FIRST VIRTUAL HOLDINGS INC
10-Q, 1998-11-16
SERVICES, NEC
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<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                       ----------------------------------

                                    FORM 10-Q

             [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1998

             [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES AND EXCHANGE ACT OF 1934

               For the transition 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 other jurisdiction of         (I.R.S. Employer Identification Number)
 incorporation or organization)

                         4104 SORRENTO VALLEY BLVD. #200
                               SAN DIEGO, CA 92121
          (Address, including zip code, of principal executive offices)

                                 (619) 410-3700
              (Registrant's telephone number, including area code)

(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 - 33,061,743 shares as of September 30, 1998.




                                                                               1
<PAGE>   2



                       FIRST VIRTUAL HOLDINGS INCORPORATED
                                      INDEX

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


Item 1.   Financial Statements

          Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997       3

          Statements of Operations for the three months (unaudited) and nine months
          (unaudited) ended September 30, 1998 and 1997                                   4

          Statements of Cash Flows for the nine months (unaudited) ended September 30,
          1998 and 1997                                                                   5

          Notes to the Financial Statements                                               6

Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations                                                           7

          Factors Affecting Operating Results & Market Price of Stock                    14

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings                                                              25

Item 2.   Changes in Securities                                                          25

Item 3.   Defaults upon Senior Securities                                                25

Item 4.   Submission of Matters to a Vote of Security Holders                            25

Item 5.   Other Information                                                              25

Item 6.   Exhibits and Reports on Form 8-K                                               25


SIGNATURES                                                                               26
</TABLE>




                                                                               2
<PAGE>   3



PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                       FIRST VIRTUAL HOLDINGS INCORPORATED
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      September 30,      December 31,
                                                                          1998               1997
                                                                          ----               ----
ASSETS                                                                 (Unaudited)
<S>                                                                   <C>                <C>         
Current assets:
  Cash and cash equivalents                                           $  7,620,705       $  6,331,059
  Accounts receivable                                                       85,842            207,985
  Notes receivable                                                         100,000                 --
  Prepaid expenses and other                                               405,115            418,615
                                                                      ------------       ------------
Total current assets                                                     8,211,662          6,957,659

Furniture, equipment and software, net                                   1,285,885          1,859,048
Information technology, net                                                     --             19,845
Organization and other costs, net                                           57,277             77,630
Deposits and other                                                          42,263            133,907
                                                                      ------------       ------------
Total assets                                                          $  9,597,087       $  9,048,089
                                                                      ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable                                                    $    671,879       $  1,440,224
  Accrued compensation and related liabilities                             146,294            370,741
  Accrued interest                                                              --            289,903
  Deferred revenue                                                              --            537,790
  Current portion, due to stockholder                                      270,000          1,530,000
  Other accrued liabilities                                                364,678            601,300
                                                                      ------------       ------------
Total current liabilities                                                1,452,851          4,769,958

Amount due to stockholder                                                  125,000            162,500

Series A convertible preferred stock                                            --          4,687,500

Stockholders' equity (deficit):

  Series A convertible preferred stock, $0.001 par value;
    1,000 shares authorized; 0 and 1,000 shares outstanding
    at September 30, 1998 and December 31, 1997, respectively;
    liquidation preference of $5,000,000                                        --                  1

  Preferred stock, 5,000,000 shares authorized, none
    outstanding at September 30, 1998 and December 31, 1997                     --                 --

  Common stock, $0.001 par value; 40,000,000 shares authorized,
    33,061,743 and 8,903,855 shares issued and outstanding at
    September 30, 1998 and December 31, 1997, respectively                  33,062              8,904
  Additional paid-in-capital                                            46,034,536         26,300,228
  Warrants                                                               1,080,828          3,017,115
  Deferred compensation                                                    (38,093)          (155,235)
  Accumulated deficit                                                  (39,091,097)       (29,742,882)
                                                                      ------------       ------------
Total stockholders' equity (deficit)                                     8,019,236           (571,869)
                                                                      ------------       ------------
Total liabilities and stockholders' equity (deficit)                  $  9,597,087       $  9,048,089
                                                                      ============       ============
</TABLE>

See accompanying notes.




                                                                               3
<PAGE>   4

                       FIRST VIRTUAL HOLDINGS INCORPORATED
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                     THREE MONTHS ENDED SEPTEMBER 30,         NINE MONTHS ENDED SEPTEMBER 30,
                                     --------------------------------         -------------------------------
                                           1998           1997                     1998            1997
                                           ----           ----                     ----            ----
<S>                                     <C>            <C>                      <C>            <C>         
Revenues                                $   346,632    $   325,921              $   844,926    $  1,111,905

Cost of revenues                             10,193         45,677                   44,830         217,662
                                        -----------    -----------              -----------    ------------
Gross profit                                336,439        280,244                  800,096         894,243

Operating expenses:
  Marketing and sales                       209,993      1,843,868                1,423,492       4,015,239
  Research, development
    and engineering                         996,078      1,817,490                3,892,823       4,876,311
  General and administrative                550,833        962,919                2,781,554       3,536,161
  Restructuring charge                           --             --                  812,166              --
  Depreciation and amortization             305,282        274,868                1,145,357         821,901
                                        -----------    -----------              -----------    ------------
Total operating expenses                  2,062,186      4,899,145               10,055,392      13,249,612
                                        -----------    -----------              -----------    ------------
Loss from operations                     (1,725,747)    (4,618,901)              (9,255,296)    (12,355,369)
Interest income                              72,603        103,256                  128,364         452,939
Interest expense                             (3,897)       (21,562)                 (68,155)        (70,506)
                                        -----------    -----------              -----------    ------------
Net loss                                 (1,657,041)    (4,537,207)              (9,195,087)    (11,972,936)
Preferred stock dividend                         --             --                 (153,126)             --
                                        -----------    -----------              -----------    ------------
Net loss applicable to
  common shares                         $(1,657,041)   $(4,537,207)             $(9,348,213)   $(11,972,936)

Net loss per share, basic
  and diluted                           $     (0.05)   $     (0.51)             $     (0.52)   $      (1.36)

Shares used in per share
  computation, basic and
  diluted                                31,744,216      8,876,032               18,125,810       8,827,919
</TABLE>

See accompanying notes.




                                                                               4
<PAGE>   5



                       FIRST VIRTUAL HOLDINGS INCORPORATED
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED SEPTEMBER 30,
                                                           -------------------------------
                                                               1998              1997
                                                               ----              ----
<S>                                                         <C>              <C>           
OPERATING ACTIVITIES

Net loss                                                    $(9,195,087)     $(11,972,936)
Adjustments to reconcile net loss to net
  cash used in operating activities:

  Depreciation and amortization                               1,145,357           821,901
  Loss on disposal of assets                                     33,943                --
  Common stock issued for services                               46,745                --
  Compensation expense recognized for stock options             446,082            52,138
  Changes in operating assets and liabilities:
    Accounts receivable                                         122,143          (231,239)
    Notes receivable                                           (100,000)               --
    Prepaid expenses and other                                  211,987           (36,751)
    Deposits and other                                         (106,842)          (95,624)
    Accounts payable                                           (768,345)         (534,899)
    Accrued compensation and related
      liabilities                                              (224,447)         (118,595)
    Deferred revenue                                           (537,790)          606,234
    Accrued interest                                           (289,903)           69,563
    Amount paid to stockholder                                  (97,500)         (112,500) 
    Other accrued liabilities                                  (236,616)           12,369
                                                            -----------      ------------
Net cash used in operating activities                        (9,550,273)      (11,540,339)

INVESTING ACTIVITIES

Additions to furniture and equipment                           (297,760)         (581,208)
Proceeds from sale of fixed assets                               14,733                --
Maturity of short-term investment                                    --           200,000
                                                            -----------      ------------
Net cash used in investing activities                          (283,027)         (381,208)

FINANCING ACTIVITIES

Proceeds from issuance of common stock, net                  11,114,423            58,709
Proceeds from the issuance of warrants                            8,523            50,000
Proceeds from SOFTBANK loan                                   1,411,578                --
Repayment of SOFTBANK loan                                   (1,411,578)               --
                                                            -----------      ------------
Net cash provided by financing activities                    11,122,946           108,709
                                                            -----------      ------------

Net increase/(decrease) in cash and cash equivalents          1,289,646       (11,812,838)

Cash and cash equivalents at the beginning
  of period                                                   6,331,059        17,127,971
                                                            -----------      ------------
Cash and cash equivalents at the end
  of period                                                 $ 7,620,705      $  5,315,133
                                                            ===========      ============
</TABLE>

See accompanying notes.




                                                                               5
<PAGE>   6


                       FIRST VIRTUAL HOLDINGS INCORPORATED
                        NOTES TO THE FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.  BASIS OF PRESENTATION

The interim unaudited financial statements included herein have been prepared by
First Virtual Holdings Incorporated ("First Virtual" or the "Company"), pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Accordingly, they do not include all the information and disclosures
required by generally accepted accounting principles for complete financial
statements. These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1997
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
September 30, 1998 and the results of operations and the changes in cash flows
for the three month and nine month periods ended September 30, 1998 and 1997
have been included. The results of operations for the interim period ended
September 30, 1998 are not necessarily indicative of the results which may be
reported for any other interim period or for the year ended December 31, 1998.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
has adopted this Statement effective January 1, 1998, and has no components of
comprehensive income to report.

2.  SOFTBANK INVESTMENT

On September 10, 1998, SOFTBANK Holdings Inc. and SOFTBANK Technology Ventures
IV, L.P. (together "SOFTBANK") purchased 1,641,026 shares of the Company's
common stock at $2 7/16 per share for $4 million. The price per share was based
on the closing price of the Company's stock as reported by the Nasdaq National
Market on September 4, 1998. This investment by SOFTBANK increases its ownership
of the Company's common stock to 64% of all shares outstanding as of September
30, 1998.

3.  PENDING ACQUISITION OF EMAIL PUBLISHING, INC.

On August 20, 1998, First Virtual signed a definitive agreement to acquire Email
Publishing, Inc. (EPub). EPub is a leading provider of message delivery and
email subscription services to publishers and other corporate customers. The
transaction, which is subject to satisfaction of certain conditions including
approval by the stockholders of First Virtual and EPub, will involve the
exchange of approximately six million common shares of First Virtual.

4.  PENDING ACQUISITION OF DISTRIBUTED BITS L.L.C.

On September 22, 1998, First Virtual signed a non-binding letter of intent to
acquire Distributed Bits L.L.C. ("Distributed Bits"). Distributed Bits is a
Chicago-based developer of inbound e-mail management products. The transaction,
if consummated pursuant to the terms set forth in the letter of intent, will
involve the exchange of First Virtual common stock and warrants for all equity
interests in Distributed Bits. The transaction is contingent upon various
factors, including the negotiation of the definitive agreement mutually
satisfactory to the parties, completion by First Virtual of its financial,
technical and legal due diligence, approval of the transaction by the First
Virtual Board and approval of the transaction by members of Distributed Bits.




                                                                               6
<PAGE>   7



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 within the meaning of Section 27 A of the Securities
Act and Section 21 E of the Exchange Act.. Actual results could differ
materially from those projected 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 14. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.

First Virtual's objective is to develop and provide market-leading interactive
messaging services for electronic commerce that integrate intelligent messaging
and interactive transactional advertisements.

The Company completed development of its first release of the Interactive
Messaging Platform (IMP) and started commercial use of the IMP in July 1998. The
IMP is a service that enables the development and deployment of interactive
multimedia e-mail messaging solutions. The IMP has been designed to be an
extensible and scaleable infrastructure for online interactive communications,
payment and data warehousing. The IMP has also been designed to allow for
intelligent e-mail communications to take place between companies and their
customers incorporating sophisticated targeted offer matching capabilities and
real time integration with legacy systems. It integrates customer service and
sales and marketing functions into interactive, round trip transactional e-mail
messages that include the ability to integrate systems for secure payments and
the use of highly graphical, animated and interactive elements. Key
differentiating core IMP features include:

o     Two-way messaging with intelligent response handling which allows
      transactions within e-mails

o     Presentation optimization which allows end users to receive the richest
      and most robust form of e-mail

o     Web-based Graphical User Interface allows clients to control from their
      desktops all aspects of messaging including message production,
      segmentation, response handling and scheduling

o     Efficient outbound transmission using heuristics gathered since 1994

In December 1997, the Company introduced the VirtualADz Software Development Kit
("Virtual ADz SDK"). The VirtualADz SDK uses the Java programming language to
create a cross-platform multimedia environment for developing stimulating,
interactive advertisements embedded within banner ads and is designed to allow
consumers to initiate the purchase and payment and arrange for the delivery of a
product being advertised without leaving the Web page on which the advertisement
appears. The VirtualADz SDK is also being designed to be embedded within an
e-mail message, allowing targeted interactive advertisements to be delivered
directly to the customers. The Company's VirtualADz SDK application is designed
to provide an interactive and engaging message by combining sound and motion,
which is activated by the consumer as the cursor is moved near or on the
advertisement.

On August 17, 1998, the Company ceased its operations of the First Virtual
Internet Payment System ("FVIPS") and encouraged its merchants and consumers to
migrate to alternative Internet payment systems.

On August 20, 1998, First Virtual, Email Publishing, Inc., a Delaware
corporation ("EPub"), EPub Holdings, Inc., a Delaware corporation and
wholly-owned subsidiary of First Virtual ("Sub") and certain other parties
entered into an Agreement and Plan of Reorganization (the "Reorganization
Agreement"). The Reorganization Agreement calls for First Virtual to acquire
EPub by means of a merger of the Sub with and into EPub. As a result of the
transaction, EPub will become a wholly-owned subsidiary of First Virtual and all
outstanding shares of stock of EPub and rights to acquire such shares will be
converted into an aggregate of 6,000,000 shares of the common stock of First
Virtual. Upon the acquisition of EPub, First Virtual intends to integrate EPub
into the Company's existing management structure and operations and to operate
the combined entities under a single new entity, MessageMedia, Inc. The
transaction is contingent on various factors, including approval of the
transaction by stockholders of First Virtual and EPub.



                                                                               7
<PAGE>   8

EPub has incurred net operating losses since its inception, and , as a result of
the anticipated investment First Virtual plans to continue to make in expanding
EPub's business, First Virtual expects that the acquisition of EPub will
increase the Company's net operating losses by approximately $85,000 per month.
The Company does not anticipate a significant increase in capital expenditures
as a result of acquiring EPub.

First Virtual has incurred net operating losses in each quarter since inception.
As of September 30, 1998, First Virtual had an accumulated deficit of
approximately $39.1 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 the Company introduces the
IMP and explores opportunities to merge with or acquire complementary businesses
and technologies, the Company expects to continue to incur significant operating
losses for the foreseeable future.

RESULTS OF OPERATIONS

Revenues

The Company has historically generated revenues from the IMP, FVIPS, consulting
and interactive advertising development. On August 17, 1998, the company ceased
the FVIPS operations. Also, in December 1997, 1 Virtual Place, the Company's
on-line shopping mall, was closed and merchandising sales ceased. Revenue was
earned as detailed in the table below:

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED SEPTEMBER 30,    NINE MONTHS ENDED SEPTEMBER 30,
                                        --------------------------------    -------------------------------
                                               1998         1997                  1998              1997
                                               ----         ----                  ----              ----
<S>                                          <C>           <C>                  <C>           <C>       
Interactive Messaging Platform               $ 56,000      $      --            $ 81,700      $       --
Consulting                                    100,000         36,250             220,000         257,500
Interactive advertising development                --             --                  --         115,000
First Virtual Internet Payment System         190,632        285,366             543,226         695,530
Merchandising                                      --          4,305                  --          43,875
                                             --------       --------            --------      ----------
Total revenues                               $346,632       $325,921            $844,926      $1,111,905
                                             ========       ========            ========      ==========
</TABLE>

For the three months ended September 30, 1998, revenues were $346,632 as
compared to $325,921 for the three months ended September 30, 1997. Starting in
the second quarter 1998, the Company began to recognize both IMP revenue and IMP
related consulting revenue as the IMP became ready for commercial use. Both
consulting revenue and IMP revenue improved slightly for the three months ended
September 30, 1998 as compared to the three months ended June 30, 1998. Revenues
from the FVIPS during the most recent quarter were primarily due to a contract
coming to completion allowing First Virtual to recognize approximately $185,000
of revenue in July 1998. The Company ceased it operations of the FVIPS on August
17, 1998 and has encouraged its merchants and consumers to migrate to
alternative Internet payment systems.

For the nine months ended September 30, 1998, revenues were $844,926 as compared
to $1,111,905 for the nine months ended September 30, 1997. Revenues from the
FVIPS, interactive advertising development and merchandising decreased while IMP
revenue increased. This change in the revenue mix is a direct result of the
Company changing its focus to developing and implementing its IMP services.
Consulting revenue remained consistent for the nine months ending September 1998
and 1997. The Company ceased merchandising operations in December 1997 and its
FVIPS operations in August 1998.



                                                                               8
<PAGE>   9



Cost of Revenues

The Company's cost of revenues from the IMP, interactive advertising
development, FVIPS and merchandising were incurred as detailed in the table
below:

<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED SEPTEMBER 30,    NINE MONTHS ENDED SEPTEMBER 30,
                                       --------------------------------    -------------------------------
                                              1998           1997                1998           1997
                                              ----           ----                ----           ----
<S>                                          <C>            <C>                 <C>           <C>     
Interactive Messaging Platform               $ 6,671        $    --             $ 6,671       $     --
Interactive advertising development               --             --                  --         46,000
First Virtual Internet Payment System          3,522         41,679              38,159        130,497
Merchandising                                     --          3,998                  --         41,165
                                             -------        -------             -------       --------
Total revenues                               $10,193        $45,677             $44,830       $217,662
                                             =======        =======             =======       ========
</TABLE>

For the three months ended September 30, 1998, the cost of revenues related to
the FVIPS decreased to 5.3% of related revenues as compared with 14.6% for the
three months ended September 30, 1997. This decrease is primarily attributable
to the Company incurring no cost of revenues for the $185,000 of revenue from a
FVIPS contract that came to completion in July 1998. Cost of services related to
the IMP were approximately 11.9% for the three months ended September 30, 1998.
The Company is still in the early stages of commercial use of its IMP and may
incur higher costs of services as the IMP process matures. In December 1997, the
Company closed its merchandising segment and suspended selling interactive
advertising development products, while focusing its efforts primarily on the
IMP and the VirtualADz SDK.

For the nine months ended September 30, 1998, the cost of revenues related to
the FVIPS decreased to 7.0% of related revenues as compared with 18.8% for the
nine months ended September 30, 1997. For the nine months ended September 30,
1998, the Company incurred the same IMP cost of services as for the three months
ended September 30, 1998. This is due to no IMP cost of services being incurred
for the six months ended June 30, 1998. Such costs were expensed as development
costs as the IMP was still in the development stage and not yet ready for
commercial use. The IMP was commercially released on July 2, 1998.

Operating Expenses

Standard operating expenses consist of marketing and sales, research,
development and engineering, and general and administrative expenses. In
addition to standard operating expenses, the Company also incurred restructuring
expenses in the second quarter of 1998. The Company expects operating expenses
to continue to be substantial as development and enhancement of technological
capabilities associated with the IMP continues. The Company also anticipates
that expenses necessary for the introduction and promotion of such products will
be substantial. In addition, the Company may incur operational expenses related
to opportunities to merge with or acquire complementary businesses and
technologies.

Marketing and sales expenses. Marketing and sales expenses, which include
salaries and wages, consulting fees, advertising, trade show expenses, travel
and other marketing expenses, decreased to $209,993 for the three months ended
September 30, 1998, as compared to $1.8 million for the three months ended
September 30, 1997. This decrease is primarily due to the elimination of 24
employees in the marketing staff, resulting in a decrease in salaries, wages and
payroll taxes of approximately $450,000, a decrease in consulting fees of
approximately $485,000 due to reductions in marketing research, a decrease in
promotional expenses of approximately $490,000 from elimination of sales efforts
related to the payment system, a decrease in recruiting and relocation related
expenses of approximately $95,000 as hiring new employees slowed and a general
decrease in spending of approximately $70,000 from lower headcount. The Company
expects that marketing and sales expenses will increase in the future as the
Company implements its sales and marketing plan to market the IMP and integrate
EPub and other potential acquisitions.



                                                                               9
<PAGE>   10

For the nine months ended September 30, 1998, marketing and sales expenses
decreased to $1.4 million as compared to $4.0 million for the nine months ended
September 30, 1997. This decrease is primarily due to the elimination of
employees from the marketing staff resulting in a decrease in salaries, wages
and payroll taxes of approximately $1.2 million, a decrease in consulting fees
of approximately $545,000 due to reductions in marketing research, a decrease in
promotional expenses of approximately $360,000 from elimination of sales efforts
related to the payment system, a decrease in recruiting and relocation expenses
of approximately $160,000 as hiring new employees slowed, and decreases in
travel related expenses of approximately $90,000 and a general decrease in
spending of approximately $245,000 from lower headcount.

Research, development and engineering expenses. Research, development and
engineering expenses, which include salaries and wages and consulting fees to
support the development, enhancement and maintenance of the Company's products
and services, decreased to $1.0 million for the three months ended September 30,
1998, as compared to $1.8 million for the three months ended September 30, 1997.
This decrease is primarily due to the elimination of 20 employees in the
research, development and engineering staff, resulting in a decrease in
salaries, wages and payroll taxes of approximately $570,000, a decrease in
travel of approximately $35,000 and a general decrease in spending of
approximately $195,000 from lower headcount. To date, all of the Company's
software development costs have been expensed as incurred. The Company
anticipates that research, development and engineering expenses will increase in
future periods as the Company enhances its IMP and integrates EPub `s messaging
technology with the IMP.

For the nine months ended September 30, 1998, research, development and
engineering expenses were $3.9 million as compared to $4.9 million for the nine
months ended September 30, 1997. This decrease is primarily due to the
elimination of employees in the research, development and engineering staff,
resulting in a decrease in salaries, wages and payroll taxes of approximately
$580,000, and decreases in travel related expenses of approximately $85,000 and
a general decrease in spending of approximately $335,000 from lower headcount.

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. For the three months ended September 30, 1998, general and
administrative expenses decreased to $550,833 as compared to $962,919 for the
three months ended September 30, 1997. This decrease is primarily due to the
elimination of 12 employees from the general and administrative staff, resulting
in a decrease in salaries, wages and payroll taxes of approximately $240,000, a
decrease in promotional expenses of approximately $90,000 from less public
relations and investor relations activities and a general reduction in spending
of approximately $82,000 from lower headcount.

For the nine months ended September 30, 1998, general and administrative
expenses decreased to $2.8 million as compared to $3.5 million for the nine
months ended September 30, 1997. This decrease is primarily due to the
elimination of employees from the general and administrative staff resulting in
a decrease in salaries, wages and payroll taxes of approximately $680,000, a
decrease in promotional expenses of approximately $355,000 from less public
relations and investor relations activities, offset in part, by an increase in
legal expenses of approximately $230,000 for litigation and Nasdaq related
issues and an increase in consulting expenses of approximately $105,000 for
merger and acquisition related research and analysis.

Restructuring expenses. In the second quarter 1998, the Company took steps to
focus its efforts on the IMP. In doing so, the Company incurred restructuring
expenses of approximately $812,166, of which approximately $545,000 was for
severance compensation packages related to a reduction in staff and consultants,
approximately $170,000 of expenses related to the shut down of the FVIPS and
approximately $95,000 of expenses related to moving the Company's corporate
offices.

The Company expects to experience significant fluctuations in its future
quarterly operating results.



                                                                              10
<PAGE>   11

These fluctuations will be due to several factors, many of which are beyond the
control of the Company, including, among others, market response to the
Company's IMP; difficulties encountered in the development or deployment of
products or services, including interactive messaging; difficulties encountered
in acquiring and/or merging with other companies or technologies, including in
particular any difficulties in integrating the technology and operations of Epub
and/or Distributed Bits; market acceptance of Internet commerce in general and
the IMP concept in particular; fluctuating market demand for the Company's
products and services; the degree of acceptance of the Internet as an
advertising and merchandising medium; 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 advertising,
messaging, and consulting services, are subject to change as the Company
introduces the IMP and assesses its marketing strategy and competitive position.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1998, the Company had $7.6 million in cash and cash
equivalents. On September 10, 1998, SOFTBANK Holdings Inc. and SOFTBANK
Technology Ventures IV, L.P. (together "SOFTBANK") purchased 1,641,026 shares of
the Company's common stock at $2 7/16 per share for $4 million. The price per
share was based on the closing price of the Company's stock as reported by the
Nasdaq National Market on September 4, 1998. This investment by SOFTBANK
increases its ownership of the Company's common stock to 64% of all shares
outstanding as of September 30, 1998.

First Virtual believes that existing cash resources will be sufficient to
support First Virtual's currently anticipated working capital and capital
expenditure requirements through the end of 1998. However, it appears that First
Virtual 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 the
first quarter 1999, to ensure that First Virtual remains in compliance with the
requirements of the Nasdaq National Market for continued listing. As of this
filing, First Virtual has initiated efforts to raise additional capital. The
timing and amount of First Virtual's capital requirements will depend on a
number of factors, including demand for First Virtual'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 First
Virtual may wish to acquire. If additional funds are raised through the issuance
of equity securities, the percentage ownership of First Virtual's stockholders
will be diluted and such equities may have rights, preferences or privileges
senior to those of the holders of First Virtual's common stock. There can be no
assurance that additional financing will be available when needed or that, if
available, will include terms favorable to First Virtual or its stockholders. If
adequate funds are not available on acceptable terms, First Virtual may be
unable to develop or enhance its products or services, take advantage of
opportunities or respond to competition and the Nasdaq National Market may
continue to discontinue the listing of First Virtual's common stock.

During the nine months ended September 30, 1998, First Virtual significantly
reduced its operating expenditures. These cost reduction efforts have been
coupled with the planned reduction of capital expenditures. Management continues
to pursue opportunities to increase its revenues and believes that the market
for the IMP has recently shown signs of significant expansion. Management
believes that these efforts and its continuing efforts to raise additional
capital through equity placements with existing stockholders, their affiliates
or strategic partners should allow First Virtual to continue operations for the
next twelve months. If near term revenues do not increase or if First Virtual is
unable to raise additional equity, management would be required to further
reduce its expenditures on research and development and general and
administrative activities. These reductions could significantly hamper First
Virtual's ability to develop the IMP.



                                                                              11
<PAGE>   12

Operating activities used cash of $9.4 million during the nine months ended
September 30, 1998. Net cash used during this period was primarily to fund the
net operating loss of $7.5 million (excluding depreciation, amortization and
compensation expense related to the issuance of stock), reduce accounts payable
and other accrued liabilities by approximately $1.5 million, pay down amounts
due to stockholders by approximately $98,000, reduce deferred revenue by
approximately $538,000 and increase deposits by approximately $105,000, offset
by decreases in prepaid expenses of approximately $210,000 and collection of
accounts receivable of approximately $120,000.

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 $297,760 and $581,208 for the nine months ended
September 30, 1998 and 1997, respectively. Furniture and equipment are stated at
cost and depreciated over three to five years using the straight line method.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately 1 1/4 years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although First Virtual believes that the IMP is Year 2000 compliant,
there can be no assurance that coding errors or other defects will not be
discovered in the near future. While the IMP was designed to be Year 2000
compliant, the Company has not yet undertaken a systematic effort to identify
any Year 2000 compliance problems in the various components of the IMP. The
Company believes that compliance testing will require approximately 200-300
man-hours and intends to complete such testing in 1999.

Several collateral software and communications systems provided by third parties
are required for the operation of the IMP, any of which may contain coding which
is not yet Year 2000 compliant. These collateral systems include server software
used to operate First Virtual's network servers, software controlling routers,
switches and other components of First Virtual's data network, disk management
software used to control the Company's data disk arrays, firewall, security,
monitoring and back-up software, as well as desktop PC applications software. In
each case, First Virtual employs widely available software applications from
leading third party vendors, and expects that such vendors will provide any
required upgrades or modifications in a timely fashion. However, any failure of
third party software suppliers to provide Year 2000 compliant versions of the
software used by the Company could result in a temporary disruption of the IMP
services or otherwise disrupt the Company's operations.

Year 2000 compliance problems could also undermine the general infrastructure
necessary to support First Virtual's operations. For instance, the Company
depends on third party Internet Service Providers (ISPs) for connectivity to the
Internet and to customers' information systems. Any interruption of service from
the Company's ISPs could result in a temporary interruption of First Virtual's
interactive messaging and other services. The Company has attempted to address
this risk by obtaining redundant service capacity from multiple ISPs. In
addition, First Virtual relies on a third party data center to house certain of
its servers and communications systems. Any interruption in the security,
access, monitoring or power systems at the third party data center could result
in an interruption in the Company's services. Moreover, the effects of Year 2000
compliance deficiencies on the integrity and stability of the Internet are
difficult to predict. A significant disruption in the ability of businesses and
consumers to reliably access the Internet would have an adverse effect on demand
for the Company's services and adversely impact First Virtual's business,
financial condition and results of operations.

Failure of First Virtual's customers to ensure that their software systems are
Year 2000 compliant could also adversely affect the Company's operations. The
IMP is designed to interface with customer databases and communications systems
in order to retrieve relevant information from customers' electronic commerce



                                                                              12
<PAGE>   13

systems or customer databases and in order to allow customers to independently
control certain features of the service including content of transmitted
messages. First Virtual cannot assess or control the degree of Year 2000
compliance in its customers' information systems. Disruptions in the information
systems of significant customers could temporarily prevent such customers from
accessing or using the IMP, which could materially affect the Company's
operating results. In order to address the risk of disruptions in customer
information systems, First Virtual has designed the IMP to include redundant
manual control features which can be used by such customers. Nevertheless,
certain customers may elect to discontinue use of the Company's interactive
messaging services until such customers' internal information technology
problems have been alleviated, which could adversely affect First Virtual's
business, financial condition and results of operations. Moreover, the spending
patterns of current or potential customers may be affected by Year 2000 issues
as companies expend significant resources to correct or update their systems for
Year 2000 compliance. These expenditures may result in reduced funds available
for such customers to pay for First Virtual's services, which could have a
material adverse affect on the Company's business, financial condition and
results of operations.








                                                                              13
<PAGE>   14



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 September 30, 1998, the Company had an
accumulated deficit of approximately $39.1 million. To date, the Company has not
generated significant revenues. There can be no assurance that the Company's
revenues will increase in the future. In addition, as a result of the
anticipated significant investment that the Company is making and plans to
continue to make in its systems, sales, marketing, research, development and
engineering 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 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. 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, because of First Virtual's history of operating losses
and, as of December 31, 1997, insufficient working capital to finance First
Virtual's planned operations through 1998, First Virtual independent auditors in
their report on First Virtual's 1997 financial statements noted that such
conditions raised substantial doubt about First Virtual's ability to continue as
a going concern.

First Virtual commenced operations in March 1994 and, accordingly, First Virtual
has a limited operating history upon which to base an evaluation of its business
and prospects. To date, substantially all of the Company's revenues have been
attributable to the receipt of registration fees from consumers and merchants,
transaction processing fees, merchandising fees, sales of VirtualTAGs and
consulting fees associated with FVIPS. The Company ceased its FVIPS operations
on August 17, 1998 and has encouraged its merchants and consumers to migrate to
alternative Internet payment systems. First Virtual has decided to dedicate all
its resources to developing and implementing its IMP and related services and
technologies. The Company's future financial performance will depend
significantly on the successful introduction and customer acceptance of the IMP
and other new and enhanced products and services. Demand for new product
categories such as the IMP is inherently difficult to predict, and the Company
believes that its prior experience in developing and operating FVIPS does not
offer a meaningful basis to assess the future prospects of the IMP and related
products and services. Accordingly, there is no assurance that a significant
market for the IMP or for any other technologies or services of the Company will
develop or that the Company will be successful in marketing the IMP or any new
or enhanced products or services.

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.
On August 20, 1998, First Virtual announced that it signed a definitive merger
agreement with Email Publishing Inc. This and any such future acquisition 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 will be successful in overcoming these risks or any other problems
encountered in connection with such acquisitions.



                                                                              14
<PAGE>   15

On July 28, 1998, First Virtual entered into a new non-binding letter of intent
with Distributed Bits with respect to the potential acquisition by First Virtual
of Distributed Bits. In addition to the integration risks described above, there
can be no assurances that such proposed acquisition of Distributed Bits or other
potential acquisitions by First Virtual will be consummated. Such potential
acquisitions are generally contingent upon numerous factors, including the
negotiation of a definitive agreement mutually satisfactorily to the parties,
completion by First Virtual of its financial, technical and legal due diligence,
approval of the transaction by the First Virtual Board and approval of the
transaction by the acquisition target, as well as other customary approvals and
matters.

UNCERTAINTY RELATING TO INTEGRATION

The successful combination of First Virtual and EPub, including the successful
operation of EPub as a subsidiary of First Virtual, will require substantial
effort from each company. The diversion of the attention of management and any
difficulties encountered in the transition process could have an adverse impact
on First Virtual's ability to realize the anticipated benefit of the merging the
two entities. The successful combination of the two companies will also require
coordination of the companies' research and development and sales and marketing
efforts. In addition, the process of combining the two organizations could cause
the interruption of, or a loss of momentum in First Virtual's and/or EPub's
activities. There can be no assurance that First Virtual will be able to retain
EPub's key management, technical, sales and customer support personnel, or that
First Virtual will realize the anticipated benefits of merging the two entities.

EFFECT OF EPUB ACQUISITION ON CUSTOMERS AND PARTNERS

Certain of EPub's existing customers or strategic partners may view themselves
as competitors of First Virtual and therefore determine that the acquisition is
competitively disadvantageous to them. As a consequence, EPub's relationship
with these customers or strategic partners could be adversely affected. In
addition, First Virtual's relationship with certain of its suppliers that
compete with EPub may be adversely affected by the acquisition.

NEED FOR ADDITIONAL CAPITAL

First Virtual will need to raise additional funds 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 adequate funds cannot
be obtained or are not available on acceptable terms, First Virtual 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 First Virtual's business, financial condition
and results of operations. Also, as additional funds are raised through the
issuance of equity securities, the percentage ownership of the stockholders of
First Virtual will be further reduced, stockholders may experience significant
additional dilution and such equity securities may also have rights, preferences
or privileges senior to those of the holders of First Virtual common stock.
Although First Virtual believes that it has sufficient capital to fund its
operations through the end of 1998, First Virtual may elect to raise funds
through a private placement of capital stock before the end of the first quarter
of 1999.

UNCERTAINTY OF NASDAQ NATIONAL MARKET LISTING

First Virtual anticipates that it will need to raise additional funds from time
to time to ensure that First Virtual remains in compliance with the requirements
of the Nasdaq National Market for continued listing. If the Nasdaq in the future
decides to discontinue the listing of First Virtual common stock, such actions
by the Nasdaq would adversely affect the liquidity and market price of First
Virtual common stock.

If First Virtual should continue to experience losses from operations, it may be
unable to maintain the standards for continued quotation on the Nasdaq National
Market, and the shares of First Virtual common stock could be subject to removal
from the Nasdaq National Market. Trading, if any, of the First Virtual



                                                                              15
<PAGE>   16

common stock would therefore be conducted on the Nasdaq SmallCap Market, which
is a significantly less liquid market than the Nasdaq National Market. As a
result, a stockholder could find it more difficult to dispose of the First
Virtual common stock. Nasdaq has recently promulgated new rules which make
continued listing of companies on both the Nasdaq National Market and the Nasdaq
SmallCap Market more difficult and has significantly increased its enforcement
efforts with regard to standards for such listing. In addition, if the First
Virtual common stock were removed from the Nasdaq National Market and does not
qualify for listing on the Nasdaq SmallCap Market, the First Virtual common
stock could be subject to the so-called "penny stock" rules that impose
additional sales practice and marketing requirements on broker-dealers who sell
and/or make a market in such securities. Consequently, failure to qualify for
listing on, or removal from, the Nasdaq SmallCap Market, if it were to occur,
could affect the ability or willingness of broker-dealers to sell and/or make a
market in the First Virtual common stock and the ability of First Virtual
stockholders to sell their securities in the secondary market. In addition, if
the market price of the First Virtual common stock is less than $5.00 per share,
First Virtual may become subject to certain "penny stock" rules even if still
quoted on the Nasdaq SmallCap Market. Such rules may further limit the market
liquidity of the First Virtual common stock and the ability of First Virtual
stockholders to sell such First Virtual common stock in the secondary market.
Furthermore, under such circumstances, if First Virtual was deemed to be an
issuer of "penny stock", forward-looking statements of First Virtual would not
be subject to Section 27 A of the Securities Act and Section 21 E of the
Exchange Act.

ANTICIPATED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

As a result of the early stage of development of Internet commerce, the IMP and
the Company's limited operating history, the Company's revenue expectations are
based almost entirely on internal estimates of future demand and not on actual
experience. In particular, it is difficult to forecast revenue expectations for
the IMP, which was released for commercial use in July 1998. 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. There can be no assurance that revenues
associated with use of the IMP or Internet related consulting will increase
significantly, or at all. Any material shortfall of demand for the Company's
products and services would have a material adverse effect on the Company's
business and financial condition and could cause significant fluctuations in the
Company's results of operations.

The Company expects its future operating results over both the short and the
long term will be subject to annual and quarterly fluctuations due to several
factors, many of which are beyond the control of the Company, including, among
others, market response to the Company's IMP; difficulties encountered in the
development or deployment of products or services, including interactive
messaging; difficulties encountered in acquiring and/or merging with other
companies or technologies: market acceptance of Internet commerce in general and
the IMP concept in particular; fluctuating market demand for the Company's
products and services; the degree of acceptance of the Internet as an
advertising and merchandising medium; 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 advertising,
messaging, and consulting services are subject to change as the Company
introduces the IMP and assesses its marketing strategy and competitive position.
The Company believes that period-to-period comparisons of its operating results
are not meaningful and should not be relied upon as any indication of future
performance. Due to the foregoing factors, among others, it is probable and
possible that the Company's future quarterly or annual operating results from
time to time will not meet the



                                                                              16
<PAGE>   17

expectations of market analysts or investors, which may have a material adverse
effect on the price of the Company's common stock.

RISKS RELATED TO PRODUCT TRANSITION;  RISK OF CAPACITY CONSTRAINTS

The Company has derived substantially all of it revenues to date from FVIPS,
VirtualTAGs and related services. In the second quarter of fiscal 1997, the
Company determined to refocus it resources on developing and commercializing the
IMP. Since the IMP has just recently been completed, and since the IMP has only
been implemented on a limited basis, no assurance can be given that the IMP will
be successful or that the cost of future enhancements will not exceed future
revenues generated by the IMP. In addition, there is no assurance that the
Company's current server capacity and communications systems will be adequate to
support high volumes of IMP usage. A key element of the Company's strategy is to
generate a high volume of messages and associated transactions through the IMP.
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 messages processed
by the Company's systems could strain the capacity of the Company's software or
hardware, which could lead to slower response time or system failures. Any
additional investment in enhancing the capacity of the Company's server and
communications systems may adversely affect the Company's financial condition
and operating results and may result in service delays and interruptions that
would adversely impact the Company's revenues and reputation. In the event that
the IMP is not successfully introduced and marketed and revenues from the IMP
are not sufficient to return the cost of its operation and future enhancements,
the Company's business, financial condition and results of operation will be
materially and adversely affected.

UNCERTAIN ACCEPTANCE OF INTERACTIVE MESSAGING SERVICES

The Company's future success depends to a significant degree on the Company's
ability to successfully market the IMP and related services. The first phase of
the IMP was commercially released in early July 1998 and to date, the Company
has not secured any significant customer commitments to license, use or
implement the IMP. Moreover, market demand for new product and service
categories, such as interactive messaging, is inherently uncertain. The IMP
represents a departure from the traditional methods of marketing and information
exchange employed by the Company's target customers, who have typically relied
predominantly on advertising and direct mail to attract new customers and
maintain customer relationships. Acceptance of the IMP will require a transition
to new ways of conducting business by enterprises that have already made
substantial investments in other means of conducting commerce and exchanging
information. Accordingly, the market prospects for the IMP are highly uncertain.
Moreover, although the Company believes that the IMP will prove to be an
efficient and cost-effective marketing and relationship-management vehicle for a
broad variety of customers, there is no assurance that prospective customers
will be able to implement the IMP without substantial additional cost, or that
the cost-efficiency of the IMP will compare favorably with traditional methods
of marketing and information exchange for most customers. Failure of the IMP to
meet customers' demands for efficacy and cost-efficiency may result in a decline
in use of the Company's interactive messaging services over time and would
materially adversely affect the Company's business, financial condition and
results of operations.

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 financial institutions,
catalog companies, direct marketers and travel services, which include airlines,
rental cars agencies and hotel operators, to promote the Company's products and
services to their merchant and consumer customers. Although the Company has
established relationships with such entities in an effort to enhance the
Company's ability to penetrate the market for interactive messaging, such
relationships are nonexclusive and have not resulted in any comprehensive or
measurable increase in the Company's revenues to date. No assurance can be given
that the Company will be able to develop strategic relationships or that any
such relationship will prove to be effective in creating demand for the IMP. 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



                                                                              17
<PAGE>   18

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.

The operation of the IMP is dependent on the continued availability and
reliability of the Internet and collateral telecommunications. The Company is
substantially dependent on several third party providers of Internet
connectivity and collateral telecommunication services. There can be no
assurance that these companies will continue to provide 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 such service providers also would be likely to result in the
disruption of the operation of the IMP 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 promote the use of the IMP, 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. Acceptance and usage of the IMP is dependent on continued growth in use of
e-mail as a primary means of communications by businesses and consumers.
Increased usage of interactive messaging is also contingent on acceptance of
e-mail as a vehicle for targeted marketing of products and services and on the
ability of the Company to successfully differentiate its services from random
mass e-mailing products and services which have encountered substantial
resistance from consumers. 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.
Accordingly, it is not assured that sufficient demand for the Company's products
and services will develop to sustain the Company's business.

The Company's success is critically dependent on 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 the Internet. There can be no assurance that use of e-mail as a
primary method of communication will become widespread, that a market for the
Company's products and services will emerge or that the IMP 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.



                                                                              18
<PAGE>   19


COMPETITION

The market for products and services that enable interactive messaging
capabilities and the sale of goods and services over the Internet is intensely
competitive, and, to the extent that 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 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 interactive messaging services arena
include providers of e-mail based services such as PostX Corporation, Axciom,
ReplyNet, InfoBeat, Inc. and Cyber Data Systems, Inc. The Company also competes
with Narrative Communication's Corp. and Thinking Media Corp. in the interactive
advertising arena and with BroadVision Inc., Intellipost Corporation and E-Care
Group, Inc. for one-to-one marketing, as well as with traditional advertising,
merchandising and direct marketing companies that use more conventional means of
delivering information and marketing messages to consumers.

The Company may experience additional competition from Internet service
providers, advertising and direct marketing agencies and other large established
businesses who enter the market for either interactive messaging services.
Companies such as America Online, Microsoft Corp., IBM Corp., Integrion, AT&T,
Hewlett-Packard Company, Netscape Communications Corporation, Harte-Hanks Data
Technology, ADVO, The Interpublic Group of Companies, Inc. and Foote, Cone and
Belding, which possess large, existing customer bases, substantial financial
resources and established distribution channels, could develop, market or resell
a number of messaging services or payment alternatives. Such potential
competitors may also choose to enter the market for messaging services by
acquiring one of the Company's existing competitors or by forming strategic
alliances with such competitors, either of which may impede the Company's
ability to compete effectively.

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, if any, for the Company's products and services might be
substantially reduced, and the ability of the Company to successfully effect the
distribution of its products and the utilization of its services would be
substantially diminished. As a result of the foregoing or other factors, there
can be no assurance that the Company will compete effectively with current or
future competitors or that the competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations.

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

The Company's success depends upon its ability to develop the IMP and other new
products and services that satisfy evolving customer requirements including
potential applications for Internet advertising, merchandising and direct
marketing. The market for the Company's services is characterized by rapidly
changing technology, emerging industry standards and customer requirements that
have been changing every few months. There can be no assurance that the Company
will successfully identify new product and service opportunities and develop and
bring to market new products and services in a timely manner. Failure of the
Company, for technological or other reasons, to develop the IMP and introduce
other new



                                                                              19
<PAGE>   20

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 current 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. 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.

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 its clients, 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.

DEPENDENCE ON INCREASED USAGE AND STABILITY OF THE INTERNET; SECURITY RISKS AND
LACK OF INSURANCE

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. In particular, future growth of
e-mail as a pre-eminent method of communication depends on growing user
preference of e-mail over traditional means of communication, and on widespread
access to reliable and affordable e-mail services by individuals, businesses and
other organizations. Because usage of the Internet as a medium for on-line
exchange of information, advertising, merchandising and entertainment is a
recent phenomenon, it is difficult to predict whether the number of users drawn
to the Internet will continue to increase and whether any significant market for
the IMP or any substantial commercial use of the Internet, will develop. There
can be no assurance that Internet usage patterns, and reliance on e-mail
communication in particular, will continue to grow and will not decline as the
novelty of the medium recedes. In addition, it is uncertain whether the cost of
Internet access will decline. Failure of the Internet or e-mail communication to
achieve increased acceptance 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. Accordingly, there can be no assurance that
e-mail messaging or 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



                                                                              20
<PAGE>   21

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 becomes unable to support the demands of its users,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols or due to increased governmental
regulation. If the necessary infrastructure, complementary services or
facilities are not developed, or if the Internet does not become a viable
commercial marketplace, the Company's business, financial condition and results
of operations will be materially and adversely affected.

The Company's services are 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 centers 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 information in a
secure database server that the Company believes to be isolated from the
Internet. Although the server is protected by firewalls along with regular
Company reviews of the system for security weaknesses, there can be no assurance
that unauthorized individuals could not obtain access to this database server.
Any unauthorized penetration of the Company's servers could result in the theft
confidential customer information, e-mail addresses, and comprehensive
transaction histories. Unauthorized penetration could lead to attempts to use
such information for fraudulent purposes. Although the Company believes that the
its system's architecture should thwart attempts to use misappropriated
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 misuse confidential customer
information, exposing the Company to legal liability. Furthermore, although the
Company employs disclaimers and limitation of warranty provisions in its client
agreements to attempt to limit its liability to clients, including liability
arising out of systems failure, 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 insurance, which it deems to be adequate, 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. 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 clients, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.



                                                                              21
<PAGE>   22


MANAGEMENT OF POTENTIAL GROWTH; RISKS ASSOCIATED WITH MANAGEMENT TEAM

The rapid development necessary for the Company to exploit the market
opportunity for the IMP and its other services requires an effective planning
and management process. The Company has recently experienced significant changes
in its senior management. Lee H. Stein, the Company's Chairman and Chief
Executive Officer resigned from his position as an officer of the Company on
June 30, 1998, although Mr. Stein continues to serve on the Company's Board of
Directors and continues to serve as a consultant to the Company. In addition,
John M. Stachowiak, the Company's Vice President, Finance and Administration and
Chief Financial Officer resigned from his position as an officer of the Company
on May 15, 1998 and Dr. Carolyn Turbyfill, the Company's VP of Engineering and
Operations resigned from her position as an officer of the Company on June 15,
1998. On October 8, 1998, the Company hired Bert Klein as the Company's Chief
Financial Officer and Vice President Finance and Administration. The Company's
future success will depend to a significant extent on the Company's ability to
recruit new management talent and 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 executive team will succeed in these roles in a
timely and efficient manner. The Company has experienced some difficulty, and
will most likely continue to experience difficulty in integrating or replacing
members of a management team from a variety of industry backgrounds. It is
uncertain whether current or future members of the management team can be
successfully assimilated or replaced. The Company's failure to attract, retain
and assimilate qualified personnel, or the failure of any of the executives to
perform effectively, or the loss of any such personnel, 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.

The continued development of the IMP, the Company's efforts to acquire other
entities or other complementary technologies and the Company's efforts to grow
the Company's customer base have placed, and are expected to continue to place,
a significant strain on the Company's managerial, operational and financial
resources. 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 of the Company to effectively manage available resources 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 interactive
messaging technologies 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



                                                                              22
<PAGE>   23

copy or otherwise obtain and use products or technology that the Company
considers proprietary, and third parties may attempt to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain countries. Accordingly,
there can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology.

As the volume of Internet commerce increases, and the number of products and
service providers that support Internet commerce increases, the Company believes
that Internet commerce technology providers may become increasingly subject to
infringement claims. There can be no assurance that infringement claims will not
be filed by plaintiffs in the future. Any such claims, with or without merit,
could be time consuming, result in costly litigation, disrupt or delay the
enhancement or shipment of the Company's products and services or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable or favorable
to the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. In particular, on October 29, 1998, First Virtual
filed a complaint in the Federal District Court in San Diego, California against
InfoBeat, Inc. (the "InfoBeat Lawsuit"). First Virtual's complaint alleges
infringement of a patent held by First Virtual and seeks injunctive relief and
unspecified damages. 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 addition, patent
litigation such as the InfoBeat Lawsuit often gives rise to counterclaims by the
defendants, which could include challenges to the validity of patents held by
First Virtual. 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



                                                                              23
<PAGE>   24

the Company's business or operations. Government agencies 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.













                                                                              24
<PAGE>   25


PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        On October 29, 1998, the Company filed a complaint in the Federal
        District Court, San Diego County, against InfoBeat, Inc., a Delaware
        corporation. The complaint alleges infringement of U.S. Patent No.
        5,826,241 which is held by the Company. The complaint seeks injunctive
        relief and unspecified damages.

ITEM 2. CHANGES IN SECURITIES

        On September 10, 1998, the Company issued an aggregate of 1,641,026
        shares of its common Stock to SOFTBANK at a per share price of $2 7/16
        pursuant to Section 4(2) of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

        None

ITEM 5. OTHER INFORMATION

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (A)  Exhibit Index

             Exhibit 10.37  -  Bert Klein Employment Agreement

             Exhibit 27.1   -  Financial Data Schedule

        (B)  Form 8-K date August 20, 1998 reporting information under Item 5
             with respect to the Agreement and Plan of Organization dated August
             20, 1998 between the Company, Email Publishing Inc. and certain
             other parties.






                                                                              25
<PAGE>   26



                                   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: November 16, 1998                    By:  /s/  Keith S. Kendrick
                                            -----------------------------------
                                                 Keith S. Kendrick 
                                                 President
                                                 (Principal Executive Officer)

Dated: November 16, 1998                    By:  /s/  Bert C. Klein
                                            -----------------------------------
                                                 Bert C. Klein
                                                 Chief Financial Officer, VP
                                                 Finance and Administration
                                                 (Principal Financial and
                                                 Accounting Officer)












                                                                              26

<PAGE>   1
                                                                   EXHIBIT 10.37



October 6, 1998


Mr. Bert Klein:

This letter is to formalize our offer to you for employment with First Virtual
Holdings Incorporated as Chief Financial Officer and Vice President of Finance
and Administration which is subject to Board approval, reporting directly to the
President, or such other Officer as the Board of Directors may designate.

SALARY

The initial annual base salary shall be $150,000. Salary is payable two times
each month, and we will give you a periodic review of performance and wages on
not less than an annual basis.

We have also agreed that you will be paid a signing bonus of $30,000 that will
be paid in three payments of $10,000 on a monthly basis, with the first payment
beginning on your start date, which payment will be treated for tax purposes as
additional salary and all withholdings shall be deducted. You agree that if you
voluntarily resign from First Virtual for any reason in the first year of
employment you will reimburse First Virtual your signing bonus, paid back in
three equal monthly payments of $10,000.

BONUS

We have agreed that you will be eligible for any bonus plan offered to Officers
of the Company. Any bonus will be at the sole discretion of the Company's Board
of Directors; provided however, that for the first year of your employment, you
will be able to earn up to $40,000. After your first year of employment, the
Board of Directors of the Company shall decide whether you are entitled to any
additional bonuses.

OPTION GRANT

We will also grant you an option to purchase 150,000 shares of the Company's
Common Stock, with a price per share of Common Stock at a price equal to the
fair market value of the Company's Common Stock as of the close of business on
your start date of October 8, 1998.

You will receive consideration annually for additional stock option awards based
on your performance and the performance of the company.




<PAGE>   2


                                     Page 2


All Options shall vest in accordance with the 1995 Stock Option Plan, which
provides that 25% of the shares subject to the option shall vest and become
exercisable on the first anniversary of the vesting commencement date, and an
additional 1/48th of the shares subject to the option at the end of each
one-month period thereafter shall vest and become exercisable provided in each
case that the optionee remains an employee and/or consultant of the Corporation.

OTHER BENEFITS

You will be entitled to three weeks paid vacation during each year of
employment, provided that no more than one week is taken at a time without the
permission of the Company. You shall be eligible to participate in the existing
plans for group life, health and accident insurance plans, and any other plans
that the Company may adopt in the future.

SEVERANCE

The company agrees that in the event the Company terminates your employment it
shall pay you severance equal to six (6) months current salary. This severance
package will be in exchange for a full satisfaction exchange of any claims that
you may have against the Company, and the Company may, at its sole discretion,
require your signature on such release.


RELOCATION

The company agrees that for a period of 2-3 months you will temporarily be based
in Colorado to work on integration of Email Publishing and other on going
projects. Any necessary travel to San Diego during this period will be
considered a reimbursable business expense.


Your relocation will begin on the date requested in writing by the company. The
Company agrees to offer a relocation allowance of up to $55,000 to cover
reasonable and necessary Relocation Expenses for up to twelve months from the
requested date. Relocation expenses include, by way of example but not
limitation, the following: transportation of you and your family, movement of
household goods, house hunting trips, temporary living, trips home from the
temporary residence. The company will "gross up" the taxable elements of this
reimbursement to cover all incremental taxes associated with your relocation.
The "gross-up" is not considered part of the relocation allowance, but is in
addition to it. All expenses must be supported by receipts and must be
reasonable in light of the reimbursement sought.

REPRESENTATIONS AND WARRANTIES


You represent and warrant that no prior contract or agreement to which you are a
party or any prior performance of any such agreement will interfere in any
manner, or conflicts with, the terms of and complete performance of this
agreement




<PAGE>   3

                                     Page 3


Your execution of this letter will create a binding agreement between you and
the Company. We would want you to provide your present employer with notice of
termination of employment with a copy to us. We are excited to have you with us
and look forward to working together to ensure the continued success of First
Virtual.



Sincerely,

/s/ Keith S. Kendrick

Keith S. Kendrick, President
First Virtual Holdings Incorporated





Accepted:  /s/ Bert Klein                                Date:  October 8, 1998
           ---------------------
               Bert Klein


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