<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the period from _______ to _______.
Commission File Number: 000-21751
FIRST VIRTUAL HOLDINGS INCORPORATED
(Exact Name of Registrant as specified in its charter)
Delaware 33-0612860
------------------- -------------------------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11975 EL CAMINO REAL #300
SAN DIEGO, CA 92130
(Address, including zip code, of principal executive offices)
(619) 793-2700
(Registrant's telephone number, including area code)
N/A
(Former name, former address & former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents
and reports to be filed by sections 12,13, or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by the court. Yes [ ] No [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, $0.001 Par Value -- 10,889,024 shares as of March 31, 1998.
<PAGE> 2
FIRST VIRTUAL HOLDINGS INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 3
Statements of Operations (unaudited) for the three months ended
March 31, 1998 and 1997 4
Statements of Cash Flows (unaudited) for the three months ended
March 31, 1998 and 1997 5
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Factors Affecting Operating Results & Market Price of Stock 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST VIRTUAL HOLDINGS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 765,229 $6,331,059
Restricted cash (1) 1,525,968 --
Accounts receivable 79,516 207,985
Prepaid expenses and other 310,055 418,615
---------- ----------
Total current assets 2,680,768 6,957,659
Furniture, equipment and software, net 1,709,902 1,859,048
Information technology, net 13,125 19,845
Organization and other costs, net 70,846 77,630
Deposits and other 156,384 133,907
---------- ----------
Total assets $4,631,025 $9,048,089
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $1,091,137 $1,440,224
Accrued compensation and related liabilities 204,720 370,741
Accrued interest 313,903 289,903
Deferred revenue 374,690 537,790
Current portion, due to stockholders 1,470,000 1,530,000
Other accrued liabilities 363,356 601,300
---------- ----------
Total current liabilities 3,817,806 4,769,958
Amount due to stockholder 125,000 162,500
Series A convertible preferred stock 4,093,750 4,687,500
Stockholders' deficit:
Series A convertible preferred stock, $0.001
par value; 1,000 shares authorized; 750
and 1,000 shares outstanding at March 31,
1998 and December 31, 1997, respectively;
liquidation preference of $5,000,000 (2) -- 1
Preferred stock, 5,000,000 shares authorized,
none outstanding at December 31, 1997 and 1996 -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized, 10,889,024 and 8,903,855 shares
issued and outstanding at March 31, 1998 and
December 31, 1997, respectively 10,889 8,904
Additional paid-in-capital 29,272,454 26,300,228
Warrants 1,080,828 3,017,115
Deferred compensation (362,182) (155,235)
Accumulated deficit (33,407,520) (29,742,882)
---------- ----------
Total stockholders' deficit (3,405,531) (571,869)
---------- ----------
Total liabilities and stockholders' deficit $4,631,025 $9,048,089
========== ==========
</TABLE>
- ----------
(1)Pursuant to a civil lawsuit filed against the Company in February 1998, $1.5
million of the Company's available cash has been segregated pursuant to a
writ of attachment.
(2)655 shares of the Series A convertible preferred stock have been classified
outside of stockholders' deficit.
See accompanying notes.
3
<PAGE> 4
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $ 280,669 $ 392,917
Cost of revenues 18,600 111,514
----------- -----------
Gross profit 262,069 281,403
Operating expenses:
Marketing and sales 792,534 1,049,337
Research, development and engineering 1,644,056 1,452,006
General and administrative 1,021,064 1,163,581
Depreciation and amortization 399,263 257,999
----------- -----------
Total operating expenses 3,856,917 3,922,923
----------- -----------
Loss from operations (3,594,848) (3,641,520)
Interest income 44,897 192,891
Interest expense (27,185) (24,944)
----------- -----------
Net loss (3,577,136) (3,473,573)
Preferred stock dividend (87,502) --
----------- -----------
Net loss applicable to common shares $(3,664,638) $ (3,473,573)
=========== ============
Net loss per share, basic and diluted $ (0.38) $ (0.39)
==== ====
Shares used in per share computation,
basic and diluted 9,605,870 8,795,323
</TABLE>
See accompanying notes.
4
<PAGE> 5
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,577,136) $(3,473,573)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 399,263 257,999
Loss on disposal of assets 170 --
Common stock issued for services 24,283 --
Changes in operating assets and
liabilities:
Accounts receivable 128,469 (111,948)
Prepaid expenses and other 108,560 (2,661)
Deposits and other (22,477) (98,242)
Accounts payable (349,087) (674,400)
Accrued compensation and related
liabilities (166,021) (190,086)
Deferred revenue (163,100) 711,822
Accrued interest 24,000 24,000
Amount paid to stockholder (97,500) (37,500)
Other accrued liabilities (237,944) (355,199)
----------- -----------
Net cash used in operating activities (3,928,520) (3,949,788)
INVESTING ACTIVITIES
Additions to furniture and equipment (129,214) (295,671)
Proceeds from sale of fixed assets 2,000 --
Maturity of short-term investment -- 200,000
----------- -----------
Net cash used in investing activities (127,214) (95,671)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 7,349 30
Proceeds from the issuance of warrants 8,523 --
Restricted Cash* (1,525,968) --
------------ -----------
Net cash provided by financing activities (1,510,096) 30
Net decrease in cash and cash equivalents (5,565,830) (4,045,429)
Cash and cash equivalents at the beginning
of period 6,331,059 17,127,971
----------- -----------
Cash and cash equivalents at the end
of period $ 765,229 $13,082,542
=========== ===========
</TABLE>
- ---------------
* As shown on the balance sheet, $1,525,968 is restricted cash, pursuant to the
civil lawsuit filed against the Company in February 1998.
See accompanying notes.
5
<PAGE> 6
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim unaudited financial statements included herein have been prepared by
First Virtual Holdings Incorporated (the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Accordingly,
they do not include all the information and disclosures required by generally
accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with the financial statements
and notes thereto for the year ended December 31, 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 March 31, 1998 and
the results of operations and the changes in cash flows for the three month
periods ended March 31, 1998 and 1997 have been included. The results of
operations for the interim period ended March 31, 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. RELATED PARTY TRANSACTIONS
In conjunction with the sale of 1,250,000 shares of common stock to a
stockholder on September 16, 1994 for $200,000, the Company obtained an
unsecured line of credit commitment from the stockholder for borrowings up to
$800,000. The Company also obtained a $400,000 unsecured line of credit from a
stockholder. The borrowings plus interest at 8% were due upon the earlier of (i)
January 31, 1998 or (ii) the closing of an underwritten public offering (other
than the IPO) of the Company's common stock. At March 31, 1998, $1,200,000 has
been drawn against these lines of credit.
On February 5, 1998, the above two stockholders filed civil actions against the
Company seeking to recover the principal and interest due under the unsecured
lines of credit. The total amount of principal and interest is approximately
$1.5 million which is reflected as a current liability in the financial
statements. Subsequently on February 20, 1998, $1.5 million of the Company's
available cash was segregated pursuant to a writ of attachment. This amount is
shown on the balance sheet as restricted cash and is not currently available to
fund the Company's operations.
3. SERIES A CONVERTIBLE PREFERRED STOCK
On October 22, 1997, First Virtual completed a private placement of preferred
stock and received net proceeds of $4.9 million. Under the private placement
agreement, 1,000 shares of Series A convertible preferred stock were issued at
$5,000 per share. The Series A convertible preferred stock is convertible into
common stock at the option of the investors at a per share conversion price
equal to the lesser of $5.50, or 80% of the average closing bid price of the
common stock for the prior ten trading days. At December 31, 1997, the Company
recorded imputed dividends on the Series A preferred convertible stock totaling
$1,250,000 for discounted conversion terms. The Series A convertible preferred
stock may be redeemable for cash in the event that the Company's stockholders do
not approve the private placement at its upcoming Annual Stockholders' meeting
scheduled for June 23, 1998. However, the Company has obtained proxies from a
majority in interest of its stockholders which allow certain executive officers
of the Company to vote their shares for the approval of the private placement.
As of April 30, 1998, 345 shares of the Series A convertible preferred stock
have been converted into 1,752,141 shares of the Company's common stock. The
remaining 655 shares of Series A convertible preferred stock will remain
classified as mezzanine
6
<PAGE> 7
financing until they are converted into common stock or until stockholders' vote
approving the private placement has been obtained at the Annual Stockholders'
meeting.
The Series A convertible preferred stock carries an annual dividend of 7%,
payable quarterly, in cash or shares of common stock at the option of the
Company.
In connection with the sale of Series A convertible preferred stock, warrants to
purchase up to 850,000 shares of common stock at $5.75 per share were issued to
the Series A convertible preferred stock stockholders. These warrants will
expire on October 15, 2001.
4. SUBSEQUENT EVENTS
On April 30, 1998, the Company entered into a definitive agreement, whereby
SOFTBANK Holdings Inc. ("SOFTBANK") and certain of its affiliates, agreed to
purchase 10 million shares of the Company's common stock at a price of $0.60 per
share. The Company also agreed to issue additional shares of its common stock to
SOFTBANK at a conversion price of $0.60 per share upon the conversion of
approximately $1.5 million in debt obligations of the Company (See Note 2) which
SOFTBANK has agreed to acquire, and upon conversion of shares of Series A
convertible preferred stock of the Company which SOFTBANK has acquired options
to purchase from the stockholders referred to in Note 3.
SOFTBANK's right to exercise these options is contingent on the Company
agreeing to reduce the exercise price of the warrants to purchase 850,000
shares of common stock held by the Series A convertible preferred holders from
$5.75 to $1.00. Accordingly, the Company expects that the exercise price of the
warrants will be so reduced following the closing of the offering.
The completion of the contemplated transactions is subject to satisfaction of
several significant contingencies and conditions, including the approval by
stockholders at the Company's annual meeting of the stockholders in June 1998.
If the contemplated transactions are completed, SOFTBANK and affiliates will own
a majority of the Company's outstanding common stock and will have the ability
to designate a majority of the members of the Company's Board of Directors.
SOFTBANK and the Company have also entered into an interim loan agreement under
which the Company may request up to $1.5 million in loans from SOFTBANK upon
satisfaction of certain conditions.
The Company offered all employees of record as of April 29, 1998, the
opportunity to re-price their option grants under the 1995 Stock Option Plan to
the fair market value of the stock on that date. The closing price of the stock
on that date as listed by the Nasdaq National Market was $0.9375 per share.
On May 11, 1998, the Company reduced its workforce by approximately 25% as
part of its strategy to focus its resources on the interactive Messaging
Platform and reduce operating expenses.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This 10-Q report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the subsection entitled "Factors
Affecting Operating Results and Market Price of Stock" commencing on page 13.
Certain sections in this report have been identified as containing
forward-looking statements. The reader is cautioned that other sections and
other sentences not so identified may also contain forward-looking information.
The Company currently operates the First Virtual Payment System ("FVIPS"), and
is developing (i) the Interactive Messaging Platform, an integrated electronic
commerce solution; (ii) a VirtualTAG software "toolkit" which allows users to
build their own VirtualTAGs and (iii) a "back end" technology used to monitor
performance of VirtualTAGs. The Interactive Messaging Platform is being designed
to allow organizations to take advantage of a sophisticated messaging system
that facilitates relationship marketing on the Internet and also provides a
marketing system with an integrated payment system.* The Interactive Messaging
Platform represents the integration of First Virtual's existing services and
technology, which includes FVIPS, the VirtualPIN architecture and the
VirtualTAG. The Interactive Messaging Platform has not been commercially
released and has not generated any revenues or customer commitments to date. The
Company anticipates that completion of the development and commercial
introduction of the Interactive Messaging Platform will entail significant
research, development and engineering expenses and sales and marketing expenses
during the next four quarters.*
First Virtual has previously developed and implemented the VirtualPIN
architecture which facilitates Internet commerce and is designed to facilitate
other forms of interactive Internet communications. The VirtualPIN architecture
and the Interactive Messaging Platform use e-mail, which has the widest reach
and broadest use of any Internet application. FVIPS, a secure and easy-to-use
payment system introduced in October 1994, was the Company's first application
of the VirtualPIN architecture. In the fourth quarter of 1996, the Company
introduced VirtualTAG. The VirtualTAG is an interactive advertising applet
embedded within a banner ad and is designed to allow consumers to initiate the
purchase and payment and arrange for the delivery of a product without leaving
the web page on which the advertisement appears. The Company believes VirtualTAG
is one of the first solutions to take full advantage of the Internet's unique
attributes by combining advertising, selling and paying all in one application.*
The Company has incurred net operating losses in each quarter since inception.
As of March 31, 1998, the Company had an accumulated deficit of approximately
$33.4 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 Interactive
Messaging Platform, the Company expects to continue to incur significant
operating losses for the foreseeable future.
- -------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the actual future results will meet the Company's
current expectations. Investors are strongly encouraged to review the section
entitled "Factors Affecting Operating Results and Market Price of Stock"
commencing on page 13, for a discussion of factors that could affect future
performance. The reader is cautioned that other sections not so identified may
also contain forward looking information.
8
<PAGE> 9
RESULTS OF OPERATIONS
Revenues
The Company generates revenues from FVIPS, merchandising, interactive
advertising development and consulting, as detailed in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
First Virtual Internet Payment System $240,669 $135,797
Merchandising -- 29,620
Interactive advertising development -- 105,000
Consulting 40,000 122,500
-------- --------
Total revenues $280,669 $392,917
======== ========
</TABLE>
For the three months ended March 31, 1998, revenues were $280,669 as compared to
$392,917 for the three months ended March 31, 1997. This decrease is
attributable to the Company's decision to focus its efforts primarily on the
Interactive Messaging Platform and VirtualTAG related products starting in
December 1997. In December 1997, 1 Virtual Place, the Company's on-line shopping
mall, was closed and merchandising sales ceased. Also, the Company suspended
producing VirtualTAGs while focusing efforts on creating a VirtualTAG software
"toolkit", which will allow users to build their own VirtualTAGs. Consulting
revenue decreased as the Company experienced less demand for Internet related
consulting during the quarter. Revenues from FVIPS continued to benefit from
bulk sales of consumer and merchant registrations that occurred at the end of
the first quarter 1997. Beginning in August 1997, the Company increased the
consumer registration fees for both new accounts and renewals and in January
1998, merchant registration fees were also increased. The Company has
experienced and continues to experience declining revenues with regards to its
FVIPS and is currently looking into several alternatives regarding the future
of the FVIPS, including ceasing its operations.
Cost of Revenues
The Company incurred cost of revenues from FVIPS, merchandising, and interactive
advertising development, as detailed in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
First Virtual Internet Payment System $18,600 $ 42,070
Merchandising -- 27,444
Interactive advertising development -- 42,000
------- --------
Total cost of revenues $18,600 $111,514
======= ========
</TABLE>
- -------------
*Certain sections in this report have been identified as containing forward
looking statements. Although none of the sections on this page are so
identified, the reader is cautioned that such sections may contain forward
looking information.
9
<PAGE> 10
For the three months ended March 31, 1998, the cost of revenues related to FVIPS
decreased to 7.7% as compared with 31.0% for the three months ended March 31,
1997. By enhancing FVIPS with new capabilities and thus replacing services
provided by third parties, the Company has been able to reduce FVIPS cost of
revenues. The Company has also been able to negotiate more favorable processing
agreements with outside service providers. In December 1997, the Company decided
to close its merchandising segment and suspend production of VirtualTAGs while
focusing its efforts primarily on the Interactive Messaging Platform and
VirtualTAG related products.
Operating Expenses
Operating expenses consist of marketing and sales, research, development and
engineering, and general and administrative expenses. Currently, the Company's
intentions are focused on realigning expenses in an effort to improve overall
operating results. The Company expects operating expenses to continue to be
substantial for the necessary development and implementation of the Interactive
Messaging Platform and other new or enhanced products and services. The Company
also expects operating expenses needed for the introduction and promotion of
such products to be substantial. *
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 $792,500 for the three months ended
March 31, 1998, as compared to $1.0 million for the three months ended March 31,
1997. This decrease resulted primarily from decreases in salaries, wages and
payroll taxes of approximately $250,000, a general decrease in spending of
approximately $89,500, offset by an increase of approximately $132,000 for trade
shows and other promotional activities relating to introducing the Interactive
Messaging Platform. The Company expects that marketing and sales expenses will
increase in the future as the Company implements its sales and marketing plan to
introduce its Interactive Messaging Platform.*
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, increased to $1.6 million for the three months ended March 31,
1998, as compared to $1.5 million for the three months ended March 31, 1997.
This increase resulted primarily from increases in salaries, wages and payroll
taxes of approximately $100,000. 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 decrease in future periods
as the Company completes its development of the Interactive Messaging Platform
and enhances the functionality of the VirtualTAG.*
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 March 31, 1998, general and administrative
expenses decreased to $1.0 million as compared to $1.2 million for the three
months ended March 31, 1997. This decrease resulted primarily from decreases in
salaries, wages and payroll taxes of approximately $275,000, a general reduction
in spending of approximately $25,000, offset by an increase of approximately
$100,000 in consulting expenses.
- -------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the actual future results will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 13, for a discussion of factors that could affect
future performance. The reader is cautioned that other sections not so
identified may also contain forward looking information.
10
<PAGE> 11
The Company expects to experience significant fluctuations in its future
quarterly operating results.* These fluctuations will be due to several factors,
many of which are beyond the control of the Company, including, among others,
market response to the Company's Interactive Messaging Platform; difficulties
encountered in the development or deployment of products or services, including
interactive messaging; market acceptance of Internet commerce in general and
FVIPS and the VirtualPIN architecture in particular; fluctuating market demand
for the Company's products and services; the monthly volume and average dollar
amount of transactions using FVIPS; the degree of acceptance of the Internet as
an advertising and merchandising medium; the fees charged to the Company by
third party processors and financial institutions; the timing and effectiveness
of collaborative marketing efforts initiated by the Company's strategic
partners; the timing of the introduction of new products and services offered by
the Company; the timing of the release of enhancements to the Company's products
and services; product introductions and service offerings by the Company's
competitors; the mix of the products and services provided by the Company; the
timing and rate at which the Company increases its expenses to support projected
growth; the cost of compliance with applicable government regulations;
competitive conditions in the Company's marketplace; and general economic
conditions. In addition, the fees charged by the Company for consumer and
merchant registration, advertising, messaging, consulting services, transaction
processing and co-marketing are subject to change as the Company introduces its
Interactive Marketing Platform, develops its VirtualTAG software "toolkit", and
assesses its marketing strategy and competitive position.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $2.3 million in cash and cash equivalents. In
February 1998, pursuant to a civil lawsuit filed against the Company, $1.5
million of the Company's available cash was segregated pursuant to a writ of
attachment. This amount is shown on the balance sheet as restricted cash and is
not currently available to fund the Company's operations. On April 30, 1998, the
Company entered into a definitive agreement, whereby SOFTBANK and certain of its
affiliates, agreed to purchase 10 million shares of the Company's common stock
at a price of $0.60 per share. The Company also agreed to issue additional
shares of its common stock to SOFTBANK at a conversion price of $0.60 per share
upon the conversion of approximately $1.5 million in debt obligations of the
Company which SOFTBANK has agreed to acquire, and upon conversion of shares of
Series A preferred stock of the Company which SOFTBANK has acquired options to
purchase from stockholders.
SOFTBANK's right to exercise these options is contingent on the Company
agreeing to reduce the exercise price of the warrants to purchase 850,000
shares of common stock held by the Series A convertible preferred holders from
$5.75 to $1.00. Accordingly, the Company expects that the exercise price of the
warrants will be so reduced following the closing of the offering.
The completion of the contemplated transactions is subject to satisfaction of
several significant contingencies and conditions, including the approval by
stockholders at the Company's annual meeting of the stockholders in June 1998.
If the contemplated transactions are completed, SOFTBANK and affiliates will own
a majority of the Company's outstanding common stock and will have the ability
to designate a majority of the members of the Company's Board of Directors.
SOFTBANK and the Company have also entered into an interim loan agreement under
which the Company may request up to $1.5 million in loans from SOFTBANK upon
satisfaction of certain conditions.
If the Company is unable to complete the above contemplated transactions, the
Company's ability to operate in accordance with its plans, or at all, will be
severely jeopardized.* However, if the above mentioned transactions are
completed , the percentage ownership of the Company's stockholders will be
significantly diluted. There can be no assurance that alternative financing will
be available or that, if available, such financing will be obtained with terms
favorable to the Company or its stockholders. If adequate funds are not
available on acceptable terms, the Company may be compelled to severely curtail
its operations, may be unable to develop or enhance its products and services,
or take advantage of opportunities or respond to competition, any of which could
have a material adverse effect on the Company's ability to continue as a going
concern.
- ------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the actual future results will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 13, for a discussion of factors that could affect
future performance. The reader is cautioned that other sections not so
identified may also contain forward looking information.
11
<PAGE> 12
Operating activities used cash of $3.9 million during the three months ended
March 31, 1998. Net cash used during this period was primarily to fund the net
operating loss of $3.2 million (excluding depreciation, amortization and
compensation expense related to the issuance of stock), reduce accounts payable
and other accrued liabilities by approximately $750,000, pay down amounts due to
stockholders of $97,500, reduce deferred revenue by $163,000, increase deposits
by $22,500, offset by a reduction of prepaid expenses of $108,500, collection of
accounts receivable of $128,500 and an increase in accrued interest of $24,000.
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 $129,200 and $295,700 for the three months ended March
31, 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 two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although the Company believes that it is Year 2000 compliant, there
can be no assurance that coding errors or other defects will not be discovered
in the future. Any Year 2000 compliance problem of the Company, its service
providers, its customers or the Internet infrastructure could result in a
material adverse effect on the Company's business, operating results and
financial conditions.
- ------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the actual future results will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 13, for a discussion of factors that could affect
future performance. The reader is cautioned that other sections not so
identified may also contain forward looking information.
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<PAGE> 13
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
First Virtual operates in a rapidly changing environment that involves a number
of uncertainties, some of which are beyond the Company's control. In addition to
the uncertainties described elsewhere in this report, these uncertainties
include:
HISTORY OF OPERATING LOSSES AND ANTICIPATED FUTURE LOSSES; LIMITED OPERATING
HISTORY
The Company has incurred net operating losses in each quarter since its
inception in March 1994. As of March 31, 1998, the Company had an accumulated
deficit of approximately $33.4 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, customer care
and administrative infrastructure over the near term, the Company expects to
continue to incur significant operating losses on both a quarterly and an annual
basis for the foreseeable future. For these and other reasons, there can be no
assurance that the Company will ever achieve or be able to sustain
profitability. The Company 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.
The Company commenced operations in March 1994, and accordingly the Company 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 VTAGs and consulting
fees associated with FVIPS. While the Company has historically devoted its
efforts to developing and marketing FVIPS, the Company has determined to
dedicate substantial resources to developing and implementing its Interactive
Messaging Platform and related services and technologies. The Company's future
financial performance will depend significantly on the successful development,
introduction and customer acceptance of the Interactive Messaging Platform and
other new and enhanced products and services. Demand for new product categories
such as the Interactive Messaging Platform 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
Interactive Messaging Platform and related products and services. Accordingly,
there is no assurance that a significant market for the Interactive Messaging
Platform, or for any other technologies or services of the Company, will
develop, or that the Company will be successful in marketing the Interactive
Messaging Platform, FVIPS or any new or enhanced products or services.
UNCERTAINTY OF NASDAQ NATIONAL MARKET LISTING; DILUTION FROM RECENTLY COMPLETED
FINANCINGS; NEED FOR ADDITIONAL CAPITAL; UNCERTAINTY OF ADDITIONAL FINANCING
In October 1997, the Company completed a private placement of securities
consisting of 1,000 shares of Series A convertible preferred stock and warrants
to purchase up to 850,000 shares of common stock. Because the Series A preferred
stock is convertible into common stock at a discount below the current market
price of the common stock and because the price at which such conversion may be
effected is the lesser of $5.50 or 80% of the average closing bid price per
share of common stock for the prior ten days, conversion of the Series A
preferred stock will result in at least modest dilution to existing investors,
and may result in substantial dilution. Additional dilution may result upon the
exercise of the common stock warrants issued in this financing. In addition, the
Company believes that the sale of common stock issued upon conversion of the
Series A preferred stock has exerted, and will continue to exert, significant
downward pressure on the market price of the common stock. Moreover, holders of
Series A preferred stock enjoy certain rights and preferences which may
adversely affect holders of common stock, including a right to quarterly
dividend payments and a right to a preference payment in the event of a
liquidation or dissolution of the Company. The Company 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
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<PAGE> 14
businesses or technologies. On April 30, 1998, the Company entered into a
definitive agreement with SOFTBANK Holdings Inc. and certain of its affiliates,
whereby the Company agreed to sell 10 million shares of the Company's common
stock at a price of $0.60 per share to SOFTBANK and its affiliates. The closing
of the contemplated SOFTBANK transaction is subject to several contingencies and
conditions, including approval by the Company stockholders at the Company's
Annual Meeting of Stockholders in June 1998. If the SOFTBANK transaction is not
completed, there can be no assurance that alternative financing will be
available when needed or that if available, such financing will include terms
favorable to the Company or its stockholders. If adequate funds cannot be
obtained or are not available on acceptable terms, the Company may be unable to
develop or enhance its products and services, take advantage of important
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Also, as additional funds are raised through the issuance
of equity securities, the percentage ownership of the stockholders of the
Company will be further reduced, stockholders may experience significant
additional dilution and such equity securities may also have rights, preferences
or privileges senior to those of the holders of the Company's common stock. The
Company had a hearing before a committee of the Nasdaq Board of Governors on
April 16, 1998 with respect to its listing status on the Nasdaq National market.
The Nasdaq Stock Market has informed the Company that no further action with
respect to the Company's listing status will be taken through June 30, 1998,
pending the closing of the contemplated SOFTBANK transaction and certain other
conditions. However, should the Nasdaq Stock market in the future decide to
discontinue the listing of the Company's common stock, such actions by the
Nasdaq Stock market would adversely affect the liquidity and market price of the
common stock and may result in termination of the SOFTBANK agreement.
ANTICIPATED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
As a result of the early stage of development of Internet commerce and the
Interactive Messaging Platform, and the relatively recent dates of commercial
introduction of FVIPS, VirtualTAGs and the Company's limited operating history,
the Company's revenue expectations are based almost entirely on internal
estimates of future demand and not on actual experience. In particular, it is
difficult to forecast revenue expectations for the Interactive Messaging
Platform, since currently, the Interactive Messaging Platform strategy is under
development. Moreover, the Company has only limited historical financial data
for quarterly or annual periods on which to base planned operating expenses. The
Company's expense levels have been established in large part due to its current
expectations for future revenues and its expected development and marketing
requirements. In the event market demand and revenues do not meet expectations,
the Company may be unable to adjust its spending levels on a timely basis to
compensate for unexpected revenue shortfalls. To a certain extent, the Company
has encountered this problem to date. As a result, the Company has not and may
not be able to take advantage of revenue opportunities as quickly as it would
hope, because of an effort to scale down its infrastructure to match lower than
expected revenues. There can be no assurance that revenues associated with use
of the Interactive Messaging Platform, FVIPS 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 Interactive Messaging Platform;
difficulties encountered in the development or deployment of products or
services, including interactive messaging; market acceptance of Internet
commerce in general and FVIPS and the VirtualPIN and VirtualTAG concept in
particular; fluctuating market demand for the Company's products and services
including the rate of merchant and consumer registrations; the monthly volume
and average dollar amount of transactions using FVIPS; the degree of acceptance
of the Internet as an advertising and merchandising medium; the fees charged to
the Company by third party processors and financial institutions; the timing and
effectiveness of collaborative marketing efforts initiated by the Company's
strategic partners; the timing of the introduction of new products and services
offered by the Company; the timing of the release of enhancements to the
Company's products and services; product introductions and service offerings by
the Company's competitors; the mix of the products and services provided by the
Company; the timing and rate
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<PAGE> 15
at which the Company increases its expenses to support projected growth; the
cost of compliance with applicable government regulations; competitive
conditions in the Company's marketplace; and general economic conditions. In
addition, the fees charged by the Company for consumer and merchant
registration, advertising, messaging, consulting services, transaction
processing and co-marketing are subject to change as the Company introduces its
Interactive Marketing Platform, introduces its VirtualTAG software "toolkit",
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 expectations of market analysts or investors,
which may have a material adverse effect on the price of the Company's Common
Stock.
RISKS RELATED TO PRODUCT TRANSITION
The Company has derived substantially all of it revenues to date from FVIPS,
VirtualTAGs and related services. In the second quarter of fiscal 1997, the
Company determined to refocus it resources on developing and commercializing the
Interactive Messaging Platform. Since development of the technologies underlying
the Interactive Messaging Platform has not been completed, and since the
Interactive Messaging Platform has not yet been implemented other than on a test
basis, no assurance can be given that development of the Interactive Messaging
Platform will be successfully completed or that the cost of development will not
exceed future revenues generated by the Interactive Messaging Platform. In
addition, there is no assurance that the Company's current server capacity and
communications systems will be adequate to support high volumes of Interactive
Messaging Platform usage. A key element of the Company's strategy is to generate
a high volume of messages and associated transactions through the Interactive
Messaging Platform and FVIPS. 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. Moreover, the development and introduction of the
Interactive Messaging Platform has required the Company to substantially curtail
the resources devoted to development and enhancement of FVIPS and related
technologies and services, and has limited the ability of the Company's
management and marketing and sales staff to pursue the Company's goal of
increasing FVIPS usage, sales of VirtualTAGs and merchant and consumer
registrations. Unless the Interactive Messaging Platform is successfully
introduced and marketed, and unless revenues from the Interactive Messaging
Platform are sufficient to return the cost of its development and to compensate
for its adverse effect on FVIPS-related and VirtualTAG-related revenues, the
Company's business, financial condition and results of operation will be
materially and adversely affected.
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 Interactive Messaging Platform and related
services. The Interactive Messaging Platform has not yet been commercially
introduced and to date, the Company has not secured any significant customer
commitments to license, use or implement the Interactive Messaging Platform.
Moreover, market demand for new product and service categories such as
interactive messaging is inherently uncertain. The Interactive Messaging
Platform 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 Interactive
Messaging Platform will require a transition to new ways of conducting business
by enterprises that have already made substantial investments in other means of
conducting commerce and exchanging information. Accordingly, the market
prospects for the Interactive Messaging Platform are highly uncertain. Moreover,
although the Company believes that the Interactive Messaging
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<PAGE> 16
Platform 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 Interactive
Messaging Platform without substantial additional cost, or that the
cost-efficiency of the Interactive Messaging Platform will compare favorably
with traditional methods of marketing and information exchange for most
customers. Failure of the Interactive Messaging Platform 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 credit card issuers, 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 and Internet
payment services, such relationships are nonexclusive and have not resulted in
any comprehensive or measurable increase in the Company's revenues to date. For
instance, in 1997 the Company granted certain equity incentives to First Data
Corporation ("FDC") and General Electric Capital Corporation ("GECC"), in order
to induce FDC and GECC to meet certain goals for promoting FVIPS usage. FDC and
GECC did not meet the performance targets and the equity incentives expired. 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 Interactive Messaging Platform or in expanding the
Company's merchant and consumer base. In addition, there can be no assurance
that the Company's existing or potential marketing partners, most of whom have
significantly greater financial and marketing resources than the Company, will
not change their business strategies or discontinue their relationships with the
Company, develop and market products and services that compete with the
Company's products and services in the future or form collaborative marketing
relationships with one or more of the Company's competitors that offer
alternative Internet commerce solutions.
The operation of the Interactive Messaging Platform and FVIPS is dependent on
the continued availability and reliability of collateral telecommunications.
FVIPS is also dependent on the continued availability and reliability of
information processing and financial clearance systems. In particular, the
Company is substantially dependent on Paymentech Inc., Northern Trust Company
and Electronic Data Systems, Inc. for certain financial transactions services
relating to the operation of FVIPS. In addition, the Company is substantially
dependent on MCI Communications Corp. and WorldCom Inc. for collateral
telecommunication services. There can be no assurance that these companies will
continue to provide collateral services to the Company without disruptions in
service, at the current cost, or at all. Although the Company believes that such
services could be obtained from other sources in due course if required,
reengineering the Company's computer systems and telecommunications
infrastructure to accommodate a new service provider could only be accomplished
at significant cost and with significant delay. Any interruption of service by a
collateral services provider also would be likely to result in the disruption of
the operation of the Interactive Messaging Platform and FVIPS, with an attendant
loss of revenues and potential loss of customers. Such losses could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In order to promote the use of the Interactive Messaging Platform and to
increase market acceptance of FVIPS, the Company will be required to
significantly expand its direct sales force and marketing organization and
manage such personnel effectively. Establishing required marketing and sales
capability will require substantial efforts and significant management and
financial resources. The Company's management has very limited experience in
recruiting, developing or managing a marketing and sales force. There can be no
assurance that the Company will be able to recruit and retain direct marketing
and sales personnel in order to build an effective marketing and sales
organization, that building such a marketing and sales organization will be cost
effective or that the Company's marketing and sales efforts will be successful.
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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 Interactive Messaging Platform 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. Similarly,
increased usage of FVIPS is contingent on substantial and sustained growth in
sales of consumer products and services on the Web. 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 Internet commerce. There can be no assurance that use of e-mail as a
primary method of communication or commerce over the Internet will become
widespread, that a market for the Company's products and services will emerge or
that the Interactive Messaging Platform, FVIPS or other applications using the
VirtualPIN architecture will be generally adopted. If the market fails to
develop, or develops more slowly than expected, if the Internet infrastructure
is not adequately expanded or managed, or if the Company's products and services
do not achieve market acceptance by a significant number of individuals,
businesses and financial institutions, then the Company's business, financial
condition and results of operations will be materially and adversely affected.
DEPENDENCE ON INCREASED USAGE AND STABILITY OF THE INTERNET
The future of the Internet as a center for commerce will depend in significant
part on continued rapid growth in the number of households and commercial,
educational and government institutions with access to the Internet, in the
level of usage by individuals and in the number and quality of products and
services designed for use on the Internet. 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 Interactive Messaging Platform, VirtualTAGs, financial transactions over the
Internet, or any substantial commercial use of the Internet, will develop. There
can be no assurance that Internet usage patterns, 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 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
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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.
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, Internet payment systems and interactive Internet
communications in the near future. It is possible that a single supplier will
dominate one or more market segments. Furthermore, since there are many
potential entrants to the field, it is extremely difficult to assess which
companies are likely to offer competitive products and services in the future,
and in some cases it is difficult to discern whether an existing service is
competitive with the Company's current services.
The Company's principal competitors in the interactive messaging services arena
include providers of e-mail based services such as PostX Corporation, Axciom,
ReplyNet, InfoBeat, Inc., Email Publishing Inc., Cyber Data Systems, Inc.,
America Online, Inc. and Juno Online Services. The Company also competes with
Narrative Communication 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's principal competitors in the
market for secure consumer-initiated purchase systems include providers of
encrypted credit card transaction systems such as CyberCash, Inc., Bluemoney,
Open Market, Inc. and VeriFone, Inc. and providers of electronic cash payment
systems such as DigiCash, Inc. The Company expects that credit card processors
and acquiring banks or third party companies will also offer credit card-based
payment systems if Secure Electronic Transaction ("SET") protocols proposed by
Visa, MasterCard, American Express, Microsoft Corporation and Netscape are
adopted and/or accepted as a standard for Internet commerce. SET comprises
openly published communication and process protocols intended to facilitate
encrypted credit card transactions over the Web. Further, the Company believes
that the credit card associations may provide Internet merchants with lower
transaction fees in order to encourage usage of SET. There can be no assurance
that the Company's payment system will receive the same treatment, and as such
the Company may be at a competitive disadvantage. For example, in July 1997,
Visa announced its intention to waive its transaction fees, beginning in April
1998 for a two-year period, for credit card transactions over the Internet that
use the SET protocol.
The Company may experience additional competition from Internet service
providers, advertising and direct marketing agencies and other large established
businesses who enter the market for either interactive messaging services and
Internet payment 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 or secure Internet payments, 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. Moreover, FVIPS competes with public key encryption software
provided by RSA Data Security, Inc. ("RSA"), a subsidiary of Security Dynamics
Technology, Inc., the predominant method of reducing the risks associated with
transmission of credit card information over the Internet. RSA's encryption
technology (Secure Socket Layer) is incorporated in Web server and browser
products offered by Netscape, Microsoft and other vendors, and thus has the
largest installed base of any technology for payment security. In addition,
credit card information relating to commercial transactions over the Internet is
frequently directly transmitted in an unprotected form (i.e. "in the clear"
transactions).
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Several of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases, more
diversified lines of products and services and significantly greater financial,
technical, marketing and other resources than the Company. Such competitors may
be able to undertake more extensive marketing campaigns, adopt more aggressive
pricing policies and make more attractive offers to individuals, businesses and
financial institutions. In addition, many of the Company's current or potential
competitors have broad distribution channels that may be used to bundle
competing products or services directly to end-users or purchasers. If such
competitors were to bundle competing products or services for their customers,
the demand, if any, for the Company's products and services might be
substantially reduced, and the ability of the Company to successfully effect the
distribution of its products and the utilization of its services would be
substantially diminished. As a result of the foregoing or other factors, there
can be no assurance that the Company will compete effectively with current or
future competitors or that the competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE UPON PRODUCT AND SERVICE DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS
The Company's success depends upon its ability to develop the Interactive
Messaging Platform and other new products and services that satisfy evolving
customer requirements including potential applications for Internet advertising,
merchandising and direct marketing. The market for the Company's services is
characterized by rapidly changing technology, emerging industry standards and
customer requirements that have been changing every few months. There can be no
assurance that the Company will successfully identify new product and service
opportunities and develop and bring to market new products and services in a
timely manner. Failure of the Company, for technological or other reasons, to
develop and introduce the Interactive Messaging Platform and other new products
and services that are compatible with emerging industry standards and that
satisfy customer requirements would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company or its competitors may announce enhancements to existing products or
services, or new products or services embodying new technologies, emerging
industry standards or customer requirements that render the Company's existing
products and services obsolete and unmarketable. There can be no assurance that
the announcement or introduction of new products or services by the Company or
its competitors or any change in emerging industry standards will not cause
customers to terminate use of the Company's existing products and services,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's products and services are designed around 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.
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RISKS OF DEFECTS AND DEVELOPMENT DELAYS
Products and services based on sophisticated software and computing systems
often encounter development delays, and the underlying software may contain
undetected errors and failures when introduced or when usage increases. The
Company may experience delays in the development of the software and computing
systems underlying the Company's services. In addition, there can be no
assurance that, despite testing by the Company and 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.
RISK OF CAPACITY CONSTRAINTS
A key element of the Company's strategy is to generate a high volume of messages
and associated transactions through the company's Interactive Messaging Platform
and FVIPS. 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 and transactions could strain the capacity of the Company's software or
hardware, which could lead to slower response time or system failures. As of
this filing, the Company has not yet released the Interactive Messaging Platform
commercially and has no experience as to the strain that large volumes of
messages might have on its systems. The Company has and intends to make
substantial investments to increase its server capacity by adding new servers
and upgrading its software, when necessary. As the number of Web and Internet
users increases, there can be no assurance that the Company's products and
services will be able to meet this demand. The Company and its customers are
also dependent upon Web browsers, e-mail clients and Internet and online service
providers for access to its services, and users have experienced difficulties
due to system failures unrelated to the Company's system, products or services.
To the extent that the capacity constraints described above are not effectively
addressed by the Company, such constraints could have a material adverse effect
on the Company's business, financial condition and results of operations.
MANAGEMENT OF POTENTIAL GROWTH; RISKS ASSOCIATED WITH MANAGEMENT TEAM AND OTHER
KEY PERSONNEL
The rapid development necessary for the Company to exploit the market
opportunity for the Interactive Messaging Platform, VirtualTAGs and its other
services requires an effective planning and management process. The Company
expects to experience significant changes in its senior management in the near
future. Lee H. Stein, the Company's Chairman and Chief Executive Officer has
informed the Company that he intends to resign from his position as an officer
of the Company by June 30, 1998, although Mr. Stein is expected to continue to
serve on the Company's Board of Directors and may continue 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 has informed
the Company that he intends to cease full-time employment with the Company in
the near future. At the time of this filing, the Company has not designated
successors for Mr. Stein or Mr. Stachowiak. 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
most likely in the future will 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
20
<PAGE> 21
personnel. Competition for such personnel is intense. Successful completion of
the development of the Company's Interactive Messaging Platform is dependent on
the continued involvement of several key members of the Company's engineering
team. The loss of one or more of the Company's key developers could delay the
introduction and deployment of the Interactive Messaging Platform. 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 introduction of the Interactive Messaging Platform, the development of the
VirtualTAG software "toolkit" and the Company's efforts to grow the Company's
customer base and transaction volume, has placed, and is expected to continue to
place, a significant strain on its 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.
DEPENDENCE ON REPEATED CUSTOMER USE OF FVIPS
The future success of FVIPS and related services is dependent on its ability to
expand its base of merchants and consumers and to increase the number of
transactions that are conducted using FVIPS. The Company believes that an
increase in the number of FVIPS transactions depends primarily on the repeated
usage of the VirtualPIN by consumers. There can be no assurance that the
Company's historic rate of VirtualPIN use per consumer will continue or
increase, even if the Company is successful in increasing the variety and
quality of goods and services available over FVIPS. In addition, the Company
anticipates that it may need to modify consumer and merchant registration and
renewal fees from time to time in the future and may need to modify its
transaction rates charged to merchants. In late August 1997, the Company
increased new consumer registration and renewal fees, and in January 1998, the
Company raised its merchant registration fees. At the time of this filing, the
quantity of new consumer registrations, the number of consumer renewals and the
number of merchant registrations have declined. Because these fee changes were
implemented fairly recently, there can be no assurance as to the aggregate
effect of the fee change on the Company's operating results. Any further
modification in the fee structure may result in further consumer and merchant
attrition or reduce future consumer and merchant registrations. Significant
consumer or merchant attrition or the failure of the Company to substantially
increase the number of active users of FVIPS would materially and adversely
affect the Company's business, financial condition and results of operations.
In addition, the Company has experienced and continues to experience declining
revenues with regards to its FVIPS and is currently looking into several
alternatives regarding the future of the FVIPS, including ceasing its
operations.
Certain merchants employing FVIPS have in the past reduced their use of the
system. Although the Company has very limited information regarding merchant
usage of FVIPS, the Company believes that declining usage of FVIPS by merchants
can occur when merchants cease to maintain their Web pages, discontinue product
or service offerings on their Web sites or find other sufficient payment means,
without using FVIPS, to satisfy their business needs. Such discontinuation could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company also faces the risk of losing merchants
that choose to employ alternative payment mechanisms or experience a decline in
transactions using FVIPS. Any significant decline in the usage of FVIPS by
merchants or increase in the rate of merchant attrition could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISKS OF SYSTEMS FAILURES; LACK OF INSURANCE AND SECURITY RISKS
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.
21
<PAGE> 22
The Company currently retains highly confidential customer financial
information, including bank account and credit card information, in a secure
database server that the Company believes to be isolated from the Internet.
Although the server is protected by firewalls and proprietary, one-way batch
protocols along with regular Company reviews of the system for security
weaknesses, there can be no assurance that unauthorized individuals could not
obtain access to this database server. Any unauthorized penetration of the
Company's servers which are not directly connected to the Internet could result
in the theft of bank account and credit card information, E-mail addresses, and
comprehensive transaction histories. Any unauthorized penetration of the
Company's servers which are connected to the Internet could result in the theft
of VirtualPIN numbers, e-mail addresses and recent transaction histories.
Unauthorized penetration could lead to attempts to use such information to
effect fraudulent purchases, including the introduction of fabricated
transactions into the Company's financial processors. Although the Company
believes that the VirtualPIN architecture should thwart attempts to use
misappropriated account information, widespread attempts to effect such
transactions would require the Company to devote substantial resources to
counteracting such attempts and could result in a compromise of the system or
the interruption of the Company's ability to provide its products and services
and may result in adverse publicity to the Company and consequently have a
material adverse effect on the Company's business, financial condition and
results of operations. It is also possible that an employee of the Company could
attempt to divert customer funds or otherwise misuse confidential customer
information, exposing the Company to legal liability. In addition, although the
Company believes that the potential for the unauthorized interception of
information transmitted over the Internet through FVIPS is not likely to result
in the fraudulent use of VirtualPINs, there can be no assurance that
unauthorized use of such information will not occur and, if it does occur, that
it will not result in a financial loss or significant inconvenience to the
VirtualPIN holder. Furthermore, although the Company employs disclaimers and
limitation of warranty provisions in its customer agreements to attempt to limit
its liability to customers, including liability arising out of systems failure
or failure of security precautions, there can be no assurance that such
provisions will be enforceable, or will otherwise prove effective in limiting
the Company's exposure to damage claims.
Although the Company carries property, errors and omissions, crime and business
interruption insurance, its coverage may not be adequate to compensate the
Company for all losses that may occur. The Company is in the process of
increasing its server capacity, improving its security mechanisms and taking
other precautions to protect itself and its customers from events that could
interrupt delivery of the Company's products and services or result in a loss of
transaction or customer data. However, these measures will not eliminate a
significant risk to the Company's operations from a natural disaster or systems
failure. There can be no assurance that these measures would protect the Company
from an organized effort to inundate the Company's servers with massive
quantities of e-mail or other Internet message traffic which could overload the
Company's systems and result in a significant interruption of service. In August
1995, the Company experienced a 78-hour disruption in its systems which resulted
in interruption of service to all merchants and consumers for such period. In
addition, in July 1997, the Company experienced a situation that required
unscheduled database maintenance to be performed. As a result, transactions were
held in a queue for 4 hours until the database maintenance was complete. Any
systems failure that causes a significant interruption to or increases response
time of the Company's products and services could reduce use of the Company's
products and services and would reduce the attractiveness of the Company's
products and services to current and future customers. The Company's business
interruption insurance would not fully compensate the Company for lost revenues,
income, additional costs or increased costs experienced by the Company during
the occurrence of any disruption of its computer systems, nor is there any
assurance that the Company will be able to obtain such coverage on reasonable
terms or at all in the future. Significant service interruptions could also
damage the Company's reputation and result in the loss of a significant portion
of its merchants and consumers, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
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
22
<PAGE> 23
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 or Internet payment services without infringing any of
the Company's intellectual property rights. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use products or technology that the Company considers
proprietary, and third parties may attempt to develop similar technology
independently. In addition, effective protection of intellectual property rights
may be unavailable or limited in certain countries. Accordingly, there can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology.
As the volume of Internet commerce increases, and the number of products and
service providers that support Internet commerce increases, the Company believes
that Internet commerce technology providers may become increasingly subject to
infringement claims. There can be no assurance that infringement claims will not
be filed by plaintiffs in the future. Any such claims, with or without merit,
could be time consuming, result in costly litigation, disrupt or delay the
enhancement or shipment of the Company's products and services or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable or favorable
to the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation to determine the validity of any claims
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation is determined in favor of the Company. In the event of an
adverse ruling in any such litigation, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology. The failure of the Company to develop or license a
substitute technology could have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company believes it is not currently subject to direct regulation by any
government agency in the U.S., other than regulations generally applicable to
businesses, and there are currently few laws or regulations directly applicable
to access to, or commerce on, the Internet. However, no assurance can be given
that federal, state or foreign agencies will not attempt in the near future to
begin to regulate the market for Internet commerce. In addition, if a government
agency were to challenge the Company's position with respect to the
applicability of regulations to its activities, responding to such a challenge
could result in significant expenditures of the Company's financial and
management resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. More
generally, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations will be adopted with respect to
the Internet, covering issues such as user privacy, pricing, taxation and
characteristics and quality of products and services. For example, the
Telecommunications Reform Act of 1996 may subject certain Internet content
providers to criminal penalties for the transmission of certain information, and
could also result in liability to Internet service providers, Web hosting sites
and transaction facilitators such as the Company. Various foreign jurisdictions
have also moved to regulate access to the Internet and to strictly control Web
content. Even if the Company's business is not directly subject to regulation,
the adoption of any such laws or regulations may inhibit the growth of the
Internet, or the businesses of the users of the Company's products and services,
which could in turn adversely affect the
23
<PAGE> 24
Company's business, financial condition and results of operations. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel, taxation and personal privacy is uncertain. Such uncertainty
creates the risk that such laws could be interpreted in a manner that could
generally inhibit commerce on the Internet and adversely impact the Company's
business.
Due to the growth of Internet commerce, Congress has considered regulating
providers of services and transactions in this market, and federal or state
authorities could enact laws, rules or regulations affecting the Company's
business or operations. Senior officials from several regulatory agencies,
including the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and the Office of the Comptroller of the Currency, have
indicated that those agencies have refrained from promulgating regulations in
order to encourage continued development of electronic commerce, but will
monitor this area closely in the future. For example, the Electronic Fund
Transfer Act and Regulation E, promulgated by the Federal Reserve Board, govern
certain electronic funds transfers made by regulated financial institutions from
a consumer's account, and govern providers of access devices and electronic
funds transfer services. Although the Company believes that its current services
are not subject to Regulation E, there is no assurance that the Federal Reserve
Board will not require all or certain of the Company's services to comply with
Regulation E, revise Regulation E or adopt new rules and regulations affecting
electronic commercial transactions. Other government agencies in addition to the
Federal Reserve Board, including the Federal Trade Commission and the Federal
Communications Commission, may promulgate rules and regulations affecting the
Company's activities or those of the users of its products and services. Any or
all of these potential actions could result in increased operating costs for the
Company or for the principal users of its services and could also reduce the
convenience and functionality of the Company's services, possibly resulting in
reduced market acceptance which would have a material adverse effect on the
Company's business, financial condition and results of operations.
EVOLVING FINANCIAL INDUSTRY POLICIES FOR INTERNET COMMERCE
The Company currently relies on credit cards as the payment method for FVIPS
transactions. Credit card associations are still in the process of drafting
operating regulations governing many credit card transactions on the Internet.
In some cases, the Company's access to the payment systems of credit card
associations and other payment providers may be conditioned on its compliance,
and the compliance of associated processors such as Paymentech Inc., with
interim regulations.
The Company's operations have been reviewed by MasterCard and Visa which
currently are the sole payment methods accepted by the Company. Visa has issued
to Paymentech Inc., several conditions which govern Paymentech Inc.'s processing
of transactions for the Company over the Visa system. These conditions, among
other things, establish a maximum dollar amount and aging of small-dollar
transactions that the Company can accumulate before they are submitted to the
Visa system for processing, and establish procedures for handling chargebacks
involving such bundled transactions. The Company does not believe that these
conditions materially burden the Company's current operations. The conditions
were initially issued pursuant to an oral communication and were due to expire
on December 31, 1995. The conditions were renewed until the later of the
adoption of industry-wide operating regulations addressing Internet transactions
or December 31, 1997. At December 31, 1997, the Internet transaction operating
regulations had not been adopted, thus, the conditions were renewed until
December 31, 1998, with Visa's concurrence. To date, MasterCard has not issued
any conditions that are specific to the Company's operations. While the Company
hopes that it will be able to comply with Visa's future operating regulations
and regulations issued by any other credit card association, there can be no
assurance that it will be able to do so or that compliance will not have a
material adverse effect on its business, financial condition or results of
operations. In addition, there can be no assurance, if the operating regulations
have not been adopted, that the conditions agreement between Paymentech Inc. and
Visa, or related agreements between Paymentech Inc. and the Company and other
payment providers, will be issued or extended, if at all, on terms that do not
have a material adverse effect on the Company's business, financial condition
and results of operations.
24
<PAGE> 25
RISK OF LOSS FROM RETURNED TRANSACTIONS, MERCHANT FRAUD OR ERRONEOUS
TRANSACTIONS
Because the Company acts as an intermediary and facilitator for credit card
transactions, the Company may be subject to the risks borne by merchants
generally in the use of credit card payment systems, primarily the risk that the
consumer's payment will be "charged back" because of unauthorized use of the
consumer's credit card, disputes over the goods or services purchased by the
consumer, erroneous transmission of information by the Company, or fraud by the
merchant or consumer. The Company's customer agreements provide for the
allocation of the risk of chargebacks (other than chargebacks caused by
erroneous transmission by the Company) to merchants, but such agreements may not
be enforceable. In addition, even if the Company has an enforceable right to
charge a merchant's account for the amount of a chargeback, the Company is
subject to the risk that the merchant may not have a sufficient positive balance
of net proceeds from other FVIPS transactions to cover the chargeback and may
otherwise be unable or unwilling to pay.
The Company manages these risks through its risk management systems and internal
controls The Company currently requires explicit authorization by consumers
prior to initiating a charge of the consumer's credit card, holds funds for 91
days for merchants who do not qualify for accelerated settlement terms and
subjects merchants who attempt to so qualify to a screening process, and holds
qualified merchants' funds for three to five business days. As a result, the
Company believes that the risks associated with widespread chargebacks by
customers are minimized, but there can be no assurance that chargebacks will not
increase significantly in the future as the volume of FVIPS transactions
increases and as more merchants of goods and services requiring physical
delivery begin to use FVIPS. There also can be no assurance that the Company
will not change FVIPS in a manner that increases the risk of exposure to
chargebacks, or that the Company's reserves will be sufficient to protect the
Company from increased chargebacks. A significant increase in chargebacks could
materially and adversely affect the Company's business, financial condition and
results of operations.
RISK OF CHANGES IN CONSUMER PERCEPTIONS
The future need for FVIPS is in part dependent on the development of demand for
products and services that support transactions processed by FVIPS over the
Internet and, in particular, use credit card-based payment mechanisms. Demand
for secure payment solutions, including FVIPS, has been fueled in part by
wide-spread fears of the risks associated with the potential theft of credit
card account numbers transmitted over the Internet and other manifestations of
Internet-based credit card fraud. Such consumer perceptions of the risks
associated with credit card-based Internet transactions have received
substantial media attention, but may lack empirical support. In addition, the
Company believes that most consumers may be unaware that the potential liability
resulting from fraudulent charges to their credit card accounts is limited by
federal laws that limit the liability of cardholders for unauthorized use of
their card to no more than $50. Any change in consumer perception of the
incidence of credit card account number theft over the Internet, or the
potential liability attendant to such fraud, could impact the demand for
Internet security mechanisms, including FVIPS. Any such decline in the perceived
need for the security which the Company believes to be a principal feature of
FVIPS could have a material adverse effect on the Company's business, financial
condition and results of operations.
INTEGRATION OF POTENTIAL ACQUISITIONS
As a part of its business strategy, the Company may make acquisitions of, or
significant investments in, complementary companies, products or technologies.
Any such future acquisitions would be accompanied by the risks commonly
encountered in acquisitions of companies. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired technology and
rights into the Company's products and services, additional expense associated
with amortization of acquired intangible assets, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and customers as a result of any integration of new management
personnel. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
acquisitions.
25
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On March 12, 1998, the Company issued 6,081 shares of its common
stock to Beverly Parenti, a consultant, for past services rendered to
the Company at an average price of $1.23 per share.
On March 17, 1998, the Company issued 1,210 shares of its common
stock to Pierre Wolff, a consultant, for past services rendered to
the Company at an average price of $2.48 per share.
On March 26, 1998, the Company issued 780 shares of its common stock
to Curt Weaver, a consultant, for past services rendered to the
Company at an average price of $4.44 per share.
Such issuances were made without registration under the Securities
Act of 1933 pursuant to Section 4 (2). No underwriter or placement
agent was involved in these issuances.
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 10.32 -- David Ehrenthal Employment Agreement
Exhibit 10.33 -- Purchase Agreement dated April 30, 1998 among the
Company, SOFTBANK Holdings, Inc. and SOFTBANK
Technology Ventures IV, L.P.*
Exhibit 10.34 -- Loan Agreement dated April 30, 1998 among the
Company and SOFTBANK Holdings, Inc.*
Exhibit 10.35 -- Form of Convertible Promissory Note issued to
SOFTBANK Holdings, Inc.*
Exhibit 27.1 -- Financial Data Schedule
*Incorporated by reference to the Company's current report on
Form 8-K dated April 30, 1998.
(B) No reports on Form 8-K were filed during the three months ended
March 31, 1998.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST VIRTUAL HOLDINGS INCORPORATED
Dated: May 14, 1998 By: /s/ Lee H. Stein
------------------------------------
Lee H. Stein
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Dated: May 14, 1998 By: /s/ John M. Stachowiak
------------------------------------
John M. Stachowiak
Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
27
<PAGE> 1
EXHIBIT 10.32
January 14, 1998
Mr. David Ehrenthal
324 West 77th Street, Apt. 4
New York, New York 10024
Dear David:
First Virtual Holdings Incorporated is pleased to offer you employment on the
terms and conditions stated in this letter. First Virtual Holdings Incorporated
("First Virtual") is offering you the position of Vice President, Marketing and
Sales. You will be reporting to Keith Kendrick, President or such other Officer
as the Board of Directors may designate. We would like for you to begin work
with First Virtual on March 1, 1998. You will be working at our office in San
Diego.
SALARY.
The initial annual salary shall be $150,000 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 $30,000 within ten (10)
days of your first day of employment at First Virtual, which payment will be
treated for tax purposes as additional salary and all withholdings shall be
deducted.
BONUS.
We have also 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 eligible to receive a target bonus for up to 50% of your
annual salary in accordance with reaching the specified goals and targets, as
established by Keith Kendrick, President and with the First Virtual 1998
Operating Plan, payable no later than April 1, 1999 provided you are still an
employee of the Company on that date. Thus after your first year of employment,
the Board of Directors of the Company shall decide whether you are entitled to
any additional bonuses.
The bonus package will be treated for tax purposes as additional salary and all
withholdings shall be deducted.
OPTION GRANT.
We will also grant you an option to purchase 75,000 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 on February 2, 1998 ("Vesting
Commencement Date") ("Options"); we will also grant you an option to purchase
25,000 shares of the Company's Common Stock, with a price per share of Common
Stock at double the market price as of February 2, 1998, the Vesting
Commencement Date.
All Options shall vest in accordance with the Company's standard form of option
agreement under the 1995 Stock Option Plan, as amended, 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
<PAGE> 2
Mr. David Ehrenthal
January 14, 1998
Page 2
vest and become exercisable provided in each case that the optionee remains an
employee and/or consultant of the Company.
OTHER BENEFITS.
You will be entitled to three (3) weeks paid vacation during each year of
employment, provided that no more than one (1) 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 as the
Company may adopt in the future. You may enter the Company 401(k) plan as of
July 1, 1998.
SEVERANCE PACKAGE.
The Company further agrees that in the event the Company terminates your
employment for any reason other than cause it shall pay you severance equal to
four (4) months current salary and medical insurance premiums ("Severance
Package"). This severance package will be in full satisfaction of any claims
that you may have against the Company and the Company may, at its sole
discretion, require your signature on such release.
The Company further agrees that you have the right to terminate your employment
with the Company and will be entitled to the Severance Package if (i) fifty-one
percent (51%) or more, of the outstanding shares of stock of the Company are
sold in any single transaction ("Change of Control"); or, (ii) the marketing
function of the Company is eliminated or absorbed into another organization such
that your duties as being primarily responsible for the marketing of the
Company's products and services is significantly changed; provided however, that
a change in title is not considered a significant change and provided further,
that you must notify the Company in writing within ninety (90) days of (i) the
Change in Control or (ii) the elimination of the marketing function, of your
termination of your employment.
After termination of your employment with the Company for any reason or no
reason, you agree that for a period of two (2) months after your termination,
you shall be available to the Company up to and not to exceed fifteen (15) hours
per week, to perform consulting services for the Company upon its request. You
shall be paid monthly at the rate of $72.11 per hour for any such consulting
services performed by you.
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.
This offer is subject to your agreement to the terms and conditions found in
Appendices A and B and C. Appendix A includes basic contractual terms and a
customary form of employee Proprietary Information and Confidentiality
Agreement. Appendix B includes the Company's Voice-mail Policy and E-mail
Policy. Appendix C includes an employment application, which you are asked to
complete and return with this Agreement. This letter along with Appendices A and
B and C form your employment agreement with the Company, except that the
Non-Competition provision of Appendix A may be waived by the Company upon the
occurrence of a 51% Change of Control of the Company or the elimination of
<PAGE> 3
Mr. David Ehrenthal
January 14, 1998
Page 3
the marketing function of the Company. Any such waiver by the Company must be in
writing and may only occur if your departure or termination is not for cause.
You acknowledge that you are not receiving any tax or legal advise from the
Company and that you are consulting your own advisors.
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 would want you to begin work as
soon as possible. We are excited to have you with us and look forward to working
together to ensure the continued success of First Virtual.
Sincerely,
First Virtual Holdings Incorporated
/s/ KEITH S. KENDRICK
Keith S. Kendrick
President
Accepted: /s/ DAVID EHRENTHAL Date: January 15, 1998
-------------------------- ------------------------------
David Ehrenthal
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0
0
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