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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-23305
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FVC.COM, INC.
(Exact name of registrant in its character)
<TABLE>
<S> <C>
DELAWARE 77-0357037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
3393 OCTAVIUS DRIVE
SANTA CLARA, CA 95054
(Address of principal executive offices)
(408) 567-7200
(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 /X/ No / /
<TABLE>
<S> <C>
Common Stock, $0.001 par value 17,204,238
- ----------------------------------------- -----------------------------------------
(Class) Outstanding as of March 31, 2000
</TABLE>
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<PAGE>
FVC.COM, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999........................................... 1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999.................. 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999.................. 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 11
Item 6. Exhibits and Reports on Form 8-K............................ 11
SIGNATURES............................................................ 12
EXHIBIT INDEX......................................................... 13
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FVC.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,552 $ 997
Short-term investments.................................... 6,062 7,824
Accounts receivable, net of allowance of $1,070 and
$1,269.................................................. 11,216 14,066
Inventory................................................. 7,039 8,104
Prepaid expenses and other current assets................. 2,331 2,866
-------- --------
Total current assets.................................... 29,200 33,857
Property and equipment, net................................. 2,672 2,880
Other assets................................................ 3,249 3,462
-------- --------
$ 35,121 $ 40,199
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 135 $ 143
Accounts payable.......................................... 4,640 6,968
Accrued liabilities....................................... 3,467 3,123
Deferred revenue.......................................... 743 1,745
-------- --------
Total current liabilities............................... 8,985 11,979
Long-term debt, net of current portion...................... 74 85
Minority interest in consolidated subsidiary................ 398 323
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 5,000,000
shares authorized; no shares issued or outstanding...... -- --
Common Stock, $.001 par value; 35,000,000 shares
authorized; 17,204,238 and 16,832,522 shares issued and
outstanding, respectively............................... 17 17
Additional paid-in capital................................ 66,655 65,015
Notes receivable from stockholders........................ (130) (321)
Accumulated other comprehensive loss...................... (26) (21)
Accumulated deficit....................................... (40,852) (36,878)
-------- --------
Total stockholders' equity.............................. 25,664 27,812
-------- --------
$ 35,121 $ 40,199
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
FVC.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues.................................................... $10,083 $ 8,380
Cost of revenues............................................ 5,550 4,726
------- -------
Gross profit.............................................. 4,533 3,654
------- -------
Operating expenses:
Research and development.................................. 2,681 2,405
Selling, general and administrative....................... 5,844 4,713
------- -------
Total operating expenses................................ 8,525 7,118
------- -------
Loss from operations........................................ (3,992) (3,464)
Other income, net........................................... 93 226
Minority interest in consolidated subsidiary................ (75) --
------- -------
Net loss.................................................... $(3,974) $(3,238)
======= =======
Basic and diluted net loss per share........................ $ (0.23) $ (0.20)
======= =======
Shares used to compute net loss per share:
Basic and diluted......................................... 16,970 16,047
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
FVC.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(3,974) $(3,238)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 526 487
Non-cash stock compensation............................. 84 198
Other................................................... 75 41
Changes in assets and liabilities:
Accounts receivable..................................... 2,850 774
Inventory............................................... 1,065 (3,205)
Prepaid expenses and other assets....................... 575 (205)
Accounts payable........................................ (2,328) (118)
Accrued liabilities..................................... 344 (149)
Deferred revenue........................................ (1,002) (363)
------- -------
Net cash used in operating activities................. (1,785) (5,778)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment..................... (146) (417)
Proceeds from sale of short-term investments.............. 1,762 930
Proceeds from repayment of stockholder notes.............. 183 74
------- -------
Net cash provided by investing activities............. 1,799 587
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable, net........................... -- (1,300)
Proceeds from issuance of common stock, net............... 1,560 1,183
Repayment of capital lease obligations.................... (19) (41)
------- -------
Net cash provided by (used in) financing activities... 1,541 (158)
------- -------
Net increase (decrease) in cash and cash equivalents........ 1,555 (5,349)
Cash and cash equivalents at beginning of period............ 997 10,315
------- -------
Cash and cash equivalents at end of period.................. $ 2,552 $ 4,966
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
FVC.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed 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 Annual Report on Form 10-K/A for the year ended December 31, 1999. The
results of operations for the period ended March 31, 2000 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending December 31, 2000. The December 31, 1999 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
2. INVENTORY
Inventories as of March 31, 2000 and December 31, 1999 were (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw materials............................................... $1,799 $2,155
Finished goods.............................................. 5,240 5,949
------ ------
Total inventory......................................... $7,039 $8,104
====== ======
</TABLE>
3. 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
March 31, 2000, all potential common shares were anti-dilutive and were excluded
from the diluted net loss per share calculations for such periods.
The following table summarizes securities outstanding which were not
included in the calculations of diluted loss per share for the three months
ended March 31, 2000 and 1999 since their inclusion would be anti-dilutive (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Unvested restricted stock................................... 49 420
Common stock options........................................ 4,985 4,021
Common stock warrants....................................... 166 248
</TABLE>
Unvested restricted common stock represents stock that has been issued but
which is subject to repurchase to the extent the holder does not remain
associated with the Company until such shares are vested. The common stock
warrants outstanding at March 31, 2000 are exercisable at prices ranging from
$8.00 to $12.00 per share and expire at various times from May 2001 to
February 2003. The stock options
4
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3. EARNINGS (LOSS) PER SHARE (CONTINUED)
outstanding at March 31, 2000 had a weighted average exercise price per share of
$9.66 and expire beginning in April 2000 through November 2009.
4. COMPREHENSIVE LOSS
The Company's comprehensive loss for the three months ended March 31, 2000
was $3,979,000. The 1999 net loss presented in the statements of operations also
represents the comprehensive loss for the three months ended March 31, 1999.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Under SFAS No. 133, gains or losses resulting from
changes in the values of derivatives are to be reported in the statement of
operations or as a deferred item, depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. In June 1999, the FASB issued SFAS No. 137, "Deferral of the
Effective Date of FASB Statement Number 133," to defer for one year the
effective date of implementation of SFAS No. 133. SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000, with
earlier application encouraged. To date, the Company has not engaged in any
foreign currency hedging activity and does not expect adoption of this new
standard to have a significant impact on the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles ("GAAP") to revenue recognition in financial
statements. In March 2000, the SEC issued SAB 101A that deferred the Company's
required adoption of SAB 101 until the quarter beginning April 1, 2000. The
Company believes its revenue recognition policies are in accordance with GAAP
and does not believe that adoption of SAB 101 will have a material impact on the
consolidated financial statements.
6. LITIGATION
On or about April 9, 1999, several purported class action suits were filed
in the United States District Court for the Northern District of California
alleging violations of the federal securities laws against the Company and
certain of its officers and directors in connection with the Company's reporting
of its financial results for the period ended December 31, 1998. These actions
were dismissed by the court without leave to amend on February 14, 2000. The
plaintiffs filed a notice of appeal with the Ninth U.S. Circuit Court of Appeals
on March 29, 2000.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of FVC.COM, Inc. (the "Company") should be read in conjunction with
the Condensed Consolidated Financial Statements and the Notes thereto included
in Item 1 of this Quarterly Report on Form 10-Q.
In addition to the historical information contained in this Item, this Item
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," and words of similar import. Such
forward-looking statements will have known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others: the Company's
limited operating history and variability of operating results, market
acceptance of video technology, including the Company's new broadband video
services business, dependence on ATM and other technologies, the Company's
potential inability to maintain business relationships with resellers and
suppliers, 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, and other risk factors referenced in the Company's Annual Report
on Form 10-K/A for the year ended December 31, 1999. The Company assumes no
obligation to update any forward-looking statements contained herein.
OVERVIEW
Founded in 1993, FVC.COM, Inc., a Delaware corporation ("FVC" or the
"Company"), provides equipment and services to deliver video applications over
broadband communications networks. The Company combines its expertise in
networking systems and real-time video technology to deliver end-to-end video
communications solutions for a wide range of enterprise video applications,
including video calls, video conferences, video broadcast, video on demand over
converged multi-service networks. The Company's strategy is to become the
leading provider of high quality, cost-effective, video networking solutions in
broadband Internet and intranet environments for telecommunications carriers and
enterprise customers. With over six years of pioneering work in broadband video,
FVC is a leading provider of video networking hardware, software and services.
Historically, the Company has focused on providing video-networking systems
to the government, education and healthcare markets, both through direct and
indirect sales. FVC's original equipment manufacturer ("OEM"), distribution and
system integration partners include Ameritech (a subsidiary of SBC
Communications Inc.), Bell Atlantic Corporation ("Bell Atlantic"), British
Telecommunications plc ("British Telecom" or "BT"), Cisco Systems, Inc.
("Cisco"), Electronic Data Systems Corporation ("EDS"), France Telecom S.A.
("France Telecom"), Ingram Micro, Inc. ("Ingram Micro"), International Business
Machines Corporation ("IBM"), Nortel Networks Corporation ("Nortel"), Qwest
Communications International, Inc. ("Qwest"), and Telstra Corporation Limited
("Telstra").
The Company is leveraging its leadership position in video networking to
capitalize on the rapidly emerging opportunity to provide broadband video
services to the service provider market. The Company intends to address this
opportunity both by providing a full range of video network systems solutions
and through its recently introduced broadband video services offering. To date,
network systems sales announcements by the Company with telecommunications
carriers include expanded customer relationships with Bell Atlantic and British
Telecom, both of which are deploying broadband video services using FVC's
products and solutions. The Company's broadband video services enable
telecommunications carriers to deliver a comprehensive set of video applications
over the carrier's existing broadband networks into conference rooms, as well as
to the users' desktops. These services are delivered through the
6
<PAGE>
Company's Video Operations Center ("VOC"), which is located in Santa Clara,
California. The Company's web-based Video Portal serves as the user interface
and is designed for the end-user's ease-of-use.
The Company markets its products to enterprise customers (business
customers, government users, education and healthcare providers) and to service
providers (telecommunications carriers, regional Bell operating companies,
competitive local exchange carriers and Internet service providers) through its
internal sales force and indirect sales channels. In the quarter ended
March 31, 2000, approximately 77% of the Company's revenues were from enterprise
customers and 23% from service providers. In the first quarter of 1999, revenue
from enterprise customer and service providers represented 93% and 7%,
respectively, of total sales. Sales through Nortel represented approximately 24%
of the Company's revenues for the three months ended March 31, 2000, and 29% and
42% of the Company's revenues for the years ended December 31, 1999 and 1998,
respectively.
The Company maintains a network of distributors in Europe and Asia licensed
to sell its products under the FVC.COM name. Approximately 29% and 18% of the
Company's revenues were generated from customers outside of North America during
the three months ended March 31, 2000 and 1999, 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 Nortel
Networks and other distribution partners is sold to international end-users.
In September 1999, the Company announced its intention to offer broadband
video services to service providers. In February 2000, the Company introduced
Click to Meet-TM-, a software product for use in conjunction with FVC's video
services offering. Revenues from broadband video services are not expected to be
significant until 2001.
Revenues from the Company's international operations are subject to various
risks, including seasonality, longer payment cycles, changes in regulatory
requirements and tariffs, reduced protection of intellectual property rights,
political and economic restraints, and currency risk, among others.
Revenues are recognized upon shipment of product to customers, provided no
significant obligations remain, collectibility is probable and returns are
estimable. Revenues from sales to certain of the Company's resellers are subject
to agreements allowing rights of return. In such cases, the Company provides
reserves for estimated future returns upon revenue recognition. Such reserves
are estimated based upon historical rates of returns and allowances, reseller
inventory levels, the Company's estimates of sell through by resellers and other
related factors. Actual results could differ from these estimates. In the event
of the inability to estimate returns from any reseller, the Company defers
revenue recognition until the reseller has sold through the products or return
rights have lapsed.
Advance payments received from customers and gross margin deferred with
respect to sales to resellers wherein the Company does not have the ability to
estimate returns are recorded as deferred revenue. At March 31, 2000, deferred
revenue was $743,000. Although Nortel previously held material amounts of the
Company's products as inventory, it has now adopted a "drop ship" model,
pursuant to which Nortel has indicated it does not intend to hold for resale
inventory of the Company's products.
The Company has experienced, and is likely to experience in the future,
fluctuations in revenues, gross margins and operating results. Various factors
contribute to the fluctuations in revenues, gross margins and operating results,
including the Company's success in developing its video services business and in
developing, introducing and shipping new products and product enhancements, the
Company's success in accurately forecasting demand for new orders (which may
have short lead-times before required shipment), product mix, percentage of
revenues derived from OEMs versus distributors or resellers, new product
introductions and price reductions by its competitors, the efforts of OEMs,
distributors, resellers, and other third parties on behalf of the Company, the
Company's ability to attract, retain and motivate qualified personnel, the
timing and amount of research and development and selling, general and
7
<PAGE>
administrative expenditures, and general economic conditions. Further, a
significant portion of the Company's expenses is fixed. The Company expects that
operating expenses will increase in the future to fund expanded operations,
including the launch and expansion of the Company's broadband video services to
telecommunications carriers. To the extent these increased expenses are not
accompanied by an increase in revenues or gross margin, as is expected to be the
case as the Company expands its broadband video services business, the Company's
business, financial condition and results of operations would be materially
adversely affected. Due to all the foregoing factors, it is likely that in some
future quarter, the Company's results of operations will be below the
expectations of public market analysts and investors.
The Company out-sources certain functions to independent service providers.
The Company's products are primarily manufactured by Saturn Electronics and
Engineering, Inc. and by Celestica Corporation. Through March 31, 2000, certain
accounting and data processing functions were performed by Qwest Cyber
Solutions, a joint venture between KPMG LLP and Qwest. Effective April 1, 2000,
the Company terminated this outsourcing relationship.
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 MARCH 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues................................................... 100.0% 100.0%
Cost of revenues........................................... 55.0 56.4
----- -----
Gross profit............................................. 45.0 43.6
----- -----
Operating expenses:
Research and development................................. 26.6 28.7
Selling, general and administrative...................... 58.0 56.2
----- -----
Total operating expenses(1)................................ 84.5 84.9
----- -----
Loss from operations....................................... (39.6) (41.3)
----- -----
Other income (expense), net................................ 0.9 2.7
Minority interest in consolidated subsidiary............... (0.7) --
----- -----
Net loss................................................... (39.4)% (38.6)%
===== =====
</TABLE>
- ------------------------
(1) Operating expenses include non-cash stock compensation charges of $84,000
(0.8% of total revenues) and $198,000 (2.4% of total revenues) for the three
months ended March 31, 2000 and 1999, respectively.
8
<PAGE>
REVENUES. Revenues increased 20.3% to $10.1 million for the three months
ended March 31, 2000, compared to $8.4 million for the three months ended
March 31, 1999. The increase in revenues was primarily due to increased sales of
video systems to service providers. Revenue from Nortel represented 24% of total
revenues in the three months ended March 31, 2000, compared to 26% in the first
three months of 1999.
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 outside manufacturers and related costs of freight,
inventory obsolescence, royalties and warranties. These manufacturers procure
the majority of materials, except for certain key components that the Company
purchases from third-party vendors.
Gross profit increased to $4.5 million for the three months ended March 31,
2000, from $3.7 million for the comparable period in 1999. The increase in gross
profit was primarily due to the increased revenues. Gross margin (gross profit
as a percentage of revenues) increased to 45.0% for the three months ended
March 31, 2000, from 43.6% for the three months ended March 31, 1999. The
increase in gross margin was primarily the result of changes in product cost and
product mix, including the increased portion of shipments to service providers
that result in a relatively higher gross margin than shipments made to resellers
and integrators.
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 costs increased slightly to $2.7 million for the three
months ended March 31, 2000, from $2.4 million for the three months ended
March 31, 1999. This increase in dollars was primarily attributable to increases
in engineering staff to support new product development, including activities
associated with the Company's Click to Meet-TM- video services product
introduced during the period ended March 31, 2000. As a percentage of total
revenues, research and development expenses decreased to 26.6% for the three
months ended March 31, 2000, from 28.7% in the comparable period of 1999. The
decline in the percentage of revenues was the result of increased revenues. The
Company believes that research and development expenses will continue to
increase in absolute dollars for the foreseeable future, including increases
associated with product development for the Company's broadband video services
business. 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, other marketing and
promotional expenses, and goodwill amortization. Selling, general and
administrative expenses increased to $5.8 million for the three months ended
March 31, 2000, from $4.7 million for the three months ended March 31, 1999. As
a percentage of total revenues, selling, general and administrative expenses
increased to 58.0% for the three months ended March 31, 2000, from 56.2% for the
three months ended March 31, 1999. The increase in dollars and the increase as a
percentage of revenues were primarily due to increased staffing in sales,
marketing, customer service and administrative functions, including the costs to
establish an internal accounting function and expansion in international
markets. 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.
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 the Company's credit facilities and long-term debt.
Net other income totaled $93,000 for the three months ended March 31, 2000,
compared to net other income of $226,000 for the three months ended March 31,
1999. The decrease was primarily the result of a lower combined balance of cash
and cash equivalents and short-term investments, which generated less interest
income.
9
<PAGE>
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. Minority interest reflects
the interest of minority stockholders in the operating results of the Company's
consolidated subsidiary in the United Kingdom. The Company acquired a
controlling interest in this entity in May 1999. During the three months ended
March 31, 2000, the Company recorded a profit in this subsidiary, a portion of
which is attributable to minority stockholders.
INCOME TAXES. The Company has incurred losses since inception. No tax
benefit was recorded for any period 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, the Company has financed its operations primarily through
private and public placements of equity securities and to a lesser extent
through certain credit facilities and long-term debt. As of March 31, 2000, the
Company had cash and cash equivalents and short-term investments of
$8.6 million and working capital of $20.2 million.
During the three months ended March 31, 2000, the Company used $1.8 million
in operating activities. This was comprised of the loss of $4.0 million and a
reduction in accounts payable of $2.3 million, and deferred revenue
($1.0 million), partially offset by reductions in accounts receivable
($2.9 million), inventory ($1.0 million), and changes in other asset and
liability accounts. The reduction in receivables was due to good collection
activity and reduced revenues compared with the preceding quarter. The reduction
in inventory was attributable to improved inventory management and lower
shipment levels.
Net cash provided by investing activities totaled $1.8 million for the three
months ended March 31, 2000, primarily from proceeds from the sale of short-term
investments.
Cash provided by financing activities was $1.5 million for the three months
ended March 31, 2000, principally due to the exercise of employee stock options
and purchases under the Company's employee stock purchase plan.
The Company has a working capital line of credit agreement with a bank that
provides for borrowings of up to $10.0 million with an interest rate equal to
the bank's prime rate (9% at March 31, 2000). No borrowings were outstanding
under this line at March 31, 2000. The line of credit agreement expires in
June 2000 and the Company has initiated discussions with the bank to renew the
line. As of March 31, 2000, the Company was not in compliance with one of the
financial covenants and funds were not available to the Company under this
agreement.
The Company believes that its cash and cash equivalents and short-term
investments, together with its existing line of credit, will provide adequate
cash to fund its current operations for at least the next 12 months. In order to
aggressively pursue business opportunities in the video services business,
however, and to have increased flexibility to take advantage of other business
opportunities that are not yet known, the Company is currently seeking equity
investments from a number of strategic partners and potential strategic
partners. Should the Company be successful in selling additional equity, the
result will be some level of dilution to the Company's current stockholders.
Should the Company be unsuccessful in its current efforts to raise equity from
strategic partners, it will seek additional capital from the public and/or
private equity markets that will likely result in dilution of the Company's
current stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposures as set forth in its Annual Report on
Form 10-K/A for the year ended December 31, 1999 have not materially changed.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about April 9, 1999, several purported class action suits were filed
in the United States District Court for the Northern District of California
alleging violations of the federal securities laws against the Company and
certain of its officers and directors in connection with the Company's reporting
of its financial results for the period ended December 31, 1998. These actions
were dismissed by the court without leave to amend on February 14, 2000. The
plaintiffs filed a notice of appeal with the Ninth U.S. Circuit Court of Appeals
on March 29, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation
Certificate of Ownership and Merger, effective August 3,
3.1(i)(2) 1998
3.2(3) Amended Bylaws of the Registrant
4.1(2) Specimen Common Stock Certificate
10.1 1997 Equity Incentive Plan
11.1(4) Statement of Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(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) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1998, as filed on August 11, 1998, incorporated
herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K/A for the
period ended December 31, 1999, as filed on April 5, 2000, incorporated
herein by reference.
(4) See Note 3 to Condensed Consolidated Financial Statements
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the period covered by this report.
11
<PAGE>
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.
<TABLE>
<S> <C>
Date: May 12, 2000 FVC.COM, INC.
By: /s/ Truman Cole
--------------------------------------------
Truman Cole
CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
</TABLE>
12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation
Certificate of Ownership and Merger, effective August 3,
3.1(i)(2) 1998
3.2(3) Amended Bylaws of the Registrant
4.1(2) Specimen Common Stock Certificate
10.1 1997 Equity Incentive Plan
11.1(4) Statement of Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(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) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1998, as filed on August 11, 1998, incorporated
herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K/A for the
period ended December 31, 1999, as filed on April 5, 2000, incorporated
herein by reference.
(4) See Note 3 to Condensed Consolidated Financial Statements.
13
<PAGE>
FIRST VIRTUAL CORPORATION
1997 EQUITY INCENTIVE PLAN
ADOPTED BY THE BOARD OF DIRECTORS ON OCTOBER 22, 1997
APPROVED BY THE STOCKHOLDERS ON DECEMBER 2, 1997
AMENDED BY THE BOARD OF DIRECTORS ON DECEMBER 9, 1998
AMENDED BY THE STOCKHOLDERS ON FEBRUARY 17, 1999
1. INTRODUCTION; PURPOSES.
(a) The Board of Directors previously adopted the Company's 1996
Stock Option Plan, 1996 Stock Option Plan No. 2, and 1993 Employee Consultant
and Director Stock Purchase Plan (collectively, the "Prior Plans"). In
October 1997, the Board of Directors amended and restated the Prior Plans in
the form of this 1997 Equity Incentive Plan. Shares reserved for issuance
under the Prior Plans shall hereafter be reserved for issuance, and issued,
under the terms of this Plan in the form below.
(b) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company and its Affiliates
may be given an opportunity to benefit from increases in value of the common
stock of the Company ("Common Stock") through the granting of (i) Incentive
Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv)
rights to purchase restricted stock, all as defined below.
(c) The Company, by means of the Plan, seeks to retain the services
of persons who are now Employees, Directors or Consultants, to secure and
retain the services of new Employees, Directors and Consultants, and to
provide incentives for such persons to exert maximum efforts for the success
of the Company and its Affiliates.
(d) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which
responsibility for administration of the Plan has been delegated pursuant to
subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof,
including Incentive Stock Options and Nonstatutory Stock Options, or (ii)
stock bonuses or rights to purchase restricted stock granted pursuant to
Section 7 hereof. All Options shall be separately designated Incentive Stock
Options or Nonstatutory Stock Options at the time of grant, and a separate
certificate or certificates will be issued for shares purchased on exercise
of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
<PAGE>
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in
accordance with subsection 3(c) of the Plan.
(e) "COMPANY" means First Virtual Corporation, a Delaware corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by
the Company or an Affiliate to render consulting services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who
are not compensated by the Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
that the service of an individual to the Company, whether as an Employee,
Director or Consultant, is not interrupted or terminated. The Board or the
Chief Executive Officer of the Company may determine, in that party's sole
discretion, whether Continuous Status as an Employee, Director or Consultant
shall be considered interrupted in the case of: (i) any leave of absence
approved by the Company, including sick leave, military leave, or any other
personal leave; or (ii) transfers between the Company, Affiliates or their
successors.
(h) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange
Act, as determined for purposes of Section 162(m) of the Code.
(i) "DIRECTOR" means a member of the Board.
(j) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient
to constitute "employment" by the Company.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means, as of any date, the value of the
Common Stock of the Company determined as follows:
(i) If the Common Stock is listed on any established stock
exchange, or traded on the Nasdaq National Market or The Nasdaq SmallCap
Market, the Fair Market Value of a share of Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the
greatest volume of trading in Common Stock) on the last market trading day
prior to determination, as reported in THE WALL STREET JOURNAL or such other
source as the Board deems reliable;
(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
2
<PAGE>
(m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(n) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does
not receive compensation (directly or indirectly) from the Company or its
parent or subsidiary for services rendered as a consultant or in any capacity
other than as a Director (except for an amount as to which disclosure would
not be required under Item 404(a) of Regulation S-K promulgated pursuant to
the Securities Act ("Regulation S-K"), does not possess an interest in any
other transaction as to which disclosure would be required under Item 404(a)
of Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of
the Plan.
(s) "OPTIONEE" means a person to whom an Option is granted pursuant
to the Plan.
(t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury regulations promulgated under Section 162(m) of the
Code), is not a former employee of the Company or an "affiliated corporation"
receiving compensation for prior services (other than benefits under a tax
qualified pension plan), was not an officer of the Company or an "affiliated
corporation" at any time, and is not currently receiving direct or indirect
remuneration from the Company or an "affiliated corporation" for services in
any capacity other than as a Director, or (ii) is otherwise considered an
"outside director" for purposes of Section 162(m) of the Code.
(u) "PLAN" means this 1997 Equity Incentive Plan.
(v) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(w) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(x) "STOCK AWARD" means any right granted under the Plan, including
any Option, any stock bonus, and any right to purchase restricted stock.
3
<PAGE>
(y) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of
an individual Stock Award grant. Each Stock Award Agreement shall be subject
to the terms and conditions of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how each
Stock Award shall be granted; whether a Stock Award will be an Incentive
Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase
restricted stock, or a combination of the foregoing; the provisions of each
Stock Award granted (which need not be identical), including the time or
times when a person shall be permitted to receive stock pursuant to a Stock
Award; and the number of shares with respect to which a Stock Award shall be
granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards
granted under it, and to establish, amend and revoke rules and regulations
for its administration. The Board, in the exercise of this power, may correct
any defect, omission or inconsistency in the Plan or in any Stock Award
Agreement, in a manner and to the extent it shall deem necessary or expedient
to make the Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in
Section 13.
(iv) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best interests
of the Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee
of the Board composed of not fewer than two (2) members (the "Committee"),
all of the members of which Committee shall be, in the discretion of the
Board, Non-Employee Directors and/or Outside Directors. If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board,
including the power to delegate to a subcommittee of two (2) or more Outside
Directors any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or such a subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest
in the Board the administration of the Plan. Notwithstanding anything to the
contrary contained herein, the Board may delegate administration of the Plan
to any person or persons and the term "Committee" shall apply to any person
or persons to whom such authority has been delegated. In addition, and
notwithstanding anything in this Section 3 to the contrary, the Board or the
Committee may delegate to a committee of one or more members of the Board the
authority to grant Options to eligible persons who (1) are not then subject
to Section 16 of the Exchange Act
4
<PAGE>
and/or (2) are either (i) not then Covered Employees and are not expected to
be Covered Employees at the time of recognition of income resulting from such
Option, or (ii) not persons with respect to whom the Company wishes to comply
with Section 162(m) of the Code.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
shall not exceed in the aggregate five million three hundred seventy-five
thousand (5,375,000) shares of Common Stock (which includes shares remaining
for future issuance and shares subject to unvested options under the Prior
Plans, as of the date of adoption of the amended and restated Plan). In the
event an option or right to purchase restricted stock granted pursuant to the
Prior Plans or a Stock Award granted pursuant to the Plan shall for any
reason expire or otherwise terminate after the date of grant, in whole or in
part, without having been exercised in full, the stock not acquired under
such option, right to purchase restricted stock or Stock Award shall revert
to and again become available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees. Stock
Awards other than Incentive Stock Options may be granted only to Employees,
Directors or Consultants.
(b) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own
pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company or of any of its Affiliates unless the exercise price of such
Option is at least one hundred ten percent (110%) of the Fair Market Value of
such stock at the date of grant and the Option is not exercisable after the
expiration of five (5) years from the date of grant.
(c) Subject to the provisions of Section 12 relating to adjustments
upon changes in stock, no person shall be eligible to be granted Options
covering more than five hundred thousand (500,000) shares of the Company's
common stock in any calendar year. This subsection 5(c) shall not apply until
(i) the earliest of: (A) the first material modification of the Plan
(including any increase to the number of shares reserved for issuance under
the Plan in accordance with Section 4); (B) the issuance of all of the shares
of common stock reserved for issuance under the Plan; (C) the expiration of
the Plan; or (D) the first meeting of stockholders at which directors are to
be elected that occurs after the close of the third calendar year following
the calendar year in which occurred the first registration of an equity
security under Section 12 of the Exchange Act; or (ii) such other date
required by Section 162(m) of the Code and the rules and regulations
promulgated thereunder.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each
5
<PAGE>
Option shall include (through incorporation of provisions hereof by reference
in the Option or otherwise) the substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the
stock subject to the Option on the date the Option is granted, and the
exercise price of each Nonstatutory Stock Option shall be not less than
eighty-five percent (85%) of the Fair Market Value of the stock subject to
the Option on the date the Option is granted. Notwithstanding the foregoing,
an Option may be granted with an exercise price lower than that set forth in
the preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of
Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii)
at the discretion of the Board or Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other Common Stock of the Company,
(B) according to a deferred payment arrangement, except that payment of the
common stock's "par value" (as defined in the Delaware General Corporation
Law) shall not be made by deferred payment, or other arrangement (which may
include, without limiting the generality of the foregoing, the use of other
Common Stock of the Company) with the person to whom the Option is granted or
to whom the Option is transferred pursuant to subsection 6(d), or (C) in any
other form of legal consideration that may be acceptable to the Board. In the
case of any deferred payment arrangement, interest shall be payable at least
annually and shall be charged at the minimum rate of interest necessary to
avoid the treatment as interest, under any applicable provisions of the Code,
of any amounts other than amounts stated to be interest under the deferred
payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Incentive
Stock Option is granted only by such person. A Nonstatutory Stock Option may
be transferred to the extent provided in the Option Agreement; provided that
if the Option Agreement does not expressly permit the transfer of a
Nonstatutory Stock Option, the Nonstatutory Stock Option shall not be
transferable except by will, by the laws of descent and distribution or
pursuant to a domestic relations order, and shall be exercisable during the
lifetime of the person to whom the Option is granted only by such person or
any transferee pursuant to a domestic relations order. Notwithstanding the
foregoing, the person to whom the Option is granted may, by delivering
written notice to the Company, in a form satisfactory to the Company,
designate a third party who, in the event of the death of the Optionee, shall
thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that
6
<PAGE>
period, and may be exercised with respect to some or all of the shares
allotted to such period and/or any prior period as to which the Option became
vested but was not fully exercised. The Option may be subject to such other
terms and conditions on the time or times when it may be exercised (which may
be based on performance or other criteria) as the Board may deem appropriate.
The provisions of this subsection 6(e) are subject to any Option provisions
governing the minimum number of shares as to which an Option may be exercised.
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that
the Optionee was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three
(3) months after the termination of the Optionee's Continuous Status as an
Employee, Director or Consultant (or such longer or shorter period specified
in the Option Agreement), or (ii) the expiration of the term of the Option as
set forth in the Option Agreement. If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to and again
become available for issuance under the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified in the
Option Agreement, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it as of the date of
termination), but only within such period of time ending on the earlier of
(i) the date twelve (12) months following such termination (or such longer or
shorter period specified in the Option Agreement), or (ii) the expiration of
the term of the Option as set forth in the Option Agreement. If, at the date
of termination, the Optionee is not entitled to exercise his or her entire
Option, the shares covered by the unexercisable portion of the Option shall
revert to and again become available for issuance under the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified herein, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee
during, or within a period specified in the Option Agreement after the
termination of, the Optionee's Continuous Status as an Employee, Director or
Consultant, the Option may be exercised (to the extent the Optionee was
entitled to exercise the Option as of the date of death) by the Optionee's
estate, by a person who acquired the right to exercise the Option by bequest
or inheritance or by a person designated to exercise the option upon the
Optionee's death pursuant to subsection 6(d), but only within the period
ending on the earlier of (i) the date eighteen (18) months following the date
of death (or such longer or shorter period specified in the Option
Agreement), or (ii) the expiration of the term of such Option as set forth in
the Option Agreement. If, at the time of death, the Optionee was not entitled
to exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after death, the Option is not exercised within the time
specified herein, the Option
7
<PAGE>
shall terminate, and the shares covered by such Option shall revert to and
again become available for issuance under the Plan.
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject
to the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to
any other restriction the Board determines to be appropriate.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in
such form and shall contain such terms and conditions as the Board or
Committee shall deem appropriate. The terms and conditions of stock bonus or
restricted stock purchase agreements may change from time to time, and the
terms and conditions of separate agreements need not be identical, but each
stock bonus or restricted stock purchase agreement shall include (through
incorporation of provisions hereof by reference in the agreement or
otherwise) the substance of each of the following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such agreement but in no event shall the purchase
price be less than eighty-five percent (85%) of the stock's Fair Market Value
on the date such award is made. Notwithstanding the foregoing, the Board or
Committee may determine that eligible participants in the Plan may be awarded
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company for its benefit.
(b) TRANSFERABILITY. No rights under a stock bonus or restricted
stock purchase agreement shall be transferable except by will or the laws of
descent and distribution or, if the agreement so provides, pursuant to a
domestic relations order, so long as stock awarded under such agreement
remains subject to the terms of the agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or Committee, according to a
deferred payment or other arrangement with the person to whom the stock is
sold, except that payment of the common stock's "par value" (as defined in
the Delaware General Corporation Law) shall not be made by deferred payment;
or (iii) in any other form of legal consideration that may be acceptable to
the Board or Committee in its discretion. Notwithstanding the foregoing, the
Board or Committee to which administration of the Plan has been delegated may
award stock pursuant to a stock bonus agreement in consideration for past
services actually rendered to the Company for its benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or Committee.
(e) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant
8
<PAGE>
terminates, the Company may repurchase or otherwise reacquire any or all of
the shares of stock held by that person which have not vested as of the date
of termination under the terms of the stock bonus or restricted stock
purchase agreement between the Company and such person.
8. CANCELLATION AND RE-GRANT OF OPTIONS.
(a) The Board or the Committee shall have the authority to effect, at
any time and from time to time (i) the repricing of any outstanding Options
under the Plan and/or (ii) with the consent of the affected holders of
Options, the cancellation of any outstanding Options and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of common stock, but having an exercise price per
share not less than eighty-five percent (85%) of the Fair Market Value (one
hundred percent (100%) of the Fair Market Value in the case of an Incentive
Stock Option or, in the case of a ten percent (10%) stockholder (as defined
in subsection 5(b)), not less than one hundred and ten percent (110%) of the
Fair Market Value) per share of common stock on the new grant date.
(b) Shares subject to an Option canceled under this Section 8 shall
continue to be counted against the maximum award of Options permitted to be
granted pursuant to the Plan. The repricing of an Option hereunder resulting
in a reduction of the exercise price, shall be deemed to be a cancellation of
the original Option and the grant of a substitute Option; in the event of
such repricing, both the original and the substituted Options shall be
counted against the maximum awards of Options permitted to be granted
pursuant to the Plan, to the extent required by Section 162(m) of the Code.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.
(b) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as may be required
to issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities
Act either the Plan, any Stock Award or any stock issued or issuable pursuant
to any such Stock Award. If, after reasonable efforts, the Company is unable
to obtain from any such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful issuance and sale of
stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Stock Awards unless and
until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
11. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or
any part thereof will vest,
9
<PAGE>
notwithstanding the provisions in the Stock Award stating the time at which
it may first be exercised or the time during which it will vest.
(b) Neither an Employee, Director nor a Consultant nor any person to
whom a Stock Award is transferred in accordance with the Plan shall be deemed
to be the holder of, or to have any of the rights of a holder with respect
to, any shares subject to such Stock Award unless and until such person has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) Nothing in the Plan nor any instrument executed nor Stock Award
granted pursuant hereto shall confer upon any Employee, Director, Consultant
or Optionee any right to continue in the employ of the Company or any
Affiliate (or to continue acting as a Director or Consultant) or shall affect
the right of the Company or any Affiliate to terminate the employment of any
Employee, with or without cause, to remove any Director as provided in the
Company's By-Laws and the provisions of the General Corporation Law of the
State of Delaware, or to terminate the relationship of any Consultant in
accordance with the terms of that Consultant's agreement with the Company or
Affiliate to which such Consultant is providing services.
(d) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
this Plan and all other plans of the Company and its Affiliates exceeds one
hundred thousand dollars ($100,000), the Options or portions thereof which
exceed such limit (according to the order in which they were granted) shall
be treated as Nonstatutory Stock Options.
(e) The Company may require any person to whom a Stock Award is
granted, or any person to whom a Stock Award is transferred in accordance
with the Plan, as a condition of exercising or acquiring stock under any
Stock Award, (1) to give written assurances satisfactory to the Company as to
such person's knowledge and experience in financial and business matters
and/or to employ a purchaser representative reasonably satisfactory to the
Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone or together with
the purchaser representative, the merits and risks of exercising the Stock
Award; and (2) to give written assurances satisfactory to the Company stating
that such person is acquiring the stock subject to the Stock Award for such
person's own account and not with any present intention of selling or
otherwise distributing the stock. The foregoing requirements, and any
assurances given pursuant to such requirements, shall be inoperative if (i)
the issuance of the shares upon the exercise or acquisition of stock under
the Stock Award has been registered under a then currently effective
registration statement under the Securities Act, or (ii) as to any particular
requirement, a determination is made by counsel for the Company that such
requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company,
place legends on stock certificates issued under the Plan as such counsel
deems necessary or appropriate in order to comply with applicable securities
laws, including, but not limited to, legends restricting the transfer of the
stock.
(f) To the extent provided by the terms of a Stock Award Agreement,
the person to whom a Stock Award is granted may satisfy any federal, state or
local tax withholding obligation
10
<PAGE>
relating to the exercise or acquisition of stock under a Stock Award by any
of the following means or by a combination of such means: (1) tendering a
cash payment; (2) authorizing the Company to withhold shares from the shares
of the Common Stock otherwise issuable to the participant as a result of the
exercise or acquisition of stock under the Stock Award; or (3) delivering to
the Company owned and unencumbered shares of the Common Stock of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or
subject to any Stock Award, without the receipt of consideration by the
Company (through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares,
change in corporate structure or other transaction not involving the receipt
of consideration by the Company), the Plan will be appropriately adjusted in
the class(es) and maximum number of shares subject to the Plan and the
maximum number of shares subject to award to any person during any calendar
year, and the outstanding Stock Awards will be appropriately adjusted in the
class(es) and number of shares and price per share of stock subject to such
outstanding Stock Awards. Such adjustments shall be made by the Board or
Committee, the determination of which shall be final, binding and conclusive.
(The conversion of any convertible securities of the Company shall not be
treated as a "transaction not involving the receipt of consideration by the
Company.")
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation
in which the Company is not the surviving corporation; (3) a reverse merger
in which the Company is the surviving corporation but the shares of the
Common Stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (4) the acquisition by any person, entity or group
within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any
comparable successor provisions (excluding any employee benefit plan, or
related trust, sponsored or maintained by the Company or any Affiliate of the
Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rule) of
securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors, then to
the extent permitted by applicable law: (i) any surviving corporation (or an
Affiliate thereof shall assume any Stock Awards outstanding under the Plan or
shall substitute similar Stock Awards for those outstanding under the Plan,
or (ii) such Stock Awards shall continue in full force and effect. In the
event any surviving corporation (or an Affiliate) refuses to assume or
continue such Stock Awards, or to substitute similar Stock Awards for those
outstanding under the Plan, then the Stock Awards shall be terminated if not
exercised prior to such event.
13. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company to the extent stockholder
11
<PAGE>
approval is necessary for the Plan to satisfy the requirements of Section 422
of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing
requirements.
(b) The Board may in its sole discretion submit any other amendment
to the Plan for stockholder approval, including, but not limited to,
amendments to the Plan intended to satisfy the requirements of Section 162(m)
of the Code and the regulations thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible
Employees, Directors or Consultants with the maximum benefits provided or to
be provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan
and/or Incentive Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan
unless (i) the Company requests the consent of the person to whom the Stock
Award was granted and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms
of any one or more Stock Award; provided, however, that the rights and
obligations under any Stock Award shall not be impaired by any such amendment
unless (i) the Company requests the consent of the person to whom the Stock
Award was granted and (ii) such person consents in writing.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years from the date the
Plan is adopted by the Board or approved by the stockholders of the Company,
whichever is earlier. No Stock Awards may be granted under the Plan while the
Plan is suspended or after it is terminated.
(b) Rights and obligations under any Stock Award granted while the
Plan is in effect shall not be impaired by suspension or termination of the
Plan, except with the consent of the person to whom the Stock Award was
granted.
15. EFFECTIVE DATE OF PLAN.
This amendment and restatement of the Plan shall become effective on
the effective date of the registration statement with respect to the
Company's initial public offering of shares of Common Stock, but no Stock
Awards granted under the Plan shall be exercised unless and until the Plan
has been approved by the stockholders of the Company, which approval shall be
within twelve (12) months before or after the date the Plan is adopted by the
Board.
12
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