbitration of the International Chamber of Commerce
received a Request for Arbitration from Inter Open International Limited and Ms.
Ratna Widjati Widjaja. We received notice of this Request for Arbitration from
the Secretariat of the International Court of Arbitration on or about October 1,
2004. We acquired FVC.COM (Asia) Limited, a Hong Kong entity, in January 2002
from its shareholders, Inter Open International Limited and Ms. Widjaja. The
principal affiliate of FVC.COM (Asia) Limited, who is the husband of Ms.
Widjaja, became an employee of the Company. In the purchase agreement, we agreed
to pay certain revenue-based consideration to the shareholders following the
acquisition of FVC.COM (Asia) Limited based on our future revenue. Following our
discovery of the irregular transactions, we terminated the employment of the
affiliate and ceased paying consideration in accordance with the terms of the
agreement. The selling shareholders have alleged that termination of the
affiliate deprived them of up to approximately $1 million of potential
revenue-based consideration and are seeking to recover this sum plus interest.
Although we believe that this allegation is without merit, an arbitrator could
determine otherwise. In such case, it is conceivable that an arbitrator could
award significant damages against us for breach of contract, and/or an
employment claim by the affiliate, and we might incur substantial legal costs in
defending the matter(s). We are currently considering whether to pursue claims
against the affiliate.
We became subject to a U.S. federal class-action securities litigation
related to the decline in the value of our common stock. On August 25, 2004, a
complaint was filed in U.S. District Court for the Northern District of
California (Case No. C-04-3585) on behalf of stockholders who purchased our
securities between March 29, 2004 and August 23, 2004. On September 1, 2004, we
were served with the complaint. The complaint alleged that we, along with
certain of our executive officers, violated Section 10(b) of the Securities
Exchange Act of 1934, as amended ("Exchange Act") by artificially inflating our
stock price through materially misleading statements and omissions to the public
and by otherwise engaging in fraud against the plaintiffs. The complaint also
alleged that certain of our executive officers, as controlling persons of First
Virtual Communications, breached Section 20(b) of the Exchange Act by assisting
in the inflation of our stock price through their respective acts and omissions.
Each of the executive officers are party to an indemnification agreement which,
subject to certain exclusions and limitations, we have agreed to advance all
expenses necessary for the defense of such a lawsuit and to reimburse them for
any damages they are required to pay. The complaint seeks unspecified
compensatory damages, as well as costs and expenses of plaintiffs' attorneys in
bringing the action against us. Although our directors' and officers' liability
insurance provides coverage for legal costs as well as any damages incurred in
this litigation, the coverage would be subject to a deductible of $500,000 per
claim, which would be our obligation. This class-action case was dropped in
early 2005 against the Company, but the officers are still defendants.
18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 13, 2003, we entered into an Incentive Stock Option Agreement
with our CEO, Jonathan Morgan. The option was approved by the compensation
committee of our board of directors under our 1997 Equity Plan, as amended, and
permits Mr. Morgan to purchase up to 300,000 shares of our common stock at a
price of $0.93 per share. The option cannot be exercised as to unvested shares.
Additionally, under a related addendum signed by Mr. Morgan, the option cannot
be exercised even as to vested shares until the S-8 registration statements
covering the amended 1997 Plan are declared effective and our securities filings
have been brought current. The option vests as to 100% of the underlying shares
on the fourth anniversary of the grant date (July 26, 2008), but is subject to
accelerated vesting in three 100,000 share tranches upon the achievement of
certain milestones relating to our operating profit, as defined therein. The
option is not subject to the ordinary change of control provisions of the
existing Executive Officers' Change of Control Plan.
Due to the Company's bankruptcy filing in January 2005 and subsequent
November 2005 reorganization approval by the Court, all stock options have
effectively been canceled.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
19
ITEM 6. EXHIBITS
Exhibit
No. Description of Document
- ------- ---------------------------------------------------------------------
4.1 Warrant to purchase 7,218 shares of the Company's Common Stock, dated
May 25, 2004, issued by the Company to Silicon Valley Bancshares
4.2 First Amendment Agreement Regarding Warrant between the Company and
Silicon Valley Bancshares, dated as of November 8, 2004
10.1* Settlement Agreement between the Company and Frank Kaplan, dated
January 21, 2004
10.2* Mutual Release between the Company and Ralph Ungermann, dated January
__ 2004 10.3(1) * Executive Officers' Change of Control Plan, as
amended
10.4(2)* 1997 Equity Incentive Plan, as amended
10.5(2)* Form of Incentive Stock Option Agreement of the Company under the
1997 Equity Incentive Plan, as amended
10.6(2)* Form of Non-Statutory Stock Option Agreement under the 1997 Equity
Incentive Plan, as amended
10.7(2)* Form of Addendum to Stock Option Agreement under the 1997 Equity
Incentive Plan, as amended
10.8(2)* Incentive Stock Option Agreement and related addendum between the
Company and Jonathan Morgan, dated September 13, 2004
10.9(3)* Form of Indemnification Agreements between the Company and its
executive officers and directors
10.10(4) Loan and Security Agreement between the Company and Silicon Valley
Bank, dated as of April 3, 2003
10.11(5) Amendment to Loan Documents between the Company and Silicon Valley
Bank, dated as of May 25, 2004
10.12(2) Temporary Forbearance Agreement between the Company and Silicon
Valley Bank, dated as of September 13, 2004
10.13(6) Extension Agreement between the Company and Silicon Valley Bank,
dated as of September 13, 2004
10.14 Amendment and Extension Agreement between the Company and Silicon
Valley Bank, dated as of November 9, 2004
10.15(6) Services, Payment and Security Agreement among the Company, Morrison
& Foerster LLP, Huron Consulting Group and Applied Discovery, Inc.,
dated as of August 19, 2004
10.15(6) Subordination Agreement in favor of Silicon Valley Bank among the
Company, Morrison & Foerster LLP, Huron Consulting Group and Applied
Discovery, Inc., dated as of August 19, 2004
10.13(7) Software and Services Engagement Agreement between the Company and
IBM, dated as of August 11, 2004
10.14(8)** Statement of Work between the Company and IBM, dated August 17, 2004
20
20.1 Letter sent to holders of securities covered by the 2003 S-3
registration statement regarding the suspension of availability of
the registration statement and any related prospectus
20.2 Letter sent to holders of securities covered by 2002 S-3 registration
statement regarding the suspension of availability of the
registration statement and any related prospectus
20.3 Letter sent to participants in stock plans covered by various S-8
registration statements regarding the suspension of availability of
these registration statements and any related prospectuses
22.1(9) Published Report of Results of 2004 Annual Meeting of Stockholders
31.1 Certification Pursuant to Rule 15d-14 of the Securities and Exchange
Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- -----------------
Notes to Exhibits
* Management contract or compensatory plan or arrangement
** Confidential Treatment has been requested from the U.S. Securities and
Exchange Commission ("Commission") for portions of these exhibits. A
separate filing of omitted text has been made with the Commission.
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K, as
filed on March 29, 2004 (File No. 000-23305).
(2) Filed as an exhibit to the Company's Current Report on Form 8-K/A, as
filed on September 15, 2004 (File No. 000-23305).
(3) Filed as an exhibit to the Company's Registration Statement on Form S-1,
as amended (File No. 333-38755).
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q, as
filed on May 15, 2003 (File No. 000-23305).
(5) Filed as an exhibit to the Company's Current Report on Form 8-K, as
filed on August 17, 2004 (File No. 000-23305).
(6) Filed as an exhibit to the Company's Current Report on Form 8-K, as
filed on October 1, 2004 (File No. 000-23305).
(7) Filed as an exhibit to the Company's Current Report on Form 8-K/A, as
filed on August 23, 2004 (File No. 000-23305).
(8) Filed as an exhibit to the Company's Current Report on Form 8-K/A, as
filed on August 23, 2004 (File No. 000-23305).
(9) Filed as part of the Company's Current Report on Form 8-K, as filed on
May 26, 2004 (File No. 000-23305).
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: November 28, 2005 FIRST VIRTUAL COMMUNICATIONS, INC.
By: /s/ Gregory Sterling
----------------------------
Gregory Sterling
Chief Restructuring Officer
(Duly Authorized Officer and
Principal Financial Officer)
EXHIBIT INDEX
Exhibit
No. Description of Document
- ------- ---------------------------------------------------------------------
4.1 Warrant to purchase 7,218 shares of the Company's Common Stock, dated
May 25, 2004, issued by the Company to Silicon Valley Bancshares
4.2 First Amendment Agreement Regarding Warrant between the Company and
Silicon Valley Bancshares, dated as of November 8, 2004
10.1* Settlement Agreement between the Company and Frank Kaplan, dated
January 21, 2004
10.2* Mutual Release between the Company and Ralph Ungermann, dated January
__ 2004
10.3(1)* Executive Officers' Change of Control Plan, as amended
10.4(2)* 1997 Equity Incentive Plan, as amended
10.5(2)* Form of Incentive Stock Option Agreement of the Company under the
1997 Equity Incentive Plan, as amended
10.6(2)* Form of Non-Statutory Stock Option Agreement under the 1997 Equity
Incentive Plan, as amended
10.7(2)* Form of Addendum to Stock Option Agreement under the 1997 Equity
Incentive Plan, as amended
10.8(2)* Incentive Stock Option Agreement and related addendum between the
Company and Jonathan Morgan, dated September 13, 2004
10.9(3)* Form of Indemnification Agreements between the Company and its
executive officers and directors
10.10(4) Loan and Security Agreement between the Company and Silicon Valley
Bank, dated as of April 3, 2003
10.11(5) Amendment to Loan Documents between the Company and Silicon Valley
Bank, dated as of May 25, 2004
10.12(2) Temporary Forbearance Agreement between the Company and Silicon
Valley Bank, dated as of September 13, 2004
10.13(6) Extension Agreement between the Company and Silicon Valley Bank,
dated as of September 13, 2004
10.14 Amendment and Extension Agreement between the Company and Silicon
Valley Bank, dated as of November 9, 2004
10.15(6) Services, Payment and Security Agreement among the Company, Morrison
& Foerster LLP, Huron Consulting Group and Applied Discovery, Inc.,
dated as of August 19, 2004
10.15(6) Subordination Agreement in favor of Silicon Valley Bank among the
Company, Morrison & Foerster LLP, Huron Consulting Group and Applied
Discovery, Inc., dated as of August 19, 2004
10.13(7) Software and Services Engagement Agreement between the Company and
IBM, dated as of August 11, 2004
10.14(8)** Statement of Work between the Company and IBM, dated August 17, 2004
20.1 Letter sent to holders of securities covered by the 2003 S-3
registration statement regarding the suspension of availability of
the registration statement and any related prospectus
20.2 Letter sent to holders of securities covered by 2002 S-3 registration
statement regarding the suspension of availability of the
registration statement and any related prospectus
20.3 Letter sent to participants in stock plans covered by various S-8
registration statements regarding the suspension of availability of
these registration statements and any related prospectuses
22.1(9) Published Report of Results of 2004 Annual Meeting of Stockholders
31.1 Certification Pursuant to Rule 15d-14 of the Securities and Exchange
Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- -----------------
Notes to Exhibits
* Management contract or compensatory plan or arrangement
** Confidential Treatment has been requested from the U.S. Securities and
Exchange Commission ("Commission") for portions of these exhibits. A
separate filing of omitted text has been made with the Commission.
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K, as
filed on March 29, 2004 (File No. 000-23305).
(2) Filed as an exhibit to the Company's Current Report on Form 8-K/A, as
filed on September 15, 2004 (File No. 000-23305).
(3) Filed as an exhibit to the Company's Registration Statement on Form S-1,
as amended (File No. 333-38755).
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q, as
filed on May 15, 2003 (File No. 000-23305).
(5) Filed as an exhibit to the Company's Current Report on Form 8-K, as
filed on August 17, 2004 (File No. 000-23305).
(6) Filed as an exhibit to the Company's Current Report on Form 8-K, as
filed on October 1, 2004 (File No. 000-23305).
(7) Filed as an exhibit to the Company's Current Report on Form 8-K/A, as
filed on August 23, 2004 (File No. 000-23305).
(8) Filed as an exhibit to the Company's Current Report on Form 8-K/A, as
filed on August 23, 2004 (File No. 000-23305).
(9) Filed as part of the Company's Current Report on Form 8-K, as filed on
May 26, 2004 (File No. 000-23305).