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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 June 30, 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 - 8,866,984 shares as of June 30, 1997.
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FIRST VIRTUAL HOLDINGS INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996 3
Statements of Operations for the three months (unaudited) and six months
ended June 30, 1997(unaudited) and 1996 4
Statements of Cash Flows for the six months ended June 30, 1997 (unaudited)
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>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST VIRTUAL HOLDINGS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,096,596 $ 17,127,971
Short-term investment, available-for-sale -- 200,000
Accounts receivable 102,161 88,278
Prepaid expenses and other 88,085 83,840
------------ ------------
Total current assets 9,286,842 17,500,089
Furniture, equipment and software, net 1,995,055 1,964,635
Information technology, net 37,452 59,226
Organization and other costs, net 91,714 105,798
Deposits and other 172,703 62,809
------------ ------------
Total assets $ 11,583,766 $ 19,692,557
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 883,965 $ 1,626,198
Accrued compensation and related liabilities 230,912 372,739
Accrued interest 244,340 196,340
Deferred revenue 579,544 64,683
Other accrued liabilities 185,710 576,077
Current portion, due to stockholders 1,600,000 400,000
------------ ------------
Total current liabilities 3,724,471 3,236,037
Amount due to stockholder 237,500 312,500
Notes payable to stockholders -- 1,200,000
------------ ------------
Total long term liabilities 237,500 1,512,500
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, none
outstanding at June 30, 1997 and December 31, 1996 -- --
Common stock, $0.001 par value; 40,000,000 shares authorized,
8,866,984 and 8,794,812 shares issued and outstanding at
June 30, 1997 and December 31, 1996, respectively 8,867 8,795
Additional paid-in-capital 25,898,366 25,758,015
Stock Options 52,138 --
Warrants 3,017,115 3,017,115
Deferred compensation (123,369) (44,305)
Accumulated deficit (21,231,322) (13,795,600)
------------ ------------
Total stockholders' equity 7,621,795 14,944,020
------------ ------------
Total liabilities and stockholders' equity $ 11,583,766 $ 19,692,557
============ ============
</TABLE>
See accompanying notes.
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FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 393,067 $ 156,616 $ 785,984 $ 401,082
Cost of Revenues 60,471 76,638 171,985 169,148
----------- ----------- ----------- -----------
Gross Profit 332,596 79,978 613,999 231,934
Operating Expenses:
Marketing and sales 1,122,034 165,584 2,171,371 322,060
Research, development
and engineering 1,606,815 614,311 3,058,821 946,842
General and administrative 1,409,661 871,531 2,573,242 1,355,886
Depreciation and amortization 289,034 81,083 547,033 135,638
----------- ----------- ----------- -----------
Total operating expenses 4,427,544 1,732,509 8,350,467 2,760,426
----------- ----------- ----------- -----------
Loss from operations (4,094,948) (1,652,531) (7,736,468) (2,528,492)
Interest income 156,792 49,643 349,683 79,235
Interest expense (24,000) (28,021) (48,944) (56,577)
----------- ----------- ----------- -----------
Net loss $(3,962,156) $(1,630,909) $(7,435,729) $(2,505,834)
=========== =========== =========== ===========
Net loss per share $ (0.45) $ (0.19) $ (0.84) $ (0.30)
Shares used in per share
computation 8,811,514 8,376,661 8,803,463 8,307,984
</TABLE>
See accompanying notes.
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FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,435,729) $ (2,505,834)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 547,033 135,638
Common stock issued for services -- 7,500
Compensation expense recognized for stock options 52,138 --
Changes in operating assets and
liabilities:
Accounts receivable (13,883) (89,966)
Prepaid expenses and other (4,245) (222,051)
Deposits and other (109,894) (32,483)
Accounts payable (742,234) 355,649
Accrued compensation and related
liabilities (141,818) 121,524
Deferred revenue 514,861 --
Accrued interest 48,000 48,000
Amount paid to stockholder (75,000) --
Other accrued liabilities (390,366) 117,188
------------ ------------
Net cash used in operating activities (7,751,137) (2,064,835)
INVESTING ACTIVITIES
Additions to furniture and equipment (net) (528,911) (897,642)
Maturity (Purchase) of short-term investment 200,000 (200,000)
Organization and other costs -- (34,048)
------------ ------------
Net cash used in investing activities (328,911) (1,131,690)
FINANCING ACTIVITIES
Proceeds from issuance of Series B
preferred stock, net of issuance costs -- 1,365,775
Proceeds from issuance of common stock 48,673 9,600
Proceeds from issuance of warrants -- 3,017,115
Proceeds from borrowings bank -- 486,111
Repayment of loan from bank -- (486,111)
------------ ------------
Net cash provided by financing activities 48,673 4,392,490
Net increase/(decrease) in cash and cash equivalents (8,031,375) 1,195,965
Cash and cash equivalents at the beginning
of period 17,127,971 2,091,651
------------ ------------
Cash and cash equivalents at the end
of period $ 9,096,596 $ 3,287,616
============ ============
</TABLE>
See accompanying notes
5
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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"), in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10 Q and Article 10 of Regulation S-X.
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 June 30, 1997,
and the results of operations for the three month and six month periods ended
June 30, 1997 and 1996, and the changes in cash flows for the six months ended
June 30, 1997 and 1996, have been included. The results of operations for the
interim period ended June 30, 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 three
months and six months ended June 30, 1996, approximately $268,000 and $403,000
were reclassified to research, development and engineering expenses,
respectively, and approximately $77,000 and 169,000 were reclassified to 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 net
operating loss 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.
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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 June 30, 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 3,382,036 shares
of common stock reserved for issuance under the Company's stock option plans, of
which, 1,690,373 shares were subject to outstanding options at June 30, 1997, at
a weighted average exercise price of $4.63 per share, (iii) an aggregate of
1,000,000 shares of common stock subject to additional outstanding options at
June 30, 1997 at an exercise price of $6.30 per share and (iv) an aggregate of
100,000 shares of common stock reserved for issuance under the Company's
Employee Stock Purchase Plan, of which 5,433 were outstanding as of June 30,
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
First Virtual and ESPN/StarWave Partners have entered into an agreement whereby
First Virtual will pay monies to ESPN/StarWave Partners for (i) promotional
opportunities that are exclusive to First Virtual and (ii) twelve million
cumulative banner impressions advertising First Virtual or one of its partners
on certain web sites operated by ESPN/Starwave Partners. These payments will be
made over a six month period, beginning July 1, 1997.
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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") is
currently developing, as an additional service, an integrated electronic
commerce solution, the Interactive Messaging Platform. This service will allow
merchants and credit card issuers to take advantage of a sophisticated messaging
system that enables relationship marketing on the Internet and also provides a
marketing system with an integrated payment system. The Interactive Messaging
Platform represents the integration of First Virtual's existing services and
technology which includes the First Virtual Internet Payment System ("FVIPS") ,
the VirtualPIN and VirtualTAG. The Interactive Messaging Platform has not been
commercially released and has not generated any significant revenues or customer
commitments to date. The Company anticipates that development and commercial
introduction of the Interactive Messaging Platform will entail significant
research, development and engineering expenses and sales and marketing expenses
during the next four quarters.
First Virtual has previously developed and implemented the VirtualPIN
architecture which facilitates Internet commerce and is designed to facilitate
other forms of interactive Internet communications. The VirtualPIN architecture
uses E-mail which has the widest reach and broadest use of any Internet
application. FVIPS, a secure and easy-to-use payment system introduced in
October 1994, is the Company's first application of the VirtualPIN architecture.
As of June 30, 1997, the Company has processed approximately 385,000 FVIPS
transactions and has registered more than 3,500 Merchants and approximately
230,000 Consumers 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 Consumers to
initiate the purchase and payment and arrange for the delivery of a product
without leaving the web page on which the advertisement appears. The Company
believes VirtualTAG may become one of the first solutions to take full advantage
of the Internet's unique attributes by combining advertising, selling and paying
all in one application.* In December 1996, the Company launched 1Virtual Place,
an on-line Internet retail environment. In late June 1997, the Company launched
VPIN Central, a web site that presents marketing opportunities for VirtualPIN
Merchants. 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 June 30, 1997, the Company had an accumulated deficit of approximately
$21.2 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.
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RESULTS OF OPERATIONS
Revenues
The Company currently generates revenues from FVIPS, merchandising, interactive
advertising development and consulting, as detailed in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDING JUNE 30, SIX MONTHS ENDING JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Internet payment system $274,367 $156,616 $410,164 $401,082
Merchandising 9,950 -- 39,570 --
Interactive advertising development 10,000 -- 115,000 --
Consulting 98,750 -- 221,250 --
-------- -------- -------- --------
Total revenues $393,067 $156,616 $785,984 $401,082
</TABLE>
In July 1996, the Company began to recognize Consumer and Merchant registration
and renewal fees over a 12 month period. Prior to July 1, 1996, revenues from
registration fees were recognized in the month the Merchant's or the Consumer's
registration fee was processed and the VirtualPIN was issued. First Virtual
started providing consulting services in September 1996, selling on-line
merchandise in December 1996 and VirtualTAGs in January 1997. For the quarter
ending June 30, 1997, revenues from FVIPS benefited from bulk sales of Consumer
and Merchant registrations that occurred at the end of the quarter ended March
31, 1997. Merchandising revenues decreased from the prior quarter as marketing
efforts to support the Company's Internet shopping mall were reduced.
Interactive advertising development revenues decreased from the prior quarter as
the Company redirected its VirtualTAG efforts to produce tools to streamline
production of future orders and to incorporate the VirtualTAG technology into
the Interactive Messaging Platform. Consulting services continue to add to the
revenue mix and the Company anticipates that such services will continue to be a
significant revenue source for the foreseeable future.*
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 Consumers and Merchants.*
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 $1.1 million for the quarter ended
June 30, 1997, as compared to $166,000 for the quarter ended June 30, 1996. This
increase is attributable primarily to the addition of 26 employees resulting in
an increase in salaries, wages and payroll taxes of approximately $630,000, an
increase in promotional expenses of $50,000, a travel expense increase of
approximately $60,000, a consulting expense increase of approximately $80,000,
and a general increase in spending of approximately $115,000 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 introduce its Interactive Messaging
Platform and 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.
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For the six months ended June 30, 1997, marketing and sales expenses increased
to $2.2 million as compared to $322,000 for the six months ended June 30, 1996.
This increase resulted primarily from increases in salaries, wages and payroll
taxes of approximately $1.3 million, an increase in promotional expenses of
$70,000, a travel expense increase of approximately $160,000, a consulting
expense increase of approximately $110,000, and a general increase in spending
of approximately $240,000 to support the Company's expanding marketing and sales
activities.
Research, development and engineering expenses. Research, development and
engineering expenses consist primarily of salaries and wages and consulting fees
to support the development, enhancement and maintenance of the Company's
products and services. Research, development and engineering expenses increased
to $1.6 million for the quarter ended June 30, 1997, as compared to $614,000 for
the quarter ended June 30, 1996. This increase is primarily due to the addition
of 15 employees resulting in an increase in salaries, wages and payroll taxes of
approximately $570,000 and the Company's expensing approximately $265,000 in
software development costs paid to consultants for the quarter ended June 30,
1997, as compared to approximately $45,000 for the quarter ended June 30, 1996.
To date, all of the Company's software development costs have been expensed as
incurred. The remainder of the increase was due to increased spending of
approximately $195,000 to support the expansion of the Company's research,
development and engineering activities, which included 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, such as the Interactive Messaging Platform, along with increasing
the functionality of FVIPS.*
For the six months ended June 30, 1997, research, development and engineering
expenses increased to $3.1 million as compared to $947,000 for the six months
ended June 30, 1996. This increase resulted primarily from increases in
salaries, wages and payroll taxes of approximately $1.1 million, a consulting
expense increase of approximately $610,000, and a general increase in spending
of approximately $445,000 to support the expansion of the Company's research,
development and engineering activity, which included the establishment of a
second data processing center in San Diego, California.
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 $1.4 million for the
quarter ended June 30, 1997, as compared to $872,000 for the quarter ended June
30, 1996. This increase is primarily due to the addition of 15 employees
resulting in an increase in salaries, wages and payroll taxes of approximately
$365,000, and approximately $165,000 to support the expansion of the Company's
corporate office.
For the six months ended June 30, 1997, general and administrative expenses
increased to $2.6 million as compared to $1.4 million for the six months ended
June 30, 1996. This increase resulted primarily from increases in salaries,
wages and payroll taxes of approximately $970,000 and approximately $230,000 to
support the expansion of the Company's corporate office.
- --------------
*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
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The Company expects to experience significant fluctuations in its future
quarterly operating results. These fluctuations will be 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 Merchant and Consumer registrations; the monthly
volume and average dollar amount of transactions using FVIPS; market response to
the Company's recently announced Interactive Messaging Platform; the degree of
acceptance of the Internet as an advertising and merchandising medium; the fees
charged to the Company by third party processors and financial institutions; the
timing and effectiveness of collaborative marketing efforts initiated by the
Company's strategic partners; the timing of the introduction of new products and
services offered by the Company; the timing of the release of enhancements to
the Company's products and services; product introductions and service offerings
by the Company's competitors; the mix of the products and services provided by
the Company; the timing and rate at which the Company increases its expenses to
support projected growth; the cost of compliance with applicable government
regulations; competitive conditions in the Company's marketplace; and general
economic conditions. In addition, the fees charged by the Company for Consumer
and Merchant registration, transaction processing and co-marketing are subject
to change as the Company continues to roll out FVIPS upgrades, introduce its
Interactive Marketing Platform and assess its marketing strategy and competitive
position.
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 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 $7.8 million during the six months ended June
30, 1997. Net cash used during this period was primarily to fund net operating
expenses of $6.8 million (excluding depreciation, amortization and compensation
expense recognized for stock options), reduce accounts payable and other accrued
liabilities by $1.3 million, paydown an amount due to a stockholder of $75,000
and increase prepaids, deposits and accounts receivable by $128,000, offset by
increases in deferred revenue of $515,000 and accrued interest of $48,000.
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 $529,000 and $898,000 for the six months ended June
30, 1997 and 1996, respectively. Furniture and equipment are stated at cost and
depreciated over three to five years using the straight line method.
- -------------
*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
At June 30, 1997, the Company had $9.1 million in cash and cash equivalents. The
Company believes that existing cash resources will be sufficient to support the
Company's currently anticipated working capital and capital expenditure
requirements through 1997.* However, the Company anticipates that it will need
to raise additional funds through the public or private sale of its equity or
debt securities or from other sources before the end of 1997. As of this filing,
the Company has initiated efforts to raise additional capital. The timing and
amount of the Company's capital requirements will depend on a number of factors,
including demand for the Company's products and services, the need to develop
new or enhanced products and services, competitive pressures and the
availability of complementary businesses or technologies that the Company may
wish to acquire. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the Company's stockholders will be
diluted and such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's Common Stock. There can be no
assurance that additional financing will be available when needed or that, if
available, such financing will include terms favorable to the Company or its
stockholders. If adequate funds are not available on acceptable terms, the
Company may be unable to develop or enhance its products and services, take
advantage of opportunities or respond to competition, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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 June 30, 1997, the Company had an accumulated
deficit of approximately $21.2 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, development and engineering, customer care
and administrative infrastructure over the near term, the Company expects to
continue to incur significant operating losses on both a quarterly and an annual
basis for the foreseeable future. For these and other reasons, there can be no
assurance that the Company will ever achieve or be able to sustain
profitability.
The Company commenced operations in March 1994, launched FVIPS in October 1994,
and began recognizing revenues in the fourth quarter of 1994. The Company was a
development stage company through December 1995. Accordingly, the Company has a
limited operating history upon which to base an evaluation of its business and
prospects. The Company and its business prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
new and rapidly evolving market for Internet products and services. To address
these risks, the Company must, among other things, successfully respond to
competitive developments, market additional Internet commerce services, upgrade
its technologies and commercialize products and services incorporating such
technologies, and
- -------------
*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 this page 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.
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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. 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. As a result, the Company may not
be able to take advantage of revenue opportunities as quickly as it would hope,
because of an effort to scale down its infrastructure to match lower than
expected revenues. In addition, the Company is currently trying to maintain or
decrease its operating expenses while focusing internal resources on developing
the Interactive Messaging Platform. There can be no assurance that revenues
associated with use of the VirtualPIN, FVIPS or the Company's Interactive
Messaging Platform will increase 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.
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 Merchant and Consumer registrations;
the monthly volume and average dollar amount of transactions using FVIPS; market
response to the Company's recently announced Interactive Messaging Platform; the
degree of acceptance of the Internet as an advertising and merchandising medium;
the fees charged to the Company by third party processors and financial
institutions; the timing and effectiveness of collaborative marketing efforts
initiated by the Company's strategic partners; the timing of the introduction of
new products and services offered by the Company; the timing of the release of
enhancements to the Company's products and services; product introductions and
service offerings by the Company's competitors; the mix of the products and
services provided by the Company; the timing and rate at which the Company
increases its expenses to support projected growth; the cost of compliance with
applicable government regulations; competitive conditions in the Company's
marketplace; and general economic conditions. In addition, the fees charged by
the Company for Consumer and Merchant registration, transaction processing and
co-marketing are subject to change as the Company continues to roll out FVIPS
upgrades, introduce its Interactive Marketing Platform 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
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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 Merchant and Consumer 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 Merchant and Consumer base. In addition,
there can be no assurance that the Company's existing or potential marketing
partners, most of whom have significantly greater financial and marketing
resources than the Company, will not change their business strategies or
discontinue their relationships with the Company, develop and market products
and services that compete with the Company's products and services in the future
or form collaborative marketing relationships with one or more of the Company's
competitors that offer alternative Internet commerce solutions.
The operation of 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. There can be no assurance that these companies
will continue to provide collateral services to the Company without disruptions
in service, at the current cost, or at all. Although the Company believes that
such services could be obtained from other sources in due course if required,
reengineering the Company's computer systems and telecommunications
infrastructure to accommodate a new service provider could only be accomplished
at significant cost and with significant delay. Any interruption of service by a
collateral services provider also would be likely to result in the disruption of
the operation of FVIPS, with an attendant loss of revenues and potential loss of
customers. Such losses could have a material adverse effect on the Company's
business, financial condition and results of operations.
In order to increase market acceptance of FVIPS and to promote the use of the
recently announced Interactive Messaging Platform , 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. In addition, the
Company recently announced its intention to emphasize the use of the VirtualPIN
architecture for additional interactive Internet communications applications
such as Internet advertising, interactive
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messaging, customer loyalty programs, merchandising and direct marketing. To
date, the Company has not generated any significant revenues from such services,
and there can be no assurance that demand for such applications will develop or
increase. In addition, it is not known whether individuals or businesses will
use the Internet as a means of purchasing goods and services. To establish the
Internet as a source of widespread and significant commercial activity,
particularly by those individuals and businesses which historically have relied
upon traditional means of commerce, will require the broad acceptance of new
methods of conducting business and exchanging information. Businesses that
already have invested substantial resources in traditional or other methods of
conducting business may be reluctant to adopt new commercial methodologies or
strategies that may limit or compete with their existing businesses. Individuals
with established patterns of purchasing goods and services may be reluctant to
alter those patterns. Banks and financial institutions with established methods
of handling payments may also be reluctant to accept new payment systems based
on Internet commerce. The Company expects such historical patterns of business
conduct to inhibit the growth of Internet commerce in general and market
acceptance of the Company's services in particular.
The Company's business includes products and services that are new, operate in a
market that did not previously exist and will be subject to rapid and
unpredictable market changes. It is uncertain whether a significant market will
ever emerge for 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 Internet
infrastructure is not adequately expanded or managed, or if the Company's
products and services do not achieve market acceptance by a significant number
of individuals, businesses and financial institutions, then the Company's
business, financial condition and results of operations will be materially and
adversely affected.
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 generate and maintain user interest. In
addition, it is uncertain whether the cost of Internet access will decline.
Failure of the Internet or the Web to stimulate consumer interest and be
accessible to a broad audience at moderate costs would jeopardize the viability
of Internet commerce and the market for the Company's products and services. The
Internet and the Web have experienced, and are expected to continue to
experience, significant growth in the number of users and amount of traffic;
however, the Internet may not prove to be a viable commercial marketplace for a
number of reasons, including potentially inadequate development of the necessary
infrastructure, such as a reliable network backbone, or timely development of
performance improvements including high speed modems. In addition, there is no
assurance that the number of vendors maintaining sites on the Web will increase.
Accordingly, there can be no assurance that Internet commerce will become
widespread or that sustainable markets for the Company's products and services
will develop. If such markets fail to develop, develop more slowly than expected
or become dominated by one or more competitors, the Company's business,
financial condition and results of operations will be materially and adversely
affected. Furthermore, if the Internet were unable to support the
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<PAGE> 16
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 AND NEW PRODUCTS AND SERVICES; RISK OF CHANGES
IN CONSUMER PERCEPTIONS
Substantially all of the Company's revenues to date have been attributable to
the receipt of registration fees from Consumers and Merchants, transaction
processing fees, co-marketing fees and consulting fees associated with FVIPS.
For the three months ending June 30, 1997, revenues from FVIPS, merchandising,
interactive advertising development and consulting fees accounted for
approximately 70%, 2.5%, 2.5% and 25% of revenues, respectively. For the quarter
ended March 31, 1997 such revenues were approximately 35%, 7%, 27% and 31%,
respectively. FVIPS fees are currently expected to account for a significant
portion of the Company's revenues. As a result, a decline in demand for, or
failure to achieve broad market acceptance of FVIPS, as a result of competition,
technological change or otherwise, would have a material adverse effect on the
Company's business, financial condition and results of operations. A failure to
significantly expand both the number of Merchants and Consumers 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, such as the Interactive Messaging Platform. There can be no
assurance that the Company will be successful in marketing FVIPS, the
Interactive Messaging Platform 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.
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COMPETITION
The market for products and services that enable the sale of goods and services,
and the market for services that enable interactive messaging capabilities over
the Internet, is expected to be intensely competitive, and, to the extent
commercial activity over the Internet increases, the Company expects competition
to increase significantly. There are no substantial barriers to entry into the
Company's business, and the Company expects established and new entities to
enter the market for Internet payment systems, interactive messaging services
and interactive Internet communications in the near future. It is possible that
a single supplier will dominate one or more market segments. Furthermore, since
there are many potential entrants to the field, it is extremely difficult to
assess which companies are likely to offer competitive products and services in
the future, and in some cases it is difficult to discern whether an existing
service is competitive with the Company's current services.
The Company's principal competitors in the market for secure consumer-initiated
purchase systems include providers of encrypted credit card transaction systems
such as CyberCash, Inc., VeriFone, Inc. and Open Market, Inc. and providers of
electronic cash payment systems such as DigiCash, Inc. The Company's principal
competitors in the interactive messaging services arena include providers of
e-mail based services such as Eudora, Mercury Mail, America On-Line, JUNO,
Prodigy, Microsoft and Lotus. The Company expects that credit card processors
and acquiring banks or third party companies will also offer credit card-based
payment systems if Secure Electronic Transaction ("SET") protocols proposed by
Visa, MasterCard, Microsoft Corporation and Netscape are adopted and/or accepted
as a standard for Internet commerce. SET comprises openly published
communication and process protocols intended to facilitate encrypted credit card
transactions over the Web. Further, the Company believes that the credit card
associations may provide Internet merchants with lower transaction fees in order
to encourage usage of SET. There can be no assurance that the Company's payment
system will receive the same treatment, and as such the Company may be at a
competitive disadvantage. For example, in July 1997, Visa announced its
intention to waive its transaction fees, beginning in April 1998 for a two year
period, for credit card transactions over the Internet that use the SET
protocol.
The Company may experience additional competition from Internet service
providers and Internet directory companies who enter the market for Internet
payment services. Companies such as America Online, Inc., CompuServe
Incorporated, Microsoft, IBM, AT&T, Hewlett-Packard Company, and Netscape
Communications Corporation which possess large, existing customer bases or ready
distribution channels, could develop, market or resell a number of payment
alternatives including, but not limited to, encrypted credit card payment and
digital cash payment systems. Such major information technology providers may
also choose to enter the market for secure Internet payments by acquiring one of
the Company's existing competitors or forming strategic alliances with such
competitors, either of which may impede the Company's ability to compete
effectively. For instance, Hewlett-Packard Company, in 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 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).
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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.
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
render the Company's products and services noncompetitive or obsolete would have
a material adverse effect on the Company's business, financial condition and
results of operations.
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RISKS ASSOCIATED WITH FVIPS UPGRADES
In July 1996, the Company made a transition in the 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 Merchant
and Consumer registrations, updating of customer information and the management
of customer accounts. This upgrade was the first upgrade of FVIPS.
In May 1997, the Company implemented a second upgrade to FVIPS. This upgrade
included the installation of a relational database management system and to
date, the upgrade has performed to the Company's expectations. The Company also
plans upgrades to FVIPS from time to time in the future. 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. 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 Merchant 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.
DEPENDENCE ON REPEATED CUSTOMER USE OF FVIPS
The Company's future success is currently dependent on its ability to
significantly expand its base of Merchants and Consumers 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 Consumers. There can be no assurance that
the Company's historic rate of VirtualPIN use per Consumer will continue or
increase, even if the Company is successful in increasing the variety and
quality of goods and services available over FVIPS. The ability of the Company
to increase the average number of transactions per VirtualPIN is subject to
substantial uncertainty. As of June 30, 1997, the Company has not yet
experienced any substantial increase in VirtualPIN registrations or 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 Consumer and Merchant
registration and renewal fees from time to time in the future and may modify its
transaction rates charged to Merchants. There can be no assurance that any
modification in the fee structure will not result in significant Consumer and
Merchant attrition or reduced future Consumer and Merchant registrations. Any
significant Consumer or Merchant 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. As of this filing, the company is implementing an increase in
Consumer registration and renewal fees. Currently, there is insufficient data to
measure the impact of this increase.
Certain Merchants employing FVIPS have in the past reduced their use of the
system. Although the Company has very limited information regarding Merchant
usage of FVIPS, the Company believes that
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declining usage of FVIPS by Merchants can occur when Merchants 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 Merchants that choose to employ alternative payment
mechanisms or experience a decline in transactions using FVIPS. Any significant
decline in the usage of FVIPS by Merchants or increase in the rate of Merchant
attrition could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF CAPACITY CONSTRAINTS
A key element of the Company's strategy is to generate a high volume of FVIPS
usage. Accordingly, the performance of the Company's products and services is
critical to the Company's ability to achieve market acceptance and continued use
of these products and services. Significant increases in the volume of
transactions through FVIPS could strain the capacity of the Company's software
or hardware, which could lead to slower response time or system failures. The
Company has and 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 Merchants and Consumers,
errors will not be found in the underlying software or that the Company will not
experience development delays, resulting in delays in the commercial release of
its products and services or in the market acceptance of its products and
services, each of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS OF 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 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
20
<PAGE> 21
should thwart attempts to use misappropriated account information, widespread
attempts to effect such transactions would require the Company to devote
substantial resources to counteracting such attempts and could result in a
compromise of the system or the interruption of the Company's ability to provide
its products and services and may result in adverse publicity to the Company and
consequently have a material adverse effect on the Company's business, financial
condition and results of operations. It is also possible that an employee of the
Company could attempt to divert customer funds or otherwise misuse confidential
customer information, exposing the Company to legal liability. In addition,
although the Company believes that the potential for the unauthorized
interception of information transmitted over the Internet through FVIPS is not
likely to result in the fraudulent use of VirtualPINs, there can be no assurance
that unauthorized use of such information will not occur and, if it does occur,
that it will not result in a financial loss or significant inconvenience to the
VirtualPIN holder. Furthermore, although the Company employs disclaimers and
limitation of warranty provisions in its customer agreements to attempt to limit
its liability to customers, including liability arising out of systems failure
or failure of security precautions, there can be no assurance that such
provisions will be enforceable, or will otherwise prove effective in limiting
the Company's exposure to damage claims.
Although the Company carries property, errors and omissions and business
interruption insurance, its coverage may not be adequate to compensate the
Company for all losses that may occur. The Company is in the process of
increasing its server capacity, improving its security mechanisms and taking
other precautions to protect itself and its customers from events that could
interrupt delivery of the Company's products and services or result in a loss of
transaction or customer data. However, these measures will not eliminate a
significant risk to the Company's operations from a natural disaster or systems
failure. There can be no assurance that these measures would protect the Company
from an organized effort to inundate the Company's servers with massive
quantities of E-mail or other Internet message traffic which could overload the
Company's systems and result in a significant interruption of service. In August
1995, the Company experienced a 78-hour disruption in its systems which resulted
in interruption of service to all Merchants and Consumers for such period. Any
systems failure that causes a significant interruption to or increases response
time of the Company's products and services could reduce use of the Company's
products and services and would reduce the attractiveness of the Company's
products and services to current and future customers. The Company's business
interruption insurance would not fully compensate the Company for lost revenues,
income, additional costs or increased costs experienced by the Company during
the occurrence of any disruption of its computer systems, nor is there any
assurance that the Company will be able to obtain such coverage on reasonable
terms or at all in the future. Significant service interruptions could also
damage the Company's reputation and result in the loss of a significant portion
of its Merchants and Consumers, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
MANAGEMENT OF POTENTIAL GROWTH; RISKS ASSOCIATED WITH NEW MANAGEMENT TEAM
The rapid development necessary for the Company to exploit the market
opportunity for FVIPS and its other services requires an effective planning and
management process. As of June 30, 1997, the Company had grown to 114 employees
from 21 employees on December 31, 1995. As of June 30, 1997, the Company had
seven executive officers. Two officers were replaced during the second quarter.
The Company accepted resignations from both Michael Schauer, President of
Financial Services and Thomas Daniel, Vice President of Merchant Services. New
additions to the Company as officers are Keith Kendrick, Vice President of
Marketing and Dr. Carolyn Turbyfill, Vice President of Engineering and
Operations. In addition to Mr. Kendrick and Ms. Turbyfill, several other of the
Company's executive officers have been with the Company for approximately one
year or less. 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. 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
21
<PAGE> 22
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 has expanded its transaction processing capacity and is also expanding
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 Merchants and Consumers. 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.
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.
22
<PAGE> 23
As the volume of Internet commerce increases, and the number of products and
service providers that support Internet commerce increases, the Company believes
that Internet commerce technology providers may become increasingly subject to
infringement claims. There can be no assurance that infringement claims will not
be filed by plaintiffs in the future. Any such claims, with or without merit,
could be time consuming, result in costly litigation, disrupt or delay the
enhancement or shipment of the Company's products and services or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable or favorable
to the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation to determine the validity of any claims
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation is determined in favor of the Company. In the event of an
adverse ruling in any such litigation, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology. The failure of the Company to develop or license a
substitute technology could have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company believes it is not currently subject to direct regulation by any
government agency in the U.S., other than regulations generally applicable to
businesses, and there are currently few laws or regulations directly applicable
to access to, or commerce on, the Internet. However, no assurance can be given
that federal, state or foreign agencies will not attempt in the near future to
begin to regulate the market for Internet commerce. In addition, if a government
agency were to challenge the Company's position with respect to the
applicability of regulations to its activities, responding to such a challenge
could result in significant expenditures of the Company's financial and
management resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. More
generally, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations will be adopted with respect to
the Internet, covering issues such as user privacy, pricing, taxation and
characteristics and quality of products and services. For example, the
Telecommunications Reform Act of 1996 may subject certain Internet content
providers to criminal penalties for the transmission of certain information, and
could also result in liability to Internet service providers, Web hosting sites
and transaction facilitators such as the Company. Various foreign jurisdictions
have also moved to regulate access to the Internet and to strictly control Web
content. Even if the Company's business is not directly subject to regulation,
the adoption of any such laws or regulations may inhibit the growth of the
Internet, or the businesses of the users of the Company's products and services,
which could in turn adversely affect the Company's business, financial condition
and results of operations. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, libel, taxation and
personal 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
23
<PAGE> 24
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. While the
Company hopes that it will be able to comply with Visa's future operating
regulations and regulations issued by any other credit card association, there
can be no assurance that it will be able to do so or that compliance will not
have a material adverse effect on its business, financial condition or results
of operations. In addition, there can be no assurance, if the operating
regulations have not been adopted, that the conditions agreement between 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
Consumer's payment will be "charged back" because of unauthorized use of the
Consumer's credit card, disputes over the goods or services purchased by the
Consumer, erroneous transmission of information by the Company, or fraud by the
Merchant or Consumer. The Company's customer agreements provide for the
allocation of the risk of chargebacks (other than chargebacks caused by
erroneous transmission by the Company) to Merchants, but such agreements may not
be enforceable. In addition, even if the Company has an enforceable right to
charge a Merchant's account for the amount of a chargeback, the Company is
subject to the risk that the Merchant may not have a sufficient positive balance
of net proceeds from other FVIPS transactions to cover the chargeback and may
otherwise be unable or unwilling to pay.
The Company manages these risks through its risk management systems and internal
controls, which are still in the process of being implemented. The Company
currently requires explicit authorization by Consumers prior to initiating a
charge of the Consumer's credit card, holds funds for 91 days for Merchants who
do not qualify for accelerated settlement terms and subjects Merchants who
attempt to so qualify to a
24
<PAGE> 25
screening process, and holds qualified Merchants' funds for three to five
business days. As a result, the Company believes that the risks associated with
widespread chargebacks by customers are minimized, but there can be no assurance
that chargebacks will not increase significantly in the future as the volume of
FVIPS transactions increases and as more Merchants of goods and services
requiring physical delivery begin to use FVIPS. There also can be no assurance
that the Company will not change FVIPS in a manner that increases the risk of
exposure to chargebacks, or that the Company's reserves will be sufficient to
protect the Company from increased chargebacks. A significant increase in
chargebacks could materially and adversely affect the Company's business,
financial condition and results of operations.
LIABILITY FOR INFORMATION STORED ON THE INFOHAUS SERVER
Because materials may be uploaded to the Company's InfoHaus shared Web server
("InfoHaus") and, without intervention by the Company, may be subsequently
distributed to others, it is possible that claims will be made against the
Company for defamation, negligence, copyright or trademark infringement or other
theories based on the nature and content of such materials. In the past, such
claims have been brought, and sometimes successfully pressed against electronic
bulletin boards, on-line service providers, and Web pages hosting content
provided by other parties. Although the Company carries general liability
insurance, the Company's insurance may not adequately cover claims of this type.
Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations.
INTEGRATION OF POTENTIAL ACQUISITIONS
As a part of its business strategy, the Company may make acquisitions of, or
significant investments in, complementary companies, products or technologies.
Any such future acquisitions would be accompanied by the risks commonly
encountered in acquisitions of companies. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired technology and
rights into the Company's products and services, additional expense associated
with amortization of acquired intangible assets, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and customers as a result of any integration of new management
personnel. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
acquisitions.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company anticipates that it will need to raise additional funds in the near
future to fund its operations, as well as to develop new or enhanced services,
to respond to competitive pressures or to acquire complementary businesses or
technologies. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will be
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
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of Stockholders (the "Meeting")
on June 20, 1997. Proxies were solicited for the meeting.
(b) The matters described below were voted on at the Meeting. Of the
8,744,185 shares of Common Stock eligible to vote at the Meeting,
8,042,334 shares were actually voted and the results of the votes
taken at such meeting were as follows:
1. Of the 8,042,334 shares voted, 8,037,244 shares voted for the
re-election of Lee H. Stein, Pamela H. Patsley and Scott J.
Loftesness, the nominees for Director, and 5,090 shares voted
against the election of any these nominees for director. Each
Director will serve for a three year term, expiring in 2000 or
until successors are duly elected and designated.
2. Of the 8,042,334 shares voted, 8,036,359 voted to ratify the
appointment of Ernst & Young, LLP as the Company's independent
accountants for the fiscal year ended December 31, 1997. There
were 3,400 votes against such ratification and 2,575 votes
abstaining.
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 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 June 30, 1997.
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: August 14, 1997 By: /s/ Lee H. Stein
------------------------------------
Lee H. Stein
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 1997 By: /s/ John M. Stachowiak
------------------------------------
John M. Stachowiak
Vice President, Finance &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
27
<PAGE> 1
EXHIBIT 11.1
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss (3,962,156) (1,630,909) (7,435,729) (2,505,834)
Common Stock 8,811,514 4,329,392 8,803,463 4,307,775
Conversion of Redeemable Preferred
Stock into Common Stock --- 1,830,071 --- 1,654,754
Shares related to SAB No. 83 --- 2,217,198 --- 2,345,455
----------- ----------- ----------- -----------
Shares used in computing net
loss per share 8,811,514 8,376,661 8,803,463 8,307,984
=========== =========== =========== ===========
Net loss per share $(0.45) $(0.19) $(0.84) $(0.30)
=========== =========== =========== ===========
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,096,596
<SECURITIES> 0
<RECEIVABLES> 102,151
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,286,842
<PP&E> 3,024,300
<DEPRECIATION> 1,029,245
<TOTAL-ASSETS> 11,583,766
<CURRENT-LIABILITIES> 3,724,471
<BONDS> 0
0
0
<COMMON> 8,867
<OTHER-SE> 7,612,928
<TOTAL-LIABILITY-AND-EQUITY> 11,583,766
<SALES> 0
<TOTAL-REVENUES> 393,067
<CGS> 60,471
<TOTAL-COSTS> 4,427,544
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,000
<INCOME-PRETAX> (3,962,156)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,962,156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,962,156)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0
</TABLE>
