#### **SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

#### **FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
|       |                                                                                          |
|       | **For The Quarterly Period Ended  September 30, 2001**                                        |
|       |                                                                                          |
|       | **OR**                                                                                        |
|       |                                                                                          |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |                                                                                          |

 

**For the transition periodfrom                            to                          **

 

### **Commission file number 000-23305**

 

 

** **

**FIRST VIRTUAL COMMUNICATIONS, Inc.**(Exact name of registrant in its character)

 
| **Delaware**                                                    | **77–0357037**                      |
|-----------------------------------------------------------------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) | (I.R.S. Employer  Identification Number) |

 

**3393 Octavius Drive**

**Santa Clara, CA 95054**

(Addressof principal executive offices)

 

**(408) 567–7200**

(Registrant'stelephone number, including area code)

 

----

 

                Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

 
| Common Stock, $0.001  par value | 33,227,084                          |
|---------------------------------|-------------------------------------|
|                            |                                |
| (Class)                         | Outstanding as of  November 9, 2001 |

 

**First Virtual Communications, Inc.**

**Form 10-Q**

 

 

 

**Index**

 

 

 
|                                    |                                                                                                                          |   |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|                                    |                                                                                                                          |   |
|  **PART 1. FINANCIAL INFORMATION** |                                                                                                                          |
|  Item 1.                           | Financial Statements                                                                                                          |   |
|                                    | Condensed  Consolidated Balance Sheets at September 30, 2001 (unaudited) and December  31, 2000                               |   |
|                                    | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2001 and 2000 (unaudited) |   |
|                                    | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2001 and 2000 (unaudited)           |   |
|                                    | Notes  to Unaudited Condensed Consolidated Financial Statements                                                               |   |
|  Item 2.                           | Management's  Discussion and Analysis of Financial Condition and Results of Operations                                        |   |
|  Item 3.                           | Quantitative  and Qualitative Disclosures About Market Risk                                                                   |   |
|  **PART  II. OTHER INFORMATION**   |                                                                                                                          |
|  Item 1.                           | Legal  Proceedings                                                                                                            |   |
|  Item 3.                           | Exhibits  and Reports on Form 8–K                                                                                        |   |
| **SIGNATURES**                          |                                                                                                                          |
| **EXHIBIT INDEX**                       |                                                                                                                          |
|                                    |                                                                                                                          |   |

 

 

**PART 1. FINANCIAL INFORMATION**

 

                Item1. Financial Statements

 

**First Virtual Communications, Inc.**

**Condensed Consolidated Balance Sheets**

**(in thousands, except share data)**

** **
|                                                                                                                                   |   | ***(Unaudited)***  |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                                                                                   |   | **September  30,** |   | **December  31,** |   |
|                                                                                                                                   |   | **2001**           |   | **2000** |   |
| **ASSETS**                                                                                                                             |   |               |   |   |   |
| Current assets:                                                                                                                        |   |               |   |   |   |
| Cash and cash  equivalents                                                                                                             |   | $                  | 7,476  |   | $ | 7,077 |   |
| Short-term  investments                                                                                                                |   | 4,734              |   | 16,851 |   |
| Accounts  receivable                                                                                                                   |   | 7,262              |   | 9,937 |   |
| Inventory                                                                                                                              |   | 4,579              |   | 6,912 |   |
| Prepaids and  other current assets                                                                                                     |   | 1,947              |   | 871 |   |
| Total current  assets                                                                                                                  |   | 25,998             |   | 41,648 |   |
| Property and  equipment, net                                                                                                           |   | 3,356              |   | 2,815 |   |
| Intangible  assets, net                                                                                                                |   | 16,372             |   | 1,894 |   |
| Other assets                                                                                                                           |   | 632                |   | 584 |   |
|                                                                                                                                   |   | $                  | 46,358 |   | $ | 46,941 |   |
|                                                                                                                                   |   |               |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**                                                                                              |   |               |   |   |   |
| Current  liabilities:                                                                                                                  |   |               |   |   |   |
| Current portion  of long-term debt                                                                                                     |   | $                  | 36     |   | $ | 80 |   |
| Accounts payable                                                                                                                       |   | 3,101              |   | 5,122 |   |
| Accrued  liabilities                                                                                                                   |   | 7,314              |   | 3,574 |   |
| Deferred revenue                                                                                                                       |   | 2,282              |   | 1,143 |   |
| Total current  liabilities                                                                                                             |   | 12,733             |   | 9,919 |   |
|                                                                                                                                   |   |               |   |   |   |
| Long-term debt,  net of current portion                                                                                                |   | 153                |   | 39 |   |
|                                                                                                                                   |   |               |   |   |   |
| Minority  interest in consolidated subsidiary                                                                                          |   | 244                |   | 253 |   |
|                                                                                                                                   |   |               |   |   |   |
| Stockholders'  equity:                                                                                                                 |   |               |   |   |   |
|                                                                                                                                   |   |               |   |   |   |
| Convertible  Preferred Stock, $.001 par value; 5,000,000 share authorized; 27,437 shares  issued and outstanding at September 30, 2001 |   | -                  |   | - |   |
| Common stock,  $.001 par value; 100,000,000 shares authorized; 33,227,084 and 17,334,189  shares issued and outstanding, respectively  |   | 33                 |   | 17 |   |
| Additional  paid-in capital                                                                                                            |   | 113,562            |   | 92,168 |   |
| Accumulated  other comprehensive income                                                                                                |   | 293                |   | 210 |   |
| Accumulated  deficit                                                                                                                   |   | (80,660            | )      | (55,665 | ) |
| Total  stockholders' equity                                                                                                            |   | 33,228             |   | 36,730 |   |
|                                                                                                                                   |   | $                  | 46,358 |   | $ | 46,941 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

**First Virtual Communications, Inc.Condensed Consolidated Statementsof Operations(in thousands, except per share data; unaudited)**

 

 

 
|                                          |   | ** Three months ended**

**September 30,** |    | **Nine months ended**

**September 30,** |   |
|-----------------------------------------------|--------|-------------------------------------------------|---------|------------------------------------------|--------|
|                                          |   | **2001**                                        |    | **2000**                                 |   | **2001** |   | **2000** |   |
|                                          |   |                                            |    |                                     |   |   |   |   |   |
| Product  Revenue                              |   | $                                               | 6,640   |                                     | $      | 8,626 |   | $ | 16,404 |   | $ | 28,644 |   |
| Support  Revenue                              |   |                                            | 1,127   |                                     |   | 532 |   |   | 3,880 |   |   | 1,369 |   |
| Revenues                                      |   |                                            | 7,767   |                                     |   | 9,158 |   |   | 20,284 |   |   | 30,013 |   |
| Cost  of revenues                             |   | 8,893                                           |    | 5,016                                    |   | 15,869 |   |   | 16,376 |   |
| Gross  profit  (loss)                    |   | (1,126                                          | )       | 4,142                                    |   | 4,415 |   | 13,637 |   |
|                                          |   |                                            |    |                                     |   |   |   |   |   |
| Operating  expenses:                          |   |                                            |    |                                     |   |   |   |   |   |
| Research  and development                     |   | 3,128                                           |    | 3,302                                    |   | 9,956 |   | 9,017 |   |
| Selling,  general and administrative          |   | 6,434                                           |    | 6,426                                    |   | 18,311 |   | 17,774 |   |
| Acquisition  and other non-recurring charges  |   | -                                               |    | -                                        |   | 1,781 |   | - |   |
| Total  operating expenses                     |   | 9,562                                           |    | 9,728                                    |   | 30,048 |   | 26,791 |   |
| Operating  loss                               |   | (10,688                                         | )       | (5,586                                   | )      | (25,633 | ) | (13,154 | ) |
|                                          |   |                                            |    |                                     |   |   |   |   |   |
| Other  income, net                            |   | 122                                             |    | 474                                      |   | 608 |   | 776 |   |
| Minority  interest in consolidated subsidiary |   | 44                                              |    | (69                                      | )      | 30 |   | (112 | ) |
| Net  loss                                     |   | $                                               | (10,522 | )                                        | $      | (5,181 | ) | $ | (24,995 | ) | $ | (12,490 | ) |
|                                          |   |                                            |    |                                     |   |   |   |   |   |
| Net  loss per share:                          |   |                                            |    |                                     |   |   |   |   |   |
| Basic  and diluted                            |   |                                            | $ (0.34 | )                                        |   | $ (0.30 | ) |   | $ (1.10 | ) |   | $ (0.73 | ) |
|                                          |   |                                            |    |                                     |   |   |   |   |   |
| Shares  used to compute net loss per share:   |   |                                            |    |                                     |   |   |   |   |   |
| Basic  and diluted                            |   | 30,707                                          |    | 17,318                                   |   | 22,735 |   | 17,166 |   |

 

 

 

Seeaccompanying notes to condensed consolidated financial statements.

 

**First VirtualCommunications, Inc.Condensed Consolidated Statementsof Cash Flows(in thousands; unaudited)**

 
|                                                                                |   | **Nine months ended September 30** |    |
|-------------------------------------------------------------------------------------|--------|------------------------------------|---------|
|                                                                                |   | **2001**                           |    | **2000** |   |
|                                                                                |   |                               |    |   |   |
| Cash flows from  operating activities:                                              |   |                               |    |   |   |
| Net loss                                                                            |   | $                                  | (24,995 | ) | $ | (12,490 | ) |
| Adjustments to  reconcile net loss to net cash used in  operating activities:  |   |                               |    |   |   |
| Depreciation and  amortization                                                      |   | 2,092                              |    | 1,908 |   |
| Write-down of  stock compensation                                                   |   | 148                                |    | 217 |   |
| Provision for  inventory                                                            |   | 6,092                              |    | 683 |   |
| Acquired  in-process research and development                                       |   | 276                                |    | - |   |
| Other  non-recurring costs (net)                                                    |   | 1,083                              |    | - |   |
| Other                                                                               |   | (9                                 | )       | 134 |   |
| Changes in  assets and liabilities net of effects of acquisitions                   |   |                               |    |   |   |
| Accounts  receivable                                                                |   | 3,632                              |    | 4,569 |   |
| Inventory                                                                           |   | (3,706                             | )       | (720 | ) |
| Prepaid expenses  and other assets                                                  |   | (806                               | )       | 1,721 |   |
| Accounts payable                                                                    |   | (2,091                             | )       | (1,969 | ) |
| Accrued  liabilities                                                                |   | (2,051                             | )       | 1,058 |   |
| Deferred revenue                                                                    |   | 1,139                              |    | (1,007 | ) |
|                                                                                |   |                               |    |   |   |
| Net cash used in  operating activities                                              |   | (19,196                            | )       | (5,896 | ) |
|                                                                                |   |                               |    |   |   |
| Cash flows from  investing activities:                                              |   |                               |    |   |   |
| Acquisition of  property and equipment,net                                          |   | (439                               | )       | (796 | ) |
| Proceeds from  sales of short-term investments                                      |   | 12,130                             |    | (23,738 | ) |
| Repayment of  shareholder notes receivable                                          |   | -                                  |    | 3,760 |   |
| Cash acquired in  acquisition of CUseeMe Networks, Inc.                             |   | 6,601                              |    |   |   |
| Net cash  provided by (used in) investing activities                                |   | 18,292                             |    | (20,774 | ) |
|                                                                                |   |                               |    |   |   |
| Cash flows from  financing activities:                                              |   |                               |    |   |   |
| Proceeds from  issuance of stock, net                                               |   | 1,233                              |    | 26,849 |   |
| Increase  (repayment) of capital lease obligations                                  |   | 70                                 |    | (75 | ) |
|                                                                                |   |                               |    |   |   |
| Net cash  provided by financiing activities                                         |   | 1,303                              |    | 26,774 |   |
|                                                                                |   |                               |    |   |   |
| Net  increase/(decrease) in cash and cash equivalents                               |   | 399                                |    | 104 |   |
| Cash and cash  equivalents at beginning of period                                   |   | 7,077                              |    | 997 |   |
|                                                                                |   |                               |    |   |   |
| Cash and cash  equivalents at end of period                                         |   | $                                  | 7,476   |   | $ | 1,101 |   |
|                                                                                |   |                               |    |   |   |
| Supplemental  Disclosure of Non-Cash Flow Information                               |   |                               |    |   |   |
| Common stock  issued and options and warrant assumed in connection with acquisition |   | 20,190                             |    | **-** |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

**First Virtual Communications, Inc.**

 

**Notes to Unaudited Condensed Consolidated FinancialStatements**

 

 

**1. Basis of Presentation**

 

First Virtual Communications, Inc. (the “Company”) hasprepared the accompanying condensed financial statements for the quarterlyperiod and nine months ended September 30, 2001 pursuant to the rules andregulations of the Securities and Exchange Commission ( SEC ). Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to such rules andregulations.

 

In the opinion ofmanagement, the accompanying condensed consolidated financial statementscontain all normal and recurring adjustments necessary to present fairly theCompany’s consolidated financial position as of September 30, 2001,consolidated results of operations for the three and nine months endedSeptember 30, 2001 and 2000, and consolidated cash flow activities for the ninemonths ended September 30, 2001 and 2000.

 

The preparation offinancial statements in accordance with accounting principles generally acceptedin the United States of America requires management to make estimates andassumptions that affect the amounts reported in the condensed consolidatedfinancial statements and accompanying notes. Actual results could differ fromthose estimates.

 

The results ofoperations for the three and nine months ended September 30, 2001 are notnecessarily indicative of the results to be expected for the full year. Theinformation included in this Form 10-Q should be read in conjunction withManagement s Discussion and Analysis of Financial Condition and Results ofOperations, the consolidated financial statements and notes thereto included inFirst Virtual Communications’ 2000 Annual Report on Form 10-K.

 

**2. Acquisition of CUseeMe Networks, Inc.**

 

**               **On June 19, 2001, theCompany completed its acquisition of CUseeMe Networks, Inc. (CUseeMe), aprovider of innovative software solutions that enable voice and visualcommunications over IP-based networks. The acquisition was accounted for usingthe purchase method of accounting. Accordingly, the estimated fair value ofassets acquired and liabilities assumed were included in the Company’scondensed consolidated results of operations as of and since the effective dateof the purchase. There were no significant differences between the accountingpolicies of the Company and CUseeMe Networks.

 

TheCompany acquired CUseeMe, in a stock-for-stock acquisition, for a totalconsideration of $22.7 million, including direct acquisition costs of $2.5million for legal, consulting and accounting fees. The Company exchangedoptions to purchase 4,109,888 shares of CUseeMe Networks’ common stock withoptions to purchase shares of the Company’s stock, for which the Black-Scholesoption-pricing model value of approximately $1.6 million was included in thepurchase price.

 

TheCompany engaged an independent appraiser to value the intangible assets.  The total purchase price was preliminarilyallocated to the estimated fair value of assets acquired and liabilitiesassumed as follows:

 
| **                (In  thousands)** |   |   |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                           |   |   |   |
| Fair value of tangible assets and liabilities                                                                  |   | $      | 6,237  |   |
| In-process research and development                                                                            |   | 276    |   |
| Trademark                                                                                                      |   | 661    |   |
| Current technology                                                                                             |   | 5,918  |   |
| Assembled workforce                                                                                            |   | 1,505  |   |
| Deferred stock compensation                                                                                    |   | 1,300  |   |
| Goodwill                                                                                                       |   | 6,822  |   |
|                                                                                                           |   |   |   |
| Total                                                                                                          |   | $      | 22,719 |   |
|                                                                                                           |   |   |   |

                The amounts allocated to currenttechnology, assembled workforce and residual goodwill are being amortized usingthe straight-line method over their estimated useful lives,  of 5years.

                The following unaudited proforma consolidated amounts give effect to the acquisition of CUseeMe Networksas if it had occurred at the beginning of each of fiscal 2001 and 2000 (inthousands, except per share data):

 
|   |   | **Three months  ended**

**September 30,** |     | **Nine months   ended   September 30,** |   |
|--------|--------|--------------------------------------------|----------|-----------------------------------------|--------|
|   |   |                                       | **2000** |                                    |   | **2001** |   | **2000** |   |  
 

 

 

 

 

 

 

 

 

 

 
Revenue

 

 

$

11,779

 

 

$

22,656

 

$

39,321

 

 
Net loss

 

 

$

(8,122

)

 

$

(39,952

)

$

(20,679

)

 
Net loss per share

 

 

$

(0.27

)

 

$

(1.20

)

$

(0.70

) 

 
 

                The above unaudited pro formaconsolidated amounts are not necessarily indicative of the actual results ofoperations that would have been reported if the acquisition had actuallyoccurred as of the beginning of the periods described above, nor does suchinformation purport to indicate the results of the Company’s future operations.In the opinion of management, all adjustments necessary to present fairly suchpro forma amounts have been made.

 

                During the quarter ended June30, 2001, the Company recorded deferred compensation of approximately $91,000for the difference between the grant or issuance price of common stock optionsand the fair value of the Company’s common stock issued in conjunction with theCUseeMe Networks acquisition. These amounts are being amortized in accordancewith Statement of Financial Accounting Standards Board Interpretation No. 28,“Accounting for Stock Appreciation Rights and Other Variable Stock Option orAward Plans,” over the vesting period of the individual stock options.

 
****
**3. Short Term Investments**

 

Management determines the appropriate classificationof short term investments in marketable securities at the time of purchase andreevaluates such designation as of each balance sheet date. Held-to-maturitysecurities are carried at amortized cost, which approximates fair value.Available-for-sale securities are stated at fair value as determined by themost recently traded price of each security at the balance sheet date. The netunrealized gains or losses on available-for-sale securities are reported as acomponent of comprehensive loss, net of tax. The specific identification methodis used to compute the realized gains and losses on debt and equity securities.

The Company regularly monitors and evaluates therealizable value of its marketable securities. If events and circumstancesindicate that a decline in the value of these assets has occurred and is otherthan temporary, the Company records a charge to investment income (expense).

Marketable securities are comprised as follows (inthousands):

 

 

**September 30,**

 

**December 31,**

 

 

 

**2001**

 

**2000**

 

Available-for-sale:

 

 

 

 

 

Commercial  paper

 

$

 

 

$

12,969

 

Corporate  medium-term notes

 

4,661

 

3,747

 

Certificate of  Deposit

 

60

 

135

 

 

 

 

 

 

 

 

 

$

4,721

 

$

16,851

 

 

As of September 30, 2001, the Company’s available forsale securities had contractual maturities of less than one year. 

Available-for-sale securities are comprised as followsat September 30, 2001 and December 31, 2000 (in thousands):

 

 

**Cost**

 

**Unrealized Gains**

 

**Unrealized Losses**

 

**Fair Value**

 
**September 30, 2001**
 

 

 

 

 

 

 

 

 

Equity  securities

 

$

4,571

 

$

13

 

$

-

 

$

4,584

 

Debt securities

 

-

 

-

 

-

 

-

 

Total

 

$

4,571

 

$

13

 

$

-

 

$

4,584

 

 

 

 

 

 

 

 

 

 

 

**December 31, 2000**

 

 

 

 

 

 

 

 

 

Equity  securities

 

$

16,569

 

$

-

 

$

-

 

$

16,569

 

Debt securities

 

-

 

-

 

-

 

-

 

Total

 

$

16,569

 

$

-

 

$

-

 

$

16,569

 

 

 

 

 

 

 

 

 

 

 

 

The fair values of held-to-maturity debt securities atSeptember 30, 2001 and 2000 approximate cost.

 

**4. Inventory**

 

                Inventoriesas of September 30, 2001 and December 31, 2000 were (in thousands):

 

 

 

**September 30, 2001**

 

**December 31, 2000**

 

 

 

 

 

 

 

Raw materials

 

$3,322

 

$1,553

 

Finished goods

 

1,257

 

5,359

 

Total inventory

 

$4,579

 

$6,912

 

 

     In thethird quarter of 2001, the Company recorded an impairment charge to cost ofrevenues in the amount of $5.5 million, related to excess inventory for certainlegacy products.  These productsincluded switches,, ATM products, VANs and Nic cards.  Sale of the Company’s legacy products declined significantlyduring the quarter and are expected to continue to decline in the future inview of the change in focus of the Company’s sales force towards sales of Clickto Meet and software MCU products, following the acquisition of CUseeMeNetworks. During the quarter ended September 30, 2001, the Company has decidedto move its limited resources away from pursuing sales of legacy products.

* *

In addition inview of the reduction in force actions taken during the quarter, the Companyhas limited resources to pursue potential sales opportunities for legacyproducts at previous levels.

 

**5. Net Loss Per Share**

 

                Netloss per share is computed in accordance with Statement of Financial AccountingStandards No. 128 "Earnings Per Share"("FAS 128"). FAS 128 requires the Company to report bothbasic earnings (loss) per share, which is based on the weighted–averagenumber of common shares outstanding excluding contingently issuable orreturnable shares such as shares of unvested restricted common stock, anddiluted earnings (loss) per share, which is based on the weighted–averagenumber of common shares outstanding and dilutive potential common sharesoutstanding.

 

                As aresult of the losses incurred by the Company for the nine months endedSeptember 30, 2001 and 2000, all potential common shares wereanti-dilutive and were excluded from the diluted net loss per sharecalculations for such periods.

 

                Thefollowing table summarizes securities outstanding (on an as-converted basis)which were not included in the calculations of diluted net loss per share forthe nine months ended September 30, 2001 and 2000, since their inclusionwould be anti-dilutive (in thousands):

 

 

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

 

 

 

 

Unvested restricted common  stock

 

—

 

24

 

Common stock options

 

11,083

 

6,562

 

Common stock warrants

 

1,803

 

1,016

 

Convertible preferred stock

 

3,617

 

3,430

 

 

 

 

 

 

 

 

                Unvestedrestricted common stock represents stock that has been issued but which issubject to repurchase to the extent the holder does not remain associated withthe Company until such shares are vested. The common stock warrants areexercisable at $.91 to $12.00 per share and expire at various times from April2002 through May 2006. The stock options outstanding at September 30,2001, had a weighted average exercise price per share of $4.19, and expirebeginning in June 2004 through September 2011. Convertible preferred stockrepresents the number of shares of common stock that would be outstanding ifthe Series A Preferred Stock was converted at a conversion rate of 131.8for 1.

 
****
 

**6. Comprehensive Income (Loss)**

 

Comprehensive income (loss) is defined as the changein equity of a business enterprise during a period from transactions and otherevents and circumstances from non-owner sources, including foreign currencytranslation adjustments and unrealized gains and losses on marketablesecurities. The Company will present other comprehensive income (loss) in itsconsolidated statements of stockholders’ equity.

 

Components of accumulated other comprehensive lossconsist of the following (in thousands):

 

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

 

 

 

 

Foreign  currency translation

 

$

280

 

$

210

 

Unrealized (loss) gain on marketable 

securities, net of income taxes

 

13

   

-

   

 

 

$

293

 

$

210

 

 

 

 

 

 

 

 

 

Comprehensive losses for the three and nine month periods endedSeptember 30, 2001 and 2000 were as follows (in thousands):

 

 

 

**Three months ended**

 

**Nine months ended**

 

 

 

**September 30,**

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

 

 

 

 

 

 

 

 

Net loss, as  reported

 

$

(10,522

)

$

(5,181

)

$

(24,995

)

$

(12,490

)

Cumulative  translation adjustment

 

44

 

132

 

70

 

149

 

Unrealized gain  (loss) on marketable

 

 

 

 

 

 

 

 

 

Securities, net  of income

 

 

 

 

 

 

 

 

 

Taxes

 

13

 

-

 

13

 

-

 

Comprehensive  loss

 

$

(10,465

)

$

(5,049

)

$

(24,912

)

$

(12,341

)

 

 

**7. Litigation**

 

                Onor about April 9, 1999, several purported class action suits were filed inthe United States District Court for the Northern District of Californiaalleging violations of the federal securities laws against the Company andcertain of its officers and directors in connection with the Company'sreporting of its financial results for the period ended December 31, 1998.The court dismissed these actions without leave to amend on February 14,2000, and the plaintiffs appealed the dismissal to the U.S. Court of Appealsfor the Ninth Circuit. The appeal was taken under submission by the Court ofAppeals following the filing of briefs by the parties and the presentation oforal argument on July 11, 2001. The Court of Appeals has not yet issued aruling on the appeal.

 

                OnApril 23, 2001, the Company received notice of a shareholder's derivativeaction filed in California Superior Court in the County of Santa Clara,alleging that, among other things, certain directors and officers of theCompany sold shares of the Company’s common stock between January 21, 1999and April 6, 1999, while in possession of material non-public informationpertaining to the Company. The Company and the individual defendants demurredto the complaint, and moved to dismiss the action, or in the alternative tostay the action pending the outcome of the appeal in the related federal courtclass action or, if necessary, the investigation of the claims by the Company.The court granted the demurrer in part and denied it in part, granting plaintiffleave to file an amended complaint, and stayed the action pending the outcomeof the appeal in the federal court class action. The court also ordered thatcertain limited discovery of documents could take place with respect to thefiling of the amended complaint.

 

**8. Issuance of Convertible PreferredStock**

 

                OnJune 8, 2000, the Company issued 27,437 shares of Series AConvertible Preferred Stock (the "Preferred Stock") in a privateplacement to Vulcan Ventures Incorporated ("Vulcan") for an aggregatepurchase price of $27,437,000. The Preferred Stock is convertible into3,616,778 shares of common stock of the Company. The Company also issued afive-year warrant to Vulcan to purchase 850,000 shares of the Company's commonstock at an exercise price of $7.00 per share. On the date of issuance, thewarrant had an approximate fair market value of $3,700,000.  Thefair value of the warrants granted was determined at the date of the grantusing a Black-Scholes pricing model with the following assumptions: a risk freeinterest rate of 5.0%; zero percent dividend yield, volatility factors of theexpected market price of the Company’s common stock of 70%, and a term of 5years.  The aggregate gross proceedsfrom the transaction exceed the fair value of the stock and warrants issued.The warrant provides anti-dilution protection to Vulcan in the event that theCompany issues additional shares of common stock at a price less than $7.00 pershare, subject to certain exceptions.

 

**9. Issuance of Warrants**

 

                During the second quarter endedJune 30, 2001, the Company issued a warrant to PictureTel Corporation topurchase up to 2,614,377 shares of the common stock of the Company at anexercise price of $0.91 per share, with a term of five years.  The warrant was issued in connection withthe anticipated execution of a strategic technology, marketing and distribution agreement withPictureTel Corporation, which was executed in July 2001.  Thewarrant vests and becomes exercisable upon various milestones set by theagreement.  As of September 30, 2001,one-third, or 871,459 shares, were vested in accordance with the milestonesestablished in the agreement. The aggregate value of the vested portion warrantwas determined to be approximately $365,000 and will be amortized as expenseover the remaining useful life of the technology received from PictureTel.  The fair value of the warrant granted wasdetermined at the date of the grant using a Black-Scholes pricing model withthe following assumptions: a risk free interest rate of 4.64%; zero percentdividend yield, volatility factors of the expected market price of theCompany’s common stock of 70%, and a term of 4.75 years.  Approximately $12,000 was expensed duringthe quarter ended September 30, 2001. As of September 30, 2001, the warrant had not been exercised.

 

 

**10. New Accounting Pronouncements**

 

                InJune 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 standard requires companies to recordderivatives on the balance sheet as assets or liabilities, measured at fairvalue. Under SFAS No. 133, gains or losses resulting from changes in thevalues of derivatives are to be reported in the statement of operations or as adeferred item, depending on the use of the derivatives and whether they qualifyfor hedge accounting. The key criterion for hedge accounting is that thederivative must be highly effective in achieving offsetting changes in fairvalue or cash flows of the hedged items during the term of the hedge. Theadoption of SFAS No. 133 on January 1, 2001 did not have a materialimpact on the Company's financial position, results of operations or cashflows.

 

                InJuly 2001, the FASB issued Statement of Financial Accounting Standard No.141,  “Business combinations” (SFAS No.141) and No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS 141requires that all business combinations be accounted for under the purchase methodand establishes criteria for the separate recognition of intangible assetsacquired in a business combination. SFAS 142 requires that goodwill no longerbe amortized to earnings, but instead be subject to periodic testing forimpairment. SFAS 141 is applicable to all business combinations initiatedsubsequent to June 30, 2001. SFAS 142 is effective for fiscal years beginningafter December 15, 2001, with earlier application permitted only in specifiedcircumstances. The Company is evaluating the impact that SFAS 141 and 142 willhave on the balance sheet and statement of operations.  Upon adoption of SFAS No. 142, the Companywill stop amortizing goodwill.  Goodwillamortization expense aggregated $352,000 and $585,000 for the three and ninemonth period ended September 30, 2001.  

                On October 3, 2001, theFASB issued SFAS No. 144, "Accounting for the Impairment or Disposal ofLong-Lived Assets" (SFAS 144), SFAS 144 supercedes SFAS 121,"Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of." SFAS 144 applies to all long-lived assets(including discontinued operations) and consequently amends AccountingPrinciples Board Opinion No. 30. SFAS 144 develops one accounting model forlong-lived assets that are to be disposed of by sale. SFAS 144 requires thatlong-lived assets that are to be disposed of by sale be measured at the lowerof book value or fair value less cost to sell. Additionally, SFAS 144 expandsthe scope of discontinued operations to include all components of an entitywith operations that (1) can be distinguished from the rest of the entity and(2) will be eliminated from the ongoing operations of the entity in a disposaltransaction. SFAS 144 is effective for fiscal years commencing after December15, 2001. SFAS No. 144 is not expected to have a material impact on theCompany’s operations.

 

**11. Acquisition and other non-recurringcharges, net**(in thousands) 

 

Impairment of investment in  ICAST Corporation

 

$

1,083

 

Workforce reduction

 

422

 

In-process research and  development charges

 

276

 

 

 

 

 

Acquisition and other  non-recurring charges, net

 

$

1,781

 

 

 
Impairmentof investment in ICAST Corporation
 

                InAugust 1998, the Company completed its acquisition of ICAST Corporation(‘ICAST”). ICAST developed, marketed and supported software design for Internetand Intranet broadcasting and real-time video, audit and data.  The purchase price aggregated approximately$7.6 million.

 

                As a result of the acquisitionof CUseeMe, and based on the Company’s future strategic objectives, the Companyceased to invest any further financial or engineering resources into thedevelopment of video streaming technology that was originally acquired in thepurchase of ICAST and does not expect any significant future revenues or cashflows from ICAST related products.  As aresult, the Company incurred an impairment charge of approximately $1.1 millionduring the quarter ended June 30, 2001. The impairment charges for intangible assets represent the write-off ofthe unamortized intangible assets recorded in connection with the acquisitionof ICAST. The charges of approximately $1.1 million included: $1.0 million forthe goodwill related to the acquisition and $74,000 for the workforce relatedto the acquisition.

 
Workforcereduction
 

                On June 5, 2001, the Companyreduced its workforce by 24 employees. The cost recorded for this layoff was approximately $422,000, whichincluded six weeks of severance pay and all earned vacation time for the affectedemployees.

 
In-processresearch and development charges
 

                In-processresearch and development charges were incurred in conjunction with the CUseeMeNetworks acquisition. See Note 2 for a description of the acquisition.

 

**12. Subsequent Event**

 

                InOctober of 2001, the Company further reduced its workforce, as part of theCompany’s continued efforts to reduce costs and streamline expenses.

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and  Results of Operations

 

                The following discussion of thefinancial condition and results of operations of First Virtual Communications,Inc. (the "Company") should be read in conjunction with the CondensedConsolidated Financial Statements and the Notes thereto included in Item 1 ofthis Quarterly Report on Form 10-Q.

                In addition to the historical information containedin this Item, this Item contains forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, that involverisks and uncertainties. These forward- looking statements include, withoutlimitation, statements containing the words "believes,""anticipates," "expects," and words of similar import. Suchforward-looking statements will have known and unknown risks, uncertainties andother factors that may cause the actual results, performance or achievements ofthe Company, or industry results, to be materially different from any futureresults, performance or achievements expressed or implied by such forward-lookingstatements. Such factors include, among others: the Company's limited operatinghistory and variability of operating results, market acceptance of videotechnology, including the Company's new broadband video services business,dependence on ATM and other technologies, the Company's potential inability tomaintain business relationships with telecommunications carriers, distributorsand suppliers, rapid technological changes, competition and consolidation inthe video networking industry, the importance of attracting and retainingpersonnel, management of the Company's growth, the risk that the benefitsexpected from the merger with CUseeMeNetworks will not be realized, consolidationand cost pressures in the video networking industry, dependence on keyemployees, and other risk factors set forth below and described in this Form10-Q report and in other documents the Companyfiles with the SEC. The Company assumes no obligation to update anyforward-looking statements contained herein.

 

**Overview**

 

                Foundedin 1993, First Virtual Communications, Inc., a Delaware corporation,delivers integrated, end-to-end rich media communications solutions, includingboth hardware and software technologies, for IP, ISDN and ATM networks. TheCompany combines its expertise in networking systems, real-time videotechnology, and web-based collaboration to provide both interactive andintegrated streaming media solutions for a wide range of enterprise videoapplications, including video calls, videoconferences, video broadcasts andvideo-on-demand over converged multi–service networks. The Company'sstrategy is to become the leading provider of high quality, cost-effective,rich media communications solutions in broadband Internet and intranetenvironments for telecommunications carriers and enterprise customers.

 

                On June 19, 2001,the Company and CUseeMe Networks completed a merger, pursuant to which CUseeMeNetworks became a wholly owned subsidiary of the Company. CUseeMe Networkshistorically provided innovative software-based solutions to enable voice,video, and data collaboration over IP-based networks.  CUseeMe Networks specialized in delivering a solution that wasboth centrally managed and centrally deployed, enabling large–scaledeployments of video collaboration to enterprise desktops. As a result of themerger, it is anticipated that the combined Company will provide a broad rangeof integrated rich media communications solutions that run seamlessly acrossmultiple network types to enterprise, service provider, and consumer customersworldwide.

 

                OnJuly 27, 2001, the Company executed an agreement with PictureTel Corporationfor a strategic technology, marketing, and distributor alliance.  The alliance is expected to create a morecomprehensive, scalable and functional rich media communications solution bycombining the technologies and expertise of both the Company and PictureTel.

 

                FirstVirtual Communications’ original equipment manufacturer ("OEM"),distribution and system integration partners include Accord, AdaptiveBroadband, Ameritech, Alcatel***,*** AT&T, British Telecommunications plc, , ChinaTelecom, Electronic Data Systems Corporation, Ezenia!, France Telecom S.A.,Nortel Networks Corporation, Polycom, ., SBC Communications Inc., ShanghaiTelecom, Telstra, Verizon Communications, Siemens  and other leading companies worldwide***.***

 

                TheCompany is leveraging its leadership position in video networking to capitalizeon the rapidly emerging opportunity to provide broadband rich mediacommunications solutions to enterprise markets, either as systems sold throughchannels or services delivered through service providers. First VirtualCommunications' web-based Click To MeetÔ is the Company’s flagship product.   It provides a framework for rich mediacommunications that is simple to use; it effectively manages all the componentsof the end to end solution while hiding traditional complexities from the enduser.   CUseeMe software has been mergedwith the Click to Meet product family.  CUseeMe technology enables rich media communications to be integratedwith existing workflow applications, such as Microsoft Exchange/Outlook,Instant Messaging, and other business applications.

                To date, solutions sales announcements by the Companywith service providers include expanded customer relationships with AT&T,Electronic Data Systems, Wind, Noicom and China Telecom, all of which aredeploying broadband video services using the Company's products and solutions.The Company's broadband rich media communications solutions enable telecommunicationscarriers to deliver a comprehensive set of rich media applications over thecarrier's existing broadband networks into conference rooms, as well as to theusers' desktops.

 

                TheCompany also markets its systems to enterprise customers, which includebusiness customers, government users, education and healthcare providers,primarily through indirect sales channels. For the quarter ended September 30,2001, 81% of the Company’s revenue was from enterprise customers and 19% fromservice providers, while for the quarter ended September 30, 2000, revenue fromenterprise customers was 80% and 20% was from service providers.

 

                TheCompany maintains a network of distributors in Europe and Asia licensed to sellits products under the FVC.COM name. Approximately 23% and 17% of the Company'srevenues were generated from customers outside of North America during thethree months ended September 30, 2001 and 2000, respectively. The Companyexpects that direct sales from shipments to customers outside of North Americawill continue to represent a significant portion of its future revenues. Inaddition, the Company believes that a small portion of its sales through someof its distribution partners is sold to international end-users.

 

                Revenuesfrom the Company's international operations are subject to various risks,including seasonality, longer payment cycles, changes in regulatoryrequirements and tariffs, reduced protection of intellectual property rights,political and economic restraints, and currency risks, among others.

 

                Revenuesare recognized upon shipment of product to customers, provided no significantobligations remain, collectibility is probable and returns are estimable.Revenues from sales to certain of the Company's resellers are subject to rightsof return and price protection. In such cases, the Company provides reservesfor estimated future returns upon revenue recognition. These reserves areestimated based upon historical rates of returns and allowances, resellerinventory levels, the Company's estimates of sell through by resellers andother related factors. Actual results could differ from these estimates. In theevent of the inability to estimate returns from any reseller, the Companydefers revenue recognition until the reseller has sold through the products.Advance payments received from customers and gross margin deferred with respectto sales to resellers wherein the Company does not have the ability to estimatereturns are recorded as deferred revenue. At September 30, 2001, deferredrevenue totaled $2,282,000.

 

                TheCompany has experienced, and is likely to experience in the future,fluctuations in revenues, gross margins and operating results. Various factorscontribute to the fluctuations in revenues, gross margins and operating results,including the Company's success in developing its rich media business and indeveloping, introducing and shipping new products and product enhancements, theCompany's success in accurately forecasting demand for new orders, which mayhave short lead-times before required shipment, product mix, percentage ofrevenues derived from  OEMs versusdistributors or resellers, new product introductions and price reductions bycompetitors, the efforts of OEMs, distributors, resellers, and other thirdparties on behalf of the Company, the Company's ability to attract, retain andmotivate qualified personnel, the timing and amount of research and developmentefforts and success, and selling, general and administrative expenditures.Further, a significant portion of the Company's expenses is fixed. The Companyexpects that operating expenses will decrease in the future with theimplementation of cost reduction measures. To the extent these decreasedexpenses are not accompanied by an increase in revenues or gross margin, as isexpected to be the case as the Company expands its broadband video servicesbusiness, the Company's business, financial condition and results of operationswould be materially adversely affected. Due to all the foregoing factors, it islikely that in some future quarter, as at times in past quarters, the Company'sresults of operations will be below the expectations of public market analystsand investors.

 

                TheCompany out-sources certain functions to independent service providers, and themajority of the Company's products are assembled and tested by subcontractmanufacturers, the largest subcontract manufacturer being Saturn Electronicsand Engineering, Inc.
****
 

**Results of Operations**

 

                Thefollowing table sets forth certain items from the Company's condensedconsolidated statements of operations as a percentage of total revenues for theperiods indicated.

 

 

 

**Three  months ended**

 

**Nine  months ended**

 

 

 

**September  30,**

 

**September  30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenues

 

114.5

%

54.8

%

78.2

%

54.6

%

Gross profit

 

-14.5

%

45.2

%

21.8

%

45.4

%

 

 

 

 

 

 

 

 

 

 

Operating  expenses:

 

 

 

 

 

 

 

 

 

Research and  development

 

40.3

%

36.1

%

49.1

%

30.0

%

Selling, general  and administrative

 

82.8

%

70.2

%

90.3

%

59.2

%

Acquisition and  other non-recuring charges

 

0.0

%

0.0

%

8.8

%

0.0

%

Total operating  expenses

 

123.1

%

106.3

%

148.2

%

89.2

%

Operating loss

 

-137.6

%

-61.1

%

-126.4

%

-43.8

%

 

 

 

 

 

 

 

 

 

 

Other income,  net

 

1.6

%

5.2

%

3.0

%

2.6

%

Minority  interest in consolidated subsidiary

 

0.6

%

-0.8

%

0.1

%

-0.4

%

Net loss

 

-135.5

%

-56.7

%

-123.3

%

-41.6

%

 

(1)       Operatingexpenses include non-cash stock compensation charges of $21,000 (0.3% of totalrevenues) and $59,000 (0.6% of total revenues) for the three months endedSeptember 30, 2001 and 2000, respectively, and $183,000 (0.9% of totalrevenues) and $217,000 (0.7% of total revenues) for the nine months endedSeptember 30, 2001 and 2000, respectively.

 

 

 *Revenues.* Revenues were $7.8 million for the three months endedSeptember 30, 2001, a decrease of 15.2% from the three months endedSeptember 30, 2000.  The softeningeconomy appears to be causing many of our customers to slow their purchasedecision making process. Revenues for the nine months ended September 30, 2001compared to the first nine months of 2000 decreased 32.4%, from $30.0 millionto $20.3 million. The decrease in revenues for both the three and nine monthperiods resulted from lower product shipments to both enterprise customers andservice providers partially offset by revenue generated from the sale ofCUseeMe products after its acquisition in June 2001.

 

 *Gross Profit.*  Gross profit consists of revenues less the cost of revenues,which consists primarily of costs associated with the manufacture of theCompany's products by outside manufacturers and related costs of freight,inventory obsolescence, royalties and warranties. These manufacturers procurethe majority of materials, except for certain key components, which the Companypurchases from third–party vendors.

 

                Grossprofit for the three months ended September 30, 2001 was negative 14.5%,compared to 45.2% in the comparable period of 2000.  Gross profit during the nine months ended September 30, 2001decreased to 21.8% from 45.4% in the first nine months of 2000.  This reduction was mainly due to a $5.5million charge to cost of revenues that the Company recorded in the thirdquarter. Without this one-time charge, gross profit would have been 56.5%

 

     In thethird quarter of 2001, the Company recorded a charge to cost of revenues in theamount of $5.5 million, related to excess inventory for certain legacyproducts.  Legacy products includedswitches, ATM products, VANs and Nic cards. Sale of the Company’s legacy products declined significantly during thequarter and are expected to continue to decline in the future in view of thechange in focus of the Company’s sales force towards sales of Click to Meet andsoftware MCU products, following the acquisition of CUseeMe Networks. Duringthe quarter ended September 30, 2001, the Company has decided to move itslimited resources away from pursuing sales of legacy products.
**
 

In addition, inview of the reduction in force actions taken during the quarter, the Companyhas limited resources to pursue potential sales opportunities for legacyproducts at the previous levels. 

 

 *Research and Development.*  Research and development expenses consistprimarily of personnel costs, costs of contractors and outside consultants,supplies and materials expenses, equipment depreciation and overhead costs.Research and development expenses increased to 40.3% of revenues in the quarterended September 30, 2001, from 36.1% during the quarter endedSeptember 30, 2000. The increase as a percentage of revenues was due tothe reduction in revenues during the three month period ending September 30,2001. Research and development expenses increased to 49.1% of revenues in thenine months ended September 30, 2001, from 30.0% in the first nine months of 2000,for the same reason.

 

                Therewas a $0.9 million  increase in absolutedollars of spending in the nine months ended September 30, 2001 compared to thenine months ended September 30, 2000. The increase was principally due to anincrease in research and development staff after the merger with CUseeMeNetworks and increased activities to support new product development.  The dollar increase was partially offset bythe Company’s aggressive cost cutting measures implemented throughout theorganization. The Company will continue to invest in various developmentprojects and believes that research and development expenses will increase inabsolute dollars for the foreseeable future. However, these expenses willfluctuate depending on various factors, including the status of developmentprojects.

 

 *Selling, General and Administrative.*  Selling, general and administrative(SG&A) expenses include personnel and related overhead costs for sales,marketing, finance, human resources and general management. SG&A expensesalso include costs of outside contractors, advertising trade shows, othermarketing and promotional expenses, and goodwill amortization. As a percentageof revenue, SG&A expenses increased to 82.8%, or $6.4 million, duringthe quarter ended September 30, 2001, from 70.2%, or $6.4 millionduring the quarter ended September 30, 2000, and to 90.3% or $18.3 million forthe nine months ended September 30, 2001, from 59.2% or $17.8 million in thecomparable period of 2000. The increase in absolute dollars for nine monthsended September 30, 2001 was primarily due to an increase in marketing andbusiness development activities in the first nine months of the year.  The increase in SG&A as a percentage ofrevenues in the quarter ended September 30, 2001 also reflected thedecline in revenues from the comparable period of 2000.

 

*Acquisition and other non-recurringcosts, net.* The $1.8 million of one time charges, in the second quarter of 2001,include $276,000 of in-process research and development costs as a result ofthe acquisition of CUseeMe Networks, the impairment of $1.1 million of goodwill, associated with the 1998acquisition of ICAST Corporation and $422,000 of costs associated with thereduction in workforce during the quarter ended June 30, 2001.

 

 *Other Income, Net.*  Other income, net consists primarily ofinterest income earned on short-term investments and cash balances, offset byinterest expense relating to the Company's credit facilities and long-termdebt.  Other income, net totaled$122,000 for the three months ended September 30, 2001, compared to otherincome, net of $474,000 for the three months ended September 30, 2000. Thedecrease was as a result of lower interest income from lower average cash andshort term investment balances in 2001. The decrease of $168,000 in other income, net for the nine months endedSeptember 30, 2001 compared to the first nine months of 2000 was also a resultof a lower cash and short term investment balances.

 

 *Minority Interest in Consolidated Subsidiary.*  Minority interest reflects the interest ofminority stockholders in the operating results of the Company's consolidatedsubsidiary in the United Kingdom. The Company acquired a controlling interestin this entity in May 1999. For the three and nine month periods endedSeptember 30, 2001, the amounts reflect the portion of profits and lossesin this subsidiary that were attributable to minority stockholders.

 

 *Income Taxes.*  The Company has incurred losses since its inception. No taxbenefit was recorded for any period presented, as the Company believes that,based on the history of such losses and other factors, the weight of availableevidence indicates that it is more likely than not that it will not be able torealize the benefit of these net operating losses, and thus a full valuationreserve has been recorded.

 

**Liquidity and Capital Resources**

 

                Sinceinception, the Company has financed its operations primarily through privateand public placements of equity securities and to a lesser extent throughcertain credit facilities and long-term debt. As of September 30, 2001,the Company had cash and cash equivalents and short-term investments of$12.2 million and working capital of $13.3 million. The Companybelieves that its cash and cash equivalents and short-term investments willprovide adequate cash to fund its current operations for the next twelvemonths.

 

                Duringthe nine months ended September 30, 2001, the Company used$19.2 million in its operating activities. This was comprised of the lossof $25.0 million and reductions in accounts payable ($2.0 million)and accrued liabilities ($2.0 million), increase in inventory($3.7 million) and deferred revenue ($1.1 million), and partiallyoffset by reductions in accounts receivables ($3.6 million).  The reduction in receivables was due toaggressive collection activity.  Duringthe nine months ended September 30, 2000, the Company used$5.9 million in operating activities. This was comprised of the loss of$12.5 million and a reduction in accounts payable of $2.0 million,and deferred revenue ($1.0 million), partially offset by reductions ininventory ($0.7 million), and changes in other assets and liability accounts.Net cash provided by investing activities totaled $18.3 million for thenine months ended September 30, 2001, primarily consisting of $12.1 million in net sales of short-terminvestments and $6.6 million of cash acquired in the acquisition of CUseeMeNetworks, Inc. which was partially offset by $439,000 used for the acquisitionof property and equipment. Net cash used in investing activities for the ninemonths ended September 30, 2000 totaled $20.7 million, primarily fromthe purchase of short term investments ($23.7 million) and partially offset byrepayment of shareholder notes receivable ($3.7 million).

 

                Cashprovided by financing activities was $1.3 million for the nine months endedSeptember 30, 2001, principally from the issuance of stock.  Cash provided by financing activities was$26.8 million for the nine months ended September 30, 2000, principallyfrom the net proceeds from the sale of Series A convertible Preferred Stock of$26.8 million.

 

 

*Acquisition of CUseeMe Networks, Inc.*On June 19, 2001, the Company completed itsacquisition of CUseeMe Networks, Inc. (CUseeMe Networks), a provider ofinnovative software solutions that enable voice and vsual communication overIP-based networks. The acquisition was accounted for using the purchase methodof accounting. Accordingly, the estimated fair value of assets acquired andliabilities assumed were included in the Company’s condensed consolidatedresults of operations as of and since the effective date of the purchase. Therewere no significant differences between the accounting policies of the Companyand CUseeMe Networks.

 

                The Company acquired CUseeMeNetworks for a total consideration of $22.7 million, including directacquisition costs of $2.5 million for legal, consulting and accounting fees.The Company exchanged options to purchase 4,109,888 shares of CUseeMe Networkscommon stock with options to purchase shares of the Company’s stock for whichthe Blak-Scholes option-pricing model value of approximately $1.6 million wasincluded in the purchase price.

 

                The Company engaged anindependent appraiser to value the intangible assets. The total purchase pricewas preliminarily allocated to the estimated fair value of assets acquired andliabilities assumed as follows (in thousands):

 

Fair value of tangible assets and liabilities

 

$

6,237

 

In-process research and development

 

276

 

Trademark

 

661

 

Current technology

 

5,918

 

Assembled workforce

 

1,505

 

Deferred stock compensation

 

1,300

 

Goodwill

 

6,822

 

 

 

 

 

Total

 

$

22,719

 

 

 

 

 

 

*                Impairment of Investment inICAST Corporation.*InAugust 1998, First Virtual Communications, Inc. completed its acquisition ofICAST Corporation (“ICAST”).  ICASTdeveloped, marketed and supported software, designed for Internet and Intranetbroadcasting and real-time video, audio and data.    The purchase price aggregated approximately $7.6 million.  As a result of the acquisition of CUseeMeNetworks, and based on the Company’s future strategic objectives, the Companyhas ceased to invest any further financial or engineering resources into thedevelopment of video streaming technology, that was originally acquired in thepurchase of ICAST.  The Company does notanticipate deriving any significant revenues or cash flows from products usingthe ICAST technology. The Company incurred an impairment charge of approximately$1.1 million during the quarter ending June 30, 2001 for the write-off of theunamortized intangible assets recorded in connection with the acquisition ofICAST.  The charges of approximately$1.1 million included: $1.0 million for the goodwill  and $74,000 for other identified intangibles related to the ICASTacquisition.

 

                *New Accounting Pronouncements.* In June1998, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS No. 133”). The standard requires companies to record derivatives on the balancesheet 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 bereported in the statement of operations or as a deferred item, depending on theuse of the derivatives and whether they qualify for hedge accounting. The keycriterion for hedge accounting is that the derivative must be highly effectivein achieving offsetting changes in fair value or cash flows of the hedged itemsduring the term of the hedge. The adoption of SFAS No. 133 on January 1, 2001did not have a material impact on the Company’s financial position, results ofoperations or cash flows.  

 

                InJuly 2001, the FASB issued Statement of Financial Accounting Standard No. 141,“Business combinations” (FAS No. 141) and No. 142, Goodwill and OtherIntangible Assets (FAS No. 142). FAS 141 requires that all businesscombinations be accounted for under the purchase method and establishescriteria for the separate recognition of intangible assets acquired in abusiness combination. FAS 142 requires that goodwill no longer be amortized toearnings, but instead be subject to periodic testing for impairment. FAS 141 isapplicable to all business combinations initiated subsequent to June 30, 2001.FAS 142 is effective for fiscal years beginning after December 15, 2001, withearlier application permitted only in specified circumstances. The Company isevaluating the impact that FAS 141 and 142 will have on its balance sheet andstatement of operations.  Upon adoptionof SFAS No. 142, the Company will stop amortizing goodwill. Goodwillamortization expense aggregated $352,000 and $585.000 for the three and ninemonth period ended September 30, 2001.  

 

On October 3, 2001, the FASB issued SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived Assets".SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of." SFAS 144 applies toall long-lived assets (including discontinued operations) and consequentlyamends Accounting Principles Board Opinion No. 30. SFAS 144 develops oneaccounting model for long-lived assets that are to be disposed of by sale. SFAS144 requires that long-lived assets that are to be disposed of by sale bemeasured at the lower of book value or fair value less cost to sell.Additionally, SFAS 144 expands the scope of discontinued operations to includeall components of an entity with operations that (1) can be distinguished fromthe rest of the entity and (2) will be eliminated from the ongoing operationsof the entity in a disposal transaction. SFAS 144 is effective for fiscal yearscommencing after December 15, 2001. SFAS No. 144 is not expected to have amaterial impact on the Company’s operations. 

 

**Risk Factors**

 

                Inaddition to the other information provided in this report, the following riskfactors should be considered in evaluating the Company and its business.

 

*The Company has a history of operatinglosses and will incur losses in the future. The Company may never generatesufficient revenue to achieve profitability.*

 

                TheCompany has incurred operating losses in each quarter since it commencedoperations. The Company expects to continue to devote substantial resources toexpand its research and development and sales and marketing activities. As aresult, the Company expects that it will continue to incur operating losses forthe foreseeable future. The Company's revenues decreased from $9.2 millionfor the three months ended September 30, 2000 to $7.8 million for thethree months ended September 30, 2001, while its net loss increased from$5.2 million for the three months ended September 30, 2000 to $10.5 millionfor the three months ended September 30, 2001. At September 30, 2001,the Company had an accumulated deficit of $80.7 million.

 

*The Company's quarterly results areexpected to fluctuate and may cause the price of the Company’s common stock tofall.*

 

                TheCompany has experienced in the past, and is likely to experience in the future,fluctuations in revenues, gross margins and operating results. Various factorscould contribute to the fluctuations in revenues, gross margins and operatingresults, including the Company's:

 

                •               success indeveloping its rich media business and in developing, introducing and shippingnew products and product enhancements;

 

                •               success inaccurately forecasting demand for new orders, which may have short lead-timesbefore required shipment, product mix, percentage of revenues derived from OEMsversus distributors or resellers;

 

                •               new productintroductions and price reductions by competitors;

 

                •               results fromstrategic colaborations;

 

                •               use of OEMs,distributors, resellers, and other third parties;

 

                •               ability toattract, retain and motivate qualified personnel;

 

                •               research anddevelopment efforts and success; and

 

                •               selling,general and administrative expenditures.

 

                Additionally,the Company's quarterly operating results may vary significantly depending on anumber of factors outside of its control. Further, a significant portion of theCompany's expenses will be fixed. The Company expects that operating expenseswill decrease in the future.  To theextent these decreased expenses are not accompanied by an increase in revenuesor gross margin, the Company's business, financial condition and results ofoperations would be materially adversely affected. Due to all the foregoingfactors, it is likely that in some future quarter, as at times in pastquarters, the Company's results of operations will be below the expectations ofpublic market analysts and investors, resulting in a negative impact on theCompany's common stock price.

 

*The Company's success depends in parton the market's acceptance of rich media and broadband video service and theCUseeMe Conference Server .*

 

                TheCompany's success depends in part on the market's acceptance of rich media andbroadband video services and the CUseeMe Conference Server. Potential end-usersmust accept video applications as a viable alternative to face-to-face meetingsand conventional classroom based learning. New applications, such as the use ofvideo in marketing, selling and manufacturing, are still in the developmentstage. The Company’s  contracts withtelecommunications service providers to provide broadband video services are inthe early stage and only recently has the Company received revenues from theseservices.  If rich media and broadbandvideo services fail to achieve broad commercial acceptance or if suchacceptance is delayed, the Company's business, financial condition and resultsof operations will  be materiallyadversely affected. The Company anticipates that significant revenue and growthin the foreseeable future will come from the sale of the CUseeMe ConferenceServer and related products and services. Broad market acceptance of theCUseeMe Conference Server, therefore, is critical to the Company’s operatingsuccess.

 

*Integration of the operations of theCompany and CUseeMe Networks pursuant to the recent merger of the companies maybe difficult, expensive and lead to adverse effects.*

 

                Therealization of the anticipated benefits of the recent merger of the Company andCUseeMe Networks will depend in part on whether the Company and CUseeMeNetworks can integrate their operations in an efficient and effective manner.Integrating the Company and CUseeMe Networks continues to be a complex, timeconsuming and expensive process. Successful integration  requires combining the companies'respective:

 

                •               products andservices;

 

                •               sales andmarketing groups;

 

                •               information andsoftware systems;

 

                •               hiring andtraining practices;

 

                •               strategicgoals;

 

                •               management andother employees;

 

                •               businessdevelopment efforts; and

 

                •               geographicallyseparate facilities.

 

                TheCompany and CUseeMe Networks may not accomplish this integration smoothly orsuccessfully and the business synergies may not develop as quickly or to theextent currently expected. The diversion of the attention of management to theintegration effort and any difficulties encountered in combining operationscould cause the interruption of, or a loss of momentum in, the activities ofeither or both of the companies' businesses. Furthermore, employee morale maysuffer, and the combined company may have difficulties retaining key employees.In addition, the merger may result in a loss of customers and suppliers. Somecustomers of the Company or CUseeMe may seek alternative sources of products orservices after the merger due to, among other reasons, a desire not to dobusiness with the combined company. The Company anticipates that the combinedcompany could experience some customer attrition after the merger. Difficultiesin combining operations can also result in the loss of suppliers. Steps bymanagement to counter potential customer and supplier attrition may not beeffective. If the Company is unable to address any of the foregoing risks, itcould materially harm the  Company'sbusiness and impair the value of the Company’s common stock.

 

*The Company's reliance on third partymanufacturers and suppliers could adversely affect the Company's business.*

 

                TheCompany currently outsources the manufacturing of its products and purchasescritical components for its products from single suppliers. The Company  relies on several vendors to manufacturecertain of its products. If one or more of these manufacturers experiencesquality control or other problems, product shipments by the Company may bedelayed. The Company does not have long-term agreements with suppliers, and itscurrent suppliers are not obligated to provide components to the Company forany specific period, in any specific quantity or at any specific price, exceptas may be provided in a particular purchase order. Qualifying additionalsuppliers is a time consuming and expensive process, and there is a greaterlikelihood of problems arising during a transition period to a new supplier. Ifthe Company is required to find replacements for its manufacturers orsuppliers, this could result in short-term cost increases and delays indelivery, which could have a material adverse effect on the Company's business,financial condition and results of operations. The Company may not be able tocontinue to negotiate arrangements with its existing, or any future,manufacturers or suppliers on terms favorable to the Company. Existingmanufacturers and suppliers may not continue to meet the Company's requirementsfor products and components.

 

*The Company's success depends on theperformance of participants in the Company's distribution channels.*

 

                TheCompany currently sells its products through OEMs, distributors and resellers.The Company's future performance will depend in large part on sales of itsproducts through these distribution relationships, such as SBC Communications,Verizon and other key partners. In addition, the Company’s future performancewill depend in large part on the success of its alliance with PictureTel. Pastperformance by the Company should not be considered a reliable indicator offuture performance. Agreements with distribution partners generally provide fordiscounts based on the Company's list prices, and do not require minimumpurchases or restrict development or distribution of competitive products.Therefore, entities that distribute the Company's products may compete with theCompany. In addition, OEMs, distributors and resellers may not dedicatesufficient resources or give sufficient priority to selling the Company'sproducts. The Company additionally depends on its respective distributionrelationships for most customer support, and expends significant resources totrain its respective OEMs, distributors and resellers to support customers.These entities can generally terminate the distribution relationship upon30 days notice for a material breach. The loss of a distributionrelationship or a decline in the efforts of a material distributor, or loss inbusiness or cancellation of orders from, significant changes in scheduleddeliveries to, or decreases in the prices of products sold to, any of thesedistribution relationships, could have a material adverse effect on theCompany's results of operations.

 

*The Company expects to rely on alimited number of large projects for its revenues in the future. Losing one ormore of these customers may adversely affect the Company's future revenue.*

 

                TheCompany depends on a limited number of large end-user projects for a majorityof its revenues, which has resulted in, and may in the future result in,significant fluctuations in quarterly revenues. The Company expects thatrevenues from the sale of products to large end-users will continue to accountfor a significant percentage of its revenues in any particular quarter for theforeseeable future. Additionally, a significant portion of Company's sales ofvideo networking products has historically been to government–relatedagencies, such as military and educational institutions, or third parties usingthe Company's products on behalf of government agencies. Such government–relatedcustomers are often subject to budgetary pressures and may from time to timereduce 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 theCompany or its distribution partners to market the Company's productssuccessfully to new customers could have a material adverse effect on theCompany's business, financial condition and results of operations.

 

*Because sales of the Company's productsrequire a lengthy sales effort and implementation cycle, revenues may beunpredictable and the Company's business may be harmed.*

 

                Salesof the Company's products have required and will continue to require anextended sales effort. The Company must first train the entities with which ithas distribution relationships to market its products. The period from aninitial sales call to an end-user agreement typically ranges from six to 12months, and can be longer. Therefore, the timing of revenues may be unpredictable.A lengthy delay in recognizing revenue could have a material adverse effect onthe Company's business, financial condition and results of operations.

 

*Rapid technological change and evolvingindustry standards and regulations may impair the Company's ability to developand market its services.*

 

                Rapidtechnological change and evolving industry standards characterize the marketfor the Company's products. The Company's success will depend, in part, on itsability to maintain technological leadership and enhance and expand itsexisting product and services offerings. The Company's success also will dependin part upon its ability and the ability of its strategic partners to complywith evolving industry standards. The Company's products must meet a significantnumber of domestic and international video, voice and data communicationsregulations and standards, some of which are evolving as new technologies aredeployed. The Company's products are currently in compliance with applicableregulatory requirements. However, as standards evolve, the Company will berequired to modify its products, or develop and support new versions of itsproducts. In addition, telecommunications service providers require thatequipment connected to their networks comply with their own standards, whichmay vary from industry standards.

 

                TheCompany's ability to compete successfully also is dependent upon the continuedcompatibility and interoperability of its products with products andarchitectures offered by various vendors. The Company's business, financialcondition and results of operations would be materially adversely affected ifit were unable in a timely manner to comply with evolving industry standards orto address compatibility issues. In addition, from time to time, the Companymay announce new products, capabilities or technologies that have the potentialto replace or shorten the life cycle of the Company's existing productofferings. The announcement of product enhancements or new product or serviceofferings could cause customers to defer purchasing the Company's products. Inaddition, the Company has experienced delays in the introduction of newproducts in the past and may experience such delays in the future. The failureof the Company to successfully introduce new products, product enhancements orservices, or customer delays in purchasing products in anticipation of newproduct introductions or because of changes in industry standards, could have amaterial adverse effect on the Company's business, financial condition andresults of operations.

 

*The Company faces potential volatilityin its common stock price.*

 

                Themarket price of the Company’s common stock has been extremely volatile in thepast and, like that of other technology companies, may be subject tosignificant volatility in the future, depending upon many factors, including:

 

                •               fluctuations inthe Company's financial results;

 

                •               announcementsregarding the acquisition of technologies, products or companies;

 

                •               technologicalinnovations or new commercial products developed by the Company or itscompetitors;

 

                •               regulatorychanges and developments that affect the Company's business;

 

                •               developments ordisputes concerning patent and proprietary rights and other legal matters;

 

                •               establishmentof and success of corporate partnerships or licensing arrangements;

 

                •               issuance of newor changed stock market analyst reports and/or recommendations; and

 

                •               economic andother external factors.

 

                Oneor more of these factors could significantly harm the Company's business anddecrease the price of its common stock in the public market. Severe pricefluctuations in a company's stock have frequently been followed by securitieslitigation. Such litigation can result in substantial costs and a diversion ofmanagement's attention and resources and therefore could have a materialadverse effect on the Company's business, financial condition and results ofoperations. Past financial performance of the Company should not be considereda reliable indicator of future performance, and investors should not usehistorical trends to anticipate results or trends in future periods.

 

*If the Company's common stock priceconsistently trades below $1.00 per share, the Company will face potentialdelisting from The Nasdaq National Market. If delisting occurs, the marketprice and market liquidity of the Company's common stock would be adverselyaffected.*

 

                TheCompany's common stock is listed on The Nasdaq National Market. Pursuant toNasdaq rules, Nasdaq may commence procedures to delist any shares trading below$1.00 per share on The Nasdaq National Market for a period of 30 consecutivetrading days; provided, however, that Nasdaq recently announced that it wasimplementing a moratorium on these trading requirements until January 2, 2002.The Company's common stock has at times been trading below $1.00 per share. Ifthe Company's common stock price consistently trades below $1.00 per share andNasdaq does not extend the moratorium beyond January 2, 2002, the Company willface potential delisting from The Nasdaq National Market.

 

                Ifdelisting occurs, the trading of the Company's common stock is likely to beconducted on the OTC Bulletin Board which will have an adverse affect on themarket price of the Company’s common stock and on the ability of stockholdersand investors to buy and sell the common stock.

 

*The Company  faces intense competition from other industry participants andmay not be able to compete effectively.*

 

                Themarket for rich media communications and networking products and services isextremely competitive. Because the barriers to entry in the market arerelatively low and the potential market is large, the Company expects continuedgrowth in the industry and the entrance of new competitors in the future. Manyof the Company's current and potential competitors have significantly longeroperating histories and significantly greater managerial, financial, marketing,technical and other competitive resources, as well as greater name recognition,than that of the Company. As a result, these companies may be able to adaptmore quickly to new or emerging technologies and changes in customerrequirements and may be able to devote greater resources to the promotion andsale of their competing products and services. In addition, to the extent thatcompetitors choose to bundle competing rich media communications applicationswith other products, the demand for the Company's products and services mightbe substantially reduced.

 

                As aresult, the Company may not be able to compete successfully with existing ornew competitors in the rich media communications products and services market.The Company believes that its ability to compete successfully in this marketwill depend on a number of factors both within and outside its control,including:

 

                •               the timing ofthe introduction of new  products andservices by the Company and its competitors;

 

                •               the pricingpolicies of the Company's competitors and suppliers;

 

                •               the Company'sability to hire and retain highly qualified employees;

 

                •               continuedinvestment in research and development;

 

                •               continuedinvestment in sales and marketing; and

 

                •               the adoptionand evolution of industry standards.

 

*The Company's business may be harmed ifit is unable to protect its proprietary rights.*

 

                TheCompany's success and ability to compete in the rich media communications andnetworking products and services industry depends, in part, upon its ability toprotect its proprietary technology. The Company may be unable to determisappropriation of its proprietary technology, detect unauthorized use andtake appropriate steps to enforce its intellectual property rights.

 

                TheCompany does not rely on patent protection for, and does not hold, any patentsrelating to its products, although it has filed one patent application relatedto its recently developed video services technology. This application may notissue, however, and even if issued by the United States Patent and TrademarkOffice, it may not give the Company an advantage over competitors. TheCompany's adherence to industry-wide technical standards and specifications maylimit its opportunities to provide proprietary product features. The Companycurrently licenses certain technology from third parties, and plans to continueto do so in the future. The commercial success of the Company will depend, inpart, on its ability to continue to obtain licenses to third–partytechnology for use in its products.

 

                TheCompany relies upon a combination of trade secret, copyright and trademark lawsand contractual restrictions to establish and protect proprietary rights in itstechnology. The Company also enters into confidentiality and inventionassignment agreements with its employees and enters into non-disclosureagreements with its consultants, suppliers, distributors and customers to limitaccess to and disclosure of its proprietary information.  However, these statutory and contractualarrangements may not be sufficient to deter misappropriation of the Company'sproprietary technologies. In addition, independent third parties may developsimilar or superior technologies to those of the Company. Furthermore, the lawsof some foreign countries do not provide the same degree of protection of theCompany's proprietary information as do the laws of the United States.
**
*Claims by third parties that theCompany infringes their proprietary technology could prevent the Company fromoffering its products or otherwise hurt the Company’s business.*

 

                Thecommercial success of the Company also will depend, in part, on the Company notbreaching the Company's current and future licenses of third–partytechnology used in certain of its products. The Company is, however, subject tothe risk of litigation alleging infringement of third party intellectualproperty rights from the Company's licensed and proprietary technology andthird parties. A number of companies have developed technologies or receivedpatents on technologies that may be related to or be competitive with theCompany's technologies. The Company has not conducted a patent search relatingto the technology used in its  products.In addition, since patent applications in the United States are not publiclydisclosed until the patent issues, applications may have been filed which, ifissued as patents, would relate to the Company's products. The Company's lackof patents may inhibit the Company's ability to negotiate or obtain licensesfrom or oppose patents of third parties, if necessary.

 

                Giventhe rapid development of technology in the rich media communications industry,it is possible that the Company's existing or future products may in the futureinfringe upon the existing or future proprietary rights of others. The Companyis subject to the risk of litigation alleging infringement of third partyintellectual property rights by the Company. The Company could incursubstantial costs in defending itself and its customers against any suchclaims, regardless of the merits of such claims. The Company may also berequired by contract or by statutory implied warranties to indemnify itsdistribution partners and end-users against third–party infringementclaims. Parties making infringement claims against the Company may be able toobtain injunctive or other equitable relief which could effectively block theCompany's ability to sell its products in the United States and abroad, andcould result in an award of substantial damages. In the event of a successfulclaim of infringement, the Company, its customers and end-users may be requiredto obtain one or more licenses from third parties. The Company, or itscustomers, may not be able to obtain necessary licenses from third parties at areasonable cost, or at all. The defense of any lawsuit could result intime-consuming and expensive litigation, damages, license fees, royaltypayments and restrictions on the Company's ability to sell its products, any ofwhich could have a material adverse effect on the Company's business, financialcondition, and results of operations.

 

*The Company will be dependent on keypersonnel and must hire and retain skilled personnel.*

 

                TheCompany's success is significantly dependent on the contributions of a numberof its key personnel. The Company's success depends to a significant degree onthe services of Ralph Ungermann, its chairman of the board of directors, andKillko Caballero, its chief executive officer and president. The loss of theservices of either of these individuals or any of the Company's key personnelcould have a material adverse effect on the Company. The Company believes thatits future success also will depend upon its ability to attract and retainadditional highly skilled technical, managerial, manufacturing, sales andmarketing personnel. Competition for these personnel is intense. The Company maynot be able to anticipate accurately, or to obtain, the personnel that it mayrequire in the future.

 

*The Company's inability to secureadditional funding could adversely effect its business.*

 

                Inorder to meet the Company's anticipated working capital and capital expenditurerequirements, the Company may need to raise additional funds through theissuance of equity securities in the future. If additional funds are raisedthrough the issuance of equity securities, the percentage ownership of thestockholders of the Company will be reduced, stockholders may experienceadditional dilution, and the new equity securities may have rights, preferencesor privileges senior to those of the holders of the Company's common stock.Additional financing may not be available when needed or on terms favorable tothe Company, or at all. If adequate funds are not available or are notavailable on acceptable terms, the Company may be required to delay, reduce oreliminate some or all of its development programs for its products or services,and may be unable to take advantage of future opportunities or respond tocompetitive pressures, which could have a material adverse effect on theCompany's business, financial condition and operating results.

 
**
*The Company faces additional risks fromits international operations*

 

                TheCompany's international business involves a number of risks that couldadversely affect its operating results or contribute to fluctuations in thoseresults. The Company's revenue from international sales represented 23% of itstotal revenue in the nine months ended September 30, 2001, 12% of itstotal revenue in 2000 and 14% of its total revenue in 1999. The Company intendsto seek opportunities to expand its product and service offerings into additionalinternational markets, although the Company may not succeed in developinglocalized versions of its products for new international markets or inmarketing or distributing products and services in those markets.

 

                Themajority of the Company's international sales are currently denominated in U.S.dollars. However, it is possible that a significantly higher level of futuresales of the Company’s products may be denominated in foreign currencies. Tothe extent that the Company's sales are denominated in currencies other thanU.S. dollars, fluctuations in exchange rates may render the Company's productsless competitive relative to local product offerings or result in foreignexchange losses. The Company does not have experience in implementing hedgingtechniques that might minimize the Company's risks from exchange ratefluctuations.

 

                TheCompany's international business also involves a number of other difficultiesand risks, including risks associated with:

 

                •               changingeconomic conditions in foreign countries;

 

                •               exportrestrictions and export controls relating to the Company's technology;

 

                •               compliance withexisting and changing regulatory requirements;

 

                •               tariffs andother trade barriers;

 

                •               difficulties instaffing and managing international operations;

 

                •               longer paymentcycles and problems in collecting accounts receivable;

 

                •               softwarepiracy;

 

                •               politicalinstability;

 

                •               seasonalreductions in business activity in Europe and certain other parts of the worldduring the summer months;

                                and

 

                •               potentiallyadverse tax consequences.

 

*The Company's software products maycontain potential undetected defects.*

 

                Softwaredeveloped by the Company or developed by others and incorporated by the Companyinto its products may contain significant undetected errors when first releasedor as new versions are released. Although the Company's software products willbe tested before commercial release, errors in the products may be found aftercustomers begin to use the software. Any defects in the Company's current orfuture products may result in significant decreases in revenue or increases inexpenses because of adverse publicity, reduced orders, product returns,uncollectible accounts receivable, delays in collecting accounts receivable,and additional and unexpected costs of further product development to correctthe defects.

 

 

*Control By Insiders*

 

                Asof October 31, 2001, the Company's executive officers, directors and theiraffiliates beneficially owned approximately 8,760,223 shares or 22.5% of theoutstanding shares of the Company's outstanding common stock, on anas-converted to common stock basis. As a result, these persons may have theability to effectively control the Company and direct its affairs and business,including the election of directors and approval of significant corporatetransactions. This concentration of ownership may also have the effect ofdelaying, deferring or preventing a change in control of the Company, andmaking certain transactions more difficult or impossible absent the support ofthese stockholders, including proxy contests, mergers involving the Company,tender offers, open-market purchase programs or other purchases of common stockthat could give stockholders of the Company the opportunity to realize a premiumover the then prevailing market price for shares of common stock.

 

Item 3. Quantitative andQualitative Disclosures about Market Risk

 

                TheCompany's market risk exposures as set forth in its Annual Report onForm 10-K for the year ended December 31, 2000, have not materiallychanged.

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

 

                Onor about April 9, 1999, several purported class action suits were filed inthe United States District Court for the Northern District of Californiaalleging violations of the federal securities laws against the Company andcertain of its officers and directors in connection with the Company’sreporting of  its financial results forthe period ended December 31, 1998. The court dismissed these actionswithout leave to amend on February 14, 2000 and the plaintiffs appealedthe dismissal to the U.S. Court of Appeals for the Ninth Circuit. The appealwas taken under submission by the court of Appeals following the filing ofbriefs by the parties and the presentation of oral argument on July 11, 2001.The Court of Appeals has not yet issued a ruling on the appeal.

 

                OnApril 23, 2001, the Company received notice of a shareholder's derivativeaction filed in California Superior Court in the County of Santa Clara,alleging that, among other things, certain directors and officers of theCompany sold shares of the Company 's common stock between January 21,1999 and April 6, 1999, while in possession of material non-publicinformation pertaining to the Company. The Company and the individualdefendants demurred to the complaint, and moved to dismiss the action, or inthe alternative to stay the action pending the outcome of the appeal in therelated federal court class action or, if necessary, the investigation of theclaims by the Company.  The courtgranted the demurrer in part and denied it in part, granting plaintiff leave tofile an amended complaint, and stayed the action pending the outcome of theappeal in the federal court class action. The court also ordered that certainlimited discovery of documents could take place with respect to the filing ofthe amended complaint.

 

Item2:  Changes in Securities

 

                On May 7, 2001, the Companyissued to PictureTel, a warrant to purchase 2,614,377 shares of Common Stock ofthe Company at an exercise price of $0.91 per share, to become exercisable inthree tranches upon the achievement of certain milestones, subsequent to theexecution of a collaboration agreement between the Company and PictureTel inJuly 2001.

 

                The issuance of the warrant wasintended to be exempt from registration and prospectus delivery requirementsunder the Securities Act of 1933, as amended (the “Act”), pursuant to Section4(2) of the Act and Regulation D promulgated thereunder. PictureTel, anaccredited investor, represented its intention to acquire the securities forinvestment only and not with a view to distribution thereof. An appropriatelegend was affixed to the warrant. PictureTel was knowledgeable, sophisticatedand experienced in making investment decisions of this kind and receivedadequate information about the Company or had adequate access, through itsbusiness relationships with the Company, to information about the Company.

 

Item 3.

 

Exhibits and Reports on Form 8-K.

 

                (a)           Exhibits

 

 

 

 

**Exhibit Number**

 

**Description**

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation (1)

3.1(i)

 

Certificate of Ownership and Merger, effective August  3, 1998 (2)

3.1(ii)

 

Certificate of Designation of Series A Convertible  Preferred Stock (4)

3.1(iii)

 

Certificate of Ownership and Merger, effective February  5, 2001 (5)

3.1(iv)

 

Certificate of Amendment of Restated Certificate of  Incorporation filed on June 19, 2001 (5)

3.2

 

Amended Bylaws of the Company (4)

4.1

 

Specimen Common Stock Certificate (3)

4.2

 

Specimen Series A Convertible Preferred Stock  Certificate (4)

4.3

 

Warrant to purchase 2,614,377 shares of the Company’s  Common Stock, dated May 7, 2001, issued by the Company to PictureTel  Corporation

4.4

 

Warrant to purchase 850,000 shares of the Company’s  Common Stock, dated June 8, 2000 issued by the Company to Vulcan Ventures  Incorporated (4)

4.5

 

Warrant to purchase 18,750 shares of the Company’s  Common Sotck, dated April 30, 1997 issued by the Company to Silicon Valley  Bank (1)

 

 

(1)                                  Filed as an exhibit tothe Company's Registration Statement on Form S-1, File No, 333-38755,declared effective on April 29, 1998, incorporated herein by reference.

 

(2)                                  Filed as an exhibit tothe Company's Quarterly Report on Form 10-Q for the period endedSeptember 30, 1998, as amended, as filed on April 29, 1999,incorporated herein by reference.

 

(3)                                  Filed as an exhibit tothe Company's Annual Report on Form 10-K, as amended, for the period endedDecember 31, 1999, as filed on April 5, 2000, incorporated herein byreference.

 

(4)                                  Filed as an exhibit tothe Company's Quarterly Report on Form 10–Q for the period endedJune 30, 2000, as filed on August 14, 2000, incorporated herein byreference.

 

(5)                                  Filed as an exhibit tothe Company’s Quarterly Report on Form 10-Q for the period ended on June 30,2001, as filed on August 15, 2001, incorporated herein by reference.

 

                (b)           Reports on Form 8-K.

 

TheCompany filed a Current Report on Form 8-K on August 31, 2001 to include theunaudited pro-forma combined condensed financial statements required inconnection with the acquisition of CUseeMe Networks.

 

**                SIGNATURES**

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 Date: November  14, 2001

**FIRST VIRTUAL COMMUNICATIONS**

 

 

 

By:

/s/ Randy Acres

 

 

Randy Acres

 

 

Chief Financial Officer

 

 

 

(Duly Authorized Officer and Principal Financial and  Accounting Officer)
****
 

** **
**Exhibit Index**
 

 

 

 

 

**Exhibit Number**

 

**Description**

** **

 

 

 

 

3.1

 

Amended and Restated Certificate of  Incorporation (1)

 

3.1(i)

 

Certificate of Ownership and Merger, effective August  3, 1998 (2)

 

3.1(ii)

 

Certificate of Designation of Series A Convertible  Preferred Stock (4)

 

3.1(iii)

 

Certificate of Ownership and Merger, effective February  5, 2001 (5)

 

3.1 (iv)

 

Certificate of Amendment of Restated Cerificate of  Incorporation filed on June 19, 2001 (5)

 

3.2

 

Amended Bylaws of the Company (4)

 

4.1

 

Specimen Common Stock Certificate (3)

 

4.2

 

Specimen Series A Convertible Preferred Stock  Certificate (4)

 

4.3

 

Warrant to purchase 2,614,377 shares of the Company’s  Common Stock, dated May 7, 2001, issued by the Company to PictureTel  Corporation

 

4.4

 

Warrant to purchase 850,000 shares of the Company’s  Common Stock, dated June 8, 2000 issued by the Company to Vulcan Ventures  Incorporated (4)

 

4.5

 

Warrant to purchase 18,750 shares of the Company’s  Common Stock, dated April 30, 1997 issued by the Company to Silicon Valley  Bank (1)

 

 

 

(1)                                  Filed as an exhibit tothe Company's Registration Statement on Form S-1, File No, 333-38755,declared effective on April 29, 1998, incorporated herein by reference.

 

(2)                                  Filed as an exhibit tothe Company's Quarterly Report on Form 10-Q for the period endedSeptember 30, 1998, as amended, as filed on April 29, 1999,incorporated herein by reference.

 

(3)                                  Filed as an exhibit tothe Company's Annual Report on Form 10-K, as amended, for the period endedDecember 31, 1999, as filed on April 5, 2000, incorporated herein byreference.

 

(4)                                  Filed as an exhibit tothe Company's Quarterly Report on Form 10–Q for the period endedJune 30, 2000, as filed on August 14, 2000, incorporated herein byreference.

 

(5)                                  Filed as an exhibit tothe Company’s Quarterly Report on Form 10-Q for the period ended on June 30,2001, as filed on August 15, 2001, incorporated herein by reference.

 

                                (b)           Reports on Form 8-K.

 

The Company filed a Current Report on Form 8-K onAugust 31, 2001 to include the unaudited pro-forma combined condensed financialstatements required in connection with the acquisition of CUseeMe Networks. |