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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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COMMISSION FILE NUMBER 000-23305
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FVC.COM, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
DELAWARE 77-0357037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
3393 OCTAVIUS DRIVE, SANTA CLARA, CA 95054
(Address of principal executive (Zip code)
offices)
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(408) 567-7200
(Registrant's Telephone Number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
As of February 29, 2000 there were 16,952,465 shares of the registrant's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on February 29, 2000) was approximately
$328 million. Shares of the registrant's common stock held by each executive
officer, director and holder of five percent or more of the registrant's common
stock outstanding as of February 29, 2000 have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the registrant's definitive proxy statement for the
2000 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED IN THIS DESCRIPTION OF
THE BUSINESS OF FVC.COM, INC. (THE "COMPANY"), THIS ITEM CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT") THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION,
STATEMENTS CONTAINING THE WORDS "BELIEVES," ANTICIPATES," "EXPECTS," AND WORDS
OF SIMILAR IMPORT. SUCH FORWARD-LOOKING STATEMENTS WILL HAVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE RISK FACTORS SET FORTH BELOW, UNDER "OVERVIEW", "RISK FACTORS"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN THIS FORM 10-K. THE COMPANY ASSUMES NO OBLIGATION
TO UPDATE ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
OVERVIEW
Founded in 1993, 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 multiservice 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 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.
Recent 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 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.
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The Company's management team brings significant networking and technology
industry experience to FVC was significantly strengthened during 1999. During
the past year, the Company added a new Chief Executive Officer, Richard Beyer
(the former president of VLSI Technology and Chief Operating Officer of National
Semiconductor), a new Chief Financial Officer, Truman Cole, a new Vice President
of North American Sales, Stephen Rackets, a new Vice President of Operations,
Robin Richards, and a newly appointed Vice President of Business Development,
Ruth Cox, to help execute the strategic vision of co-founders Ralph Ungermann
and Allwyn Sequeira.
INDUSTRY BACKGROUND
In recent years, Internet infrastructure has evolved to meet the
requirements of new and emerging Internet applications, such as the integration
of voice and data. Until recently, however, the technologies employed in the
Internet infrastructure were unable to differentiate between data transmission
bursts and video streams. Therefore, the Internet was unable to support high
quality video networking applications. These hindrances have historically
limited an end user's ability to deploy and utilize interactive applications
that simultaneously involve data and high quality video applications. Over the
past six to twelve months, however, the acceleration of the following three key
market drivers has significantly enhanced the opportunity for the widespread
adoption of video networks and broadband video services by telecommunications
carriers and enterprise markets:
- PROLIFERATION OF BROADBAND NETWORKS. According to RHK, a
telecommunications research firm, telecommunications carriers are doubling
network capacity every 18 to 24 months. Because of this great increase in
network capacity, telecommunications carriers are moving rapidly to
exploit the plentiful and inexpensive bandwidth of their networks by
adding video services to existing voice and data offerings. In addition to
increased quality, video transmission over broadband networks costs a
fraction of transmission over traditional ISDN networks. According to our
estimates, telecommunications carriers realize transmission cost savings
of up to 70% to 80%. As a result, carriers now have greater ability to
offer customers bandwidth-intensive applications such as
videoconferencing, video broadcast and video on demand.
- SIGNIFICANT DECLINE IN COST OF VIDEO ENDPOINTS. For many years, the cost
of purchasing and maintaining a videoconferencing endpoint for a
conference room quality system ranged from $35,000 to $50,000. Over the
past 12 months, a number of companies have entered the market for video
endpoints and now offer this functionality in set-top box and PC-based
forms at prices below $5,000. Concurrently, upgrades to enable interactive
video on desktop PCs are being sold by companies such as Intel Corporation
for less than $1,000. As with other communications products--such as
cellular phones, which were prohibitively expensive at the time of their
introduction, but which dropped in price and increased in functionality
over time--the reduction in price and increase in functionality in video
endpoints is also driving demand for video applications.
- EASE OF USE OF WEB BROWSERS. Historically, the interfaces used to place a
videoconferencing call have been proprietary and difficult to use,
requiring the user to manually input a variety of complex and
indiscernible information about the call, including such variables as
network type, transmission speed and connection bandwidth. The development
of web-based user interfaces allows for the point and click simplicity of
a typical web-based browser, simplifying the process and allowing a video
call to be placed with a single click on a directory name, similar to the
simple user experience of sending an email.
THE COMPANY'S PRODUCTS AND TECHNOLOGY
The Company's strategy is to become the leading provider worldwide of high
quality, cost-effective, video networking solutions in Internet and intranet
environments for telecommunications carriers and enterprise customers.
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The Company's solutions address its customers' requirements for high quality
interactive visual communications through the following broad range of services
and products, including hardware and software:
- BROADBAND VIDEO SERVICES. In order to fundamentally change the way video
networking services are delivered, in September 1999, the Company
announced its broadband video services offering that will be delivered
through the Company's web-based Video Portal. This Video Portal changes
the way video networking services are delivered by:
- Expanding the potential user base from the current 200,000 room systems
to the more than 200 million networked PCs;
- Transitioning the user interface from various complex proprietary systems
to a simple browser-based point and click interface; and
- Moving video traffic delivery from a separate ISDN network to the
existing broadband voice/ video/data network.
This Video Portal will include a suite of real-time video applications, such
as video calls, video conferences, video mail, video events and other
value-added video services.
In addition to its existing VOC in Santa Clara, the Company intends to
deploy several VOCs elsewhere in the United States, as well as in Europe and
other strategic locations, in order to provide its broadband video services to
telecommunications carriers globally. FVC intends to utilize the VOCs to provide
carriers with rapid market entry, state-of-the-art technology and facilities,
and attractive pricing for FVC's video service offering. The Company's recent
announcements with Qwest, Bell Atlantic and British Telecom highlight the early
success of the Company's new strategic focus on the carrier market. FVC intends
to expand these relationships and form additional relationships with
telecommunications carriers globally. In addition to next generation carriers
such as Qwest, FVC.COM is targeting competitive local exchange carriers,
regional bell operating companies, Internet service providers, Internet exchange
carriers and national post office/telephone/telegraph companies for its
broadband video services.
THE COMPANY'S STRATEGY
LEVERAGE FIRST MOVER ADVANTAGE IN MANAGED BROADBAND VIDEO SERVICES
The Company's deployment of the first carrier-based broadband video services
offering will enable telecommunications carriers to provide enterprise customers
with high quality, affordable and easy-to-use video conferencing capabilities
both in conference rooms and on desktop PCs. The recent proliferation of
bandwidth has enabled high quality video services to the desktop mass market for
the first time. The Company believes that as broadband video services offerings
become increasingly critical for carriers, FVC's expertise in broadband video
networking, its easy-to-use web-based interface and its cost-efficient systems
solutions give the Company a significant lead over its competitors in addressing
this market opportunity.
EXPLOIT LARGE UNDER-SERVED MARKET OPPORTUNITY
Massive infrastructure upgrades by carriers and corporations are being
driven by the growing need for bigger pipes to carry data applications, and, in
particular, Internet access. Established telecommunications and networking
companies have yet to develop a high level of expertise in broadband video
networking to service the corporate market. The Company believes that video
applications will benefit from the build-out of broadband data networks and that
these applications are likely to become a strategic revenue source for carriers
as voice and data increasingly become commodity services. Applications Service
Providers such as FVC provide the video expertise and solutions needed to
deliver video services over existing networks. As
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one of only a limited number of companies currently focused exclusively on video
networking, the Company believes that it is well-positioned to capitalize on
this opportunity.
EXPAND DEPLOYMENT OF IP-BASED VIDEO NETWORKING PRODUCTS
In order to capitalize on the overall growth in the networking market and
the trend towards the deployment of end-to-end IP networks, the Company has
expanded its product development focus into the IP environment. In 1998, FVC
introduced one of the first IP to ISDN to ATM gateways and an IP-based product
for video streaming and video-on-demand. The Company's current and future
product development plans reflect an increased emphasis on IP-based products.
MAINTAIN STEADY GROWTH IN CORE SYSTEMS BUSINESS
The Company's core business of selling end-to-end broadband video solutions
has shown steady growth, with revenues increasing from $3.7 million in 1995 to
$45.7 million in 1999. FVC believes its leading position in broadband video
networking, enhanced by distribution relationships with partners such as Nortel,
Lucent Technologies Inc. and Bell Atlantic will enable the Company to continue
to grow its core business.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company believes that two significant growth areas for its video
equipment and services are: 1) telecommunications carriers and service
providers, and 2) enterprises. The Company's products take advantage of
broadband networks being implemented in these environments to achieve high
quality video transmission.
The Company markets its products to business customers, government users and
educational providers through its internal sales force and indirect sales
channels. The Company's internal sales force uses the Company's video technology
to directly qualify and stimulate end-user demand, as well as to manage the
Company's strategic relationships with OEMs, VARs and systems integrators. A
significant portion of the Company's sales to date have been fulfilled through
the Company's OEMs, including Nortel Networks. Sales through Nortel Networks
(including Bay Networks) represented approximately 29% of the Company's total
sales in 1999, 39% in 1998 and 64% in 1997. OEMs either sell and install the
Company's products directly or work with leading systems integrators to sell and
install the Company's products. Systems integrators qualified to sell and
install the Company's products include Bell Atlantic, BT, EDS, France Telecom,
GTE Corporation, Global Telemedics, IBM, NTT, NEC Corporation and Telstra.
The Company has sales offices in the United Kingdom, Germany, France, Italy,
Japan and Australia and distributes its products under the FVC.COM name in both
Europe and Asia through resellers and distributors in more than 25 countries.
For the years ended December 31, 1999, 1998 and 1997, approximately 14%, 21% and
20%, respectively, of the Company's sales were generated from customers outside
of the United States.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has recognized that a strong technical base
is essential to its long-term success and has made a substantial investment in
research and development. To date, the Company has aggressively brought a wide
range of products into the marketplace. The Company intends to make substantial
investments in product development and to participate in the development of
industry standards. The Company monitors changing customer needs and works
closely with its OEM partners, end-user customers and market research
organizations to track changes in the marketplace, including emerging industry
standards in both networking and video. The Company intends to maintain its
product development focus on products for the two-way video broadband networking
market.
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The Company's research and development expenditures totaled $10.2 million,
$9.5 million and $5.4 million for the years ended December 31, 1999, 1998 and
1997, respectively. The Company performs its research and product development
activities at its headquarters in Santa Clara.
COMPETITION
The video networking industry is becoming increasingly competitive. Some of
these competitors offer video networking over the data network using the
asynchronous transfer mode (ATM) protocol, including FORE Systems, Inc. and
Newbridge Networks Corporation. The Company's video networking products also
compete with systems based on other technologies, such as ISDN-based video
networking products. The Company's video access products, when sold by its
distribution partners such as Nortel, are used to compete with products sold by
companies such as Cisco and 3Com Corporation. In the interactive video area, the
Company's technology licensing agreement with IBM has resulted in products that
compete with products sold in the high-end H.310 videoconferencing market. In
video storage, the Company's V-Cache products face competition from companies
that offer high-performance servers that can store video. In the video broadcast
area, the Company's products compete with system and software products of
companies that provide "streamed" video over IP/Ethernet networks. The Company
faces potential competition from large companies that have products in related
areas. The Company could encounter new competition if companies which distribute
the Company's products, or whose interactive video equipment is used together
with the Company's products, develop or acquire video networking technologies or
products. Further, although currently there are no major competitors in the
broadband video services area, a number of the Company's competitors in other
areas have expressed an interest in developing their own broadband video
services. In particular, there is no assurance that telecommunications service
providers will not develop internally the capability to offer broadband video
services. There can be no assurance that the Company will be able to compete
successfully in this environment.
In order to compete effectively, the Company must offer an end-to-end
solution, provide high-performance products and services that comply with
applicable standards and are easy to use, and expand its product distribution
channels domestically and internationally. In addition, the Company expects
price competition to escalate in the video networking industry which may force
the Company in the future to lower product prices on a regular basis and add new
products and features without increasing prices. There can be no assurance that
the Company will be able to compete successfully in such a price competitive
environment.
MANUFACTURING
The Company uses third-party manufacturers to perform materials planning,
production scheduling, mechanical assembly, board testing, system integration,
burn-in, final system testing and distribution of its products to customers. The
Company's operations staff develops manufacturing strategies and qualifies
manufacturing processes and suppliers. The Company and its contract
manufacturers work together to reduce manufacturing costs and to resolve quality
control issues. The Company's manufacturing strategy enables it to leverage the
manufacturing capabilities of its third-party manufacturers, while allowing the
Company to focus on its core competencies of rapid product development and
deployment. If one or more of the Company's manufacturers experiences quality or
other problems, product shipments by the Company may be delayed. If the Company
is required to replace its manufacturers, such a change could result in
short-term cost increases and delays in delivery that could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's supply chain, including reserve inventory buffer stock
of critical components, may not be sufficient to meet increases in demand
occurring simultaneously with delayed deliveries from manufacturers. There can
be no assurance that the Company will be able to negotiate acceptable
arrangements with its existing or future manufacturers, or if negotiated, that
such arrangements will be on terms favorable to the Company.
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EMPLOYEES
As of February 29, 2000, the Company employed approximately 130 individuals
full-time. In addition, the Company employs a number of temporary contract
employees. The Company's employees are not represented by a collective
bargaining agreement and the Company believes its relationships with its
employees are good.
RISK FACTORS
In addition to the other information provided in this report, the following
risk factors should be considered in evaluating the Company and its business.
LIMITED OPERATING HISTORY: CUMULATIVE LOSSES; STOCK PRICE
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company was incorporated in
October 1993, first shipped its video networking products in 1995 and first
announced its video services business in 1999. The Company's prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies in their early stage of development, particularly companies in new and
rapidly evolving markets and companies experiencing rapid growth and expansion.
To address these risks, the Company must, among other things, continue to
achieve market acceptance for its products, maintain technological leadership,
respond to evolving markets and competition, and attract, retain and motivate
qualified employees. There can be no assurance that the Company will be
successful in addressing these risks.
VOLATILITY OF STOCK PRICE
The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenues or earnings in any quarter fail
to meet the investment community's expectations, there could be an immediate
impact on the company's stock price and a resulting securities class action
suit. The stock price may also be affected by broader market trends unrelated to
the Company's performance. Past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced, and is likely to experience in the future,
fluctuations in revenues, gross margins and operating results. Various factors
contribute to the fluctuations in revenues, gross 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
administrative expenditures, and general economic conditions.
Further, a significant portion of the Company's expenses are fixed. The
Company expects that operating expenses will increase in the future to fund
expanded operations, 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.
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MARKET ACCEPTANCE OF VIDEO NETWORKING AND BROADBAND VIDEO SERVICES
The Company's success depends on the market acceptance of video networking
and broadband video services. Potential end-users must accept video applications
as a viable alternative to face-to-face meetings and conventional classroom
based learning. New applications, such as the use of video in marketing, selling
and manufacturing, are still in the development stage. Additionally, the
Company's broadband video services are still in the development stage. The
Company has only recently entered into its first contracts with
telecommunications service providers to provide broadband video services and
does not expect any material revenues from these services to be generated until
the second half of 2000. If video networking and broadband video services fail
to achieve broad commercial acceptance or such acceptance is delayed, the
Company's business, financial condition and results of operations would be
materially adversely affected.
DEPENDENCE ON THIRD PARTY RELATIONSHIPS
The Company currently outsources the manufacturing of its products. The
Company relies on several vendors, to manufacture certain of its products. If
one or more of these manufacturers experiences quality or other problems,
product shipments by the Company may be delayed. If the Company is required to
find replacements for its manufacturers, such change could result in short-term
cost increases and delays in delivery, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
There also can be no assurance that the Company will be able to continue to
negotiate arrangements with its existing or any future manufacturers on terms
favorable to the Company.
The Company currently sells its products through OEMs, distributors and
resellers ("distribution relationships"). The Company's future performance will
depend in large part on sales of its products through its distribution
relationships, such as Nortel, Bell Atlantic and other key partners. For the
year ended December 31, 1999, Nortel (including Bay Networks) was the Company's
most significant customer, representing 29% of the Company's revenues for that
period. However, such past performance should not be considered a reliable
indicator of future performance. Agreements with Nortel and other distribution
partners generally provide for discounts based on the Company's list prices, and
do not require minimum purchases or restrict development or distribution of
competitive products. Therefore, some of the entities that distribute the
Company's products may compete with the Company. The Company also cannot assure
that an OEM, distributor or reseller will dedicate sufficient resources or give
sufficient priority to selling the Company's products. The Company additionally
depends on its distribution relationships for most customer support, and expends
significant resources to train its OEMs, distributors and resellers to support
their customers. These entities can generally terminate the distribution
relationship upon 30 days notice for a material breach. The loss of a
distribution relationship or a decline in the efforts of a material distributor,
or loss in business or cancellation of orders from, significant changes in
scheduled deliveries to, or decreases in the prices of products sold to, any of
these distribution relationships, could have a material adverse effect on the
Company's results of operations.
LIMITED NUMBER OF LARGE PROJECTS; LENGTHY SALES AND IMPLEMENTATION CYCLE
The Company depends on a limited number of large end-user projects for a
majority of its revenues, which has resulted in, and may in the future result
in, significant fluctuations in quarterly revenues. The Company expects that
revenues from the sale of products to large end-users will continue to account
for a significant percentage of its revenues in any particular quarter for the
foreseeable future. Additionally, a significant portion of the Company's sales
of video networking products has historically been to government-related
agencies, such as military and educational institutions, or third parties using
the Company's products on behalf of government agencies. Such government-related
customers are often subject to budgetary pressures and may from time to time
reduce their expenditures and/or cancel orders. The loss of any major customer,
or any reduction or delay in orders by such customer, or the failure of the
Company or its distribution partners to market the Company's products
successfully to new customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
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Sales of the Company's products require an extended sales effort. The
Company must first train the entities with which it has distribution
relationships to market the Company's products. The period from an initial sales
call to an end-user agreement typically ranges from six to twelve months, and
can be longer. Therefore, the timing of revenues may be unpredictable. This
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; INDUSTRY STANDARDS AND REGULATIONS
Rapid technological change and evolving industry standards characterize the
market for the Company's products. The Company's success will depend, in part,
on its ability to maintain its technological leadership and enhance and expand
its existing product and services offerings. The Company's success also will
depend in part upon its ability and the ability of its strategic partners to
comply with evolving industry standards. The Company's products must meet a
significant number of domestic and international video, voice and data
communications regulations and standards, some of which are evolving as new
technologies are deployed. The Company's products are currently in compliance
with applicable regulatory requirements. However, as standards evolve, the
Company must modify its products, or develop and support new versions of its
products. In addition, telecommunications service providers require that
equipment connected to their networks comply with their own standards, which may
vary from industry standards.
The Company's ability to compete successfully also is dependent upon the
continued compatibility and interoperability of its products with products and
architectures offered by various vendors. The Company's business, financial
condition and results of operations would be materially adversely affected if it
were unable in a timely manner to comply with evolving industry standards or
address compatibility issues. In addition, from time to time, the Company may
announce new products, capabilities or technologies that have the potential to
replace or shorten the life cycle of the Company's existing product offerings.
The announcement of product enhancements or new product or service offerings
could cause customers to defer purchasing the Company's products. In addition,
the Company has experienced delays in the introduction of new products in the
past and may experience such delays in the future. The failure of the Company to
introduce successfully new products, product enhancements or services, or
customer delays in purchasing products in anticipation of new product
introductions or because of changes in industry standards, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON SUPPLIERS
Several critical components used in the Company's products, including
certain custom and programmable semiconductors are currently available only from
single suppliers. The Company does not have long-term agreements with these
suppliers, and they are not obligated to provide components to the Company for
any specific period, in any specific quantity or at any specific price, except
as may be provided in a particular purchase order. Qualifying additional
suppliers is a time consuming and expensive process, and there is a greater
likelihood of problems arising during a transition period to a new supplier.
There can be no assurance that the existing suppliers will continue to meet the
Company's requirements for these components. Any interruption in the supply of
these components, or the inability of the Company to procure these components
from alternate sources at acceptable prices and within a reasonable period of
time, or any excessive rework costs associated with defective components or
process errors, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company uses a product sales forecast based on anticipated product
orders to determine its components requirements. As a result of the relatively
short lead-time on certain orders, however, this forecast may not be accurate.
Failure of the Company to predict accurately its required quantities of these
components has resulted and could result in the future in shortages of or excess
inventory and higher component costs, as well as cause the Company to delay
shipments of its products in response to orders, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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COMPETITION; INDUSTRY CONSOLIDATION
Many of the Company's actual and potential competitors have greater name
recognition; a larger installed base of networking products and strong
relationships with end users; more extensive engineering, manufacturing,
marketing and distribution capabilities; and greater financial, technological
and personnel resources than the Company. The networking industry is undergoing
a period of consolidation in which companies, including some of the Company's
competitors, are participating in business combinations, resulting in
competitors with larger market shares, customer bases, sales forces, product
offerings and technology and marketing expertise. In addition, there can be no
assurance that products or technologies developed by others will not render the
Company's products and services noncompetitive or obsolete.
RELIANCE ON INTELLECTUAL PROPERTY
The Company's success and ability to compete in the video networking
industry depends, in part, upon its ability to protect its proprietary
technology and to operate without infringing the proprietary rights of others.
The Company does not rely on patent protection for, and does not hold, any
patents relating to its products, although it is engaged in preparing patent
applications related to its recently developed video services technology. The
Company's adherence to industry-wide technical standards and specifications may
limit the Company's opportunities to provide proprietary product features. The
Company currently licenses certain technology from third parties and plans to
continue to do so in the future. The commercial success of the Company will
depend, in part, on its ability to continue to obtain licenses to third-party
technology for use in its products.
The Company currently relies upon a combination of trade secret, copyright
and trademark laws and contractual restrictions to establish and protect
proprietary rights in its products. The Company also enters into confidentiality
and invention assignment agreements with its employees and enters into
non-disclosure agreements with its suppliers, distributors and customers to
limit access to and disclosure of its proprietary information. There can be no
assurance that the pending patent applications will be successful, or that these
statutory and contractual arrangements will be sufficient to deter
misappropriation of the Company's proprietary technologies or that independent
third parties will not develop similar or superior technologies. The development
of alternative technologies by third parties could adversely affect the
competitiveness of the Company's products. In addition, the laws of some
countries do not provide the same degree of protection of the Company's
proprietary information as do the laws of the United States.
The commercial success of the Company will also depend, in part, on the
Company not breaching its current and future licenses of third-party technology
used in certain of the Company's products. The Company is, however, subject to
the risk of litigation alleging infringement of third party intellectual
property rights from both its licensed and proprietary technology. A number of
companies have developed technologies or received patents on technologies that
may be related to or be competitive with the Company's technologies. The Company
has not conducted a patent search relating to the technology used in its
products. In addition, since patent applications in the United States are not
publicly disclosed until the patent issues, applications may have been filed
which, if issued as patents, would relate to the Company's products. Given the
rapid development of technology in the video networking industry, there can be
no assurance that the Company's existing or future products will not infringe
upon the existing or future proprietary rights of others. Also, the Company's
lack of patents may inhibit the Company's ability to negotiate or obtain
licenses from or oppose patents of third parties, if necessary. Further, the
Company is subject to the risk of litigation alleging infringement of third
party intellectual property rights from both its licensed and proprietary
technology. The Company could incur substantial costs in defending itself and
its customers against any such claims, regardless of the merits of such claims.
The Company may be required by contract or by statutory implied warranties to
indemnify its distribution partners and end-users against third-party
infringement claims. Parties making such claims may be able to obtain injunctive
or other equitable relief which could effectively block the Company's ability to
sell its products in the United States and abroad, and could result in an award
of substantial damages. In the event of a successful claim of infringement, the
Company, its customers and end-users may be required to obtain one or more
licenses
9
<PAGE>
from third parties. There can be no assurance that the Company or its customers
could obtain necessary licenses from third parties at a reasonable cost, or at
all. The defense of any lawsuit could result in time-consuming and expensive
litigation, damages, license fees, royalty payments and restrictions on the
Company's ability to sell its products, any of which could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN PERSONNEL
The Company's success is significantly dependent on the contributions of a
number of its key personnel. The loss of the services any of its key personnel
could have a material adverse effect on the Company. The Company believes that
its future success also will depend upon its ability to attract and retain
additional highly skilled technical, managerial, manufacturing, sales and
marketing personnel. Competition for these personnel is intense. There can be no
assurance that the Company will be able to anticipate accurately, or to obtain,
the personnel that it may require in the future.
CONTROL BY INSIDERS
As of March 16, 2000, the Company's executive officers, directors and their
affiliates beneficially owned approximately 3,122,274 shares or 17.6% of the
outstanding shares of the Company's common stock. As a result, these persons may
have the ability to effectively control the Company and direct its affairs and
business, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also have the effect
of delaying, deferring or preventing a change in control of the Company, and
making certain transactions more difficult or impossible absent the support of
these stockholders, including proxy contests, mergers involving the Company,
tender offers, open-market purchase programs or other purchases of common stock
that could give stockholders of the Company the opportunity to realize a premium
over the then prevailing market price for shares of common stock.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources combined
with funds from the Company's existing line of credit, will be sufficient to
meet its presently anticipated working capital, capital expenditure requirements
and general corporate purposes, including expansion of the Company's broadband
video services, for at least the next 12 months. However, in order to
aggressively pursue business opportunities in the video services business, have
the ability to respond to competitive pressures and 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. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's common stock. Should
the Company be unsuccessful in its current efforts to raise equity from
strategic partners, it may seek additional capital from the public and/or
private equity markets that will likely result in dilution of the Company's
current stockholders. There can be no assurance that additional financing will
be available when needed on terms favorable to the Company or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may be unable to develop or enhance its services, take advantage of
future opportunities or respond to competitive pressures, which could have a
material adverse effect on the Company's business, financial condition or
operating results.
ITEM 2. PROPERTIES.
The Company is headquartered in Santa Clara, California, where it leases
approximately 48,000 square feet of space that houses administrative, sales and
marketing, customer service and product development activities. The space is
occupied pursuant to an operating lease that expires in 2009. Additionally, the
Company has rental agreements for small sales offices in the United States,
Europe and Asia. Rental expense under these facility leases for the year ended
December 31, 1999 was approximately $1.1 million. The Company believes that its
existing facilities are adequate to meet current needs.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
On or about April 9, 1999, several purported class action suits were filed
in the United States District Court for the Northern District of California
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National Market under the
symbol "FVCX." Public trading of the common stock commenced on April 29, 1998.
Prior to that, there was no public market for the common stock. The following
table sets forth, for the periods indicated, the high and low sale price per
share of the common stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------------- ------------
<S> <C> <C>
1998
Second Quarter (from April 29, 1998)...................... $17 $9 1/2
Third Quarter............................................. $17 3/4 $7 1/2
Fourth Quarter............................................ $19 $7 13/16
1999
First Quarter............................................. $15 3/8 $10
Second Quarter............................................ $13 3/4 $3 3/4
Third Quarter............................................. $15 5/16 $6
Fourth Quarter............................................ $15 15/16 $9
</TABLE>
As of February 29, 2000, there were approximately 244 holders of record of
the Company's common stock. On February 29, 2000, the last sale price reported
on the Nasdaq National Market System for the Company's common stock was $19.375
per share.
The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain any future earnings to support operations
and to finance the growth and development of the Company's business and does not
anticipate paying cash dividends for the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On December 8, 1999, the Company issued to each of Mr. Ugo Assi and Kiwi
Ventura Servicos SA, in exchange for the share capital of FVC.COM BV held by
each of them, a warrant for the purchase of 30,833 shares of the Company's
common stock, at an exercise price of $12.00 per share. The warrants expire on
December 31, 2002. The warrants were issued pursuant to Regulation S under the
Securities Act of 1933, as amended.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary selected historical data of the Company
as of and for each of the five years in the period ended December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 45,700 $ 37,251 $ 18,771 $ 12,093 $ 3,670
Cost of revenues............................ 28,851 19,220 10,466 6,547 2,874
-------- -------- -------- -------- -------
Gross profit.............................. 16,849 18,031 8,305 5,546 796
-------- -------- -------- -------- -------
Operating expenses:
Research and development.................. 10,170 9,463 5,420 2,930 2,582
Selling, general and administrative....... 21,633 11,878 6,997 4,886 3,603
Acquired in-process research and
development............................. -- 4,664 -- -- --
-------- -------- -------- -------- -------
Total operating expenses (1)............ 31,803 26,005 12,417 7,816 6,185
-------- -------- -------- -------- -------
Operating loss.............................. (14,954) (7,974) (4,112) (2,270) (5,389)
Other income (expense), net................. 646 (42) (216) 27 79
Minority interest in consolidated
subsidiary................................ (20) -- -- -- --
-------- -------- -------- -------- -------
Net loss.................................... $(14,328) $ (8,016) $ (4,328) $ (2,243) $(5,310)
======== ======== ======== ======== =======
Net loss per share:
Basic and diluted (2)..................... $ (0.87) $ (0.69) $ (1.44) $ (1.14) $ (5.30)
Shares used to compute net loss per share:
Basic and diluted (2)..................... 16,433 11,541 3,012 1,974 1,001
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments............................... $ 8,821 $ 26,748 $ 2,500 $ 676 $ 2,787
Working capital............................. 21,878 32,939 1,891 1,046 1,452
Total assets................................ 40,199 51,165 11,104 5,432 4,516
Total debt.................................. 228 1,665 3,466 1,312 392
Accumulated deficit......................... (36,878) (22,550) (14,534) (10,206) (7,963)
Total stockholders' equity.................. 27,812 38,613 1,909 2,074 2,017
</TABLE>
- ------------------------
(1) Operating expenses included non-cash employee stock compensation charges of
$493,000, $1.2 million, $1.1 million, and $339,000 for the years ended
December 31, 1999, 1998, 1997 and 1996, respectively.
(2) See Note 1 to the consolidated financial statements for an explanation of
the computation of net loss per share
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 8 OF THIS FORM 10-K. IN
ADDITION TO THE HISTORICAL INFORMATION CONTAINED IN THIS ITEM, THIS ITEM
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION,
STATEMENTS CONTAINING THE WORDS "BELIEVES," ANTICIPATES," "EXPECTS," AND WORDS
OF SIMILAR IMPORT. SUCH FORWARD-LOOKING STATEMENTS WILL HAVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE RISK FACTORS SET FORTH ABOVE IN "BUSINESS--OVERVIEW",
"BUSINESS--RISK FACTORS," THE RISK FACTORS SET FORTH IN THIS ITEM AND ELSEWHERE
IN THIS FORM 10-K. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
OVERVIEW
The Company provides equipment and services that enable the delivery of
video applications over broadband communications networks. In 1999, the Company
recorded $45.7 million in net revenues, an increase of 23% compared to the
previous year. The Company was incorporated in California in October 1993 and
reincorporated in Delaware in December 1997. The Company first shipped its video
networking products in 1995 and announced its video services product offering in
September 1999.
The Company's revenues in 1999 resulted from the sale of video networking
systems to enterprise customers and to telecommunications service providers. The
Company's internal sales force qualifies and stimulates end-user demand, and
manages the Company's strategic relationships with its distribution partners:
OEMs, VARs and systems integrators. In 1999, more than 75% of the company's
revenue was derived through its distribution partners, including Ameritech (a
subsidiary of SBC Communications Inc.), Bell Atlantic, BT, Cisco, EDS, France
Telecom, Ingram Micro, IBM, Nortel, Qwest and Telstra.
The Company maintains sales offices in the United Kingdom, Germany, France,
Italy, Japan and Australia and distributes its products under the FVC.COM name
in both Europe and Asia through resellers and distributors in more than 25
countries. For the years ended December 31, 1999, 1998 and 1997 approximately
14%, 21% and 20%, respectively, of the Company's sales were generated from
customers outside of the United States. The Company expects that sales from
shipments to customers outside of the United States will continue to represent a
significant portion of its future revenues. In addition, the Company believes
that a small portion of its sales through Nortel 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.
In September 1999, the Company introduced its broadband video services
offering that will enable telecommunications carriers to provide broadband video
services to the enterprise market. No revenues were recorded from this service
offering in 1999.
Revenues are recognized upon shipment of products to customers, provided no
significant obligations remain, collectibility is probable and returns are
estimable. Revenues from sales to certain of the Company's resellers are subject
to agreements allowing rights of return and price protection. In these cases,
the Company provides reserves for estimated future returns and allowances upon
revenue recognition. These reserves are estimated based upon historical rates of
returns and allowances, reseller inventory levels, the Company's estimates of
sell through by resellers and other related factors. Actual results could differ
from these estimates. In the event of the inability to estimate returns from any
reseller, the Company defers revenue recognition until the reseller has sold
through the products.
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<PAGE>
Advance payments received from customers and gross margin deferred with
respect to sales to resellers wherein the Company does not have the ability to
estimate returns are recorded as deferred revenue. At December 31, 1999,
deferred revenue was $1.7 million, the majority of which related to inventory
held at Nortel.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's Consolidated
Statements of Operations as a percentage of total revenues for the periods
indicated. The data set forth below should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues................................................. 100.0% 100.0% 100.0%
Cost of revenues......................................... 63.1 51.6 55.8
-------------- -------------- --------------
Gross profit........................................... 36.9 48.4 44.2
-------------- -------------- --------------
Operating expenses:
Research and development............................... 22.3 25.4 28.9
Selling, general and administrative.................... 47.3 31.9 37.2
Acquired in-process research and development........... -- 12.5 --
-------------- -------------- --------------
Total operating expenses (1)......................... 69.6 69.8 66.1
-------------- -------------- --------------
Operating loss........................................... (32.7) (21.4) (21.9)
Other income (expense), net.............................. 1.4 (0.1) (1.2)
-------------- -------------- --------------
Net loss................................................. (31.4)% (21.5)% (23.1)%
============== ============== ==============
</TABLE>
REVENUES. Revenues increased 23%, to $45.7 million in 1999, from
$37.3 million in 1998 and $18.8 million in 1997. The increase in revenues in
both 1999 and 1998 resulted from higher unit shipments due to wider acceptance
of the Company's products primarily as a result of marketing efforts of the
Company and its strategic partners. Sales through Nortel (including Bay
Networks) represented 29% of total sales in 1999, compared to 39% and 64% in
1998 and 1997, respectively. The reduction in concentration of revenues with
Nortel resulted from changes in Nortel's strategic direction, including the
merger of Northern Telecom and Bay Networks in 1998, and the intention of the
Company to broaden its customer base.
GROSS PROFIT. Gross profit consists of revenues less the cost of revenues,
which includes the costs associated with the manufacture of the Company's
products by outside manufacturers and related costs of freight, inventory
obsolescence, royalty and warranty. These manufacturers procure the majority of
materials, except for certain key components that the Company purchases from
third-party vendors.
In 1999, gross profit declined by $1.2 million to $16.8 million, or 37% of
net revenue, compared to $18.0 million or 48% of net revenue in the previous
year. The decrease in gross profit was primarily the result of a charge for
$5.0 million related to reductions in value of certain components,
sub-assemblies and finished goods for which inventory quantities on-hand were
excessive to current demand or were obsolete, and physical inventory
adjustments. The charge for excess and obsolete inventory was primarily
associated with materials that had been acquired in early 1999 based on
projected demand for one-way, streaming video products that had been introduced
late in 1998.
Excluding the $5.0 million charge recorded in the fourth quarter of 1999,
gross profit increased by $3.9 million to $21.9 million, or 48% of net revenue.
In 1998, gross profit increased by $9.7 million to $18.0 million, or 48% of net
revenue, from $8.3 million or 44% of net revenue, in the year ended
14
<PAGE>
December 31, 1997. The increases in gross profit in 1999 over 1998 and in 1998
over 1997 were primarily attributable to increased unit volumes, changes in the
revenue mix to higher margin products, an increase in the revenues derived from
sales to service providers that carry higher margins than revenue in other
distribution channels, and decreases in costs for some of the Company's
products.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs, cost of contractors and outside consultants,
supplies and material expenses, equipment depreciation and overhead costs.
Research and development expenses increased to $10.2 million in 1999, an
increase of 7.0% over the $9.5 million recorded in 1998 and an increase of 75%,
or $4.0 million, compared to 1997. As a percentage of total revenues, research
and development expenses decreased to 22.3% in 1999 from 25.4% in 1998 and 28.9%
in 1997. The increases in absolute dollars were principally due to the hiring of
additional engineers and consultants for product development, including costs in
1998 associated with the acquisition of ICAST. The decrease in research and
development expenses as a percentage of revenues was due to the relatively
greater increase in revenues compared to research and development expenses. The
Company believes that research and development expenses will continue to
increase in absolute dollars for the foreseeable future. However, these expenses
will fluctuate depending on various factors, including the number and types of
development projects.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses (SG&A) include personnel and related overhead costs for sales,
marketing, finance, human resources and general management. These expenses also
include costs of outside contractors, advertising, trade shows and other
marketing and promotional expenses. SG&A increased 82% in 1999, to
$21.6 million, from $11.9 million in 1998. SG&A expense totaled $7.0 million in
1997. As a percentage of total revenues, SG&A decreased to 47.3% in 1999, from
31.9% in 1998 and 37.3% in 1997. The increase in absolute dollars in 1998 over
1997 and 1997 over 1996 was the result of the expansion of the Company's sales
and marketing infrastructure, as well as higher marketing costs associated with
advertising and promotional activities, and higher selling costs related to the
increases in revenues. The increase in 1998 was also attributable to a
$1.2 million increase in the provision for bad debts for accounts receivable
related to certain international customers. SG&A includes non-cash compensation
charges relating to the Company's employee stock plans of $493,000 in 1999,
$589,000 in 1998, and $631,000 in 1997. The increase in SG&A as a percentage of
revenues in 1999 compared to 1998 reflected expense increases that exceeded the
rate of revenue growth, including increased spending in administrative functions
and spending associated with activities in international markets. The decrease
in SG&A as a percentage of revenues in 1998 compared to 1997 was due to the
relatively greater increases in revenues for 1998 compared to the change in SG&A
expense levels. The Company anticipates that SG&A will continue to increase in
absolute dollars in the foreseeable future as the Company expands its selling
and marketing efforts and continues to incur the administrative costs associated
with being a publicly held company.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In August 1998, the Company
acquired ICAST Corporation, a developer of software designed for Internet and
intranet broadcasting of real-time video, audio and data. The purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values at the date of acquisition as determined by an
independent appraisal. The acquired in-process research and development
represents the estimated fair market value, using a risk-adjusted income
approach, of specifically identified technologies which had not reached
technological feasibility and had no alternative future uses.
The purchase price, including liabilities assumed of $1.8 million,
aggregated approximately $7.6 million, of which $6.2 million was initially
allocated to acquired in-process research and development. As a result of views
expressed by the SEC staff, as discussed below, the Company subsequently reduced
its estimate of the amount allocated to in-process research and development
("IPR&D") by $1.5 million to $4.7 million for the year ended December 31, 1998
and allocated $2.5 million to goodwill and other identified intangibles. As a
result of the reduction in the IPR&D charge, amortization of intangibles
15
<PAGE>
increased by $116,000 from $56,000 to $172,000 for the year ended December 31,
1998. The basic and diluted net loss per share decreased from $0.82 to $0.69 for
the year ended December 31, 1998.
The amount allocated to IPR&D and intangible assets in the third quarter of
1998 was determined in a manner consistent with widely recognized appraisal
practices at the date of acquisition. Subsequent to the acquisition, the SEC
staff expressed views that took issue with certain appraisal practices generally
employed by companies in determining the fair value of the in-process research
and development that was the basis for the Company's measurement of its
in-process research and development charge. The charge of $6.2 million, as first
reported by the Company, was based upon the work of an independent valuation
firm that had utilized the methodologies the SEC subsequently announced it does
not consider appropriate.
As a result of computing in-process research and development using the
current SEC preferred methodology, the Company revised the amount originally
allocated to in-process research and development.
At the time of the acquisition, ICAST was a privately held, development
stage company involved in research and development of a low-bit rate software
product designed for Internet and intranet broadcasting of real-time video,
audio and data. The value assigned to in-process research and development was
based on this research project for which technological feasibility had not been
established. The value was determined by estimating the expected cash flows from
this project once commercially viable, discounting the net cash flows back to
their present value and then applying a percentage of completion.
The percentage of completion for this project was determined by comparing
both effort expended and research and development costs incurred as of August
1998, to the remaining effort to be expended and research and development costs
to be incurred, based on management's estimates, to bring the project to
technological feasibility. Based on these comparisons management estimated the
project to be approximately 83% complete as of the date of acquisition. The
project was substantially completed in December 1998. The effort and costs
required to complete the project approximated the estimates made by management
at the date of acquisition.
Management believes that the restated in-process research and development
charge of $4.7 million was valued consistently with the SEC staff's current
views regarding valuation methodologies. There can be no assurances, however,
that the SEC staff will not take issue with any assumptions used in the
Company's valuation model and require the Company to further revise the amount
allocated to in-process research and development.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily
of interest expense relating to the Company's credit facilities and long-term
debt, offset in part by interest income earned on short term investments and
cash balances. Net other income totaled $646,000 in 1999, compared to other net
expense of $42,000 in 1998 and other net expense of $216,000 in 1997.
The change in other income (expense) in 1999 from 1998 was primarily the
result of reduced interest expense on short term borrowings. The change from
1998 to 1997 was primarily due to interest income earned on the proceeds from
the Company's initial public offering completed in May 1998 and a reduction in
interest expense due to the repayment of borrowings under short-term credit
facilities with the proceeds from the initial public offering.
INCOME TAXES. As of December 31, 1999, the Company had net operating loss
carryforwards for federal tax purposes of approximately $21.0 million. These
carryforwards, if not utilized to offset future taxable income, will expire at
various dates beginning in 2010. In addition, under the Tax Reform Act of 1986,
the amount of the benefit that can be carried forward may be limited in certain
circumstances, including, but not limited to, a cumulative stock ownership
change of more than 50% over a three year
16
<PAGE>
period, as defined. No benefit has been recorded for income taxes for any of the
periods presented as the Company believes that, based on the history of such
losses and other factors, the weight of available evidence indicates that it
will not be able to realize the benefit of these net operating losses. Thus, a
full valuation reserve has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through the completion of its initial public offering in
May 1998, the Company financed its operations primarily through private
placements of equity securities and to a lesser extent through certain credit
facilities and long-term debt. As of December 31, 1999, the Company had cash,
cash equivalents and short-term investments of $8.8 million and working capital
of $21.9 million.
The Company has used cash in its operating activities primarily to fund
losses of $36.9 million incurred through December 31, 1999 and to finance its
working capital needs.
Cash used in operating activities totaled $16.5 million in 1999, reflecting
the net loss of $14.3 million and net increases in both inventory and accounts
receivable associated with the increase in business activity level in 1999
compared to1998.
Cash provided by investment activities totaled $6.0 million, primarily the
proceeds from the sale of short-term investments ($8.6 million) partially offset
by the acquisition of property and equipment ($2.0 million). Capital
expenditures in 1999 were at the same level as 1998, and consisted of purchases
of computers and related equipment, furniture and fixtures necessary to support
the Company's growth. To date, the Company has not made significant outlays for
capital expenditures because of its strategy to outsource manufacturing and
certain other functions.
Cash provided by financing activities was $1.1 million in 1999, and
consisted principally of $2.6 million in proceeds from the sale of common stock
through the Company's stock option and stock purchase plans, offset in part by
the repayment of $1.3 million in notes payable that were assumed by the Company
in the acquisition of ICAST in August 1998.
The Company has a working capital line of credit with a bank that 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 December 31, 1999). As of
December 31, 1999, the Company had no borrowings outstanding under this line.
The line expires in June 2000.
The Company believes that its cash, cash equivalents and short term
investments of $8.8 million at December 31, 1999, together with existing sources
of liquidity, 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 may seek additional capital from the public and/or
private equity markets that will likely result in dilution of the Company's
current stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of December 31, 1999, the Company held a total of $8.8 million of cash,
cash equivalents and short-term investments. These securities, which consist
primarily of U.S. government securities, municipal notes and corporate bonds,
are subject to interest rate risk and will decline in value if market interest
rates increase. If market interest rates were to increase immediately and
uniformly by 10 ten percent from levels as of December 31, 1999, the decline in
fair value of the portfolio would not be material.
17
<PAGE>
The Company transacts substantially all of its revenues and costs in United
States dollars and therefore is not subject to fluctuations in foreign exchange
rates. Accordingly, the Company currently does not use derivative financial
instruments. The Company has no fixed rate obligations except for capitalized
leases of approximately $228,000. As such, the fair value of the Company's fixed
rate obligations is not subject to an adverse material impact from changes in
interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements and Notes thereto appear
beginning at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in the Company's independent accountants during the
two most recent fiscal years.
18
<PAGE>
PART III
CERTAIN INFORMATION REQUIRED IN PART III OF THIS REPORT IS INCORPORATED BY
REFERENCE TO THE COMPANY'S PROXY STATEMENT (THE "PROXY STATEMENT") FOR THE
COMPANY'S 2000 ANNUAL MEETING OF STOCKHOLDERS. THE PROXY STATEMENT WILL BE FILED
WITH THE SEC IN ACCORDANCE WITH REGULATION 14A UNDER THE EXCHANGE ACT NO LATER
THAN APRIL 30, 1999.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors: The information concerning the Company's
directors and nominees is incorporated by reference from the section entitled
"Proposal I: Election of Directors" in the Proxy Statement, a copy of which will
be filed with the SEC no later than April 30, 1999.
(b) Identification of Executive Officers: The information concerning the
Company's Executive Officers is incorporated by reference from the section
entitled "Management" in the Proxy Statement, a copy of which will be filed with
the SEC no later than April 30, 1999.
(c) Compliance with Section 16(a) of the Exchange Act: Based solely upon a
review of Forms 3 and 4 and amendments thereto furnished to the Company pursuant
to Rule 16a-3(e) during the 1998 fiscal year and Form 5 and amendments thereto
furnished to the Company with respect to fiscal year 1998, no director, officer,
or beneficial owner of more than 10 percent of any class of equity security of
the Company has failed to file on a timely basis, as disclosed by the above
forms, reports required by Section 16(a) of the Exchange Act during the 1999
fiscal year or prior fiscal years.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement, a copy of
which will be filed with the SEC no later than April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement, a copy of which will be filed with the SEC
no later than April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section entitled "Certain Relationships and Related Transactions" in the Proxy
Statement, a copy of which will be filed with the SEC no later than April 30,
1999.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILES AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS
The consolidated financial statements required by this item are submitted in
a separate section beginning on page F-1 of this report.
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets at December 31, 1999 and 1998... F-2
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1999................. F-3
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1999....... F-4
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1999................. F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because the information required to be set forth
therein is not applicable or is included in the financial statements or
notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization among the
Registrant, FVC Acquisition Corp., ICAST Corporation and
Certain Shareholders of ICAST Corporation, dated as of July
30, 1998 (1)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (2) (exhibit 3.3)
3.2 Certificate of Ownership and Merger, effective August 3,
1998 (3) (exhibit 3.1(i))
3.3 Bylaws of the Registrant (2) (exhibit 3.4)
4.1 Specimen Common Stock Certificate (3)
10.1* 1997 Equity Incentive Plan (2)
10.2* Form of Incentive Stock Option Grant (2)
10.3* Form of Nonstatutory Stock Option Grant (2)
10.4* 1997 Employee Stock Purchase Plan (2)
10.5* Form of 1997 Employee Stock Purchase Plan Offering (2)
10.6* 1997 Non-Employee Directors' Stock Option Plan (2)
10.7* Form of Nonstatutory Stock Option Grant (5)
10.8* Executive Officers' Change of Control Plan (5)
10.9* Non-Employee Directors' Change of Control Plan (5)
10.10* 1999 Equity Incentive Plan
10.11* Form of Nonstatutory Stock Option Grant
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.12* Form of Indemnification Agreement between the Registrant and
its directors and executive officers (2) (exhibit 10.7)
10.13 Amended and Restated Investors' Rights Agreement, dated as
of April 1, 1998, among the Registrant and the investors
named therein (2) (exhibit 10.8)
10.14 Lease Agreement between the Registrant and John Arrillaga,
or his successor Trustee, UTA 7/20/77, dated July 19, 1995
(the "Lease Agreement") (2) (exhibit 10.9)
10.15 Amendment No. 1 to the Lease Agreement, dated November 7,
1997 (2) (exhibit10.9(i))
10.16 Amendment No. 4 to the Lease Agreement, dated February 4,
1999 (5)
10.17 Loan and Security Agreement between the Registrant and
Silicon Valley Bank ("SVB"), dated July 3, 1996 (2) (exhibit
10.10)
10.18 Amendment to Loan and Security Agreement between the
Registrant and SVB, dated June 10, 1998 (3)
(exhibit10.10(i))
10.19 Loan Modification Agreement between the Registrant and SVB,
dated as of March 10, 2000
10.20 Master Lease Agreement between the Registrant and Comdisco,
Inc. ("Comdisco"), dated April 30, 1997(2) (exhibit 10.11)
10.21 Subordinated Loan and Security Agreement between the
Registrant and Comdisco, dated April 30, 1997(2) (exhibit
10.12)
10.22 Original Equipment Manufacturing Agreement between the
Registrant and Bay Networks, Inc., dated November 3, 1995 as
amended through April 9, 1997 (2) (exhibit 10.13)
10.23 Fourth Amendment to OEM Agreement, between the Registrant
and Bay Networks, Inc., dated October 26, 1997 (2)
(exhibit10.13(i))
10.24 OEM Reseller Agreement between the Registrant and Northern
Telecom Inc., dated May 1, 1997 (2) (exhibit 10.14)
10.25 Development and License Agreement between the Registrant and
Advanced Telecommunications Modules Limited, dated February
25, 1994, as amended (2) (exhibit 10.15)
10.26 Equipment Manufacturing OEM Agreement between the Registrant
and VTEL Corporation, dated August 20, 1997 (2) (exhibit
10.16)
10.27 Technology Licensing Agreement between IBM Corporation and
the Registrant, dated October 16, 1997 (2) (exhibit 10.17)
10.28 Warrant issued to SVB, dated April 11, 1997 (2) (exhibit
10.18)
10.29 Subordinated Loan and Security Agreement between the
Registrant and Comdisco, dated October 23, 1997 (2) (exhibit
10.20)
10.30 Lease Agreement between the Registrant and John Arrillaga,
or his successor Trustee, UTA 7/20/77, dated November 7,
1997 (2) (exhibit 10.22)
10.31 Letter Agreement between IBM Corporation and the Registrant,
dated February 8, 1998 (2) (exhibit 10.23)
10.37 Employment Agreement, dated as of December 14, 1998, by and
between the Registrant and Richard M. Beyer (5)
10.38 Amended and Restated Promissory Note, dated December 16,
1998, issued in favor of the Registrant by Allwyn Sequeira
(5)
11.1 Statement of Computation of Earnings (Loss) Per Share (4)
23.1 Consent of PricewaterhouseCoopers LLP
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
NOTES TO EXHIBITS
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to exhibit 2.1 to the Company's Current Report on
Form 8-K filed on September 15, 1998 (File No. 000-23305).
(2) Incorporated by reference to the corresponding or indicated exhibit in the
Company's Registration Statement on Form S-1, as amended (File No.
333-38755).
(3) Incorporated by reference to the corresponding or indicated exhibit in the
Company's Quarterly Report on Form 10-Q filed on June 10, 1998 (File No.
000-23305).
(4) See Note 1 to the consolidated financial statements.
(5) Incorporated by reference to the corresponding or indicated exhibit in the
Company's Annual Report on Form 10-K filed on April 15, 1999 (File
No. 333-72533)
(B) REPORTS ON FORM 8-K
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 29(th) day of March 2000.
<TABLE>
<S> <C> <C>
FVC.COM, INC.,
By: /s/ RICHARD M. BEYER
-----------------------------------------
Richard M. Beyer
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard M. Beyer and Ralph K. Ungermann, and each
of them, his attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all such attorneys-in-fact
and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chief Executive Officer,
/s/ RICHARD M. BEYER President & Director
------------------------------------------- (Principal Executive March 29, 2000
Richard M. Beyer Officer)
Vice President and Chief
/s/ TRUMAN COLE Financial Officer
------------------------------------------- (Principal Financial and March 29, 2000
Truman Cole Accounting Officer)
/s/ RALPH UNGERMANN
------------------------------------------- Chairman of the Board of March 29, 2000
Ralph Ungermann Directors
/s/ NEAL M. DOUGLAS
------------------------------------------- Director March 29, 2000
Neal M. Douglas
/s/ DAVID A. NORMAN
------------------------------------------- Director March 29, 2000
David A. Norman
/s/ ROBERT WILMOT
------------------------------------------- Director March 29, 2000
Robert Wilmot
/s/ PIER CARLO FALOTTI
------------------------------------------- Director March 29, 2000
Pier Carlo Falotti
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of FVC.COM, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 20, present fairly, in all material
respects, the financial position of FVC.COM, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 25, 2000, except as to Note 13,
which is as of February 14, 2000
F-1
<PAGE>
FVC.COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 997 $10,315
Short-term investments.................................... 7,824 16,433
Accounts receivable, net of allowances of $1,269 and
$168.................................................... 14,066 11,221
Inventory................................................. 8,104 6,053
Prepaid expenses and other current assets................. 2,866 1,241
------- -------
Total current assets.................................... 33,857 45,263
Property and equipment, net................................. 2,880 2,400
Other assets................................................ 3,462 3,502
------- -------
Total assets.......................................... $40,199 $51,165
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ -- $ 1,300
Current portion of long-term debt......................... 143 137
Accounts payable.......................................... 6,968 5,045
Accrued liabilities....................................... 3,123 1,937
Deferred revenue.......................................... 1,745 3,905
------- -------
Total current liabilities............................... 11,979 12,324
------- -------
Long-term debt, net of current portion...................... 85 228
Minority interest in consolidated subsidiaries.............. 323 --
Commitments and contingencies (Notes 9 and 13)
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; 16,832,522 and 16,389,007 shares issued and
outstanding, respectively............................... 17 16
Additional paid-in capital................................ 65,015 61,649
Notes receivable from stockholders........................ (321) (502)
Cumulative translation adjustment......................... (21) --
Accumulated deficit....................................... (36,878) (22,550)
------- -------
Total stockholders' equity.............................. 27,812 38,613
------- -------
$40,199 $51,165
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
FVC.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $ 45,700 $37,251 $18,771
Cost of revenues............................................ 28,851 19,220 10,466
-------- ------- -------
Gross profit.............................................. 16,849 18,031 8,305
======== ======= =======
Operating expenses:
Research and development.................................. 10,170 9,463 5,420
Selling, general and administrative....................... 21,633 11,878 6,997
Acquired in-process research and development.............. -- 4,664 --
-------- ------- -------
Total operating expenses................................ 31,803 26,005 12,417
-------- ------- -------
Loss from operations........................................ (14,954) (7,974) (4,112)
Interest expense............................................ (54) (1,057) (295)
Interest and other income, net.............................. 700 1,015 79
Minority interest in consolidated subsidiary................ (20) -- --
-------- ------- -------
Net loss.................................................... $(14,328) $(8,016) $(4,328)
======== ======= =======
Basic and diluted net loss per share........................ $ (0.87) $ (0.69) $ (1.44)
Shares used to compute basic and diluted net loss per
share..................................................... 16,433 11,541 3,012
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FVC.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE
---------------------- --------------------- PAID-IN FROM TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS ADJUSTMENT
---------- --------- ---------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 7,699,635 $ 7 4,863,963 $ 5 $13,192 $(924) $ --
Issuance of Series C preferred
stock, net....................... 20,518 -- -- -- 137 -- --
Issuance of Series D preferred
stock, net....................... 320,000 1 -- -- 2,548 -- --
Exercise of stock options.......... -- -- 32,700 -- 77 -- --
Issuance (repurchase) of common
stock, net....................... -- -- (71,979) -- 176 87 --
Stock compensation charges......... -- -- -- -- 1,137 -- --
Net loss........................... -- -- -- -- -- -- --
---------- --------- ---------- --- ------- ----- -----
Balance at December 31, 1997....... 8,040,153 8 4,824,684 5 17,267 (837) --
Issuance of common stock in initial
public offering, net............. -- -- 3,132,000 3 36,072 -- --
Conversion of preferred stock into
common stock upon initial public
offering......................... (8,040,153) (8) 8,040,153 8 -- -- --
Issuance of common stock and other
equity instruments for business
acquisition...................... -- -- 401,389 -- 5,179 -- --
Exercise of stock options.......... -- -- 194,133 -- 815 -- --
Issuance (repurchase) of common
stock, net....................... -- -- (203,352) -- (147) 335 --
Stock compensation charges......... -- -- -- -- 2,463 -- --
Net loss........................... -- -- -- -- -- -- --
---------- --------- ---------- --- ------- ----- -----
Balance at December 31, 1998....... -- -- 16,389,007 16 61,649 (502) --
Issuance of common stock under
stock option plans and related
benefits......................... -- -- 409,494 1 2,090 -- --
Issuance of common stock, net...... -- -- 34,021 -- 491 181 --
Issuance of warrants for business
acquisition...................... -- -- -- -- 292 --
Stock compensation charges......... -- -- -- -- 493 -- --
Cumulative translation
adjustment....................... -- -- -- -- -- -- (21)
Net loss........................... -- -- -- -- -- -- --
---------- --------- ---------- --- ------- ----- -----
Balance at December 31, 1999....... -- -- 16,832,522 $17 $65,015 $(321) $ (21)
========== ========= ========== === ======= ===== =====
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balance at December 31, 1996....... $(10,206) $ 2,074
Issuance of Series C preferred
stock, net....................... -- 137
Issuance of Series D preferred
stock, net....................... -- 2,549
Exercise of stock options.......... -- 77
Issuance (repurchase) of common
stock, net....................... -- 263
Stock compensation charges......... -- 1,137
Net loss........................... (4,328) (4,328)
-------- -------
Balance at December 31, 1997....... (14,534) 1,909
Issuance of common stock in initial
public offering, net............. -- 36,075
Conversion of preferred stock into
common stock upon initial public
offering......................... -- --
Issuance of common stock and other
equity instruments for business
acquisition...................... -- 5,179
Exercise of stock options.......... -- 815
Issuance (repurchase) of common
stock, net....................... -- 188
Stock compensation charges......... -- 2,463
Net loss........................... (8,016) (8,016)
-------- -------
Balance at December 31, 1998....... (22,550) 38,613
Issuance of common stock under
stock option plans and related
benefits......................... -- 2,091
Issuance of common stock, net...... -- 672
Issuance of warrants for business
acquisition...................... -- 292
Stock compensation charges......... -- 493
Cumulative translation
adjustment....................... -- (21)
Net loss........................... (14,328) (14,328)
-------- -------
Balance at December 31, 1999....... $(36,878) $27,812
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FVC.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(14,328) $(8,016) $(4,328)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 2,118 1,961 566
Stock compensation...................................... 493 1,250 1,137
Acquired in-process research and development............ -- 4,664 --
Other................................................... 306 (44) 215
Changes in assets and liabilities net of effects of
acquisitions:
Accounts receivable................................... (2,345) (8,591) (347)
Inventory............................................. (2,551) (1,839) (2,948)
Prepaid expenses and other assets..................... (1,144) (1,308) (580)
Accounts payable...................................... 1,923 843 3,012
Accrued liabilities................................... 1,186 468 689
Deferred revenue...................................... (2,160) 3,643 (18)
-------- ------- -------
Net cash used in operating activities............... (16,502) (6,969) (2,602)
-------- ------- -------
Cash flows from investing activities:
Acquisition of businesses, net of cash received........... (750) (360) --
Acquisition of property and equipment..................... (2,000) (1,987) (451)
Purchase of short-term investments........................ -- (16,433) --
Proceeds from sale of short term investments.............. 8,609 -- --
Repayment of shareholder notes receivable................. 181 -- --
-------- ------- -------
Net cash provided by (used in) investing
activities.......................................... 6,040 (18,780) (451)
-------- ------- -------
Cash flows from financing activities:
Borrowings under short-term credit facilities............. -- 3,600 801
Repayment of short-term credit facilities................. -- (4,905) (494)
Proceeds from long-term debt.............................. -- -- 2,250
Repayment of long-term debt............................... -- (2,015) (235)
Repayment of notes payable................................ (1,300) -- --
Proceeds from issuance of stock, net...................... 2,581 37,078 2,793
Repayment of capital lease obligations.................... (137) (194) (238)
-------- ------- -------
Net cash provided by financing activities........... 1,144 33,564 4,877
-------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (9,318) 7,815 1,824
Cash and cash equivalents at beginning of period............ 10,315 2,500 676
-------- ------- -------
Cash and cash equivalents at end of period.................. $ 997 $10,315 $ 2,500
======== ======= =======
Supplemental cash flow information:
Cash paid for interest.................................... $ 54 $ 206 $ 248
Equipment acquired under capital lease obligations........ -- 203 --
Issuance of options and warrants to third parties......... 70 1,213 233
Common stock issued and options and warrants issued or
assumed in connection with acquisitions................. 292 5,179 --
Debt assumed in connection with acquisition of ICAST...... -- 1,300 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
FVC.COM, Inc. (the "Company") was incorporated in California in
October 1993 and subsequently reincorporated in Delaware in December 1997 as
First Virtual Corporation. In July 1998, the Company changed its name to
FVC.COM, Inc. The Company is engaged in developing, manufacturing and marketing
video networking systems for use in business, government and educational
environments. The Company sells its products worldwide through original
equipment manufacturers ("OEM partners"), distributors and resellers.
The Company has one reporting segment based on its management structure.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Investments in entities of which the Company owns between
20% and 50% and entities on which the Company has the ability to exercise
significant influence but not control are accounted for under the equity method.
All significant intercompany accounts and transactions have been eliminated.
Minority interest reflects the interest of minority shareholders in the
operating results of consolidated subsidiaries.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents and those with maturities
greater than three months are considered short-term investments. The Company has
classified all short-term investments as available-for-sale. Short-term
investments held at December 31, 1999 and 1998 have been presented at cost,
which approximates fair value.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. During the quarter ended December 31, 1999, the
Company recorded an inventory related charge of $5.0 million. These charges
related to the write down of inventories for certain excess and obsolete
products and to record physical inventory adjustments. The charge has been
included in cost of revenues.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets, generally
three years. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the remaining
lease term.
F-6
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
When property or equipment is retired or otherwise disposed of, the Company
removes the asset and accumulated depreciation from its records and recognizes
any related gain or loss in the determination of income.
GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill, representing the excess of purchase price and acquisition costs
over the fair value of net assets of businesses acquired, and other purchased
intangibles are amortized on a straight-line basis over the estimated economic
lives, which range from 4 to 5 years. Amortization expense relating to goodwill
and other intangible assets was $601,000 for 1999 and $172,000 for 1998.
LONG-TERM ASSETS
The Company periodically reviews the recoverability of long-term assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable.
REVENUE RECOGNITION
Revenues are recognized upon shipment of product to customers, provided no
significant obligations remain, collectibility is probable and returns are
estimable. Revenues from sales to certain of the Company's resellers are subject
to agreements allowing rights of return and price protection. In such cases, the
Company provides reserves for estimated future returns and credits for price
protection upon revenue recognition. Such reserves are estimated based on
historical rates of return and allowances, reseller inventory levels, the
Company's estimates of expected sell through by resellers and other related
factors. Actual results could differ from these estimates. In the event of
inability to estimate returns from any reseller, the Company defers revenue
recognition until the reseller has sold through the products.
Advance payments received from customers and gross margin deferred with
respect to sales to resellers wherein the Company does not have the ability to
estimate returns are recorded as deferred revenue.
The Company on occasion receives nonrecurring engineering funding for
development projects. Revenues from such funding are recognized over the term of
the respective contract using the percentage of completion method. Amounts
received under such projects have not been material to date.
A provision is made upon revenue recognition for the estimated cost to
repair or replace products under warranty arrangements. The Company provides a
limited amount of telephone technical support to customers. These activities are
generally considered insignificant customer support obligations and related
costs are accrued upon revenue recognition.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the product are capitalized, if material. To date, all software
development costs have been expensed as incurred.
F-7
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
thereof. Options and warrants granted to non-employees are accounted for using
the fair value method prescribed by Statement of Financial Accounting Standards
No. 123 ("FAS 123)," "Accounting for Stock-Based Compensation." The Company also
has adopted the disclosure only provisions of FAS 123.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach. The
asset and liability approach requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. The measurements of current and deferred
tax liabilities and assets are based on provisions of currently enacted tax law;
the effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
EARNINGS PER SHARE
Basic earnings (loss) per share is based on the weighted-average number of
common shares outstanding excluding contingently issuable or returnable shares,
such as shares of unvested restricted common stock. Diluted earnings (loss) per
share is based on the weighted-average number of common shares outstanding and
dilutive potential common shares outstanding. As a result of the losses incurred
by the Company during 1999, 1998 and 1997, all potential common shares were
anti-dilutive and excluded from the diluted net loss per share calculations.
The following table summarizes securities outstanding as of each period end
which were not included in the calculation of diluted net loss per share since
their inclusion would be anti-dilutive:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Unvested restricted common stock............................ 56 492 1,198
Preferred stock............................................. -- -- 8,040
Warrants.................................................... 307 290 61
Stock options............................................... 4,729 3,322 2,129
</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.
CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC DISTRIBUTION OF REVENUES
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and accounts receivable. The
F-8
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
Company invests its excess cash in a variety of financial instruments such as
U.S. government securities, municipal notes and corporate bonds. The Company, by
policy, limits the amount of credit exposure to any one financial institution or
commercial issuer, and restricts the placement of funds to financial
institutions evaluated as highly credit-worthy. The Company sells its products
to original equipment manufacturers, distributors, value-added resellers and
end-user customers throughout the world. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company provides an allowance for
uncollectible accounts receivable based upon the expected collectibility of such
receivables. For the years ended December 31, 1999, 1998 and 1997, the allowance
for doubtful accounts was increased for additions of $1,201,000, $136,000, and
$240,000, respectively, and reduced for deductions of $100,000, $183,000, and
$25,000, respectively.
In 1999, 1998 and 1997 revenues from one customer represented 29%, 39% and
64%, respectively, of total revenues, and a second customer represented 10% of
total revenues in 1999.
The following table summarizes the percentage of total revenues by
geographic area based on the destination of the related shipments:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States............................................... 86% 79% 80%
Asia........................................................ 5 9 8
Europe...................................................... 9 12 12
--- --- ---
Total....................................................... 100% 100% 100%
=== === ===
</TABLE>
At December 31, 1999, outstanding receivables from two customers represented
14% and 13% of accounts receivable. At December 31, 1998, outstanding
receivables from two customers represented 29% and 10% of accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments
and other current assets and liabilities such as accounts receivable, accounts
payable and accrued liabilities, as presented in the consolidated financial
statements, approximate fair value because of their short maturities. The
recorded amount of long-term debt approximates fair value as the actual interest
rates approximate current competitive rates.
COMPREHENSIVE INCOME
Under Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"), the Company is required to report
comprehensive income, which includes the company's net income, as well as
changes in equity from other sources. FAS 130 requires that comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements that constitute a full set of financial
statements. Prior to 1999, the adoption of this standard had no effect on the
Company's consolidated financial statements because none of its transactions to
date had resulted in any material items meeting the definition of components of
comprehensive income. Accordingly, the Company's reported net loss approximated
its comprehensive net loss for 1998 and 1997. The Company's comprehensive net
loss for 1999 was $14,349,000.
F-9
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no impact on previously reported
results of operations or stockholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Under SFAS No. 133, gains or losses resulting from
changes in the values of derivatives are to be reported in the statement of
operations or as a deferred item, depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. In June 1999, the FASB issued SFAS No. 137, "Deferral of the
Effective Date of FASB Statement Number 133," to defer for one year the
effective date of implementation of SFAS No. 133. SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000, with
earlier application encouraged. To date, the Company has not engaged in any
foreign currency hedging activity and does not expect 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 1999, the SEC issued SAB 101A which deferred the Company's
required adoption of SAB 101 until the quarter beginning April 1, 2000. Although
the Company believes its revenue recognition policies are in accordance with
GAAP, the Company is currently studying SAB 101 and has not determined its
impact on the consolidated financial statements.
DEPENDENCE ON SUPPLIERS
The Company's ability to timely deliver its products is dependent upon the
availability of quality components and subsystems used in these products. The
Company depends in part upon subcontractors to manufacture, assemble and deliver
certain items in a timely and satisfactory manner. The Company obtains certain
components and subsystems from single or a limited number of sources. A
significant interruption in the delivery of such items could have a material
adverse effect on the Company's consolidated financial condition and results of
operations.
NOTE 2--ACQUISITION OF ICAST CORPORATION
In August 1998, the Company acquired ICAST Corporation, ("ICAST"). Since its
inception, ICAST has been developing software designed for Internet and intranet
broadcasting of real-time video, audio and data. The Company acquired all of the
outstanding stock of ICAST in exchange for 401,389 shares of FVC.COM common
stock, a cash payment of $327,000 and the assumption of certain outstanding
ICAST stock options and warrants and debt. The transaction was accounted for as
a purchase; accordingly, the purchase price was allocated to the assets acquired
and liabilities assumed based upon their estimated fair
F-10
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITION OF ICAST CORPORATION (CONTINUED)
market values at the date of acquisition as determined by an independent
appraisal. The acquired in-process research and development represents the
estimated fair market value, using a risk-adjusted income approach, of
specifically identified technologies which had not reached technological
feasibility and had no alternative future uses.
IN-PROCESS RESEARCH AND DEVELOPMENT
The purchase price, including liabilities assumed of $1.8 million,
aggregated approximately $7.6 million, of which $6.2 million was initially
allocated to acquired in-process research and development. As a result of views
expressed by the SEC as discussed below, the Company subsequently reduced its
estimate of the amount allocated to in-process research and development
("IPR&D") by $1.5 million to $4.7 million for the year ended December 31, 1998
and allocated $2.5 million to goodwill and other identified intangibles. As a
result of the reduction in the IPR&D charge, amortization of intangibles
increased by $116,000 from $56,000 to $172,000 for the year ended December 31,
1998. The basic and diluted net loss per share decreased from $0.82 to $0.69 for
the year ended December 31, 1998.
The amount allocated to IPR&D and intangible assets in the third quarter of
1998 was determined in a manner consistent with widely recognized appraisal
practices at the date of acquisition. Subsequent to the acquisition, the SEC
expressed views that took issue with certain appraisal practices generally
employed by companies in determining the fair value of the in-process research
and development that was the basis for the Company's measurement of its
in-process research and development charge. The charge of $6.2 million, as first
reported by the Company, was based upon the work of an independent valuation
firm that had utilized the methodologies the SEC subsequently announced it did
not consider appropriate.
As a result of computing in-process research and development using the
current SEC preferred methodology, the Company revised the amount originally
allocated to in-process research and development.
At the time of the acquisition, ICAST was a privately held, development
stage company involved in research and development of a low-bit rate software
product designed for Internet and intranet broadcasting of real-time video,
audio and data. The value assigned to in-process research and development was
based on this research project for which technological feasibility had not been
established. The value was determined by estimating the expected cash flows from
this project once commercially viable, discounting the net cash flows back to
their present value and then applying a percentage of completion.
The percentage of completion for this project was determined by comparing
both effort expended and research and development costs incurred as of
August 1998, to the remaining effort to be expended and research and development
costs to be incurred, based on management's estimates, to bring the project to
technological feasibility. Based on these comparisons management estimated the
project to be approximately 83% complete as of the date of acquisition. The
project was substantially completed in December 1998. The effort and costs
required to complete the project approximated the estimates made by management
at the date of acquisition.
Management believes that the restated in-process research and development
charge of $4.7 million was valued consistently with the SEC's current views
regarding valuation methodologies. There can be no assurances, however, that the
SEC will not take issue with any assumptions used in the Company's valuation
model and require the Company to further revise the amount allocated to
in-process research and development.
F-11
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITION OF ICAST CORPORATION (CONTINUED)
The following pro forma information reflects the results of operations for
the years ended December 31, 1998 and 1997 as if the acquisition of ICAST
Corporation had occurred as of the beginning of each of the periods presented,
after giving effect to certain pro forma adjustments and excludes the charge
relating to IPR&D. These pro-forma results have been prepared for comparative
purposes only and do not purport to be indicative of what operating results
would have been had the acquisition actually taken place as of the beginning of
such periods or what operating results may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1998 1997
-------- --------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $37,495 $18,878
Net loss.................................................... $(5,406) $(6,722)
Net loss per share.......................................... $ (0.46) $ (1.97)
</TABLE>
NOTE 3--ACQUISITION OF BUSINESSES
In May 1999, the Company acquired a controlling interest in a United Kingdom
based entity which has been a distributor of the Company's products in the
United Kingdom and the Middle East. The Company acquired 52% of the outstanding
stock of a newly incorporated holding company that owns 100% of the shares of
this entity in exchange for a cash payment of $750,000. The transaction was
accounted for as a purchase; accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed based upon their estimated fair
market values at the date of acquisition. Goodwill of $360,000 arising from the
acquisition is being amortized over its estimated useful life of five years.
In December 1999, the Company acquired an entity in The Netherlands that has
been a distributor of the Company's products in Germany and Italy. The Company
acquired 80% of the outstanding stock it did not already own in exchange for
warrants valued at $292,000. The warrants give the holders the right to purchase
61,666 shares of the Company's common stock at a price of $12 per share. The
transaction was accounted for as a purchase; accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values at the date of acquisition. Goodwill of $275,000
arising from the acquisition is being amortized over its estimated useful life
of five years.
NOTE 4--INITIAL PUBLIC OFFERING
In May 1998, the Company completed its initial public offering whereby the
Company sold 3,132,000 shares of its common stock to the public at a price of
$13 per share. The Company received $36.1 million of cash, net of underwriting
discounts, commissions and other offering costs. In addition, each outstanding
share of convertible preferred stock was automatically converted into one share
of common stock (see Note 10). The Company used $6.9 million of the net proceeds
from its initial public offering to repay outstanding indebtedness, including
$2.3 million for borrowings under its working capital line of credit and
$2.6 million for the outstanding balance of a loan from Hambrecht & Quist
Guaranty Finance, LLC (see Note 6).
F-12
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Inventory:
Raw materials............................................. $2,155 $3,176
Finished goods............................................ 5,949 2,877
------ ------
$8,104 $6,053
====== ======
Prepaid expenses and other current assets
Prepaid expenses.......................................... $ 758 $ 199
Other receivables......................................... 2,108 1,042
------ ------
$2,866 $1,241
====== ======
Property and equipment:
Computers and equipment................................... $4,788 $3,718
Furniture and fixtures.................................... 1,241 496
Leasehold improvements.................................... 346 222
------ ------
6,375 4,436
Less accumulated depreciation and amortization............ (3,495) (2,036)
------ ------
$2,880 $2,400
====== ======
Other assets
Goodwill and intangible assets............................ $2,459 $2,112
Other..................................................... 1,003 1,390
------ ------
$3,462 $3,502
====== ======
Accrued liabilities:
Accrued employee compensation............................. $1,149 $ 921
Other..................................................... 1,974 1,016
------ ------
$3,123 $1,937
====== ======
</TABLE>
As of both December 31, 1999 and 1998, property and equipment recorded under
capital leases, consisting primarily of computers and equipment, totaled
approximately $1,053,000 and $740,000 with related accumulated amortization of
approximately $847,000 and $630,000, respectively.
NOTE 6--CREDIT FACILITIES AND NOTES PAYABLE
The Company has a working capital line of credit agreement with a bank that
provides for borrowings of up to $10,000,000. 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 assets of the Company.
Interest on borrowings is set at the bank's prime rate (8.5% at December 31,
1999). 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. No borrowings were outstanding under this
arrangement at December 31, 1999 and 1998.
F-13
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--CREDIT FACILITIES AND NOTES PAYABLE (CONTINUED)
In February 1998, the Company entered into a transaction with Hambrecht &
Quist Guaranty Finance, LLC ("Guaranty Finance"), whereby Guaranty Finance would
loan the Company up to $5 million. Under related agreements which were executed
on March 12, 1998 and subsequently amended on April 24, 1998, (i) Guaranty
Finance agreed to lend the Company up to $5 million at an interest rate of 12%
per annum, $1.1 million of which was loaned to the Company in March 1998 and
$1.5 million of which was loaned to the Company in April 1998 (the "Loan") and
(ii) Guaranty Finance purchased from the Company for $1,250 a warrant to
purchase 125,000 shares of the Company's common stock at a per share purchase
price equal to the initial public offering price of $13.00. The warrant is
exercisable through March 1, 2003. The fair value of this warrant was estimated
to be approximately $563,000, using the Black-Scholes model, and was expensed as
an additional cost of financing in 1998. The Company also paid a $100,000 fee to
Guaranty Finance in consideration for entering into the Loan. This financing
agreement expired on December 31, 1998.
In connection with the ICAST acquisition, the Company assumed various notes
payable aggregating $1.3 million. The notes bore interest at 6% per annum and
were repaid in the first quarter of 1999.
NOTE 7--LONG-TERM DEBT
Long-term debt comprises:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Capitalized lease obligations............................... $ 228 $ 365
Less current portion........................................ (143) (137)
----- -----
$ 85 $ 228
===== =====
</TABLE>
In 1997, the Company entered into subordinated debt agreements pursuant to
which the Company borrowed $2,250,000. The debt was secured by certain assets of
the Company. The Company used part of the net proceeds from its initial public
offering to repay this 12% subordinated debt.
NOTE 8--INCOME TAXES
No provision or benefit for income taxes has been recognized for any of the
periods presented as the Company has incurred net operating losses for income
tax purposes and had no carryback potential.
F-14
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
Deferred tax assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 8,013 $ 4,394
Tax credits................................................. 2,507 1,072
Accruals and reserves....................................... 4,251 2,652
-------- -------
Total deferred tax assets................................... 14,771 8,118
Less valuation allowance.................................... (14,771) (8,118)
-------- -------
Net deferred tax assets..................................... $ -- $ --
======== =======
</TABLE>
Based on a number of factors, including the lack of a history of profits and
the fact that the Company competes in a developing market that is characterized
by rapidly changing technology, management believes that the weight of available
evidence indicates that it is more likely than not that the company will not be
able to realize its deferred tax assets and thus a full valuation allowance has
been provided at December 31, 1999 and 1998.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $21.0 million and $5.0 million for federal and state
jurisdictions, respectively, available to reduce future taxable income.
Approximately $1.8 million of the federal net operating loss carryforwards
resulted from the Company's acquisition of ICAST Corporation. The federal net
operating loss carryforwards expire from 2013 through 2019 and the state net
operating loss carryforwards expire from 2001 to 2014.
Under the Tax Reform Act of 1986, the amount of the benefit from net
operating losses that can be carried forward may be limited in certain
circumstances including, but not limited to, a cumulative stock ownership change
of more than 50% over a three-year period, as defined. As a result of the
ownership change that occurred upon the Company's acquisition of ICAST,
utilization of the net operating loss carryforwards related to ICAST is limited
to approximately $350,000 per year.
NOTE 9--COMMITMENTS
LEASES
The Company leases its facility under noncancelable operating lease
agreements that expire in 2005. In addition, the Company leases certain
equipment under long-term lease agreements that are classified as capital
leases. These capital leases terminate at various dates through 2002. Future
minimum lease
F-15
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMITMENTS (CONTINUED)
payments under all noncancelable operating and capital leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
Year ending December 31,
2000.................................................... $ 1,328 $ 152
2001.................................................... 1,451 83
2002.................................................... 1,498 9
2003.................................................... 1,518 --
2004.................................................... 1,545 --
Thereafter.............................................. 7,502 --
------- -----
Total minimum lease payments............................ $14,482 244
Less amount representing interest....................... -- (15)
======= =====
Present value of capital lease obligations.............. 229
Less current portion.................................... (143)
-----
Lease obligations, long-term................................ $ 86
=====
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
approximately $1,103,000, $583,000 and 266,000, respectively.
NOTE 10--CONVERTIBLE PREFERRED STOCK
At December 31, 1999, the Company had authorized 5,000,000 shares of
undesignated convertible preferred stock. Prior to completion of the Company's
initial public offering, the Company had authorized 10,000,000 shares of
preferred stock, of which 4,000,000 shares had been designated Series A
convertible preferred stock ("Series A"), 2,200,000 shares had been designated
Series B convertible preferred stock ("Series B"), 1,375,000 shares had been
designated Series C convertible preferred stock ("Series C") and 687,500 shares
had been designated Series D convertible preferred stock ("Series D")
(collectively "Preferred Shares"). Holders of the Preferred Shares were entitled
to receive noncumulative, preferential dividends of $0.05, $0.15, $0.40 and
$0.80, respectively, per annum, when and if declared by the Board of Directors.
No such dividends were declared. Each Preferred Share was converted into one
share of common stock upon completion of the Company's initial public offering
in May 1998.
SERIES D PREFERRED STOCK WARRANTS
In 1997, the Company issued warrants to purchase 60,936 shares of its
Series D preferred stock at $8.00 per share in conjunction with certain
financing arrangements. The warrants were exercisable immediately and were to
expire at various times from 3 to 4.3 years following the closing of the
Company's initial public offering. Upon closing of the offering in May 1998, the
warrants converted to warrants to purchase the same number of shares of the
Company's common stock at an exercise price of $8.00 per share. As of
December 31, 1999 and 1998, no warrants had been exercised. The aggregate value
of these warrants was estimated by the Company, using the Black-Scholes model,
at approximately $233,000 and was expensed as an additional cost of financing
over the term of the related outstanding borrowings.
F-16
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK PLANS
1997 EQUITY INCENTIVE PLAN
In October 1997, the Board of Directors and stockholders approved the
consolidation and restatement of the Company's 1993 Employee, Consultant and
Director Stock Purchase Plan (the "1993 Plan") and the 1996 Stock Option Plans
(the "1996 Plans") into the 1997 Equity Incentive Plan (the "1997 Plan") which
became effective upon the closing of the Company's initial public offering. The
1997 Plan is intended to serve as the successor equity incentive program to the
1993 Plan and the 1996 Plans (the "Predecessor Plans"). Outstanding options and
stock purchase awards under the Predecessor Plans were incorporated into the
1997 Plan upon effectiveness of the initial public offering. The incorporated
options and stock purchase awards will continue to be governed by their existing
terms which are essentially the same as similar awards granted under the 1997
Plan described below. Under the 1997 Plan, as amended, an aggregate of 5,125,000
shares (500,000 of which were approved by the Board of Directors in
January 2000 and are subject to stockholder approval) of common stock may be
issued pursuant to stock awards.
The 1997 Plan provides for the grant of stock options, stock purchase awards
and stock bonuses to employees, directors and consultants. Options granted under
the 1997 Plan are for periods not to exceed ten years, and must be issued at
prices not less than 100% and 85%, for incentive and nonqualified stock options,
respectively, of the fair market value of the stock on the date of grant.
Incentive stock options granted to stockholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years and must be issued at
prices not less than 110% of the fair market value of the stock on the date of
grant. Options granted under the 1997 Plan are exercisable at such time and
under such conditions as determined by the Board of Directors, and generally
vest over four years.
Restricted stock purchase awards under the 1997 Plan are to be issued at a
price not less than 85% of the fair market value of the stock on the date of
grant. Restricted stock purchase awards may be accompanied by a repurchase
option in favor of the Company in accordance with a vesting schedule and at a
price determined by the Board of Directors. Shares subject to stock awards that
have expired or otherwise terminated shall again become available for the grant
of awards under the 1997 Plan, including shares subject to currently outstanding
options and restricted stock issued under the 1993 Plan and the 1996 Plans. As
of December 31, 1999 and 1998, a total of 148,824 and 492,144, respectively, of
unvested shares of common stock were subject to repurchase by the Company at a
repurchase price equal to the original issuance price of such shares.
1999 EQUITY INCENTIVE PLAN
In April 1999, the Board of Directors and stockholders approved the 1999
Equity Incentive Plan (the "1999 Plan"). Under the 1999 Plan, an aggregate of
1,000,000 shares of common stock may be issued pursuant to stock awards. In
January 2000, the Board of Directors authorized a 1,000,000 share increase in
the number of shares available for issuance under the 1999 Plan.
The 1999 Plan provides for the grant of nonqualified stock options, stock
purchase awards and stock bonuses to selected employees and consultants. Options
granted under the 1999 Plan are for periods not to exceed ten years, and must be
issued at prices not less than 85% of the fair market value of the stock on the
date of grant. Options granted under the 1999 Plan are exercisable at such time
and under such conditions as determined by the Board of Directors, and generally
vest over four years.
Restricted stock purchase awards under the 1999 Plan are to be issued at a
price determined by the Board of Directors. Restricted stock purchase awards may
be accompanied by a repurchase option in favor
F-17
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK PLANS (CONTINUED)
of the Company in accordance with a vesting schedule and at a price determined
by the Board of Directors. Shares subject to stock awards that have expired or
otherwise terminated shall again become available for the grant of awards under
the 1999 Plan. As of December 31, 1999, no unvested shares of common stock were
subject to repurchase by the Company under the Plan.
1997 NON-EMPLOYEE DIRECTOR'S STOCK OPTION PLAN
In September 1997, the Company's Board of Directors approved the 1997
Non-Employee Director's Stock Option Plan (the "Directors' Plan") and reserved
350,000 shares (100,000 of which were approved by Board of Directors in
January 2000 and are subject to stockholder approval) of the Company's common
stock for issuance thereunder.
The Directors' Plan provides for the grant of options to purchase 30,000
shares of common stock to each director upon initial election to the Board of
Directors and subsequent automatic grants of options to purchase 10,000 shares
of common stock on each anniversary of a previous grant.
A summary of option activity under the 1999 Plan, the 1997 Plan and the
Directors' Plan follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES SUBJECT AVERAGE
TO OPTIONS EXERCISE
OUTSTANDING PRICE
-------------- --------
IN THOUSANDS
<S> <C> <C>
Balance at December 31, 1996.......................... 928 $ 2.60
Granted............................................... 1,285 7.79
Exercised............................................. (33) 2.73
Cancelled............................................. (51) 4.00
------
Balance at December 31, 1997.......................... 2,129 5.71
Granted............................................... 2,449 11.03
Exercised............................................. (194) 4.20
Cancelled............................................. (1,062) 10.12
------
Balance at December 31, 1998.......................... 3,322 8.30
Granted............................................... 2,666 10.74
Exercised............................................. (409) 5.63
Cancelled............................................. (850) 9.95
------
Balance at December 31, 1999.......................... 4,729 9.61
======
</TABLE>
With respect to certain options and restricted stock granted in 1996 and
1997, the Company is recognizing a compensation charge of approximately $2.1
million. Further, in early February 1998, after considering various factors
including the input provided by the Company's investment bankers, the Board of
Directors of the Company approved a plan under which 499,500 options previously
granted at prices of $10.20 and $11.00 to employees (excluding officers) were
exchanged for options at $8.50 per share, which the Board concluded was the fair
value of the Company's common stock at that time. The Company is recognizing a
compensation charge of approximately $1.3 million with respect to the 499,500
repriced stock options and 278,000 additional stock options granted in early
February 1998 at $8.50 per share, computed based on a deemed value of $10.20 per
share of common stock. The charges referred to above are being amortized over
the vesting period of the awards, which is generally five years. The Company
recognized
F-18
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK PLANS (CONTINUED)
$493,000, $1,250,000, and $1,137,000 of said charges as compensation expense
during the years ended December 31, 1999, 1998 and 1997 respectively. The future
compensation charges are subject to reduction for any employee who terminates
employment prior to the expiration of such employee's option vesting period and
aggregated approximately $370,000 at December 31, 1999.
Significant option groups outstanding at December 31, 1999 and related
weighted average exercise price and contractual life information are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE
RANGE OF OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
EXERCISE PRICES (IN THOUSANDS) (IN YEARS) (PER SHARE) (IN THOUSANDS) (PER SHARE)
--------------------- -------------- ---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.34-$2.75 593 4.06 $ 2.63 430 $ 2.65
$3.40-$5.25 477 8.60 4.66 127 4.30
$5.63-$7.31 671 9.48 6.37 52 6.01
$8.25-$10.00 755 8.37 9.22 238 9.07
$10.20-$12.75 813 8.52 11.70 232 11.26
$13.44-$13.88 533 9.09 13.66 114 13.86
$14.00-$15.13 182 9.72 14.88 -- --
$15.25-$16.75 705 9.01 15.47 139 15.47
----- ---- ------ ----- ------
$0.34-$16.75 4,729 8.27 $ 9.61 1,332 $ 7.88
===== ==== ====== ===== ======
</TABLE>
PRO FORMA DISCLOSURES
Had compensation cost for the Company's stock option plans been determined
based on the value of such options at the grant dates as prescribed by FAS 123,
the Company's pro forma net loss and net loss per share would have been:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
As reported:
Net loss.................................................. $(14,328) $ (8,016) $(4,328)
Net loss per share (basic and diluted).................... $ (0.87) $ (0.69) $ (1.44)
Pro forma:
Net loss.................................................. $(22,385) $(10,247) $(4,912)
Net loss per share (basic and diluted).................... $ (1.36) $ (0.89) $ (1.63)
</TABLE>
The weighted-average estimated grant-date fair value of options granted
under the Company's various stock option plans during 1999, 1998 and 1997 was
$7.50, $4.03 and $1.56, respectively. For the years ended December 31, 1999 and
1998, the fair value of each option on the date of grant was determined using
the Black-Scholes model with the following assumptions: no annual dividend yield
for either period; expected volatility of 70% and 50%, respectively; risk-free
annual interest rates of 5% and 4.17% to 5.57%,
F-19
<PAGE>
FVC.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK PLANS (CONTINUED)
respectively; and an expected option term of 4 and 2.98 years, respectively. For
the year ended December 31, 1997, the value of each option was estimated on the
date of grant using the minimum-value method with the following assumptions: no
annual dividend yield; risk-free annual interest rates of 5.84% to 6.61%; and an
expected option term of five years.
1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Stock Purchase Plan (the "Purchase Plan") was approved by
the Board of Directors and stockholders in October 1997 and became effective
upon the closing of the initial public offering. Under the Purchase Plan a total
of 350,000 shares of common stock have been reserved for issuance to
participating employees who meet eligibility requirements.
The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of an employee's base
compensation, including commissions, bonuses and overtime, at a price equal to
85% of the fair value of the common stock at the beginning of each offering
period or the end of the purchase period, whichever is lower. The initial
purchase period commenced on April 29, 1998. As of December 31, 1998 no shares
had been issued under the Purchase Plan. During 1999, the Company issued 59,601
shares of common stock under the Purchase Plan for aggregate proceeds of
approximately $400,000. Compensation cost (included in pro forma net loss and
net loss per share amounts only) for the years ended December 31, 1999 and 1998,
for the grant date fair value, as defined by SFAS 123, of the purchase rights
granted under the Purchase Plan was calculated using the Black-Scholes model
with the following assumptions: no annual dividend yield for either year;
expected volatility of 70% and 50%, respectively; risk-free annual interest
rates of 5% and 5.38%, respectively; and expected terms of 1 and 0.67 years,
respectively. The pro forma SFAS 123 disclosures include compensation expense
for purchase rights granted during 1998 and 1999. The weighted average estimated
grant date fair value for purchase rights granted under the Purchase Plan during
1999 and 1998 was $4.48 and $4.26, respectively.
NOTE 12--RELATED PARTY TRANSACTIONS
During the period from January 1994 through October 1996, the Company made
full recourse loans to certain executives and employees pursuant to the
Company's 1993 Plan. The loans bear interest at rates ranging from 4.92% to
7.96% per annum and interest on the notes accrues monthly. The loans are due on
the earlier of various dates through 2001 or termination of employment.
NOTE 13--LITIGATION
Beginning in April 1999, several purported class action suits were filed in
the U.S. District Court for the Northern District of California (the "Court")
alleging violations of the federal securities laws against the Company and
certain of its officers and directors in connection with the Company's reporting
of its financial results for the period ended December 31, 1998.
In July 1999, the Court entered orders consolidating all existing class
actions into a single action and appointing a lead plaintiff and lead
plaintiff's co-counsel. A consolidated amended complaint was filed in
September 1999 and the Company and the individual defendants filed a motion to
dismiss the complaint on October 8, 1999.
On February 14, 2000, the Court granted the Company's motion to dismiss the
lawsuit without leave to amend.
F-20
<PAGE>
Exhibit 10.10
FVC.COM, INC.
1999 EQUITY INCENTIVE PLAN
ADOPTED BY THE BOARD OF DIRECTORS EFFECTIVE APRIL 21, 1999
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Consultants 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) Nonstatutory Stock Options, (ii) stock bonuses, and (iii) rights
to purchase restricted stock.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Consultants, to secure and retain the services
of new Employees and Consultants and to provide incentives for such persons to
exert maximum efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board, be either (i) Nonstatutory Stock Options granted
pursuant to Section 6 hereof or (ii) stock bonuses or rights to purchase
restricted stock granted pursuant to Section 7 hereof. All Options shall be in
such form as issued pursuant to Section 6.
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, or such other parent corporation or
subsidiary corporation designated by the Board.
(b) "BOARD" means the Board of Directors of the Company.
(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 FVC.COM, Inc., 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 a Director.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
service relationship, whether as an Employee, Director or a Consultant, is not
interrupted or terminated. The Board or the Committee, in that party's sole
discretion, may determine 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 Board, including sick leave, military leave, or any
other
1.
<PAGE>
personal leave, or (ii) transfers between locations of the Company or between
the Company, Affiliates or their successors.
(h) "DIRECTOR" means a member of the Board.
(i) "DISABILITY" means the inability of a person, in the opinion of a
qualified physician acceptable to the Company, to perform the major duties of
that person's position with the Company or an Affiliate of the Company because
of the sickness or injury of the person.
(j) "EMPLOYEE" means any person employed by the Company or by any
Affiliate, excluding Officers and Directors of the Company (and of any Affiliate
which controls the Company) and excluding stockholders beneficially owning ten
percent (10%) or more of the Company's Common Stock.
(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:
(1) 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 shall be the closing sales price for such Share (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 the Common Stock)
on the last market trading day prior to the day of determination, as reported in
THE WALL STREET JOURNAL or such other source as the Board deems reliable.
(2) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an incentive stock option pursuant to Section 422 of the Code and the
regulations promulgated thereunder.
(n) "OFFICER" means a person who is an officer of the Company, including
any corporate officer with the title of vice president and above and any other
Employee of the Company whom the Board or the Committee classifies as "Officer."
(o) "OPTION" means a Nonstatutory Stock Option granted pursuant to the
Plan.
(p) "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.
(q) "OPTIONEE" means a person to whom an Option is granted pursuant to the
Plan.
(r) "PLAN" means this FVC.COM, Inc. 1999 Equity Incentive Plan.
(s) "SHARE" means a share of Common Stock of the Company.
2.
<PAGE>
(t) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus and any right to purchase restricted stock.
(u) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(v) "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:
(1) 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 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 Shares pursuant to
a Stock Award and the number of Shares with respect to which a Stock Award shall
be granted to each such person.
(2) 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.
(3) To amend the Plan or a Stock Award as provided in Section 13.
(4) 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 or
committees ("Committee") of one or more members of the Board. 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 (and
references in this Plan to the Board shall thereafter be to the Committee),
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.
3.
<PAGE>
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments upon
changes in the Common Stock, the Shares that may be issued pursuant to Stock
Awards shall not exceed in the aggregate One Million (1,000,000) Shares. If any
Stock Award shall for any reason expire or otherwise terminate, in whole or in
part, without having been exercised in full (or vested in the case of restricted
stock), the Shares not acquired under such Stock Award shall revert to and again
become available for issuance under the Plan.
(b) The Shares subject to the Plan may be unissued Shares or reacquired
Shares bought on the market or otherwise.
5. ELIGIBILITY.
(a) Stock Awards may be granted only to Employees or Consultants as
defined in Section 2 hereof. An Employee or Consultant who has been granted a
Stock Award, if he or she remains eligible, may be granted an additional Stock
Award or Stock Awards. Notwithstanding the foregoing, no Employee who is an
Officer of the Company (and of any Affiliate which controls the Company) or who
is a Director shall be entitled to receive the grant of a Stock Award under the
Plan.
(b) Stock Awards may not be granted to Consultants who are not natural
persons unless the Company determines both (i) that such grant (A) shall be
registered in a manner other than on a Form S-8 Registration Statement under the
Securities Act (E.G., on a Form S-3 Registration Statement) or (B) does not
require registration under the Securities Act in order to comply with the
requirements of the Securities Act, if applicable, and (ii) that such grant
complies with the securities laws of all other relevant jurisdictions.
(c) The Plan shall not confer upon any Stock Award holder any right with
respect to continuation of employment or consultancy by the Company, nor shall
it interfere in any way with the holder's right or the Company's right to
terminate the Stock Award holder's employment at any time, for any reason or no
reason, with or without cause, or to terminate the Stock Award holder's
consultancy pursuant to the terms of the Consultant's agreement with the
Company.
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 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 or such longer or shorter term as may be
provided in the Option Agreement.
(b) PRICE. The exercise price of each Option shall be not less than 85% of
the Fair Market Value of the Common Stock subject to the Option on the date of
grant.
4.
<PAGE>
(c) CONSIDERATION. The consideration to be paid for the Shares to be
issued upon exercise of an Option, including the method of payment, shall be
determined by the Board and may consist entirely of (1) cash or check, (i)
promissory note (except that payment of the Share's "par value", as defined in
the Delaware General Corporation Law, shall not be made by deferred payment),
(ii) other Shares having a fair market value on the date of surrender equal to
the aggregate exercise price of the Shares as to which the Option shall be
exercised, including by delivering to the Company an attestation of ownership of
owned and unencumbered Shares in a form approved by the Company, (iii) payment
pursuant to a program developed under Regulation T as promulgated by the Federal
Reserve Board which, prior to the issuance of the Shares, results in either the
receipt of cash (or check) by the Company or the receipt of irrevocable
instructions to pay the aggregate exercise price to the Company from the sales
proceeds, (iv) any combination of such methods of payment, or (v) such other
consideration and method of payment for the issuance of Shares to the extent
permitted under applicable law. In making its determination as to the type of
consideration to accept, the Board shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company. In the case of
any deferred payment arrangement, interest 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 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 an Option, the 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 Option is granted only
by such person. 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 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 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 vesting provisions of individual Options
may vary. 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 CONTINUOUS SERVICE AS AN EMPLOYEE, 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 within three (3) months
(or such longer or shorter period, which in no event shall be less than thirty
(30) days, specified in the Option Agreement) (the "Post-Termination Exercise
Period") and only to the extent that the Optionee was entitled to exercise the
Option on the date the Optionee's Continuous Status as an Employee, Director or
Consultant terminates. The Board
5.
<PAGE>
may at any time extend the Post-Termination Exercise Period and provide for
continued vesting during such extended period. If, as of 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
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement or as otherwise
determined above, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan. Notwithstanding the foregoing, the Board shall
have the power to permit an Option to vest, in whole or in part, during the
Post-Termination Exercise Period.
(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, 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 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 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 shall deem
appropriate. The terms and conditions of stock bonus or restricted stock
purchase agreements may change from time to time,
6.
<PAGE>
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 shall determine and
designate in such agreement. Notwithstanding the foregoing, the Board 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 or 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 so long as stock awarded under such agreement remains subject
to the terms of any restrictive covenant (such as a repurchase option or
reacquisition option) in favor of the Company.
(c) CONSIDERATION. The purchase price of Shares 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, according to a deferred payment
or other arrangement with the person to whom the Shares are 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 in its
discretion. Notwithstanding the foregoing, the Board 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 or for its
benefit.
(d) VESTING. Shares sold or awarded under the Plan may, but need not, be
subject to a repurchase option or reacquisition option in favor of the Company
in accordance with a vesting schedule to be determined by the Board.
(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 terminates, the Company may repurchase or otherwise
reacquire any or all of the Shares 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.
The Board 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 any adversely affected holders of Options, the cancellation
of any outstanding Options under the Plan and the grant in substitution therefor
of new Options under the Plan covering the same or different numbers of Shares.
7.
<PAGE>
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 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 Shares 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 Shares under
the Plan, the Company shall be relieved from any liability for failure to issue
and sell Shares upon exercise of such Stock Awards unless and until such
authority is obtained.
10. USE OF PROCEEDS FROM SHARES.
Proceeds from the sale of Shares 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 all or
any part of a Stock Award may first be exercised or the time during which a
Stock Award or any part thereof will vest, 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) No Employee, Consultant or any person to whom an Option 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 Option
unless and until such person has satisfied all requirements for exercise of the
Option pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any Employee, Consultant or other holder of
Stock Awards any right to continue in the employ of the Company or any Affiliate
or to continue serving as a Consultant or shall affect the right of the Company
or any Affiliate to terminate the employment of any Employee with or without
notice and with or without cause, or the right to terminate the relationship of
any Consultant pursuant to the terms of such Consultant's agreement with the
Company or Affiliate.
(d) 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 Shares under any Stock Award, (i) 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 associated with the Stock Award, and (ii)
to give written assurances satisfactory to the Company stating that
8.
<PAGE>
such person is acquiring the Shares subject to the Stock Award for such person's
own account and not with any present intention of selling or otherwise
distributing the Shares. 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 Shares 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 Shares.
(e) 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 relating to the exercise or acquisition of Shares
under a Stock Award by any of the following means or by a combination of such
means: (i) tendering a cash payment, (ii) authorizing the Company to withhold
Shares from the Shares otherwise issuable to the participant as a result of the
exercise or acquisition of Shares under the Stock Award or (iii) delivering to
the Company owned and unencumbered Shares, including by delivering to the
Company an attestation of ownership of owned and unencumbered Shares in a form
approved by the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the Shares 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 pursuant to subsection 4(a), and the
outstanding Stock Awards will be appropriately adjusted in the class(es) and
number of Shares and price per Share subject to such outstanding Stock Awards.
Such adjustments shall be made by the Board, 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
9.
<PAGE>
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.
(b) The Board, in its sole discretion, may submit the Plan and/or any
amendment to the Plan for stockholder approval.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide those eligible with
the maximum benefits provided or to be provided under the provisions of the Code
and the regulations promulgated thereunder.
(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 Awards; 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 when all Shares reserved for issuance under
the Plan have been issued and all such issued Shares are no longer subject to a
repurchase option or a reacquisition option in favor of the Company. 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 written consent of the person to whom the Stock Award was granted.
15. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on April 21, 1999.
10.
<PAGE>
Exhibit 10.11
FVC.COM, INC.
1999 EQUITY INCENTIVE PLAN
NONSTATUTORY STOCK OPTION
_________________________, Optionee:
FVC.COM, Inc. (the "Company"), pursuant to its 1999 Equity Incentive Plan
(the "Plan"), has granted to you, the optionee named above, an option to
purchase shares of the common stock of the Company ("Common Stock"). This option
is not intended to qualify and will not be treated as an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's Employees
and Consultants. Defined terms not explicitly defined in this agreement but
defined in the Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of
shares of Common Stock subject to this option is ______________________
(_________).
2. VESTING. Subject to the limitations contained herein, ten (10%)
percent of the shares will vest (become exercisable) on _________________, _____
(which shall be the date six months following the vesting commencement date) and
.0548% of the shares will then vest each day thereafter until either (i) you
cease to provide services to the Company for any reason, or (ii) this option
becomes fully vested.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(a) EXERCISE PRICE. The exercise price of this option is
__________________ ($______) per share, being not less than 100% of the fair
market value of the Common Stock on the date of grant of this option.
(b) METHOD OF PAYMENT. Payment of the exercise price per share is due
in full upon exercise of all or any part of each installment which has accrued
to you. You may elect, to the extent permitted by applicable statutes and
regulations, to make payment of the exercise price under one of the following
alternatives: (i) payment of the exercise price per share in cash (including
check) at the time of exercise; (ii) payment pursuant to a program developed
under Regulation T as promulgated by the Federal Reserve Board which, prior to
the issuance of Common Stock, results in either the receipt of cash (or check)
by the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds; (iii) provided that at
the time of exercise the Company's Common Stock is publicly traded and quoted
regularly in the Wall
1.
<PAGE>
Street Journal, payment by delivery of already-owned shares of Common Stock,
held for the period required to avoid a charge to the Company's reported
earnings, and owned free and clear of any liens, claims, encumbrances or
security interests, which Common Stock shall be valued at its fair market value
on the date of exercise; or (iv) payment by a combination of the methods of
payment permitted by subparagraphs 3(b)(i) through 3(b)(iii) above.
4. WHOLE SHARES. This option may not be exercised for any number of
shares which would require the issuance of anything other than whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, this option may not be exercised unless the shares issuable
upon exercise of this option are then registered under the Securities Act of
1933, as amended (the "Act") or, if such shares are not then so registered, the
Company has determined that such exercise and issuance would be exempt from the
registration requirements of the Act.
6. TERM. The term of this option commences on __________________, _____,
the date of grant and expires on ________________________ (the "Expiration
Date," which date shall be no more than ten (10) years from the date this option
is granted), unless this option expires sooner as set forth below or in the
Plan. In no event may this option be exercised on or after the Expiration Date.
This option shall terminate prior to the Expiration Date as follows: thirty (30)
days after the termination of your Continuous Status as an Employee, Director or
Consultant with the Company or an Affiliate of the Company for any reason or for
no reason unless:
(a) such termination of Continuous Status as an Employee, Director or
Consultant is due to your disability, in which event the option shall expire on
the earlier of the Expiration Date set forth above or six (6) months following
such termination of Continuous Status as an Employee, Director or Consultant; or
(b) such termination of Continuous Status as an Employee, Director or
Consultant is due to your death or your death occurs within thirty (30) days
following your termination for any other reason, in which event the option shall
expire on the earlier of the Expiration Date set forth above or eighteen (18)
months after your death; or
(c) during any part of such thirty (30) day period the option is not
exercisable solely because of the condition set forth in paragraph 5 above, in
which event the option shall not expire until the earlier of the Expiration Date
set forth above or until it shall have been exercisable for an aggregate period
of thirty (30) days after the termination of your Continuous Status as an
Employee, Director or Consultant; or
(d) exercise of the option within thirty (30) days after termination
of your Continuous Status as an Employee, Director or Consultant with the
Company or with an Affiliate of the Company would result in liability under
section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act), in
which case the option will expire on the earlier of (i) the Expiration Date set
forth above, (ii) the tenth (10th) day after the last date upon which exercise
would result in such liability, or (iii) six (6) months and ten (10) days after
the termination of your Continuous
2.
<PAGE>
Status as an Employee, Director or Consultant with the Company or an Affiliate
of the Company.
However, this option may be exercised following termination of Continuous
Status as an Employee, Director or Consultant only as to that number of shares
as to which it was exercisable on the date of termination of Continuous Status
as an Employee, Director or Consultant under the provisions of paragraph 2 of
this option.
7. EXERCISE.
(a) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to subsection
11(d) of the Plan.
(b) By exercising this option you agree that as a precondition to the
completion of any exercise of this option, the Company may require you to enter
an arrangement providing for the cash payment by you to the Company of any tax
withholding obligation of the Company arising by reason of: (1) the exercise of
this option; (2) the lapse of any substantial risk of forfeiture to which the
shares are subject at the time of exercise; or (3) the disposition of shares
acquired upon such exercise. You also agree that any exercise of this option has
not been completed and that the Company is under no obligation to issue any
Common Stock to you until such an arrangement is established or the Company's
tax withholding obligations are satisfied, as determined by the Company.
8. TRANSFERABILITY. This option is not transferable, except by will or by
the laws of descent and distribution and is exercisable during your life only by
you. Notwithstanding the foregoing, by delivering written notice to the Company,
in a form satisfactory to the Company, you may designate a third party who, in
the event of your death, shall thereafter be entitled to exercise this option.
9. OPTION NOT A SERVICE CONTRACT. This option is not an employment
contract and nothing in this option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the Company,
or of the Company to continue your employment with the Company. In addition,
nothing in this option shall obligate the Company or any Affiliate of the
Company, or their respective stockholders, Board of Directors, officers, or
employees to continue any relationship which you might have as a Director or
Consultant for the Company or Affiliate of the Company.
10. NOTICES. Any notices provided for in this option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by the Company to you, five (5) days after deposit in
the United States mail, postage prepaid, addressed to you at the address
specified below or at such other address as you hereafter designate by written
notice to the Company.
11. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions
of the
3.
<PAGE>
Plan, a copy of which is attached hereto and its provisions are hereby made a
part of this option, including without limitation the provisions of Section 6 of
the Plan relating to option provisions, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of this option and those of the Plan, the provisions of
the Plan shall control.
Dated the _____ day of _________________________, _____.
Very truly yours,
FVC.COM, INC.
By_______________________________________
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
FVC. COM, Inc. 1999 Equity Incentive Plan
Notice of Exercise
4.
<PAGE>
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its Affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) the options and any other stock awards previously granted and
delivered to the undersigned under stock award plans of the Company, and (ii)
the following agreements only:
NONE ___________________
(Initial)
OTHER _________________________________
_________________________________________
OPTIONEE
Address: ______________________________
______________________________
5.
<PAGE>
Exhibit 10.19
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of March 10, 2000, by
and between FVC.Com, Inc. formerly known as First Virtual Corporation
("Borrower") and Silicon Valley Bank ("Bank").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, a Loan and Security Agreement, dated July 3, 1996, as may
be amended from time to time, (the "Loan Agreement"). The Loan Agreement
provided for, among other things, a Committed Line in the original principal
amount of One Million Dollars ($1,000,000) (the "Revolving Facility"). The
Revolving Facility has been modified pursuant to among other documents an
Amendment to Loan and Security Agreement dated June 10, 1998, pursuant to
which, among other things, the principal amount of the Revolving Facility was
increased to Ten Million Dollars ($10,000,000). Defined terms used but not
otherwise defined herein shall have the same meanings as in the Loan
Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the indebtedness shall be
referred to as the "Security Documents." Hereinafter, the Security Documents,
together with all other documents evidencing or securing the indebtedness
shall be referred to as the "Existing Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO LOAN AGREEMENT.
1. Section 6.9 entitled "Tangible Net Worth" is hereby amended in
part to provide that Borrower shall maintain as of the last day
of quarter ending December 31, 1999, a Tangible Net worth of not
less than Twenty Seven Million Dollars ($27,000,000).
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of
Five Hundred Dollars ($500) (the "Loan Fee") plus all out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any
amounts under the indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Bank is relying upon Borrower's representations, warranties, and agreements,
as set forth in the Existing Loan Documents. Except as expressly modified
pursuant to this Loan Modification Agreement, the terms of the Existing Loan
Documents remain unchanged and in full force and effect. Bank's agreement to
modifications to the existing indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Bank to make any future modifications to
the indebtedness. Nothing in this Loan Modification Agreement shall
constitute a satisfaction of the indebtedness. It is the intention of Bank
and Borrower to retain as liable parties all makers and endorsers of Existing
Loan Documents, unless the party is expressly released by Bank in writing. No
maker, endorser, or guarantor will be released by virtue of this Loan
Modification Agreement. The terms of this paragraph apply not only to this
Loan Modification Agreement, but also to all subsequent loan modification
agreements.
<PAGE>
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
FVC.COM, INC. FORMERLY KNOWN AS SILICON VALLEY BANK
FIRST VIRTUAL CORPORATION
By: /s/ Truman Cole [Truman Cole] By: /s/ Joy C. Olgzay
------------------------------- --------------------------------
Vice President Name: Joy C. Olgzay
----------------------------- ------------------------------
Title: Chief Financial Officer Title: Vice President
---------------------------- -----------------------------
2
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos.: 333-72533, 333-80721, and 333-80725) of FVC.Com,
Inc. of our report dated January 25, 2000, except as to Note 13, which is as of
February 14, relating to the consolidated financial statements, which appears on
page F-1 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 997
<SECURITIES> 7,824
<RECEIVABLES> 14,066
<ALLOWANCES> 1,269
<INVENTORY> 8,104
<CURRENT-ASSETS> 33,857
<PP&E> 6,375
<DEPRECIATION> 3,495
<TOTAL-ASSETS> 40,199
<CURRENT-LIABILITIES> 11,979
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 27,795
<TOTAL-LIABILITY-AND-EQUITY> 40,199
<SALES> 45,700
<TOTAL-REVENUES> 45,700
<CGS> 28,851
<TOTAL-COSTS> 60,654
<OTHER-EXPENSES> 680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> 14,328
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,328
<EPS-BASIC> 0.87
<EPS-DILUTED> 0.87
</TABLE>
