<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1996
REGISTRATION NO. 333-14573
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FIRST VIRTUAL HOLDINGS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 8980 33-0612860
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
11975 EL CAMINO REAL, SUITE 300
SAN DIEGO, CA 92130-2543
(619) 793-2700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LEE H. STEIN
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
FIRST VIRTUAL HOLDINGS INCORPORATED
11975 EL CAMINO REAL, SUITE 300
SAN DIEGO, CA 92130-2543
(619) 793-2700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
JEFFREY D. SAPER, ESQ. THOMAS H. KENNEDY, ESQ.
JOHN T. SHERIDAN, ESQ. KENTON J. KING, ESQ.
BRADLEY A. BENBROOK, ESQ. IRA A. GREENSTEIN, ESQ.
RAMSEY HANNA, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
WILSON SONSINI GOODRICH & ROSATI, P.C. 919 THIRD AVENUE
650 PAGE MILL ROAD NEW YORK, NY 10022
PALO ALTO, CA 94304 (212) 735-3000
(415) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
FIRST VIRTUAL HOLDINGS INCORPORATED
CROSS REFERENCE SHEET
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF ITEMS REQUIRED IN FORM S-1
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FORM S-1 ITEM LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages;
Additional Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Underwriting
6. Dilution.................................. Dilution
7. Selling Security Holders.................. Principal Stockholders
8. Plan of Distribution...................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................ Prospectus Summary; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and Counsel.... Legal Matters
11. Information with Respect to the
Registrant................................ Outside Front Cover Page; Prospectus
Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Dilution;
Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Stockholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Legal Matters; Experts; Additional
Information; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1996
PROSPECTUS
3,000,000 SHARES
LOGO
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the Common
Stock of the Company. The Company estimates that the initial public offering
price will be between $11.00 and $13.00 per share. For factors to be considered
in determining the initial public offering price, see "Underwriting."
Application has been made to have the Company's Common Stock approved for
listing on the Nasdaq National Market under the symbol "FVHI."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.................................... $ $ $
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Total(3)..................................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,400,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock, on the same terms and conditions
as set forth above, to cover over-allotments, if any. If all such shares are
purchased by the Underwriters, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ and the
total Proceeds to Company will be $ . See "Underwriting."
------------------------
The shares of Common Stock are offered subject to prior sale, when, as and
if delivered and accepted by the Underwriters and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
said offer and to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made on or about , 1996 at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
------------------------
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
LEHMAN BROTHERS
UNTERBERG HARRIS
, 1996
<PAGE> 4
[ARTWORK]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information. First Virtual Holdings IncorporatedTM and VirtualPINTM are
trademarks of the Company. This Prospectus also includes other trademarks and
trade names of the Company and of other companies.
2
<PAGE> 5
(GATEFOLD)
<PAGE> 6
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and the Financial Statements
and notes thereto appearing elsewhere in this Prospectus. The purchase of Common
Stock involves a high degree of risk. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors including those set forth under "Risk
Factors" and elsewhere in this Prospectus. Except as otherwise noted, all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option and reflects, prior to the completion of this offering,
(i) the conversion of all outstanding shares of the Company's Preferred Stock
into shares of Common Stock and (ii) the conversion of all outstanding options
and warrants to purchase shares of Preferred Stock into options and warrants to
purchase shares of Common Stock.
First Virtual Holdings Incorporated ("First Virtual" or the "Company") has
developed and implemented the VirtualPIN architecture which facilitates Internet
commerce and is designed to facilitate other forms of interactive Internet
communications. The VirtualPIN architecture uses E-mail which has the widest
reach and broadest use of any Internet application. The First Virtual Internet
Payment System ("FVIPS"), a secure and easy-to-use payment system introduced in
October 1994, is the Company's first application of the VirtualPIN architecture.
As of September 30, 1996, the Company has processed over 260,000 FVIPS
transactions and has registered more than 2,650 merchants ("Sellers") and
180,000 consumers ("Buyers") in 166 countries. The Company believes that the
VirtualPIN architecture can also serve as the basis for additional Internet
applications including direct marketing, interactive advertising, merchandising,
subscriptions and renewals, bill payments, client response surveys and Internet
communications.
The Internet and the World Wide Web have become well-established and are
generally expected to support a growing number of applications including
commerce. International Data Corporation ("IDC") estimates that there were 56
million Internet users worldwide at the end of 1995, with approximately 200
million users forecasted by the end of 1999.
First Virtual's objective is to become a leading facilitator of Internet
commerce and other forms of interactive Internet communications. The Company
intends to pursue this objective by rapidly deploying VirtualPINs through
multiple channels, including credit card companies and other financial
institutions, on-line and Internet service providers, value added integrators,
businesses with large direct response customer bases and a variety of direct
marketing programs. To promote the deployment of the VirtualPIN, the Company has
entered into strategic relationships with several major financial institutions
including First USA Paymentech, General Electric Capital Corporation and First
Data Corporation. These relationships include equity investments in the Company,
representation on the Company's Board of Directors, and, in certain instances,
distribution and marketing arrangements. To date, the Company has not derived
any significant revenues as a result of such relationships.
The VirtualPIN, an alphanumeric sequence unique to each user, allows the
user to establish and maintain identity on the Internet in a controlled and
confidential manner. To initiate a transaction using FVIPS, the Buyer transmits
a VirtualPIN to the Seller, who accepts it as a form of payment for the Buyer's
order and relays it to First Virtual for verification. After the Buyer responds
to the Company's automated request for E-mail confirmation of the transaction,
First Virtual initiates financial settlement through the established and secure
credit card transaction processing networks. The Company's VirtualPIN
architecture also enables merchandisers to target specific registered users with
the users' consent and without revealing the users' sensitive personal data. The
VirtualPIN is designed for integration with a broad set of Internet applications
and for use on a wide variety of platforms. In contrast to certain other
Internet payment systems which require complex computer architectures capable of
deciphering intricate encrypted messages and the installation of hardware or
software on the Buyer's computer, FVIPS, through the VirtualPIN, can be used on
virtually any standard personal computer or Internet access appliance.
In an effort to further promote the retail environment on the Web, the
Company has prototyped the VirtualTAG, the second application of the VirtualPIN
architecture. The VirtualTAG uses cross-platform multimedia environments such as
Java or Shockwave to create stimulating, interactive advertisements within
banners or "store fronts" which are designed to allow Buyers to initiate the
purchase and payment and arrange for the delivery of a product being advertised
without leaving the Web page on which the advertisement
3
<PAGE> 7
appears. Upon its introduction, the Company believes VirtualTAG may become one
of the first solutions that takes full advantage of the Internet's unique
attributes by combining advertising, selling and paying in one application. The
Company believes the VirtualTAG represents an attractive opportunity to work
with merchandisers and advertising agencies to market products on the Web and to
establish First Virtual's own direct merchandising channel.
The Company was incorporated in Wyoming in March 1994 and was
reincorporated into Delaware in July 1996. The Company's executive offices are
located at 11975 El Camino Real, Suite 300, San Diego, California 92130-2543,
and its telephone number is (619) 793-2700. Information regarding the Company
can be obtained from its site on the Web located at "http://www.fv.com."
Information contained in the Company's Web site shall not be deemed to be a part
of this Prospectus.
THE OFFERING
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<S> <C>
Common Stock offered by the Company................. 3,000,000 shares
Common Stock to be outstanding after the offering... 11,072,733 shares(1)
Use of proceeds..................................... For working capital and other general
corporate purposes including capital
expenditures and the repayment of
approximately $1.4 million of indebtedness to
certain stockholders. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.............. FVHI
</TABLE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 11,
1994 (DATE
OF
INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ---------------------------
1994 1995 1995 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
Revenues................................ $ 3,580 $ 197,902 $ 87,230 $ 498,262
Total operating expenses................ 826,110 2,399,993 1,692,721 6,550,673
Net loss................................ (835,679) (2,269,981) (1,657,548) (5,980,314)
Pro forma net loss per share(2)......... $(0.28) $(0.68)
Shares used in computing pro forma net
loss per share(2)..................... 8,141,959 8,774,157
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------
<S> <C> <C> <C>
BALANCE SHEET DATA: ACTUAL PRO FORMA(3) AS ADJUSTED(4)
---------- ---------- ----------
Cash, cash equivalents, and a short-term
investment, available-for-sale.................. $ 6,081,945 $6,095,225 $ 36,802,885
Working capital................................... 4,135,162 4,148,442 35,028,442
Total assets...................................... 8,278,472 8,291,752 38,999,412
Notes payable to stockholders..................... 1,200,000 1,200,000 --
Total stockholders' equity........................ 4,657,202 4,670,482 36,750,482
</TABLE>
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(1) Based on number of shares outstanding as of November 26, 1996 and includes
1,328,006 shares of Common Stock issuable upon exercise of warrants
outstanding as of November 26, 1996 at an exercise price of $0.01 per share
held by First USA Merchant Services Inc. ("First USA Merchant Services"), a
wholly-owned subsidiary of First USA Paymentech, Inc. ("First USA
Paymentech"). Excludes (i) an aggregate of 3,460,750 shares of Common Stock
reserved for issuance under the Company's stock option plans, of which
1,748,145 shares were subject to outstanding options at November 26, 1996 at
a weighted average exercise price of $4.79 per share, (ii) an aggregate of
1,000,000 shares of Common Stock subject
4
<PAGE> 8
to additional outstanding options at November 26, 1996 at an exercise price
of $6.30 per share, (iii) an aggregate of 100,000 shares of Common Stock
reserved for issuance under the Company's Employee Stock Purchase Plan, none
of which were outstanding as of the date of this Prospectus, (iv) shares of
Common Stock equivalent to up to four percent of the Company's outstanding
capital stock issuable upon the exercise of a warrant held by First USA
Merchant Services at an exercise price of $0.01 per share subject to the
satisfaction of certain marketing-related performance milestones and which
terminates immediately prior to the closing date of this offering, (v) up to
47,619 shares of Common Stock reserved for issuance upon the exercise of an
outstanding warrant at an exercise price of $10.50 per share held by General
Electric Capital Corporation ("GE Capital"), subject to adjustment and (vi)
1,500,000 shares of Common Stock reserved for issuance upon the exercise of
an outstanding warrant at exercise prices between $2.23 and $5.00 per share
held by First Data Corporation ("First Data"), subject to the satisfaction
of certain marketing-related performance milestones. See "Capitalization,"
"Dilution," "Management -- Stock Plans," "Certain Transactions" and Notes 6
and 8 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of the number
of shares used in computing pro forma net loss per share.
(3) Gives effect to (i) the assumed exercise of warrants outstanding as of
September 30, 1996 to purchase 1,328,006 shares of Common Stock at an
exercise price of $0.01 per share held by First USA Merchant Services, and
(ii) the conversion of the 2,273,441 outstanding shares of Preferred Stock
into 2,295,207 shares of Common Stock.
(4) Adjusted to reflect the sale of the 3,000,000 shares of Common Stock offered
hereby at an assumed offering price of $12.00 per share (after deduction of
the underwriting discounts and commissions and estimated offering expenses)
and the application of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
5
<PAGE> 9
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of certain
events could differ materially from those projected in the forward-looking
statements due to a number of factors, including those set forth below and
elsewhere in this Prospectus. Prospective investors should consider carefully
the following factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the shares of Common Stock offered
hereby.
HISTORY OF OPERATING LOSSES AND ANTICIPATED FUTURE LOSSES; LIMITED OPERATING
HISTORY
The Company has incurred net operating losses in each quarter since its
inception in March 1994. As of September 30, 1996, the Company had an
accumulated deficit of approximately $9.1 million. To date, the Company has not
generated significant revenues, and the Company anticipates that it will
generate only limited revenues for the year ending December 31, 1996 and
possibly thereafter. There can be no assurance that the Company's revenues will
remain at current levels or increase, and the Company's ability to generate
significant future revenues is subject to substantial uncertainty. In addition,
as a result of the anticipated significant investment that the Company plans to
make in its systems, sales, marketing, research and development, customer
support and administrative infrastructure over the near term, the Company
expects to continue to incur significant operating losses on both a quarterly
and an annual basis for the foreseeable future. For these and other reasons,
there can be no assurance that the Company will ever achieve or be able to
sustain profitability.
The Company commenced operations in March 1994, launched FVIPS in October
1994 and began recognizing revenues in the fourth quarter of 1994. The Company
was a development stage company through December 1995. Accordingly, the Company
has a limited operating history upon which to base an evaluation of its business
and prospects. The Company and its business prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in the new and rapidly evolving market for Internet products and
services. To address these risks, the Company must, among other things,
successfully respond to competitive developments, market additional Internet
commerce services, upgrade its technologies and commercialize products and
services incorporating such technologies, and attract, retain and motivate
qualified personnel. There can be no assurance that the Company will succeed in
addressing any or all of these risks, and the failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, the limited operating history of the Company
makes the prediction of future results of operations very difficult.
Accordingly, the Company believes that period-to-period comparisons of its
operating results are not meaningful and that the results for any period should
not be relied upon as an indication of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ANTICIPATED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
As a result of the early stage of development of Internet commerce and the
Company's limited operating history, the Company's revenue expectations are
based almost entirely on internal estimates of future demand and not on actual
experience. Moreover, the Company has only limited historical financial data for
quarterly or annual periods on which to base planned operating expenses. The
Company's expense levels have been established in large part due to its current
expectations for future revenues and its expected development and marketing
requirements. In the event market demand and revenues do not meet expectations,
the Company may be unable to adjust its spending levels on a timely basis to
compensate for unexpected revenue shortfalls. In addition, the Company's
operating expenses have increased substantially in recent periods, and the
Company currently anticipates that its operating expenses will continue to
increase substantially for the foreseeable future as the Company continues to
develop and market its initial products and services, increases its marketing
and sales activities, creates and expands the distribution channels for its
services, and broadens its customer support capabilities. The Company's revenues
for each of the fiscal quarters ended June 30, 1996 and September 30, 1996
declined from the previous quarter. There can be no assurance that revenues
associated with use of the VirtualPIN and FVIPS will be increased significantly
as required for the Company to attain profitability, or at all. Any material
shortfall of demand for the Company's products and services in
6
<PAGE> 10
relation to the Company's expectations would have a material adverse effect on
the Company's business and financial condition and could cause significant
fluctuations in the Company's results of operations.
The Company expects its future operating results over both the short and
the long term will be subject to annual and quarterly fluctuations due to
several factors, many of which are beyond the control of the Company, including,
among others, market acceptance of Internet commerce in general and FVIPS and
the VirtualPIN concept in particular; fluctuating market demand for the
Company's products and services including the rate of Seller and Buyer
registrations; the monthly volume and average dollar amount of transactions
using FVIPS; the degree of acceptance of the Internet as an advertising and
merchandising medium; the fees charged to the Company by third party processors
and financial institutions; the timing and effectiveness of collaborative
marketing efforts initiated by the Company's strategic partners; the timing of
the introduction of new products and services offered by the Company; the timing
of the release of enhancements to the Company's products and services; product
introductions and service offerings by the Company's competitors; the mix of the
products and services provided by the Company; the timing and rate at which the
Company increases its expenses to support projected growth; the cost of
compliance with applicable government regulations; competitive conditions in the
Company's marketplace; and general economic conditions. In addition, the fees
charged by the Company for Buyer and Seller registration, transaction processing
and co-marketing are subject to change as the Company continues to roll out
FVIPS and assess its marketing strategy and competitive position. The Company
believes that period-to-period comparisons of its operating results are not
meaningful and should not be relied upon as any indication of future
performance. Due to the foregoing factors, among others, it is possible that the
Company's future quarterly or annual operating results from time to time will
not meet the expectations of market analysts or investors, which may have a
material adverse effect on the price of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNDEVELOPED AND RAPIDLY CHANGING MARKETS
The markets for the Company's products and services are at a very early
stage of development, are rapidly changing and are characterized by an
increasing number of market entrants that have introduced or are developing
competing products and services for use on the Internet and the Web. As is
typical for a new and rapidly evolving industry, demand for and market
acceptance of recently introduced products and services are subject to a high
level of uncertainty and risk. While the number of individuals and businesses
using the Internet and the Web for commercial purposes has grown rapidly over
recent years, there can be no assurance that this growth will continue, that
Internet commerce will become widespread or that sufficient demand for the
Company's products and services will develop to sustain the Company's business.
Furthermore, if the Company successfully expands the applications of the
VirtualPIN architecture for additional interactive Internet communications
applications such as Internet advertising, merchandising or direct marketing,
there can be no assurance that demand for such applications will develop or
increase. In addition, it is not known whether individuals or businesses will
use the Internet as a means of purchasing goods and services. To establish the
Internet as a source of widespread and significant commercial activity,
particularly by those individuals and businesses which historically have relied
upon traditional means of commerce, will require the broad acceptance of new
methods of conducting business and exchanging information. Businesses that
already have invested substantial resources in traditional or other methods of
conducting business may be reluctant to adopt new commercial methodologies or
strategies that may limit or compete with their existing businesses. Individuals
with established patterns of purchasing goods and services may be reluctant to
alter those patterns. Banks and financial institutions with established methods
of handling payments may also be reluctant to accept new payment systems based
on Internet commerce. The Company expects such historical patterns of business
conduct to inhibit the growth of Internet commerce in general and market
acceptance of the Company's services in particular.
The Company's business includes products and services that are new, operate
in a market that did not previously exist and will be subject to rapid and
unpredictable market changes. It is uncertain whether a significant market will
ever emerge for effecting payments over the Internet by means of FVIPS or any
other payment system or that the Internet will develop as an effective medium
for advertising and merchandising.
7
<PAGE> 11
The Company's success is critically dependent on the development of Internet
commerce, which the Company believes will require the significant expansion of
the Internet infrastructure in order to provide adequate Internet access, the
proper management of Internet traffic and a substantial amount of public
education to, among other things, increase confidence in the integrity and
security of Internet commerce. There can be no assurance that commerce over the
Internet will become widespread, that a market for the Company's products and
services will emerge or that FVIPS or other applications using the VirtualPIN
architecture will be generally adopted. If the market fails to develop, or
develops more slowly than expected, if the infrastructure for the Internet is
not adequately established or if the Company's products and services do not
achieve market acceptance by a significant number of individuals, businesses and
financial institutions, then the Company's business, financial condition and
results of operations will be materially and adversely affected.
DEPENDENCE ON INCREASED USAGE AND STABILITY OF THE INTERNET
The future of the Internet as a center for commerce will depend in
significant part on continued rapid growth in the number of households and
commercial, educational and government institutions with access to the Internet,
in the level of usage by individuals and in the number and quality of products
and services designed for use on the Internet. Because usage of the Internet as
a medium for on-line exchange of information, advertising, merchandising and
entertainment is a recent phenomenon, it is difficult to predict whether the
number of users drawn to the Internet will continue to increase and whether any
significant market for effecting financial transactions over the Internet or any
substantial commercial use of the Internet will develop. There can be no
assurance that Internet usage patterns will not decline as the novelty of the
medium recedes or that the quality of products and services offered on-line will
improve sufficiently to continue to support user interest. In addition, it is
uncertain whether the cost of Internet access will decline. Failure of the
Internet or the Web to stimulate consumer interest and be accessible to a broad
audience at moderate costs would jeopardize the viability of Internet commerce
and the market for the Company's products and services. The Internet and the Web
have experienced, and are expected to continue to experience, significant growth
in the number of users and amount of traffic; however, the Internet may not
prove to be a viable commercial marketplace for a number of reasons, including
potentially inadequate development of the necessary infrastructure, such as a
reliable network backbone, or timely development of performance improvements
including high speed modems. In addition, there is no assurance that the number
of vendors maintaining sites on the Web will increase. Accordingly, there can be
no assurance that Internet commerce will become widespread or that sustainable
markets for the Company's products and services will develop. If such markets
fail to develop, develop more slowly than expected or become dominated by one or
more competitors, the Company's business, financial condition and results of
operations will be materially and adversely affected. Furthermore, if the
Internet were unable to support the demands of its users, the Internet could
lose its viability due to delays in the development or adoption of new standards
and protocols or due to increased governmental regulation. If the necessary
infrastructure, complementary services or facilities are not developed, or if
the Internet does not become a viable commercial marketplace, the Company's
business, financial condition and results of operations will be materially and
adversely affected. See "Business -- Industry Background."
Moreover, critical issues regarding the stability of the Internet's
infrastructure remain unresolved. The rapid rise in the number of Internet users
and increased transmission of audio, video, graphical and other multimedia
content over the Web has placed increasing strains on the Internet's
communications and transmission infrastructures. Continuation of such trends
could lead to significant deterioration in transmission speeds and reliability
of the Internet and could reduce the usage of the Internet by businesses and
individuals. In addition, to the extent that the Internet continues to
experience significant growth in the number of users and level of use without
corresponding increases and improvements in the Internet infrastructure there
can be no assurance that the Internet will be able to support the demands placed
upon it by such continued growth. Any failure of the Internet to support such
increasing number of users due to inadequate infrastructure, or otherwise, would
seriously limit the development of the Internet as a viable commercial
marketplace and could materially and adversely affect the acceptance of the
Company's products and services which would, in turn, materially and adversely
affect the Company's business, financial condition and results of operations.
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DEPENDENCE ON ACCEPTANCE OF FVIPS; RISK OF CHANGES IN CONSUMER PERCEPTIONS
Substantially all of the Company's revenues to date have been attributable
to the receipt of registration fees from Buyers and Sellers, transaction
processing fees and co-marketing fees associated with FVIPS. Registration fees,
transaction processing fees and co-marketing fees accounted for approximately
39%, 39% and 22% of revenues, respectively, for the nine month period ended
September 30, 1996. Such fees are currently expected to account for a
significant portion of the Company's revenues for the foreseeable future. As a
result, a decline in demand for, or failure to achieve broad market acceptance
of FVIPS, as a result of competition, technological change or otherwise, would
have a material adverse effect on the Company's business, financial condition
and results of operations. A failure to significantly expand both the number of
Sellers and Buyers using FVIPS and the number of transactions processed by FVIPS
would also have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's future financial performance
will depend in part on the successful development, introduction and customer
acceptance of new and enhanced products and services which are dependent upon
the success of FVIPS. There can be no assurance that the Company will be
successful in marketing FVIPS or any new or enhanced products or services.
The Company's future success is substantially dependent on the development
of demand for products and services that support transactions processed by FVIPS
over the Internet and, in particular, use credit card-based payment mechanisms.
Demand for secure payment solutions, including FVIPS, has been fueled in part by
wide-spread fears of the risks associated with the potential theft of credit
card account numbers transmitted over the Internet and other manifestations of
Internet-based credit card fraud. Such consumer perceptions of the risks
associated with credit card-based Internet transactions have received
substantial media attention, but may lack empirical support. In addition, the
Company believes that most consumers may be unaware that the potential liability
resulting from fraudulent charges to their credit card accounts is limited by
federal laws that limit the liability of cardholders for unauthorized use of
their card to no more than $50. Any change in consumer perception of the
incidence of credit card account number theft over the Internet, or the
potential liability attendant to such fraud, could impact the demand for
Internet security mechanisms, including FVIPS. Any such decline in the perceived
need for the security which the Company believes to be a principal feature of
FVIPS could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- The VirtualPIN
Architecture and its Applications," " -- The First Virtual Internet Payment
System" and "-- Competition."
COMPETITION
The market for products and services that enable the sale of goods and
services over the Internet is expected to be intensely competitive, and, to the
extent commercial activity over the Internet increases, the Company expects
competition to increase significantly. There are no substantial barriers to
entry into the Company's business, and the Company expects established and new
entities to enter the market for Internet payment systems and interactive
Internet communications in the near future. It is possible that a single
supplier will dominate one or more market segments. Furthermore, since there are
many potential entrants to the field, it is extremely difficult to assess which
companies are likely to offer competitive products and services in the future,
and in some cases it is difficult to discern whether an existing service is
competitive with the Company's current services.
The Company's principal competitors in the market for consumer-initiated
purchases over the Internet include providers of encrypted credit card
transaction systems such as CyberCash, Inc. ("CyberCash"), Verifone, Inc.
("Verifone"), Open Market, Inc. ("Open Market"), Netscape Communications
Corporation ("Netscape"), and GC Tech and providers of electronic cash payment
systems such as DigiCash, Inc. ("DigiCash"). The Company expects that credit
card processors and acquiring banks will also offer credit card-based payment
systems if Secure Electronic Transaction ("SET") protocols proposed by Visa,
MasterCard, Microsoft Corporation ("Microsoft") and Netscape are adopted and/or
accepted as a standard for Internet commerce. SET comprises openly published
communication and process protocols intended to facilitate encrypted credit card
transactions over the Web. The Company may experience additional competition
from Internet service providers and Internet directory companies who enter the
market for
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Internet payment services. Companies such as America Online, Inc. ("AOL"),
CompuServe Incorporated ("CompuServe"), Microsoft, IBM, AT&T, Hewlett-Packard
and Federal Express which possess large, existing customer bases or ready
distribution channels, could develop, market or resell a number of payment
alternatives including, but not limited to, encrypted credit card payment and
digital cash payment systems. Additionally, competitors such as Checkfree
Corporation ("Checkfree") may emerge to provide payment systems based on
alternative systems or methods other than credit cards or digital cash, such as
Internet checking transaction systems. The Company also competes with the direct
transmission of unprotected credit card information for commercial transactions
over the Internet (i.e., "in the clear" transactions), which is currently the
primary method for Internet commercial transactions that use a credit card as a
form of payment. The Company believes that mail order companies and companies
that sell from catalogues using "800" telephone numbers also compete with
Internet payment systems. As the Company expands the applications of its
VirtualPIN architecture, it will compete with a broader range of companies
including traditional advertising, merchandising and direct marketing companies
as well as additional entrants into the interactive Internet communications
market.
Several of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases,
more diversified lines of products and services and significantly greater
financial, technical, marketing and other resources than the Company. Such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to individuals,
businesses and financial institutions. In addition, many of the Company's
current or potential competitors have broad distribution channels that may be
used to bundle competing products or services directly to end-users or
purchasers. If such competitors were to bundle competing products or services
for their customers, the demand for the Company's products and services might be
substantially reduced, and the ability of the Company to successfully effect the
distribution of its products and the utilization of its services would be
substantially diminished. As a result of the foregoing or other factors, there
can be no assurance that the Company will compete effectively with current or
future competitors or that the competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Competition."
DEPENDENCE UPON PRODUCT AND SERVICE DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS
The Company's success depends upon its ability to develop new products and
services that satisfy evolving customer requirements including potential
applications for Internet advertising, merchandising and direct marketing. The
market for the Company's services is characterized by rapidly changing
technology, emerging industry standards and customer requirements that have been
changing every few months. There can be no assurance that the Company will
successfully identify new product and service opportunities and develop and
bring to market new products and services in a timely manner. Failure of the
Company, for technological or other reasons, to develop and introduce new
products and services that are compatible with emerging industry standards and
that satisfy customer requirements would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company or its competitors may announce enhancements to existing products or
services, or new products or services embodying new technologies, emerging
industry standards or customer requirements that render the Company's existing
products and services obsolete and unmarketable. There can be no assurance that
the announcement or introduction of new products or services by the Company or
its competitors or any change in emerging industry standards will not cause
customers to terminate use of the Company's existing products and services,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's products and services are designed around certain technical
standards, and the Company's current and future revenues are dependent on
continued industry acceptance of such standards. While the Company intends to
provide compatibility with the standards promulgated by leading industry
participants and groups, widespread adoption of a proprietary or closed standard
could preclude the Company from effectively doing so. Moreover, a number of
leading industry participants have announced their intention
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to enter into or expand their positions in the market for Internet payment
systems through the development of new technologies and standards. There can be
no assurance that the Company's products and services will achieve market
acceptance, that the Company will be successful in developing and introducing
new products and services that meet changing customer needs and respond to
technological changes or emerging industry standards in a timely manner, if at
all, that the standards upon which the Company's products and services are or
will be based will be accepted by the industry or that products, services or
technologies developed by others will not render the Company's products and
services noncompetitive or obsolete. The inability of the Company to respond to
changing market conditions, technological developments, emerging industry
standards or changing customer requirements or the development of competing
technologies or products that renders the Company's products and services
noncompetitive or obsolete would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- The
VirtualPIN Architecture and its Applications," "-- The First Virtual Internet
Payment System" and "-- Research and Development."
RISKS ASSOCIATED WITH FVIPS UPGRADES
In July 1996, the Company transitioned FVIPS from a system that relied
solely on Electronic Data Systems, Inc. ("EDS") for financial services
processing of transactions to a system that is primarily managed by the Company.
While EDS continues to perform authorization and settlement processing of credit
card transactions for First Virtual, the Company now operates and maintains the
computer which communicates with the established financial networks, a function
formerly performed by EDS. The Company also plans upgrades to FVIPS from time to
time in the future. Prior to this recent transition to a self-managed system,
the Company relied entirely on EDS for all financial services processing of
FVIPS transactions and for management of the Company's database, including the
entry of new Seller and Buyer registrations, updating of customer information
and the management of customer accounts. Prior to the upgrade of the system, the
Company had not previously effected a general upgrade of FVIPS. Given the
limited time the upgraded system has been in operation, there can be no
assurance that complications resulting from the upgrade will not arise, that the
new system will prove to be capable of functioning in a fully operating
environment over an extended period of time or that operating flaws or
disruptions will not emerge. For example, subsequent to the upgrade, the Company
discovered during a batch process with the Automated Clearing House ("ACH")
network that a file created to ACH specifications did not clear the ACH
processing routines. As a result, deposits destined for Seller bank accounts did
not occur until the problem was resolved 34 hours after the problem was
discovered. Any similar systems failure, if prolonged or compounded, could cause
a significant interruption to the Company's products and services and could
reduce the viability of FVIPS and, if sustained or repeated, could reduce the
demand for the Company's products and services by current and potential Internet
customers which would result in a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, the
Company has no prior experience with managing a large database of customer and
transactional information. In order to properly manage its operational database,
the Company will need to (i) improve its management information systems and
controls, (ii) implement new database management software and (iii) attract and
retain qualified personnel. Currently, the Company's databases are inadequate to
support its planned future operations. The Company currently anticipates
spending approximately $6.0 million to install and maintain a relational
database management system and related hardware in connection with an upgrade of
FVIPS. There can be no assurance that any such upgrade will be completed in a
timely manner or that any such upgrade will be adequate to meet the needs of the
Company. Any inability to properly effect and manage upgrades to the Company's
customer database could result in a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON REPEATED CUSTOMER USE OF FVIPS
The Company's future success is substantially dependent on its ability to
significantly expand its base of Sellers and Buyers and to increase the number
of transactions that are conducted using FVIPS. The Company believes that an
increase in the number of FVIPS transactions depends primarily on the repeated
usage of the VirtualPIN by Buyers. As a result of the limited data that the
Company has received from the relatively small number of Sellers and Buyers
using FVIPS, the Company believes that conclusions regarding the tendencies
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of its Sellers and Buyers are not meaningful and should not be relied on as an
indication of future performance. However, the limited information First Virtual
has accumulated to date indicates that the average number of total transactions
per VirtualPIN since the introduction of FVIPS in October 1995 through September
30, 1996 is approximately 1.4, which suggests that a substantial number of
Buyers have failed to make repeated usage of their VirtualPINs. There can be no
assurance that the Company's historic rate of VirtualPIN use per Buyer will
continue or increase, even if the Company is successful in increasing the
variety and quality of goods and services available over FVIPS. The ability of
the Company to increase the average number of transactions per VirtualPIN is
subject to substantial uncertainty. In the event the average number of
transactions per VirtualPIN does not substantially increase in the future, the
Company's business, financial condition and results of operations would be
materially and adversely affected. In addition, the Company anticipates that it
will modify Buyer registration and renewal fees from time to time in the future.
There can be no assurance that any modification in the fee structure will not
result in significant Buyer attrition or reduced future Buyer registrations. Any
significant Buyer attrition or the failure of the Company to substantially
increase the number of active users of FVIPS would materially and adversely
affect the Company's business, financial condition and results of operations.
Certain Sellers employing FVIPS have in the past reduced their use of the
system. Although the Company has very limited information regarding Seller usage
of FVIPS, the Company believes that declining usage of FVIPS by Sellers can
occur when Sellers cease to maintain their Web sites or discontinue product or
service offerings on their Web sites. Such discontinuation could have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, in the fall of 1995, Apple Computer, Inc. ("Apple"),
which had previously offered customers the option of purchasing its QuickTime
application software on its Web site using FVIPS, decided to offer QuickTime as
"freeware," resulting in a decrease in Apple's use of FVIPS and a reduction in
FVIPS transaction volume. The Company also faces the risk of losing Sellers that
choose to employ alternative payment mechanisms or experience a decline in
transactions using FVIPS. In this regard, in March 1996, PC Quote, one of the
Company's largest Sellers, deployed an alternative payment mechanism, resulting
in a substantial decline in usage of FVIPS transactions by the PC Quote Web
site. Sellers that offer low priced products may incur per transaction costs
using FVIPS that are higher than they may experience from custom developed
solutions or from competitive solutions. Accordingly, Sellers that offer low
priced products may be prone to migration to competing technologies in the
future. Any significant decline in the usage of FVIPS by Sellers or increase in
the rate of Seller attrition could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
anticipates that it will modify Seller registration, renewal and transaction
fees from time to time in the future. There can be no assurance that any such
modification in the fee structure will not result in increased attrition or
reduced future Seller registrations, which could materially and adversely affect
the Company's business, financial condition and results of operations.
RISK OF CAPACITY CONSTRAINTS
A key element of the Company's strategy is to generate a high volume of
FVIPS usage. Accordingly, the performance of the Company's products and services
is critical to the Company's ability to achieve market acceptance and continued
use of these products and services. Significant increases in the volume of
transactions through FVIPS could strain the capacity of the Company's software
or hardware, which could lead to slower response time or system failures. The
Company intends to make substantial investments to increase its server capacity
by adding new servers and upgrading its FVIPS management software. As the number
of Web and Internet users increases, there can be no assurance that the
Company's products and services will be able to meet this demand. The Company
and its customers are also dependent upon Web browsers and Internet and online
service providers for access to its services, and users have experienced
difficulties due to system failures unrelated to the Company's system, products
or services. To the extent that the capacity constraints described above are not
effectively addressed by the Company, such constraints could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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RISKS OF DEFECTS AND DEVELOPMENT DELAYS
Products and services based on sophisticated software and computing systems
often encounter development delays, and the underlying software may contain
undetected errors and failures when introduced or when usage increases. The
Company may experience delays in the development of the software and computing
systems underlying the Company's services. In addition, there can be no
assurance that, despite testing by the Company and Sellers and Buyers, errors
will not be found in the underlying software or that the Company will not
experience development delays, resulting in delays in the commercial release of
its products and services or in the market acceptance of its products and
services, each of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Research and Development."
RISKS OF SYSTEMS FAILURES; LACK OF INSURANCE AND SECURITY RISKS
The operation of FVIPS is dependent on the Company's ability to protect its
computer equipment and the information stored in its data centers against loss
or damage that may be caused by system overloads, fire, power loss,
telecommunications failures, unauthorized intrusion, infection by computer
viruses and similar events. The Company's data center and servers are currently
located at its headquarters in San Diego, California and at a facility in
Dallas, Texas, and the Company will soon add a second facility in San Diego.
There can be no assurance that a system failure at any of these locations would
not materially and adversely affect the Company's ability to provide its
products and services.
The Company uses a UNIX file system for its database which, from time to
time has been susceptible to some data corruption. The Company is in the process
of developing a relational database for installation scheduled for completion in
the first half of 1997, and will remain susceptible to such data corruption
until the installation is completed. Corruption of data could result in a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company currently retains highly confidential customer financial
information, including bank account and credit card information, in a secure
database server that the Company believes to be isolated from the Internet.
Although the server is protected by firewalls and proprietary, one-way batch
protocols and the Company regularly reviews the system for security weaknesses,
there can be no assurance that unauthorized individuals could not obtain access
to this database server. Any unauthorized penetration of the Company's servers
which are not directly connected to the Internet could result in the theft of
bank account and credit card information, E-mail addresses, and comprehensive
transaction histories. Any unauthorized penetration of the Company's servers
which are connected to the Internet could result in the theft of VirtualPIN
numbers, E-mail addresses and recent transaction histories. Unauthorized
penetration could lead to attempts to use such information to effect fraudulent
purchases, including the introduction of fabricated transactions into the
Company's financial processors. Although the Company believes that the
VirtualPIN architecture should thwart attempts to use misappropriated account
information, widespread attempts to effect such transactions would require the
Company to devote substantial resources to counteracting such attempts and could
result in a compromise of the system or the interruption of the Company's
ability to provide its products and services and may result in adverse publicity
to the Company and consequently have a material adverse effect on the Company's
business, financial condition and results of operations. It is also possible
that an employee of the Company could attempt to divert customer funds or
otherwise misuse confidential customer information, exposing the Company to
legal liability. In addition, although the Company believes that the potential
for the unauthorized interception of information transmitted over the Internet
through FVIPS is not likely to result in the fraudulent use of VirtualPINs,
there can be no assurance that unauthorized use of such information will not
occur and, if it does occur, that it will not result in a financial loss or
significant inconvenience to the VirtualPIN holder. Furthermore, although the
Company employs disclaimers and limitation of warranty provisions in its
customer agreements to attempt to limit its liability to customers, including
liability arising out of systems failure or failure of security precautions,
there can be no assurance that such provisions will be enforceable, or will
otherwise prove effective in limiting the Company's exposure to damage claims.
See "Business -- The VirtualPIN Architecture and its Applications" and "-- The
First Virtual Internet Payment System."
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Although the Company carries property and business interruption insurance,
its coverage may not be adequate to compensate the Company for all losses that
may occur. The Company is in the process of increasing its server capacity,
improving its security mechanisms and taking other precautions to protect itself
and its customers from events that could interrupt delivery of the Company's
products and services or result in a loss of transaction or customer data.
However, these measures will not eliminate a significant risk to the Company's
operations from a natural disaster or systems failure. There can be no assurance
that these measures would protect the Company from an organized effort to
inundate the Company's servers with massive quantities of E-mail or other
Internet message traffic which could overload the Company's systems and result
in a significant interruption of service. In August 1995, the Company
experienced a 78-hour disruption in its systems which resulted in interruption
of service to all Sellers and Buyers for such period. Any systems failure that
causes a significant interruption to or increases response time of the Company's
products and services could reduce use of the Company's products and services
and would reduce the attractiveness of the Company's products and services to
current and future customers. The Company's business interruption insurance
would not fully compensate the Company for lost revenues, income, additional
costs or increased costs experienced by the Company during the occurrence of any
disruption of its computer systems, nor is there any assurance that the Company
will be able to obtain such coverage on reasonable terms or at all in the
future. Significant service interruptions could also damage the Company's
reputation and result in the loss of a significant portion of its Sellers and
Buyers, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Facilities."
DEPENDENCE ON DISTRIBUTION RELATIONSHIPS, COLLATERAL SYSTEMS AND EXPANSION OF
DIRECT SALES FORCE
A key element of the Company's current business and marketing strategy is
to establish, develop and maintain relationships with credit card companies and
other financial institutions to promote the Company's products and services to
their merchant and consumer customers. Although the Company has established
relationships with several entities in an effort to enhance the Company's
ability to penetrate the market for Internet payment services, such
relationships have only been entered into recently, are nonexclusive and have
not resulted in any comprehensive marketing effort or a measurable increase in
the Company's Seller and Buyer base to date. No assurance can be given that the
Company will be able to maintain its current strategic relationships or
cultivate additional partnering relationships in the future or that any such
relationship will prove to be effective in expanding the Company's Seller and
Buyer base. In addition, there can be no assurance that the Company's existing
or potential marketing partners, most of whom have significantly greater
financial and marketing resources than the Company, will not change their
business strategies or discontinue their relationships with the Company, develop
and market products and services that compete with the Company's products and
services in the future or form collaborative marketing relationships with one or
more of the Company's competitors that offer alternative Internet payment
mechanisms.
The operation of FVIPS is dependent on the continued availability and
reliability of collateral telecommunications, information processing and
financial clearance systems. In particular, the Company is substantially
dependent on First USA Paymentech for merchant transaction acquisition services
and on Northern Trust Company ("Northern Trust") for clearinghouse services. The
Company also continues to depend on EDS for financial services processing,
although on a more limited basis than prior to the upgrade of FVIPS in July
1996. There can be no assurance that these companies will continue to provide
collateral services to the Company without disruptions in service, at the
current cost, or at all. Although the Company believes that such services could
be obtained from other sources in due course if required, reengineering the
Company's computer systems and telecommunications infrastructure to accommodate
a new service provider could only be accomplished at significant cost and with
significant delay. Any interruption of service by a collateral services provider
also would be likely to result in the disruption of the operation of FVIPS, with
an attendant loss of revenues and potential loss of customers. Such losses could
have a material adverse impact on the Company's business, financial condition
and results of operations.
In order to increase market acceptance of FVIPS and to increase the number
of Sellers and Buyers using the system to a level necessary for the Company to
attain profitability, the Company will be required to significantly expand its
direct sales force and marketing organization and manage such personnel
effectively.
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As of October 31, 1996, the Company had 20 marketing and sales employees.
Establishing required marketing and sales capability will require substantial
efforts and significant management and financial resources. The Company's
management has very limited experience in recruiting, developing or managing a
marketing and sales force. There can be no assurance that the Company will be
able to recruit and retain direct marketing and sales personnel in order to
build an effective marketing and sales organization, that building such a
marketing and sales organization will be cost effective or that the Company's
marketing and sales efforts will be successful.
MANAGEMENT OF POTENTIAL GROWTH; RISKS ASSOCIATED WITH NEW MANAGEMENT TEAM
The rapid development necessary for the Company to exploit the market
opportunity for FVIPS requires an effective planning and management process. As
of October 31, 1996, the Company had grown to 94 employees from 21 employees on
December 31, 1995, and the Company expects this growth to continue. As of
October 31, 1996 the Company had seven executive officers. Many of the Company's
executive officers have joined the Company since April 1996, including the
President of Financial Services; Vice President, Merchant Services; and Vice
President, Finance and Administration and Chief Financial Officer, each of whom
joined in September or October 1996. The Company's success depends to a
significant extent on the ability of its executive officers and other members of
its management to operate effectively, both individually and as a group. There
can be no assurance that the Company will satisfactorily allocate
responsibilities and that the new executives will succeed in these roles in a
timely and efficient manner. Furthermore, the continued success of the Company
is largely dependent on the personal efforts and abilities of its senior
management and certain other key personnel and on the Company's ability to
retain current management and to attract and retain qualified personnel in the
future. The Company's failure to assimilate these new executives could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational and financial
resources. Prior to July 1996, the Company's internal operational, financial and
management information systems were in the process of development and were
relatively unsophisticated. To manage its potential growth, the Company must
implement a comprehensive management information system and improve its internal
operational and financial systems. The Company currently anticipates spending
approximately $2.0 million through the end of 1997 to upgrade the Company's
internal operating systems and its management information systems. There can be
no assurance that any upgrade of its management information systems will be
completed in a timely fashion or that any such upgrade will be adequate to meet
the Company's needs. The Company is also expanding its transaction processing
capacity and its marketing and sales organizations, funding increasing levels of
research and development, and increasing its customer support organization to
accommodate the growth of its installed base of Sellers and Buyers. The growth
in the Company's customer base and transaction volume has placed, and any future
growth is expected to continue to place, increased demands on the Company's
management and operations, including its marketing and sales, customer support,
research and development, general and administrative operations. There can be no
assurance that the Company will be able to effectively manage the expansion of
its operations, that the Company's systems, procedures and controls will be
adequate to support the Company's operations or that Company's management will
be able to achieve the rapid execution necessary to exploit the market
opportunity for the Company's products and services. Any inability to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance is substantially dependent upon the
continued contributions of members of the Company's senior management and
technical personnel. In particular, the Company's success substantially depends
on the continued participation of its Chief Executive Officer, Lee Stein, its
principal senior technical employees, Nathaniel Borenstein and Marshall Rose,
and other members of its senior management team, which is currently composed of
a small number of individuals who recently joined the Company. The loss of any
of such persons could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has obtained key man
life insurance in the amount of $3.0 million each on the lives of Messrs. Stein,
Borenstein and Rose. In addition, the Company believes that
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its future success will depend upon its continuing ability to identify, attract,
train and retain other highly skilled managerial, engineering, sales and
marketing and other personnel. Competition for such personnel is intense. There
can be no assurance that the Company will be successful in identifying,
attracting, training and retaining the necessary personnel, and the failure to
do so could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management."
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company relies on a combination of trade secret, copyright and
trademark laws, nondisclosure agreements, and other contractual provisions and
technical measures to protect its proprietary rights. There can be no assurance
that trade secret, copyright and trademark protections will be adequate to
safeguard the proprietary software underlying the Company's products and
services, or that its agreements with employees, consultants and others who
participate in the development of its software will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known. Moreover, notwithstanding the Company's
efforts to protect its intellectual property, there is no assurance that
competitors will not be able to develop functionally equivalent Internet payment
services without infringing any of the Company's intellectual property rights.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use products or technology
that the Company considers proprietary, and third parties may attempt to develop
similar technology independently. In addition, effective protection of
intellectual property rights may be unavailable or limited in certain countries.
Accordingly, there can be no assurance that the Company's means of protecting
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology.
The Company currently has pending two patent applications relating to
FVIPS. While the Company believes that its pending patent applications relate to
patentable inventions, the Company's set of claims with respect to its first
patent application was rejected by the U.S. Patent and Trademark Office (the
"PTO"). Although the Company is vigorously protesting the PTO's position, there
can be no assurance that any pending or future patent applications will be
granted or that any patent relied upon by the Company in the future will not be
challenged, invalidated or circumvented or that the rights granted thereunder or
under licensing agreements will provide competitive advantages to the Company.
The Company believes that, due to the rapid pace of technological innovation for
Internet products, the Company's ability to establish and maintain a position of
technology leadership in the industry depends more on the skills of its
development personnel than upon the legal protections afforded its existing
technology.
As the volume of Internet commerce increases, and the number of products
and service providers that support Internet commerce increases, the Company
believes that Internet commerce technology providers may become increasingly
subject to infringement claims. Any such claims, with or without merit, could be
time consuming, result in costly litigation, disrupt or delay the enhancement or
shipment of the Company's products and services or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable or favorable to the Company,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company was named as a defendant in a
patent infringement suit filed by E-data, Inc. ("E-data") in August 1995. The
suit was dismissed without prejudice in March 1996 and the Company now holds an
exclusive license for Internet payment systems under the Freeny patent, E-data's
applicable patent for Internet payment systems. There can be no assurance that
similar claims will not be filed by other plaintiffs in the future. In addition,
the Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. Litigation to determine the validity of any
claims could result in significant expense to the Company and divert the efforts
of the Company's technical and management personnel from productive tasks,
whether or not such litigation is determined in favor of the Company. In the
event of an adverse ruling in any such litigation, the Company may be required
to pay substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing technology. The failure of the Company to develop or
license a substitute technology could have a material adverse effect
16
<PAGE> 20
on the Company's business, financial condition and results of operations. See
"Business -- Proprietary Rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company believes it is not currently subject to direct regulation by
any government agency in the U.S., other than regulations generally applicable
to businesses, and there are currently few laws or regulations directly
applicable to access to, or commerce on, the Internet. However, no assurance can
be given that federal, state or foreign agencies will not attempt in the near
future to begin to regulate the market for Internet commerce. In addition, if a
government agency were to challenge the Company's position with respect to the
applicability of regulations to its activities, responding to such a challenge
could result in significant expenditures of the Company's financial and
management resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. More
generally, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations will be adopted with respect to
the Internet, covering issues such as user privacy, pricing, taxation and
characteristics and quality of products and services. For example, the recently
enacted Telecommunications Reform Act of 1996 subjects certain Internet content
providers to criminal penalties for the transmission of certain information, and
could also result in liability to Internet service providers, Web hosting sites
and transaction facilitators such as the Company. Various foreign jurisdictions
have also moved to regulate access to the Internet and to strictly control Web
content. Even if the Company's business is not directly subject to regulation,
the adoption of any such laws or regulations may inhibit the growth of the
Internet, or the businesses of the users of the Company's products and services,
which could in turn adversely affect the Company's business, financial condition
and results of operations. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, libel, taxation and
personal privacy is uncertain. Such uncertainty creates the risk that such laws
could be interpreted in a manner that could generally inhibit commerce on the
Internet and adversely impact the Company's business.
Due to the growth of Internet commerce, Congress has considered regulating
providers of services and transactions in this market, and federal or state
authorities could enact laws, rules or regulations affecting the Company's
business or operations. Senior officials from several regulatory agencies,
including the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and the Office of the Comptroller of the Currency, have
indicated that those agencies have refrained from promulgating regulations in
order to encourage continued development of electronic commerce, but will
monitor this area closely in the future. For example, the Electronic Fund
Transfer Act and Regulation E, promulgated by the Federal Reserve Board, govern
certain electronic funds transfers made by regulated financial institutions from
a consumer's account, and govern providers of access devices and electronic
funds transfer services. Although the Company believes that its current services
are not subject to Regulation E, there is no assurance that the Federal Reserve
Board will not require all or certain of the Company's services to comply with
Regulation E, revise Regulation E or adopt new rules and regulations affecting
electronic commercial transactions. Other government agencies in addition to the
Federal Reserve Board, including the Federal Trade Commission and the Federal
Communications Commission, may promulgate rules and regulations affecting the
Company's activities or those of the users of its products and services. Any or
all of these potential actions could result in increased operating costs for the
Company or for the principal users of its services and could also reduce the
convenience and functionality of the Company's services, possibly resulting in
reduced market acceptance which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
EVOLVING FINANCIAL INDUSTRY POLICIES FOR INTERNET COMMERCE
The Company currently relies on credit cards as the payment method for
FVIPS transactions. Credit card associations are still in the process of
drafting operating regulations governing many credit card transactions on the
Internet. In some cases, the Company's access to the payment systems of credit
card associations and other payment providers may be conditioned on its
compliance, and the compliance of associated processors such as First USA
Paymentech, with interim regulations.
17
<PAGE> 21
The Company's operations have been reviewed by MasterCard and Visa which
currently are the sole payment methods accepted by the Company. Visa has issued
to First USA Paymentech several conditions which govern First USA Paymentech's
processing of transactions for the Company over the Visa system. These
conditions, among other things, establish a maximum dollar amount and aging of
small-dollar transactions the Company can accumulate before they are submitted
to the Visa system for processing, and establish procedures for handling
chargebacks involving such bundled transactions. The Company does not believe
that these conditions materially burden the Company's current operations. The
conditions were initially issued pursuant to an oral communication and were due
to expire on December 31, 1995. The conditions were renewed until the later of
the adoption of industry-wide operating regulations addressing Internet
transactions or December 31, 1997. If the Internet transaction operating
regulations are not in place by December 31, 1997, the conditions provide that
they can be extended, with Visa's concurrence. To date, MasterCard has not
issued any conditions that are specific to the Company's operations. The Company
is applying to accept Discover, JCB and American Express credit cards, although
there can be no assurance that any of such applications will be accepted. While
the Company expects that it will be able to comply with Visa's future operating
regulations and regulations issued by any other credit card association, there
can be no assurance that it will be able to do so or that compliance will not
have a material adverse effect on its business, financial condition or results
of operations. In addition, there can be no assurance, if the operating
regulations have not been adopted, that the conditions agreement between First
USA Paymentech and Visa, or related agreements between First USA Paymentech and
the Company and other payment providers, will be issued or extended, if at all,
on terms that do not have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF LOSS FROM RETURNED TRANSACTIONS, MERCHANT FRAUD OR ERRONEOUS
TRANSACTIONS
Because the Company acts as an intermediary and facilitator for credit card
transactions, the Company may be subject to the risks borne by merchants
generally in the use of credit card payment systems, primarily the risk that the
Buyer's payment will be "charged back" because of unauthorized use of the
Buyer's credit card, disputes over the goods or services purchased by the Buyer,
erroneous transmission of information by the Company, or fraud by the Seller or
Buyer. The Company's customer agreements provide for the allocation of the risk
of chargebacks (other than chargebacks caused by erroneous transmission by the
Company) to Sellers, but such agreements may not be enforceable. In addition,
even if the Company has an enforceable right to charge a Seller's account for
the amount of a chargeback, the Company is subject to the risk that the Seller
may not have a sufficient positive balance of net proceeds from other FVIPS
transactions to cover the chargeback and may otherwise be unable or unwilling to
pay.
The Company manages these risks through its risk management systems and
internal controls, which are still in the process of being implemented. The
Company currently requires explicit authorization by Buyers prior to initiating
a charge of the Buyer's credit card, holds funds for 91 days for Sellers who do
not qualify for accelerated settlement terms and subjects Sellers who attempt to
so qualify to a screening process, and holds qualified Sellers' funds for three
to five business days. As a result, the Company believes that the risks
associated with widespread chargebacks by customers are minimized, but there can
be no assurance that chargebacks will not increase significantly in the future
as the volume of FVIPS transactions increases and as more Sellers of goods and
services requiring physical delivery begin to use FVIPS. There also can be no
assurance that the Company will not change FVIPS in a manner that increases the
risk of exposure to chargebacks, or that the Company's reserves will be
sufficient to protect the Company from increased chargebacks. A significant
increase in chargebacks could materially and adversely affect the Company's
business, financial condition and results of operations. See "Business -- The
VirtualPIN Architecture and its Applications" and "-- The First Virtual Internet
Payment System."
LIABILITY FOR INFORMATION STORED ON THE INFOHAUS SERVER
Because materials may be uploaded to the Company's InfoHaus shared Web
server ("InfoHaus") and, without intervention by the Company, may be
subsequently distributed to others, it is possible that claims will be made
against the Company for defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of such
materials. In the past, such claims have been brought, and sometimes
successfully pressed against electronic bulletin boards, on-line service
providers, and Web sites
18
<PAGE> 22
hosting content provided by other parties. Although the Company carries general
liability insurance, the Company's insurance may not adequately cover claims of
this type. Any imposition of liability that is not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Additional Products and Services."
SIGNIFICANT UNALLOCATED NET PROCEEDS
The Company currently intends to use the net proceeds of this offering as
follows: (i) approximately $10.0 million for the expansion of the Company's
marketing and sales, and customer service and support capabilities; (ii)
approximately $8.0 million to fund the Company's capital expenditures necessary
to accommodate the increasing base of Sellers and Buyers and processing of their
transactions, including approximately $6.0 million in connection with an upgrade
of FVIPS; (iii) approximately $5.0 million to expand certain financial and
administrative functions, including approximately $2.0 million to upgrade the
Company's internal operating systems and management information systems; (iv)
approximately $2.0 million for the Company's research and development
activities; and (v) approximately $1.4 million for the repayment of indebtedness
subject to promissory notes held by two stockholders of the Company. The Company
intends to use the remainder of the net proceeds of the offering for working
capital and general corporate purposes. In addition, the Company may use a
significant portion of the net proceeds to acquire complementary technologies,
products or businesses which broaden or enhance the Company's current business,
although the Company has no specific agreements or commitments and is not
currently engaged in any negotiations for any such acquisition. There can be no
assurance that any such acquisitions would be consummated. In the event of any
such acquisition, the Company's Board of Directors reserves the right to modify
the allocation of proceeds set forth above. As a result of the foregoing, the
Company's Board of Directors and management will have broad discretion as to the
use of the proceeds described above, particularly with respect to the portion of
the net proceeds allocated to working capital and general corporate purposes.
See "Use of Proceeds."
INTEGRATION OF POTENTIAL ACQUISITIONS
As a part of its business strategy, the Company expects to make
acquisitions of, or significant investments in, complementary companies,
products or technologies, although no such acquisitions or investments are
currently pending. Any such future acquisitions would be accompanied by the
risks commonly encountered in acquisitions of companies. Such risks include,
among other things, the difficulty of assimilating the operations and personnel
of the acquired companies, the potential disruption of the Company's ongoing
business, the inability of management to maximize the financial and strategic
position of the Company through the successful incorporation of acquired
technology and rights into the Company's products and services, additional
expense associated with amortization of acquired intangible assets, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of any
integration of new management personnel. There can be no assurance that the
Company would be successful in overcoming these risks or any other problems
encountered in connection with such acquisitions. See "Use of Proceeds."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources,
combined with the net proceeds of this offering, will be sufficient to meet its
presently anticipated cash requirements at least through 1997. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's working
capital and capital expenditure requirements, the Company will need to raise
additional funds. Furthermore, the Company may need to raise additional funds
sooner in order to fund more rapid expansion, to develop new or enhanced
services, to respond to competitive pressures or to acquire complementary
businesses or technologies. If additional funds are raised through the issuance
of equity securities, the percentage ownership of the stockholders of the
Company will be reduced, stockholders may experience significant additional
dilution and such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's Common Stock. There can be no
assurance that additional financing will be available when needed or that if
available, such financing will include terms favorable to the Company or its
stockholders. If
19
<PAGE> 23
adequate funds are not available or are not available on acceptable terms, the
Company may be unable to develop or enhance its products and services, take
advantage of important opportunities or respond to competitive pressures, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Dilution" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION AND DELAWARE LAW
Upon completion of the offering, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options and warrants (other
than outstanding warrants to purchase 1,328,006 shares of Common Stock with an
exercise price of $0.01 per share), executive officers and directors of the
Company and companies associated with such individuals will collectively own an
aggregate of 67.1% of the Company's outstanding Common Stock, including 23.3% to
be held by First USA Merchant Services. Accordingly, such persons will have the
effective power to influence significantly the outcome of matters submitted for
the vote of stockholders, including the election of members of the Board of
Directors and the approval of significant change in control transactions. Their
combined equity interest in the Company accordingly may have the effect of
making certain transactions more difficult in the absence of the support of
management of the Company and may have the effect of delaying, deferring or
preventing a change in control of the Company.
In addition, following the completion of this offering, the Board of
Directors shall have the authority to issue up to 5,000,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of such stock without further stockholder
approval. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. Issuance of Preferred Stock could have the effect
of delaying, deferring or preventing a change in control of the Company.
Furthermore, certain provisions of the Company's Certificate of Incorporation to
be filed immediately following completion of this offering, including the
provision for a classified Board of Directors, and certain provisions of the
Delaware General Corporation Law could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Management," "Certain
Transactions," "Principal Stockholders" and "Description of Capital Stock."
BENEFITS TO EXISTING STOCKHOLDERS AND AFFILIATES
The consummation of this offering will result in benefits to certain
existing stockholders and affiliates of the Company as discussed herein. The
Company will use a portion of the proceeds from this offering to repay
approximately $1.4 million of indebtedness subject to promissory notes held by
two existing stockholders who are members of the Board of Directors of the
Company. The Company also intends to use approximately $6.0 million of the
proceeds of this offering to upgrade FVIPS, a portion of which could benefit
Sybase, Inc. ("Sybase"), a database software developer and a stockholder of the
Company. Robert Epstein, a director of the Company, is a founder, Executive Vice
President and a director of Sybase. In addition, the existing holders of Common
Stock will benefit from the conversion of the Preferred Stock into shares of
Common Stock due to the termination of senior rights, preferences and privileges
attributable to the Preferred Stock. Furthermore, certain members of the Board
of Directors of the Company hold stock options to purchase shares of Common
Stock which, among other provisions, entitle the holder to perform a cashless
exercise of the options by leveraging the fair value of the Common Stock in the
public market. As a result of the public offering and the attendant increased
per share fair market value of such Common Stock, such option holders will be
able to exercise increased leverage upon the exercise of such options than would
have been likely if the Company had not effected this offering. See "Use of
Proceeds" and "Management."
NO PRIOR MARKET FOR THE SHARES; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to the offering, there has been no market for the Common Stock.
Although the Company's Common Stock has been approved for quotation on The
Nasdaq Stock Market, there can be no assurance that an active trading market
will develop upon completion of the offering or, if it does develop, that such
market will be sustained. The initial public offering price of the Common Stock
will be determined by negotiation among the Company and the representatives of
the Underwriters. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.
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<PAGE> 24
The market price for the Common Stock may be significantly affected by
factors such as the announcement of new products and services or enhancements
thereto by the Company or its competitors, technological innovation by the
Company or its competitors, quarterly variations in the Company's results of
operations or the operating results of the Company's competitors or changes in
earnings estimates by analysts or in opinions of writers or analysts. The stock
prices for many emerging growth companies have experienced wide fluctuations
which have often been unrelated to the operating performance of such companies.
Such fluctuations may adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
this offering may adversely affect the prevailing market prices of the Common
Stock and could impair the Company's ability to raise capital in the future
through the sale of its equity securities. Upon completion of this offering, the
Company will have outstanding an aggregate of 11,072,733 shares of Common Stock,
assuming no exercise of the Underwriters' over-allotment option and no exercise
of outstanding options and warrants (other than outstanding warrants to purchase
1,328,006 shares of Common Stock with an exercise price of $0.01 per share) and
based upon the number of shares outstanding as of November 26, 1996. Of these
shares, all of the shares sold in this offering will be freely tradable without
further registration under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 8,072,733 shares of Common Stock held by
stockholders (assuming exercise of warrants to purchase an aggregate of
1,328,006 shares) are "restricted securities" as that term is defined in Rule
144 under the Securities Act (the "Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 or 701 promulgated under the Securities Act. As
a result of contractual restrictions and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(i) no Restricted Shares will be eligible for immediate sale on the effective
date of the Registration Statement of which this Prospectus is a part (the
"Effective Date"); (ii) 3,269,062 Restricted Shares will be eligible for sale
upon expiration of lock-up agreements 180 days after the Effective Date; and
(iii) the remaining 4,803,671 Restricted Shares will be eligible for sale from
time to time thereafter upon expiration of their respective two-year holding
periods. Of the Restricted Shares eligible for sale beginning 180 days after the
Effective Date, approximately 3,000,000 shares will be subject to volume
limitations and other resale restrictions pursuant to Rule 144. The Securities
and Exchange Commission has recently proposed to reduce the Rule 144 holding
periods. If enacted, the proposal could permit more rapid resale of Restricted
Shares. In addition, beginning six months after the effective date of this
offering, the holders of approximately 7,750,000 Restricted Shares will be
entitled to certain rights with respect to registration of such shares for sale
in the public market. Any sales by such holders resulting from the exercise of
such registration rights could have a material adverse effect on the market
price of the Company's Common Stock.
As of November 26, 1996, the Company has reserved 1,748,145 shares of
Common Stock for issuance upon the exercise of outstanding stock options granted
pursuant to the Company's 1994 Incentive and Non-Statutory Stock Option Plan
(the "1994 Stock Plan") and the 1995 Stock Plan, and 1,000,000 shares of Common
Stock for issuance upon the exercise of certain additional outstanding stock
options. In addition, the Company has reserved 1,712,605 shares of Common Stock
for issuance pursuant to options to be granted in the future under the 1995
Stock Plan and 100,000 shares of Common Stock for future issuance pursuant to
the Company's Employee Stock Purchase Plan. The Company intends to file a
Registration Statement on Form S-8 to register the shares of Common Stock
issuable upon exercise of options granted under the 1994 Stock Plan and the 1995
Stock Plan and sold pursuant to the Employee Stock Purchase Plan. Following the
filing of the Form S-8, shares of Common Stock issued under such plans will be
available for sale in the public market, subject to the Rule 144 volume
limitations applicable to affiliates. See "Description of Capital Stock" and
"Shares Eligible for Future Sale."
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<PAGE> 25
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS
The initial public offering price is substantially higher than the book
value per share of the outstanding Common Stock. Investors purchasing Common
Stock in the offering will, therefore, incur immediate and substantial dilution
of approximately $8.69 in the net tangible book value per share of Common Stock
from the initial public offering price and may incur additional dilution upon
the exercise of outstanding stock options. See "Dilution."
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<PAGE> 26
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock being offered by the Company in the offering are estimated to be
approximately $32,080,000 ($37,102,000 if the Underwriters' over-allotment
option is exercised in full), after deduction of the underwriting discounts and
commissions and estimated offering expenses. The Company currently intends to
use the net proceeds of this offering as follows: (i) approximately $10.0
million for the expansion of the Company's marketing and sales, and customer
service and support capabilities; (ii) approximately $8.0 million to fund the
Company's capital expenditures necessary to accommodate the increasing base of
Sellers and Buyers and processing of their transactions, including approximately
$6.0 million in connection with an upgrade of FVIPS; (iii) approximately $5.0
million to expand certain financial and administrative functions, including
approximately $2.0 million to upgrade the Company's internal operating systems
and management information systems; (iv) approximately $2.0 million for the
Company's research and development activities; and (v) approximately $1.4
million for the repayment of indebtedness subject to promissory notes held by
two stockholders of the Company, which notes bear interest at a rate of 8% per
annum and are due and payable upon the closing of the offering. The Company
intends to use the remainder of the net proceeds of the offering for working
capital and general corporate purposes. The Company may also use a portion of
the net proceeds to fund acquisitions of products, technologies or businesses
that are related or complementary to Internet commerce products and services.
Although the Company has no present agreements or commitments and is not
currently engaged in any negotiations with respect to any such transactions, the
Company from time to time evaluates such opportunities. In the event of any such
acquisition, the Company's Board of Directors reserves the right to modify the
allocation of proceeds set forth above. As a result of the foregoing, the
Company's Board of Directors and management will have broad discretion as to the
use of the proceeds described above, particularly with respect to the portion of
the proceeds allocated to working capital and general corporate purposes.
Pending use of the net proceeds for the foregoing purposes, the Company intends
to invest the net proceeds in investment grade interest-bearing marketable
securities.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its future earnings, if any, to
fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
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<PAGE> 27
CAPITALIZATION
The following table sets forth the (i) capitalization of the Company as of
September 30, 1996, (ii) pro forma capitalization as of such date after giving
effect to the assumed exercise of warrants outstanding at September 30, 1996 to
purchase 1,328,006 shares of Common Stock at an exercise price of $0.01 per
share, conversion of all outstanding shares of Preferred Stock into 2,295,207
shares of Common Stock and an amendment of the Company's Certificate of
Incorporation on or prior to the closing of the offering and (iii) as adjusted
capitalization to give effect to the application of the estimated net proceeds
from the sale by the Company of the 3,000,000 shares of Common Stock offered by
the Company hereby (after deduction of the underwriting discounts and
commissions and estimated expenses of the offering) and the application of the
net proceeds to pay outstanding notes payable to certain stockholders.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Notes payable to stockholders....................... $ 1,200,000 $ 1,200,000 $ --
---------- ---------- ----------
Stockholders' equity(1):
Preferred Stock, $0.001 par value; 3,601,447
shares authorized, 2,273,441 shares issued and
outstanding, actual; 5,000,000 shares
authorized and no shares outstanding pro forma
and as adjusted................................ 2,273 -- --
Common Stock, $0.001 par value; 40,000,000 shares
authorized, 4,441,520 shares issued and
outstanding, actual; 40,000,000 shares
authorized, 8,064,733 shares issued and
outstanding, pro forma; 40,000,000 shares
authorized, 11,064,733 shares issued and
outstanding, as adjusted....................... 4,442 8,065 11,065
Additional paid-in-capital........................ 10,764,450 13,793,495 45,870,495
Warrants(2)....................................... 3,017,115 -- --
Deferred compensation............................. (45,104) (45,104) (45,104)
Accumulated deficit............................... (9,085,974) (9,085,974) (9,085,974)
---------- ---------- ----------
Total stockholders' equity.......................... 4,657,202 4,670,482 36,750,482
---------- ---------- ----------
Total capitalization...................... $ 5,857,202 $ 5,870,482 $36,750,482
========== ========== ==========
</TABLE>
- ---------------
(1) Based on number of shares outstanding as of September 30, 1996 and includes
1,328,006 shares of Common Stock issuable upon the assumed exercise of
warrants outstanding as of September 30, 1996 at an exercise price of $0.01
per share. The Company believes the assumed exercise of the warrants is
appropriate given the substantial difference between the $0.01 exercise
price of such warrants and the assumed price of the shares of Common Stock
offered hereby. Excludes (i) an aggregate of 2,468,750 shares of Common
Stock reserved for issuance under the Company's stock option plans, of which
1,526,895 shares were subject to outstanding options at September 30, 1996
at a weighted average exercise price of $3.91 per share, (ii) an aggregate
of 1,000,000 shares of Common Stock subject to additional outstanding
options at September 30, 1996 at an exercise price of $6.30 per share, (iii)
an aggregate of 100,000 shares of Common Stock reserved for issuance under
the Company's Employee Stock Purchase Plan, none of which were outstanding
as of September 30, 1996, (iv) shares of Common Stock equivalent to up to
four percent of the Company's outstanding capital stock issuable upon the
exercise of a warrant at an exercise price of $0.01 per share subject to the
satisfaction of certain marketing-related performance milestones, which
warrant terminates immediately prior to the closing date of this offering,
(v) a warrant exercisable for up to 47,619 shares of Common Stock at an
exercise price of $10.50 per share, subject to adjustment, and (vi) a
warrant exercisable for up to 1,500,000 shares of Common Stock at exercise
prices between $2.23 and $5.00 per share, subject to the satisfaction of
certain marketing-related performance milestones. After September 30, 1996
and prior to the date of this Prospectus, the Company granted additional
options under its 1995 Stock Plan to purchase 239,750 shares of Common Stock
at an exercise price of $10.50 per share. See "Dilution," "Management --
Stock Plans," "Certain Transactions" and Notes 6 and 8 of Notes to Financial
Statements.
(2) Represents proceeds received by the Company from the sale of warrants to
purchase capital stock in March 1996. See "Certain Transactions."
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<PAGE> 28
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1996, after giving effect to the assumed exercise of outstanding warrants to
purchase an aggregate of 1,328,006 shares of Common Stock at an exercise price
of $0.01 per share, and the conversion of all outstanding shares of Preferred
Stock into 2,295,207 shares of Common Stock, was approximately $4.5 million or
$0.56 per share of Common Stock. Pro forma net tangible book value per share
represents the amount of total tangible assets of the Company reduced by the
amount of its total liabilities, divided by the total number of shares of Common
Stock outstanding. After giving effect to the estimated net proceeds from the
sale of 3,000,000 shares of Common Stock offered by the Company at an assumed
public offering price of $12.00 per share, the adjusted pro forma net tangible
book value of the Company as of September 30, 1996 would have been approximately
$36.6 million or $3.31 per share. This represents an immediate increase in pro
forma net tangible book value of $2.75 per share to existing stockholders and an
immediate dilution of $8.69 per share to new investors.
The following table illustrates the per share dilution in pro forma net
tangible book value to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................... $ 12.00
Pro forma net tangible book value as of September 30, 1996........ $ 0.56
Increase attributable to new investors............................ 2.75
----------
Adjusted pro forma net tangible book value after this offering...... 3.31
----------
Dilution to new investors........................................... $ 8.69
==========
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1996, the differences between the existing stockholders and the purchasers of
shares in the offering (at an assumed public offering price of $12.00 per share
and before deducting underwriting discounts and commissions and estimated
offering expenses) with respect to the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 8,064,733 72.9% $14,030,700 28.0% $ 1.74
New investors...................... 3,000,000 27.1% 36,000,000 72.0% $ 12.00
----- ----- ------- -----
Total............................ 11,064,733 100.0% $50,030,700 100.0%
===== ===== ======= =====
</TABLE>
The foregoing table assumes no exercise of the Underwriter's over-allotment
option and no exercise of stock options or warrants outstanding as of September
30, 1996 (except for outstanding warrants to purchase an aggregate of 1,328,006
shares of Common Stock at an exercise price of $0.01 per share). As of September
30, 1996, (i) an aggregate of 2,468,750 shares of Common Stock were reserved for
issuance under the Company's stock option plans, of which 1,526,895 shares were
subject to outstanding options at a weighted average exercise price of $3.91 per
share, (ii) an aggregate of 1,000,000 shares of Common Stock were subject to
additional outstanding options with an exercise price of $6.30 per share, (iii)
an aggregate of 100,000 shares of Common Stock were reserved for issuance under
the Company's Employee Stock Purchase Plan, none of which were outstanding, (iv)
an aggregate of 1,328,006 shares of Common Stock were reserved for issuance upon
the exercise of outstanding warrants at an exercise price of $0.01 per share
(which warrants are assumed exercised for purposes of the foregoing table), (v)
shares of Common Stock equivalent to up to four percent of the Company's
outstanding capital stock were issuable upon the exercise of a warrant at an
exercise price of $0.01 per share subject to the satisfaction of certain
marketing-related performance milestones and which terminates immediately prior
to the closing date of this offering, (vi) a warrant exercisable for up to
47,619 shares of Common Stock at an exercise price of $10.50 per share subject
to adjustment, was outstanding and (vii) a warrant exercisable for up to
1,500,000 shares of Common Stock at exercise prices between $2.23 and $5.00 per
share, subject to the satisfaction of certain marketing-related performance
milestones, was outstanding. Additionally, after September 30, 1996 and prior to
the date of this Prospectus the Company granted additional options under its
1995 Stock Plan to purchase 239,750 shares of Common Stock at an exercise price
of $10.50 per share. See "Capitalization," "Management -- Stock Plans," "Certain
Transactions" and Notes 6 and 8 of Notes to Financial Statements.
25
<PAGE> 29
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus. The statement of operations data for the period from the date
of inception through December 31, 1994, for the year ended December 31, 1995 and
for the nine months ended September 30, 1996, and the balance sheet data as of
December 31, 1994 and 1995 and September 30, 1996 are derived from the Company's
financial statements audited by Ernst & Young LLP, independent auditors,
included elsewhere in this Prospectus. The statement of operations data for the
nine months ended September 30, 1995 have been derived from unaudited financial
statements of the Company and include all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for a fair
presentation of the financial data for such period and as of such date. The
results for the nine months ended September 30, 1996 are not necessarily
indicative of the results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 11,
1994 (DATE
OF
INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------------
1994 1995 1995 1996
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 3,580 $ 197,902 $ 87,230 $ 498,262
Operating expenses:
Marketing and sales.............. 143,678 346,400 242,086 745,006
Research and development......... 307,315 530,809 190,858 1,501,188
General and administrative....... 375,117 1,522,784 1,259,777 4,304,479
------------ ------------ ----------- ------------
Total operating expenses............ 826,110 2,399,993 1,692,721 6,550,673
------------ ------------ ----------- ------------
Loss from operations................ (822,530) (2,202,091) (1,605,491) (6,052,411)
Interest income (expense), net...... (13,149) (67,890) (52,057) 72,097
------------ ------------ ----------- ------------
Net loss............................ $ (835,679) $ (2,269,981) $(1,657,548) $ (5,980,314)
========== ========== ========== ==========
Pro forma net loss per share(1)..... $ (0.28) $ (0.68)
========== ==========
Shares used in computing pro forma
net loss per share(2)............ 8,141,959 8,774,157
========== ==========
<CAPTION>
DECEMBER 31, SEPTEMBER
---------------------------- 30,
1994 1995 1996
------------ ----------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and a short-term
investment, available-for-sale................. $ 14,847 $ 2,091,651 $ 6,081,945
Working capital (deficit)......................... (121,825) 1,480,201 4,135,162
Total assets...................................... 320,421 2,574,826 8,278,472
Notes payable to stockholders..................... 713,400 1,200,000 1,200,000
Total stockholders' equity (net capital
deficiency).................................... (541,651) 752,423 4,657,202
</TABLE>
- ---------------
(1) A further pro forma adjustment to reflect the effect of the contemplated
repayment of $1.2 million of notes payable to stockholders as if it had
occurred at the beginning of 1995 with anticipated proceeds from the sale of
a portion of the shares comprising this offering, would not have a material
effect on the pro forma net loss per share.
(2) See Note 1 of Notes to Financial Statements for an explanation of the number
of shares used in computing pro forma net loss per share.
26
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors" as well as those discussed
elsewhere in this Prospectus.
OVERVIEW
The Company commenced operations in March 1994, and developed and
implemented the VirtualPIN architecture which facilitates Internet commerce and
other forms of interactive Internet communications. FVIPS, the Company's initial
application of the VirtualPIN architecture, was introduced in October 1994. As
of September 30, 1996, the Company has registered more than 2,650 Sellers and
180,000 Buyers in 166 countries and, for the nine months ended September 30,
1996, processed approximately 190,000 FVIPS transactions. The Company
differentiates FVIPS Sellers into two categories, Pioneer Sellers and Express
Sellers. Pioneer Sellers are typically smaller, less established merchants that
may not qualify for a traditional credit card merchant account. The Company's
Pioneer Seller program allows any person or entity to be a Seller. The Company
has established a 91-day settlement period for transactions involving Pioneer
Sellers to minimize its financial exposure to chargebacks and fraud. During this
settlement period, the Company's merchant acquiror, First USA Paymentech, holds
the proceeds from the Pioneer Seller transaction in an escrow account prior to
releasing the funds to the Company, which after deducting its fees, remits the
net proceeds to the Pioneer Seller. The Company receives interest on funds held
in the escrow account. Express Sellers are typically larger, more established
merchants that have been qualified by a merchant acquiror and approved by the
Company under terms similar to those for a traditional credit card merchant
account. Although the Company independently evaluates and approves all Express
Sellers, it currently relies on credit information gathered by First USA
Paymentech in making its evaluation. The Express Seller program allows these
Sellers to be paid for FVIPS transactions within a time frame similar to
standard credit card settlement terms, usually three to five business days.
Through September 30, 1996, the Company's revenues were derived solely from
FVIPS and, in particular, the Pioneer Seller program. The capability to offer
the Express Seller program occurred in connection with major enhancements to
FVIPS in July 1996 which were offered on a general basis in October 1996. The
Company believes that the Express Seller program will be particularly attractive
to merchants selling hard goods or services requiring physical delivery and to
merchants with large transaction volumes, since the program allows Express
Sellers to be paid for transactions within three to five business days, a time
frame similar to standard credit card settlement terms. Although the Company
expects to derive a substantial portion of its revenues in the future from the
Express Seller program, there can be no assurance that the program will generate
significant revenues. In addition, as the Company develops and markets
additional applications of the VirtualPIN architecture, it anticipates
decreasing its dependence on FVIPS as a source of revenues, although there can
be no assurance that additional applications will result in substantial
revenues.
The Company has incurred net operating losses in each quarter since
inception. As of September 30, 1996, the Company had an accumulated deficit of
approximately $9.1 million. To date, the Company has not generated significant
revenues, and the Company anticipates that it will generate only limited
revenues for the year ending December 31, 1996. There can be no assurance that
the Company's revenues will remain at their current level or increase, and the
Company's ability to generate significant future revenues is subject to
substantial uncertainty. In addition, as a result of the anticipated significant
investments that the Company plans to make in its systems, sales, marketing,
research and development, customer support and administrative infrastructure
over the near term, the Company expects to continue to incur significant
operating losses on both a quarterly and an annual basis for the foreseeable
future.
RESULTS OF OPERATIONS
The financial results for the period from inception to September 30, 1996
reflect the Company's initial organization efforts, research and development
activities, capital raising and deployment of FVIPS as the first application of
the VirtualPIN architecture. The Company believes that its limited operating
history makes
27
<PAGE> 31
prediction of future results of operations difficult and, accordingly, that its
operating results should not be relied upon as an indication of future
performance. FVIPS was introduced in October 1994, and the Company recognized
nominal revenues for the period from inception to December 31, 1994. The
Company's revenues and expenses increased for the year ended December 31, 1995
and the nine month period ended September 30, 1996 due to growth of the Company
and related operational and development costs. The Company believes that any
comparison of the results of operations for the period from inception to
December 31, 1994 with the results for the year ended December 31, 1995 or of
the results for the nine months ended September 30, 1995 with the results for
the nine months ended September 30, 1996 is not meaningful.
Revenues
The Company currently generates revenues from the receipt of Buyer and
Seller registration fees, transaction processing fees and co-marketing fees
associated with FVIPS. As of July 1, 1996, the Company released a major system
upgrade to FVIPS, which enables the sale of hard goods, the ability to return
credit card authorization codes to the Sellers and the clearing of credit card
payments for transactions within three to five business days. In conjunction
with this system upgrade, the Company changed its business model to charge a
first year registration fee of $2 for Buyers and $10 and $350 for Pioneer
Sellers and Express Sellers, respectively, and instituted annual renewal fees of
$2 for Buyers and $10 and $250 for Pioneer Sellers and Express Sellers,
respectively. The Company will begin collecting annual renewal fees in July
1997. The Company anticipates that the system upgrade may result in additional
goods and services offered by Sellers and potentially more repeat use of FVIPS
by Buyers. The changes described above in the system and Company's business
model, which are clearly different in substance from those in place prior to
July 1996, necessitated the modification of the Company's revenue recognition
policy. Beginning in July 1996, the Company began to recognize Buyer and Seller
registration and renewal fees over a 12 month period. Prior to July 1, 1996,
revenues from registration fees were recognized in the month the Seller's or the
Buyer's registration fee was processed and the VirtualPIN was issued as the
Company had fulfilled its performance obligations to register the Buyer or
Seller on FVIPS. Had this modification been considered a change in accounting
principle, it would have had an immaterial effect on the Company's results from
operations for all periods presented herein. Revenues from transaction
processing fees are recognized on the date the transaction amount is charged to
the Buyer's credit card. Currently, the Company charges a transaction fee
consisting of 2% of the purchase price of the product or service plus an
additional $0.29 per transaction. The Company collects transaction processing
fees automatically by deducting its fees prior to the time the net proceeds are
forwarded to Pioneer Sellers (after 91 days) and Express Sellers (between three
and five business days) by the Company's ACH agent. Revenues from co-marketing
fees are recognized in the month the Buyer accepts the promotional offer of one
of the Company's co-marketing partners. To date, such revenues consist of
commissions earned on sales resulting from such promotional offers. The Company
receives interest income on funds held during the 91-day settlement period for
Pioneer Sellers. The Company continuously reviews its registration, renewal,
transaction processing and co-marketing fees and expects that such fees will be
modified in the future.
For the nine month period ended September 30, 1996, revenues were $498,000
compared to $87,000 for the nine month period ended September 30, 1995. The
primary reason for this growth was the increase in Buyer and Pioneer Seller
registration fees and transaction processing fees as a result of an increase in
the number of Buyer and Seller registrations and transactions. Registration
fees, transaction processing fees and co-marketing fees accounted for
approximately 39%, 39% and 22% of revenues, respectively, for the nine month
period ended September 30, 1996, as compared to approximately 93%, 6% and 1% of
revenues respectively, for the nine month period ended September 30, 1995. This
shift in revenue mix resulted from an increase in the number of transactions
processed and co-marketing offers accepted by Buyers. For the year ended
December 31, 1995, revenues increased to $198,000 as compared to $4,000 for the
period from March 11, 1994 (date of inception) through December 31, 1994. The
increase resulted from a full year of operation of FVIPS (which commenced
operation in October 1994) and an increase in Buyer and Seller registrations and
transactions processed.
28
<PAGE> 32
Operating Expenses
Operating expenses consist of marketing and sales, research and
development, and general and administrative expenses. The Company anticipates
that operating expenses will increase in connection with increasing levels of
research and development for new and enhanced products and services, growth in
its marketing and sales organization, and expansion of the Company's support
organization to accommodate the anticipated increased installed base of Buyers
and Sellers.
Marketing and sales expenses. Marketing and sales expenses, which include
salaries and wages, consulting fees, advertising, trade show expenses, travel
and other marketing expenses, increased to $745,000 for the nine month period
ended September 30, 1996 as compared to $242,000 for the nine month period ended
September 30, 1995. This increase resulted primarily from the addition of nine
personnel resulting in increased salaries and wages of $340,000 and a general
increase in spending of $163,000 to support the Company's expanding operations.
The Company expects that marketing and sales expenses will increase
significantly in the future as the Company implements its marketing plan to
rapidly deploy VirtualPINs.
For the year ended December 31, 1995, marketing and sales expenses
increased to $346,000 as compared to $144,000 for the period March 11, 1994
(date of inception) through December 31, 1994. This increase resulted primarily
from an increase in salaries and wages of $45,000 related to the addition of two
personnel and an increase in marketing consulting services expenses of $157,000.
Research and development expenses. Research and development expenses
consist primarily of salaries and wages and consulting fees to support the
development and enhancement of the Company's products and services. Research and
development expenses increased to $1.5 million for the nine month period ended
September 30, 1996 as compared to $191,000 for the nine month period ended
September 30, 1995. The increase resulted primarily from the addition of 13
research and development personnel resulting in increased salaries and wages of
$660,000, as well as a related increase in travel expenses of $90,000. In
addition, the Company expensed $465,000 in software development costs for the
nine months ended September 30, 1996 as compared to $13,000 for the nine months
ended September 30, 1995. To date, all of the Company's software development
costs have been expensed as incurred. The Company anticipates that research and
development expenses will increase during the balance of 1996 and in future
years as the Company leverages the VirtualPIN architecture to offer new products
and services and increases the functionality of FVIPS.
For the year ended December 31, 1995, research and development expenses
increased to $531,000 as compared to $307,000 for the period March 11, 1994
(date of inception) through December 31, 1994. This increase resulted primarily
from increases of $30,000 in salaries and wages related to the addition of four
personnel, $75,000 in consultant fees, $50,000 in travel expenses, $20,000 in
communication expenses and $10,000 in insurance expenses.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and wages, professional and consulting fees and
other expenses associated with the general management and administration of the
Company. General and administrative expenses increased to $4.3 million for the
nine month period ended September 30, 1996 as compared to $1.3 million for the
nine month period ended September 30, 1995. The increase resulted primarily from
an increase in expenses of approximately $250,000 relating to the establishment
of the Company's headquarters, a $1.0 million increase in payroll, consulting
and recruiting expenses in connection with the Company's expansion of the number
of employees by 44, and an increase in related travel expenses of $250,000. In
addition, the Company incurred a one-time charge of $1.0 million in the quarter
ended September 30, 1996 in connection with the payment of certain fees to First
USA Merchant Services in consideration for the waiver of certain exclusive
merchant processing rights held by First USA Merchant Services. The Company
anticipates that its general and administrative expenses will increase
substantially in the near future in connection with the hiring of additional
management personnel and the anticipated professional fees and other costs
associated with becoming a public company. See Note 3 of Notes to Financial
Statements.
For the year ended December 31, 1995, general and administrative expenses
increased to $1.5 million as compared to $375,000 for the period ended March 11,
1994 (date of inception) through December 31, 1994. This increase resulted
primarily from increases of $375,000 in salaries and wages related to the
addition of ten
29
<PAGE> 33
personnel, $200,000 for legal fees, $100,000 for processing fees, $80,000 in
interest expense, and approximately $200,000 for communication expenses.
For certain Common Stock options granted between January and April 1996,
the Company has recorded deferred compensation as the difference between the
exercise price and the deemed fair value, as determined in part by an
independent valuation. This deferred compensation, which aggregated $51,000,
will be amortized according to the related options' four year vesting schedule.
As of September 30, 1996, $5,000 of such compensation had been amortized. See
Note 6 of Notes to Financial Statements.
Income Taxes
As of September 30, 1996, the Company has federal and state net operating
loss carryforwards of approximately $6.4 million. These federal and state
carryforwards will begin to expire in 2010 and 2000, respectively, unless
previously used. Pursuant to Internal Revenue Code Sections 382 and 383, a
change in ownership of greater than 50% of a corporation within a three-year
period will place an annual limitation on the corporation's ability to utilize
its existing carryforwards. The Company anticipates that while an ownership
change will occur upon the closing of this offering, the resulting limitation
will not have an effect on its ability to utilize the Company's carryforwards.
See Note 7 of Notes to Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly financial data for each of
the seven quarters ended September 30, 1996. This data has been prepared on the
same basis as the audited Financial Statements and, in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the unaudited quarterly results set
forth herein, when read in conjunction with the Company's audited Financial
Statements appearing elsewhere in this Prospectus. The operating results for any
quarter are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 5,734 $ 25,485 $ 56,011 $ 110,672 $ 244,466 $ 156,616 $ 97,180
Operating expenses:
Marketing and sales.... 95,541 103,026 43,519 104,314 156,476 165,584 422,946
Research and
development.......... 25,411 76,491 88,956 339,951 197,807 346,143 957,238
General and
administrative....... 290,057 537,249 432,471 263,007 766,144 1,297,420 2,240,915
--------- --------- --------- --------- --------- -----------
Total operating
expenses............... 411,009 716,766 564,946 707,272 1,120,427 1,809,147 3,621,099
--------- --------- --------- --------- --------- -----------
Loss from operations..... (405,275) (691,281) (508,935) (596,600) (875,961) (1,652,531) (3,523,919)
Interest income
(expense), net......... (17,459) (19,123) (15,475) (15,833) 1,036 21,622 49,439
--------- --------- --------- --------- --------- -----------
Net loss................. $(422,734) $(710,404) $(524,410) $(612,433) $(874,925) $(1,630,909) $(3,474,480)
========= ========= ========= ========= ========= ===========
</TABLE>
The Company's revenues for each of the quarters ended June 30, 1996 and
September 30, 1996 declined from the previous quarter. The Company believes that
the decrease in revenues in the quarters ended June 30, 1996 and September 30,
1996 resulted primarily from the lack of active promotional efforts by the
Company to register additional Buyers and Sellers during such quarters in
anticipation of the roll out of the FVIPS upgrade in the fourth quarter. In
addition, the decline in revenues in the quarter ended September 30, 1996
reflects the change in the Company's revenue recognition policies with respect
to Buyer and Seller registration fees. The impact of this change during the
quarter ended September 30, 1996 resulted in deferred revenue of $43,000 as of
September 30, 1996. Prior to such upgrade, FVIPS was in its development stage.
In July 1996, the Company began offering FVIPS upgrade, which included the
Express Seller program and increased functionality, only to selected customers.
In October 1996, the Company began offering such upgraded FVIPS services on a
general basis.
30
<PAGE> 34
The Company expects to experience significant fluctuations in its future
quarterly operating results. These fluctuations will be due to several factors,
some of which are beyond the control of the Company, including, among others,
market acceptance of Internet commerce in general and the VirtualPIN concept and
FVIPS in particular; fluctuating market demand for the Company's products and
services, including the rate of Seller and Buyer registrations; the monthly
volume and average dollar amount of transactions using FVIPS; the degree of
acceptance of the Internet as an advertising and merchandising medium; the fees
charged to the Company by third party processors and financial institutions; the
timing and effectiveness of collaborative marketing efforts initiated by the
Company's strategic partners; the timing of the introduction of new products and
services offered by the Company; the timing of the release of enhancements to
the Company's products and services; product introductions and service offerings
by the Company's competitors; the mix of the products and services provided by
the Company; the timing and rate at which the Company increases its expenses to
support projected growth; the cost of compliance with applicable government
regulations; competitive conditions in the Company's marketplace; and general
economic conditions. In addition, the fees charged by the Company for Buyer and
Seller registration, transaction processing and co-marketing are subject to
change as the Company continues to roll out FVIPS upgrades and assess its
marketing strategy and competitive position. The Company believes that
period-to-period comparisons of its operating results are not meaningful and
should not be relied upon as any indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations and satisfied
its capital expenditure requirements primarily through the sale of capital stock
and borrowings under certain subordinated lines of credit provided by two
stockholders. To date, the Company has raised $13.7 million from the sale and
issuance of its Preferred Stock, Common Stock and warrants, and $1.2 million of
principal under the stockholder lines of credit. The borrowings from such
stockholders, plus interest at 8% per annum, are due and payable upon the
closing of this offering.
Operating activities used cash of $1.8 million during the year ended
December 31, 1995. Net cash used during the year was primarily to fund operating
expenses of $2.4 million (excluding depreciation and amortization), offset in
part by revenues of $198,000 and an increase in accounts payable of $412,000.
Investing activities used net cash of $181,000 in 1995, principally to purchase
furniture and equipment. Financing activities generated cash of $4.0 million
during 1995 from the sale of Preferred Stock and borrowings from stockholders.
Operating activities used cash of $4.4 million during the nine months ended
September 30, 1996. Net cash used during this period was primarily to fund
operating expenses of $6.2 million (excluding depreciation and amortization)
offset in part by revenues of $498,000 and a decrease in non-cash working
capital of $1.3 million. Investing activities used net cash of $1.7 million
during the nine month period, principally to purchase furniture and equipment.
Financing activities generated cash of $9.8 million during the nine month period
primarily from the sale of Preferred Stock, Common Stock and warrants in
addition to the proceeds from the partial exercise of a previously outstanding
warrant.
Capital expenditures have been, and future expenditures are expected to be,
primarily for facilities, furniture and capital equipment to support the
expansion of the Company's operations and management information systems.
Capital expenditures were $151,000 for the year ended December 31, 1995 and $1.4
million for the nine month period ended September 30, 1996. Furniture and
equipment are stated at cost and depreciated over three to five years using the
straight line method. While the Company has no material capital commitments, it
expects to spend approximately $6.0 million to install and maintain a relational
database management system and related hardware in connection with a further
upgrade of FVIPS. The Company also anticipates spending approximately $2.0
million through 1997 to upgrade the Company's internal operating systems and
management information systems. The Company expects to use a portion of the net
proceeds of this offering for such expenditures. In addition, the Company may
finance a portion of such expenditures through equipment leases. There can be no
assurance that any upgrades of the Company's database and management information
system will be completed in a timely manner or that any such upgrades will be
adequate to meet the Company's needs.
31
<PAGE> 35
At September 30, 1996, the Company had $6.1 million in cash, cash
equivalents and a short-term investment, available-for-sale. The Company
believes that existing cash resources, together with the net proceeds of this
offering, will be sufficient to support the Company's currently anticipated
working capital and capital expenditure requirements at least through 1997.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's working capital and capital expenditure requirements, the Company will
need to raise additional funds through the public or private sale of its equity
or debt securities or from other sources. Furthermore, there can be no assurance
that the Company will not be required to seek additional capital at an earlier
date. The timing and amount of the Company's capital requirements will depend on
a number of factors, including demand for the Company's products and services,
the need to develop new or enhanced products and services, competitive pressures
and the availability of complementary businesses or technologies that the
Company may wish to acquire. If additional funds are raised through the issuance
of equity securities, the percentage ownership of the Company's stockholders
will be diluted and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. There
can be no assurance that additional financing will be available when needed or
that, if available, such financing will include terms favorable to the Company
or its stockholders. If adequate funds are not available on acceptable terms,
the Company may be unable to develop or enhance its products and services, take
advantage of opportunities or respond to competition, any of which could have a
material adverse affect on the Company's business, financial condition and
results of operations.
32
<PAGE> 36
BUSINESS
First Virtual has developed and implemented the VirtualPIN architecture
which facilitates Internet commerce and is designed to facilitate other forms of
interactive Internet communications. The VirtualPIN architecture uses E-mail
which has the widest reach and broadest use of any Internet application. FVIPS,
a secure and easy-to-use payment system introduced in October 1994, is the
Company's first application of the VirtualPIN architecture. As of September 30,
1996, the Company has processed over 260,000 FVIPS transactions and has
registered more than 2,650 Sellers and 180,000 Buyers in 166 countries. The
Company believes that the VirtualPIN architecture can also serve as the basis
for additional Internet applications including direct marketing, interactive
advertising, merchandising, subscriptions and renewals, bill payments, client
response surveys and Internet communications.
INDUSTRY BACKGROUND
The Internet is a rapidly growing network of computers and computer
networks that permits communication among users throughout the world. IDC
estimates that the number of Internet users will grow to approximately 200
million by the end of 1999 from 56 million at the end of 1995. The most widely
used application of the Internet is E-mail. The popularity of E-mail and the
emergence of the Web and easy-to-use browser software have fostered continued
rapid growth in Internet use by businesses and individuals.
The evolution of the Internet and the Web as vehicles for electronic
commerce have led to the emergence of new media, merchandising and transaction
processing opportunities. Advertisers, for example, can use newly provided
demographic data to cost effectively target individuals or narrowly defined
groups. Internet commerce can reduce, and in some cases eliminate, merchants'
requirements for physical store premises, warehouses and distribution centers,
by permitting shipment directly from manufacturer to consumer. Information
products, such as news, data and research, can be downloaded directly to a
personal computer, minimizing the cost of physical reproduction, packaging and
distribution of these products. Buyers are motivated to accept these new
offerings because they improve the likelihood of viewing information and
receiving merchandise offers of specific interest to them. The Internet provides
Buyers with the potential to conveniently locate and initiate purchases in a
single marketplace which is easily accessible from home or office.
Consumers have accepted credit cards as a payment method for most mail
order, catalogue and similar transactions, and the majority of consumers hold at
least one credit card. In addition, credit card payment processing, refund
procedures and legal regulations are well established. As a result, the Company
believes that accommodating secure credit card usage on the Internet is one of
the key elements of Internet commerce. Several companies are seeking to provide
a viable secure transaction-based payment system to enable credit card
processing and business-to-consumer Internet commerce. In general, these payment
systems can be classified into two broad categories: those using off-line
process-based technologies, which process and maintain sensitive financial
information off the Internet, and those using encryption-based technologies,
which encode sensitive financial information for transmission on the Internet.
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BARRIERS TO INTERNET COMMERCE AND INTERACTIVE INTERNET COMMUNICATION
The Company believes that there are a number of barriers to the
proliferation of Internet commerce and related interactive Internet
communication applications including (i) developing effective methods of
Internet advertising to stimulate consumer interest, (ii) developing direct
marketing and merchandising capabilities and (iii) developing a secure and
effective transaction processing system.
Lack of effective methods of advertising to stimulate consumer
interest. Currently, Sellers are generally restricted to providing passive
advertising similar to that offered in traditional media. The effectiveness of
advertising on the Internet would likely be increased substantially by the
ability to proactively present advertising to specific Internet subscribers and
to incorporate interactive, stimulating images and sounds within Web
advertisements.
Lack of direct marketing and merchandising capability. The Company believes
that Sellers are becoming increasingly aware that having a Web site does not, of
itself, result in effective Internet commerce. Currently, Sellers lack the means
of effectively marketing directly to potential Buyers who fit specific profiles.
Buyers have the burden of actively searching the vast information and numerous
Web sites on the Internet, often in inefficient and time consuming ways, for
specific products or services. In addition, a purchase transaction may be more
time consuming, require moving through multiple Web sites or disconnecting from
the Internet to place a toll-free call.
Lack of a secure and effective transaction processing system. The Company
believes that an effective transaction processing system for Internet commerce
must successfully address the following:
- Lack of security. The Internet is a public network which potentially
allows third parties to gain unauthorized access to data as it is routed
to its intended destination or stored in databases. Current solutions
generally require encryption and specialized hardware or software
solutions which may be expensive, difficult to use and susceptible to
penetration by proficient and determined hackers.
- Lack of privacy. The open and public nature of the Internet reduces the
ability of the consumer to maintain the privacy of the personal data
typically submitted and compiled in order to process a commercial
transaction.
- Transaction fraud. The Internet may facilitate transaction fraud by
parties posing as legitimate merchants, collecting payment without
delivering goods or services, or as consumers, acquiring goods or
services without making a payment for such goods or services.
- Consumer reluctance to use new payment systems. In order for Buyers to
adopt Internet commerce on a widespread basis, purchasing and selling
over the Internet must be as convenient and easy-to-use as traditional
purchasing methods.
- Difficulty of widespread system deployment and acceptance. The interface
which enables Internet commerce must be compatible with existing hardware
and software and inexpensive and easy-to-use for the average consumer.
The payment systems must also interoperate with established financial
networks and protocols since financial institutions may be reluctant to
adopt and implement entirely new processing and payment methods.
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THE FIRST VIRTUAL SOLUTION
First Virtual has developed and implemented the VirtualPIN architecture
which facilitates Internet commerce and is designed to facilitate other forms of
interactive Internet communications. The VirtualPIN, an alphanumeric sequence
unique to each user, allows the user to establish and maintain identity on the
Internet in a controlled and confidential manner. FVIPS is the Company's first
application of the VirtualPIN architecture. To initiate a transaction using
FVIPS, the Buyer transmits a VirtualPIN to the Seller, who accepts it as a form
of payment for the Buyer's order and relays it to First Virtual for
verification. After the Buyer responds affirmatively to the Company's automated
request for E-mail confirmation of the transaction, First Virtual initiates
financial settlement through the established and secure credit card transaction
processing networks.
In order to bring the retail environment to any Web page, the Company has
prototyped the VirtualTAG, its second application of the VirtualPIN
architecture. The Company believes the VirtualTAG, currently scheduled for
release in the first quarter of 1997, will be one of the first solutions that
takes full advantage of the Internet's unique attributes by combining
advertising, selling and paying in one application. The VirtualTAG uses
cross-platform multimedia environments such as Java or Shockwave to create
stimulating, interactive advertisements within banners or "store fronts" which
are designed to allow Buyers to initiate the purchase and payment and arrange
for the delivery of a product being advertised without leaving the Web page on
which the advertisement appears. The Company believes that the VirtualPIN
architecture, FVIPS and anticipated VirtualTAG applications provide the
following key advantages:
Targeted and interactive advertising. The Company's VirtualPIN architecture
is designed to enable merchandisers to target specific registered users with the
users' consent and without revealing the users' sensitive personal or
demographic data. The Company's VirtualTAG application is designed to provide an
interactive and engaging message by combining sound and motion which is
activated by the Buyer as the cursor moves near or on the advertisement.
Direct marketing and merchandising facility. The Company believes the
VirtualTAG application may enable Sellers to directly market and merchandise
their products and services to Buyers. For example, if the advertisement were in
a newspaper, the VirtualTAG would be comparable to touching a retail store
advertisement, obtaining additional product information, and buying a product,
without having to stop reading the newspaper and visit the store.
Enhanced transaction processing system. By transmitting only a Buyer's
VirtualPIN over the Internet, using E-mail verification and processing and
storing sensitive information off-line, FVIPS offers a simple and effective
transaction processing solution with the following attributes:
- Security. Confidential information, such as credit card numbers, are
stored on servers which cannot be accessed from the Internet and are
never transmitted over the Internet by First Virtual. All that is
transmitted over the Internet is the non-confidential VirtualPIN.
Therefore, the Company believes that FVIPS virtually eliminates the risk
of credit card theft on the Internet.
- Privacy. The Buyer's E-mail address, VirtualPIN and any other personal
information that is willingly disclosed when registering are stored on
one of the Company databases which are connected to the Internet and are
protected by enhanced commercial fire walls and by restricted log-in
access. In addition, the Company's registered users maintain their
privacy by using their VirtualPIN in FVIPS transactions.
- Transaction safeguards. On receipt of the Seller's transaction request,
the Company automatically sends E-mail to the Buyer to confirm that the
Buyer authorizes the order, thereby ensuring authenticity without the
need to transmit confidential information.
- Familiarity and accessibility. The VirtualPIN architecture and FVIPS rely
on E-mail, a widespread, proven and accepted technology with established
standards, and does not require Buyers to purchase or install any
additional hardware or software. The architecture is also based on the
PIN concept, which is widely understood and accepted. Once a Buyer has
completed the simple registration process with the Company, the Buyer can
purchase goods and information services from home or office, 24 hours a
day, through the familiar point-and-click process.
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- Interoperability and adaptability. The VirtualPIN is designed for
integration with a broad set of Internet applications and evolving
platforms and protocols. In contrast to other Internet commerce and
communications solutions which require complex computer architectures
capable of deciphering intricate encrypted messages, the VirtualPIN can
be used on virtually any standard personal computer or Internet access
appliance. FVIPS uses traditional financial payment mechanisms and
enables financial institutions to maintain their existing financial
networks and back-office operations and still participate in the
potential growth opportunities offered by Internet commerce. As a result,
financial institutions incur little additional cost in adopting FVIPS.
STRATEGY
The Company's objective is to become a leading facilitator of Internet
commerce and other forms of interactive Internet communications. The Company's
strategy includes the following key elements:
Leverage technological expertise. The Company intends to leverage its
technological expertise to accelerate the development of new and enhanced
products and services. The Company has world-class expertise in E-mail
technology, with particular emphasis on E-mail-based distributed services, and
has invested significant resources to develop the VirtualPIN architecture to
operate seamlessly with most E-mail systems around the world. The Company also
has substantial expertise in other key areas of Internet-related technology,
such as Java and Virtual Reality Markup Language ("VRML") technology and
cryptography, as well as in the development of scalable and reliable distributed
systems. See "Business -- Management."
Rapidly deploy VirtualPINs through strategic partners and other
distribution channels. The Company intends to establish a large installed base
of Buyer and Seller VirtualPINs through multiple channels including credit card
companies and other financial institutions, on-line and Internet service
providers, value added integrators, businesses with large direct response
customer bases, and a variety of direct marketing programs. To accelerate the
distribution of the VirtualPIN, the Company has entered into strategic
relationships with several major financial institutions including First USA
Paymentech, GE Capital and First Data. These relationships include financial
investments in the Company, representation on the Company's Board of Directors,
and, in certain instances, distribution and marketing arrangements. See "Certain
Transactions."
Further enhance FVIPS. The Company intends to further enhance FVIPS to
include a wider variety of pay-in and pay-out options and features to expand its
globalization. These pay-in methods may include credit cards other than the
currently accepted Visa and MasterCard cards, direct bank withdrawals, checks,
debit cards, digital cash, purchase orders, money orders and wire transfers. The
Company intends to enhance its pay-out mechanisms by adding additional merchant
acquirors and accommodating Sellers who do not currently have a U.S. bank
account. The Company intends to further expand the international features of
FVIPS to include foreign currencies, languages, banking systems and phone access
for registration.
Leverage the VirtualPIN architecture for additional applications. The
Company believes it may be able to expand the VirtualPIN architecture to address
a number of new applications including interactive advertising, targeted direct
marketing and consumer research. For example, the Company's VirtualTAG
application is designed to enable Sellers to create stimulating, interactive
advertisements within banners or "store fronts" which allow Buyers to initiate
the purchase and payment and arrange for the delivery of a product being
advertised without leaving the Web page on which the advertisement appears. The
Company expects to pursue the development of FVIPS enhancements and new
applications through internal product development, the establishment of joint
ventures with businesses in complementary fields and the acquisition of related
products or businesses.
Expand transaction-based business model providing recurring revenues. The
VirtualPIN architecture is designed to enable the Company to generate a
recurring revenue stream from Buyers and Sellers through fees from annual
registration, transaction processing, automatic subscription renewal, bill
paying and royalties.
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THE VIRTUALPIN ARCHITECTURE AND ITS APPLICATIONS
The VirtualPIN, an alphanumeric sequence unique to each user, allows the
user to establish and maintain identity on the Internet in a controlled and
confidential manner.
The VirtualPIN is designed for integration with a broad set of Internet
applications and evolving platforms and protocols. FVIPS is the first
application of the VirtualPIN architecture and can be used on virtually any
standard personal computer or Internet access appliance. The following table
sets forth existing and currently proposed future applications of the VirtualPIN
architecture.
<TABLE>
<CAPTION>
INTRODUCTION
PRODUCT/SERVICE DATE SUMMARY DESCRIPTION
- -------------------- ---------------------- --------------------------------------------------
<S> <C> <C>
FVIPS October 1994 Secure and easy-to-use Internet payment system
VirtualTAG First Quarter 1997 Interactive advertising applet within banners or
"store fronts" at the Web site
1 Virtual Place First Quarter 1997 "Virtual" store showcasing First Virtual
technologies and concepts in cooperation with
Sellers
Targeted Marketing Second Quarter 1997 Seller-initiated direct marketing to consenting
Buyers, who remain anonymous
Billing Notification Fourth Quarter 1997 Seller-initiated electronic billing notification
including subscription and membership renewal and
recurring bill payment
</TABLE>
The Company's proposed VirtualTAG, 1 Virtual Place, targeted marketing and
billing notification products and services are under development. There can be
no assurance that any of such products or services will be introduced in
accordance with the dates above, or at all, or that if introduced, such products
or services will achieve market acceptance.
THE FIRST VIRTUAL INTERNET PAYMENT SYSTEM
The VirtualPIN substitutes for the Seller's bank account number and E-mail
address and the Buyer's credit card number and E-mail address during the course
of the FVIPS transaction. Use of the VirtualPIN allows transactions to be
completed on the Internet without exposing sensitive Seller and Buyer
information to unauthorized discovery.
FVIPS functions as a two-tier system of "Purchase" and "Back-Office"
authorization and settlement processes. A secure barrier exists between the
Purchase tier on the Internet and the Back-Office tier on existing credit card
processing networks. This barrier separates the sensitive Seller and Buyer
information from the Internet. The initiation and verification of the
transaction between the Seller and the Buyer occurs on the Purchase tier. The
Company has a Purchase database server that is connected to the Internet and
interacts with Sellers and Buyers to receive transaction details and manage the
transaction process. This server stores limited and non-financial Seller and
Buyer information, including the user's VirtualPIN, E-mail address and data
regarding any FVIPS transaction that has not yet been completed.
Financial authorization and credit card settlement occurs on the
Back-Office tier. The Company maintains a Back-Office database server that is
connected to existing financial networks used for processing Visa and MasterCard
transactions, but is not directly connected to the Internet. Functionally, this
server integrates FVIPS transactions with existing financial networks. This
server also stores credit card and bank account numbers and complete VirtualPIN
transaction histories. Since the sensitive information on this server is never
stored on nor transmitted over the Internet by First Virtual, the VirtualPIN
architecture prevents unauthorized access to this sensitive information. Both
the Purchase and Back-Office servers are protected by extensive security
measures. See "Server Security" below.
The Company believes that FVIPS' security and privacy capabilities provide
significant advantages to both the Seller and the Buyer for conducting commerce
over the Internet. The security and privacy of the Buyer's sensitive financial
information is protected because the use of the VirtualPIN does not require the
transmission of this information over the Internet. By storing sensitive
financial information in the Back-Office tier, the Company's database of bank
account and credit card numbers is protected from electronic attempts to
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acquire or compromise the data. The required Buyer confirmation of the
transaction by E-mail renders the unauthorized possession of a VirtualPIN
virtually harmless and deters fraud. Through the use of process-based security
that does not require the protection of the VirtualPIN during transmission over
the Internet, FVIPS avoids the need for complicated encryption methods
characteristic of competing Internet payment systems.
The following description relates to the current operation of FVIPS. The
Company may make changes to the operation of FVIPS in the future as warranted by
business conditions or changes in credit card association operating rules.
Buyer Registration
The registration process for Buyers is quick and simple. FVIPS requires
only that the Buyer possess a valid Visa or MasterCard credit card and have
access to Internet E-mail. No additional hardware or software is needed. Most
Buyers also want access to the Web, where most Sellers maintain retail sites. In
order to register, a Buyer completes an application containing the Buyer's name,
E-mail address and postal address via E-mail or by visiting a Seller's or the
Company's Web site. On receipt of the application, the Company confirms the
validity of the Buyer's E-mail address by sending the applicant E-mail
instructions to call a toll-free automated response unit to provide the Buyer's
credit card information. The Company validates the applicant's financial
information by submitting the registration fee as a charge to the applicant's
credit card. If the credit card information is valid, the Buyer is sent E-mail
issuing his VirtualPIN. If the credit card information is invalid, the Buyer is
notified via E-mail.
Seller Registration
A Seller can be any individual or entity that has an E-mail address and a
valid U.S. bank account. In addition to an account application process similar
to the one outlined for a Buyer above, a Seller applicant must also pay an
initial registration fee and provide the Company with information to identify
the U.S. bank account into which net sales receipts will be deposited by the
Company after settlement of the transaction. In most cases, a check is
sufficient to meet both requirements. After receiving the bank account
information, and, if applicable, upon qualifying as an Express Seller, the
Company issues a VirtualPIN to the Seller and notifies the Seller of its
VirtualPIN via E-mail.
To qualify as an Express Seller and receive transaction settlement in
approximately three to five business days, the Seller must meet First USA
Merchant Services' traditional credit card merchant qualifications. In addition
to the standard Seller application process outlined above, Express Sellers must
submit an additional hard copy application to First USA Paymentech, the
Company's merchant acquiror, for credit screening, and to the Company for
approval. The Company is contemplating a program which would permit certain
potential Express Sellers to use their existing merchant acquiror arrangements.
The Company believes that most established credit card merchants using FVIPS
will apply and qualify for Express Seller status.
No additional hardware is needed and only minimal software is required if
the Seller wishes to integrate the Company's merchant software with the Seller's
Web server for manual processing. However, a Seller who wishes to enhance its
Web server to allow for automatic processing of FVIPS transactions may download
the Company's publicly available code, write customized software using
Company-provided specifications or use third party software incorporating FVIPS.
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The Purchase Cycle
The Purchase Cycle of a FVIPS transaction involves the following steps:
LOGO
1. The Buyer initiates the purchase cycle by transmitting his order and
VirtualPIN to the Seller. This is typically done by accessing the Seller's Web
site. At the Seller's option, the Buyer's VirtualPIN can be verified in real
time with the Company's server, ensuring that the Buyer's VirtualPIN is valid.
2. The Seller submits a transaction request either by E-mail or SMXP
real-time messaging with the following information: the Seller's and Buyer's
VirtualPINs, purchase amount, item name, and an optional request to receive
notification of the credit card authorization result.
3. On receipt of the Seller's transaction request, the Company
automatically sends E-mail to the Buyer to confirm that the Buyer authorizes the
order.
4. The Buyer replies to the Company's confirmation E-mail by answering
"yes," "no," or "fraud." A "yes" response indicates the Buyer authorizes the
order. A "no" response indicates the Buyer does not authorize the order, for
reasons including changing his mind or, in the case of an information product
which has already been transmitted to the Buyer at the time of confirmation,
that the Buyer did not receive what he should have. A "fraud" response indicates
that the Buyer's VirtualPIN was used without his authorization.
5. If the Buyer replies "no," the Company cancels the transaction (however,
repeated "no" replies subject a Buyer to VirtualPIN revocation); if the Buyer
replies "fraud," the Company cancels the transaction and the Buyer's VirtualPIN
to protect the Seller and Buyer from further attempts at fraudulent use; if the
Buyer fails to reply to the confirmation E-mail, several additional attempts
will be made before the Company notifies the Seller of a "no sale." If the Buyer
replies "yes," the Company notifies the Seller by E-mail of the Buyer's
affirmative reply.
6. The Company proceeds to process the transaction through the established
financial networks.
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The Back-Office Cycle
The Back-Office Cycle of a financial transaction involves the following
steps:
LOGO
6. Once the Buyer replies "yes," the Company transmits the transaction
information (Seller and Buyer VirtualPINs and transaction details) to a secure
Back-Office server through dedicated lines using a one-way batch protocol. The
Back-Office server is not directly connected to the Internet.
7. At the secure Back-Office server, the Buyer's VirtualPIN is matched with
the Buyer's credit card number and the Seller's VirtualPIN is matched with the
Seller's ACH routing number. The Company never transmits Buyers' and Sellers'
sensitive financial information on the Internet.
8. Credit authorization is requested through the Company's processor, which
in turn processes the credit authorization through the existing Visa/MasterCard
interchange networks.
9. The processor passes back credit authorization results to the Company's
Back-Office server.
10. If the Seller requested notification of credit authorization (see Step
2 above), it is transmitted to the Seller; if the Seller did not request
notification of credit authorization, the Seller will only be notified in the
event of an authorization failure. If such a failure occurs, the transaction is
canceled, the Buyer is notified, and the Buyer's VirtualPIN is suspended.
11. The Buyer's credit card is charged through the Company's processor and
the Visa/MasterCard interchange networks. Transactions of less than $10 are
accumulated until they total more than $10 or have aged more than 10 days, and
the accumulated amount is processed as a single item. The issuing bank will bill
the Buyer on his next monthly statement. The processor bills the Company monthly
for transaction authorization and settlement fees.
12. The Buyer is automatically notified of the charge by E-mail.
13. The following morning, the issuing bank remits the transaction amount
(less its issuing bank interchange fee) to the Company's merchant acquiror, via
the Company's processor. First USA Paymentech is the Company's merchant
acquiror. The funds from the purchase are held at First USA Paymentech: for a
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Pioneer Seller, the funds are held in escrow for 91 calendar days and for an
Express Seller, the funds are paid within three to five business days. The
merchant acquiror bills the Company monthly for transaction fees and a network
assessment fee paid to the credit card association.
14. At the end of the holding period, First USA Merchant Services transfers
the funds to the Company's deposit account held at Northern Trust. The Company
collects its transaction fees before transferring the net proceeds to the
Seller.
15. The following day, the Seller's net funds are transferred to the
Seller's bank account via ACH. Northern Trust bills the Company monthly for ACH
transfer fees.
16. The Seller is automatically notified of the deposit by E-mail.
The Seller may independently choose, depending on his security
requirements, to deliver the product at any of the following four points in the
transaction process: (i) following the verification of the validity of the
Buyer's VirtualPIN by the Purchase server; (ii) when the transaction has been
accepted by the Purchase server, indicating the VirtualPIN is valid and in good
standing; (iii) following the Buyer's confirmation of the transaction; or (iv)
following the receipt of credit card authorization.
Server Security
The Company's Purchase and Back-Office servers are located at facilities
leased from First USA Paymentech. The Company's servers that connect directly to
the Internet (the "Purchase" servers) are protected by Company-modified
commercial firewalls and restricted log-in-access. Remote log-in sessions are
protected through the use of one-time passwords and encrypted communication. The
only information that resides on or passes through the Purchase servers includes
nonsensitive information such as VirtualPINs, E-mail addresses and recent
VirtualPIN transaction histories.
The Company's servers which store and transmit financially sensitive
information, such as bank account and credit card numbers and complete
VirtualPIN transaction histories, are not connected to the Internet. These
Back-Office servers cannot be accessed from the Internet and can only be
accessed in person or by direct telephone connection using specific, unique
cryptographic hardware which only the Company possesses.
Communication between the Purchase servers and the Back-Office servers uses
a proprietary one-way batch protocol that allows extremely limited types of
transmission of information and activity between the servers. The Company
believes that it is virtually impossible for sensitive financial information to
be compromised without physical access to the Company's Back-Office servers.
Further, the Company has implemented a series of sophisticated auditing and
intruder-detection systems. Should an intruder ever be suspected, communications
between the Purchase and Back-Office servers would be severed immediately to
ensure the safety and integrity of the financial information. There can be no
assurance that, due to technological advancements or other factors beyond the
control of the Company, such measures will maintain absolute security.
Disaster Recovery
FVIPS is configured to provide hardware and data redundancy. In the event
that a computer within the system should fail, the Company believes that
adequate redundancy in hardware and data storage units exists to allow FVIPS to
continue operating at a reduced capacity. All data is backed up daily to tape
and stored off-site in a secure storage facility. The Company maintains on-site
duplicates of the system's data storage units, known as "mirrors," to provide
additional data integrity and security. The Company intends to build a second
system in 1997 to reduce the chance of system overload or failure. The second
system will be located at a physical location separate from the existing FVIPS
location.
Digital Signatures
When the Company sends credit authorization results to the Seller (see Step
10 under "The Back Office Cycle" above), the Company can use public key
cryptography to digitally sign authorization notices. This
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procedure is intended to prevent the forging of authorization results and the
subsequent fraudulent inducing of product shipment. Copies of the Company's
public authentication keys are available on the Company's server. For security
purposes, current plans provide that the keys are to be changed monthly and are
to be made available only a few days before they are eligible for use. The
private keys necessary for full digital signing of messages are kept off the
Internet. If the Seller wishes to take advantage of this authentication feature,
additional cryptographic software (both publicly and commercially available) is
required.
Optional Encryption of Seller Messages
FVIPS allows the Seller the option of encrypting messages with purchase
information to the Purchase servers for additional security. This option
requires the Seller to obtain additional cryptographic software and the
Company's public encryption keys, which are available without charge from the
Company's server.
Fraud and Chargebacks
If a credit cardholder purchases a product or service and is dissatisfied
after the purchase, the cardholder may be able to return the product and demand
a refund. Under Federal Reserve Regulation Z, credit cardholders have
significant rights to dispute charges for up to two billing cycles after the
billing period in which the charge appears on the cardholder's statement. If the
merchant, after having received payment from its merchant acquiror, refuses to
issue a refund or properly provide the product or service to the cardholder, the
cardholder may initiate a "chargeback" through the issuing bank. When a
chargeback occurs, the merchant's acquiring bank is responsible for refunding
the amount of the charge to the issuing bank (who then refunds the charge amount
to the consumer) and collecting funds from the merchant. If the merchant does
not have sufficient funds to repay the chargeback, the merchant acquiror is
liable. With respect to the Company's operations, First USA Paymentech is the
merchant acquiror and thus liable to the consumer's issuing bank in the event
the merchant cannot pay the chargeback. First USA Paymentech has required, and
the Company has agreed, to indemnify First USA Paymentech in the event any
merchant cannot pay a chargeback.
Pursuant to the terms of an agreement between the parties, the Company is
liable to First USA Paymentech for chargebacks if First USA Paymentech cannot
obtain payment from a Pioneer Seller or an Express Seller. The Company's
customer agreements provide for the allocation of the risk of chargebacks (other
than chargebacks caused by erroneous transmission by the Company) to Pioneer
Sellers and Express Sellers. In addition, under the Pioneer Sellers service,
funds are held for 91 calendar days, thereby minimizing the Company's exposure
to the risk of the Pioneer Seller being unable or unwilling to fund a
chargeback. Under the Express Seller service, funds are held for approximately
three to five business days. The Company believes that the Seller screening
associated with the Express Seller application process mitigates chargeback
exposure.
The Company has experienced negligible fraud (i.e., unauthorized use of
credit card or VirtualPIN) and chargeback rates in its limited operating
history. For Pioneer Sellers, the Company's policy of aging the settlement funds
before paying the Pioneer Seller protects the Company from having to seek
collection of chargebacks from Pioneer Sellers. In all cases, the Seller is
responsible for refunds, and any refunds are deducted by the Company from future
payments to the Seller. If there are no covering payments to the Seller, the
Seller is liable to pay the Company for such refund. While the Company believes
that the design of FVIPS and its Seller application process reduce the risk of
fraud and chargebacks, there can be no assurance that the low fraud and
chargeback rates the Company has experienced historically will continue in the
future. A substantial increase in fraudulent activity or chargebacks could have
a material adverse effect on the Company's business, financial condition and
results of operation.
Financial Industry Policies
The Company currently relies on credit cards as the payment method for
FVIPS transactions. Credit card associations are still in the process of
drafting operating regulations governing many credit card transactions on the
Internet. In some cases, the Company's access to the payment systems of credit
card associations and
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other payment providers may be conditioned on its compliance, and the compliance
of associated processors such as First USA Paymentech, with interim regulations.
The Company's operations have been reviewed by MasterCard and Visa which
currently are the sole payment methods accepted by the Company. Visa has issued
to First USA Paymentech several conditions which govern First USA Paymentech's
processing of transactions for the Company over the Visa system. These
conditions, among other things, establish a maximum dollar amount and aging of
small-dollar transactions the Company can accumulate before they are submitted
to the Visa system for processing, and establish procedures for handling
chargebacks involving such bundled transactions. The Company does not believe
that these conditions materially burden the Company's current operations. The
conditions were initially issued pursuant to an oral communication, and were due
to expire on December 31, 1995. The conditions were renewed until the later of
the adoption of industry-wide operating regulations addressing Internet
transactions or December 31, 1997. If the Internet transaction operating
regulations are not in place by December 31, 1997, the conditions provide that
they can be extended, with Visa's concurrence. To date, MasterCard has not
issued any conditions that are specific to the Company's operations. The Company
is applying to accept Discover, JCB and American Express credit cards, although
there can be no assurance that any of such applications will be accepted. While
the Company expects that it will be able to comply with Visa's future operating
regulations and regulations issued by any other credit card association, there
can be no assurance that it will be able to do so or that compliance will not
have a material adverse effect on its business, financial condition or results
of operations. In addition, there can be no assurance, if the operating
regulations have not been adopted, that the conditions agreement between First
USA Paymentech and Visa, or related agreements between First USA Paymentech and
the Company and other payment providers, will be issued or extended, if at all,
on terms that do not have a material adverse effect on the Company's business,
financial condition and results of operations.
ADDITIONAL PRODUCTS AND SERVICES
VirtualTAG
In order to bring the retail environment to any Web page, the Company has
prototyped the VirtualTAG, its second application of the VirtualPIN. Upon its
introduction, the Company believes VirtualTAG will be one of the first solutions
that takes full advantage of the Internet's unique attributes by combining
advertising, selling and paying in one application. The VirtualTAG uses Java or
Shockwave software to create stimulating, interactive advertisements within
banners or "store fronts" which are designed to allow Buyers to initiate the
purchase, payment and arrange for the delivery of a product being advertised
without leaving the Web page on which the advertisement appears. If the
advertisement were in a newspaper, the VirtualTAG would be comparable to
touching a retail store advertisement, obtaining additional product information
and buying a product, without having to stop reading the newspaper and visit the
store.
1 Virtual Place
The Company intends to introduce 1 Virtual Place, a service through which
Buyers can purchase retail items directly from First Virtual, in the first
quarter of 1997. The Company believes that 1 Virtual Place may be an effective
means of testing technologies and concepts as well as increasing the numbers of
VirtualPIN holders and FVIPS transactions. The Company plans to sell merchandise
through the use of VirtualTAG, advertising banners and the Company's 1 Virtual
Place Web site. The Company anticipates that retail products sold through 1
Virtual Place may range from electronic computer products to gourmet foods and
corporate gifts. The Company is currently testing 1 Virtual Place through an
agreement with Juno whereby limited products such as gift baskets and Casio
watches are being offered to Juno customers.
Presently, the Company intends to order only from vendors following
confirmed Buyer purchase requests, thereby eliminating purchase commitments and
the cost of carrying inventory. The Company plans to generally negotiate rights
of return with the vendor for goods ultimately rejected by the Buyer. However,
with respect to goods ultimately rejected by the Buyer or lost in transit, the
Company will have financial exposure for shipping costs, chargebacks and, in the
event the goods cannot be satisfactorily returned to the vendor, the Company's
cost of the product.
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Targeted Marketing
The Company's Purchase server has a "relay" capability which enables the
forwarding of messages from Sellers directly to Buyers using the Buyer's
VirtualPIN as an E-mail address ([email protected]). This function was
designed to enable Sellers to transmit targeted marketing materials or
questionnaires while maintaining the Buyer's anonymity. The Buyer has the option
of declining to receive any of these communications from Sellers. If the Buyer
wishes to receive promotional offers from Sellers, this "relay" function will
not disclose the Buyer's name or E-mail address. Currently, FVIPS enables
Sellers to use this capability with respect to Buyers who have previously
purchased from them. The Company is planning FVIPS enhancements to enable
Sellers to use this capability on a widespread basis.
Billing Notification
FVIPS enables Sellers to initiate electronic billing notifications for
Buyer confirmation. This capability facilitates a number of applications,
including subscription or membership renewals and recurring bill payments.
Subscription and membership renewal. In the magazine publishing industry,
publishers typically begin sending monthly renewal notices six months prior to
the expiration of the consumer's subscription which results in the incursion of
postal and printing costs for each notice. In addition, many subscribers respond
with a physical check which must then be processed by the fulfillment house or
publisher. Using FVIPS, fulfillment houses and publishers can simply E-mail a
"confirmation-request" to the Buyer, to which a response of "yes" will renew the
subscription and initiate a FVIPS transaction. This procedure has the potential
to significantly reduce billing costs for the Seller, while providing the Buyer
with a convenient and less costly method to effect a renewal. An example of such
a capability is the Company's contract with Network Solutions, Inc. ("Network
Solutions"), a nationwide provider of domain name registration and renewal
services which it administers from the InterNIC domain site. As a result of
development work undertaken by the Company, the InterNIC site will be configured
to enable those seeking registration and renewal of domain names to pay with
their VirtualPINs. Those not having VirtualPINs are expected to be able to link
to the Company's Web site to register for a VirtualPIN. In addition, Network
Solutions intends to notify each registrant in its billing statements that
VirtualPINs are accepted for payment. Network Solutions has also agreed to work
with the Company in devising outbound "value added" messages that can be sent to
its 500,000 plus mailing list of domain name registrants.
Recurring bill payments. As public utilities prepare to face a deregulated
environment and operate outside their traditional geographic locale, FVIPS could
provide a system and a process to facilitate convenient billing on a national
scale. As in the case of subscription renewals, utility companies can benefit
from reduced billing costs by using FVIPS to save on printing, mailing and
processing charges. In addition to the convenience of having utility payments
itemized on a credit card bill, the Buyer would also benefit from reduced
postage cost. In the telecommunications, cable, electric, and gas industries,
FVIPS offers utilities the potential to facilitate consumer billing by using the
Buyer's existing E-mail account, regardless of where that account may be held.
Although the current capability of FVIPS would enable Sellers to utilize the
subscription membership renewal and recurring billing payment services with
respect to a limited number of Buyers, the Company intends to enhance FVIPS to
enable Sellers and Buyers to utilize these services on a widespread basis.
The Company is currently in the process of developing VirtualTAG, 1 Virtual
Place and additional products and services which enable targeted marketing and
facilitate billing notification and recurring bill payments. There can be no
assurance that any of such products will be introduced or, if introduced,
achieve market acceptance.
InfoHaus
For Sellers who offer information products and do not wish to establish
their own Web site, the Company offers the InfoHaus shared Web server
("InfoHaus"). InfoHaus is an on-line retail environment designed to provide
electronic store fronts for Sellers of information products. InfoHaus eliminates
the need for a Seller to maintain any hardware, software or continuous Internet
connection. InfoHaus, in conjunction with FVIPS,
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manages all aspects of the selling process, including confirmation of purchases,
distribution of information goods, accounting, settlement and collection and
payment of proceeds. InfoHaus has been a part of the Company's services since
the deployment of FVIPS and had approximately 300 Sellers as of September 30,
1996. In addition to the standard transaction processing fees, InfoHaus Sellers
also pay an additional surcharge as a percent of the transaction amount and a
monthly storage fee for keeping files on the Company's server.
MARKETING AND DISTRIBUTION
First Virtual's marketing objective is to become the leading facilitator of
Internet commerce and other forms of interactive Internet communications. The
Company intends to rapidly deploy VirtualPINs to all potential Buyers and
Sellers. The Company intends to establish a large installed base of VirtualPINs
issued to Buyers and Sellers through multiple channels including credit card
companies and other financial institutions, on-line and Internet service
providers, value added integrators, businesses with large direct response
customer bases, and a variety of direct marketing programs. The Company intends
to market its services, including VirtualTAG, to merchants regardless of their
Web presence. Initially the Company plans to work cooperatively with advertising
agencies and their clients to develop the creative content and placement of
VirtualTAGs.
The Company believes that a variety of factors will motivate widespread
adoption of FVIPS. Buyers will register with the Company to ensure a secure and
convenient method for on-line purchasing and to take advantage of premium offers
from well-known merchants. Merchants will become Sellers to offer a secure and
highly efficient sales channel that provides the opportunity for two-way
interaction with a broad customer base. The Company intends to enact initiatives
in a number of channels to promote universal availability and adoption of FVIPS,
including the following:
BUYER ENROLLMENT
Credit card companies and other financial institutions. The Company intends
to work with First USA Bank, one of the largest credit card issuers in the U.S.,
GE Capital, a major financial services company with one of the world's largest
portfolios of private label credit cards, First Data, the largest credit card
processor in the U.S., and other major credit card companies and financial
institutions to deploy VirtualPIN marketing campaigns tied to credit card
billing and solicitations. The Company will provide the credit card companies
and other financial institutions with the opportunity to issue VirtualPINs to
their customers on a "co-branded" basis.
On-line and Internet service providers. The Company intends to offer
on-line and Internet service providers the opportunity to provide their
customers co-branded VirtualPINs that will enable their customers to buy and
sell over the Internet. Internet service providers' customers have a
demonstrated interest in using the Internet for diverse applications. In
addition, because they are currently using the Internet, these customers already
have the capability of conducting commercial transactions using FVIPS.
Information technology product firms. The Company plans to launch a variety
of co-marketing campaigns with firms communicating with, servicing and selling
products to on-line, computer-literate consumers. These include iCat, Farcast,
Earthweb, Network Solutions and other personal computer hardware, software and
peripheral production and distribution companies. The Company anticipates that
these companies will bundle the Company's promotional material with their
products, either as a ride-along with product delivery or as an added inducement
or premium to encourage purchase.
Existing and future FVIPS Sellers. The Company expects that a portfolio of
Sellers who support FVIPS will contribute significantly to the rate of Buyer
registration. Individual consumers who use the Web will be motivated to register
as Buyers when they encounter Web merchants who accept payment using FVIPS.
Direct sales. The Company expects to attract VirtualPIN Buyers through
direct marketing programs including solo direct mail, co-op direct mail, disk
inserts in publications, space advertising and direct
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marketing public relations. Any consumer can become a Buyer simply by visiting
the Company's Web site or sending E-mail to [email protected].
SELLER ENROLLMENT
Credit card companies and other financial institutions. The Company has
established relationships with leading credit card companies and financial
institutions to enhance the value of the services these groups provide to their
merchant customers. The Company and credit card companies and financial
institutions, together with Web developers, can provide a turnkey solution to
enabling Internet commerce. The Company intends to pursue relationships with
additional credit card companies and financial institutions.
Value-added integrators. As previously described, the Company has
established a relationship with iCat and is establishing relationships with
additional Web development firms, software development firms which provide
packaged point-of-sale solutions, computer service companies, and advertising
and marketing agencies which provide services and assistance to merchants
establishing or maintaining Web sites. The Company will provide training,
software development tools and technical support to these firms to encourage
them to integrate FVIPS into their clients' Web sites. These firms are
potentially an effective sales force for the Company, reaching a large base of
potential Sellers.
Existing and future FVIPS Buyers. As the number of Buyers and FVIPS
transactions increases, the Company believes that additional Sellers will be
attracted to the potential expanding user base.
Direct sales. The Company has an internal sales force which identifies
businesses with large direct response customer bases (including those businesses
with an online presence). This sales force pursues opportunities through
personal contact, direct marketing, E-mail, and industry events. The Company
believes that businesses which rely on a renewal revenue model, such as magazine
publishers and public utilities, are particularly good prospects, as they will
recognize the value of providing their customers with a means to pay their bills
easily and electronically. Supporting payment through FVIPS will allow these
companies to bill, receive and process payment from their customers at a
significantly reduced cost. The sales force will also focus on software
companies, which have the opportunity to distribute their products online and
rely on a renewal revenue model with maintenance fees and upgrades. Any person
or organization can become a Seller simply by visiting the Company's Web site or
sending E-mail to [email protected].
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company's customer service and support activities are designed to
provide timely, high quality technical support to meet the diverse needs of
customers and to facilitate the adoption and use of its products and services.
The Company's customer service and support organization relies on a continuous
monitoring system that enables the Company to provide support services 24 hours
a day, seven days a week. Sellers and Buyers also have access to numerous
self-help reference materials at the Company's Web and FTP sites.
The Company's customer services and support organization is comprised of
three groups, responsible for customer support, services administration and
systems administration. Customer support staff members are the first line of
support for the Company's customers. Customer support is provided 24 hours a
day, seven days a week by E-mail and facsimile. A toll-free telephone support
service is provided from 6 a.m. to 6 p.m. (west coast time), seven days a week.
The vast majority of customer support inquiries are made via E-mail. Through the
use of an innovative customer support application, database, and E-mail process,
customer support inquiries are recorded, linked automatically with pertinent
customer account history, and dispatched to customer support representatives.
Responses to inquiries are closely monitored for accuracy and timeliness, and an
escalation procedure allows for urgent issues to be resolved by senior
personnel. Management reporting enables regular monitoring of customer support
efficiency. Customer support staff members also provide routine support for the
Company's internal staff and systems.
Services administrators serve as liaisons between the Company's technical
staff and financial partners and resolve escalated support requests from
customer support staff. Services administrators also work closely with
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the Company's development teams and financial partners to provide smooth
transitions of enhanced or upgraded products and services.
Systems administrators pro-actively monitor critical Company computing
systems 24 hours a day, seven days a week to assure maximum uptime and system
efficiency.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on the design
and development of new products and services for the Internet commerce market,
as well as on increasing the capacity and reliability of existing products and
services. The Company has devoted a significant portion of its resources to
research and development programs. As of September 30, 1996, the Company had 18
persons engaged in research and development activities. The Company's research
and development expenses were $307,000, $531,000 and $1,501,000 for the period
from inception to December 31, 1994, the year ended December 31, 1995 and the
nine months ended September 30, 1996, respectively. The Company believes that
significant research and development expenditures will be required in order for
the Company to remain competitive. Accordingly, the Company expects that
research and development expenses will increase substantially in the future.
The Company's research and development and marketing departments work
closely in the selection of research projects. Current research activities
include projects in the following four areas:
- Extension of VirtualPIN architecture.
- Development of a suite of Seller tools that facilitate various activities
using FVIPS.
- Development of a suite of tools using the Company's E-mail confirmation
technology for automated electronic mail dialogues with customers for a
variety of applications.
- Development of advanced application-level services, including systems for
permitting extremely small payments (micro-transactions), systems for the
collection of royalties on copyrighted materials, systems for the
facilitation of pay-per-use software (including games) and systems for
the management of cryptographic keys.
There can be no assurance, however, that any of these services will be made
commercially available on a timely and cost-effective basis, or at all, or that
if introduced, these services will achieve market acceptance.
The Company believes that its software development team represents a
significant competitive advantage. The Company has world-class expertise in
E-mail technology with particular emphasis on E-mail-based distributed services.
The Company also has substantial expertise in other key areas of
Internet-related technology, such as Java and VRML technology and cryptography,
as well as in the development of scalable and reliable distributed systems. The
Company's research and product development team includes among others Nathaniel
Borenstein, the primary author of a number of Internet E-mail standards, and
Marshall Rose, an expert in a number of Internet technologies. The Company's
ability to attract and retain highly qualified employees will be the principal
determinant of its success in maintaining technological leadership.
The Company's ability to design, develop, test and support new software
products and enhancements on a timely basis that meet changing customer needs
and respond to technological developments and emerging industry standards is
critical to the Company's future success. There can be no assurance that the
Company will be successful in developing and marketing new software products and
enhancements that meet changing customer needs and respond to such technological
changes or evolving industry standards. The Company's current services are
designed around certain widely used and accepted standards, including the MIME
and SMTP E-mail standards and upon process-based security via an E-mail
confirmation. Current and future use of the Company's services will depend, in
part, on industry acceptance of such standards and practices as they apply to
the Internet and Internet commerce.
COMPETITION
The market for products and services that enable the sale of goods and
services over the Internet is expected to be intensely competitive and, to the
extent commercial activity over the Internet increases, the
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Company expects competition to increase significantly. There are no substantial
barriers to entry into the Company's business, and the Company expects
established and new entities to enter the market for Internet payment systems
and interactive Internet communications in the near future. It is possible that
a single supplier will dominate one or more market segments. Furthermore, since
there are many potential entrants to the field, it is extremely difficult to
assess which companies are likely to offer competitive products and services in
the future, and in some cases it is difficult to discern whether an existing
service is competitive with the Company's current services.
The Company's principal competitors in the market for consumer-initiated
purchases over the Internet include providers of encrypted credit card
transaction systems such as CyberCash, Verifone, Open Market, Netscape and GC
Tech and providers of electronic cash payment systems such as DigiCash. The
Company expects that credit card processors and acquiring banks will also offer
credit card-based payment systems if SET protocols proposed by Visa, MasterCard,
Microsoft and Netscape are adopted and/or accepted as a standard for Internet
commerce. SET comprises openly published communication and process protocols
intended to facilitate encrypted credit card transactions over the Web. The
Company may experience additional competition from Internet service providers
and Internet directory companies who enter the market for Internet payment
services. Companies such as AOL, CompuServe, Microsoft, IBM, AT&T, Hewlett-
Packard and Federal Express, which possess large, existing customer bases or
ready distribution channels, could develop, market or resell a number of payment
alternatives including, but not limited to, encrypted credit card payment and
digital cash payment systems. Additionally, competitors such as Checkfree may
emerge to provide payment systems based on alternative systems or methods other
than credit cards or digital cash, such as Internet checking transaction
systems. The Company also competes with the direct transmission of unprotected
credit card information for commercial transactions over the Internet (i.e., "in
the clear" transactions), which is currently the primary method for Internet
commercial transactions that use a credit card as a form of payment. The Company
believes that mail order companies and companies that sell from catalogues using
"800" telephone numbers also compete with Internet payment systems. As the
Company expands the applications of its VirtualPIN architecture, it will compete
with a broader range of companies including traditional advertising,
merchandising and direct marketing companies as well as additional entrants into
the interactive Internet communications market.
Several of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases,
more diversified lines of products and services and significantly greater
financial, technical, marketing and other resources than the Company. Such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to individuals,
businesses and financial institutions. In addition, many of the Company's
current or potential competitors have broad distribution channels that may be
used to bundle competing products directly to end-users or purchasers. If such
competitors were to bundle competing products for their customers, the demand
for the Company's services might be substantially reduced, and the ability of
the Company to successfully effect the distribution of its products and the
utilization of its services would be substantially diminished. As a result of
the foregoing or other factors, there can be no assurance that the Company will
be able to compete effectively with current or future competitors or that the
competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, financial condition and results of operations.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies primarily upon copyright, trade
secret and trademark law to protect its technology. The Company has no patents.
The Company has applied for two U.S. patents on portions of its FVIPS system.
While the Company believes that its pending patent applications relate to
patentable inventions, the Company's set of claims with respect to its first
patent application was rejected by the PTO. While the Company is vigorously
protesting the PTO's position, there can be no assurance that patents will be
granted pursuant to the Company's applications, or that if granted, such patents
would survive a legal challenge to their validity, or provide adequate
protection. The Company generally enters into confidentiality and
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assignment agreements with its employees, consultants and vendors and generally
controls access to and distribution of its software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's services or
technology without authorization or to develop similar services or technology
independently. In addition, effective copyright and trade secret protection may
be unenforceable or limited in certain foreign countries, and the global nature
of the Internet makes it difficult to control the ultimate destinations of the
Company's services. To license its software to Sellers, the Company often relies
upon on-screen licenses that are not manually signed by the end users and,
therefore, may be unenforceable under the laws of certain jurisdictions. Despite
the Company's efforts to protect its proprietary rights, third parties may
attempt to copy aspects of the Company's products or services or to obtain and
use information that the Company regards as proprietary. Policing unauthorized
use of the Company's products and services is difficult, particularly in a
global environment in which the Company operates, and the laws of other
countries may afford the Company little or no effective protection of its
intellectual property. There can be no assurance the steps taken by the Company
will prevent misappropriation of its technology or that such agreements will be
enforceable. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is aware of patents held by independent third parties in the
area of Internet payment systems. No assurance can be given as to the
applicability of such patents to the Company's services and technologies. The
assertion of these patent rights, if successful, could result in substantial
cost to the Company. There can be no assurance that the Company's services are
not, or in the future will not be, within the scope of such patents or any other
existing or future patents, and any litigation arising thereunder, even if
successfully contested, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company was named
as a defendant in a patent infringement suit filed by E-data in August 1995. The
suit was dismissed without prejudice in March 1996, and the Company now holds an
exclusive license under the Freeny patent for Internet payment systems, E-data's
applicable patent for Internet payment systems. In addition, the Company from
time to time has received, and may receive in the future, other notices of
claims of infringements of other parties' proprietary rights. There can be no
assurance that additional claims for infringement or invalidity (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company. If any such claims or actions are asserted, the
Company may again seek to obtain a license under a third party's intellectual
property rights. There can be no assurance that such a license would be
available on reasonable terms or at all, and the assertion or prosecution of any
such claims could have a material adverse effect on the Company's business,
financial condition and results of operations.
GOVERNMENT REGULATION
With the dramatic growth of Internet commerce, the Company expects that new
laws and regulations will be enacted that may have an effect on its business and
financial results. The Company currently operates as a facilitator of
transactions over the Internet and does not engage in electronic funds transfers
from consumer accounts. Accordingly, the Company does not believe that its
current activities subject it directly to regulation.
The Company transacts business with credit card issuers and other financial
services companies which are subject to comprehensive regulations, including
consumer lending regulations and regulations governing electronic funds
transfers. Regulation E, promulgated by the Federal Reserve Board pursuant to
the Electronic Fund Transfer Act, governs transfers of funds from consumer
accounts by various means, primarily electronic. Among other things, Regulation
E limits the liability of consumers for unauthorized electronic withdrawals from
their accounts; provides procedures for resolving errors; and requires regulated
institutions to provide disclosures, terminal receipts and account statements.
Although the Company believes that its current services are not subject to
Regulation E, there is no assurance that the Federal Reserve Board will not
require all or certain of the Company's services to comply
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with Regulation E, revise Regulation E or adopt new rules and regulations
affecting electronic commercial transactions that could result in increased
operating costs for the Company or for the principal users of its services and
could also reduce the convenience and functionality of the Company's services,
possibly resulting in reduced market acceptance. For example, the Federal
Reserve Board is considering regulatory changes to Regulation E as it affects
stored value systems. Stored value systems provide a user with a device or
mechanism to purchase goods and services with a prepaid account (e.g., prepaid
long distance telephone cards). These changes may affect the Company's business
in a manner which is currently difficult to predict. Congress has directed the
Federal Reserve Board to study whether provisions of the Electronic Fund
Transfer Act could be applied to stored value products without adversely
impacting the cost, development and operation of such products, and whether
alternatives to regulation could more efficiently achieve the objectives
embodied in that Act. The Federal Reserve Board may not finalize any amendments
to Regulation E that would regulate stored value products until the later of (a)
three months after the study is submitted to Congress, or (b) June 30, 1997. In
addition, if the Federal Reserve Board were to challenge the Company's position
that its services are not subject to Regulation E, responding to such a
challenge could result in significant expenditures of the Company's financial
and management resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Because of the growth in the electronic commerce market, Congress has
debated whether or not to regulate providers of services and transactions in
this market, and federal or state authorities could enact laws, rules or
regulations affecting the Company's business or operations. Senior officials
from several regulatory
agencies, including the Federal Reserve Board and the Office of the Comptroller
of the Currency, have indicated that those agencies have refrained from
promulgating regulations in order to encourage continued development of
electronic commerce, but will monitor this area closely in the future. Other
government agencies in addition to the banking agencies, including the Federal
Trade Commission and the Federal Communications Commission, may promulgate rules
and regulations affecting the Company's activities or those of the users of the
Company's products and services. The Company also may be subject to federal,
state and foreign money transmitter laws which impose record-keeping and
registration and bonding requirements. In addition, the Company may be affected
by the efforts of states to tax online service providers even when they have no
presence within the state. If enacted or deemed applicable to the Company, such
laws, rules or regulations could be imposed on the Company's activities or its
business, thereby rendering the Company's business or operations more costly or
less efficient, either of which would have a material adverse effect on the
Company's business, financial condition and results of operations.
EMPLOYEES
As of October 31, 1996, the Company had a total of 94 employees, including
36 in operations, 19 in research and development, 20 in marketing and sales and
19 in general and administration. In addition, the Company had under contract 17
consultants and contractors.
The Company's future success depends to a significant extent upon the
continued service of its key technical and senior management personnel and upon
its ability to attract and retain additional highly skilled creative, technical,
financial and strategic marketing personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting and retaining such personnel, and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management." None of the Company's employees are
represented by a labor union. The Company has never experienced a work stoppage
and believes that its relationships with its employees are good.
FACILITIES
The Company's corporate facility consists of approximately 20,000 square
feet of leased space in San Diego, California. Of this space, approximately
2,900 square feet is subleased through July 1997, 10,600 square feet is leased
through May 1999 and 6,500 square feet is leased through September 1999. The
Company also leases 2,390 square feet in Ann Arbor, Michigan. This space is
leased through April 30, 1999. The Company leases space from First USA
Paymentech within its facilities in Dallas, Texas. The Company believes that
sufficient additional space will be available as needed.
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The Company's operations are dependent in part upon its ability to protect
its operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events. The
Company does not presently have redundant, multiple site capacity in the event
of any such occurrence. Despite the implementation of network security measures
by the Company, its servers are also potentially vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering with the Company's
computer system. The occurrence of any of these events could result in
interruptions, delays or cessations in service to users of the Company's
products and services, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
October 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- --- ---------------------------------------------
<S> <C> <C>
Lee H. Stein 43 Chairman of the Board and Chief Executive
Officer
Michael D. Schauer 35 President of Financial Services
Thomas A. Daniel 36 Vice President of Merchant Services
Nathaniel S. Borenstein 39 Chief Scientist
John J. Donegan 56 Vice President, Operations
Marshall T. Rose 35 Technical Advisor, Office of the Chairman
John M. Stachowiak 44 Vice President, Finance & Administration and
Chief Financial Officer
Robert S. Epstein(1) 44 Director
Tawfiq N. Khoury(1)(2) 66 Director
Scott Loftesness 49 Director
John A. McKinley 38 Director
Pamela H. Patsley(2) 39 Director
Jon M. Rubin(2) 28 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
MR. STEIN, a founder of the Company, has served as Chairman of the Board of
the Company since January 1996 and as a director and Chief Executive Officer of
the Company since March 1994. Since 1980, Mr. Stein has also been Chairman of
Stein & Stein Incorporated, a firm which has provided advisory and management
services to a selected clientele of high net worth and entertainment industry
individuals, and which is the general partner of The Stein Company, Ltd., an
investment partnership. Mr. Stein is a director of Scripps Foundation for
Medicine and Science, a former director of the American Cancer Society and
former chairman of Jack Murphy Stadium Authority, City of San Diego. Mr. Stein
is a member of the bar of the State of California and the Commonwealth of
Pennsylvania.
MR. SCHAUER has served as the Company's President of Financial Services
since September 1996. From 1993 to September 1996, Mr. Schauer was President,
Consumer Financial Services of GE Capital. Prior to joining GE Capital, Mr.
Schauer was with Valley National Bank where he was Senior Vice President --
Retail Lending from 1989 to 1992 and Executive Vice President -- Retail Lending
from 1992 to 1993. Mr. Schauer also served as a director of the Mastercard U.S.
Region Board from March 1994 through September 1996.
MR. DANIEL has served as the Company's Vice President of Merchant Services
since October 1996. From April 1994 to September 1996, Mr. Daniel served as
President and Chief Operating Officer of Intuit Services Corp. Prior to joining
Intuit Services Corp., Mr. Daniel worked at Automatic Data Processing, Inc. from
1982 through March 1994, serving as Senior Director of the Softpay Services
Division as his last position.
DR. BORENSTEIN, a founder of the Company, has served as the Company's Chief
Scientist since March 1994. Dr. Borenstein was also a member of the technical
staff in the Interpersonal Communication Group at Bellcore from 1989 through
1994. In 1985, Dr. Borenstein joined Carnegie Mellon University where he served
as a system designer until 1988, a lecturer until 1989 and as manager of
applications development from 1988 to 1989. Dr. Borenstein is a director of
Computer Professionals for Social Responsibility and the Institute for Global
Communication.
DR. DONEGAN has served as the Company's Vice President of Operations since
July 1996 and served as a consultant to the Company from March 1996 to July
1996. He has been President of John Donegan Associates, Inc., a computer systems
and network consulting firm, since October 1994. Dr. Donegan retired from the
United States Navy in August 1994 as a Rear Admiral. From January 1992 to August
1994, Rear Admiral Donegan was the first Commander of the Naval Command, Control
and Ocean Surveillance Center,
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<PAGE> 56
a major Navy warfare center and laboratory in San Diego. From June 1989 to
December 1991, he served as the Commanding Officer of the Naval Research
Laboratory in Washington, D.C.
DR. ROSE, a founder of the Company, has served as Technical Advisor, Office
of the Chairman of the Company since July 1996. From March 1994 to July 1996,
Dr. Rose was a consultant to the Company. Dr. Rose has also been a Principal and
owner of Dover Beach Consulting, Inc., an Internet consulting company, since
August 1991. From January 1990 to May 1991, Dr. Rose was the principal
scientist, and, from April 1989 to December 1989, a senior scientist at PSI,
Inc. (formerly NYSERNet, Inc.), an Internet services company.
MR. STACHOWIAK has served as the Company's Vice President, Finance and
Administration and Chief Financial Officer since October 1996. From August 1996
to October 1996, Mr. Stachowiak served as Chief Administrative Officer of the
Company. Mr. Stachowiak also served as a consultant to the Company from May 1996
to August 1996. Mr. Stachowiak served as Vice President, Finance and
Administration and Chief Financial Officer of NeoPath, Inc, a medical device
company, from October 1994 to April 1996. Mr. Stachowiak served as Vice
President, Administration and Process Improvement of US West New Vector Group,
Inc. from January 1991 to October 1994 and as Vice President, Finance and
Administration and Chief Financial Officer from July 1987 to December 1990.
DR. EPSTEIN has served as a director of the Company since December 1995.
Dr. Epstein was a founder of Sybase, Inc., a database software developer
("Sybase"), and has served as Executive Vice President and a director of Sybase
since November 1984. Prior to that, he served as Vice President of Product
Development for Britton-Lee, Inc., a relational database hardware manufacturer.
MR. KHOURY has served as a director of the Company since March 1994 and was
Chairman of the Board of Directors from March 1994 to January 1996. Mr. Khoury
has also served as Chairman of the Board of Directors and Chief Executive
Officer of Pacific Scene, Inc., a company which was a diversified builder
headquartered in San Diego, since August 1971; as Chairman of the Board of
Directors of 2111 Corporation, a property management company, since June 1985;
and a managing director of K Enterprises, an investment company, since August
1991.
MR. LOFTESNESS has served as a director of the Company since November 1996.
Mr. Loftesness is Group Executive of First Data Merchant Systems group of First
Data Corporation. First Data Merchant Systems is responsible for service
management, product and systems development and systems and network operations
for all of First Data's merchant payment processing activities. Prior to joining
First Data in 1994, Mr. Loftesness held a series of payment systems, systems
development and business development positions at Visa International from 1985
to 1989 and 1991 to 1994, Fidelity Investments from 1989 to 1991 and IBM from
1969 to 1985.
MR. MCKINLEY has served as a director of the Company since July 1996. Mr.
McKinley has been the Chief Technology and Information Officer of GE Capital
since October 1995. From February 1982 to September 1995, Mr. McKinley served as
a consultant for Ernst & Young, including serving as a consulting partner from
October 1992 to September 1995.
MS. PATSLEY has served as a director of the Company since December 1995.
Ms. Patsley has been President, Chief Executive Officer and a director of First
USA Paymentech since December 1995. She has also served as President and Chief
Executive Officer of First USA Merchant Services, a wholly-owned subsidiary of
First USA Paymentech, since December 1991 and Executive Vice President and
Manager since July 1990, and as Chairman of the Board of First USA Financial
Services, Inc., a wholly-owned subsidiary of First USA Paymentech, since August
1994. Ms. Patsley has also served as Executive Vice President and Secretary of
First USA, Inc. since July 1989. Ms. Patsley was Chief Financial Officer of
First USA, Inc. and its predecessor from January 1987 to April 1994 and a Senior
Vice President prior to such time. Ms. Patsley currently serves on the Delivery
Systems Advisors' Committees of VISA USA, Inc. and VISA International, Inc. Ms.
Patsley has also served as a director of First USA Bank since November 1993.
MR. RUBIN has served as a director of the Company since September 1994. Mr.
Rubin has been President and a director of Next Century Communications Corp.
("NCCC"), a direct marketing agency and
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holding company for numerous direct marketing businesses and related
investments, since June 1993, and was President of its Strategic Response
division from October 1990 to June 1993.
Effective upon the closing of this offering, the Board of Directors will be
divided into three classes with each director serving a three-year term and one
class being elected at each year's annual meeting of stockholders. The initial
members of such classes will be determined at a meeting of stockholders in
October 1996. There are no family relationships between any directors or
executive officers of the Company.
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<PAGE> 58
BOARD COMMITTEES
The Audit Committee of the Board of Directors was formed in July 1996 to
review the internal accounting procedures of the Company and consult with and
review the services provided by the Company's independent auditors. The
Compensation Committee of the Board of Directors was formed in January 1996 to
review and recommend to the Board the compensation and benefits of all officers
of the Company and review general policy relating to compensation and benefits
of employees of the Company. The Compensation Committee also administers the
issuance of stock options and other awards under the Company's stock plans.
DIRECTOR COMPENSATION
Directors of the Company receive reimbursement of expenses for attending
meetings of the Board of Directors. In April 1996, Lee H. Stein, Tawfiq N.
Khoury and Jon Rubin received fully-vested stock options to purchase 475,000,
100,000 and 90,000 shares of the Company's Common Stock, respectively, and NCCC,
an affiliate of Mr. Rubin's, received an option to purchase 135,000 shares of
Common Stock; each such option has an exercise price of $6.30 per share.
Directors are also eligible to receive stock option grants under the Company's
1995 Stock Plan. On October 8, 1996, each of the Company's non-employee
directors was granted a fully vested option to purchase 5,000 shares of the
Company's Common Stock at an exercise price of $10.50 per share. In October
1996, the Board determined that, in the future, non-employee directors shall
receive a fully vested option to purchase 5,000 shares of the Company's Common
Stock upon such director's election to the Board (the "Initial Grant") and a
fully vested option to purchase 2,000 shares of the Company's Common Stock
immediately following the Company's annual meeting of stockholders (the "Annual
Grant"). Initial Grants and Annual Grants shall be made under the Company's 1995
Stock Plan. Scott Loftesness received an Initial Grant of a fully vested option
to purchase 5,000 shares of the Company's Common Stock at an exercise price of
$11.00 per share upon joining the Board in November 1996. Each of the Company's
current non-employee directors is eligible to receive Annual Grants, commencing
on the Company's 1997 annual meeting of stockholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was formed in January 1996 to review
and approve the compensation and benefits for the Company's executive officers,
administer the Company's stock option plans and make recommendations to the
Board of Directors regarding such matters. The committee is currently composed
of Ms. Patsley, Mr. Khoury and Mr. Rubin. Ms. Patsley serves as President and
Chief Executive Officer of First USA Paymentech, a beneficial owner of more than
5% of the Company's capital stock. Mr. Khoury beneficially owns more than 5% of
the Company's capital stock. Mr. Rubin is President of NCCC, a holder of more
than 5% of the Company's capital stock. See "Principal Stockholders." For a
description of certain transactions involving the Company and NCCC, Mr. Khoury
and a corporate affiliate of First USA Paymentech, see "Certain Transactions."
No interlocking relationship exists between the Company's Board of Directors or
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
EXECUTIVE COMPENSATION
The following table shows the compensation paid by the Company during the
fiscal year ended December 31, 1995 to the Company's Chairman and Chief
Executive Officer and Nathaniel Borenstein, the Company's only executive officer
whose salary plus bonus exceeded $100,000 during such year (the "Named
Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- ------------------------------------------------------------------------- -------- ------
<S> <C> <C>
Lee H. Stein............................................................. $ -- $ --
Chairman and Chief Executive Officer
Nathaniel Borenstein..................................................... 130,000 --
Chief Scientist
</TABLE>
Mr. Stein, Mr. Borenstein, Michael Schauer, the Company's President of
Financial Services, John M. Stachowiak, the Company's Vice President, Finance
and Administration and Chief Financial Officer and Marshall T. Rose, Technical
Advisor, Office of the Chairman, are currently compensated at annual rates of
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<PAGE> 59
$240,000, $200,000, $275,000, $200,000 and $200,000, respectively. Fifty percent
of Mr. Stein's compensation is deferred until such time as the Company's
Preferred Stock is converted into Common Stock pursuant to the Company's
Certificate of Incorporation, which is expected to occur at the closing of this
offering. Any deferred amount accrues interest at an annual rate of 7.0%.
OPTION GRANTS AND AGGREGATE OPTIONS EXERCISES DURING 1995 FISCAL YEAR
The following table contains information concerning the grant of options to
purchase shares of Common Stock to the Named Officer and the only additional
grant to an officer of the Company during the fiscal year ended December 31,
1995.
OPTION GRANTS IN FISCAL YEAR 1995
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------
GRANTED FISCAL 1995 SHARE(1) DATE 5% 10%
--------- ------------ --------- ---------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Nathaniel S. Borenstein.... 16,700 9.3% $0.04 5/22/05 $420 $1,065
Marshall T. Rose........... 4,550 2.5% $0.04 5/22/05 $114 $ 290
</TABLE>
- ---------------
(1) All options were granted at the fair market value of the Common Stock on the
date of grant, as determined by the Board of Directors of the Company. The
option granted to Nathaniel S. Borenstein was fully exercisable on the date
of grant. The option granted to Marshall T. Rose was subject to vesting and
will be fully exercisable as of May 22, 1997.
(2) This column shows the hypothetical gains or option spreads of the option
granted based on assumed annual compound stock appreciation rates of 5% and
10% over the full ten-year term of the option. The assumed rates of
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future Common Stock prices.
AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END VALUES
No options were exercised during fiscal 1995 by any executive officer. The
following table sets forth the number and value of exercisable and unexercisable
options held at December 31, 1995 by executive officers who held options to
purchase shares of the Company's capital stock as of such date.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1995 AT DECEMBER 31, 1995(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Nathaniel S. Borenstein.................... 16,700 0 $ 4,676 $ 0
Marshall T. Rose........................... 1,138 3,412 $ 319 $ 995
</TABLE>
- ---------------
(1) Calculated by determining the difference between the deemed fair market
value of the securities on December 31, 1995 underlying the options and the
exercise price.
Subsequent to December 31, 1995, (i) Lee H. Stein was granted options to
purchase 250,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share and 475,000 shares of Common Stock at an exercise price of $6.30
per share, (ii) Nathaniel S. Borenstein was granted options to purchase 14,500
shares of the Company's Common Stock at an exercise price of $0.32 per share and
100,000 shares of Common Stock at an exercise price of $6.30 per share, (iii)
Marshall T. Rose was granted an option to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $6.30 per share,
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<PAGE> 60
(iv) John M. Stachowiak was granted options to purchase an aggregate of 125,000
shares of the Company's Common Stock at an exercise price of $10.50 per share,
and (v) Michael D. Schauer was granted options to purchase 225,000 shares of the
Company's Common Stock at an exercise price of $10.50 per share. No officer of
the Company exercised options to purchase the Company's Common Stock during the
fiscal year ended December 31, 1995.
STOCK PLANS
1994 Stock Plan. The 1994 Incentive and Non-Statutory Stock Option Plan
(the "1994 Stock Plan") provides for the grant of stock options to employees,
officers, directors of and certain other persons providing services to the
Company. Under the 1994 Stock Plan, the Company may grant options that are
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code") and options not
intended to qualify as incentive stock options. Incentive stock options may only
be granted to employees of the Company. Under the 1994 Stock Plan, 461,250
shares of Common Stock were subject to outstanding options as of the date of
this Prospectus. Options with respect to 454,832 of such shares have vested as
of November 26, 1996. By resolution of the Board of Directors of the Company, no
additional options may be granted under the 1994 Stock Plan. The 1994 Stock Plan
is administered by the Board of Directors or a committee thereof. Generally,
options vest over two years and must be exercised within ten years. All options
are non-transferable other than by will or the laws of descent and distribution.
The 1994 Stock Plan provides that, in the event the Company is a party to a
reorganization or merger with one or more other corporations, whether or not the
Company is the surviving corporation, or if the Company consolidates with one or
more other corporations or the Company is liquidated or sells or otherwise
disposes of substantially all of its assets to another corporation ("Transfer of
Control"), the Board may accelerate the time for exercise of all unexercised and
unexpired options to and after a date prior to the effective date of a Transfer
of Control. The Board may also cancel all outstanding options, provided that,
holders receive notice and have the right to exercise options then exercisable
(including options accelerated by the Board). If the Board does not cancel such
options, unexercised options shall remain outstanding and shall be exercisable
either for Common Stock or, if applicable, any form of consideration received
pursuant to the terms of the Transfer of Control.
1995 Stock Plan. The 1995 Stock Plan of the Company provides for the grant
of stock options to employees, officers, directors and consultants of the
Company and any subsidiaries. The 1995 Stock Plan, as amended and restated by
the Board in October 1995, is subject to stockholder approval. Under the 1995
Stock Plan, the Company may grant options that are intended to qualify as
incentive stock options within the meaning of Section 422 of the Code and
options not intended to qualify as incentive stock options. Incentive stock
options may only be granted to employees of the Company and any subsidiaries.
Under the 1995 Stock Plan, 3,000,000 shares of Common Stock have been reserved
for issuance upon exercise of granted options, of which 1,286,895 shares of
Common Stock were subject to outstanding options as of November 26, 1996.
Options with respect to 207,775 of such shares have vested as of November 26,
1996.
The 1995 Stock Plan is administered by the Board of Directors or a
committee thereof. Subject to the provisions of the 1995 Stock Plan, the Board
or committee has the authority to select the persons to whom awards are granted
and determine the terms of each award, including (i) the number of shares of
Common Stock covered by the award, (ii) when the award becomes exercisable
subject to certain limitations, (iii) the exercise price of the award and (iv)
the duration of the option (which may not exceed ten years and five years in the
case of incentive options granted to stockholders who hold more than ten percent
of the Company's capital stock). Generally, 25% of shares subject to an option
vest at the end of the first year and 1/48 of the shares subject to such option
vests each month thereafter. Generally, options must also be exercised upon the
earlier of (i) 90 days after the termination of the Optionee's employment or
(ii) ten years. All options are non-transferable other than by will or the laws
of descent and distribution.
The 1995 Stock Plan provides that in the event of a merger of the Company
with or into another corporation, the options may be assumed or an equivalent
option substituted by the successor corporation or a parent or subsidiary of
such successor corporation. If the options are not so assumed or substituted
for, the options shall automatically become fully vested and exercisable. In the
event of a proposed dissolution or
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<PAGE> 61
liquidation of the Company, unexercised options shall terminate immediately
prior to the consummation of such dissolution or liquidation.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") provides for the purchase by eligible employees of shares
of the Company's Common Stock. The Purchase Plan was adopted by the Board of
Directors in July 1996 and approved at the annual stockholders' meeting in
October 1996. A total of 100,000 shares of Common Stock have been reserved for
issuance under the Purchase Plan. The Purchase Plan, which is intended to
qualify under Section 423 of the Code, is administered by the Compensation
Committee of the Board of Directors. Employees (including officers and employee
directors) of the Company or any subsidiary of the Company designated by the
Board for participation in the Purchase Plan are eligible to participate in the
Purchase Plan if they are customarily employed for more than 20 hours per week
and more than five months per calendar year. The Purchase Plan will be
implemented during concurrent 24 month offering periods each of which will
initially be divided into four consecutive six-month purchase periods, subject
to change by the Board of Directors. Offering periods generally begin in January
and July of each year. The initial offering period will begin shortly after the
effective date of the offering and will end in December 1997. The Purchase Plan
terminates on the earliest of (i) the last business day of December 2006; (ii)
the date on which all shares available for issuance have been sold or (iii) the
date on which all purchase rights are exercised in connection with an
acquisition or change in control of the Company. The Company has not yet offered
or sold shares of Common Stock to employees pursuant to the Purchase Plan. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 20% of an employee's compensation
during a purchase period. Shares are purchased on the last day of each purchase
period. The price at which stock may be purchased under the Purchase Plan is
equal to 85% of the lower of the fair market value of the Company's Common Stock
on the first day of the offering period or the last day of the purchase period.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company. In addition, participants generally may not
purchase stock having a value greater than $25,000 in any calendar year.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Stein,
Schauer, Borenstein, Rose and Stachowiak.
Mr. Stein's employment agreement, effective as of January 1996, provides
for an annual base salary of $240,000. The agreement provides that Mr. Stein
shall serve as the Company's Chairman and Chief Executive Officer. The agreement
may be terminated by either party at will, at any time. The agreement also
provides for a payment to Mr. Stein of one year's salary and vesting of all
unvested options in the event that he is terminated (other than for cause) from
his position as the Company's Chairman of the Board of Directors or in the event
of certain changes of the composition of the Board of Directors or the Company's
stockholder base. In the event Mr. Stein is terminated (other than for cause)
from his employment as Chief Executive Officer and remains Chairman of the Board
of Directors without a reduction in compensation, then all of Mr. Stein's
unvested options shall continue to vest during such time that Mr. Stein
continues to serve as Chairman of the Board of Directors.
Mr. Schauer's employment agreement, dated August 26, 1996, provides for an
annual base salary of $275,000, with eligibility for a bonus of up to 100% of
such annual salary as a bonus, provided that, in February 1997, Mr. Schauer
shall receive at least 50% of such amount as a guaranteed bonus. In addition,
Mr. Schauer shall receive approximately $23,000 per month during the first six
months of the agreement as compensation for foregone bonus payments from Mr.
Schauer's previous employer. Pursuant to the agreement, the Company granted Mr.
Schauer an option to purchase 225,000 shares of the Company's Common Stock
50,000 shares of which shall vest upon the closing of this offering. The
agreement provides that Mr. Schauer shall receive severance payment equal to one
year's salary plus the greater of $275,000 or the previous year's bonus in the
event Mr. Schauer is terminated (other than for cause). In addition, if Mr.
Schauer is terminated (other than for cause) prior to the first anniversary of
the agreement, then all of Mr. Schauer's unvested options shall vest and become
exercisable; if such termination occurs after such initial anniversary, then all
shares subject to vesting within six months of such termination shall vest and
become
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exercisable. The agreement also provides that the foregoing severance benefits
shall apply in the event of an adverse change in Mr. Schauer's employment
following a change in control.
Mr. Rose's employment agreement, dated July 15, 1996, provides for an
annual base salary of $200,000. The agreement provides for an employment term of
two years, subject to an additional one-year period at the Company's option.
Following the termination of Mr. Rose's employment for any reason, the Agreement
provides that he shall remain available for one year to perform consulting
services for the Company for up to 15 hours per week at a rate of $1,500 per
hour. The agreement also grants registration rights to Mr. Rose, pursuant to
which Mr. Rose may participate in a Company registration, subject to any
existing registration rights agreement to which the Company is a party and
subject to the ability of underwriters to restrict participation in such
registrations.
Mr. Borenstein's employment agreement, dated August 8, 1996, provides for
an annual base salary of $200,000. The agreement provides for an employment term
of two years, subject to an additional one-year period at the Company's option.
Following the termination of Mr. Borenstein's employment for any reason, the
Agreement provides that he shall remain available for one year to perform
consulting services for the Company for up to 15 hours per week at a rate of
$300 per hour. The agreement also grants registration rights to Mr. Borenstein,
pursuant to which Mr. Borenstein may participate in a Company registration,
subject to any existing registration rights agreement to which the Company is a
party and subject to the ability of underwriters to restrict participation in
such registrations.
Mr. Stachowiak's employment agreement, dated October 14, 1996, provides for
an annual base salary of $200,000. Pursuant to the agreement, the Company
granted Mr. Stachowiak an option to purchase 100,000 shares of the Company's
Common Stock, which vests in accordance with the Company's 1995 Stock Plan, and
an option to purchase 25,000 shares of the Company's Common Stock which vests
six months after the closing of this offering.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law (the "DGCL"), the
Company has included in its Certificate of Incorporation a provision to
eliminate the personal liability of its directors for monetary damages for
breach or alleged breach of their fiduciary duties as directors, subject to
certain exceptions. In addition, the Bylaws of the Company provide that the
Company is required to indemnify its officers and directors under certain
circumstances, including those circumstances in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses to
its officers and directors as incurred in connection with proceedings against
them for which they may be indemnified. The Company has entered into
indemnification agreements with its officers and directors containing provisions
that are in some respects broader than the specific indemnification provisions
contained in the DGCL. The indemnification agreements require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms. At present, the Company is
not aware of any pending or threatened litigation or proceeding involving a
director, officer, employee or agent of the Company in which indemnification
would be required or permitted. The Company believes that its charter provisions
and indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.
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CERTAIN TRANSACTIONS
Securities Issuances. On March 11, 1994, persons and entities affiliated
with Lee H. Stein, Chairman of the Board and Chief Executive Officer of the
Company, and Tawfiq N. Khoury, a director of the Company, purchased a total of
2,500,000 shares of Common Stock at a purchase price of $0.04 per share. The
persons and entities purchasing shares of Common Stock, and the number of shares
purchased by each, are as follows: Lee H. Stein (625,000 shares); June L. Stein,
the spouse of Mr. Stein (625,000 shares); and trusts for the benefit of Mr.
Khoury and his immediate family (1,250,000 shares).
On September 19, 1994, Jon Rubin, a director of the Company, purchased
1,250,000 shares of the Company's Common Stock for an aggregate purchase price
of $200,000. In January 1996 Mr. Rubin transferred 1,000,000 of such shares to
NCCC. Mr. Rubin is the President of NCCC.
On May 22, 1995, the Company sold an aggregate of 551,500 shares of Series
A Preferred Stock to Sybase and an affiliate of Unterberg Harris, each of which
purchased 275,750 shares for an aggregate purchase price of $485,320. The
Company agreed to redeem the shares purchased by Sybase at cost in the event
First Virtual chooses not to use the Sybase database platform. Such redemption
right remains in effect until such time as the shares purchased by Sybase are
converted into Common Stock, which will occur upon the closing of this offering.
Robert Epstein, a director of the Company, is a director and an Executive Vice
President of Sybase. See "Underwriting."
On December 22, 1995, the Company entered into a Series B Preferred Stock
Purchase Agreement (the "Series B Agreement") with First USA Merchant Services,
pursuant to which the Company sold to First USA Merchant Services 783,945 shares
of its Series B Preferred Stock for an aggregate purchase price of $2.5 million.
In connection with the financing, the Company also issued to First USA Merchant
Services a warrant to purchase up to 852,272 shares of its Series A Preferred
Stock for $1.76 per share (the "Series A Warrant") and up to 940,734 shares of
its Series B Preferred Stock at $3.189 per share (the "Series B Warrant").
Pamela H. Patsley, a director of the Company, is the President and Chief
Executive Officer of First USA Merchant Services. In addition, First USA
Merchant Services received a warrant (the "Incentive Warrant") to purchase a
number of shares of the Company's Common Stock equal to up to four percent of
the Company's outstanding capital stock as of the date of exercise, which
warrant is exercisable only in the event that First USA Merchant Services
induces certain of its merchant customers to establish Internet sites employing
FVIPS. The Incentive Warrant expires immediately prior to the closing of this
offering.
In connection with First USA Merchant Services' investment in the Company,
First Virtual, First USA Merchant Services and certain stockholders of the
Company entered into an Acquisition Option Agreement dated December 22, 1995
(the "Acquisition Option Agreement"), pursuant to which First USA Merchant
Services received the right to purchase all, but not less than all, outstanding
shares of the Company's capital stock held by such stockholders in exchange for
shares of Common Stock of First USA Merchant Services of equal value in
connection with First USA Merchant Services initial public stock offering,
subject to certain minimum valuation thresholds. The Acquisition Option
Agreement further provided for the exchange of options, warrants and other
rights to purchase shares of capital stock of the Company for equivalent rights
with respect to shares of capital stock of First USA Merchant Services, in the
event First USA Merchant Services chooses to exercise its acquisition right
pursuant to the Acquisition Option Agreement. The Acquisition Option Agreement
provided that First USA Merchant Services' rights pursuant to such agreement
terminates upon the earlier of (i) the effective date of a registration
statement relating to the initial public offering of First USA Merchant Services
or the Company or (ii) March 1997. The Company and First USA Merchant Services
entered into an agreement terminating First USA Merchant Services' rights
pursuant to the Acquisition Option Agreement on October 21, 1996.
On March 31, 1996, the Company and First USA Merchant Services entered into
an amendment to the Series B Agreement, pursuant to which (i) First USA Merchant
Services purchased 465,000 shares of Series B Preferred Stock for an aggregate
purchase price of $1,482,885 upon partial exercise of the Series B Warrant, (ii)
the Series A Warrant and the unexercised portion of the Series B Warrant were
canceled, and (iii) in consideration for a cash payment of $3,017,115, the
Company issued to First USA Merchant Services warrants (the "New Warrants") to
purchase up to 852,272 shares of Series A Preferred Stock and up to
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475,734 shares of Series B Preferred Stock at an exercise price of $0.01 per
share. The New Warrants expire in March 2001.
On July 3, 1996, the Company and GE Capital entered into a Securities
Purchase Agreement, pursuant to which GE Capital purchased 130,952 shares of the
Company's Series C Preferred Stock and 107,144 shares of the Company's Common
Stock for an aggregate purchase price of $2.5 million. GE Capital also received
a warrant to purchase an additional $500,000 of Common Stock of the Company. The
per share exercise price of such warrant will be $10.50 in the event the Company
and GE Capital enter into a joint marketing agreement prior to December 31,
1996, and $15.00 otherwise. In connection with the financing, GE Capital agreed
that, for a period ending two years following the offering contemplated hereby,
GE Capital would (i) take such action as may be required so that all shares of
Common Stock owned by it would be voted for the Company's nominees to the Board
of Directors and (ii) refrain from soliciting proxies or participating in any
election contest relating to the election of Directors of the Company. The
Company and GE Capital also entered into a letter agreement providing that the
parties shall explore ways in which they can cooperate with respect to joint
marketing and market development activities. To date, the Company and GE Capital
have not agreed to undertake any joint marketing or market development
activities, and there can be no assurance that any such activities will ever be
undertaken or, if undertaken, will be of benefit to the Company. John McKinley,
a director of the Company, is Chief Technology and Information Officer of GE
Capital.
On August 26, 1996 the Company and First Data entered into a Securities
Purchase Agreement, pursuant to which First Data purchased 200,000 shares of the
Company's Series D Preferred Stock at a price of $15.00 per share for an
aggregate purchase price of $3.0 million. First Data also received a warrant to
purchase up to an additional 1,500,000 shares of the Common Stock of the Company
at an exercise price ranging from $2.23 to $5.00 per share of Common Stock. The
right to exercise the warrants and the exercise price is conditioned upon First
Data securing the registration of a certain number of VirtualPINs. In connection
with the financing, First Data agreed that, for a period ending two years
following the offering contemplated hereby, First Data would (i) take such
action as may be required so that all shares of Common Stock owned by it would
be voted for the Company's nominees to the Board of Directors and (ii) refrain
from soliciting proxies or participating in any election contest relating to the
election of Directors of the Company. In connection with the financing, the
Company and First Data also entered into a Marketing Agreement dated August 26,
1996 (the "Marketing Agreement") providing that FDC shall develop a plan to
encourage credit card issuers affiliated with First Data to offer VirtualPIN
accounts to their cardholders. The Marketing Agreement provides for a minimum
expenditure by First Data of $1,000,000 during 1997 in support of such plan;
provided that in the event that First Data fails to expend such sum, it shall
only be obligated to reimburse the Company for 50% of the deficiency in its
expenditures. The Marketing Agreement provides that the Company and First
Virtual shall negotiate an agreement for joint development of a "digital
currency" payment system, that First Data shall be the sole credit provider with
respect to any such digital currency payment system, and that the interest float
generated by such payment system shall be shared in equal parts by the Company
and First Data. In addition, the Marketing Agreement contemplates that First
Data present to the Company a plan for assuming all of the Company's foreign
exchange settlement transactions as long as First Data is able to do so on
commercially reasonable terms or until December 1999, whichever occurs first.
Neither First Data nor the Company is under any obligation to enter into any
definitive commitment with respect to marketing activities, development of a
digital currency payment system or implementation of a foreign exchange
settlement system, and there can be no assurance that any such efforts will be
undertaken or, it undertaken, will be of benefit to the Company. Scott
Loftesness, a director of the Company, is Group Executive of First Data Merchant
Systems, a subsidiary of First Data.
Loans from Affiliates. Between the Company's inception and June 30, 1996,
the Company borrowed a total of $400,000 from a trust affiliated with Mr. Khoury
(the "Khoury Trust"), and issued promissory notes (the "Khoury Trust Notes")
with such aggregate principal amount to the Khoury Trust. Between the Company's
inception and June 30, 1996, the Company also borrowed an aggregate of $800,000
from NCCC. The Company issued promissory notes with such an aggregate principal
amount to NCCC (the "NCCC Notes"). The Khoury Trust Notes and the NCCC Notes
bear an annual interest rate of 8% and were due and payable on June 1, 1999. On
May 18, 1995, all outstanding Khoury Trust Notes and NCCC Notes were
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canceled in consideration for the issuance to the holders thereof of new
promissory notes (the "New Notes"), which accrue interest at an annualized rate
of 8% and are due and payable upon the closing of this offering. As of September
30, 1996, total principal and interest outstanding on the New Notes was
approximately $1.4 million.
On November 30, 1995, the Company borrowed $125,000 from each of Sybase and
a fund managed by Unterberg Harris. In connection with the issuance of such
promissory notes (the "Notes"), the Company issued to each such party a warrant
to purchase 71,022 shares of its Series A Preferred Stock at an exercise price
equal to the lesser of $1.76 per share and the price per share paid by investors
in the Company's next round of equity financing. On December 22, 1995, the
parties exercised such warrants and each received 71,022 shares of Series A
Preferred Stock in consideration for cancellation of the principal amount owing
under the Notes.
Services Arrangements. Since September 12, 1994, First USA Merchant
Services has provided credit card transaction acquisition services to the
Company pursuant to a Merchant Credit Card Agreement between the Company and
First USA Merchant Services dated as of that date. The Company paid First USA
Merchant Services $100,700 and $28,200 for the nine-month period ended September
30, 1996 and the year ended December 31, 1995, respectively, pursuant to the
agreement.
In addition, pursuant to a Shareholder Rights Agreement dated December 22,
1995 (the "Shareholder Rights Agreement") among the Company and its
stockholders, including First USA Merchant Services, the Company agreed, for a
period of four years, not to enter into an agreement with, or otherwise utilize,
a payment card transaction acquiror other than First USA Merchant Services for
provision of payment processing services that First USA Merchant Services is
willing and capable of providing at a commercially reasonable price (the
"Processing Right"). In August 1996, in connection with the amendment and
restatement of the Shareholder Agreement, the Company entered into an agreement
with First USA Merchant Services for the waiver of the Processing Right. In
exchange for such waiver, the Company agreed to pay First USA Merchant Services
facility fees totaling $500,000 and transaction surcharges of no less than
$500,000 during the forty month period beginning September 1, 1996, depending
upon the number of transactions processed through merchant acquirors other than
First USA Merchant Services. The Company incurred a charge of $1.0 million in
connection with such fees and surcharges in the quarter ended September 30,
1996; the Company has paid an initial installment of $250,000 pursuant to the
agreement.
From October 1994 through September 1995, NCCC provided certain marketing
and technology consulting services to the Company, for which it had billed the
Company an aggregate of approximately $153,000. As of September 30, 1996,
approximately $12,000 of such amount remained outstanding. Jon Rubin, a director
of the Company, is President of NCCC.
In June 1996, the Company signed a Facilities Agreement with First USA
Paymentech wherein First USA Paymentech agreed to lease space for computer
servers used to operate FVIPS.
In August 1996, the Company entered into a consulting agreement with Sybase
pursuant to which Sybase agreed to provide the Company with supplementary
staffing for a period of approximately six months for fees of approximately
$900,000.
The Company believes that the payments for services provided by Sybase,
First USA Merchant Services and NCCC were no less favorable to the Company than
would be charged for similar services by unrelated third parties. Any future
transaction between the Company and its executive officers, directors and their
affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties, and any material transactions with
such persons will be approved by a majority of the disinterested members of the
Board of Directors.
Options Grants to Affiliates. On April 11, 1996, certain officers,
directors and other affiliates of the Company were granted options to purchase
shares of Common Stock of the Company at an exercise price of $6.30 per share.
Each such option has a term of ten years. The persons receiving such option
grants, and the number of shares subject to each grant, are as follows: Mr.
Stein (475,000 shares), Mr. Khoury (100,000 shares), Nathaniel S. Borenstein,
Chief Scientist of the Company (100,000 shares), Marshall T. Rose,
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Technical Advisor to the Office of the Chairman of the Company (100,000 shares),
Mr. Rubin (90,000 shares) and NCCC (135,000 shares). The options granted to
Messrs. Stein, Khoury and Rubin and to NCCC were fully exercisable as of the
date of grant; the options granted to Drs. Borenstein and Rose become fully
exercisable June 30, 1998 contingent on continued employment with the Company.
Indemnification Agreements. The Company has entered into indemnification
agreements with each of its directors and executive officers. Such agreements
require the Company to indemnify such individuals to the fullest extent
permitted by law. See "Management -- Limitation of Liability and Indemnification
Matters."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 26, 1996, assuming the
conversion of all outstanding shares of the Company's Preferred Stock into
Common Stock and as adjusted to reflect the sale of the Common Stock offered by
the Company hereby, for (i) each of the Company's directors, (ii) each person
who is known by the Company to beneficially own more than 2% of the Company's
Common Stock, (iii) the Named Officer and (iv) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
OUTSTANDING(1)
-------------------
NUMBER PRIOR TO AFTER
BENEFICIAL OWNER OF SHARES(1) OFFERING OFFERING
- ------------------------------------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
First USA Merchant Services, Inc.(2).............................. 2,576,951 32.0% 23.3%
1601 Elm Street
Dallas, Texas 75201
Lee H. Stein(3)................................................... 1,986,667 23.0 17.1
11975 El Camino Real, Suite 300
San Diego, California 92130-2543
Tawfiq N. Khoury(4)............................................... 1,355,000 16.6 12.1
2505 Congress Street, Suite 200
San Diego, California 92110
Next Century Communications Corp.(5).............................. 1,035,000 12.6 9.3
1400 Key Boulevard, First Floor
Arlington, Virginia 22209
Sybase, Inc....................................................... 346,772 4.3 3.1
Unterberg Harris Interactive Media Limited Partnership, C.V. ..... 346,772 4.3 3.1
General Electric Capital Corporation(6)........................... 285,715 3.5 2.6
First Data Corporation(7)......................................... 200,000 2.5 1.8
Nathaniel S. Borenstein(8)........................................ 241,394 2.9 2.1
Marshall T. Rose(9)............................................... 252,288 3.1 2.9
Einar Stefferud(10)............................................... 187,788 2.3 1.7
Robert Epstein(11)................................................ 351,772 4.4 3.1
Scott Loftesness(12).............................................. 200,000 2.5 1.8
John McKinley(13)................................................. 290,715 3.6 2.6
Pamela H. Patsley(14)............................................. 2,581,951 32.1 23.3
Jon Rubin(15)..................................................... 1,380,000 16.7 12.2
All Directors and Executive Officers as a group (13
persons)(16).................................................... 4,195,349 46.2% 34.7%
</TABLE>
- ---------------
(1) Based on 8,050,967 shares of Common Stock outstanding as of November 26,
1996 (assuming the exercise of warrants to purchase 1,328,006 shares).
Except pursuant to applicable community property laws or as indicated in
the footnotes to this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Includes 1,328,006 shares issuable upon exercise of warrants exercisable in
full within 60 days of November 26, 1996 at an exercise price of $0.01 per
share. Excludes shares issuable upon exercise of an outstanding warrant to
purchase up to four percent of the Company's outstanding capital stock,
which warrant shall only become exercisable upon attainment of certain
marketing-related milestones and will expire immediately prior to the
closing date of this offering. First USA Merchant Services is a wholly-
owned subsidiary of First USA Paymentech. See "Certain Transactions."
(3) Includes 579,167 shares subject to options exercisable within 60 days of
November 26, 1996 and 595,000 shares held by June L. Stein, Mr. Stein's
spouse, for her own account. Also includes 60,000
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<PAGE> 68
shares held in trusts for the benefit of Mr. Stein's children and 57,500 shares
held by The Stein Company Ltd. of which Stein & Stein Incorporated is the
general partner. Mr. Stein and his spouse are the sole shareholders of Stein &
Stein Incorporated.
(4) Includes 312,500 shares held by the TNKRGK Family Trust dated 12/23/76, of
which Mr. Khoury is a beneficiary, 937,500 shares held by the trust for the
benefit of Mr. Khoury's children and 105,000 shares issuable upon exercise
of options exercisable within 60 days of November 26, 1996.
(5) Includes 135,000 shares subject to options exercisable within 60 days of
November 26, 1996. Excludes shares held by Jon Rubin, President of NCCC and
a director of the Company.
(6) Includes 47,619 shares subject to a warrant exercisable within 60 days of
November 26, 1996, subject to adjustment.
(7) Excludes 1,500,000 shares subject to a warrant exercisable upon the
achievement of certain marketing milestones.
(8) Represents shares issuable upon exercise of options exercisable within 60
days of November 26, 1996.
(9) Includes 3,413 shares issuable upon exercise of an option exercisable
within 60 days of November 26, 1996.
(10) Includes 184,375 shares held by trusts for the benefit of Mr. Stefferud's
family. Also includes 3,413 shares issuable upon exercise of an option
exercisable within 60 days of November 26, 1996.
(11) Includes 5,000 shares issuable upon exercise of an option exercisable
within 60 days of November 26, 1996. Also includes 346,772 shares held by
Sybase, as to which Dr. Epstein disclaims beneficial ownership. Dr. Epstein
is Executive Vice President and a Director of Sybase and may therefore be
deemed to share voting and investment power with respect to such shares.
(12) Includes 200,000 shares held by First Data, as to which Mr. Loftesness
disclaims beneficial ownership. Mr. Loftesness is Group Executive of First
Data Merchant Systems, a subsidiary of First Data.
(13) Includes 5,000 shares issuable upon exercise of an option exercisable
within 60 days of November 26, 1996. Also includes shares held by GE
Capital, as to which Mr. McKinley disclaims beneficial ownership. Mr.
McKinley serves as Chief Technology and Information Officer of GE Capital.
(14) Includes 5,000 shares issuable upon exercise of an option exercisable
within 60 days of November 26, 1996. Also includes shares held by First USA
Merchant Services, as to which Ms. Patsley disclaims beneficial ownership.
Ms. Patsley is President and Chief Executive Officer of First USA Merchant
Services and President and Chief Executive Officer of First USA Paymentech,
of which First USA Merchant Services is a wholly-owned subsidiary, and may
therefore be deemed to share voting and investment power with respect to
such shares.
(15) Includes 95,000 shares issuable upon exercise of options exercisable within
60 days of November 26, 1996. Also includes shares held by NCCC, as to
which Mr. Rubin disclaims beneficial ownership, except to the extent of his
pecuniary interest therein. NCCC is a privately held corporation. Miles L.
Rubin owns a majority of the voting securities of NCCC, and his address is
11201 Armour Drive, El Paso, Texas 79935. Jon Rubin owns approximately 12%
of the voting securities of NCCC. Mr. Rubin is the President and a director
of NCCC and may therefore be deemed to share voting and investment power
with respect to shares held by NCCC.
(16) Includes 1,038,974 shares subject to options exercisable within 60 days of
November 26, 1996. Excludes shares held by First USA Merchant Services,
Sybase, GE Capital, First Data and NCCC.
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DESCRIPTION OF CAPITAL STOCK
Following the closing of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.001 par value, and
5,000,000 shares of Preferred Stock, $0.001 par value.
COMMON STOCK
As of November 26, 1996, there were 8,050,967 shares of Common Stock
outstanding (after giving effect to the conversion of all shares of Preferred
Stock issued and outstanding and assuming the exercise of outstanding warrants
to purchase 1,328,006 shares of Common Stock at an exercise price of $0.01 per
share) held by 32 stockholders of record. The holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
shares of Preferred Stock, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior liquidation rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the Common Stock. All outstanding shares of
Common Stock are fully paid and nonassessable, and the shares of Common Stock to
be outstanding upon completion of this offering will be fully paid and
nonassessable.
PREFERRED STOCK
The Company currently has issued and outstanding 2,273,441 shares of
Preferred Stock, divided into Series A, Series B, Series C and Series D. The
Preferred Stock is convertible, at the option of the holder, into Common Stock,
subject to anti-dilution adjustments, and will automatically convert into Common
Stock (the "Automatic Conversion") concurrent with the closing of an
underwritten public offering of Common Stock under the Securities Act, in which
the Company receives at least $10 million in gross proceeds with a per share
price to the public of at least $10.50 per share (subject to anti-dilution
adjustments). Anti-dilution adjustments will be made in the event that, among
other things, the Company issues additional shares of Common Stock for per share
consideration of less than $1.76, $3.189, $15.00 and $15.00 for the Series A,
Series B, Series C and Series D Preferred Stock, respectively. Assuming that the
conditions to the Automatic Conversion are satisfied, following the closing of
this offering, 5,000,000 shares of Preferred Stock, $0.001 par value, will be
authorized and no shares will be outstanding. The Board of Directors has the
authority, without further action by the stockholders, to issue the Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and the number of shares
constituting any series or the designation of such series. Preferred Stock could
thus be issued quickly with terms calculated to delay or prevent a change of
control of the Company or to serve as an entrenchment device for incumbent
management. Additionally, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Common Stock, and may adversely affect the
voting and other rights of the holders of Common Stock. At present, the Company
has no plans to issue any of the Preferred Stock.
REGISTRATION RIGHTS
Following the sale of shares offered by this Prospectus, the holders of
approximately 7,750,000 shares of Common Stock (the "Holders") will be entitled
to certain rights with respect to the registration of such shares under the
Securities Act. Under the terms of agreements between the Company and the
Holders, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or the account of other security
holders exercising registration rights, the Holders are entitled to notice of
such registration and are entitled to include, at the Company's expense, shares
of such Common Stock therein, provided, among other conditions, that the
underwriters of any offering have the right to limit the number of such shares
included in such registration. In addition, certain Holders (holding
approximately 5,250,000
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<PAGE> 70
shares of Common Stock) may require the Company, on not more than three
occasions, to file a registration statement under the Securities Act at the
Company's expense with respect to such shares, and the Company is required to
use its best efforts to effect such registration, subject to certain conditions
and limitations. The Holders may also require the Company to register all or a
portion of their shares with registration rights on Form S-3, when the Company
is eligible to use such form, subject to certain conditions and limitations.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to Section 203 of the DGCL, an anti-takeover law. In
general, Section 203 of the DGCL prevents a person owning 15% or more of a
corporation's outstanding voting stock ("Interested Stockholder") from engaging
in a "business combination" (as defined in the DGCL) with a Delaware corporation
for three years following the date such person became an Interested Stockholder,
subject to certain exceptions such as the approval of the board of directors and
of the holders of at least two-thirds of the outstanding shares of voting stock
not owned by the interested stockholder. The existence of this provision would
be expected to have the effect of discouraging takeover attempts, including
attempts that might result in a premium over the market price for the shares of
Common Stock held by stockholders.
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of preventing, discouraging or delaying any change in the
control of the Company and may maintain the incumbency of the Board of Directors
and management. The Company's Certificate of Incorporation provides that any
action required or permitted to be taken by the stockholders of the Company may
be taken only at a duly called annual or special meeting of the stockholders and
does not provide for cumulative voting in the election of directors. The
Certificate of Incorporation and Bylaws also restrict the right of stockholders
to change the size of the Board of Directors and to fill vacancies on the Board
of Directors. The Bylaws also establish procedures, including advance notice
procedures, with regard to the nomination, other than by or at the direction of
the Board of Directors, of candidates for election as directors or for
stockholder proposals to be submitted at stockholder meetings. The authorization
of undesignated Preferred Stock makes it possible for the Board of Directors to
issue Preferred Stock with voting or other rights or preferences that could
impede the success of any attempt to change control of the Company. In addition,
the division of the Board of Directors into three classes (with each class
serving a staggered three-year term) following the closing of the offering could
have the effect of making it more difficult for a third party to effect a change
in the control of the Board of Directors and therefore may discourage another
person or entity from making a tender offer for the Company's Common Stock,
including offers at a premium over the market price of the Common Stock, and
might result in a delay in changes in control of management. In addition, these
provisions could have the effect of making it more difficult for proposals
favored by the stockholders to be presented for stockholder consideration. The
amendment of any of these provisions would require approval by holders of 66.67%
or more of the outstanding Common Stock.
The Company has also included in its Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by the DGCL and to indemnify its directors and officers to the fullest extent
permitted by Section 145 of the DGCL.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company. Its telephone number is (212) 936-5100.
LISTING
The Company's application to list its Common Stock on the Nasdaq National
Market under the trading symbol "FVHI" has been approved.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock of the Company, and there can be no assurance that a significant public
market for the Common Stock will develop or be sustained after the offering.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time and could impair the
Company's ability to raise capital through sale of its equity securities. As
described below, no shares currently outstanding will be available for sale
immediately after this offering due to certain contractual restrictions on
resale. Sales of substantial amounts of Common Stock of the Company in the
public market after the restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of this offering, the Company will have outstanding
11,072,733 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options or warrants (except
for the exercise of outstanding warrants to purchase 1,328,006 shares of Common
Stock at an exercise price of $0.01 per share). Of these shares, the 3,000,000
shares sold in this offering will be freely tradable without restriction under
the Securities Act unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act. The remaining shares held by
existing stockholders ("Restricted Shares") are subject to lock-up agreements
providing that, with certain limited exceptions, the stockholder will not offer,
sell, contract to sell, grant an option to purchase, make a short sale or
otherwise dispose of or engage in any hedging or other transaction that is
designed or reasonably expected to lead to a disposition of any shares of Common
Stock or any option or warrant to purchase shares of Common Stock or any
securities exchangeable for or convertible into shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Bear, Stearns & Co. Inc. The Company has also agreed that, with
certain limited exceptions, for a period of 180 days after the date of this
Prospectus, it will not offer, sell, contract to sell or otherwise dispose of,
any securities of the Company that are substantially similar to the Common
Stock, including but not limited to any securities that are convertible into,
exchangeable for, or that represent the right to receive Common Stock or any
such substantially similar securities. As a result of the lock-up agreements,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, no shares of Common Stock will be salable until 180
days after the date of this Prospectus. As a result of the lock-up agreements,
and assuming no exercise of outstanding options or warrants (except for the
exercise of outstanding warrants to purchase 1,328,006 shares of Common Stock at
an exercise price of $0.01 per share), only the 3,000,000 shares of Common Stock
sold in this offering will be eligible for sale on the date of this Prospectus;
approximately 3,300,000 additional Restricted Shares will first be eligible for
sale beginning 180 days after the date of this Prospectus, approximately
3,000,000 of which will be subject to certain volume limitations, and the
remaining Restricted Shares will not be eligible for sale until the expiration
of their two-year holding periods.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years (including
the holding period of any prior owner except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) 1% of the number of shares of Common Stock then outstanding
(which will equal approximately 110,727 shares immediately after this offering);
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. The Securities
and Exchange Commission has recently proposed to reduce the Rule 144 holding
periods. If enacted, such modification will have a material effect on the timing
of when shares of Common Stock will become eligible for resale.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or
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consultant to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares.
Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the Company's 1994 Stock Plan and 1995 Stock Plan or
reserved for issuance under such plans or the Purchase Plan. Based on the number
of shares subject to outstanding options as of October 31, 1996 and currently
reserved for issuance under all such plans, such registration statement would
cover approximately 3,560,750 shares. Such registration statement will
automatically become effective upon filing. Accordingly, shares registered under
such registration statement will, subject to Rule 144 volume limitations
applicable to affiliates of the Company, be available for sale in the open
market immediately after the 180-day lock-up agreements expire. Also, beginning
six months after the closing of this offering, the holders of approximately
7,750,000 shares of Common Stock will be entitled to certain rights with respect
to registration of such shares for sale in the public market. See "Description
of Capital Stock -- Registration Rights."
69
<PAGE> 73
UNDERWRITING
The Underwriters named below, for whom Bear, Stearns & Co. Inc., Cowen &
Company, Lehman Brothers Inc. and Unterberg Harris are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock set forth opposite their respective names
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Bear, Stearns & Co. Inc. .........................................
Cowen & Company...................................................
Lehman Brothers Inc. .............................................
Unterberg Harris .................................................
-------
Total................................................... 3,000,000
=======
</TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase all of the shares of Common Stock being
sold pursuant to the Underwriting Agreement if any are purchased (other than
shares of Common Stock covered by the over-allotment option described below).
The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock to the public initially at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession of not more than $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus, solely to
cover over-allotments, if any. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
Certain affiliates of the Company are expected to purchase up to
approximately 100,000 shares of Common Stock registered in this offering at the
public offering price set forth on the cover page of this Prospectus. The number
of shares available for sale to the general public will be reduced to the extent
that such persons purchase such shares. Any shares not so purchased will be
offered by the Underwriters to the general public on the same basis as the other
shares offered by this Prospectus.
70
<PAGE> 74
The Company has agreed not to offer, issue, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of, directly or indirectly, any
shares of Common Stock, options or warrants to acquire shares of Common Stock,
or securities exchangeable for or convertible into shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Bear, Stearns & Co. Inc., subject to certain limited exceptions. The
officers and directors of the Company and other stockholders of the Company, who
collectively hold 8,050,967 shares of Common Stock (assuming exercise of a
warrant to purchase 1,328,006 shares), have agreed that, subject to certain
exceptions, they will not offer, sell, transfer, assign, or otherwise dispose
of, any such shares of Common Stock, options or warrants to acquire shares of
Common Stock, or securities exchangeable for or convertible into shares of
Common Stock owned by them for a period of 180 days after the date of this
Prospectus without the prior written consent of Bear, Stearns & Co. Inc.
The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts by the Underwriters to exceed 5% of the
number of shares of Common Stock offered hereby.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price was determined by negotiations among
the Company and the Representatives. Among the factors considered in such
negotiations were the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, its past and present earnings and the trend of such
earnings, the prospects for future earnings, the present state of the Company's
development, the general condition of the economy and the securities markets at
the time of this offering, the market conditions for new offerings of securities
and the recent market prices and price/earnings multiples of publicly traded
common stocks of comparable companies.
On May 22, 1995 and December 22, 1995 Unterberg Harris Interactive Media,
Limited Partnership, C.V. ("UHIM"), an affiliate of Unterberg Harris, purchased
275,750 shares and 71,022 shares of Series A Preferred Stock, respectively,
which will convert into 346,772 shares of Common Stock upon the completion of
this offering, representing 4.3% of the shares of Common Stock outstanding. UHIM
is not selling any of its shares of Common Stock in the offering.
LEGAL MATTERS
The validity of the issuance of shares of Common Stock offered hereby will
be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo
Alto, California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York. As of October 31, 1996, an investment partnership of which
members of Wilson Sonsini Goodrich & Rosati, P.C. are partners beneficially
owned 27,000 shares of the Company's Common Stock.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995,
and September 30, 1996 and for the period from March 11, 1994 (date of
inception) through December 31, 1994, the year ended December 31, 1995 and the
nine month period ended September 30, 1996, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
in the Registration Statement and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
71
<PAGE> 75
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules filed as part thereof. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, if such contract or document is
filed as an exhibit, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each statement being
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington D.C., and copies of
all or any part thereof may be obtained from such office after payment of fees
prescribed by the Commission. In addition, the Commission maintains a Web site
on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
72
<PAGE> 76
FIRST VIRTUAL HOLDINGS INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996................ F-3
Statements of Operations for the period from March 11, 1994 (date of inception)
through December 31, 1994, the year ended December 31, 1995 and the nine months
ended September 30, 1995 (unaudited) and September 30, 1996......................... F-4
Statements of Stockholders' Equity (Net Capital Deficiency) for the period from March
11, 1994 (date of inception) through December 31, 1994, the year ended December 31,
1995 and the nine months ended September 30, 1995 (unaudited) and September 30,
1996................................................................................ F-5
Statements of Cash Flows for the period from March 11, 1994 (date of inception)
through December 31, 1994, the year ended December 31, 1995 and the nine months
ended September 30, 1995 (unaudited) and September 30, 1996......................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 77
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
First Virtual Holdings Incorporated
We have audited the accompanying balance sheets of First Virtual Holdings
Incorporated as of December 31, 1994 and 1995 and September 30, 1996, and the
related statements of operations, stockholders' equity (net capital deficiency),
and cash flows for the period March 11, 1994 (date of inception) through
December 31, 1994, the year ended December 31, 1995 and for the nine months
ended September 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Virtual Holdings
Incorporated at December 31, 1994 and 1995 and September 30, 1996, and the
results of its operations and its cash flows for the period March 11, 1994 (date
of inception) through December 31, 1994, the year ended December 31, 1995 and
the nine months ended September 30, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
October 18, 1996, except for the
fifteenth paragraph of Note 6,
as to which the date is October 31, 1996
F-2
<PAGE> 78
FIRST VIRTUAL HOLDINGS INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
------------------------ SEPTEMBER 30, EQUITY AT
1994 1995 1996 SEPTEMBER 30,
--------- ----------- ------------- 1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 14,847 $ 2,091,651 $ 5,881,945
Short-term investment, available-for-sale..................... -- -- 200,000
Accounts receivable........................................... -- -- 88,745
Prepaid expenses and other.................................... 12,000 10,953 35,742
--------- ----------- -----------
Total current assets............................................ 26,847 2,102,604 6,206,432
--------- ----------- -----------
Furniture and equipment, net (Note 2)........................... 213,305 304,320 1,483,692
Information technology, net (Note 5)............................ 48,333 113,333 70,113
Organization and other costs, net............................... 31,936 50,569 92,324
Deposits and other.............................................. -- 4,000 425,911
--------- ----------- -----------
$ 320,421 $ 2,574,826 $ 8,278,472
========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.............................................. $ 102,255 $ 513,893 $ 1,237,632
Accrued compensation and related liabilities.................. 30,087 8,170 164,010
Accrued interest.............................................. 16,330 100,340 172,340
Deferred revenue.............................................. -- -- 42,793
Current portion, amount due to stockholder (Note 3)........... -- -- 400,000
Other accrued liabilities..................................... -- -- 54,495
--------- ----------- -----------
Total current liabilities....................................... 148,672 622,403 2,071,270
--------- ----------- -----------
Amount due to stockholder (Note 3).............................. -- -- 350,000
Notes payable to stockholders (Note 3).......................... 713,400 1,200,000 1,200,000
--------- ----------- -----------
Total long term liabilities..................................... 713,400 1,200,000 1,550,000
--------- ----------- -----------
Commitments (Note 5)
Stockholders' equity (net capital deficiency) (Note 6):
Preferred stock, Series A convertible, $0.001 par value;
1,545,816 shares authorized, 693,544 shares issued and
outstanding with liquidation preference totaling $1,220,637
at December 31, 1995 and September 30, 1996................. -- 694 694 $ --
Preferred stock, Series B convertible, $0.001 par value;
1,724,679 shares authorized, 783,945 and 1,248,945 shares
issued and outstanding at December 31, 1995 and September
30, 1996, respectively with liquidation preferences totaling
$2,500,000 and $3,982,886 at December 31, 1995 and September
30, 1996, respectively...................................... -- 784 1,249 --
Preferred stock, Series C convertible, $0.001 par value;
130,952 shares authorized and outstanding with liquidation
preference totaling $2,488,088 at September 30, 1996........ -- -- 131 --
Preferred stock, Series D convertible, $0.001 par value;
200,000 shares authorized and outstanding with liquidation
preference totaling $3,800,000 at September 30, 1996........ -- -- 200 --
Common stock, $0.001 par value; 40,000,000 shares authorized,
4,083,350, 4,273,250 and 4,441,520 shares issued and
outstanding at December 31, 1994 and 1995 and September 30,
1996, respectively (6,736,727 pro forma, unaudited)......... 4,083 4,273 4,441 6,737
Additional paid-in-capital.................................... 289,945 3,852,332 10,764,450 10,764,428
Warrants...................................................... -- -- 3,017,115 3,017,115
Deferred compensation......................................... -- -- (45,104) (45,104)
Accumulated deficit........................................... (835,679) (3,105,660) (9,085,974) (9,085,974)
--------- ----------- ----------- -----------
Total stockholders' equity (net capital deficiency)............. (541,651) 752,423 4,657,202 $ 4,657,202
===========
--------- ----------- -----------
$ 320,421 $ 2,574,826 $ 8,278,472
========= =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 79
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 11, 1994 NINE MONTHS ENDED SEPTEMBER
(DATE OF INCEPTION) 30,
THROUGH YEAR ENDED ---------------------------
DECEMBER 31, DECEMBER 31, 1995
1994 1995 ----------- 1996
------------------- ------------ (UNAUDITED) -----------
<S> <C> <C> <C> <C>
Revenues........................... $ 3,580 $ 197,902 $ 87,230 $ 498,262
Operating expenses:
Marketing and sales.............. 143,678 346,400 242,086 745,006
Research and development......... 307,315 530,809 190,858 1,501,188
General and administrative(1).... 375,117 1,522,784 1,259,777 4,304,479
--------- ----------- ----------- -----------
Total operating expenses........... 826,110 2,399,993 1,692,721 6,550,673
--------- ----------- ----------- -----------
Loss from operations............... (822,530) (2,202,091) (1,605,491) (6,052,411)
Interest income.................... 648 18,653 10,804 144,097
Interest expense to stockholders... (13,797) (86,543) (62,861) (72,000)
--------- ----------- ----------- -----------
Net loss........................... $(835,679) $ (2,269,981) $(1,657,548) $(5,980,314)
========= =========== =========== ===========
Pro forma net loss per share....... $ (0.28) $ (0.68)
=========== ===========
Shares used in computing pro forma
net loss per share............... 8,141,959 8,774,157
=========== ===========
</TABLE>
- ---------------
(1) The nine months ended September 30, 1996 includes $1,000,000 of expense in
connection with obtaining a waiver of an exclusivity provision of an
agreement with a stockholder.
See accompanying notes.
F-4
<PAGE> 80
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK ADDITIONAL EQUITY (NET
----------------- ----------------- PAID-IN DEFERRED ACCUMULATED CAPITAL
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS COMPENSATION DEFICIT DEFICIENCY)
--------- ------ --------- ------ ----------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders, net of
issuance costs of
$5,250................. -- $ -- 2,500,000 $2,500 $ 92,250 $ -- $ -- $ -- $ 94,750
Issuance of common stock
for
services............... -- -- 333,350 333 13,001 -- -- -- 13,334
Issuance of common stock,
net of issuance costs
of $14,056............. -- -- 1,250,000 1,250 184,694 -- -- -- 185,944
Net loss................. -- -- -- -- -- -- -- (835,679 ) (835,679)
--------- ------ --------- ------ ----------- ---------- ------------ ----------- -------------
Balance at December 31,
1994................... -- -- 4,083,350 4,083 289,945 -- -- (835,679 ) (541,651)
Issuance of common stock
for
services............... -- -- 135,400 135 5,281 -- -- -- 5,416
Issuance of Series A
convertible preferred
stock at $1.76 per
share
for cash, net of
issuance costs
of $71,791............. 551,500 552 -- -- 898,297 -- -- -- 898,849
Issuance of Series A
convertible preferred
stock at $1.76 per
share
for retirement of notes
payable,
net of issuance costs
of $7,257.............. 142,044 142 -- -- 242,598 -- -- -- 242,740
Issuance of Series B
convertible preferred
stock at $3.189 per
share,
net of issuance costs
of $100,390............ 783,945 784 -- -- 2,398,826 -- -- -- 2,399,610
Issuance of common stock
for
services............... -- -- 54,500 55 17,385 -- -- -- 17,440
Net loss................. -- -- -- -- -- -- -- (2,269,981 ) (2,269,981)
--------- ------ --------- ------ ----------- ---------- ------------ ----------- -------------
Balance at December 31,
1995................... 1,477,489 1,478 4,273,250 4,273 3,852,332 -- -- (3,105,660 ) 752,423
Issuance of common stock
for cash
and services........... -- -- 61,126 61 51,776 -- -- -- 51,837
Issuance of Series B
convertible preferred
stock at $3.189 per
share,
net of issuance costs
of $117,110............ 465,000 465 -- -- 1,365,310 -- -- -- 1,365,775
Issuance of warrants..... -- -- -- -- -- 3,017,115 -- -- 3,017,115
Issuance of Series C
convertible preferred
stock at $15 per share
and shares of common
stock at $5 per share,
net of issuance costs
of $45,934............. 130,952 131 107,144 107 2,453,828 -- -- -- 2,454,066
Issuance of Series D
convertible preferred
stock at $15 per share,
net of issuance costs
$9,163................. 200,000 200 -- -- 2,990,637 -- -- -- 2,990,837
Deferred compensation
related to grant of
certain stock
options................ -- -- -- -- 50,567 -- (50,567) -- --
Amortization of deferred
compensation........... -- -- -- -- -- -- 5,463 -- 5,463
Net loss................. -- -- -- -- -- -- -- (5,980,314 ) (5,980,314)
--------- ------ --------- ------ ----------- ---------- ------------ ----------- -------------
Balance at September 30,
1996................... 2,273,441 $2,274 4,441,520 $4,441 $10,764,450 $3,017,115 $(45,104) $(9,085,974) $ 4,657,202
======== ======= ======== ======= ========== ========= ============ =========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 81
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 11, 1994 NINE MONTHS ENDED SEPTEMBER
(DATE OF INCEPTION) 30,
THROUGH YEAR ENDED ---------------------------
DECEMBER 31, DECEMBER 31, 1995
1994 1995 ----------- 1996
------------------- ------------ (UNAUDITED) -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $(835,679) $(2,269,981 ) $(1,657,548) $(5,980,314)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 17,994 106,628 69,038 302,843
Common stock issued for services......... 13,334 22,856 -- 20,000
Changes in operating assets and
liabilities:
Accounts receivable.................... -- -- -- (88,745)
Prepaid expenses and other............. (12,000) 1,047 12,000 (24,789)
Information technology charge.......... (50,000) (100,000 ) (100,000)
Deposits and other..................... -- (4,000 ) (4,000) (421,911)
Accounts payable....................... 102,255 411,638 661,135 745,976
Accrued compensation and related
liabilities.......................... 30,087 (21,917 ) (23,345) 155,840
Deferred revenue....................... -- -- -- 42,793
Accrued interest....................... 16,330 84,010 60,328 72,000
Amount due to stockholder.............. -- -- -- 750,000
Other accrued liabilities.............. -- -- -- 54,495
--------- ----------- ----------- -----------
Net cash flows used in operating
activities............................... (717,679) (1,769,719 ) (982,392) (4,371,812)
INVESTING ACTIVITIES
Additions to furniture and equipment....... (225,858) (151,148 ) (128,990) (1,420,633)
Purchase of short-term investment.......... -- -- -- (200,000)
Organization and other costs............... (35,710) (30,128 ) (10,594) (54,654)
--------- ----------- ----------- -----------
Net cash flows used in investing
activities............................... (261,568) (181,276 ) (139,584) (1,675,287)
FINANCING ACTIVITIES
Proceeds from issuance of Series A
preferred stock, net of issuance costs... -- 1,141,589 898,849 --
Proceeds from issuance of Series B
preferred stock, net of issuance costs... -- 2,399,610 -- 1,365,775
Proceeds from issuance of Series C
preferred stock, net of issuance costs... -- -- -- 1,928,189
Proceeds from issuance of Series D
preferred stock, net of issuance costs... -- -- -- 2,990,837
Proceeds from issuance of common stock, net
of issuance costs........................ 280,694 -- -- 535,477
Proceeds from issuance of warrants......... -- -- -- 3,017,115
Proceeds from borrowings from stockholders
and bank................................. 713,400 486,600 425,000 486,111
Repayment of loan from bank................ -- -- -- (486,111)
--------- ----------- ----------- -----------
Net cash flows provided by financing
activities............................... 994,094 4,027,799 1,323,849 9,837,393
Net increase in cash and cash
equivalents.............................. 14,847 2,076,804 201,873 3,790,294
Cash and cash equivalents at the beginning
of period................................ -- 14,847 14,847 2,091,651
--------- ----------- ----------- -----------
Cash and cash equivalents at the end
of period................................ $ 14,847 $ 2,091,651 $ 216,720 $ 5,881,945
========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 82
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
The Company, formed on March 11, 1994, has developed and implemented the
VirtualPIN architecture which facilitates Internet commerce and is designed to
facilitate other forms of interactive Internet communications. The VirtualPIN
architecture utilizes E-mail which has the widest reach and broadest use of any
Internet application. The First Virtual Internet Payment System ("FVIPS"), a
secure and easy-to-use payment system launched in October 1994, is the Company's
first application of the VirtualPIN architecture.
On August 11, 1995, the Company declared a twenty five-for-one stock split
of the Company's common stock and Series A convertible preferred stock. All
applicable share and stock option information have been restated to reflect the
split.
On July 3, 1996, the Company was reincorporated in Delaware. In connection
with the reincorporation, the Company is authorized to issue 40,000,000 shares
of common stock and 3,401,447 shares of preferred stock. In addition, on August
26, 1996 in connection with the sale of Series D preferred stock, the Company's
certificate of incorporation was amended to authorize the issuance of 3,601,447
shares of preferred stock. All of the accompanying financial statements have
been restated to reflect the reincorporation.
Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. The Company anticipates that it will
require additional funds to continue the Company's research and development
activities; expand the Company's marketing and sales and customer services and
support capabilities; fund the Company's capital expenditures necessary to
accommodate the anticipated increase of sellers and buyers; and expand certain
financial and administrative functions. Management believes that the funds
necessary to meet its capital requirements for the next twelve months will be
raised either from the offering contemplated by this Prospectus or by private
equity or debt financing. Without the additional financing, the Company will be
required to delay, reduce the scope of and eliminate one or more of its research
and development projects; and significantly reduce its expenditures on
infrastructure and product upgrade programs that enhance the VirtualPIN
architecture and more specifically FVIPS.
The Company was classified as a development stage company through December
31, 1995.
Interim Financial Data
The financial statements for the nine months ended September 30, 1995 are
unaudited. The unaudited financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information set forth therein, in
accordance with generally accepted accounting principles.
While the Company has experienced growth in its revenues to approximately
$498,000 for the nine months ended September 30, 1996, this increase and the
interim results of operations are not necessarily indicative of results to be
expected for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of less than three months to be cash equivalents.
F-7
<PAGE> 83
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Short-Term Investment, Available-for-Sale
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Debt and Equity Securities," the Company's short-term
investment is classified as available-for-sale. Available-for-sale securities
consist of certificates of deposit with maturities greater than three months and
are stated at cost, as the difference between cost and fair value is immaterial.
Concentration of Credit Risk
Because the Company acts as an intermediary and facilitator for credit card
transactions, the Company is exposed to the credit risks associated with credit
card payment systems. These credit risks include returned transactions, merchant
fraud and transmission of erroneous information. Through September 30, 1996, the
Company has not incurred significant losses for these credit risks.
Furniture and Equipment
Furniture and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (three to five years) using the
straight-line method.
Organization and Other Costs
Organization and other costs are being amortized over five years.
Accumulated amortization at December 31, 1994 and 1995 and September 30, 1996
amounted to $3,774, $11,495 and $24,393, respectively.
Asset Impairment
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS 121), effective January 1, 1996. SFAS 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. There was no effect on the financial statements from the adoption
of SFAS 121.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. As a result, deferred compensation is recorded
for the excess of the fair value of the stock on the date of the option grant,
over the exercise price of the option. The deferred compensation is amortized
over the vesting period of the option.
Income Taxes
On May 24, 1995, in conjunction with the issuance of Series A preferred
stock (Note 6), the Company changed its status for federal and state income tax
purposes from an S Corporation (whereby the Corporation's activities flowed
through to the stockholders) to become a C Corporation (whereby the Company is
subject to federal and state income taxes). The Company accounts for income
taxes in accordance with Statement of Financial Accounting Standards No. 109.
F-8
<PAGE> 84
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Revenues include registration and renewal fees from Buyers and Sellers,
transaction processing fees and co-marketing fees. In July 1996, the Company
instituted annual renewal fees. The Company will begin collecting annual renewal
fees in July 1997. In conjunction with the Company's decision to institute
annual renewal fees, the Company's policy will be to recognize Buyer and Seller
registration and renewal fees over a 12-month period beginning in July 1996.
Also beginning July 1996, the related direct costs of processing Buyer and
Seller registrations and renewals are being deferred and amortized over a
12-month period. Prior to July 1, 1996, revenues from registration fees and
related direct costs of processing registrations were recognized in the month
the Seller's or the Buyer's registration fee was processed and the VirtualPIN
was issued. Revenues from transaction processing fees are recognized on the date
the transaction amount is charged to the Buyer's credit card. Revenues from
co-marketing fees are recognized in the month the Buyer accepts the promotional
offer of one of the Company's co-marketing partners.
As part of processing certain transactions, the Company earns interest from
the time money is collected from Buyers until the time payment is made to the
applicable Sellers.
Research and Development
Research and development costs are expensed in the period incurred.
Software Developments Costs
Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility of the software is
attained. No such costs have been capitalized to date because the impact on the
financial statements would not be material.
Pro Forma Net Loss Per Share
The Company's pro forma net loss per share calculations are based upon the
weighted average number of shares of common stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, convertible preferred stock, convertible preferred stock warrants,
common stock, and options to purchase common stock issued at prices below the
estimated initial public offering price during the twelve months immediately
preceding the contemplated initial filing of the registration statement relating
to the initial public offering ("IPO"), have been included in the computation of
net loss per share as if they were outstanding for all periods presented (using
the treasury method assuming repurchase of common stock at the estimated IPO
price). The pro forma calculation also gives effect to the conversion of
convertible preferred shares not included above that will automatically convert
upon completion of the Company's IPO (using the if-converted method) from the
original date of issuance. Other shares issuable upon the exercise of stock
options have been excluded from the computation because the effect of their
inclusion would be antidilutive. Subsequent to the Company's IPO, options under
the treasury stock method will be included to the extent they are dilutive. Net
loss per share prior to 1995 has not been presented since such amounts are not
deemed meaningful due to the significant change in the Company's capital
structure that will occur in connection with the IPO.
Pro Forma Stockholders' Equity
If the offering contemplated by this Prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into 2,273,441 shares of common stock, based on the
shares of convertible preferred stock outstanding as of September 30, 1996 and
assuming no antidilution adjustments are necessary. Pro forma stockholders'
equity at September 30, 1996 as adjusted for the conversion of preferred stock,
is disclosed on the balance sheet.
F-9
<PAGE> 85
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Furniture and equipment.................. $225,858 $377,006 $ 1,797,640
Less accumulated depreciation............ (12,553) (72,686) (313,948)
-------- -------- ----------
$213,305 $304,320 $ 1,483,692
======== ======== ==========
</TABLE>
3. RELATED PARTY TRANSACTIONS
In conjunction with the sale of 1,250,000 shares of common stock to a
stockholder on September 16, 1994 for $200,000, the Company obtained a two-year
unsecured line of credit commitment from the stockholder for borrowings up to
$800,000. The Company also has an unsecured line of credit from a stockholder
which allows for maximum borrowings of $400,000. The borrowings plus interest at
8% are due upon the earliest to occur of (i) June 15, 2003, (ii) the closing of
an initial public offering or (iii) the consent of certain holders of Series A
Preferred Stock. At September 30, 1996, $1,200,000 has been drawn against these
lines of credit.
The stockholders who have provided these lines of credit have agreed to
subordinate the debt to future institutional financing. Pursuant to these
agreements, no dividends will be paid by the Company until the borrowings are
paid in full and the lines of credit have been terminated.
On August 20, 1996, the Company entered into an agreement with the Series B
stockholder for the waiver of a previous agreement to use the Series B
stockholder as an exclusive services provider. In return for the waiver, the
Company agreed to pay the Series B stockholder facility fees totaling $500,000
and transaction surcharges of no less than $500,000 during the 40-month period
beginning September 1, 1996, dependent upon the number of transactions processed
through service providers other than the Series B stockholder. The Company
charged the $1,000,000 associated with this agreement to operations during the
third quarter of 1996.
The Company's credit card transaction acquisition services are provided by
First USA Merchant Services, Inc., a preferred stockholder. Fees for these
services amounted to $28,198 and $100,703 for the year ended December 31, 1995
and the nine months ended September 30, 1996, respectively.
Certain marketing and technology consulting services were provided by a
company whose president is a director of the Company. These services amounted to
$20,235 and $132,521 for the period from March 11, 1994 (date of inception)
through December 31, 1994 and the year ended December 31, 1995, respectively. No
services were provided during the nine months ended September 30, 1996.
4. NOTE PAYABLE
On February 27, 1996, the Company entered into a promissory note to borrow
up to $500,000 at the prime rate plus 2% from a financial institution. The loan
was repaid in full in April 1996.
F-10
<PAGE> 86
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS
Leases
The Company leases its office facilities in San Diego, California under
operating leases which expire in 1999. The leases generally require the Company
to pay all maintenance, insurance and property taxes and are subject to certain
minimum escalation provisions. Rent expense for all operating leases was
approximately $38,400 and $109,000 for the year ended December 31, 1995 and the
nine months ended September 30, 1996, respectively.
Future minimum operating lease payments as of September 30, 1996 are as
follows:
<TABLE>
<S> <C>
1996 (three months).............................. $ 107,000
1997............................................. 405,000
1998............................................. 382,000
1999............................................. 278,000
--------
$1,172,000
========
</TABLE>
Information Service Agreement
In October 1994, the Company entered into a technology service agreement
with another company to receive information technology services from the other
company beginning in 1994. Minimum monthly payments of $5,000 for services
commenced upon full system implementation. The Company paid an implementation
charge of $150,000 which is being amortized over three years. Accumulated
amortization at December 31, 1994 and 1995 and September 30, 1996 amounted to
$1,667, $36,667 and $79,887, respectively. In June 1996, this agreement was
amended, reducing the information technology services to be received, and as a
result, effective July 1, 1996, minimum monthly charges no longer apply.
6. STOCKHOLDERS' EQUITY
Preferred Stock
In May 1995, the Company sold 551,500 shares of Series A preferred stock at
$1.76 per share. An additional 142,044 shares were issued at $1.76 per share to
retire certain notes payable in December 1995. In December 1995, the Company
sold 783,945 shares of Series B preferred stock at $3.189 per share.
The holders of the Series A and Series B preferred stock are entitled to
receive dividends at the rate of $0.162 per share and $0.32 per share per annum,
respectively, if and when such dividends are declared by the Board of Directors.
The right to such dividends is not cumulative. No dividends have been declared
to date.
The preferred stock is convertible, at the option of the holder, into the
Company's common stock on a one-for-one basis, subject to antidilution
adjustments, and will automatically convert into common stock concurrent with
the closing of an underwritten public offering of common stock under the
Securities Act of 1933 in which the Company receives at least $10,000,000 in
gross proceeds and a per share price to the public of at least $10.50 per share
(subject to antidilution adjustments). The holder of each preferred share is
entitled to one vote for each common share into which such preferred share would
convert.
As part of the agreement to sell 275,750 shares of Series A preferred
stock, the Company acknowledged that if it elects not to utilize the purchaser's
technology products, the purchaser will have the option to redeem its shares at
$1.76 per share plus all declared but unpaid dividends. In August 1996, the
Company entered into a consulting agreement with this Series A stockholder to
provide the Company with supplementary staffing for a period of approximately
six months for fees of approximately $900,000. At September 30, 1996,
approximately $237,000 is owed under this agreement and is included in accounts
payable.
F-11
<PAGE> 87
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On July 3, 1996, the Company sold 130,952 shares of Series C preferred
stock at $15.00 per share and 107,144 shares of common stock at $5.00 per share
for total proceeds of approximately $2,500,000. The holders of the Series C
preferred stock are entitled to receive dividends at the rate of $1.50 per share
per annum if and when declared by the Board of Directors. The right to such
dividends is not cumulative. The holders of the Series C preferred stock are
entitled to a liquidation preference of $19.00 per share, plus any declared but
unpaid dividends. The preferred stock is convertible, at the option of the
holder, into the Company's common stock on a one-for-one basis, subject to
antidilution adjustments, and will automatically convert into common stock
concurrent with the closing of an underwritten public offering of common stock
under the Securities Act of 1933 in which the Company receives at least
$10,000,000 in gross proceeds and a per share price to the public of at least
$10.50 per share (subject to antidilution adjustments). The holder of each
preferred share is entitled to one vote for each common share into which such
preferred share would convert.
In connection with the sale of the Series C preferred stock, the Company
issued a warrant to purchase shares of the Company's common stock. The number of
shares will be equal to $500,000 divided by the exercise price. The exercise
price will be $10.50 per share if the Company and the Series C stockholder have
entered into a marketing agreement prior to the earlier of the date of exercise
of the warrant or December 31, 1996. Otherwise, the exercise price will be
$15.00 per share. The warrant expires on July 3, 1997.
On August 26, 1996, the Company sold 200,000 shares of Series D preferred
stock at $15.00 per share for total proceeds of approximately $3,000,000. The
holders of the Series D preferred stock are entitled to receive dividends at the
rate of $1.50 per share per annum if and when declared by the Board of
Directors. The right to such dividends is not cumulative. The holders of the
Series D preferred stock are entitled to a liquidation preference of $19.00 per
share, plus any declared but unpaid dividends. The preferred stock is
convertible, at the option of the holder, into the Company's common stock on a
one-for-one basis, subject to antidilution adjustments, and will automatically
convert into common stock concurrent with the closing of an underwritten public
offering of common stock under the Securities Act of 1933 in which the Company
receives at least $10,000,000 in gross proceeds and a per share price to the
public of at least $10.50 per share (subject to antidilution adjustments). The
holder of each preferred share is entitled to one vote for each common share
into which such preferred share would convert.
In connection with the sale of Series D preferred stock, the Company issued
a warrant to purchase shares of the Company's common stock. The number of shares
and exercise price are contingent upon the Series D stockholder achieving
certain performance criteria with respect to the issuance of VirtualPINs to its
customer base as outlined in the following schedule:
<TABLE>
<CAPTION>
INCREMENTAL EXERCISE PRICE
DEADLINE FOR ACHIEVING PERFORMANCE CRITERIA SHARES PER SHARE
---------------------------------------------------------- ----------- --------------
<S> <C> <C>
May 31, 1997.............................................. 375,000 $ 5.00
August 31, 1997........................................... 375,000 3.33
October 31, 1997.......................................... 375,000 2.50
December 30, 1997......................................... 375,000 2.23
</TABLE>
The performance warrant expires on December 30, 1997. The Company will
value this warrant as set forth in SFAS 123 and will report it as an expense as
the VirtualPIN distribution performance criteria are met.
Total issuance costs for all preferred stock amounted to $179,438 and
$351,645 at December 31, 1995 and September 30, 1996, respectively.
F-12
<PAGE> 88
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Warrants
In connection with the sale of Series B preferred stock in December 1995 to
a financial institution, the Company issued warrants to purchase shares of
Series A and Series B preferred stock. In April 1996, the Series B preferred
stockholder partially exercised this warrant by purchasing 465,000 shares of
Series B preferred stock at $3.189 per share. In addition, the Series B
preferred stockholder paid the Company $3,017,115 for warrants to purchase
852,272 shares of Series A preferred stock and 475,734 shares of Series B
preferred stock at $0.01 per share. These new warrants are currently exercisable
and will expire on March 4, 2001. The Company received total proceeds of
approximately $4.5 million in connection with this transaction. Furthermore, all
of the unexercised warrants originally issued on December 22, 1995 have been
canceled.
The Company also issued to the Series B preferred stockholder an incentive
warrant to purchase shares of common stock for $0.01 per share up to 4% of the
number of shares of common stock outstanding at the exercise date assuming
conversion of all preferred stock into common stock. The number of shares that
may be purchased under this warrant is contingent upon the achievement of
certain milestones, which relate to establishing merchant accounts by customers
of the financial institution, as defined in the incentive warrant agreement. As
set forth in SFAS 123, this warrant must be accounted for based on its fair
value. The Financial Accounting Standards Board's Emerging Issues Task Force has
met recently and has reached a consensus that the grant date is the appropriate
time to value such warrants. Accordingly, the Company obtained an independent
valuation to determine the fair value for this warrant. Based upon this
valuation the value of the warrant was determined to be $0.09 per share. The
value of the warrant will be recorded as an expense as merchant accounts are
established by the financial institution. Since no milestones contemplated by
this agreement have been achieved by the financial institution through September
30, 1996, the expense, if any, resulting from this transaction will occur in
subsequent periods. This warrant expires upon the earlier of the closing of an
initial public offering of the Company's common stock or June 30, 1998.
Stock Option Plan
The Company's 1994 Incentive and Non-Statutory Stock Option Plan (1994
Plan), under which options to purchase 468,750 shares of common stock were
granted, was replaced with the 1995 Stock Plan (1995 Plan). Under the 1995 Plan,
the Company is authorized to issue up to 2,000,000 common shares to officers,
employees, directors and certain other individuals providing services to the
Company. Options granted under the 1995 Plan generally vest over four years and
are exercisable for a period of up to ten years from the date of grant.
Incentive stock options are granted at prices which approximate the fair value
of the shares at the date of grant as determined by the board of directors. The
following table summarizes stock option activity:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options granted during period ended December 31, 1994..... 288,875 $ 0.04
-------
Balance at December 31, 1994.............................. 288,875 0.04
Options granted......................................... 179,875 0.04 - 0.176
-------
Balance at December 31, 1995.............................. 468,750 0.04 - 0.176
Options granted......................................... 1,080,395 0.32 - 10.50
Options canceled........................................ 22,250 0.32 - 9.00
-------
Balance at September 30, 1996............................. 1,526,895 $0.04 - $10.50
=======
</TABLE>
As of September 30, 1996, options to purchase 578,316 shares are
exercisable and 941,855 shares are available for future grant under the 1995
Plan.
After September 30, 1996 and through October 31, 1996, the Company granted
177,750 additional options under its 1995 Plan to purchase shares of Common
Stock at a weighted average price of $10.50 per share and issued 8,000 shares of
Common Stock as a result of exercise of stock options.
F-13
<PAGE> 89
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to the terms of the December 22, 1995 Series B Preferred Stock
Purchase Agreement, on April 11, 1996, the Company's board of directors granted
options to purchase 475,000 shares of common stock at $6.30 per share to an
officer and director of the Company. The options vest immediately and expire on
April 11, 2006. Two directors of the Company were granted options to purchase
225,000 and 100,000 shares under the same terms. In addition, the board of
directors granted options to purchase 200,000 shares of common stock at $6.30
per share to two key employees of the Company. The options to these two key
employees vest on June 30, 1998 provided that each remains an employee of the
Company at that date and expire in ten years. These options to purchase
1,000,000 shares were not granted under the 1995 Plan. No deferred compensation
was deemed appropriate for the April 1996 option grants. The fair value of
common stock was determined by an independent valuation.
As of September 30, 1996, the Company has reserved shares of common stock
for future issuance as follows:
<TABLE>
<S> <C>
Stock options..................................... 3,468,750
Preferred stock................................... 2,273,441
Warrants.......................................... 2,875,625
Employee stock purchase plan...................... 100,000
---------
8,717,816
=========
</TABLE>
Through September 30, 1996, the Company recorded deferred compensation
expense for the difference between the exercise price and the deemed fair value
for financial statement presentation purposes of the Company's common stock, as
determined in part by an independent valuation, for options granted during 1996.
Such options were granted at $0.32 per share with a deemed fair value of $0.40
per share and at $1.00 per share with a deemed fair value of $3.00 per share.
This deferred compensation expense aggregates to $50,567, which will be
amortized over the vesting period of the related options, generally four years.
Adjusted pro forma information regarding net loss is required by SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the "minimum value" method for
option pricing with the following weighted-average assumptions for both 1995 and
the nine months ended September 30, 1996: risk-free interest rates of 6%;
dividend yields of 0%; and a weighted-average expected life of the option of
seven years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER SEPTEMBER
31, 30,
1995 1996
----------- -----------
<S> <C> <C>
Adjusted pro forma net loss....................................... $(2,276,119) $(6,073,305)
Adjusted pro forma loss per share................................. $ (0.28) $ (0.69)
</TABLE>
Employee Stock Purchase Plan
On July 18, 1996, the Company adopted the Employee Stock Purchase Plan. A
total of 100,000 shares of common stock have been reserved for issuance under
the Purchase Plan.
F-14
<PAGE> 90
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1995 and September 30, 1996
are shown below. A valuation allowance for the entire deferred tax asset has
been recognized as realization of such assets is uncertain.
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
1995 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating losses carryforwards.............................. $ 530,000 $ 2,593,000
Other........................................................... 48,000 175,000
--------- -----------
578,000 2,768,000
Valuation allowance for deferred tax assets....................... (578,000) (2,768,000)
--------- -----------
Net deferred tax assets........................................... $ -- --
========= ===========
</TABLE>
At September 30, 1996, the Company has federal and state net operating loss
carryforwards of approximately $6,400,000. These federal and state carryforwards
will begin to expire in 2010 and 2000, respectively, unless previously utilized.
The Company also has federal and state research credit carryforwards of
approximately $64,000 and $39,000, respectively, which will begin expiring in
2010, unless previously utilized.
Pursuant to Internal Revenue Code Section 382 and 383, use of the Company's
net operating loss and tax credit carryforwards may be limited if a cumulative
change in ownership of more than 50% occurs within a three year period.
8. SUBSEQUENT EVENT
Stock Option Plan
On October 16, 1996, the Board of Directors of the Company increased the
number of shares of common stock reserved for issuance under the 1995 Stock Plan
from 2,000,000 shares to 3,000,000 shares.
F-15
<PAGE> 91
Linden Music Web site designed, maintained and copyrighted by Kit Watkins.
Farcast and the Farcast logo are trademarks of Farcast. Permission granted by
Cybernet Data Systems, Inc. LandWare and the slogan "Software for Terra Firma"
are trademarks of LandWare, Inc. Copyright PC Quote, Inc. 1996-1997. Copyright
1996, Charles River Media, All rights reserved. Copyright 1993-1996, Electronic
Frontier Foundation.
<PAGE> 92
[ART]
The merchant customers of the Company depicted above have not accounted for a
material portion of the Company's revenues to date. The Company's merchant
customers are not contractually obligated to continue to use FVIPS for any
period of time and may end such usage of FVIPS on an at-will basis.
<PAGE> 93
INSIDE FRONT COVER:
The graphic describes the VirtualPIN architecture in the form of a triangle
with dotted lines for sides. The heading of the graphic reads "VirtualPIN
Architecture." The upper left corner of the triangle is a square including the
words "Buyer's Computer." The upper right corner of the triangle is a square
including the words "Seller's Computer." The bottom corner of the triangle is a
square including the First Virtual logo. The middle contains the word
"VirtualPIN" and includes the VirtualPIN logo.
INSIDE FRONT COVER (LEFT FOLDOUT):
The graphic describes the First Virtual Internet Payment System with seven
rectangles representing the different components of such system. The heading of
the graphic reads "First Virtual Internet Payment System." The graphic
demonstrates the flow and sequence of functions in a FVIPS transaction with
dotted lines connecting the rectangles. The top of the graphic includes text
that reads "FV enables Buyers and Sellers to conduct secure, private
transactions over the Internet." The middle of the graphic includes text that
reads "FV uses dedicated, secure lines to transfer transaction information to
established financial networks." The bottom of the graphic includes text that
reads "FV integrates seamlessly with established financial networks to authorize
and settle transactions."
INSIDE FRONT COVER (RIGHT FOLDOUT):
The graphic describes the Company's VirtualTAG application of the
VirtualPIN architecture. The graphic depicts the VirtualTAG in use on the
Internet, which contains an advertisement within a banner on a World Wide Web
page. The display demonstrates the steps taken in purchasing a product or
service on the Internet. The heading of the graphic contains the words
"VirtualTAG CLICK HERE."
PAGE 37:
The graphic contains a diagram setting forth the steps, numbered in order,
of the purchase cycle of a financial transaction using FVIPS. The graphic
contains three squares, connected by numbered arrows forming a triangle. The
numbers on the arrows correspond to the numbers in the text. The square at the
top left of the triangle contains the words "Buyer's Computer." The square at
the top right of the triangle contains the words "Seller's Computer." The square
at the bottom of the triangle contains the words "FV Purchase Server." The
triangle is connected by an arrow to a rectangle below. Such rectangle contains
the words "The Back-Office."
PAGE 38:
The graphic contains a diagram setting forth the steps, numbered in order,
of the "Back-Office Cycle" of a financial transaction using FVIPS. The graphic
contains six squares, two of which are placed above the other four. The top
right square is connected by an arrow to text reading "The Purchase Cycle." The
squares are connected by numbered arrows corresponding to the text. The squares
contain, in counter-clockwise order, text which reads "FV Back-Office Server,"
"Credit Card Processor," "Issuing Bank," "FV Merchant Acquiror," "FV Deposit
Account," and "Seller Bank Account."
INSIDE BACK COVER:
The graphic contains a square containing the First Virtual logo within a
larger rectangle. The large rectangle contains six squares, each containing
customer Web pages. The heading of the graphic contains the words "FIRST VIRTUAL
HOLDINGS INCORPORATED." The bottom of the graphic contains the words "LEADING
THE CHARGE TO INTERNET COMMERCE."
<PAGE> 94
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO CIRCUMSTANCES
SHALL THE DELIVERY OF THIS PROSPECTUS, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 23
Dividend Policy....................... 23
Capitalization........................ 24
Dilution.............................. 25
Selected Financial Data............... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 33
Management............................ 52
Certain Transactions.................. 60
Principal Stockholders................ 64
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 68
Underwriting.......................... 70
Legal Matters......................... 71
Experts............................... 71
Additional Information................ 72
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,000,000 SHARES
LOGO
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
LEHMAN BROTHERS
UNTERBERG HARRIS
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates except
the Securities and Exchange Commission registration fees, the NASD filing fees
and the Nasdaq National Market application fee.
<TABLE>
<CAPTION>
TO BE PAID
BY THE
REGISTRANT
-----------
<S> <C>
Securities and Exchange Commission registration fee............... 30,000
NASD filing fees.................................................. 10,000
Nasdaq National Market application fee............................ 50,000
Accounting fees and expenses...................................... 180,000
Printing and engraving expenses................................... 150,000
Transfer agent and registrar fees................................. 2,500
Blue Sky fees and expenses........................................ 15,000
Legal fees and expenses........................................... 360,000
Officer and Director Liability Insurance.......................... 400,000
Miscellaneous expenses............................................ 202,500
----------
Total................................................... 1,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides in relevant part that "[a] corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful." With
respect to derivative actions, Section 145(b) of the DGCL provides in relevant
part that "[a] corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its
favor . . . [by reason of his service in one of the capacities specified in the
preceding sentence] against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expense
which the Court of Chancery and such other court shall deem proper."
Article V of the Registrant's Bylaws provides that the Company may
indemnify each person who is or was a director of the Company to the full extent
permitted by the DGCL. Such Article also provides that the
II-1
<PAGE> 96
Registrant may, but is not required to, indemnify its employees and agents
(other than directors and officers) to the extent and in the manner permitted by
the DGCL.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant, its directors and executive officers and
other persons for certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act").
The Registrant has entered into an indemnification agreement with each of
its directors and officers and intends to maintain insurance for the benefit of
its directors and officers insuring such persons against certain liabilities,
including liabilities under the securities laws.
See also the undertakings set out in response to Item 17 herein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Common Stock, Preferred Stock, options and warrants of the Registrant
issued to stockholders, option holders and warrant holders of First Virtual
Holdings Incorporated, a Wyoming corporation, in connection with the
reincorporation in Delaware were not deemed "sold" as a result of Rule 145(a)(2)
promulgated under the Securities Act. The following table includes information
regarding all securities sold by the Registrant's Wyoming predecessor from March
11, 1994 through the date of such incorporation and all securities sold by the
Registrant since such reincorporation.
<TABLE>
<CAPTION>
NUMBER
DATE OF AGGREGATE PURCHASE PRICE
CLASS OF PURCHASERS OF SALE TITLE OF SECURITIES SECURITIES AND FORM OF CONSIDERATION
- ------------------------------ -------- -------------------------- ------------- ---------------------------
<S> <C> <C> <C> <C>
Lee H. Stein, an officer and 3/11/94 Common Stock 1,250,000 $50,000 cash
director, and June L. Stein
(spouse of Mr. Stein)
Trusts affiliated with Tawfiq 3/11/94 Common Stock 1,250,000 $50,000 cash
N. Khoury, a director
Marshall T. Rose, an officer 5/23/94 Common Stock 166,675 For services rendered
A consultant 5/26/94 Common Stock 166,675 For services rendered
Jon Rubin, a director 9/19/94 Common Stock 1,250,000 $200,000 cash
Marshall T. Rose, an officer 5/12/95 Common Stock 67,700 Waiver of certain
preemptive rights
A consultant 5/12/95 Common Stock 67,700 Waiver of certain
preemptive rights
Sybase, Inc., an affiliate 5/22/95 Series A Preferred Stock 275,750 $485,320 cash
Unterberg Harris Interactive 5/22/95 Series A Preferred Stock 275,750 $485,320 cash
Media Limited Partnership,
C.V.
First USA Merchant Services, 12/22/95 Series B Preferred Stock, 783,945(1) $2,500,000 cash
Inc., an affiliate Warrant to purchase Series
A Preferred Stock at $1.76
per share, Warrant to
purchase Series B
Preferred Stock at $3.189
per share, and Warrant to
purchase Common Stock at
$0.32 per share
Sybase, Inc., an affiliate 12/22/95 Series A Preferred Stock 71,022 Cancellation of $125,000 of
indebtedness
Unterberg Harris Interactive 12/22/95 Series A Preferred Stock 71,022 Cancellation of $125,000 of
Media Limited Partnership, indebtedness
C.V.
An employee 12/28/95 Common Stock 10,000 For services rendered
A consultant 12/28/95 Common Stock 30,000 For services rendered
Marshall T. Rose, an officer 12/28/95 Common Stock 14,500 For services rendered
A consultant 2/28/96 Common Stock 27,000 $8,640 cash
A consultant 2/28/96 Common Stock 3,000 $960 cash
</TABLE>
II-2
<PAGE> 97
<TABLE>
<CAPTION>
NUMBER
DATE OF AGGREGATE PURCHASE PRICE
CLASS OF PURCHASERS OF SALE TITLE OF SECURITIES SECURITIES AND FORM OF CONSIDERATION
- ------------------------------ -------- -------------------------- ------------- ---------------------------
<S> <C> <C> <C> <C>
First USA Merchant Services, 4/22/96 Series B Preferred 465,000 $1,482,885 cash
Inc., an affiliate
First USA Merchant Services, 4/22/96 Warrants to purchase 1,328,006(2) $3,017,115 cash and
Inc., an affiliate Series A Preferred Stock surrender of Series A
and Series B Preferred Preferred Stock and Series
Stock at $0.01 per share B Preferred Stock warrants
issued on December 22, 1995
A consultant 4/11/96 Common Stock 14,425 For services rendered
A consultant 4/11/96 Common Stock 7,812 For services rendered
A consultant 4/11/96 Common Stock 2,500 For services rendered
A consultant 4/11/96 Common Stock 2,500 For services rendered
A consultant 4/11/96 Common Stock 2,500 For services rendered
General Electric Capital 7/3/96 Series C Preferred Stock, 238,096(3) $2,500,000 cash
Corporation, an affiliate Common Stock and Warrant
to purchase Common Stock
An employee 7/18/96 Common Stock 1,389 For services rendered
An employee 10/02/96 Common stock 500 Exercise of option
First Data Corporation 8/26/96 Series D Preferred Stock 200,000(4) $3,000,000 cash
and Warrant to purchase
Common Stock
All directors, employees and 3/30/94- Options to purchase Common 2,777,645 Options granted for no cash
consultants 11/27/96 Stock(5) consideration. Exercise
prices range from $0.04 to
$11.00 per share.
</TABLE>
- ---------------
(1) Represents outstanding shares of Series B Preferred Stock. Does not include
852,272 shares of Series A Preferred Stock issuable upon exercise of a
warrant, up to 940,734 shares of Series B Preferred Stock issuable upon
exercise of a warrant (which warrants were subsequently canceled) and shares
of Common Stock equivalent to up to four percent of the Company's
outstanding capital stock issuable upon exercise of a warrant subject to the
satisfaction of certain marketing-related performance milestones (which
warrant will terminate upon completion of the offering).
(2) Includes 852,272 shares of Series A Preferred Stock and 475,734 shares of
Series B Preferred Stock issuable upon exercise of outstanding warrants at
an exercise price of $0.01 per share.
(3) Represents 130,952 shares of Series C Preferred Stock and 107,144 shares of
Common Stock. Does not include up to 47,619 shares of Common Stock
exercisable upon exercise of a warrant.
(4) Does not include up to 1,500,000 shares of Common Stock issuable upon
exercise of a warrant, subject to the achievement of certain
marketing-related milestones.
(5) All stock option grants, and all sales of Common Stock pursuant to the
exercise of stock options granted, were made pursuant to the exemption from
the registration requirements of the Securities Act afforded by Rule 701
promulgated under the Securities Act as transactions pursuant to a
compensatory benefit plan or a written contract relating to compensation.
Unless otherwise noted, all sales were made in reliance on Section 4(2) of
the Securities Act and/or Regulation D or Rule 701 promulgated under the
Securities Act. The securities were sold to a limited number of people with no
general solicitation or advertising.
II-3
<PAGE> 98
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ --------------------------------------------------------------------------
<S> <C>
1.1 Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Amended and Restated Certificate of Incorporation of Registrant to be
filed after closing of offering
3.3* Bylaws of the Registrant
4.1 Form of Stock Certificate
5.1* Opinion and Consent of Wilson Sonsini Goodrich & Rosati, P.C., with
respect to the Common Stock being registered
10.1* Form of Indemnification Agreement entered into between Registrant and its
officers and directors
10.2* The Registrant's 1994 Incentive and Non-Statutory Stock Option Plan.
10.3* The Registrant's 1995 Stock Plan
10.4* The Registrant's Employee Stock Purchase Plan
10.5* Lee H. Stein Employment Agreement
10.6* Nathaniel S. Borenstein Employment Agreement
10.7* Marshall T. Rose Employment Agreement
10.8* John M. Stachowiak Employment Agreement
10.9* Michael D. Schauer Employment Agreement
10.10* Series A Preferred Stock Purchase Agreement dated as of May 22, 1995
between the Registrant and the purchasers named therein
10.11* Series B Preferred Stock Purchase Agreement dated as of December 22, 1995
between the Registrant and First USA Merchant Services, Inc.
10.12* Securities Purchase Agreement between the Registrant and General Electric
Capital Corporation dated July 3, 1996
10.13* Warrant to Purchase 47,619 shares of Common Stock, issued to General
Electric Capital Corporation as of July 3, 1996
10.14* Series D Preferred Stock Purchase Agreement between the Registrant and
First Data Corporation, dated August 26, 1996
10.15* Amended and Restated Shareholder Rights Agreement dated August 26, 1996 by
and among Registrant and certain of its stockholders
10.16+ Warrant to Purchase up to 1,500,000 shares of Common Stock, issued to
First Data Corporation as of August 26, 1996
10.17* Marketing and Product Development Agreement dated as of August 26, 1996
between the Registrant and First Data Corporation
10.18* Warrant to purchase 852,272 shares of Series A Preferred Stock, issued to
First USA Merchant Services
10.19* Warrant to purchase 475,734 shares of Series B Preferred Stock, issued to
First USA Merchant Services
10.20* Lease Agreement dated as of February 1, 1996 by and between Registrant and
Carmel Valley Partners I (now Spieker Properties, L.P.), as amended
10.21* Sublease Agreement dated as of June 15, 1996 by and between Registrant and
Integrated Medical Systems
10.22* Lease Agreement dated as of April 18, 1996 by and between Registrant and
KMD Foundation
10.23* Facilities Agreement dated as of August 14, 1996 between the Registrant
and First USA Merchant Services, Inc.
10.24* Waiver and Amendment dated as of August 20, 1996 between the Registrant
and First USA Merchant Services, Inc.
</TABLE>
II-4
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ --------------------------------------------------------------------------
<S> <C>
10.25* Merchant Credit Card Agreement dated as of September 12, 1994, between the
Registrant and First USA Merchant Services, as amended
10.27* Agreement for Information Technology Services dated as of October 12, 1994
between the Registrant and Electronic Data Systems Corporation, as amended
10.28* Consulting and Development Agreement dated as of August 16, 1996 between
the Registrant and Sybase, Inc.
11.1* Statement re: Computation of Per Share Earnings
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Counsel (included in Exhibit 5.1)
24.1* Power of Attorney (included on the signature page of this Registration
Statement)
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested for certain portions.
(b) Financial Statement Schedule.
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or notes
thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 14 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling persons of the Registrant in the successful defense of any action,
suite or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against policy as expressed in
the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the Closing, as specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on December 9, 1996.
FIRST VIRTUAL HOLDINGS INCORPORATED
By: /s/ LEE H. STEIN
-----------------------------------------
Lee H. Stein,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ------------------
<S> <C> <C>
/s/ LEE H. Chairman and Chief Executive December 9, 1996
STEIN Officer (Principal Executive
- ------------------------------------------ Officer)
Lee H. Stein
/s/ JOHN M. STACHOWIAK Vice President, Finance and December 9, 1996
- ------------------------------------------ Administration and Chief
John M. Stachowiak Financial Officer (Principal
Financial and Accounting
Officer)
/s/ ROBERT S. EPSTEIN* Director December 9, 1996
- ------------------------------------------
Robert S. Epstein
/s/ TAWFIQ N. KHOURY* Director December 9, 1996
- ------------------------------------------
Tawfiq N. Khoury
Director December 9, 1996
- ------------------------------------------
Scott Loftesness
/s/ JOHN A. McKINLEY* Director December 9, 1996
- ------------------------------------------
John A. McKinley
/s/ PAMELA H. PATSLEY* Director December 9, 1996
- ------------------------------------------
Pamela H. Patsley
/s/ JON Director December 9, 1996
RUBIN*
- ------------------------------------------
Jon Rubin
*By: /s/ LEE H.
STEIN
- ------------------------------------------
Lee H. Stein, Attorney-in-Fact
*By: /s/ JOHN M. STACHOWIAK
- ------------------------------------------
John M. Stachowiak, Attorney-in-Fact
</TABLE>
II-6
<PAGE> 101
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE PAGE
- ------ -----------------------------------------------------------------------------------
<S> <C> <C>
1.1 Underwriting Agreement................................................
3.1* Amended and Restated Certificate of Incorporation of the Registrant...
3.2* Amended and Restated Certificate of Incorporation of Registrant to be
filed after closing of offering.......................................
3.3* Bylaws of the Registrant..............................................
4.1 Form of Stock Certificate.............................................
5.1* Opinion and Consent of Wilson Sonsini Goodrich & Rosati, P.C., with
respect to the Common Stock being registered..........................
10.1* Form of Indemnification Agreement entered into between Registrant and
its officers and directors............................................
10.2* The Registrant's 1994 Incentive and Non-Statutory Stock Option Plan.
10.3* The Registrant's 1995 Stock Plan......................................
10.4* The Registrant's Employee Stock Purchase Plan.........................
10.5* Lee H. Stein Employment Agreement.....................................
10.6* Nathaniel S. Borenstein Employment Agreement..........................
10.7* Marshall T. Rose Employment Agreement.................................
10.8* John M. Stachowiak Employment Agreement...............................
10.9* Michael D. Schauer Employment Agreement...............................
10.10* Series A Preferred Stock Purchase Agreement dated as of May 22, 1995
between the Registrant and the purchasers named therein...............
10.11* Series B Preferred Stock Purchase Agreement dated as of December 22,
1995 between the Registrant and First USA Merchant Services, Inc......
10.12* Securities Purchase Agreement between the Registrant and General
Electric Capital Corporation dated July 3, 1996.......................
10.13* Warrant to Purchase 47,619 shares of Common Stock, issued to General
Electric Capital Corporation as of July 3, 1996.......................
10.14* Series D Preferred Stock Purchase Agreement between the Registrant and
First Data Corporation, dated August 26, 1996.........................
10.15* Amended and Restated Shareholder Rights Agreement dated August 26,
1996 by and among Registrant and certain of its stockholders..........
10.16+ Warrant to Purchase up to 1,500,000 shares of Common Stock, issued to
First Data Corporation as of August 26, 1996..........................
10.17* Marketing and Product Development Agreement dated as of August 26,
1996 between the Registrant and First Data Corporation................
10.18* Warrant to purchase 852,272 shares of Series A Preferred Stock, issued
to First USA Merchant Services........................................
10.19* Warrant to purchase 475,734 shares of Series B Preferred Stock, issued
to First USA Merchant Services........................................
10.20* Lease Agreement dated as of February 1, 1996 by and between Registrant
and Carmel Valley Partners I (now Spieker Properties, L.P.), as
amended...............................................................
10.21* Sublease Agreement dated as of June 15, 1996 by and between Registrant
and Integrated Medical Systems........................................
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE PAGE
- ------ -----------------------------------------------------------------------------------
<S> <C> <C>
10.22* Lease Agreement dated as of April 18, 1996 by and between Registrant
and KMD Foundation....................................................
10.23* Facilities Agreement dated as of August 14, 1996 between the
Registrant and First USA Merchant Services, Inc.......................
10.24* Waiver and Amendment dated as of August 20, 1996 between the
Registrant and First USA Merchant Services, Inc.......................
10.25* Merchant Credit Card Agreement dated as of September 12, 1994 between
the Registrant and First USA Merchant Services, as amended............
10.27* Agreement for Information Technology Services dated as of October 12,
1994 between the Registrant and Electronic Data Systems Corporation,
as amended............................................................
10.28* Consulting and Development Agreement dated as of August 16, 1996
between the Registrant and Sybase, Inc................................
11.1* Statement re: Computation of Per Share Earnings.......................
23.1 Consent of Ernst & Young LLP, Independent Auditors....................
23.2* Consent of Counsel (included in Exhibit 5.1)..........................
24.1* Power of Attorney (included on the signature page of this Registration
Statement)............................................................
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested for certain portions.
<PAGE> 1
Exhibit 1.1
3,000,000 Shares of Common Stock
FIRST VIRTUAL HOLDINGS INCORPORATED
UNDERWRITING AGREEMENT
____________ , 1996
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
LEHMAN BROTHERS INC.
UNTERBERG HARRIS
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Ladies and Gentlemen:
First Virtual Holdings Incorporated, a corporation organized
and existing under the laws of Delaware (the "Company"), proposes, subject to
the terms and conditions stated herein, to issue and sell to the several
underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
3,000,000 shares (the "Firm Shares") of its common stock, par value $0.001 per
share (the "Common Stock") and, for the sole purpose of covering
over-allotments in connection with the sale of the Firm Shares, at the option of
the Underwriters, up to an additional 450,000 shares (the "Additional Shares")
of Common Stock. The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "Shares." The Shares are more fully
described in the Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a
<PAGE> 2
registration statement, and may have filed an amendment or amendments thereto,
on Form S-1 (No. 333-14573), for the registration of the Shares under the
Securities Act of 1933, as amended (the "Act"). Such registration statement,
including the prospectus, financial statements and schedules, exhibits and all
other documents filed as a part thereof, as amended at the time of effectiveness
of the registration statement, including a registration statement (if any) filed
pursuant to Rule 462(b) under the Act (the "Rule 462b Registration Statement")
increasing the size of the Offering registered under the Act and any information
deemed to be a part thereof as of the time of effectiveness pursuant to
paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the
Commission under the Act (the "Regulations"), is herein called the "Registration
Statement" and the prospectus, in the form first filed with the Commission
pursuant to Rule 424(b) of the Regulations or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing is
required, is herein called the "Prospectus". The term "preliminary prospectus"
as used herein means a preliminary prospectus as described in Rule 430 of the
Regulations. Neither the Commission nor the Blue Sky or securities authority of
any jurisdiction has issued a stop order suspending the effectiveness of the
Regulation Statement, preventing or suspending the use of any preliminary
prospectus, the Prospectus, the Registration Statement or any amendment or
supplement thereto, refusing to permit the effectiveness of the Registration
Statement or suspending the registration or qualification of the Shares, nor, to
the Company's knowledge, has any of such authorities instituted or threatened to
institute any proceedings with respect to a stop order.
(b) At the time of the effectiveness of the Registration
Statement or the effectiveness of any post-effective amendment to the
Registration Statement, when the Prospectus is first filed with the Commission
pursuant to Rule 424(b) or Rule 434 of the Regulations, when any supplement to
or amendment of the Prospectus is filed with the Commission and at the Closing
Date and the Additional Closing Date, if any, (as hereinafter respectively
defined), the Registration Statement and the Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material respects
with the applicable provisions of the Act and
2
<PAGE> 3
the Regulations and does not or will not contain an untrue statement of a
material fact and does not or will not omit to state any material fact required
to be stated therein or necessary in order to make the statements therein (i) in
the case of the Registration Statement, not misleading and (ii) in the case of
the Prospectus, in light of the circumstances under which they were made, not
misleading. When any related preliminary prospectus was first filed with the
Commission (whether filed as part of the registration statement for the
registration of the Shares or any amendment thereto or pursuant to Rule 424(a)
of the Regulations) and when any amendment thereof or supplement thereto was
first filed with the Commission, such preliminary prospectus and any amendments
thereof and supplements thereto complied in all material respects with the
applicable provisions of the Act and the Regulations and did not contain an
untrue statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not misleading.
No representation and warranty is made in this subsection (b), however, with
respect to any information contained in or omitted from the Registration
Statement or the Prospectus or any related preliminary prospectus or any
amendment thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through you as herein stated expressly for use in connection with
the preparation thereof. If Rule 434 is used, the Company will comply with the
requirements of Rule 434.
(c) Ernst & Young LLP, who have certified the financial
statements and supporting schedules included in the Registration Statement, are
independent public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
set forth in the Registration Statement and the Prospectus, there has been no
material adverse change or any development involving a prospective material
adverse change in the business, prospects, properties, operations, condition
(financial or other) or results of operations of the
3
<PAGE> 4
Company, whether or not arising from transactions in the ordinary course of
business, and since the date of the latest balance sheet presented in the
Registration Statement and the Prospectus, the Company has not incurred or
undertaken any liabilities or obligations, direct or contingent, which are
material to the Company, except for liabilities or obligations which are
reflected in the Registration Statement and the Prospectus.
(e) This Agreement and the transactions contemplated
herein have been duly and validly authorized by the Company and this Agreement
has been duly and validly executed and delivered by the Company.
(f) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (i) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with notice or lapse
of time, or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any material property or
assets of the Company pursuant to, any material agreement, instrument,
franchise, license or permit to which the Company is a party or by which the
Company or its properties or assets may be bound or (ii) violate or conflict
with any provision of the certificate of incorporation or by-laws of the Company
or any judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over the
Company or any of its properties or assets. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its properties or assets is required for
the execution, delivery and performance of this Agreement or the consummation of
the transactions contemplated hereby, including the issuance, sale and
delivery of the Shares to be issued, sold and delivered by the Company
hereunder, except the registration under the Act of the Shares and such
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the Shares
by the Underwriters.
4
<PAGE> 5
(g) All of the outstanding shares of Common Stock are duly
and validly authorized and issued, fully paid and nonassessable and were not
issued and are not now in violation of or subject to any preemptive rights. The
Shares, when issued, delivered and sold in accordance with this Agreement, will
be duly and validly issued and outstanding, fully paid and nonassessable, and
will not have been issued in violation of or be subject to any preemptive
rights. The Company had, at September 30, 1996, an authorized and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
The Common Stock, the Firm Shares and the Additional Shares conform to the
descriptions thereof contained in the Registration Statement and the Prospectus.
(h) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of its jurisdiction of
incorporation. The Company is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures to be so qualified
or in good standing which will not in the aggregate have a material adverse
effect on the Company. The Company has all requisite power and authority, and
all necessary consents, approvals, authorizations, orders, registrations,
qualifications, licenses and permits of and from all public, regulatory or
governmental agencies and bodies, to own, lease and operate its properties and
conduct its business as now being conducted and as described in the Registration
Statement and the Prospectus, and no such consent, approval, authorization,
order, registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration Statement
and the Prospectus.
(i) Except as described in the Prospectus, there is no
litigation or governmental proceeding to which the Company is a party or to
which any property of the Company is subject or which is pending or, to the
knowledge of the Company, contemplated against the Company which might result in
any material adverse change or any development involving a material adverse
change in the business, prospects, properties, operations,
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<PAGE> 6
condition (financial or other) or results of operations of the Company or which
is required to be disclosed in the Registration Statement and the Prospectus.
(j) The Company has not taken and will not take, directly
or indirectly, any action designed to cause or result in, or which constitutes
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.
(k) The financial statements, including the notes thereto,
and supporting schedules included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the dates
indicated and the results of its operations for the periods specified; except as
otherwise stated in the Registration Statement, said financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis; and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein.
(l) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of securities of
the Company because of the filing of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby which have not been
waived with respect to the Offering.
(m) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940.
(n) The Company is not in violation of its certificate of
incorporation or by-laws, as the case may be, or in default in the performance
or observance of any material obligation, agreement, covenant or condition
contained in any material bond, debenture, note or other evidence of
indebtedness or in any material contract, indenture, mortgage, deed of trust,
loan or credit agreement, lease, joint venture or other agreement or instrument
to which the Company is a party or by which any of its properties may be bound,
which default
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<PAGE> 7
would have, singly or in the aggregate, a material adverse effect on the
Company, or in violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court or governmental agency or body, the violation of
which would have, singly or in the aggregate, a material adverse effect on the
Company.
(o) The Shares have been approved for inclusion on the
Nasdaq National Market, subject to notice of issuance or sale, as the case may
be.
(p) The Company has good and marketable title to all the
properties and assets reflected as owned in the financial statements hereinabove
described and elsewhere in the Prospectus, subject to no lien, mortgage, pledge,
charge, security interest, claim, encumbrance or other deficit in title of any
kind except those reflected in such financial statements or elsewhere in the
Prospectus or such as are not material to the Company. The Company holds its
leased properties that are material to the Company under valid and binding
leases, except for such imperfections in title to the leasehold estates as are
not material and do not interfere with the use made and proposed to be made of
such properties, by the Company.
(q) The Company owns and possesses all right, title and
interest in and to, or has duly licensed from third parties a valid and
enforceable right to use, all trademarks, copyrights, patents, trade secrets
and other proprietary rights (collectively, the "Rights") presently employed by
the Company in connection with its business as described in the Prospectus,
whether such Rights are registered or unregistered, except where the failure to
own, possess or license the same would not have a material adverse effect on the
Company. The Company has not received any notice of infringement,
misappropriation or conflict from any third party as to the material Rights
which has not yet been resolved or disposed of and the Company has not
infringed, misappropriated or otherwise conflicted with the Rights of any third
parties, which infringement, misappropriation or conflict would have a material
adverse effect upon the condition (financial or otherwise) or results of
operations of the Company.
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<PAGE> 8
(r) There are no agreements, leases or other documents of
a character required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the Registration
Statement by the Act or by the Regulations that have not been described or
referred to therein or filed as required.
(s) The Company has filed all necessary federal and state
income and franchise tax returns required to be filed through the date hereof
and have paid all taxes when due, except where the failure to file or pay such
taxes, in the aggregate, could not reasonably be expected to have a material
adverse effect on the Company and there is no tax deficiency that has been, or
to the knowledge of the Company might be, asserted against the Company, or its
properties or assets, that would have a material adverse effect on the Company's
ability to perform its obligations under this Agreement, the Company's condition
(financial or other) or the results of operations of the Company.
(t) The Company maintains a system of internal accounting
controls that, taken as a whole, are sufficient to provide reasonable assurance
that: (i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(u) The Company is insured by insurers of recognized
financial responsibility against such losses and risks in such amounts as are
prudent and customary in the businesses in which they are engaged; the Company
has not been refused any insurance coverage sought or applied for; and the
Company has no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business.
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<PAGE> 9
(v) No labor disputes with the employees of the Company
exists or is threatened or imminent that could result in a material adverse
change that would (i) affect the Company's ability to perform its obligations
under this Agreement, or (ii) materially adversely affect the Company's
condition (financial or other) or the results of operations of the Company.
(w) The Company has no Subsidiaries (as defined in Rule
405 of the Regulations).
2. Purchase, Sale and Delivery of the Shares.
(a) on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to the Underwriters and
the Underwriters, severally and not jointly, agree to purchase from the Company,
at a purchase price per share of $ , the number of Firm Shares set forth
opposite the respective names of the Underwriters in Schedule I hereto plus any
additional number of Shares which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the office of Skadden, Arps,
Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022, or at such
other place as shall be agreed upon by you and the Company, at 10:00 A.M. on
the third or fourth business day (as permitted under Rule 15c6-1 under the
Exchange Act) (unless postponed in accordance with the provisions of Section 9
hereof) following the date of the effectiveness of the Registration Statement
(or, if the Company has elected to rely upon Rule 430A of the Regulations, the
third or fourth business day (as permitted under Rule 15c6-1 under the Exchange
Act) after the determination of the initial public offering price of the
Shares), or such other time not later than ten business days after such date as
shall be agreed upon by you and the Company (such time and date of payment and
delivery being herein called the "Closing Date"). Payment shall be made to the
Company by wire transfer in same day funds, against delivery to you for the
respective accounts of the Underwriters of certificates for the Shares to be
purchased by them. Certificates for the
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<PAGE> 10
Shares shall be registered in such name or names and in such authorized
denominations as you may request in writing at least two full business days
prior to the Closing Date. The Company will permit you to examine and package
such certificates for delivery at least one full business day prior to the
Closing Date.
(c) In addition, the Company hereby grants to the
Underwriters the option to purchase up to 450,000 Additional Shares at the same
purchase price per share to be paid by the Underwriters to the Company for the
Firm Shares as set forth in this Section 2, for the sole purpose of covering
over-allotments in the sale of Firm Shares by the Underwriters. This option may
be exercised at any time, in whole or in part, on or before the thirtieth day
following the date of the Prospectus, by written notice by you to the Company.
Such notice shall set forth the aggregate number of Additional Shares as to
which the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Shares are to be delivered (such date and
time being herein sometimes referred to as the "Additional Closing Date");
provided, however, that the Additional Closing Date shall not be earlier than
the Closing Date or earlier than the second full business day after the date on
which the option shall have been exercised nor later than the eighth full
business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Shares shall be registered
in such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter
shall be the number which bears the same ratio to the aggregate number of
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto (or such number
increased as set forth in Section 9 hereof) bears to 3,000,000 Firm Shares,
subject, however, to such adjustments to eliminate any fractional shares as you
in your sole discretion shall make.
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<PAGE> 11
Payment for the Additional Shares shall be made by wire
transfer in same day funds at the offices of Skadden, Arps, Slate, Meagher &
Flom, 919 Third Avenue, New York, New York 10022, or such other location as may
be mutually acceptable, upon delivery of the certificates for the Additional
Shares to you for the respective accounts of the Underwriters.
3. Offering. Upon your authorization of the release of the
Firm Shares, the Underwriters propose to offer the Shares for sale to the public
upon the terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees
with the Underwriters that:
(a) If the Registration Statement has not yet been
declared effective the Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the Prospectus
is otherwise required under Rule 424(b) or Rule 434, the Company will file the
Prospectus (properly completed if Rule 430A has been used) pursuant to Rule
424(b) or Rule 434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to rely on Rule
434, the Company will prepare and file a term sheet that complies with the
requirements of Rule 434.
The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when the Registration Statement
and any amendments thereto become effective, and when any Rule 462 Registration
Statement is filed and becomes effective (ii) of any request by the Commission
for any amendment of or supplement to the Registration Statement or the
Prospectus or for any additional information (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to the
Registration Statement or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the threatening,
of any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification
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<PAGE> 12
with respect to the suspension of the qualification of the Shares for sale in
any jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement
or any amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b)or Rule 434) that differs from the
prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement to
which you shall reasonably object in writing after being timely furnished in
advance a copy thereof.
(b) If at any time when a prospectus relating to the
Shares is required to be delivered under the Act any event shall have occurred
as a result of which the Prospectus as then amended or supplemented would, in
the judgment of the Underwriters or the Company include an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, the Company will notify you promptly and
prepare and file with the Commission an appropriate amendment or supplement (in
form and substance satisfactory to you) which will correct such statement or
omission and will use its best efforts to have any amendment to the Registration
Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you two signed
copies of the Registration Statement, including exhibits and all amendments
thereto, and the Company will promptly deliver to each of the Underwriters such
number of copies of any preliminary prospectus, the Prospectus, the Registration
Statement, and all amendments of and supplements to such documents, if any, as
you may reasonably request.
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<PAGE> 13
(d) The Company will endeavor in good faith, in
cooperation with you, at or prior to the time of effectiveness of the
Registration Statement, to qualify the Shares for offering and sale under the
securities laws relating to the offering or sale of the Shares of such
jurisdictions as you may designate and to maintain such qualification in effect
for so long as required for the distribution thereof; except that in no event
shall the Company be obligated in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process.
(e) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to you as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 180 days from the date of the
Prospectus, the Company will not, without your prior written consent, issue,
sell, offer or agree to sell, grant any option for the sale of, or otherwise
dispose of (or announce any offer, sale, grant of an option to purchase or other
disposition), directly or indirectly, any Common Stock ('or any securities
convertible into, exercisable for or exchangeable for Common Stock), and the
Company will obtain the undertaking of each of its officers and directors and
such of its shareholders as have been heretofore designated by you and listed on
Schedule II attached hereto not to engage in any of the aforementioned
transactions on their own behalf, other than (i) the Company's sale of Shares
hereunder, (ii) the Company's issuance of Common Stock upon the exercise of
presently outstanding stock options, (iii) grants of options to purchase Common
Stock or awards of restricted stock pursuant to option and restricted stock
plans in existence on the date hereof, provided such options are not exercisable
within such 180-day period, (iv) issuances under the Company's Employee Stock
Purchase Plan in effect as described in the Prospectus and (v) the pledges of
shares of Common Stock by any such officers, directors or stockholders provided
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<PAGE> 14
that the pledgee agrees in writing to be bound by the same restrictions in the
event of foreclosure on the pledged shares.
(g) During a period of three years from the effective date
of the Registration Statement, the Company will furnish to you copies of (i) all
reports to its shareholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
(h) The Company will apply the proceeds from the sale of
the Shares as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the
Shares to be quoted on the National Association of Securities Dealers Automated
Quotation National Market System.
5. Payment of Expense. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
the Company hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including those in
connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus and
any amendments or supplements thereto (including, without limitation, fees and
expenses of the Company's accountants and counsel), the underwriting documents
(including this Agreement and the Agreement Among Underwriters and the Selling
Agreement) and all other documents related to the public offering of the Shares
(including those supplied to the Underwriters in quantities as hereinabove
stated), (ii) the issuance, transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
qualification of the Shares under state or foreign securities or Blue Sky laws,
including the costs of printing and mailing a preliminary and final "Blue Sky
Survey" and the fees of counsel for the Underwriters and such counsel's
disbursements in relation thereto, (iv) quotation of the Shares on the National
Association of Securities Dealers Automated Quotation National Market System,
(v) filing fees of the Commission and the National Association of Securities
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<PAGE> 15
Dealers, Inc.; (vi) the cost of printing certificates representing the Shares
and (vii) the cost and charges of any transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations
of the Underwriters to purchase and pay for the Firm Shares and the Additional
Shares, as provided herein, shall be subject to the accuracy of the
representations and warranties of the Company herein contained, as of the date
hereof and as of the Closing Date (for purposes of this Section 6 "Closing Date"
shall refer to the Closing Date for the Firm Shares and any Additional Closing
Date, if different, for the Additional Shares), to the absence from any
certificates, opinions, written statements or letters furnished to you or to
Skadden, Arps, Slate, Meagher & Flom LLP ("Underwriters' Counsel") pursuant to
this Section 6 of any misstatement or omission, to the performance by the
Company of its obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become effective
not later than 5:30 P.M. (and, in the case of a Rule 462 Registration Statement,
not later than 10:00 P.M., New York time, on the date of this Agreement, or at
such later time and date as shall have been consented to in writing by you; if
the Company shall have elected to rely upon Rule 430A or Rule 434 of the
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 4(a) hereof; and, at or prior to the
Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the
opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Company, dated the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. The Company is duly
qualified and in good standing as a foreign
15
<PAGE> 16
corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in
good standing which will not in the aggregate have a material
adverse effect on the Company. The Company has all requisite
corporate authority to own, lease and license its properties
and conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus.
(ii) The Company has an authorized capital stock as
set forth in the Registration Statement and the Prospectus.
All of the outstanding shares of Common Stock are duly and
validly authorized and issued, are fully paid and
nonassessable and were not issued in violation of or subject
to any preemptive rights. The Shares to be delivered on the
Closing Date have been duly and validly authorized and, when
delivered by the Company in accordance with this Agreement,
will be duly and validly issued, fully paid and nonassessable
and will not have been issued in violation of or subject to
any preemptive rights. The Common Stock, the Firm Shares and
the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(iii) The form of certificates for the Shares
complies in all material respects with the requirements of the
Delaware General Corporation Law. As of the date of the
opinion, the Shares to be sold under this Agreement to the
Underwriters are duly authorized for quotation, on the
National Association of Securities Dealers Automated Quotation
National Market System.
(iv) This Agreement has been duly and validly
authorized, executed and delivered by the Company.
(v) There is no litigation or governmental or other
action, suit, proceeding
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<PAGE> 17
or investigation before any court or before or by any public,
regulatory or governmental agency or body pending or to the
best of such counsel's knowledge, threatened against, or
involving the properties or business of, the Company, which is
of a character required to be disclosed in the Registration
Statement and the Prospectus which has not been properly
disclosed therein.
(vi) The execution, delivery, and performance of this
Agreement and the consummation of the transactions
contemplated hereby by the Company do not and will not (A)
conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default)
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the
Company pursuant to, any material agreement, instrument,
franchise, license or permit known to such counsel to which
the Company is a party or by which the Company or its
properties or assets may be bound or (B) violate or conflict
with any provision of the certificate of incorporation or
by-laws of the Company, or, to the best knowledge of such
counsel, any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company
or any of its properties or assets. No consent, approval,
authorization, order, registration, filing, qualification,
license or permit of or with any court or any public,
governmental, or regulatory agency or body having jurisdiction
over the Company or any of its properties or assets is
required for the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated
hereby, except for (1) such as may be required under state
securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters (as to
which such counsel need express no opinion) and (2) such as
have been made or obtained under the Act.
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<PAGE> 18
(vii) The Registration Statement and the Prospectus
and any amendments thereof or supplements thereto (other than
the financial statements and schedules and other financial
data included or incorporated by reference therein, as to
which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the
Regulations.
(viii) The Registration Statement is effective under
the Act, and, to the best knowledge of such counsel, no stop
order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof has been
issued and no proceedings therefor have been initiated or
threatened by the Commission and all filings required by Rule
424(b) of the Regulations have been made.
(ix) The descriptions in the Registration Statement
and the Prospectus of the provisions of the certificate of
incorporation and bylaws of the Company accurately reflect, in
all material respects, such provisions.
(x) The descriptions in the Registration Statement
and the Prospectus, as regards any part of the Registration
Statement or the Prospectus not purporting to be made on
authority of an expert, which related to the provisions of
statutes, regulations, government proceedings, agreements and
contracts, if any, accurately reflect, in all material
respects, such provisions, and such counsel does not know of
any statutes, regulations or government proceedings required
to be described or referred to in the Registration Statement
or Prospectus that are not described or referred to therein.
(xi) To the knowledge of such counsel, the Company is
not in violation of its certificate of incorporation or bylaws
and the Company is not in default under (and no event has
occurred which with notice, lapse of time or both would
constitute a breach of or a default under) any agreement,
license, mortgage,
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<PAGE> 19
gage deed of trust, loan or credit agreement, indenture or
instrument filed as an exhibit to the Registration Statement,
which violation or default would have a material adverse
effect on the Company.
(xii) To the knowledge of such counsel based upon
representations provided to such counsel by the Company, there
are no agreements, contracts, leases or documents of a
character required to be described or referred to in the
Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement by the Act or by the
Regulations that are not described or referred to therein or
filed as required.
(xiii) The Company is not an "investment company" or
a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940 and, upon its
receipts of any proceeds from the sale of the Shares, will not
become or be deemed to be an "investment company" thereunder.
(xv) The Company has no Subsidiaries (as defined in
Rule 405 of the Regulations).
(xiv) In addition, such opinion shall also contain a
statement that such counsel has participated in conferences
with officers and representatives of the Company,
representatives of the independent public accountants for the
Company and the Underwriters at which the contents and the
Prospectus and related matters were discussed and, no facts
have come to the attention of such counsel which would lead
such counsel to believe that either the Registration Statement
at the time it became effective (including any Rule 462
Registration Statement the information deemed to be part of
the Registration Statement at the time of effectiveness
pursuant to Rule 430A(b) or Rule 434, if applicable), or any
amendment thereof made prior to the Closing Date as of the
date of such amendment, contained an untrue statement of a
material fact or omitted to state any material fact required
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<PAGE> 20
to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus as of its date
(or any amendment thereof or supplement thereto made prior to
the Closing Date as of the date of such amendment or
supplement) and as of the Closing Date contained or contains
an untrue statement of a material fact or omitted or omits to
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (it
being understood that such counsel need express no belief or
opinion with respect to the financial statements and schedules
and other financial data included or incorporated by reference
therein).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company, provided that copies of any such
statements or certificates shall be delivered to Underwriters' Counsel. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and, in their opinion, you
and they are justified in relying thereon.
(c) At the Closing Date, you shall have received the
opinion of Brobeck, Phleger, special counsel for the Company, dated the Closing
Date addressed to the underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
[(i) regulatory opinions to be determined upon review of
Wilson, Sonsini opinion]
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(d) All proceedings taken in connection with the sale or
the Firm Shares and the Additional Shares as herein contemplated shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date with respect to the issuance and sale of
the Shares, the Registration Statement and the Prospectus and such other related
matters as you may reasonably require, and the Company shall have furnished to
Underwriters' Counsel such documents as they request for the purpose of enabling
them to pass upon such matters.
(e) At the Closing Date you shall have received a
certificate of the Chief Executive Officer and Chief Financial Officer of the
Company, dated the Closing Date to the effect that (i) the condition set forth
in subsection (a) of this Section 6 has been satisfied, (ii) as of the date
hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date
the obligations of the Company to be performed hereunder on or prior thereto
have been duly performed and (iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not sustained any material loss or interference with its businesses
or properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse change, or
any development involving a material adverse change, in the business prospects,
properties, operations, condition (financial or otherwise), or results of
operations of the Company, except in each case as described in or contemplated
by the Prospectus.
(f) At the time this Agreement is executed and at the
Closing Date, you shall have received a letter, from Ernst & Young LLP,
independent public accountants for the Company, dated, respectively, as of the
date of this Agreement and as of the Closing Date addressed to the Underwriters
and in form and substance satisfactory to you, to the effect that: (i) they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the Regulations and stating that the answer to Item 10 of
the Registration Statement is correct insofar as it relates to them; (ii)
stating that, in their opinion, the finan-
21
<PAGE> 22
cial statements and schedules of the Company included in the Registration
Statement and the Prospectus and covered by their opinion therein comply as to
form in all material respects with the applicable accounting requirements of the
Act and the applicable published rules and regulations of the Commission
thereunder; (iii) on the basis of procedures consisting of a reading of the
latest available unaudited interim consolidated financial statements of the
Company, a reading of the minutes of meetings and consents of the shareholders
and board of directors of the Company and the committees of such board
subsequent to [ ], 1996, inquiries of officers and other employees of the
Company who have responsibility for financial and accounting matters of the
Company with respect to transactions and events subsequent to [ ], 1996 and
other specified procedures and inquiries to a date not more than five days prior
to the date of such letter, nothing has come to their attention that would cause
them to believe that: (A) the unaudited consolidated financial statements and
schedules of the Company presented in the Registration Statement and the
Prospectus do not comply as to form in all material respects with the applicable
accounting requirements of the Act and, if applicable, the Exchange Act and the
applicable published rules and regulations of the Commission thereunder or that
such unaudited consolidated financial statements are not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated financial
statements included in the Registration Statement and the Prospectus; (B) with
respect to the period subsequent to September 30, 1996 there were, as of the
date of the most recent available monthly consolidated financial statements of
the Company, if any, and as of a specified date not more than five days prior to
the date of such letter, any changes in the capital stock or long-term
indebtedness of the Company or any decrease in the net current assets or
stockholders' equity of the Company, in each case as compared with the amounts
shown in the most recent balance sheet presented in the Registration Statement
and the Prospectus, except for changes or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which are
set forth in such letter or (C) that during the period from September 30, 1996
to the date of the most recent available monthly consolidated financial
statements of the Company, if any, and to a specified date not more than five
days prior to the date of such letter, there
22
<PAGE> 23
was any decrease, as compared with the corresponding period in the prior fiscal
year, in total revenues, or total or per share net income, except for decreases
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter; and (iv) stating that they have
compared specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company set forth in
the Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting and
financial records of the Company or from schedules furnished by the Company, and
excluding any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries, and
other appropriate procedures specified by you set forth in such letter, and
found them to be in agreement.
(g) Prior to the Closing Date the Company shall have
furnished to you such further information, certificates and documents as you may
reasonably request.
(h) You shall have received from each person who is a
director or executive officer of the Company or such shareholder as have been
heretofore designated by you and listed on Schedule II hereto an agreement to
the effect that such person will not, without your prior written consent, sell,
offer or agree to sell, grant any option for the sale of or otherwise dispose of
(or announce any offer, sale, grant of an option to purchase or other
disposition) directly or indirectly, any Common Stock (or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock)
for a period of 180 days after the date of the Prospectus other than the pledge
of shares of Common Stock by any such director, officer or shareholder listed
on Schedule II, provided that the pledgee agrees in writing to be bound by such
restrictions in the event of foreclosure on the pledged shares.
(i) At the effective date of the Registration Statement,
the Shares shall have been approved for quotation on the National Association of
Securities Dealers Automated Quotation National Market System.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certifi-
23
<PAGE> 24
cates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such case to the extent but only to the
extent that any such loss, liability, claim, damage or expense arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
you expressly for use therein. This indemnity agreement will be in addition to
any liability which the Company may otherwise have including under this
Agreement.
24
<PAGE> 25
(b) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), jointly or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that any such loss,
liability, claim, damage or expense arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
you expressly for use therein; provided, however, that in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company
acknowledges that the statements set forth in the last paragraph of the cover
page and in the third, eighth and tenth paragraphs under the caption
"Underwriting" in the Prospectus constitute the only information furnished in
writing by or on behalf of any Underwriter expressly for use in the registration
statement relating to the Shares as originally filed or in any amendment
thereof, any related preliminary prospectus or the Prospectus or in any
amendment thereof or supplement thereto, as the case may be.
25
<PAGE> 26
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal
26
<PAGE> 27
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company any contribution received by the Company from persons,
other than the Underwriters, who may also be liable for contribution, including
persons who control the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, officers of the Company who signed the
Registration Statement and directors of the Company) as incurred to which the
Company and one or more of the Underwriters may be subject, in such proportions
as is appropriate to reflect the relative benefits received by the Company and
the Underwriters from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Underwriters shall be deemed to be in the same proportion as (x) the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company and (y) the underwriting
discounts and commissions received by the Underwriters, respectively, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company and of the Underwriters shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty
27
<PAGE> 28
of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. Notwithstanding the
provisions of this Section 8 and the preceding sentence, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. For purposes of this Section 8, each
person, if any, who controls an Underwriter within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as such Underwriter, and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 8. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for contribution may be made against another party
or parties, notify each party or parties from whom contribution may be sought,
but the omission to so notify such party or parties shall not relieve the party
or parties from whom contribution may be sought from any obligation it or they
may have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in
its or their obligation to purchase Firm Shares or Additional Shares hereunder,
and if the Firm Shares or Additional Shares with respect to which such default
relates do not (after giving effect to arrangements, if any, made by you
pursuant to subsection (b) below) exceed in the aggregate 10% of the number of
Firm Shares or Additional Shares, to which the default relates shall be
purchased by the non-defaulting Underwriters in proportion to the respective
proportions which the numbers of Firm Shares set forth opposite their respective
names in Schedule I hereto bear to the aggregate number of Firm Shares set forth
opposite the names of the non-defaulting Underwriters.
28
<PAGE> 29
(b) In the event that such default relates to more than
10% of the Firm Shares or Additional Shares, as the case may be, you may in
your discretion arrange for yourself or for another party or parties (including
any non-defaulting Underwriter or Underwriters who so agree) to purchase such
Firm Shares or Additional Shares, as the case may be, to which such default
relates on the terms contained herein. In the event that within 5 calendar days
after such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares
to which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company shall have the right to postpone the Closing Date or
Additional Closing Date, as the case may be for a period, not exceeding five
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the opinion
of Underwriters' Counsel, may thereby be made necessary or advisable. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All
representations and warranties, covenants and agreements of the Underwriters and
the Company contained in this Agreement, including the agreements contained in
Section 5, the indemnity agreements contained in Section 7 and the contribution
agreements contained in Section 8, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any controlling person thereof or by or on behalf of the Company, any of its
29
<PAGE> 30
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective, upon the later
of when (i) you and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase price per
Share has not been agreed upon prior to 5:00 P.M., New York time, on the fifth
full business day after the Registration Statement shall have become effective,
this Agreement shall thereupon terminate without liability to the Company or the
Underwriters except as herein expressly provided. Until this Agreement becomes
effective as aforesaid, it may be terminated by the Company by notifying you or
by you notifying the Company. Notwithstanding the foregoing, the provisions of
this Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in
full force and effect.
(b) You shall have the right to terminate this Agreement
at any time prior to the Closing Date or the obligations of the Underwriters
to purchase the Additional Shares at any time prior to the Additional Closing
Date, as the case may be, if (A) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, the market for the Company's securities or securities
in general; or (B) if trading on the New York or American Stock Exchanges shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required, on
the New York or American Stock Exchanges by the New York or American Stock
Exchanges or by order of the Commission or any other governmental authority
having jurisdiction; or (C) if a banking moratorium has been declared by a state
or federal authority or if any new restriction materially adversely affecting
the distribution of the Firm Shares or the Additional Shares, as the case may
be, shall have become effective; or (D) (i) if the United States becomes engaged
in hostilities or there is an escalation of hostilities involving the United
States or there is a declaration of a national emergency or war by the United
States or (ii) if there shall have been such change in
30
<PAGE> 31
political, financial or economic conditions if the effect of any such event in
(i) or (ii) as in your judgment makes it impracticable or inadvisable to proceed
with the offering, sale and delivery of the Firm Shares or the Additional
Shares, as the case may be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11
shall be by telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any
of the provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all
out-of-pocket expenses (including the fees and expenses of their counsel),
incurred by the Underwriters in connection herewith.
12. Notice. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: Dennis A. Bovin and Michael J. Urfirer, with a
copy to Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York,
N.Y., 10022, Attention: Thomas H. Kennedy, Esq.; if sent to the Company, shall
be mailed, delivered, or telegraphed and confirmed in writing to the Company,
11975 El Camino Real, San Diego, California 92130, Attention: Lee H. Stein.
13. Parties. This Agreement shall insure solely to the benefit
of, and shall be binding upon, the Underwriters and the Company and the
controlling persons, directors, officers, employees and agents referred to in
Section 7 and 8, and their respective successors and assigns, and no other
person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any provision
herein contained. The term "successors and assigns" shall not include a
purchaser, in its capacity as such, of Shares from any of the Underwriters.
31
<PAGE> 32
14. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York, but without
regard to principles of conflicts of law.
32
<PAGE> 33
If the foregoing correctly sets forth the understanding
between you and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
FIRST VIRTUAL HOLDINGS
INCORPORATED
By______________________________________
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
LEHMAN BROTHERS INC.
UNTERBERG HARRIS
By_____________________________________
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
33
<PAGE> 34
SCHEDULE I
Number of Firm Shares
Name of Underwriter To be Purchased
- ------------------- ---------------------
Bear, Stearns & Co. Inc ..........................
Cowen & Company ..................................
Lehman Brothers Inc ..............................
Unterberg Harris .................................
Total ......................
---------
3,000,000
34
<PAGE> 35
SCHEDULE II
First USA Merchant Services Inc.
Next Century Communications Corp.
Sybase, Inc.
Unterberg Harris Interactive Media
Limited Partnership, C.V.
General Electric Capital Corporation
First Data Corporation
Lee H. Stein
Tawfiq N. Khoury
Nathaniel S. Borenstein
Marshall T. Rose
Einar Stefferud
Robert Epstein
Scott Loftesness
John McKinley
Pamela H. Patsley
Jon Rubin
35
<PAGE> 1
EXHIBIT 4.1
[CERTIFICATE BORDER WITH THREE LOGOS]
COMMON STOCK COMMON STOCK
[LOGO] [LOGO] [LOGO]
Incorporated Under The Laws Of See Reverse for
The State Of Delaware Certain Definitions
CUSIP 337466 10 4
FIRST VIRTUAL HOLDINGS INCORPORATED
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $.001 PER SHARE OF
=========FIRST VIRTUAL HOLDINGS INCORPORATED=========
transferred on the books of the Corporation by the holder hereof in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar
WITNESS the facsimile signatures of its duly authorized officers.
Dated
/s/ Philip Borne /s/ Lee H. Stein
<PAGE> 2
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ____________________ Custodian_________________
TEN ENT -- as tenants by the (Cust) (Minor)
entireties Under uniform gifts to minors
JT TEN -- as joint tenants with Act ___________________________________________
and not as tenants (Cust)
in common
UNIF TRF MIN ACT -- _____________________ Custodian ________________
(until age)
_________________ Under Uniform Transfers to
(Minor)
Minors Act___________________________
(Cust)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,_____________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated____________________________
X_____________________________________________
X_____________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAMED AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKHOLDERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE PROGRAM, PURSUANT TO S.E.C. RULE
1740-12.
<PAGE> 1
CONFIDENTIAL TREATMENT
REQUESTED FOR CERTAIN PORTIONS
10.16
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
WARRANT
To Purchase Shares of Common Stock of
First Virtual Holdings Incorporated
THIS CERTIFIES that, for value received First Data Corporation ("FDC"),
is entitled, upon the terms and subject to the conditions hereinafter set forth,
to purchase from First Virtual Holdings Incorporated, a Delaware corporation
(the "Company" or "First Virtual"), that number of fully paid and nonassessable
shares of the Company's Common Stock (the "Common Stock") at the purchase prices
per share as set forth in Section 1 below ("Exercise Prices"). The number of
shares and Exercise Prices are subject to adjustment as provided in Section 10
hereof.
1. Number of Shares; Exercise Price.
(a) Subject to adjustments as provided herein, this Warrant
shall be exercisable only in the event that FDC induces credit card issuers
affiliated with FDC (the "Affiliate Banks") to distribute First Virtual Internet
Payment System VirtualPIN numbers ("VirtualPINs") to their customers (the
"Cardholders") pursuant to the terms of the Marketing and Product Development
Agreement between the Company and FDC of even date herewith (the "Marketing
Agreement"). The number of shares of Common Stock issuable upon exercise of this
Warrant and the purchase price thereof shall be determined as follows:
(i) In the event that the Company does not, on or
prior to September 30, 1996 enter into an agreement with [*] involving the
issuance to [*] or its affiliates of a warrant to purchase no less than 500,000
of Common Stock, this warrant shall be exercisable for (A) 375,000 shares of
Common Stock at an exercise price of $5.00 (the "First Exercise Price") in the
event that the number of Participating Cardholders equals or exceeds [*] on or
before May 31, 1997, (B) an additional 375,000 shares at an exercise price of
$3.33 (the "Second Exercise Price") in the event that the number of
Participating Cardholders equals or exceeds [*] on or before August 31, 1997,
(C) an additional 375,000 shares at an exercise price of $2.50 (the "Third
Exercise Price") in the event that the number of Participating Cardholders
equals or exceeds [*] on or before October 31, 1997, and (D) an additional
375,000 shares at an exercise price of $2.23 (the "Fourth Exercise Price") in
the event that the number of Participating Cardholders equals or exceeds [*] on
or before December 30, 1997.
* CONFIDENTIAL TREATMENT REQUESTED. The confidential information has been
omitted and filed separately with the Commission subject to a request for
confidential treatment.
<PAGE> 2
(ii) In the event the Company enters into a [*] on
or prior to September 30, 1996, this Warrant shall be exercisable for (A)
500,000 shares of Common Stock at the First Exercise Price in the event that
the number of Participating Cardholders equals or exceeds [*] on or before May
31, 1997, and (B) an additional 500,000 shares at the Second Exercise Price in
the event that the number of Participating Cardholders equals or exceeds [*]
on or before November 30, 1997.
(b) For purposes of Section 1(a) hereof, a VirtualPIN number
shall be considered "activated" only if the person to whom such VirtualPIN is
issued either (i) completes a purchase using such VirtualPIN, (ii) remits to
First Virtual the customary membership or activation fee associated with such
VirtualPIN account, or (iii) in the event First Virtual does not require a
membership or activation fee, such person submits to First Virtual a request for
activation and supplies First Virtual with such person's e-mail address.
(c) For purposes of Section 1(a) hereof, "Participating
Cardholders" shall mean unique holders of payment cards issued by the Affiliate
Banks who shall have activated VirtualPINs distributed to them pursuant to
Section 1(a) hereof; provided, however, that in the event that First Virtual and
FDC are unable, as of the time of exercise of this Warrant, to determine the
number of unique holders of payment cards, then "Participating Cardholders"
shall mean unique payment cards issued by Affiliate Banks with which activated
VirtualPINs distributed pursuant to Section 1(a) hereof are associated;
provided, further, however, that "Participating Cardholders" shall not include
holders of payment cards issued by First USA, Inc. or a direct or indirect
subsidiary thereof ("First USA"), unless otherwise expressly agreed to by First
USA and FDC through a separate marketing agreement.
(d) This warrant shall expire on December 30, 1997.
2. Title to Warrant. This Warrant shall be transferrable only with the
prior written consent of the Company. Transfers shall occur at the office or
agency of the Company by the holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant together with the Assignment Form
annexed hereto properly endorsed.
3. Exercise of Warrant. The purchase rights represented by this Warrant
are exercisable by the registered holder hereof, in whole or in part, at any
time, or from time to time, during the term hereof as described in Section l
above, by the surrender of this Warrant and the Notice of Exercise annexed
hereto duly completed and executed on behalf of the holder hereof, at the office
of the Company in San Diego, California (or such other office or agency of the
Company as it may designate by notice in writing to the registered holder hereof
at the address of such holder appearing on the books of the Company), and
subject to Section 5 hereof, upon payment of the purchase price of the shares
thereby purchased in cash or check reasonably acceptable to the Company,
whereupon the holder of this Warrant shall be entitled to receive a certificate
for the number of shares so purchased and, if this Warrant is exercised in part,
a receipt acknowledging tender of the Warrant, with a new Warrant for the
unexercised portion of this Warrant to be issued as soon as reasonably
practicable. The Company agrees that, upon exercise of this Warrant in
accordance with the terms hereof, the shares so purchased shall be deemed to be
issued
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* CONFIDENTIAL TREATMENT REQUESTED. The confidential information has been
omitted and filed separately with the Commission subject to a request for
confidential treatment.
<PAGE> 3
to such holder as the record owner of such shares as of the close of business on
the date on which this Warrant shall have been exercised.
Certificates for shares purchased hereunder and, on partial exercise of
this Warrant, a new Warrant for the unexercised portion of this Warrant shall be
delivered to the holder hereof as promptly as practicable after the date on
which this Warrant shall have been exercised.
The Company covenants that all shares which may be issued upon the
exercise of rights represented by this Warrant will, upon exercise of the rights
represented by this Warrant and payment of the Exercise Price, be fully paid and
nonassessable and free from all taxes, liens and charges in respect of the issue
thereof (other than taxes in respect of any transfer occurring contemporaneously
or otherwise specified herein).
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which such holder would otherwise be
entitled, such holder shall be entitled, at its option, to receive either (i) a
cash payment equal to the excess of fair market value for such fractional share
above the Exercise Price for such fractional share (as mutually determined by
the Company and the holder) or (ii) a whole share if the holder tenders the
Exercise Price for one whole share.
5. Charges, Taxes and Expenses. Issuance of certificates for shares
upon the exercise of this Warrant shall be made without charge to the holder
hereof for any issue or transfer tax or other incidental expense in respect of
the issuance of such certificates, all of which taxes and expenses shall be paid
by the Company, and such certificates shall be issued in the name of the holder
of this Warrant or in such name or names as may be directed by the holder of
this Warrant (with the prior written consent of the Company); provided, however,
that in the event certificates for shares are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof and the Notice of Exercise duly completed and
executed and stating in whose name and certificates are to be issued; and
provided further, that such assignment shall be subject to applicable laws and
regulations. Upon any transfer involved in the issuance or delivery of any
certificates for shares of the Company's securities, the Company may require, as
a condition thereto, the payment of a sum sufficient to reimburse it for any
transfer tax incidental thereto.
6. No Rights as Shareholders. This Warrant does not entitle the holder
hereof to any voting rights, dividend rights or other rights as a shareholder of
the Company prior to the exercise hereof.
7. Exchange and Registry of Warrant. The Company shall maintain a
registry showing the name and address of the registered holder of this Warrant.
This Warrant may be surrendered for exchange, transfer or exercise, in
accordance with its terms, at the office of the Company, and the Company shall
be entitled to rely in all respects, prior to written notice to the contrary,
upon such registry.
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<PAGE> 4
8. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new Warrant of like tenor and dated as of such cancellation,
in lieu of this Warrant.
9. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a Saturday or a Sunday or a legal holiday.
10. Adjustments and Termination of Rights. The First Exercise Price,
Second Exercise Price, Third Exercise Price and Fourth Exercise Price and the
number of shares purchasable hereunder are subject to adjustment from time to
time as follows:
(a) Merger. If at any time there shall be a merger or
consolidation of the Company with or into another corporation pursuant to which
the stockholders of the Company immediately prior to such merger or
consolidation control less than 50% of the voting securities of the surviving
corporation, then, as a part of such merger or consolidation, lawful provision
shall be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the aggregate Exercise Price then in effect, the number of
shares of stock or other securities or property resulting from such merger or
consolidation, to which a holder of the stock deliverable upon exercise of this
Warrant would have been entitled in such merger or consolidation if this Warrant
had been exercised immediately before such merger or consolidation. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Warrant with respect to the rights and interests of the holder after the
merger or consolidation.
(b) Reclassification, etc. If the Company at any time shall,
by subdivision, combination or reclassification of securities or otherwise,
change any of the securities as to which purchase rights under this Warrant
exist into the same or a different number of securities of any other class or
classes, this Warrant shall thereafter represent the right to acquire such
number and kind of securities as would have been issuable as the result of such
change with respect to the securities which were subject to the purchase rights
under this Warrant immediately prior to such subdivision, combination,
reclassification or other change.
(c) Split, Subdivision or Combination of Shares. If the
Company at any time while this Warrant remains outstanding and unexpired shall
split, subdivide or combine the securities as to which purchase rights under
this Warrant exist, each Exercise Price shall be proportionately decreased in
the case of a split or subdivision or proportionately increased in the case of a
combination.
(d) Common Stock Dividends. If the Company at any time while
this Warrant is outstanding and unexpired shall pay a dividend with respect to
Common Stock payable in, or make any other distribution with respect to Common
Stock of, shares of Common Stock, then each Exercise Price
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<PAGE> 5
in effect immediately prior to such event shall be adjusted, from and after the
date of determination of the stockholders entitled to receive such dividend or
distribution, to that price determined by multiplying such Exercise Price by a
fraction (i) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution, and
(ii) the denominator of which shall be the total number of shares of the Common
Stock outstanding immediately after such dividend or distribution. This
paragraph shall apply only if and to the extent that, at the time of such event,
this Warrant is then exercisable for Common Stock.
(e) Other Dividends. If the Company at any time while this
Warrant is outstanding and unexpired shall pay a dividend (other than dividends
out of retained earnings), or make any other distribution with respect to Common
Stock payable in stock (other than Common Stock) or other securities or
property, then the Company may, at its option, either (i) decrease the per share
Exercise Prices by an appropriate amount based upon the value distributed on
each share of Common Stock as determined in good faith by the Company's Board of
Directors or (ii) provide by resolution of the Company's Board of Directors that
on exercise of this Warrant, the holder hereof shall receive, in addition to the
shares of Common Stock otherwise receivable on exercise hereof, the same number
and kind of stock, other securities and property which such holder would have
received had the holder held the shares of Common Stock receivable on exercise
hereof on and before the record date for such dividend or distribution. This
paragraph shall apply only if and to the extent that, at the time of such event,
this Warrant is then exercisable for Common Stock.
(f) Adjustment of Number of Shares. Upon each adjustment in
the First Exercise Price, Second Exercise Price, Third Exercise Price or Fourth
Exercise Price pursuant to 10(c) or 10(d) above, the number of shares
purchasable under Sections 1(a) hereof shall be adjusted, to the nearest whole
share, to the product obtained by multiplying the number of shares purchasable
immediately prior to such adjustment the applicable Exercise Price by a fraction
(i) the numerator of which shall be such Exercise Price immediately prior to
such adjustment, and (ii) the denominator of which shall be such Exercise Price
immediately after such adjustment.
11. Notice of Adjustments; Notices. Whenever the Exercise Prices or
number of shares purchasable hereunder shall be adjusted pursuant to Section 10
hereof, the Company shall issue a certificate signed by its Chief Executive
Officer setting forth, in reasonable detail, the event requiring the adjustment,
the amount of the adjustment, the method by which such adjustment was calculated
and the Exercise Prices and number of shares purchasable hereunder after giving
effect to such adjustment, and shall cause a copy of such certificate to be
mailed (by first class mail, postage prepaid) to the holder of this Warrant.
12. "Lock-Up" Agreement. The holder hereof agrees, if requested by the
Company and an underwriter of Common Stock (or other securities) of the Company
in connection with the Company's initial public stock offering, not to sell or
otherwise transfer or dispose of any Common Stock (or other securities) of the
Company held by such holder during a period of time determined by the Company
and its underwriters (not to exceed 180 days) following the effective date of
the registration statement of the Company filed under the Securities Act
relating to such public offering, provided that all officers and directors of
the Company who then hold Common Stock (or other securities) of the Company
enter into
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<PAGE> 6
similar agreements, and provided further that, in no event, the holder be
prohibited from transferring or selling Common Stock or other securities of the
Company to an affiliate of such holder. Such agreement shall be in writing in a
form reasonably satisfactory to the Company and such underwriter. The Company
may impose stop-transfer instructions with respect to the Common Stock (or
securities) subject to the foregoing restriction until the end of said period.
13. Miscellaneous.
(a) Governing Law. This Warrant shall be binding upon any
successors or assigns of the Company. This Warrant shall constitute a contract
under the laws of California and for all purposes shall be construed in
accordance with and governed by the laws of said state, without giving effect to
the conflict of laws principles.
(b) Restrictions. THESE SECURITIES HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933.
(c) Attorney's Fees. In any litigation, arbitration or court
proceeding between the Company and the holder relating hereto, the prevailing
party shall be entitled to reasonable attorneys' fees and expenses incurred in
enforcing this Warrant.
(d) Amendments. This Warrant may be amended and the observance
of any term of this Warrant may be waived only with the written consent of the
Company and FDC.
(e) Notice. Any notice required or permitted hereunder shall
be deemed effectively given upon personal delivery to the party to be notified
or upon deposit with the United States Post Office, by certified mail, postage
prepaid and addressed to the party to be notified at the address indicated below
for such party, or at such other address as such other party may designate by
ten-day advance written notice.
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<PAGE> 7
IN WITNESS WHEREOF, First Virtual Holdings Incorporated has caused this
Warrant to be executed by its officer thereunto duly authorized.
Dated: August ___, 1996
FIRST VIRTUAL HOLDINGS INCORPORATED
By: /s/ Lee H. Stein
___________________________________
Title: President
___________________________________
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<PAGE> 8
EXHIBIT A
NOTICE OF EXERCISE
To: First Virtual Holdings Incorporated
1. The undersigned hereby elects to purchase ___________ shares of
Common Stock ("Stock") of First Virtual Holdings Incorporated (the "Company")
pursuant to the terms of the attached Warrant (payment of the purchase price and
any transfer taxes payable pursuant to the terms of the Warrant is tendered
herewith).
2. An executed Investment Representation Statement in the form attached
as Exhibit C to the Warrant is attached hereto.
3. The undersigned understands the instruments evidencing the Stock may
bear one or all of the following legends:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO
RULE 144 OF SUCH ACT."
(b) Any legend required by applicable state law.
4. Please issue a certificate or certificates representing said shares
of Stock in the name of the undersigned:
_______________________________
[Name]
5. Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned:
_______________________________
[Name]
_________________________ _______________________________
[Date] [Signature]
<PAGE> 9
EXHIBIT B
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
___________________________________________________________________
(Please Print)
whose address is___________________________________________________
(Please Print)
_________________________________________________________________.
Dated:______________________, 19____.
Holder's Signature:____________________________________
Holder's Address:____________________________________
____________________________________
Signature Guaranteed:____________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
<PAGE> 10
EXHIBIT C
INVESTMENT REPRESENTATION STATEMENT
PURCHASER : First Data Corporation
COMPANY : First Virtual Holdings Incorporated
SECURITIES : ______________ shares of Common Stock
DATE : __________________, 199__
In connection with the purchase of the above-listed Securities, the undersigned,
the Purchaser, represents to the Company the following:
(a) The above-listed Securities are being sold by the Company
in reliance upon the Purchaser's representations and covenants made in this
Investment Representation Statement. The Purchaser represents that the
Securities to be received will be acquired for investment for its own account,
not as a nominee or agent, and not with a view to the sale or "distribution" of
any part thereof within the meaning of the Securities Act of 1933, as amended
(the "Securities Act").
(b) The Purchaser understands and acknowledges that the sale of
the Securities will not, be registered under the Securities Act on the ground
that the sale provided for in this Agreement and the issuance of securities
hereunder is exempt pursuant to section 4(2) of the Securities Act, and that the
Company's reliance on such exemption is predicated on the Purchaser's
representations set forth herein.
(c) The Purchaser is an "accredited investor" within the
meaning of Regulation D under the Securities Act.
(d) The Purchaser represents that it is able to fend for itself
in transactions such as the one contemplated by this Warrant, has such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits and risks of its prospective investment in the Company,
and has the ability to bear the economic risks of the investment.
(e) The Purchaser acknowledges and understands that the
Securities, must be held indefinitely unless they are subsequently registered
under the Securities Act or an exemption from such registration is available.
(f) The Purchaser acknowledges that it is familiar with Rule
144 promulgated under the Securities Act.
(g) The Purchaser acknowledges that in the event the applicable
requirements of Rule 144 are not met, registration under the Securities Act or
compliance with another exemption from registration will be required for any
disposition of the Company's stock.
<PAGE> 11
(h) The Purchaser covenants that, in the absence of an
effective registration statement covering the stock in question, it will sell,
transfer, or otherwise dispose of the Securities only in a transaction
registered under the Securities Act or exempt from the registration provisions
thereof. In connection therewith, the Purchaser acknowledges that the Company
shall make a notation on its stock books regarding the restrictions on transfer
set forth in this Investment Representation Statement and shall transfer shares
on the books of the Company only to the extent not inconsistent therewith.
(i) The Purchaser represents that, it has received and reviewed
the Warrant; that, to its knowledge and without special inquiry of any sort, it,
its attorney and its accountant have had access to, and an opportunity to review
all documents and other materials requested of, the Company; it and they have
been given an opportunity to ask any and all questions of, and receive answers
from, the Company and to obtain all information it or they believe necessary or
appropriate to evaluate the suitability of an investment in the Securities.
Signature of Purchaser:
By:_____________________________________
Title:__________________________________
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated October 18,
1996, except for the fifteenth paragraph of Note 6, as to which the date is
October 31, 1996, in Amendment No. 3 to the Registration Statement (Form S-1 No.
333-14573) and related Prospectus of First Virtual Holdings Incorporated for the
registration of 3,450,000 shares of its common stock.
/s/ Ernst & Yound LLP
ERNST & YOUNG LLP
San Diego, California
December 6, 1996
