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As Filed with the Securities and Exchange Commission on December 19, 1997
Registration No.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
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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<S> <C> <C>
DELAWARE 7389 77-0385435
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(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation organization) Classification Code Number) Identification Number
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11975 El Camino Real, Suite 200
San Diego, California 92130-2543
(619) 793-2700
(Address, including zip code and telephone number, including
area code, of Registrant's principal executive offices)
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LEE H. STEIN
Chief Executive Officer
FIRST VIRTUAL HOLDINGS INCORPORATED
11975 El Camino Real, Suite 300
San Diego, California 92130-2543
(619) 793-2700
(Name, address, including zip code and telephone number,
including area code, of agent for service)
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Copy to:
JEFFREY D. SAPER, ESQ.
JOHN T. SHERIDAN, ESQ.
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) 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 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. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Proposed Maximum Proposed Maximum
Securities to Amount to be Offering Price Per Aggregate Offering Amount of
be Registered Registered Share (1) Price (1) Registration Fee
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Common Stock, $0.001 par value 4,923,520(2) $2.9685 $14,615,469.12 $4,429
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(1) Estimated solely for the purpose of computing the registration fee,
based on the average of the high and low sales prices of the Common
Stock as reported on the Nasdaq National Market on December 17, 1997
in accordance with Rule 457 under the Securities Act of 1933.
(2) Includes shares of Common Stock which may be offered pursuant to this
Registration Statement issuable upon conversion of 1,000 shares of
Series A Convertible Preferred Stock (the "Series A Preferred") and
upon exercise of warrants to purchase up to 850,000 shares of Common
Stock (the "Warrants"). The number of shares of Common Stock included
in this Registration Statement is based on the sum of the number of
shares subject to the Warrants plus [200%] of the estimated number of
shares of Common Stock issuable in connection with the conversion of
the Company's Series A Preferred (based on an assumed conversion
price of $2.45 which is 80% of the average closing price of the
Common Stock reported on the Nasdaq National Market for the ten (10)
consecutive trading days ending December 16, 1997).
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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SUBJECT TO COMPLETION
PROSPECTUS
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 the registration or qualification under the securities laws of any such
State.
4,923,520 SHARES
FIRST VIRTUAL
HOLDINGS INCORPORATED
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COMMON STOCK
($0.001 PAR VALUE)
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This Prospectus relates to the public offering, which is not being
underwritten, of shares of the common stock ("Common Stock") of First Virtual
Holdings Incorporated, a Delaware corporation (the "Company") offered from time
to time by certain stockholders of the Company or their donees or certain other
permitted transferees (the "Selling Stockholders") for their own benefit. It is
anticipated that the Selling Stockholders will generally offer shares of Common
Stock for sale at prevailing prices in the over-the-counter market on the date
of sale. The Company will receive no part of the proceeds of sales made
hereunder. All expenses of registration incurred in connection with this
offering are being borne by the Company, but all selling and other expenses
incurred by Selling Stockholders will be borne by such Selling Stockholders.
None of the shares offered pursuant to this Prospectus have been registered
prior to the filing of the Registration Statement of which this Prospectus is a
part.
The Common Stock of the Company is traded on the Nasdaq National
Market (Nasdaq Symbol: FVHI). On December 18, 1997, the closing price of the
Company's Common Stock was $2.75.
SEE "RISK FACTORS" COMMENCING ON PAGE 4 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
The Selling Stockholders and any broker executing selling orders on
behalf of the Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act. Commissions received by any such broker may be
deemed to be underwriting commissions under the Securities Act.
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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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The date of this Prospectus is December __, 1997.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH
PERSON TO MAKE SUCH OFFER, SOLICITATION OR SALE. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company hereby undertakes to provide without charge to each
person to whom a copy of this Prospectus is delivered, upon written or oral
request of any such person, a copy of any and all of the information that has
been or may be incorporated by reference in this Prospectus, other than exhibits
to such documents (unless such exhibits are specifically incorporated by
reference into such documents). Requests for such copies should be directed to
First Virtual Holdings Incorporated, 11975 El Camino Real, Suite 300, San Diego,
California 92130-2543, Attn: Investor Relations (telephone (619) 793-2700).
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission also maintains a World Wide Web
site that contains reports, proxy statements and other information regarding
registrants, including the Company, that file such information electronically
with the Commission. The address of the Commission's Web site is
http:\\www.sec.gov. The Common Stock of the Company is quoted on the Nasdaq
National Market. Reports, proxy and information statements and other information
concerning the Company may be inspected at The Nasdaq Stock Market at 1735 K
Street, N.W., Washington, D.C. 20006. Information, as of particular dates,
concerning directors and officers of the Company, their remuneration, options
granted to them, and the principal holders of securities of the Company has been
disclosed in the proxy statements distributed to shareholders of the Company and
filed with the Commission.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act").
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the shares of Common Stock offered hereby, reference
is hereby made to the Registration Statement. Statements contained herein
concerning the provisions of any document are not necessarily complete, and each
such statement is qualified in its entirety by reference to the copy of such
document filed with the Commission.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
hereby incorporated by reference in this Prospectus: (i) the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, filed pursuant to
Section 13 of the Exchange Act; (ii) the Company's quarterly reports on Form
10-Q for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997
filed pursuant to Section 13 of the Exchange Act; (iii) the Company's current
report on Form 8-K dated as of October 22, 1997; (iv) the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders, filed pursuant to Section
14 of the Exchange Act; and (v) the description of the Company's Common Stock
contained in its Registration Statement on Form 8-A as filed with the Commission
on November 19, 1996.
All reports and other documents filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and documents. Any statement incorporated herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
THE COMPANY
First Virtual Holdings Incorporated ("First Virtual" or the
"Company") develops and implements the VirtualPIN architecture which facilitates
Internet commerce and is designed to facilitate other forms of interactive
Internet communications. In addition to operating the First Virtual Internet
Payment System ("FVIPS"), First Virtual is currently developing an integrated
electronic commerce solution, the Interactive Messaging Platform. This service
will allow merchants and credit card issuers to take advantage of a
sophisticated messaging system that facilitates relationship marketing on the
Internet and also provides a marketing system with an integrated payment system.
The Interactive Messaging Platform represents the integration of First Virtual's
existing services and technology, which includes the FVIPS, the VirtualPIN and
VirtualTAG. The Interactive Messaging Platform has not been commercially
released and has not generated any revenues or customer commitments to date.
The VirtualPIN architecture and the Interactive Messaging Platform
use 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, was the Company's first application of the VirtualPIN
architecture. In the fourth quarter of 1996, the Company introduced VirtualTAG.
The VirtualTAG is an interactive advertising applet within banners or "roving
store fronts" which is designed to allow consumers to initiate the purchase and
payment and arrange for the delivery of a product without leaving the web page
on which the advertisement appears. The Company believes VirtualTAG may become
one of the first solutions to take full advantage of the Internet's unique
attributes by combining advertising, selling and paying all in one application.
The Company's executive offices are located at 11975 El Camino Real,
Suite 300, San Diego, California 92130-2543. Its telephone number at that
address is (619) 793-2700. The Company's Internet address is: http://www.fv.com.
Information contained on the Company's Internet site shall not be deemed part of
this Prospectus. First Virtual(TM), Internet Payment System(sm), VirtualPin(sm)
and Virtual TAG(TM), are the trademarks of First Virtual Holdings Incorporated,
which may be registered in some jurisdictions. All other trademarks used are
owned by their respective owners.
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RISK FACTORS
In addition to reviewing other information in this Prospectus and the
Company's Annual Report on Form 10-K and the other documents incorporated herein
by reference (the "Incorporated Documents"), the following factors should be
considered carefully in evaluating the Company and its business before
purchasing the shares of Common Stock offered by this Prospectus. Statements in
this "Risk Factors" section regarding expectations or future events and certain
sections of the Incorporated Documents (identified with more particularity in
such Incorporated Documents) may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ materially from those projected in such forward-looking statements as a
result of the factors set forth below and elsewhere in this document and the
Incorporated Documents.
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, 1997, the Company had an
accumulated deficit of approximately $25.8 million. To date, the Company has not
generated significant revenues. There can be no assurance that the Company's
revenues will increase in the future. In addition, as a result of the
anticipated significant expenses that the Company expects to continue to incur
to maintain its systems, sales, marketing, research, development and
engineering, customer care 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 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.
ANTICIPATED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
As a result of the early stage of development of the Interactive
Messaging Platform, FVIPS, VirtualTAGs and Internet commerce in general 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. In particular, it is difficult to forecast revenue expectations for
the Interactive Messaging Platform, since currently, the Interactive Messaging
Platform strategy is under development. 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
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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. To a certain extent, the Company has already encountered this
problem. As a result, the Company has not and may not be able to take advantage
of revenue opportunities as quickly as it would hope, because of an effort to
scale down its infrastructure to match lower than expected revenues. There can
be no assurance that revenues associated with use of the VirtualPIN, FVIPS or
the Interactive Messaging Platform will increase significantly, or at all. Any
material shortfall of demand for the Company's products and services 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 response to the Company's Interactive Messaging Platform;
difficulties encountered in the development or deployment of products or
services, including interactive messaging; 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 merchant and consumer 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 consumer
and merchant registration, advertising, messaging, consulting services,
transaction processing and co-marketing are subject to change as the Company
introduces its Interactive Marketing Platform, continues to roll out FVIPS
upgrades and its VirtualTAG "toolkit", 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 probable 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.
RISKS RELATED TO PRODUCT TRANSITION
The Company has derived substantially all of it revenues to date
from, and has devoted a significant portion of its research, development,
engineering and marketing resources to, FVIPS, VirtualTAGs and related services.
In the second quarter of fiscal 1997, the Company determined to refocus it
resources on developing and commercializing the Interactive Messaging Platform.
The Interactive Messaging Platform has not yet been commercially introduced and
the Company has to date not secured any customer commitments to license, use or
implement the Interactive Messaging Platform. Moreover, because the Interactive
Messaging Platform represents a departure from traditional methods of marketing
and information exchange, the market prospects for the Interactive Messaging
Platform are highly uncertain. Acceptance of the Interactive Messaging Platform
will require a transition to new ways of conducting business by enterprises that
have already made substantial investments in other means of conducting commerce
and exchanging information. In addition, since development of the technologies
underlying the Interactive Messaging Platform has not been completed, and since
the Interactive Messaging Platform has not yet been implemented, no assurance
can be given that development of the Interactive Messaging Platform will be
successfully completed, that the cost of development will not exceed future
revenues generated by the Interactive Messaging Platform, that prospective
customers will be able to implement the Interactive MessagingPlatform without
substantial additional cost, or that the Company's current server capacity and
communications systems will be adequate to
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support high volumes of Interactive Messaging Platform usage. Moreover, the
development and introduction of the Interactive Messaging Platform has required
the Company to substantially curtail the resources devoted to development and
enhancement of FVIPS, and related technologies and services, and has limited the
ability of the Company's management and marketing and sales staff to pursue the
Company's goal of increasing FVIPS usage, sales of VirtualTAGs and merchant and
consumer registrations. As a result, the Company's FVIPS-related revenues,
VirtualTAG-related revenues and the number of new merchant and consumer
registrations declined during the third quarter of fiscal 1997, and may continue
to decline in future periods. Unless the Interactive Messaging Platform is
successfully introduced and marketed, and unless revenues from the Interactive
Messaging Platform are sufficient to return the cost of its development and to
compensate for adverse effect on FVIPS-related and VirtualTAG-related revenues,
the Company's business, financial condition and results of operation will be
materially and adversely affected.
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
issuers, direct marketers, airlines and catalog merchants to promote the
Company's products and services to their merchant and consumer customers.
Although the Company has established relationships with such entities in an
effort to enhance the Company's ability to penetrate the market for interactive
messaging, sales of VirtualTAGs and Internet payment services, such
relationships are nonexclusive and have not resulted in any comprehensive or
measurable increase in the Company's revenues to date. In particular, the
Company had granted certain equity incentives to First Data Corporation ("FDC")
in order to induce FDC to cause its affiliated banks to distribute up to
2,500,000 VirtualPINs to their customers by September 29, 1997. FDC did not
achieve this goal and this equity incentive expired. The Company had a similar
equity incentive arrangement with General Electric Capital Corporation ("GECC"),
in order to induce GECC to produce a marketing agreement between one of its
affiliates and First Virtual by July 3, 1997. GECC did not produce such a
marketing agreement and this equity incentive also expired. 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 creating demand for the
Interactive Messaging Platform or in expanding the Company's merchant and
consumer 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 commerce solutions.
The operation of the Interactive Messaging Platform and FVIPS is
dependent on the continued availability and reliability of collateral
telecommunications. FVIPS is also dependent on the continued availability and
reliability of information processing and financial clearance systems. In
particular, the Company is substantially dependent on Paymentech Inc. for
merchant transaction acquisition services and on Northern Trust Company
("Northern Trust") for clearinghouse services. The Company also continues to
depend on Electronic Data Systems, Inc. ("EDS") for financial services
processing. In addition, the Company is substantially dependent on MCI
Communications Corp. and WorldCom Inc. for collateral telecommunication
services. 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 the Interactive Messaging Platform and FVIPS, with an attendant
loss of revenues and potential loss of customers. Such losses could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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In order to promote the use of the Interactive Messaging Platform and
to increase market acceptance of FVIPS, the Company will be required to
significantly expand its direct sales force and marketing organization and
manage such personnel effectively. 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.
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, the volume and prevalence of Internet commerce generally, and of
retail sales of goods and services on the Internet in particular, has not grown
as rapidly as certain observers had projected, and, there can be no assurance
that Internet commerce will become widespread. Because acceptance and usage of
the Interactive Messaging Platform and increased usage of FVIPS is contingent on
substantial and sustained growth in sales of consumer products and services on
the Web, it is not assured that sufficient demand for the Company's products and
services will develop to sustain the Company's business. To date, the Company
has not generated any significant revenues from such services, and 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 the Interactive Messaging Platform, 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. 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 the Interactive Messaging Platform, 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 Internet
infrastructure is not adequately expanded or managed, 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.
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FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
In October 1997, the Company completed a private placement of
securities consisting of 1,000 shares of Series A Convertible Preferred Stock
and warrants to purchase up to 850,000 shares of Common Stock at an exercise
price of $5.75 per share. Because the Series A Preferred Stock is convertible
into Common Stock at a discount below the current market price of the Common
Stock and because the price at which such conversion may be effected is the
lesser of $5.50 or 80% of the average closing bid price per share of Common
Stock for the prior ten days, conversion of the Series A Preferred Stock will
result in at least modest dilution to existing investors, and may result in
substantial dilution. Additional dilution may result upon the exercise of the
Common Stock warrants issued in this financing. Moreover, holders of Series A
Convertible Preferred Stock enjoy certain rights and preferences which may
adversely affect holders of Common Stock, including a right to quarterly
dividend payments and a right to a preference payment in the event of a
liquidation or dissolution of the Company. Moreover, the Company anticipates
that it will need to raise additional funds in the near future to fund its
operations, as well as 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 further reduced,
stockholders may experience significant additional dilution and such equity
securities may also 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. In
addition, the Company's ability to raise additional funds prior to May 1998
without the consent of the holders of Series A Convertible Preferred Stock, is
subject to certain limitations. If adequate funds cannot be obtained or are not
available on acceptable terms the Company's business, financial condition and
results of operations would be materially and adversely affected. In addition,
any difficulty or delay the Company may experience in raising additional equity
capital may adversely affect the ability of the Company to continue to meet
the listing requirements of the Nasdaq National Market. Continued listing of the
Company's Common Stock on the Nasdaq National Market is contingent on compliance
on a variety of criteria established by the Nasdaq National Market, including
maintenance of at least $4,000,000 in net tangible assets. If the Company is
unable to continue to satisfy all listing criteria, the Common Stock will be
delisted from the Nasdaq National Market, which would impair the liquidity of
the Common Stock, and may adversely affect the market price of the Common Stock.
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 the Interactive Messaging Platform, VirtualTAGs,
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 generate and maintain 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
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<PAGE> 10
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.
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.
DEPENDENCE ON ACCEPTANCE OF FVIPS AND NEW PRODUCTS AND SERVICES; 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 consumers and merchants,
transaction processing fees, co-marketing fees and consulting fees associated
with FVIPS. For the three months ending September 30, 1997, revenues from FVIPS,
merchandising, interactive advertising development and consulting fees accounted
for approximately 88%, 1%, 0% and 11% of revenues, respectively. For the nine
months ended September 30, 1997 such revenues were approximately 63%, 4%, 10%
and 23% of total revenues, respectively. FVIPS fees are currently expected to
account for a significant portion of the Company's revenues. 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. 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, such as the Interactive Messaging Platform.
There can be no assurance that the Company will be successful in marketing the
Interactive Messaging Platform, FVIPS or any new or enhanced products or
services.
The Company's future success is dependent in part 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.
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COMPETITION
The market for products and services that enable the sale of goods
and services over the Internet, and the market for services that enable
interactive messaging capabilities 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, interactive messaging services 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 secure,
consumer-initiated purchase systems include providers of encrypted credit card
transaction systems such as CyberCash, Inc., Open Market, Inc. and VeriFone,
Inc. and providers of electronic cash payment systems such as DigiCash, Inc. The
Company's principal competitors in the interactive messaging services arena
include providers of e-mail based services such as InfoBeat, Inc., Email
Publishing Inc., America OnLine, Inc., and Juno Online Services. The Company
also competes with Narrative Communication in the interactive advertising arena
and with BroadVision Inc., for one to one marketing. The Company expects that
credit card processors and acquiring banks or third party companies will also
offer credit card-based payment systems if Secure Electronic Transaction
("SET")protocols proposed by Visa, MasterCard, American Express, Microsoft
Corporation 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. Further,
the Company believes that the credit card associations may provide Internet
merchants with lower transaction fees in order to encourage usage of SET. There
can be no assurance that the Company's payment system will receive the same
treatment, and as such the Company may be at a competitive disadvantage. For
example, in July 1997, Visa announced its intention to waive its transaction
fees, beginning in April 1998 for a two year period, for credit card
transactions over the Internet that use the SET protocol.
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 America Online, Microsoft Corp.,
IBM Corp., Integrion, AT&T, Hewlett-Packard Company, and Netscape Communications
Corporation 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. Such major information technology providers may also choose to
enter the market for secure Internet payments by acquiring one of the Company's
existing competitors or forming strategic alliances with such competitors,
either of which may impede the Company's ability to compete effectively. For
instance, Hewlett-Packard Company, in June 1997, acquired VeriFone and now
promotes VeriFone's Internet technologies. Netscape has established
relationships with VeriFone and CyberCash, and it announced in February 1997,
that it would recommend use of VeriFone's and CyberCash secure payment systems
to Netscape commerce server users. Additionally, competitors such as Checkfree
Corporation 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 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. Moreover, to date the predominant method of reducing the risks
associated with transmission of credit card information over the Internet has
been use of public key encryption software provided by RSA Data Security,
Inc.("RSA"), a subsidiary of Security Dynamics Technology, Inc. RSA's encryption
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<PAGE> 12
technology (Secure Socket Layer) is incorporated in Web server and browser
products offered by Netscape, Microsoft and other vendors, and thus has the
largest installed base of any technology for payment security. In addition,
credit card information relating to commercial transactions over the Internet is
frequently directly transmitted in an unprotected form (i.e.
"in the clear"transactions).
Many 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 maybe 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, if any, 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.
DEPENDENCE UPON PRODUCT AND SERVICE DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS
The Company's success depends upon its ability to develop the
Interactive Messaging Platform and other 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 the Interactive Messaging Platform and
other 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 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
bothers will not render the Company's products and services noncompetitive or
obsolete. The inability of the Company to respond to changing market conditions,
technological
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<PAGE> 13
developments, emerging industry standards or changing customer requirements or
the development of competing technologies or products that render 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.
RISKS ASSOCIATED WITH FVIPS UPGRADES
In July 1996, the Company made a transition in FVIPS from a system
that relied solely on EDS for financial services processing of transactions to a
system that is primarily managed by the Company. The Company now operates and
maintains the computer which communicates with the established financial
networks. The Company continues to use EDS as a back-up system to perform
authorization and settlement processing of credit card transactions for
FirstVirtual. Prior to this 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 merchant and consumer registrations, updating of customer information and
the management of customer accounts. This upgrade was the first upgrade of
FVIPS.
In May 1997, the Company implemented a second upgrade to FVIPS. This
upgrade included the installation of a relational database management system and
to date, the upgrade has performed to the Company's expectations. Any inability
to properly effect and manage any required future 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. 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 May 1997 upgrade, the Company experienced a
situation that required unscheduled database maintenance to be performed. As a
result, transactions were held in a queue for 5 hours until the database
maintenance was completed. 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 and (ii) attract and retain qualified
personnel.
DEPENDENCE ON REPEATED CUSTOMER USE OF FVIPS
The future success and viability of FVIPS is currently dependent on
its ability to maintain or expand its base of merchants and consumers and the
number of transactions that are conducted using FVIPS. The Company believes that
the number of FVIPS transactions depends primarily on the repeated usage of the
VirtualPIN by consumers. There can be no assurance that the Company's historic
rate of VirtualPIN use per consumer 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 sustain or increase
the average number of transactions per VirtualPIN is subject to substantial
uncertainty. As of September 30, 1997, the Company has not yet experienced any
substantial increase in VirtualPIN registrations or transactions per VirtualPIN.
In addition, the Company anticipates that it will modify consumer and merchant
registration and renewal fees from time to time in the future and may modify its
transaction rates charged to merchants. In late August 1997, the Company
increased new consumer registration and renewal fees. At the time of this
filing, both the number of new consumer registrations and the number of consumer
renewals have declined, as a result of the Company implementing its new fee
structure. Because the fee change was only implemented recently, there can be no
assurance as to the aggregate effect of the fee change on the Company's
operating results. Any further modification in the fee structure may result in
further significant
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<PAGE> 14
consumer and merchant attrition or reduce future consumer and merchant
registrations. Significant consumer or merchant attrition would materially and
adversely affect the Company's business, financial condition and results of
operations.
Certain merchants employing FVIPS have in the past reduced their use
of the system. Although the Company has very limited information regarding
merchant usage of FVIPS, the Company believes that declining usage of FVIPS by
merchants can occur when merchants cease to maintain their Web pages,
discontinue product or service offerings on their Web sites or find other
sufficient payment means, without using FVIPS, to satisfy their business needs.
Such discontinuation could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also faces
the risk of losing merchants that choose to employ alternative payment
mechanisms or experience a decline in transactions using FVIPS. Any significant
decline in the usage of FVIPS by merchants or increase in the rate of merchant
attrition could have a material adverse effect on 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. 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,
e-mail clients 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.
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 merchants and consumers,
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.
RISKS OF SYSTEM 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 in San Diego, California, and at a facility in Dallas, Texas. There can
be no assurance that a system failure at either of these locations would not
materially and adversely affect the Company's ability to provide its products
and services.
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
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<PAGE> 15
is protected by firewalls and proprietary, one-way batch protocols along with
regular Company reviews of 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.
Although the Company carries property, errors and omissions 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 July
1997, the Company experienced a situation that required unscheduled database
maintenance to be performed. As a result, transactions were held in a queue for
4 hours until the database maintenance was completed. 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 merchants and
consumers, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
MANAGEMENT OF POTENTIAL GROWTH; RISKS ASSOCIATED WITH NEW MANAGEMENT TEAM
The rapid development necessary for the Company to exploit the market
opportunity for the Interactive Messaging Platform, VirtualTAGs, FVIPS and its
other services requires an effective planning and management process. As of
September 30, 1997, the Company had seven executive officers. Two officers were
replaced during the second quarter of 1997. The Company accepted resignations
from both Michael Schauer, President of Financial Services, and Thomas Daniel,
Vice
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<PAGE> 16
President of Merchant Services, and the Company hired as officers, Keith
Kendrick, Vice President of Marketing and Dr. Carolyn Turbyfill, Vice President
of Engineering and Operations. In October 1997, Mr. Kendrick was promoted to
President of the Company. 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. The
Company has experienced some difficulty and most likely in the future will
continue to experience difficulty in integrating or replacing members of
management's team from a variety of industry backgrounds. It is uncertain
whether all members of the current management team can be successfully
assimilated or replaced. 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, or the failure of any of
the executives to perform effectively, or the loss of any such executive, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's growth has placed a significant strain on its
managerial, operational and financial resources. The growth in the Company's
customer base and transaction volume, along with the introduction of the
Interactive Messaging Platform and the development of the VirtualTAG "toolkit",
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 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. In
December 1997, the Company reduced its staff by twenty persons due to budgetary
constraints. This and any future staff reductions could adversely impact the
Company's business, financial condition and results of operation.
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 members of its senior management team, which
is currently composed of a small number of individuals, some of whom have joined
the Company only recently. See "Management of Potential Growth; Risks Associated
with New Management Team"above. The loss of any of such persons could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company believes that 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.
LIMITED INTELLECTUAL PROPERTY
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. 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. 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
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<PAGE> 17
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 interactive messaging technologies or 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.
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. There can be no assurance that
infringement claims will not be filed by plaintiffs in the future. 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. 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 on the Company's business,
financial condition and results of operations.
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
Telecommunications Reform Act of 1996 may subject 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
-16-
<PAGE> 18
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.
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 Paymentech Inc.,
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 Paymentech Inc. several conditions which govern Paymentech Inc.'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. While the
Company hopes 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
Paymentech Inc. and Visa, or related agreements between Paymentech Inc. 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.
-17-
<PAGE> 19
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 consumer's payment will be "charged back" because of unauthorized
use of the consumer's credit card, disputes over the goods or services purchased
by the consumer, erroneous transmission of information by the Company, or fraud
by the merchant or consumer. 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 merchants, but such agreements may
note enforceable. In addition, even if the Company has an enforceable right to
charge a merchant's account for the amount of a chargeback, the Company is
subject to the risk that the merchant 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 consumers prior to
initiating a charge of the consumer's credit card, holds funds for 91 days for
merchants who do not qualify for accelerated settlement terms and subjects
merchants who attempt to so qualify to a screening process, and holds qualified
merchants' 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 merchants 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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although the Company believes that it is Year 2000 compliant, there
can be no assurance that coding errors or other defects will not be discovered
in the future. Any Year 2000 compliance problem of the Company, its service
providers, its customers or the internet infrastructure could result in a
material adverse effect on the Company's business, operating results and
financial conditions.
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 pages 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.
INTEGRATION OF POTENTIAL ACQUISITIONS
As a part of its business strategy, the Company may make acquisitions
of, or significant investments in, complementary companies, products or
technologies. 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
-18-
<PAGE> 20
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.
-19-
<PAGE> 21
SELLING STOCKHOLDERS
The Selling Stockholders received or will receive the shares offered
by this prospectus upon conversion of shares of Series A Preferred Stock of the
Company (the "Series A Preferred") or exercise of warrants to purchase Common
Stock (the "Warrants"). All of the shares of Common Stock received or which may
be received by the Selling Stockholders upon conversion of the Series A
Preferred Stock or exercise of the Warrants may be sold pursuant to this
Prospectus. No Selling Stockholder holds shares of Common Stock of the Company
other than those offered pursuant to this Prospectus.
The following table sets forth the aggregate number of shares of
Common Stock held by each Selling Stockholder and offered by each Selling
Stockholder hereunder and the percentage of all shares of Common Stock held by
such Selling Stockholder before giving effect to the offering (based on
8,883,599 shares of Common Stock outstanding as of September 30, 1997. The share
numbers set forth in the table below include an aggregate of 850,000 shares of
Common issuable upon the exercise price of the Warrants held by the Selling
Stockholders, and an estimated 2,036,759 shares issuable upon conversion of the
shares of Series A Preferred held by the Selling Stockholders. The estimated
number of shares issuable upon conversion of the shares of Series A Preferred is
based on an estimated conversion price of $2.45 per share of Common Stock, which
would have been the applicable conversion price of the Series A Preferred had
all shares of Series A Preferred been converted into Common Stock on December
17, 1997 (based on 80% of the average closing bid price for the Common Stock on
the Nasdaq National Market for the ten trading day period ended December 16,
1997). The actual number of shares of Common Stock issuable upon conversion of
Series A Preferred is indeterminate, is subject to adjustment and could be
materially less or more than such estimated number depending on factors which
cannot be predicted by the Company at this time, including, among other factors,
the future market price of the Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY PERCENT OF OUTSTANDING
NAME OF SELLING STOCKHOLDER OWNED PRIOR TO OFFERING COMMON STOCK
--------------------------- ----------------------- ------------
<S> <C> <C>
Huberfeld Bodner Family Foundation 1,154,704 11.5%
Millenco LP 513,843 5.5
Murray Huberfeld/David Bodner 187,639 2.1
Partnership
Cong. Aharas Tzedokah V'Chesed 178,979 2.0
Seth J. Antine 173,206 1.9
Harry Adler 57,735 *
American Friends of Tiferet Tiberias 57,735 *
Institution Inc.
Rita Folger 57,735 *
Philip Huberfeld 57,735 *
Connie Lerner 57,735 *
Clifton Management Trading, Inc. 54,848 *
Friends of Kiryat Meor Chaim 43,301 *
Wolowitz Pension Plan 43,301 *
Shekel Hakodesh 34,641 *
Herman R. Nanni Bodenheimer 28,868 *
Foundation, Inc.
</TABLE>
-20-
<PAGE> 22
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY PERCENT OF OUTSTANDING
NAME OF SELLING STOCKHOLDER OWNED PRIOR TO OFFERING COMMON STOCK
--------------------------- ----------------------- ------------
<S> <C> <C>
The Jerusalem Fund, Inc. 28,868 *
Isaac Weiss 28,868 *
Keren Mordechai Yankov and Chaya 28,868 *
Blima Elias, Inc.
Yeshiva of Telshe Alumni 28,868 *
Jerome Bloom 14,434 *
Ohr Somayach 14,434 *
Reuvain Schepansky 14,434 *
Shor Yushuv B'dg. Fund 14,434 *
Irwin G. Katsof 11,547 *
All Selling Shareholders 2,886,760 24.5
</TABLE>
- - -------------------------------
(*) Less than 1%.
PLAN OF DISTRIBUTION
The Company has been advised by the Selling Stockholders that they or
their pledgees, donees, transferees or other successors in interest intend to
sell all or a portion of the shares offered hereby from time to time in the
over-the-counter market and that sales will be made at prices prevailing at the
times of such sales. Such persons may also make private sales directly or
through a broker or brokers, who may act as agent or as principal. In connection
with any sales, the Selling Stockholders and any brokers or dealers
participating in such sales may be deemed to be underwriters within the meaning
of the Securities Act. The Company will receive no part of the proceeds of sales
made hereunder.
Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Stockholders and/or purchasers of the shares
offered hereby (and, if it acts as agent for the purchaser of such shares, from
such purchaser). Usual and customary brokerage fees will be paid by the Selling
Stockholders. Broker-dealers may agree with the Selling Stockholders to sell a
specified number of shares at a stipulated price per share, and, to the extent
such a broker-dealer is unable to do so acting as agent for a Selling
Stockholder, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment to such Selling Stockholder. Broker-dealers
who acquire shares as principal may thereafter resell such shares from time to
time in transactions (which may involve cross and block transactions and which
may involve sales to and through other broker-dealers, including transactions of
the nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
from the purchasers of such shares commissions computed as described above.
The Company has advised the Selling Stockholders that Regulation M
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), may apply to its sales in the market, has furnished the Selling
Stockholders with a copy of this regulation and has informed it of the need for
delivery of copies of this Prospectus. The Selling Stockholders may indemnify
any broker-dealer that participates in transactions involving the sale of the
shares against certain liabilities,
-21-
<PAGE> 23
including liabilities arising under the Securities Act. Any commissions paid or
any discounts or concessions allowed to any such broker-dealers, and any profits
received on the resale of such shares, may be deemed to be underwriting
discounts and commissions under the Securities Act if any such broker-dealers
purchase shares as principal. The Company has agreed to indemnify the Selling
Stockholders against certain liabilities, including liabilities under the
Securities Act.
Any securities covered by this Prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act may be sold under that Rule rather than
pursuant to this Prospectus.
There can be no assurance that the Selling Stockholders will sell any or
all of the shares of Common Stock offered by it hereunder.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. The Company's Bylaws
provide that the Company shall indemnify its officers and directors and may
indemnify its employees and other agents to the fullest extent permitted by
Delaware law. The Company has entered into indemnification agreements with its
officers and directors containing provisions which are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. 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. The Company believes that these
agreements are necessary to attract and retain qualified persons as directors
and officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the corporation and with respect to any criminal action, had no reasonable cause
to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed 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.
LEGAL MATTERS
The validity of the Common Stock offered pursuant to this Prospectus and
certain other legal matters will be passed upon for the Company by Wilson
Sonsini Goodrich & Rosati, Professional Corporation ("WSGR"), Palo Alto,
California. Certain of WSGR own an aggregate of shares of Common Stock of the
Company.
-22-
<PAGE> 24
EXPERTS
The financial statements of First Virtual Holdings Incorporated appearing
in First Virtual Holdings Incorporated's Annual Report (Form 10-K) for the year
ended December 31, 1996, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
-23-
<PAGE> 25
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information................................................... 2
Incorporation of Certain Documents
by Reference......................................................... 3
The Company............................................................. 3
Risk Factors............................................................ 4
Selling Stockholders.................................................... 20
Plan of Distribution.................................................... 21
Indemnification......................................................... 22
Legal Matters........................................................... 22
Experts................................................................. 23
</TABLE>
4,923,520 SHARES
FIRST VIRTUAL
HOLDINGS
INCORPORATED
____________
COMMON STOCK
PROSPECTUS
DECEMBER ____, 1997
================================================================================
-24-
<PAGE> 26
FIRST VIRTUAL HOLDINGS INCORPORATED
REGISTRATION STATEMENT ON FORM S-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item
Number
Item 14 Other Expenses of Issuance and Distribution.
The following table sets forth costs and expenses of the sale and
distribution of the securities being registered. All amounts except Securities
and Exchange Commission and Nasdaq Stock Market Listing fees are estimates.
<TABLE>
<S> <C>
Registration Statement--Securities and Exchange Commission.............$ ___
Nasdaq Stock Market Listing Fee........................................$ ___
Accounting fees........................................................$ ___
Legal fees.............................................................$ ___
Miscellaneous..........................................................$ ___
Total..................................................................$ ___
</TABLE>
Item 15 Indemnification of Directors and Officers.
See "Indemnification of Directors and Officers."
Item 16 Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
4.1 Certificate of Designation of Series A Preferred Stock dated October 15, 1997.*
4.2 Form of Private Placement Purchase Agreement dated October 22, 1997 between First Virtual Holdings
Incorporated and certain investors.*
5.1 Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.4 Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
24.1 Power of Attorney (contained on page II-3 hereof).
</TABLE>
- - ------------------------------
* Filed as exhibits to Registrant's current report on Form 8-K, dated
October 22, 1997.
II-1
<PAGE> 27
Item 17 Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in the registration statement 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 hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities as that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report to security holders that is incorporated
by reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, 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 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
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, 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 public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-2
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, First Virtual Holdings Incorporated, a corporation organized and
existing under the laws of the State of Delaware, certifies that it has
reasonable cause to believe that it meets all of the requirements for filing on
Form S-3 and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on the 19th day of December, 1997.
FIRST VIRTUAL HOLDINGS INCORPORATED
By: /s/ Lee H. Stein
------------------------------------------
Lee H. Stein, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints Lee H. Stein, John M. Stachowiak and
Philip H. Bane, jointly and severally, his or her attorneys-in-fact, each with
the power of substitution, for him or her in any and all capacities, to sign any
amendment to this Registration Statement on Form S-3, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Lee H. Stein Chief Executive Officer (Principal Executive Officer) December 19, 1997
- - ------------------------------- and Chairman of the Board of Directors
(Lee H. Stein)
/s/ John M. Stachowiak Vice President, Finance and Chief Financial Officer December 19, 1997
- - ------------------------------- (Principal Financial and Accounting Officer)
(John M. Stachowiak)
/s/ Scott J. Loftesness Director December 19, 1997
- - -------------------------------
(Scott J. Loftesness)
/s/ Stephen Marcus Director December 19, 1997
- - -------------------------------
(Stephen Marcus)
Director December 19, 1997
- - -------------------------------
(John A. McKinley)
/s/ Pamela H. Patsley Director December 19, 1997
- - -------------------------------
(Pamela H. Patsley)
Director December 19, 1997
- - -------------------------------
(James Taylor)
</TABLE>
II-3
<PAGE> 29
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------------
EXHIBITS
------------------------------------------------------
Registration Statement on Form S-3
FIRST VIRTUAL HOLDINGS INCORPORATED
December 19, 1997
II-4
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
4.1 Certificate of Designation of Series A Preferred Stock dated October 15, 1997.*
4.2 Form of Private Placement Purchase Agreement dated October 22, 1997 between the Registrant and certain
investors.*
5.1 Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.4 Consent of Wilson Sonsini, Goodrich & Rosati (included in Exhibit 5.1).
24.1 Power of Attorney (contained on Page II-3).
</TABLE>
- - ------------
* Filed as exhibits to Registrant's current report on Form 8-K, dated
October 22, 1997.
II-5
<PAGE> 1
EXHIBIT 5.1
December 19, 1997
First Virtual Holdings Incorporated
11975 El Camino Real, Suite 200
San Diego, California 92130-2543
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 to be
filed by you with the Securities and Exchange Commission on or about December
19, 1997 (the "Registration Statement") in connection with the registration
under the Securities Act of 1933, as amended, of a total of 4,923,520 shares of
your Common Stock (the "Shares"), to be offered for sale for the benefit of
certain selling stockholders. The Shares are to be sold from time to time in the
over-the counter-market at prevailing prices or as otherwise described in the
Registration Statement. As legal counsel for First Virtual Holdings
Incorporated, we have examined the proceedings taken by you in connection with
the sale of the Shares.
It is our opinion that upon conclusion of the proceedings
being taken or contemplated by us, as your counsel, to be taken prior to the
issuance of the Shares, and upon completion of the proceedings being taken in
order to permit such transactions to be carried out in accordance with the
securities laws of the various states or foreign jurisdictions where required,
the Shares, when issued and sold in the manner described in the Registration
Statement, will be legally and validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement, including the prospectus constituting a part thereof,
and further consent to the use of our name wherever it appears in the
Registration Statement and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
II-6
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of First Virtual
Holdings Incorporated for the registration of 4,923,520 shares of its common
stock and to the incorporation by reference therein of our report dated January
24, 1997, with respect to the financial statements of First Virtual Holdings
Incorporated included in its Annual Report on Form 10-K for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
San Diego, California
December 18, 1997
II-7
