**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-Q**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**ForThe Quarterly Period Ended June 30, 2002**

 

**OR**

** **

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transitionperiodfrom             to             **

 

**Commission file number 000-23305**

 

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| **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**                   |
| (Address of principal  executive offices)                        |
|                                                             |   |   |
| **(408) 567-7200**                                               |
| (Registrant’s telephone  number, including area code)       |

 

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Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 
| Common Stock, $0.001 par value |   | 40,328,535  shares                |
|--------------------------------|--------|-----------------------------------|
| (Class)                        |   | Outstanding  as of August 8, 2002 |

 

 

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**First VirtualCommunications, Inc.**

**Form 10-Q**

 

**Index**

 
| **PART 1.**        | **FINANCIAL INFORMATION**                                                                         | Page   |
|--------------------|---------------------------------------------------------------------------------------------------|--------|
| Item 1.            | Financial Statements                                                                              |   |
|               | Condensed Consolidated Balance Sheets at  June 30, 2002 (unaudited) and December 31, 2001         | 1      |
|               | Condensed Consolidated Statements of  Operations for the three and six months ended June 30, 2002 | 2      |
|               | Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2002           | 3      |
|               | Notes to Unaudited Condensed Consolidated  Financial Statements                                   | 4      |
| Item 2.            | Management’s Discussion and Analysis of  Financial Condition and Results of Operations       | 9      |
| Item 3.            | Quantitative and Qualitative Disclosures  About Market Risk                                       | 23     |
| **PART II.**       | **OTHER INFORMATION**                                                                             |   |
| Item 1.            | Legal Proceedings                                                                                 | 24     |
| Item 2.            | Change in Securities                                                                              | 24     |
| Item 4.            | Submission of Matters to Vote of Security  Holders                                                | 25     |
| Item 6.            | Exhibits and Reports on Form 8-K                                                                  | 26     |
| **SIGNATURES**     | 27                                                                                                |
| **EXHIBIT  INDEX** | 28                                                                                                |

 

i

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**PART 1.FINANCIAL INFORMATION**

 

Item 1. Financial Statements

 

**First VirtualCommunications, Inc.**

**CondensedConsolidated Balance Sheets**

**(in thousands, exceptshare data)**

 
|                                                                                                                                 |   | **June 30,  2002****(Unaudited)** |   | **December 31,  2001  (Audited****)** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------------|--------|
| **ASSETS**                                                                                                                           |   |                              |   |                                  |   |
| Current assets:                                                                                                                      |   |                              |   |                                  |   |
| Cash and cash equivalents                                                                                                            |   | $                                 | 10,305 |                                  | $      | 6,946 |   |
| Short-term investments                                                                                                               |   | 495                               |   | 2,438                                 |   |
| Accounts receivable                                                                                                                  |   | 6,524                             |   | 6,365                                 |   |
| Inventory                                                                                                                            |   | 1,639                             |   | 3,188                                 |   |
| Prepaids and other current assets                                                                                                    |   | 1,056                             |   | 1,227                                 |   |
| Total current assets                                                                                                                 |   | 20,019                            |   | 20,164                                |   |
| Property and equipment, net                                                                                                          |   | 2,847                             |   | 3,183                                 |   |
| Other assets                                                                                                                         |   | 398                               |   | 322                                   |   |
| Intangible assets, net                                                                                                               |   | 13,807                            |   | 14,489                                |   |
|                                                                                                                                 |   | $                                 | 37,071 |                                  | $      | 38,158 |   |
|                                                                                                                                 |   |                              |   |                                  |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                        |   |                              |   |                                  |   |
| Current liabilities:                                                                                                                 |   |                              |   |                                  |   |
| Current portion of long-term debt                                                                                                    |   | $                                 | 261    |                                  | $      | 36 |   |
| Accounts payable                                                                                                                     |   | 3,372                             |   | 3,268                                 |   |
| Accrued liabilities                                                                                                                  |   | 4,076                             |   | 5,561                                 |   |
| Deferred revenue                                                                                                                     |   | 4,137                             |   | 2,936                                 |   |
| Total current liabilities                                                                                                            |   | 11,846                            |   | 11,801                                |   |
|                                                                                                                                 |   |                              |   |                                  |   |
| Long-term debt, net of current portion                                                                                               |   | 225                               |   | —                                |   |
|                                                                                                                                 |   |                              |   |                                  |   |
| Minority interest in consolidated subsidiary                                                                                         |   | 5                                 |   | —                                |   |
|                                                                                                                                 |   |                              |   |                                  |   |
| Stockholders’ equity:                                                                                                           |   |                              |   |                                  |   |
| Convertible Preferred Stock, $.001 par value; 5,000,000 shares  authorized; 27,437 shares issued and outstanding, respectively       |   | —                            |   | —                                |   |
| Common stock, $.001 par value; 100,000,000 shares authorized; 40,116,179  and 33,327,995 shares issued and outstanding, respectively |   | 40                                |   | 33                                    |   |
| Additional paid-in capital                                                                                                           |   | 118,333                           |   | 113,437                               |   |
| Accumulated other comprehensive loss                                                                                                 |   | 74                                |   | 153                                   |   |
| Accumulated deficit                                                                                                                  |   | (93,452                           | )      | (87,266                               | )      |
| Total stockholders’ equity                                                                                                      |   | 24,995                            |   | 26,357                                |   |
|                                                                                                                                 |   | $                                 | 37,071 |                                  | $      | 38,158 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

 

1

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**First Virtual Communications, Inc.**

**CondensedConsolidated Statements of Operations**

**(in thousands, exceptper share data; unaudited)**

 
|                                                          |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|---------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                          |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                                          |   |                             |   |                           |   |   |   |   |   |
| Revenue                                                       |   |                             |   |                           |   |   |   |   |   |
| Software                                                      |   | $                                | 1,916  |                           | 730    |   | $ | 5,998 |   | 763 |   |
| Product                                                       |   | 3,568                            |   | 5,695                          |   | 4,909 |   | 9,001 |   |
| Support Services                                              |   | 1,160                            |   | 1,710                          |   | 2,338 |   | 2,753 |   |
| Total Revenue                                                 |   | 6,644                            |   | 8,135                          |   | 13,245 |   | 12,517 |   |
|                                                          |   |                             |   |                           |   |   |   |   |   |
| Cost of revenue                                               |   | 3,653                            |   | 4,389                          |   | 5,001 |   | 6,976 |   |
|                                                          |   |                             |   |                           |   |   |   |   |   |
| Gross profit                                                  |   | 2,991                            |   | 3,746                          |   | 8,244 |   | 5,541 |   |
|                                                          |   |                             |   |                           |   |   |   |   |   |
| Operating expense:                                            |   |                             |   |                           |   |   |   |   |   |
| Research and development                                      |   | 2,431                            |   | 2,842                          |   | 5,188 |   | 6,828 |   |
| Sales and marketing                                           |   | 2,375                            |   | 2,353                          |   | 4,290 |   | 5,368 |   |
| General and administrative                                    |   | 2,777                            |   | 3,070                          |   | 5,061 |   | 6,509 |   |
| Acquisition and other non-recurring charges                   |   | —                           |   | 1,781                          |   | — |   | 1,781 |   |
| Total operating expense                                       |   | 7,583                            |   | 10,046                         |   | 14,539 |   | 20,486 |   |
|                                                          |   |                             |   |                           |   |   |   |   |   |
| Operating loss                                                |   | (4,592                           | )      | (6,300                         | )      | (6,295 | ) | (14,945 | ) |
|                                                          |   |                             |   |                           |   |   |   |   |   |
| Other income, net                                             |   | 48                               |   | 170                            |   | 92 |   | 486 |   |
| Minority interest in consolidated subsidiary                  |   | 32                               |   | (12                            | )      | 17 |   | (14 | ) |
|                                                          |   |                             |   |                           |   |   |   |   |   |
| Net loss                                                      |   | $                                | (4,512 | )                              | $      | (6,142 | ) | $ | (6,186 | ) | $ | (14,473 | ) |
|                                                          |   |                             |   |                           |   |   |   |   |   |
| Basic and diluted net loss per share                          |   | $                                | (0.12  | )                              | $      | (0.33 | ) | $ | (0.17 | ) | $ | (0.79 | ) |
|                                                          |   |                             |   |                           |   |   |   |   |   |
| Shares used in computing basic and diluted net loss per share |   | 38,445                           |   | 18,859                         |   | 36,267 |   | 18,238 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

2

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**First VirtualCommunications, Inc.**

**CondensedConsolidated Statements of Cash Flows**

**(in thousands;unaudited)**

** **
|                                                                                                          |   | **Six Months Ended June 30** |   |
|---------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                          |   | **2002**                     |   | **2001** |   |
|                                                                                                          |   |                         |   |   |   |
| Cash flows from operating activities:                                                                         |   |                         |   |   |   |
| Net Loss                                                                                                      |   | $                            | (6,186 | ) | $ | (14,473 | ) |
|                                                                                                          |   |                         |   |   |   |
| Adjustments to reconcile net loss to net  cash used in operating activities:                                  |   |                         |   |   |   |
| Depreciation and Amortization                                                                                 |   | 1,587                        |   | 1,900 |   |
| Provision for doubtful accounts                                                                               |   | 509                          |   | — |   |
| Acquired in-process research and development                                                                  |   | —                       |   | 276 |   |
| Other non-recurring costs                                                                                     |   | —                       |   | 1,083 |   |
| Provision for inventory                                                                                       |   | 1,000                        |   | 592 |   |
| Other                                                                                                         |   | (98                          | )      | (9 | ) |
| Changes in assets and liabilities:                                                                            |   |                         |   |   |   |
| Accounts receivable                                                                                           |   | (441                         | )      | 2,422 |   |
| Inventory                                                                                                     |   | 549                          |   | (4,143 | ) |
| Prepaid expenses and other assets                                                                             |   | (121                         | )      | (1,407 | ) |
| Accounts payable                                                                                              |   | 104                          |   | (1,385 | ) |
| Accrued liabilities                                                                                           |   | (1,185                       | )      | (1,389 | ) |
| Deferred revenue                                                                                              |   | 1,201                        |   | 1,332 |   |
| Net cash used in operating activities                                                                         |   | (3,081                       | )      | (15,201 | ) |
|                                                                                                          |   |                         |   |   |   |
| Cash flows from investing  activities:                                                                        |   |                         |   |   |   |
| Acquisition of property and equipment, net                                                                    |   | (430                         | )      | 218 |   |
| Proceeds from sales of short-term investments, net                                                            |   | 1,848                        |   | 12,032 |   |
| Cash acquired in acquisition of CUseeMe Networks, Inc.                                                        |   | —                       |   | 6,601 |   |
| Net cash provided by investing activities                                                                     |   | 1,418                        |   | 18,851 |   |
|                                                                                                          |   |                         |   |   |   |
| Cash flows from financing  activities:                                                                        |   |                         |   |   |   |
| Proceeds from issuance of common stock, net                                                                   |   | 5,022                        |   | 170 |   |
| Repayment of Capital lease obligations                                                                        |   | —                       |   | 29 |   |
| Net cash provided by financing activities                                                                     |   | 5,022                        |   | 199 |   |
|                                                                                                          |   |                         |   |   |   |
| Net increase in cash and cash equivalents                                                                     |   | 3,359                        |   | 3,849 |   |
| Cash and cash equivalents at beginning of period                                                              |   | 6,946                        |   | 7,077 |   |
|                                                                                                          |   |                         |   |   |   |
| Cash and cash equivalents at end of period                                                                    |   | $                            | 10,305 |   | $ | 10,926 |   |
|                                                                                                          |   |                         |   |   |   |
| Supplemental cash flow information:                                                                           |   |                         |   |   |   |
|                                                                                                          |   |                         |   |   |   |
| Common stock issued and options and warrant assumed in connection  with acquisition of CUseeMe Networks, Inc. |   | $                            | — |   | $ | 20,190 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**First VirtualCommunications, Inc.**

 

**Notes toUnaudited Condensed Consolidated Financial Statements**

 

**1. Basis of Presentation**

 

First VirtualCommunications, Inc. (the “Company”) has prepared the accompanying financialdata for the quarterly period ended June 30, 2002 pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”). Certaininformation and footnote disclosures normally included in financial statements preparedin accordance with accounting principles generally accepted in the UnitedStates of America have been condensed or omitted pursuant to such rules andregulations.

 

In the opinionof management, the accompanying condensed consolidated financial statementscontain all normal and recurring adjustments necessary to present fairly theCompany’s consolidated financial position as of June 30, 2002, consolidatedresults of operations for the three and six months ended June 30, 2002 and2001, and consolidated cash flow activities for the six months ended June 30,2002 and 2001.

 

Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the condensedconsolidated financial statements and accompanying notes. Actual results maydiffer from those estimates.

 

The results ofoperations for the six months ended June 30, 2002 are not necessarilyindicative of the results to be expected for the full year. The informationincluded in this Form 10-Q should be read in conjunction with Management sDiscussion and Analysis of Financial Condition and Results of Operations, theconsolidated financial statements and notes thereto included in the Company’s2001 Annual Report on Form 10-K/A.

 

**2. Short Term Investments**

 

Managementdetermines the appropriate classification of short term investments inmarketable securities at the time of purchase and reevaluates such designationas of each balance sheet date. Held-to-maturity securities are carried atamortized cost, which approximates fair value. Available-for-sale securitiesare stated at fair value as determined by the most recently traded price ofeach security at the balance sheet date. The net unrealized gains or losses onavailable-for-sale securities are reported as a component of comprehensiveloss, net of tax. The specific identification method is used to compute therealized gains and losses on debt and equity securities.

 

The Companyregularly monitors and evaluates the realizable value of its marketablesecurities. If events and circumstances indicate that a decline in the value ofthese assets has occurred and is other than temporary, the Company records acharge to investment income (expense).

 

Marketablesecurities are comprised as follows (in thousands):

 
|                        |   | **June 30,  2002** |   | **December  31,  2001** |   |
|-----------------------------|--------|--------------------|--------|-------------------------|--------|
| Available-for-sale:         |   |               |   |                    |   |
| Corporate debt              |   | $                  | 407    |                    | $      | 414 |   |
| Corporate medium-term notes |   | —             |   | 1,850                   |   |
| Certificate of Deposit      |   | 70                 |   | 60                      |   |
| Equity securities           |   | 18                 |   | 114                     |   |
|                        |   | $                  | 495    |                    | $      | 2,438 |   |

 

4

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As of June 30,2002, the Company’s available for sale securities had contractual maturities ofless than one year. Available-for-sale securities are comprised as follows atJune 30, 2002 and December 31, 2001 (in thousands):

 

|                  |   | **Cost** |   | **Unrealized  Gains** |   | **Unrealized  Losses** |   | **Fair  Value** |   |
|-----------------------|--------|----------|--------|-----------------------|--------|------------------------|--------|-----------------|--------|
| **December 31, 2001** |   |     |   |                  |   |                   |   |            |   |
| Equity  securities    |   | $        | 169    |                  | $      | —                 |   | $               | (55    | ) | $ | 114 |   |
| Debt securities       |   | 2,320    |   | 5                     |   | (1                     | )      | 2,324           |   |
| Total                 |   | $        | 2,489  |                  | $      | 5                      |   | $               | (56    | ) | $ | 2,438 |   |
|                  |   |     |   |                  |   |                   |   |            |   |
| **June 30, 2002**     |   |     |   |                  |   |                   |   |            |   |
| Equity  securities    |   | $        | 169    |                  | $      | —                 |   | $               | (151   | ) | $ | 18 |   |
| Debt securities       |   | 477      |   | —                |   | —                 |   | 477             |   |
| Total                 |   | $        | 646    |                  | $      | —                 |   | $               | (151   | ) | $ | 495 |   |

 

**3. Inventory**

 

Inventories as of June 30, 2002 and December 31, 2001 were (inthousands):

 
|            |   | **June 30, 2002** |   | **December 31, 2001** |   |
|-----------------|--------|-------------------|--------|-----------------------|--------|
|            |   |              |   |                  |   |
| Raw materials   |   | $                 | 1,052  |                  | $      | 2,384 |   |
| Finished goods  |   | 587               |   | 804                   |   |
| Total inventory |   | $                 | 1,639  |                  | $      | 3,188 |   |

 

**4. Net Loss Per Share**

 

Basic loss per share is based on the weighted-average number of commonshares outstanding excluding contingently issuable or returnable shares, suchas shares of unvested restricted common stock. Diluted earnings (loss) pershare is based on the weighted-average number of common shares outstanding anddilutive potential common shares outstanding.

 

As a result of the losses incurred by the Company for the three and sixmonths ended June 30, 2002 and 2001, all potential common shares wereanti-dilutive and were excluded from the diluted net loss per sharecalculations for such periods.

 

The following table summarizes securities outstanding that were notincluded in the calculations of diluted net loss per share for the three andsix months ended June 30, 2002 and 2001, since their inclusion would beanti-dilutive:

 
|                              |   | **Three and Six months ended****June 30,** |   |     |
|-----------------------------------|--------|--------------------------------------------|--------|----------|
|                              |   | **2002**                                   |   | **2001** |   |   |
|                              |   | **(in thousands)**                         |   |     |
| Unvested  restricted common stock |   |                                       |   | —   |   |
| Common stock  options             |   | 11,501                                     |   | 12,208   |   |
| Common stock  warrants            |   | 6,913                                      |   | 3,589    |   |
| Convertible  preferred stock      |   | 3,617                                      |   | 5,617    |   |
|                                   |        |                                            |        |          |  |  |  |  |

 

The common stock warrants are exercisable at $.91 to $12.00 per shareand expire at various times from December 31, 2002 through April 12, 2007.  The stock options outstanding at June 30,2002, had a weighted average exercise price per share of $2.72, and expirebeginning in June 2004 through June 2012.

 

**5. Adoption of SFAS 142, Goodwill and Other Intangible Assets**

 

The Company adopted Statement of Financial Accounting Standards No. 142(SFAS 142), “Goodwill and Other Intangible Assets,” in the first quarter of2002. SFAS 142 supersedes Accounting Principles Board Opinion No. 17,“Intangible Assets,” and discontinues the amortization of goodwill. Inaddition, SFAS 142 includes provisions regarding: 1) the reclassificationbetween goodwill and identifiable intangible assets in accordance with the newdefinition of intangible assets set forth in Statement of Financial AccountingStandards No. 141, “Business Combinations;” 2) the reassessment of the usefullives of existing recognized intangibles; and 3) the testing for impairment ofexisting goodwill and other intangibles.

 

5

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In accordance with SFAS 142, beginning January 1, 2002, goodwill is nolonger being amortized, but will be reviewed periodically for impairment.  The Company did not identify any intangiblesto be reclassified out of previously reported goodwill under the new definitionof intangible assets.  Purchasedtechnology and other intangible assets are being amortized over their estimateduseful lives of five years using the straight-line method. No changes were madeto the useful lives of amortizable intangibles in connection with the adoptionof SFAS 142.

 

Components of intangible assets were as follows (in thousands):

 
|                            |   | **June 30 , 2002**        |   | **December 31, 2001**        |   |
|---------------------------------|--------|---------------------------|--------|------------------------------|--------|
|                            |   | **Gross Carrying Amount** |   | **Accumulated Amortization** |   | **Gross Carrying Amount** |   | **Accumulated Amortization** |   |
|                            |   |                      |   |                         |   |   |   |   |   |
| Amortized  intangible assets:   |   |                      |   |                         |   |   |   |   |   |
| Purchased  technology           |   | $                         | 6,161  |                         | $      | (1,222) |   | $ | 6,161 |   | $ | (651 | ) |
| Assembled  workforce            |   | —                    |   | —                       |   | 1,505 |   | (159 | ) |
| Trademark                       |   | 661                       |   | (132)                        |   | 661 |   | (70 | ) |
| Other                           |   | 668                       |   | (270)                        |   | 218 |   | (74 | ) |
|                            |   |                      |   |                         |   |   |   |   |   |
| Total                           |   | $                         | 7,490  |                         | $      | (1,624) |   | $ | 8,545 |   | $ | (954 | ) |
|                            |   |                      |   |                         |   |   |   |   |   |
| Unamortized  intangible assets: |   |                      |   |                         |   |   |   |   |   |
| Goodwill                        |   | $                         | 9,069  |                         | $      | (1,128) |   | $ | 8,026 |   | $ | (1,128 | ) |

 

TheCompany reclassified previously identified intangible assets related to thepurchase of an assembled workforce with a net unamortized balance of $1,346,000to goodwill.  During the six monthsended June 30, 2002, the Company settled certain pre-acquisition contingencies,resulting in a net decrease of goodwill in the amount of approximately$303,000.

 

Aggregate amortization expensewas $441,000 for the three months ended June 30, 2002 and $154,000 for thethree months ended June 30, 2001. Aggregate amortization expense was $821,000for the six months ended June 30, 2002 and $308,000 for the six months endedJune 30, 2001.  As of June 30, 2002,future estimated amortization expense is expected to be: $0.8 million for thesecond half of 2002, $1.5 million for 2003, $1.5 million for 2004, $1.4 millionfor 2005 and $0.6 million for 2006.

 

Net income on a pro formabasis, excluding goodwill amortization expense, would have been as follows (inthousands):

 
|                                 |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|--------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                 |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                 |   |                             |   |                           |   |   |   |   |   |
| Reported net loss                    |   | $                                | (4,512 | )                              | $      | (6,142 | ) | $ | (6,186 | ) | $ | (14,473 | ) |
| Adjustments                          |   |                             |   |                           |   |   |   |   |   |
| Goodwill amortization                |   | —                           |   | 154                            |   | — |   | 308 |   |
|                                 |   |                             |   |                           |   |   |   |   |   |
| Adjusted net income/(loss)           |   | (4,512                           | )      | (5,988                         | )      | (6,186 | ) | (14,165 | ) |
|                                 |   |                             |   |                           |   |   |   |   |   |
| Basic and diluted net loss per share |   |                             |   |                           |   |   |   |   |   |
| Reported net loss                    |   | $                                | (0.12  | )                              | $      | (0.33 | ) | $ | (0.17 | ) | $ | (0.79 | ) |
| Adjusted net loss                    |   | $                                | (0.12  | )                              | $      | (0.32 | ) | $ | (0.17 | ) | $ | (0.78 | ) |

 

**6. Comprehensive Loss**

 

Comprehensiveloss is defined as the change in equity of a business enterprise during aperiod from transactions and other events and circumstances from non-ownersources, including foreign currency translation adjustments and unrealizedgains and losses on marketable securities.

 

6

----

 

Components ofaccumulated other comprehensive loss consist of the following (in thousands):

 

|                                                           |   | **June 30,  2002** |   | **December  31,  2001** |   |
|----------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
| Foreign currency translation                                   |   | $                  | 225    |                    | $      | 204 |   |
| Unrealized loss on marketable securities,  net of income taxes |   | (151               | )      | (51                     | )      |
|                                                           |   | $                  | 74     |                    | $      | 153 |   |
|                                                                |        |                    |        |                         |        |  |  |  |  |

 

Comprehensive losses for thethree and six month periods ended June 30, 2002 and 2001 were as follows (inthousands):

 
|                                                                  |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                  |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                                                  |   |                             |   |                           |   |   |   |   |   |
| Net loss, as reported                                                 |   | $                                | (4,512 | )                              | $      | (6,142 | ) | $ | (6,186 | ) | $ | (14,473 | ) |
| Cumulative translation adjustment                                     |   | (54                              | )      | (10                            | )      | (21 | ) | 26 |   |
| Unrealized gain (loss) on marketable  securities, net of Income Taxes |   | (44                              | )      |                           |   | (95 | )  |   |   |
|                                                                  |   |                             |   |                           |   |   |   |   |   |
| Comprehensive loss                                                    |   | $                                | (4,610 | )                              | $      | (6,132 | ) | $ | (6,302 | ) | $ | (14,447 | ) |
|                                                                       |        |                                  |        |                                |        |  |  |  |  |  |  |  |  |  |

 

**7.  Litigation**

 

On April 23, 2001, the Company received notice of a stockholder’sderivative action filed in California Superior Court in the County of SantaClara, 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, grantingplaintiff leave to file an amended complaint, and stayed the action pending theoutcome of the appeal in the federal court class action. The court also orderedthat certain limited discovery of documents could take place with respect tothe filing of the amended complaint. In December 2001, the plaintiff movedfor leave to take certain third-party discovery. The motion was denied by thecourt. Plaintiff filed an amended complaint on February 22, 2002. Ahearing on the defendants’ demurrer to the amended complaint was scheduled totake place on May 21, 2002. The parties agreed to a continuance of the hearingin order to permit them to engage in settlement discussions with a third-partymediator. On July 25, 2002, the parties reached a tentative settlement of thederivative action, subject to a number of conditions, including approval of thesettlement by a special committee of independent directors appointed by theCompany’s Board of Directors and empowered to act on behalf of the Company withrespect to the action. Under the terms of the tentative settlement, the Companywould not pay any money to any party in connection with the settlement, norwould it pay any money as indemnification to present or former officers anddirectors in the event of a settlement of the SEC enforcement action describedin the following paragraph.

 

On April 25,2002, the Company was informed by the staff of the SEC that the staff intendsto recommend that the SEC commence an enforcement action against the Company,Ralph Ungermann and two former officers of the Company in connection with theCompany’s January 1999 announcement of unaudited financial results for thequarter and year ended December 31, 1998, which were revised by the Companyprior to the release of the Company’s Form 10-K in April 1999.  The staff indicated that the basis for suchan action would be allegations that the January 1999 announcement was misleadingand/or the result of inadequate financial controls.  The staff did not state what remedies it would seek in such anaction, but noted that the remedies it might seek could include an injunctionagainst future violations, disgorgement, civil penalties and an officer anddirector bar against the individuals. The Company expresses no opinion as to the likely outcome of thismatter.  While no assurances can beprovided, the Company does not believe that the investigation will have amaterial adverse effect on its business, financial condition or results ofoperations. However, the Company's evaluation of the likely impact of

 

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these actions could change inthe future and an unfavorable outcome, depending upon the amount and timing,could have a material effect on our results of operations or cash flows of afuture period.

 

**8.  New Accounting Pronouncements**

 

On October 3,2001, the FASB issued Statement of Financial Accounting Standard No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS144).  SFAS 144 supercedes Statement ofFinancial Accounting Standard No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed of.” SFAS 144applies to all long-lived assets (including discontinued operations) andconsequently amends Accounting Principles Board Opinion No. 30. SFAS 144develops one accounting model for long-lived assets that are to be disposed ofby sale. SFAS 144 requires that long-lived assets that are to be disposed of bysale be measured 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 the Companyfor all financial statements issued in fiscal 2003.

 

In April 2002,the FASB issued FAS 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections,” which iseffective for transactions occurring after May 15, 2002.  FAS 145 rescinds FAS 4 and FAS 64, whichaddressed the accounting for gains and losses from extinguishment of debt.  FAS 44 set forth industry-specifictransitional guidance that did not apply to the Company.  FAS 145 amends FAS 13 to require thatcertain lease modifications that have economic effects similar tosale-leaseback transactions be accounted for in the same manner assale-leaseback transactions.   FAS 145also makes technical corrections to certain existing pronouncements that arenot substantive in nature.  The Companydoes not expect the adoption of FAS 145 to have a significant impact on its financialposition or results of operations.

 

In July 2002, the FASB issued SFAS 146,"Accounting for Costs Associated with Exit or Disposal Activities"(SFAS 146).  SFAS 146 addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies emerging Issues Task Force (EITF) Issue No. 94-3,"Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (Including Certain Costs Incurred in aRestructuring)."  SFAS 146 is effectivefor exit or disposal activities that are initiated after December 31, 2002,with early application encouraged.  TheCompany is currently evaluating the provisions of SFAS 146 but does not believethat the adoption will have a material impact on its results of operations,financial position, or cash flows.

 

**9. Issuance of common stock and warrants**

 

                On March 29, 2002, the Company signed a definitive bindingagreement to raise approximately $4.8 million from a private placement ofits common stock and warrants.  On April12, 2002, the Company issued 6,686,000 shares of common stock at $0.72 pershare and warrants to purchase 3,343,001 shares of common stock at an exerciseprice of $1.01 per share. The warrants are exercisable for five years,commencing six months from the closing date. Among others, the investors in theoffering included Mr. Ungermann and Dr. Gaut, members of theCompany’s Board of Directors, and Special Situations Technology Fund L.P., ofwhich Adam Stettner, a member of the Company’s Board of Directors, serves asthe Managing Director.

 

**10. ****Subsequent Event(s)**

 

On July 31, 2002 the Company acquired theremaining 48% interest in its subsidiary in the United Kingdom in exchange for$259,098 in cash and potential future payments based on financial performance.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations

 

The following discussion of the financial condition and results ofoperations of First Virtual Communications, Inc. should be read in conjunctionwith the Unaudited Condensed Consolidated Financial Statements and the Notesthereto included in Item 1 of this Quarterly Report on Form 10-Q.

 

In addition tothe historical information contained in this Item, this Item containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, that involve risks and uncertainties. Theseforward looking statements include, without limitation, statements containingthe words “believes,” “anticipates,” “expects,” and words of similar import.Such forward-looking statements will have known and unknown risks,uncertainties and other factors that may cause the actual results, performanceor achievements of the Company, or industry results, to be materially differentfrom any future results, performance or achievements expressed or implied bysuch forward-looking statements. Such factors include, among others: theCompany’s limited operating history and variability of operating results,market acceptance of video technology, including the Company’s new broadbandvideo services business, dependence on ATM and other technologies, theCompany’s potential inability to maintain business relationships withtelecommunications carriers, distributors and suppliers, rapid technologicalchanges, competition and consolidation in the video networking industry, theimportance of attracting and retaining personnel, management of the Company’sgrowth, the risk that the benefits****expected from the merger with CUseeMeNetworks will not be realized, consolidation and cost pressures in the videonetworking industry, dependence on key employees, and other risk factors setforth below and described in this Form 10-Q report and in other documents theCompany files with the SEC. The Company assumes no obligation to update anyforward-looking statements contained herein.

 

**Overview**

 

The Companydelivers integrated, end-to-end rich media Web conferencing and collaborationsolutions, including both hardware and software technologies, for IP, ISDN andATM networks. The Company combines its expertise in networking systems,real-time audio and video technology, and Web-based collaboration to provideintegrated voice, video, data, text and streaming media solutions for a widerange of rich media enterprise applications, including Web conferences,broadcasts, video-on-demand, videoconferences and video calls over convergedmulti-service networks. The Company provides integrated, end-to-end rich mediacommunications solutions, including both hardware and software technologies,for IP, ISDN and ATM networks. The Company was incorporated in California inOctober 1993 and reincorporated in Delaware in December 1997. TheCompany first shipped its video networking products in 1995.

 

OnJune 19, 2001, the Company and CUseeMe Networks completed a merger,pursuant to which CUseeMe Networks became a wholly owned subsidiary of theCompany. CUseeMe Networks provided innovative software-based solutions toenable voice, video, and data collaboration over IP-based networks. CUseeMeNetworks specialized in delivering a solution that was both centrally managedand centrally deployed, enabling large-scale deployments of rich mediacollaboration to enterprise desktops. As a result of the merger, the Company isable to provide a broad range of integrated rich media Web conferencingsolutions that run seamlessly across multiple network types to enterprisecustomers and service providers worldwide.

 

In the threemonths ended June 30, 2002, the Company recorded $6.6 million in revenue, adecrease of 18.3% compared to the same period of the previous year.  In the six months ended June 30, 2002, theCompany recorded $13.2 million in revenue, an increase of 5.8% compared to thesame period of the previous year. The Company derived its revenue in the threemonths and six months ended June 30, 2002 from the sale of products andservices to distributors, value added resellers, federal government agencies,enterprise customers and telecommunications service providers. The Companysells primarily through indirect sales channels and telecommunications serviceproviders, which include companies such as Net One Systems, Hitron, ElectronicData Systems, AT&T and France Telecom. For the three months ended June 30, 2002, 54.3% of the Company’s revenuewas from enterprise customers and 45.7% was from service providers, compared to52.3% from enterprise customers and 47.7% from service providers in the sameperiod of the prior year. For the six months ended June 30, 2002, 70.6% of theCompany’s revenue was from enterprise customers and 29.4% was from serviceproviders, while for the six months ended June 30, 2001, revenue from enterprisecustomers was 63.0% and 37.0% was from service providers. The Company’sinternal sales force qualifies and stimulates end-user demand, and manages theCompany’s strategic relationships with its distribution partners, includingoriginal equipment manufacturers, or OEMs, and value added resellers, or VARs,and systems integrators.  AT&TCorporation accounted for 36.7% of net revenue in the three months ended June30, 2002, and AT&T Corporation and a federal government agency accountedfor 19.0% and 14.1%, respectively, of net revenue in the six months ended June30, 2002.  Electronic Data Systemsaccounted for 15.6% of net revenue in the three months ended June 30, 2001, andElectronic Data Systems accounted for 14.8% of net revenue in the six monthsended June 30, 2001.  At June 30, 2002,two customers accounted for 19.6% of total accounts receiveable.  At June 30, 2001, one customer accounted for12.5% of total accounts receiveable.

 

The Companymaintains sales offices in the United Kingdom, France, Italy, Hong Kong andJapan, and distributes its products under the FVC.COM name in both Europe andAsia through resellers and distributors in more than 25 countries. Sales inAsia, excluding Japan, are conducted through the Company’s Hong Kong salessubsidiary, since the Company’s acquisition of its exclusive distributor forAsia in January of 2002. For the three months ended June 30, 2002 and June 30,2001, approximately 28.0% and 19.6%, of the Company’s sales were generated fromcustomers outside of the United States. For the six months ended June 30, 2002 and June 30, 2001, approximately30.2% and 21.3% of the Company's sales were generated from customers outside ofthe United States.

 

9

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The Company expects that directsales from shipments to customers outside of the United States will continue torepresent a significant portion of its future revenue. In addition, the Companybelieves that a small portion of its sales through OEMs, resellers andintegrators are ultimately sold to international end-users. Revenue from theCompany’s international operations is subject to various risks, includingseasonality, longer payment cycles, changes in regulatory requirements andtariffs, reduced protection of intellectual property rights, political andeconomic restraints, and currency risks, among others. To date, the Company hasnot engaged in any foreign currency hedging activity.

 

Some of theCompany’s products are assembled and tested by subcontract manufacturers, thelargest provider being InnerStep, Inc.

 

**CRITICALACCOUNTING POLICIES**

 

We haveidentified the policies below as critical to our business operations and theunderstanding of our results of operations. The impact and any associated risksrelated to these policies on our business operations is discussed throughoutManagement’s Discussion and Analysis of Financial Condition and Results ofOperations where such policies affect our reported and expected financialresults. For a detailed discussion of the application of these and otheraccounting policies, see Note 1 in the Notes to the Consolidated FinancialStatements in Item 14 of our Annual Report on Form 10-K/A for the yearended December 31, 2001.  Thepreparation of our financial statements requires us to make estimates andassumptions that affect the reported amount of assets and liabilities,disclosure of contingent assets and liabilities at the date of our financialstatements, and the reported amounts of revenue and expenses during thereporting period. There can be no assurance that actual results will not differfrom those estimates.

 

**Revenuerecognition**. We derive our revenue from primarily twosources (i) product revenue, which includes software license and hardwarerevenue, and (ii) services and support revenue which includes softwarelicense maintenance, training and consulting revenue. As described below,significant management judgments and estimates must be made and used inconnection with the revenue recognized in any accounting period. Material differencesmay result in the amount and timing of our revenue for any period if ourmanagement made different judgments or utilized different estimates.

 

We apply the provisions ofStatement of Position 97-2, “Software Revenue Recognition,” to all transactionsinvolving the sale of software products and hardware transactions where thesoftware is not incidental. For hardware transactions where software isincidental, we apply the provisions of SEC Staff Accounting Bulletin 101,“Revenue Recognition.”

 

We license our softwareproducts on a perpetual basis. We recognize revenue from the sale of softwarelicenses when persuasive evidence of an arrangement exists, the product hasbeen delivered, the fee is fixed and determinable and collection of theresulting receivable is reasonably assured. Delivery generally occurs whenproduct is delivered to a common carrier.

 

At the time ofthe transaction, we assess whether the associated fee is fixed and determinableand whether or not collection is reasonably assured. We assess whether the feeis fixed and determinable based on the payment terms associated with thetransaction. If a significant portion of a fee is due after our normal paymentterms, which are 30 to 90 days from invoice date, we account for the feeas not being fixed and determinable. In these cases, we recognize revenue asthe fees become due.

 

We assess collection basedon a number of factors, including past transaction history with the customerand the credit-worthiness of the customer. We do not request collateral fromour customers. If we determine that collection of a fee is not reasonablyassured, we defer the fee and recognize revenue at the time collection becomesreasonably assured, which is generally upon receipt of cash.

 

For all sales, except those completedover the Internet, we generally use either a binding purchase order or othersigned agreement as evidence of an arrangement. For sales over the Internet, weuse a credit card authorization as evidence of an arrangement. Generally salesthrough our distributors and official resellers are evidenced by a reselleragreement governing the relationship with or without binding purchase orders ona transaction by transaction basis.

 

For arrangements withmultiple obligations (for example, undelivered maintenance and support), weallocate revenue to each component of the arrangement using the residual valuemethod based on the fair value of the undelivered elements, which is specificto the Company. This means that we defer revenue from the arranged fee that isequivalent to the fair value of the undelivered elements. Fair values for theongoing maintenance and support obligations for our perpetual licenses arebased upon separate sales of renewals to other customers or upon renewal ratesquoted in the contracts. The

 

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Company bases the fair value ofservices, such as training or consulting, upon separate sales of these servicesto other customers. We recognize revenue for maintenance services ratably overthe contract term. Our training and consulting services are billed based onhourly rates, and we generally recognize revenue as these services areperformed.

 

Our arrangements do notgenerally include acceptance clauses. However, if an arrangement includes anacceptance provision, acceptance occurs upon the earlier of receipt of awritten customer acceptance or expiration of the acceptance period.

 

Revenue from sales tocertain of the Company’s resellers is subject to agreements allowing rights ofreturn and price protection. In these cases, the Company provides reserves forestimated future returns and allowances upon revenue recognition. Thesereserves are estimated based upon historical rates of returns and allowances,reseller inventory levels, the Company’s estimates of sell through by resellersand other related factors. Actual results could differ from these estimates. Inthe event of the inability to estimate returns from any reseller, the Companydefers revenue recognition until the reseller has sold the products to theend-user. Advance payments received from customers and gross margin deferredwith respect to sales, for which revenue has not been recorded, are recorded asdeferred revenue.

 

**Salesreturns and other allowances, allowance for doubtful accounts and litigation.** The preparation of financial statementsrequires our management to make estimates and assumptions that affect thereported amount of assets and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpense during the period. Specifically, our management must make estimates ofpotential future product returns related to current period product revenue.Management analyzes historical returns, current economic trends, and changes incustomer demand and acceptance of our products when evaluating the adequacy ofthe sales return and other allowances. Significant management judgments andestimates must be made and used in connection with establishing the salesreturn and other allowances in any accounting period. Material differences mayresult in the amount and timing of our revenue for any period if managementmade different judgments or utilized different estimates. The provision forsales returns and other allowances amounted to $708,000 at June 30, 2002 and$809,000 at June 30, 2001. Similarly, our management must make estimates of theuncollectability of our accounts receivable. Management specifically analyzesaccounts receivable, including historical bad debts, customer concentrations,customer credit-worthiness and current economic trends when evaluating theadequacy of the allowance for doubtful accounts. The accounts receivablebalance was $6.5 million, net of allowance for doubtful accounts and returns of$1.8 million as of June 30, 2002.  Theaccounts receivable balance was $6.4 million, net of allowance fordoubtful accounts and returns of $2.5 million as of December 31,2001.

 

Management’s currentestimated range of liability related to some of the pending litigationinvolving the Company is based on claims for which our management can estimatethe amount and range of loss. We have recorded the minimum estimated liabilityrelated to those claims, where there is a range of loss. Because of theuncertainties related to both the amount and range of loss on the pendinglitigation, management is unable to make a reasonable estimate of the liabilitythat could result from an unfavorable outcome. As additional informationbecomes available, we will assess the potential liability related to ourpending litigation and revise our estimates. Such revisions in our estimates ofthe potential liability could materially impact our results of operation andfinancial position.

 

**Valuationof Inventories.**    TheCompany writes down its inventory for estimated obsolescence or unmarketableinventory equal to the difference between the cost of inventory and theestimated market value based upon assumptions about future demand and marketconditions. If actual future demand or market conditions are less favorablethan those projected by management, additional inventory write-downs may berequired. During the three months ended June 30, 2002, the Company recordedinventory related charges of $1.0 million, which related to the write down ofinventories for excess and obsolete products. During the year ended December 31, 2001, the Company recordedinventory related charges of $7.3 million, which related to the write downof inventories for excess and obsolete products.

 

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**Valuationof long-lived and intangible assets and goodwill.**   The Company willperform goodwill impairment tests on an annual basis and between annual testsin certain circumstances. In response to changes in industry and marketconditions, the Company may strategically realign its resources and considerrestructuring, disposing of, or otherwise exiting businesses, which couldresult in an impairment of goodwill. Factorsthe Company considers important that could trigger an impairment review includethe following:

 

• significantunderperformance relative to expected historical or projected future operatingresults;

• significant changes in the manner of theCompany’s use of the acquired assets or the strategy for its overall business;

• significantnegative industry or economic trends;

• significantdecline in the Company’s stock price for a sustained period; and

• theCompany’s market capitalization relative to net book value.

 

When the Company determinesthat the carrying value of intangibles, long-lived assets and goodwill may notbe recoverable based upon the existence of one or more of the above indicatorsof impairment, the Company measures any impairment based on a projecteddiscounted cash flow method using a discount rate determined by its managementto be commensurate with the risk inherent in the Company’s current businessmodel.

 

**Accountingfor income taxes.**    Aspart of the process of preparing the Company’s consolidated financialstatements the Company is required to estimate its income taxes in each of thejurisdictions in which it operates. This process involves the Companyestimating its actual current tax exposure together with assessing temporarydifferences resulting from differing treatment of items, such as deferredrevenue, for tax and accounting purposes. These differences result in deferredtax assets and liabilities, which are included within the Company’sconsolidated balance sheet. The Company must then assess the likelihood thatits deferred tax assets will be recovered from future taxable income and to theextent that the Company believes that recovery is not likely, it must establisha valuation allowance. To the extent the Company establishes a valuationallowance or increases this allowance in a period, it must include an expensewithin the tax provision in the statement of operations.

 

Significant managementjudgment is required in determining the Company’s provision for incometaxes,  deferred tax assets andliabilities and any valuation allowance recorded against its net deferred taxassets. The Company has recorded a valuation allowance of $46.5 million asof December 31, 2001, due to uncertainties related to the ability toutilize some of the deferred tax assets, primarily consisting of certain netoperating losses carried forward and foreign tax credits, before they expire.The valuation allowance is based on the Company’s estimates of taxable incomeby jurisdiction in which it operates and the period over which its deferred taxassets will be recoverable. In the event that actual results differ from theseestimates or the Company adjusts these estimates in future periods, the Companymay need to establish an additional valuation allowance which could materiallyimpact its financial position and results of operations.  At June 30, 2002, the deferred tax assetcontinued to be fully reserved.

 

**Results of Operations**

The following table sets forth certain items from the Company’scondensed consolidated statements of operations as a percentage of totalrevenues for the periods indicated.

 

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|                                          |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|-----------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                          |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                          |   |                             |   |                           |   |   |   |   |   |
| Revenue                                       |   | 100.0                            | %      | 100.0                          | %      | 100.0 | % | 100.0 | % |
| Cost of revenue                               |   | 55.0                             | %      | 54.0                           | %      | 37.8 | % | 55.7 | % |
|                                          |   |                             |   |                           |   |   |   |   |   |
| Gross profit                                  |   | 45.0                             | %      | 46.0                           | %      | 62.2 | % | 44.3 | % |
|                                          |   |                             |   |                           |   |   |   |   |   |
| Operating expense:                            |   |                             |   |                           |   |   |   |   |   |
| Research and development                      |   | 36.6                             | %      | 34.9                           | %      | 39.2 | % | 54.5 | % |
| Sales and marketing                           |   | 35.7                             | %      | 28.9                           | %      | 32.4 | % | 42.9 | % |
| General and administrative                    |   | 41.8                             | %      | 37.7                           | %      | 38.2 | % | 52.0 | % |
| Acquisition and other non-recurring charges   |   | 0.0                              | %      | 21.9                           | %      | 0.0 | % | 14.2 | % |
|                                          |   |                             |   |                           |   |   |   |   |   |
| Total operating expense                       |   | 114.1                            | %      | 123.5                          | %      | 109.8 | % | 163.7 | % |
|                                          |   |                             |   |                           |   |   |   |   |   |
| Operating loss                                |   | -69.1                            | %      | -77.4                          | %      | -47.5 | % | 119.4 | % |
|                                          |   |                             |   |                           |   |   |   |   |   |
| Other income, net                             |   | 0.7                              | %      | 2.1                            | %      | 0.7 | % | 3.9 | % |
| Minority interest in consolidated  subsidiary |   | 0.5                              | %      | -0.1                           | %      | 0.1 | % | -0.1 | % |
|                                          |   |                             |   |                           |   |   |   |   |   |
| Net loss                                      |   | -67.9                            | %      | -75.5                          | %      | -46.7 | % | -115.6 | % |

 

**ThreeMonths Ended June 30, 2002 Compared to Three Months Ended June 30, 2001**

 

*Revenue.*  Revenuewas $6.6 million for the three months ended June 30, 2002, a decrease of18.3% from $8.1 million for the three months ended June 30, 2001.  The decrease in revenue was primarily aresult of lower demand and lower average selling prices of hardware based ATMlegacy products.

 

*Gross Profit.*  Grossprofit consists of revenue less the cost of revenue, which consists primarilyof costs associated with the purchase of components from outside manufacturersor the manufacture of the Company’s products by outside manufacturers andrelated costs of freight, inventory obsolescence, royalties, warranties andcustomer support costs, which were expensed in the period incurred.

 

Gross profit for the three months ended June 30, 2002 decreased by$755,000 to $3.0 million, or 45% of revenue, compared to $3.7 million, or 46%of revenue in the comparable period of 2001. The decrease was due to the provision for excess and obsolete inventoryrelated to legacy ATM products offset by a higher percentage of revenue fromsoftware-based products.

 

*Research and Development.*  Researchand development expense consist primarily of personnel costs, costs ofcontractors and outside consultants, supplies and materials expenses, equipmentdepreciation and overhead costs. Research and development expense decreased$411,000 to $2.4 million in the three months ended June 30, 2002, a decrease of14.5% over the $2.8 million during the three months ended June 30, 2001. Thedecrease in absolute dollars was principally due to a $141,000 decrease inpersonnel-related expenses, a $141,000 decrease in consulting expenditures anda $129,000 decrease in other expenses after the Company implemented costcutting measures throughout the organization. As a percentage of total revenue,research and development expense increased to 36.6% for the three months endedJune 30, 2002, from 34.9% for the three months ended June 30, 2001. Theincrease as a percentage of revenue primarily was due to the lower revenueduring the three months ended June 30, 2002.

 

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*Sales and Marketing.*  Sales andmarketing expense includes personnel and related overhead costs for sales andmarketing, costs of outside contractors, advertising, trade shows and otherrelated marketing and promotional expenses. Sales and marketing expense was$2.4 million for the three months ended June 30, 2002, which slightly increasedby 0.9% compared to the spending during the three months ended June 30, 2001.As a percentage of total revenue, sales and marketing expense increased to35.7% for the three months ended June 30, 2002, from 28.9% for the three monthsended June 30, 2001.  The increase as apercentage of revenue primarily was due to lower revenue during the threemonths ended June 30, 2002.

 

*General and Administrative.*  Generaland administrative expense includes personnel and related overhead costs forfinance, human resources, information technology, product operations, andgeneral management and the amortization of intangible assets. General andadministrative expense decreased $293,000, or 9.5%, for the three months endedJune 30, 2002, to $2.8 million, from $3.1 million in the three months endedJune 30, 2001. The decrease was mainly due to a $253,000 decrease in personnel-relatedexpenses, a $374,000 decrease in professional expenditures and a $395,000decrease in other expenses after the Company implemented cost cutting measuresthroughout the organization, offset by an increase of $729,000 in bad debtexpense. As a percentage of revenue, general and administrative expenseincreased to 41.8% in the three months ended June 30, 2002, compared to 37.7%for the three months ended June 30, 2001. The increase in general andadministrative expense as a percentage of revenues for the three months endedJune 30, 2002 primarily reflects the lower revenue from the comparable periodof 2001.

 

*Acquisition and other non-recurring costs,net.* The $1.8million of one-time charges in the second quarter of 2001 includes $276,000 ofin-process research and development activities as a result of the acquisitionof CUseeMe Networks, the impairment of $1.1 million of goodwill, associatedwith the 1998 acquisition of ICAST Corporation and $422,000 of costs associatedwith the reduction in workforce during the quarter, ended September 30,2001.  We incurred no acquisition orother non-recurring costs, net, in the period ending Jne 30, 2002.

 

*Other Income, Net.*  Otherincome, net consists primarily of interest income earned on short-terminvestments and cash balances, offset by interest expense relating to theCompany’s credit facilities and long-term debt, if any.  Other income, net totaled $48,000 for thethree months ended June 30, 2002, compared to $170,000 for the three monthsended June 30, 2001. The decrease primarily was a result of lower marketinterest rates.

 

*Minority Interest in Consolidated Subsidiary.*  Minorityinterest reflects the interest of minority stockholders in the operatingresults of the Company’s consolidated subsidiary in the United Kingdom. TheCompany acquired a controlling interest in this entity in May 1999. Forthe three months ended June 30, 2002, the amount primarily reflects the portionof losses in this subsidiary that were attributable to minority stockholders.

 

*Income Taxes.*  TheCompany has incurred losses since its inception. No tax benefit was recordedfor any period presented, as the Company believes that, based on the history ofsuch losses and other factors, the weight of available evidence indicates thatit is more likely than not that it will not be able to realize the benefit ofthese net operating losses, and thus a full valuation reserve has beenrecorded.

 

**Six Months Ended June 30, 2002Compared to Six Months Ended June 30, 2001**

 

*Revenue.* Revenuewas $13.2 million for the six months ended June 30, 2002, an increase of 5.8%from the $12.5 million for the six months ended June 30, 2001. The increase inrevenue was mainly due to the Company’s transition form sales of hardware-basedATM legacy products to software-based products as well as its efforts to expandits customer base worldwide.

 

*Gross Profit.*  Grossprofit consists of revenue less the cost of revenues, which consists primarilyof costs associated with the purchase of components from outside manufacturersor the manufacture of the Company’s products by outside manufacturers andrelated costs of freight, inventory obsolescence, royalties, warranties andcustomer support costs, which were expensed in the period incurred.

 

Gross profit for the six months ended June 30, 2002 increased by $2.7million to $8.2 million, or 62.2% of revenue, compared to $5.5 million, or44.3% of revenue in the comparable period of 2001.  The increase primarily was due to a higher percentage of revenuefrom software-based products in the quarter.

 

*Research and Development.*  Researchand development expense consists primarily of personnel costs, costs ofcontractors and outside consultants, supplies and materials expenses, equipmentdepreciation and overhead costs. Research and development expense decreased$1.6 million to $5.2 million for the six months ended June 30, 2002, a decreaseof 24.0% over the $6.8 million for the six months ended June 30, 2001. Thedecrease in absolute dollars principally was due to an $888,000 decrease inpersonnel-related expenses, a $406,000 decrease in professional expenditures, a$276,000 decrease in equipment and supply expenses, and a $271,000 decrease intravel and entertainment expenses and other expenses after the Companyimplemented

 

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cost cutting measures throughout theorganization, offset by an increase of $201,000 in allocated facility expensesmainly due to the merger with CuseeMe Networks. As a percentage of totalrevenue, research and development expense decreased to 39.2% for the six monthsended June 30, 2002, from 54.5% for the six months ended June 30, 2001. Thedecrease as a percentage of revenue primarily was due to the higher sales andlower spending during the six months ended June 30, 2002.

 

*Sales and Marketing.*  Sales andmarketing expense includes personnel and related overhead costs for sales andmarketing, costs of outside contractors, advertising, trade shows and otherrelated marketing and promotional expenses. Sales and marketing expensedecreased $1.1 million, or 20.1%, for the six months ended June 30, 2002, to$4.3 million from $5.4 for the six months ended June 30, 2001. The decrease inabsolute dollars was principally due to a $376,000 decrease inpersonnel-related expenses, a $278,000 decrease in trade show and marketingactivity expenditures, and a $174,000 decrease in equipment and supply expenseand other expenses after the Company implemented cost cutting measuresthroughout the organization, [and a $359,000 decrease in bad debt expense dueto the subsequent collection of the accounts receivable from one of oursubsidiaries, which was originally reserved as doubtful accounts in the quarterended December 31, 2001, offset by an increase of $109,000 in allocated facilityexpense mainly due to the merger with CuseeMe Networks. As a percentage oftotal revenue, sales and marketing expense decreased to 32.4% for the sixmonths ended June 30, 2002, from 42.9% for the six months ended June 30, 2001.  The decrease as a percentage of revenueprimarily was due primarily to lower spending during the six months ended June30, 2002.

 

*General and Administrative.*  Generaland administrative expense include personnel and related overhead costs forfinance, human resources, information technology, product operations, andgeneral management and the amortization of intangible assets. General andadministrative expense decreased $1.4 million, or 22.2%, for the six monthsended June 30, 2002, to $5.1 million, from $6.5 million for the six monthsended June 30, 2001. The decrease primarily was due to a $1.0 million decreasein personnel-related expenses, a $859,000 decrease in professionalexpenditures, a $209,000 decrease in equipment and supply expense, a $173,000decrease in travel and entertainment expenditures, and a $269,000 decrease inother expenses after the Company implemented cost cutting measures throughoutthe organization, offset by an increase of $729,000 in bad debt expense. As apercentage of revenue, general and administrative expense decreased to 38.2% inthe six months ended June 30, 2002, compared to 52.0% for the six months endedJune 30, 2001. The decrease in general and administrative expense as apercentage of revenues for the six months ended June 30, 2002 primarily reflectsthe higher revenue and lower spending from the comparable period of 2001.

 

*Acquisition and other non-recurring costs,net.* The $1.8million of one-time charges in the second quarter of 2001 includes $276,000 ofin-process research and development activities as a result of the acquisitionof CUseeMe Networks, the impairment of $1.1 million of goodwill, associatedwith the 1998 acquisition of ICAST Corporation and $422,000 of costs associatedwith the reduction in workforce during the quarter ended on September 30,2001.  We incurred no accquisition orother non-recurring costs, net, in the period ending June 30, 2002.

 

*Other Income, Net.*  Otherincome, net consists primarily of interest income earned on short-terminvestments and cash balances, offset by interest expense relating to theCompany’s credit facilities and long-term debt.  Other income, net totaled $92,000 for the six months ended June30, 2002, compared to $486,000 for the six months ended June 30, 2001. Thedecrease primarily was a result of lower market interest rates.

 

*Minority Interest in Consolidated Subsidiary.*  Minorityinterest reflects the interest of minority stockholders in the operatingresults of the Company’s consolidated subsidiary in the United Kingdom. TheCompany acquired a controlling interest in this entity in May 1999. Forthe six months ended June 30, 2002, the amount primarily reflects the portionof losses in this subsidiary that were attributable to minority stockholders.

 

*Income Taxes.*  TheCompany has incurred losses since its inception. No tax benefit was recordedfor any period presented, as the Company believes that, based on the history ofsuch losses and other factors, the weight of available evidence indicates thatit is more likely than not that it will not be able to realize the benefit ofthese net operating losses, and thus a full valuation reserve has beenrecorded.

 

**Liquidity and Capital Resources**

 

Since inception, the Company hasfinanced its operations primarily through private and public placements of equitysecurities and to a lesser extent through certain credit facilities andlong-term debt. As of June 30, 2002, the Company had cash and cash equivalentsand short-term investments of $10.8 million and working capital of $8.2million.

 

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On March 29, 2002, theCompany entered into a binding agreement to sell common stock and warrants topurchase common stock to investors in a private placement for aggregateproceeds of approximately $4.8 million. On April 12, 2002 the Companyissued 6,686,000 shares of common stock at $0.72 per share and warrants topurchase 3,343,001 shares of common stock at an exercise price of $1.01 pershare. The warrants are exercisable for five years, commencing six months fromthe closing date. The investors in the financing included Special SituationsFunds, including Special Situations Technology Funds, L.P., of which AdamStettner, a member of the Company’s Board of Directors, serves as ManagingDirector, Mr. Ungermann and Dr. Gaut, each of whom are members of theCompany’s Board of Directors, and other purchasers.

 

The Company has experiencedsignificant net operating losses from inception. In the six months ended June30, 2002, the Company incurred losses of $6.2 million and used $3.1 million ofcash in its operating activities.  Inthe comparable period of 2001, the Company incurred net losses of$31.6 million and used $20.7 million of cash in its operatingactivities. Management currently expects that operating losses and negativecash flows will continue for the foreseeable future.  The Company decreased the size of its workforce by 26% in 2001and 7% in 2002, as well as instituting measures to control discretionaryspending.  Management currently believesthat the Company's existing cash and investments are adequate to fund theCompany's operations through December 31, 2002.  However, the Company’s cash requirements depend on severalfactors, including the rate of market acceptance of its products and services,the ability to expand and retain its customer base the Company's ability tocontinue to control its expenses and other factors.

 

In order to aggressively pursuebusiness opportunities, the Company may be required to seek equity investmentsfrom existing or potential strategic partners in the future. Should the Companysell additional equity, the sale may result in dilution to the Company’scurrent stockholders. Should the Company be unsuccessful in its efforts toraise equity from strategic partners, it may seek additional capital from thepublic and/or private equity markets that will likely result in dilution of theCompany’s current stockholders. There can be no assurance that any financingwill be available at acceptable terms or at all.

 

Cash used in operating activities totaled$3.1 million for the six months ended June 30, 2002, compared to $15.2million for the six months ended June 30, 2001.  Cash used in operating activities primarily consisted of$6.2 million from a net loss adjusted for non-cash items, a decrease of$1.2 million in accrued liabilities and an increase of $441,000 inaccounts receivable, partially offset by an increase of $1.2 million ofdeferred revenue, a decrease of $549,000 in inventory, and an increase of$104,000 of accounts payable.  Cash usedin operating activities for the six months ended June 30, 2001, reflects$14.5 million from a net loss adjusted for non-cash items, an increase of$4.1 million in inventory,  $1.4 millionin prepaid expenses and other assets, a decrease of $1.4 million in accountspayable and $1.4 million in accrued liabilities, offset in part by a decreaseof $2.4 million in accounts receivable and an increase of $1.3 million indeferred revenue.

 

Cash provided from investmentactivities totaled $1.4 million for the six months ended June 30, 2002,compared to $18.9 million for the six months ended June 30, 2001.  Cash provided by investment activities forthe six months ended June 30, 2002, primarily consisted of $1.8 million ofnet sales of short-term investments, offset by $430,000 of cash used in theacquisition of property and equipment. Cash provided in investment activitiesfor the six month ended June 30, 2001, primarily consisted of net sales ofshort-term investments of $12.0 million and $6.6 million in cash acquiredfrom the acquisition of CuseeMe Networks.

 

Cash provided by financingactivities was $5.0 million for the six months ended June 30, 2002, principallyfrom the issuance of stock. Cash provided by financing activities was $199,000for the six months ended June 30, 2001, principally from the issuance of stock.

 

*New AccountingPronouncements*. OnOctober 3, 2001, the FASB issued Statement of Financial Accounting Standard No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS144).  SFAS 144 supercedes SFAS 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed of.” SFAS 144 applies to all long-lived assets (includingdiscontinued operations) and consequently amends Accounting Principles Board OpinionNo. 30. SFAS 144 develops one accounting model for long-lived assets that areto be disposed of by sale. SFAS 144 requires that long-lived assets that are tobe disposed of by sale be measured at the lower of book value or fair valueless cost to sell. Additionally, SFAS 144 expands the scope of discontinuedoperations to include all components of an entity with operations that (1) canbe distinguished from the rest of the entity and (2) will be eliminated fromthe ongoing operations of the entity in a disposal transaction. SFAS 144 iseffective for the Company for all financial statements issued in fiscal 2003.

 

In April 2002, the FASB issuedSFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASBStatement No. 13, and Technical Corrections,” which is effective fortransactions occurring after May 15, 2002. SFAS 145 rescinds SFAS 4 and FAS 64, which addressed the accounting forgains and losses from extinguishment of debt. SFAS 44 set forth industry-specific transitional guidance that did notapply to the Company.  SFAS 145 amendsSFAS 13 to require that certain lease modifications that have economic effectssimilar to sale-leaseback transactions be accounted for in the same manner assale-leaseback transactions.  SFAS 145also makes technical corrections to certain existing pronouncements that arenot substantive in

 

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nature.  The Company does not expect the adoption ofSFAS 145 to have a significant impact on its financial position or results ofoperations.

 

In July 2002, the FASB issued SFAS 146,"Accounting for Costs Associated with Exit or Disposal Activities"(SFAS 146).  SFAS 146 addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies emerging Issues Task Force (EITF) Issue No. 94-3,"Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (Including Certain Costs Incurred in aRestructuring)."  SFAS 146 iseffective for exit or disposal activities that are initiated after December 31,2002, with early application encouraged. The Company is currently evaluating the provisions of SFAS 146 but doesnot believe that the adoption will have a material impact on its results of operations,financial position, or cash flows.

 

**Risk Factors**

 

In addition to the other information provided in this report, thefollowing risk factors should be considered in evaluating the Company and itsbusiness.

 

*The Company has a history of operating losses and will incur losses inthe future. The Company may never generate sufficient revenue to achieveprofitability.*

 

The Company has incurred operating losses ineach quarter since it commenced operations in 1993. The Company expects tocontinue to devote substantial resources to its research and development andsales and marketing activities. As a result, the Company expects that it willcontinue to incur operating losses for the foreseeable future. The Company’srevenues decreased from $40 million for the year ended December 31, 2000 to$27.7 million for the year ended December 31, 2001, while its net lossincreased from $18.8 million for the year ended December 31, 2000 to $31.6million for the year ended December 31, 2001. At June 30, 2002, the Company hadan accumulated deficit of $93.5 million.

 

*The Company’s quarterly financial results are expected to fluctuate andmay cause the price of the Company’s common stock to fall.*

 

The Company has experienced in the past, andis likely to experience in the future, fluctuations in revenue, gross marginand operating results. Various factors could contribute to the fluctuations inrevenue, gross margin and operating results, including the Company’s:

 

•                                         successin developing its rich media Web conferencing business and in developing,introducing and shipping new products and product enhancements, particularlyfor Click to Meet and the Multi Conferencing Unit, or MCU;

 

•                                         successin accurately forecasting demand for new orders that may have short lead-timesbefore required shipment, product mix, percentage of revenue derived fromoriginal equipment manufacturers, or OEMs versus distributors or resellers;

 

•                                         new productintroductions and price reductions by competitors;

 

•                                         results fromstrategic collaborations;

 

•                                         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 operating resultsmay vary significantly depending on a number of factors that are outside of itscontrol. Further, a significant portion of the Company’s expenses are fixed.The Company has made significant progress in reducing its operating expenses inthe last year and expects that operating expenses will decrease in the futuredue to continued expense reduction measures. However, to the extent thatoperating expenses are not reduced and to the extent that revenue or grossmargin cannot be increased, the Company’s business, financial condition andresults of operations would be materially adversely affected. Due to all theforegoing factors, it is likely that in some future quarter, as at times inpast quarters, the Company’s results of operations will be below theexpectations of public market analysts and investors, resulting in a negativeimpact on the Company’s common stock price.

 

 

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*The Company’s success depends on the market’s acceptance of rich mediaand Web conferencing services and the Company’s products, including Click toMeetTM and the Multi Conferencing Unit.*

 

The Company’s success depends in part on themarket’s acceptance of rich media and Web conferencing services and theCompany’s products, including Click to MeetTM and the MCU. 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 of videoconferencing in marketing, selling and manufacturing, are still in thedevelopment stage. The Company’s contracts withtelecommunications service providers to provide video and Web conferencingsolutions are in the early stage and only recently has the Company receivedsignificant revenue from this market segment. If richmedia, Web conferencing and broadband video services fail to achieve broadcommercial acceptance or if such acceptance is delayed, the Company’s business,financial condition and results of operations will be materially adverselyaffected. The Company anticipates that significant revenue and growth in theforeseeable future will come from the sale of its Click to MeetTM and MCUproducts and services. Broad market acceptance of these products and servicesis therefore critical to the Company’s operating success.

 

*The Company faces potential delisting from The Nasdaq National Market.If delisting occurs, the market price and market liquidity of the Company’scommon stock may be adverselyaffected.*

 

The Company’s common stock currently is listed on The Nasdaq NationalMarket. Pursuant to its rules, The Nasdaq National Market commenced proceduresto delist the Company’s shares based on the shares trading below $1.00 pershare on The Nasdaq National Market for a period of 30 consecutive tradingdays.  In June 2002, the Companyreceived notice from The Nasdaq National Market of its continued non-compliancewith the Nasdaq rules and that its shares would be delisted from The NasdaqNational Market.  The Company requesteda written appeal hearing before a Nasdaq Listing Qualification Panel to reviewthe delisting determination.  In July2002, the written appeal hearing was granted and a hearing date was set forAugust 8, 2002. The Company is awaiting the Panel’s determination from thathearing.  If the Company’s appeal to TheNasdaq National Market for relief from compliance is unsuccessful, then theCompany’s common stock will be delisted from The Nasdaq National Market, andthe Company intends to apply to transfer its shares for trading on The NasdaqSmall Cap Market. On August 9, 2002, the last sale reported on the NasdaqNational Market System for the Company’s stock was at $0.44.

 

If delistingoccurs the trading of the Company’s common stock is likely to be conducted onThe Nasdaq Small Cap Market.  If theCompany fails to meet the qualification to transfer to The Nasdap Small CapMarket or fails to continue to meet the listing requirements under The NasdaqSmall Cap Market, 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. If delisting occurs, you maylose some or all of your investment.

 

Softwaredeveloped by the Company or developed by others and incorporated by the Companyinto its products may contain significant undetected errors, especially whenfirst released or as new versions are released. Although the Company’s softwareproducts are tested before commercial release, errors in the products may befound after customers begin to use the software. Any defects in the Company’scurrent or future products may result in significant decreases in revenue orincreases in expenses because of adverse publicity, reduced orders, productreturns, uncollectible accounts receivable, delays in collecting accountsreceivable, and additional and unexpected costs of further product developmentto correct the defects.

 

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*The Company faces potential volatility in its common stock price.*

 

The market price of the Company’s common stock has been extremelyvolatile in the past and, like that of other technology companies, is likely tobe subject to significant volatility in the future, depending upon manyfactors, including:

 

•              fluctuations in the Company’s financialresults;

 

•              technological innovations or new commercialproducts developed by the Company or its competitors;

 

•              establishmentof and success of corporate partnerships or licensing arrangements;

 

•              announcementsregarding the acquisition of technologies, products or companies;

 

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

 

•              developmentsor disputes concerning patent and proprietary rights and other legal matters;

 

•              anadverse outcome from the SEC enforcement proceedings;

 

•              issuanceof new or changed stock market analyst reports and/or recommendations; and

 

•              economicand other external factors.

 

One or more of these factors could significantly harm the Company’sbusiness and decrease the price of its common stock in the public market.Severe price fluctuations in a company’s stock, including the Company’s stock,have frequently been followed by securities litigation. Such litigation canresult in substantial costs and a diversion of management’s attention andresources and therefore could have a material adverse effect on the Company’sbusiness, financial condition and results of operations. Past financialperformance of the Company should not be considered a reliable indicator offuture performance, and investors should not use historical trends toanticipate results or trends in future periods.

 

*The Company has a history of generating a large percentage of itsrevenue at the end of each quarterly accounting period.*

 

Due to the way that many customers in the Company’s target marketsallocate and spend their budgeted funds for acquisition of the Company’sproducts and other products, a large percentage of the Company’s business isbooked at the end of each quarterly accounting period. Because of this, theCompany may not be able to reliably predict order volumes or prepare orders forshipment on time. If the Company is unable to ship its customer orders on time,there could be a material adverse effect on the Company’s results ofoperations.

 

*The Company’s success depends on the performance of participants in theCompany’s distribution channels.*

 

The Company currently sells its products through OEMs, distributors andresellers. The Company’s future performance will depend in large part on salesof its products through these distribution relationships, such as Net One, SBCCommunications, Verizon and other key partners. Agreements with distributionpartners generally provide for discounts based on the Company’s list prices,and do not require minimum purchases or restrict development or distribution ofcompetitive products. Therefore, entities that distribute the Company’sproducts may compete with the Company. In addition, OEMs, distributors andresellers may not dedicate sufficient resources or give sufficient priority toselling the Company’s products. The Company additionally depends on itsrespective distribution relationships for most customer support, and expendssignificant resources to train its respective OEMs, distributors and resellersto support customers. These entities can generally terminate the distributionrelationship upon 30 days notice. The loss of a distribution relationship or adecline in the efforts of a material distributor, or loss in business orcancellation of orders from, significant changes in scheduled deliveries to, ordecreases in the prices of products sold to, any of these distributionrelationships could have a material adverse effect on the Company’s results ofoperations.

 

*The Company expects to rely on a limited number of large customerprojects for its revenue in the future. Losing one or more of these customersmay adversely affect the Company’s future revenue.*

 

The Company depends on a limited number of large end-user projects fora majority of its revenue which has resulted in, and mayin the future result in, significant fluctuations in quarterly revenue. TheCompany expects that revenue from the sale of products to large resellers andtelecommunications service providers will continue to account for a

 

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significant percentage of itsrevenue in any particular quarter for the foreseeable future. Additionally, asignificant portion of Company’s sales of video networking products hashistorically been to government agencies, such as military and educationalinstitutions, or to third parties using the Company’s products on behalf ofgovernment agencies. Government customers are often subject to budgetarypressures and may from time to time reduce their expenditures and/or cancelorders. The loss of any major customer, or any reduction or delay in orders bya customer, or the failure of the Company or its distribution partners tomarket the Company’s products successfully to new customers could have amaterial adverse effect on the Company’s business, financial condition andresults of operations.

 

*Because sales of some of the Company’s products require a lengthy saleseffort and implementation cycle, revenue may be unpredictable and the Company’sbusiness may be harmed.*

 

Sales of some of the Company’s products have required and will continueto require an extended sales effort. For some projects the period from aninitial sales call to an end-user agreement can range from six totwelve months, and can be longer. Therefore, the timing of revenue bookingand recognition may be unpredictable. A lengthy delay in recognizing revenuecould have a material adverse effect on the Company’s business, financialcondition and results of operations.

 

*Rapid technological change and evolving industry standards andregulations may impair the Company’s ability to develop and market its productsand services.*

 

Rapid technological change and evolving industry standards characterizethe market for the Company’s products and services. The Company’s success willdepend, in part, on its ability to maintain technological leadership andenhance and expand its existing product and services offerings. The Company’ssuccess also will depend in part upon its ability and the ability of itsstrategic partners to comply with evolving industry standards. The Company’sproducts must meet a significant number of domestic and international video,voice and data communications regulations and standards, some of which areevolving as new technologies are deployed. The Company’s products are currentlyin compliance with applicable regulatory requirements. However, as standardsevolve, the Company will be required to modify its products, or develop andsupport new versions of its products. In addition, telecommunications serviceproviders require that equipment connected to their networks comply with theirown environment and standards, which may vary from industry standards.

 

The Company’s ability to compete successfully is also dependent uponthe continued compatibility and interoperability of its products with productsand architectures offered by other 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 additional delays in the introductionof products currently under development or products developed in the future.The failure of the Company to successfully introduce new products, productenhancements or services on schedule or in time to meet market opportunities,or customer delays in purchasing products in anticipation of new productintroductions 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 intense competition from other industry participantsand may not be able to compete effectively.*

 

The market for Web conferencing 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 existing competitors and the entrance of new competitors in thefuture. Many of the Company’s current and potential competitors havesignificantly longer operating histories and significantly greater managerial,financial, marketing, technical and other competitive resources, as well asgreater name recognition, than that of the Company. As a result, thesecompanies may be able to adapt more quickly to new or emerging technologies andchanges in customer requirements and may be able to devote greater resources tothe promotion and sale of their competing products and services.

 

As a result, the Company may not be able to compete successfully withexisting or new competitors in the rich media Web conferencing andcollaboration solutions market. The Company believes that its ability tocompete successfully in this market will depend on a number of factors bothwithin and outside its control, including:

 

•                                         the timing of the introduction of newproducts and services by the Company and its competitors;

 

•                                         the pricing policies of the Company’scompetitors and suppliers;

 

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•                                         the Company’s ability to hire and retainhighly qualified employees;

 

•                                         continued investment in research anddevelopment;

 

•                                         continued investment in sales and marketing;and

 

•                                         the adoption and evolution of industrystandards.

 

*The Company’s business may be harmed if it is unable to protect itsproprietary rights.*

 

The Company’s success and ability to compete in the rich media Webconferencing and collaboration solutions market depends, in part, upon itsability to protect its proprietary technology. The Company may be unable todeter misappropriation of its proprietary technology, detect unauthorized use,and take appropriate steps to enforce its intellectual property rights.

 

The Company does not rely on patent protection for its products, anddoes not hold any patents, although it has filed a patentapplication relating to the initiation and support of video conferencing usinginstant messagingThispatent application may not be approved, however, and even if issued by theUnited States Patent and Trademark Office, it may not give the Company anadvantage over competitors. The Company’s adherence toindustry-wide technical standards and specifications may limit itsopportunities to provide proprietary product features. The Company currentlylicenses certain technology from third parties and plans to continue to do soin the future. The commercial success of the Company will depend, in part, onits ability to continue to obtain licenses to use third-party technology in itsproducts.

 

The Companyrelies upon a combination of trade secret, copyright and trademark laws andcontractual 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 statutoryand contractual arrangements may not be sufficient to deter misappropriation ofthe Company’s proprietary technologies. In addition, independent third partiesmay develop similar or superior technologies to those of the Company.Furthermore, the laws of some foreign countries do not provide the same degreeof protection of the Company’s proprietary information as do the laws of theUnited States.

 

*Claims by third parties that the Companyinfringes their proprietary technology could prevent the Company from offeringits products or otherwise hurt the Company’s business.*

 

The commercial success of the Company alsowill depend, in part, on the Company not breaching third-party intellectualproperty rights. The Company licenses certain third-party technology for use inits products, but is subject to the risk of litigation alleging infringement ofother third–party intellectual property rights. A number of companieshave developed technologies or received patents on technologies that may berelated to or be competitive with the Company’s technologies. The Company hasnot conducted a patent search relating to 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.

 

The Company could incursubstantial costs in defending itself and its customers against anyintellectual property litigation, regardless of the merits of such claims. TheCompany may also be required by contract or by statutory implied warranties toindemnify its distribution partners and end-users against third–partyinfringement claims. Parties making infringement claims against the Company maybe able to obtain injunctive or other equitable relief which could effectivelyblock the Company’s ability to sell its products in the United States andabroad, and could result in an award of substantial damages. In the event of asuccessful claim of infringement, the Company, its customers and end-users maybe required to obtain one or more licenses from third parties. The Company, orits customers, may not be able to obtain necessary licenses from third partiesat a reasonable 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.

 

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*The Company is dependent on key personnel and must hire and retainskilled personnel.*

 

The Company’s success is significantlydependent on the contributions of a number of its key personnel. The Company’ssuccess depends to a significant degree on the services of Ralph Ungermann, itsexecutive chairman of the board of directors, and Killko Caballero, its chiefexecutive officer and president. The loss of the services of either of theseindividuals or any of the Company’s other 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 Companymay not be able to anticipate accurately, or to obtain, the personnel that itmay require in the future.

 

*The Company’s reliance on third party manufacturers and suppliers couldadversely affect the Company’s business.*

 

The Company currently outsources themanufacturing of some of its products and purchases critical components forsome of its products from single suppliers. The Company relies on severalvendors to manufacture certain of its products. If one or more of thesemanufacturers experiences quality control or other problems, product shipmentsby the Company may be delayed. The Company does not have long-term agreementswith suppliers, and its current suppliers are not obligated to providecomponents to the Company for any specific period, in any specific quantity orat any specific price, except as may be provided in a particular purchaseorder. Qualifying additional suppliers is a time consuming and expensiveprocess, and there is a greater likelihood of problems arising during a transitionperiod to a new supplier. If the Company is required to find replacements forits manufacturers or suppliers, this could result in short-term cost increasesand delays in delivery, which could have a material adverse effect on theCompany’s business, financial condition and results of operations. The Companymay not be able to continue to negotiate arrangements with its existing, or anyfuture, manufacturers or suppliers on terms favorable to the Company.

 

*The Company faces additional risks from its international operations.*

 

The Company’s international business involvesa number of risks that could adversely affect its operating results orcontribute to fluctuations in those results. The Company’s revenue frominternational sales represented 30.2% of its total revenue in the six monthsended June 30, 2002, 21% of its total revenue in 2001 and 12% of its totalrevenue in 2000. The Company intends to seek opportunities to expand itsproduct and service offerings into additional international markets, althoughthe Company may not succeed in developing localized versions of its productsfor new international markets or in marketing or distributing products andservices in those markets.

 

The majorityof the Company’s international sales are currently denominated in United Statesdollars. 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 than UnitedStates dollars, fluctuations in exchange rates may result in foreign exchangelosses. The Company does not have experience in implementing hedging techniquesthat might minimize the Company’s risks from exchange rate fluctuations.

 

The Company’s international business alsoinvolves a number of other difficulties and risks, including risks associatedwith:

 

•                                         changing economic conditions and politicalinstability in foreign countries;

 

•                                         export restrictions and export controlsrelating to the Company’s technology;

 

•                                         compliance with existing and changingregulatory requirements;

 

•                                         tariffs and other trade barriers;

 

•                                         difficulties in staffing and managinginternational operations;

 

•                                         longer payment cycles and problems incollecting accounts receivable;

 

•                                         software piracy;

 

•                                         seasonal reductions in business activity inEurope and certain other parts of the world during the summer months; and

 

•                                           potentially adverse tax consequences.

 

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*The Company’s inability to secure additional funding could adverselyeffect its business.*

 

In order tomeet the Company’s anticipated working capital and Company’s capitalexpenditure requirements, the Company may need to raise additional fundsthrough the issuance of equity securities in the future. If additional fundsare raised through the issuance of equity securities, the percentage ownershipof the stockholders 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 not availableon acceptable terms, the Company may be required to delay, reduce or eliminatesome or all of its development programs for its products or services, and maybe unable to take advantage of future opportunities or respond to competitivepressures, which could have a material adverse effect on the Company’sbusiness, financial condition and operating results.

 

*Control By Insiders*

 

As of August 1 2002, the Company’s executive officers, directors andtheir affiliates beneficially owned approximately 10,146,579 shares or approximately 22%of the outstanding shares of the Company’s common stock,on an as-converted to common stock basis. As a result, these persons may havethe ability to effectively control the Company and direct its affairs andbusiness, including the election of directors and approval of significantcorporate transactions. This concentration of ownership may also have theeffect of delaying, deferring or preventing a change in control of the Company,and making certain transactions more difficult or impossible absent the supportof these 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 apremium over the then prevailing market price for sharesof common stock.

 

Item 3. Quantitative and QualitativeDisclosures about Market Risk

 

The Company’s market riskexposures as set forth in its Annual Report on Form 10-K/A for the year endedDecember 31, 2001, have not materially changed.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On April 23, 2001, the Company received notice of a stockholder’sderivative action filed in California Superior Court in the County of SantaClara, 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, grantingplaintiff leave to file an amended complaint, and stayed the action pending theoutcome of the appeal in the federal court class action. The court also orderedthat certain limited discovery of documents could take place with respect tothe filing of the amended complaint. In December 2001, the plaintiff movedfor leave to take certain third–party discovery. The motion was denied bythe court. Plaintiff filed an amended complaint on February 22, 2002. Ahearing on the defendants’ demurrer to the amended complaint was scheduled totake place on May 21, 2002. The parties agreed to a continuance of the hearingin order to permit them to engage in settlement discussions with a third-partymediator.  On July 25,2002, the parties reached a tentative settlement of the derivative action,subject to a number of conditions, including approval of the settlement by aspecial committee of independent directors appointed by the Company’s Board ofDirectors and empowered to act on behalf of the Company with respect to theaction. Under the terms of the tentative settlement, the Company would not payany money to any party in connection with the settlement, nor would it pay anymoney as indemnification to present or former officers and directors in theevent of a settlement of the SEC enforcement action described in the followingparagraph.

 

On April 25,2002, the Company was informed by the staff of the SEC that the staff intendsto recommend that the SEC commence an enforcement action against the Company,Ralph Ungermann and two former officers of the Company in connection with theCompany’s January 1999 announcement of unaudited financial results for thequarter and year ended December 31, 1998, which were revised by the Companyprior to the release of the Company’s Form 10-K in April 1999.  The staff indicated that the basis for suchan action would be allegations that the January 1999 announcement wasmisleading and/or the result of inadequate financial controls.  The staff did not state what remedies itwould seek in such an action, but noted that the remedies it might seek couldinclude an injunction against future violations, disgorgement, civil penaltiesand an officer and director bar against the individuals.  The Company expresses no opinion as to thelikely outcome of this matter.  While noassurances can be provided, the Company does not believe that the investigationwill have a material adverse effect on its business, financial condition orresults of operations. However, our evaluation of the likely impact of theseactions could change in the future and an unfavorable outcome, depending uponthe amount and timing, could have a material effect on our results ofoperations or cash flows of a future period.

 

Item 2.Changes in Securities

 

On March 29, 2002, theCompany entered into a purchase agreement with certain investors pursuant towhich the Company agreed to issue and sell an aggregate of 6,686,000 shares ofCommon Stock at a per share purchase price of $0.72, the closing bid price ofthe Common Stock as traded on The Nasdaq National Market (“Nasdaq”) on the dateimmediately prior to the date the parties signed the purchase agreement for thetransaction, to the following investors: (i) Special Situations Fund III, L.P.;(ii) Special Situations Cayman Fund, L.P.; (iii) Special Situations TechnologyFund, L.P.; (iv) Stratford Partners, L.P.; (v) Ralph Ungermann; (vi) NormanGaut; (vii) Net One Systems Co., LTD; and (vii) Shigeru Ota. In addition, theCompany agreed to issue warrants to the investors to purchase up to 3,343,001shares of Common Stock exercisable at any time on or after October 12, 2002through April 12, 2007, at an exercise price of $1.01 per share (a 40% premiumto the fair market value on the date of issuance as determined by the Nasdaqrules). The closing occured on April 12, 2002, pursuant to which the Companyissued the Common Stock and warrants for aggregate cash proceeds of $4,813,290.Pursuant to a registration rights agreement, the Company filed a Form S-3registration statement (File No. 333-88058) with the SEC on May 10, 2002, asamended on May 29, 2002, covering the resale of the shares of its Common Stockissued and the Common Stock issuable upon exercise of warrants in the privateplacement. The SEC declared the registration statement effective on May 29,2002.

 

The parties intended theprivate placement to be exempt from registration and prospectus deliveryrequirements under the Securities Act of 1933, as amended (the “Act”), pursuantto Section 4(2) of the Act and Regulation D promulgated thereunder. Each of theinvestors represented that it was an accredited investor and its intention wasto acquire the securities for investment only and not with a view todistribution thereof. An appropriate legend was affixed to each Common Stock

 

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certificate and warrant. Eachinvestor was knowledgeable, sophisticated and experienced in making investmentdecisions of this kind and received adequate information about the Company orhad adequate access, through its business relationships with the Company, toinformation about the Company.

 

Item 4.Submission of Matters to Vote of Security Holders

 

The Company’sAnnual Meeting of Stockholders was held on June 14, 2002 (the “AnnualMeeting”).  The following matters wereconsidered and voted upon at the Annual Meeting:

 

(1)           the election of two directornominees, Adam Stettner and Robert W. Wilmot, to serve as directors until the2005 Annual Meeting of Stockholders. The votes cast for and against such nominees were as follows:

 
| **Name:**        |   | **For**    |   | **Withheld** |   |
|------------------|--------|------------|--------|--------------|--------|
| Adam Stettner    |   | 36,805,055 |   | 244,631      |   |
| Robert W. Wilmot |   | 36,793,628 |   | 256,058      |   |

 

(2)           the approval of the Company’sNon-Employee Directors’ Stock Option Plan, as amended, to provide for (i) anincrease in the aggregate number of shares of Common Stock authorized undersuch plan by 800,000 shares, to an aggregate of 1,500,000 shares, (ii) anincrease in the initial and annual automatic grants under such plan tonon-employee directors for service on the Board of Directors, (iii) an increasein the initial and annual automatic grants under such plan to non-employeedirectors for service on the Audit, Compensation and Nominating Committees ofthe Board of Directors, (iv) a change in the vesting schedule for all grantsmade pursuant to such plan, and (v) an extension of the option exercise periodafter a director ceases to be a member of the Board of Directors, an employeeor consultant to the Company.   Therewere 34,981,246 votes cast for approval and 2,003,077 votes cast againstapproval.  There were 87,045 abstentionsand 423,114 broker non-votes.

 

(3)           the ratification of the appointmentof PricewaterhouseCoopers LLP as independent accountants of the Company for itsfiscal year ending December 31, 2002. There were 36,875,340 votes cast for ratification and 150,085 votes castagainst ratification.  There were 45,673abstentions and 423,384 broker non-votes.

 

(4)           the approval of a series ofamendments to the Company’s Amended and Restated Certificate of Incorporation,as amended, to effect a reverse stock split of the Company’s Common Stockwhereby each outstanding three, four or five shares would be combined,converted and changed into one share of Common Stock, with the effectiveness ofone of such amendments, or the abandonment of the other amendments, or theabandonment of all of the amendments, as permitted under Section 242(c) of theDelaware General Corporation Law, to be determined by the Board ofDirectors.  There were 13,509,523 votescast for approval and 1,545,546 votes cast against approval.  There were 56,581 abstentions and 22,247,038broker non-votes.

 

Based on thevoting results, the stockholders of the Company elected each of the directorsnominated, approved the second matter and ratified the third matter.  The stockholders of the Company did notapprove the fourth matter.

 

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Item 6. Exhibitsand 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 (3)                                                                                                                               |
| 3.1(iii)            |   | Certificate of Ownership and Merger,  effective February 5, 2001 (4)                                                                                                                                  |
| 3.1(iv)             |   | Certificate of Amendment of Restated  Certificate of Incorporation filed on June 19, 2001 (4)                                                                                                         |
| 3.2                 |   | Amended Bylaws of the Company (5) (Exhibit  3.3)                                                                                                                                                      |
| 4.1                 |   | Specimen Common Stock Certificate (6)                                                                                                                                                                 |
| 4.2                 |   | Specimen Series A Convertible Preferred  Stock Certificate (3)                                                                                                                                        |
| 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 (7)                                                      |
| 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 (5) (Exhibit 10.5)                                  |
| 4.5                 |   | Warrant to purchase 18,750 shares of the  Company’s Common Stock, dated April 11, 1997 issued by the Company to Silicon  Valley Bank (1) (Exhibit 10.18)                                         |
| 4.6                 |   | Warrant to purchase the Company’s Common  Stock, dated April 12, 2002, issued by the Company to the purchasers and in  the amounts as set forth on Schedule A attached thereto (8) (Exhibit 4.3) |
| 10.1                |   | Registration Rights Agreement, dated April  12, 2002, by and among the Company and each of the purchasers listed therein  (8) (Exhibit 4.2)                                                           |
| 10.2                |   | Amended and Restated Promissory Note and  related Security Agreement executed on May 14, 2002 by Killko Caballero in  favor of the Company. (9) (Exhibit 10.9)                                        |
| 10.3                |   | First Virtual Communications  Partner Agreement, dated April 1, 2002 between Net One Systems and the  Company*                                                                                        |
| 99.1                |   | Certification, dated August 14, 2002,  required by Section 906 of the Public Company Accounting Reform and Investor  Protection Act of 2002 (18 U.S.C. § 1350, as adopted)                       |

 

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(1)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Registration Statement on Form S-1(File No. 333-38755), as filed on October 24, 1997.

 

(2)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Quarterly Report on Form 10-Q for the periodended June 30, 1998, as filed on August 11, 1998 (File No. 000-23305).

 

(3)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Quarterly Report on Form 10-Q for the periodended June 30, 2000, as filed on August 14, 2000 (File No. 333-72533).

 

(4)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Quarterly Report on Form 10-Q for the periodended June 30, 2001, as filed on August 15, 2001 (File No. 000-23305).

 

(5)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Annual Report on Form 10-K 405/A for theperiod ended December 31, 1999, as filed on April 15, 2000 (File No.333-72533).

 

(6)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Registration Statement on Form S-1/A (FileNo. 333-38755), as filed on December 4, 1997.

 

(7)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Quarterly Report on Form 10-Q for the periodended September 30, 2001, as filed on November 14, 2001 (File No. 000-23305).

 

(8)                                  Incorporatedby reference to the corresponding or indicated exhibit to the Company’sRegistration Statement on Form S-3 (File No. 333-88058), as filed on May 10,2002.

 

(9)                                  Incorporatedby reference to the corresponding or indicated exhibit to the Company’sRegistration Statement on Form 10-Q for the period ended March 31, 2002, asfiled on May 15, 2002.

 

*                                         Confidentialtreatment has been requested with respect to certain portions of this exhibit.Omitted portions have been filed separately with the Securities and ExchangeCommission.

 

(b)           Reportson Form 8-K.

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| Date: August 14, 2002 | **FIRST  VIRTUAL COMMUNICATIONS, INC.** |
|-----------------------|-----------------------------------------|
|                  |                                    |   |
|                  | By:                                     | /s/  Timothy A. Rogers |   |
|                  |                                    | Timothy A. Rogers |
|                  |                                    | Chief Financial Officer and Senior Vice  President |
|                  |                                    | (Duly Authorized Officer and Principal  Financial and Accounting Officer) |

 

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**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 (3)                                                                                                                               |
| 3.1(iii)            |   | Certificate of Ownership and Merger,  effective February 5, 2001 (4)                                                                                                                                  |
| 3.1(iv)             |   | Certificate of Amendment of Restated Certificate  of Incorporation filed on June 19, 2001 (4)                                                                                                         |
| 3.2                 |   | Amended Bylaws of the Company (5) (Exhibit  3.3)                                                                                                                                                      |
| 4.1                 |   | Specimen Common Stock Certificate (6)                                                                                                                                                                 |
| 4.2                 |   | Specimen Series A Convertible Preferred  Stock Certificate (3)                                                                                                                                        |
| 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 (7)                                                      |
| 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 (5) (Exhibit 10.5)                                  |
| 4.5                 |   | Warrant to purchase 18,750 shares of the  Company’s Common Stock, dated April 11, 1997 issued by the Company to Silicon  Valley Bank (1) (Exhibit 10.18)                                         |
| 4.6                 |   | Warrant to purchase the Company’s Common  Stock, dated April 12, 2002, issued by the Company to the purchasers and in  the amounts as set forth on Schedule A attached thereto (8) (Exhibit 4.3) |
| 10.1                |   | Registration Rights Agreement, dated April  12, 2002, by and among the Company and each of the purchasers listed therein  (8) (Exhibit 4.2)                                                           |
| 10.2                |   | Amended and Restated Promissory Note and  related Security Agreement executed on May 14, 2002 by Killko Caballero in  favor of the Company. (9) (Exhibit 10.9)                                        |
| 10.3                |   | First Virtual Communications Partner  Agreement, dated April 1, 2002 between Net One Systems and the Company*                                                                                         |
| 99.1                |   | Certification, dated August 14, 2002,  required by Section 906 of the Public Company Accounting Reform and Investor  Protection Act of 2002 (18 U.S.C. § 1350, as adopted)                       |

 

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(1)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Registration Statement on Form S-1(File No. 333-38755), as filed on October 24, 1997.

 

(2)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Quarterly Report on Form 10-Q for the periodended June 30, 1998, as filed on August 11, 1998 (File No. 000-23305).

 

(3)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Quarterly Report on Form 10-Q for the periodended June 30, 2000, as filed on August 14, 2000 (File No. 333-72533).

 

(4)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Quarterly Report on Form 10-Q for the periodended June 30, 2001, as filed on August 15, 2001 (File No. 000-23305).

 

(5)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Annual Report on Form 10-K 405/A for theperiod ended December 31, 1999, as filed on April 15, 2000 (File No.333-72533).

 

(6)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Registration Statement on Form S-1/A (FileNo. 333-38755), as filed on December 4, 1997.

 

(7)                                  Incorporated by reference to the corresponding orindicated exhibit to the Company’s Quarterly Report on Form 10-Q for the periodended September 30, 2001, as filed on November 14, 2001 (File No. 000-23305).

 

(8)                                  Incorporatedby reference to the corresponding or indicated exhibit to the Company’sRegistration Statement on Form S-3 (File No. 333-88058), as filed on May 10,2002.

 

(9)                                  Incorporatedby reference to the corresponding or indicated exhibit to the Company’sRegistration Statement on Form 10-Q for the period ended March 31, 2002, asfiled on May 15, 2002

 

*              Confidential treatment has beenrequested with respect to certain portions of this exhibit. Omitted portionshave been filed separately with the Securities and Exchange Commission.

 

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