FIRST VIRTUAL HOLDING INC
10-Q, 1997-05-15
SERVICES, NEC
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<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                    ________________________________________

                                    FORM 10-Q

              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended March 31, 1997

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                   OF THE SECURITIES AND EXCHANGE ACT OF 1934
                     For the period from _______ to _______.

                        Commission File Number: 000-21751

                       FIRST VIRTUAL HOLDINGS INCORPORATED
             (Exact Name of Registrant as specified in its charter)


            Delaware                                    33-0612860
_______________________________          _______________________________________
(State or jurisdiction of                (I.R.S. Employer Identification Number)
 incorporation or organization)

                            11975 EL CAMINO REAL #200
                               SAN DIEGO, CA 92130
          (Address, including zip code, of principal executive offices)

                                 (619) 793-2700
              (Registrant's telephone number, including area code)

                                       N/A
(Former name, former address & former fiscal year, if changed since last report)

         Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X   No
                                              ---     ---

                Applicable Only to Issuers Involved in Bankruptcy
                   Proceedings During the Preceding Five Years

         Indicate by check mark whether the registrant has filed all documents
and reports to be filed by sections 12,13, or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by the court. Yes ___ No___

                      Applicable Only to Corporate Issuers

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.

Common Stock, $0.001 Par Value - 8,796,062 shares as of March 31, 1997.

                                                                               1
<PAGE>   2
                       FIRST VIRTUAL HOLDINGS INCORPORATED
                                      INDEX

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
<S>                                                                                         <C>
PART I.  FINANCIAL INFORMATION


Item 1.     Financial Statements

            Balance sheets as of  March 31, 1997 (unaudited) and December 31, 1996            3

            Statements of Operations (unaudited) for the three months ended
            March 31, 1997 and 1996                                                           4

            Statements of Cash Flows (unaudited) for the three months ended
            March 31, 1997 and 1996                                                           5

            Notes to the Financial Statements                                                 6

Item 2.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                                             8

            Factors Affecting Operating Results & Market Price of Stock                      12


PART II.    OTHER INFORMATION


Item 1.     Legal Proceedings                                                                26

Item 2.     Changes in Securities                                                            26

Item 3.     Defaults upon Senior Securities                                                  26

Item 4.     Submission of Matters to a Vote of Security Holders                              26

Item 5.     Other Information                                                                26

Item 6.     Exhibits and Reports on Form 8-K                                                 26


SIGNATURES                                                                                   27
</TABLE>

                                                                               2
<PAGE>   3
PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

                       FIRST VIRTUAL HOLDINGS INCORPORATED
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    March 31,          December 31,
                                                                      1997                 1996
                                                                      ----                 ----
ASSETS                                                            (Unaudited)
<S>                                                               <C>                 <C>         
Current assets:
  Cash and cash equivalents                                       $ 13,082,542        $ 17,127,971
  Short-term investment, available-for-sale                               --               200,000
  Accounts receivable                                                  200,226              88,278
  Prepaid expenses and other                                            86,501              83,840
                                                                  ------------        ------------
Total current assets                                                13,369,269          17,500,089

Furniture, equipment and software, net                               2,021,487           1,964,635
Information technology, net                                             48,339              59,226
Organization and other costs, net                                       98,755             105,798
Deposits and other                                                     161,051              62,809
                                                                  ------------        ------------
Total assets                                                      $ 15,698,901        $ 19,692,557
                                                                  ============        ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                $    951,798        $  1,626,198
  Accrued compensation and related liabilities                         182,653             372,739
  Accrued interest                                                     220,340             196,340
  Deferred revenue                                                     776,505              64,683
  Current portion, amount due to stockholder                           400,000             400,000
  Other accrued liabilities                                            220,878             576,077
                                                                  ------------        ------------
Total current liabilities                                            2,752,174           3,236,037

Amount due to stockholder                                              275,000             312,500
Notes payable to stockholders                                        1,200,000           1,200,000
                                                                  ------------        ------------
Total long term liabilities                                          1,475,000           1,512,500
Stockholders' equity:
  Preferred stock, 5,000,000 shares authorized, none
    outstanding at December 31, 1996                                      --                  --
  Common stock, $0.001 par value; 40,000,000 shares authorized:
    8,796,062 and 8,794,812 shares issued and outstanding at
    March 31, 1997 and December 31, 1996, respectively                   8,796               8,795
  Additional paid-in-capital                                        25,758,044          25,758,015
  Warrants                                                           3,017,115           3,017,115
  Deferred compensation                                                (43,062)            (44,305)
  Accumulated deficit                                              (17,269,166)        (13,795,600)
                                                                  ------------        ------------
Total stockholders' equity                                          11,471,727          14,944,020
                                                                  ------------        ------------
Total liabilities and stockholders' equity                        $ 15,698,901        $ 19,692,557
                                                                  ============        ============

</TABLE>

See accompanying notes.

                                                                               3
<PAGE>   4
                       FIRST VIRTUAL HOLDINGS INCORPORATED
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED MARCH 31,
                                                     1997               1996
                                                     ----               ----
<S>                                              <C>                <C>        
Revenues                                         $   392,917        $   244,466

Cost of revenues                                     111,514             92,510
                                                 -----------        -----------
Gross margin                                         281,403            151,956

Operating expenses:
     Marketing and sales                           1,049,337            156,476
     Research, development and engineering         1,452,006            332,531
     General and administrative                    1,163,581            484,356
     Depreciation and amortization                   257,999             54,554
                                                 -----------        -----------

Total operating expenses                           3,922,923          1,027,917
                                                 -----------        -----------
Loss from operations                              (3,641,520)          (875,961)
Interest income                                      192,891             29,592
Interest expense                                     (24,944)           (28,556)
                                                 -----------        -----------
Net loss                                         $(3,473,573)       $  (874,925)
                                                 ===========        ===========


Net loss per share                               $     (0.39)       $     (0.11)
                                                 ===========        ===========

Shares used in per share
  computation                                      8,795,323          8,257,260
</TABLE>

See accompanying notes.

                                                                               4
<PAGE>   5
                       FIRST VIRTUAL HOLDINGS INCORPORATED
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED MARCH 31,
                                                       1997                 1996
                                                       ----                 ----
<S>                                                <C>                 <C>          
OPERATING ACTIVITIES
Net loss                                           $ (3,473,573)       $   (874,925)
Adjustments to reconcile net loss to net
  cash used in operating activities:
  Depreciation and amortization                         257,999              54,554
  Changes in operating assets and
    liabilities:
    Accounts receivable                                (111,948)            (71,462)
    Prepaid expenses and other                           (2,661)            (34,847)
    Deposits and other                                  (98,242)             (4,200)
    Accounts payable                                   (674,400)            281,519
    Accrued compensation and related
      liabilities                                      (190,086)             21,467
    Deferred revenue                                    711,822                --
    Accrued interest                                     24,000              24,000
    Amount paid to stockholder                          (37,500)               --
    Other accrued liabilities                          (355,199)               --
                                                   ------------        ------------
Net cash used in operating activities                (3,949,788)           (603,894)

INVESTING ACTIVITIES
Additions to furniture and equipment                   (295,671)           (486,736)
Maturity (purchase) of short-term investment            200,000            (200,000)
Organization and other costs                               --                (1,467)
                                                   ------------        ------------
Net cash used in investing activities                   (95,671)           (688,203)

FINANCING ACTIVITIES
Proceeds from issuance of common stock                       30               9,600
Proceeds from bank borrowings                              --               486,111
                                                   ------------        ------------
Net cash provided by financing activities                    30             495,711

Net decrease in cash and cash equivalents            (4,045,429)           (796,386)

Cash and cash equivalents at the beginning
  of period                                          17,127,971           2,091,651
                                                   ------------        ------------
Cash and cash equivalents at the end
  of period                                        $ 13,082,542        $  1,295,265
                                                   ============        ============
</TABLE>

See accompanying notes.

                                                                               5
<PAGE>   6
                       FIRST VIRTUAL HOLDINGS INCORPORATED
                        NOTES TO THE FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.  BASIS OF PRESENTATION

The interim unaudited financial statements included herein have been prepared by
First Virtual Holdings Incorporated (the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Accordingly,
they do not include all the information and disclosures required by generally
accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with the financial statements
and notes thereto for the year ended December 31, 1996 included in the Company's
Annual Report on Form 10-K. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position of the Company as of March 31, 1997 and
the results of operations and the changes in cash flows for the three month
periods ended March 31, 1997 and 1996 have been included. The results of
operations for the interim period ended March 31, 1997 are not necessarily
indicative of the results which may be reported for any other interim period or
for the year ended December 31, 1997.

Reclassification of Expenses

On January 1, 1997, the Company reclassified certain expenses relating to its
operations from general and administrative expenses to research, development and
engineering expenses or cost of revenues . The net result of this
reclassification had no effect on the net loss of the Company. For the quarter
ended March 31, 1996, $227,000 and $92,510 were reclassified to research,
development and engineering expenses and cost of revenues , respectively, which
had previously been included in general and administrative expenses.

2.  INCOME TAXES

On May 24, 1995, in conjunction with the issuance of Series A preferred stock,
the Company changed its status for federal and state income tax purposes from an
S Corporation (whereby the Corporation's activities flowed through to the
stockholders) to become a C Corporation (whereby the Company is subject to
federal and state income taxes). The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109.

At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $11,300,000. These federal and state
carryforwards will begin to expire in 2010 and 2000, respectively, unless
previously utilized. The Company also had federal and state research credit
carryforwards of approximately $185,000 and $78,000, respectively, which will
begin expiring in 2010, unless previously utilized.

Pursuant to Internal Revenue Code Section 382 and 383, use of the Company's net
operating loss and tax credit carryforwards may be limited if a cumulative
change in ownership of more than 50% occurs within a three year period.

                                                                               6
<PAGE>   7
3.  NET LOSS PER SHARE

The Company's net loss per share calculations are based upon the weighted
average number of shares of common stock outstanding. Pursuant to the
requirements of the SEC Staff Accounting Bulletin No. 83, convertible preferred
stock, convertible preferred stock warrants, common stock, and options to
purchase common stock issued at prices below the price to the public of common
stock sold in the Company's initial public offering ("IPO") during the twelve
months immediately preceding the IPO, have been included in the computation of
net loss per share as if they were outstanding through the date of the Company's
IPO for all periods presented (using the treasury method assuming repurchase of
common stock at the IPO price). Other shares issuable upon the exercise of stock
options have been excluded from the computation because the effect of their
inclusion would be antidilutive. Subsequent to the IPO, options and warrants
under the treasury stock method are only included to the extent that their
inclusion would be dilutive. Accordingly the number of shares used in computing
net loss per share for the quarter ended March 31, 1997 excludes: (i) the
warrants held by First USA Merchant Services to purchase 1,328,006 shares of
common stock at an exercise price of $0.01 per share, (ii ) the warrant held by
General Electric Capital Corporation to purchase 33,333 shares of common stock
at an exercise price of $15.00 per share, (iii) the 3,447,525 shares of common
stock reserved for issuance under the Company's stock option plan, of which
1,789,337 shares were subject to outstanding options at March 31, 1997 at a
weighted average exercise price of $4.93 per share, (iv) an aggregate of
1,000,000 shares of common stock subject to additional outstanding options at
March 31, 1997 at an exercise price of $6.30 per share and (v) an aggregate of
100,000 shares of common stock reserved for issuance under the Company's
Employee Stock Purchase Plan, none of which were outstanding as of March 31,
1997. The First USA Merchant Services warrant and certain of the other
outstanding options were included in the pro forma net loss per share in 1996
pursuant to certain requirements of the SEC.

4.  COMMITMENTS

The Company entered into a three year operating lease (the "Lease") to finance
$468,353 of equipment needed for the establishment of a second data processing
center in San Diego, California. The Lease calls for three monthly payments of
approximately $6,720 and 33 monthly payments of approximately $8,325. The Lease
commenced February 1, 1997 and bears an interest rate based on the current three
year U.S. Treasury yield, which, on March 31, 1997 was 6.52% per annum. In
addition, the Lease required up-front fees by the Company of $154,473 in
February 1997 and $32,868 in April 1997 which are being amortized over the term
of the lease.

                                                                               7
<PAGE>   8
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
            RESULTS OF OPERATIONS

This 10-Q report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the subsection entitled "Factors
Affecting Operating Results and Market Price of Stock" commencing on page 12.
Certain sections in this report have been identified as containing
forward-looking statements. The reader is cautioned that other sections and
other sentences not so identified may also contain forward-looking information.

First Virtual Holdings Incorporated ("First Virtual" or "the Company") has
developed and implemented the VirtualPIN architecture which facilitates Internet
commerce and is designed to facilitate other forms of interactive Internet
communications. The VirtualPIN architecture uses E-mail which has the widest
reach and broadest use of any Internet application. The First Virtual Internet
Payment System ("FVIPS"), a secure and easy-to-use payment system introduced in
October 1994, is the Company's first application of the VirtualPIN architecture.
As of March 31, 1997, the Company has processed approximately 350,000 FVIPS
transactions and has registered more than 3,300 merchants ("Sellers") and
215,000 consumers ("Buyers") in 166 countries. In the fourth quarter of 1996,
the Company introduced VirtualTAG. The VirtualTAG is an interactive advertising
applet within banners or "roving store fronts" which are designed to allow
Buyers 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.* In December 1996, the Company launched
1Virtual Place, an Internet retail environment which permits the testing of
technologies and concepts along with the sale of products. The Company believes
that the VirtualPIN architecture can also serve as the basis for additional
Internet applications including direct marketing, interactive advertising,
merchandising, subscriptions and renewals, bill presentment and payment, client
response surveys and Internet communications.*

The Company has incurred net operating losses in each quarter since inception.
As of March 31, 1997, the Company had an accumulated deficit of approximately
$17.3 million. To date, the Company has not generated significant revenues.
There can be no assurance that the Company's future revenues will
increase and the Company's ability to generate significant future revenues is
subject to substantial uncertainty. In addition, as a result of the anticipated
significant investments that the Company plans to make in its systems, sales,
marketing, research and development, customer support and administrative
infrastructure over the near term, the Company expects to continue to incur
significant operating losses on both a quarterly and an annual basis for the
foreseeable future.


- -------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 12, for a discussion of factors that could affect
future performance. The reader is cautioned that other sections not so
identified may also contain forward looking information.

                                                                               8
<PAGE>   9
RESULTS OF OPERATIONS

Revenues

The Company currently generates revenues from FVIPS, merchandising and sale of
products, production of VirtualTAGs and consulting, as detailed in the table
below:

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDING MARCH 31,
                                            1997           1996
                                            ----           ----
<S>                                       <C>            <C>     
Revenues:
Internet payment system                   $135,797       $244,466
Merchandising                               29,620           --
Interactive advertising development        105,000           --
Consulting                                 122,500           --
                                          --------       --------
Total revenues                            $392,917       $244,466
</TABLE>


Among other reasons, such as market demand the decline, in FVIPS revenue, as
reported, is primarily due to an accounting change beginning in July 1996, when
the Company began to recognize Buyer and Seller registration and renewal fees
over a 12 month period. Prior to July 1, 1996, revenues from registration fees
were recognized in the month the Seller's or the Buyer's registration fee was
processed and the VirtualPIN was issued. The impact of this change resulted in
net deferred revenue of approximately $776,000 as of March 31, 1997.

Operating Expenses

Operating expenses consist of marketing and sales, research, development and
engineering, and general and administrative expenses. The Company anticipates
that operating expenses will increase in connection with increasing levels of
research, development and engineering for new and enhanced products and
services, growth in its marketing and sales organization, and expansion of the
Company's support organization to accommodate the anticipated increase in the
number of Buyers and Sellers.*

Marketing and sales expenses. Marketing and sales expenses, which include
salaries and wages, consulting fees, advertising, trade show expenses, travel
and other marketing expenses, increased to $1.0 million for the quarter ended
March 31, 1997, as compared to $156,000 for the quarter ended March 31, 1996.
This increase is attributable primarily to the addition of 35 employees
resulting in an increase in salaries, wages and payroll taxes of approximately
$595,000, an increase in recruiting and relocation costs of $35,000, a travel
expense increase of approximately $50,000, a consulting expense increase of
$80,000, and a general increase in spending of approximately $85,000 to support
the Company's expanding marketing and sales activities. The Company expects that
marketing and sales expenses will increase significantly in the future as the
Company implements its marketing plan to rapidly deploy VirtualPINs.*


- -------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 12, for a discussion of factors that could affect
future performance. The reader is cautioned that other sections not so
identified may also contain forward looking information.

                                                                               9
<PAGE>   10
Research, development and engineering expenses. Research, development and
engineering expenses consist primarily of salaries and wages and consulting fees
to support the development and enhancement of the Company's products and
services. Research, development and engineering expenses increased to $1.5
million for the quarter ended March 31, 1997 as compared to $333,000 for the
quarter ended March 31, 1996. This increase is primarily due to the addition of
21 employees resulting in an increase in salaries, wages and payroll taxes of
approximately $515,000 and the Company's expensing approximately $410,000 in
software development costs paid to consultants for the quarter ended March 31,
1997 as compared to approximately $23,000 for the quarter ended March 31, 1996.
To date, all of the Company's software development costs have been expensed as
incurred. In addition, the Company had an increase in travel expenses of
approximately $32,000. The remainder of the increase was due to increased
spending of approximately $200,000 to support the expansion of the Company's
research, development and engineering activity, which includes the establishment
of a second data processing center in San Diego, California. The Company
anticipates that research, development and engineering expenses will increase in
future years as the Company leverages the VirtualPIN architecture to offer new
products and services and increases the functionality of FVIPS.*

General and administrative expenses. General and administrative expenses consist
primarily of salaries and wages, professional and consulting fees and other
expenses associated with the general management and administration of the
Company. General and administrative expenses increased to $1.2 million for the
quarter ended March 31, 1997 as compared to $484,000 for the quarter ended March
31, 1996. This increase is primarily due to the addition of 17 employees
resulting in an increase in salaries, wages and payroll taxes of approximately
$520,000 and an increase in related employee benefits and travel expenses of
approximately $190,000.

The Company expects to experience significant fluctuations in its future
quarterly operating results.* These fluctuations will be due to several factors,
some of which are beyond the control of the Company, including, among others,
market acceptance of Internet commerce in general and the VirtualPIN concept and
FVIPS in particular; fluctuating market demand for the Company's products and
services, including the rate of Seller and Buyer registrations; the monthly
volume and average dollar amount of transactions using FVIPS; the degree of
acceptance of the Internet as an advertising and merchandising medium; the fees
charged to the Company by third party processors and financial institutions; the
timing and effectiveness of collaborative marketing efforts initiated by the
Company's strategic partners; the timing of the introduction of new products and
services offered by the Company; the timing of the release of enhancements to
the Company's products and services; product introductions and service offerings
by the Company's competitors; the mix of the products and services provided by
the Company; the timing and rate at which the Company increases its expenses to
support projected growth; the cost of compliance with applicable government
regulations; competitive conditions in the Company's marketplace; and general
economic conditions. In addition, the fees charged by the Company for Buyer and
Seller registration, transaction processing and co-marketing are subject to
change as the Company continues to roll out FVIPS upgrades and assess its
marketing strategy and competitive position.*


- --------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 12, for a discussion of factors that could affect
future performance. The reader is cautioned that other sections not so
identified may also contain forward looking information.

                                                                              10
<PAGE>   11
LIQUIDITY AND CAPITAL RESOURCES

The Company finances its operations primarily through cash raised in its initial
public offering (the "IPO") of Common Stock. On December 13, 1996, the Company
received net proceeds of approximately $15.0 million from its IPO. Prior to the
IPO, the Company funded its operations and satisfied its capital expenditure
requirements primarily through private sales of capital stock and borrowings
under certain subordinated lines of credit provided by two stockholders. The
Company, prior to the IPO, had raised $13.7 million from the sale and issuance
of its Preferred Stock, Common Stock and warrants, and $1.2 million of principal
under the stockholder lines of credit. The borrowings from such stockholders
accrue interest at 8% per annum and are due and payable upon the earlier to
occur of (i) January 31, 1998 or (ii) the closing of an underwritten public
offering (other than the IPO) of shares of the Company's Common Stock.

Operating activities used cash of $3.9 million during the quarter ended March
31, 1997. Net cash used during this period was primarily to fund net operating
expenses of $3.2 million (excluding depreciation and amortization), reduce
accounts payable and other accrued liabilities of $1.2 million and increase
deposits and accounts receivable of $212,000, offset by an increase in deferred
revenue of $712,000.

Capital expenditures have been, and future capital expenditures are expected to
be, primarily for facilities, furniture and capital equipment to support the
expansion of the Company's operations and management information systems.*
Capital expenditures were $296,000 and $487,000 for the quarters ended March 31,
1997 and 1996, respectively. Furniture and equipment are stated at cost and
depreciated over three to five years using the straight line method. The Company
is using a portion of the net proceeds from the IPO for such expenditures. In
addition, the Company has entered into an operating lease to finance $468,000 of
equipment needed for the establishment of a second data processing center in San
Diego, California. The lease commenced February 1, 1997 and bears an interest
rate based on the current three year U.S. Treasury yield, which, on March 31,
1997 was 6.52% per annum. In addition, the Lease required up-front fees by the
Company of $154,473 in February 1997 and $32,868 in April 1997 which are being
amortized over the term of the lease.

At March 31, 1997, the Company had $13.1 million in cash and cash equivalents.
The Company believes that existing cash resources may be sufficient to support
the Company's currently anticipated working capital and capital expenditure
requirements through 1997.* However, if the Company pursues certain strategic
opportunities that require cash investments or if certain of its expectations
are not met, the Company may require additional equity capital before the end of
1997. In addition, if cash generated from operations is insufficient to satisfy
the Company's working capital and capital expenditure requirements, the Company
will need to raise additional funds through the public or private sale of its
equity or debt securities or from other sources. Furthermore, there can be no
assurance that the Company will not be required to seek additional capital at an
earlier date. The timing and amount of the Company's capital requirements will
depend on a number of factors, including demand for the Company's products and
services, the need to develop new or enhanced products and services, competitive
pressures and the availability of complementary or new businesses or
technologies that the Company may wish to acquire. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
the Company's stockholders will be diluted and such equity securities may have
rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. There can be no assurance that additional financing will
be available when needed or that, if available, such financing will include
terms favorable to the Company or its stockholders. If adequate funds are not
available on acceptable terms, the Company may be unable to develop or enhance
its products and services, take advantage of opportunities or respond to
competition, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. 


- ------------- 
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 12, for a discussion of factors that could affect
future performance. The reader is cautioned that other sections not so
identified may also contain forward looking information.

                                                                              11
<PAGE>   12
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK

First Virtual operates in a rapidly changing environment that involves a number
of uncertainties, some of which are beyond the Company's control. In addition to
the uncertainties described elsewhere in this report, these uncertainties
include:

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 March 31, 1997, the Company had an accumulated
deficit of approximately $17.3 million. To date, the Company has not generated
significant revenues. There can be no assurance that the Company's future
revenues will increase. In addition, as a result of the anticipated significant
investment that the Company is making and plans to continue to make in its
systems, sales, marketing, research and development, 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 was a
development stage company through December 1995. Accordingly, the Company has a
limited operating history upon which to base an evaluation of its business and
prospects. The Company and its business prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
new and rapidly evolving market for Internet products and services. To address
these risks, the Company must, among other things, successfully respond to
competitive developments, develop and 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 Internet commerce and the
Company's limited operating history, the Company's revenue expectations are
based almost entirely on internal estimates of future demand and not on actual
experience or any known industry experience. Moreover, the Company has only
limited historical financial data for quarterly or annual periods on which to
base planned operating expenses. The Company's expense levels have been
established in large part due to its current expectations for future revenues
and its expected development and marketing requirements. In the event market
demand and revenues do not meet expectations, the Company may be unable to
adjust its spending levels on a timely basis to compensate for unexpected
revenue shortfalls. In addition, the Company's operating expenses have increased
substantially in recent periods, and the Company currently anticipates that its
operating expenses will continue to increase substantially for the foreseeable
future as the Company continues to develop and market its initial products and
services, increases its marketing and sales activities, creates and expands the
distribution channels for its services, and broadens its customer support
capabilities. There can be no assurance that revenues associated with use of the
VirtualPIN and FVIPS will be increased significantly as required for the Company
to attain profitability, or at all. Any material shortfall of demand for the
Company's products and services in relation to the Company's expectations would
have a material adverse effect on the Company's business and financial condition
and could cause significant fluctuations in the Company's results of operations.

                                                                              12
<PAGE>   13
The Company expects its future operating results over both the short and the
long term will be subject to annual and quarterly fluctuations due to several
factors, many of which are beyond the control of the Company, including, among
others, market acceptance of Internet commerce in general and FVIPS and the
VirtualPIN concept in particular; fluctuating market demand for the Company's
products and services including the rate of Seller and Buyer registrations; the
monthly volume and average dollar amount of transactions using FVIPS; the degree
of acceptance of the Internet as an advertising and merchandising medium; the
fees charged to the Company by third party processors and financial
institutions; the timing and effectiveness of collaborative marketing efforts
initiated by the Company's strategic partners; the timing of the introduction of
new products and services offered by the Company; the timing of the release of
enhancements to the Company's products and services; product introductions and
service offerings by the Company's competitors; the mix of the products and
services provided by the Company; the timing and rate at which the Company
increases its expenses to support projected growth; the cost of compliance with
applicable government regulations; competitive conditions in the Company's
marketplace; and general economic conditions. In addition, the fees charged by
the Company for Buyer and Seller registration, transaction processing and
co-marketing are subject to change as the Company continues to roll out FVIPS
and assess its marketing strategy and competitive position. The Company believes
that period-to-period comparisons of its operating results are not meaningful
and should not be relied upon as any indication of future performance. Due to
the foregoing factors, among others, it is possible that the Company's future
quarterly or annual operating results from time to time will not meet the
expectations of market analysts or investors, which may have a material adverse
effect on the price of the Company's Common Stock.*

DEPENDENCE ON DISTRIBUTION RELATIONSHIPS, COLLATERAL SYSTEMS AND EXPANSION OF
DIRECT SALES FORCE

A key element of the Company's current business and marketing strategy is to
establish, develop and maintain relationships with credit card companies and
other financial institutions to promote the Company's products and services to
their merchant and consumer customers. Although the Company has established
relationships with several entities in an effort to enhance the Company's
ability to penetrate the market for Internet payment services, such
relationships have only been entered into recently, are nonexclusive and have
not resulted in any comprehensive marketing effort or a measurable increase in
the Company's Seller and Buyer base to date. In particular, the Company has
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 15, 1997. The Company does not
anticipate that FDC will be able to cause all such VirtualPins to be distributed
by the target date. No assurance can be given that the Company will be able to
maintain its current strategic relationships or cultivate additional partnering
relationships in the future or that any such relationship will prove to be
effective in expanding the Company's Seller and Buyer base. In addition, there
can be no assurance that the Company's existing or potential marketing partners,
most of whom have significantly greater financial and marketing resources than
the Company, will not change their business strategies or discontinue their
relationships with the Company, develop and market products and services that
compete with the Company's products and services in the future or form
collaborative marketing relationships with one or more of the Company's
competitors that offer alternative Internet payment mechanisms.

The operation of FVIPS is dependent on the continued availability and
reliability of collateral telecommunications, information processing and
financial clearance systems. In particular, the Company is substantially
dependent on First USA Paymentech for merchant transaction acquisition services
and on Northern Trust Company ("Northern Trust") for clearinghouse services. The
Company also continues to depend on Electronic Data Systems, Inc. ("EDS") for
financial services processing, although on a more limited basis than prior to
the upgrade of FVIPS in July 1996. There can be no assurance that these
companies will continue to provide collateral services to the Company without
disruptions in service, at the current cost, or at all. Although the Company
believes that such services could be obtained from other sources in due course
if required, reengineering the Company's computer systems and telecommunications
infrastructure to accommodate a new service provider could only be accomplished
at significant cost and with significant delay. Any interruption of service by a
collateral services provider also would be likely to result in the disruption of
the operation of FVIPS, with an attendant loss of revenues and potential loss of


- -------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will
meet the Company's current expectations. The reader is cautioned that other
sections not so identified may also contain forward looking information.

                                                                              13
<PAGE>   14
customers. Such losses could have a material adverse effect on the Company's
business, financial condition and results of operations.

In order to increase market acceptance of FVIPS and to increase the number of
Sellers and Buyers using the system to a level necessary for the Company to
attain profitability, the Company will be required to significantly expand its
direct sales force and marketing organization and manage such personnel
effectively. 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 increase 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. Furthermore, if the
Company successfully expands the applications of the VirtualPIN architecture for
additional interactive Internet communications applications such as Internet
advertising, merchandising or direct marketing, there can be no assurance that
demand for such applications will develop or increase. In addition, it is not
known whether individuals or businesses will use the Internet as a means of
purchasing goods and services. To establish the Internet as a source of
widespread and significant commercial activity, particularly by those
individuals and businesses which historically have relied upon traditional means
of commerce, will require the broad acceptance of new methods of conducting
business and exchanging information. Businesses that already have invested
substantial resources in traditional or other methods of conducting business may
be reluctant to adopt new commercial methodologies or strategies that may limit
or compete with their existing businesses. Individuals with established patterns
of purchasing goods and services may be reluctant to alter those patterns. Banks
and financial institutions with established methods of handling payments may
also be reluctant to accept new payment systems based on Internet commerce. The
Company expects such historical patterns of business conduct to inhibit the
growth of Internet commerce in general and market acceptance of the Company's
services in particular.

The Company's business includes products and services that are new, operate in a
market that did not previously exist and will be subject to rapid and
unpredictable market changes. It is uncertain whether a significant market will
ever emerge for effecting payments over the Internet by means of FVIPS or any
other payment system or that the Internet will develop as an effective medium
for advertising and merchandising. The Company's success is critically dependent
on the development of Internet commerce, which the Company believes will require
the significant expansion of the Internet infrastructure in order to provide
adequate Internet access, the proper management of Internet traffic and a
substantial amount of public education to, among other things, increase
confidence in the integrity and security of Internet commerce. There can be no
assurance that commerce over the Internet will become widespread, that a market
for the Company's products and services will emerge or that FVIPS or other
applications using the VirtualPIN architecture will be generally adopted. If the
market fails to develop, or develops more slowly than expected, if the
infrastructure for the Internet is not adequately established or if the
Company's products and services do not achieve market acceptance by a
significant number of individuals, businesses 


                                                                              14
<PAGE>   15
and financial institutions, then the Company's business, financial condition and
results of operations will be materially and adversely affected.

DEPENDENCE ON INCREASED USAGE AND STABILITY OF THE INTERNET

 The future of the Internet as a center for commerce will depend in significant
part on continued rapid growth in the number of households and commercial,
educational and government institutions with access to the Internet, in the
level of usage by individuals and in the number and quality of products and
services designed for use on the Internet. Because usage of the Internet as a
medium for on-line exchange of information, advertising, merchandising and
entertainment is a recent phenomenon, it is difficult to predict whether the
number of users drawn to the Internet will continue to increase and whether any
significant market for effecting financial transactions over the Internet or any
substantial commercial use of the Internet will develop. There can be no
assurance that Internet usage patterns will not decline as the novelty of the
medium recedes or that the quality of products and services offered on-line will
improve sufficiently to continue to support user interest. In addition, it is
uncertain whether the cost of Internet access will increase or decline. Failure
of the Internet or the Web to stimulate consumer interest and be accessible to a
broad audience at moderate costs would jeopardize the viability of Internet
commerce and the market for the Company's products and services. The Internet
and the Web have experienced, and are expected to continue to experience,
significant growth in the number of users and amount of traffic; however, the
Internet may not prove to be a viable commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary
infrastructure, such as a reliable network backbone, or timely development of
performance improvements including high speed modems. In addition, there is no
assurance that the number of vendors maintaining sites on the Web will increase.
Accordingly, there can be no assurance that Internet commerce will become
widespread or that sustainable markets for the Company's products and services
will develop. If such markets fail to develop, develop more slowly than expected
or become dominated by one or more competitors, the Company's business,
financial condition and results of operations will be materially and adversely
affected. Furthermore, if the Internet were unable to support the demands of its
users, the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols or due to increased governmental
regulation. If the necessary infrastructure, complementary services or
facilities are not developed, or if the Internet does not become a viable
commercial marketplace, the Company's business, financial condition and results
of operations will be materially and adversely affected.

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; RISK OF CHANGES IN CONSUMER PERCEPTIONS

Substantially all of the Company's revenues to date have been attributable to
the receipt of registration fees from Buyers and Sellers, transaction processing
fees, co-marketing fees and consulting fees associated with FVIPS. At March 31,
1997 revenues from FVIPS, merchandising, interactive advertising development and
consulting fees accounted for approximately 35%, 7%, 27% and 31% of revenues,
respectively. For the quarter ended December 31, 1996 such revenues were
approximately 36%, 7%, 0% and 57%, respectively. 


                                                                              15
<PAGE>   16
FVIPS fees are currently expected to account for a significant portion of the
Company's revenues for the foreseeable future. As a result, a decline in demand
for, or failure to achieve broad market acceptance of FVIPS, as a result of
competition, technological change or otherwise, would have a material adverse
effect on the Company's business, financial condition and results of operations.
A failure to significantly expand both the number of Sellers and Buyers using
FVIPS and the number of transactions processed by FVIPS would also have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's future financial performance will depend in
part on the successful development, introduction and customer acceptance of new
and enhanced products and services which are dependent upon the success of
FVIPS. There can be no assurance that the Company will be successful in
marketing FVIPS or any new or enhanced products or services.

The Company's future success is substantially dependent on the development of
demand for products and services that support transactions processed by FVIPS
over the Internet and, in particular, use credit card-based payment mechanisms.
Demand for secure payment solutions, including FVIPS, has been fueled in part by
wide-spread fears of the risks associated with the potential theft of credit
card account numbers transmitted over the Internet and other manifestations of
Internet-based credit card fraud. Such consumer perceptions of the risks
associated with credit card-based Internet transactions have received
substantial media attention, but may lack empirical support. In addition, the
Company believes that most consumers may be unaware that the potential liability
resulting from fraudulent charges to their credit card accounts is limited by
federal laws that limit the liability of cardholders for unauthorized use of
their card to no more than $50. Any change in consumer perception of the
incidence of credit card account number theft over the Internet, or the
potential liability attendant to such fraud, could impact the demand for
Internet security mechanisms, including FVIPS. Any such decline in the perceived
need for the security which the Company believes to be a principal feature of
FVIPS could have a material adverse effect on the Company's business, financial
condition and results of operations.

COMPETITION

The market for products and services that enable the sale of goods and services
over the Internet is expected to be intensely competitive, and, to the extent
commercial activity over the Internet increases, the Company expects competition
to increase significantly. There are no substantial barriers to entry into the
Company's business, and the Company expects established and new entities to
enter the market for Internet payment systems and interactive Internet
communications in the near future. It is possible that a single supplier will
dominate one or more market segments. Furthermore, since there are many
potential entrants to the field, it is extremely difficult to assess which
companies are likely to offer competitive products and services in the future,
and in some cases it is difficult to discern whether an existing service is
competitive with the Company's current services.

The Company's principal competitors in the market for secure consumer-initiated
purchase systems include providers of encrypted credit card transaction systems
such as CyberCash, Inc., VeriFone, Inc., Open Market, Inc., and GC Tech and
providers of electronic cash payment systems such as DigiCash, Inc. The Company
expects that credit card processors and acquiring banks will also offer credit
card-based payment systems if Secure Electronic Transaction ("SET") protocols
proposed by Visa, MasterCard, Microsoft Corporation 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.

The Company may experience additional competition from computer software
providers, Internet service providers and Internet directory companies and other
information technology companyies who enter the market for Internet payment
services. Companies such as America Online, Inc., CompuServe Incorporated,
Microsoft, IBM, AT&T, Hewlett-Packard Company, Netscape Communications
Corporation and Federal Express which possess large, existing customer bases or
ready distribution channels, could develop, market or resell a number of payment
alternatives including, but not limited to, 


                                                                              16
<PAGE>   17
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 April 1997, announced that they would acquire VeriFone and promote
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's 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 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).

Several of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases, more
diversified lines of products and services and significantly greater financial,
technical, marketing and other resources than the Company. Such competitors may
be able to undertake more extensive marketing campaigns, adopt more aggressive
pricing policies and make more attractive offers to individuals, businesses and
financial institutions. In addition, many of the Company's current or potential
competitors have broad distribution channels that may be used to bundle
competing products or services directly to end-users or purchasers. If such
competitors were to bundle competing products or services for their customers,
the demand for the Company's products and services might be substantially
reduced, and the ability of the Company to successfully effect the distribution
of its products and the utilization of its services would be substantially
diminished. As a result of the foregoing or other factors, there can be no
assurance that the Company will compete effectively with current or future
competitors or that the competitive pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.

DEPENDENCE UPON PRODUCT AND SERVICE DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS

The Company's success depends upon its ability to develop new products and
services that satisfy evolving customer requirements including potential
applications for Internet advertising, merchandising and direct marketing. The
market for the Company's services is characterized by rapidly changing
technology, emerging industry standards and customer requirements that have been
changing every few months. There can be no assurance that the Company will
successfully identify new product and service opportunities and develop and
bring to market new products and services in a timely manner. Failure of the
Company, for technological or other reasons, to develop and introduce new
products and services that are compatible with emerging industry standards and
that satisfy customer requirements would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company or its competitors may announce enhancements to existing products or
services, or new products or services embodying new technologies, emerging
industry standards or customer requirements that render the Company's existing
products and services obsolete and unmarketable. There can be no assurance that
the announcement or introduction of new products or services by the Company or
its competitors or any change in emerging industry standards will not cause
customers to terminate use of the Company's existing products and services,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.


                                                                              17
<PAGE>   18
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 by
others will not render the Company's products and services noncompetitive or
obsolete. The inability of the Company to respond to changing market conditions,
technological developments, emerging industry standards or changing customer
requirements or the development of competing technologies or products that
renders the Company's products and services noncompetitive or obsolete would
have a material adverse effect on the Company's business, financial condition
and results of operations.

RISKS ASSOCIATED WITH FVIPS UPGRADES

In July 1996, the Company transitioned 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 First Virtual. 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 Seller and Buyer registrations,
updating of customer information and the management of customer accounts. This
upgrade was the first upgrade of FVIPS.

The Company implemented a relational database management system and installed
the related hardware needed for the second upgrade of FVIPS. It became
operational in May 1997. The Company does not know whether the upgrade will
successfully scale as planned and the reliability of the upgrade in not yet
proven. Any inability to properly effect and manage upgrades to the Company's
customer database could result in a material adverse effect on the Company's
business, financial condition and results of operations. The Company also plans
upgrades to FVIPS from time to time in the future. 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 July 1996 upgrade, the Company discovered during
a batch process with the Automated Clearing House ("ACH") network that a file
created to ACH specifications did not clear the ACH processing routines. As a
result, deposits destined for Seller bank accounts did not occur until the
problem was resolved 34 hours after the problem was discovered. Any similar
systems failure, if prolonged or compounded, could cause a significant
interruption to the Company's products and services and could reduce the
viability of FVIPS and, if sustained or repeated, could reduce the demand for
the Company's products and services by current and potential Internet customers
which would result in a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, the Company has no
prior experience with managing a large database of customer and transactional
information. In order to properly manage its operational database, the Company
will need to (i) improve its management information systems and controls and
(ii) attract and retain qualified personnel.


                                                                              18
<PAGE>   19
DEPENDENCE ON REPEATED CUSTOMER USE OF FVIPS

The Company's future success is substantially dependent on its ability to
significantly expand its base of Sellers and Buyers and to increase the number
of transactions that are conducted using FVIPS. The Company believes that an
increase in the number of FVIPS transactions depends primarily on the repeated
usage of the VirtualPIN by Buyers. There can be no assurance that the Company's
historic rate of VirtualPIN use per Buyer will continue or increase, even if the
Company is successful in increasing the variety and quality of goods and
services available over FVIPS. The ability of the Company to increase the
average number of transactions per VirtualPIN is subject to substantial
uncertainty. As of March 31, 1997, the Company has not yet experienced any
significant increase in the rate of VirtualPIN registrations or in transactions
per VirtualPIN. In the event the average number of transactions per VirtualPIN
does not substantially increase in the future, the Company's business, financial
condition and results of operations would be materially and adversely affected.
In addition, the Company anticipates that it will modify Buyer registration and
renewal fees from time to time in the future. There can be no assurance that any
modification in the fee structure will not result in significant Buyer attrition
or reduced future Buyer registrations. Any significant Buyer attrition or the
failure of the Company to substantially increase the number of active users of
FVIPS would materially and adversely affect the Company's business, financial
condition and results of operations.

Certain Sellers employing FVIPS have in the past reduced their use of the
system. Although the Company has very limited information regarding Seller usage
of FVIPS, the Company believes that declining usage of FVIPS by Sellers can
occur when Sellers cease to maintain their Web pages or discontinue product or
service offerings on their Web sites. Such discontinuation could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company also faces the risk of losing Sellers that choose to
employ alternative payment mechanisms or experience a decline in transactions
using FVIPS. Any significant decline in the usage of FVIPS by Sellers or
increase in the rate of Seller attrition could have a material adverse effect on
the Company's business, financial condition and results of operations.

RISK OF CAPACITY CONSTRAINTS

A key element of the Company's strategy is to generate a high volume of FVIPS
usage. Accordingly, the performance of the Company's products and services is
critical to the Company's ability to achieve market acceptance and continued use
of these products and services. Significant increases in the volume of
transactions through FVIPS could strain the capacity of the Company's software
or hardware, which could lead to slower response time or system failures. The
Company intends to make substantial investments to increase its server capacity
by adding new servers and upgrading its FVIPS management software, when
necessary. As the number of Web and Internet users increases, there can be no
assurance that the Company's products and services will be able to meet this
demand. The Company and its customers are also dependent upon Web browsers and
Internet and online service providers for access to its services, and users have
experienced difficulties due to system failures unrelated to the Company's
system, products or services. To the extent that the capacity constraints
described above are not effectively addressed by the Company, such constraints
could have a material adverse effect on the Company's business, financial
condition and results of operations.

RISKS OF  DEFECTS AND DEVELOPMENT DELAYS

Products and services based on sophisticated software and computing systems
often encounter development delays, and the underlying software may contain
undetected errors and failures when introduced or when usage increases. The
Company may experience delays in the development of the software and computing
systems underlying the Company's services. In addition, there can be no
assurance that, despite testing by the Company and Sellers and Buyers, errors
will not be found in the underlying software or that the Company will not
experience development delays, resulting in delays in the commercial release of
its products and services or in the market acceptance of its products and
services, each of which could have a material adverse effect on the Company's
business, financial condition and results of operations.

                                                                              19
<PAGE>   20
RISKS OF SYSTEMS FAILURES; LACK OF INSURANCE AND SECURITY RISKS

The operation of FVIPS is dependent on the Company's ability to protect its
computer equipment and the information stored in its data centers against loss
or damage that may be caused by system overloads, fire, power loss,
telecommunications failures, unauthorized intrusion, infection by computer
viruses and similar events. The Company's data center and servers are currently
located 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 believes that the relational database it installed in May 1997 will
allow for scalability, improved reporting and additional security, but to date,
there is no evidence that these goals have been achieved.

The Company currently retains highly confidential customer financial
information, including bank account and credit card information, in a secure
database server that the Company believes to be isolated from the Internet.
Although the server is protected by firewalls and proprietary, one-way batch
protocols and the Company regularly reviews the system for security weaknesses,
there can be no assurance that unauthorized individuals could not obtain access
to this database server. Any unauthorized penetration of the Company's servers
which are not directly connected to the Internet could result in the theft of
bank account and credit card information, E-mail addresses, and comprehensive
transaction histories. Any unauthorized penetration of the Company's servers
which are connected to the Internet could result in the theft of VirtualPIN
numbers, E-mail addresses and recent transaction histories. Unauthorized
penetration could lead to attempts to use such information to effect fraudulent
purchases, including the introduction of fabricated transactions into the
Company's financial processors. Although the Company believes that the
VirtualPIN architecture should thwart attempts to use misappropriated account
information, widespread attempts to effect such transactions would require the
Company to devote substantial resources to counteracting such attempts and could
result in a compromise of the system or the interruption of the Company's
ability to provide its products and services and may result in adverse publicity
to the Company and consequently have a material adverse effect on the Company's
business, financial condition and results of operations. It is also possible
that an employee of the Company could attempt to divert customer funds or
otherwise misuse confidential customer information, exposing the Company to
legal liability. In addition, although the Company believes that the potential
for the unauthorized interception of information transmitted over the Internet
through FVIPS is not likely to result in the fraudulent use of VirtualPINs,
there can be no assurance that unauthorized use of such information will not
occur and, if it does occur, that it will not result in a financial loss or
significant inconvenience to the VirtualPIN holder. Furthermore, although the
Company employs disclaimers and limitation of warranty provisions in its
customer agreements to attempt to limit its liability to customers, including
liability arising out of systems failure or failure of security precautions,
there can be no assurance that such provisions will be enforceable, or will
otherwise prove effective in limiting the Company's exposure to damage claims.

Although the Company carries property and business interruption insurance, its
coverage may not be adequate to compensate the Company for all losses that may
occur. The Company is in the process of increasing its server capacity,
improving its security mechanisms and taking other precautions to protect itself
and its customers from events that could interrupt delivery of the Company's
products and services or result in a loss of transaction or customer data.
However, these measures will not eliminate a significant risk to the Company's
operations from a natural disaster or systems failure. There can be no assurance
that these measures would protect the Company from an organized effort to
inundate the Company's servers with massive quantities of E-mail or other
Internet message traffic which could overload the Company's systems and result
in a significant interruption of service. In August 1995, the Company
experienced a 78-hour disruption in its systems which resulted in interruption
of service to all Sellers and Buyers for such period. Any systems failure that
causes a significant interruption to or increases response time of the Company's
products and services could reduce use of the Company's products and services
and would reduce the attractiveness of the Company's products and services to
current and future customers. The Company's business interruption insurance
would not fully compensate the Company for lost revenues, income, additional
costs or increased costs experienced by the Company during the occurrence of any


                                                                              20
<PAGE>   21
disruption of its computer systems, nor is there any assurance that the Company
will be able to obtain such coverage on reasonable terms or at all in the
future. Significant service interruptions could also damage the Company's
reputation and result in the loss of a significant portion of its Sellers and
Buyers, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

MANAGEMENT OF POTENTIAL GROWTH; RISKS ASSOCIATED WITH NEW MANAGEMENT TEAM

The rapid development necessary for the Company to exploit the market
opportunity for FVIPS requires an effective planning and management process. As
of March 31, 1997, the Company had grown to 108 employees from 21 employees on
December 31, 1995, and the Company expects this growth to continue. As of March
31, 1997, the Company had seven executive officers. Many of the Company's
executive officers have joined the Company since April 1996, including the
President of Financial Services; Vice President, Merchant Services; and Vice
President, Finance and Administration and Chief Financial Officer, each of whom
joined in September or October 1996. The Company's success depends to a
significant extent on the ability of its executive officers and other members of
its management to operate effectively, both individually and as a group. There
can be no assurance that the Company will satisfactorily allocate
responsibilities and that the new executives will succeed in these roles in a
timely and efficient manner. The Company has experienced some difficulty
integrating a new management team from a variety of industry backgrounds. It is
uncertain whether all members of the current management team can be successfully
assimilated. Discussions are taking place to restructure the management team as
of this filing. 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 recent growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational and financial resources. The
Company is also expanding its transaction processing capacity and its marketing
and sales organizations, funding increasing levels of research and development,
and increasing its customer support organization to accommodate the growth of
its installed base of Sellers and Buyers. The growth in the Company's customer
base and transaction volume has placed, and any future growth is expected to
continue to place, increased demands on the Company's management and operations,
including its marketing and sales, customer support, research and development,
general and administrative operations. There can be no assurance that the
Company will be able to effectively manage the expansion of its operations, that
the Company's systems, procedures and controls will be adequate to support the
Company's operations or that Company's management will be able to achieve the
rapid execution necessary to exploit the market opportunity for the Company's
products and services. Any inability to manage growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.

DEPENDENCE ON KEY PERSONNEL

The Company's future performance is substantially dependent upon the continued
contributions of members of the Company's senior management and technical
personnel. In particular, the Company's success substantially depends on the
continued participation of its Chief Executive Officer, Lee Stein, its principal
senior technical employees, Nathaniel Borenstein and Marshall Rose, and other
members of its senior management team, which is currently composed of a small
number of individuals who recently joined the Company. 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.

                                                                              21
<PAGE>   22
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 employees, consultants and others who
participate in the development of its software will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known. Moreover, notwithstanding the Company's
efforts to protect its intellectual property, there is no assurance that
competitors will not be able to develop functionally equivalent Internet payment
services without infringing any of the Company's intellectual property rights.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use products or technology
that the Company considers proprietary, and third parties may attempt to develop
similar technology independently. In addition, effective protection of
intellectual property rights may be unavailable or limited in certain countries.
Accordingly, there can be no assurance that the Company's means of protecting
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology.

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 infrequent 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


                                                                              22
<PAGE>   23
characteristics and quality of products and services. For example, the recently
enacted Telecommunications Reform Act of 1996 subjects certain Internet content
providers to criminal penalties for the transmission of certain information, and
could also result in liability to Internet service providers, Web hosting sites
and transaction facilitators such as the Company. Various foreign jurisdictions
have also moved to regulate access to the Internet and to strictly control Web
content. Even if the Company's business is not directly subject to regulation,
the adoption of any such laws or regulations may inhibit the growth of the
Internet, or the businesses of the users of the Company's products and services,
which could in turn adversely affect the Company's business, financial condition
and results of operations. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, libel, taxation and
personal privacy is uncertain. Such uncertainty creates the risk that such laws
could be interpreted in a manner that could generally inhibit commerce on the
Internet and adversely impact the Company's business.

Due to the growth of Internet commerce, Congress has considered regulating
providers of services and transactions in this market, and federal or state
authorities could enact laws, rules or regulations affecting the Company's
business or operations. Senior officials from several regulatory agencies,
including the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and the Office of the Comptroller of the Currency, have
indicated that those agencies have refrained from promulgating regulations in
order to encourage continued development of electronic commerce, but will
monitor this area closely in the future. For example, the Electronic Fund
Transfer Act and Regulation E, promulgated by the Federal Reserve Board, govern
certain electronic funds transfers made by regulated financial institutions from
a consumer's account, and govern providers of access devices and electronic
funds transfer services. Although the Company believes that its current services
are not subject to Regulation E, there is no assurance that the Federal Reserve
Board will not require all or certain of the Company's services to comply with
Regulation E, revise Regulation E or adopt new rules and regulations affecting
electronic commercial transactions. Other government agencies in addition to the
Federal Reserve Board, including the Federal Trade Commission and the Federal
Communications Commission, may promulgate rules and regulations affecting the
Company's activities or those of the users of its products and services. Any or
all of these potential actions could result in increased operating costs for the
Company or for the principal users of its services and could also reduce the
convenience and functionality of the Company's services, possibly resulting in
reduced market acceptance which would have a material adverse effect on the
Company's business, financial condition and results of operations.

EVOLVING FINANCIAL INDUSTRY POLICIES FOR INTERNET COMMERCE

The Company currently relies on credit cards as the payment method for FVIPS
transactions. Credit card associations are still in the process of drafting
operating regulations governing many credit card transactions on the Internet.
In some cases, the Company's access to the payment systems of credit card
associations and other payment providers may be conditioned on its compliance,
and the compliance of associated processors such as First USA Paymentech, with
interim regulations.

The Company's operations have been reviewed by MasterCard and Visa which
currently are the sole payment methods accepted by the Company. Visa has issued
to First USA Paymentech several conditions which govern First USA Paymentech's
processing of transactions for the Company over the Visa system. These
conditions, among other things, establish a maximum dollar amount and aging of
small-dollar transactions the Company can accumulate before they are submitted
to the Visa system for processing, and establish procedures for handling
chargebacks involving such bundled transactions. The Company does not believe
that these conditions materially burden the Company's current operations. The
conditions were initially issued pursuant to an oral communication and were due
to expire on December 31, 1995. The conditions were renewed until the later of
the adoption of industry-wide operating regulations addressing Internet
transactions or December 31, 1997. If the Internet transaction operating
regulations are not in place by December 31, 1997, the conditions provide that
they can be extended, with Visa's concurrence. To date, MasterCard has not
issued any conditions that are specific to the Company's operations. The Company
plans to apply to accept Discover, JCB and American Express credit cards,
although there can be no assurance that any of such applications will be
accepted. While the Company hopes that it will be able to comply with Visa's
future operating regulations and regulations issued by any other credit card
association, there


                                                                              23
<PAGE>   24
can be no assurance that it will be able to do so or that compliance will not
have a material adverse effect on its business, financial condition or results
of operations. In addition, there can be no assurance, if the operating
regulations have not been adopted, that the conditions agreement between First
USA Paymentech and Visa, or related agreements between First USA Paymentech and
the Company and other payment providers, will be issued or extended, if at all,
on terms that do not have a material adverse effect on the Company's business,
financial condition and results of operations.

RISK OF LOSS FROM RETURNED TRANSACTIONS, MERCHANT FRAUD OR ERRONEOUS
TRANSACTIONS

Because the Company acts as an intermediary and facilitator for credit card
transactions, the Company may be subject to the risks borne by merchants
generally in the use of credit card payment systems, primarily the risk that the
Buyer's payment will be "charged back" because of unauthorized use of the
Buyer's credit card, disputes over the goods or services purchased by the Buyer,
erroneous transmission of information by the Company, or fraud by the Seller or
Buyer. The Company's customer agreements provide for the allocation of the risk
of chargebacks (other than chargebacks caused by erroneous transmission by the
Company) to Sellers, but such agreements may not be enforceable. In addition,
even if the Company has an enforceable right to charge a Seller's account for
the amount of a chargeback, the Company is subject to the risk that the Seller
may not have a sufficient positive balance of net proceeds from other FVIPS
transactions to cover the chargeback and may otherwise be unable or unwilling to
pay.

The Company manages these risks through its risk management systems and internal
controls, which are still in the process of being implemented. The Company
currently requires explicit authorization by Buyers prior to initiating a charge
of the Buyer's credit card, holds funds for 91 days for Sellers who do not
qualify for accelerated settlement terms and subjects Sellers who attempt to so
qualify to a screening process, and holds qualified Sellers' funds for three to
five business days. As a result, the Company believes that the risks associated
with widespread chargebacks by customers are minimized, but there can be no
assurance that chargebacks will not increase significantly in the future as the
volume of FVIPS transactions increases and as more Sellers of goods and services
requiring physical delivery begin to use FVIPS. There also can be no assurance
that the Company will not change FVIPS in a manner that increases the risk of
exposure to chargebacks, or that the Company's reserves will be sufficient to
protect the Company from increased chargebacks. A significant increase in
chargebacks could materially and adversely affect the Company's business,
financial condition and results of operations.

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 to 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 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


                                                                              24
<PAGE>   25
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.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING

If cash generated from operations is insufficient to satisfy the Company's
working capital and capital expenditure requirements, the Company will need to
raise additional funds. Furthermore, the Company may need to raise additional
funds to fund more rapid expansion, to develop new or enhanced services, to
respond to competitive pressures or to acquire complementary businesses or
technologies. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will be
reduced, stockholders may experience significant additional dilution and such
equity securities may have rights, preferences or privileges senior to those of
the holders of the Company's Common Stock. There can be no assurance that
additional financing will be available when needed or that if available, such
financing will include terms favorable to the Company or its stockholders. If
adequate funds are not available or are not available on acceptable terms, the
Company may be unable to develop or enhance its products and services, take
advantage of important opportunities or respond to competitive pressures, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.


                                                                              25
<PAGE>   26
PART II.    OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

            None

ITEM 2.     CHANGES IN SECURITIES

            On February 1, 1997, the Company issued 750 shares of its Common
            Stock to Darren H. New, an employee, upon exercise of a previously
            issued stock option held by such employee. The exercise price of the
            option paid by Mr. New was $30, or $0.04 per share.

            On March 26, 1997, the Company issued 500 shares of its Common Stock
            to Marc Weiser, an employee, upon exercise of a previously issued
            stock option held by such employee. The exercise price of the option
            paid by Mr. Weiser was $160, or $0.32 per share.

            Such issuances were made without registration under the Securities
            Act of 1933 in reliance on Rule 701 promulgated thereunder. No
            underwriter or placement agent was involved in either issuance.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

            None

ITEM 4.     SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

            None

ITEM 5.     OTHER INFORMATION

            The management of the Company is not aware of any events required to
            be reported hereunder.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

            (A)   Exhibit Index
            
                  Exhibit 10.31 - Amended Agreement between the Company and
                                  First Data Corporation dated, March 31, 1997.*

                  Exhibit 11.1 - Statement Regarding Computation of Earnings Per
                                 Share

                  Exhibit 27.1 - Financial Data Schedule

            (B) No reports on Form 8-K were filed during the three months ended
                March 31, 1997.



                *Confidential treatment requested for certain portions.


                                                                              26
<PAGE>   27
                                   SIGNATURES


  Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned thereunto duly authorized.



                                            FIRST VIRTUAL HOLDINGS INCORPORATED


Dated: May 15, 1997                    By:  /s/  Lee H. Stein
                                            -----------------------------
                                            Lee H. Stein
                                            Chairman of the Board and
                                            Chief Executive Officer
                                            (Principal Executive Officer)


Dated: May 15, 1997                    By:  /s/  John M. Stachowiak
                                            -----------------------------
                                            John M. Stachowiak
                                            Vice President, Finance &
                                            Chief Financial Officer
                                            (Principal Financial and
                                            Accounting Officer)


                                                                              27

<PAGE>   1
                                                                   Exhibit 10.31

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4), 200.83
AND 230.406. * INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL
TREATMENT REQUEST THAT IS FILED SEPERATELY WITH THE COMMISSION.


                           AMENDMENT NO. 1 TO WARRANT

        This Amendment (the "Amendment No. 1") is entered into as of March 31,
1997 among First Virtual Holdings Incorporated, Inc., a Delaware corporation
(the "Company") and First Data Corporation, a Delaware corporation ("FDC").

                                    RECITALS

        WHEREAS, on August 21, 1996 the Company issued to FDC a warrant (the
"Warrant") to purchase shares of Company Stock of the Company, which Warrant
becomes exercisable based on the distribution and activation of VirtualPINs by
FDC and its affiliates.

        WHEREAS, the Company and FDC desire to amend the performance target
dates set forth in the Warrant, as well as the exercise prices specified in the
Warrant. 

        WHEREAS, concurrently with the execution of this Amendment No. 1, the
Company and FDC are entering into a VirtualPIN license agreement, whereby the
Company will license to FDC 350,000 VirtualPINs which FDC may relicense to end
users. 

        NOW THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
considerations, the parties hereby agree as follows:

        1.      Amendment to Section 1(a).

                a.      Section 1(a)(i) of the Warrant is hereby amended to
                        read in its entirety as follows:

        "This warrant shall be exercisable for (A) 375,000 shares of Common
Stock at an exercise price of $4.50 (the "First Exercise Price") in the event
that the number of Participating Cardholders equals or exceeds ******* on or
before September 15, 1997, (B) an additional 375,000 shares at an exercise price
of $2.50 (the "Second Exercise Price") in the event that the number of
Participating Cardholders equals or exceeds ******* on or before September 15,
1997, (C) an additional 375,000 shares at an exercise price of $2.00 (the "Third
Exercise Price") in the event that the number of Participating Cardholders
equals or exceeds ******* on or before September 15, 1997, and (D) an
additional 375,000 shares at an exercise price of $1.50 (the "Fourth Exercise
Price") in the event that the number of Participating Cardholders equals or
exceeds ****** on or before September 15, 1997."

                b.      Section 1(a)(ii) of the Warrant is hereby deleted.

        2.      Amendment to Section 1(b). Section 1(b) is hereby amended by
                adding the following to the end of that section:


                                      -1-

* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>   2
                "For purposes of Section 1(a) hereof, the 350,000 VirtualPINs 
licensed by the Company to FDC pursuant to the VirtualPIN License Agreement
dated March 31, 1997 shall be considered "activated"."

        3.      Full Force and Effect. Subject to the foregoing amendments, the
Warrant remains in full force and effect and is herewith confirmed.

        4.      Counterparts. This Amendment No. 1 may be executed in one or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other party, it being understood that
all parties need not sign the same counterpart.


                                      -2-
<PAGE>   3
        IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as
of the date first written above.

FIRST VIRTUAL HOLDINGS                  FIRST DATA CORPORATION
INCORPORATED

By: /s/ Lee Stein                       By:  /s/ Charlie Fote
   -----------------------------            -------------------------------
    Lee H. Stein
    Chairman and Chief Executive        Title:  Executive Vice President
    Officer                                    ----------------------------

<PAGE>   1
                                                                   EXHIBIT 11.1

                      FIRST VIRTUAL HOLDINGS INCORPORATED

                STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED      THREE MONTHS ENDED
                                           MARCH 31,               MARCH 31,
                                             1996                    1997
                                      ------------------      ------------------
<S>                                     <C>                     <C>
Net loss                                   (874,925)              (3,473,573)
Common Stock                              4,285,917                8,795,323
Conversion of Redeemable Preferred 
  Stock into Common Stock                 1,477,489                       --
Shares related to SAB No. 83              2,493,854                       --
                                          ---------               ----------
Shares used in computing pro forma
  net loss per share                      8,257,260                8,795,323
                                          =========               ==========
Pro forma net loss per share                 $(0.11)                  $(0.39)
                                          =========               ==========
</TABLE>

<TABLE> <S> <C>


<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               MAR-31-1997
<EXCHANGE-RATE>                                      1
<CASH>                                      13,082,542
<SECURITIES>                                         0
<RECEIVABLES>                                  200,226
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                            13,369,269
<PP&E>                                       2,784,029
<DEPRECIATION>                                 762,542
<TOTAL-ASSETS>                              15,698,901
<CURRENT-LIABILITIES>                        2,752,174
<BONDS>                                              0
                                0
                                          0
<COMMON>                                         8,796
<OTHER-SE>                                  11,462,931
<TOTAL-LIABILITY-AND-EQUITY>                15,698,901
<SALES>                                              0
<TOTAL-REVENUES>                               392,917
<CGS>                                          111,514
<TOTAL-COSTS>                                3,922,923
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              24,944
<INCOME-PRETAX>                            (3,473,573)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                        (3,473,573)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (3,473,573)
<EPS-PRIMARY>                                   (0.39)
<EPS-DILUTED>                                        0
        

</TABLE>


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