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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
/ / 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
FVC.COM, INC.
(formerly First Virtual Corporation)
(Exact name of registrant as specified in its charter)
DELAWARE 77-0357037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3393 OCTAVIUS DRIVE
SUITE 102
SANTA CLARA, CA 95054
(Address of principal executive offices)
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(408) 567-7200
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Common Stock, $0.001 Par Value 15,940,792
------------------------------ -------------------------------
(Class) Outstanding as of June 30, 1998
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FVC.COM, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 1998 and December 31, 1997 ........................ 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1998 and 1997 ..... 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 ............... 5
Notes to Condensed Consolidated Financial Statements .......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 9
PART II.OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ..................... 15
Item 5. Other Information ............................................. 16
Item 6. Exhibits and Reports on Form 8-K .............................. 16
SIGNATURES ............................................................ 17
Exhibit Index ......................................................... 18
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FVC.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,034 $ 2,500
Accounts receivable, net 5,704 2,469
Inventory 3,336 4,178
Prepaid expenses and other current assets 547 627
---------- ---------
Total current assets 41,621 9,774
Property and equipment, net 1,593 1,043
Other assets 1,709 287
---------- ---------
$ 44,923 $ 11,104
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under short-term credit facilities $ - $ 1,306
Current portion of long-term debt 63 848
Accounts payable 3,321 4,141
Accrued liabilities 1,560 1,326
Deferred revenue 105 262
---------- ---------
Total current liabilities 5,049 7,883
---------- ---------
Long-term debt, net of current portion 105 1,312
---------- ---------
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 5,000,000 and
10,000,000 shares authorized, respectively; 0 and
8,040,153 shares issued and outstanding, respectively - 8
Common Stock, $.001 par value; 35,000,000 and 30,000,000
shares authorized, respectively; 15,940,792 and
4,824,684 shares issued and outstanding, respectively 16 5
Additional paid-in capital 55,423 17,267
Notes receivable from stockholders (765) (837)
Accumulated deficit (14,905) (14,534)
---------- ---------
Total stockholders' equity 39,769 1,909
---------- ---------
$ 44,923 $ 11,104
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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FVC.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -----------------------
1998 1997 1998 1997
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 10,991 $ 3,413 $ 20,033 $ 6,143
Cost of revenues 5,973 1,898 10,805 3,475
----------- ---------- --------- ---------
Gross profit 5,018 1,515 9,228 2,668
----------- ---------- --------- ---------
Operating expenses:
Research and development 1,987 1,252 3,871 2,205
Selling, general and administrative 2,730 1,598 5,347 2,948
----------- ---------- --------- ---------
Total operating expenses 4,717 2,850 9,218 5,153
----------- ---------- --------- ---------
Operating income (loss) 301 (1,335) 10 (2,485)
Other income (expense), net (180) (35) (381) (51)
----------- ---------- --------- ---------
Net Income (loss) $ 121 $ (1,370) $ (371) $ (2,536)
----------- ---------- --------- ---------
----------- ---------- --------- ---------
Earnings (loss) per share:
Basic $ 0.01 $ (0.47) $ (0.05) $ (0.91)
----------- ---------- --------- ---------
----------- ---------- --------- ---------
Diluted $ 0.01 $ (0.47) $ (0.05) $ (0.91)
----------- ---------- --------- ---------
----------- ---------- --------- ---------
Shares used to compute earnings
(loss) per share:
Basic 10,597 2,912 7,504 2,780
----------- ---------- --------- ---------
----------- ---------- --------- ---------
Diluted 15,478 2,912 7,504 2,780
----------- ---------- --------- ---------
----------- ---------- --------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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FVC.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (371) $ (2,536)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 749 247
Non-cash stock compensation 678 251
Other 228 -
Changes in assets and liabilities:
Accounts receivable (3,419) 172
Inventory 842 407
Prepaid expenses and other current assets 80 -
Other assets (458) 4
Accounts payable (820) (584)
Accrued liabilities 234 317
Deferred revenue (157) 10
------- --------
Net cash used in operating activities (2,414) (1,712)
------- --------
Cash flows used in investing activities
for acquisition of property and equipment (921) (345)
------- --------
Cash flows from financing activities:
Borrowings under short-term credit facilities 3,600 801
Repayment of short-term credit facilities (4,906) (494)
Proceeds from long-term debt - 1,250
Repayment of long-term debt (2,014) (41)
Proceeds from issuance of stock, net 36,299 128
Repayment of capital lease obligations (110) (90)
------- --------
Net cash provided by financing activities 32,869 1,554
------- --------
Net increase (decrease) in cash and cash equivalents 29,534 (503)
Cash and cash equivalents at beginning of period 2,500 676
------- --------
Cash and cash equivalents at end of period $ 32,034 $ 173
------- --------
------- --------
Supplemental cash flow information:
Cash paid for interest $ 192 $ 84
Issuance of warrants to third parties 1,213 159
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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FVC.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Change of Name
On August 3, 1998, the Company changed its name from First Virtual
Corporation to FVC.COM, Inc.
2. Basis of Presentation
The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary to fairly state
the Company's consolidated financial position, results of operations and cash
flows for the periods presented. These consolidated financial statements
should be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Registration Statement on Form
S-1, File No. 333-38755, declared effective on April 29, 19988.The results
of operations for the period ended June 30, 1998 are not necessarily
indicative of the results to be expected for any subsequent quarter or for
the entire year ending December 31, 1998. The December 31, 1997 balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
3. Inventory
Inventories as of June 30, 1998 and December 31, 1997 were as follows
(in thousands):
- -------------------------------------------------------------------------------
June 30, December 31,
1998 1997
- -------------------------------------------------------------------------------
Raw materials $ 1,338 $ 1,418
Finished goods 1,998 2,760
- -------------------------------------------------------------------------------
Total inventory $ 3,336 $ 4,178
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. Earnings (Loss) Per Share
Earnings (loss) per share is computed in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"). FAS
128 requires the Company to report both basic earnings (loss) per share,
which is based on the weighted-average number of common shares outstanding
excluding contingently issuable or returnable shares such as shares of
unvested restricted Common Stock, and diluted earnings (loss) per share,
which is based on the weighted-average number of common shares outstanding
and dilutive potential common shares outstanding.
As a result of the losses incurred by the Company for the three months
ended June 30, 1997 and the six months ended June 30, 1998 and 1997, all
potential common shares were anti-dilutive and were excluded from the diluted
net loss per share calculations for such periods.
6
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The following table sets forth a reconciliation of the computation of
basic and diluted earnings (loss) per share under the provisions of FAS 128
(in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 121 $ (1,370) $ (371) $ (2,536)
-------- ---------- -------- ----------
-------- ---------- -------- ----------
Weighted-average common shares outstanding
(excluding unvested restricted common stock) 10,597 2,912 7,504 2,780
Effect of dilutive potential common shares:
Unvested restricted common stock 866 - - -
Convertible preferred stock 2,680 - - -
Stock options 1,301 - - -
Warrants 34 - - -
-------- ---------- -------- ----------
Weighted-average common and dilutive
potential common shares outstanding 15,478 2,912 7,504 2,780
-------- ---------- -------- ----------
-------- ---------- -------- ----------
Earnings (loss) per share:
Basic $ 0.01 $ (0.47) $ (0.05) $ (0.91)
Diluted $ 0.01 $ (0.47) $ (0.05) $ (0.91)
</TABLE>
The potential common shares related to unvested restricted Common Stock
represent stock that has been issued but which is subject to repurchase to
the extent the holder does not remain associated with the Company until such
shares are vested. The potential common shares related to Convertible
Preferred Stock are attributable to 8,040,153 shares of Convertible Preferred
Stock which, upon completion of the Company's initial public offering in May
1998, automatically converted into the same number of shares of Common Stock.
Substantially all outstanding stock options and warrants were included in
the computation of diluted earnings per share for the three months ended June
30, 1998.
5. Credit Facilities
In February 1998, the Company agreed in principle to enter into a
transaction with Hambrecht & Quist Guaranty Finance, LLC ("Guaranty
Finance"), whereby Guaranty Finance would loan the Company up to $5 million.
Under the related agreements which were executed on March 12, 1998 and
subsequently amended on April 24, 1998, (i) Guaranty Finance agreed to lend
the Company up to $5 million at an interest rate of 12% per annum, $1.1
million of which was loaned to the Company in March 1998 and $1.5 million of
which was loaned to the Company in April 1998 (the "Loan") and (ii) Guaranty
Finance purchased from the Company for $1,250 a warrant to purchase 125,000
shares of the Company's Common Stock at a per share purchase price equal to
the initial public offering price of $13.00. The warrant is exercisable
through March 1, 2003. The fair value of this warrant was estimated to be
7
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$563,000 and is being expensed as an additional cost of financing in 1998.
The Company also paid a $100,000 fee to Guaranty Finance in consideration for
entering into the Loan.
In June 1998, the Company amended its working capital line of credit
agreement with a bank. The amended agreement provides for borrowings of up
to $10 million. Borrowings under the line of credit are limited to a
specified percentage of eligible accounts receivable and inventory, and are
secured by substantially all of the Company's accounts receivable and
inventory. Interest on borrowings is set at the bank's prime rate (8.5% at
June 30, 1998). Among other provisions, the Company is required to maintain
certain financial covenants and is prohibited from paying dividends. The
line of credit agreement expires in June 2000. As of June 30, 1998, the
Company had no borrowings outstanding under this line.
6. Initial Public Offering
In May 1998, the Company completed its initial public offering whereby
the Company sold 3,132,000 shares of Common Stock. Net proceeds to the
Company aggregated $36.3 million. The Company used $6.9 million of the net
proceeds from the offering to repay outstanding indebtedness, including $2.3
million for borrowings under the working capital line of credit and $2.6
million for the outstanding balance of the Loan.
7. New Accounting Pronouncement
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Under FAS 133, gains or losses resulting from changes in the values
of derivatives are to be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they
qualify for hedge accounting. The key criterion for hedge accounting is that
the derivative must be highly effective in achieving offsetting changes in
fair value or cash flows of the hedged items during the term of the hedge.
The Company is required to adopt FAS 133 in the first quarter of 2000 and is
currently evaluating the effect, if any, of adopting the new standard.
8. Subsequent Event
On July 30, 1998, the Company entered into an agreement to acquire ICAST
Corporation ("ICAST") in exchange for 425,000 shares of the Company's Common
Stock and the assumption of certain liabilities and outstanding ICAST stock
options. ICAST develops, markets and supports software designed for Internet
and Intranet broadcasting of real-time video, audio and data. The
acquisition, which is expected to be consummated in August 1998, will be
accounted for under the purchase method of accounting. The Company currently
anticipates that the acquisition, when completed, will result in a
significant charge to earnings for in-process research and development.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE COMPANY NOTES THAT, EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED
HEREIN, THE MATTERS DISCUSSED BELOW CONTAIN FORWARD-LOOKING STATEMENTS WHICH
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR
INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION TO UPDATE THIS
INFORMATION OR PUBLICLY RELEASE ANY REVISIONS OR REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS REPORT. SUCH FACTORS INCLUDE, AMONG
OTHERS: THE COMPANY'S LIMITED OPERATING HISTORY AND VARIABILITY OF OPERATING
RESULTS, MARKET ACCEPTANCE OF VIDEO TECHNOLOGY, DEPENDENCE ON ATM BACKBONE
TECHNOLOGY AND THE NEXT GENERATION INTERNET, POTENTIAL INABILITY TO MAINTAIN
BUSINESS RELATIONSHIPS WITH DISTRIBUTORS AND SUPPLIERS, RAPID TECHNOLOGICAL
CHANGES, COMPETITION IN THE VIDEO NETWORKING INDUSTRY, THE IMPORTANCE OF
ATTRACTING AND RETAINING PERSONNEL, MANAGEMENT OF THE COMPANY'S GROWTH,
CONSOLIDATION AND COST PRESSURES IN THE VIDEO NETWORKING INDUSTRY, DEPENDENCE
ON KEY EMPLOYEES, THE RISK THAT THE ICAST ACQUISITION WILL NOT BE CONSUMMATED
ON SCHEDULE, OR AT ALL, THE RISK THAT THE INTEGRATION OF THE COMPANY'S AND
ICAST'S RESPECTIVE BUSINESS OPERATIONS WILL NOT BE ACHIEVED IN A TIMELY AND
EXPECTED MANNER, OR THAT KEY PERSONNEL OF ICAST ARE NOT SUCCESSFULLY
RETAINED, AND OTHER RISK FACTORS REFERENCED IN THE COMPANY'S REGISTRATION
STATEMENT ON FORM S-1, FILE NO. 333-38755, DECLARED EFFECTIVE ON APRIL 29,
1998.
OVERVIEW
The Company provides a high quality, cost effective video networking
solution for the Next Generation Internet that integrates video with voice
and data, while leveraging existing network infrastructures. The Company's
products enable end-to-end video in a wide range of room and desktop
environments for video applications such as distance learning, distance
meetings and distance medicine. The Company was incorporated in California
in October 1993 and reincorporated in Delaware in December 1997. The Company
first shipped its video networking products in 1995.
The Company sells its products worldwide through original equipment
manufacturer ("OEM") partners, distributors and resellers. The Company
established strategic relationships with Bay Networks, Inc. ("Bay Networks")
in November 1995, Northern Telecom, Inc. ("Nortel") in May 1997 and Ascend
Communications, Inc. ("Ascend Communications") in May 1998. In November
1995, the Company granted Bay Networks the worldwide non-exclusive right to
market and sell certain of the Company's products. In September 1996, the
Company granted Bay Networks the worldwide non-exclusive right to market and
sell all of the Company's current and future products, under both the
Company's and Bay Networks' names. In May 1997, the Company granted similar
rights to Nortel to market the Company's products under the Company's name.
In May 1998, the Company granted rights to Ascend Communications to market
and sell certain of the Company's products under the Company's name on a
world-wide non-exclusive basis. Sales through Bay Networks represented 54%,
64% and 29% of the Company's revenues in the six months ended June 30, 1998
and the years ended December 31, 1997 and 1996, respectively. Sales by
Nortel and Ascend Communications have not been significant to date. The
Company also plans to enter into additional distribution agreements.
Nortel recently announced its plans to acquire Bay Networks. The
Company does not believe that the acquisition of Bay Networks by Nortel will
have a material adverse effect on its future operating results.
9
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The Company recognizes revenues upon shipment of products to customers,
provided that no significant obligations remain and collectibility is
probable. The OEM partners generally have no rights of return and have
historically carried limited amounts of inventories of the Company's
products. Agreements with certain distribution partners contain price
protection provisions and certain return rights. Accordingly, the Company
records a provision for estimated future returns and price protection upon
revenue recognition. To date, returns and charges for price protection have
not been material.
Direct sales from shipments to customers outside of North America
accounted for approximately 20%, 20% and 36% of the Company's revenues in the
six months ended June 30, 1998, and the years ended December 31, 1997 and
1996, respectively. The Company expects that direct sales from shipments to
customers outside of North America will continue to represent a significant
portion of its future revenues. In addition, the Company believes that a
small portion of its sales through Bay Networks and other distribution
partners is sold to international end-users. Revenues from the Company's
international operations are subject to various risks. To date, the Company
has not engaged in any foreign currency hedging activity.
The Company has in the past experienced, and may from time to time in
the future experience, fluctuations in revenues, gross margins and operating
results. The Company adopted a strategy in the fourth quarter of 1996 to
focus on a limited number of substantial end-user projects, rather than on
the implementation of a large number of evaluation and demonstration
projects. The initial impact of this change of strategy was a decrease in
revenues from $3.9 million in the fourth quarter of 1996 to $2.7 million in
the first quarter of 1997. The Company's focus on a limited number of large
end-user projects has resulted in, and may in the future result in,
significant fluctuations in quarterly revenues. There can be no assurance
that revenues will increase on a quarterly basis or at all. The Company's
gross margins have also historically fluctuated from period to period and are
expected to continue to fluctuate in the future. Gross margins are
significantly influenced by a variety of factors, including product mix,
percentage of revenues derived from OEM partners versus distributors or
resellers, pricing within the video networking industry and the prices of
significant components used in the Company's products. The Company generally
recognizes higher margins from video products and value added switch modules
and lower margins from base model V-Switches and adapter cards.
Various factors, in addition to those discussed above, contribute to the
fluctuations in revenues, gross margins and operating results, including but
not limited to the development of the market for video networking and for the
Company's products, the Company's success in developing, introducing and
shipping new products and product enhancements, the Company's success in
accurately forecasting demand for new orders, new product introductions and
price reductions by the Company's competitors. Further, a significant portion
of the Company's expenses is fixed in advance. The Company expects that
operating expenses will increase in the future to fund expanded operations.
To the extent that these increased expenses are not accompanied by an
increase in revenues, the Company's business, financial condition and results
of operations would be materially adversely affected. If revenues or gross
margins were below Company expectations in any given period, the Company's
inability to adjust operating expenses in response would adversely affect
operating results.
The Company outsources certain functions to independent service
providers. The Company's products are manufactured primarily by Tanon
Manufacturing, Inc. and accounting and data processing functions are
performed by KPMG Peat Marwick LLP.
On July 30, 1998, the Company entered into an agreement to acquire ICAST
Corporation ("ICAST") in exchange for 425,000 shares of First Virtual Common
Stock and the assumption of certain
10
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liabilities and outstanding ICAST stock options. ICAST develops, markets and
supports software designed for Internet and Intranet broadcasting of
real-time video, audio and data. The acquisition, which is expected to be
consummated in August 1998, will be accounted for under the purchase method
of accounting. The Company currently anticipates that the acquisition, when
completed, will result in a significant charge to earnings for in-process
research and development.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's condensed
consolidated statements of operations as a percentage of total revenues
for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 54.3% 55.6% 53.9% 56.6%
---------- ---------- ---------- ----------
Gross profit 45.7% 44.4% 46.1% 43.4%
---------- ---------- ---------- ----------
Operating expenses:
Research and development 18.1% 36.7% 19.3% 35.9%
Selling, general and administrative 24.8% 46.8% 26.7% 48.0%
---------- ---------- ---------- ----------
Total operating expenses 42.9% 83.5% 46.0% 83.9%
---------- ---------- ---------- ----------
Operating income (loss) 2.7% (39.1%) 0.0% (40.5%)
Other income (expense), net (1.6%) (1.0%) (1.9%) (0.8%)
---------- ---------- ---------- ----------
Net income (loss) 1.1% (40.1%) (1.9%) (41.3%)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Operating expenses include non-cash employee stock compensation charges of
$262,000 (2.4% of total revenues) and $112,000 (3.3% of total revenues) for
the three months ended June 30, 1998 and 1997, respectively, and $678,000
(3.4% of total revenues) and $251,000 (4.0% of total revenues) for the six
months ended June 30, 1998 and 1997, respectively.
REVENUES. Revenues increased 222%, to $11.0 million for the three
months ended June 30, 1998, from $3.4 million for the three months ended June
30, 1997. Revenues increased 226%, to $20.0 million for the six months ended
June 30, 1998, from $6.1 million for the six months ended June 30, 1997. The
increases in revenues for both the three and six month periods resulted from
wider acceptance of the Company's products as a result of marketing efforts
of the Company and its strategic partners. Sales through Bay Networks
increased 316%, to $6.6 million for the three months ended June 30, 1998,
from $1.6 million for the three months ended June 30, 1997, and increased
268%, to $10.8 million for the six months ended June 30, 1998, from $2.9
million for the six months ended June 30, 1997.
GROSS PROFIT. Gross profit consists of revenues less the cost of
revenues, which consists primarily of costs associated with the manufacture
of the Company's products by Tanon Manufacturing,
11
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Inc. and other manufacturers and related costs of freight, inventory
obsolescence, royalty and warranty. These manufacturers procure the majority
of materials, except for certain key components which the Company purchases
from third-party vendors.
Gross profit increased to $5.0 million for the three months ended June
30, 1998, from $1.5 million for the three months ended June 30, 1997. Gross
margin (gross profit as a percentage of revenues) increased to 45.7% for the
three months ended June 30, 1998, from 44.4% for the three months ended June
30, 1997. Gross profit increased to $9.2 million for the six months ended
June 30, 1998, from $2.7 million for the six months ended June 30, 1997.
Gross margin increased to 46.1% for the six months ended June 30, 1998, from
43.4% for the six months ended June 30, 1997. The increases in gross profit
for both the three and six month periods ended June 30, 1998 over the
comparable periods in 1997 were primarily due to the related increases in
revenues. The increases in gross margin for both the three and six month
periods ended June 30, 1998 over the comparable periods in 1997 were due to a
shift in mix to higher margin products, as well as decreases in product costs
for certain of the Company's products.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs, costs of contracts and outside consultants,
supplies and material expenses, equipment depreciation and overhead costs.
Research and development expenses increased 59%, to $2.0 million for the
three months ended June 30, 1998, from $1.3 million for the three months
ended June 30, 1997. As a percentage of total revenues, research and
development expenses decreased to 18.1% for the three months ended June 30,
1998, from 36.7% for the three months ended June 30, 1997. Research and
development expenses increased 76%, to $3.9 million for the six months ended
June 30, 1998, from $2.2 million for the six months ended June 30, 1997. As
a percentage of total revenues, research and development expenses decreased
to 19.3% for the six months ended June 30, 1998, from 35.9% for the six
months ended June 30, 1997. The increases in absolute dollars were the
result of hiring additional engineers and consultants for product development
and non-cash compensation charges relating to the Company's employee stock
plans, which increased to $111,000 and $285,000, respectively, for the three
and six month periods ended June 30, 1998, from $55,000 and $120,000,
respectively, for the three and six month periods ended June 30, 1997. The
decreases as a percentage of revenues were due to the relatively greater
increases in revenues for the three and six month periods ended June 30, 1998
than in the level of research and development expenses for those periods.
The Company believes that research and development expenses will continue to
increase in absolute dollars for the foreseeable future. However, such
expenses will fluctuate depending on various factors, including the status of
development projects.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses include personnel and related overhead costs for
sales, marketing, finance, human resources and general management. Such
expenses also include costs of outside contractors, advertising, trade shows
and other marketing and promotional expenses. Selling, general and
administrative expenses increased 71%, to $2.7 million for the three months
ended June 30, 1998, from $1.6 million for the three months ended June 30,
1997. As a percentage of total revenues, selling, general and administrative
expenses decreased to 24.8% for the three months ended June 30, 1998, from
46.8% for the three months ended June 30, 1997. Selling, general and
administrative expenses increased 81%, to $5.3 million for the six months
ended June 30, 1998, from $2.9 million for the six months ended June 30,
1997. As a percentage of total revenues, selling, general and administrative
expenses decreased to 26.7% for the six months ended June 30, 1998, from
48.0% for the six months ended June 30, 1997. The increases in absolute
dollars were the result of the expansion of the Company's sales and marketing
infrastructure, in addition to higher marketing and selling costs, and to
non-cash compensation charges relating to the Company's employee
12
<PAGE>
stock plans, which increased to $152,000 and $394,000, respectively, for the
three and six month periods ended June 30, 1998, from $57,000 and $131,000,
respectively, for the three and six month periods ended June 30, 1997. The
decreases as a percentage of revenues were due to the relatively greater
increases in revenues for the three and six month periods ended June 30, 1998
than in the level of selling, general and administrative expenses for those
periods. The Company anticipates that selling, general and administrative
expenses will continue to increase in absolute dollars in the foreseeable
future as the Company expands its selling and marketing efforts and incurs
the administrative costs associated with being a publicly-held company.
OTHER INCOME (EXPENSE) NET. Other income (expense), net consists
primarily of interest expense relating to the Company's credit facilities and
long-term debt, offset in part by interest income earned on cash balances.
Other income (expense), net increased to a net expense of $180,000 for the
three months ended June 30, 1998, from a net expense of $35,000 for the three
months ended June 30, 1997. Other income (expense), net increased to a net
expense of $381,000 for the six months ended June 30, 1998, from a net
expense of $51,000 for the six months ended June 30, 1997. The increases for
both the three and six month periods ended June 30, 1998 resulted from the
relatively higher level of borrowings during the 1998 periods as compared to
the corresponding 1997 periods.
INCOME TAXES. The Company has incurred losses since inception. No
benefit has been recorded for income taxes for any of the periods presented
as the Company believes that, based on the history of such losses and other
factors, the weight of available evidence indicates that it is more likely
than not that it will not be able to realize the benefit of these net
operating losses, and thus a full valuation reserve has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through completion of its initial public offering in May
1998, the Company financed its operations primarily through private
placements of equity securities, raising an aggregate of approximately $14.8
million, net of issuance costs, and to a lesser extent through certain credit
facilities and long-term debt. As of June 30, 1998, the Company had cash and
cash equivalents of $32.0 million and working capital of $36.6 million.
During the six months ended June 30, 1998, the Company used $2.4 million
in its operating activities, primarily to fund an increase in accounts
receivable of $3.4 million offset in part by a decrease in inventory of
$842,000. The increase in accounts receivable was due to increased sales.
During the six months ended June 30, 1997, the Company had a net loss of $2.5
million which was offset in part by a decrease in inventory of $407,000,
resulting in $1.7 million of cash used in operating activities.
Cash used for investing activities for acquisition of property and
equipment was $921,000 for the six months ended June 30, 1998, compared to
$345,000 for the six months ended June 30, 1997. The capital expenditures
consisted of purchases of computers and related equipment, furniture and
fixtures necessary to support the Company's growth. To date the Company has
not made significant outlays for capital expenditures because of its strategy
to outsource manufacturing and certain other functions.
The Company has a working capital line of credit with a bank, which
provides for borrowings of up to $10 million. Borrowings under the line of
credit bear interest at the bank's prime rate (8.5% at June 30, 1998), are
secured by certain assets of the Company and are limited to certain
percentages of the Company's accounts receivable and inventory balances. As
of June 30, 1998, the Company had no borrowings outstanding under this line.
The line, which expires in June 2000, requires the Company to
13
<PAGE>
comply with certain financial ratios and covenants, and also limits the
Company's ability to pay dividends.
In February 1998, the Company agreed in principle to enter into a
transaction with Hambrecht & Quist Guaranty Finance, LLC ("Guaranty
Finance"), whereby Guaranty Finance would loan the Company up to $5 million.
Under the related agreements which were executed on March 12, 1998 and
subsequently amended on April 24, 1998, (i) Guaranty Finance agreed to lend
the Company up to $5 million at an interest rate of 12% per annum, $1.1
million of which was loaned to the Company in March 1998 and $1.5 million of
which was loaned to the Company in April 1998 (the "Loan") and (ii) Guaranty
Finance purchased from the Company for $1,250 a warrant to purchase 125,000
shares of the Company's Common Stock at a per share purchase price equal to
the initial public offering price of $13.00. The warrant is exercisable
through March 1, 2003. The fair value of this warrant was estimated to be
$563,000 and is being expensed as an additional cost of financing in 1998.
The Company also paid a $100,000 fee to Guaranty Finance in consideration for
entering into the Loan.
In May 1998, the Company completed its initial public offering whereby
the Company sold 3,132,000 shares of Common Stock. Net proceeds to the
Company aggregated $36.3 million. The Company used $6.9 million of the net
proceeds from its initial public offering to repay outstanding indebtedness,
including $2.3 million for borrowings under the working capital line of
credit and $2.6 million for the outstanding balance of the Loan.
The Company believes that its cash and cash equivalents of $32.0 million
at June 30, 1998, together with existing sources of liquidity, will provide
adequate cash to fund its operations for at least the next 12 months.
Thereafter, if cash generated by operations is insufficient to satisfy the
Company's liquidity requirements, the Company may be required to sell
additional equity or debt securities or increase its lines of credit. The
sale of additional equity or convertible debt securities may result in
additional dilution to the Company's stockholders.
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs and
operating systems in its internal operations, as well as its products. The
use of computer programs that rely on two-digit date programs to perform
computations and decision-making functions may cause computer systems to
malfunction in the year 2000 and lead to significant business delays and
disruptions. While the Company believes that the software applications that
it uses or has developed are year 2000 compliant, to the extent that any of
these software applications contain source code that is unable to
appropriately interpret the upcoming calendar year 2000, some level of
modification or possible replacement of such source code or applications will
be necessary. The Company has analyzed the software applications that it uses
or has developed and, as a result, the Company at this time does not
anticipate any significant expense in ensuring that they are year 2000
compliant. However, until the year 2000 arrives, the Company cannot be
absolutely certain that its analysis is correct. Additionally, there can be
no assurance that the Company's suppliers, vendors or other enterprises with
which the Company interacts are or will be year 2000 compliant. Failure of
third-party enterprises with which the Company interacts to achieve year 2000
compliance could have a material adverse effect on the Company's business,
financial condition and results of operations.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) In May 18, 1998, as part of an agreement entered into between the
Company and Tanon Manufacturing, Inc. ("Tanon"), the Company issued to Tanon
a warrant to purchase 100,000 shares of Common Stock at a per share exercise
price equal to $9.00 (the "Securities"). The warrant is exercisable through
May 18, 2001. The fair value of this warrant was estimated to be $650,000 and
is being expensed as an element of cost of sales.
The issuance and sale of the Securities was intended to be exempt from
registration and prospectus delivery requirements under the Securities Act of
1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof
due to, among other things, (i) the limited number of persons to whom the
Securities were issued, (ii) the distribution of disclosure documents to the
investor, (iii) the fact that such entity represented and warranted to the
Company, among other things, that such entity was acquiring the Securities
for investment only and not with a view to the resale or distribution
thereof, and (iv) the fact that a certificate representing the Securities was
issued with a legend to the effect that such Securities had not been
registered under the Securities Act or any state securities laws and could
not be sold or transferred in the absence of such registration or an
exemption therefrom.
(d) The effective date of the Company's registration statement, filed on
Form S-1 under the Securities Act of 1933 (File No. 333-38755), was April 29,
1998 (the "Registration Statement"). The class of securities registered was
Common Stock and all securities registered were sold in the offering. The
managing underwriters for the offering were BancAmerica Robertson Stephens;
Bear, Stearns & Co. Inc.; and Hambrecht & Quist LLC. Pursuant to the
Registration Statement, the Company sold 3,132,000 shares of its Common Stock
for an aggregate offering price of $40,716,000. Also pursuant to the
Registration Statement, certain selling stockholders of the Company sold
180,000 shares of Common Stock of the Company for an aggregate offering price
of $2,340,000.
In connection with the public offering, the Company incurred expenses of
approximately $4.7 million, of which approximately $2.9 million represented
underwriting discounts and commissions and approximately $1.8 million
represented other expenses related to the offering. All such expenses were
direct or indirect payments to others. The net offering proceeds to the
Company and the selling stockholders after total expenses were $36.3 million
and $2.2 million, respectively.
Through June 30, 1998, the Company has used $6.9 million of the net
proceeds from the offering to repay outstanding indebtedness, including $2.3
million for borrowings under the working capital line of credit and $2.6
million for the outstanding balance of the Loan, and $7.2 million for working
capital and general corporate purposes. The Company has invested the
remainder of the net proceeds in short-term, investment-grade, interest
bearing financial instruments. The use of the proceeds from the offering does
not represent a material change in the use of the proceeds described in the
Registration Statement.
15
<PAGE>
ITEM 5. OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders who wish to bring matters
or propose nominees for director at the Company's 1999 annual meeting of
stockholders (the "1999 Annual Meeting") must provide specified information to
the Company not earlier than the close of business on the 90th day prior to the
1999 Annual Meeting and not later than the close of business on the 60th day
prior to the 1999 Annual Meeting, or, in the event of a public announcement of
the date of the 1999 Annual Meeting fewer than 70 days prior to the date of the
1999 Annual Meeting, not later than the close of business on the 10th day
following public announcement of the date of such meeting (unless such matters
are included in the Company's proxy statement pursuant to Rule 14a-8 under the
Securities Exchange Act of 1934, as amended).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
3.1(1) Amended and Restated Certificate of Incorporation
3.1(i) Certificate of Ownership and Merger, effective August 3, 1998
3.2(1) Bylaws of the Registrant
4.1 Specimen Common Stock Certificate
10.10(i) Amendment to Loan and Security Agreement between the Company
and Silicon Valley Bank, dated June 10, 1998
11.1(2) Statement of Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1, File No. 333-38755, declared effective on April 29, 1998,
incorporated herein by reference.
(2) See Note 4 to Condensed Consolidated Financial Statements.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 1998 FVC.COM, INC.
By: /s/ James O. Mitchell
----------------------------
James O. Mitchell
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
3.1(1) Amended and Restated Certificate of Incorporation
3.1(i) Certificate of Ownership and Merger, effective August 3, 1998
3.2(1) Bylaws of the Registrant
4.1 Specimen Common Stock Certificate
10.10(i) Amendment to Loan and Security Agreement between the Company
and Silicon Valley Bank, dated June 10, 1998
11.1(2) Statement of Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1, File No. 333-38755, declared effective on April 29,
1998, incorporated herein by reference.
(2) See Note 4 to Condensed Consolidated Financial Statements.
18
<PAGE>
EXHIBIT 3.1(i)
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
FVC.COM, INC.
a Delaware Corporation
INTO
FIRST VIRTUAL CORPORATION
a Delaware Corporation
______________________________________________________________________________
Pursuant to Section 253 of the
General Corporation Law of the State of Delware
______________________________________________________________________________
First Virtual Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That this corporation owns all of the outstanding shares of
FVC.COM, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware.
SECOND: That this corporation, by the following resolutions of its Board
of Directors, duly adopted by Unanimous Written Consent pursuant to Section
141(f) of the General Corporation Law of the State of Delaware on the 28th day
of July, 1998, determined to merge FVC.COM, Inc. into itself on the terms and
conditions set forth in such resolutions:
RESOLVED, that FVC.COM, Inc. be merged with and into
the Corporation and that the Corporation be the surviving
corporation in such merger;
FURTHER RESOLVED, that the merger shall become
effective upon the date and time of the filing of a
Certificate of Ownership and Merger with the Secretary of
State of the State of Delaware;
FURTHER RESOLVED, that upon the effectiveness of the
merger, the Corporation shall assume all of the liabilities
and obligations of FVC.COM, Inc.; and
FURTHER RESOLVED, that upon the effectiveness of the
merger, the name of the Corporation shall be changed to
"FVC.COM, Inc." and
1
<PAGE>
Article I of the Amended and Restated Certificate of
Incorporation of the Corporation shall be amended to read as
follows:
"I: The name of the corporation is:
FVC.COM, Inc."
IN WITNESS WHEREOF, this Certificate of Ownership and Merger is hereby
executed on behalf of the surviving Corporation, First Virtual Corporation, and
attested to by its officers thereunto duly authorized.
Dated as of July 31, 1998
FIRST VIRTUAL CORPORATION
By: /s/ James O. Mitchell
---------------------
James O. Mitchell
Vice President and Chief
Financial Officer
ATTEST:
By: /s/ Lee F. Benton
------------------
Lee F. Benton,
Secretary
2
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
-------- --------
FVC.COM, Inc.
[LOGO]
-------- --------
INCORPORATED UNDER SEE REVERSE FOR
THE LAWS OF DELAWARE CERTAIN DEFINITIONS
AND RESTRICTIONS
CUSIP 30266P100
- ------------------------------------------------------------------------------
This Certifies That
is the owner of
- ------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
FVC.COM, Inc.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated
[SIG] [SIG]
Secretary FVC.COM, Inc. Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER, INC.
(P.O. Box 1596, Denver CO 80201) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
FVC.COM, Inc.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT- _____________________Custodian ____________________
TEN ENT- as tenants by the entireties (Cust) (Minor)
JT TEN- as joint tenants with right of survivorship under Uniform Gifts to Minors Act ______________________
and not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
for value received, ______________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
X X
X X
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
Attorney
- ---------------------------------------------------------------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises.
Date, X
- ----------------------------- -----------------------------------------------------------------------------------
X
-----------------------------------------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
SIGNATURE GUARANTEED: --------------------------------------------
</TABLE>
<PAGE>
Exhibit 10.10(i)
AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This Amendment to Loan and Security Agreement is entered into as of June
10, 1998, by and between SILICON VALLEY BANK ("Bank") and FIRST VIRTUAL
CORPORATION ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security
Agreement dated as of July 3, 1996, and amended by that certain Amendment to
Loan and Security Agreement dated April 11, 1997, as modified by that certain
Loan Modification Agreement dated September 3, 1997, and as amended
thereafter (the "Agreement"). The parties desire to amend the Agreement in
accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The definition of "Committed Line" under Section 1.1 is amended to
read "Ten Million Dollars ($10,000,000)." The definition of "Revolving
Maturity Date" under Section 1.1 is amended to read "June 11, 2000".
Paragraph (i) under the definition of "Eligible Accounts" under Section 1.1
is hereby amended to read "(i) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts, to the extent such
obligations exceed the aforementioned percentage, except as approved in
writing by Bank (provided that the concentration limit for Bay Networks shall
be fifty percent (50%) of all Accounts);".
2. Section 2.1 is amended to read as follows:
"2.1 ADVANCES. Subject to and upon the terms and conditions of this
Agreement, Borrower may request Advances in an aggregate outstanding amount
not to exceed the Committed Line MINUS the face amount of all outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit) MINUS
the Exchange Reserve. Notwithstanding the preceding sentence, if the
aggregate amount of outstanding Advances exceeds Two Million Dollars
($2,000,000), then Borrower may request Advances in an aggregate outstanding
amount not to exceed (i) the lesser of the Committed Line or the Borrowing
Base, MINUS (ii) the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit) MINUS the Exchange
Reserve. For purposes of this Agreement, "Borrowing Base" shall mean an
amount equal to (i) eighty percent (80%) of Eligible Accounts and Eligible
Foreign Accounts; PLUS (ii) one hundred percent (100%) of Accounts that are
supported by one or more letters of credit in an amount and of a tenor, and
issued by a financial institution, acceptable to Bank; PLUS (iii) the lesser
of (a) fifty percent (50%) of the book value of Borrower's Inventory, or (b)
Two Million Dollars ($2,000,000)."
The Revolving Facility shall terminate on the Revolving Maturity Date,
at which time all Advances under this Section 2.1 shall be immediately due
and payable."
3. Section 2.1.1(a) is amended to read as follows:
"2.1.1 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued Letters of Credit for
the account of Borrower in an aggregate face amount not to exceed (i) the
lesser of the Committed Line or the Borrowing Base minus (ii) the then
outstanding principal balance of the Advances provided that the face amount
of outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) shall not in any case exceed Two Million Dollars ($2,000,000) MINUS
the amount of the Exchange Reserve. Each such letter of credit shall have an
expiry date no later than the Maturity Date; provided that the expiry date
may be extended up to 180 days beyond the expiry date provided Borrower
secures its reimbursement and other obligations in connection with such
letter of credit upon terms reasonably acceptable to Bank. All such letters
of credit shall be, in form and substance, acceptable to Bank in its sole
discretion and shall be subject to the terms and conditions of Bank's form of
application and letter of credit agreement. All amounts actually paid by
Bank in respect of a letter of credit shall, when paid, constitute an Advance
under this Agreement."
1
<PAGE>
4. Section 2.1.4 is amended to read as follows:
"2.1.4 [Intentionally omitted.]"
5. Section 2.3(a) is amended to read as follows:
"(a) INTEREST RATE. Except as set forth in Section 2.3(b), any
Advances shall bear interest, on the average Daily Balance, at a rate equal
to the Prime Rate."
6. Section 6.3 is hereby deleted and replaced with the following:
"When there are any Obligations outstanding, Borrower shall deliver
to Bank: (a) within five (5) days upon becoming available, copies of all
statements, reports and notices sent or made available generally by Borrower
to its security holders or to any holders of Subordinated Debt and all
reports and notices sent or made on Form 10-K and 10-Q filed with the
Securities and Exchange Commission; (b) along with the Form 10-K's required
in this section, a Compliance Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT D hereto; (c) promptly upon receipt of
notice thereof, a report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to Borrower
or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (d)
such budgets, sales projections, operating plans or other financial
information as Bank may reasonable request from time to time.
In the event aggregate outstanding Advances (including any Letters
of Credit or the Exchange Reserve) exceed Two Million Dollars ($2,000,000),
within twenty (20) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer
in substantially the form of EXHIBIT C hereto, together with aged listings of
accounts receivable and accounts payable.
Bank shall have the right prior to funding an Advance that causes
the aggregate outstanding obligations under Section 2.1 to exceed Two Million
Dollars ($2,000,000), and a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every twelve (12) months unless an Event of
Default has occurred and is continuing."
7. Sections 6.6, 6.7, 6.8 and 6.9 are amended to read as follows:
"6.6 PRINCIPAL DEPOSITORY/DEMAND DEPOSIT ACCOUNT. Borrower shall
maintain its principal depository and operating accounts with Bank, PROVIDED
that quality of service is satisfactory, which satisfaction is to be determined
on a commercially reasonable basis. In addition to the foregoing, Borrower
shall maintain a demand deposit account with Bank with a compensating free
balance, not including service charge requirements, of at least One Million
Dollars ($1,000,000).
6.7 QUICK RATIO. Borrower shall maintain as of the last day of
each quarter a ratio of Quick Assets to Current Liabilities, excluding deferred
revenue, of at least 2.0 to 1.0.
6.8 DEBT-TANGIBLE NET WORTH. Borrower shall maintain as of the
last day of each quarter a ratio of Total Liabilities, excluding deferred
revenue, to Tangible Net Worth of not more than 1.0 to 1.0.
6.9 TANGIBLE NET WORTH. Borrower shall maintain as of the last
day of each quarter a Tangible Net Worth of not less than Thirty Million Dollars
($30,000,000), increasing on June 9, 1999 to Thirty Million Dollars
($30,000,000), PLUS, seventy-five percent (75%) of Borrower's net income or new
equity received over the previous twelve (12) months."
8. Sections 6.10 and 6.11 are amended to read as follow:
"6.10 [Intentionally omitted.]
6.11 [Intentionally omitted.]"
2
<PAGE>
9. Exhibit A is amended in its entirety to read as reflected on Exhibit A
attached hereto.
10. The Borrowing Base Certificate and Compliance Certificate to be
delivered after the date of this Amendment shall be in substantially the form of
EXHIBIT C and EXHIBIT D, respectively.
11. As a condition to the effectiveness of this Amendment, Bank shall have
received, in form and substance satisfactory to Bank, the following:
(a) resolutions by the Borrowers authorizing the execution and
delivery of this Amendment;
(b) UCC-2 amending the Collateral description in Exhibit A; and
(c) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
12. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
13. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
14. This Amendment may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one instrument.
15. As a condition to the effectiveness of this Amendment, Borrower
shall pay an additional fee in an amount equal to Eight Thousand Five Hundred
Dollars ($8,500), of which, Five Thousand Dollars ($5,000) is payable on the
date hereof and the balance of which, Three Thousand Five Hundred Dollars
($3,500) is due and payable on June 9, 1999, plus all Bank Expenses incurred in
connection with the preparation of this Amendment.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
FIRST VIRTUAL CORPORATION
By: /s/ James O. Mitchell
_________________________________
Title: ______________________________
SILICON VALLEY BANK
By: /s/ Tim Walsh
_________________________________
Title: ______________________________
3
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower in
and to the following:
(a) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing;
(b) All now existing and hereafter arising accounts, letters of credit,
contract rights, royalties, license rights and all other forms of obligations
owing to Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing;
(c) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to
include any copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; any
patents, trademarks, servicemarks and applications therefor, any trade secret
rights, including any rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now
owned or hereafter acquired; or any claims for damages by way of any past,
present and future infringement of any of the foregoing (the "Intellectual
Property") EXCEPT that the Collateral shall include the proceeds of, and all
rights to payment arising under the Intellectual Property.
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
_______________________________________________________________________________
Borrower: First Virtual Corporation Lender: Silicon Valley Bank
Commitment Amount: $10,000,000
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
<S> <C> <C> <C>
1. Accounts Receivable Book Value as of ____ $________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
2. Amounts over 90 days due $________
3. Balance of 50% over 90 day accounts $________
4. Concentration Limits $________
5. Foreign Accounts $________
6. Governmental Accounts $________
7. Contra Accounts $________
8. Promotion or Demo Accounts $________
9. Intercompany/Employee Accounts $________
10. Other (please explain on reverse) $________
11. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $________
12. Eligible Accounts (#1 minus #11) $________
13. LOAN VALUE OF ACCOUNTS (80% of #12) $________
INVENTORY
14. Inventory Book Value as of ____ $________
15. LOAN VALUE OF INVENTORY (lesser of 50% of #14 or $2,000,000) $________
BALANCES
16. Maximum Loan Amount $10,000,000
17. Total Funds Available* $________
18. Present balance owing on Line of Credit $________
19. Outstanding under Sublimits () $________
20. RESERVE POSITION (#17 minus #18 and #19) $________
</TABLE>
* #16 minus sublimits or upon aggregate Advances in excess of $2M, the lesser
of (i) #16 minus sublimits or (ii) #13 plus #15
THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THE FOREGOING IS TRUE, COMPLETE
AND CORRECT, AND THAT THE INFORMATION REFLECTED IN THIS BORROWING BASE
CERTIFICATE COMPLIES WITH THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THE
LOAN AND SECURITY AGREEMENT BETWEEN THE UNDERSIGNED AND SILICON VALLEY BANK.
COMMENTS:
|-----------------------------|
| BANK USE ONLY |
| |
| Rec'd By: ________ |
| Auth. Signer |
FIRST VIRTUAL CORPORATION | Date: ____________ |
| |
| Verified: ________ |
By: | Auth. Signer |
| Date: ____________ |
_______________________ | __________________ |
Authorized Signer |-----------------------------|
<PAGE>
EXHIBIT D
FORM OF COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: FIRST VIRTUAL CORPORATION
The undersigned authorized officer of FIRST VIRTUAL CORPORATION hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in complete compliance for the period ending ______________ with all
required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies
that these are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and are consistently applied from one period to the next
except as explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C>
10-K and 10-Q financial statements Within 5 days(1) Yes No
A/R & A/P Agings Monthly within 20 days(2) Yes No
A/R Audit Annual(3) Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 2.0:1.0 _____:1.0 Yes No
Liquidity 1.0:1.0 _____:1.0 Yes No
Tangible Net Worth $30,000,000(4) $________ Yes No
</TABLE>
|-----------------------------|
COMMENTS REGARDING EXCEPTIONS: See Attached. | BANK USE ONLY |
| |
(1) Only when Obligations outstanding | Received By: _____________ |
(2) Only when aggregate Advances exceed | AUTHORIZED SIGNER |
$2,000,000 | |
(3) Prior to aggregate Advances in excess | Date: ____________________ |
of $2,000,000, and annually thereafter | |
(4) Increasing to $30,000,000 plus 75% of | Verified: ________________ |
net income or new equity on June 9, 1999 | AUTHORIZED SIGNER |
| |
Sincerely, | Date: ____________________ |
| |
|Compliance Status: Yes No |
|-----------------------------|
_______________________
SIGNATURE
_______________________
TITLE
_______________________
DATE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FVC.COM, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 32,034
<SECURITIES> 0
<RECEIVABLES> 5,953
<ALLOWANCES> 249
<INVENTORY> 3,336
<CURRENT-ASSETS> 41,621
<PP&E> 3,001
<DEPRECIATION> 1,408
<TOTAL-ASSETS> 44,923
<CURRENT-LIABILITIES> 5,049
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 39,753
<TOTAL-LIABILITY-AND-EQUITY> 44,923
<SALES> 20,033
<TOTAL-REVENUES> 20,033
<CGS> 10,805
<TOTAL-COSTS> 20,023
<OTHER-EXPENSES> 9,218
<LOSS-PROVISION> 184
<INTEREST-EXPENSE> 619
<INCOME-PRETAX> (371)
<INCOME-TAX> 0
<INCOME-CONTINUING> (371)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (371)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
