<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
FIRST VIRTUAL HOLDINGS INCORPORATED
- --------------------------------------------------------------------------------
(Name of Registrant as specified in its charter)
- --------------------------------------------------------------------------------
(Name of person(s) filing proxy statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22 (a) (2) of Schedule 14A.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction
applies: Common Stock, $.001 par value
(2) Aggregate number of securities to which transaction applies:
6,000,000
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state
how it was determined): $2.4065 based on the average of the
high and low sales prices of the Registrant's Common Stock on
August 28, 1998
(4) Proposed maximum aggregate value of transaction: $14,439,000
(5) Total fee paid: $2,887.80
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $2,887.80
(2) Form, Schedule, or Registration Statement No.: 000-21751
(3) Filing Party: First Virtual Holdings Incorporated
(4) Date Filed: September 1, 1998
<PAGE> 2
FIRST VIRTUAL HOLDINGS INCORPORATED
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 9, 1998
TO THE STOCKHOLDERS OF FIRST VIRTUAL HOLDINGS INCORPORATED:
NOTICE IS HEREBY GIVEN that the Special Meeting of Stockholders of First
Virtual Holdings Incorporated, a Delaware corporation ("FV"), will be held on
December 9, 1998 at 9:00 a.m., local time, at FV's executive offices, 4104
Sorrento Valley Blvd., Suite 200, San Diego, California 92121 for the following
purposes:
1. To (i) approve and adopt the Agreement and Plan of Reorganization (the
"Reorganization Agreement"), dated as of August 20, 1998, among FV,
Email Publishing Inc., a Delaware corporation ("EPub"), EPub Holdings,
Inc., a Delaware corporation and wholly-owned subsidiary of FV ("Sub"),
certain stockholders of EPub, and Chase Manhattan Bank & Trust Company,
N.A., as escrow agent, and (ii) approve the merger of Sub with and into
EPub pursuant to which EPub will become a wholly-owned subsidiary of FV
and all outstanding shares of EPub capital stock will be converted into
shares of FV common stock.
2. To approve an amendment to FV's Amended and Restated Certificate of
Incorporation that will change FV's corporate name to "MessageMedia,
Inc."
3. To approve an amendment to FV's Amended and Restated Certificate of
Incorporation that will increase the number of authorized shares of FV
common stock from 40,000,000 to 100,000,000 shares.
4. To amend FV's 1995 Stock Plan to increase the number of shares of common
stock available for issuance thereunder by 2,000,000 shares to an
aggregate of 6,000,000 shares.
5. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on October 30, 1998
are entitled to notice of, and to vote at, the meeting and any adjournment
thereof.
All stockholders are cordially invited to attend the meeting in person.
HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO MARK,
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE
POSTAGE PAID ENVELOPE ENCLOSED FOR THAT PURPOSE. You may revoke your proxy at
any time before it has been voted, and, if you attend the meeting, you may vote
in person even if you have previously returned your proxy card. Thank you for
your continued support.
Sincerely,
Lewis Silverberg
Secretary
San Diego, California
November 12, 1998
<PAGE> 3
FIRST VIRTUAL HOLDINGS INCORPORATED
------------------------
PROXY STATEMENT
------------------------
EMAIL PUBLISHING INC.
INFORMATION STATEMENT
First Virtual Holdings Incorporated, a Delaware corporation ("FV"), Email
Publishing Inc., a Delaware corporation ("EPub"), EPub Holdings, Inc., a
Delaware corporation and wholly-owned subsidiary of FV ("Sub"), certain
stockholders of EPub and Chase Manhattan Bank & Trust Company, N.A. ("Escrow
Agent") have entered into an Agreement and Plan of Reorganization, dated as of
August 20, 1998 (the "Reorganization Agreement"). The Reorganization Agreement
sets forth the terms and conditions on which FV will assume control of EPub. The
Reorganization Agreement calls for FV to acquire EPub by means of a merger of
the Sub with and into EPub. As a result of the transaction, EPub will become a
wholly-owned subsidiary of FV, the current stockholders of EPub will cease to be
stockholders of EPub and all outstanding shares of common stock and preferred
stock of EPub, $0.001 par value per share ("EPub Capital Stock"), will be
converted into shares of the common stock of FV, $0.001 par value per share ("FV
Common Stock") (all such actions referred to in the preceding two sentences is
herein collectively defined as the "Merger").
This Proxy Statement/Information Statement is being furnished to
stockholders of FV in connection with the solicitation of proxies by the Board
of Directors of FV (the "FV Board") for use at the special meeting of FV
stockholders to be held on December 9, 1998, at FV's executive offices, 4104
Sorrento Valley Blvd., Suite 200, San Diego, California 92121, commencing at
9:00 a.m., local time, and at any adjournment or postponement thereof (the "FV
Stockholders Meeting"). At the FV Stockholders Meeting, stockholders of FV will
be asked to approve and adopt the Reorganization Agreement and approve the
Merger. In addition, the stockholders of FV will be asked to (i) approve an
amendment to FV's Certificate of Incorporation that will change FV's corporate
name to "MessageMedia, Inc.", (ii) approve an amendment to FV's Certificate of
Incorporation that will increase the number of authorized shares of FV Common
Stock from 40,000,000 to 100,000,000 shares and (iii) amend FV's 1995 Stock Plan
to increase the number of shares of FV Common Stock available for issuance
thereunder by 2,000,000 shares to an aggregate of 6,000,000 shares. Stockholders
of FV are requested to sign, date and return the enclosed proxy card as promptly
as possible in the postage paid envelope enclosed for that purpose.
This Proxy Statement/Information Statement is being furnished to the
stockholders of EPub in connection with the solicitation of written consents
from the stockholders of EPub. The stockholders of EPub are being asked to
approve and adopt the Reorganization Agreement and approve the Merger. The
stockholders of EPub are requested to sign, date and return the enclosed form of
action by written consent of the stockholders as promptly as possible in the
postage paid envelope enclosed for that purpose.
------------------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT/
INFORMATION STATEMENT. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. THE
STOCKHOLDERS OF FV AND EPUB ARE URGED TO READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT/INFORMATION STATEMENT IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED
TO UNDER "RISK FACTORS" BEGINNING ON PAGE 20.
------------------------
This Proxy Statement/Information Statement and the accompanying proxy card
or form of action by written consent are first being mailed to stockholders of
FV and EPub on or about November 12, 1998.
THE DATE OF THIS PROXY STATEMENT/INFORMATION STATEMENT IS NOVEMBER 12, 1998.
<PAGE> 4
Upon consummation of the Merger (i) each issued and outstanding share of
EPub Capital Stock (other than any shares as to which appraisal rights pursuant
to the Delaware General Corporation Law have been exercised) will be converted
into a number of shares (the "Exchange Ratio") of FV Common Stock equal to
6,000,000 shares divided by the aggregate number of shares of common stock of
EPub outstanding as of the effective time of the Merger, assuming conversion or
exercise of all outstanding rights to acquire shares of common stock of EPub;
(ii) each outstanding option and warrant to purchase EPub Capital Stock will be
assumed by FV and will become an equivalent right with respect to FV Common
Stock, on the same terms as the original option or warrant, as applicable; and
(iii) all shares of EPub Capital Stock will cease to be outstanding and will be
canceled and retired and will cease to exist, and each holder of a certificate
formerly representing shares of EPub Capital Stock will thereafter cease to have
any rights with respect thereto, except the right to receive certificates
representing the shares of FV Common Stock into which such shares of EPub
Capital Stock have been converted.
On July 10, 1998, the last full trading day prior to the public
announcement of FV's and EPub's intent to enter into the Reorganization
Agreement, the closing sale price of FV Common Stock on the Nasdaq National
Market ("Nasdaq") was $4.63 per share. On November 9, 1998, the closing price of
the FV Common Stock was $3.69 per share.
Based on the capitalization of EPub as of August 20, 1998, the Exchange
Ratio would be 2.20 if the Merger were consummated on such date. Because the
numerator of the Exchange Ratio is fixed, changes in the market price of FV
Common Stock before the consummation of the Merger will affect the dollar value
of FV Common Stock to be received by stockholders of EPub in the Merger. There
can be no assurance as to the market price per share of FV Common Stock at any
time prior to, at or after the consummation of the Merger. Stockholders of EPub
are encouraged to obtain current market quotations for FV Common Stock prior to
voting on the proposal to approve and adopt the Reorganization Agreement and
approve the Merger. Additionally, the Exchange Ratio will be decreased to the
extent additional shares of, or rights to acquire, EPub Capital Stock are issued
prior to the closing of the Merger.
The aggregate and per share consideration to be received by the
stockholders of EPub is valued at approximately $22,140,000 (of which $1,539,892
is the approximate value of the shares to be issued upon exercise of options and
warrants assumed by FV in the Merger) and $3.69, respectively, based on the
closing price of the FV Common Stock on November 9, 1998.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/INFORMATION
STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES AND WRITTEN CONSENTS
MADE HEREBY, AND, IF GIVEN, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY FV, EPUB OR ANY OTHER PERSON. THE
DELIVERY OF THIS PROXY STATEMENT/INFORMATION STATEMENT SHALL NOT CREATE UNDER
ANY CIRCUMSTANCES ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF FV OR EPUB SINCE THE DATE HEREOF, OR THAT ANY INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE AS OF WHICH SUCH INFORMATION IS PROVIDED.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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<S> <C>
AVAILABLE INFORMATION....................................... iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. iii
SUMMARY..................................................... 1
SELECTED FINANCIAL INFORMATION.............................. 17
RISK FACTORS................................................ 20
Risks Related to the Merger............................... 20
Risks Related to FV's Business............................ 22
Risks Related to EPub's Business.......................... 33
COMPARATIVE PER SHARE DATA.................................. 38
MARKET PRICE INFORMATION.................................... 39
FIRST VIRTUAL HOLDINGS INCORPORATED STOCKHOLDERS MEETING.... 40
Date, Time and Place of FV Stockholders Meeting........... 40
Purpose................................................... 40
Record Date and Outstanding Shares........................ 40
Vote Required............................................. 40
Voting and Solicitation................................... 41
Quorum; Abstentions; Broker Nonvotes...................... 41
Stockholder Proposals..................................... 41
FV Auditors............................................... 42
Recommendation of FV Board................................ 42
EMAIL PUBLISHING INC. ACTION BY WRITTEN CONSENT OF THE
STOCKHOLDERS.............................................. 43
Purpose................................................... 43
Record Date and Outstanding Shares........................ 43
Vote Required............................................. 43
Recommendation of EPub Board.............................. 43
FV AND EPUB PROPOSAL NO. 1 -- APPROVAL OF THE MERGER AND
RELATED TRANSACTIONS...................................... 43
FV's Reasons for the Merger............................... 44
EPub's Reasons for the Merger............................. 45
Material Contacts and Board Deliberations................. 47
Opinion of FV Financial Advisor........................... 48
Interests of Certain Persons in the Merger................ 52
Material Federal Income Tax Considerations................ 53
Anticipated Accounting Treatment.......................... 55
EPub Options and Warrants................................. 55
Regulatory Matters........................................ 56
Appraisal Rights of Dissenting Stockholders............... 56
FV MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 59
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
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<S> <C>
EPUB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 66
BUSINESS OF EPUB............................................ 69
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
OF EPUB................................................... 73
TERMS OF THE MERGER......................................... 74
Effective Time............................................ 74
Manner and Basis for Converting Shares.................... 74
Treatment of Options and Warrants......................... 75
Stock Ownership Following the Merger...................... 76
Effect of the Merger...................................... 76
Representations and Warranties............................ 76
Indemnification........................................... 77
Conduct of EPub's Business Prior to the Merger............ 77
No Solicitation........................................... 78
Conditions to the Merger.................................. 79
Termination of the Reorganization Agreement............... 80
Effect of Termination..................................... 80
Amendments and Waivers.................................... 81
Anti-Dilution Rights...................................... 81
Co-Sale Agreement......................................... 81
Noncompetition and Employment Agreements.................. 82
Restrictions on Transfer.................................. 83
Registration Rights....................................... 84
Voting Agreement.......................................... 84
Interim Loan.............................................. 84
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS........... 86
COMPARISON OF CAPITAL STOCK................................. 93
Description of FV Capital Stock........................... 93
Description of EPub Capital Stock......................... 94
Comparison of Capital Stock............................... 97
FV STOCKHOLDER PROPOSAL NO. 2............................... 102
FV STOCKHOLDER PROPOSAL NO. 3............................... 103
FV STOCKHOLDER PROPOSAL NO. 4............................... 104
LEGAL MATTERS............................................... 107
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX A -- Agreement and Plan of Reorganization, dated as of
August 20, 1998, Among FV, EPub, Sub, certain
stockholders of EPub and Escrow Agent............ A-1
ANNEX B -- Delaware Appraisal Rights Provisions............. B-1
ANNEX C -- Opinion of William Blair & Company............... C-1
</TABLE>
ii
<PAGE> 7
AVAILABLE INFORMATION
FV is subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements
and other information may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may be obtained by mail from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC also maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at the address
http://www.sec.gov. FV Common Stock is listed on the Nasdaq Stock Market, and
such reports, proxy statements and other information can also be inspected at
the offices of the Nasdaq Stock Market, 1735 K Street, NW, Washington, DC 20006.
Under the rules and regulations of the SEC, the solicitation of written
consents from stockholders of EPub to approve the Merger constitutes an offering
of the FV Common Stock to be issued in connection with the Merger. Accordingly,
FV will file with the SEC a Form D under the Securities Act with respect to such
offering.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the SEC by FV pursuant to the
Exchange Act are incorporated by reference in this Proxy Statement/Information
Statement:
1. FV's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, as amended.
2. FV's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1998 and June 30, 1998.
3. FV's Current Reports on Form 8-K filed with the SEC on January 29,
1998, April 29, 1998, May 1, 1998, June 26, 1998 (as amended by FV's
Current Report on Form 8-K/A filed with the SEC on November 3, 1998) and
August 25, 1998.
4. The description of FV Common Stock contained in FV's Registration
Statement on Form 8A filed with the SEC on November 19, 1996.
The SEC file number for each of the documents incorporated by reference
herein is 0-21751.
All documents and reports filed by FV pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act between the date of this Proxy
Statement/Information Statement and the date of the FV Stockholders Meeting
shall be deemed to be incorporated by reference in this Proxy
Statement/Information Statement and to be part hereof from the dates of filing
of such documents and reports. Statements contained in this Proxy
Statement/Information Statement as to the contents of any contract or other
document referred to herein are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other documents filed as an
exhibit to the reports referenced above or incorporated by reference therein,
each such statement being qualified in all respects by such reference.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof except
as so modified or superseded.
All information contained or incorporated by reference in this Proxy
Statement/Information Statement relating to FV has been supplied by FV and all
such information relating to EPub has been supplied by EPub.
THIS PROXY STATEMENT/INFORMATION STATEMENT INCORPORATES DOCUMENTS BY
REFERENCE RELATING TO FV THAT ARE NOT PRESENTED HEREIN OR
iii
<PAGE> 8
DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS,
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE
AVAILABLE, WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST BY ANY PERSON TO WHOM
THIS PROXY STATEMENT/INFORMATION STATEMENT HAS BEEN DELIVERED FROM FIRST VIRTUAL
HOLDINGS INCORPORATED, 4104 SORRENTO VALLEY BLVD., SUITE 200, SAN DIEGO,
CALIFORNIA 92121, ATTENTION: INVESTOR RELATIONS; TELEPHONE NUMBER: (619)
410-3759. IN ORDER TO ASSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE FV
STOCKHOLDERS MEETING, ANY SUCH REQUEST SHOULD BE MADE BY NOVEMBER 25, 1998.
This Proxy Statement/Information Statement contains trademarks of FV and
EPub and may contain trademarks of others.
iv
<PAGE> 9
SUMMARY
Other than statements of historical fact, statements made in this Proxy
Statement/Information Statement, including statements as to the benefits
expected to result from the Merger and as to future financial performance, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Actual results could differ materially
from those anticipated in such forward-looking statements as a result of certain
factors, including those set forth in "Risk Factors" below, which FV and EPub
stockholders should carefully review. Since EPub is not a public company subject
to the reporting requirements of Section 13(a) or Section 15(d) of the Exchange
Act, any of the forward-looking statements of EPub made in this Proxy
Statement/Information Statement are not subject to Section 27A of the Securities
Act and Section 21E of the Exchange Act.
The following contains a summary of certain information contained elsewhere
in this Proxy Statement/ Information Statement. This summary does not contain a
complete statement of all material elements of the proposal to be voted on and
is qualified in its entirety by the more detailed information appearing
elsewhere in this Proxy Statement/Information Statement and in the information
and documents annexed hereto and incorporated by reference herein.
FV and EPub, along with certain other parties, have entered into the
Reorganization Agreement. The Reorganization Agreement sets forth the terms and
conditions on which FV will acquire control of EPub. The Reorganization
Agreement sets forth the terms for FV to acquire EPub by merging a wholly-owned
subsidiary of FV with and into EPub. All outstanding shares of capital stock and
options and warrants to purchase capital stock of EPub will be exchanged for
shares of FV Common Stock or equivalent options or warrants to purchase FV
Common Stock. The terms of the Reorganization Agreement are summarized below and
a copy of the full text of the Reorganization Agreement is attached as Annex A
to this Proxy Statement/Information Statement. In summary, the Reorganization
Agreement defines, (i) the terms of the Merger, (ii) the representations,
warranties, covenants and agreements of the parties to the Reorganization
Agreement, (iii) indemnification obligations and (iv) certain conditions which
must be satisfied prior to the consummation of the Merger.
THE COMPANIES
First Virtual Holdings Incorporated
FV's objective is to develop and provide market-leading products and
services which facilitate e-mail communications between businesses and their
customers. These products and services include the ability to incorporate
personalized content and formatting within e-mail messages; the ability to
automatically process responses to e-mail messages; the ability to initiate
financial transactions based on responses to e-mail messages; and the ability to
incorporate graphic and multimedia elements, such as banner advertisements or
Java applets, within e-mail messages.
FV completed development and started commercial use of its Interactive
Messaging Platform ("IMP") in July 1998. The IMP is a family of products and
services that enable the development and deployment of e-mail solutions which
address all aspects of using e-mail in a business-to-customer environment,
including customized e-mail generation; sophisticated e-mail delivery; and
automatic response processing. The IMP is designed to be an extensible and
scaleable infrastructure for online interactive communications, payment and data
warehousing. The IMP is also designed to allow companies to incorporate
customized content and formatting into e-mail sent to their customers. It
integrates the ability to deliver personalized, proactive customer service
messages and/or sales and marketing offers via e-mail with the capability to
automatically process customer responses to such e-mail messages and to initiate
financial transactions (such as charging the customer's credit card) in a secure
manner. The IMP is interoperable with virtually all e-mail platforms and
protocols and is expected to integrate FV's VirtualRECEIPT, VirtualALERT and
VirtualMAIL technologies.
FV was established as a Wyoming corporation in May 1994 and was
reincorporated in Delaware in February 1996. FV's executive offices are located
at 4104 Sorrento Valley Blvd., Suite 200, San Diego, California 92121, and its
telephone number is (619) 410-3700.
1
<PAGE> 10
Email Publishing Inc.
EPub's objective is to be the leading provider of e-mail message delivery
services to businesses and organizations on an "outsourced" basis. EPub's
service offerings are intended to make managing communications via e-mail easy
and accessible to companies with a need to get their message to a larger
audience, whether the message is in the form of an advertisement, a newsletter,
a picture, a software upgrade or just information. The EPub message publishing
platform allows EPub to send personalized, targeted and highly customized mass
e-mail on behalf of its clients to a large number of recipients who have a
pre-existing relationship with these clients.
Target clients for EPub's services include a variety of organizations
desiring close customer contact and timely delivery of information. Markets
addressable with EPub's products and service offerings include magazine
publishers, software providers, credit card issuers, catalog companies, direct
marketers and travel services, such as airlines, rental car agencies and hotel
operators. Initially, EPub has focused primarily on the magazine and software
publishing industry. As EPub expands its sales and support capabilities, it
plans to broaden the scope of its targeted vertical market segments.
EPub markets its services nationally via tradeshows, direct mail and
advertising. EPub sells its services through a direct sales force and through
other indirect channels, such as resellers.
EPub was established as a Delaware corporation in September 1996. EPub's
investors include Softven No. 2 Investment Enterprise Partnership and several
other private investors. EPub's executive offices are located at 6685 Gunpark
Drive East, Suite 240, Boulder, Colorado 80301, and its telephone number is
(303) 440-7550.
EPub Holdings, Inc.
Sub is a Delaware corporation recently organized by FV for the purpose of
effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the Merger. Sub's executive offices are
located at 4104 Sorrento Valley Blvd., Suite 200, San Diego, California 92121,
and its telephone number is (619) 410-3700.
SPECIAL MEETING OF STOCKHOLDERS OF FV
Date, Time, Place and Purpose
The FV Stockholders Meeting will be held at FV's executive offices, 4104
Sorrento Valley Blvd., Suite 200, San Diego, California 92121 on December 9,
1998 at 9:00 a.m., local time. The purpose of the FV Stockholders Meeting is to
allow FV stockholders to vote upon proposals to (1) approve and adopt the
Reorganization Agreement and approve the Merger, (2) approve an amendment to
FV's Certificate of Incorporation that will change FV's corporate name to
"MessageMedia, Inc.", (3) approve an amendment to FV's Certificate of
Incorporation that will increase the number of authorized shares of FV Common
Stock to 100,000,000 shares and (4) amend FV's 1995 Stock Plan to increase the
number of shares available for issuance thereunder to an aggregate of 6,000,000
shares. See "FV Stockholders Meeting -- Date, Time and Place of FV Stockholders
Meeting" and "-- Purpose."
Record Date and Vote Required
Only holders of record of FV Common Stock at the close of business on
October 30, 1998 (the "FV Record Date") are entitled to notice of and to vote at
the FV Stockholders Meeting. The affirmative vote of (1) the holders of a
majority of the shares of FV Common Stock represented (in person or by proxy)
and voting at the FV Stockholders Meeting and (2) the holders of a majority of
the shares of FV Common Stock represented and voting at the FV Stockholders
meeting, other than shares held by SOFTBANK Holdings Inc., a Delaware
corporation ("SOFTBANK Holdings"), SOFTBANK Technology Ventures IV L.P., a
Delaware limited partnership ("SOFTBANK Technology"), and their affiliates
(collectively, "SOFTBANK"), is required to approve and adopt the Reorganization
Agreement and to approve the Merger.
2
<PAGE> 11
Approval of the proposal to amend FV's Certificate of Incorporation requires the
affirmative vote of a majority of the shares of FV Common Stock outstanding as
of the FV Record Date. Approval of the proposal to amend FV's 1995 Stock Plan to
increase the number of shares reserved for issuance thereunder requires the
affirmative vote of holders of a majority of the shares of FV Common Stock
represented and voting at the FV Stockholders Meeting. As of the FV Record Date,
there were approximately 200 stockholders of record of FV Common Stock and
33,091,260 shares of FV Common Stock outstanding, with each share entitled to
one vote on the matter to be acted upon at the FV Stockholders Meeting. SOFTBANK
Holdings, SOFTBANK Technology, Lee H. Stein, Paymentech Inc. and First USA
Financial Corp., who collectively beneficially own an aggregate of 75.3% of the
FV Common Stock, have entered into a certain voting agreement with EPub pursuant
to which such stockholders have agreed to vote such shares (and any additional
shares of FV Common Stock that such stockholders acquire beneficial ownership of
prior to the termination of such voting agreement) in favor of approval and
adoption of the Reorganization Agreement and approval of the Merger. The parties
to the voting agreement need not vote their shares in accordance with such
agreement if the majority of the shares of FV Common Stock represented and
voting at such FV Stockholders Meeting, other than shares held by the parties to
the voting agreement and their affiliates, are voted against the approval and
adoption of the Reorganization Agreement and approval of the Merger. See "FV
Stockholders Meeting -- Vote Required."
Voting of Proxies and Revocation
All holders of record of FV Common Stock as of the FV Record Date are
invited to attend the FV Stockholders Meeting in person. However, to ensure
representation at the FV Stockholders Meeting, all FV stockholders should mark,
sign, date and return the proxy card enclosed herein as promptly as possible in
the postage paid envelope enclosed for that purpose. The shares represented by
the returned proxies will be voted in accordance with the specifications made
therein. If no specifications are made, such shares will be voted for the
proposal to approve and adopt the Reorganization Agreement and approve the
Merger and the other FV stockholder proposals, and for such other matters as may
properly come before the FV Stockholders Meeting, as the proxyholders deem
advisable. FV stockholders returning their proxies may revoke such proxies at
any time before the FV Stockholders Meeting by delivering a revised proxy or
notice of their election to revoke their proxy to FV, and if such FV
stockholders attend the FV Stockholders Meeting, they may vote in person even if
they have previously returned their proxies.
Recommendation of FV Board of Directors
The FV Board has approved the Reorganization Agreement and the transactions
contemplated thereby and has determined that the Merger is fair to and in the
best interests of FV and its stockholders. After careful consideration, the FV
Board recommends a vote "for" approval and adoption of the Reorganization
Agreement and "for" approval of the Merger. Stockholders should read this Proxy
Statement/Information Statement carefully prior to voting. The conclusion of the
FV Board with respect to the Merger is based upon a number of factors. See "FV
Stockholders Meeting -- Recommendations of FV Board," "Approval of the Merger
and Related Transactions -- FV's Reasons For the Merger," and "-- Material
Contacts and Board Deliberations." In addition, the FV Board has approved the
amendments to FV's Certificate of Incorporation and FV's 1995 Stock Plan and
recommends votes "for" such proposals. See "FV Stockholder Proposal No. 2," "FV
Stockholder Proposal No. 3" and "FV Stockholder Proposal No. 4."
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS OF EPUB
Purpose
A form of action by written consent (the "Action by Written Consent") is
being presented to the stockholders of EPub together with this Proxy
Statement/Information Statement. The purpose of the Action by Written Consent is
to approve and adopt the Reorganization Agreement and approve the Merger. EPUB
HAS REQUESTED THAT THE EPUB STOCKHOLDERS PROVIDE THEIR CONSENTS IN WRITING TO
THE REORGANIZATION AGREEMENT AND THE PROPOSED MERGER AND
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RELATED REQUIRED DOCUMENTATION BY FACSIMILE NO LATER THAN DECEMBER 1, 1998 TO
MARK G. SENEKER OF COOLEY GODWARD LLP, COUNSEL FOR EPUB, AT (303) 546-4099.
ORIGINALLY EXECUTED CONSENTS AND RELATED DOCUMENTS ARE REQUESTED TO BE RETURNED
TO MARK G. SENEKER OF COOLEY GODWARD LLP NO LATER THAN DECEMBER 9, 1998. See
"EPub Action by Written Consent of the Stockholders."
Record Date and Approval Required
Only holders of record of EPub Capital Stock at the close of business on
November 6, 1998 (the "EPub Record Date") are entitled to notice of and to
participate in the Action by Written Consent of the stockholders of EPub.
Pursuant to the Delaware General Corporation Law ("DGCL"), the affirmative vote
of the holders of a majority of the shares of EPub Capital Stock, on an
as-converted to common stock basis, outstanding as of the EPub Record Date is
required to approve and adopt the Reorganization Agreement and to approve the
Merger. Certain executive officers, directors and stockholders of EPub (who as
of the EPub Record Date owned in the aggregate approximately 98.4% of the
outstanding shares of EPub Capital Stock, on an as-converted to common stock
basis) (the "EPub Majority Stockholders") are parties to the Reorganization
Agreement which obligates each such stockholder to vote all shares of EPub
Capital Stock held by such holder in favor of the proposal to approve and adopt
the Reorganization Agreement and approve the Merger.
As a condition to Closing, FV will require that EPub stockholders holding
no more than three percent (3%) of the EPub Capital Stock exercise, or be
entitled to exercise, appraisal rights granted under applicable Delaware law.
As of the EPub Record Date, there were 14 stockholders of record of EPub
Common Stock and 1,906,503 shares of EPub Common Stock outstanding, one
stockholder of record of EPub Series A Preferred Stock and 400,000 shares of
EPub Series A Preferred Stock outstanding, and three stockholders of record of
EPub Series A-1 Preferred Stock and 232,558 shares of EPub Series A-1 Preferred
Stock outstanding. Each share of Common Stock, Series A Preferred Stock and
Series A-1 Preferred Stock is entitled to one vote on the matters to be acted
upon by the Action by Written Consent. See "EPub Action by Written Consent of
the Stockholders -- Vote Required."
Recommendation Of EPub Board of Directors
The EPub Board has unanimously approved the Reorganization Agreement and
the transactions contemplated thereby and has determined that the Merger is fair
to and in the best interests of EPub and its stockholders. After careful
consideration, the EPub Board unanimously recommends a vote in favor of approval
and adoption of the Reorganization Agreement and approval of the Merger.
Stockholders should read this Proxy Statement/Information Statement carefully
prior to voting. The EPub stockholders are advised that the EPub Board did not
obtain an independent opinion as to the fairness of the consideration to be
received by the EPub stockholders in the Merger. See "EPub Action by Written
Consent of the Stockholders -- Recommendation of EPub Board of Directors,"
"Approval of the Merger and Related Transactions -- EPub's Reasons For the
Merger," "-- Material Contacts and Board Deliberations" and "Risk Factors --
Risks Related to the Merger -- No Independent Fairness Opinion Obtained by EPub
Board."
RISK FACTORS
See "Risk Factors" beginning on page 20 for a discussion of material risks
pertaining to the Merger and the businesses of FV and EPub.
FV AND EPUB PROPOSAL NO. 1 -- APPROVAL OF REORGANIZATION AGREEMENT AND MERGER
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the FV Board with respect to the
Reorganization Agreement and the Merger, holders of FV Common Stock should be
aware that members of the FV Board and certain stockholders of FV have certain
interests in the Merger that are in addition to the interests of holders of FV
Common Stock generally. In particular, certain members of the FV Board own, or
may be deemed
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affiliates of entities which own, a significant number of shares of EPub Capital
Stock. See "Approval of the Merger and Related Transactions -- Interests of
Certain Persons in the Merger."
In considering the recommendation of the EPub Board with respect to the
Reorganization Agreement and the Merger, holders of EPub Capital Stock should be
aware that members of the EPub Board and the executive officers of EPub have
certain interests in the Merger that are in addition to the interests of holders
of EPub Capital Stock generally. In particular, certain of EPub's executive
officers are expected to enter into employment agreements following the Merger
under which they will receive cash payments if they are terminated under certain
circumstances. See "Approval of the Merger and Related Transactions -- Interests
of Certain Persons in the Merger."
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), in which case no
gain or loss generally should be recognized by the holders of shares of EPub
Capital Stock on the conversion of their shares of EPub Capital Stock solely
into shares of FV Common Stock in the Merger. As a condition to the consummation
of the Merger, FV and EPub will have received an opinion from their respective
tax counsel that the Merger will constitute a reorganization under Section
368(a) of the Code. Because of the complexity of the tax laws and the individual
nature of the tax consequences of the Merger to each EPub stockholder, each EPub
stockholder is urged to consult its own tax advisors. See "Approval of the
Merger and Related Transactions -- Certain Federal Income Tax Considerations;"
and "Terms of the Merger -- Conditions to the Merger."
GOVERNMENTAL AND REGULATORY MATTERS
The Merger must satisfy the requirements of federal and certain state
securities laws. See "Approval of the Merger and Related
Transactions -- Governmental and Regulatory Matters."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a purchase for accounting and
financial reporting purposes in accordance with generally accepted accounting
principles.
RIGHTS OF DISSENTING STOCKHOLDERS
The stockholders of EPub who vote against the Merger may be entitled to
appraisal rights under applicable Delaware law. EPub stockholders who desire to
exercise their appraisal rights must satisfy all of the conditions of Section
262 of the DGCL. Such stockholders must hold the shares of EPub Capital Stock on
the date of making a demand for appraisal rights with respect to such stock and
must continuously hold such shares through the Effective Time of the Merger.
Such stockholders should (i) file a written demand for appraisal of shares with
EPub before the taking of the vote on the Merger and (ii) not vote for or
consent to the adoption and approval of the Reorganization Agreement and
approval of the Merger. EPub stockholders must deliver notice of their election
to exercise appraisal rights to EPub prior to the Effective Time of the Merger.
Within 120 days after the Effective Time of the Merger, such stockholders may
(i) deliver to EPub a written demand for a statement listing the aggregate
number of shares of EPub Capital Stock not voted in favor of the Merger and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares and (ii) file a petition in the Delaware Court
of Chancery demanding a determination of the fair value of such EPub Capital
Stock. If a petition for appraisal is filed in a timely fashion, after a hearing
on the petition, the Delaware Court of Chancery will determine which
stockholders are entitled to appraisal rights and will appraise the shares owned
by these stockholders, determining the fair value of such shares, exclusive of
any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest to be paid, if any, upon the
amount determined to be the fair value. EPub stockholders considering seeking
appraisal of their shares of EPub Capital Stock should note that the fair value
of their shares determined under Section 262 could be more, the same or less
than the consideration they would receive pursuant to the Reorganization
Agreement if they did not seek appraisal of their shares.
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This summary does not purport to be a complete statement of provisions for
the DGCL relating to the rights of EPub stockholders to an appraisal of the
value of their shares and is qualified in its entirety by reference to DGCL
Section 262, the full text of which is attached to this Proxy/Information
Statement as Annex B. EPub stockholders should also refer to the more detailed
discussion under "Approval of the Merger and Related Transactions -- Appraisal
Rights."
FAIRNESS OPINION
William Blair & Company, L.L.C. has delivered to the FV Board its written
opinion, dated August 19, 1998, to the effect that the transaction contemplated
by the terms of the Reorganization Agreement is fair, from a financial point of
view, to FV. The full text of the opinion of William Blair & Company, L.L.C.,
which sets forth assumptions made and matters considered, is attached as Annex C
to this Proxy Statement/ Information Statement and is incorporated herein by
reference. Holders of FV Common Stock are urged to, and should, read such
opinion in its entirety. See "Approval of the Merger and Related Transactions --
Opinion of FV Financial Advisor" and Annex C hereto.
ADVANTAGES AND DISADVANTAGES OF THE MERGER CONSIDERED BY FV AND EPUB BOARDS
In approving the Reorganization Agreement and the transactions contemplated
thereby and recommending a stockholder vote in favor of approval and adoption of
the Reorganization Agreement and approval of the Merger, each of the FV Board
and EPub Board has considered several potential benefits of the Merger.
The FV Board has identified several potential benefits of the Merger,
including:
- the complementary electronic messaging technology of EPub which may allow
FV to provide its clients with a broader range of products and services
that address all aspects of the e-mail communications process;
- the valuable messaging expertise and experience of EPub which may enhance
FV's ability to deliver valuable products and services to its clients and
to remain on the leading edge of messaging technology; and
- the complementary target clients of EPub in the traditional and software
publishing markets and of FV in the financial services, travel, catalog
and on-line services industries which may allow FV and EPub to leverage
and cross-market each other's products and services.
The EPub Board's recommendation in favor of approval and adoption of the
Reorganization Agreement and approval of the Merger is based primarily on its
belief that the Merger:
- presents a strategic opportunity to maximize EPub's and EPub's
stockholders' potential returns; and
- gives EPub stockholders an opportunity to achieve greater liquidity in
their investment through sales of FV Common Stock in the public market.
More specifically, the EPub Board has considered the potential benefits of:
- the opportunity to participate in a combined company with greater
resources and capabilities;
- sharing information, resources and ideas to increase functionality of
products and services and to achieve economies of scale and business
synergy;
- the ability of the combined company to expand its customer base by
leveraging EPub's relationships in the traditional and software
publishing markets and FV's strength in the interactive messaging market;
- the merger consideration to be issued to EPub stockholders and the
assumption of liabilities by FV in connection with the Merger; and
- the liquidity of the Nasdaq National Market listed FV Common Stock to be
issued in connection with the Merger. See "Approval of the Merger and
Related Transactions -- FV's Reasons for the Merger" and "-- EPub's
Reason for the Merger."
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The FV and EPub Board also considered a number of potentially negative
factors in their deliberations concerning the Merger, including, but not limited
to:
- the possibility of management disruption associated with the Merger and
the risk that key technical and management personnel of EPub might not
continue with EPub;
- the risks associated with obtaining necessary approvals of the Merger and
the possibility that the Merger may not be consummated even if approved
by the stockholders;
- the possibility that the Merger might adversely affect FV's or EPub's
relationships with certain of their respective customers, suppliers and
partners;
- the risk that the potential benefits of the Merger might not be realized;
- the risk that the market price of FV Common Stock might be adversely
affected by the public announcement of the Merger;
- the substantial charges expected to be incurred in connection with the
Merger, including the transaction expenses arising from the Merger and
the costs associated with combining the operations of the two companies;
- the limitations on EPub stockholders' ability to sell shares of FV Common
Stock received in the Merger due to the fact that these shares will
initially not be registered under the Securities Act or under any
applicable state securities laws and therefore will initially be
"restricted securities" under the Securities Act and the fact that a
majority of the shares will be subject to a contractual restriction on
transfer preventing EPub stockholders from selling or otherwise disposing
of any such shares of the merger consideration for six to twelve months
after the closing of the Merger (see "Terms of the Merger -- Restrictions
on Transfer");
- the fact that 20% of the shares of FV Common Stock that would otherwise
be issued to the EPub stockholders in the Merger will be placed in an
escrow fund and could be forfeited if FV makes a claim or claims against
the escrow fund (see "Terms of the Merger -- Indemnification"); and
- the other risks described under "Risk Factors." See "Approval of the
Merger and Related Transactions -- FV's Reasons for the Merger,"
"-- EPub's Reasons for the Merger," and "Risk Factors."
MATERIAL CONTACTS AND BOARD DELIBERATIONS
On October 2, 1997, representatives of FV and EPub met to initiate
preliminary discussions between the two companies. During the period from such
date to the end of January 1998, the representatives of the companies discussed
possible strategic relationships between FV and EPub, including the possible
acquisition of EPub by FV, evaluated the business prospects of EPub and the
strategic fit between FV and EPub and conducted preliminary deal term
discussions, initial financial due diligence and preliminary assessment of
EPub's technology, software and systems. On January 28, 1998, the parties agreed
to suspend further negotiation of the proposed acquisitions until FV completed
its next equity financing. On May 27, 1998, FV and EPub signed a joint marketing
agreement, whereby FV agreed to resell EPub's services.
On May 29, 1998, FV and EPub commenced negotiating a preliminary draft of a
letter of intent to acquire EPub. During the period from such date to July 10,
1998, the representatives of the companies discussed the potential synergies
between FV and EPub, the operational logistics that would need to be addressed
in the event of FV's acquisition of EPub and the integration of the two
companies to achieve cost efficiencies and marketplace leverage, and the
representatives of FV learned more about EPub's existing technology, as well as
EPub's future technical plans, and engaged William Blair & Company, L.L.C. as
its financial advisor in connection with a possible acquisition of EPub. On July
10, 1998, the parties executed a non-binding letter of intent whereby FV would
acquire EPub.
During the period from July 10, 1998 to the end of August 1998, the parties
conducted general financial, tax, legal and technical due diligence,
representatives of FV and EPub and their respective legal and financial
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advisors negotiated and finalized definitive terms to the acquisition of EPub by
FV and the FV and EPub Boards held special meetings to consider the final terms
and conditions of the proposed acquisition of EPub.
The Reorganization Agreement was executed by all parties on August 20,
1998, and a joint public announcement of the execution of the Reorganization
Agreement was made on that date.
THE MERGER
The terms and conditions of the Merger are set forth in the Reorganization
Agreement. The descriptions of the Reorganization Agreement set forth below and
elsewhere in this Proxy Statement/Information Statement are qualified in their
entirety by reference to the Reorganization Agreement and certain related
agreements, which are attached as appendices or exhibits hereto. The FV and EPub
stockholders are strongly encouraged to review the Reorganization Agreement and
such related agreements in their entirety prior to determining whether to
provide the vote or consent requested herewith.
Terms of the Merger; Exchange Ratio
At the Effective Time of the Merger (as defined below), Sub will merge with
and into EPub and EPub will become a wholly-owned subsidiary of FV. Once the
Merger is consummated, Sub will cease to exist as a corporation and EPub will
remain as a wholly-owned subsidiary of FV (the "Surviving Corporation"). As a
result of the Merger, each outstanding share of EPub Capital Stock, other than
any shares as to which appraisal rights under the DGCL have been exercised, will
be converted into a number of shares (the "Exchange Ratio") of FV Common Stock
equal to 6,000,000 shares divided by the aggregate number of shares of common
stock of EPub outstanding as of the Effective Time of the Merger, assuming
conversion or exercise of all outstanding rights to acquire shares of common
stock of EPub (the "Merger Consideration"), and each outstanding option and
warrant with respect to EPub Capital Stock will be assumed by FV and will become
an equivalent option and warrant with respect to shares of FV Common Stock. In
determining the number of shares of FV Common Stock to be issued in the Merger,
FV and EPub considered the relative contribution of the two companies to various
factors considered to be determinative of the combined entity's future revenue
and earnings prospects. These factors included the prospective combined
technology, engineering and management resources, customer base, and product and
service offerings of the combined entity. As a result of the discussions
described on pages 47 to 48 of this Proxy Statement, the parties agreed that
considering the foregoing factors, 6,000,000 shares of FV Common Stock would
constitute an appropriate percentage of FV's total capitalization for
consideration in the Merger, based on approximately 31,000,000 shares of FV
Common Stock outstanding as of June 30, 1998. Neither FV nor EPub conducted an
independent appraisal of the other company, and the parties did not attempt an
analysis of future earnings or cash flow projections, comparable company
valuations or other valuation methodologies. No fraction of a share of FV Common
Stock will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of EPub Capital Stock who would otherwise be entitled to a fraction of a
share of FV Common Stock (after aggregating all fractional shares of FV Common
Stock that otherwise would be received by such holder) shall receive from FV an
amount of cash (rounded to the nearest whole cent) equal to the product of such
fraction, multiplied by $1.675. See "Terms of the Merger Manner and Basis for
Converting Shares."
The aggregate value of the shares of FV Common Stock to be issued in the
Merger is approximately $22,140,000 (of which $1,539,892 is the approximate
value of the shares to be issued upon exercise of options and warrants assumed
by FV in the Merger), based on the closing price of the FV Common Stock on
November 9, 1998, of which approximately $3,530,859 will initially be placed in
an escrow account as described below.
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The following diagram illustrates the Merger and the post-Merger ownership
structure of FV and EPub:
THE MERGER
[MERGER DIAGRAM]
POST-MERGER OWNERSHIP STRUCTURE(3)
[POST-MERGER OWNERSHIP DIAGRAM]
- ---------------
(1) Shares of FV Common Stock are exchanged for all outstanding shares of EPub
Capital Stock.
(2) Sub, a wholly-owned subsidiary of FV, is merged with and into EPub. EPub is
the surviving corporation.
(3) Following the Merger, the current stockholders of FV and the former
stockholders of EPub own all outstanding capital stock of FV and EPub is a
wholly-owned subsidiary of FV.
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A portion of the shares of FV Common Stock otherwise issuable to most EPub
stockholders in connection with the Merger will be withheld and placed into an
escrow fund for a period of twelve months following the Effective Time of the
Merger. Such escrow fund will be used to satisfy indemnification obligations of
such EPub stockholders under the Reorganization Agreement on account of breaches
of the representations, warranties, covenants and agreements of EPub or the EPub
Majority Stockholders. The stockholders of EPub who will not be required to
contribute a portion of their FV Common Stock to the escrow fund are Catalyst
Infotech Development Fund, L.P., Grandhaven L.L.C., Hexagon Investments L.L.C.,
Labyrinth Enterprises L.L.C. and Legacy Enterprises L.L.C. (the "Excluded
Stockholders"), who collectively beneficially owned an aggregate of 14.3% of
EPub Capital Stock as of the EPub Record Date. Twenty percent (20%) of the
shares of FV Common Stock which would otherwise be issuable to all stockholders
of EPub other than the Excluded Stockholders will be placed in the escrow fund.
Accordingly, only the Excluded Stockholders will receive 100% of their pro rata
portion of the shares of FV Common Stock issued in connection with the Merger at
the Effective Time of the Merger. All other stockholders of EPub will receive
only 80% of their pro rata portion of the shares of FV Common Stock issued in
connection with the Merger at that time. The remaining shares will be released
to such stockholders twelve months after the Effective Time of the Merger, but
only if such shares are not required to satisfy a claim for indemnification by
FV. To the extent the escrow fund is used to satisfy a claim for indemnification
by FV, the shares of FV Common Stock available for distribution upon dissolution
of the escrow fund will be accordingly reduced, and the stockholders of EPub
other than the Excluded Stockholders will not receive their full pro rata
portion of the FV Common Stock issued in the Merger. The Excluded Stockholders
are not required to contribute a portion of their shares of FV Common Stock to
the escrow fund under the terms of the Reorganization Agreement and are not
subject to any indemnification obligations to FV. The Excluded Stockholders are
exempt from the indemnification and the escrow fund contribution provisions of
the Reorganization Agreement because the Excluded Stockholders became
stockholders of EPub shortly before the execution of the Reorganization
Agreement, and accordingly did not have sufficient familiarity with EPub and its
affairs to provide FV with representations, warranties and indemnity in the
Reorganization Agreement. All of the Excluded Stockholders are investment
partnerships which have a co-investment relationship with Catalyst Infotech
Development Fund, L.P. Current EPub stockholders need not remain stockholders of
FV in order to receive their pro rata portion of the shares of FV Common Stock
remaining in the escrow fund, if any, upon dissolution of the escrow fund. See
"Terms of the Merger -- Indemnification."
FV Common Stock is currently traded on Nasdaq under the symbol "FVHI". On
July 10, 1998, the last full trading day prior to the public announcement of
FV's and EPub's intent to enter into the Reorganization Agreement, the closing
sale price of FV Common Stock on Nasdaq was $4.63 per share. On November 9,
1998, the closing price per share of FV Common on Nasdaq was $3.69. See "Market
Price Information." Based on the capitalization of EPub as of August 20, 1998,
the Exchange Ratio would be 2.20 if the Merger were consummated on such date.
Because the numerator of the Exchange Ratio is fixed, changes in the market
price of FV Common Stock will affect the value of the FV Common Stock to be
received by stockholders of EPub in the Merger. There can be no assurance as to
the market price per share of FV Common Stock at any time prior to, at or after
the consummation of the Merger. EPub stockholders are encouraged to obtain
current market quotations for FV Common Stock prior to voting on the proposal to
approve and adopt the Reorganization Agreement and approve the Merger.
Additionally, the Exchange Ratio will be decreased to the extent additional
shares of, or rights to acquire, EPub Capital Stock are issued prior to the
closing of the Merger.
The terms and conditions of the Merger are set forth in the Reorganization
Agreement, which appears as Annex A to this Proxy/Information Statement. The
Reorganization Agreement sets forth, among other things, (i) the terms of the
Merger, including the Exchange Ratio, (ii) the representations, warranties,
covenants and agreements made by EPub and FV in connection with the Merger,
(iii) indemnification provisions and (iv) certain conditions which must be
satisfied prior to the consummation of the Merger. Pursuant to the terms of the
Reorganization Agreement, FV will acquire EPub by the merger of the Sub with and
into EPub, whereby the separate corporate existence of the Sub will cease, EPub
will be the surviving corporation and EPub will become a wholly-owned subsidiary
of FV. If the representations, warranties, covenants and agreements of the
parties contained in the Reorganization Agreement are violated or the
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conditions to the consummation of the Merger are not complied with, the Merger,
notwithstanding approval by the stockholders of FV and EPub, may not be
consummated. See also "Termination of the Reorganization Agreement."
The Reorganization Agreement may be amended prior to the Effective Time of
the Merger with the consent of FV and EPub, and FV and EPub may waive any of the
conditions to consummation of the Merger set forth in the Reorganization
Agreement. FV and EPub currently do not anticipate that the Reorganization
Agreement will be amended or that any of the material conditions to the
consummation of the Merger will be waived, and both companies intend to
re-submit the proposal to approve and adopt the Reorganization Agreement and
approve the Merger to their respective stockholders for approval in the event
that there is a material adverse change in the terms of the Reorganization
Agreement or if a material condition to the consummation of the Merger is to be
waived. However, the respective Boards of Directors of FV and/or EPub may choose
to consummate the Merger notwithstanding the occurrence of events or
circumstances which cause the representations and warranties of the other party
in the Reorganization Agreement to no longer be true and correct if such events
or circumstances do not, in the judgment of the applicable Board of Directors,
undermine the fundamental benefits of the Merger. In particular, since the date
of the Reorganization Agreement, EPub has been named as a defendant in a
complaint filed by InfoBeat, Inc. ("InfoBeat") in the Federal District Court in
the District of Colorado. InfoBeat's complaint alleges infringement of a patent
held by InfoBeat and seeks injunctive relief and unspecified damages. In
addition, FV has filed a complaint against InfoBeat in the Federal District
Court in San Diego, California. FV's complaint alleges infringement of a patent
held by FV and seeks injunctive relief and unspecified damages. These events
could be deemed to cause the representations and warranties of FV and/or EPub in
the Reorganization Agreement to no longer be true. FV and EPub intend to waive
any right to not effect the Merger which may arise out of such events.
Effective Time of the Merger
The Merger will become effective upon the filing of an Agreement of Merger
(the "Merger Agreement") with the Secretary of State of the State of Delaware
(the "Effective Time"). Assuming all conditions to the Merger are met or waived
prior thereto, it is currently anticipated that the Effective Time will be on
December 9, 1998. See "Terms of the Merger -- Effective Time."
Exchange of EPub Stock Certificates
Promptly after the Effective Time, FV, acting through American Stock
Transfer & Trust Company as its exchange agent (the "Exchange Agent"), will
deliver to each EPub stockholder of record as of the Effective Time of the
Merger by U.S. mail at its address of record a letter of transmittal with
instructions to be used by such stockholder in surrendering certificates which,
prior to the Merger, represented shares of EPub Capital Stock. CERTIFICATES
SHOULD NOT BE SURRENDERED BY THE HOLDERS OF EPUB CAPITAL STOCK UNTIL SUCH
HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT, AND THEN ONLY
IN ACCORDANCE WITH THE TERMS OF SUCH LETTER OF TRANSMITTAL.
Form S-8 Registration Statement
After the Effective Time, FV will file a registration statement on Form S-8
under the Securities Act covering the shares of FV Common Stock issuable upon
exercise of options to purchase EPub Common Stock to be assumed by FV. See
"Terms of the Merger -- Manner and Basis for Converting Shares."
Stock Ownership Following the Merger
Based upon the capitalization of EPub as of August 20, 1998, at the
Effective Time, an aggregate of approximately 5,582,685 shares of FV Common
Stock will be issued to EPub stockholders in the Merger, and FV will assume
options and warrants of EPub which will become equivalent options and warrants
of FV to acquire up to approximately 417,315 additional shares of FV Common
Stock. Based upon the number of shares of FV Common Stock issued and outstanding
as of June 30, 1998, and after giving effect to the issuance
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of FV Common Stock as described in the previous sentence and the exercise of all
options to purchase EPub Capital Stock assumed by FV, the former holders of EPub
Capital Stock and options to purchase EPub Capital Stock would hold, and have
voting power with respect to, approximately 16.1% of FV's total issued and
outstanding shares. The foregoing numbers of shares and percentages are subject
to adjustment to reflect any changes in the capitalization of either FV or EPub
subsequent to the dates indicated and prior to the Effective Time of the Merger,
and there can be no assurance as to the actual capitalization of FV or EPub at
the Effective Time or FV at any time following the Effective Time.
Board of Directors; Management Following the Merger
The Board of Directors of the Surviving Corporation will consist of the
directors of Sub immediately prior to the Effective Time. The officers of Sub
immediately prior to the Effective Time will be the officers of the Surviving
Corporation.
Representations and Warranties
The Reorganization Agreement contains representations and warranties by
EPub, the EPub Majority Stockholders, FV and Sub relating to a number of
matters, including: (i) the due organization of EPub, FV and Sub; (ii) the
authorization, execution, delivery and enforceability of the Reorganization
Agreement and related matters; (iii) the capital structure of EPub and FV; (iv)
the absence of conflicts under certificates of incorporation or bylaws, required
consents or approvals and violations of any instruments or law; (v) the absence
of any liability to pay any fees or commissions to any broker or agent with
respect to the transactions under the Reorganization Agreement and (vi) the
absence of certain material adverse changes or events.
The covenants, representations and warranties of EPub will survive the
Merger for a period of 12 months from the Effective Time, provided that all
covenants, representations and warranties relating to title to and validity of
capital stock and taxes will survive until the expiration of the applicable
statutes of limitations. All representations and warranties of FV will survive
the Merger for a period of 12 months from the Effective Time. See "Terms of the
Merger -- Representations and Warranties" for additional representations and
warranties by EPub, the EPub Majority Stockholders and FV.
Indemnification
Pursuant to the Reorganization Agreement, the EPub stockholders other than
the Excluded Stockholders (Catalyst Infotech Development Fund, L.P., Grandhaven
L.L.C., Hexagon Investments L.L.C., Labyrinth Enterprises L.L.C. and Legacy
Enterprises L.L.C., who collectively owned 14.3% of the EPub Capital Stock as of
the EPub Record Date) are required to indemnify FV, its officers, directors and
affiliates for damages resulting from any breach of the covenants,
representations and warranties of EPub and the EPub Majority Stockholders. Such
indemnity will be satisfied solely by an escrow fund consisting of 20% of the
shares of FV Common Stock issued to all EPub Stockholders other than the
Excluded Stockholders; provided, however, such indemnity will not be limited to
such escrow fund for knowing breach of any covenant, representation or warranty
or for fraud. In no event will any EPub stockholder be required to compensate FV
and its affiliates for losses in an amount exceeding the value of such
stockholder's pro rata portion of the Merger Consideration. FV and Sub have
agreed to indemnify the EPub stockholders (excluding certain EPub stockholders
referred to in the Reorganization Agreement) for damages resulting from any
breach of the covenants, representations and warranties of FV or Sub. Such
indemnity will be limited to an aggregate amount of the escrow fund; provided,
however, such indemnity will not be limited to such amount for knowing breach of
any covenant, representation or warranty or for fraud. See "Terms of the
Merger -- Indemnification."
Conduct of EPub's Business Prior to the Merger
Pursuant to the Reorganization Agreement, EPub has agreed that, until the
earlier of the termination of the Reorganization Agreement pursuant to its terms
and the Effective Time of the Merger, EPub will not take certain actions, or
enter into certain transactions, outside of the ordinary course of business. See
"Terms of the Merger -- Conduct of EPub's Business Prior to the Merger."
12
<PAGE> 21
No Solicitation
Pursuant to the Reorganization Agreement, except under certain limited
circumstances, EPub and the EPub Majority Stockholders have agreed that they
will not (i) solicit, initiate or encourage the submission of any proposal or
offer from any entity relating to the acquisition of any capital stock or other
voting securities, or any portion of the assets, of EPub (including any
acquisition structured as a merger, consolidation, or share exchange) or (ii)
participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any entity to do or seek any of the
foregoing. See "Terms of the Merger -- No Solicitation."
Conditions to the Merger
Consummation of the Merger is subject to certain conditions, including (i)
approval and adoption of the Reorganization Agreement and approval of the Merger
by the holders of 90% of the outstanding EPub Capital Stock and a majority of
the outstanding shares of FV Common Stock other than shares held by entities
which may be deemed affiliates of certain EPub stockholders, (ii) approval by
the stockholders of FV of the proposal set forth in this Proxy
Statement/Information Statement to increase the number of authorized shares of
FV Common Stock, (iii) absence of any law or order prohibiting consummation of
the Merger and any action, suit or proceeding which may prohibit the Merger or
have certain other adverse effects, (iv) receipt by FV and EPub of legal
opinions that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, (v) receipt of the consents of certain third parties
with respect to the Merger, (vi) subject to certain materiality thresholds, the
accuracy of the representations and warranties made by each party in the
Reorganization Agreement, (vii) subject to certain materiality thresholds,
performance of all covenants required by the Reorganization Agreement, (viii)
the execution and delivery of certain employment agreements and noncompetition
agreements among FV, EPub and the officers of EPub, (ix) maintenance of an FV
Common Stock price of $1.40 or more for more than seven days in the fifteen
trading day period ending the three trading days prior to the Effective Time,
and (x) the absence of any material adverse effect with regard to FV or EPub.
See "Terms of the Merger -- Conditions to the Merger."
Termination of the Reorganization Agreement
The Reorganization Agreement provides that it may be terminated at any time
prior to the Effective Time (i) by mutual written consent of FV and EPub; (ii)
by either FV or EPub if (A) there is a final nonappealable order of a court of
competent jurisdiction in effect preventing the consummation of the Merger or
(B) there is any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental entity that would
make consummation of the Merger illegal; (iii) by FV if the Merger is not
consummated by (1) November 30, 1998 in the event the SEC determines to
undertake a review of the Proxy Statement or (2) October 31, 1998 in the event
the SEC determines to not undertake a review of the Proxy Statement by reason of
the failure of any condition to the Merger described above; (iv) by FV, if there
is any action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the transaction by any
governmental entity which would (A) prohibit FV's or EPub's ownership or
operation of all or a portion of the business of EPub or (B) compel FV or EPub
to dispose of or hold separate all or a portion of the business or assets of FV
or EPub as a result of the Merger; (v) by FV, upon a breach of any
representation, warranty or covenant on the part EPub or the EPub Majority
Stockholders set forth in the Reorganization Agreement, subject to certain
materiality thresholds and cure provisions and provided that FV is not in
material breach of any of its obligations under the Reorganization Agreement;
and (vi) by EPub, upon a breach of any representation, warranty or covenant on
the part of FV set forth in the Reorganization Agreement, subject to certain
materiality thresholds and cure provisions and provided that EPub and the EPub
Majority Stockholders are not in material breach of any of their obligations
under the Reorganization Agreement. If the Reorganization Agreement is
terminated by FV or EPub as described above, the Reorganization Agreement will
be of no further force or effect, except that certain provisions contained
therein, including those relating to the parties bearing their own respective
costs and expenses, will survive such termination, and each party will remain
liable for any breaches of the
13
<PAGE> 22
Reorganization Agreement occurring prior to such termination. See "Terms of the
Merger -- Termination of the Reorganization Agreement" and "-- Effect of
Termination."
Anti-Dilution Rights
To provide EPub stockholders a degree of anti-dilution protection against
FV issuing additional shares of FV Common Stock below a threshold price of the
$1.50 per share of FV Common Stock, FV has agreed to enter into a letter
agreement with the EPub stockholders pursuant to which FV, during the one year
period following the Effective Time, is required to issue to EPub stockholders
additional shares of FV Common Stock (as determined pursuant to a weighted
average formula) in the event FV, subject to certain exceptions, issues
additional shares of FV Common Stock or securities convertible into FV Common
Stock at a price per share less than such threshold price. See "Terms of the
Merger -- Anti-Dilution Rights."
Noncompetition and Employment Agreements
Each of Andrew Currie and Brian Makare, as a condition to the Merger, is
required pursuant to the Reorganization Agreement to enter into a noncompetition
agreement with FV and EPub which, during the period of such individual's
employment with FV and/or any affiliated entity and for a period of one year
thereafter, prevents such employee, subject to limited exceptions, from engaging
in any business in direct competition with the business of EPub for the purpose
of competing with FV or EPub, contacting any employees of EPub or FV with the
purpose of enticing such employees out of the employ of FV or EPub, contacting
customers of EPub or FV for the purpose of competing with FV or EPub and
contacting persons who were called upon by EPub or FV as prospective acquisition
candidates, in each case subject to certain geographical restrictions. In
addition, each of Mr. Currie and Mr. Makare, as a condition to the Merger, is
required pursuant to the Reorganization Agreement to enter into employment
agreements with FV, which among other things, provides for severance
compensation in the event such employee is terminated other than for Cause (as
defined therein) during a period of two years from the date of such employment
agreements. See "Terms of the Merger -- Noncompetition and Employment
Agreements."
Restrictions on Transfer; Registration Rights
The shares of FV Common Stock to be issued to EPub stockholders in
connection with the Merger will not be registered under the Securities Act or
under any applicable state securities laws and will be "restricted securities"
under the Securities Act. Such shares will not be freely salable. Accordingly,
such shares must be held indefinitely and may not be sold or disposed of unless
a registration statement with respect to such shares has become effective under
the Securities Act or an exemption from regulation under the Securities Act is
applicable to such transaction. In addition, such shares of FV Common Stock to
be issued to EPub stockholders in connection with the Merger will be subject to
a contractual restriction on transfer preventing EPub stockholders from selling
or otherwise disposing of such shares prior to the first anniversary of the
closing of the Merger. Such contractual restriction on transfer will only apply
to 67% of the total number of shares of FV Common Stock received by an EPub
stockholder in the Merger, and beginning on the date six months after the
closing of the Merger, such restriction will only apply to 34% of the total
number of shares of FV Common Stock received by an EPub stockholder.
Furthermore, each EPub stockholder must agree, if requested by FV and if all
executive officers and directors of FV similarly agree, not to sell or otherwise
transfer or dispose of any FV capital stock held by the EPub stockholder during
a period of time determined by FV and its underwriters (not to exceed 90 days)
following the effective date of a registration statement of FV filed under the
Securities Act. See "Terms of the Merger -- Restrictions on Transfer." Pursuant
to the Registration Rights Agreement described below, the EPub stockholders will
have certain rights with respect to the registration of the shares of FV Common
Stock to be issued in connection with the Merger. Except as set forth in such
agreement, FV is under no obligation to register any of the FV Common Stock
issuable pursuant to the Reorganization Agreement.
FV, as a condition to the Merger, is required pursuant to the
Reorganization Agreement to enter into a Registration Rights Agreement with the
EPub stockholders entitling such stockholders and their permitted transferees to
certain rights with respect to the registration of shares of FV Common Stock
under the
14
<PAGE> 23
Securities Act. Subject to certain limitations set forth in the Registration
Rights Agreement, FV will prepare and file with the SEC, and use its reasonable
best efforts to have declared within 60 days of the Effective Time, a
registration statement on Form S-3 providing for the resale by such stockholders
of all shares of FV Common Stock then owned (or to be owned upon exercise of
securities convertible into FV Common Stock) by such stockholders. In addition,
subject to certain limitations in the Registration Rights Agreement, if FV
registers any of its securities either for its own account or for the account of
other security holders, such holders will be entitled to include their shares of
FV Common Stock in the registration, subject to the ability of the underwriters
to limit the number of shares included in the Offering. See "Terms of the
Merger -- Registration Rights."
Voting Agreement
SOFTBANK Holdings, SOFTBANK Technology, Lee H. Stein, Paymentech Inc. and
First USA Financial Corp., who collectively beneficially own an aggregate of
75.3% of the FV Common Stock as of the FV Record Date, have entered into a
certain voting agreement with EPub pursuant to which such stockholders have
agreed to vote such shares (and any additional shares of FV Common Stock that
such stockholders acquire beneficial ownership of prior to the termination of
such voting agreement) in favor of approval and adoption of the Reorganization
Agreement and approval of the Merger. The parties to the voting agreement need
not vote their shares in accordance with such agreement if the majority of the
shares of FV Common Stock represented and voting at such FV Stockholders
Meeting, other than shares held by the parties to the voting agreement and their
affiliates, are voted against the approval and adoption of the Reorganization
Agreement and approval of the Merger. See "FV Stockholders Meeting -- Voting
Required."
Co-Sale Agreement
To provide EPub stockholders a certain level of liquidity with respect to
the shares of FV Common Stock to be issued to EPub stockholders in connection
with the Merger, SOFTBANK Holdings and SOFTBANK Technology have agreed to enter
into a co-sale agreement with EPub stockholders granting such stockholders
certain co-sale rights with respect to such shares of the Merger Consideration.
See "Terms of the Merger -- Co-Sale Agreement."
FV STOCKHOLDER PROPOSAL NO. 2 -- CHANGE OF CORPORATE NAME
The FV Board is proposing an amendment to FV's Amended and Restated
Certificate of Incorporation to change the name of the corporation to
"MessageMedia, Inc." The FV Board believes that a change in the name of the
corporation is advisable in light of FV's new business focus on e-mail-based
messaging services and technologies, including FV's Interactive Messaging
Platform and its shift away from secure Internet-based payment systems. The FV
Board believes the adoption of the name "MessageMedia, Inc." will serve to
heighten market awareness of FV's Interactive Messaging Platform and related
services and technologies and to enhance customer brand recognition. See "FV
Stockholder Proposal No. 2."
FV STOCKHOLDER PROPOSAL NO. 3 -- INCREASE IN AUTHORIZED CAPITAL STOCK
The FV Board is proposing an amendment to FV's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of FV
Common Stock from 40,000,000 shares to 100,000,000 shares. The FV Board has
determined that an increase in the authorized capital stock is necessary in
light of the fact that, as of the FV Record Date, 33,091,260 of the 40,000,000
authorized shares of FV Common Stock were issued and outstanding, and an
additional 5,602,454 shares were reserved for issuance upon exercise of
outstanding stock options and warrants. The FV Board believes that the issuance
of additional shares of FV Common Stock is likely to be required in order to
attract and retain officers, employees and consultants and in connection with
future acquisitions of any businesses, assets or technologies that FV may
undertake. In particular, the adoption of this proposal is necessary in order to
permit the issuance of the shares of FV Common Stock issuable to EPub
stockholder in the Merger. If adopted, subject to applicable restrictions under
the DGCL and the rule and regulations of Nasdaq, the proposal will allow the FV
Board, without further action by the FV stockholders, to issue the additional
authorized shares of FV Common Stock as the FV Board may deem advisable in its
sole discretion. See "FV Stockholder Proposal No. 3."
15
<PAGE> 24
FV STOCKHOLDER PROPOSAL NO. 4 -- AMENDMENT OF 1995 STOCK PLAN
FV's 1995 Stock Plan authorizes the FV Board, or a committee which the FV
Board may appoint from among its members, to grant options and rights to
purchase shares of FV Common Stock. In July 1998, the FV Board amended FV's 1995
Stock Plan, subject to stockholder approval, to increase the shares reserved for
issuance thereunder by 2,000,000 shares to an aggregate of 6,000,000 shares. FV
stockholders are being asked to approve this share increase at the FV
Stockholders Meeting. The FV Board believes that increasing the number of shares
available under FV's 1995 Stock Plan is necessary in order to allow FV to
continue to attract, retain and motivate employees. See "FV Stockholder Proposal
No. 4."
MARKET AND PRICE DATA
FV Common Stock is traded on Nasdaq under the symbol "FVHI." On July 10,
1998, the last full trading day prior to the public announcement of FV's and
EPub's intent to enter into the Reorganization Agreement, the closing sale price
of FV Common Stock as reported on Nasdaq was $4.63 per share. On November 9,
1998, the closing price of FV Common Stock as reported on Nasdaq was $3.69 per
share. Stockholders of EPub are encouraged to obtain current market quotations
for FV Common Stock prior to voting on the proposal to approve and adopt the
Reorganization Agreement and approve the Merger. There can be no assurance as to
the actual price of FV Common Stock prior to, at or at any time following, the
Effective Time of the Merger.
16
<PAGE> 25
SELECTED FINANCIAL INFORMATION
The following selected historical financial information of FV and EPub has
been derived from their respective historical financial statements and should be
read in conjunction with such financial statements and notes thereto. The
audited financial statements and notes thereto of FV as of December 31, 1996 and
1997 and for the three years in the period ended December 31, 1997 and the
unaudited financial statements and notes thereto as of June 30, 1998 and for the
six months ended June 30, 1997 and 1998 are set forth elsewhere in this Proxy
Statement/Information Statement. The audited financial statements and notes
thereto of FV as of and for the period from inception through December 31, 1994
are not included herein. The selected historical financial information of FV as
of June 30, 1997 and 1998, and for the six-month periods ended June 30, 1997 and
1998 has been derived from the unaudited financial statements of FV and, in the
opinion of FV's management, reflects all adjustments necessary for the fair
presentation of such unaudited interim financial information. The selected
historical financial information of EPub as of June 30, 1997 and 1998, and for
the period from inception through June 30, 1997 and for the twelve-month period
ended June 30, 1998 has been derived from the audited financial statements of
EPub set forth elsewhere in this Proxy Statement/ Information Statement. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the entire year.
FV SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
INCEPTION SIX MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------------------------- -------------------------
1994 1995 1996 1997 1997 1998
------------ ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $ 3,580 $ 197,902 $ 695,866 $ 1,450,598 $ 785,984 $ 498,294
Cost of revenue............ -- 123,375 265,900 270,416 171,985 34,637
--------- ----------- ------------ ------------ ----------- -----------
Gross profit............. 3,580 74,527 429,966 1,180,182 613,999 463,657
Operating expenses
Marketing and sales...... 143,678 346,400 1,836,545 5,424,110 2,171,371 1,213,499
Research, development and
engineering............ 307,315 530,809 4,652,582 6,687,177 3,058,821 2,896,745
General and
administrative......... 358,790 1,292,781 4,237,638 4,377,688 2,573,242 2,230,721
Restructuring charge..... -- -- -- -- -- 812,166
Depreciation and
amortization........... 16,327 106,628 524,124 1,097,716 547,033 840,075
--------- ----------- ------------ ------------ ----------- -----------
Total operating expenses... 826,110 2,276,618 11,250,889 17,586,691 8,350,467 7,993,206
--------- ----------- ------------ ------------ ----------- -----------
Loss from operations..... (822,530) (2,202,091) (10,820,923) (16,406,509) (7,736,468) (7,529,549)
Interest income
(expense).............. (13,149) (67,890) 130,983 459,227 300,739 (8,497)
--------- ----------- ------------ ------------ ----------- -----------
Net loss................... (835,679) (2,269,981) (10,689,940) (15,947,282) (7,435,729) (7,538,046)
Dividends imputed on
preferred stock........ -- -- -- (1,250,000) -- (153,126)
--------- ----------- ------------ ------------ ----------- -----------
Net loss applicable to
common shares............ $(835,679) $(2,269,981) $(10,689,940) $(17,197,282) $(7,435,729) $(7,691,172)
========= =========== ============ ============ =========== ===========
Net loss per share, basic
and diluted.............. $ (0.26) $ (0.54) $ (2.33) $ (1.94) $ (0.84) $ (0.69)
Shares used in per share
computation, basic and
diluted.................. 3,185,606 4,170,231 4,588,262 8,842,367 8,803,463 11,183,418
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $6,301,489
Furniture, equipment, software and information technology,
net....................................................... 1,539,788
Total assets................................................ 8,296,091
Current liabilities......................................... 2,688,903
Amount due to stockholder, net of current portion........... 125,000
Stockholders' equity........................................ 5,482,188
</TABLE>
17
<PAGE> 26
EPUB SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
INCEPTION FISCAL YEAR
THROUGH ENDED
JUNE 30, JUNE 30,
1997 1998
---------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 80,347 $ 864,030
Operating expenses
Marketing and sales....................................... 19,237 271,772
Research and development.................................. 46,769 125,782
General and administrative................................ 258,611 611,911
---------- ----------
Total operating expenses.................................... 324,617 1,009,465
---------- ----------
Loss from operations...................................... (244,270) (145,435)
Interest expense.......................................... (1,025) (11,710)
Interest income........................................... -- 889
Miscellaneous income...................................... 5,000 2,800
---------- ----------
Net loss.................................................... $ (240,295) $ (153,456)
========== ==========
Net loss per share, basic and diluted....................... $ (0.13) $ (0.08)
Shares used in per share computation, basic and diluted..... 1,871,445 1,887,012
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $144,023 $ 62,273
Property and equipment, net................................. 31,015 220,552
Total assets................................................ 214,081 442,329
Current liabilities......................................... 21,704 175,107
Long-term debt and capital lease obligations, net of current
portion................................................... 12,103 88,840
Stockholders' equity........................................ 180,274 178,382
</TABLE>
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<PAGE> 27
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
The selected unaudited pro forma combined financial information of FV, EPub
and Distributed Bits L.L.C. ("Distributed Bits") gives effect to the Merger and
proposed acquisition of Distributed Bits and is derived from the unaudited pro
forma combined financial statements and should be read in conjunction with such
pro forma statements and the notes thereto, which are included in this Proxy
Statement/Information Statement. FV has entered into a non-binding letter of
intent with Distributed Bits with respect to the acquisition by FV of
Distributed Bits. See "FV Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments" and "Risk
Factors -- Risks Related to FV's Business -- Integration of Potential
Acquisitions." The pro forma data does not reflect any additional shares issued
since June 30, 1998.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Merger and the proposed acquisition of
Distributed Bits had been consummated on January 1, 1997, nor is it necessarily
indicative of future operating results or financial position.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue.............................................. $ 1,786,229 $ 868,301 $ 1,109,010
Cost of revenue...................................... 270,416 171,985 34,637
------------ ------------ ------------
Gross profit....................................... 1,515,813 696,316 1,074,373
Operating expenses
Marketing and sales................................ 5,539,333 2,201,935 1,442,301
Research, development and engineering.............. 7,236,765 3,263,791 3,417,099
General and administrative......................... 4,914,790 2,802,417 2,916,013
Restructuring charge............................... -- -- 812,166
Depreciation and amortization...................... 13,560,194 6,778,272 7,071,314
------------ ------------ ------------
Total operating expenses............................. 31,251,082 15,046,415 15,658,893
------------ ------------ ------------
Loss from operations............................... (29,735,269) (14,350,099) (14,584,520)
Interest income.................................... 554,587 352,333 55,761
Interest expense................................... (92,511) (48,944) (72,478)
------------ ------------ ------------
Net Loss............................................. (29,273,193) (14,046,710) (14,601,237)
Dividends imputed on preferred stock............... (1,250,000) -- (153,126)
------------ ------------ ------------
Net loss applicable to common shares................. $(30,523,193) $(14,046,710) $(14,754,363)
============ ============ ============
Net loss per share, basic and diluted................ $ (1.85) $ (0.85) $ (0.78)
Shares used in per share computation, basic and
diluted............................................ 16,539,023 16,500,119 18,880,074
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1998
-------------
<S> <C>
BALANCE SHEET DATA(1):
Cash, cash equivalents and short-term investments........... $ 6,436,602
Furniture, equipment, software and information technology,
net....................................................... 1,865,756
Total assets................................................ 33,883,732
Current liabilities......................................... 3,855,283
Amounts payable, net of current portion..................... 248,362
Stockholders' equity........................................ 29,780,087
</TABLE>
- ---------------
(1) FV intends to account for the Merger and the proposed acquisition of
Distributed Bits using the purchase method of accounting. FV, EPub and
Distributed Bits estimate that they will incur merger-related and
acquisition related costs, consisting primarily of transaction costs for
attorneys, accountants, financial printing and other related charges, of
approximately $500,000 for FV, $150,000 for EPub and $100,000 for
Distributed Bits LLC. This estimate is preliminary and is therefore subject
to change. These costs will be added to the purchase price. See "Unaudited
Pro Forma Combined Financial Statements" and the notes thereto included
elsewhere herein.
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<PAGE> 28
RISK FACTORS
This proxy statement/information statement contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and elsewhere in this proxy statement/information statement. Such
statements are subject to certain risks and uncertainties, including those
discussed below, that could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Since EPub
is not a public company subject to the reporting requirements of Section 13(a)
or Section 15(d) of the Exchange Act, any of the forward-looking statements of
EPub made in this Proxy Statement/Information Statement are not subject to
Section 27A of the Securities Act and Section 21E of the Exchange Act. The
following factors should be considered carefully by holders of FV common stock
and EPub capital stock in evaluating whether to approve and adopt the
Reorganization Agreement and approve the Merger. These factors should be
considered in conjunction with the other information included or incorporated by
reference in this proxy statement/information statement, including in
conjunction with forward-looking statements made herein. FV and EPub undertake
no obligation to publicly release the results of any revisions to
forward-looking statements contained herein that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. For periods following the merger, references to FV should
be considered to refer to FV and its subsidiaries, including EPub, unless the
context otherwise requires.
RISKS RELATED TO THE MERGER
Uncertainty Relating to Integration
The successful combination of FV and EPub, including the successful
operation of EPub as a subsidiary of FV, will require substantial effort from
each company. The diversion of the attention of management and any difficulties
encountered in the transition process could have an adverse impact on FV's
ability to realize the anticipated benefits of the Merger. The successful
combination of the two companies will also require coordination of the
companies' research and development and sales and marketing efforts. In
addition, the process of combining the two organizations could cause the
interruption of, or a loss of momentum in, FV's and/or EPub's activities. There
can be no assurance that FV will be able to retain EPub's key management,
technical, sales and customer support personnel, or that FV will realize the
anticipated benefits of the Merger. See also "Risks Related to FV's
Business -- Integration of Potential Acquisitions."
Integration of Technologies
Each of FV's and EPub's success in the businesses of interactive messaging
services for electronic commerce and e-mail message delivery services,
respectively, is dependent on its ability to respond to technological
developments and protect its proprietary technology by a combination of trade
secret, copyright and trademark laws, nondisclosure agreements and other
contractual provisions and technical measures to protect its proprietary
technology. See "Risks Related to FV's Business -- Dependence Upon Product and
Service Development; Risks of Technological Change and Evolving Industry
Standards," "-- Limited Intellectual Property," "Risks Related to EPub's
Business -- Developing Internet Market; Unproven Acceptance of EPub's Products
and Services; Rapid Technological Change" and "-- Risks Associated with Reliance
on Intellectual Property Rights." The successful combination of FV and EPub will
not only require that each company continue to respond to such technological
change and protect its proprietary technology, but also that the companies
integrate their technologies to achieve certain potential benefits of the
Merger. See "Approval of the Merger and Related Transactions -- FV's Reasons for
the Merger -- Complementary Electronic Messaging Technology." There can be no
assurance that FV will be able to maximize the financial and strategic position
of FV through the successful incorporation of EPub's technology and rights into
FV's products and services.
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Need for Additional Capital as a Result of Expansion of Operations
FV expects it will need to raise additional funds which may not be readily
available or available on acceptable terms. See "Risks Related to FV's
Business -- Need for Additional Capital," "-- Uncertainty of Nasdaq National
Market Listing" and "Risks Related to EPub's Business -- Possible Adverse Effect
Due to Future Capital Requirements; Uncertainty of Additional Financing." The
consummation of the Merger and the resulting expansion of operations may further
strain FV's financial resources. There is no assurance that FV will be able to
raise additional funds on acceptable terms to support such expansion of
operations. The failure to raise any needed funds on sufficiently favorable
terms could have a material adverse effect on the combined business, financial
condition and results of operations.
Effect of Merger on Customers and Partners
Certain of EPub's existing customers or strategic partners may view
themselves as competitors of FV and therefore determine that the Merger is
competitively disadvantageous to them. As a consequence, EPub's relationship
with these customers or strategic partners could be adversely affected. In
addition, FV's relationships with certain of its suppliers that compete with
EPub may be adversely affected by the Merger.
Risks Associated with Fixed Exchange Ratio
As a result of the Merger, each outstanding share of EPub Common Stock will
be converted into a number of shares of FV Common Stock equal to 6,000,000
shares divided by the aggregate number of shares of common stock of EPub
outstanding as of the Effective Time of the Merger, assuming conversion or
exercise of all outstanding rights to acquire shares of common stock of EPub.
Based on the capitalization of EPub as of August 20, 1998, the Exchange Ratio
would be 2.20 if the Merger were consummated on such date. Because the numerator
of the Exchange Ratio is fixed and will not increase or decrease due to
fluctuations in the market price of FV Common Stock, the specific value of the
consideration to be received by EPub stockholders in the Merger will depend on
the market price of FV Common Stock at the Effective Time. In the event that the
market price of FV Common Stock decreases or increases prior to the Effective
Time, the market value at the Effective Time of FV Common Stock to be received
by EPub stockholders in the Merger would correspondingly decrease or increase.
The market price of FV Common Stock as of a recent date is set forth herein
under "Summary -- Market and Price Data" and "Market Price Information." EPub
stockholders are advised to obtain recent market quotations for FV Common Stock.
FV Common Stock historically has been subject to substantial price volatility.
No assurance can be given as to the market price of FV Common Stock at any time
before the Effective Time or as to the market price of FV Common Stock at any
time thereafter. See "Summary -- Market and Price Data," "Market Price
Information" and "Comparison of Capital Stock." Additionally, the Exchange Ratio
will be decreased to the extent additional shares of, or rights to acquire, EPub
Capital Stock are issued prior to the closing of the Merger.
Possible Volatility of Stock Prices
EPub stockholders will receive FV Common Stock in the Merger. The market
price for FV Common Stock could be subject to significant fluctuations in
response to various factors and events, including variations in FV's operating
results and fluctuations in the stock market as a whole.
Tax Consequences of Merger
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Code with the consequences that generally no gain or loss should be
recognized by the EPub stockholders on the exchange of EPub Capital Stock for FV
Common Stock. There is no assurance, however, that the Merger will qualify as a
reorganization or that the FV Common Stock received by the EPub stockholders
will be received without recognition of gain or loss. See "The Merger -- Certain
Federal Income Tax Consequences."
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Escrow of Shares and Indemnity Obligations
Under the Reorganization Agreement, twenty percent (20%) of the shares of
FV Common Stock to be delivered to the EPub stockholders (excluding Catalyst
Infotech Development Fund, L.P., Grandhaven L.L.C., Hexagon Investments L.L.C.,
Labyrinth Enterprises L.L.C. and Legacy Enterprises L.L.C.) at the Effective
Time will be placed in escrow to secure the indemnity obligations of the EPub
stockholders. Such escrow shares will be deposited, pro rata, from the shares of
FV Common Stock that would otherwise be delivered to the EPub stockholders after
the closing of the Merger. In the event such escrow shares are delivered to FV
from the escrow pursuant to the Reorganization Agreement, the number of shares
of FV Common Stock ultimately received by the EPub stockholders would be less
than anticipated at the Effective Time.
Issuance of Restricted Securities
The shares of FV Common Stock to be issued in the Merger for the EPub
Capital Stock will not be registered under the Securities Act. Such shares of FV
Common Stock may not be resold or transferred in the absence of such
registration except in compliance with Rule 144 under the Securities Act or
unless FV receives an opinion of counsel reasonably acceptable to it stating
that such resale or transfer is otherwise exempt from the registration and
prospectus delivery requirements of the Securities Act. The Reorganization
Agreement provides that the shares of FV Common Stock to be issued in connection
with the Merger will be registered under the Securities Act within sixty (60)
days following the closing. Even after such registration statement is declared
effective, the resale of any shares of FV Common Stock issued in connection with
the Merger may be delayed by FV as it deems necessary to update information
contained in any prospectus made part of such registration statement. In
addition, such shares of FV Common Stock to be issued to EPub stockholders in
connection with the Merger will be subject to contractual restrictions on
transfer pursuant to a certain stockholder representation statement to be
executed and delivered to FV by each EPub stockholder as a condition to the
consummation of the Merger. See "Terms of the Merger -- Restrictions on
Transfer."
No Independent Fairness Opinion Obtained by EPub Board
The EPub Board believes that the Merger is fair to and in the best
interests of EPub and its stockholders, and the EPub Board has unanimously
approved the Reorganization Agreement and the Merger. In reaching its decision,
the EPub Board considered a number of factors. However, the EPub Board did not
obtain a fairness opinion from an independent financial advisor as to the
fairness of the consideration to be received by the EPub stockholders. There can
be no assurance that an independent financial advisor would determine that the
consideration to be paid to the EPub stockholders would be fair to such
stockholders from a financial point of view.
RISKS RELATED TO FV'S BUSINESS
History of Operating Losses and Anticipated Future Losses
FV has incurred net operating losses in each quarter since its inception in
March 1994. As of June 30, 1998, FV had an accumulated deficit of approximately
$37.5 million. To date, FV has not generated significant revenues. There can be
no assurance that FV's revenues will increase in the future. In addition, as a
result of the anticipated significant investment that FV is making and plans to
continue to make in its systems, sales, marketing, research, development and
engineering and administrative infrastructure over the near term, FV 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 FV will ever achieve or be able to sustain profitability. FV 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 FV
will succeed in addressing any or all of these risks, and the failure to do so
would have a material adverse effect on FV's business, financial condition and
results of operations. Furthermore, because of FV's history of operating losses
and, as of December 31, 1997, insufficient working capital to finance FV's
planned operations through 1998, FV's independent auditors in their report on
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FV's 1997 financial statements noted that such conditions raised substantial
doubt about FV's ability to continue as a going concern.
Limited Operating History
FV commenced operations in March 1994 and, accordingly, FV has a limited
operating history upon which to base an evaluation of its business and
prospects. To date, substantially all of FV's revenues have been attributable to
the receipt of registration fees from consumers and merchants, transaction
processing fees, merchandising fees, sales of VirtualTAGs and consulting fees
associated with the FV Internet Payment System ("FVIPS"). FV ceased its FVIPS
operations on August 17, 1998 and is currently encouraging its merchants and
consumers to migrate to alternative Internet payment systems. FV has decided to
dedicate all its resources to developing and implementing its IMP and related
services and technologies. FV's future financial performance will depend
significantly on the successful introduction and customer acceptance of the IMP
and other new and enhanced products and services. Demand for new product
categories such as the IMP is inherently difficult to predict, and FV believes
that its prior experience in developing and operating FVIPS does not offer a
meaningful basis to assess the future prospects of the IMP and related products
and services. Accordingly, there is no assurance that a significant market for
the IMP or for any other technologies or services of FV will develop or that FV
will be successful in marketing the IMP or any new or enhanced products or
services.
Integration of Potential Acquisitions
As a part of its business strategy, FV intends to make acquisitions of, or
significant investments in, complementary companies, products or technologies.
Any such future acquisition would be accompanied by the risks commonly
encountered in acquisitions of companies. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of FV's ongoing business, the
inability of management to maximize the financial and strategic position of FV
through the successful incorporation of acquired technology and rights into FV'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 FV would be successful in overcoming these risks or any
other problems encountered in connection with such acquisitions.
On July 28, 1998, FV entered into a non-binding letter of intent with
Distributed Bits with respect to the potential acquisition by FV of Distributed
Bits. In addition to the integration risks described above, there can be no
assurances that such proposed acquisition of Distributed Bits or other potential
acquisitions by FV will be consummated. Such potential acquisitions are
generally contingent upon numerous factors, including the negotiation of a
definitive agreement mutually satisfactory to the parties, completion by FV of
its financial, technical and legal due diligence, approval of the transaction by
the FV Board and approval of the transaction by the acquisition target, as well
as other customary approvals and matters. See "FV Management's Discussions and
Analysis of Financial Condition and Results of Operations -- Recent
Developments."
Need for Additional Capital
FV will need to raise additional funds to fund its operations, as well as
to develop new or enhanced services, to respond to competitive pressures or to
acquire complementary businesses or technologies. If adequate funds cannot be
obtained or are not available on acceptable terms, FV 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 FV'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 FV 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 FV Common Stock. Although FV believes that it has sufficient
capital to fund its operations
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through the end of 1998, FV may elect to raise up to $15 million through a
private placement of capital stock of FV before the end of first quarter of
1999.
Uncertainty of Nasdaq National Market Listing
FV anticipates that it will need to raise additional funds from time to
time to ensure that FV remains in compliance with the requirements of the Nasdaq
National Market for continued listing. If Nasdaq in the future decides to
discontinue the listing of FV Common Stock, such actions by Nasdaq would
adversely affect the liquidity and market price of FV Common Stock.
If FV should continue to experience losses from operations, it may be
unable to maintain the standards for continued quotation on the Nasdaq National
Market, and the shares of FV Common Stock could be subject to removal from the
Nasdaq National Market. Trading, if any, in the FV Common Stock would therefore
be conducted on the Nasdaq SmallCap Market, which is a significantly less liquid
market than the Nasdaq National Market. As a result, a stockholder could find it
more difficult to dispose of the FV Common Stock. Nasdaq has recently
promulgated new rules which make continued listing of companies on both the
Nasdaq National Market and the Nasdaq SmallCap Market more difficult and has
significantly increased its enforcement efforts with regard to the standards for
such listing. In addition, if the FV Common Stock were removed from the Nasdaq
National Market and does not qualify for listing on the Nasdaq SmallCap Market,
the FV Common Stock could be subject to the so-called "penny stock" rules that
impose additional sales practice and market making requirements on
broker-dealers who sell and/or make a market in such securities. Consequently,
failure to qualify for listing on, or removal from, the Nasdaq SmallCap Market,
if it were to occur, could affect the ability or willingness of broker-dealers
to sell and/or make a market in the FV Common Stock and the ability of FV
stockholders to sell their securities in the secondary market. In addition, if
the market price of the FV Common Stock is less than $5.00 per share, FV may
become subject to certain "penny stock" rules even if still quoted on the Nasdaq
SmallCap Market. Such rules may further limit the market liquidity of the FV
Common Stock and the ability of FV stockholders to sell such FV Common Stock in
the secondary market. Furthermore, under such circumstances, if FV was deemed to
be an issuer of "penny stock," forward-looking statements of FV would not be
subject to Section 27A of the Securities Act and Section 21E of the Exchange
Act.
Anticipated Fluctuations in Quarterly Operating Results
As a result of the early stage of development of Internet commerce, the IMP
and FV's limited operating history, FV's revenue expectations are based almost
entirely on internal estimates of future demand and not on actual experience. In
particular, it is difficult to forecast revenue expectations for the IMP, which
was released for commercial use in July 1998. Moreover, FV has only limited
historical financial data for quarterly or annual periods on which to base
planned operating expenses. FV'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, FV may be unable to adjust its spending levels on a
timely basis to compensate for unexpected revenue shortfalls. To a certain
extent, FV has encountered this problem to date. As a result, FV 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 IMP or Internet related consulting will increase significantly or at all.
Any material shortfall of demand for FV's products and services would have a
material adverse effect on FV's business and financial condition and could cause
significant fluctuations in FV's results of operations.
FV 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 FV, including, among others,
market response to FV's IMP; difficulties encountered in the development or
deployment of products or services, including interactive messaging; market
acceptance of Internet commerce in general and the IMP concept in particular;
fluctuating market demand for FV's products and services; the degree of
acceptance of the Internet as an advertising and merchandising medium; the
timing and effectiveness of collaborative marketing efforts initiated by FV's
strategic partners; the timing of the introduction of new products and
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services offered by FV; the timing of the release of enhancements to FV's
products and services; product introductions and service offerings by FV's
competitors; the mix of the products and services provided by FV; the timing and
rate at which FV increases its expenses to support projected growth; the cost of
compliance with applicable government regulations; competitive conditions in
FV's marketplace; and general economic conditions. In addition, the fees charged
by FV for advertising, messaging, and consulting services are subject to change
as FV introduces the IMP and assesses its marketing strategy and competitive
position. FV 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 FV'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 FV Common Stock.
Risks Related to Product Transition
FV has derived substantially all of it revenues to date from FVIPS,
VirtualTAGs and related services. In the second quarter of fiscal 1997, FV
determined to refocus its resources on developing and commercializing the IMP.
Since the IMP has just recently been completed, and since the IMP has only been
implemented on a limited basis, no assurance can be given that the IMP will be
successful or that the cost of future enhancements will not exceed future
revenues generated by the IMP. In addition, there is no assurance that FV's
current server capacity and communications systems will be adequate to support
high volumes of IMP usage. A key element of FV's strategy is to generate a high
volume of messages and associated transactions through the IMP. Accordingly, the
performance of FV's products and services is critical to FV's ability to achieve
market acceptance and continued use of these products and services. Significant
increases in the volume of messages processed by FV's systems could strain the
capacity of FV's software or hardware, which could lead to slower response time
or system failures. Any additional investment in enhancing the capacity of FV's
server and communications systems may adversely affect FV's financial condition
and operating results and may result in service delays and interruptions that
would adversely impact FV's revenues and reputation. In the event that the IMP
is not successfully introduced and marketed and revenues from the IMP are not
sufficient to return the cost of its operation and future enhancements, FV's
business, financial condition and results of operation will be materially and
adversely affected.
Uncertain Acceptance of Interactive Messaging Services
FV's future success depends to a significant degree on FV's ability to
successfully market the IMP and related services. The first phase of the IMP has
just recently been commercially introduced and, to date, FV has not secured any
significant customer commitments to license, use or implement the IMP. Moreover,
market demand for new product and service categories such as interactive
messaging is inherently uncertain. The IMP represents a departure from the
traditional methods of marketing and information exchange employed by FV's
target customers, who have typically relied predominantly on advertising and
direct mail to attract new customers and maintain customer relationships.
Acceptance of the IMP will require a transition to new ways of conducting
business by enterprises that have already made substantial investments in other
means of conducting commerce and exchanging information. Accordingly, the market
prospects for the IMP are highly uncertain. Moreover, although FV believes that
the IMP will prove to be an efficient and cost-effective marketing and
relationship-management vehicle for a broad variety of customers, there is no
assurance that prospective customers will be able to implement the IMP without
substantial additional cost, or that the cost-efficiency of the IMP will compare
favorably with traditional methods of marketing and information exchange for
most customers. Failure of the IMP to meet customers' demands for efficacy and
cost-efficiency may result in a decline in use of FV's interactive messaging
services over time and would materially and adversely affect FV's business,
financial condition and results of operations.
Dependence on Distribution Relationships, Collateral Systems and Expansion of
Direct Sales Force
A key element of FV's current business and marketing strategy is to
establish, develop and maintain relationships with financial institutions,
catalog companies, direct marketers and travel services, which include airlines,
rental car agencies and hotel operators, to promote FV's products and services
to their merchant and
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consumer customers. Although FV has established relationships with such entities
in an effort to enhance FV's ability to penetrate the market for interactive
messaging, such relationships are nonexclusive and have not resulted in any
comprehensive or measurable increase in FV's revenues to date. No assurance can
be given that FV will be able to develop strategic relationships or that any
such relationship will prove to be effective in creating demand for the IMP. In
addition, there can be no assurance that FV's existing or potential marketing
partners, most of whom have significantly greater financial and marketing
resources than FV, will not change their business strategies or discontinue
their relationships with FV, develop and market products and services that
compete with FV's products and services in the future or form collaborative
marketing relationships with one or more of FV's competitors that offer
alternative Internet commerce solutions.
The operation of the IMP is dependent on the continued availability and
reliability of the Internet and collateral telecommunications. FV is
substantially dependent on several third party providers of Internet
connectivity and collateral telecommunication services. There can be no
assurance that these companies will continue to provide services to FV without
disruptions in service, at the current cost, or at all. Although FV believes
that such services could be obtained from other sources in due course if
required, reengineering FV's computer systems and telecommunications
infrastructure to accommodate a new service provider could only be accomplished
at significant cost and with significant delay. Any interruption of such service
providers also would be likely to result in the disruption of the operation of
the IMP with an attendant loss of revenues and potential loss of customers. Such
losses could have a material adverse effect on FV's business, financial
condition and results of operations.
In order to promote the use of the IMP, FV 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. FV's management has very limited experience in recruiting,
developing or managing a marketing and sales force. There can be no assurance
that FV 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 FV's
marketing and sales efforts will be successful.
Undeveloped and Rapidly Changing Markets
The markets for FV'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 World Wide Web. As is typical for a new
and rapidly evolving industry, demand for and market acceptance of recently
introduced products and services are subject to a high level of uncertainty and
risk. Acceptance and usage of the IMP is dependent on continued growth in use of
e-mail as a primary means of communications by businesses and consumers.
Increased usage of interactive messaging is also contingent on acceptance of
e-mail as a vehicle for targeted marketing of products and services and on the
ability of FV to successfully differentiate its services from random mass
e-mailing products and services which have encountered substantial resistance
from consumers. Businesses that already have invested substantial resources in
traditional or other methods of conducting business may be reluctant to adopt
new commercial methodologies or strategies that may limit or compete with their
existing businesses. Individuals with established patterns of purchasing goods
and services may be reluctant to alter those patterns. Accordingly, it is not
assured that sufficient demand for FV's products and services will develop to
sustain FV's business.
FV'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 FV's products and services will emerge or that the IMP will be
generally adopted. If the market fails to develop, or develops more slowly than
expected, if the Internet infrastructure is not adequately expanded or managed,
or if FV's products and services do not achieve market acceptance by a
significant number of individuals, businesses and financial institutions, then
FV's business, financial condition and results of operations will be materially
and adversely affected.
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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, FV expects competition to increase significantly. There are no
substantial barriers to entry into FV's business, and FV expects established and
new entities to enter the market for interactive messaging services and
interactive Internet communications in the near future. It is possible that a
single supplier will dominate one or more market segments. Furthermore, since
there are many potential entrants to the field, it is extremely difficult to
assess which companies are likely to offer competitive products and services in
the future, and in some cases it is difficult to discern whether an existing
service is competitive with FV's current services.
FV's principal competitors in the interactive messaging services arena
include providers of e-mail based services such as PostX Corporation, Axciom,
ReplyNet, InfoBeat, Inc. and Cyber Data Systems, Inc. FV 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.
FV may experience additional competition from Internet service providers,
advertising and direct marketing agencies and other large established businesses
who enter the market for interactive messaging services. Companies such as
America Online, Microsoft Corp., IBM Corp., Integrion, AT&T, Hewlett-Packard
Company, Netscape Communications Corporation, Harte-Hanks Data Technology, ADVO,
The Interpublic Group of Companies, Inc. and Foote, Cone and Belding, which
possess large, existing customer bases, substantial financial resources and
established distribution channels, could develop, market or resell a number of
messaging services or payment alternatives. Such potential competitors may also
choose to enter the market for messaging services by acquiring one of FV's
existing competitors or by forming strategic alliances with such competitors,
either of which may impede FV's ability to compete effectively.
Several of FV'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 FV. 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 FV'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 FV's products and services might be substantially
reduced, and the ability of FV 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 FV
will compete effectively with current or future competitors or that the
competitive pressures will not have a material adverse effect on FV's business,
financial condition and results of operations.
Dependence Upon Product and Service Development; Risks of Technological Change
and Evolving Industry Standards
FV's success depends upon its ability to develop the IMP and other new
products and services that satisfy evolving customer requirements including
potential applications for Internet advertising, merchandising and direct
marketing. The market for FV'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 FV will successfully
identify new product and service opportunities and develop and bring to market
new products and services in a timely manner. Failure of FV, for technological
or other reasons, to develop and introduce the IMP 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 FV's business,
financial condition and results of operations. In addition, FV or its
competitors may announce enhancements to existing products or services, or new
products or services embodying new technologies,
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emerging industry standards or customer requirements that render FV's existing
products and services obsolete and unmarketable. There can be no assurance that
the announcement or introduction of new products or services by FV or its
competitors or any change in emerging industry standards will not cause
customers to terminate use of FV's existing products and services, which could
have a material adverse effect on FV's business, financial condition and results
of operations.
FV's products and services are designed around current technical standards,
and FV's current and future revenues are dependent on continued industry
acceptance of such standards. While FV intends to provide compatibility with the
standards promulgated by leading industry participants and groups, widespread
adoption of a proprietary or closed standard could preclude FV from effectively
doing so. There can be no assurance that FV's products and services will achieve
market acceptance, that FV 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 FV'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 FV's products and services
noncompetitive or obsolete. The inability of FV 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 FV's products and services noncompetitive or obsolete would have a
material adverse effect on FV's business, financial condition and results of
operations.
Risks of Defects and Development Delays
Products and services based on sophisticated software and computing systems
often encounter development delays, and the underlying software may contain
undetected errors and failures when introduced or when usage increases. FV may
experience delays in the development of the software and computing systems
underlying FV's services. In addition, there can be no assurance that, despite
testing by FV and its clients, errors will not be found in the underlying
software or that FV 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 FV's business, financial condition and results of operations.
Risk of Capacity Constraints
A key element of FV's strategy is to generate a high volume of messages and
associated transactions through FV's IMP. Accordingly, the performance of FV's
products and services is critical to FV's ability to achieve market acceptance
and continued use of these products and services. Significant increases in the
volume of messages could strain the capacity of FV's software or hardware, which
could lead to slower response time or system failures. FV has and intends to
continue 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 FV's products
and services will be able to meet this demand. FV 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 FV's system, products or services. To the
extent that the capacity constraints described above are not effectively
addressed by FV, such constraints could have a material adverse effect on FV's
business, financial condition and results of operations.
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,
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merchandising and entertainment is a recent phenomenon, it is difficult to
predict whether the number of users drawn to the Internet will continue to
increase and whether any significant market for the IMP or any substantial
commercial use of the Internet, will develop. There can be no assurance that
Internet usage patterns, and reliance on e-mail communication in particular,
will continue to grow and will not decline as the novelty of the medium recedes.
In addition, it is uncertain whether the cost of Internet access will decline.
Failure of the Internet or e-mail communication to achieve increased acceptance
and be accessible to a broad audience at moderate costs would jeopardize the
viability of Internet commerce and the market for FV'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 FV'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, FV's business,
financial condition and results of operations will be materially and adversely
affected. Furthermore, if the Internet becomes unable to support the demands of
its users, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols or due to increased
governmental regulation. If the necessary infrastructure, complementary services
or facilities are not developed, or if the Internet does not become a viable
commercial marketplace, FV's business, financial condition and results of
operations will be materially and adversely affected.
Management of Potential Growth; Risks Associated with Management Team
The rapid development necessary for FV to exploit the market opportunity
for the IMP and its other services requires an effective planning and management
process. FV has recently experienced significant changes in its senior
management. Lee H. Stein, FV's Chairman and Chief Executive Officer resigned
from his position as an officer of FV on June 30, 1998, although Mr. Stein
continues to serve on the FV Board and continues to serve as a consultant to FV.
In addition, John M. Stachowiak, FV's Vice President, Finance and Administration
and Chief Financial Officer resigned from his position as an officer of FV on
May 15, 1998 and Dr. Carolyn Turbyfill, FV's VP of Engineering and Operations,
resigned from her position as an officer of FV on June 15, 1998. FV has not
designated successors for Mr. Stein or Ms. Turbyfill. FV's future success will
depend to a significant extent on FV'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 FV will satisfactorily allocate responsibilities and that the
management team will succeed in these roles in a timely and efficient manner. FV
has experienced some difficulty and will most likely continue to experience
difficulty in integrating or replacing members of the 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. FV'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 FV's business, financial condition and
results of operations.
In addition, FV believes that its future success will depend upon its
continuing ability to identify, attract, train and retain other highly skilled
managerial, engineering, sales and marketing and other personnel. Competition
for such personnel is intense. There can be no assurance that FV 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 FV's
business, financial condition and results of operations.
The introduction of the IMP and FV's efforts to grow FV's customer base
have placed, and are expected to continue to place, a significant strain on FV's
managerial, operational and financial resources. There can be no assurance that
FV will be able to effectively manage the expansion of its operations, that FV's
systems, procedures and controls will be adequate to support FV's operations or
that Company's management will be able to achieve the rapid execution necessary
to exploit the market opportunity for FV's products and services. Any inability
of FV to effectively manage available resources could have a material adverse
effect on FV's business, financial condition and results of operations.
Risks of Systems Failures; Lack of Insurance and Security Risks
FV's services are dependent on FV'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,
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telecommunications failures, unauthorized intrusion, infection by computer
viruses and similar events. FV'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 FV's ability to provide its products and
services.
FV currently retains highly confidential customer information in a secure
database server that FV 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 FV's servers could result in
the theft of confidential customer information, e-mail addresses and
comprehensive transaction histories. Unauthorized penetration could lead to
attempts to use such information for fraudulent purposes. Although FV believes
that the its system's architecture should thwart attempts to use misappropriated
information, widespread attempts to effect such transactions would require FV to
devote substantial resources to counteracting such attempts and could result in
a compromise of the system or the interruption of FV's ability to provide its
products and services and may result in adverse publicity for FV and,
consequently, have a material adverse effect on FV's business, financial
condition and results of operations. It is also possible that an employee of FV
could attempt to misuse confidential customer information, exposing FV to legal
liability. Furthermore, although FV employs disclaimers and limitation of
warranty provisions in its client agreements to attempt to limit its liability
to clients, including liability arising out of systems failure, there can be no
assurance that such provisions will be enforceable or will otherwise prove
effective in limiting FV's exposure to damage claims.
Although FV carries property, errors and omissions, crime and business
interruption insurance, its coverage may not be adequate to compensate FV for
all losses that may occur. FV 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
FV's products and services or result in a loss of transaction or customer data.
However, these measures will not eliminate a significant risk to FV's operations
from a natural disaster or systems failure. There can be no assurance that these
measures would protect FV from an organized effort to inundate FV's servers with
massive quantities of e-mail or other Internet message traffic which could
overload FV's systems and result in a significant interruption of service. Any
systems failure that causes a significant interruption to or increases response
time of FV's products and services could reduce use of FV's products and
services and would reduce the attractiveness of FV's products and services to
current and future customers. FV's business interruption insurance would not
fully compensate FV for lost revenues, income, additional costs or increased
costs experienced by FV during the occurrence of any disruption of its computer
systems, nor is there any assurance that FV will be able to obtain such coverage
on reasonable terms or at all in the future. Significant service interruptions
could also damage FV's reputation and result in the loss of a significant
portion of its clients, which could have a material adverse effect on FV's
business, financial condition and results of operations.
Limited Intellectual Property
FV 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. FV believes that, due to the rapid pace of
technological innovation for Internet products, FV'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 FV'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 FV will have adequate remedies for any breach or that FV's
trade secrets will not otherwise become known. Moreover, notwithstanding FV's
efforts to protect its intellectual property, there is no assurance that
competitors will not be able to develop functionally equivalent interactive
messaging technologies without infringing any of FV's intellectual property
rights. Despite FV's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use products or technology
that FV considers proprietary, and third parties may attempt to develop similar
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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 FV's means of protecting its proprietary rights
will be adequate or that FV'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, FV 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 FV's products and services or require FV to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable or favorable to FV, which
could have a material adverse effect on FV's business, financial condition and
results of operations. In addition, FV may initiate claims or litigation against
third parties for infringement of FV's proprietary rights or to establish the
validity of FV's proprietary rights. In particular, on October 29, 1998, FV
filed a complaint in the Federal District Court in San Diego, California against
InfoBeat, Inc. (the "InfoBeat Lawsuit"). FV's complaint alleges infringement of
a patent held by FV and seeks injunctive relief and unspecified damages.
Litigation to determine the validity of any claims could result in significant
expense to FV and divert the efforts of FV's technical and management personnel
from productive tasks, whether or not such litigation is determined in favor of
FV. In addition, patent litigation such as the InfoBeat Lawsuit often gives rise
to counterclaims by the defendants, which could include challenges to the
validity of patents held by FV. In the event of an adverse ruling in any such
litigation, FV 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 for infringing technology. The
failure of FV to develop or license a substitute technology could have a
material adverse effect on FV's business, financial condition and results of
operations.
Government Regulation and Legal Uncertainties
FV 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 FV's position with respect to the applicability of
regulations to its activities, responding to such a challenge could result in
significant expenditures of FV's financial and management resources, which could
have a material adverse effect on FV'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, World Wide Web
hosting sites and transaction facilitators such as FV. Various foreign
jurisdictions have also moved to regulate access to the Internet and to strictly
control World Wide Web content. Even if FV'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 FV's products and services,
which could in turn adversely affect FV'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 FV'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 FV's business or
operations. Government agencies may promulgate rules and regulations affecting
FV'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 FV or
for the principal users of its services and could also reduce the convenience
and
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functionality of FV's services, possibly resulting in reduced market acceptance
which would have a material adverse effect on FV's business, financial condition
and results of operations.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries in date code fields. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately 1 1/4 years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although FV believes that FV's Interactive Messaging Platform is
Year 2000 compliant, there can be no assurance that coding errors or other
defects will not be discovered in the future. While the Interactive Messaging
Platform was designed to be Year 2000 compliant, FV has not yet undertaken a
systematic effort to identify any Year 2000 compliance problems in the various
components of the Interactive Messaging Platform. FV believes that compliance
testing will require approximately 200-300 man-hours, and intends to complete
such testing in 1999.
Several collateral software and communications systems provided by third
parties are required for the operation of the Interactive Messaging System, any
of which may contain coding which is not Year 2000 compliant. These collateral
systems include server software used to operate FV's network servers, software
controlling routers, switches and other components of FV's data network, disk
management software used to control FV's data disk arrays, firewall, security,
monitoring and back-up software used by FV, as well as desktop PC applications
software. In each case, FV employs widely available software applications from
leading third party vendors, and expects that such vendors will provide any
required upgrades or modifications in a timely fashion. However, any failure of
third party software suppliers to provide Year 2000 compliant versions of the
software used by FV could result in a temporary disruption of Interactive
Messaging Platform service or otherwise disrupt FV's operations.
Year 2000 compliance problems could also undermine the general
infrastructure necessary to support FV's operations. For instance, FV depends on
third party Internet service providers (ISPs) for connectivity to the Internet
and to customers' information systems. Any interruption of service from FV's
ISPs could result in a temporary interruption of FV's interactive messaging and
other services. FV has attempted to address this risk by obtaining redundant
service capacity from multiple ISPs. In addition, FV relies on a third-party
data center to house certain of its servers and communications systems. Any
interruption in the security, access, monitoring or power systems at the third
party data center could result in an interruption of FV's services. Moreover,
the effects of Year 2000 compliance deficiencies on the integrity and stability
of the Internet are difficult to predict. A significant disruption in the
ability of businesses and consumers to reliably access the Internet would have
an adverse effect on demand for FV's services and adversely impact FV's
business, financial condition and results of operations.
Failure of FV's customers to ensure that their software systems are Year
2000 compliant could also adversely affect FV's operations. The Interactive
Messaging Platform is designed to interface with customer databases and
communications systems in order to retrieve relevant information from customers'
electronic commerce systems or customer databases and in order to allow
customers to independently control certain features of the service including the
content of transmitted messages. FV cannot assess or control the degree of Year
2000 compliance in its customers' information systems. Disruptions in the
information systems of significant customers could temporarily prevent such
customers from accessing or using the Interactive Messaging Platform, which
could materially affect FV's operating results. In order to address the risk of
disruptions in customer information systems, FV has designed the Interactive
Messaging Platform to include redundant manual control features which can be
used by such customers. Nevertheless, certain customers may elect to discontinue
use of FV's interactive messaging services until such customers' internal
information technology problems have been alleviated, which would adversely
affect FV's business, financial condition and results of operations. Moreover,
the spending patterns of current or potential customers may be affected by Year
2000 issues as companies expend significant resources to correct or update their
systems for Year 2000 compliance. These expenditures may result in reduced funds
available for such customers to pay for FV's
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services, which could have a material adverse affect on FV's business, financial
condition and results of operations.
RISKS RELATED TO EPUB'S BUSINESS
History of Operating Losses; Limited Operating History
EPub was formed in 1996, and, accordingly, has only a limited operating
history upon which an evaluation of EPub and its prospects can be based. Since
its inception, EPub has recorded only limited revenue and has not been
profitable. EPub's prospects must be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
their early stages of development. The new and rapidly evolving markets in which
EPub operates, together with an evolving and unpredictable business model, makes
these risks, uncertainties, expenses and difficulties particularly pronounced.
In order to address these risks and uncertainties, EPub must, among other
things, maintain and increase its customer base, implement and successfully
execute its business and marketing strategy, respond to competitive pressures,
continue to develop and upgrade its products and technology more rapidly than
competitors, provide superior customer service and attract, retain and motivate
qualified personnel. There can be no assurance that EPub will successfully
implement any of its strategies or successfully address such risks and
uncertainties or that EPub will be profitable in the future.
Uncertainty of Future Operating Results; Potential Fluctuations in Operating
Results
Although EPub's revenue has increased significantly in recent periods, such
growth is not necessarily indicative of future operating results. Moreover,
EPub's operating results may fluctuate significantly in the future. As a result
of EPub's limited operating history, as well as the recent emergence of the
Internet markets addressed by EPub, EPub has neither internal nor industry-based
historical financial data for any significant period of time upon which to
project revenues or base planned operating expenses. Future operating results
will depend on a variety of factors, including the ability of EPub to maintain
or increase market demand for its products and services, usage and acceptance of
the Internet, the introduction and acceptance of new, enhanced or alternative
products or services by EPub or its competitors, EPub's ability to anticipate
and effectively adapt to a developing market and to rapidly changing
technologies, general economic conditions, competition by existing and emerging
competitors, software defects and other quality control problems and the mix of
products and services sold.
EPub's expense levels are based, in part, on its expectations as to future
revenues and are not expected to decrease, at least in the short term. EPub may
not be able to adjust its spending plan in a timely manner to compensate for any
future revenue shortfall. Further, EPub may from time to time be forced by the
competitive environment in which it competes to make strategic decisions that
disrupt or reduce anticipated revenues. Accordingly, any significant shortfall
in relation to EPub's revenue expectations would have a material adverse impact
on EPub's business, results of operations, financial condition and prospects.
Developing Internet Market; Unproven Acceptance of EPub's Products and
Services; Rapid Technological Change
EPub's future success is highly dependent upon the increased use of the
Internet for information, publication, distribution, communication and commerce.
The market for EPub's products and services has only recently developed, is
rapidly evolving and is characterized by an increasing number of market entrants
who have introduced or developed services and products for use on the Internet.
There can be no assurance that a stable market for EPub's services and products
will develop, that EPub's services and products will be adopted by potential
users or that businesses or consumers will continue their efforts to use the
Internet.
Critical issues concerning the commercial use of the Internet remain
unresolved and may impact the growth of Internet use. The adoption of the
Internet for commerce, communications, distribution and publication,
particularly by those individuals and enterprises that have historically relied
on alternative means for such purposes, generally requires the understanding and
acceptance of a new way of conducting business
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and exchanging information. In particular, enterprises that have already
invested substantial resources in other means of conducting commerce and
exchanging information may be particularly reluctant or slow to adopt new
technologies. If EPub's markets fail to develop, or develop more slowly than
expected, or if EPub's services and products do not achieve market acceptance,
EPub's business, results of operations, financial condition and prospects would
be materially and adversely affected.
Competition
Competition in the e-mail products and services industry is intense and
EPub expects competition to persist, intensify and increase in the future. There
are no substantial barriers to entry into EPub's business and EPub expects
established and new entities to enter EPub's market for products and services in
the near future. Furthermore, since there are many potential entrants to the
field, it is difficult to assess which companies are likely to offer competitive
products and services in the future.
Several of EPub's existing and potential competitors have substantially
longer operating histories, greater financial, technological, marketing and
other resources, larger installed customer bases and longer-standing
relationships with customers than EPub. EPub's principal competitors include
Postmaster Direct, Matchlogic, Email Channel and Infobeat.
EPub believes that its ability to compete successfully depends on numerous
factors, both within and outside of its control, including continuing to quickly
field required messaging features. A variety of potential actions by EPub's
competitors, including pricing changes and development of new services or
products or enhancement of existing services and products, could have a material
adverse effect on EPub's business, financial condition and results of
operations. There can be no assurance that EPub will be able to compete
successfully with existing or new competitors. The failure of EPub to adapt to
emerging market demands or compete successfully with existing competitors would
have a material adverse effect on EPub's business, financial condition and
results of operations.
Reliance on Significant Customers
A significant portion of EPub's revenues has been, and EPub believes will
continue to be, generated by a limited number of customers. CMP Media, EPub's
largest customer, accounted for 94% and 64% of EPub's revenue during the period
from September 11, 1996 (inception) through June 30, 1997 and the year ended
June 30, 1998, respectively. EPub expects to continue to depend on large
contracts with a small number of significant customers, which can cause its
revenue and earnings to fluctuate between quarters based on the timing of
contracts. None of EPub's customers has any obligation to purchase additional
products or services. Consequently, the failure by EPub to develop relationships
with significant new customers would have a material adverse effect on EPub's
business, financial condition and results of operations.
Dependence on Key Personnel; Ability to Attract and Retain Personnel
EPub's future success will depend in large part on the continued
contributions of its key technical, research, development and senior management
personnel. The loss of the services of one or more of these employees,
particularly if lost to competitors, could have a material adverse effect on
EPub's business, financial condition and results of operations. In particular,
the services of Andrew Currie, EPub's President and Chief Executive Officer, and
Brian Makare, EPub's Vice President of Engineering and Product Development,
would be difficult to replace.
The future success of EPub will depend to a significant extent on its
ability to attract, train and retain highly skilled software development
professionals, particularly project managers, software engineers and other
senior technical personnel. There is a worldwide shortage of, and significant
competition for, software development professionals with the advanced technical
skills necessary to develop the services offered by EPub. The failure to
attract, train and retain current or future employees could have a material
adverse effect on EPub's business, financial condition and results of
operations.
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Neither Mr. Currie nor Mr. Makare currently has an employment agreement
with EPub. However, as a condition to the Merger, each of such persons must
enter into an employment agreement and a noncompetition agreement with FV. Mr.
Currie and Mr. Makare are currently parties to a noncompetition and proprietary
information agreement with EPub that prohibits each of them from, during the
term of their employment and for up to two years thereafter, engaging in a
business in the United States involved in the design, development, marketing or
sales of Internet e-mail software products for the publication of an identical
or personalized e-mail message to multiple e-mail addresses through the
management of free controlled circulation or paid e-mail subscriptions. Upon
consummation of the Merger, such existing agreements will be terminated in their
entirety and Messrs. Currie and Makare shall become parties to employment
agreements and noncompetition agreements with FV. Further, a portion of the
shares of EPub stock held by Messrs. Currie, Makare and Feld are currently
subject to a right of repurchase in favor of EPub in the event of termination of
their services to EPub as directors, employees or consultants. Effective upon
the consummation of the Merger, such repurchase rights shall lapse in their
entirety. See "Terms of the Merger -- Noncompetition and Employment Agreements."
Risks Associated with Reliance on Intellectual Property Rights
EPub's success and ability to compete is dependent in part upon its
proprietary technology. EPub currently relies on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. EPub seeks to protect its
software, documentation and other written materials under trade secret, patent
and copyright laws, which afford only limited protection. EPub does not hold any
patents. EPub believes that, due to the rapid pace of technological innovation
for Internet products, EPub's ability to establish and maintain a position of
leadership in the industry depends more on the skills of its development
personnel than upon the legal protections afforded its existing technology.
Additionally, there have been substantial amounts of litigation in the
computer industry regarding intellectual property rights. There can be no
assurance that third parties will not in the future claim infringement by EPub
with respect to current or future products, trademarks or other proprietary
rights, that EPub will counterclaim against any such parties in such actions or
that if EPub makes claims against third parties with respect thereto, that any
such party will not counterclaim against EPub in such actions. Any such claims
or counterclaims could be time-consuming, result in costly litigation, cause
product delays or require EPub to redesign its products, any of which could have
a material adverse effect upon EPub's business, financial condition or results
of operations. On October 19, 1998, InfoBeat, Inc. ("InfoBeat"), a competitor of
EPub filed a complaint in the Federal District Court for the District of
Colorado, alleging infringement of a patent held by InfoBeat. The complaint
seeks injunctive relief and unspecified damages. Although EPub believes that the
complaint is without merit, litigation with InfoBeat could result in significant
expense to EPub and could divert EPub management's time and resources from other
matters. In the event of an adverse ruling in such litigation, EPub may be
required to pay substantial damages, discontinue certain of its services, pay
significant royalties to InfoBeat or devote significant resources to developing
alternative technologies.
EPub generally enters into confidentiality agreements with its employees
and with its consultants and customers. There can be no assurance that these
agreements will not be breached and that EPub will have adequate remedies for
any such breach. Litigation may be necessary to protect EPub's proprietary
technology. Any such litigation may be time-consuming and costly. Despite EPub's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of EPub's products or services or to obtain and use information
that EPub regards as proprietary. There can be no assurance that EPub's means of
protecting its proprietary rights will be adequate.
Because the computer industry is characterized by technological changes,
the policing of the unauthorized use of computer software is a difficult task.
Software piracy is expected to continue to be a persistent problem for the
software industry. Despite steps taken by EPub to protect its software products,
third parties still may make unauthorized copies of EPub's products for their
own use or for sale to others.
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Dependence on Increased Usage; Stability of the Internet
The usage of the Internet for services such as those offered by EPub 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 such entities and in the number and quality
of products and services designed for use on the Internet. Because usage of the
Internet as a source for information, products and services is a relatively
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
usage of the Internet for such purposes will continue to develop and expand.
There can be no assurance that Internet usage patterns will not decline as the
novelty of the medium recedes or that the quality of products and services
offered online will improve significantly to continue to support user interest.
In addition, it is uncertain whether the cost of Internet access will decline.
Failure of the Internet to stimulate user interest and be accessible to a broad
audience at moderate costs would jeopardize the markets for EPub's services.
Moreover, issues regarding the stability of the Internet's infrastructure
remain unresolved. The rapid rise in the number of Internet users and increased
transmission of audio, video, graphical and other multimedia content over the
Internet has placed increasing strains on the Internet's communications and
transmission infrastructures. Continuation of such trends could lead to
significant deterioration in transmission speeds and reliability of the Internet
and could reduce the usage of the Internet by businesses and individuals. In
addition, to the extent that the Internet continues to experience significant
growth in the number of users and level of use without corresponding increases
and improvements in the Internet infrastructure, there can be no assurance that
the Internet will be able to support the demands placed upon it by such
continued growth. Any failure of the Internet to support such increasing number
of users due to inadequate infrastructure, or otherwise, would seriously limit
the development of the Internet as a viable source of advertising, which could
materially and adversely affect the acceptance of EPub's services which would,
in turn, materially and adversely affect EPub's business, results of operations,
financial condition and prospects.
Reliability of EPub's Network Infrastructure; Access to Internet; Single Site
The performance of EPub's network and technological infrastructure is
critical to EPub's ability to attract customers, to achieve market acceptance
and to its overall business success. Any system failure that causes
interruptions, increases response times or decreases the reliability of EPub's
services could reduce the attractiveness of EPub's services to advertisers and
users. In addition, a dramatic unanticipated increase in the number of customers
or the average volume of traffic generated by EPub's services could strain the
capacity of the software, hardware or telecommunications lines deployed by EPub.
Such strains could result in delays in response times, service interruptions or
potentially system failures. Any substantial increase in the volume of EPub's
services will require EPub to expand and further upgrade its network
infrastructure. There can be no assurance that EPub will be able to accurately
project the rate or timing of increases, if any, to the use of its services or
timely expand and upgrade its systems and infrastructure to accommodate such
increases.
EPub is dependent upon Web browser companies and Internet and online
service providers for access to its products and services, and users have
experienced and may in the future experience difficulties due to system,
software or telecommunications failures or incompatibilities that are not within
EPub's control. EPub is also dependent on hardware suppliers for prompt
delivery, installation and service of servers and other equipment utilized by
EPub. Finally, EPub must also contract with telecommunications service providers
to obtain access to the Internet. EPub generally does not control the quality
and the cost of such service. A significant disruption or change in the cost of
the Internet access and service provided to EPub by its service providers could
have a material adverse effect on EPub's business, results of operations,
financial condition and prospects.
In addition, EPub's operation depends upon its ability to maintain and
protect its computer systems, all of which are located at EPub's principal
offices in Boulder, Colorado. This system is vulnerable to damage from fire,
floods, power loss, telecommunications failures, physical break-ins and similar
events. EPub does not currently have a disaster recovery plan in effect and does
not have redundant systems for its service at an alternate site. Despite the
implementation of network security measures by EPub, its servers are also
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vulnerable to viruses, break-ins and similar disruptive problems. Computer
viruses, break-ins or other problems caused by third parties could lead to
interruptions, delays in or temporary cessation of service to EPub's customers.
The occurrence of any of these events could have a material adverse effect on
EPub's business, results of operations, financial condition and prospects.
Possible Adverse Effect Due to Future Capital Requirements; Uncertainty of
Additional Financing
EPub expects that it will be required to raise additional funds. EPub has
commenced discussions with the holder of an existing subordinated promissory
note in the principal amount of $100,000 about increasing the borrowings under
such note and expects to receive an additional $100,000 loan from FV. However,
no assurance can be given that additional funding, would be available to EPub or
that, if available, such funds would be available on terms favorable to EPub or
its current stockholders. The failure to raise needed funds on sufficiently
favorable terms could have a material adverse effect on EPub's business, results
of operations, financial condition and prospects.
Governmental Regulation and Legal Uncertainties
EPub believes that it is not currently subject to direct regulation by any
government agency, 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. A number of legislative and regulatory proposals
are under consideration by federal and state lawmakers and regulatory bodies and
may be adopted with respect to the Internet covering issues such as user
privacy, pricing and characteristics and quality of products and services. The
adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the projected demand for EPub's products
and services, increase EPub's cost of doing business, or otherwise have an
adverse effect on EPub's business, results of operations, financial condition
and prospects. Moreover, the applicability to the Internet of existing United
States and international laws governing issues such as property ownership,
copyright, trade secret, libel and personal privacy is uncertain and developing.
Any new legislation or regulation, or application or interpretation of existing
laws, could have a material adverse effect on EPub's business, results of
operations, financial condition and prospects.
Because materials may be distributed by EPub and may be subsequently
distributed to others, there is a potential that claims will be made against
EPub for defamation, negligence, patent, copyright or trademark infringement,
personal injury or other theories based on the nature, content, publication and
distribution of such materials. In addition, it is possible that if any
information provided through EPub's services contains errors, third parties
could make claims against EPub for losses incurred in reliance on such
information. It is also possible that EPub may be exposed to further potential
risks, such as liabilities or claims resulting from unsolicited e-mail
(spamming), lost or misdirected messages, illegal or fraudulent use of e-mail,
harassment or interruptions or delays in e-mail service.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code filed. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century date from 20th century dates. As a result, in
approximately 1 1/4 years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although EPub 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 EPub, its service providers, its
customers or the Internet infrastructure could result in a material adverse
effect on EPub's business, operating results and financial conditions.
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COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of FV and
EPub and certain equivalent EPub per share data. The information set forth below
should be read in conjunction with the selected historical financial data
included elsewhere in this Proxy Statement/Information Statement. The equivalent
EPub per share data is calculated based on FV historical data and an assumed
Exchange Ratio in the Merger of 2.20 shares of FV Common Stock for each share of
EPub Common Stock outstanding. The pro forma combined financial data, which
includes the effect of the pending acquisition of Distributed Bits, are not
necessarily indicative of the operating results that would have been achieved
had the Merger been consummated as of the beginning of the periods presented and
should not be construed as representative of future operations.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
<S> <C> <C>
Historical -- FV
Net loss per share................................ $(1.94) $(0.69)
Cash dividends per share.......................... -- --
Book value per share (at period end)(1)........... $(0.06) $ 0.18
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------- ----------
<S> <C> <C>
Historical -- EPUB
Net loss per share............................... $(0.14) $(0.03)
Cash dividends per share......................... -- --
Book value per share (at period end)(1).......... $ 0.06 $ 0.09
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------- ----------
<S> <C> <C>
Pro Forma Combined Loss Per Share:
Per FV Share..................................... $(1.85) $(0.78)
Equivalent EPub Share............................ $(4.06) $(1.72)
Pro Forma Combined Book Value Per Share(2):
Per FV Share..................................... N/A $ 1.58
Equivalent EPub Share............................ N/A $ 3.47
</TABLE>
- ---------------
(1) Historical book value per share is computed by dividing total stockholders'
equity by the number of shares of common stock outstanding at the end of
each period.
(2) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common stock
outstanding at the end of each period.
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MARKET PRICE INFORMATION
The table below sets forth, for the calendar quarters indicated, the
reported high and low sales price of FV Common Stock, as reported on Nasdaq. The
prices appearing in the table below reflect the over-the-counter market
quotations which reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996 CALENDAR YEAR
Fourth Quarter............................................ 9 1/2 9
1997 CALENDAR YEAR
First Quarter............................................. 9 1/2 6 3/4
Second Quarter............................................ 7 1/4 3 1/2
Third Quarter............................................. 7 2 7/8
Fourth Quarter............................................ 5 7/8 2 1/16
1998 CALENDAR YEAR
First Quarter............................................. 3 1/8 11/16
Second Quarter............................................ 3 1/16 21/32
Third Quarter............................................. 7 3/8 1 7/16
Fourth Quarter (through November 9, 1998)................. 4 1/2 1 5/8
</TABLE>
The table below sets forth the closing prices per share of FV Common Stock
on Nasdaq on July 10, 1998, the last full trading date prior to the public
announcement of FV's and EPub's intent to enter into the Reorganization
Agreement, and on November 9, 1998, the last practicable trading date for which
information is available before the printing of the Proxy Statement/Information
Statement; and the equivalent per share prices for EPub Common Stock based on
the FV Common Stock prices multiplied by the assumed Exchange Ratio of 2.20.
<TABLE>
<CAPTION>
FV
COMMON EPUB
STOCK EQUIVALENT
------ ----------
<S> <C> <C>
July 10, 1998............................................... $4.63 $10.19
November 9, 1998............................................ $3.69 $ 8.11
</TABLE>
The trading price of FV Common Stock has been and in the future is expected
to be subject to extreme fluctuations in response to both business-related
issues, such as quarterly variations in operating results, the timing of
development and introduction of new technologies or services, gain or loss of
significant customers, and announcements of new services or business
acquisitions by FV or its competitors, and stock market related influences, such
as changes in estimates of securities analysts, the presence or absence of
short-selling of FV's stock, and events affecting other companies that the
market deems to be comparable to FV. In addition, the stock market has from time
to time experienced extreme price and volume fluctuations that have particularly
affected the market price of many technology-oriented companies and that often
have been unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations may adversely affect the market price
of FV Common Stock. The trading prices of many high technology and
Internet-related companies' stocks are at or near their historical highs and
reflect price/earning ratios substantially above historical norms. There can be
no assurance that the trading price of FV Common Stock will remain at or near
its current level.
Based on the capitalization of EPub as of August 20, 1998, the Exchange
Ratio would be approximately 2.20 if the Merger were consummated on such date.
Because the numerator of the Exchange Ratio is fixed, changes in the market
price of FV Common Stock will affect the dollar value of FV Common Stock to be
received by stockholders of EPub in the Merger. There can be no assurance as to
the market price per share of FV Common Stock at any time prior to, at or after
the consummation of the Merger. EPub stockholders are urged to obtain current
market quotations for FV Common Stock prior to voting on the proposal to approve
and adopt the Reorganization Agreement and approve the Merger. Additionally, the
Exchange Ratio will be
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<PAGE> 48
decreased to the extent additional shares of, or rights to acquire, EPub Capital
Stock are issued prior to the closing of the Merger.
To date, FV has not declared or paid dividends on its Common Stock. The FV
Board presently intends to retain any earnings for use in FV's business and
therefore does not anticipate declaring or paying any cash dividends in the
foreseeable future.
FIRST VIRTUAL HOLDINGS INCORPORATED
STOCKHOLDERS MEETING
DATE, TIME AND PLACE OF FV STOCKHOLDERS MEETING
The FV Stockholders Meeting will be held at FV's executive offices, 4104
Sorrento Valley Blvd., Suite 200, San Diego, California 92121, on December 9,
1998 at 9:00 a.m., local time.
PURPOSE
The purpose of the FV Stockholders Meeting is to vote upon proposals to (1)
approve and adopt the Reorganization Agreement and approve the Merger, (2)
approve an amendment to FV's Amended and Restated Certificate of Incorporation
that will change FV's corporate name, (3) approve an amendment to FV's Amended
and Restated Certificate of Incorporation that will increase the number of
authorized shares of FV Common Stock from 40,000,000 to 100,000,000 shares, (4)
amend FV's 1995 Stock Plan to increase the number of shares available for
issuance thereunder by 2,000,000 shares to an aggregate of 6,000,000 shares and
(5) transact such other business as may properly come before the FV Stockholders
Meeting or any adjournment thereof.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of FV Common Stock on the FV Record Date are
entitled to notice of, and to vote at, the FV Stockholders Meeting. As of the FV
Record Date, there were approximately 200 stockholders of record holding an
aggregate of approximately 33,091,260 shares of FV Common Stock.
This Proxy Statement/Information Statement is being mailed on or about
November 12, 1998 to all stockholders of record of FV as of the FV Record Date.
VOTE REQUIRED
The affirmative vote of the holders of a (1) majority of the shares of FV
Common Stock represented and voting (in person or by proxy) at the FV
Stockholders Meeting and (2) a majority of the shares represented and voting at
the FV Stockholders Meeting, other than shares held by SOFTBANK, is required to
approve and adopt the Reorganization Agreement and to approve the Merger. The FV
Board has determined that the approval of holders of a majority of the shares of
FV Common Stock represented and voting at the FV Stockholders Meeting other than
shares held by SOFTBANK will be required in order to approve and adopt the
Reorganization Agreement and approve the Merger in light of the fact that
entities which may be deemed affiliates of SOFTBANK own a significant number of
shares of EPub Capital Stock. Approval of the proposal to amend FV's Amended and
Restated Certificate of Incorporation requires the affirmative vote of a
majority of the shares of FV Common Stock outstanding as of the FV Record Date.
Approval of the proposal to amend FV's 1995 Stock Plan to increase the number of
shares reserved for issuance thereunder requires the affirmative vote of holders
of a majority of the shares of Common Stock represented and voting at the FV
Stockholders Meeting. Each holder of record of FV Common Stock on the FV Record
Date will be entitled to cast one vote per share on the proposal to be acted
upon at the FV Stockholders Meeting. As of the FV Record Date, the directors and
executive officers of FV and their affiliates held approximately 75.3% of the
outstanding shares of FV Common Stock.
SOFTBANK Holdings, SOFTBANK Technology, Lee H. Stein and certain of his
affiliates, Paymentech Inc. and First USA Financial Corp. (the "Restricted
Stockholders" and certain of their affiliates), who
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<PAGE> 49
collectively beneficially own an aggregate of 75.3% of the FV Common Stock, have
entered into a certain voting agreement (the "Voting Agreement") with EPub
pursuant to which the Restricted Stockholders have agreed to vote such shares
(and any additional shares of FV Common Stock that such stockholders acquire
beneficial ownership of prior to the termination of the Voting Agreement) in
favor of approval and adoption of the Reorganization Agreement and approval of
the Merger and in favor of any other actions contemplated by the Reorganization
Agreement or required in furtherance of the Merger which are submitted to a vote
of the stockholders of FV, including a proposal to increase the authorized
shares of FV Common Stock. In the event that a majority of the shares of FV
Common Stock represented and voting at the FV Stockholder Meeting, other than
shares held by the Restricted Stockholders and their respective affiliates, are
voted against the approval and adoption of the Reorganization Agreement and
approval of the Merger, the voting obligation of the Restricted Stockholders
pursuant to the Voting Agreement will be without further force or effect, and
the Restricted Stockholders may exercise their full discretion in voting their
shares of FV Common Stock.
VOTING AND SOLICITATION
The cost of this solicitation will be borne by FV. FV will reimburse
brokerage firms and other persons representing beneficial owners of shares for
their expenses in forwarding solicitation material to such beneficial owners in
accordance with applicable regulations. Proxies may also be solicited by certain
of FV's directors, officers and regular employees, without additional
compensation, personally or by telephone, electronic mail or facsimile.
QUORUM; ABSTENTIONS; BROKER NONVOTES
The required quorum for the transaction of business at the FV Stockholders
Meeting is a majority of the shares of Common Stock issued and outstanding on
the FV Record Date. Shares that are voted "FOR," "AGAINST" or "WITHHELD FROM" a
matter are treated as being present at the meeting for purposes of establishing
a quorum and are also treated as shares "represented and voting" at the FV
Stockholders Meeting (the "Votes Cast") with respect to such matter.
While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, FV believes that abstentions should be
counted for purposes of determining both the presence or absence of a quorum for
the transaction of business and the total number of Votes Cast with respect to a
particular matter. In the absence of controlling precedent to the contrary, FV
intends to treat abstentions in this manner. In a 1988 Delaware case, Berlin v.
Emerald Partners, the Delaware Supreme Court held that, while broker non-votes
may be counted for purposes of determining the presence or absence of a quorum
for the transaction of business, broker non-votes should not be counted for
purposes of determining the number of Votes Cast with respect to the particular
proposal on which the broker has expressly not voted. Broker non-votes with
respect to proposals set forth in this Proxy Statement will therefore not be
considered Votes Cast and, accordingly, will not affect the determination as to
whether the requisite majority of Votes Cast has been obtained with respect to a
particular matter.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of FV a
written notice of revocation or a duly executed proxy bearing a later date, or
by attending the meeting and voting in person. This Proxy Statement/Information
Sheet and form of proxy will first be sent or given to FV stockholders on or
about November 12, 1998, together with the Notice of Special Meeting of
Stockholders.
STOCKHOLDER PROPOSALS
Proposals of stockholders of FV that are intended to be presented by such
stockholders at FV's next Annual Meeting of Stockholders must be received by FV
no later than February 4, 1999 in order to be considered for possible inclusion
in FV's proxy statement and form of proxy relating to that meeting.
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<PAGE> 50
FV AUDITORS
Representatives of Ernst & Young LLP, FV's independent auditors, are
expected to be present at the meeting, will have the opportunity to make a
statement if they desire to do so, and are expected to be available to respond
to appropriate questions.
RECOMMENDATION OF FV BOARD
The FV Board has approved the Reorganization Agreement and the transactions
contemplated thereby and has determined that the Merger is fair to, and in the
best interests of, FV and its stockholders. AFTER CAREFUL CONSIDERATION, THE FV
BOARD RECOMMENDS A VOTE "FOR" APPROVAL AND ADOPTION OF THE REORGANIZATION
AGREEMENT AND "FOR" APPROVAL OF THE MERGER. IN ADDITION, THE FV BOARD HAS
APPROVED THE AMENDMENTS TO FV'S CERTIFICATE OF INCORPORATION AND FV'S 1995 STOCK
PLAN AND RECOMMENDS VOTES "FOR" THE PROPOSALS TO APPROVE SUCH AMENDMENTS. See
"FV Stockholder Proposal No. 2," "FV Stockholder Proposal No. 3" and "FV
Stockholder Proposal No. 4."
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<PAGE> 51
EMAIL PUBLISHING INC.
ACTION BY WRITTEN CONSENT OF THE STOCKHOLDERS
PURPOSE
A form of Action by Written Consent of the Stockholders of EPub is being
sent to the stockholders of EPub together with this Proxy Statement/Information
Statement. The purpose of the Action by Written Consent of the Stockholders is
to vote upon a proposal to approve and adopt the Reorganization Agreement and
approve the Merger.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of EPub Capital Stock on the EPub Record Date are
entitled to notice of and to participate in the Action by Written Consent of the
stockholders of EPub. As of the EPub Record Date, there were 14 stockholders of
record of EPub Common Stock and 1,906,503 shares of EPub Common Stock
outstanding, one stockholder of record of EPub Series A Preferred Stock and
400,000 shares of EPub Series A Preferred Stock outstanding, and three
stockholders of record of EPub Series A-1 Preferred Stock and 232,558 shares of
EPub Series A-1 Preferred Stock outstanding with each share entitled to one vote
on the matter to be acted upon at the EPub Stockholders Meeting.
This Proxy Statement/Information Statement and the form of Action by
Written Consent of the Stockholders of EPub is being mailed on or about November
12, 1998 to all stockholders of record of EPub as of the EPub Record Date.
VOTE REQUIRED
Pursuant to the DGCL and the EPub Restated Certificate of Incorporation,
the affirmative vote of the holders of a majority of the shares of EPub Capital
Stock, on an as-converted to common stock basis, outstanding as of the EPub
Record Date is required to approve and adopt the Reorganization Agreement and
approve the Merger. Each holder of record of EPub Capital Stock on the EPub
Record Date will be entitled to cast one vote per share on the proposal to be
acted upon by written consent of the stockholders. As of the EPub Record Date,
the EPub Majority Stockholders owned in the aggregate approximately 98.4% of the
outstanding shares of EPub Capital Stock, on an as-converted to common stock
basis. See "Security Ownership of Management and Principal Stockholders of
EPub." The EPub Majority Stockholders are parties to the Reorganization
Agreement which obligates each such stockholder to vote all shares of EPub
Capital Stock held by such holder in favor of the proposal to approve and adopt
the Reorganization Agreement and approve the Merger.
As a condition to Closing, FV will require that EPub stockholders holding
no more than three percent (3%) of the EPub Capital Stock exercise, or be
entitled to exercise, appraisal rights granted under applicable Delaware law.
RECOMMENDATION OF EPUB BOARD
The EPub Board has unanimously approved the Reorganization Agreement and
the transactions contemplated thereby and has determined that the Merger is fair
to, and in the best interests of, EPub and its stockholders. AFTER CAREFUL
CONSIDERATION, THE EPUB BOARD UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF APPROVAL
AND ADOPTION OF THE REORGANIZATION AGREEMENT AND APPROVAL OF THE MERGER.
FV AND EPUB PROPOSAL NO. 1 -- APPROVAL OF THE MERGER
AND RELATED TRANSACTIONS
Other than statements of historical fact, the statements made in this
section, including statements as to the benefits expected to result from the
Merger and as to future financial performance are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act.
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<PAGE> 52
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Proxy Statement/Information
Statement.
FV'S REASONS FOR THE MERGER
The FV Board has identified several benefits of the Merger, including the
following:
Complementary electronic messaging technology. EPub's vertical market focus
on traditional and software publishing clients has led it to develop specialized
electronic messaging technology that addresses the complexities of efficiently
delivering high volumes of electronic mail and the management of large
subscriber bases. EPub's outbound messaging technology complements FV's focus on
providing technology for the automated processing of email customer responses.
FV believes that a successful combination of these technologies would allow FV
to provide its clients with a broader range of products and services that
address all aspects of the email communications process, including message
delivery, response processing, error handling and subscriber management, and
would move FV closer towards being the preferred sole provider of comprehensive
electronic messaging services.
Valuable messaging expertise and experience. FV believes a critical element
in achieving and maintaining market dominance in the electronic messaging arena
is FV's technical expertise and experience in electronic messaging. EPub has
proven itself a technical leader in electronic messaging and has experience in
operating its solutions on behalf of numerous clients. FV believes that EPub's
technical expertise and experience will enhance FV's ability to deliver valuable
products and services to its clients and to remain on the leading edge of
messaging technology.
Complementary target markets and existing client base. EPub has
historically focused on serving the needs of clients in the traditional and
software publishing vertical markets, and over the past 18 months has
accumulated a client base which includes Intuit, CMP Media, Cahners Publishing,
and GeoCities. FV believes that EPub's vertical market focus complements FV's
focus on the financial services, travel, catalog and online services industries.
FV further believes that EPub's client base and sales efforts can be leveraged
to cross-market FV's products and services to EPub's existing and expanding
client base. FV also believes that there are opportunities to leverage FV's
sales and marketing efforts to expand EPub's sales.
In addition to the factors set forth above, in the course of its
deliberations concerning the Merger, the FV Board consulted with FV's legal
advisors as well as FV's management and reviewed a number of other factors
relevant to the Merger, including (i) reports from management and legal advisors
on specific terms of the Reorganization Agreement and ancillary transaction
agreements referred to in the Reorganization Agreement; (ii) information
concerning the financial performance, business operations and prospects of EPub
presented at meetings of the FV Board; (iii) FV's belief that the management
styles and corporate cultures of the two companies would be complementary; (iv)
the expected tax and accounting treatment of the Merger; (v) the detailed
financial analysis presented by William Blair & Company, FV's financial adviser,
including the opinion of William Blair & Company, dated August 19, 1998, that
the consideration to be paid to the EPub stockholders in the Merger was fair
from a financial point of view to the stockholders of FV, and (vi) the fact that
the Reorganization Agreement would permit the FV Board to terminate the
agreement under certain circumstances.
The FV Board also considered a number of potentially negative factors in
its deliberations concerning the Merger, including, but not limited to: (i) the
possibility of management disruption associated with the Merger and the risk
that key technical and management personnel of EPub might not continue with
EPub; (ii) the risks associated with obtaining necessary approvals of the Merger
and the possibility that the Merger may not be consummated even if approved by
FV's stockholders; (iii) the possibility that the Merger might adversely affect
FV's or EPub's relationships with certain of their respective customers,
suppliers and partners; (iv) the risk that the potential benefits of the Merger
might not be realized and (v) the other risks described above under "Risk
Factors." The FV Board concluded, however, that the benefits of the transaction
to FV and its stockholders outweighed the risks associated with the foregoing
factors.
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<PAGE> 53
Upon the acquisition of EPub, FV intends to integrate EPub into FV's
existing management structure and operations and to operate the combined
entities under a single new entity, MessageMedia, Inc. See "FV Stockholder
Proposal No. 2." General management and legal and human resources coordination
of the combined entities will take place through FV's existing management and
administrative infrastructure.
Sales and marketing resources from EPub will be organizationally combined
with FV's existing sales and marketing organization to form a national sales and
marketing team responsible for selling a suite of products and services
comprising both FV and EPub offerings under the MessageMedia brand name. By
combining both companies' sales and marketing resources, FV believes it will be
able to better take advantage of cross-marketing both companies products and
services to each others' client base.
FV intends to ultimately integrate EPub and FV technology into a single
suite of interoperable products and services. Research, development and
engineering efforts for FV and EPub will be organizationally combined under the
leadership of a single Vice President of Engineering. Likewise, technical
strategy for both companies and their respective products and services will be
centralized under the leadership of FV's Chief Technology Officer. In
centralizing the combined entities' research, development and engineering
efforts, FV believes it will be able to better utilize the broader employee
skill base and develop a more integrated suite of products and services than by
operating the two companies in a stand-alone fashion.
FV intends to continue to maintain EPub's Boulder, Colorado, operations in
addition to FV's existing San Diego corporate headquarters, and will maintain
sales and marketing and research, development and engineering resources, as well
as limited administrative functions, at the Boulder facility.
EPub has incurred net operating losses since its inception, and, as a
result of the anticipated investment FV plans to continue to make in expanding
EPub's business, FV expects that the acquisition of EPub will increase FV's net
operating losses by approximately $85,000 per month. FV does not anticipate a
significant increase in capital expenditures as a result of acquiring EPub.
EPUB'S REASONS FOR THE MERGER
The EPub Board believes that the Merger is fair to and in the best
interests of EPub and its stockholders, and the EPub Board has unanimously
approved the Reorganization Agreement and the Merger. The decision of the EPub
Board is based on its belief that (i) the Merger presents a strategic
opportunity to maximize EPub's and the EPub stockholders' potential returns and
(ii) the Merger gives EPub stockholders an opportunity to achieve greater
liquidity in their investment through sales of FV Common Stock in the public
market. In reaching its conclusions, the EPub Board considered a number of
factors, including the following:
- The opportunity to participate in a combined company that will have the
resources and capabilities to create enhanced service lines and a
stronger overall marketing strategy.
- The benefits of sharing information, resources and ideas, thereby
increasing functionality of products and services and achieving economies
of scale and business synergy.
- The combined company's ability to expand its customer base by leveraging
EPub's relationships in the traditional and software publishing sector
and FV's strength in the interactive messaging market to achieve a
leading market position in each of its target customer groups.
- The capability to pursue new technical and market opportunities by way of
internal development and, potentially, through acquisition of new
products and technologies.
- The number of shares of FV Common Stock to be issued to EPub stockholders
and the contractual liabilities to be assumed by FV in connection with
the Merger.
- The general desire of EPub stockholders to obtain liquidity for their
investment in EPub and the fact that FV Common Stock is listed on the
Nasdaq National Market.
- The favorable terms of the Reorganization Agreement, including but not
limited to the registration rights available under the Reorganization
Agreement.
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- The benefits that could reasonably be expected to be realized by the EPub
stockholders from their continuing interest in the combined company,
including but not limited to:
- The financial strength and greater resources of the combined company,
and its consequent enhanced ability to realize the potential of the
business contributed by EPub;
- The potential to expand the combined company's existing customer base;
- The potential for growth in the business of the combined company as a
result of the synergy created by the combined company; and
- The potential cost savings and future cost avoidance which may be
created by such business synergy.
In addition to the factors set forth above, in the course of its
deliberations concerning the Merger, the EPub Board consulted with EPub's legal
advisors as well as EPub's management, and reviewed a number or other factors
relevant to the Merger, including but not limited to:
- The relative benefits of alternative strategies for growth such as
additional private financing or an initial public offering.
- Assessment of the fair market value of EPub and whether the capital stock
of FV provided as consideration in the Merger sufficiently compensates
the EPub stockholders.
- Assessment of FV's business, financial position, results of operations,
product development schedules, and technologies and whether the corporate
culture and operations of EPub and FV would likely be compatible.
The EPub Board also considered a number of potentially negative factors in
its deliberations concerning the Merger, including but not limited to:
- The risk that the market price of FV Common Stock might be adversely
affected by the public announcement of the Merger.
- The substantial charges expected to be incurred, primarily in the quarter
ending December 31, 1998, in connection with the Merger, including the
transaction expenses arising from the Merger and the costs associated
with combining the operations of the two companies.
- The risk that, despite the intentions and the efforts of the parties, the
benefits sought to be achieved in the Merger will not be achieved.
- The limitations on EPub stockholders' ability to sell shares of FV Common
Stock received in the Merger due to the fact that these shares will
initially not be registered under the Securities Act or under any
applicable state securities laws and therefore will initially be
"restricted securities" under the Securities Act and the fact that a
majority of the shares will be subject to a contractual restriction on
transfer preventing EPub stockholders from selling or otherwise disposing
of any such shares of the merger consideration for six to twelve months
after the closing of the Merger. See "Terms of the Merger -- Restrictions
on Transfer."
- The fact that 20% of the shares of FV Common Stock that would otherwise
be issued to the EPub stockholders other than the Excluded Stockholders
(Catalyst Infotech Development Fund, L.P., Grandhaven L.L.C., Hexagon
Investments L.L.C., Labyrinth Enterprises L.L.C. and Legacy Enterprises
L.L.C., who collectively owned 14.3% of the EPub Capital Stock as of the
EPub Record Date) in the Merger will be placed in an escrow fund and
could be forfeited if FV makes a claim or claims against the escrow fund.
See "Terms of the Merger -- Indemnification."
- The other risks described above under "Risk Factors."
Additionally, while the EPub Board considered obtaining an independent
financial opinion as to the fairness of the transaction from a financial point
of view to EPub and its stockholders, the EPub Board determined that the time
and expense associated with obtaining such an opinion were not justified under
the circumstances. This conclusion was based, in part, on the Board's
determination that EPub's small and sophisticated stockholder base offered the
EPub Board the opportunity to receive direct input from EPub's significant
stockholders as to the material terms of the transaction, the consideration to
be received by the EPub stockholders in the transaction represented a
significant premium over the per-share price obtained in EPub's most recent
stock issuances, and the fact that the FV Common Stock is publicly traded.
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The foregoing discussion of the information and factors considered by the
FV Board and EPub Board in connection with their evaluation of the Merger is not
intended to be exhaustive but is intended to include the material factors
considered by such boards of directors. In view of the wide variety of factors
considered by such boards of directors, the directors of each such board did not
find it practical to, and did not, quantify or otherwise assign relative weights
to the specific factors considered.
MATERIAL CONTACTS AND BOARD DELIBERATIONS
On October 2, 1997, John Stachowiak, then Vice President of Finance and
Administration and Chief Financial Officer of FV, Philip Bane, then Secretary
and General Counsel of FV, Bradley Feld, Andrew Currie, President and Chief
Executive Officer of EPub, and Brian Makare, Vice President of Engineering and
Product Development of EPub, met to initiate preliminary discussions between the
two companies.
On October 17, 1997, Keith Kendrick, then Vice President of Marketing of
FV, and Andrew Currie met at FV's executive offices to introduce the two
companies to each other and to discuss possible strategic relationships between
FV and EPub, including the acquisition of EPub by FV. Based on this preliminary
discussion, FV's management team determined that the possibility of acquiring
EPub should be further explored and evaluated.
On November 7 and 8, 1997, Keith Kendrick, John Stachowiak and Philip Bane
met with Andrew Currie in Boulder, CO, for the purpose of further evaluating the
business prospects of EPub and the strategic fit between FV and EPub.
Preliminary deal term discussions and initial financial due diligence were
continued during the course of this meeting.
On November 12, 1997, Lee Stein, Philip Bane and Bradley Feld, Chairman of
EPub, met in Los Angeles to further discuss the possibility of FV and EPub
merging.
On November 25, 1997, Lee Stein and Carolyn Turbyfill, then Vice President
of Engineering and Operations of FV, along with other FV representatives, met
with Andrew Currie, Brian Makare, Bradley Feld and EPub's engineering team at
EPub's Boulder, Colorado, offices for the purpose of preliminarily assessing
EPub's technology, software and systems.
On January 28, 1998, Keith Kendrick presented the proposed EPub acquisition
to the FV Board, including the strategic benefits of the acquisition as well as
the tentative deal terms, and, following additional discussions, both companies
agreed to suspend further negotiation of the proposed acquisition until FV
completed its next equity financing.
On May 27, 1998, FV and EPub signed a joint marketing agreement, whereby FV
agreed to resell EPub's services.
On May 29, 1998, FV and EPub commenced negotiating a preliminary draft of a
letter of intent to acquire EPub.
On June 9 and 10, 1998, Lee Stein, Keith Kendrick, Carolyn Turbyfill and
FV's engineering team met with Brian Makare at FV's San Diego offices to learn
more about EPub's existing technology, as well as EPub's future technical plans.
On July 6 and 7, 1998, Keith Kendrick and Andrew Currie met at EPub's
Boulder, Colorado, offices to discuss specific acquisition deal terms. Also
discussed were potential synergies between FV and EPub, operational logistics
that would need to be addressed in the event of FV's acquisition of EPub, and
how to integrate the two companies to achieve cost efficiencies and marketplace
leverage.
On July 8, 1998, FV engaged William Blair as its financial advisor in
connection with a possible acquisition of EPub.
On July 10, 1998, representatives of FV and EPub, including FV's legal
advisors, spoke by phone to finalize the basic terms of FV's acquisition of
EPub. As a result of these negotiations, FV and EPub executed a non-binding
letter of intent whereby FV would acquire EPub.
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On July 15, 1998, FV commenced a general financial, tax and legal due
diligence review of EPub, through discussions with representatives of EPub and a
review of various materials provided by EPub to FV.
Over the period of July 15 to August 19, 1998, representatives of FV and
EPub and their respective legal and financial advisors negotiated and finalized
definitive terms to the acquisition of EPub by FV.
On July 16 and 17, 1998, representatives of FV's engineering team met with
representatives of EPub's engineering team in EPub's executive offices to
undertake an exhaustive technical due diligence of EPub's existing technology
and systems. FV's technical due diligence team determined that EPub's e-mail
broadcast technology was robust, scaleable and efficient.
On July 24, 1998, the FV Board discussed the status of the EPub
acquisition, including the role EPub would play in FV's business strategy, the
terms of the proposed acquisition, and the various considerations necessary to
ensure the fairness of the proposed acquisition to FV stockholders.
On August 4, 1998, the FV Board held a special meeting to discuss the final
terms and conditions of the proposed acquisition of EPub. The FV Board also
received a report from its financial advisors, William Blair & Company, L.L.C.,
as to the fairness of the definitive terms to FV stockholders. The Board
determined that the terms of the proposed acquisition of EPub were fair to FV
stockholders and approved the Reorganization Agreement and the transactions
contemplated thereby.
On August 11, 12 and 13, 1998, Andrew Currie and Brian Makare met with
representatives of FV's engineering, sales and marketing and executive teams to
discuss the various issues relating to the integration of FV's and EPub's
technology and organizational resources.
The Reorganization Agreement was executed by all parties on August 20,
1998, and a joint public announcement of the execution of the Reorganization
Agreement was made on that date.
On August 25, 1998, Keith Kendrick and other representatives of FV met with
representatives of EPub to continue planning the integration of the two
companies and their joint marketing plan.
OPINION OF FV FINANCIAL ADVISOR
Pursuant to an engagement letter dated July 8, 1998 (the "William Blair &
Company Engagement Letter"), the FV Board retained William Blair & Company,
L.L.C. ("William Blair") to serve as its financial advisor to assist FV in
evaluating the fairness, from a financial point of view, to FV of the
transaction (the "Transaction") contemplated by the terms of the Reorganization
Agreement dated as of August 20, 1998.
On July 31, 1998, William Blair delivered certain of its written analyses,
and on August 4, 1998, at a meeting of the FV Board held to evaluate the
proposed Transaction, William Blair rendered to the FV Board a draft written
opinion (which opinion was subsequently confirmed by delivery of a final written
opinion dated August 19, 1998) to the effect that the Transaction was fair, from
a financial point of view, to FV.
THE FULL TEXT OF THE WRITTEN OPINION OF WILLIAM BLAIR, DATED AUGUST 19,
1998, IS ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED BY REFERENCE. HOLDERS
OF FV COMMON STOCK ARE URGED TO, AND SHOULD, READ THE OPINION IN ITS ENTIRETY
FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, AND OTHER MATTERS CONSIDERED AND
LIMITS OF THE REVIEW BY WILLIAM BLAIR. THIS SUMMARY OF THE WRITTEN OPINION OF
WILLIAM BLAIR IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION. WILLIAM BLAIR'S ANALYSES AND OPINION WERE PREPARED FOR AND ADDRESSED
THE FV BOARD AND ARE DIRECTED ONLY TO THE FAIRNESS TO FV, FROM A FINANCIAL POINT
OF VIEW, OF THE TRANSACTION, AND DO NOT CONSTITUTE AN OPINION AS TO THE MERITS
OF THE TRANSACTION OR A RECOMMENDATION TO ANY HOLDERS OF FV COMMON STOCK AS TO
HOW TO VOTE AT THE FV STOCKHOLDERS MEETING AT WHICH THE TRANSACTION WILL BE
CONSIDERED.
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William Blair was selected by the FV Board as its financial advisor to
render an opinion to the FV Board because William Blair is a nationally
recognized investment banking firm and because the principals of William Blair
have substantial experience in transactions similar to that contemplated by the
Reorganization Agreement and are familiar with the Internet and marketing
services industries. Additionally, William Blair was selected because of its
reputation and its independence from FV and its principal stockholders,
including SOFTBANK. As part of its investment banking business, William Blair is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and valuations for corporate and other
purposes. In the ordinary course of its business, William Blair and its
affiliates may trade the equity securities of FV for their own account or for
the accounts of their customers, and accordingly, may at any time hold a long or
short position in such securities.
In arriving at its opinion, William Blair has examined, among other things:
(i) the Reorganization Agreement; (ii) the unaudited historical financial
statements of EPub for the six months ended June 30, 1998; (iii) the unaudited
historical financial statements of EPub and the audited historical financial
statements of FV for the fiscal year ended December 31, 1997; (iv) the unaudited
historical financial statements of EPub and the audited historical financial
statements of FV for the fiscal year ended December 31, 1996; (v) certain
internal financial information including various forecast scenarios prepared by
EPub's management; (vi) certain other public and non-public information
available concerning EPub and FV; (vii) the historical market prices and trading
volumes of FV Common Stock from the commencement of public trading through the
period ending five days prior to the public announcement of the Transaction; and
(viii) the general condition of the securities markets. William Blair has also
held discussions with members of senior management and directors of FV and their
advisors to discuss the foregoing, as well as representatives of EPub and their
advisors with respect to the terms of the Reorganization Agreement and have
considered other matters which it has deemed relevant to its inquiry.
In rendering its opinion, William Blair assumed no responsibility for the
accuracy and completeness of any financial or other information provided to it
and did not attempt to verify independently any of such information, nor did
William Blair make or obtain an independent valuation or appraisal of the
assets, properties or liabilities of EPub or FV. With respect to financial
forecasts and projections, William Blair assumed that such forecasts were
reasonably prepared on bases reflecting the best available estimates and
judgments of EPub's management as to the future financial performance of EPub
and that such projections provided a reasonable basis upon which William Blair
could form an opinion. William Blair has assumed no responsibility for, and
expressed no view as to, such forecasts, projections, or the assumptions on
which they were based. Except as otherwise set forth herein, William Blair's
opinion is necessarily based on general economic, market, financial and other
conditions as they existed on, and could be evaluated as of, the date of such
opinion, as well as the information then currently available to William Blair.
It should be understood that, although subsequent developments may have affected
William Blair's opinion, William Blair has not updated, revised or reaffirmed
its opinion, nor does it have any obligation to do so. William Blair's opinion
does not constitute a recommendation to any holder of FV's Common Stock as to
how such holder should vote on the proposed Transaction. The opinion does not
imply any conclusion as to the likely trading range for FV's Common Stock
following consummation of the Transaction, which may vary depending on numerous
factors, including, among others, changes in interest rates, currency exchange
rates, dividend rates, market conditions, general economic conditions and other
factors that generally influence the price of securities. The opinion is limited
to the fairness of the Transaction, from a financial point of view, to FV.
William Blair expresses no opinion with respect to any other reasons, legal,
business or otherwise, that may support the decision of the FV Board to approve,
or FV's decision to consummate, the Transaction.
For purpose of rendering this opinion, William Blair assumed that the
Transaction would be consummated on the terms described in the Reorganization
Agreement and related agreements, without any waiver of any material terms or
conditions by FV. William Blair also assumed that the final form of the
Reorganization Agreement, including exhibits thereto, as and when executed,
would be substantially similar to the draft thereof reviewed by William Blair.
The following is a brief summary of certain financial analyses performed by
William Blair to arrive at its opinion with respect to the Transaction. William
Blair performed certain procedures, including each of the
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financial analyses described below and reviewed with the management of FV and
EPub the assumptions on which such analyses were based and other factors. The
amount of consideration exchanged in the Transaction was not determined by
William Blair, but through negotiations between FV and EPub.
The following presentation summarizes certain financial analyses performed
by William Blair in arriving at its opinion, which analyses William Blair
discussed with the FV Board.
Comparable Company Analysis. William Blair compared selected historical and
projected operating information and financial ratios for EPub to selected
historical and projected operating information, stock market data and financial
ratios of certain other publicly traded Internet and marketing services
companies. These companies included Broadvision, CKS Group, Fine.com, USWeb
Group, DoubleClick and NetGravity. While no company in this segment is identical
to EPub, they were chosen principally by William Blair because they are
publicly-traded companies which William Blair deemed most comparable to EPub.
Among the information considered were revenues, gross profits, earnings
before interest and taxes ("EBIT"), EBIT before depreciation and amortization
("EBITDA") and net income, gross margins, EBIT margins, EBITDA margins and net
income margins, growth in revenues, EBIT, EBITDA and net income, return on
assets and equity, and capital structure. For the purposes of this evaluation,
William Blair did not base the valuation on multiples of Last Twelve Months
("LTM") EBIT, EBITDA or net income as EPub incurred losses for the periods
considered. Because there has been a measurable increase in EPub revenues over
the last 15 months, William Blair considered LTM revenues as the metric for
comparison for this analysis.
For companies used as comparables an analysis of current total enterprise
value (defined as equity value adjusted by adding long-term debt and subtracting
cash and short-term investments) to LTM revenues yielded an absolute range of
2.0 to 25.9 times with an average of 15.4 times and a median of 19.8 times.
William Blair has determined that the total enterprise value to LTM revenue
multiple implied to be paid for EPub based on the financial terms of the
Reorganization Agreement, was 10.0 to 12.2 times, and was below the average and
median of the range of multiples of the comparable public companies current
trading ranges.
Comparable Merger Analysis. William Blair reviewed 17 mergers and
acquisitions involving Internet marketing and services companies during the
period from October 10, 1996 to April 6, 1998. The selected transactions were
not intended to be representative of the entire range of possible transactions
in EPub's industry. Although William Blair compared the transaction multiples of
these companies to the implied purchase price multiples of EPub, none of the
selected companies is identical to EPub.
In examining these transactions, William Blair analyzed, among other
factors, certain income statement, cash flow statement and balance sheet
parameters of the acquired companies relative to the consideration paid.
Multiples analyzed included total transaction value as a multiple of the LTM
revenues, EBITDA and EBIT and multiples of equity value to LTM net income. In
certain cases, complete financial data were not publicly available for these
transactions and only partial information was used in such instances.
An analysis of these ratios as applied to the revenue multiples implied by
the Reorganization Agreement follows: The implied transaction multiple paid was
10.0 to 12.2 times LTM revenue, as compared to the range of 1.1 to approximately
3,850.0 with a median of 3.9 for the comparable transactions. Given EPub's
increasing revenues, increasing operating profit, customer base, number of
e-mails transmitted, proprietary software, technical personnel and favorable
projections, the appropriate comparable transactions were at the higher end of
the range.
Discounted Cash Flow Analysis. William Blair performed a discounted cash
flow analysis of EPub for the fiscal years 1998 to 2001 to estimate the present
value of the stand-alone unlevered free cash flows that EPub would be expected
to generate if it performed in accordance with certain financial forecasts.
William Blair performed this analysis using EPub-supplied projections (the "Base
Case") and a separate analysis using EPub projections formulated off lower
forecasted results (the "Adjusted Base Case"). The discounted cash flow analyses
were based upon certain discussions with the management of EPub as well as upon
certain financial forecasts prepared by management of EPub and William Blair.
Unlevered free cash flows of EPub were calculated as earnings before interest,
but after taxes, plus depreciation and amortization and other non-
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cash expenses, less investments in working capital, capital expenditures and
other non-cash income. William Blair calculated terminal values by applying a
range of revenue multiples from 2.0 times to 4.0 times. Using assumed weighted
average costs of capital between 27.5% and 45.0%, without factoring in synergies
of the transaction, the implied transaction equity value of $8.2 to $10.1
million was below the range of values calculated in the Base Case discounted
cash flow analysis and overlapped the Adjusted Base Case valuation of $6.2 to
$9.0 million.
In performing its valuation analyses, for the purposes of determining the
value of FV Common Stock, William Blair used the median closing price of FV
Common Stock over the 15 trading days ending 5 trading days prior to the public
announcement of the Transaction. With a fully-diluted EPub common stock
equivalent count of 5,980,184, this implies the consideration for the
Transaction was $10.0 million, plus assumed debt.
The summary set forth above does not purport to be a complete description
of the analyses performed by William Blair. The preparation of a fairness
opinion is a complex process and involves various subjective business
determinations as to the most appropriate and relevant methods of financial
analyses and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. William Blair did not attribute any particular weight to
any analysis or factor considered by it, but rather made qualitative judgments
as to the significance and relevance of each analysis and factor. Accordingly,
notwithstanding the separate factors summarized above, William Blair believes,
and has advised the FV Board, that its analyses must be considered as a whole
and that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the process underlying its opinion. In performing its analyses, William Blair
made numerous assumptions with respect to industry performance, business and
economic conditions and other matters, many of which are beyond the control of
EPub. These analyses performed by William Blair are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to the
value of businesses do not purport to be appraisals or to reflect the prices at
which businesses or securities may actually be sold. Accordingly, such analyses
and estimates are inherently subject to substantial uncertainty and neither FV
nor William Blair assumes responsibility for their accuracy or responsibility if
future results are materially different from those implied. As mentioned above,
the analyses supplied by William Blair and its opinion were among many factors
taken into consideration by the FV Board in making its determination to approve
the Reorganization Agreement and related transactions. The analyses of William
Blair and its opinion should not be considered as determinative of the decision
of FV to consummate the Transaction.
Pursuant to the William Blair Engagement Letter, FV has agreed to pay
certain fees to William Blair for its financial advisory services provided in
connection with the Agreement, none of which are contingent upon consummation
thereof. Upon rendering the fairness opinion to the FV Board, William Blair
received from FV an Opinion Fee. Additionally, FV has agreed to reimburse
William Blair for its out-of-pocket expenses (including the fees and expenses of
its counsel, and any other independent experts retained by William Blair)
reasonably incurred or accrued during the period of, and in connection with,
William Blair's engagement. FV has also agreed to indemnify William Blair
against certain liabilities, including liabilities under the federal securities
laws, relating to or arising out of services performed by William Blair as
financial advisor to the FV Board in connection with the Transaction, unless it
is finally judicially determined that such liabilities arose out of William
Blair's gross negligence or willful misconduct. The terms of the fee arrangement
with William Blair, which are customary in transactions of this nature, were
negotiated at arm's length between FV and William Blair. No limitations were
imposed by the FV Board with respect to the investigations made or procedures
followed by William Blair in rendering its opinion.
William Blair has not undertaken to update or revise its opinion prior to
the date of the FV Stockholders Meeting. Future developments which could alter
William Blair's fairness opinion may include a substantial appreciation in the
value of the FV Common Stock or a substantial adverse change in EPub's operating
results. No such development has occurred as of the date of this
Proxy/Information Statement.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the FV Board and the EPub Board with
respect to the Reorganization Agreement and the Merger, holders of shares of FV
Common Stock and EPub Capital Stock should be aware that certain directors of FV
and certain executive officers and directors of EPub have certain interests in
the Merger that are in addition to the interests of holders of FV Common Stock
or EPub Capital Stock generally as the case may be. The FV Board and EPub Board
have considered these interests, among other matters, in approving the
Reorganization Agreement and the Merger.
Ownership of Capital Stock of FV and EPub
Certain significant stockholders and directors of FV may be deemed
affiliates of a significant stockholder and a director of EPub. As a result,
such stockholders and directors may be deemed to have interests in the
Reorganization Agreement and the transactions contemplated thereby which are
different than the respective interests of the stockholders of FV and EPub
generally.
SOFTBANK Holdings and SOFTBANK Technology are the two largest holders of FV
Common Stock, each holding 9,755,262 shares of FV Common Stock. SOFTBANK
Holdings' and SOFTBANK Technology's aggregate holdings constitute approximately
62% of the FV Common Stock outstanding as of June 30, 1998.
Because SOFTBANK Technology's general partner is wholly-owned by SOFTBANK
Holdings, SOFTBANK Holdings is deemed to have beneficial ownership of SOFTBANK
Technology's FV Common Stock. SOFTBANK Holdings is a wholly-owned subsidiary of
SOFTBANK Corporation, a Japanese corporation ("SOFTBANK Corporation").
SOFTBANK Corporation is the sole shareholder of SOFTVENTURE Capital Inc., a
Japanese corporation that serves as the general partner of SOFTVEN No. 2
Investment Enterprise Partnership, a Japanese partnership ("SOFTVEN"). SOFTVEN
beneficially owns 400,000 shares of Series A Preferred Stock of EPub,
constituting approximately 63.2% of the EPub preferred stock outstanding and
approximately 15.8% of the EPub Capital Stock outstanding on an as-converted to
EPub common stock basis.
Bradley A. Feld, a Managing Director of SOFTBANK Technology, serves on the
FV Board as its Co-Chairman. Mr. Feld is also the Chairman of the EPub Board and
beneficially owns 225,726 shares of EPub common stock. Ronald D. Fisher,
Co-Chairman of the FV Board, is Vice Chairman and a director of SOFTBANK
Holdings, a Managing Director of SOFTBANK Technology and a director of SOFTBANK
Corporation. Gary Rieschel, the Executive Managing Director of SOFTBANK
Technology, is also a director of FV. Scott Russell, a Managing Director of
SOFTBANK Technology, is also a director of EPub.
Employment Agreements
As a condition to the consummation of the Merger, FV and EPub intend to
enter into at-will Employment Agreements with each of Andrew Currie, President,
Chief Executive Officer and a director of EPub, and Brian Makare, Vice
President, Secretary and a director of EPub. The Employment Agreements will
provide for a base salary per annum of $120,000 (subject, in the case of Mr.
Makare, to a mutually acceptable adjustment in the event he is offered and
accepts a different or additional position with FV or relocates out of the
Denver, Colorado area). In addition, each of Mr. Currie and Mr. Makare will be
granted incentive stock options to purchase 100,000 shares of FV Common Stock
and be eligible to receive incentive bonuses up to $40,000 based upon objectives
agreed to by FV's President. Pursuant to such Employment Agreements, for a
period of two years from the date of such Employment Agreements, if EPub
terminates Mr. Currie's or Mr. Makare's employment other than for Cause (as
defined in the Employment Agreements), then such employee will be entitled to
receive his base salary and incentive bonus, if any, through the end of the term
of such agreement. The Employment Agreements define Cause as any one or more of
the following occurrences, as determined in the good faith discretion of the FV
Board after having given the employee an opportunity to be heard: (i) the
employee's material breach of the Employment Agreement or any confidentiality or
invention assignment agreement with FV, subject to the opportunity to cure any
such breach; (ii) the employee's nonperformance or misperformance of his duties,
or refusal to abide by or comply with the
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good faith directives of the FV Board or employee's superior officers (including
directive intended to address any negligent conduct by the employee) or FV's
policies and procedures, subject to the opportunity to cure any such conduct;
(iii) the employee's gross negligence, willful dishonesty, fraud or
misappropriation of funds with respect to the business or affairs of FV which
materially and adversely affects the operations or reputation of FV; (iv) the
employee's conviction by, or entry of a plea of guilty or nolo contendere in, a
court of competent and final jurisdiction for any crime which constitutes a
felony in the jurisdiction involved; or (v) the employee's abuse of alcohol or
drugs that materially impairs employee's ability to perform his duties, subject
to the opportunity to cure any such conduct.
As a further condition to the consummation of the Merger, each of Mr.
Currie and Mr. Makare is required pursuant to the Reorganization Agreement to
enter into Noncompetition Agreements with FV and EPub providing that during the
period of such individual's employment with FV and/or any entity affiliated with
EPub or FV and for a period of one year after the termination of any such
employment arrangement, each will not (i) engage in any business selling any
products or services in direct competition with the business of EPub as of the
date of the Noncompetition Agreement or the business of FV and/or EPub after the
date of the Noncompetition Agreement in which such individual has substantial
involvement in; provided however, each of Mr. Currie and Mr. Makare may engage
in such activities with a subsidiary or distinct division of a larger business
which employs less than 10% of the aggregate number of employees of the larger
business so long as such subsidiary or division does not itself engage in such
businesses, (ii) contact any employee of EPub or FV for the purpose or with the
intent of enticing such employee away from or out of the employ of EPub or FV,
(iii) contact any customer of EPub or FV for the purpose of soliciting or
selling products or services in competition with EPub or FV or (iv) contact any
person who or that, during such individual's employment by EPub or FV, was
called upon by EPub or FV as a prospective acquisition candidate for the purpose
of acquiring a significant interest in such candidate or its assets, in each
case such restrictions are only applicable in the United States and areas
outside the United States where FV or any subsidiary of FV conducts business.
None of the restrictions described above prohibit Mr. Currie or Mr. Makare from
acquiring as an investment not more than 1% of the capital stock of a competing
business, whose stock is traded on a national securities exchange or through the
automated quotation system of a registered securities association. See "Terms of
the Merger -- Noncompetition and Employment Agreements."
Stock Options
At the Effective Time, each outstanding option issued pursuant to the EPub
1996 Stock Option Plan (the "Plan") will be assumed by FV. Each option so
assumed will continue to have, and be subject to, the same terms and conditions
set forth in the Plan and/or the stock option agreement by which it is
evidenced, except that each option will be or become exercisable for FV Common
Stock rather than EPub Common Stock. The exercise prices for such options range
between $0.05 and $1.00 per share. See "Terms of the Merger -- Treatment of
Options and Warrants -- EPub Stock Options." As of the EPub Record Date, no
executive officer or director of EPub owned any outstanding options to purchase
shares of EPub common stock.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations relevant to the conversion of shares of EPub Capital Stock into
FV Common Stock pursuant to the Merger that are generally applicable to holders
of EPub Common Stock. This discussion is based on currently existing provisions
of the Code, existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change
or interpretation. Any such change or interpretation, which may or may not be
retroactive, could alter the tax consequences to FV, Sub, EPub or their
stockholders as described herein.
EPub stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular EPub
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, who do not hold their EPub
Capital Stock as capital assets or who acquired their shares in connection with
stock option plans or in other compensatory transactions. In addition,
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the following discussion does not address the tax consequences of the Merger
under foreign, state or local tax laws, the tax consequences of transactions
effectuated prior or subsequent to, or concurrently with, the Merger (whether or
not any such transactions are undertaken in connection with the Merger),
including without limitation any transaction in which shares of EPub Common
Stock are acquired or shares of FV Capital Stock are disposed of, or the tax
consequences of the assumption by FV of the EPub options. ACCORDINGLY, EPUB
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES.
The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code (a "Reorganization"), in which case, subject to
the limitations and qualifications referred to herein, the Merger will generally
result in the following federal income tax consequences:
(a) No gain or loss will be recognized by holders of EPub Capital
Stock upon their receipt in the Merger of shares of FV Common Stock solely
in exchange for such EPub Capital Stock except to the extent of cash
received in lieu of fractional shares.
(b) The aggregate tax basis of the FV Common Stock received by EPub
stockholders in the Merger (including any fractional shares not actually
received) will be the same as the aggregate tax basis of the EPub Capital
Stock converted pursuant to the Merger.
(c) The holding period of the FV Common Stock received by each EPub
stockholder in the Merger will include the period for which the EPub
Capital Stock surrendered in exchange therefor was considered to be held,
provided that the EPub Capital Stock so surrendered is held as a capital
asset at the time of the Merger.
(d) A stockholder who exercises dissenters' rights with respect to a
share of EPub Capital Stock and receives payment for such share in cash
will generally recognize gain or loss for federal income tax purposes,
measured by the difference between the holder's basis in such share and the
amount of cash received, provided that the payment is neither essentially
equivalent to a dividend within the meaning of Section 302 of the Code nor
has the effect of a distribution of a dividend within the meaning of
Section 356(a)(2) of the Code (collectively, a "Dividend Equivalent
Transaction"). A sale of EPub Capital Stock pursuant to an exercise of
dissenters' rights will generally not be a Dividend Equivalent Transaction
if, as a result of such exercise, the stockholder exercising dissenters'
rights owns no shares of FV Common Stock (either actually or constructively
within the meaning of Section 318 of the Code). If, however, a
stockholder's sale for cash of EPub Capital Stock pursuant to an exercise
of dissenters' rights is a Dividend Equivalent Transaction, then such
stockholder will generally recognize income for federal income tax purposes
in an amount up to the entire amount of cash so received.
(e) Cash payments in lieu of a fractional share will be treated as if
a fractional share of FV Common Stock had been issued in the Merger and
then redeemed by FV. An EPub stockholder receiving such cash will generally
recognize gain or loss upon such payment equal to the difference (if any)
between such stockholder's basis in the fractional share and the amount of
cash received.
(f) None of FV, Sub or EPub will recognize any gain or loss solely as
a result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. The obligations of each of FV and EPub to
effect the Merger are contingent on receipt of opinions from their counsel
(Wilson Sonsini Goodrich & Rosati, P.C. and Cooley Godward LLP, respectively),
to the effect that, for federal income tax purposes, the Merger will qualify as
a "reorganization" within the meaning of Section 368(a) of the Code. These
opinions, which are collectively referred to herein as the "Tax Opinions," will
neither bind the IRS nor preclude the IRS from adopting a contrary position. In
addition, the Tax Opinions will be subject to certain assumptions and
qualifications and will be based in part on the truth and accuracy of certain
representations made by FV, Sub and EPub, including representations in
certificates delivered to counsel by the respective managements of FV, Sub and
EPub. FV and EPub may waive the requirement that opinions of tax counsel be
obtained prior to consummation of the Merger. Neither party currently intends to
waive this requirement.
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A successful IRS challenge to the Reorganization status of the Merger would
result in EPub stockholders recognizing taxable gain or loss with respect to
each share of EPub Capital Stock surrendered equal to the difference between the
stockholder's basis in such share and the fair market value, as of the Effective
Time, of the FV Common Stock received in exchange therefor. In such event, a
stockholder's aggregate basis in the FV Common Stock so received would equal its
fair market value, and the stockholder's holding period for such stock would
begin the day after the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of shares of
FV Common Stock would recognize gain to the extent that such shares were
considered to be received in exchange for services or property (other than
solely EPub Capital Stock). All or a portion of such gain may be taxable as
ordinary income. Gain would also have to be recognized to the extent that an
EPub stockholder was treated as receiving (directly or indirectly) consideration
other than FV Common Stock in exchange for EPub Capital Stock.
ANTICIPATED ACCOUNTING TREATMENT
FV intends to treat the Merger as a purchase for accounting and financial
reporting purposes in accordance with generally accepted accounting principles.
Under this method of accounting, the purchase price will be allocated to assets
acquired and liabilities assumed based on their estimated fair values at the
Effective Time of the Merger. FV's results of operations will not include the
results of EPub prior to the Effective Time of the Merger.
EPUB OPTIONS AND WARRANTS
STOCK OPTION PLANS. Under the terms of the Reorganization Agreement, each
option to purchase shares of EPub common stock (the "EPub Stock Options")
granted pursuant to the EPub 1996 Stock Option Plan shall be converted into an
option to acquire, on the same terms and conditions as were applicable to such
EPub Stock Option on the date of the Reorganization Agreement, the number of
shares of FV Common Stock equal to the number of shares of EPub Common Stock
subject to such EPub Stock Option immediately prior to the Effective Time of the
Merger multiplied by the Exchange Ratio, rounding down to the nearest whole
share (with cash, less the applicable exercise price, being payable for any
fraction of a share). The per share exercise price under each such EPub Stock
Option shall be adjusted by dividing the per share exercise price under such
EPub Stock Option by the Exchange Ratio and rounding up to the nearest cent.
As of the EPub Record Date, options to acquire 178,172 shares of EPub
common stock were outstanding under the EPub Stock Option Plan. The vesting
schedule of the options under the EPub Stock Option Plan will not become
accelerated prior to the Effective Time.
Following the Effective Time of the Merger, FV will file a Registration
Statement on Form S-8 with respect to the shares of FV Common Stock subject to
the EPub Stock Options.
WARRANTS. At the Effective Time of the Merger, all rights with respect to
the warrants to purchase EPub Capital Stock (the "EPub Warrants") shall be
converted into and become rights with respect to FV Common Stock, and FV shall
assume each EPub Warrant in accordance with the terms (as in effect as of the
date of the Reorganization Agreement) of such EPub Warrants. From and after the
Effective Time, (i) each EPub Warrant assumed by FV may be exercised solely for
shares of FV Common Stock, (ii) the number of shares of FV Common Stock subject
to each such EPub Warrant shall be equal to the number of shares of EPub Capital
Stock subject to such EPub Warrant immediately prior to the Effective Time
multiplied by the Exchange Ratio, (iii) the per share exercise price under each
such EPub Warrant shall be adjusted by dividing the per share exercise price
under such EPub Warrant by the Exchange Ratio and (iv) any restriction on the
exercise of any such EPub Warrant shall continue in full force and effect and
the term, exercisability, vesting schedule and other provisions of such EPub
Warrant shall otherwise remain unchanged. As of the Record Date, there were
outstanding EPub Warrants to acquire 11,627 shares of EPub Capital Stock.
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REGULATORY MATTERS
ANTITRUST. FV and EPub do not believe that any governmental filings with
the Federal Trade Commission ("FTC") are required with respect to the Merger.
However, the FTC or the Antitrust Division of the United States Department of
Justice could take such action under the antitrust laws as they deem necessary
or desirable in the public interest, including seeking to enjoin consummation of
the Merger or seeking to cause divestiture of significant assets of EPub or FV.
There can be no assurance that a challenge to the Merger on antitrust grounds
will not be made or, if such challenge is made, of what the result would be.
Consummation of the Merger is conditioned upon, among other things, the absence
of any temporary restraining order, preliminary or permanent injunction, or
other order issued by any federal or state court in the United States which
prevents the consummation of the Merger or which requires the divestitures of
significant assets.
FILING WITH THE DELAWARE SECRETARY OF STATE. A Certificate of Merger must
be filed with the Secretary of State of the State of Delaware to consummate the
Merger.
SECURITIES LAWS. FV and EPub must comply with the federal securities laws
and applicable securities laws of various states.
EPub stockholders may not sell their shares of FV Common Stock acquired in
connection with the Merger, except pursuant to an effective registration under
the Securities Act covering such shares or in compliance with Rule 145 or
another applicable exemption from the registration requirements of the
Securities Act. In general, under Rule 145, beginning one year following the
Effective Time of the Merger a stockholder would be entitled to sell shares of
FV Common Stock acquired in connection with the Merger only through unsolicited
"brokers' transactions" or in transactions directly with a "market maker," as
such terms are defined in Rule 145. Additionally, the number of shares to be
sold by a stockholder within any three-month period for purposes of Rule 145 may
not exceed the greater of 1% of the outstanding shares of FV Common Stock or the
average weekly trading volume of such stock during the four calendar weeks
preceding such sale. Rule 145 would only remain available, however, to
affiliates if FV remained current with its informational filings under the
Exchange Act. Two years after the Effective Time of the Merger, EPub
stockholders would be able to sell such shares of FV Common Stock without any
restrictions so long as such stockholders had not been affiliates of FV for at
least three months prior thereto. Furthermore, the shares of FV Common Stock
acquired in connection with the Merger are subject to certain contractual
restrictions on transfer. See "Terms of the Merger -- Restrictions on Transfer."
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
If the Merger is consummated, dissenting holders of EPub Capital Stock may
be entitled to have the "fair value" (exclusive of any element of value arising
from the accomplishment or expectation of the Merger) of their EPub Capital
Stock at the Effective Time of the Merger judicially determined and paid to them
by complying with the provisions of Section 262 of the DGCL.
The following is a brief summary of Section 262, which sets forth the
procedures for dissenting from the Merger and demanding statutory appraisal
rights. This summary does not purport to be a complete statement of provisions
for the DGCL relating to the rights of EPub stockholders to an appraisal of the
value of their shares and is qualified in its entirety by reference to Section
262, the full text of which is attached as Annex B. Failure to follow these
procedures exactly could result in the loss of appraisal rights. This Joint
Proxy Statement/Information Statement constitutes notice to holders of EPub
Capital Stock concerning the availability of appraisal rights under Section 262.
Under Section 262, a stockholder of record wishing to assert appraisal rights
must hold the shares of stock on the date of making a demand for appraisal
rights with respect to such shares and must continuously hold such shares
through the Effective Time of the Merger.
STOCKHOLDERS WHO DESIRE TO EXERCISE THEIR APPRAISAL RIGHTS MUST SATISFY ALL
OF THE CONDITIONS OF SECTION 262. A WRITTEN DEMAND FOR APPRAISAL OF SHARES MUST
BE FILED WITH EPUB BEFORE THE TAKING OF THE VOTE ON THE MERGER. This written
demand for appraisal of shares must be in addition to and separate from any vote
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abstaining from or voting against the Merger. Any such abstention or vote
against the Merger will not constitute a demand for appraisal within the meaning
of Section 262.
Stockholders electing to exercise their appraisal rights under Section 262
must not vote for or consent to the adoption and approval of the Reorganization
Agreement and approval of the Merger. If a stockholder returns a signed written
consent in favor of the Reorganization Agreement and approval of the Merger,
such consent will have the effect of waiving the stockholder's appraisal rights.
A demand for appraisal must be executed by or for the stockholder of record
fully and correctly, as such stockholder's name appears on the share
certificate. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, this demand must be executed by or for the
fiduciary. If the shares are owned by or for more than one person, as in a joint
tenancy or tenancy in common, such demand must be executed by or for all joint
owners. An authorized agent, including an agent for two or more joint owners,
may execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner and expressly disclose the fact that, in
exercising the demands, he is acting as agent for the record owner. A person
having a beneficial interest in EPub Capital Stock held of record in the name of
another person, such as a broker or nominee, must act promptly to cause the
record holder to follow the steps summarized below and in a timely manner to
perfect whatever appraisal rights the beneficial owner may have.
A record owner, such as a broker, who holds EPub Capital Stock as a nominee
for others may exercise his or her right of appraisal with respect to the shares
for all or less than all of the beneficial owners of shares as to which he or
she is the record owner. In such case, the written demand must set forth the
number of shares covered by such demand. Where the number of shares is not
expressly mentioned, the demand will be presumed to cover all shares outstanding
in the name of such record owner.
A holder of EPub Capital Stock who elects to exercise appraisal rights
should mail or deliver his or her written demand to EPub at its address at 6685
Gunpark Drive East, Suite 240, Boulder, Colorado 80301, Attention: Secretary.
The written demand for appraisal should specify the stockholder's name and
mailing address, and that the stockholder is thereby demanding appraisal of his
or her EPub Capital Stock. Within ten days after the Effective Time of the
Merger, EPub must provide notice of the Effective Time of the Merger to all of
its stockholders who have complied with Section 262 and have not consented to or
voted for approval of the Merger.
Within 120 days after the Effective Time of the Merger, any holder of EPub
Capital Stock who has satisfied the requirements of Section 262 may deliver to
EPub a written demand for a statement listing the aggregate number of shares of
EPub Stock not voted in favor of the merger and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares.
Within 120 days after the Effective Time of the Merger (but not
thereafter), either EPub or any holder of EPub Capital Stock who has complied
with the required conditions of Section 262 may file a petition in the Delaware
Court of Chancery (the "Court") demanding a determination of the fair value of
such EPub Capital Stock. EPub has no present intention to file such a petition
if demand for appraisal is made.
Upon the filing of any petition by a stockholder in accordance with Section
262, service of a copy will be made upon EPub, which will, within 20 days after
service, file in the office of the Register in Chancery in which the petition
was filed a duly verified list containing the names and addresses of all holders
of EPub Capital Stock who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by EPub. If the
petition is filed by EPub, the petition will be accompanied by the verified
list. The Register of Chancery, if so ordered by the Court, will give notice of
the time and place filed for the hearing of such petition by registered or
certified mail to EPub and to the stockholders shown on the list at the
addresses therein stated, and notice will also be given by publishing a notice
at least one week before the day of the hearing in a newspaper of general
circulation published in the City of Wilmington, Delaware, or such publication
as the Court deems advisable. The forms of the notices by mail and by
publication must be approved by the Court, and the costs thereof shall be born
by EPub.
If a petition for an appraisal is filed in a timely fashion, after a
hearing on the petition, the Court will determine which stockholders are
entitled to appraisal rights and will appraise the shares owned by these
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stockholders, determining the fair value of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest to be paid, if any, upon the amount
determined to be the fair value. In determining fair value, the Court is to take
into account all relevant factors. In Weinberger v. UOP. Inc. et al., the
Delaware Supreme Court stated that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered and that "fair price
obviously requires consideration of all relevant factors involving the value of
a company . . ." The Delaware Supreme Court stated that, in making a
determination of fair value, the agency fixing the value must consider market
value, asset value, dividends, earnings prospects, the nature of the enterprise
and any other factors which could be ascertained as of the date of the merger
and which throw any light on future prospects of the merged corporation. In
Weinberger, the Delaware Supreme Court held that the "elements of future value,
including the nature of the enterprise, which are known or susceptible of proof
as of the date of the merger and not the product of speculation, may be
considered." In addition, the Delaware Supreme Court has determined that the
statutory appraisal remedy, depending upon the factual circumstances, may or may
not be a stockholders' exclusive remedy in connection with a merger.
EPub stockholders considering seeking appraisal of their shares of EPub
Capital Stock should note that the fair value of their shares determined under
Section 262 could be more, the same or less than the considerations they would
receive pursuant to the Reorganization Agreement if they did not seek appraisal
of their shares. The costs of the appraisal proceeding may be determined by the
Court and taxed against the parties as the Court deems equitable in the
circumstances. Upon application of a dissenting stockholder, the Court may order
that all or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceedings, including reasonable attorney's fees
and the fees and expenses of experts, be charged pro rata against the value of
all shares entitled to appraisal. In the absence of a determination or
assessment, each party bears his or her own expenses.
Any holder of EPub Capital Stock who has duly demanded appraisal in
compliance with Section 262 will not, after the Effective Time of the Merger, be
entitled to vote for any purpose the shares subject to demand or to receive
payment of dividends or other distributions on such shares, except for dividends
or distributions payable to stockholders of record at a date prior to the
Effective Time of the Merger.
At any time within 60 days after the Effective Time of the Merger, any
stockholder will have the right to withdraw his or her demand for appraisal and
to accept the terms offered in the Reorganization Agreement. After this period,
a stockholder may withdraw his or her demand for appraisal and receive payment
for his or her shares as provided in the Reorganization Agreement only with the
consent of EPub. If no petition for appraisal is filed with the Court within 120
days after the Effective Time of the Merger, stockholder's rights to appraisal
(if available) will cease and holders of EPub Capital Stock will be entitled to
receive shares of FV Common Stock as provided in the Reorganization Agreement.
Inasmuch as EPub has no obligation to file such a petition, any stockholder who
desires a petition to be filed is advised to file it on a timely basis. No
petition timely filed in the Court demanding appraisal may be dismissed as to
any stockholder without the approval of the Court, which approval may be
conditional upon such terms as the Court deems just.
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FV MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. FV'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 "Risk
Factors" commencing on page 20.
FV's objective is to develop and provide market-leading interactive
messaging services for electronic commerce that integrate secure payment
processing with intelligent messaging and interactive transactional
advertisements.
FV completed development and started commercial use of the Interactive
Messaging Platform ("IMP") in July 1998. The IMP is a family of products and
services that enable the development and deployment of interactive, multimedia
e-mail messaging solutions. The IMP is designed to be an extensible and
scaleable infrastructure for online interactive communications, payment and data
warehousing. The IMP is also designed to allow for intelligent e-mail
communications to take place between companies and their customers. It
integrates customer service and sales and marketing functions into transactional
e-mail messages that include the ability to provide a system for secure payments
and the use of highly graphical, animated and interactive elements. The IMP is
interoperable with virtually all e-mail platforms and protocols and is expected
to integrate FV's VirtualRECEIPT, VirtualALERT and VirtualMAIL technologies.
FV is currently enhancing the IMP with the three new technologies of
VirtualMAIL, VirtualRECEIPT and VirtualALERT. VirtualMAIL is being designed to
allow customized direct e-mail, from merchants to consumers, that is tailored to
the individual profiles of the recipient. VirtualRECEIPT is being designed to
allow for electronic receipts to be generated and sent via e-mail to the
consumer regardless of whether the transaction originally took place in the
physical world or over the Internet. VirtualALERT is also an e-mail message sent
to the consumer that is being designed to notify the consumer of shipment,
billing or other critical information regarding a product or service. FV
believes the VirtualMAIL, VirtualRECEIPT and VirtualALERT applications will
enable merchants to directly market and merchandise their products and services
to consumers.
FV has incurred net operating losses in each quarter since inception. As of
June 30, 1998, FV had an accumulated deficit of approximately $37.5 million. To
date, FV has not generated significant revenues. There can be no assurance that
FV's future revenues will increase, and FV's ability to generate significant
future revenues is subject to substantial uncertainty. In addition, as FV
introduces the IMP and explores opportunities to merge with or acquire
complementary businesses and technologies, FV expects to continue to incur
significant operating losses for the foreseeable future.
RESULTS OF OPERATIONS
REVENUES
FV generates revenues from the IMP, FVIPS, interactive advertising
development and consulting. In August 1998, FVIPS operations and related
revenues ceased. In December 1997, 1 Virtual Place, FV's on-line shopping mall,
was closed and merchandising sales ceased. Revenue was earned as detailed in the
table below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Interactive Messaging Platform..... $ -- $ -- $ -- $ -- $ 25,700
FV Internet payment system......... 197,902 532,134 1,002,554 410,164 352,594
Consulting......................... -- 150,000 288,300 221,250 120,000
Interactive advertising
development...................... -- -- 115,000 115,000 --
Merchandising...................... -- 13,732 44,744 39,570 --
-------- -------- ---------- -------- --------
Total revenues................ $197,902 $695,866 $1,450,598 $785,984 $498,294
======== ======== ========== ======== ========
</TABLE>
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For the year ended December 31, 1997, revenues increased to $1,450,598 as
compared to $695,866 for the year ended December 31, 1996. Revenues from FVIPS
increased $470,420 from several bulk sales of consumer and merchant VPIN
registrations that occurred at the end of the first quarter 1997. Also, in
August 1997, FV increased the annual consumer VPIN registration fee from $2 to
$5 for both new accounts and renewals. Revenues from merchandising and
interactive advertising development increased in 1997, as compared to the year
ended December 31, 1996, as First Virtual sold on-line merchandise for twelve
months of 1997, as compared to only one month in 1996, and also sold VirtualTAGs
for twelve months of 1997. FV did not sell VirtualTAGs in 1996. Consulting
revenue increased for the year ended December 31, 1997 as First Virtual
experienced greater demand for Internet related consulting.
For the year ended December 31, 1996, revenues increased to $695,866 as
compared to $197,902 for the year ended December 31, 1995. The primary reason
for this growth was the increase in consumer and merchant FVIPS registration
fees and transaction processing fees as a result of an increase in the number of
consumer and merchant registrations and transactions. FV also collected $150,000
of consulting fees in 1996 and began selling merchandise through its on-line
shopping mall.
For the six months ended June 30, 1998, revenues were $498,294 as compared
to $785,984 for the six months ended June 30, 1997. Revenues from FVIPS,
interactive advertising development and consulting decreased as FV decided to
focus its efforts primarily on developing the IMP starting in December 1997.
COST OF REVENUES
FV incurred cost of revenues from FVIPS, merchandising, and interactive
advertising development, as detailed in the table below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Interactive Messaging Platform....... $ -- $ -- $ -- $ -- $ --
FV Internet payment system........... 123,375 256,508 182,563 88,818 34,637
Interactive advertising
development........................ -- -- 46,000 46,000 --
Merchandising........................ -- 9,392 41,853 37,167 --
-------- -------- -------- -------- -------
Total cost of revenues.......... $123,375 $265,900 $270,416 $171,985 $34,637
======== ======== ======== ======== =======
</TABLE>
For the year ended December 31, 1997, the cost of revenues related to FVIPS
decreased to 18% of FVIPS related revenues. For the years ended December 31,
1996 and 1995, FVIPS related cost of revenues were 48% and 62%, respectively. By
enhancing FVIPS with new capabilities and thus replacing services provided by
third parties, FV was also able to reduce FVIPS cost of revenues. FV was able to
negotiate more favorable processing agreements with outside service providers,
as the volume of FVIPS transactions increased. For the year ended December 31,
1997, merchandising cost of revenues increased to 94% of related revenues, as
compared to 68% for the year ended December 31, 1996. This increase was
primarily due to the competitive nature of this area of revenue. In December
1997, FV decided to close its merchandising segment and focus its efforts on the
Interactive Messaging Platform, FVIPS and VirtualTAG related products. For the
year ended December 31, 1997, FV's interactive advertising development cost of
revenues were for the creation of VirtualTAGs.
For the six months ended June 30, 1998, the cost of revenues related to
FVIPS decreased to 9.8% as compared with 21.7% for the six months ended June 30,
1997. The six month decreases in cost of revenues are discussed above in the
cost of revenues narrative.
OPERATING EXPENSES
Operating expenses consist of marketing and sales, research, development
and engineering, and general and administrative expenses. FV expects operating
expenses to continue to be substantial as more robust capabilities and
enhancements associated with the IMP are developed and deployed. FV also expects
operating expenses needed for the introduction and promotion of such products to
be substantial. In addition,
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FV is anticipating increased expenses from potential opportunities to merge with
or acquire complementary businesses and technologies.
Marketing and sales expenses. Marketing and sales expenses, which include
salaries and wages, consulting fees, advertising, trade show expenses, travel
and other marketing expenses, increased to $5.4 million for the year ended
December 31, 1997, as compared to $1.8 million for the year ended December 31,
1996. This increase resulted primarily from an increase in salaries, wages and
payroll taxes of approximately $1.7 million as FV increased its sales and
marketing headcount to build sales and customer care teams, an increase in
advertising and promotional expenses of $785,000 as FV marketed its VPIN concept
to attract new customers, a consulting expense increase of approximately
$580,000 for market research analysis, a recruiting and relocation expense
increase of approximately $110,000 for recruitment of new employees, a travel
expense increase of approximately $70,000 due to increased sales efforts, and a
general increase in spending of approximately $355,000 to support FV's expanding
marketing and sales activities. FV expects that marketing and sales expenses
will continue to increase in the future as FV implements its marketing plan to
introduce its Interactive Messaging Platform.
For the year ended December 31, 1996, marketing and sales expenses
increased to $1.8 million, as compared to $346,000 for the year ended December
31, 1995. This increase was primarily from an increase in marketing headcount of
28 employees, resulting in an increase in salaries, wages and payroll taxes of
approximately $870,000, an increase in recruiting and relocation costs of
$80,000 for recruitment of new employees, a travel expense increase of $150,000
due to increased sales efforts, a consulting expense increase of $240,000 for
market research analysis, and a general increase in spending of approximately
$114,000 to support FV's expanding operations.
For the six months ended June 30, 1998, marketing and sales expenses
decreased to $1.2 million as compared to $2.2 million for the six months ended
June 30, 1997. This decrease was primarily from the elimination of 37 employees
in the marketing department, resulting in decreases in salaries, wages and
payroll taxes of approximately $800,000, a decrease in consulting of
approximately $56,000 due to reductions in marketing research, a decrease in
travel related expenses of approximately $63,000 from lower headcount, a
decrease in recruiting and relocation expenses of approximately $61,000 as
hiring new employees slowed and a general decrease in spending of approximately
$20,000.
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 FV's products and
services, increased to $6.7 million for the year ended December 31, 1997, as
compared to $4.7 million for the year ended December 31, 1996. This increase was
primarily from increases in salaries, wages and payroll taxes of approximately
$1.7 million as FV increased its research, development and engineering staff to
support the FVIPS operations, as well as begin development of its new
e-messaging product, the IMP, and a general increase in spending of
approximately $720,000 to support the expansion of FV's research, development
and engineering activities in San Diego, California, which included the
establishment of a second data processing center, offset by a decrease in
consulting expenses of approximately $420,000 as consultants were replaced by
newly hired employees. To date, all of FV's software development costs have been
expensed as incurred. FV anticipates that research, development and engineering
expenses will increase in future periods as FV leverages the VirtualPIN
architecture to offer new products and services, such as the Interactive
Messaging Platform, along with enhancing the functionality of FVIPS and
VirtualTAGs.
For the year ended December 31, 1996, research, development and engineering
expenses increased to $4.7 million, as compared to $531,000 for the year ended
December 31, 1995. This increase resulted in part from FV expensing
approximately $1.7 million in software development costs paid to consultants for
the year ended December 31, 1996, as compared to approximately $77,000 for the
year ended December 31, 1995. FV also had an increase in its research,
development and engineering headcount of 35 employees, resulting in an increase
in salaries, wages and payroll taxes of approximately $1.7 million, an increase
in travel expense of approximately $285,000 and a general increase in spending
of approximately $561,000 to support FV's expansion, which included the
establishment of an office in Ann Arbor, Michigan, in October 1996.
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For the six months ended June 30, 1998, research, development and
engineering expenses were $2.9 million as compared to $3.1 million for the six
months ended June 30, 1997. This decrease was primarily from the elimination of
15 employees in the research, development and engineering staff, resulting in
decreases in salaries, wages and payroll taxes of approximately $90,000,
decreases in travel related expenses of approximately $48,000 and a decrease in
general spending of approximately $62,000.
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 FV.
For the year ended December 31, 1997, general and administrative expenses
increased to $4.4 million as compared to $4.2 million for the year ended
December 31, 1996. This increase resulted primarily from increases in salaries,
wages and payroll taxes of approximately $730,000 as FV increased its general
and administrative staff to support its growth, and from an increase of
approximately $520,000 on public relations and investor relations expenses
associated with being a publicly held company, offset by a $1.0 million,
one-time charge that FV incurred for the year ended December 31, 1996, relating
to a payment to First USA Merchant Services in consideration for the waiver of
certain exclusive processing rights and a general reduction in spending of
approximately $50,000.
For the year ended December 31, 1996, general and administrative expenses
increased to $4.2 million, as compared to $1.3 million for the year ended
December 31, 1995. This increase was primarily from an increase in general and
administrative staff of 16 employees, resulting in increases in salaries, wages
and payroll taxes of approximately $1.1 million, a consulting expense increase
of approximately $435,000 to help prepare the company for its initial public
offering and an increase in spending of approximately $365,000 to support the
increased activities of FV's corporate office. In addition, FV incurred a
one-time charge of $1.0 million for the year ended December 31, 1996, in
connection with payment of certain fees to First USA Merchant Services in
consideration for the waiver of certain exclusive merchant processing rights.
For the six months ended June 30, 1998, general and administrative expenses
decreased to $2.2 million as compared to $2.6 million for the six months ended
June 30, 1997. This decrease was primarily from the elimination of 14 employees
in the general and administrative staff, resulting in decreases in salaries,
wages and payroll taxes of approximately $545,000, a general reduction in
spending of approximately $80,000 due to lower headcount, offset by an increase
in legal expenses of approximately $225,000 for litigation and Nasdaq related
issues.
Restructuring expenses. In the second quarter 1998, FV took further steps
to focus its efforts on the IMP. In doing so, FV incurred restructuring expenses
of approximately $812,000, of which, approximately $545,000 was for severance
compensation packages related to a reduction in staff and consultants,
approximately $170,000 of expenses related to the shut down of the FVIPS and
approximately $95,500 of expenses related to moving the company's corporate
offices.
FV expects to experience significant fluctuations in its future quarterly
operating results.(1) These fluctuations will be due to several factors, many of
which are beyond the control of FV, including, among others, market response to
FV's IMP; difficulties encountered in the development or deployment of products
or services, including interactive messaging; market acceptance of Internet
commerce in general and IMP in particular; fluctuating market demand for FV's
products and services; the degree of acceptance of the Internet as an
advertising and merchandising medium; the timing and effectiveness of
collaborative marketing efforts initiated by FV's strategic partners; the timing
of the introduction of new products and services offered by FV; the timing of
the release of enhancements to FV's products and services; product introductions
and service offerings by FV's competitors; the mix of the products and services
provided by FV; the timing and rate at which FV increases its expenses to
support projected growth; the cost of compliance with applicable government
regulations; competitive conditions in FV's marketplace; and general economic
conditions. In addition, the fees charged by FV for advertising, messaging,
consulting services and co-marketing are subject to change as FV introduces its
IMP and assesses its marketing strategy and competitive position.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, FV had $6.3 million in cash and cash equivalents. On June
23, 1998, at FV's annual meeting, FV's stockholders approved the sale of
10,000,000 shares of FV Common Stock to SOFTBANK Holdings and SOFTBANK
Technology. This sale raised approximately $6 million for FV. In conjunction
with the sale of the 10,000,000 shares of FV Common Stock, FV settled a civil
action brought against it by creditors holding certain promissory notes of FV.
As part of the settlement, SOFTBANK Holdings and SOFTBANK Technology purchased
(1) the promissory notes from the creditors for a purchase price of
approximately $1.5 million, representing the aggregate principal amount of and
accrued but unpaid interest on the promissory notes, and (2) 1,200,000 shares of
FV Common Stock for a purchase price of $720,000, and the creditors agreed to
dismiss their civil action with prejudice. In a transaction unrelated to the
civil action, SOFTBANK Holdings and SOFTBANK Technology also purchased 655
shares of FV Series A Convertible Preferred Stock of FV. The Series A
Convertible Preferred Stock and promissory notes were subsequently converted
into FV Common Stock. The original Series A Convertible Preferred stockholders
were granted a reduction in the exercise price of their warrants to purchase up
to 850,000 shares of FV Common Stock from $5.75 per share to $1.00 per share.
Such warrants carry restrictions as to their exercisability. Pursuant to a
Purchase Agreement dated as of September 8, 1998 among FV and SOFTBANK Holdings,
SOFTBANK Technology and SOFTBANK Technology Advisors Fund, L.P. ("SOFTBANK
Technology Advisors"), FV, on September 9, 1998, consummated the sale of
820,513, 805,087 and 15,426 additional shares of FV Common Stock at the closing
price on September 4, 1998, to each of SOFTBANK Holdings, SOFTBANK Technology
and SOFTBANK Technology Advisors, respectively. This sale of additional shares
of FV Common Stock raised $4 million for FV. After giving effect to all of these
transactions SOFTBANK and its affiliates own approximately 21.2 million shares
of FV Common Stock, and SOFTBANK also holds a majority of the votes on the FV
Board.
FV believes that existing cash resources will be sufficient to support FV's
currently anticipated working capital and capital expenditure requirements
through the end of first quarter of 1999. However, FV anticipates that it will
need to raise additional funds through the public or private sale of its equity
or debt securities or from other sources before the end of first quarter of 1999
to ensure that FV remains in compliance with the requirements of the Nasdaq
National Market for continued listing. As of this filing, FV has initiated
efforts to raise additional capital. The timing and amount of FV's capital
requirements will depend on a number of factors, including demand for FV's
products and services, the need to develop new or enhanced products and
services, competitive pressures and the availability of complementary businesses
or technologies that FV may wish to acquire. If additional funds are raised
through the issuance of equity securities, the percentage ownership of FV's
stockholders will be diluted and such equity securities may have rights,
preferences or privileges senior to those of the holders of FV's common stock.
There can be no assurance that additional financing will be available when
needed or that, if available, such financing will include terms favorable to FV
or its stockholders. If adequate funds are not available on acceptable terms, FV
may be unable to develop or enhance its products and services, take advantage of
opportunities or respond to competition and the Nasdaq National Market may
decide to discontinue the listing of FV Common Stock.
During the six months ended June 30, 1998, FV significantly reduced its
operating expenditures. These cost reduction efforts have been coupled with the
planned reduction of capital expenditures. Management continues to pursue
opportunities to increase its revenues and believes that the market for IMP has
recently shown signs of significant expansion. Management believes that these
efforts and its continuing efforts to raise additional capital through equity
placements with existing stockholders, their affiliates or strategic partners
should allow FV to continue operations for the next twelve months. If near term
revenues do not increase or FV is unable to raise additional equity, management
would be required to further reduce its expenditures on research and development
and general and administrative activities. These reductions could significantly
hamper FV's ability to develop the IMP.
Operating activities used cash of $6.5 million during the six months ended
June 30, 1998. Net cash used during this period was primarily to fund the net
operating loss of $6.7 million (excluding depreciation, amortization and
compensation expense related to the issuance of stock), reduce accounts payable
and other accrued liabilities by approximately $305,000, pay down amounts due to
stockholders by $97,500, reduce
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deferred revenue by approximately $225,000, offset by a decrease in deposits and
prepaid expenses of approximately $225,000, collection of accounts receivable of
approximately $145,000 and a savings of approximately $450,000 in compensation
expense from employees and consultants who accepted common stock and stock
options in lieu of cash compensation.
Capital expenditures have been, and future capital expenditures are
expected to be, primarily for facilities, furniture and capital equipment to
support the expansion of FV's operations and management information systems.
Capital expenditures were $263,400 and $528,900 for the six months ended June
30, 1998 and 1997, respectively. Furniture and equipment are stated at the cost
and depreciated over three to five years using the straight line method.
RECENT DEVELOPMENTS
On July 28, 1998, FV entered into a non-binding letter of intent with
Distributed Bits, with respect to the acquisition by FV of Distributed Bits (the
"DB Acquisition"). The letter of intent provides that the DB Acquisition, if
consummated, will involve the acquisition of all equity interests, including
options, warrants or other purchase rights, if any, in Distributed Bits, in
exchange for $5,750,000 in shares of FV Common Stock and warrants to purchase an
additional 500,000 shares of FV Common Stock. The number of shares of FV Common
Stock to be issued will be determined based on the average closing price of FV
Common Stock for the twenty day trading period ending three business days prior
to the closing of the transaction. The final amount of the acquisition
consideration will be contingent upon the results of FV's financial, technical
and legal due diligence. The warrants to be issued in the transaction will be
exercisable (i) as to 50% of the underlying shares at a cash exercise price of
$7.50 per share for a period of 30 months and (ii) as to the remaining
underlying shares at a cash exercise price of $10.00 per share for a period of
42 months. The acquisition is expected to be accounted for as a purchase
transaction. There can be no assurances that the DB Acquisition will be
consummated. The consummation of the DB Acquisition is contingent upon numerous
factors, including the negotiation of the definitive agreement mutually
satisfactory to the parties, completion by FV of its financial, technical and
legal due diligence, approval of the transaction by the FV Board and approval of
the transaction by members of Distributed Bits. In addition, it is expected that
the definitive agreement with respect to the DB Acquisition will contain various
conditions to closing, included the absence of material adverse change in the
business, financial condition, results of operations or prospects of FV or
Distributed Bits, obtaining requisite consents and governmental approvals,
accuracy of representations, warranties and covenants, absence of injunctions or
orders restraining the transaction and receipt of customary certificates and
opinions.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in date code fields. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately 1 1/4 years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although FV believes that FV's Interactive Messaging Platform is
Year 2000 compliant, there can be no assurance that coding errors or other
defects will not be discovered in the future. While the Interactive Messaging
Platform was designed to be Year 2000 compliant, FV has not yet undertaken a
systematic effort to identify any Year 2000 compliance problems in the various
components of the Interactive Messaging Platform. FV believes that compliance
testing will require approximately 200 - 300 man-hours, and intends to complete
such testing in 1999.
Several collateral software and communications systems provided by third
parties are required for the operation of the Interactive Messaging System, any
of which may contain coding which is not Year 2000 compliant. These collateral
systems include server software used to operate FV's network servers, software
controlling routers, switches and other components of FV's data network, disk
management software used to control FV's data disk arrays, firewall, security,
monitoring and back-up software used by FV, as well as desktop PC applications
software. In each case, FV employs widely available software applications from
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leading third party vendors, and expects that such vendors will provide any
required upgrades or modifications in a timely fashion. However, any failure of
third party software suppliers to provide Year 2000 compliant versions of the
software used by FV could result in a temporary disruption of Interactive
Messaging Platform service or otherwise disrupt FV's operations.
Year 2000 compliance problems could also undermine the general
infrastructure necessary to support FV's operations. For instance, FV depends on
third party Internet service providers (ISPs) for connectivity to the Internet
and to customers' information systems. Any interruption of service from FV's
ISPs could result in a temporary interruption of the Company's interactive
messaging and other services. FV has attempted to address this risk by obtaining
redundant service capacity from multiple ISPs. In addition, FV relies on a
third-party data center to house certain of its servers and communications
systems. Any interruption in the security, access, monitoring or power systems
at the third party data center could result in an interruption of FV's services.
Moreover, the effects of Year 2000 compliance deficiencies on the integrity and
stability of the Internet are difficult to predict. A significant disruption in
the ability of businesses and consumers to reliably access the Internet would
have an adverse effect on demand for FV's services and adversely impact FV's
business, financial condition and results of operations.
Failure of FV's customers to ensure that their software systems are Year
2000 compliant could also adversely affect FV's operations. The Interactive
Messaging Platform is designed to interface with customer databases and
communications systems in order to retrieve relevant information from customers'
electronic commerce systems or customer databases and in order to allow
customers to independently control certain features of the service including the
content of transmitted messages. FV cannot assess or control the degree of Year
2000 compliance in its customers' information systems. Disruptions in the
information systems of significant customers could temporarily prevent such
customers from accessing or using the Interactive Messaging Platform, which
could materially affect FV's operating results. In order to address the risk of
disruptions in customer information systems, FV has designed the Interactive
Messaging Platform to include redundant manual control features which can be
used by such customers. Nevertheless, certain customers may elect to discontinue
use of FV's interactive messaging services until such customers' internal
information technology problems have been alleviated, which would adversely
affect FV's business, financial condition and results of operations. Moreover,
the spending patterns of current or potential customers may be affected by Year
2000 issues as companies expend significant resources to correct or update their
systems for Year 2000 compliance. These expenditures may result in reduced funds
available for such customers to pay for FV's services, which could have a
material adverse affect on FV's business, financial condition and results of
operations.
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EPUB MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in the
following discussion and elsewhere in this Proxy Statement/Information Statement
relative to markets for EPub's products and services, and trends in revenue and
anticipated expense levels, as well as other statements including words such as
"anticipate", "believe", "plan", "estimate", "expect" and "intend" and other
similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks and
uncertainties, and EPub's actual results of operations may differ materially
from those contained in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors" as well as other risks and uncertainties referenced
in this Prospectus.
OVERVIEW
EPub was incorporated on September 11, 1996 to develop, market and support
large-scale personalized messaging services to periodical publishers and large
corporations. EPub generates its revenue from service contracts to support
large-scale personalized messaging services. EPub's service contracts typically
provide for a monthly fee based on actual services rendered. Revenue from
service contracts is recognized monthly over the period of the contract.
During the period from September 11, 1996 (inception) through June 30, 1997
and for the year ending June 30, 1998, approximately 94% and 64%, respectively,
of EPub's total revenue was derived from CMP Media, EPub's largest customer. As
of June 30, 1997 and June 30, 1998, this customer accounted for approximately
100% and 41% of accounts receivables, respectively. See "Risk
Factors -- Reliance on Significant Customers."
RESULTS OF OPERATIONS
The following table presents certain items contained in EPub's statement of
operations reflected as a percentage of total revenue.
<TABLE>
<CAPTION>
SEPTEMBER 11,
1996 (INCEPTION)
THROUGH YEAR ENDING
JUNE 30, 1997 JUNE 30, 1998
---------------- -------------
<S> <C> <C>
Services revenue........................................ 100.0% 100.0%
Operating Expenses:
Research and development.............................. 58.2 14.6
Sales and marketing................................... 23.9 31.5
General and administrative............................ 321.9 70.8
------ -----
Total operating expenses...................... 404.0 116.9
------ -----
Loss from operations.................................... (304.0) (16.9)
------ -----
Other income (expense), net............................. 4.9 (.9)
------ -----
Net loss................................................ (299.1)% (17.8)%
====== =====
</TABLE>
SEPTEMBER 11, 1996 (INCEPTION) THROUGH JUNE 30, 1997 AND THE YEAR ENDING
JUNE 30, 1998
REVENUE
Services revenue increased 975.4% from $80,000 in the period from September
11, 1996 (inception) through June 30, 1997 to $864,000 in the year ending June
30, 1998, reflecting EPub's continued progress toward the successful
introduction of EPub's large-scale personalized messaging service. EPub's
large-scale personalized messaging service was introduced in March 1997. EPub
recognizes revenue from service contracts monthly over the period of the
contract.
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COSTS AND EXPENSES
EPub's research and development expenses consist primarily of salaries and
other personnel-related expenses relating to the development of EPub's messaging
service product. EPub has not capitalized any software costs to date. Research
and development expenses increased 168.9% from $47,000 in the period from
September 11, 1996 (inception) through June 30, 1997 to $126,000 in the year
ending June 30, 1998. As a percentage of revenue, research and development
expenses decreased to 14.6% in the year ending June 30, 1998 from 58.2% in the
period from September 11, 1996 (inception) through June 30, 1997. The decrease
in research and development expenses was due to the finalization of the
messaging service product in 1997. The research and development expenses
recognized in the year ended June 30, 1998 relate to development of a
significant enhancement to this messaging service product.
Sales and marketing expenses consist primarily of salaries and commissions.
Sales and marketing expenses increased 1,312.8% from $19,000 in the period from
September 11, 1996 (inception) through June 30, 1997 to $272,000 in the year
ending June 30, 1998. As a percentage of revenue, sales and marketing expenses
increased to 31.5% in the year ending June 30, 1998 from 23.9% in the period
from September 11, 1996 (inception) through June 30, 1997. The increase in sales
and marketing was due primarily to the expansion of the sales and marketing
department from one employee as of June 30, 1997 to four employees as of June
30, 1998.
General and administrative expenses consist primarily of salaries for
administration, facilities, finance, human resources and general management
personnel, as well as legal and accounting expenses. General and administrative
expenses increased 136.6% from $259,000 in the period from September 11, 1996
(inception) through June 30, 1997 to $612,000 in the year ending June 30, 1998.
As a percentage of revenue, general and administrative expenses decreased to
70.8% in the year ending June 30, 1998 from 321.9% in the period from September
11, 1996 (inception) through June 30, 1997. The increase in general and
administrative was due primarily the expansion of EPub's business and an
increase in the number of administration and general management personnel from
seven employees as of June 30, 1997 to 14 employees as of June 30, 1998. The
increase in employees reflects the growth and expanded operations of EPub's
business.
Other income (expense), net, includes rental income and interest expense on
EPub's debt financing and capital lease obligations. Other income (expense),
net, totaled $4,000 in the period from September 11, 1996 (inception) through
June 30, 1997 and ($8,000) in the year ending June 30, 1998. The change in the
other income (expense), net balance is due to increased interest expense on
capital leases and bank debt obtained in the year ending June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
EPub has historically financed operations through cash flow from the sale
of common and preferred stock or borrowings.
Net cash used in operating activities totaled $259,000 for the period from
September 11, 1996 (inception) through June 30, 1997 and $84,000 for the year
ending June 30, 1998. Net cash used in operations in fiscal year 1997 and fiscal
year 1998 was substantially impacted by the net operating loss for each of the
periods.
Net cash used in investing activities totaled $13,000 for the period from
September 11, 1996 (inception) through June 30, 1997 and $111,000 for the year
ending June 30, 1998. Net cash used in each period related to the purchase of
property and equipment.
Net cash provided by financing activities totaled $416,000 for the period
from September 11, 1996 (inception) through June 30, 1997 and $114,000 for the
year ending June 30, 1998. Net cash provided by financing activities for the
period from September 11, 1996 (inception) through June 30, 1997 resulted
primarily from proceeds from the issuance of common stock and preferred stock of
$419,000. Net cash provided by financing activities for the year ending June 30,
1998 related primarily to proceeds from the issuance of long-term debt and
payments on capital lease obligations of $150,000 and $31,000, respectively. In
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July 1996, EPub signed a subordinated promissory note for $100,000, with an
interest rate of 10%, which is due December 1998.
For the year ending June 30, 1998, EPub incurred a net loss of $153,000 and
experienced net cash outflows of $82,000. If the Merger is not consummated at
all or in a timely fashion, EPub intends to fund its future cash requirements,
to the extent not provided by operations, by seeking additional equity or debt
financing. EPub has commenced discussions with the holder of the aforementioned
$100,000 subordinated promissory note about increasing the amount of borrowings
under such note. No assurance can be given that additional funding would be
available to EPub or that, if available, such funds would be available on terms
favorable to EPub or its current stockholders. On September 25, 1998, FV
extended a loan of $100,000 to EPub to fund EPub's operation pending the closing
of the Merger. The loan is evidenced by a senior secured promissory note issued
by EPub (the "Note"). The Note carries an annual interest rate of 10.0% and is
due April 15, 1999. The principal amount of, and accrued interest under, the
Note is due and payable in full upon the occurrence of certain events of
default, including failure of EPub to pay any amount due to FV when due and
payable, initiation of bankruptcy, insolvency and similar proceedings with
respect to EPub, and the acceleration of other indebtedness of EPub. The Note is
secured by all assets of EPub pursuant to a Security Agreement dated September
25, 1998 between FV and EPub. The security interest granted to FV is subordinate
to a prior interest granted by EPub to a commercial bank. FV and EPub currently
expect that FV will provide an additional loan of $100,000 to EPub prior to the
closing of the Merger on terms similar to the first loan.
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 date from 20th century dates. As a result, in
approximately 1 1/4 years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although EPub 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 EPub, its service providers, its
customers or the Internet infrastructure could result in a material adverse
effect on EPub's business, operating results and financial conditions.
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BUSINESS OF EPUB
OVERVIEW
EPub's objective is to be the leading provider of e-mail message delivery
services to businesses and organizations on an "outsourced" basis. EPub's
service offerings make managing communications via e-mail easy and accessible to
companies with a need to get their message to a larger audience, whether the
message is in the form of an advertisement, newsletter, a picture, a software
upgrade or just information. The EPub message publishing platform allows EPub to
send personalized, targeted and highly customized mass e-mail on behalf of its
clients to a large number of recipients who have a pre-existing relationship
with these clients.
Target clients for EPub's services include a variety of organizations
desiring close customer contact and timely delivery of information. Markets
addressable with EPub's products and service offerings include magazine
publishers, software providers, credit card issuers, catalog companies, direct
marketers and travel services, such as airlines, rental car agencies and hotel
operators. Initially, EPub has focused primarily on the magazine and software
publishing industry. As EPub expands its sales and support capabilities, it
plans to broaden the scope of its targeted vertical market segments. EPub
markets its services nationally via tradeshows, direct mail and advertising.
EPub sells its services through a direct sales force and through other indirect
channels, such as resellers.
EPub was established as a Delaware corporation in September 1996. EPub's
investors include Softven No. 2 Investment Enterprise Partnership and several
private investors. EPub's executive offices are located at 6685 Gunpark Drive
East, Suite 240, Boulder, Colorado 80301, and its telephone number is (303)
440-7550.
EPUB PLATFORM AND SERVICES
Message Publishing Platform
Since its founding, EPub has developed an advanced suite of software tools
for the management and delivery of messages, letters and publications over the
Internet. The EPub platform's highly scaleable architecture and software
supports a wide array of sophisticated messaging features at high message
volume. The message publishing platform interoperates with all common e-mail
standards including POP3, MIME and SMTP.
The systems architecture allows it to:
Efficiently Manage Large E-mail Address Lists. EPub's system can
efficiently manage multiple subscriber lists with virtually unlimited
numbers of subscribers; clean and correct duplicate or "ill-formed"
addresses; identify and remove undeliverable addresses; and manage
subscribe, unsubscribe and change of address processing. In addition, the
system can import and export addresses and other data from and to a broad
array of data formats.
Collect and Report on Key Information. The system allows EPub to
collect information regarding e-mail circulation, undeliverable messages
and e-mail list activity including subscribes and unsubscribes. This
information is output to clients detailing the number of messages delivered
and returned, number of new subscribers and subscriber cancellations and
other information requested by the client.
Customize Content. EPub clients can request custom services, such as
e-mail merge and "narrowcasting." E-mail merge allows the client to
personalize each e-mail message with data unique to each subscriber. For
example, a client could send e-mails that are personally addressed to the
recipient or contain account number or other data. The narrowcasting
feature allows subscribers to receive specific content based on preferences
that they submit. For example, a subscriber could request specific types of
news content (e.g. sports, business) and continue to receive this targeted
information.
Service Agreements and Fees
EPub typically enters into service contracts with its clients pursuant to
which EPub provides its message management and delivery services. EPub's
standard service contracts provide for an initial set up fee and a recurring
monthly fee based on actual services rendered. The monthly fee is generally
based on the number of
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lists to be managed by EPub, the number of addresses in each list, the frequency
of message delivery, and the features used by the client (broadcast, e-mail
merge, narrowcast).
CUSTOMERS AND APPLICATIONS
As of August 19, 1998, EPub was providing e-mail delivery services to over
20 clients in the magazine publishing, newspaper publishing, new media, software
publishing, and Web commerce industries. CMP Media, EPub's largest customer,
accounted for 94% and 64% of EPub's revenue during the period from September 11,
1996 (inception) through June 30, 1997 and for the year ended June 30, 1998,
respectively.
EPub services include broadcast, personalized, and customized e-mail
message delivery and support with a variety of customer-specific options.
Clients use EPub's service for a variety of communication applications,
including:
- E-mail magazine editions to complement print or Web publications
- Periodic customer newsletters
- Distribution of magazine renewal or requalification notices
- Customer or industry "alert" messages
- New product or product upgrade announcements
As the use of electronic technologies, such as e-mail, continues to
increase, EPub believes that the use and types of applications for the e-mail
delivery systems will proliferate.
SALES AND MARKETING
EPub markets its services nationally via tradeshows, direct mail, and
Web-based advertising. EPub sells its services through a direct sales force and
through other indirect channels, such as resellers. EPub's direct sales force
comprises three employees.
RESEARCH AND DEVELOPMENT
EPub's research and development activities have been and continue to be
focused on development and enhancement of EPub's Message Publishing Platform, as
well as development of new components and technologies to broaden the scope of
EPub's service offerings. EPub's research and development expenses were $125,782
and $46,769 for the fiscal year ended June 30, 1998 and the period from
September 11, 1996 (inception) through June 30, 1997, respectively. EPub
believes that significant research and development expenditures will be required
in order for EPub to remain competitive. Accordingly, EPub expects that
research, development and engineering expenses will constitute a significant
portion of EPub's overall expenses in the future.
COMPETITION
Competition in the e-mail products and services industry is intense and
EPub expects competition to persist, intensify and increase in the future. There
are no substantial barriers to entry into EPub's business and EPub expects
established and new entities to enter EPub's market for products and services in
the near future. Furthermore, since there are many potential entrants to the
field, it is difficult to assess which companies are likely to offer competitive
products and services in the future.
Several of EPub's existing and potential competitors have substantially
longer operating histories, greater financial, technological, marketing and
other resources, larger installed customer bases and longer-standing
relationships with customers than EPub. EPub's principal competitors include
Postmaster Direct, Matchlogic, Email Channel and Infobeat.
EPub believes that its ability to compete successfully depends on numerous
factors, both within and outside of its control, including continuing to quickly
field required messaging features. A variety of potential
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actions by EPub's competitors, including pricing changes and development of new
services or products or enhancement of existing services and products, could
have a material adverse effect on EPub's business, financial condition and
results of operations. There can be no assurance that EPub will be able to
compete successfully with existing or new competitors. The failure of EPub to
adapt to emerging market demands or compete successfully with existing
competitors would have a material adverse effect on EPub's business, financial
condition and results of operations.
PROPRIETARY RIGHTS
EPub's success and ability to compete is dependent in part upon its
proprietary technology. EPub relies primarily upon copyright, trade secret and
trademark law to protect its technology. EPub has no patents. EPub generally
enters into confidentiality and assignment agreements with its employees,
consultants and vendors and generally controls access to and distribution of its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use EPub's services or technology without authorization or to develop
similar services or technology independently. In addition, effective copyright
and trade secret protection may be unenforceable or limited in certain foreign
countries, and the global nature of the Internet makes it difficult to control
the ultimate destinations of EPub's services. Despite EPub's efforts to protect
its proprietary rights, third parties may attempt to copy aspects of EPub's
products or services or to obtain and use information that EPub regards as
proprietary. Policing unauthorized use of EPub's products and services is
difficult, particularly in a global environment in which EPub operates, and the
laws of other countries may afford EPub little or no effective protection of its
intellectual property. There can be no assurance the steps taken by EPub will
prevent misappropriation of its technology or that such agreements will be
enforceable. In addition, litigation may be necessary in the future to enforce
EPub's intellectual property rights, to protect EPub's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversions of
resources, either of which could have a material adverse effect on EPub's
business, financial condition and results of operations.
EPub is aware of patents held by independent third parties in the area of
Internet communications. On October 19, 1998, InfoBeat, Inc. ("InfoBeat"), a
competitor of EPub filed a complaint in the Federal District Court for the
District of Colorado, alleging infringement of a patent held by InfoBeat. The
complaint seeks injunctive relief and unspecified damages. Although EPub
believes that the complaint is without merit, litigation with InfoBeat could
result in significant expense to EPub and could divert EPub management's time
and resources from other matters. In the event of an adverse ruling in such
litigation, EPub may be required to pay substantial damages, discontinue certain
of its services, pay significant royalties to InfoBeat or devote significant
resources to developing alternative technologies. No assurance can be given as
to the applicability of any additional issued patents, or potential patents
issued in the future, to EPub's services and technologies. The assertion of
these patent rights, if successful, could result in substantial cost to EPub.
There can be no assurance that EPub's services are not, or in the future will
not be, within the scope of such patents or any other existing or future
patents, and any litigation arising thereunder, even if successfully contested,
could have a material adverse effect on EPub's business, financial condition and
results of operations. In addition, EPub may receive in the future other notices
of claims of infringements of other parties' proprietary rights. There can be no
assurance that additional claims for infringement or invalidity (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against EPub. If any such claims or actions are asserted, EPub may
again seek to obtain a license under a third party's intellectual property
rights. There can be no assurance that such a license would be available on
reasonable terms or at all, and the assertion or prosecution of any such claims
could have a material adverse effect on EPub's business, financial condition and
results of operations.
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EMPLOYEES
As of August 19, 1998, EPub employed 18 people, all of whom are full time
employees. EPub outsources its human resources operations. None of EPub's
employees are represented by a labor union and EPub considers its employee
relations to be good.
FACILITIES
EPub's principal offices are located in approximately 5,800 square feet of
space in Boulder, Colorado. EPub believes that its current facilities will be
adequate for EPub's needs for at least the next 12 months.
LEGAL PROCEEDINGS
EPub is not currently subject to any formal legal proceedings. In March
1998, EPub received a letter from a competitor of EPub alleging that EPub's
services could be deemed to infringe claims of the competitor's pending patent
application. EPub responded to the allegations by letter in April 1998 and
requested information regarding the alleged infringement. In August 1998, EPub
received notices from such other company indicating that the patent was issued
and requesting that EPub send certain information regarding EPub's products and
services to such other company by September 30, 1998. There has been no further
correspondence with regard to such matter. There can be no assurance that the
patent, will not have a material adverse effect on EPub or that the party
claiming infringement will not commence formal litigation proceedings against
EPub, the result of which could have a material adverse effect on EPub's
business, financial condition and results of operations.
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SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS OF EPUB
The following table sets forth certain information regarding beneficial
ownership of EPub Common Stock and EPub Preferred Stock as of the EPub Record
Date (except as otherwise noted) by (i) each director of EPub, (ii) each
executive officer of EPub, (iii) all directors and executive officers of EPub as
a group, and (iv) all those known by EPub to be beneficial owners of more than
five percent of outstanding shares of EPub Common Stock or EPub Preferred Stock.
This table is based on information provided by EPub. Unless otherwise indicated
in the footnotes below, and subject to community property laws where applicable,
each of the named persons has sole voting and investment power with respect to
the shares shown as beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OF NUMBER OF PERCENTAGE OF
NUMBER OF OUTSTANDING NUMBER OF PERCENTAGE OF COMMON AND OUTSTANDING
COMMON COMMON PREFERRED OUTSTANDING PREFERRED COMMON AND
SHARES STOCK SHARES PREFERRED SHARES PREFERRED
BENEFICIALLY OWNED BENEFICIALLY STOCK OWNED BENEFICIALLY STOCK OWNED
BENEFICIAL OWNER OWNED (1) OWNED (2) OWNED (3)
---------------- ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Softven No. 2 Investment
Enterprise Partnership... -- -- 400,000 63.2% 400,000 15.8%
Catalyst Infotech
Development Fund,
L.P. .................... 271,625 14.2% -- -- 271,625 10.7%
EXECUTIVE OFFICERS AND
DIRECTORS
Andrew Currie.............. 827,661 43.4% -- -- 827,661 32.6%
Brian Makare............... 451,452 23.7% -- -- 451,452 17.8%
Bradley Feld............... 225,726 11.8% -- -- 225,726 8.9%
Scott Russell.............. -- -- -- -- -- --
All directors and executive
officers as a group
including the above-named
persons (4 persons)...... 1,504,839 78.9% -- -- 1,504,839 59.3%
</TABLE>
- ---------------
(1) Based on 1,906,503 shares of Common Stock outstanding as of the EPub Record
Date.
(2) Based on 632,558 shares of Preferred Stock outstanding as of the EPub Record
Date.
(3) Based on 2,539,061 shares of Common and Preferred Stock outstanding as of
the EPub Record Date.
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TERMS OF THE MERGER
The following is a summary of the material provisions of the Reorganization
Agreement, a copy of which is attached as Annex A to this Proxy
Statement/Information Statement and is incorporated herein by reference.
However, the following is not a complete statement of all provisions of the
Reorganization Agreement and related agreements. Statements made in this Proxy
Statement/Information Statement with respect to the terms of the Reorganization
Agreement and such related agreements are qualified in their respective
entireties by reference to the more detailed information set forth in the
Reorganization Agreement and such related agreements. The terms and conditions
of the Merger are set forth in the Reorganization Agreement.
EFFECTIVE TIME
Subject to the provisions of the Reorganization Agreement and applicable
provisions of Delaware law, FV, EPub and Sub shall cause the Merger to be
consummated by filing a Certificate of Merger with the Secretary of State of the
State of Delaware in accordance with the relevant provisions of Delaware law as
soon as practicable on or after the closing of the Merger (the "Closing") (the
time of such filing, or such later time as may be agreed in writing by the
parties and specified in the Certificate of Merger being the "Effective Time" of
the Merger). The Closing shall take place at the offices of Wilson Sonsini
Goodrich & Rosati, P.C., counsel to FV, at a time and date to be specified by
the parties as soon as practicable after satisfaction or waiver of the
conditions set forth in the Reorganization Agreement or at such other date, time
and location as FV, Sub and EPub may agree. The Closing is currently anticipated
to occur on or about December 9, 1998.
MANNER AND BASIS FOR CONVERTING SHARES
At the Effective Time, by virtue of the Merger and without any action on
the part of Sub, EPub or their respective stockholders, each share of EPub
Capital Stock issued and outstanding immediately prior to the Effective Time
(other than any shares as to which appraisal rights under the DGCL have been
exercised) will be canceled and extinguished and automatically converted into a
number of shares of FV Common Stock equal to the quotient of (i) 6,000,000
divided by (ii) the aggregate number of shares of EPub common stock outstanding
as of the Effective Time or issuable upon exercise of all options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights and
other similar rights to purchase shares of EPub capital stock outstanding as of
the Effective Time.
The Exchange Ratio will be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend (including any dividend or
distribution of securities convertible into FV Common Stock or EPub Capital
Stock), reorganization, recapitalization, reclassification or other like change
with respect to FV Common Stock or EPub Capital Stock occurring or having a
record date on or after the date of the Reorganization Agreement and prior to
the Effective Time.
No fraction of a share of FV Common Stock will be issued by virtue of the
Merger, but in lieu thereof each holder of shares of EPub Capital Stock who
would otherwise be entitled to a fraction of a share of FV Common Stock (after
aggregating all fractional shares of FV Common Stock that otherwise would be
received by such holder) shall receive from FV an amount of cash (rounded to the
nearest whole cent) equal to the product of such fraction, multiplied by $1.675.
The aggregate and per share consideration to be received by the
stockholders of EPub is valued at approximately $22,140,000 (of which $1,539,892
is the approximate value of the shares to be issued upon exercise of options and
warrants assumed by FV in the Merger) and $3.69, respectively, based on the
closing price of the FV Common Stock on November 9, 1998.
A portion of the shares of FV Common Stock otherwise issuable to most EPub
stockholders in connection with the Merger will be withheld and placed into an
escrow fund for a period of twelve months following the Effective Time of the
Merger. Such escrow fund will be used to satisfy indemnification obligations of
such EPub stockholders under the Reorganization Agreement on account of breaches
of the representations, warranties, covenants and agreements of EPub or the EPub
Majority Stockholders. The
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stockholders of EPub who will not be required to contribute a portion of their
FV Common Stock to the escrow fund are Catalyst Infotech Development Fund, L.P.,
Grandhaven L.L.C., Hexagon Investments L.L.C., Labyrinth Enterprises L.L.C. and
Legacy Enterprises, L.L.C. (the "Excluded Stockholders"), who collectively
beneficially owned an aggregate of 14.3% of EPub Capital Stock as of the EPub
Record Date. Twenty percent (20%) of the shares of FV Common Stock which would
otherwise be issuable to all stockholders of EPub other than the Excluded
Stockholders will be placed in the escrow fund. Accordingly, only the Excluded
Stockholders will receive 100% of their pro rata portion of the shares of FV
Common Stock issued in connection with the Merger at the Effective Time of the
Merger. All other stockholders of EPub will receive only 80% of their pro rata
portion of the shares of FV Common Stock issued in connection with the Merger at
that time. The remaining shares will be released to such stockholders twelve
months after the Effective Time of the Merger, but only if such shares are not
required to satisfy a claim for indemnification by FV. To the extent the escrow
fund is used to satisfy a claim for indemnification by FV, the shares of FV
Common Stock available for distribution upon dissolution of the escrow fund will
be accordingly reduced, and the stockholders of EPub other than the Excluded
Stockholders will not receive their full pro rata portion of the FV Common Stock
issued in the Merger. The Excluded Stockholders are not required to contribute a
portion of their shares of FV Common Stock to the escrow fund under the terms of
the Reorganization Agreement and are not subject to any indemnification
obligations to FV. The Excluded Stockholders are exempt from the indemnification
and the escrow fund contribution provisions of the Reorganization Agreement
because the Excluded Stockholders became stockholders of EPub shortly before the
execution of the Reorganization Agreement, and accordingly did not have
sufficient familiarity with EPub and its affairs to provide FV with
representations, warranties and indemnity in the Reorganization Agreement. All
of the Excluded Stockholders are investment partnerships which have a
co-investment relationship with Catalyst Infotech Development Fund, L.L.C.
Current EPub stockholders need not remain stockholders of FV in order to receive
their pro rata portion of the shares of FV Common Stock remaining in the escrow
fund, if any, upon dissolution of the escrow fund. See "-- Indemnification."
Promptly after the Effective Time of the Merger, FV shall make available to
the American Stock Transfer & Trust Company (the "Exchange Agent") for exchange
the shares of FV Common Stock issuable pursuant to the Reorganization Agreement
in exchange for outstanding shares of EPub Capital Stock, other than certain
shares to be held in escrow pursuant to the Reorganization Agreement.
Within ten days after the Effective Time of the Merger, the Exchange Agent,
will deliver to each holder of record of EPub Capital Stock, as of the Effective
Time, a letter of transmittal with instructions to be used by such holder in
surrendering such certificates in exchange for certificates representing shares
of FV Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF
EPUB CAPITAL STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH THE TERMS OF SUCH LETTER OF
TRANSMITTAL.
TREATMENT OF OPTIONS AND WARRANTS
EPub Stock Options
At the Effective Time, each outstanding EPub Stock Option, whether or not
exercisable, will be assumed by FV. Each EPub Stock Option so assumed by FV
under the Reorganization Agreement will continue to have, and be subject to, the
same terms and conditions as were applicable to such EPub Stock Option
immediately prior to the Effective Time (including, to the extent permissible,
with respect to the status as an "incentive stock option" under Section 422 of
the Code), except that (i) each EPub Stock Option will be exercisable (or will
become exercisable in accordance with its terms) for that number of whole shares
of FV Common Stock equal to the product of the number of shares of EPub Capital
Stock that were issuable upon exercise of such EPub Stock Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, rounded down to
the nearest whole number of shares of FV Common Stock, and (ii) the per share
exercise price for the shares of FV Common Stock issuable upon exercise of such
assumed EPub Stock Option will be equal to the quotient determined by dividing
the exercise price per share of EPub Capital Stock
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at which such EPub Stock Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
Warrants
At the Effective Time, each EPub Warrant shall be converted into and become
rights with respect to FV Common Stock, and FV shall assume each EPub Warrant in
accordance with the terms (as in effect as of the date of the Reorganization
Agreement) of such EPub Warrants. From and after the Effective Time, (i) each
EPub Warrant assumed by FV may be exercised solely for shares of FV Common
Stock, (ii) the number of shares of FV Common Stock subject to each such EPub
Warrant shall be equal to the number of shares of EPub Capital Stock subject to
such EPub Warrant immediately prior to the Effective Time multiplied by the
Exchange Ratio, (iii) the per share exercise price under each such EPub Warrant
shall be adjusted by dividing the per share exercise price under such EPub
Warrant by the Exchange Ratio and (iv) any restriction on the exercise of any
such EPub Warrant shall continue in full force and effect and the term,
exercisability, vesting schedule and other provisions of such EPub Warrant shall
otherwise remain unchanged. As of the EPub Record Date, there were outstanding
EPub Warrants to acquire 11,627 shares of EPub Capital Stock.
Form S-8 Filing
After the Effective Time, FV will file with the SEC a registration
statement on Form S-8 to register shares of FV Common Stock issuable as the
result of the assumption of the EPub Options.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the capitalization of EPub as of the close of business on the
EPub Record Date, an aggregate of approximately 5,582,685 shares of FV Common
Stock will be issued to EPub stockholders in the Merger, and FV will assume
options and warrants of EPub which will become equivalent options and warrants
of FV to acquire up to approximately 417,315 additional shares of FV Common
Stock. Based upon the number of shares of FV Common Stock issued and outstanding
as of June 30, 1998, and after giving effect to the issuance of FV Common Stock
as described in the previous sentence and the exercise of all options to
purchase EPub Capital Stock assumed by FV, the former holders of EPub Capital
Stock and options to purchase EPub Capital Stock would hold, and have voting
power with respect to, approximately 16.1% of FV's total issued and outstanding
shares. The foregoing numbers of shares and percentages are subject to change to
reflect any changes in the capitalization of either FV or EPub subsequent to the
dates indicated and prior to the Effective Time, and there can be no assurance
as to the actual capitalization of FV or EPub at the Effective Time or of FV at
any time following the Effective Time.
EFFECT OF THE MERGER
Once the Merger is consummated, Sub will cease to exist as a corporation
and EPub will remain as the Surviving Corporation and will be a wholly owned
subsidiary of FV.
Pursuant to the Reorganization Agreement, the Certificate of Incorporation
of Sub in effect immediately prior to the Effective Time will become the
Certificate of Incorporation of the Surviving Corporation and the Bylaws of Sub
will become the Bylaws of the Surviving Corporation. The Board of Directors of
the Surviving Corporation will consist of the directors who are serving as
directors of Sub immediately prior to the Effective Time. The officers of Sub
immediately prior to the Effective Time will be the officers of the Surviving
Corporation.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains representations and warranties by
EPub, the EPub Majority Stockholders, FV and Sub relating to a number of
matters, including: (i) the due organization of EPub, FV and Sub; (ii) the
authorization, execution, delivery and enforceability of the Reorganization
Agreement and related matters; (iii) the capital structure of EPub and FV; (iv)
the absence of conflicts under certificates of incorporation or bylaws, required
consents or approvals and violations of any instruments or law; (v) the
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absence of any liability to pay any fees or commissions to any broker or agent
with respect to the transactions under the Reorganization Agreement and (vi) the
absence of certain material adverse changes or events.
In addition, the Reorganization Agreement contains representations and
warranties by EPub and the EPub Majority Stockholders relating to a number of
additional matters, including: (i) EPub's financial statements; (ii) absence of
any subsidiaries; (iii) title to assets; (iv) absence of undisclosed
liabilities; (v) compliance with applicable law; (vi) taxes, tax returns and tax
deficiencies; (vii) the possession of leasehold interests in real properties
necessary for the conduct of business; (viii) intellectual property rights; (ix)
the condition and status of tangible assets, inventory and notes and accounts
receivable; (x) agreements, contracts and commitments; (xi) absence of any
powers of attorney executed on behalf of EPub; (xii) insurance; (xiii)
litigation; (xiv) product warranty and liability; (xv) employee and employee
benefits matters; (xvi) guaranties; (xvii) environmental, health and safety
matters; and (xviii) certain business relationships of affiliates of EPub.
The Reorganization Agreement also contains representations and warranties
by FV relating to the filing of documents and financial statements by FV with
the SEC and the accuracy of information contained therein.
The covenants, representations and warranties of EPub will survive the
Merger for a period of 12 months from the Effective Time, provided that all
covenants, representations and warranties relating to title to and validity of
capital stock and taxes will survive until the expiration of the applicable
statutes of limitations. All representations and warranties of FV will survive
the Merger for a period of 12 months from the Effective Time.
INDEMNIFICATION
Pursuant to the Reorganization Agreement, the EPub stockholders other than
the Excluded Stockholders (Catalyst Infotech Development Fund, L.P., Grandhaven
L.L.C., Hexagon Investments L.L.C., Labyrinth Enterprises L.L.C. and Legacy
Enterprises L.L.C., who collectively owned 14.3% of the EPub Capital Stock as of
the EPub Record Date) are required to indemnify FV, its officers, directors and
affiliates for damages resulting from any breach of the covenants,
representations and warranties of EPub and the EPub Majority Stockholders. Such
indemnity will be satisfied solely by an escrow fund consisting of 20% of the
shares of FV Common Stock issued to all EPub Stockholders other than the
Excluded Stockholders; provided, however, such indemnity will not be limited to
such escrow fund for knowing breach of any covenant, representation or warranty
or for fraud. In no event will any EPub stockholder be required to compensate FV
and its affiliates for losses in an amount exceeding the value of such
stockholder's pro rata portion of the Merger Consideration. FV and Sub have
agreed to indemnify the EPub stockholders (excluding certain EPub stockholders
referred to in the Reorganization Agreement) for damages resulting from any
breach of the covenants, representations and warranties of FV or Sub. Such
indemnity will be limited to an aggregate amount of the escrow fund; provided,
however, such indemnity will not be limited to such amount for knowing breach of
any covenant, representation or warranty or for fraud.
CONDUCT OF EPUB'S BUSINESS PRIOR TO THE MERGER
Pursuant to the Reorganization Agreement, EPub has agreed that, until the
earlier of the termination of the Reorganization Agreement pursuant to its terms
or the Effective Time of the Merger, except as permitted by the terms of the
Reorganization Agreement, EPub will carry on its business in the usual, regular
and ordinary course, and in compliance with all applicable laws and regulations,
and use its best efforts consistent with past practices and policies (i) to
preserve intact its present business organization, (ii) to keep available the
services of its employees, and (iii) to preserve its relationships with
customers, suppliers, distributors, licensors, licensees and others with which
it has business dealings. In addition, EPub will promptly notify FV of any
material adverse development causing a breach of any of its representations and
warranties.
In addition, except as permitted by the terms of the Reorganization
Agreement, until the earlier of the termination of the Reorganization Agreement
pursuant to its terms or the Effective Time, EPub has agreed not to do any of
the following: (a) cause or permit any amendment to its Certificate of
Incorporation or
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Bylaws; (b) issue any capital stock or issue or grant any options, warrants or
rights to acquire any capital stock (other than in connection with the exercise
of stock options outstanding on the date of the Reorganization Agreement); (c)
declare, set aside, or pay any dividend or make any distribution with respect to
its capital stock (whether in cash or in kind) or redeem, purchase, or otherwise
acquire any of its capital stock; (d) pay any bonuses or increase the amount of
compensation otherwise payable to any employee, consultant or director; (e)
sell, lease, transfer or assign any assets or properties, tangible or
intangible, outside the ordinary course of business; (f) except for certain
identified agreements, enter into, assume or become bound under or obligated by
any agreement, contract, lease or commitment or extend or modify the terms of
any such agreement which (i) involves the payment of greater than $25,000 per
annum or which extends for more than 1 year, (ii) involves any payment or
obligation to any affiliate of EPub other than in the ordinary course of
business, (iii) involves the sale of any material assets, (iv) involves any OEM
relationship or (v) involves any license of EPub's technology; (g) accelerate,
terminate, make modifications to, or cancel any agreement, contract, lease, or
license to which EPub is a party or by which it is bound; (h) modify, cancel or
waive or settle any debts or claims held by EPub outside the ordinary course of
business, or waive or settle any rights or claims of a substantial value,
whether or not in the ordinary course of business; (i) subject any of EPub's
assets, tangible or intangible, to any security interest; (j) make any capital
expenditures except in the ordinary course of business and not exceeding $25,000
in the aggregate of all such capital expenditures; (k) make any capital
investment in, or any loan to, any other person; (l) create, incur, assume,
prepay or guarantee any indebtedness for borrowed money and capitalized lease
obligations, or extend or modify any existing indebtedness; (m) grant any
license or sublicense of any rights under or with respect to any intellectual
property; (n) engage in any practice or take any action which causes any damage,
destruction or loss (whether or not recovered by insurance) to its property in
excess of $10,000 in the aggregate of all such damage, destruction and losses;
(o) engage in any practice or take any action which causes any repeated,
recurring or prolonged shortage, cessation or interruption of inventory
shipments, supplies or utility services; (p) make any loan to, or enter into any
other transaction with, or pay any bonuses in excess of an aggregate of $10,000
to, any of its affiliates, directors, officers, or employees or their
affiliates, and, in any event, any such transaction will be on fair and
reasonable terms no less favorable to EPub than would be obtained in a
comparable arm's length transaction with a person which is not such a director,
officer or employee or affiliate thereof; (q) enter into any employment contract
or collective bargaining agreement, written or oral, or modify the terms of any
existing such contract or agreement; (r) adopt, amend, modify, or terminate any
bonus, profit-sharing, incentive, severance, or other plan, contract, or
commitment for the benefit of any of its directors, officers, or employees (or
taken any such action with respect to any other employee benefit plan); (s) make
any other change in employment terms for any of its directors or officers, and
make any other change in employment terms for any other employees outside the
ordinary course of business; (t) engage in any practice or take any action which
causes any adverse change or any threat of any adverse change in its relations
with, or any loss or threat of loss of, any of its major customers, distributors
or dealers; (u) engage in any practice or take any action which causes any
adverse change or any threat of any adverse change in its relations with, or any
loss or threat of loss of, any of it major suppliers; (v) engage in any practice
or take any action which causes labor trouble or strike, or any other
occurrence, event or condition of a similar character; (w) change any of the
accounting principles followed by it or the method of applying such principles;
(x) make a change in any of its banking or safe deposit arrangements; (y) enter
into any transaction other than in the ordinary course of business; and (z)
agree in writing or otherwise to take any of the foregoing actions.
NO SOLICITATION
Under the terms of the Reorganization Agreement, EPub and the EPub Majority
Stockholders have agreed that, until the earlier of the Effective Time or
termination of the Reorganization Agreement pursuant to its terms, none of such
EPub Majority Stockholders nor EPub will (i) solicit, initiate, or encourage the
submission of any proposal or offer from any person relating to the acquisition
of any capital stock or other voting securities, or any portion of the assets,
of EPub or its subsidiaries (including any acquisition structured as a merger,
consolidation, or share exchange) or (ii) participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
person to do or seek any of the foregoing. Moreover, none of such EPub Majority
Stockholders
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will transfer or offer to transfer any of their EPub Capital Stock. In addition,
such EPub Majority Stockholders have agreed to vote their EPub Capital Stock in
favor of approval and adoption of the Reorganization Agreement and approval of
the Merger and not to vote their EPub Capital Stock in favor of any alternative
acquisition whether structured as a merger, consolidation, share exchange or
asset acquisition.
CONDITIONS TO THE MERGER
The obligations of FV and Sub to consummate and effect the Merger is
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, exclusively by FV:
(i) the representations and warranties of EPub and the EPub Majority
Stockholders contained in the Reorganization Agreement shall, subject to certain
materiality thresholds, have been true and correct in all material respects on
and as of the Effective Time; (ii) EPub and the EPub Majority Stockholders shall
have performed or complied with all agreements and covenants required by the
Reorganization Agreement to be performed or complied with by them on or prior to
the Effective Time; (iii) EPub shall have obtained the consents of certain third
parties with respect to the Merger; (iv) no action, suit or proceeding and no
law, statute, ordinance, rule, regulation or order which may prohibit or rescind
the Merger or have certain material adverse effects shall be pending or have
been enacted, enforced or entered on or prior to the Effective Time; (v) the
President and Secretary of EPub shall have delivered to FV a certificate to the
effect that each of the conditions specified in clauses (i), (ii), (iii) and
(iv) above have been satisfied in all respects; (vi) the parties to the
Reorganization Agreement shall have received the authorizations, consents and
approvals of certain governmental entities; (vii) each of Andrew Currie and
Brian Makare shall have executed and delivered a noncompetition agreement (the
"Noncompetition Agreement") and employment agreement (the "Employment
Agreement") in the forms prescribed in the Reorganization Agreement and each
such agreement shall be in full force and effect; (viii) FV shall have received
from counsel to EPub an opinion regarding certain representations and warranties
of EPub and other matters; (ix) FV shall have received substantially identical
written opinions from Wilson Sonsini Goodrich & Rosati and Cooley Godward LLP,
in form and substance reasonably satisfactory to it, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code, and such opinions shall not have been withdrawn; (x) the
Reorganization Agreement and the Merger shall have been approved by the vote of
the holders of at least 90% of the outstanding capital stock of EPub and holders
of no more than 3% of the outstanding capital stock of EPub shall have exercised
or shall be eligible to exercise any dissenters' rights with respect to the
Merger; (xi) the Reorganization Agreement and the Merger, as well as the
amendment to FV's Certificate of Incorporation to increase FV's authorized
capital stock, shall have been approved by the required vote of the holders of
FV Common Stock pursuant to Delaware law and the rules of the Nasdaq National
Market; (xii) EPub and the EPub Majority Stockholders as a group shall have
entered into certain tax representation statements to permit the rendering of
the tax opinions described in clause (ix) above; (xiii) no event having a
material adverse effect with respect to EPub shall have occurred since the date
of the Reorganization Agreement; (xiv) each of the officers and directors of
EPub shall have resigned; (xv) the Reorganization Agreement shall have been
approved and adopted and the Merger shall have been approved by the holders of a
majority of the outstanding shares of FV Common Stock, other than shares held by
SOFTBANK and its affiliates; (xvi) as of immediately prior to the Effective
Time, all shares of Series A Preferred Stock and Series A-1 Preferred Stock of
EPub shall have been converted into an equal number of shares of common stock of
EPub; and (xvii) each of the EPub stockholders shall have executed and delivered
to FV a stockholder representation statement.
Further, the obligations of EPub and the EPub Majority Stockholders to
consummate and effect the Merger are subject to the satisfaction at or prior to
the Effective Time of each of the following conditions, any of which may be
waived, in writing, exclusively by EPub: (i) the representations and warranties
of FV and Sub contained in the Reorganization Agreement shall, subject to
certain materiality thresholds, have been true and correct in all material
respects on and as of the Effective Time; (ii) FV shall have performed or
complied with all agreements and covenants required by the Reorganization
Agreement to be performed or complied with by it on or prior to the Effective
Time; (iii) no action, suit or proceeding which may prohibit or rescind the
Merger shall be pending at the Effective Time; (iv) the President or other duly
authorized officer of FV shall have delivered to EPub a certificate to the
effect that each of the conditions specified in clauses (i),
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(ii) and (iii) above have been satisfied in all respects; (v) EPub shall have
received from counsel to FV an opinion regarding certain representations and
warranties of FV and other matters; (vi) EPub shall have received substantially
identical written opinions from Wilson Sonsini Goodrich & Rosati and Cooley
Godward LLP, in form and substance reasonably satisfactory to it, to the effect
that the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code, and such opinions shall not have been withdrawn; (vii) FV
shall have entered into a certain Registration Rights Agreement (the
"Registration Rights Agreement") and such agreement shall be in full force and
effect; (viii) the average of the high and low sales prices for the FV Common
Stock as reported by the Nasdaq Stock Market shall not have been less than $1.40
(as adjusted for stock splits, stock dividends and similar events) for more than
seven days of the fifteen day trading period ending three days prior to the
Effective Time of the Merger; (ix) FV shall not have received notice of the
commencement of any action for de-listing of the FV Common Stock from Nasdaq;
(x) no event having a material adverse effect with respect to FV shall have
occurred since the date of the Reorganization Agreement, provided however, that
a decline in the price of the FV Common Stock shall not be considered an event
having such an effect; and (xi) FV shall have entered into a certain tax
representation statement to permit the rendering of the tax opinions described
in clause (vi) above.
TERMINATION OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement provides that it may be terminated at any time
prior to the Effective Time (i) by mutual written consent of FV and EPub; (ii)
by either FV or EPub if (A) there is a final nonappealable order of a court of
competent jurisdiction in effect preventing the consummation of the Merger or
(B) there is any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental entity that would
make consummation of the Merger illegal; (iii) by either FV or EPub if the
Merger is not consummated by (1) November 30, 1998 in the event the SEC
determines to undertake a review of this Proxy Statement/Information Statement
or (2) October 31, 1998 in the event the SEC determines to not to undertake a
review of this Proxy Statement/Information Statement by reason of the failure of
any condition to the Merger described above; (iv) by FV, if there is any action
taken, or any statute, rule, regulation or order enacted, promulgated or issued
or deemed applicable to the transaction by any governmental entity which would
(A) prohibit FV's or EPub's ownership or operation of all or a portion of the
business of EPub or (B) compel FV or EPub to dispose of or hold separate all or
a portion of the business or assets of FV or EPub as a result of the Merger; (v)
by FV, upon a breach of any representation, warranty or covenant on the part
EPub or the EPub Majority Stockholders set forth in the Reorganization
Agreement, subject to certain materiality thresholds and cure provisions and
provided that FV is not in material breach of any of its obligations under the
Reorganization Agreement; and (vi) by EPub, upon a breach of any representation,
warranty or covenant on the part of FV set forth in the Reorganization
Agreement, subject to certain materiality thresholds and cure provisions and
provided that EPub and the EPub Majority Stockholders are not in material breach
of any of their obligations under the Reorganization Agreement.
EFFECT OF TERMINATION
If the Reorganization Agreement is terminated by FV or EPub as described
above, the Reorganization Agreement will be of no further force or effect,
except that certain provisions contained therein, including those relating to
the parties bearing their own respective costs and expenses, will survive such
termination, and each party will remain liable for any breaches of the
Reorganization Agreement occurring prior to such termination. Notwithstanding
the general agreement that the parties shall bear their own respective costs and
expenses, to the extent any such termination of the Reorganization Agreement is
due to a failure to satisfy the conditions that (i) the Reorganization Agreement
and the Merger, as well as the amendment to FV's Certificate of Incorporation to
increase FV's authorized capital stock, be approved by the required vote of the
holders of FV Common Stock pursuant to Delaware law and the rules of the Nasdaq
National Market and (ii) the Reorganization Agreement be approved and adopted
and the Merger be approved by the holders of a majority of the outstanding
shares of FV Common Stock, other than shares held by SOFTBANK, FV has agreed to
pay the reasonable out-of-pocket legal and accounting fees and expenses and
travel expenses of EPub up to a total of $150,000.
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AMENDMENTS AND WAIVERS
The Reorganization Agreement may be amended prior to the Effective Time of
the Merger with the consent of FV and EPub, and FV and EPub may waive any of the
conditions to consummation of the Merger set forth in the Reorganization
Agreement. FV and EPub currently do not anticipate that the Reorganization
Agreement will be amended or that any of the material conditions to the
consummation of the Merger will be waived, and both companies intend to
re-submit the proposal to approve and adopt the Reorganization Agreement and
approve the Merger to their respective stockholders for approval in the event
that there is a material adverse change in the terms of the Reorganization
Agreement or if a material condition to the consummation of the Merger is to be
waived. However, the respective Boards of Directors of FV and/or EPub may choose
to consummate the Merger notwithstanding the occurrence of events or
circumstances which cause the representations and warranties of the other party
in the Reorganization Agreement to no longer be true and correct if such events
or circumstances do not, in the judgment of the applicable Board of Directors,
undermine the fundamental benefits of the Merger.
ANTI-DILUTION RIGHTS
To provide EPub stockholders a degree of anti-dilution protection against
FV issuing additional shares of FV Common Stock below a threshold price of one
dollar and fifty cents per share of FV Common Stock (the "Threshold Price"), FV
has agreed to enter into a letter agreement with EPub pursuant to which FV
during the one year period following the Effective Time is required to issue to
EPub stockholders additional shares of FV Common Stock (as determined pursuant
to a weighted average formula described below) in the event FV, subject to
certain exceptions (as described below), issues additional shares of FV Common
Stock or securities convertible into FV Common Stock at a price per share less
than the Threshold Price (an "Issuance of Additional Shares of FV Common
Stock"). More specifically, in the event of such an Issuance of Additional
Shares of FV Common Stock during such period, FV will concurrently issue to each
EPub stockholder a number of additional shares determined by multiplying the
number of shares of FV Common Stock issued to such stockholder in the Merger
which are still held by such stockholder as of such date by the result of (i) a
fraction, the numerator of which shall be the sum of (A) the aggregate number of
shares of FV Common Stock then outstanding, including the aggregate number of
shares of FV Common Stock issuable upon conversion or exercise of all
convertible securities of FV then outstanding and (B) the number of additional
shares of common stock so issued, and the denominator of which shall be the sum
of (A) the aggregate number of shares of FV Common Stock then outstanding,
including the aggregate number of shares of FV Common Stock issuable upon
conversion of exercise of all convertible securities of FV then outstanding and
(B) the number of shares of FV Common Stock which would be issuable if sold at
the Threshold Price for the aggregate consideration received by FV in such
Issuance of Additional Shares of FV Common Stock, minus (ii) one. FV will not be
required to issue additional shares of FV Common Stock to EPub stockholders
pursuant to such agreement if Issuances of Additional Shares of FV Common Stock
are (i) pursuant to a dividend or distribution on the FV Common Stock or
pursuant to a subdivision, combination or consolidation of the FV Common Stock;
(ii) upon exercise of options or warrants to subscribe for, purchase or
otherwise acquire shares of FV Common Stock issued to employees or directors of,
or consultants to, FV in connection with services rendered to FV and pursuant to
stock purchase plans and benefit arrangements or plans authorized by a majority
of the FV Board; (iii) in connection with a merger, consolidation, share
acquisition or other business combination or asset acquisition; (iv) in
connection with a strategic transaction pursuant to which significant additional
commercial value is received by FV in addition to any securities or assets
acquired (as determined in good faith by the FV Board); or (v) in connection
with the establishment, extension or amendment of credit and leasing facilities
and arrangements approved by a majority of the FV Board.
CO-SALE AGREEMENT
To provide EPub stockholders a certain level of liquidity with respect to
the shares of FV Common Stock to be issued to EPub stockholders in connection
with the Merger, SOFTBANK Holdings and SOFTBANK Technology have agreed to enter
into a co-sale agreement (the "Co-Sale Agreement") with EPub stockholders
granting such stockholders the co-sale rights described below with respect to
such shares of the
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Merger Consideration. Pursuant to the Co-Sale Agreement, in the event SOFTBANK
Holdings and SOFTBANK Technology propose to sell or transfer a number of shares
of FV Common Stock equal to 20% or more of the shares of FV Common Stock held by
SOFTBANK as of the date of the Co-Sale Agreement, EPub stockholders will be
entitled, subject to certain exceptions, to participate in such sale of FV
Common Stock on the same terms and conditions. To the extent that one or more of
such EPub stockholders exercise such co-sale right, the number of shares of FV
Common Stock that SOFTBANK may sell in the transaction will be correspondingly
reduced. Each such EPub stockholder electing to participate in such sale may
sell all or any part of that number of shares of FV Common Stock equal to the
product obtained by multiplying (i) the aggregate number of shares of FV Common
Stock proposed to be sold by SOFTBANK Holdings and SOFTBANK Technology by (ii) a
fraction the numerator of which is the number of shares of FV Common Stock owned
by such EPub stockholder at the time of sale or transfer and the denominator of
which is the total number of shares of FV Common Stock owned by SOFTBANK
Holdings and SOFTBANK Technology and all such EPub stockholders. Currently, each
of Andrew Currie, Brian Makare, Bradley Feld, Dan Lynch, John Strauss, Softven
No. 2 Investment Enterprise Partnership, Catalyst Infotech Development Fund,
L.P., WHP Family Limited Partnership, Grandhaven LLC, Hexagon Investments LLC,
Labyrinth Enterprises LLC and Legacy Enterprises LLC have entered into the
Co-Sale Agreement with SOFTBANK Holdings and SOFTBANK Technology. The remaining
EPub stockholders will be given an opportunity to enter into and obtain the
benefits of the Co-Sale Agreement prior to the Effective Time of the Merger.
Notwithstanding the foregoing, the shares of the Merger consideration are
subject to certain restrictions on transfer as described in "-- Restrictions on
Transfer."
NONCOMPETITION AND EMPLOYMENT AGREEMENTS
Each of Andrew Currie and Brian Makare, as a condition to the Merger, is
required pursuant to the Reorganization Agreement to enter into a Noncompetition
Agreement with FV and EPub providing that during the period of such individual's
employment with FV and/or any entity affiliated with EPub or FV and for a period
of one year after the termination of any such employment arrangement (the
"Restricted Period"), each will not engage, as an officer, director,
stockholder, owner, partner, joint venturer, or in a managerial capacity,
whether as an employee, independent contractor, consultant, advisor, or sales
representative, in any business selling any products or services in direct
competition with the business of EPub as of the date of the Noncompetition
Agreement or the business of FV and/or EPub after the date of the Noncompetition
Agreement in which such individual has substantial involvement; provided
however, each of Mr. Currie and Mr. Makare may engage in such activities with a
subsidiary or distinct division of a larger business which employs less than 10%
of the aggregate number of employees of the larger business so long as such
subsidiary or division does not itself engage in such businesses. In addition,
each of Mr. Currie and Mr. Makare also agreed that during the Restricted Period,
each will not (i) contact any employee of EPub or FV for the purpose or with the
intent of enticing such employee away from or out of the employ of EPub or FV,
(ii) contact any person who is, at that time, or has been within one year prior
to that time, a customer of EPub or FV for the purpose of soliciting or selling
products or services in competition with EPub or FV, or (iii) contact any person
who, during such individual's employment by EPub or FV, was called upon by EPub
or FV as a prospective acquisition candidate for the purpose of acquiring a
significant interest in such candidate or its assets. Each of the restrictions
described above are only applicable in the United States and areas outside the
United States where FV or any subsidiary of FV conducts business. Furthermore,
none of the restrictions described above prohibit Mr. Currie or Mr. Makare from
acquiring as an investment not more than 1% of the capital stock of a competing
business, whose stock is traded on a national securities exchange or through the
automated quotation system of a registered securities association. Such
restrictive covenants contained in the Noncompetition Agreements terminate with
respect to Mr. Currie and Mr. Makare at such time as payment of such employee's
salary is terminated if such employee's employment with EPub and/or any other
entity owned by EPub or FV is terminated (i) by EPub other than for Cause (as
defined below) or (ii) by such employee for Good Reason (as defined below). For
purposes of such Noncompetition Agreements, the term "Good Reason" is defined
as: (i) FV's material breach of the Noncompetition Agreement, subject to certain
cure provisions; (ii) an involuntary discontinuance of such employee's
participation in any employee benefit plan maintained by FV which results in
such employee's overall benefits
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package being significantly reduced, unless such plans are discontinued by
reason of law or change in applicable rules or regulations, or are discontinued
as a matter of FV's policy applied equally to all participants, without the
consent of such employee or (iii) a significant reduction in such employee's
responsibilities and status within FV without the consent of such employee other
than for Cause (as defined below).
In addition, each of Mr. Currie and Mr. Makare, as a condition to the
Merger, is required pursuant to the Reorganization Agreement to enter into an
Employment Agreement with FV for a base salary per annum of no less than
$120,000 (subject, in the case of Mr. Makare, to a mutually acceptable
adjustment in the event he is offered and accepts a different or additional
position with FV or relocates out of the Denver, Colorado area). Furthermore,
each of Mr. Currie and Mr. Makare will be granted incentive stock options to
purchase 100,000 shares of FV Common Stock and be eligible to receive incentive
bonuses up to $40,000 based upon objectives agreed to by FV's President.
Pursuant to such Employment Agreements, for a period of two years from the date
of such Employment Agreements (the "Term"), if FV terminates such employee's
employment other than for Cause (as defined below), then such employee is
entitled to receive his base salary and any earned but unpaid incentive bonus,
if any, through the end of such Term. For purposes of the Employment Agreements
and Noncompetition Agreements, the term "Cause" is defined as any one or more of
the following occurrences as determined in the good faith discretion of the
Board of Directors of FV after having given the employee an opportunity to be
heard: (i) employee's material breach of the Employment Agreement or
Noncompetition Agreement, as applicable, or any confidentiality or invention
assignment agreement with FV, subject to certain cure provisions; (ii)
employee's nonperformance or misperformance of his duties, or refusal to abide
by or comply with the good faith directives of the Board of Directors of FV or
his superior officers (including directives intended to address any negligent
conduct by such employee) or FV's policies and procedures, subject to certain
cure provisions; (iii) employee's gross negligence, willful dishonesty, fraud,
or misappropriation of funds with respect to the business or affairs of FV which
materially and adversely affects the operations or reputation of FV; (iv)
employee's conviction by, or entry of a plea of guilty or nolo contendere in, a
court of competent and final jurisdiction for any crime which constitutes a
felony in the jurisdiction involved; or (v) employee's abuse of alcohol or drugs
that materially impairs employee's ability to perform his duties, subject to
certain cure provisions. Except as described below, if such employee terminates
his employment with FV, such employee is not entitled to receive any severance
compensation. In the event that during the Term such employee terminates his
employment with FV as a result of a requirement by FV to relocate from his
present residence to another geographic location as a condition of continued
employment with FV, then such employee is entitled to receive his base salary
through the end of the Term.
RESTRICTIONS ON TRANSFER
The shares of FV Common Stock to be issued to EPub stockholders in
connection with the Merger will not be registered under the Securities Act or
under any applicable state securities laws, and will be "restricted securities"
under the Securities Act. Such shares will not be freely salable. Accordingly,
such shares must be held indefinitely and may not be sold or disposed of unless
a registration statement with respect to such shares has become effective under
the Securities Act or an exemption from registration under the Securities Act is
applicable to such transaction. Each certificate representing shares of FV
Common Stock to be issued to EPub stockholders in connection with the Merger
will bear a legend or legends to the effect that the holder will not be entitled
to sell, transfer or otherwise dispose of such shares except in compliance with
the Securities Act and that the shares are subject to certain restrictions on
transfer. Pursuant to the Registration Rights Agreement described below, certain
EPub stockholders will have certain rights with respect to the registration of
the shares of FV Common Stock to be issued in connection with the Merger. Except
as set forth in such agreement, FV is under no obligation to register any of the
FV Common Stock issuable pursuant to the Reorganization Agreement.
In addition, such shares of FV Common Stock to be issued to EPub
stockholders in connection with the Merger will be subject to contractual
restrictions on transfer pursuant to a certain stockholder representation
statement (the "Stockholder Certificate") to be executed and delivered to FV by
each EPub stockholder as a condition to the consummation of the Merger. Pursuant
to the Stockholder Certificate, no EPub stockholder
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may, without the prior written consent of FV, offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, or enter into any swap or similar
agreement that transfers, in whole or in part, the economic ownership of the FV
Common Stock received by the stockholder in the Merger prior to the first
anniversary of the Closing. Such contractual restriction on transfer will only
apply to 67% of the total number of shares of FV Common Stock received by an
EPub stockholder in the Merger, and beginning on the date six months after the
Closing, such restriction will only apply to 34% of the total number of shares
of FV Common Stock received by an EPub stockholder. Furthermore, pursuant to
such Stockholder Certificate, each EPub stockholder must agree, if requested by
FV and if all executive officers and directors of FV similarly agree, not to
sell or otherwise transfer or dispose of any FV capital stock held by the EPub
stockholder during a period of time determined by FV and its underwriters (not
to exceed 90 days) following the effective date of a registration statement of
FV filed under the Securities Act. The foregoing contractual restrictions on
transfer terminate as to each EPub stockholder at such time it beneficially owns
less than 200,000 shares of FV Common Stock.
REGISTRATION RIGHTS
FV, as a condition to the Merger, is required pursuant to the
Reorganization Agreement to enter into a Registration Rights Agreement with the
EPub stockholders entitling such stockholders and their permitted transferees to
certain rights with respect to the registration of the Registrable Securities
(as defined below) under the Securities Act. Subject to certain limitations in
the Registration Rights Agreement, FV will prepare and file with the SEC, and
use its reasonable best efforts to have declared within 60 days of the Effective
Time, a registration statement on Form S-3 providing for the resale by such
stockholders of all Registrable Securities then owned (or to be owned upon
exercise of convertible securities) by such stockholders. In addition, subject
to certain limitations in the Registration Rights Agreement, if FV registers any
of its securities either for its own account or for the account of other
security holders, such holders will be entitled to include their shares of
Registrable Securities in the registration, subject to the ability of the
underwriters to limit the number of shares included in the offering. For
purposes of such Registration Rights Agreement, the term "Registrable
Securities" is defined as (i) the shares of FV Common Stock issued to such
stockholders pursuant to the Reorganization Agreement, (ii) any shares of FV
Common Stock issued to such stockholders pursuant to a certain letter agreement,
and (iii) any shares of FV Common Stock issued as a dividend or other
distribution with respect to, or in exchange for or replacement of, such shares,
provided, however, that Registrable Securities shall not include (x) any shares
of FV Common Stock that have been previously sold to the public or (y) any
shares of FV Common Stock that may be sold in the public market by such a
stockholder pursuant to Rule 144 under the Securities Act in a single three
month period.
VOTING AGREEMENT
SOFTBANK Holdings, SOFTBANK Technology, Lee H. Stein and certain of his
affiliates, Paymentech Inc. and First USA Financial Corp., who collectively
beneficially own an aggregate of 75.3% of the FV Common Stock, have entered into
a certain voting agreement with EPub pursuant to which such stockholders have
agreed to vote such shares (and any additional shares of FV Common Stock that
such stockholders acquire beneficial ownership of prior to the termination of
such voting agreement) in favor of approval and adoption of the Reorganization
Agreement and approval of the Merger. The parties to the voting agreement need
not vote their shares in accordance with such agreement if the majority of the
shares of FV Common Stock represented and voting at such FV Stockholders
Meeting, other than shares held by the parties to the voting agreement and their
affiliates, are voted against the approval and adoption of the Reorganization
Agreement and approval of the Merger. See "FV Stockholders Meeting -- Vote
Required."
INTERIM LOAN
On September 25, 1998, FV extended a loan of $100,000 to EPub to fund
EPub's operation pending the closing of the Merger. The loan is evidenced by a
senior secured promissory note issued by EPub (the "Note"). The Note carries an
annual interest rate of 10.0% and is due April 15, 1999. The principal amount
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of, and accrued interest under, the Note is due and payable in full upon the
occurrence of certain events of default, including failure of EPub to pay any
amount due to FV when due and payable, initiation of bankruptcy, insolvency and
similar proceedings with respect to EPub, and the acceleration of other
indebtedness of EPub. The Note is secured by all assets of EPub pursuant to a
Security Agreement dated September 25, 1998 between FV and EPub. The security
interest granted to FV is subordinate to a prior interest granted by EPub to a
commercial bank. FV and EPub currently expect that FV will provide an additional
loan of $100,000 to EPub prior to the closing of the Merger on terms similar to
the first loan.
85
<PAGE> 94
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined balance sheet as of June 30,
1998 and the unaudited pro forma combined statements of operations for the year
ended December 31, 1997 and for the six months ended June 30, 1997 and 1998 have
been prepared to give effect to the proposed Merger and the proposed acquisition
of Distributed Bits, using the purchase method of accounting. The pro forma
combined balance sheet assumes the Merger and the proposed acquisition of
Distributed Bits took place on June 30, 1998. The pro forma combined statements
of operations assume the Merger and the proposed acquisition of Distributed Bits
took place on January 1, 1997. These pro forma combined financial statements
have been prepared by the management of FV based upon the audited financial
statements of FV as of December 31, 1997, the unaudited financial statements of
FV for the six months ended June 30, 1997 and 1998; the unaudited financial
statements of EPub for the twelve months ended December 31, 1997 and for the six
months ended June 30, 1998; and the audited financial statements of Distributed
Bits as of December 31, 1997, and the unaudited financial statements of
Distributed Bits for the six months ended June 30, 1997 and 1998. The fiscal
year end of EPub is June 30. The unaudited statements of operations for the six
months ended June 30, 1998 and the twelve months ended December 31, 1997 used in
the unaudited pro forma combined financial statements have been prepared on the
same basis as the historical information derived from the audited financial
statements and, in the opinion of EPub's management, contain all adjustments,
consisting only of normal recurring accruals, necessary for the fair
presentation of the results of operations for such periods. There can be no
assurances that such proposed acquisition of Distributed Bits will be
consummated. See "FV Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments" and "Risk Factors -- Risks
Related to FV's Business -- Integration of Potential Acquisitions."
Such unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the Merger and the proposed acquisition of Distributed Bits
occurred on January 1, 1997, nor is it necessarily indicative of future
financial position or results of operations. These unaudited pro forma combined
condensed financial statements do not incorporate, nor do they assume, any
benefits from cost savings or synergies of operations resulting from the Merger
and the proposed acquisition of Distributed Bits. They should be read in
conjunction with the historical financial statements and notes thereto and
narrative sections included elsewhere herein.
86
<PAGE> 95
FIRST VIRTUAL HOLDINGS INCORPORATED,
EMAIL PUBLISHING, INC. AND DISTRIBUTED BITS L.L.C.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PENDING PURCHASE
TRANSACTIONS PRO FORMA ADJUSTMENTS
------------------------ ----------------------------
FIRST VIRTUAL EMAIL DISTRIBUTED EMAIL DISTRIBUTED COMBINED
HOLDINGS PUBLISHING BITS PUBLISHING BITS PRO FORMA
------------- ---------- ----------- ----------- ----------- ------------
(NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 6,301,489 $ 62,273 $ 72,840 $ -- $ -- $ 6,436,602
Accounts receivable................. 64,060 138,895 -- -- -- 202,955
Prepaid expenses and other.......... 246,136 9,989 34,196 -- -- 290,321
------------ ---------- ----------- ----------- ----------- ------------
Total current assets.................. 6,611,685 211,157 107,036 -- -- 6,929,878
Furniture, equipment and software,
net................................. 1,533,383 220,552 111,821 -- -- 1,865,756
Organization and other costs, net..... 64,061 -- -- -- -- 64,061
Intangibles........................... -- -- 18,336,787(d) 5,838,168(i) 24,924,955
500,000(f) 250,000(j)
Other assets.......................... 86,962 10,620 1,500 -- -- 99,082
------------ ---------- ----------- ----------- ----------- ------------
Total assets.......................... $ 8,296,091 $ 442,329 $ 220,357 $18,836,787 $ 6,088,168 $ 33,883,732
============ ========== =========== =========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $ 1,157,784 $ 60,911 $ 147,863 $ 500,000(f) $ 250,000(j) $ 2,116,558
Accrued compensation and related
liabilities....................... 176,513 30,705 43,357 -- -- 250,575
Deferred revenue.................... 184,536 -- 36,000 -- -- 220,536
Other accrued liabilities........... 900,070 -- -- -- -- 900,070
Current portion, due to
stockholder....................... 270,000 -- -- -- -- 270,000
Current portion, note payable to
bank.............................. -- 47,350 -- -- -- 47,350
Current portion, capital lease
obligations....................... -- 36,141 14,053 -- -- 50,194
------------ ---------- ----------- ----------- ----------- ------------
Total current liabilities............. 2,688,903 175,107 241,273 500,000 250,000 3,855,283
Long term liabilities:
Amount due to stockholder........... 125,000 -- -- -- -- 125,000
Note payable to bank................ -- 42,615 -- -- -- 42,615
Obligation under capital lease...... -- 46,225 34,522 -- -- 80,747
------------ ---------- ----------- ----------- ----------- ------------
Total long term liabilities........... 125,000 88,840 34,522 -- -- 248,362
Total liabilities..................... 2,813,903 263,947 275,795 500,000 250,000 4,103,645
Stockholders' equity:
Preferred stock..................... -- 632 -- (632)(a) -- --
Common stock........................ 31,216 1,897 -- 632(a) 2,114(i) 34,520
(1,897)(b) --
558(d)
Members' capital.................... -- -- 1,495,433 -- (1,495,433)(g) --
Additional paid in capital.......... 41,869,894 1,017,735 -- 1,897(b) 1,495,433(g) 67,967,730
(393,751)(c) (1,495,761)(h)
18,336,229(d) 5,836,054(i)
1,300,000(e)
Warrants............................ 1,080,828 -- -- -- 1,080,828
Deferred compensation............... (65,694) (448,131) (55,110) -- -- (568,935)
Accumulated deficit................. (37,434,056) (393,751) (1,495,761) 393,751(c) 1,495,761(h) (38,734,056)
(1,300,000)(e)
------------ ---------- ----------- ----------- ----------- ------------
Total stockholders' equity............ 5,482,188 178,382 (55,438) 18,336,787 5,838,168 29,780,087
------------ ---------- ----------- ----------- ----------- ------------
Total liabilities and stockholders'
equity.............................. $ 8,296,091 $ 442,329 $ 220,357 $18,836,787 $ 6,088,168 $ 33,883,732
============ ========== =========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
87
<PAGE> 96
FIRST VIRTUAL HOLDINGS INCORPORATED,
EMAIL PUBLISHING, INC. AND DISTRIBUTED BITS L.L.C.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PENDING PURCHASE
TRANSACTIONS PRO FORMA ADJUSTMENTS
------------------------- ---------------------------
FIRST VIRTUAL EMAIL DISTRIBUTED EMAIL DISTRIBUTED COMBINED
HOLDINGS PUBLISHING BITS PUBLISHING BITS PRO FORMA
------------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 498,294 $ 610,716 $ -- $ -- $ -- $ 1,109,010
Cost of revenues............... 34,637 -- -- -- -- 34,637
----------- --------- --------- ----------- ----------- ------------
Gross profit................... 463,657 610,716 -- -- -- 1,074,373
Operating expenses
Marketing and sales.......... 1,213,499 228,802 -- -- -- 1,442,301
Research, development, and
engineering................ 2,896,745 76,432 443,922 -- -- 3,417,099
General and administrative... 2,230,721 352,267 333,025 -- -- 2,916,013
Restructuring charge......... 812,166 -- -- -- -- 812,166
Depreciation and
amortization............... 840,075 -- -- 4,709,197(a) 1,522,042(c) 7,071,314
----------- --------- --------- ----------- ----------- ------------
Total operating expenses....... 7,993,206 657,501 776,947 4,709,197 1,522,042 15,658,893
----------- --------- --------- ----------- ----------- ------------
Loss from operations........... (7,529,549) (46,785) (776,947) (4,709,197) (1,522,042) (14,584,520)
Interest income.............. 55,761 -- -- -- -- 55,761
Interest expense............. (64,258) (8,220) -- -- -- (72,478)
----------- --------- --------- ----------- ----------- ------------
Net loss....................... (7,538,046) (55,005) (776,947) (4,709,197) (1,522,042) (14,601,237)
Dividend imputed on preferred
stock........................ (153,126) -- -- -- -- (153,126)
----------- --------- --------- ----------- ----------- ------------
Net loss applicable to common
shares....................... $(7,691,172) $ (55,005) $(776,947) $(4,709,197) $(1,522,042) $(14,754,363)
=========== ========= ========= =========== =========== ============
Net loss per share, basic and
diluted...................... $ (0.69) $ (0.03) $ (0.78)
=========== ========= ============
Shares used in per share
computation, basic and
diluted...................... 11,183,418 1,891,033 3,691,652(b) 2,113,971(d) 18,880,074
</TABLE>
- ---------------
(a) Adjustment to reflect the six-month amortization of goodwill and other
intangibles based on the allocation of the assumed purchase price in the
June 30, 1998 pro forma balance sheet for EMail Publishing, Inc.
(b) Adjustment to the average common shares outstanding for the elimination of
EPub's shares and the issuance of 5,582,685 shares of First Virtual Common
Stock.
(c) Adjustment to reflect the six-month amortization of goodwill and other
intangibles based on the allocation of the assumed purchase price in the
June 30, 1998 pro forma balance sheet for Distributed Bits.
(d) Adjustment to the average common shares outstanding for the issuance of
2,113,971 shares of First Virtual Common Stock for all the equity interests
at Distributed Bits based on an assumed purchase price of $5,750,000 in
First Virtual common stock at a price of $2.72 per share.
The above pro forma combined statement of operations does not include a $1.3
million in-process technology charge to be recorded by First Virtual Holdings in
conjunction with the Merger for the estimated fair value of the in-process
technology of EPub.
See accompanying notes to unaudited pro forma combined financial statements.
88
<PAGE> 97
FIRST VIRTUAL HOLDINGS INCORPORATED,
EMAIL PUBLISHING, INC. AND DISTRIBUTED BITS L.L.C.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PENDING PURCHASE
TRANSACTIONS PRO FORMA ADJUSTMENTS
------------------------- --------------------------
FIRST VIRTUAL EMAIL DISTRIBUTED EMAIL DISTRIBUTED COMBINED
HOLDINGS PUBLISHING BITS PUBLISHING BITS PRO FORMA
------------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 1,450,598 $ 335,631 $ -- $ -- $ -- $ 1,786,229
Cost of revenues................ 270,416 -- -- -- -- 270,416
------------ --------- --------- ----------- ----------- ------------
Gross profit.................... 1,180,182 335,631 -- -- -- 1,515,813
Operating expenses
Marketing and sales........... 5,424,110 115,223 -- -- -- 5,539,333
Research, development, and
engineering................. 6,687,177 71,850 477,738 -- -- 7,236,765
General and administrative.... 4,377,688 415,932 121,170 -- -- 4,914,790
Depreciation and
amortization................ 1,097,716 -- -- 9,418,394(a) 3,044,084(c) 13,560,194
------------ --------- --------- ----------- ----------- ------------
Total operating
expenses............. 17,586,691 603,005 598,908 9,418,394 3,044,084 31,251,082
------------ --------- --------- ----------- ----------- ------------
Loss from operations............ (16,406,509) (267,374) (598,908) (9,418,394) (3,044,084) (29,735,269)
Interest income............... 554,587 -- -- -- -- 554,587
Interest expense.............. (95,360) 2,849 -- -- -- (92,511)
------------ --------- --------- ----------- ----------- ------------
Net loss........................ (15,947,282) (264,525) (598,908) (9,418,394) (3,044,084) (29,273,193)
Dividend imputed on preferred
stock......................... (1,250,000) -- -- -- -- (1,250,000)
------------ --------- --------- ----------- ----------- ------------
Net loss applicable to common
shares........................ $(17,197,282) $(264,525) $(598,908) $(9,418,394) $(3,044,084) $(30,523,193)
============ ========= ========= =========== =========== ============
Net loss per share, basic and
diluted....................... $ (1.94) $ (0.14) $ (1.85)
============ ========= ============
Shares used in per share
computation, basic and
diluted....................... 8,842,367 1,877,646 3,705,039(b) 2,113,971(d) 16,539,023
</TABLE>
- ---------------
(a) Adjustment to reflect the twelve-month amortization of goodwill and other
intangibles based on the allocation of the assumed purchase price in the
June 30, 1998 pro forma balance sheet for EMail Publishing, Inc.
(b) Adjustment to the average common shares outstanding for the elimination of
EPub's shares and the issuance of 5,582,685 shares of First Virtual Common
Stock.
(c) Adjustment to reflect the twelve-month amortization of goodwill and other
intangibles based on the allocation of the assumed purchase price in the
June 30, 1998 pro forma balance sheet for Distributed Bits.
(d) Adjustment to the average common shares outstanding for issuance of
2,113,971 shares of First Virtual Common Stock for all the equity interests
of Distributed Bits based on an assumed purchase price of $5,750,000 in
First Virtual stock at a price of $2.72 per share.
The above pro forma combined statement of operations does not include a $1.3
million in-process technology charge to be recorded by First Virtual Holdings in
conjunction with the Merger for the estimated fair value of the in-process
technology of EPub.
See accompanying notes to unaudited pro forma combined financial statements.
89
<PAGE> 98
FIRST VIRTUAL HOLDINGS INCORPORATED,
EMAIL PUBLISHING, INC. AND DISTRIBUTED BITS L.L.C.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PENDING PURCHASE
TRANSACTIONS PRO FORMA ADJUSTMENTS
------------------------- ---------------------------
FIRST VIRTUAL EMAIL DISTRIBUTED EMAIL DISTRIBUTED COMBINED
HOLDINGS PUBLISHING BITS PUBLISHING BITS PRO FORMA
------------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 785,984 $ 82,317 $ -- $ -- $ -- $ 868,301
Cost of revenues.............. 171,985 -- -- -- -- 171,985
----------- ---------- --------- ----------- ----------- ------------
Gross profit.................. 613,999 82,317 -- -- -- 696,316
Operating expenses
Marketing and sales......... 2,171,371 30,564 -- -- -- 2,201,935
Research, development, and
engineering............... 3,058,821 22,500 182,470 -- -- 3,263,791
General and
administrative............ 2,573,242 197,977 31,198 -- -- 2,802,417
Depreciation and
amortization.............. 547,033 -- -- 4,709,197(a) 1,522,042(c) 6,778,272
----------- ---------- --------- ----------- ----------- ------------
Total operating
expenses........... 8,350,467 251,041 213,668 4,709,197 1,522,042 15,046,415
----------- ---------- --------- ----------- ----------- ------------
Loss from operations.......... (7,736,468) (168,724) (213,668) (4,709,197) (1,522,042) (14,350,099)
Interest income............. 349,683 2,650 -- -- -- 352,333
Interest expense............ (48,944) -- -- -- -- (48,944)
----------- ---------- --------- ----------- ----------- ------------
Net loss applicable to common
shares...................... $(7,435,729) $ (166,074) $(213,668) $(4,709,197) $(1,522,042) $(14,046,710)
=========== ========== ========= =========== =========== ============
Net loss per share, basic and
diluted..................... $ (0.84) $ (0.09) $ (0.85)
=========== ========== ============
Shares used in per share
computation, basic and
diluted..................... 8,803,463 1,873,424 3,709,261(b) 2,113,971(d) 16,500,119
</TABLE>
- ---------------
(a) Adjustment to reflect the six-month amortization of goodwill and other
intangibles based on the allocation of the assumed purchase price in the
June 30, 1998 pro forma balance sheet for EMail Publishing, Inc..
(b) Adjustment to the average common shares outstanding for the elimination of
EPub's shares and the issuance of 5,582,685 shares of First Virtual Common
Stock.
(c) Adjustment to reflect the six-month amortization of goodwill and other
intangibles based on the allocation of the assumed purchase price in the
June 30, 1998 pro forma balance sheet for Distributed Bits.
(d) Adjustment to the average common shares outstanding for the issuance of
2,113,971 shares of First Virtual for all the equity interests of
Distributed Bits based on an assumed purchase price of $5,750,000 in First
Virtual stock at a price of $2.72 per Common Stock.
The above pro forma combined statement of operations does not include an $1.3
million in-process technology charge to be recorded by First Virtual Holdings in
conjunction with the Merger for the estimated fair value of the in-process
technology of EPub.
See accompanying notes to unaudited pro forma combined financial statements.
90
<PAGE> 99
FIRST VIRTUAL HOLDINGS INCORPORATED,
EMAIL PUBLISHING, INC. AND DISTRIBUTED BITS L.L.C.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1.
The unaudited pro forma financial statements reflect the proposed and
pending acquisitions of EPub and Distributed Bits for an aggregate purchase
price of $26,851,140.
NOTE 2.
Upon consummation of the Merger, FV will acquire all of the common stock
and all outstanding rights to acquire shares of common stock of EPub in exchange
for 5,582,685 shares of FV common stock and the assumption by FV of options and
warrants to acquire up to approximately 417,315 additional shares of FV common
stock at a weighted average exercise price of $.04 per share. The purchase price
is calculated to be $20,763,300 based on the fair market value of $3.38 per
share of FV common stock. The purchase price also includes estimated merger
costs of $500,000. The purchase price is subject to change based upon
anti-dilution rights of the EPub stockholders during the one year period
following the closing of the Merger. In the event that FV is required to issue
additional shares of FV common stock during this period, additional purchase
price will be recorded. The purchase price was allocated as follows based upon a
valuation of the tangible and intangible assets, including acquired technology
and in-process technology, by an independent appraiser, as well as management's
best estimates:
<TABLE>
<S> <C>
Current assets acquired..................................... $ 211,157
Furniture, equipment and software........................... 220,552
Other assets................................................ 10,620
In-process technology....................................... 1,300,000
Developed technology........................................ 900,000
Goodwill.................................................... 17,936,787
Liabilities assumed......................................... (263,947)
Deferred compensation....................................... 448,131
-----------
$20,763,300
</TABLE>
The pro forma combined balance sheet includes the adjustments necessary as
if the Merger had occurred on June 30, 1998 and reflect the allocation of the
purchase price, issuance of FV common stock and elimination of EPub's equity
accounts. These adjustments are summarized as follows:
<TABLE>
<S> <C> <C>
(a) Conversion of all outstanding preferred stock into common
stock
(b) Elimination of existing EPub common stock
(c) Elimination of EPub's accumulated deficit
(d) Issuance of FV common stock (5,582,685 shares @ $.0001 par
value) and record the net assets and deferred compensation
of EPub and excess purchase price (goodwill and other
intangibles)
(e) Write off of EPub's in-process technology
(f) Accrue estimated merger costs to be incurred by FV
</TABLE>
NOTE 3.
FV anticipates acquiring all equity interests, including options, warrants
or other purchase rights, if any, in Distributed Bits, in exchange for
$5,750,000 in shares of FV common stock and warrants to purchase an additional
500,000 shares of FV common stock. Based on an average closing price of $2.72
per share of FV common stock, FV would issue approximately 2,113,971 shares of
FV common stock in connection with this transaction (excluding warrants to
purchase an additional 500,000 shares of FV common stock). The per share price
used in calculating the number of shares to be issued was the average closing
price of FV common stock for the twenty trading day period ending three business
days prior to the signing of the non-binding letter of intent to acquire
Distributed Bits. Because the actual number of shares to be issued in connection
with this
91
<PAGE> 100
transaction will be based on the average closing price of FV common stock for
the twenty trading day period ending three business days prior to the closing of
the acquisition, changes in the market price of FV common stock prior to the
consummation of the acquisition will affect the actual number of shares to be
issued. There can be no assurance that fluctuations in the market price of FV
common stock will not result in a material change in the number of shares to be
issued as a result of this transaction. In addition, it is possible that the
acquisition consideration set forth in the definitive acquisition agreement to
be entered into with Distributed Bits may change and such change could be
material. The purchase price of the proposed acquisition is anticipated to be
approximately $6,087,840, which includes estimated merger costs of $250,000 and
the value of warrants of $87,512. This purchase price will be allocated as
follows, based upon management's best estimates:
<TABLE>
<S> <C>
Current assets acquired..................................... $ 107,036
Furniture, equipment and software........................... 111,821
Other assets................................................ 1,500
Goodwill.................................................... 6,088,168
Liabilities assumed......................................... (275,795)
Deferred compensation....................................... 55,110
----------
$6,087,840
</TABLE>
The pro forma combined balance sheet includes the adjustments necessary as
if the pending acquisition had occurred on June 30, 1998 and reflect the
allocation of the purchase price, issuance of FV common stock and elimination of
Distributed Bits' equity accounts. These adjustments are summarized as follows:
<TABLE>
<S> <C> <C>
(g) Elimination of existing Distributed Bits members' capital
(h) Elimination of Distributed Bits accumulated deficit
(i) Issuance of FV common stock (2,113,971 shares @ $.0001 par
value) and record the net liabilities and deferred
compensation of Distributed Bits and excess purchase price
(goodwill and other intangibles)
(j) Record estimated merger costs
</TABLE>
NOTE 4.
The allocation of the purchase price was applied to the historical balance
sheet or historical statements of operations of FV, EPub and Distributed Bits to
arrive at the pro forma combined balance sheet and statements of operations. The
developed technology and goodwill are amortized over their estimated useful
lives of two years due to the unusually rapid pace of technological development
of the Internet. It is not uncommon for a specific technology product or service
in the industry to become obsolete in a relatively short period of time.
Furthermore, the Internet, as an industry, is in its infancy stage with rapidly
shifting trends, technologies, consumer preferences and competitive pressures.
The management of EPub has indicated that the technologies and business models
developed by their company appear generally to have a useful life of no more
than one or two years before they require complete redevelopment. It is
anticipated that this rapid rate of change will continue in the future. The
technology currently under development, for which technological feasibility has
not been established and for which there are no future alternative uses, will be
written off at the date of acquisition. Based on an initial review of
Distributed Bits technologies and their planned business models, FV's management
anticipates that it will be appropriate to use a two year life for Distributed
Bits' intangibles as well. In addition, both EPub and Distributed Bits are
operating in very competitive environments and competitive advantages are often
short lived. The pro forma combined statements of operations for the year ended
December 31, 1997 and the six months ended June 30, 1998 reflect amortization
expense of $12,462,478 and $6,231,239, respectively.
92
<PAGE> 101
COMPARISON OF CAPITAL STOCK
DESCRIPTION OF FV CAPITAL STOCK
The authorized capital stock of FV consists of 40,000,000 shares of Common
Stock, $0.001 par value per share, and 5,000,000 shares of Preferred Stock,
$0.001 par value per share.
FV Common Stock
As of the FV Record Date, there were 31,388,076 shares of FV Common Stock
outstanding. The holders of Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Subject to preferences that
may be applicable to any outstanding shares of FV Preferred Stock, the holders
of FV Common Stock are entitled to receive ratably such dividends, if any, as
may be declared from time to time by the FV Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of FV, the holders of FV Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior liquidation
rights of FV Preferred Stock, if any, then outstanding. The FV Common Stock has
no preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions available to the FV Common Stock. All
outstanding shares of FV Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be outstanding upon completion of this offering will
be fully paid and nonassessable.
FV Preferred Stock
FV currently has no shares of Preferred Stock outstanding. The FV Board of
Directors has the authority, without further action by the stockholders, to
issue the FV Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
and the number of shares constituting any series or the designation of such
series. FV Preferred Stock could thus be issued quickly with terms calculated to
delay or prevent a change of control of FV or to serve as an entrenchment device
for incumbent management. Additionally, the issuance of FV Preferred Stock may
have the effect of decreasing the market price of the FV Common Stock and may
adversely affect the voting and other rights of the holders of FV Common Stock.
At present, FV has no plans to issue any of the authorized shares of FV
Preferred Stock.
FV is subject to Section 203 of the DGCL, an anti-takeover law. In general,
Section 203 of the DGCL prevents a person owning 15% or more of a corporation's
outstanding voting stock ("Interested Stockholder") from engaging in a "business
combination" (as defined in the DGCL) with a Delaware corporation for three
years following the date such person became an Interested Stockholder, subject
to certain exceptions such as the approval of the board of directors and of the
holders of at least two-thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision would be
expected to have the effect of discouraging takeover attempts, including
attempts that might result in a premium over the market price for the shares of
FV Common Stock held by stockholders.
Certain provisions of FV's Certificate of Incorporation and Bylaws may have
the effect of preventing, discouraging or delaying any change in the control of
FV and may maintain the incumbency of the FV Board of Directors and management.
FV's Certificate of Incorporation provides that any action required or permitted
to be taken by the stockholders of FV may be taken only at a duly called annual
or special meeting of the stockholders and does not provide for cumulative
voting in the election of directors. The Certificate of Incorporation and Bylaws
also restrict the right of stockholders to change the size of the Board of
Directors and to fill vacancies on the Board of Directors. The Bylaws also
establish procedures, including advance notice procedures, with regard to the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors or for stockholder proposals to be
submitted at stockholder meetings. The authorization of undesignated Preferred
Stock makes it possible for the Board of Directors to issue Preferred Stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of FV. In addition, these provisions could have the
effect of making it more difficult for proposals
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favored by the stockholders to be presented for stockholder consideration. The
amendment of any of these provisions would require approval by holders of 66.67%
or more of the outstanding Common Stock.
FV has also included in its Certificate of Incorporation provisions to
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the DGCL and to
indemnify its directors and officers to the fullest extent permitted by Section
145 of the DGCL.
Transfer Agent and Registrar
The Transfer Agent and Registrar for FV Common Stock is American Stock
Transfer & Trust Company. Its telephone number is (212) 936-5100.
Listing
FV Common Stock is listed on Nasdaq under the trading symbol "FVHI."
DESCRIPTION OF EPUB CAPITAL STOCK
As of the EPub Record Date, the authorized capital stock of EPub consists
of 3,000,000 shares of Common Stock, $0.001 par value, and 750,000 shares of
Preferred Stock, $0.001 par value; of which 400,000 shares are designated Series
A Preferred Stock and 350,000 shares are designated Series A-1 Preferred Stock.
EPub Common Stock. As of the EPub Record Date there were 1,906,503 shares
of EPub Common Stock issued and outstanding. Subject to certain Preferred Stock
class voting rights described below, the holders of EPub Common Stock are
entitled to vote as a class with the holders of the Preferred Stock and are
entitled to one vote per share on all matters to be voted upon by the
stockholders. In the event of a liquidation, dissolution or winding up of EPub,
after payment of all liabilities and payment in full of the liquidation
preference of the Preferred Stock as described below, the holders of EPub Common
Stock are entitled to receive ratably the remaining assets of EPub, if any.
Subject to the rights of the holders of Preferred Stock to receive preferential
dividends and to participate in any payment of dividends on an as-converted
basis, the holders of EPub Common Stock are entitled to receive ratably such
dividends when, as and if declared by the Board of Directors of EPub out of
funds legally available therefor. The EPub Common Stock has no conversion rights
or other subscription rights. There are no redemption or sinking fund provisions
applicable to the EPub Common Stock. Transfers of EPub Common Stock, subject to
certain exceptions, are subject to a right of first refusal in favor of EPub. In
the event that EPub elects not to exercise, in whole or in part, its right of
first refusal on sales of EPub Common Stock, EPub shall assign to the existing
holders of Preferred Stock the portion of such right that is not exercised. All
outstanding shares of EPub Common Stock are fully paid and non-assessable.
Certain significant holders of EPub Common Stock are subject to Founder's
Stock Purchase Agreements which provides that shares of EPub Common Stock owned
by them are subject to a purchase option in favor of EPub. Such purchase option
lapses with respect to a certain number of shares on a quarterly basis. The
purchase option lapses in its entirety in September 1999 or upon any merger,
sale or sale of all or substantially all of the assets of EPub. Additionally,
certain significant holders of EPub Common Stock are parties to an Amended and
Restated Stockholders Agreement which provides that the existing holders of
Preferred Stock are entitled to a co-sale right to participate in transfers of
EPub Common Stock held by such significant holders, subject to certain
exceptions.
EPub Preferred Stock. As of the EPub Record Date, there were 400,000 shares
of Series A Preferred Stock issued and outstanding and 232,558 shares of Series
A-1 Preferred Stock issued and outstanding. The EPub Preferred Stock has no
redemption or sinking fund provisions. All outstanding shares of EPub Preferred
Stock are fully paid and non-assessable. The principal rights, privileges and
preferences of the issued and outstanding shares of EPub Preferred Stock are as
set forth below.
Dividends. The holders of EPub Series A Preferred Stock and Series A-1
Preferred Stock (collectively, the "Series Preferred") are entitled to receive,
in preference to the holders of any other stock ("Junior Stock") of EPub,
ratably such dividends, if any, as may be declared from time to time by the EPub
Board out
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of funds legally available therefor. Such dividends shall be payable only when,
as and if declared by the EPub Board and shall be non-cumulative from May 16,
1997, the original issue date of the Series A-1 Preferred Stock. So long as any
shares of Series Preferred shall be outstanding, no dividend, whether in cash or
property, shall be paid or declared, nor shall any other distribution be made,
on any Junior Stock, nor shall any shares of any Junior Stock of EPub be
purchased, redeemed, or otherwise acquired for value by EPub (except for
acquisitions of Common Stock by EPub pursuant to agreements that permit EPub to
repurchase such shares upon termination of services to EPub or in exercise of
EPub's right of first refusal upon a proposed transfer) until all dividends on
the Series Preferred shall have been paid or declared and set apart. In the
event dividends are paid on any share of Common Stock, an additional dividend
shall be paid with respect to all outstanding shares of Series Preferred in an
amount equal per share (on an as-if-converted to Common Stock basis) to the
amount paid or set aside for each share of Common Stock except for dividends
paid on Common Stock in connection with the following: (i) a dividend payable in
Common Stock, (ii) the acquisition of shares of any Junior Stock in exchange for
shares of any other Junior Stock, or (iii) any repurchase of any outstanding
securities of EPub that is unanimously approved by EPub's Board of Directors.
Voting Rights. Except as required by law or as specifically set forth in
the EPub Restated Certificate of Incorporation, the Series Preferred will vote
together with the Common Stock of EPub and not as a separate class. Each share
of Series Preferred shall have the number of votes equal to the number of shares
of Common Stock of EPub then issuable upon conversion of such share of Series
Preferred.
Protective Provisions of Series Preferred. For so long as at least 100,000
shares of Series Preferred (subject to adjustment for stock splits, combinations
and the like) remain outstanding, the consent of the holders of at least a
majority of the outstanding Series Preferred shall be necessary for effecting or
validating the following actions: (i) any amendment, alteration or repeal of any
provision of the EPub Restated Certificate of Incorporation or Bylaws that
adversely affects the voting powers, preferences or other special rights or
privileges, qualifications, limitations or restrictions of the Series Preferred,
(ii) any authorization or any designation of any new class or series of equity
securities ranking on a parity with or senior to the Series Preferred in right
of redemption, liquidation preference, voting or dividends or any increase in
the authorized or designated number of any such class or series, (iii) the
issuance of any note or debt security in excess of the net worth of EPub that
has not been unanimously approved by the EPub Board of Directors, (iv) any
agreement by the Company or its stockholders regarding an Asset Transfer or
Acquisition (as defined below) in which the per share price received by the
holders of Series Preferred is less than the original issue price of the Series
Preferred, (v) any material change in EPub's line of business that has not been
approved by the EPub Board of Directors and (vi) any agreement between the
Company and any executive officer or director other than in the ordinary course
of business.
Election of Board of Directors. So long as SOFTVEN No. 2 Investment
Enterprise Partnership or its affiliate holds at least 40,000 shares of Series
Preferred, then it shall be entitled to elect one member of the EPub Board of
Directors at each meeting or pursuant to each consent of the EPub stockholders
for the election of directors, and to remove from office such director and to
fill any vacancy caused by the resignation, death or removal of such director.
Liquidation. In the event of a liquidation, dissolution or winding up of
EPub, the holders of EPub Series Preferred are entitled to receive in preference
to the holders of any Junior Stock, an amount per share of Series Preferred
equal to $0.50 per share for the Series A Preferred and $0.86 per share for the
Series A-1 Preferred, plus all declared and unpaid dividends on such shares of
Series Preferred. The following events shall be considered a liquidation: (i)
any consolidation or merger of EPub with or into any other corporation or other
entity or person, or any other corporate reorganization, in which the
stockholders of EPub immediately prior to such consolidation, merger or
reorganization, own less than 50% of EPub's voting power immediately after such
consolidation, merger or reorganization, or any transaction or series of related
transactions in which in excess of fifty percent (50%) of EPub's voting power is
transferred (an "Acquisition"); or (i) a sale, lease or other disposition of all
or substantially all of the assets of EPub (an "Asset Transfer").
Conversion. Holders of Series Preferred have the right at any time to
convert such shares into Common Stock at the then effective applicable
conversion rate. Each share of Series Preferred is presently convertible
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into one share of EPub Common Stock, subject to adjustment in the event of any
subdivision or combination of the EPub Common Stock, any capital reorganization
(other than an Acquisition or Asset Transfer), the issuance of any equity
securities (or securities convertible into equity securities) at a per share
price less than the applicable conversion rate, subject to certain exceptions.
The Series Preferred shall automatically convert into Common Stock, at the then
effective applicable conversion rate, immediately upon the closing of a firmly
underwritten public offering pursuant to an effective registration statement
under the Securities Act, covering the offer and sale of Common Stock for the
account of EPub in which the per share price is at least $5.00 per share (as
adjusted for stock splits, combinations and the like) and the gross cash
proceeds to EPub are at least $10,000,000.
Registration Rights. Certain EPub stockholders have registrations rights
with respect to EPub Registrable Securities. EPub Registrable Securities means
any shares of Common Stock owned by the holders of Series Preferred and any
shares of Common Stock issued or issuable upon conversion of the Series
Preferred (other than shares that have previously been registered under the
Securities Act or otherwise sold to the public in an open-market transaction
under Rule 144).
Demand Registration. At any time beginning 180 days after the effective
date of the first registration statement with respect to an underwritten public
offering of Common Stock lead managed by an underwriter acceptable to the
holders of at least 50% of the Registrable Securities, resulting in proceeds to
EPub of more than $10,000,000 (prior to expenses and underwriting commissions)
and at an offering price per share equal to at least $5.00 (as adjusted for
stock splits, stock dividends, and the like) filed by EPub under the Securities
Act of 1933, the holders of Registrable Securities representing 51% of the
then-outstanding Registrable Securities may require that EPub effect a
registration under the Securities Act of 1933 up to two times utilizing a
registration on Form S-1 or any similar form and as many times as requested
utilizing a Form S-3 or any similar form, if available, with respect to
Registrable Securities with an anticipated offering price of $1,000,000 or more.
EPub has the ability to defer any such registration statement, subject to
certain limitations.
Piggyback Registration. If EPub shall determine to register any of its
securities for its own account or for the account of other security holders of
EPub on any registration form (other than Form S-4 or S-8) which permits the
inclusion of Registrable Securities, EPub will promptly give each holder of
Registrable Securities written notice thereof, subject to the limitations
discussed below, shall include in such registration all the Registrable
Securities requested to be included therein pursuant to the written requests of
holders of Registrable Securities received within 20 days after delivery of
EPub's notice. The investor's participation in such a registration is subject to
the qualification that if such registration is an underwritten offering such
investor's participation is conditioned upon such investor agreeing to
participate in such underwriting by executing the underwriting agreement. If
such proposed registration is an underwritten offering and the managing
underwriter for such offering advises EPub that the securities requested to be
included therein exceeds the amount of securities that can be sold in such
offering, any securities to be sold by EPub in such offering shall have priority
over any Registrable Securities, and the number of shares to be included by a
holder of Registrable Securities in such registration shall be reduced pro rata
on the basis of the percentage of the outstanding Common Stock held by such
Stockholder (assuming the conversion of the Preferred Stock and the exercise of
all options, warrants and similar rights held by such Stockholder) and all other
holders exercising similar registration rights. Notwithstanding the foregoing,
in no event shall the amount of securities of the selling holders of Registrable
Securities included in the registration be reduced below thirty percent (30%) of
the total amount of securities included in such registration, unless such
offering is EPub's first firm commitment underwritten public offering of its
Common Stock registered under the Securities Act, in which event any or all of
the Registrable Securities of the holders may be excluded in accordance with the
immediately preceding sentence.
The Registration Rights listed above shall terminate when (i) all EPub
Registrable Securities beneficially owned by such holder of EPub Registrable
Securities may immediately be sold under Rule 144(k), and (ii) EPub's Common
Stock is listed on a national securities exchange or traded on the Nasdaq
National Market; provided, however, that these termination provisions shall not
apply to any holder of EPub Registrable Securities representing more than 5% of
EPub's then-outstanding Common Stock.
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Indemnification. To the extent permitted by law, EPub will indemnify the
holders of EPub Registrable Securities (and certain related parties) against any
losses or liabilities to which they may become subject based on any untrue
statement of material fact contained in, or material fact omitted from, a
registration statement covering the EPub Registrable Securities, or any other
violation or alleged violation of any state or federal securities laws (a
"Violation") by EPub.
To the extent permitted by law, each person who held EPub Registrable
Securities included in a registration effected by EPub will indemnify (i) EPub,
its officers, directors, legal counsel, control persons and underwriters and
(ii) any other holder of EPub Registrable Securities (and certain related
parties) selling securities in such registration against any losses or
liabilities to which they may become subject based on a Violation by such holder
in connection with written information supplied by such Investor for use in such
registration.
Transferability. The aforementioned registration rights of any holder of
EPub Registrable Securities may be transferred to (i) any subsidiary, parent,
partner or retired partner, member or retired member, (ii) any family member or
trust for the benefit of any individual holder or (iii) any transferee who
acquires at least 100,000 shares of Registrable Securities, provided EPub is
given written notice thereof.
Expenses. The Company shall bear registration expenses (exclusive of
underwriting discounts and commissions) of up to two long-form demand
registrations and all piggy-back and S-3 registrations (including the expense of
one special counsel of the selling shareholders).
Market Standoff. No holder of EPub Registrable Securities shall sell,
transfer or otherwise dispose of any Common Stock (or other securities) of EPub
held by such holder (other than those included in the registration) for a period
specified by the representative of the underwriters of Common Stock (or other
securities) of EPub not to exceed 180 days following the effective date of a
registration statement of EPub filed under the Securities Act relating to EPub's
initial public offering, unless such holders own less than 1% of EPub's then
outstanding securities.
Co-Sale Rights. Holders of Series Preferred have a participation right of
co-sale in connection with any sale, transfer, assignment, pledge or other
disposition of stock held by certain significant holders of Common Stock other
than to a member of such transferor's immediate family, a transfer by will or
the laws of intestate succession, and with respect to Softbank Holdings any
affiliated partnership managed by it provided that such transferee agrees in
writing to be subject to the terms of the Amended and Restated Stockholders
Agreement.
Preemptive Rights. Each holder of EPub Registrable Securities shall have
the right in the event that EPub proposed to offer equity securities to any
person to purchase its pro rata portion of such securities. Such right is
subject to certain exceptions and limitations and expires upon an initial public
offering of EPub Common Stock meeting certain size and manner requirements.
Information Rights. Each holder of EPub Registrable Securities is entitled
to receive from EPub certain annual, quarterly and monthly financial information
with respect to EPub.
COMPARISON OF CAPITAL STOCK
After consummation of the Merger, the holders of EPub Capital Stock who
receive FV Common Stock under the terms of the Reorganization Agreement will
become stockholders of FV. As stockholders of EPub, their rights are governed by
EPub's Restated Certificate of Incorporation (the "EPub Certificate") and EPub's
Bylaws (the "EPub Bylaws"). As stockholders of FV, their rights will be governed
by FV's Amended and Restated Certificate of Incorporation (the "FV Certificate")
and FV's Bylaws (the "FV Bylaws"). The following discussion summarizes the
material differences between the rights of holders of EPub Common Stock and the
rights of holders of FV Common Stock and differences between the charters and
bylaws of EPub and FV. This summary does not purport to be complete and is
qualified in its entirety by reference to the EPub Certificate, the EPub Bylaws,
the FV Certificate and the FV Bylaws.
Size of the Board of Directors. The FV Certificate provides that the number
of directors which constitute the whole board of directors of FV shall be
designated in the FV Bylaws. The number of directors of FV is
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currently fixed in the FV Bylaws at five. The FV Board acting without
stockholder approval may change such number by a duly adopted amendment to the
FV Bylaws. The EPub Bylaws provide that the Board of Directors shall consist of
one or more members and grants the EPub Board the authority to set the exact
number of directors. The number of directors of EPub is currently fixed at four.
Softven is entitled to elect one member of the EPub Board and to remove such
director and to fill any vacancy caused by the resignation, death or removal of
such director so long as it or its affiliate holds at least 40,000 shares of
EPub's preferred stock.
Voting by Ballot. The FV Certificate provides that the election of
directors need not be by written ballot unless a stockholder demands an election
by written ballot at the meeting before voting begins. The FV Bylaws specify
that the election of directors at a stockholders' meeting need not be by written
ballot. The EPub Certificate provides that directors need not be elected by
written ballot unless the bylaws so provide. EPub's Bylaws provide that all
elections of directors shall be by written ballot, unless otherwise provided in
the Certificate of Incorporation.
Cumulative Voting. In an election of directors under cumulative voting,
each share of stock normally having one vote is entitled to a number of votes
equal to the number of directors to be elected. A stockholder may then cast all
such votes for a single candidate or may allocate them among as many candidates
as the stockholder may choose. Under Delaware law, cumulative voting in the
election of directors is not available unless specifically provided for in the
certificate of incorporation. Neither the FV Certificate nor the EPub
Certificate provides for cumulative and cumulative voting is therefore not
available to FV's or EPub's stockholders.
Classified Board of Directors. A classified board is one on which a certain
number of the directors are elected on a rotating basis each year. This method
of electing directors makes changes in the composition of the board of
directors, and thus a potential change in control of a corporation, a lengthier
and more difficult process. Delaware law permits, but does not require, a
classified board of directors, with staggered terms under which one-half or
one-third of the directors are elected for terms of two or three years,
respectively. Neither the FV Certificate nor the EPub Certificate provides for a
classified board.
Power to Call Special Stockholders' Meetings; Advance Notice of Stockholder
Business and Nominees. Under Delaware law, a special meeting of stockholders may
be called by the board of directors or by any other person authorized to do so
in the certificate of incorporation or the bylaws. The FV Bylaws provide that
special stockholders' meetings may be called by the Board of Directors or by a
committee of the Board of Directors which has been duly designated by the Board
of Directors and whose powers and authority, as expressly provided in a
resolution of the Board of Directors, include the power to call such special
meetings. The FV Bylaws require that advance written notice (not less than ten
(10) nor more than sixty (60) days in advance) of such a special meeting be
provided and that it include the place, date, and hour of the meeting, and the
purpose or purposes for which the meeting is called. The EPub Bylaws allow
stockholders holding 10% of the outstanding shares of EPub's voting stock, the
Board of Directors, the Chairman of the Board or the President to call special
meetings of stockholders. The EPub Bylaws require that a request for a special
meeting by any person or persons other than the Board of Directors be in writing
and specify the time of such meeting and the general nature of the business
proposed to be transacted. Such form of notice shall be delivered to the
Chairman of the Board, the President, the Vice President, or the Secretary of
EPub. Unlike the FV Bylaws, the EPub Bylaws provide explicitly that no business
may be transacted at such special meeting otherwise than specified in such form
of notice.
Elimination of Actions by Written Consent of Stockholders. Under Delaware
law, stockholders may take action by written consent in lieu of voting at a
stockholders meeting. Delaware law permits a corporation, pursuant to a
provision in such corporation's certificate of incorporation to eliminate the
ability of stockholders to act by written consent. The FV Certificate eliminates
the ability of stockholders to act by written consent, while the EPub
Certificate does not. Elimination of the ability of stockholders to act by
written consent could lengthen the amount of time required to take stockholder
actions because certain actions by written consent are not subject to the
minimum notice requirements of a stockholders' meeting and could, as a
consequence, deter hostile takeover attempts. If the ability of stockholders to
act by written consent is eliminated, a holder
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or group of holders controlling a majority in interest of a corporation's
capital stock, for example, would not be able to amend such corporation's bylaws
or remove its directors pursuant to a stockholders' written consent.
Filling Vacancies on the Board of Directors. Under Delaware law, vacancies
and newly created directorships may be filled by a majority of the directors
then in office (even though less than a quorum) unless otherwise provided in the
certificate of incorporation or bylaws (and unless the certificate of
incorporation directs that a particular class of stock is to elect such
director, in which case any other directors elected by such class, or a sole
remaining director so elected, may fill such vacancy). The FV Certificate allows
vacancies on the Board to be filled by a majority of the directors remaining in
office (even though less than a quorum). The FV Bylaws allow a vacancy created
by resignation to be filled by a majority of those directors then in office (as
constituted immediately prior to any such increase). The FV Bylaws also provide
that vacancies and newly created directorships resulting from any increase in
the authorized number of directors elected by all of the stockholders having the
right to vote as a single class may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
The FV Bylaws further specify that whenever the holders of any class or classes
of stock or series thereof are entitled to elect one or more directors by the
provisions of the certificate of incorporation, vacancies and newly created
directorships of such class or series may be filled by a majority of the
directors elected by such class or classes or series thereof then in office, or
by a sole remaining director so elected. The EPub Bylaws allow a vacancy to be
filled by a majority of the remaining members of the Board (even though less
than a quorum), or by a sole remaining director, unless otherwise provided in
the certificate of incorporation. In addition, the EPub Bylaws provide that, at
a special stockholders meeting called for the purpose, the Board of Directors,
or any individual director, may be removed from office with or without cause,
and a new director or directors may be elected by a majority vote of
stockholders entitled to vote at such meeting.
Indemnification and Limitation of Liability. Delaware law permits
corporations to adopt a provision in their charters eliminating the liability of
a director to the corporation or its stockholders for monetary damages for
breach of the director's fiduciary duty of care. Both the FV Certificate and the
EPub Certificate eliminate the liability of directors to the fullest extent
permissible under Delaware law, as such law exists currently or as it may be
amended in the future. Under Delaware law, such provision may not eliminate or
limit director monetary liability for (i) breaches of the director's duty of
loyalty to the corporation or its stockholders; (ii) acts or omissions not in
good faith or involving intentional misconduct or knowing violations of law;
(iii) the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or (iv) transactions in which the director received an improper
personal benefit. Such limitation of liability provisions do not affect the
availability of non-monetary remedies such as injunctive relief or rescission.
Delaware law states that the indemnification provided by statute shall not
be deemed exclusive of any other rights under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. The FV Certificate
provides that, to the fullest extent permitted by Delaware law, a director of FV
shall not be personally liable to FV or its stockholders for monetary damages
for breach of fiduciary duty as a director. In addition, the FV Bylaws provide
that FV shall indemnify, to the fullest extent permitted by law, each of its
directors, officers, employees and agents against expenses (including attorney's
fees), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding, arising by reason of the fact that
such person is or was an agent of FV. The EPub Bylaws include a provision that
EPub shall indemnify its directors and officers to the fullest extent
permissible under Delaware law, provided that EPub shall not be required to
indemnify any director in connection with any proceeding (or part thereof)
initiated by such person or any proceeding by such person against the
corporation or its directors, officers, employees or other agents unless (i)
such indemnification is expressly required to be made by law, (ii) the
proceeding was authorized by the Board of Directors of EPub or (iii) such
indemnification is provided by EPub, in its sole discretion, pursuant to the
powers vested in EPub under Delaware law.
Inspection of Stockholders List. Delaware law allows any stockholder to
inspect and copy the stockholders list for a purpose reasonably related to such
person's interest as a stockholder. The FV Bylaws provide that any stockholder
of record, in person or by attorney or other agent, shall, upon written demand
under oath stating the purpose thereof, have the right during usual hours for
business to inspect FV's stock ledger, a list of FV's stockholders, and its
other books and records and to make copies or extracts therefrom, provided that
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such inspection is reasonably related to such person's interest as a
stockholder. The EPub Bylaws direct that the Secretary of EPub shall compile, at
least ten (10) days before every meeting of stockholders, a complete list of
stockholders entitled to vote at said meeting and that such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours for a period of at least ten (10) days prior to
the meeting.
Dividends and Repurchases of Shares. Delaware law permits a corporation to
declare and pay dividends out of (i) surplus or (ii) if there is no surplus, out
of net profits for the fiscal year in which the dividend is declared and/or for
the preceding fiscal year as long as the amount of capital of the corporation
following the declaration and payment of the dividend is not less than the
aggregate amount of the capital represented by the issued and outstanding stock
of all classes having a preference upon the distribution of assets. In addition,
Delaware law generally provides that a corporation may redeem or repurchase its
shares only if such redemption or repurchase would not impair the capital of the
corporation. Notwithstanding the foregoing, a Delaware corporation may redeem or
repurchase shares having a preference upon the distribution of any of its assets
(or shares of common stock, if there are no such shares of preferred stock) if
such shares will be retired upon acquisition (and provided that, after the
reduction in capital made in connection with such retirement of shares, the
corporation's remaining assets are sufficient to pay any debts not otherwise
provided for).
The FV Bylaws provide that the directors of FV may, subject to any
restrictions in the FV Certificate, declare and pay dividends upon the shares
its capital stock pursuant to the General Corporation Law of Delaware. The FV
Certificate is silent as to FV dividend policy. The EPub Certificate requires
that dividends, when and if declared by the board of directors, shall be payable
to holders of preferred stock in preference and priority to any payment of any
dividend on the common stock. Preferred stockholders' rights to dividends shall
not be cumulative. The EPub Certificate further specifies that so long as any
shares of preferred stock are outstanding, no dividend, whether in cash or
property, shall be paid or declared on any common stock, nor shall, with minor
exceptions, any shares of common stock of EPub be purchased, redeemed, or
otherwise acquired for value by EPub, until all dividends on the preferred stock
have been paid or declared and set apart.
Stockholder Voting on Mergers and Similar Transactions. Delaware law
generally requires that the holders of a majority of the outstanding voting
shares of the acquiring and target corporations approve statutory mergers, but
does not require a stockholder vote of the surviving corporation in a merger
(unless the corporation provides otherwise in its certificate of incorporation)
if (i) the merger agreement does not amend the existing certificate of
incorporation; (ii) each share of the surviving corporation outstanding before
the merger is equal to an identical outstanding or treasury share after the
merger; and (iii) the number of shares to be issued by the surviving corporation
in the merger does not exceed 20% of the shares outstanding immediately prior to
the merger. Delaware law requires that a sale of all or substantially all of the
assets of a corporation be approved by a majority of the outstanding voting
shares of the corporation transferring such assets.
Delaware law generally does not require class voting (i.e., approval by a
majority vote of each class of shares outstanding), except in certain
transactions involving an amendment to the certificate of incorporation which
adversely affects a specific class of shares, increases or decreases the number
of authorized shares of a class of shares or increases or decreases the par
value of the shares of a class of shares. EPub's Certificate of Incorporation
requires that the holders of a majority of the outstanding preferred
stockholders approve (i) any amendment, alteration, or repeal of any provision
of EPub's Certificate that affects adversely the voting powers, preferences, or
other special rights, privileges, qualifications, limitations, or restrictions
of the preferred stock, (ii) any authorization or designation of any new class
or series of stock or any other securities convertible into equity securities of
EPub ranking on a parity with, or senior to, the existing preferred stock in
right of redemption, liquidation preference, voting or dividends or any increase
in the authorized or designated number of any such new class or series, (iii)
the issuance of any note or debt security in excess of the net worth of EPub
that has not been unanimously approved by EPub's directors (with all interested
directors abstaining), (iv) any agreement by EPub or its stockholders regarding
an asset transfer or acquisition in which the per share price received by the
holders of preferred stock as a result of such event is less than the original
issue price of the preferred stock, (v) any material change in EPub's line of
business that has not been
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<PAGE> 109
approved by EPub's directors, or (vi) any agreement between EPub and any
executive officer or director other than in the ordinary course of business.
Appraisal Rights. Under Delaware law, a stockholder of a corporation
participating in certain major corporate transactions may be entitled, under
varying circumstances, to dissenters' or appraisal rights pursuant to which such
stockholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transaction. Under Delaware law, such rights are not available (i) with respect
to the sale, lease or exchange of all or substantially all of the assets of a
corporation (unless otherwise provided in the corporation's certificate of
incorporation); (ii) with respect to a merger or consolidation by a corporation
the shares of which are either listed on a national securities exchange or are
held of record by more than 2,000 holders if such stockholders receive only
shares of the surviving corporation, shares of any other corporation which are
either listed on a national securities exchange or held of record by more than
2,000 holders, cash in lieu of fractional shares or a combination of the
foregoing; or (iii) to stockholders of a corporation surviving a merger if no
vote of the stockholders of the surviving corporation is required to approve the
merger because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to the
merger is an identical outstanding or treasury share after the merger, and the
number of shares to be issued in the merger does not exceed 20% of the shares of
the surviving corporation outstanding immediately prior to the merger and if
certain other conditions are met. Unlike the EPub Capital Stock, FV Common Stock
is listed on Nasdaq. Accordingly, no appraisal rights would be available with
respect to FV Common Stock in connection with a merger or consolidation if FV
stockholders receive only shares of the surviving corporation which are either
listed on a national securities exchange or held of record by more than 2,000
holders, cash in lieu of fractional shares or a combination of the foregoing.
Dissolution. Under Delaware law, unless the board of directors approves a
proposal to dissolve, a dissolution must be approved by stockholders holding
100% of the total voting power of the corporation. Only if a dissolution is
initially approved by the board of directors may it be ratified by a simple
majority of the corporation's outstanding shares of capital stock entitled to
vote thereon. Delaware law allows a Delaware corporation to include in its
certificate of incorporation a super majority voting requirement in connection
with dissolutions initiated by the Board. Neither the FV Certificate nor the
EPub Certificate contain any such super majority voting requirement. The FV
Bylaws provide that if the board of directors deem it advisable to dissolve FV,
the board shall adopt a resolution to that effect by a majority of the whole
board at a meeting called for that purpose, and shall cause notice to be mailed
to each stockholder entitled to vote on the adoption of the resolution of a
meeting of stockholders to take action upon the resolution.
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<PAGE> 110
FV STOCKHOLDER PROPOSAL NO. 2
APPROVAL OF AN AMENDMENT TO FV'S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO CHANGE THE NAME OF THE CORPORATION
The FV Board is proposing an amendment ("Amendment No. 1") to FV's Amended
and Restated Certificate of Incorporation (the "Restated Certificate") to change
the name of the corporation to "MessageMedia, Inc."
CHANGE OF CORPORATE NAME
The FV Board believes that a change in the name of the corporation is
advisable in light of FV's new business focus on e-mail-based messaging services
and technologies. FV's current corporate name is reflective of FV's historical
focus on secure Internet-based payment systems. In June 1997, the FV Board
determined to aggressively pursue the development and commercialization of FV's
Interactive Messaging Platform and related technologies and services. On August
17, 1998, FV phased out its principal payment service, the First Virtual
Internet Payment System, in order to allow FV to concentrate its full resources
on pursuing opportunities in the email messaging sector. The FV Board believes
that adoption of the name "MessageMedia, Inc." will serve to heighten market
awareness of FV's Interactive Messaging Platform and related services and
technologies and to enhance customer brand recognition.
VOTE REQUIRED
The affirmative vote of a majority of the shares of FV Common Stock
outstanding as of the FV Record Date will be required to approve Amendment No.
1.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AMENDMENT NO. 1 AND
RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" AMENDMENT NO. 1.
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<PAGE> 111
FV STOCKHOLDER PROPOSAL NO. 3
APPROVAL OF AN AMENDMENT TO FV'S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK TO 100,000,000 SHARES
The FV Board is proposing an amendment ("Amendment No. 2") to the Restated
Certificate to increase the number of authorized shares of FV Common Stock from
40,000,000 shares to 100,000,000 shares.
INCREASE IN AUTHORIZED CAPITAL STOCK
The FV Board has determined that the increase in authorized capital stock
is necessary in light of the fact that, as of the FV Record Date, 33,091,260 of
the 40,000,000 authorized shares of Common Stock were issued and outstanding,
and an additional 5,602,454 shares were reserved for issuance upon exercise of
outstanding stock options and warrants.
The FV Board believes that the issuance of additional shares of FV Common
Stock is likely to be required in order to attract and retain highly qualified
officers, employees and consultants and in connection with the acquisition of
any businesses, assets or technologies that FV may choose to undertake in the
future. In particular, the proposed increase in the number of authorized shares
of FV Common Stock is necessary in order to permit the issuance of the shares of
FV Common Stock issuable to the EPub stockholders in the Merger. Accordingly,
the Reorganization Agreement provides that approval of this proposal by the FV
Stockholders is a condition to the obligation of EPub to consummate the Merger.
If this proposal is approved by the FV stockholders, subject to applicable
restrictions under the DGCL and the rules and regulations of Nasdaq, the FV
Board will have the authority, without further action by the FV stockholders, to
issue the additional authorized shares of FV Common Stock as the FV Board may
deem advisable in its sole discretion. The issuance of additional shares of FV
Common Stock will reduce the percentage ownership interest of existing FV
Stockholders and may have the effect of decreasing the market price of the FV
Common Stock.
VOTE REQUIRED
The affirmative vote of a majority of the shares of FV Common Stock
outstanding as of the FV Record Date will be required to approve Amendment No.
2.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AMENDMENT NO. 2 AND
RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" AMENDMENT NO. 2.
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<PAGE> 112
FV STOCKHOLDER PROPOSAL NO. 4
AMENDMENT OF 1995 PLAN
FV's 1995 Stock Plan (the "1995 Plan") was adopted in September 1995, with
2,000,000 shares of Common Stock reserved for issuance thereunder. In October
1996, the 1995 Plan as amended to increase the number of shares of Common Stock
reserved for issuance thereunder by 1,000,000 to an aggregate of 3,000,000
shares. The number of shares of Common Stock reserved for issuance under the
1995 Plan was increased by a further 1,000,000 shares in January 1998, to a
total of 4,000,000 shares. As of June 30, 1998, an aggregate of 1,055,608 shares
were available for future grant under the 1995 Plan. In July 1998, the FV Board
amended the 1995 Plan, subject to stockholder approval, to increase the shares
reserved for issuance thereunder by 2,000,000 shares to an aggregate of
6,000,000 shares. The stockholders are being asked to approve this share
increase at the FV Stockholders Meeting. The FV Board believes that increasing
the number of shares available under the 1995 Plan is necessary in order to
allow FV to continue to attract, retain and motivate employees.
The principal features of the 1995 Plan, as proposed to be modified, are
described below:
General
The 1995 Plan authorizes the FV Board, or a committee which the FV Board
may appoint from among its members (the "Option Committee"), to grant options
and rights to purchase shares of Common Stock. Options granted under the Stock
Plan may either be "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, ("the Code"), or nonstatutory stock
options, as determined by the Board or Option Committee. The 1995 Plan is not a
qualified deferred compensation plan under Section 401(a) of the Code, nor is it
subject to the Employee Retirement Income Security Act of 1974, as amended.
Purpose
The general purpose of the 1995 Plan is to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to the employees and consultants of FV and to promote the
success of FV's business.
Stock Subject to the 1995 Plan
Subject to other provisions of the 1995 Plan, the maximum aggregate number
of shares of FV Common Stock which may be optioned and sold under the 1995 Plan
shall be 6,000,000 shares. The shares reserved under the 1995 Plan may be
authorized, but unissued, or reacquired FV Common Stock.
Administration
The 1995 Plan may be administered by the Board or Option Committee. Subject
to other provisions of the 1995 Plan, the FV Board or Option Committee has the
authority to: (i) select the employees, directors and consultants to whom
options are to be granted; (ii) to approve forms of agreement for use under the
1995 Plan; (iii) determine whether and to what extent options are granted under
the 1995 Plan; (iv) determine the number of shares to be made subject to each
option; (v) determine whether and to what extent options are to be granted; (vi)
prescribe the terms and conditions of each option (including the exercise price,
whether an option will be classified as an incentive stock option or a
nonstatutory option and the provisions of the stock option or restricted stock
purchase agreement to be entered into between FV and the grantee); (vii) modify
or amend each option subject to applicable legal and plan restrictions; (viii)
reduce the exercise price of any Option to the then current fair market value if
the fair market value of the Common Stock covered by such Option has declined
since the date the Option was granted; (ix) allow optionees to satisfy
withholding tax obligations by electing to have FV withhold from the shares to
be issued upon exercise of an option that number of shares having a fair market
value equal to the amount required to be withheld, (x) to provide for the early
exercise of unvested Options, subject to such terms and conditions as shall be
determined by the
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<PAGE> 113
Administrator and (ix) construe and interpret the terms of the Plan and awards
granted pursuant to the 1995 Plan. The Board or Option Committee's decisions,
determinations and interpretations are final and binding on all optionees and
any other holder of options.
Eligibility
The 1995 Plan provides that nonstatutory stock options may be granted to
employees, directors and consultants of FV and its subsidiaries. Incentive stock
options may be granted only to employees.
Limitation
The 1995 Plan provides that no employee shall be granted, in any fiscal
year of FV, options to purchase more than 500,000 shares of Common Stock.
Terms and Conditions of Options
Each option is to be evidenced by a stock option agreement between FV and
the employee or consultant to whom such option is granted and is subject to the
following additional terms and conditions:
(a) Exercise Price. The FV Board or the Option Committee determines
the exercise price of options at the time the options are granted. However,
excluding options issued to 10% stockholders, the exercise price under an
incentive stock option must not be less than 100% of the fair market value
of the FV Common Stock on the date such option is granted. In the case of
nonstatutory stock option, the exercise price shall be determined by the FV
Board or Option Committee. Incentive stock options granted to 10%
stockholders must have an exercise price of not less than 110% of the fair
market value of FV Common Stock on the date such option is granted.
Notwithstanding the foregoing, options may be granted with an exercise
price of less than 100% of the fair market value per share on the date of
grant pursuant to a merger or other corporate transaction.
(b) Form of Consideration. The means of payment for shares issued upon
exercise of an option is specified in each option agreement and generally
may be made by cash, check, other shares of FV Common Stock owned by the
optionee for more than six months on the date of surrender, delivery of an
exercise notice together with such other documentation as the administrator
or broker shall require to effect the exercise of the option and delivery
to FV of the sale or loan proceeds required to pay the exercise price, or
by any combination thereof or any other consideration and payment method
for the issuance of FV Common Stock to the extent permitted by applicable
laws.
(c) Term of the Option. Each stock option agreement will specify the
term of the option and the date when the option is to become exercisable.
In the case of an incentive stock option, the term must be ten years from
the date of grant or such shorter time as may be provided in the notice of
grant. In the case of an incentive stock option granted to a 10%
stockholder, the term of the option must be no more than five years from
the date of grant. No option may be exercised by any person after the
expiration of its term.
(d) Termination of Employment. If an optionee's employment terminates
for any reason (other than death or permanent disability), then all options
held by such optionee under the 1995 Plan will expire as set forth in his
or her notice of grant (but not to exceed three months after the
termination of his or her employment in the case of an incentive stock
option). The optionee may exercise all or part of his or her option at any
time before such expiration to the extent such option was exercisable at
the time of termination of employment.
(e) Disability. If an optionee should terminate his or her employment
or consulting relationship as a result of total and permanent disability
(as defined in the Code), then all options held by such optionee under the
1995 Plan will expire the earlier of (i) the date specified in the option
agreement (which may not exceed 12 months from the date of termination of
the optionee's employment), or (ii) the expiration date of such option. The
optionee may exercise all or part of his or her option at any time before
such expiration to the extent that such option was exercisable at the time
of termination of employment.
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<PAGE> 114
(f) Death. In the event of death of an optionee, any options which are
then vested, or which would have otherwise vested within 12 calendar months
from the date of death, may be exercised at any time within 12 months after
the date of death (but in no event later than the expiration of such), by
the optionee's estate or by the person who acquired the right to exercise
the option by bequest or inheritance.
(g) Nontransferability of Options. During an optionee's lifetime, his
or her option(s) will be exercisable only by the optionee and will not be
transferable other than by will or laws of descent and distribution.
(h) Value Limitation. If the aggregate fair market value of all shares
of FV Common Stock subject to an optionee's incentive stock option which
are exercisable for the first time during any calendar year exceeds
$100,000, the excess options shall be treated as nonstatutory stock
options.
(i) Other Provisions. The stock option agreements used in conjunction
with the 1995 Plan may contain such other terms, provisions and conditions
not inconsistent with the 1995 Plan as may be determined by the Board or
Option Committee.
Adjustments Upon Changes in Capitalization
In the event that the stock of FV is changed by reason of any stock split,
reverse stock split, stock dividend, combination, reclassification or other
change in the capital structure of FV effected without the receipt of
consideration, appropriate proportional adjustments shall be made in the number
and class of shares of stock subject to the 1995 Plan, the number and class of
shares of stock subject to any option outstanding under the 1995 Plan, and the
exercise price of any such outstanding option. Any such adjustment shall be made
upon approval of the FV Board, whose determination shall be conclusive.
Notwithstanding the above, in connection with any merger, consolidation,
acquisition of assets or like occurrence involving FV, each outstanding option
must be assumed or an equivalent option or right substituted by a successor
corporation. If the successor corporation refuses to assume the options or to
substitute substantially equivalent options, the optionee will have the right to
exercise the option to all the optioned stock, including shares which would not
otherwise be exercisable. If the option is exercisable in lieu of assumption or
substitution, the FV Board or Option Committee will notify the optionee that the
option shall be fully exercisable for 15 days from the date of such notice, and
the option will terminate upon expiration of such period.
Amendment and Termination of the Plan
The Board may amend, alter, suspend or terminate the 1995 Plan or any part
thereof, at any time and for any reason. However, FV will obtain stockholder
approval for any amendment to the 1995 Plan to the extent necessary to comply
with any applicable law, rule or regulation. No such action by the Board of
Directors or stockholders may alter or impair any option previously granted
under the 1995 Plan without the written consent of the optionee. In any event,
the 1995 Plan shall terminate no later than ten years from its approval by the
Board.
FEDERAL INCOME TAX CONSEQUENCES
Options granted under the 1995 Plan may be either "incentive stock
options," as defined in Section 422 of the Code, or nonstatutory options. An
optionee who is granted an incentive stock option will not recognize taxable
income at the time the option is granted or upon its exercise, although the
exercise may subject the optionee to the alternative minimum tax. Upon the sale
or exchange of the shares more than two years after grant of the option and one
year after exercising the option, any gain or loss will be treated as long-term
capital gain or loss. If these holding periods are not satisfied, the optionee
will recognize ordinary income at the time of sale or exchange equal to the
difference between the exercise price and the lower of (i) the fair market value
at the date of the option exercise or (ii) the sale price of the shares. A
different rule for measuring ordinary income upon such a premature disposition
may apply if the optionee is also an officer, director, or 10% stockholder of
FV. FV will be entitled to a deduction in the same amount as the ordinary income
recognized by the optionee. Any gain or loss recognized on such a premature
disposition of the shares in excess
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<PAGE> 115
of the amount treated as ordinary income will be characterized as long-term or
short-term capital gain or loss, depending on the holding period.
All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income at the time he or she is granted a nonstatutory option. However, upon its
exercise, the optionee will recognize taxable income generally measured by the
excess of the then fair market value of the shares purchased over the purchase
price. Any taxable income recognized in connection with an option exercise by an
optionee who is also an employee of FV will be subject to tax withholding by FV.
FV will be entitled to a deduction in the same amount as ordinary income
recognized by the employee. Upon sale of such shares by the optionee, any
difference between the sales price and the optionee's purchase price, to the
extent not recognized as taxable income as provided above, will be treated as
long-term or short-term capital gain or loss, depending on the holding period.
The foregoing is only a summary of the effect of federal income taxation
upon the employee or consultant and FV with respect to awards under the 1995
plan and does not purport to be complete, and reference should be made to the
applicable provisions of the code. In addition, this summary does not discuss
alternative minimum tax laws or the provisions of the income tax laws of any
municipality, state or foreign country in which the employee or consultant may
reside.
Vote Required
The approval of the amendment to the 1995 Plan requires the affirmative
vote of a majority of the Votes Cast on the proposal at the FV Stockholders
Meeting.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDMENT TO THE 1995
PLAN AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THIS PROPOSAL.
LEGAL MATTERS
Certain legal matters in connection with the Reorganization Agreement and
the federal income tax consequences of the Merger will be passed upon for FV and
Sub by Wilson Sonsini Goodrich & Rosati, Professional Corporation ("WSGR").
Certain members of WSGR own an aggregate of 10,300 shares of FV Common Stock.
Certain legal matters in connection with the Reorganization Agreement and the
federal income tax consequences of the Merger will be passed upon for EPub by
Cooley Godward LLP.
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<PAGE> 116
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FIRST VIRTUAL HOLDINGS INCORPORATED
Annual Financial Statements
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1997 and 1996............. F-3
Statements of Operations for the years ended December 31,
1997, 1996 and 1995....................................... F-4
Statements of Stockholders' Equity (Net Capital Deficiency)
for the years ended December 31, 1997, 1996 and 1995...... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995....................................... F-6
Notes to Financial Statements............................... F-7
Interim Financial Statements
Balance Sheets as of June 30, 1998 (unaudited) and December
31, 1997.................................................. F-17
Statements of Operations for the three months and six months
ended June 30, 1998 and 1997 (unaudited).................. F-18
Statements of Cash Flows for the six months ended June 30,
1998 and 1997 (unaudited)................................. F-19
Notes to Financial Statements for the six months ended June
30, 1998 (unaudited)...................................... F-20
EMAIL PUBLISHING, INC
Report of PricewaterhouseCoopers LLP, Independent
Auditors.................................................. F-22
Balance Sheets as of June 30, 1997 and 1998................. F-23
Statements of Operations for the years ended June 30, 1997
and 1998.................................................. F-24
Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1997 and 1998.............................. F-25
Statements of Cash Flows for the years ended June 30, 1997
and 1998.................................................. F-26
Notes to Financial Statements............................... F-27
DISTRIBUTED BITS L.L.C.
Report of Ernst & Young LLP, Independent Auditors........... F-34
Balance Sheets as of December 31, 1996 and 1997 and June 30,
1998 (unaudited).......................................... F-35
Statements of Operations for the period from September 9,
1996 (inception) to December 31, 1996, the year ended
December 31, 1997, the six months ended June 30, 1997 and
1998 (unaudited) and the period from September 9, 1996
(inception) to June 30, 1998 (unaudited).................. F-36
Statements of Members' Equity (Deficit) for the period from
September 9, 1996 (inception) to December 31, 1996, the
year ended December 31, 1997, and the six months ended
June 30, 1998 (unaudited)................................. F-37
Statements of Cash Flows for the period from September 9,
1996 (inception) to December 31, 1996, the year ended
December 31, 1997, and the six months ended June 30, 1997
and 1998 (unaudited) and the period from September 9, 1996
(inception) to June 30, 1998 (unaudited).................. F-38
Notes to Financial Statements............................... F-39
</TABLE>
F-1
<PAGE> 117
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
First Virtual Holdings Incorporated
We have audited the accompanying balance sheets of First Virtual Holdings
Incorporated as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Virtual Holdings
Incorporated at December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating losses and has insufficient working
capital to finance its planned operations through 1998. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan as to this matter is described in Note 1. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
San Diego, California
January 16, 1998
except for the first paragraph of Note 6
and Note 10, for which the date is
March 20, 1998
F-2
<PAGE> 118
FIRST VIRTUAL HOLDINGS INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents(1).............................. $ 6,331,059 $ 17,127,971
Short-term investment, available-for-sale................. -- 200,000
Accounts receivable....................................... 207,985 88,278
Prepaid expenses and other................................ 418,615 83,840
------------ ------------
Total current assets.............................. 6,957,659 17,500,089
Furniture, equipment and software, net (Note 2)............. 1,859,048 1,964,635
Information technology, net (Note 5)........................ 19,845 59,226
Organization and other costs, net........................... 77,630 105,798
Deposits and other.......................................... 133,907 62,809
------------ ------------
Total assets...................................... $ 9,048,089 $ 19,692,557
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 1,440,224 $ 1,626,198
Accrued compensation and related liabilities.............. 370,741 372,739
Accrued interest.......................................... 289,903 196,340
Deferred revenue.......................................... 537,790 64,683
Current portion, due to stockholders (Note 3)............. 1,530,000 400,000
Directors and officers insurance payable.................. 275,415 --
Other accrued liabilities................................. 325,885 576,077
------------ ------------
Total current liabilities......................... 4,769,958 3,236,037
Amount due to stockholder (Note 3).......................... 162,500 312,500
Notes payable to stockholders (Note 3)...................... -- 1,200,000
------------ ------------
Total long term liabilities....................... 162,500 1,512,500
Commitments (Note 5)
Series A convertible preferred stock (Note 6)............. 4,687,500 --
Stockholders' equity (net capital deficiency) (Note 7):
Series A convertible preferred stock, $0.001 par value;
1,000 shares authorized and outstanding at December 31,
1997; 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, 8,903,855 and 8,794,812 shares issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 8,904 8,795
Additional paid-in-capital................................ 26,300,228 25,758,015
Warrants.................................................. 3,017,115 3,017,115
Deferred compensation..................................... (155,235) (44,305)
Accumulated deficit....................................... (29,742,882) (13,795,600)
------------ ------------
Total stockholders' equity (net capital
deficiency)..................................... (571,869) 14,944,020
------------ ------------
Total liabilities and stockholders' equity
(net capital deficiency)........................ $ 9,048,089 $ 19,692,557
============ ============
</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 attached. (Note 10).
(2) 750 shares of the Series A convertible preferred stock have been classified
outside of stockholders' equity (net capital deficiency).
See accompanying notes.
F-3
<PAGE> 119
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Revenues.......................................... $ 1,450,598 $ 695,866 $ 197,902
Cost of revenues.................................. 270,416 265,900 123,375
------------ ------------ -----------
Gross profit...................................... 1,180,182 429,966 74,527
Operating expenses:
Marketing and sales............................. 5,424,110 1,836,545 346,400
Research, development and engineering........... 6,687,177 4,652,582 530,809
General and administrative(1)..................... 4,377,688 4,237,638 1,292,781
Depreciation and amortization..................... 1,097,716 524,124 106,628
------------ ------------ -----------
Total operating expenses................ 17,586,691 11,250,889 2,276,618
------------ ------------ -----------
Loss from operations.............................. (16,406,509) (10,820,923) (2,202,091)
Interest income................................... 554,587 235,560 20,259
Interest expense.................................. (95,360) (104,577) (88,149)
------------ ------------ -----------
Net loss.......................................... $(15,947,282) $(10,689,940) $(2,269,981)
Dividend imputed on preferred stock(2)............ (1,250,000) -- --
------------ ------------ -----------
Net loss applicable to common shares.............. $(17,197,282) $(10,689,940) $(2,269,981)
============ ============ ===========
Net loss per share, basic and diluted............. $ (1.94) $ (2.33) $ (0.54)
Shares used in per share computation, basic and
diluted......................................... 8,842,367 4,588,262 4,170,231
</TABLE>
- ---------------
(1) The year ended December 31, 1996 includes $1,000,000 of expense in
connection with obtaining a waiver of an exclusivity provision of an
agreement with a stockholder.
(2) The year ended December 31, 1997 includes an imputed dividend on the Series
A convertible preferred stock totaling $1,250,000 for discounted conversion
terms.
See accompanying notes.
F-4
<PAGE> 120
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------ PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
---------- ------- --------- ------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... -- $ -- 4,083,350 $4,083 $ 289,945 $ -- $ --
Issuance of common stock for
services....................... -- -- 135,400 135 5,281 -- --
Issuance of Series A convertible
preferred stock at $1.76 per
share for cash, net of issuance
costs of $71,791............... 551,500 552 -- -- 898,297 -- --
Issuance of Series A convertible
preferred stock at $1.76 per
share for retirement of notes
payable, net of issuance costs
of $7,257...................... 142,044 142 -- -- 242,598 -- --
Issuance of Series B convertible
preferred stock at $3.189 per
share, net of issuance costs of
$100,390....................... 783,945 784 -- -- 2,398,826 -- --
Issuance of common stock for
services....................... -- -- 54,500 55 17,385 -- --
Net loss......................... -- -- -- -- -- -- --
---------- ------- --------- ------ ----------- ---------- ---------
Balance at December 31, 1995..... 1,477,489 1,478 4,273,250 4,273 3,852,332 -- --
Issuance of common stock for cash
and services................... -- -- 61,126 61 51,776 -- --
Issuance of Series B convertible
preferred stock at $3.189 per
share, net of issuance costs of
$117,110....................... 465,000 465 -- -- 1,365,310 -- --
Issuance of warrants............. -- -- -- -- -- 3,017,115 --
Issuance of Series C convertible
preferred stock at $15 per
share and shares of common
stock at $5 per share, net of
issuance costs of $45,934...... 130,952 131 107,144 107 2,453,828 -- --
Issuance of Series D convertible
preferred stock at $15 per
share, net of issuance costs of
$9,163......................... 200,000 200 -- -- 2,990,637 -- --
Deferred compensation related to
grant of certain stock
options........................ -- -- -- -- 50,567 -- (50,567)
Amortization of deferred
compensation................... -- -- -- -- -- -- 6,262
Issuance of common stock for IPO
net of issuance costs.......... -- -- 2,000,000 2,000 14,991,067 -- --
Issuance of common stock for
converted preferred stock upon
IPO............................ (2,273,441) (2,274) 2,273,441 2,274 -- -- --
Issuance of common stock for
anti-dilutive shares in
preferred stock conversion..... -- -- 59,876 60 (60) -- --
Issuance of common stock for
exercise of stock options...... -- -- 19,975 20 2,558 -- --
Net loss......................... -- -- -- -- -- -- --
---------- ------- --------- ------ ----------- ---------- ---------
Balance at December 31, 1996..... -- -- 8,794,812 8,795 25,758,015 3,017,115 (44,305)
Deferred compensation and related
amortization................... -- -- -- -- 128,888 -- (110,930)
Accelerated vesting of stock
options........................ -- -- -- -- 52,137 -- --
Extension of warrants............ -- -- -- -- 50,000 -- --
Issuance of Series A stock, net
of issuance cost............... 250 1 -- -- 1,137,999 -- --
Employee stock purchase plan..... -- -- 22,160 22 74,958 -- --
Issuance of common stock for
services rendered.............. -- -- 1,193 1 8,052 -- --
Issuance of common stock for
exercise of stock options...... -- -- 85,690 86 27,679 -- --
Dividend imputed on Series A
convertible preferred stock,
classified outside of
stockholders' equity (net
capital deficiency)............ -- -- -- -- (937,500) -- --
Net loss......................... -- -- -- -- -- -- --
---------- ------- --------- ------ ----------- ---------- ---------
Balance at December 31, 1997..... 250 $ 1 8,903,855 $8,904 $26,300,228 $3,017,115 $(155,235)
========== ======= ========= ====== =========== ========== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (NET
ACCUMULATED CAPITAL
DEFICIT DEFICIENCY)
------------ -------------
<S> <C> <C>
Balance at December 31, 1994..... $ (835,679) $ (541,651)
Issuance of common stock for
services....................... -- 5,416
Issuance of Series A convertible
preferred stock at $1.76 per
share for cash, net of issuance
costs of $71,791............... -- 898,849
Issuance of Series A convertible
preferred stock at $1.76 per
share for retirement of notes
payable, net of issuance costs
of $7,257...................... -- 242,740
Issuance of Series B convertible
preferred stock at $3.189 per
share, net of issuance costs of
$100,390....................... -- 2,399,610
Issuance of common stock for
services....................... -- 17,440
Net loss......................... (2,269,981) (2,269,981)
------------ ------------
Balance at December 31, 1995..... (3,105,660) 752,423
Issuance of common stock for cash
and services................... -- 51,837
Issuance of Series B convertible
preferred stock at $3.189 per
share, net of issuance costs of
$117,110....................... -- 1,365,775
Issuance of warrants............. -- 3,017,115
Issuance of Series C convertible
preferred stock at $15 per
share and shares of common
stock at $5 per share, net of
issuance costs of $45,934...... -- 2,454,066
Issuance of Series D convertible
preferred stock at $15 per
share, net of issuance costs of
$9,163......................... -- 2,990,837
Deferred compensation related to
grant of certain stock
options........................ -- --
Amortization of deferred
compensation................... -- 6,262
Issuance of common stock for IPO
net of issuance costs.......... -- 14,993,067
Issuance of common stock for
converted preferred stock upon
IPO............................ -- --
Issuance of common stock for
anti-dilutive shares in
preferred stock conversion..... -- --
Issuance of common stock for
exercise of stock options...... -- 2,578
Net loss......................... (10,689,940) (10,689,940)
------------ ------------
Balance at December 31, 1996..... (13,795,600) 14,944,020
Deferred compensation and related
amortization................... -- 17,958
Accelerated vesting of stock
options........................ -- 52,137
Extension of warrants............ -- 50,000
Issuance of Series A stock, net
of issuance cost............... -- 1,138,000
Employee stock purchase plan..... -- 74,980
Issuance of common stock for
services rendered.............. -- 8,053
Issuance of common stock for
exercise of stock options...... -- 27,765
Dividend imputed on Series A
convertible preferred stock,
classified outside of
stockholders' equity (net
capital deficiency)............ -- (937,500)
Net loss......................... (15,947,282) (15,947,282)
------------ ------------
Balance at December 31, 1997..... $(29,742,882) $ (571,869)
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 121
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $(15,947,282) $(10,689,940) $(2,269,981)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 1,097,716 524,124 106,628
Loss on disposal of assets...................... 11,249 -- --
Common stock issued for services................ 60,191 20,000 22,856
Changes in operating assets and liabilities:
Accounts receivable.......................... (119,707) (88,278) --
Prepaid expenses and other................... (334,775) (72,887) 1,047
Information technology charge................ -- -- (100,000)
Deposits and other........................... (71,098) (58,809) (4,000)
Accounts payable............................. (185,974) 1,134,542 411,638
Accrued compensation and related
liabilities................................ (1,998) 364,569 (21,917)
Deferred revenue............................. 473,107 64,683 --
Accrued interest............................. 93,563 96,000 84,010
Due to stockholders.......................... (220,000) 712,500 --
Directors and officers insurance payable..... 275,415 -- --
Other accrued liabilities.................... (250,192) 576,077 --
------------ ------------ -----------
Net cash flows used in operating activities....... (15,119,785) (7,417,419) (1,769,719)
INVESTING ACTIVITIES
Additions to furniture and equipment.............. (929,641) (2,104,301) (151,148)
Proceeds from sales of fixed assets............... 11,769 -- --
Maturity/(purchase) of short-term investment...... 200,000 (200,000) --
Organization and other costs...................... -- (74,998) (30,128)
------------ ------------ -----------
Net cash flows used in investing activities....... (717,872) (2,379,299) (181,276)
FINANCING ACTIVITIES
Proceeds from issuance of Series A preferred
stock, net of issuance costs.................... 4,888,000 -- 1,141,589
Proceeds from issuance of Series B preferred
stock, net of issuance costs.................... -- 1,365,775 2,399,610
Proceeds from issuance of Series C preferred
stock, net of issuance costs.................... -- 1,928,189 --
Proceeds from issuance of Series D preferred
stock, net of issuance costs.................... -- 2,990,837 --
Proceeds from issuance of common stock, net of
issuance costs.................................. 102,745 15,531,122 --
Proceeds from issuance/extension of warrants...... 50,000 3,017,115 --
Proceeds from borrowings from stockholders and
bank............................................ -- 486,111 486,600
Repayment of loan from bank....................... -- (486,111) --
------------ ------------ -----------
Net cash flows provided by financing activities... 5,040,745 24,833,038 4,027,799
Net increase/(decrease) in cash and cash
equivalents..................................... (10,796,912) 15,036,320 2,076,804
Cash and cash equivalents at the beginning of
year............................................ 17,127,971 2,091,651 14,847
------------ ------------ -----------
Cash and cash equivalents at the end of year...... $ 6,331,059 $ 17,127,971 $ 2,091,651
============ ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 122
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and business activity
Founded in 1994, First Virtual Holdings Incorporated is a leader in
advanced marketing and customer service systems for Internet commerce. In
October 1994, the Company developed and implemented the FVIPS, a secure and
easy-to-use payment system. This was the Company's first application of the
VirtualPIN architecture. The VirtualPIN architecture facilitates Internet
commerce and is designed to facilitate other forms of interactive Internet
communications.
On August 11, 1995, the Company declared a twenty five-for-one stock split
of the Company's common stock and Series A convertible preferred stock. All
applicable share and stock option information have been restated to reflect the
split.
On July 3, 1996, the Company was reincorporated in Delaware. In connection
with the reincorporation, the Company is authorized to issue 40,000,000 shares
of common stock and 3,401,447 shares of preferred stock. In addition, on August
26, 1996 in connection with the sale of Series D preferred stock, the Company's
certificate of incorporation was amended to authorize the issuance of 3,601,447
shares of preferred stock. All of the accompanying financial statements have
been restated to reflect the reincorporation.
On December 13, 1996, the Company completed an initial public offering (the
"Offering") of 2,000,000 shares of its common stock. The offering price of all
shares sold in the Offering was $9.00 per share, resulting in gross proceeds of
$18.0 million and net proceeds (less the underwriters' discount and offering
expenses) of approximately $15.0 million. Upon completion of the offering, all
of the then outstanding preferred stocks were converted to common stock and the
Company amended its Articles of Incorporation and is authorized to issue
40,000,000 shares of common stock and 5,000,000 shares of preferred stock.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. The Company anticipates that its
existing available cash and cash equivalents and the related interest income
will not be adequate to satisfy its capital requirements through December 31,
1998. Management estimates that additional funding will be necessary to enable
the Company to fund its presently planned operations through the end of 1998.
Although the Company believes it has reasonable alternatives to meet the
financial needs of its operations, there can be no assurance that the requisite
fundings will be consummated in the necessary time frame or on terms that are
favorable to the Company. To fund the ongoing research, development and general
operating activities, the Company is dependent on raising additional funds from
the capital markets and corporate partners. In this regard, the Company is
presently in discussion with several companies about strategic alliances for the
deployment of the Interactive Messaging Platform. In addition to seeking capital
and strategic partners, management plans to address the cash flow used in
operations by reducing general and administrative expenditures through the
reduction of employee headcount and the consolidation of operating facilities
into smaller and lower cost facilities; reducing marketing expenditures through
the reduction of employee headcount and activities associated with the marketing
of FVIPS; and reducing research, development and engineering expenditures
through the elimination of further development of FVIPS and focusing the
Company's future efforts on IMP, thereby significantly reducing the cash used in
operating activities. Additionally, management plans to limit its expenditures
on capital assets and to negotiate with certain of its shareholders to convert
their debt into equity. Should the Company be unable to raise sufficient funds,
establish funding through strategic alliances, significantly reduce cash used in
its operations and convert certain of its debt to equity, it may be required to
file for bankruptcy.
F-7
<PAGE> 123
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of less than three months to be cash equivalents.
Short-Term Investment, Available-for-Sale
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Debt and Equity Securities," the Company's short-term
investment is classified as available-for-sale. Available-for-sale securities
consist of certificates of deposit with maturities greater than three months and
are stated at cost, as the difference between cost and fair value is immaterial.
Concentration of Credit Risk
Because the Company acts as an intermediary and facilitator for credit card
transactions, the Company is exposed to the credit risks associated with credit
card payment systems. These credit risks include returned transactions, merchant
fraud and transmission of erroneous information. Through December 31, 1997, the
Company has not incurred significant losses from these credit risks.
Furniture and Equipment
Furniture and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (three to five years) using the
straight-line method.
Organization and Other Costs
Organization and other costs are being amortized over five years.
Accumulated amortization at December 31, 1997 and 1996 amounted to $59,431 and
$31,264, respectively.
Asset Impairment
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS 121), effective January 1, 1996. SFAS 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. There was no effect on the financial statements from the adoption
of SFAS 121.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. As a result, deferred compensation is recorded
for the excess of the fair value of the stock on the date of the option grant,
over the exercise price of the option. The deferred compensation is amortized
over the vesting period of the option.
Income Taxes
On May 24, 1995, in conjunction with the issuance of Series A Preferred
Stock, the Company changed its status for federal and state income tax purposes
from an S Corporation (whereby the Corporation's operating
F-8
<PAGE> 124
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
gains and losses flowed through to the stockholders for tax purposes) to become
a C Corporation (whereby the Company is subject to federal and state income
taxes). The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109.
Revenue Recognition
First Virtual has four main sources of revenue: Internet payment system
(IPS), merchandising, interactive advertising development and consulting.
Internet payment system revenue consists of consumer and merchant registrations,
transaction revenue, Infohaus revenue and marketing revenue. Merchandising
revenue consists of sales generated from JUNO On-line and 1 Virtual Place
merchandise sales. Interactive advertising development consists of sales of
VTAGs. Consulting revenue consists of payments for Internet consulting services
provided.
Consumer registration fees and merchant registration fees are recognized
over a 12 month period. Also, the related direct costs of processing such
registrations and renewals are deferred and amortized over a 12-month period.
Consumer registration fees renew annually. Prior to July 1, 1996, revenues from
registration fees and related direct costs of processing registrations were
recognized in the month the consumer's or the merchandiser's registration fee
was processed and the VirtualPIN was issued. Transaction revenue and marketing
revenue are recognized when earned. InfoHaus revenue is recognized when it is
collected.
As part of processing certain transactions, the Company earns interest from
the time money is collected from consumers until the time payment is made to the
applicable merchants.
All other revenues are recognized upon delivery of goods or performance of
service.
Research and Development
Research and development costs are expensed in the period incurred.
Software Developments Costs
Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility of the software is
attained. No such costs have been capitalized to date.
Reclassification of Expenses
For the years ended December 31, 1996 and 1995, approximately $1,403,624
and $0 were reclassified as research, development and engineering expenses,
respectively, and approximately $265,900 and $123,375 were reclassified as cost
of revenues, respectively, which had previously been included in general and
administrative expenses. Such reclassification was done to be consistent with
current year presentation.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 128, Earnings Per Share, which is
effective for the fiscal periods ending December 15, 1997. SFAS 128 includes a
new computation for earnings per share and presentation of basic and diluted
earnings per share. The Company retroactively adopted SFAS 128 in the fourth
quarter of 1997. Upon adoption, all loss per share amounts for all periods have
been represented, and where appropriate, restated to conform to the SFAS 128
requirements.
The Company's net loss per share calculations are based upon the weighted
average number of shares of common stock outstanding.
F-9
<PAGE> 125
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
Reporting Comprehensive Income and SFAS 131, Segment Information. Both of these
standards are effective for the fiscal years beginning after December 15, 1997.
SFAS 130 requires that all components of comprehensive income, including net
income, be reported in the financial statements in the period in which they are
recognized. The Company's comprehensive loss will not be materially different
than net loss as reported. SFAS 131 amends the requirements for public
enterprises to report financial and descriptive information about its reportable
operating segments. The Company currently operates in one business and operating
segment and does not believe adoption of this standard will have a material
impact on the Company's financial statements as reported.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Furniture, equipment and software.................. $ 3,378,530 $2,481,307
Less accumulated depreciation...................... (1,519,482) (516,672)
----------- ----------
$ 1,859,048 $1,964,635
=========== ==========
</TABLE>
3. 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 has an unsecured line of credit from a stockholder
which allows for maximum borrowings of $400,000. The borrowings plus interest at
8% are 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 December 31, 1997, $1,200,000 has been drawn against these lines of credit.
See further discussion at Note 10.
The stockholders who have provided these lines of credit have agreed to
subordinate the debt to future institutional financing. Pursuant to these
agreements, no dividends will be paid by the Company until the borrowings are
paid in full and the lines of credit have been terminated.
On August 20, 1996, the Company entered into an agreement with the Series B
stockholder for the waiver of a previous agreement to use the Series B
stockholder as an exclusive services provider. In return for the waiver, the
Company agreed to pay the Series B stockholder facility fees totaling $500,000
and transaction surcharges of no less than $500,000 during the 40-month period
beginning September 1, 1996, dependent upon the number of transactions processed
through service providers other than the Series B stockholder. The Company
charged the $1,000,000 associated with this agreement to general and
administrative during 1996. At December 31, 1997, the Company had an outstanding
balance of $492,500 due to this stockholder. There is no interest being charged
on the outstanding balance.
F-10
<PAGE> 126
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The Company's credit card transaction services are provided by Paymentech,
Inc., a stockholder. Fees for these services amounted to $151,284, $123,622 and
$28,198 for the years ended December 31, 1997, 1996 and 1995, respectively.
Certain marketing and technology consulting services were provided by a
company whose president was a director of the Company. No services were provided
during the years ended December 31, 1997 and 1996. Services amounted to $132,521
for the year ended December 31, 1995.
4. NOTE PAYABLE
On February 27, 1996, the Company entered into a promissory note to borrow
up to $500,000 at the prime rate plus 2% from a financial institution. The loan
was repaid in full in April 1996.
5. COMMITMENTS
Leases
The Company leases its office facilities and certain equipment under
non-cancelable operating lease agreements. The facility lease requires the
Company to pay standard common area maintenance fees and is subject to certain
minimum escalation provisions. Rent expense for all operating leases was
approximately $523,214, $210,000 and $38,400 for the years ended December 31,
1997, 1996 and 1995, respectively.
Future minimum operating lease payments as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................. $ 614,641
1999............................................. 581,265
2000............................................. 101,867
----------
$1,297,773
==========
</TABLE>
Information Service Agreement
In October 1994, the Company entered into a technology service agreement
with another company to receive information technology services from the other
company beginning in 1994. Minimum monthly payments of $5,000 for services
commenced upon full system implementation. The Company paid an implementation
charge of $150,000 which is being amortized over three years. Accumulated
amortization at December 31, 1997 and 1996 amounted to $130,155 and $90,774,
respectively. In June 1996, this agreement was amended, reducing the information
technology services to be received, and as a result, effective July 1, 1996,
minimum monthly charges no longer apply.
6. 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 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
executive officers of the Company to vote their shares for the approval of the
private placement. As of March 20, 1998, 250 shares of the Series A convertible
preferred
F-11
<PAGE> 127
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
stock have been converted into 953,269 shares of the Company's common stock. The
remaining 750 shares of Series A convertible preferred stock will remain
classified as mezzanine financing until they are converted 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.
7. STOCKHOLDERS' EQUITY
Preferred Stock
In May 1995, the Company sold 551,500 shares of Series A preferred stock at
$1.76 per share. An additional 142,044 shares were issued at $1.76 per share to
retire certain notes payable in December 1995. In December 1995, the Company
sold 783,945 shares of Series B preferred stock at $3.189 per share.
On July 3, 1996, the Company sold 130,952 shares of Series C preferred
stock at $15.00 per share and 107,144 shares of common stock at $5.00 per share
for total proceeds of approximately $2,500,000.
In connection with the sale of the Series C preferred stock, the Company
issued a performance warrant to purchase 33,333 shares of the Company's common
stock at an exercise price of $15 per share. This warrant was extended to July
23, 1997 from July 3, 1997 in exchange for $50,000. The warrant expired on July
23, 1997.
On August 26, 1996, the Company sold 200,000 shares of Series D preferred
stock at $15.00 per share for total proceeds of approximately $3,000,000. In
connection with the sale of Series D preferred stock, the Company issued a
warrant to purchase shares of the Company's common stock. The number of shares
and exercise price are contingent upon the Series D stockholder achieving
certain performance criteria with respect to the issuance of VirtualPINs to its
customer base as outlined in the following schedule:
<TABLE>
<CAPTION>
INCREMENTAL EXERCISE PRICE
DEADLINE FOR ACHIEVING PERFORMANCE CRITERIA SHARES PER SHARE
- ------------------------------------------------------ ----------- --------------
<S> <C> <C>
May 31, 1997.......................................... 375,000 $5.00
August 31, 1997....................................... 375,000 3.33
October 31, 1997...................................... 375,000 2.50
December 30, 1997..................................... 375,000 2.23
</TABLE>
The Company and First Data agreed to an amendment to the First Data Warrant
in March 1997. Pursuant to such amendment, the deadlines for First Data securing
registration of VirtualPINs (on which the exercisability of First Data Warrant
is contingent) were altered, and the range of exercise prices for the First Data
Warrant was reduced to $1.50 to $4.50 per share and the deadline for achieving
the performance criteria was changed to September 1997.
This performance warrant expired on September 29, 1997.
Total issuance costs for preferred stock issued prior to the Company's IPO
amounted to $351,645 and $179,438 at December 31, 1996 and December 31, 1995,
respectively.
On December 13, 1996, all outstanding preferred stock was converted into
common stock concurrent with the closing of the Company's underwritten initial
public offering. As a result of certain anti-dilution
F-12
<PAGE> 128
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
adjustments, the 2,273,441 shares of preferred stock outstanding prior to the
offering were converted to 2,333,317 shares of common stock.
Warrants
In connection with a sale of Series B preferred stock in December 1995 to a
financial institution, the Company issued warrants to purchase shares of Series
A and Series B preferred stock. In April 1996, the Series B preferred
stockholder partially exercised this warrant by purchasing 465,000 shares of
Series B preferred stock at $3.189 per share. In addition, the Series B
preferred stockholder paid the Company $3,017,115 for warrants to purchase
852,272 shares of Series A preferred stock and 475,734 shares of Series B
preferred stock at $0.01 per share. These warrants are currently exercisable as
to common stock of the same number of shares and will expire on March 4, 2001.
The Company received total proceeds of approximately $4.5 million in connection
with this transaction. Furthermore, all of the unexercised warrants originally
issued on December 22, 1995 have been canceled.
In connection with a consulting agreement, an incentive warrant to purchase
300,000 shares of common stock at $5.63 per share was issued on September 24,
1997 to a third party. When the third party receives $10 million of net sales
through the use of technology and services provided by the Company, 100,000
shares of common stock can be issued under this warrant. An additional 100,000
shares of common stock can be issued under this warrant when the third party
receives $25 million of net sales through the use of technology and services
provided by the Company and the remaining 100,000 shares of common stock can be
issued under this warrant when the third party receives $50 million of net sales
through the use of technology and services provided by the Company. This warrant
expires on December 20, 2003.
Under a certain consulting agreement, dated September 8, 1997, a warrant to
purchase 65,000 shares of common stock at $5.63 per share was granted to a third
party as payment for consulting services rendered. Under the terms of the
warrant agreement, 20,000 shares of common stock became available to be issued
when the third party completed its obligation to the Company in September 1997
(as defined in the agreement), with the remaining 45,000 common shares to be
issued under this warrant when the third party delivers to the Company, two
catalog merchants who execute agreements with the Company in regards to either
licensing of VirtualPINS or Interactive Messaging services. This warrant expires
on December 30, 2002. The Company estimated the fair value of the 20,000 common
shares issued under this warrant in September 1997 using the Black-Scholes
option pricing model. However, no value was allocated to the warrant as the
estimated fair value was nominal.
F-13
<PAGE> 129
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Stock Option Plan
The Company's 1994 Incentive and Non-Statutory Stock Option Plan (1994
Plan), under which options to purchase 482,300 shares of common stock were
granted, was replaced with the 1995 Stock Plan (1995 Plan). Under the 1995 Plan,
the Company is authorized to issue up to 3,000,000 common shares to officers,
employees, directors and certain other individuals providing services to the
Company. Options granted under the 1995 Plan generally vest over four years and
are exercisable for a period of up to ten years from the date of grant.
Incentive stock options are granted at prices which approximate the fair value
of the shares at the date of grant as determined by the board of directors. The
following table summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1994............................. 288,875 $0.04
Options granted........................................ 179,875 $0.07
---------
Balance at December 31, 1995............................. 468,750 $0.05
Options granted........................................ 1,327,645 $6.43
Options exercised...................................... (19,975) $0.13
Options canceled....................................... (33,250) $4.94
---------
Balance at December 31, 1996............................. 1,743,170 $4.82
Options granted........................................ 1,115,600 $4.54
Options exercised...................................... (85,690) $0.32
Options canceled....................................... (504,987) $7.49
---------
Balance at December 31, 1997............................. 2,268,093 $4.14
=========
</TABLE>
As of December 31, 1997, options to purchase 1,046,362 shares are
exercisable under the 1994 and 1995 plan and 1,108,542 shares are available for
future grant under the 1995 Plan.
The weighted average fair value of the options granted during 1997, 1996
and 1995 were $4.66, $2.83 and $0.13, respectively.
Exercise prices and weighted average remaining contractual life for the
options outstanding under the 1994 Plan and 1995 Plan as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.04 - $ 0.32 794,184 7.04 $ 0.12 670,471 $ 0.11
1.00 - 5.00 870,280 9.54 3.97 41,106 2.91
6.00 - 7.50 70,000 9.43 6.59 12,000 6.38
9.00 - 10.50 533,629 8.71 10.07 322,785 10.23
--------- ---------
2,268,093 1,046,362
========= =========
</TABLE>
Some of these options were granted at a per share value below the then
current fair market value of such shares. The Company recorded deferred
compensation expense for the difference between the exercise price and the fair
value of the Company's common stock for options granted during 1997 and 1996.
Deferred compensation expense aggregates to $128,888 and $50,567 for the years
ended December 31, 1997 and 1996, respectively.
Pursuant to the terms of the December 22, 1995 Series B Preferred Stock
Purchase Agreement, on April 11, 1996, the Company's board of directors granted
options to purchase 475,000 shares of common stock at $6.30 per share to an
officer and director of the Company. The options vested immediately and expire
on
F-14
<PAGE> 130
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
April 11, 2006. Two directors of the Company were granted options to purchase
225,000 and 100,000 shares under the same terms. In addition, the board of
directors granted options to purchase 200,000 shares of common stock at $6.30
per share to two key employees of the Company. The options to these two key
employees vest on June 30, 1998 provided that each remains an employee of the
Company at that date and expire in ten years. These options to purchase
1,000,000 shares were not granted under the 1995 Plan. No deferred compensation
was deemed appropriate for the April 1996 option grants. The fair value of
common stock was determined by an independent valuation.
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for the 1997
options was estimated at the date of grant, using the Black-Scholes option
pricing model, with the following assumptions: risk-free interest rates of
5.41%; dividend yields of 0%; and a weighted-average expected life of the option
of five years with a volatility factor of .50. The fair value for the 1996
options that were granted after the Company filed its initial filing of the
registration statement relating to the IPO, was estimated at the date of grant,
using the Black-Scholes option pricing model, with the following assumptions:
risk-free interest rates of 6.18%; dividend yields of 0%; and a weighted-average
expected life of the option of five years with a volatility factor of .75. The
fair value for the 1996 options granted before the Company filed its initial
filing of the registration statement relating to the IPO and the fair value of
the 1995 options, were estimated at the date of grant, using the "minimum value"
method for option pricing through the initial filing of the registration
statement relating to the IPO, with the following weighted-average assumptions:
risk-free interest rates of 6%; dividend yields of 0%; and a weighted-average
expected life of the option of seven years. The volatility factor was based upon
the Company's competitive situation, marketing dynamics and competitive
technology inherent in the Internet.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying Statement 123 for pro forma disclosure purposes are not likely to be
representative of the effects on pro forma net income (loss) in the future years
because they do not take into consideration pro forma compensation expense
related to grants made prior to 1995. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net loss applicable to common
shares.................................. $(17,889,405) $(11,186,398) $(2,276,119)
Pro forma net loss per common share, basic
and diluted............................. $ (2.02) $ (2.44) $ (0.55)
</TABLE>
Employee Stock Purchase Plan
In 1996, the Company adopted an Employee Stock Purchase Plan (the "ESPP"),
whereby employees, at their option, can purchase shares of Company common stock.
This is done through a payroll deduction at the lower of 85% of the fair market
value on the first day of the ESPP offering period or the end of each six-month
period. The ESPP expires at the earlier of December 31, 2006 or the date on
which all shares available for issuance have been sold. The Company has reserved
100,000 shares of common stock for issuance under the
F-15
<PAGE> 131
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
ESPP. At December 31, 1997 employees have purchased 22,160 shares through the
ESPP and 77,840 shares are available for future purchases.
Shares Reserved for Future Issuance
As of December 31, 1997, the Company has reserved shares of common stock
for future issuance as follows:
<TABLE>
<S> <C>
Stock options............................................... 3,376,635
Warrants.................................................... 2,543,006
Series A convertible preferred stock........................ 4,608,294
Employee stock purchase plan................................ 77,840
----------
10,605,775
==========
</TABLE>
8. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1997 and 1996 are shown below. Valuation allowances of $11,750,000 and
$5,063,000 have been recognized for 1997 and 1996, respectively, to offset the
net deferred tax assets, as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating losses carryforwards............. $ 10,280,000 $ 4,519,000
R & D credit................................... 790,000 --
Other.......................................... 680,000 544,000
------------ -----------
11,750,000 5,063,000
Valuation allowance for deferred tax assets...... (11,750,000) (5,063,000)
------------ -----------
Net deferred tax assets.......................... $ -- $ --
============ ===========
</TABLE>
At December 31, 1997, the Company has federal and California tax net
operating loss carryforwards of approximately $26,730,000 and $16,100,000. These
federal and state carryforwards will begin to expire in 2010 and 2000,
respectively, unless previously utilized. The Company also has federal and state
research credit carryforwards of approximately $612,000 and $279,000,
respectively, which will begin expiring in 2010, unless previously utilized.
Pursuant to Internal Revenue Code Section 382 and 383, use of the Company's
net operating loss and tax credit carryforwards may be significantly limited if
a cumulative change in ownership of more than 50% occurs within a three year
period.
9. 401(K) PROFIT SHARING PLAN
The Company maintains a 401(k) profit sharing plan which allows
substantially all employees to contribute up to 15% of their salary, subject to
annual limitations. The Board of Directors, may at its sole discretion, approve
Company contributions. To date, there have been no Company contributions under
the plan.
10. SUBSEQUENT EVENT
On February 5, 1998, two stockholders filed civil actions against the
Company seeking to recover the principal and interest due under the unsecured
lines of credit described in Note 3. The total amount of principal and interest
is approximately $1.5 million which is reflected as current liabilities in the
financial statements. Subsequently, on February 20, 1998, $1.5 million of the
Company's available cash was attached.
F-16
<PAGE> 132
FIRST VIRTUAL HOLDINGS INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,301,489 $ 6,331,059
Accounts receivable....................................... 64,060 207,985
Prepaid expenses and other................................ 246,136 418,615
------------ ------------
Total current assets........................................ 6,611,685 6,957,659
Furniture, equipment and software, net...................... 1,533,383 1,859,048
Information technology, net................................. 6,405 19,845
Organization and other costs, net........................... 64,061 77,630
Deposits and other.......................................... 80,557 133,907
------------ ------------
Total assets................................................ $ 8,296,091 $ 9,048,089
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,157,784 $ 1,440,224
Accrued compensation and related liabilities.............. 176,513 370,741
Accrued interest.......................................... -- 289,903
Deferred revenue.......................................... 184,536 537,790
Current portion, due to stockholders...................... 270,000 1,530,000
Other accrued liabilities................................. 900,070 601,300
------------ ------------
Total current liabilities................................... 2,688,903 4,769,958
Amount due to stockholder................................... 125,000 162,500
Series A convertible preferred stock........................ -- 4,687,500
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.001 par value;
1,000 shares authorized; 0 and 1,000 shares outstanding
at June 30, 1998 and December 31, 1997, respectively;
liquidation preference of $5,000,000................... -- 1
Preferred stock, 5,000,000 shares authorized, none
outstanding at June 30, 1998 and December 31, 1997..... -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized, 31,215,599 and 8,903,855 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively........................................... 31,216 8,904
Additional paid-in-capital................................ 41,869,894 26,300,228
Warrants.................................................. 1,080,828 3,017,115
Deferred compensation..................................... (65,694) (155,235)
Accumulated deficit....................................... (37,434,056) (29,742,882)
------------ ------------
Total stockholders' equity (deficit)........................ 5,482,188 (571,869)
------------ ------------
Total liabilities and stockholders' equity (deficit)........ $ 8,296,091 $ 9,048,089
============ ============
</TABLE>
See accompanying notes.
F-17
<PAGE> 133
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues.............................. $ 217,625 $ 393,067 $ 498,294 $ 785,984
Cost of Revenues...................... 16,037 60,471 34,637 171,985
----------- ----------- ----------- -----------
Gross Profit.......................... 201,588 332,596 463,657 613,999
Operating Expenses:
Marketing and sales................. 420,965 1,122,034 1,213,499 2,171,371
Research, development and
engineering...................... 1,252,689 1,606,815 2,896,745 3,058,821
General and administrative.......... 1,209,657 1,409,661 2,230,721 2,573,242
Restructuring charge................ 812,166 -- 812,166 --
Depreciation and amortization....... 440,812 289,034 840,075 547,033
----------- ----------- ----------- -----------
Total operating expenses.............. 4,136,289 4,427,544 7,993,206 8,350,467
----------- ----------- ----------- -----------
Loss from operations.................. (3,934,701) (4,094,948) (7,529,549) (7,736,468)
Interest income....................... 10,864 156,792 55,761 349,683
Interest expense...................... (37,073) (24,000) (64,258) (48,944)
----------- ----------- ----------- -----------
Net loss.............................. (3,960,910) (3,962,156) (7,538,046) (7,435,729)
Preferred stock dividend.............. (65,624) -- (153,126) --
----------- ----------- ----------- -----------
Net loss applicable to common
shares.............................. $(4,026,534) $(3,962,156) $(7,691,172) $(7,435,729)
Net loss per share, basic and
diluted............................. $ (0.32) $ (0.45) $ (0.69) $ (0.84)
Shares used in per share computation,
basic and diluted................... 12,763,183 8,811,514 11,183,418 8,803,463
</TABLE>
See accompanying notes.
F-18
<PAGE> 134
FIRST VIRTUAL HOLDINGS INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities
Net loss.................................................... $(7,538,046) $(7,435,729)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............................. 840,075 547,033
Loss on disposal of assets................................ 19,146 --
Common stock issued for services.......................... 42,109 --
Compensation expense recognized for stock options......... 405,718 52,138
Changes in operating assets and liabilities:
Accounts receivable.................................... 143,925 (13,883)
Prepaid expenses and other............................. 172,479 (4,245)
Deposits and other..................................... 53,350 (109,894)
Accounts payable....................................... (282,440) (742,234)
Accrued compensation and related liabilities........... (194,228) (141,818)
Deferred revenue....................................... (224,516) 514,861
Accrued interest....................................... -- 48,000
Amount paid to stockholder............................. (97,500) (75,000)
Other accrued liabilities.............................. 170,035 (390,366)
----------- -----------
Net cash used in operating activities....................... (6,489,893) (7,751,137)
Investing Activities
Additions to furniture and equipment........................ (263,427) (528,911)
Proceeds from sale of fixed assets.......................... 14,738 --
Maturity of short-term investment........................... -- 200,000
----------- -----------
Net cash used in investing activities....................... (248,689) (328,911)
Financing Activities
Proceeds from issuance of common stock, net................. 6,700,489 48,673
Proceeds from the issuance of warrants...................... 8,523 --
Proceeds from SOFTBANK loan................................. 1,411,578 --
Repayment of SOFTBANK loan.................................. (1,411,578) --
----------- -----------
Net cash provided by financing activities................... 6,709,012 48,673
Net decrease in cash and cash equivalents................... (29,570) (8,031,375)
----------- -----------
Cash and cash equivalents at the beginning of period........ 6,331,059 17,127,971
----------- -----------
Cash and cash equivalents at the end of period.............. $ 6,301,489 $ 9,096,596
=========== ===========
</TABLE>
See accompanying notes.
F-19
<PAGE> 135
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim unaudited financial statements included herein have been
prepared by First Virtual Holdings Incorporated ("First Virtual" or the
"Company"), pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Accordingly, they do not include all the information and
disclosures required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended December 31,
1997 included in the Company's Annual Report on Form 10-K. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the financial position of the Company as of
June 30, 1998 and the results of operations and the changes in cash flows for
the three month and six month periods ended June 30, 1998 and 1997 have been
included. The results of operations for the interim period ended June 30, 1998
are not necessarily indicative of the results which may be reported for any
other interim period or for the year ended December 31, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
has adopted this Statement effective January 1, 1998, and has no components of
comprehensive income to report.
2. SOFTBANK AND E*TRADE INVESTMENT
On June 23, 1998, at the Company's Annual Meeting of Stockholders ("Annual
Meeting"), the Company's stockholders approved an investment in the Company by
SOFTBANK Holdings Inc., SOFTBANK Technology Ventures IV, L.P. (together
"SOFTBANK") and E*Trade Group Inc. ("E*Trade").
The Company issued approximately 9.8 million shares of common stock to
SOFTBANK and 833,333 shares of common stock to E*Trade for approximate net
proceeds of $6.6 million. In addition, SOFTBANK purchased $5.8 million of the
Company's outstanding debt and preferred stock, which were subsequently
converted into approximately 8.5 million shares of the Company's common stock.
The $5.8 million amount includes a settlement to two stockholders of the Company
who, on February 5, 1998 had filed civil actions against the Company seeking to
recover the principal and interest due under unsecured lines of credit. The
total amount of principal and interest paid out as settlement was approximately
$1.5 million. Also included in the transaction was the purchase of the 655
remaining outstanding shares of the Series A convertible preferred stock. The
original Series A convertible preferred stockholders were granted a reduction in
the exercise price of outstanding warrants to purchase up to 850,000 shares of
common stock from $5.75 per share to $1.00 per share. Such warrants carry
restrictions as to their exercisability. After giving effect to these
transactions and the private purchase of 1.2 million shares of the Company's
common stock from two stockholders, SOFTBANK owns approximately 19.5 million
shares of the Company's common stock and holds a majority of the votes on the
Board of Directors of the Company that was elected at the Annual Meeting.
3. RESTRUCTURING CHARGE
In the second quarter 1998, the Company took further steps to focus its
efforts on the Interactive Messaging Platform ("IMP"). In doing so, the Company
incurred expenses of approximately $545,000 for severance compensation packages
related to a reduction in staff and consultants, booked expenses of
approximately $170,000 related to the shut down of the First Virtual Internet
Payment System ("FVIPS") and incurred expenses of approximately $95,500 related
to moving the corporate office to less expensive office space.
F-20
<PAGE> 136
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. SUBSEQUENT EVENTS
On July 13, 1998, First Virtual announced that it entered into a
non-binding letter of intent with Email Publishing Inc. ("EMP") to acquire 100%
of the outstanding stock of EMP. Email Publishing is a leading provider of
message delivery and email subscription management services to publishers and
other corporate customers. The transaction, if consummated, will involve the
exchange of approximately six million First Virtual common shares for the
outstanding stock of EMP. The transaction is contingent upon various factors,
including approval by the stockholders of First Virtual and EMP, as well as
other customary matters.
On July 20, 1998, First Virtual announced that it entered into a
cooperative agreement with CyberCash, Inc. ("CyberCash") to offer all of First
Virtual's merchants and consumers a migration path to CyberCash's CashRegister
Payment Service. Pursuant to the agreement, CyberCash will provide Internet
payment solutions to First Virtual's merchants and consumers. Additionally,
First Virtual's IMP will be CyberCash's preferred solution for interactive
messaging and First Virtual will incorporate CyberCash's payment systems into
the Company's IMP. First Virtual ceased its Internet payment services in August
1998.
F-21
<PAGE> 137
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of EMAIL PUBLISHING INC.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of EMAIL PUBLISHING INC. at June 30,
1997 and 1998, and the results of its operations and its cash flows for the
period from September 11, 1996 (inception) through June 30, 1997 and the year
ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Broomfield, Colorado
August 13, 1998
F-22
<PAGE> 138
EMAIL PUBLISHING INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
--------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 144,023 $ 62,273
Accounts receivable, net of allowance for doubtful
accounts of $874 and $7,926 in 1997 and 1998........... 34,040 138,895
Prepaid expenses.......................................... 4,513 9,989
--------- ----------
Total current assets.............................. 182,576 211,157
Property and equipment, net................................. 31,015 220,552
Other noncurrent assets..................................... 490 10,620
--------- ----------
Total assets...................................... $ 214,081 $ 442,329
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,602 $ 60,911
Accrued salaries.......................................... 10,000 15,000
Accrued vacation.......................................... 2,777 15,705
Current portion of long-term debt......................... 47,350
Current portion of capital lease obligations.............. 6,325 36,141
--------- ----------
Total current liabilities......................... 21,704 175,107
Long-term debt, net of current portion...................... -- 42,615
Capital lease obligations, net of current portion........... 12,103 46,225
--------- ----------
Total liabilities................................. 33,807 263,947
Commitments and contingencies (Note 6)
Stockholders' Equity:
Series A preferred stock; $.001 par value; 400,000 shares
authorized, issued and outstanding at June 30, 1997 and
1998................................................... 400 400
Series A-1 preferred stock; $.001 par value; 350,000
shares authorized; 232,558 shares issued and
outstanding at June 30, 1997 and 1998.................. 232 232
Common stock; $.001 par value; 3,000,000 shares
authorized; 1,877,668 and 1,896,753 shares issued and
outstanding at June 30, 1997 and 1998, respectively.... 1,878 1,897
Additional paid-in capital................................ 460,397 1,017,735
Deferred compensation..................................... (42,338) (448,131)
Accumulated deficit....................................... (240,295) (393,751)
--------- ----------
Total stockholders' equity........................ 180,274 178,382
--------- ----------
Total liabilities and stockholders' equity........ $ 214,081 $ 442,329
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 139
EMAIL PUBLISHING INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 11,
1996
(INCEPTION) YEAR ENDED
THROUGH JUNE 30, JUNE 30,
1997 1998
---------------- ----------
<S> <C> <C>
Revenues.................................................... $ 80,347 $ 864,030
Operating expenses:
Sales and marketing....................................... 19,237 271,772
Research and development.................................. 46,769 125,782
General and administrative................................ 258,611 611,911
---------- ----------
Total operating expenses.......................... 324,617 1,009,465
---------- ----------
Loss from operations........................................ (244,270) (145,435)
---------- ----------
Other income (expense):
Interest expense.......................................... (1,025) (11,710)
Interest income........................................... -- 889
Miscellaneous income...................................... 5,000 2,800
---------- ----------
Total other income (expense)...................... 3,975 (8,021)
---------- ----------
Net loss.................................................... $ (240,295) $ (153,456)
========== ==========
Basic net loss per common share............................. $ (.13) $ (.08)
Basic weighted-average common shares outstanding............ 1,871,445 1,887,012
Diluted net loss per common share........................... $ (.13) $ (.08)
Diluted weighted-average common shares outstanding.......... 1,871,445 1,887,012
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 140
EMAIL PUBLISHING INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------- ------------------ PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------- ------ --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 11, 1996
(inception)................... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of Series A preferred
stock......................... 400,000 400 199,600 200,000
Issuance of Series A-1 preferred
stock......................... 232,558 232 199,768 200,000
Issuance of common stock........ 1,867,000 1,867 16,802 18,669
Exercise of stock options....... 10,668 11 523 534
Deferred compensation........... 43,704 (43,704)
Amortization of deferred
compensation.................. 1,366 1,366
Net loss........................ (240,295) (240,295)
------- ---- --------- ------ ---------- --------- --------- ---------
Balance, June 30, 1997.......... 632,558 632 1,877,668 1,878 460,397 (42,338) (240,295) 180,274
Exercise of stock options....... 19,085 19 1,161 1,180
Deferred compensation........... 488,822 (488,822)
Amortization of deferred
compensation.................. 83,029 83,029
Issuance of Series A-1 preferred
warrants...................... 67,355 67,355
Net loss........................ (153,456) (153,456)
------- ---- --------- ------ ---------- --------- --------- ---------
Balance, June 30, 1998.......... 632,558 $632 1,896,753 $1,897 $1,017,735 $(448,131) $(393,751) $ 178,382
======= ==== ========= ====== ========== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 141
EMAIL PUBLISHING INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 11,
1996
(INCEPTION)
THROUGH YEAR ENDED
JUNE 30, JUNE 30,
1997 1998
------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(240,295) $(153,456)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 4,038 29,158
Amortization of deferred compensation.................. 1,366 83,029
Amortization of debt discount.......................... 1,292
Provision for doubtful accounts........................ 874 7,052
Changes in:
Accounts receivable.................................. (34,914) (111,907)
Prepaid expenses..................................... (4,513) (5,476)
Other noncurrent assets.............................. (490) (10,228)
Accounts payable..................................... 2,602 58,309
Accrued salaries..................................... 10,000 5,000
Accrued vacation..................................... 2,777 12,928
--------- ---------
Net cash used in operating activities....................... (258,555) (84,299)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (13,494) (111,032)
--------- ---------
Net cash used in investing activities....................... (13,494) (111,032)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A preferred stock.......... 200,000 --
Proceeds from issuance of Series A-1 preferred stock........ 200,000 --
Proceeds from issuance of common stock...................... 19,203 1,180
Proceeds from notes payable................................. -- 150,000
Payments on notes payable................................... -- (6,972)
Payments on capital lease obligations....................... (3,131) (30,627)
--------- ---------
Net cash provided by financing activities................... 416,072 113,581
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 144,023 (81,750)
Cash and cash equivalents, beginning of period.............. -- 144,023
--------- ---------
Cash and cash equivalents, end of period.................... $ 144,023 $ 62,373
========= =========
Supplemental Disclosure of other Cash and Non-cash Financing
Activities
Interest paid............................................... $ 1,025 $ 11,710
Acquisition of equipment under capital leases............... $ 21,559 $ 94,565
Acquisition of equipment with note payable.................. $ -- $ 13,000
Issuance of warrants with debt.............................. $ -- $ 67,355
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 142
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Email Publishing, Inc. (the "Company") was incorporated on September 11,
1996 in the State of Delaware to develop, market and support large-scale
personalized messaging services to periodical publishers and large corporations.
REVENUE RECOGNITION
Revenue from service contracts is recognized monthly over the period of the
contract.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets
(generally three years). Repair and maintenance costs are charged to expense
when incurred.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all
highly-liquid investments purchased with an original maturity of three months or
less to be cash equivalents. All cash equivalents are carried at cost, which
approximates fair value.
STOCK OPTIONS
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123") permits the use of either a
fair-value-based method or the method defined in Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25") to account
for stock-based compensation arrangements. The Company has elected to determine
the value of stock-based compensation arrangements under the provisions of APB
No. 25, and has included the pro forma disclosures required under SFAS No. 123
in Note 4.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
Statement of Financial Accounting Standard No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" requires the
capitalization of certain software development costs once technological
feasibility is established. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenue to total projected product revenue, whichever is greater. Software
development costs qualifying for capitalization have been insignificant and
therefore, the Company has not capitalized any software development costs.
INCOME TAXES
Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying balance sheet, as well as
operating loss carryforwards. Deferred tax assets are reduced by a valuation
allowance if current evidence indicates that it is considered likely that these
benefits will not be realized.
F-27
<PAGE> 143
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, prepaid expenses and other current assets, accounts payable
and accrued liabilities and capital lease obligations. The carrying amounts of
financial instruments approximate fair value due to their short maturities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standard No. 128 "Earnings per Share" was
issued in February of 1997. This pronouncement establishes new standards for
computing and presenting earnings per share ("EPS") on a basis that is more
comparable to international standards and provides for the presentation of basic
and diluted EPS. Basic EPS is computed by dividing net income by the
weighted-average number of shares outstanding during the period. Diluted EPS is
computed by using the weighted-average number of shares outstanding plus all
dilutive potential common shares outstanding. The convertible preferred shares,
options and warrants were not included in the computation of diluted EPS for the
respective periods because they were anti-dilutive due to the net loss for all
periods presented.
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements were reclassified to
conform to current year presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of June 30:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Office and communications equipment......................... $27,826 $193,850
Computer software........................................... 7,227 31,806
Furniture and fixtures...................................... 2,666
Leasehold improvements...................................... 25,328
------- --------
35,053 253,650
Less: accumulated depreciation.............................. (4,038) (33,098)
------- --------
$31,015 $220,552
======= ========
</TABLE>
F-28
<PAGE> 144
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) LONG-TERM DEBT
Long-term debt consisted of the following as of June 30:
<TABLE>
<CAPTION>
1997 1998
----------- --------
<S> <C> <C>
Note payable to bank; interest at prime plus 1% (9.5%);
payable in monthly installments of $6,250 through June
2000; secured by business assets.......................... $ -- $150,000
Less unamortized discount................................... (66,063)
----------- --------
83,937
Note payable to company; interest at 11.76%; payable in
monthly installments of $703 through March 1999; secured
by equipment.............................................. 6,028
----------- --------
89,965
Less current portion........................................ (47,350)
----------- --------
$ -- $ 42,615
=========== ========
</TABLE>
Future maturities of long-term debt at June 30, 1998, are as follows:
<TABLE>
<S> <C>
1999............................................... $47,350
2000............................................... 42,615
-------
$89,965
=======
</TABLE>
On June 16, 1998, the Company executed a bank loan agreement of $150,000,
and issued 11,627 detachable warrants. Each warrant entitles the holder to
purchase one share of Series A-1 Preferred stock at $.86 at any time between
issuance and June 30, 2003.
(4) PREFERRED STOCK
Each share of preferred stock is convertible into shares of common stock,
at anytime, based on the conversion rate, at the option of the holder.
Additionally, if the Company completes an initial public offering of its common
stock in which the price is at least $5 per share, and gross proceeds are at
least $10,000,000, the preferred stock will automatically convert into shares of
common stock. The conversion rate is the original preferred stock issue price
plus any declared but unpaid dividends divided by the original preferred stock
issue price, which is subject to future adjustment upon certain events taking
place. As of June 30, 1997 and 1998, the Company has reserved 632,558 shares of
common stock for issuance upon conversion of the preferred stock.
In the event of liquidation, dissolution or winding up of the Company, the
holders of preferred stock will be entitled to be repaid prior and in preference
to any payments to common stockholders. The payments shall be an amount per
share equal to the investment price plus declared but unpaid dividends. As of
June 30, 1997, the liquidation price of the preferred stock is the original
preferred stock issue price per share of $0.50 for Series A preferred and $0.86
for Series A-1 preferred, or $400,000 in total.
(5) STOCK OPTIONS AND WARRANTS
The Company maintains a stock option plan (the "Plan") which provides for
the grant of incentive stock options to directors, key employees, and
consultants to purchase common stock of the Company. The Board of Directors has
reserved 400,000 shares of common stock for issuance under the Plan. The vesting
period is determined by the Board of Directors and is generally four years for
directors and key employees and options granted to consultants for services
rendered vest on the date of grant. The options expire ten years after the date
of grant.
F-29
<PAGE> 145
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity for the period from
September 11, 1996 (inception) through June 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at September 11, 1996........................... -- $ --
Granted................................................... 98,675 .05
Exercised................................................. (10,668) .05
Forfeited.................................................
------- ----
Outstanding at June 30, 1997................................ 88,007 .05
------- ----
Granted................................................... 103,500 .12
Exercised................................................. (19,085) .06
Forfeited.................................................
------- ----
Outstanding at June 30, 1998................................ 172,422 $.09
======= ====
Vested at June 30, 1997..................................... 2,667 $.05
======= ====
Vested at June 30, 1998..................................... 26,250 $.10
======= ====
</TABLE>
The exercise price of all options outstanding at June 30, 1998 range from
$.05 to $.15. The weighted-average remaining contractual life of common stock
options outstanding at June 30, 1998 is 9.31 years. There are 189,825 options
available for grant at June 30, 1998.
Had the Company recognized compensation cost for options granted to
employees and directors based on the fair value of the options granted as of the
grant date as prescribed, net loss would have increased by an immaterial amount.
The range of weighted-average grant date fair values of common stock
options granted during the period from September 11, 1996 (inception) through
June 30, 1997 and the year ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
1997 WEIGHTED-AVERAGE 1998 WEIGHTED-AVERAGE
SHARES GRANT DATE FAIR VALUE SHARES GRANT DATE FAIR VALUE
- ------ --------------------- ------ ---------------------
<S> <C> <C> <C>
53,340 $0.01 36,500 $3.70
32,000 $1.38 8,000 $3.74
13,335 $0.02 59,000 $5.54
</TABLE>
In accordance with the guidance provided under SFAS 123, fair values are
based on minimum values. The fair value of each option grant to directors or key
employees is estimated on the date of grant using a Black-Scholes-type
option-pricing model with the following weighted-average assumptions used for
grants in the period from September 11, 1996 (inception) through June 30, 1997
and the year ended June 30, 1998: dividend yield of zero; expected volatility of
zero; risk-free interest rates ranging from 5.57% to 5.87% and an expected term
of four years. The fair value of each option grant to consultants is estimated
on the date of grant using a Black-Scholes-type option pricing model with the
following weighted-average assumptions used for grants in the period from
September 11, 1996 (inception) through June 30, 1997 and the year ended June 30,
1998: dividend yield of zero; expected volatility of 55%; risk-free interest
rates ranging from 5.57% to 5.60% and an expected term of four years. The
risk-free interest rate used in the calculation is the yield on the grant date
of the U.S. Treasury Strip with maturity equal to the expected term of the
option.
Generally, stock options are granted with an exercise price not less than
the fair value of common stock as determined by the Board of Directors at the
date of grant. During the period from September 11, 1996 (inception) through
June 30, 1997 and the year ended June 30, 1998, the Company recorded $43,704 and
$488,822, respectively, as deferred compensation, representing the excess of the
deemed fair value of the Company's common stock over the exercise price of
options granted during the period from September 11,
F-30
<PAGE> 146
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1996 (inception) through June 30, 1997 and the year ended June 30, 1998. Such
deferred compensation cost is being amortized over the vesting period of the
options.
On June 16, 1998, debt was issued with 11,627 detachable warrants for
Series A-1 preferred stock with a weighted average exercise price and an
exercise price of $.86 per share. Based on calculations using a minimum
value-pricing model, the weighted average grant date fair value of each
detachable warrant was $5.79 or approximately $67,300 in total. The $67,300 debt
discount is being amortized over the term of the debt. The fair value of each
detachable warrant is estimated on the date of grant using a Black-Scholes-type
pricing model with the following weighted-average assumptions used for grants in
the year ended June 30, 1998: dividend yield of zero; expected volatility of
55%; risk-free interest rate 5.57% and an expected term of one year. As of June
30, 1998 there were 11,627 warrants outstanding and exercisable.
(6) LEASE COMMITMENTS
The Company maintains a non-cancelable operating lease arrangement for
office space.
Future minimum lease payments as of June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999...................................................... $ 87,543
2000...................................................... 83,724
2001...................................................... 83,724
2002...................................................... 76,747
--------
$331,738
========
</TABLE>
Rent expense was $11,124 and $22,561 for the period from September 11, 1996
(inception) through June 30, 1997 and for the year ended June 30, 1998,
respectively.
The Company also leases office and communications equipment, which are
capitalized for financial reporting purposes. The related capital equipment
collateralizes these agreements. Office and communications equipment under
capital leases include the following at June 30:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Office and communications equipment..................... $21,559 $116,124
Less: accumulated amortization.......................... (2,644) (19,144)
------- --------
$18,915 $ 96,980
======= ========
</TABLE>
Amortization expense for the period from September 11, 1996 (inception)
through June 30, 1997 and the year ended June 30, 1998 was $2,644 and $16,500,
respectively.
At June 30, 1998, future minimum lease payments under capital leases are as
follows:
<TABLE>
<S> <C>
1999........................................................ $46,377
2000........................................................ 34,706
2001........................................................ 14,781
2002........................................................ 2,822
-------
Total minimum lease payments................................ 98,686
Less amount representing interest........................... (16,320)
-------
Present value of future minimum lease payments.............. 82,366
Less current portion........................................ 36,141
-------
Long-term portion........................................... $46,225
=======
</TABLE>
F-31
<PAGE> 147
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
At June 30, 1998, the Company has net operating loss carryforwards
aggregating approximately $247,000, which expire between 2012 and 2013. The
Internal Revenue Code places certain limitations on the annual amount of net
operating loss carryforwards which can be utilized if certain changes in the
Company's ownership occur.
The Company's net deferred tax assets are comprised of the following at
June 30:
<TABLE>
<CAPTION>
1997 1998
------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $41,859 $ 92,128
Start-up costs............................................ 54,011 42,355
Accounts payable and accrued liabilities.................. 2,017 28,578
Accrued salaries.......................................... 3,750 5,595
------- ---------
Total deferred tax assets......................... 101,637 168,656
------- ---------
Deferred tax liabilities:
Accounts receivable and prepaid expenses.................. (14,441) (56,784)
Depreciation and capital leases........................... (1,762) (1,752)
------- ---------
Total deferred tax liabilities.................... (16,203) (58,536)
------- ---------
Net deferred tax asset...................................... 85,434 110,120
Less: net deferred tax asset valuation allowance............ (85,434) (110,120)
------- ---------
Net deferred tax asset...................................... $ -- $ --
======= =========
</TABLE>
The net deferred tax assets have been reduced by a valuation allowance
because it is currently more likely than not that such benefits will not be
realized.
The difference between the zero provision for income taxes and the expected
amount determined by applying the federal statutory rate to loss before income
taxes results from the following:
<TABLE>
<CAPTION>
SEPTEMBER 11,
1996
(INCEPTION)
THROUGH YEAR ENDED
JUNE 30, JUNE 30,
1997 1998
------------------ ----------
<S> <C> <C>
Federal income tax benefit at statutory rate............ $(81,700) $(52,175)
Valuation allowance..................................... 85,434 24,686
State income tax benefit, net of federal effect......... (7,930) (2,184)
Deferred compensation................................... 464 28,230
Other................................................... 3,732 1,443
-------- --------
$ -- $ --
======== ========
</TABLE>
(8) MAJOR CUSTOMERS
Sales to one customer accounted for 94% and 64% of total revenue for the
period from September 11, 1996 (inception) through June 30, 1997 and for the
year ended June 30, 1998, respectively. At June 30, 1997 and 1998, accounts
receivable from this customer were $34,000 and $56,365, respectively.
F-32
<PAGE> 148
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) SUBSEQUENT EVENTS
On July 6, 1998, the Company signed a subordinated promissory note for
$100,000, with an interest rate at 10%, which is due December 1998.
In July 1998, the Company granted 15,500 stock options to employees of the
Company. The Company recorded approximately $87,000 of deferred compensation
associated with these grants.
On July 10, 1998, the Company entered into a definitive agreement for the
sale of the Company in a transaction involving the exchange of all of its
outstanding shares for the acquiring company's stock.
F-33
<PAGE> 149
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Management Committee
Distributed Bits L.L.C.
We have audited the accompanying balance sheets of Distributed Bits L.L.C.
(a development stage company) as of December 31, 1996 and 1997, and the related
statements of operations, members' equity (deficit) and cash flows for the
period from September 9, 1996 (inception) to December 31, 1996 and the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Distributed Bits L.L.C. (a
development stage company) at December 31, 1996 and 1997, and the results of its
operations and its cash flows for the period from September 9, 1996 (inception)
to December 31, 1996 and the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, at
December 31, 1997 the Company has limited working capital and will require
additional sources of financing to complete the commercialization of its
services and products. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
September 1, 1998
San Diego, California
F-34
<PAGE> 150
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 7,090 $ -- $ 72,840
Capital subscriptions receivable from members........ -- 344,092 --
Employee advance and other........................... 6,000 6,000 10,000
Inventory............................................ -- -- 24,196
--------- --------- -----------
Total current assets......................... 13,090 350,092 107,036
Property and equipment, net............................ 571 60,541 111,821
Deposit................................................ 2,500 1,500 1,500
--------- --------- -----------
Total assets................................. $ 16,161 $ 412,133 $ 220,357
========= ========= ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................... $ 15,225 $ 55,331 $ 147,863
Accrued compensation and related liabilities......... 7,042 26,501 43,357
Deferred revenue..................................... -- 36,000 36,000
Current portion, capital lease commitment............ -- -- 14,053
--------- --------- -----------
Total current liabilities.................... 22,267 117,832 241,273
Capital lease commitment............................... -- -- 34,522
Members' equity (deficit):
Members capital...................................... 113,800 1,013,115 1,495,433
Deferred compensation................................ -- -- (55,110)
Deficit accumulated during the development stage..... (119,906) (718,814) (1,495,761)
--------- --------- -----------
Net members' equity (deficit).......................... (6,106) 294,301 (55,438)
--------- --------- -----------
Total liabilities and members' equity
(deficit).................................. $ 16,161 $ 412,133 $ 220,357
========= ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 151
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
SEPTEMBER 9, 1996 SIX MONTHS SEPTEMBER 9, 1996
(INCEPTION) TO YEAR ENDED ENDED JUNE 30, (INCEPTION) TO
DECEMBER 31, DECEMBER 31, --------------------- JUNE 30,
1996 1997 1997 1998 1998
----------------- ------------ --------- --------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cost and expenses:
Research and development.............. $ 82,491 $ 477,738 $ 182,470 $ 443,922 $ 1,004,151
General and administrative............ 37,415 121,170 31,198 333,025 491,610
--------- --------- --------- --------- -----------
Net loss................................ $(119,906) $(598,908) $(213,668) $(776,947) $(1,495,761)
========= ========= ========= ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 152
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM SEPTEMBER 9, 1996
(INCEPTION) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEFERRED DEVELOPMENT TOTAL MEMBERS'
MEMBERS CAPITAL COMPENSATION STAGE EQUITY (DEFICIT)
--------------- ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Issuance of Member Interest from
inception through December 1996..... $ 113,800 $ -- $ -- $113,800
Net loss............................... -- -- (119,906) (119,906)
---------- -------- ----------- --------
Balance at December 31, 1996............. 113,800 -- (119,906) (6,106)
Issuance of Member Interest throughout
1997................................ 899,315 -- -- 899,315
Net loss............................... -- -- (598,908) (598,908)
---------- -------- ----------- --------
Balance at December 31, 1997............. 1,013,115 -- (718,814) 294,301
Issuance of Member Interest from
January through June 1998
(unaudited)......................... 369,708 -- -- 369,708
Issuance of unit options for services
(unaudited)......................... 24,500 -- -- 24,500
Deferred compensation (unaudited)...... 88,110 (88,110) -- --
Amortization of deferred compensation
(unaudited)......................... -- 33,000 -- 33,000
Net loss (unaudited)................... -- -- (776,947) (776,947)
---------- -------- ----------- --------
Balance at June 30, 1998 (unaudited)..... $1,495,433 $(55,110) $(1,495,761) $(55,438)
========== ======== =========== ========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 153
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
SEPTEMBER 9, 1996 SIX MONTHS SEPTEMBER 9, 1996
(INCEPTION) TO YEAR ENDED ENDED JUNE 30, (INCEPTION) TO
DECEMBER 31, DECEMBER 31, --------------------- JUNE 30,
1996 1997 1997 1998 1998
----------------- ------------ --------- --------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................ $(119,906) $(598,908) $(213,668) $(776,947) $(1,495,761)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation....................... 114 11,661 419 27,956 39,731
Amortization of deferred
compensation..................... -- -- -- 33,000 33,000
Unit options issued for services
rendered......................... -- -- -- 24,500 24,500
Changes in operating assets and
liabilities:
Employee advance and other....... (6,000) -- -- (4,000) (10,000)
Inventory........................ -- -- -- (24,196) (24,196)
Accounts payable................. 15,225 40,106 (4,567) 92,532 147,863
Accrued compensation and related
liabilities................... 7,042 19,459 (5,640) 16,856 43,357
Deferred revenue................. -- 36,000 12,000 -- 36,000
--------- --------- --------- --------- -----------
Net cash used in operating activities... (103,525) (491,682) (211,456) (610,299) (1,205,506)
INVESTING ACTIVITIES
Acquisition of property and
equipment.......................... (685) (71,631) (40,142) (25,756) (98,072)
Deposits................................ (2,500) 1,000 1,000 -- (1,500)
--------- --------- --------- --------- -----------
Net cash used in investing activities... (3,185) (70,631) (39,142) (25,756) (99,572)
FINANCING ACTIVITIES
Payments on capital lease commitments... -- -- -- (4,905) (4,905)
Proceeds from issuance of member
interest.............................. 113,800 555,223 243,650 369,708 1,038,731
Proceeds from capital subscriptions
receivable from members............... -- -- -- 344,092 344,092
--------- --------- --------- --------- -----------
Net cash provided by financing
activities............................ 113,800 555,223 243,650 708,895 1,377,918
Increase (decrease) in cash and cash
equivalents........................... 7,090 (7,090) (6,948) 72,840 72,840
Cash and cash equivalents at beginning
of period............................. -- 7,090 7,090 -- --
--------- --------- --------- --------- -----------
Cash and cash equivalents at end of
period................................ $ 7,090 $ -- $ 142 $ 72,840 $ 72,840
========= ========= ========= ========= ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES
Capital subscriptions receivable from
members............................... $ -- $ 344,092 $ -- $ -- $ --
========= ========= ========= ========= ===========
Capital lease commitment entered into
for equipment......................... $ -- $ -- $ -- $ 53,480 $ 53,840
========= ========= ========= ========= ===========
</TABLE>
F-38
<PAGE> 154
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO JUNE 30, 1998
AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Distributed Bits L.L.C. (the Company) develops customer e-mail management
systems and solutions. The Company was formed on September 9, 1996, as a limited
liability company in accordance with the Limited Liability Company Act (LLCA) of
the State of Illinois. Under the terms of the LLCA, the Company will dissolve
upon the earlier of December 31, 2006, or unanimous agreement of all members.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. Since inception, the Company has been
primarily engaged in organizational activities, including raising capital,
recruiting personnel and the engaging in research and development activities. As
of December 31, 1997, the Company has not realized significant revenues and
therefore is considered to be in the development stage.
The Company's ability to transition from the development stage and
ultimately to attain profitable operations is dependent upon its ability to
raise additional capital through debt or equity financing and the successful
market acceptance of its products and services. There can be no assurances that
the Company's products and services or its efforts to raise additional capital
will be successful. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
INTERIM FINANCIAL INFORMATION
The financial statements for the six months ended June 30, 1997 and 1998
and for the period from September 9, 1996 (inception) to June 30, 1998 are
unaudited. The unaudited financial statements have been prepared on the same
basis as the audited financial statements, and in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information set forth therein, in
accordance with generally accepted accounting principles.
The results of operations for the interim period ended June 30, 1998 are
not necessarily indicative of the results which may be reported for any other
interim period or for the year ended December 31, 1998.
FISCAL YEAR END
The Company's fiscal year end is December 31.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of three months or less when acquired to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market and consist of finished
goods.
F-39
<PAGE> 155
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO JUNE 30, 1998
AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory is stated at the lower of cost or market and consist only of
finished goods.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation,
and is depreciated over the estimated useful lives (three to five years) of the
assets using straight line methods.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
establishes the accounting for the impairment of long-lived assets, identifiable
intangibles and goodwill related to those assets. To date the Company has not
identified any indicators of impairment nor recorded any impairment losses.
INCOME TAXES
Losses of the Company are allocated to, and included in the individual
returns of members.
UNIT OPTIONS
SFAS No. 123, Accounting for Stock-Based Compensation, establishes the use
of the fair value based method of accounting for equity-based compensation
arrangements, under which compensation cost is determined using the fair value
of equity-based compensation determined as of the grant date, and is recognized
over the periods in which the related services are rendered. SFAS No. 123 also
permits companies to elect to continue using the current intrinsic value
accounting method specified in Accounting Principles Board (APB) Opinion No. 25
to account for equity-based compensation. The Company has decided to use the
intrinsic value based method, and will disclose the pro forma effect of using
the fair value based method to account for its equity-based compensation.
REVENUE RECOGNITION
Through December 31, 1997, the Company recognizes revenue in accordance
with American Institute of Certified Public Accountants (AICPA) Statement of
Position on Software Revenue Recognition No. 91-1. Initial license fee revenue
is recognized upon shipment of the product to customers if no significant
Company obligations remain and collection of the receivable is deemed probable.
The portion of the initial license fee revenue which represents the software
support for the first year is deferred and recognized ratably over the contract
period. In subsequent years, customers pay annual license fees for continued use
and support of licensed software. Annual renewal license and support fees
revenue is deferred and recognized ratably over the contract period.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with research and development are charged to
operations as incurred.
F-40
<PAGE> 156
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO JUNE 30, 1998
AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility of the software is
attained. No such costs have been capitalized to date because costs incurred
subsequent to reaching technological feasibility have not been material.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
The AICPA's Statement of Position, Software Revenue Recognition (SOP 97-2),
provides guidance for recognizing revenue related to sales by software vendors.
SOP 97-2 is effective for the Company beginning on January 1, 1998. The Company
does not believe the adoption of SOP 97-2 has had a significant impact on its
revenue recognition policy.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income which establishes rules for reporting and
displaying comprehensive income. The Statement is effective for the Company
during 1998. The Company does not believe that the adoption of SFAS No. 130 will
have a material impact on the Company's results of operations, cash flows or
financial position.
2. EMPLOYEE ADVANCE
The Company has a non-interest bearing note receivable from the Chief
Executive Officer totaling $6,000. The note is payable on demand by the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
----- -------
<S> <C> <C>
Software.................................................. $ -- $11,131
Computer equipment........................................ 685 56,959
Office equipment.......................................... -- 4,226
----- -------
685 72,316
Less accumulated depreciation............................. (114) (11,775)
----- -------
$ 571 $60,541
===== =======
</TABLE>
4. DEFERRED REVENUE
In March 1997, the Company entered into an agreement to develop and license
software to a customer totaling $36,000. The agreement provides for support
services at an annual fee of $5,400. At December 31, 1997, the Company recorded
amounts received under the agreement as deferred revenue pending completion of
significant development obligations.
F-41
<PAGE> 157
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO JUNE 30, 1998
AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. COMMITMENTS
The Company leases its office facilities under a month-to-month operating
lease. Total rent expense was $5,000 for the period from September 9, 1996 to
December 31, 1996 and $27,000 for the year ended December 31, 1997.
In April 1998, the Company entered into a three year non-cancellable
capital lease commitment for computer equipment requiring monthly payments of
$1,752.
6. MEMBERS' EQUITY
As of December 31, 1997 the Company had issued Member Interest to six
individuals. In accordance with the Operating Agreement (the "Agreement"), these
individuals are required to contribute total capital of $1,049,115 of which
$705,023 had been received by the Company as of December 31, 1997. The Company
has recorded the remaining $344,092 to be received under the Agreement as
capital subscriptions receivable in the accompanying balance sheet. The
outstanding subscription amounts were received as of June 30, 1998. The transfer
of Member Interest is restricted as defined in the Agreement. Members are not
entitled to demand or receive from the Company the liquidation of such. There is
one class of members.
Member Interest in the Company will be until the Company is dissolved in
accordance with the provisions of the Agreement. Profits and losses of the
Company for each fiscal year shall be allocated to the members in proportion as
described in the Agreement.
Upon dissolution of the Company, existing assets of the Company will be
used to settle liabilities owed to creditors prior to any distribution to
holders of Member Interest.
On April 1, 1998 the Manager and Members adopted the Company's Unit Option
Plan (the Plan), which provides for the issuance of unit options consisting of
membership interests of the Company to eligible employees and consultants of the
Company. The initial maximum number of unit options which may be issued,
pursuant to the Plan, shall be 2,000 unit options (representing 20% of the total
ownership interest in the Company at June 30, 1998) unless increased by an
appropriate action of the Manager. Under the Plan, the terms and conditions of
the unit options are determined at the discretion of the Manager or the
management committee.
Through June 30, 1998, the Company granted 267 unit options representing
approximately 3% ownership interest at exercise prices of $20 per unit option.
At June 30, 1998, none of the unit options were exercised and 100 unit options
were vested and exercisable. The deemed weighted-average fair value of unit
options granted in the six months ended June 30, 1998 was $350.
Through December 31, 1997, the Company recorded deferred compensation for
the difference between the exercise price of unit options granted and the deemed
fair value for financial statement presentation purposes of the Company's Member
Interest at the date of issuance or grant. The deferred compensation will be
amortized over the vesting period of the related unit options which is generally
four years. Gross deferred compensation at June 30, 1998 totaled $88,110, and
related amortization expense totaled $33,000 for the six months ended June 30,
1998.
In January 1998, the Company granted 70 unit options to a consultant
outside the Plan. The unit options are exercisable at $.01 per unit option and
all were vested and exercisable at June 30, 1998. The Company recorded a $24,500
charge to general and administrative expense in the six months ended June 30,
1998 representing the deemed fair value of these unit options.
F-42
<PAGE> 158
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO JUNE 30, 1998
AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. RECENT DEVELOPMENTS (UNAUDITED)
On July 28, 1998, the Company entered into a non-binding letter of intent
with First Virtual Holdings Incorporated ("FV"), with respect to the acquisition
of Distributed Bits by FV(the "DB Acquisition"). The DB Acquisition, if
consummated, will involve the acquisition of all equity interests, including the
unit options in the Company, in exchange for $5,750,000 in shares of FV Common
Stock and warrants to purchase an additional 500,000 shares of FV Common Stock.
The number of shares of FV Common Stock to be issued will be determined based on
the average closing price of FV Common Stock for the twenty day trading period
ending three business days prior to the closing of the transaction. The final
amount of the acquisition consideration will be contingent upon the results of
FV's financial, technical and legal due diligence. The warrants to be issued in
the transaction will be exercisable (i) as to 50% of the underlying shares at a
cash exercise price of $7.50 per share for a period of 30 months and (ii) as to
the remaining underlying shares at a cash exercise price of $10.00 per share for
a period of 42 months. There can be no assurances that the DB Acquisition will
be consummated.
8. YEAR 2000 COMPLIANCE (UNAUDITED)
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 one and one-quarter 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.
F-43
<PAGE> 159
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
FIRST VIRTUAL HOLDINGS INCORPORATED,
EPUB HOLDINGS, INC.,
EMAIL PUBLISHING, INC.,
CERTAIN STOCKHOLDERS OF
EMAIL PUBLISHING, INC.
AND CHASE MANHATTAN BANK AND TRUST COMPANY,
NATIONAL ASSOCIATION
AUGUST 20, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C> <C>
1. Certain Definitions................................................ A-1
2. The Merger......................................................... A-2
2.1 Merger; Effective Time of the Merger........................ A-2
2.2 Closing..................................................... A-2
2.3 Effect of the Merger........................................ A-2
2.4 Tax-Free Reorganization..................................... A-3
3. Effect of Merger on the Capital Stock of the Constituent
Corporations; Exchange of Certificates; Additional Payments........ A-3
3.1 Exchange of Stock; Rights to Additional Payments............ A-3
3.2 EPub Options................................................ A-3
3.3 Fractional Shares........................................... A-3
3.4 Exchange of Certificates.................................... A-3
3.5 Taking of Necessary Action; Further Action.................. A-4
3.6 Escrow Account.............................................. A-4
3.7 Dissenters' Rights.......................................... A-4
4. Securities Act Compliance.......................................... A-5
4.1 Securities Act Exemption.................................... A-5
4.2 Stock Restrictions.......................................... A-5
5. Representations and Warranties of EPub............................. A-5
5.1 Organization, Qualification, and Corporate Power............ A-5
5.2 Authorization............................................... A-6
5.3 Capitalization.............................................. A-6
5.4 Noncontravention............................................ A-7
5.5 Fees........................................................ A-7
5.6 Financial Statements........................................ A-7
5.7 Subsidiaries................................................ A-7
5.8 Title to Assets............................................. A-7
5.9 Events Subsequent to Most Recent Fiscal Period End.......... A-7
5.10 Undisclosed Liabilities..................................... A-9
5.11 Legal Compliance............................................ A-9
5.12 Tax Matters................................................. A-9
5.13 Properties.................................................. A-10
</TABLE>
i
<PAGE> 160
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C> <C>
5.14 Intellectual Property....................................... A-10
5.15 Tangible Assets............................................. A-11
5.16 Inventory................................................... A-11
5.17 Contracts................................................... A-12
5.18 Notes and Accounts Receivable............................... A-13
5.19 Power of Attorney........................................... A-13
5.20 Insurance................................................... A-13
5.21 Litigation.................................................. A-13
5.22 Product Warranty............................................ A-13
5.23 Product Liability........................................... A-13
5.24 Employees................................................... A-13
5.25 Employee Benefits........................................... A-14
5.26 Guaranties.................................................. A-15
5.27 Environment, Health, and Safety............................. A-15
5.28 Certain Business Relationships With EPub.................... A-16
5.29 No Adverse Developments..................................... A-16
5.30 Full Disclosure............................................. A-16
6. Representations and Warranties of FV and Sub....................... A-17
6.1 Organization, Qualification, and Corporate Power............ A-17
6.2 Authorization............................................... A-17
6.3 Capitalization.............................................. A-17
6.4 Noncontravention............................................ A-17
6.5 SEC Filings................................................. A-17
6.6 Brokers' Fees............................................... A-18
6.7 Absence of Certain Changes.................................. A-18
7. Pre-Closing Covenants.............................................. A-18
7.1 General..................................................... A-18
7.2 Notices and Consents........................................ A-18
7.3 Operation of Business....................................... A-18
7.4 Preservation of Business.................................... A-18
7.5 Access to Information....................................... A-18
7.6 Notice of Developments...................................... A-18
7.7 Preparation of the Proxy/Information Statement.............. A-19
7.8 Solicitation of Proxy Statements and Written Consents....... A-19
7.9 Exclusivity................................................. A-19
8. Post-Closing Covenants............................................. A-19
8.1 General..................................................... A-19
8.2 Litigation Support.......................................... A-19
8.3 Transition.................................................. A-20
8.4 Confidentiality............................................. A-20
8.5 Company Employee Matters.................................... A-20
8.6 FIRPTA Compliance........................................... A-20
8.7 Stockholder Certificate..................................... A-20
</TABLE>
ii
<PAGE> 161
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C> <C>
9. Conditions to Obligations to Close................................. A-20
9.1 Conditions to FV's and Sub's Obligation to Close............ A-20
9.2 Conditions to EPub's Obligation............................. A-22
10. Survival of Representations, Warranties and Covenants; Escrow...... A-22
10.1 Survival of Representations and Warranties.................. A-22
10.2 Escrow Arrangements......................................... A-23
11. Termination........................................................ A-28
11.1 Termination of the Agreement................................ A-28
11.2 Effect of Termination....................................... A-29
12. Miscellaneous...................................................... A-29
12.1 Press Releases and Public Announcements..................... A-29
12.2 No Third-Party Beneficiaries................................ A-29
12.3 Entire Agreement............................................ A-29
12.4 Succession and Assignment................................... A-29
12.5 Counterparts................................................ A-29
12.6 Headings.................................................... A-29
12.7 Notices..................................................... A-29
12.8 Governing Law............................................... A-30
12.9 Forum Selection; Consent to Jurisdiction.................... A-30
12.10 Amendments and Waivers...................................... A-30
12.11 Severability................................................ A-30
12.12 Expenses.................................................... A-30
12.13 Construction................................................ A-31
12.14 Incorporation of Exhibits and Schedules..................... A-31
12.15 Attorneys' Fees............................................. A-31
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
Exhibit A Agreement and Plan of Merger
Exhibit B Stockholder Certificate
Exhibit C Intentionally Omitted
Exhibit D Intentionally Omitted
Exhibit E Non Competition Agreement
Exhibit F Opinion of Counsel for EPub
Exhibit G Intentionally Omitted
Exhibit H Opinion of Counsel for FV
Exhibit I Form of Employment Agreement
Exhibit J Registration Rights Agreement
</TABLE>
iii
<PAGE> 162
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is entered into
as of August 20, 1998, by and among First Virtual Holdings Incorporated, a
Delaware corporation ("FV"), EPub Holdings, Inc., a Delaware corporation and
wholly-owned subsidiary of FV ("Sub"), Email Publishing, Inc., a Delaware
corporation ("EPub"), the stockholders of EPub listed on the signature pages
hereto (collectively, the "Majority Stockholders") and, as to Section 10.2
hereof only, Chase Manhattan Bank and Trust Company, National Association as
Escrow Agent. FV, EPub, Sub and the Majority Stockholders are sometimes referred
to herein individually as a "Party" and collectively as the "Parties."
RECITALS
A. Pursuant to the Agreement and Plan of Merger in the form attached hereto
as Exhibit A (the "Merger Agreement") providing for the merger of Sub with and
into EPub pursuant to the Delaware General Corporation Law (the "Merger"), the
shares of capital stock of EPub, issued and outstanding immediately prior to the
effective time of the Merger will be converted into shares of Common Stock of
FV.
B. The Parties desire to enter into this Agreement for the purpose of
setting forth certain representations, warranties and covenants made by each to
the other as an inducement to the execution and delivery of this Agreement, and
to serve as conditions precedent to the consummation of the Merger.
C. The respective Boards of Directors of FV, Sub and EPub have approved and
adopted this Agreement, and the Agreement is intended to be a plan of
reorganization under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended.
NOW, THEREFORE, in consideration of these premises and of the mutual
agreements, representations, warranties and covenants herein contained, the
parties hereto do hereby agree as follows:
AGREEMENT
1. Certain Definitions. As used in this Agreement, the following terms have
the following meanings (terms defined in the singular to have a correlative
meaning when used in the plural and vice versa). Certain other terms are defined
in the text of this Agreement.
"Affiliate" of a Person means any other Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with such Person.
"Business Condition" means the current business, financial condition,
results of operations and assets of such corporate entity.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation,
retirement plan, severance plan or similar plan or arrangement; (b) Employee
Pension Benefit Plan; (c) Employee Welfare Benefit Plan; and (d) any other
nonqualified plan providing welfare benefits, including but not limited to
medical, dental, life insurance and disability benefits.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Sec.
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Sec.
3(1).
"EPub Stockholders" shall mean the stockholders of record of EPub
immediately prior to the Effective Time of the Merger (other than the holders of
Dissenting Shares).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Gross Negligence" consists of an intentional act, or the failure to
perform a duty, with reckless disregard for the consequences of such act or
failure.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures,
A-1
<PAGE> 163
together with all reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof, (b) all trademarks, service marks, trade
dress, logos, trade names, and corporate names, together with all translations,
adaptations, derivations, and combinations thereof and including all goodwill
associated therewith, (c) all copyrightable works, all copyrights, and all
applications, registrations, and renewals in connection therewith, (d) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, drawings, specifications,
customer and supplier lists, pricing and cost information, financial
information, and business and marketing plans and proposals), and (e) all
computer software (including data and related documentation).
"Material Adverse Effect" shall mean a material adverse effect on the
Business Condition of the corporate entity and its subsidiaries, taken as a
whole, other than as a result of (i) general economic or industry conditions, or
(ii) performance by such corporate entity of its obligations under this
Agreement.
"Multiemployer Plan" has the meaning set forth in ERISA Sec. 3(37) and Code
Sec. 414(f).
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for taxes not yet due and payable, (c) purchase money
liens and liens securing rental payments under capital lease arrangements, and
(d) other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
"SEC" shall mean the United States Securities and Exchange Commission.
2. The Merger.
2.1 Merger; Effective Time of the Merger. Subject to the terms and
conditions of this Agreement and the applicable provisions of the Delaware
General Corporation Law ("DGCL"), Sub will be merged with and into EPub (the
"Merger"), the separate existence of Sub shall cease and EPub shall continue as
the surviving corporation and as a wholly-owned subsidiary of FV. In accordance
with the provisions of this Agreement, the Merger Agreement shall be filed with
the Delaware Secretary of State in accordance with the DGCL on the Closing Date
(as defined in Section 2.2) and each issued and outstanding share of capital
stock of EPub ("EPub Capital Stock"), shall be converted into shares of Common
Stock, $.001 par value, of FV ("FV Common Stock") in the manner contemplated by
Section 3. The Merger shall become effective at the time of the filing of the
Merger Agreement with the Delaware Secretary of State (the date of such filing
being hereinafter referred to as the "Effective Date of the Merger" and the time
of such filing being hereinafter referred to as the "Effective Time of the
Merger").
2.2 Closing. The closing of the Merger (the "Closing") will take place as
soon as practicable after satisfaction or waiver of the latest to occur of the
conditions set forth in Section 9 (the "Closing Date"), at the offices of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo
Alto, California 94304-1050.
2.3 Effect of the Merger. At the Effective Time of the Merger, (i) the
separate existence of Sub shall cease and Sub shall be merged with and into EPub
(Sub and EPub are sometimes referred to herein as the "Constituent Corporations"
and EPub after the Merger is sometimes referred to herein as the "Surviving
Corporation"), (ii) the Certificate of Incorporation of Sub shall be the
Certificate of Incorporation of the Surviving Corporation, (iii) the Bylaws of
Sub shall be the Bylaws of the Surviving Corporation, (iv) the directors of Sub
shall be the directors of the Surviving Corporation, (v) the officers of Sub
shall be the initial officers of the Surviving Corporation, (vi) all shares of
capital stock of Sub shall be canceled, and (vii) the Merger shall, from and
after the Effective Time of the Merger, have all the effects provided by
applicable law.
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2.4 Tax-Free Reorganization. Each of FV and Epub acknowledges and agrees
that (i) it intends the Merger to qualify as a tax free reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), (ii) it will report the Merger as such a reorganization in any and
all federal, state and local income tax returns filed by it and (iii) it will
use reasonable efforts to cause the Merger to qualify as, and will not take any
action that would prevent the Merger from qualifying as, such a reorganization
both before and after the effective time of the Merger.
3. Effect of Merger on the Capital Stock of the Constituent Corporations;
Exchange of Certificates; Additional Payments.
3.1 Exchange of Stock; Rights to Additional Payments. As of the Effective
Time of the Merger, each share of EPub Capital Stock that is issued and
outstanding immediately prior to the Effective Time of the Merger (other than
shares, if any, held by persons exercising dissenters' rights in accordance with
the DGCL as provided for in Section 3.7 below) shall, by virtue of the Merger
and without any action on the part of EPub Stockholders, be converted into a
number of shares (the "Exchange Ratio") of FV Common Stock equal to 6,000,000
shares (the "Merger Consideration") divided by the aggregate number of shares of
Common Stock of EPub outstanding as of the Effective Time of the Merger or
issuable upon exercise of all outstanding Stock Rights (as defined in Section
5.3(b) hereof) outstanding as of the Effective Time of the Merger.
3.2 EPub Options. At the Effective Time of the Merger, each of the then
outstanding options and warrants to purchase EPub Capital Stock whether vested
or unvested (collectively, the "EPub Options") (including all outstanding
options granted under EPub's 1996 Stock Option Plan (the "EPub Plan"), and any
individual non-plan options) will by virtue of the Merger, and without any
further action on the part of any holder thereof, be converted into an option to
purchase that number of shares of FV Common Stock determined by multiplying the
number of shares of EPub Capital Stock subject to such EPub Option at the
Effective Time by the Exchange Ratio, at an exercise price per share of FV
Common Stock equal to the exercise price per share of such EPub Option
immediately prior to the Effective Time divided by the Exchange Ratio, rounded
up to the nearest cent. If the foregoing calculation results in an assumed EPub
Option being exercisable for a fraction of a share of FV Common Stock, then the
number of EPub shares of FV Common Stock subject to such option will be rounded
down to the nearest whole number of shares with no cash being payable for such
fractional share. The term, exercisability, vesting schedule, vesting
commencement date, status as an "incentive stock option" under Section 422 of
the Code, if applicable, and all other terms and conditions of the EPub Options
will otherwise be unchanged. Continuous employment with EPub will be credited to
an optionee of EPub for purposes of determining the number of shares of EPub
Common Stock subject to exercise under a converted EPub Option after the
Effective Time.
3.3 Fractional Shares. No fractional shares of FV Common Stock shall be
issued in the Merger. In lieu thereof, each holder of shares of EPub Capital
Stock who would otherwise be entitled to receive a fraction of a share of FV
Common Stock shall receive from FV an amount of cash (rounded to the nearest
whole cent) equal to the product of the fraction of a share of FV Common Stock
to which such holder would otherwise be entitled, multiplied by $1.675. For the
purpose of determining fractional shares, all shares of FV Common Stock to be
issued to any EPub stockholder shall be aggregated.
3.4 Exchange of Certificates.
(a) Exchange Agent. Prior to the Closing Date, FV shall appoint itself or
American Stock Transfer & Trust Company to act as the exchange agent (the
"Exchange Agent") in the Merger.
(b) FV to Provide FV Common Stock. Promptly after the Effective Date of the
Merger, FV shall make available for exchange in accordance with this Section 3,
through such reasonable procedures as FV may adopt, the shares of FV Common
Stock issuable pursuant to Section 3.1 in exchange for outstanding shares of
EPub Capital Stock, other than the shares to be held in escrow pursuant to
Section 3.6 hereof.
(c) Exchange Procedures. Within ten (10) days after the Effective Date of
the Merger, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Date of the
Merger represented outstanding shares of EPub Capital Stock (the "Certificates")
whose shares are being converted into the Merger Consideration pursuant to
Section 3.1 hereof (less any
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shares held in escrow pursuant to Section 3.6 hereof), (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and which shall be in such form and have such
other provisions as FV may reasonably specify, including appropriate investment
representations to be made by each such stockholder) (the "Letter of
Transmittal") and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Consideration (less any shares held in
escrow pursuant to Section 3.6 hereof). Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by FV, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor the
number of shares of FV Common Stock (less any shares held in escrow pursuant to
Section 3.6 hereof) to which the holder of EPub Common Stock is entitled
pursuant to Section 3.1 hereof. The Certificate so surrendered shall forthwith
be canceled. No interest will accrue or be paid to the holder of any outstanding
EPub Common Stock. From and after the Effective Date of the Merger, until
surrendered as contemplated by this Section 3.4, each Certificate shall be
deemed for all corporate purposes to evidence the number of shares of FV Common
Stock into which the shares of EPub Common Stock represented by such Certificate
have been converted. Notwithstanding the foregoing procedures, FV shall use its
reasonable efforts to provide the form of Letter of Transmittal to EPub as soon
as practical after the date hereof, and EPub shall provide such Letter of
Transmittal to each EPub Stockholder. The parties agree that in the event FV
makes such Letter of Transmittal available to EPub, any Exchange Agent shall not
be obligated to mail such Letter of Transmittal to the EPub Stockholders. FV
agrees that to the extent a EPub Stockholder provides a fully executed and
completed Letter of Transmittal together with the related Certificates held by
such stockholder to FV at least three (3) business days prior to the Closing,
then FV will provide to such EPub Stockholder at the Closing a certificate
representing the shares of FV Common Stock to which such stockholder is entitled
pursuant to the terms hereof.
(d) No Further Ownership Rights in Capital Stock of EPub. The Merger
Consideration delivered upon the surrender for exchange of shares of EPub
Capital Stock in accordance with the terms hereof shall be deemed to have been
delivered in full satisfaction of all rights pertaining to such EPub Capital
Stock. There shall be no further registration of transfers on the stock transfer
books of the Surviving Corporation of EPub Capital Stock which were outstanding
immediately prior to the Effective Date of the Merger. If, after the Effective
Date of the Merger, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this Section
3.4, provided that the presenting holder is listed on EPub's stockholder list as
a holder of EPub Capital Stock.
3.5 Taking of Necessary Action; Further Action. FV, Sub, EPub and the
Majority Stockholders shall take all such actions as may be necessary or
appropriate in order to effect the Merger as promptly as possible. If, at any
time after the Effective Date of the Merger, any further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets, property,
rights, privileges, powers and franchises of EPub, the officers and directors of
such corporation are fully authorized in the name of the corporation or
otherwise to take, and shall take, all such action.
3.6 Escrow Account. The parties agree that twenty percent (20%) of the
shares of FV Common Stock to be issued to the EPub Stockholders other than
Catalyst Infotech Development Fund, L.P., Grandhaven L.L.C., Hexagon Investments
L.L.C., Labyrinth Enterprises L.L.C. and Legacy Enterprises L.L.C. (all of such
entities are collectively referred to hereinafter as "Catalyst")) will, without
any act of any EPub Stockholder, be deposited with the Escrow Agent, such
deposit to constitute an escrow fund (the "Escrow Amount") to be governed by the
terms of Section 10.2. The portion of the Escrow Amount contributed on behalf of
each such EPub Stockholder shall be in proportion to the aggregate Merger
Consideration which such EPub Stockholder would otherwise be entitled to
receive.
3.7 Dissenters' Rights. If holders of EPub Capital Stock are entitled to
dissenters' rights at the Effective Time of the Merger under Section 262 of the
DGCL, the shares as to which dissenters' rights are available ("Dissenting
Shares") shall not be converted into the Merger Consideration on or after the
Effective Time of the Merger, but shall instead be converted into the right to
receive from the Surviving Corporation such consideration as may be determined
to be due with respect to such Dissenting Shares pursuant to the
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DGCL. Each holder of Dissenting Shares (a "Dissenting Stockholder") who,
pursuant to the provisions of Section 262 of the DGCL, becomes entitled to
payment of the value of shares of EPub Capital Stock held by such Dissenting
Stockholder shall receive payment therefor (but only after the value therefor
shall have been agreed upon or finally determined pursuant to such provisions).
In the event of the legal obligation, after the Effective Time of the Merger, to
deliver the Merger Consideration to any Dissenting Stockholder who shall have
failed to make an effective demand for appraisal or shall have lost his status
as a Dissenting Stockholder, the Surviving Corporation shall issue and deliver,
upon surrender by such Dissenting Stockholder of his certificate or certificates
representing shares of EPub Common Stock, the Merger Consideration to which such
Dissenting Stockholder is then entitled under Section 3.1. To the extent that FV
or EPub makes any payment or payments in respect of any Dissenting Shares, FV
shall be entitled to recover under the terms of Section 10 hereof (by surrender
of shares of FV Common Stock) (i) the aggregate amount by which such payment or
payments exceed the aggregate Merger Consideration that otherwise would have
been payable in respect of such shares plus (ii) the aggregate fees and expenses
(including reasonable attorneys' fees and expenses) incurred by FV or the
Surviving Corporation in connection with calculating, settling or litigating the
amount of, or making, any such payment.
4. Securities Act Compliance.
4.1 Securities Act Exemption. The issuance of the FV Common Stock in the
Merger shall not be registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon Section 4(2) and/or Rule 506 under
Regulation D of the Securities Act.
4.2 Stock Restrictions. The certificates representing the shares of FV
Common Stock issued pursuant to this Agreement shall bear restrictive legends
(and stop transfer orders shall be placed against the transfer thereof with FV's
transfer agent), stating substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE
SOLD, OFFERED FOR SALE, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF
EXCEPT (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO, (II) IN COMPLIANCE WITH RULE 144 OR (III) PURSUANT TO AN
OPINION OF COUNSEL FOR FIRST VIRTUAL THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER, AS SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THE CORPORATION. SUCH TRANSFER RESTRICTIONS ARE
BINDING ON TRANSFEREES OF THESE SHARES."
5. Representations and Warranties of EPub. EPub and the Majority
Stockholders (other than Catalyst) hereby severally but not jointly represent
and warrant to FV that the statements contained in this Section 5 are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 5), except as
set forth in the disclosure letter delivered by EPub to FV on the date hereof
(and initialed by FV) (referred to herein as the "EPub Disclosure Letter"). The
EPub Disclosure Letter will be arranged in paragraphs corresponding to the
lettered and numbered paragraphs contained in this Section 5.
5.1 Organization, Qualification, and Corporate Power. EPub is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware. EPub is duly authorized to conduct business and
is in good standing under the laws of each other jurisdiction where such
qualification is required. There is no state, other than Colorado, in which EPub
owns any property or in which it has any employees, offices or operations. EPub
has full corporate power and authority, and has all necessary licenses and
permits, to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it.
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Section 5 of the EPub Disclosure Letter lists the directors and officers of
EPub. The operations now being conducted by EPub have not been conducted under
any other name during the past five (5) years.
5.2 Authorization. EPub and each of the Majority Stockholders has full
power and authority to execute and deliver this Agreement and all agreements and
instruments delivered pursuant hereto (the "Ancillary Agreements") to which it
is a party, and, subject in the case of EPub to receipt of the requisite
approval of its stockholders, to consummate the transactions contemplated
hereunder and to perform its obligations hereunder and no other proceedings on
the part of EPub or any Majority Stockholder or, to the knowledge of EPub and
each Majority Stockholder, any other EPub Stockholders are necessary to
authorize the execution, delivery and performance of this Agreement and the
Ancillary Agreements. This Agreement and the Ancillary Agreements to which it is
a party and the transactions contemplated hereby and thereby have been approved
by the unanimous vote of EPub's Board of Directors. This Agreement and the
Ancillary Agreements to which they are parties constitute the valid and legally
binding obligations of EPub and each of the Majority Stockholders and, to the
knowledge of EPub and each Majority Stockholder, each other EPub Stockholder,
enforceable against EPub and such stockholders in accordance with their
respective terms and conditions. Neither EPub nor any Majority Stockholder, or,
to the knowledge of EPub and each Majority Stockholder, any other EPub
Stockholder need give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement.
5.3 Capitalization.
(a) Capital Stock. As of the date of this Agreement, the entire authorized
capital stock of EPub consists of 3,000,000 shares of Common Stock, 1,906,503 of
which are issued and outstanding, 400,000 shares of Series A Preferred Stock,
all of which are issued and outstanding and 350,000 shares of Series A-1
Preferred Stock, 232,558 of which are issued and outstanding. All of the issued
and outstanding shares of capital stock have been duly authorized, are validly
issued, fully paid, and non-assessable, and are held of record by the respective
stockholders as set forth in Section 5.3(a) of the EPub Disclosure Letter. All
of the outstanding shares of capital stock have been offered, issued and sold by
EPub in compliance with applicable Federal and state securities laws. As of the
Closing Date, the entire authorized capital stock of EPub shall consist of
3,000,000 shares of Common Stock, 1,906,503 of which shall be issued and
outstanding (plus any shares issued upon exercise of common stock options or
warrants outstanding as of the date hereof), 400,000 shares of Series A
Preferred Stock, all of which shall be issued and outstanding, and 350,000
shares of Series A-1 Preferred Stock, 232,558 of which are issued and
outstanding. As of the Closing Date, all of the then issued and outstanding
shares of capital stock shall have been duly authorized, shall be validly
issued, fully paid, and non-assessable, and shall be held of record by the
respective stockholders as set forth in Section 5.3(a) of the EPub Disclosure
Letter. As of the Closing Date, all of the then outstanding shares of capital
stock shall have been offered, issued and sold by EPub in compliance with
applicable Federal and state securities laws.
(b) No Other Rights or Agreements. As of the date of this Agreement,
Section 5.3(b) of the EPub Disclosure Letter lists all of the holders of
options, warrants, purchase rights, subscription rights, conversion rights,
exchange rights and other rights that could require EPub to issue, sell or
otherwise cause to become outstanding any of its capital stock (the "Stock
Rights"), and the number and class of shares of EPub Capital Stock subject to
such Stock Rights. Except as set forth in Section 5.3(b) of the EPub Disclosure
Letter, there are no other outstanding or authorized Stock Rights. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to EPub. There are no voting
trusts, proxies, or other agreements or understandings with respect to the
voting of the capital stock of EPub. No additional EPub Stock Rights will be
granted prior to the Closing Date, other than grants of stock options to
employees of EPub provided that FV is provided with written notice of such
grants at least five business days prior to the Closing Date. As of the Closing
Date, there will be (i) no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to EPub and (ii) no
voting trusts, proxies, or other agreements or understandings with respect to
the voting of the capital stock of EPub.
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5.4 Noncontravention. Neither the execution and the delivery of this
Agreement by EPub nor the consummation by EPub of the transactions contemplated
hereby, will (A) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which EPub is subject or any
provision of its Certificate of Incorporation or bylaws, or (B)(i) conflict
with, (ii) result in a breach of, (iii) constitute a default under, (iv) result
in the acceleration of, (v) create in any party the right to accelerate,
terminate, modify, or cancel, or (vi) require any notice under, any agreement,
contract, lease, license, instrument, franchise permit or other arrangement to
which EPub is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any Security Interest upon any of its
assets).
5.5 Fees. EPub has no liability or obligation to pay any fees or
commissions to any broker, finder, agent or attorney with respect to the
transactions contemplated by this Agreement.
5.6 Financial Statements. Section 5.6 of the EPub Disclosure Letter
contains the following financial statements (collectively the "Financial
Statements"): (i) audited balance sheets and statements of income and cash flows
as of and for the fiscal year ended June 30, 1997 for EPub; and (ii) an
unaudited balance sheet and statement of income (the "Most Recent Financial
Statements") as of and for the fiscal year ended June 30, 1998 (the "Most Recent
Fiscal Period End") for EPub. The Financial Statements (including the notes
thereto) have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods covered
thereby and present fairly the financial condition of EPub as of such dates and
the results of operations of EPub for such periods; provided, however, that the
Most Recent Financial Statements lack footnotes and certain other presentation
items and are subject to normal year end adjustments. The books of account of
EPub reflect as of the dates shown thereon all items of income and expenses, and
all assets, liabilities and accruals of EPub required to be reflected therein.
5.7 Subsidiaries. EPub has no, and has not had any, subsidiaries and has
not been a subsidiary of another company.
5.8 Title to Assets. Except as set forth in Section 5.8 of the EPub
Disclosure Letter, EPub has good and marketable title to, or a valid leasehold
interest in, the properties and assets (including, without limitation, all
Intellectual Property) used by it, located on its premises, or shown on the
balance sheet contained within the Most Recent Financial Statements (the "Most
Recent Balance Sheet") or acquired after the date thereof, free and clear of all
Security Interests, except for properties and assets disposed of in the Ordinary
Course of Business since the date of the Most Recent Balance Sheet. No Person
other than EPub will own at the time of the Closing any assets or properties
currently utilized in or necessary to the operations or business of EPub or
situated on any of the premises of EPub. There are no existing contracts,
agreements, commitments or arrangements with any Person to acquire any of the
assets or properties of EPub (or any interest therein) except for this
Agreement.
5.9 Events Subsequent to Most Recent Fiscal Period End. Since the Most
Recent Fiscal Period End, there has not been any material adverse change in the
Business Condition of EPub. Without limiting the generality of the foregoing,
since that date:
(a) EPub has not sold, leased, transferred, or assigned any assets or
properties, tangible or intangible, outside the Ordinary Course of
Business;
(b) except for those agreements, contracts, leases and commitments
identified in Section 5.17 of the EPub Disclosure Letter, EPub has not
entered into, assumed or become bound under or obligated by any agreement,
contract, lease or commitment (collectively a "EPub Agreement") or extended
or modified the terms of any EPub Agreement which (i) involves the payment
of greater than $25,000 per annum or which extends for more than one (1)
year, (ii) involves any payment or obligation to any Affiliate of EPub
other than in the Ordinary Course of Business, (iii) involves the sale of
any material assets, (iv) involves any OEM relationship, or (v) involves
any license of EPub's technology;
(c) no party (including EPub) has accelerated, terminated, made
modifications to, or canceled any agreement, contract, lease, or license to
which EPub is a party or by which it is bound and EPub has not modified,
canceled or waived or settled any debts or claims held by it, outside the
Ordinary Course of
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Business, or waived or settled any rights or claims of a substantial value,
whether or not in the Ordinary Course of Business;
(d) none of the assets of EPub, tangible or intangible, has become
subject to any Security Interest;
(e) EPub has not made any capital expenditures except in the Ordinary
Course of Business and not exceeding $25,000 in the aggregate of all such
capital expenditures;
(f) EPub has not made any capital investment in, or any loan to, any
other Person;
(g) EPub has not created, incurred, assumed, prepaid or guaranteed any
indebtedness for borrowed money and capitalized lease obligations, or
extended or modified any existing indebtedness;
(h) EPub has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(i) there has been no change made or authorized in the Certificate of
Incorporation or bylaws of EPub;
(j) EPub has not declared, set aside, or paid any dividend or made any
distribution with respect to its capital stock (whether in cash or in kind)
or redeemed, purchased, or otherwise acquired any of its capital stock;
(k) EPub has not experienced any damage, destruction, or loss (whether
or not covered by insurance) to its property in excess of $10,000 in the
aggregate of all such damage, destruction and losses;
(l) EPub has not suffered any repeated, recurring or prolonged
shortage, cessation or interruption of inventory shipments, supplies or
utility services;
(m) EPub has not made any loan to, or entered into any other
transaction with, or paid any bonuses in excess of an aggregate of $10,000
to, any of its Affiliates, directors, officers, or employees or their
Affiliates, and, in any event, any such transaction was on fair and
reasonable terms no less favorable to EPub than would be obtained in a
comparable arm's length transaction with a Person which is not such a
director, officer or employee or Affiliate thereof;
(n) EPub has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any
existing such contract or agreement;
(o) EPub has not granted any increase in the base compensation of any
of its directors or officers, or, except in the Ordinary Course of
Business, any of its employees;
(p) EPub has not adopted, amended, modified, or terminated any bonus,
profit-sharing, incentive, severance, or other plan, contract, or
commitment for the benefit of any of its directors, officers, or employees
(or taken any such action with respect to any other Employee Benefit Plan);
(q) EPub has not made any other change in employment terms for any of
its directors or officers, and EPub has not made any other change in
employment terms for any other employees outside the Ordinary Course of
Business;
(r) EPub has not suffered any adverse change or any threat of any
adverse change in its relations with, or any loss or threat of loss of, any
of its major customers, distributors or dealers;
(s) EPub has not suffered any adverse change or any threat of any
adverse change in its relations with, or any loss or threat of loss of, any
of it major suppliers;
(t) EPub has not received notice or had knowledge of any actual or
threatened labor trouble or strike, or any other occurrence, event or
condition of a similar character;
(u) EPub has not changed any of the accounting principles followed by
it or the method of applying such principles;
(v) EPub has not made a change in any of its banking or safe deposit
arrangements;
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(w) EPub has not entered into any transaction other than in the
Ordinary Course of Business; and
(x) EPub is not obligated to do any of the foregoing.
5.10 Undisclosed Liabilities. Subject to the limitation set forth in the
next sentence, EPub has no liability (whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due, including any liability for
taxes) of a character which, under GAAP, should be accrued, shown or disclosed
on a balance sheet of EPub, except for (i) liabilities set forth on the Most
Recent Balance Sheet and (ii) liabilities which have arisen after the Most
Recent Fiscal Period End in the Ordinary Course of Business. It is understood
and agreed that the representation and warranty set forth in the preceding
sentence shall not have the effect of expanding the scope of the representations
and warranties of EPub and the Majority Stockholders in this Section 5 as to
matters specifically addressed by other representations and warranties in this
Section 5 and which are limited to information of which EPub or the Majority
Stockholders have knowledge, such that the representations and warranties of
EPub and the Majority Stockholders as to such matters would extend to
information of which EPub or the Majority Stockholders have no knowledge.
5.11 Legal Compliance. EPub has complied with all applicable laws
(including rules, regulations, codes, plans, injunctions, judgments, orders,
decrees, rulings, and charges thereunder) of federal, state, local, and foreign
governments (and all agencies thereof). No action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, notice or inquiry has been
filed or commenced against, or received by, any governmental body alleging any
failure to so comply. EPub has all licenses, permits, approvals, registrations,
qualifications, certificates and other governmental authorizations that are
necessary for the operations of EPub as they are presently conducted.
5.12 Tax Matters
(a) For purposes of this Agreement, "Taxes" means all federal, state,
municipal, local or foreign income, gross receipts, windfall profits, severance,
property, production, sales, use, value added, license, excise, franchise,
employment, withholding, capital stock, levies, imposts, duties, transfer and
registration fees or similar taxes or charges imposed on the income, payroll,
properties or operations of EPub, together with any interest, additions or
penalties, deficiencies or assessments with respect thereto and any interest in
respect of such additions or penalties.
(b) EPub has filed all reports and returns with respect to any Taxes ("Tax
Returns") that it was required to file. All such Tax Returns were correct and
complete in all respects, and no such Tax Returns are currently the subject of
audit. All Taxes owed by EPub (whether or not shown on any Tax Return) were paid
in full when due or are being contested in good faith and are supported by
adequate reserves on the Most Recent Financial Statements. EPub has provided
adequate reserves on its Financial Statements for the payment of any taxes
accrued but not yet due and payable. EPub is not currently the beneficiary of
any extension of time within which to file any Tax Return, and EPub has not
waived any statute of limitations in respect of Taxes or agreed to any extension
of time with respect to any Tax assessment or deficiency.
(c) There is no dispute or claim concerning any Tax liability of EPub
either (A) claimed or raised by any authority in writing or (B) based upon
personal contact with any agent of such authority. There are no tax liens of any
kind upon any property or assets of EPub, except for inchoate liens for taxes
not yet due and payable.
(d) EPub has not filed a consent under Sec. 341(f) of the Internal Revenue
Code of 1986, as amended (the "Code") concerning collapsible corporations. EPub
has not made any payments, is not obligated to make any payments, and is not a
party to any agreement that under any circumstances could obligate it to make
any payments as a result of the consummation of the Merger that will not be
deductible under Code Sec. 280G. EPub has not been a United States real property
holding corporation within the meaning of Code Sec. 897(c)(2) during the
applicable period specified in Code Sec. 897(c)(1)(A)(ii). EPub is not a party
to any tax allocation or sharing agreement. EPub (A) has not been a member of
any affiliated group within the meaning of Code Sec. 1504 or any similar group
defined under a similar provision of state, local, or foreign law (an
"Affiliated Group") filing a consolidated federal Income Tax Return (other than
a group the common
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parent of which was EPub) and (B) has no any liability for the taxes of any
Person (other than any of EPub) under Treas. Reg. Section 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(e) The unpaid Taxes of EPub (A) did not, as of the Most Recent Fiscal
Period End, exceed by any amount the reserve for Tax liability (other than any
reserve for deferred taxes established to reflect timing differences between
book and tax income) set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) and (B) will not exceed that reserve as
adjusted for operations and transactions through the Closing Date in accordance
with the past custom and practice of EPub in filing its Tax Returns.
5.13 Properties
(a) EPub does not currently own and has never previously owned any real
property.
(b) Section 5.13 of the EPub Disclosure Letter lists and describes briefly
all real property leased or subleased to EPub. EPub has delivered to FV correct
and complete copies of the leases and subleases listed in Section 5.13 of the
EPub Disclosure Letter (as amended to date). With respect to each lease and
sublease listed in Section 5.13 of the EPub Disclosure Letter:
(i) the lease or sublease is legal, valid, binding, enforceable, and
in full force and effect in all respects against EPub and, to EPub's and
the Majority Stockholders' knowledge, the other parties thereto;
(ii) neither EPub nor, to EPub's or the Majority Stockholders'
knowledge, any other party thereto is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach
or default or permit termination, modification, or acceleration thereunder;
(iii) neither EPub nor, to EPub's or the Majority Stockholders'
knowledge, any other party thereto has repudiated any provision thereof;
(iv) there are no disputes, oral agreements, or forbearance programs
in effect as to the lease or sublease: and
(v) EPub has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold.
5.14 Intellectual Property
(a) To the knowledge of EPub and the Majority Stockholders, EPub has not
interfered with, infringed upon, misappropriated or violated any patent rights
of third parties. EPub has not interfered with, infringed upon, misappropriated
or violated any non-patent Intellectual Property rights of third parties, and
has not received since its inception any charge, complaint, claim, demand, or
notice alleging any interference, infringement, misappropriation, or violation
of any non-patent Intellectual Property rights of third parties (including any
claim that any of EPub must license or refrain from using any Intellectual
Property rights of any third party). No third party has interfered with,
infringed upon, misappropriated, or violated any Intellectual Property rights of
EPub. EPub owns or has the right to all Intellectual Property necessary to the
conduct of its business as it is currently conducted or is reasonably
contemplated to be conducted, including, without limitation, the design,
development, manufacture, use and sale of all products and technology currently
offered or sold by EPub or under development by EPub and the performance of all
services provided or contemplated to be provided by EPub.
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(b) Section 5.14(b) of the EPub Disclosure Letter identifies each patent or
registration which has been issued to EPub or any Affiliate of EPub and
identifies each pending patent application or application for registration which
EPub or any Affiliate of EPub has made. EPub has delivered to FV correct and
complete copies of all such patents, registrations and applications. Section
5.14(b) of the EPub Disclosure Letter also identifies (i) each trade name or
unregistered trademark of EPub or any Affiliate of EPub and (ii) each
unregistered copyright owned by EPub or any Affiliate of EPub. With respect to
each item of Intellectual Property required to be identified in Section 5.14(b)
of the EPub Disclosure Letter:
(i) EPub possesses all right, title, and interest in and to the item,
free and clear of any Security Interest, license, or other restriction;
(ii) the item is legal and valid and in full force and effect and is
not subject to any outstanding injunction, judgment, order, decree, ruling,
or charge;
(iii) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or threatened in writing which
challenges the legality, validity, enforceability, use or ownership of the
item; and
(iv) other than pursuant to the contracts listed in Section 5.14(b) of
the EPub Disclosure Letter, EPub has never agreed to indemnify any Person
for or against any interference, infringement, misappropriation, or other
conflict with respect to the item.
(c) Section 5.14(c) of the EPub Disclosure Letter identifies each item of
Intellectual Property material to the operation of EPub's business that any
third party owns and that EPub uses pursuant to license, sublicense, agreement,
or permission. EPub has delivered to FV correct and complete copies of all such
licenses, sublicenses, agreements, and permissions (as amended to date). With
respect to each item of Intellectual Property required to be identified in
Section 5.14(c) of the EPub Disclosure Letter:
(i) the license, sublicense, agreement or permission covering the item
is legal, valid, binding, enforceable, and in full force and effect in all
respects against EPub and, to EPub's and the Majority Stockholders'
knowledge, the other parties thereto;
(ii) neither EPub nor, to EPub's or the Majority Stockholders'
knowledge, any other party thereto, is in breach or default, and no event
has occurred which with notice or lapse of time would constitute a breach
or default or permit termination, modification or acceleration thereunder;
(iii) neither EPub nor, to EPub's or the Majority Stockholders'
knowledge, any other party thereto, has repudiated any provision thereof;
and
(iv) EPub has not granted any sublicense or similar right with
respect to the license, sublicense, agreement, or permission covering the
item.
(d) EPub has taken all reasonable steps that are required to protect EPub's
rights in confidential information and trade secrets of EPub or provided by any
third party to EPub. Without limiting the foregoing, EPub has, and enforces, a
policy requiring each employee, consultant and contractor to execute proprietary
information and confidentiality and assignment agreements substantially in
EPub's standard forms, and all current and former employees, consultants and
contractors of EPub have executed such an agreement.
5.15 Tangible Assets. The buildings, machinery, equipment, and other
tangible assets that EPub owns and leases have been maintained in accordance
with normal industry practice, and are in good operating condition and repair
(subject to normal wear and tear) and are usable in the Ordinary Course of
Business.
5.16 Inventory. All of the inventory of EPub, which consists of raw
materials and supplies, manufactured and processed parts, work in process, and
finished goods, is usable, merchantable and fit for the purpose for which it was
procured or manufactured, and none of such inventory is slow-moving, obsolete,
damaged, or defective, subject only to the reserve for inventory write down set
forth on the face of the Most Recent Balance Sheet as adjusted for operations
and transactions through the Closing Date in accordance with the past custom and
practice of EPub.
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5.17 Contracts. Section 5.17 of the EPub Disclosure Letter lists the
following contracts, agreements, commitments and other arrangements to which
EPub is a party or by which EPub or any of its assets is bound:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person that involves aggregate annual
payments of more than $10,000;
(b) any agreement (or group of related agreements) for the purchase or
sale of raw materials, commodities, supplies, products, or other personal
property, or for the furnishing or receipt of services, the performance of
which will extend over a period of more than one year or involve
consideration in excess of $25,000;
(c) any agreement for the purchase of supplies, components, products
or services from single source suppliers, custom manufacturers or
subcontractors that involves aggregate annual payments of more than
$25,000;
(d) any agreement concerning a partnership or joint venture;
(e) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed
money or any capitalized lease obligation in excess of $25,000 or under
which a Security Interest has been imposed on any of its assets, tangible
or intangible;
(f) any agreement concerning noncompetition or restraint of trade;
(g) any agreement with any EPub stockholder or any of such
stockholder's Affiliates (other than EPub) or with any Affiliate of EPub;
(h) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of its current or former directors, officers or
employees;
(i) any collective bargaining agreement;
(j) any agreement for the employment (other than employment agreements
that are terminable at will by EPub) of any individual on a full-time,
part-time, consulting, or other basis;
(k) any executory agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees;
(l) any agreement under which the consequences of a default or
termination could have a Material Adverse Effect;
(m) any executory agreement with any original equipment manufacturer
entered into or performed by EPub;
(n) any executory agreement pursuant to which EPub is obligated to
provide maintenance, support or training for its products;
(o) any agreement pursuant to which any of EPub's products are
manufactured which involves aggregate annual payments of more than $25,000;
and
(p) any license, agreement or other permission which EPub or any
Affiliate of EPub has granted to any third party with respect to any of the
Intellectual Property used in EPub's business.
(q) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $25,000 or which
is expected to continue for more than one (1) year from the date hereof.
EPub has delivered to FV a correct and complete copy of each written agreement
listed in Section 5.17 of the EPub Disclosure Letter (as amended to date) and a
written summary setting forth the terms and conditions of each oral agreement
referred to in Section 5.17 of the EPub Disclosure Letter. With respect to each
such agreement: (A) the agreement is legal, valid, binding, enforceable, and in
full force and effect in all respects; (B) neither EPub nor, to EPub's or the
Majority Stockholders' knowledge, any other party is in breach or
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default, and no event has occurred, which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; (C) no party has repudiated any provision of
the agreement; and (D) EPub does not have any reason to believe that the service
called for thereunder cannot be supplied in accordance with its terms and
without resulting in a loss to any of EPub.
5.18 Notes and Accounts Receivable. All notes and accounts receivable of
EPub, all of which are reflected properly on the books and records of EPub, are
valid receivables subject to no setoffs, defenses or counterclaims, are current
and, to EPub's and the Majority Stockholders' knowledge, collectible subject in
each case only to the reserve for bad debts set forth on the face of the Most
Recent Balance Sheet as adjusted for operations and transactions through the
Closing Date in accordance with the past custom and practice of EPub.
5.19 Power of Attorney. There are no outstanding powers of attorney
executed on behalf of EPub.
5.20 Insurance. EPub has delivered to FV copies of each insurance policy
(including policies providing property, casualty, liability, and workers'
compensation coverage and bond and surety arrangements) with respect to which
EPub is a party, a named insured, or otherwise the beneficiary of coverage. With
respect to each such insurance policy: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect (and there has been no notice of
cancellation or nonrenewal of the policy received); (B) neither EPub nor any
other party to the policy is in breach or default (including with respect to the
payment of premiums or the giving of notices), and no event has occurred which,
with notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; (C) no
party to the policy has repudiated any provision thereof; and (D) there has been
no failure to give any notice or present any claim under the policy in due and
timely fashion. Section 5.20 of the EPub Disclosure Letter describes any
self-insurance arrangements presently maintained by EPub.
5.21 Litigation. Section 5.21 of the EPub Disclosure Letter sets forth
each instance in which EPub (or any of its assets) (i) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is or
has been since its inception a party, or, to the knowledge of EPub and the
Majority Stockholders, is threatened to be made a party, to any action, suit,
proceeding, hearing, arbitration, or investigation of, in, or before any court
or quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction or before any arbitrator. To the knowledge of EPub and the
Majority Stockholders', there are no facts or circumstances which would form the
basis of any claim against EPub.
5.22 Product Warranty. Substantially all of the products licensed,
manufactured, sold, leased, and delivered and all services provided by EPub have
conformed in all material respects with all applicable contractual commitments
and all express warranties, and EPub has no liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due) for replacement or repair thereof or other damages in connection therewith,
other than in the Ordinary Course of Business in an aggregate amount not
exceeding $25,000.
5.23 Product Liability. Section 5.23 of the EPub Disclosure Letter
contains a description of all product liability claims and similar claims,
actions, litigation and other proceedings relating to EPub products that are
presently pending or which, to the knowledge of EPub and the Majority
Stockholders', are threatened, or which have been asserted or commenced against
EPub within the last five (5) years, in which a party thereto either requests
injunctive relief (whether temporary or permanent) or alleges damages (whether
or not covered by insurance).
5.24 Employees. No executive, key employee, or significant group of
employees has advised any executive officer of EPub that he, she or they plan to
terminate employment with EPub during the next 12 months. EPub is not a party to
or bound by any collective bargaining agreement, nor has it experienced any
strike or grievance, claim of unfair labor practices, or other collective
bargaining dispute. To EPub's and the Majority Stockholders' knowledge, there is
no organizational effort presently being made or threatened by or on behalf of
any labor union with respect to employees of EPub.
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5.25 Employee Benefits
(a) Section 5.25(a) of the EPub Disclosure Letter lists each Employee
Benefit Plan that EPub maintains or to which EPub contributes or is obligated to
contribute.
(i) Each such Employee Benefit Plan (and each related trust, or fund
established by EPub) complies in form and in operation in all respects with
their terms, the applicable requirements of ERISA, the Code, and other
applicable laws.
(ii) All required reports and descriptions (including Form 5500 Annual
Reports, Summary Annual Reports, PBGC-1's, and Summary Plan Descriptions)
have been filed or distributed appropriately with respect to each such
Employee Benefit Plan. The requirements of Code Sec. 4980B have been met in
all respects with respect to each such Employee Benefit Plan which is an
Employee Welfare Benefit Plan. No event has occurred and no condition
exists with respect to any Employee Benefit Plan that would subject EPub to
any tax under Code Sections 4972, 4976 or 4979 or to a fine under ERISA
Sections 502(i) or 502(l).
(iii) All contributions, premiums or other payments (including all
employer contributions and employee salary reduction contributions) which
are due have been paid to each Employee Benefit Plan and all contributions,
premiums or other payments for any period ending on or before the Closing
Date which are not yet due shall been paid to each such Employee Benefit
Plan or shall be accrued in accordance with the custom and practice of
EPub.
(iv) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan and which is intended to qualify under Code Sec. 401(a), has
received a favorable determination letter from the Internal Revenue Service
with respect to the qualification of the plan under Code Section 401(a) and
the exemption of any corresponding trust under Code Section 501, unless the
Internal Revenue Service is deemed to have approved the form of such Plan
under applicable IRS Revenue Procedures. A copy of such determination
letters have been provided to FV and nothing has occurred since the date of
each such determination letter that would cause such Employee Pension
Benefit Plan to lose its ability to rely on such letter. Each Employee
Pension Benefit Plan has been restated to comply with the 1986 Tax Reform
Act and subsequent applicable tax legislation to the extent required by
governing tax law. A copy of any determination letters applicable to such
restatement which have been received by EPub has been provided to FV.
(v) Neither EPub nor any other Person or entity under common control
with EPub within the meaning of Section 414(b), (c) or (m) of the Code and
the regulations thereunder has now or at any previous time, maintained,
established, sponsored, participated in, or contributed to, any Employee
Pension Benefit Plan that is subject to Part 3 of Subtitle B of Title I of
ERISA, Title IV of ERISA or Section 412 of the Code. No Employee Welfare
Benefit Plan or other Employee Benefit Plan providing welfare benefits is
funded with a trust or other funding vehicle, other than insurance policies
or contracts with a health maintenance organization or similar health care
delivery entity.
(vi) EPub has delivered to FV correct and complete copies of the plan
documents and summary plan descriptions, the most recent determination
letter received from the Internal Revenue Service, if any, the most recent
Form 5500 Annual Report, and all related trust agreements, insurance
contracts, and other funding agreements which implement each maintained
Employee Benefit Plan. The terms of any such documentation or other
communication do not prohibit FV from amending or terminating any such
Employee Benefit Plan.
(b) With respect to each Employee Benefit Plan that EPub, and/or any
controlled group of corporations within the meaning of Code Sec. 1563 (a
"Controlled Group of Corporations") which includes EPub, maintains or ever has
maintained or to which any of them contributes, ever contributed, or ever has
been required to contribute:
(i) There have been no prohibited transactions within the meaning of
ERISA Sec 406 and Code Sec. 4975 with respect to any such Employee Benefit
Plan. No fiduciary within the meaning of ERISA
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Sec. 3(21) (a "Fiduciary"), has any liability for breach of fiduciary duty
or any other failure to act or comply in connection with the administration
or investment of the assets of any such Employee Benefit Plan. No action,
suit, proceeding, hearing, or investigation with respect to the
administration or the investment of the assets of any such Employee Benefit
Plan (other than routine claims for benefits) is pending or threatened.
(c) Except as disclosed in Schedule 5.25(c) of the EPub Disclosure Letter,
EPub does not maintain or contribute to, has never maintained or contributed to,
and has never been required to contribute to, any Employee Welfare Benefit Plan
or any other Employee Benefit Plan providing medical, health, or life insurance
or other welfare-type benefits for current or future retired or terminated
employees, their spouses, or their dependents (other than in accordance with
Code Sec. 4980B or Part 6 of Subtitle B of Title I of ERISA).
(d) There is no liability in connection with any Employee Benefit Plan that
is not fully disclosed or provided for on the Most Recent Balance Sheet for
which disclosure would be required under generally accepted accounting
principles.
(e) No Employee Benefit Plan or EPub has any liability to any plan
participant, beneficiary or other person by reason of the payment of benefits or
the failure to pay benefits with respect to benefits under or in connection with
any such Employee Benefit Plan, other than claims in the normal administration
of such plans.
5.26 Guaranties. EPub is not a guarantor or otherwise responsible for any
liability or obligation (including indebtedness) of any other Person.
5.27 Environment, Health and Safety.
(a) For purposes of this Agreement, the following terms have the following
meanings:
"Environmental, Health, and Safety Laws" means any and all federal,
state, local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, plans, injunctions, judgments, decrees, requirements or
rulings now or hereafter in effect, imposed by any governmental authority
regulating, relating to, or imposing liability or standards of conduct
relating to pollution or protection of the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata), public health and safety, or employee health and
safety, concerning any Hazardous Materials or Extremely Hazardous
Substances, as such terms as defined herein, or otherwise regulated, under
any Environmental, Health and Safety Laws. The term "Environmental, Health
and Safety Laws" shall include, without limitation, the Clean Water Act
(also known as the Federal Water Pollution Control Act), 33 U.S.C. Section
1251 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601 et
seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Federal
Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 136 et seq.,
the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Section 9601 et seq., the Superfund Amendment and Reauthorization
Act of 1986, Public Law 99-4, 99, 100 Stat. 1613, the Emergency Planning
and Community Right to Know Act, 42 U.S.C. Section 11001 et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., and
the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq., all
as amended, together with any amendments thereto, regulations promulgated
thereunder and all substitutions thereof.
"Extremely Hazardous Substance" means a substance on the list described in
Section 302 (42 U.S.C. Section 11002(a)(2)) of the Emergency Planning and
Community Right to Know Act, 42 U.S.C. Section 11001 et seq., as amended.
"Hazardous Material" means any material or substance that, whether by its
nature or use, is now or hereafter defined as a pollutant, dangerous substance,
toxic substance, hazardous waste, hazardous material, hazardous substance or
contaminant under any Environmental, Health and Safety Laws, or which is toxic,
explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic or otherwise hazardous and
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which is now or hereafter regulated under any Environmental, Health and Safety
Laws, or which is or contains petroleum, gasoline, diesel fuel or other
petroleum hydrocarbon product.
(b) Each of EPub and its predecessors and Affiliates (A) has complied with
the Environmental, Health, and Safety Laws (and no action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, directive or notice
has been filed or commenced against any of them alleging any such failure to
comply), (B) has obtained and been in substantial compliance with all of the
terms and conditions of all permits, licenses, certificates and other
authorizations which are required under the Environmental, Health, and Safety
Laws, and (C) has complied in all material respects with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules, and timetables which are contained in the Environmental, Health, and
Safety Laws.
(c) EPub has no liability (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due), and none
of EPub and its predecessors and Affiliates has handled or disposed of any
Hazardous Materials or extremely Hazardous Substances, arranged for the disposal
of any Hazardous Materials or Extremely Hazardous Substances, exposed any
employee or other individual to any Hazardous Materials or Extremely Hazardous
Substances, or owned or operated any property or facility in any manner that
could give rise to any liability, for damage to any site, location, surface
water, groundwater, land surface or subsurface strata, for any illness of or
personal injury to any employee or other individual, or for any reason under any
Environmental, Health, and Safety Law.
(d) No Extremely Hazardous Substances are currently, or have been, located
at, on, in, under or about all properties and equipment used in the business of
EPub and its predecessors and Affiliates.
(e) No Hazardous Materials are currently located at, on, in, under or about
all properties and equipment used in the business of EPub and its predecessors
and Affiliates in a manner which violates any Environmental, Health and Safety
Laws or which requires cleanup or corrective action of any kind under any
Environmental, Health and Safety Laws.
5.28 Certain Business Relationships with EPub. Other than SOFTVEN and
Bradley Feld, neither the stockholders of EPub nor any director or officer of
EPub, nor any member of their immediate families, nor any Affiliate of any of
the foregoing, owns, directly or indirectly, or has an ownership interest in (a)
any business (corporate or otherwise) which is a party to, or in any property
which is the subject of, any business arrangement or relationship of any kind
with EPub, or (b) any business (corporate or otherwise) which conducts the same
business as, or a business similar to, that conducted by EPub.
5.29 No Adverse Developments. There is no development (exclusive of
general economic factors affecting business in general or the Internet,
messaging or electronic publishing sectors) or, to EPub's or the Majority
Stockholders' knowledge, threatened development affecting EPub (or affecting
customers, suppliers, employees, and other Persons which have relationships with
EPub) that (i) is having or is reasonably likely to have a Material Adverse
Effect on EPub, or (ii) would prevent FV from conducting the business of the
Surviving Corporation following the Closing in the manner in which it was
conducted by EPub prior to the Closing.
5.30 Full Disclosure. No representation or warranty in this Section 5 or
in any document delivered by any EPub Stockholder or EPub pursuant to the
transactions contemplated by this Agreement, and no statement, list, certificate
or instrument furnished to FV pursuant hereto or in connection with this
Agreement, when taken as a whole, contains any untrue statement of a material
fact, or omits to state any fact necessary to make any statement herein or
therein not materially misleading. There is no fact, development or threatened
development (excluding general economic factors affecting business in general or
the Internet, messaging or electronic publishing sectors and developments
resulting from EPub's performance of its obligations under this Agreement) which
EPub has not disclosed to FV in writing and which is having or may have a
Material Adverse Effect on EPub. EPub has delivered to FV true, correct and
complete copies of all documents, including all amendments, supplements and
modifications thereof or waivers currently in effect thereunder, described in
the EPub Disclosure Letter.
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6. Representations and Warranties of FV and Sub. FV and Sub represent and
warrant to EPub that the statements contained in this Section 6 are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 6), except as
set forth in the Disclosure Letter delivered by FV to EPub on the date hereof
(and initialed by FV and EPub) (referred to herein as the "FV Disclosure
Letter"). The FV Disclosure Letter will be arranged in paragraphs corresponding
to the numbered paragraphs contained in this Section 6.
6.1 Organization, Qualification, and Corporate Power. FV and Sub are
corporations duly organized, validly existing, and in good standing under the
laws of the State of Delaware. FV and Sub are duly authorized to conduct
business and are in good standing under the laws of each other jurisdiction
where such qualification is required. FV and Sub have full corporate power and
authority, and have all necessary licenses and permits, to carry on the
businesses in which they are engaged and to own and use the properties owned and
used by them.
6.2 Authorization. FV and Sub have full power and authority to execute and
deliver this Agreement and the Ancillary Agreement to which they are parties,
and to consummate the transactions contemplated hereunder and to perform their
obligations hereunder, and no other proceedings on the part of FV or Sub are
necessary to authorize the execution, delivery and performance of this Agreement
and the Ancillary Agreement to which they are parties. This Agreement and the
Ancillary Agreement to which they are parties and the transactions contemplated
hereby and thereby have been approved by FV's Board of Directors. This Agreement
and the Ancillary Agreement to which they are parties constitute the valid and
legally binding obligations of FV and/or Sub, enforceable against FV and/or Sub
in accordance with their respective terms and conditions. Neither FV nor Sub
need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to
consummate the transactions contemplated by this Agreement.
6.3 Capitalization
(a) As of June 30, 1998, the authorized capital stock of FV consisted of
(i) 5,000,000 shares of Preferred Stock, $0.001 par value, none of which are
issued or outstanding and (ii) 40,000,000 shares of Common Stock, $0.001 par
value of which 31,240,461 shares were issued and outstanding. All of the
outstanding shares of FV's capital stock have been duly authorized and validly
issued and are fully paid and nonassessable. Except as set forth in this Section
6.3 or as described in the FV SEC Reports (as defined herein) or in the FV
Disclosure Letter, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of FV or obligating FV to issue or sell any shares of capital
stock of, or other equity interests in, FV.
(b) The shares of FV Common Stock to be issued pursuant to Section 3.1 of
this Agreement are duly authorized and reserved for issuance, and upon issuance
thereof will be validly issued, fully paid and nonassessable.
6.4 Noncontravention. Neither the execution and the delivery of this
Agreement nor the consummation of the transactions contemplated hereby, will (A)
violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which FV or Sub is subject or any provision of
their respective charters or bylaws, or (B) (i) conflict with, (ii) result in a
breach of, (iii) constitute a default under, (iv) result in the acceleration of,
(v) create in any party the right to accelerate, terminate, modify, or cancel,
or (vi) require any notice under, any agreement, contract, lease, license,
instrument, or other arrangement to which FV is a party or by which its is bound
or to which any of its assets is subject.
6.5 SEC Filings. FV has filed all forms, reports and documents required to
be filed with the SEC since December 31, 1996, and has heretofore made available
to EPub, in the form filed with the SEC, (i) its Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, (ii) its Quarterly Reports on Form 10-Q
for the period ended March 31, 1998, (iii) the proxy statement relating to FV's
annual meeting of stockholders held on June 23, 1998, and (iv) all other reports
filed by FV with the SEC since December 31,
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1997 (collectively, the "FV SEC Reports"). The FV SEC Reports (i) were prepared
in accordance with the requirements of the Exchange Act, and (ii) did not at the
time they were filed (or if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
6.6 Brokers' Fees. FV does not have any liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
6.7 Absence of Certain Changes. Since June 30, 1998 (the "FV Balance Sheet
Date"), FV has conducted its business in the ordinary course and there has not
occurred: (i) any Material Adverse Effect to FV; (ii) any acquisition, sale or
transfer of any material asset of FV other than in the ordinary course of
business; (iii) any change in accounting methods or practices by FV; or (iv) any
material contract entered into by FV, other than as provided to EPub, or any
termination of any material contract to which FV is a party.
7. Pre-Closing Covenants. With respect to the period between the execution
of this Agreement and the earlier of the termination of this Agreement and the
Effective Time of the Merger:
7.1 General. Each of the Parties will use their reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 9 below).
7.2 Notices and Consents. EPub will give any notices to third parties and
will use its reasonable best efforts to obtain any third party consents that are
required in connection with the matters identified in Section 5.4 of the EPub
Disclosure Letter or otherwise required in connection with the Merger so as to
preserve all material rights of or benefits to the Company. Each of the Parties
will give any notices to, make any filings with, and use its reasonable best
efforts to obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters identified in Section 5.4
of the EPub Disclosure Letter or as otherwise required in connection with the
Merger.
7.3 Operation of Business. EPub will not engage in any practice, take any
action, or enter into any transaction outside the Ordinary Course of Business.
Without limiting the generality of the foregoing, EPub will not (i) cause or
permit any amendment to its Certificate of Incorporation or Bylaws, (ii) issue
any capital stock or issue or grant any options, warrants or rights to acquire
any capital stock (other than in connection with the exercise of stock options
outstanding on the date of this Agreement) or (iii) declare, set aside, or pay
any dividend or make any distribution with respect to its capital stock or
redeem, purchase, or otherwise acquire any of its capital stock, (iv) pay any
bonuses or increase the amount of compensation otherwise payable to any
employee, consultant or director or (v) otherwise engage in any practice, take
any action, or enter into any transaction of the sort described in Section 5.9
above. In addition, EPub will comply with all laws, statutes, ordinances, rules,
regulations and orders applicable to it or to the conduct of its business,
except for violations that would not subject EPub to a penalty or loss that
would constitute a Material Adverse Effect on EPub.
7.4 Preservation of Business. EPub will use its best efforts to keep its
business and properties substantially intact, including its present operations,
physical facilities, working conditions, and relationships with lessors,
licensors, suppliers, customers, and employees.
7.5 Access to Information. EPub will permit FV and its representatives to
have access at all reasonable times, and in a manner so as not to interfere with
the normal business operations of EPub, to the business and operations of EPub.
Neither such access, inspection and furnishing of information to FV and its
representatives, nor any investigation by FV and its representatives, shall in
any way diminish or otherwise affect FV's right to rely on any representation or
warranty made by EPub or the Majority Stockholders hereunder.
7.6 Notice of Developments. EPub will give prompt written notice to FV of
any material adverse development causing a breach of any of its own
representations and warranties in Section 5 above. No
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disclosure by EPub pursuant to this Section 7.6, however, shall be deemed to
amend or supplement the EPub Disclosure Letter or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
7.7 Preparation of the Proxy/Information Statement. As promptly as
practicable after the date hereof, FV shall prepare and file with the SEC a
joint proxy statement/information statement (the "Proxy Statement") for purposes
of soliciting the approval of the respective stockholders of FV and EPub of the
Merger and this Agreement. FV acknowledges that EPub and its counsel may
participate in the preparation of the Proxy Statement, provided that the final
determination of any issues related thereto shall be made by FV, in consultation
with its counsel. Each of FV and EPub will notify the other promptly upon the
receipt from the SEC or its staff or any other government officials of any
inquiries regarding, or requests for amendments or supplements to, or
supplemental information with respect to, the Proxy Statement, and will supply
the other party with copies of all correspondence between such party or any of
its representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the Proxy Statement or
the Merger. EPub shall furnish all information concerning the EPub and the
holders of EPub Capital Stock as may be reasonably requested in connection with
any of the foregoing.
7.8 Solicitation of Proxy Statement and Written Consents. EPub will
solicit the vote or written consent to the Merger from each of the stockholders
and, if necessary, option holders of EPub as soon as practicable following the
execution of this Agreement, and shall use reasonable efforts to obtain such
consent. FV shall call a special meeting of its stockholders (the "FV
Stockholders Meeting") for purposes of voting upon the Merger and this
Agreement, and will exert reasonable efforts to obtain stockholder proxies. Such
special meeting of stockholders shall be held as promptly as practicable after
the SEC has approved or declined to review the Proxy Statement. The Board of
Directors of EPub will recommend unanimously in the Proxy Statement the approval
of the Merger by the EPub Stockholders. The Board of Directors of FV will
recommend in the Proxy Statement the approval of the Merger by the FV
Stockholders and, in any event, the Merger will be submitted to the stockholders
of FV unless EPub otherwise agrees in writing.
7.9 Exclusivity. None of the Majority Stockholders nor EPub will (i)
solicit, initiate, or encourage the submission of any proposal or offer from any
Person relating to the acquisition of any capital stock or other voting
securities, or any portion of the assets, of EPub or its subsidiaries (including
any acquisition structured as a merger, consolidation, or share exchange) or
(ii) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. None of the Majority Stockholders will transfer or offer to transfer
any of their EPub Capital Stock. The Majority Stockholders will vote their EPub
Capital Stock in favor of approval and adoption of this Agreement and approval
of the Merger and none of the Majority Stockholders will vote their EPub Capital
Stock in favor of any alternative acquisition structured as a merger,
consolidation, share exchange or asset acquisition.
8. Post-Closing Covenants. With respect to the period following the
Effective Time of the Merger:
8.1 General. In case at any time after the Effective Time of the Merger
any further action is necessary to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting Party
(unless the requesting Party is entitled to indemnification therefor under
Section 10 below).
8.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection with (i) any
transaction contemplated under this Agreement or (ii) any fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act, or transaction (A) on or prior to the
Effective Time of the Merger involving EPub or (B) arising out of FV's operation
of the business of the Surviving Corporation following the Effective Time of the
Merger in the manner in which it is presently conducted and planned to be
conducted, each of the other Parties will cooperate with the party, its counsel
in the contest or defense, make available their personnel, and provide such
testimony and access to their books and records as shall be reasonably necessary
in connection with the contest or defense, all at the sole cost and
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expense of the contesting or defending Party (unless the contesting or defending
Party is entitled to indemnification therefor under Section 10 below).
8.3 Transition. None of the Majority Stockholders will take any action
that is designed or intended to have the effect of discouraging any lessor,
licensor, customer, supplier, or other business associate of EPub from
maintaining the same business relationships with the Surviving Corporation after
the Effective Time of the Merger as it maintained with EPub prior to the
Effective Time of the Merger.
8.4 Confidentiality. Each of the Parties hereto hereby agrees to keep such
information or knowledge obtained in any due diligence or other investigation
pursuant to the negotiation and execution of this Agreement or the effectuation
of the transactions contemplated hereby, confidential, except to the extent that
such information is or becomes publicly known or available or is independently
acquired or developed. In this regard, EPub and its employees (including the
Majority Stockholders) and agents acknowledge that FV's Common Stock is publicly
traded and that any information obtained during the course of its due diligence
could be considered to be material non-public information within the meaning of
federal and state securities laws. Accordingly, EPub its employees and agents,
and the Majority Stockholders acknowledge and agree not to engage in any
transactions in FV's Common Stock in violation of applicable insider trading
laws.
8.5 Company Employee Matters.
(a) Employment Offers. All EPub employees will continue to be employees of
EPub as of the day after the Effective Date; provided, however, that the
provisions of this Agreement shall not be construed to affect the status of any
employee as an "at will" employee, or to in any way limit the ability of FV to
terminate the employment of any employee at any time after the Closing.
(b) Salary and Benefits. EPub employees will receive salary and benefits
from FV which are no less favorable than the salary and benefits currently
received. For avoidance of doubt, the previous sentence shall not prevent FV or
EPub from terminating the employment of any employee at any time.
8.6 FIRPTA Compliance. On the Closing Date, EPub shall deliver to FV a
properly executed statement in a form reasonably acceptable to FV for purposes
of satisfying FV's obligations under U.S. Treasury Regulation Section
1.1445-2(c)(3).
8.7 Stockholder Certificate. EPub shall distribute to each EPub
Stockholder, and use reasonable efforts to cause such EPub Stockholders to
execute and deliver to FV prior to the Effective Time of the Merger, a
Stockholder Certificate in the form attached hereto as Exhibit B.
9. Conditions to Obligations to Close
9.1 Conditions to FV's and Sub's Obligation to Close. The obligations of
FV and Sub to consummate the transactions to be performed by them in connection
with the Closing is subject to satisfaction of the following conditions:
(a) the representations and warranties set forth in Section 5 above
shall be true and correct in all material respects at and as of the Closing
Date;
(b) EPub and the Majority Stockholders shall have performed and
complied with all of their respective covenants hereunder in all respects
through the Closing;
(c) EPub shall have procured all of the third party consents specified
in Section 5.4 of the EPub Disclosure Letter;
(d) no action, suit, or proceeding shall be pending before any court
or quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (A) prevent
consummation of any of the transactions contemplated by this Agreement, (B)
cause any of the transactions contemplated by this Agreement to be
rescinded following consummation, (C) affect materially and adversely the
right of FV to control EPub following the Effective Time of the Merger, or
(D) affect materially and adversely the right of FV or EPub to own EPub's
assets (including without limitation its intellectual property
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assets) and to operate EPub's businesses (and no such injunction, judgment,
order, decree, ruling or charge shall be in effect) and no law, statute,
ordinance, rule, regulation or order shall have been enacted, enforced or
entered which has caused any of the effects under clause (A), (B), (C), or
(D) of this Section 9.1(d) to occur.
(e) the President and the Secretary of EPub shall have delivered to FV
a certificate to the effect that each of the conditions specified above in
Section 9.1(a) to 9.1(d) (inclusive) is satisfied in all respects;
(f) the Parties shall have received all authorizations, consents and
approvals of governments and governmental agencies referred to in Section
5.4 or Section 7.2 above or disclosed in a corresponding section in the
EPub Disclosure Letter.
(g) each of Andrew Currie and Brian Makare shall have executed and
delivered a Noncompetition Agreement in the form attached hereto as Exhibit
E, and each of Andrew Currie, Brian Makare and EPub shall have executed and
delivered the Employment Agreements in the form attached hereto as Exhibit
I, and each such agreement shall be in full force and effect;
(h) FV shall have received from counsel to EPub an opinion in form and
substance as set forth in Exhibit F attached hereto, addressed to FV, and
dated as of the Closing Date;
(i) FV and EPub shall have received substantially identical written
opinions of Wilson Sonsini Goodrich & Rosati, P.C., and Cooley Godward LLP,
in form and substance reasonably satisfactory to them, to the effect that
the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code, and such opinions shall not have been withdrawn. In
rendering such opinions, counsel shall be entitled to rely upon the Tax
Representation Statements delivered pursuant to Section 9.1(l) and 9.2(k)
below.
(j) this Agreement and the Merger shall have been approved by the vote
of the holders of at least 90% of the outstanding Capital Stock of EPub and
holders of no more than three percent (3%) of the outstanding EPub Capital
Stock shall have exercised of or shall be eligible to exercise any
dissenters' rights with respect to the Merger;
(k) this Agreement and the Merger, as well as an amendment to FV's
Certificate of Incorporation to increase FV's authorized capital stock,
shall have been approved by the required vote of the holders of Common
Stock of FV pursuant to the DGCL and the rules of the Nasdaq National
Market;
(l) EPub and the Majority Stockholders as a group shall have entered
into Tax Representation Statements to permit the rendering of the opinions
as to tax matters set forth in Section 9.1(i) above;
(m) There shall not have occurred any Material Adverse Effect on EPub
since the date of this Agreement;
(n) Each of the officers and directors of the Company shall have
resigned; and
(o) This Agreement shall have been approved and adopted and the Merger
shall have been approved by holders of a majority of the shares of FV
Common Stock represented and voting on the Merger at the FV Stockholders
Meeting, other than shares held by SOFTBANK Holdings Inc., SOFTBANK
Technology Partners IV, L.P. and their respective affiliates.
(p) As of immediately prior to the Effective Time of the Merger, all
shares of Series A Preferred Stock and Series A-1 Preferred Stock of EPub
shall have been converted into an equal number of shares of Common Stock of
EPub.
(q) Each of the EPub Stockholders shall have executed and delivered to
FV a Stockholder Representation Statement in the form attached hereto as
Exhibit B.
FV may waive any condition (in whole or in part) specified in this Section
9.1 if it executes a writing so stating at or prior to the Closing.
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9.2 Conditions to EPub's Obligation. The obligation of EPub and the
Majority Stockholders to consummate the transactions to be performed by them in
connection with the Closing is subject to satisfaction of the following
conditions:
(a) the representations and warranties set forth in Section 6 above
shall be true and correct in all material respects at and as of the Closing
Date;
(b) FV shall have performed and complied with all of its covenants
hereunder in all respects through the Closing;
(c) no action, suit, or proceeding shall be pending before any court
or quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (A) prevent
consummation of any of the transactions contemplated by this Agreement or
(B) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation (and no such injunction, judgment, order,
decree, ruling, or charge shall be in effect);
(d) the President or other duly authorized officer of FV shall have
delivered to EPub a certificate to the effect that each of the conditions
specified above in Section 9.2(a) to 9.2(c) (inclusive) is satisfied in all
respects;
(e) EPub shall have received from counsel to FV an opinion in form and
substance as set forth in Exhibit H attached hereto, addressed to EPub, and
dated as of the Closing Date;
(f) FV and EPub shall have received substantially identical written
opinions of Wilson Sonsini Goodrich & Rosati, P.C., and Cooley Godward LLP,
in form and substance reasonably satisfactory to them, to the effect that
the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code, and such opinions shall not have been withdrawn. In
rendering such opinions, counsel shall be entitled to rely upon the Tax
Representation Statements delivered pursuant to Section 9.1(l) and 9.2(k)
below;
(g) FV shall have entered into the Registration Rights Agreement in
the form attached hereto as Exhibit J and such agreement shall be in full
force and effect;
(h) The average of the high and low sales prices for the FV Common
Stock as reported by the Nasdaq Stock Market shall not have been less than
$1.40 (as adjusted for stock splits, stock dividends and similar events)
for more than seven days of the fifteen day trading period ending three
days prior to the Closing Date;
(i) FV shall not have received notice of the commencement of any
action for de-listing of the FV Common Stock from the Nasdaq National
Market;
(j) There shall not have occurred any Material Adverse Effect on FV
since the date of this Agreement; provided however, that a decline in the
price of the FV Common Stock shall not be considered a Material Adverse
Effect; and
(k) FV shall have entered into a Tax Representation Statement to
permit the rendering of the opinions as to tax matters set forth in Section
9.2(f) above.
EPub may waive any condition (in whole or in part) specified in this
Section 9.2 if it executes a writing so stating at or prior to the Closing.
10. Survival of Representations, Warranties and Covenants; Escrow
10.1 Survival of Representations and Warranties. All covenants of EPub and
the Majority Stockholders to be performed prior to the Effective Time, and all
representations and warranties of EPub in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Merger for a period of
twelve (12) months from the Effective Time of the Merger; provided that all
covenants, representations and warranties relating to title to and validity of
capital stock and taxes shall survive until expiration of the applicable
statutes of limitations. Following the Effective Time of the Merger, the
remedies of FV and the
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EPub Stockholders for breach of any of the foregoing shall be as set forth in
Section 10.2. All representations and warranties of FV in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Merger for
a period of twelve (12) months from the Effective Time of the Merger.
10.2 Escrow Arrangements
(a) Escrow Fund; Indemnity.
(i) As soon as practicable after the Effective Time, shares of FV
Common Stock which comprise the Escrow Amount, without any act of any EPub
Stockholder, will be deposited with Chase Manhattan Bank & Trust, N.A. as
Escrow Agent (the "Escrow Agent"), such deposit to constitute an escrow
fund (the "Escrow Fund") to be governed by the terms set forth herein. The
portion of the Escrow Amount contributed on behalf of each EPub Stockholder
(other than Catalyst) shall be in proportion to the aggregate Merger
Consideration which such holder would otherwise be entitled under Section
3.1. The Escrow Agent shall not be responsible for confirming that the
shares contributed to the Escrow Fund comprise the Escrow Amount or that
the portion contributed on behalf of each EPub Stockholder is in the proper
proportion, which determination shall be made by FV. The EPub Stockholders
(other than Catalyst), severally but not jointly, agree to indemnify and
hold FV and its officers, directors and affiliates harmless against all
claims, losses, liabilities, damages, deficiencies, costs and expenses,
including reasonable attorneys' fees and expenses of investigation
(hereinafter individually a "Loss" and collectively "Losses") incurred by
FV, its officers, directors, or affiliates (including EPub) directly or
indirectly as a result of (A) any breach of a representation or warranty of
EPub or the Majority Stockholders contained in this Agreement, or (B) any
failure by EPub or the Majority Stockholders to perform or comply with any
covenant contained in this Agreement. The Escrow Fund shall be available to
compensate FV and its affiliates for such Losses. The EPub Stockholders
shall not have any right of contribution from FV or EPub with respect to
any Loss claimed by FV. FV, EPub and the Majority Stockholders each
acknowledge that such Losses, if any, would relate to unresolved
contingencies existing at the Effective Time, which if resolved at the
Effective Time would have led to a reduction in the aggregate Merger
Consideration. Resort to the Escrow Fund shall be the exclusive contractual
remedy of FV and its Affiliates against EPub or any of its directors,
officers, representatives, agents or stockholders or the EPub Stockholders
for any such breaches and misrepresentations if the Merger does close;
provided, however, that nothing herein shall limit any remedy for any
knowing breach of any representation, warranty or covenant or for fraud;
provided further that no EPub Stockholder shall be required to compensate
FV and its affiliates for Losses in an amount exceeding the value of such
EPub Stockholder's pro rated portion of the Merger Consideration.
(ii) FV agrees to indemnify and hold the EPub Stockholders (other than
Catalyst) harmless against all Losses to such EPub Stockholders directly or
indirectly as a result of (A) any breach of a representation or warranty of
FV or Sub contained in this Agreement, or (B) any failure by the FV or Sub
to perform or comply with any covenant contained in this Agreement. FV and
Sub's indemnification obligations pursuant to this Section 10.2 shall be
limited to Losses to the EPub Stockholders with an aggregate amount of
17.14% of value of Merger Consideration; provided, however, that nothing
herein shall limit any remedy for any knowing breach of any representation,
warranty or covenant or for fraud.
(b) Escrow Period; Distribution upon Termination of Escrow Period. Subject
to the following requirements, the Escrow Fund shall remain in existence during
the period following the Closing for twelve (12) months (the "Escrow Period").
At the expiration of the Escrow Period a portion of the Escrow Fund shall be
released from Escrow to the EPub Stockholders (other than Catalyst) in an amount
equal to the Escrow Amount less an amount equal to the sum of (i) all amounts
theretofore distributed out of the Escrow Fund to FV and its Affiliates pursuant
to this Section 10 and (ii) an amount equal to such portion of the Escrow Fund
which, in the reasonable judgment of FV, subject to the reasonable objection of
the Agent (as defined below) and the subsequent arbitration of the matter in the
manner provided in Section 10.2(f) hereof, is necessary to satisfy any
unsatisfied claims specified in any Officer's Certificate theretofore delivered
to the Escrow Agent prior to the end of the Escrow Period, which amount shall
remain in the Escrow Fund (and the Escrow Fund shall remain in existence) until
such claims have been resolved. As soon as all such claims have been resolved
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(such resolution to be evidenced by the written agreement of FV and Agent (as
defined below) or the written decision of the arbitrators as described in
Section 10.2(f)), the Escrow Agent shall deliver to the EPub Stockholders (other
than Catalyst) the remaining portion of the Escrow Fund not required to satisfy
such claims. Deliveries of Escrow Amounts to the EPub Stockholders pursuant to
this Section 10.2(b) and Section 10.2(d)(iii) shall be made in proportion to
their respective original contributions to the Escrow Fund, as calculated by the
Agent (as defined below).
(c) Protection of Escrow Fund. The Escrow Agent shall hold and safeguard
the Escrow Fund during the Escrow Period, shall treat such fund as a trust fund
in accordance with the terms of this Agreement and not as the property of FV and
shall hold and dispose of the Escrow Fund only in accordance with the terms
hereof.
(d) Distributions; Voting; Claims Upon Escrow Fund.
(i) Any shares of FV Common Stock or other equity securities issued or
distributed by FV (including shares issued upon a stock split) ("New
Shares") in respect of FV Common Stock in the Escrow Fund which have not
been released from the Escrow Fund, shall be added to the Escrow Fund and
become a part thereof. Any cash dividends paid on FV Common Stock in the
Escrow Fund, shall be paid to the persons who, prior to the Merger, were
stockholders in accordance with their respective contributions to the
Escrow Fund. New Shares and cash dividends issued in respect of FV Common
Stock which have been released from the Escrow Fund shall not be added to
the Escrow Fund, but shall be distributed to the record holders thereof.
(ii) Each person who, prior to the Merger was a stockholder of EPub
shall have voting rights with respect to the shares of FV Common Stock
contributed to the Escrow Fund on behalf of such stockholder (and on any
voting securities added to the Escrow Fund in respect of such shares of FV
Common Stock) so long as such shares of FV Common Stock or other voting
securities are held in the Escrow Fund.
(iii) Upon receipt by the Escrow Agent at any time on or before the
last day of the Escrow Period of a certificate signed by any officer of FV
(an "Officer's Certificate"): (A) stating that FV or its Affiliates has
incurred and paid or properly accrued Losses, or reasonably anticipates
that it may have to pay or accrue Losses, (B) specifying in reasonable
detail the individual items of Losses included in the amount so stated, the
date each such item was incurred and paid or properly accrued, or the basis
for such anticipated liability, and the nature of the misrepresentation,
breach of warranty or claim to which such item is related, and (C)
indicating the number of shares of FV Common Stock to be disbursed to FV
out of the Escrow Fund, the Escrow Agent shall, subject to the provisions
of Section 10.2(e) hereof, deliver to FV out of the Escrow Fund, as
promptly as practicable, such amounts held in the Escrow Fund equal to such
Losses.
(iv) For the purposes of determining the number of shares of FV Common
Stock to be disbursed to FV out of the Escrow Fund, the shares of FV Common
Stock shall be valued at the Fair Market Value of such shares. For purposes
hereof, the "Fair Market Value" of the FV Common Stock shall be determined
by using the average closing price of the FV Common Stock as reported in
the Wall Street Journal, for the ten (10) consecutive trading days ending
five (5) days prior to the date that the shares of FV Common Stock are
disbursed to FV out of the Escrow Fund.
(e) Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Agent (as defined in Section 10.2(g)), and for a period of
thirty (30) days after such delivery the Escrow Agent shall make no delivery to
FV of any Escrow Amount specified in such Officer's Certificate unless the
Escrow Agent shall have received written authorization from the Agent to make
such delivery. After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of an amount from the Escrow Fund in accordance with
such Officer's Certificate and Section 10.2(d) hereof, provided that no such
payment or delivery may be made if the Agent shall object in a written statement
to the claim made in the Officer's Certificate, and such statement shall have
been delivered to the Escrow Agent prior to the expiration of such thirty (30)
day period.
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(f) Resolution of Conflicts; Arbitration.
(i) In case the Agent shall so object in writing to any claim or
claims made in any Officer's Certificate within 30 days after delivery of
such Officer's Certificate, the Agent and FV shall attempt in good faith to
agree upon the rights of the respective parties with respect to each of
such claims. If the Agent and FV should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties and shall
be furnished to the Escrow Agent. The Escrow Agent shall be entitled to
rely on any such memorandum and distribute amounts from the Escrow Fund in
accordance with the terms thereof;
(ii) If no such agreement can be reached after good faith negotiation,
either FV or the Agent may demand arbitration of the matter unless the
amount of the damage or loss is at issue in pending litigation with a third
party, in which event arbitration shall not be commenced until such amount
is ascertained or both parties agree to arbitration; and in either such
event the matter shall be settled by arbitration conducted by one
arbitrator mutually agreeable to FV and the Agent. In the event that within
forty-five (45) days after submission of any dispute to arbitration, FV and
the Agent cannot mutually agree on one arbitrator, FV and the Agent shall
each select one arbitrator, and the two arbitrators so selected shall
select a third arbitrator. The arbitrator or arbitrators, as the case may
be, shall set a limited time period not to exceed forty-five (45) and
establish procedures designed to reduce the cost and time for discovery
while allowing the parties an opportunity, adequate in the sole judgement
of the arbitrator or majority of the three arbitrators, as the case may be,
to discover relevant information from the opposing parties about the
subject matter of the dispute. The arbitrator or a majority of the three
arbitrators, as the case may be, shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions, including
attorneys' fees and costs, to the extent as a competent court of law or
equity, should the arbitrators or a majority of the three arbitrators, as
the case may be, determine that discovery was sought without substantial
justification or that discovery was refused or objected to without
substantial justification. The decision of the arbitrator or a majority of
the three arbitrators, as the case may be, as to the validity and amount of
any claim in such Officer=s Certificate shall be binding and conclusive
upon the parties to this Agreement, and notwithstanding anything in Section
10.2(e) to the hereof, the Escrow Agent shall be entitled to act in
accordance with such decision and make or withhold payments out of the
Escrow Funds in accordance therewith. Such decision shall be written and
shall be supported by written findings of fact and conclusions which shall
set forth the award, judgment, decree or order awarded by the
arbitrator(s). In the event that the Escrow Agent has not received evidence
of resolution under Section 10.2(f)(i) or this Section 10.2(f)(ii), Escrow
Agent shall continue to hold the Escrow Funds in accordance herewith.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be
held in San Diego County, California under the rules then in effect of the
American Arbitration Association. Each party to any arbitration pursuant to
this Section 10.2(f) shall pay its own expenses; the fees of each
arbitrator and the administrative fee of the American Arbitration
Association shall be borne equally by FV, on the one hand and the EPub
Stockholders, on the other. Neither the expenses that the Agent incurs in
the course of any arbitration pursuant to this Section 10.2(f) nor the
Agent's portion of the fees of the arbitrators or the administrative fees
for the American Arbitration Association shall be deducted from any amounts
held in the Escrow Fund.
(g) Agent of the Stockholders; Power of Attorney.
(i) In the event that the Merger is approved by the EPub Stockholders,
effective upon such vote, and without any further act of any stockholder,
Andrew Currie shall be appointed as agent and attorney-in-fact (together,
the "Agent") for each stockholder of EPub on whose behalf shares were
deposited into escrow, for and on behalf of such stockholders, to give and
receive notices and communications, to authorize delivery to FV of shares
from the Escrow Fund in satisfaction of claims by FV, to object to such
deliveries, to agree to, negotiate, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims, and
to take all actions necessary or appropriate for the
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<PAGE> 187
accomplishment of the foregoing. Such Agent may be changed by the
stockholders of EPub from time to time upon not less than thirty (30) days'
prior written notice to FV and Escrow Agent; provided that the Agent may
not be removed unless holders of a two-thirds interest of the Escrow Amount
in the Escrow Fund agree to such removal and to the identity of the
substituted agent. Any vacancy in the position of Agent may be filled by
approval of the holders of a majority in interest of the Escrow Fund. No
bond shall be required of the Agent, and the Agent shall not receive
compensation for his or her services. Notices or communications to or from
the Agent shall constitute notice to or from each of the stockholders of
EPub.
(ii) The Agent shall not be liable for any act done or omitted
hereunder as Agent while acting in good faith and in the exercise of
reasonable judgment. The stockholders of EPub on whose behalf the Escrow
Amount was contributed to the Escrow Fund shall severally indemnify the
Agent and hold the Agent harmless against any loss, liability or expense
incurred without negligence or bad faith on the part of the Agent and
arising out of or in connection with the acceptance or administration of
the Agent's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Agent.
(h) Actions of the Agent. A decision, act, consent or instruction of the
Agent shall constitute a decision of all the stockholders for whom a portion of
the Escrow Amount otherwise issuable to them are deposited in the Escrow Fund
and shall be final, binding and conclusive upon each of such stockholders, and
the Escrow Agent and FV may rely upon any such decision, act, consent or
instruction of the Agent as being the decision, act, consent or instruction of
each every such stockholder of EPub. The Escrow Agent and FV are hereby relieved
from any liability to any person for any acts done by them in accordance with
such decision, act, consent or instruction of the Agent.
(i) Third-Party Claims. In the event FV becomes aware of a third-party
claim which FV believes may result in a demand against the Escrow Fund, FV shall
notify the Agent of such claim, and the Agent and the stockholders of EPub who
have monies in the escrow shall be entitled, at their expense, to participate in
any defense of such claim. FV shall have the right in its sole discretion to
settle any such claim; provided, however, that except with the consent of the
Agent, no settlement of any such claim with third-party claimants shall alone be
determinative of the amount of any claim against the Escrow Fund. In the event
that the Agent has consented to any such settlement, the Agent shall have no
power or authority to object under any provision of this Section 10 to the
amount of any claim by FV against the Escrow Fund with respect to such
settlement to the extent that such amount is consistent with the terms of such
settlement.
(j) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth in this Agreement and as set
forth in any additional written escrow instructions which the Escrow Agent
may receive after the date of this Agreement which are signed by an officer
of FV and the Agent, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be genuine
and to have been signed or presented by the proper party or parties. The
Escrow Agent shall not be liable for any act done or omitted hereunder as
Escrow Agent while acting in good faith and in the exercise of reasonable
judgment, and any act done or omitted pursuant to the advice of counsel
shall be conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to disregard any
and all warnings given by any of the parties hereto or by any other person,
excepting only orders or process of courts of law, and is hereby expressly
authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order,
judgment or decree of any court, the Escrow Agent shall not be liable to
any of the parties hereto or to any other person by reason of such
compliance, notwithstanding any such order, judgment or decree being
subsequently reversed, modified, annulled, set aside, vacated or found to
have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on account
of the identity, authority or rights of the parties executing or delivering
or purporting to execute or deliver this Agreement or any documents or
papers deposited or called for hereunder.
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<PAGE> 188
(iv) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses, except
for negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure
to act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement of affidavit
provided for in this Agreement that the Escrow Agent shall in good faith
believe to be genuine, nor will the Escrow Agent be liable or responsible
for forgeries, fraud, impersonations, or determining the scope of any
representative authority. In addition, the Escrow Agent may consult with
legal counsel in connection with Escrow Agent=s duties under this Agreement
and shall be fully protected in any act taken, suffered, or permitted by
him/her in good faith in accordance with the advice of counsel. The Escrow
Agent is not responsible for determining and verifying the authority of any
person acting or purporting to act on behalf of any party to this
Agreement.
(vi) If any controversy arises between the parties to this Agreement,
or with any other party, concerning the subject matter of this Agreement,
its terms or conditions, the Escrow Agent will not be required to determine
the controversy or to take any action regarding it. The Escrow Agent may
hold all documents and funds and may wait for settlement of any such
controversy by final appropriate legal proceedings or other means as, in
the Escrow Agent's discretion, the Escrow Agent may be required, despite
what may be set forth elsewhere in this Agreement. In such event, the
Escrow Agent will not be liable for damages. Furthermore, the Escrow Agent
may at its option, file an action of interpleader requiring the parties to
answer and litigate any claims and rights among themselves. The Escrow
Agent is authorized to deposit with the clerk of the court all documents
and funds held in escrow, except all cost, expenses, charges and reasonable
attorney fees incurred by the Escrow Agent due to the interpleader action
and which the parties jointly and severally agree to pay. Upon initiating
such action, the Escrow Agent shall be fully released and discharged of and
from all obligations and liability imposed by the terms of this Agreement.
(vii) The parties and their respective successors and assigns agree
jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated costs
of in-house counsel and disbursements that may be imposed on Escrow Agent
or incurred by Escrow Agent in connection with the performance of his/her
duties under this Agreement, including but not limited to any litigation
arising from this Agreement or involving its subject matter other than
arising out of its negligence or willful misconduct.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to the parties; provided, however, that no
such resignation shall become effective until the appointment of a
successor escrow agent which shall be accomplished as follows: the parties
shall use their best efforts to mutually agree on a successor escrow agent
within thirty (30) days after receiving such notice. If the parties fail to
agree upon a successor escrow agent within such time, the Escrow Agent
shall have the right to appoint a successor escrow agent authorized to do
business in the state of California. The successor escrow agent shall
execute and deliver an instrument accepting such appointment and it shall,
without further acts, be vested with all the estates, properties, rights,
powers, and duties of the predecessor escrow agent as if originally named
as escrow agent. Upon appointment of a successor escrow agent, the Escrow
Agent shall be discharged from any further duties and liability under this
Agreement.
(ix) In no event shall the Escrow Agent be liable for special,
indirect or consequential loss or damage of any kind whatsoever (including
but not limited to lost profits) even if the Escrow Agent has been advised
of the likelihood of such loss or damage and regardless of the form of
action.
(x) Any corporation into which the Escrow Agent in its individual
capacity may be merged or converted or with which it may be consolidated,
or any corporation resulting from any merger, conversion or consolidation
to which the Escrow Agent in its individual capacity shall be a party, or
any corporation
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<PAGE> 189
to which substantially all the corporate trust business of the Escrow Agent
in its individual capacity may be transferred, shall be the Escrow Agent
under this Agreement without further act.
(k) Fees. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by FV in accordance with the schedule of the Escrow
Agent delivered to FV at or prior to the execution of this Agreement. Such fee
schedule may be amended or modified upon mutual consent of FV and the Escrow
Agent. It is understood that the fees and usual charges agreed upon for services
of the Escrow Agent shall be considered compensation for ordinary services as
contemplated by this Agreement. In the event that the conditions of this
Agreement are not promptly fulfilled, or if the Escrow Agent renders any service
not provided for in this Agreement, or if the parties request a substantial
modification of its terms, or if any controversy arises, or if the Escrow Agent
is made a party to, or intervenes in, any litigation pertaining to the Escrow
Fund or its subject matter, the Escrow Agent shall be reasonably compensated for
such extraordinary services and reimbursed for all costs, attorney=s fees,
including allocated costs of in-house counsel, and expenses occasioned by such
default, delay, controversy or litigation.
11. Termination
11.1 Termination of the Agreement. Certain of the Parties may terminate
this Agreement as provided below:
(a) FV and EPub may terminate this Agreement as to all Parties by
mutual written consent at any time prior to the Closing;
(b) by FV, or by EPub if: (i) there shall be a final nonappealable
order of a court of competent jurisdiction in effect preventing
consummation of the Merger or (ii) there shall be any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any governmental entity that would make consummation of the
Merger illegal;
(c) by FV if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any governmental entity, which would: (i) prohibit FV's or
EPub's ownership or operation of all or a portion of the business of EPub
or (ii) compel FV or EPub to dispose of or hold separate all or a portion
of the business or assets of FV or EPub as a result of the Merger;
(d) FV may terminate this Agreement by giving written notice to EPub
and the Majority Stockholders at any time prior to the Closing (A) in the
event that FV is not in material breach of its obligations under this
Agreement and either of EPub or the Majority Stockholders has materially
breached any representation, warranty, or covenant contained in this
Agreement and such breach has not been cured within ten (10) calendar days
after written notice to EPub or the EPub Stockholders, as the case may be
(provided that no cure period is required for a breach which by its nature
cannot be cured) or (B) if the Closing shall not have occurred (1) on or
before November 30, 1998 in the event the SEC determines to undertake a
review the Proxy Statement or (2) on or before October 31, 1998 in the
event the SEC determines to not to undertake a review the Proxy Statement,
by reason of the failure of any condition precedent under Section 9.1
hereof (unless the failure results primarily from FV itself breaching any
representation, warranty, or covenants contained in this Agreement); and
(e) EPub may terminate this Agreement by giving written notice to FV
at any time prior to the Closing (A) in the event EPub and the Majority
Stockholders are not in material breach of their obligations under this
Agreement FV has materially breached any representation, warranty, or
covenant contained in this Agreement and such breach has not been cured
within ten (10) calendar days after written notice to FV (provided that no
cure period shall be required for a breach which by its nature cannot be
cured), or (B) if the Closing shall not have occurred on or before (1) on
or before November 30, 1998 in the event the SEC determines to undertake a
review the Proxy Statement or (2) on or before October 31, 1998 in the
event the SEC determines to not to undertake a review the Proxy Statement,
by reason of the failure of any condition precedent under Section 9.2
hereof (unless the failure results primarily from EPub or either of the
Majority Stockholders breaching any representation, warranty, or covenants
contained in this Agreement).
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<PAGE> 190
11.2 Effect of Termination. If any Party terminates this Agreement
pursuant to Section 11 above, all rights and obligations of the Parties
hereunder (including rights and obligations pursuant to indemnity provisions
contained in the Section 10.2 hereof) shall terminate without any liability of
any Party to any other Party (except for any liability of any Party then in
breach); provided that each Party shall remain liable for any breaches of this
Agreement prior to its termination and provided, further, that the provisions
contained in Section 12 shall survive termination.
12. Miscellaneous.
12.1 Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of FV and
EPub; provided, however, that FV may make any public disclosure it believes in
good faith is required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case FV will use its
reasonable best efforts to advise the other Parties prior to making the
disclosure).
12.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties (other than the EPub
Stockholders who are not Majority Stockholders) and their respective successors
and permitted assigns.
12.3 Entire Agreement. This Agreement (including the exhibits hereto)
constitutes the entire agreement among the Parties with respect to the subject
matter hereof and supersedes any prior understandings, agreements, or
representations by or among the Parties, written or oral, to the extent they
related in any way to the subject matter hereof.
12.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties; provided, however, that FV may (i) assign any or all of
its rights and interests hereunder to one or more of its Affiliates and (ii)
designate one or more of its Affiliates to perform its obligations hereunder.
12.5 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which together will constitute one
and the same instrument.
12.6 Headings. The Section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
12.7 Notices. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given upon receipt or, if earlier, (a) five (5) days after
deposit with the U.S. Postal Service or other applicable postal service, if
delivered by first class mail, postage prepaid, (b) upon delivery, if delivered
by hand, (c) one business day after the business day of deposit with Federal
Express or similar overnight courier, freight prepaid or (d) one business day
after the business day of facsimile transmission, if delivered by facsimile
transmission with copy by first class mail, postage prepaid, and shall be
addressed to the intended recipient as set forth below:
If to FV:
First Virtual Holdings Incorporated
4104 Sorrento Valley Blvd., Suite 200
San Diego, CA 92121
Attention: Keith S. Kendrick, President
Facsimile: 619-410-3701
Copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: John T. Sheridan
Facsimile: 650-493-6811
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<PAGE> 191
If to EPub or the Majority Stockholders:
Email Publishing Inc.
6685 Gunpark Drive East, Suite 240
Boulder, Colorado 80301
Attention: Andrew Currie
Facsimile: 303-440-0303
Copy to:
Cooley Godward LLP
2595 Canyon Boulevard, Suite 250
Boulder, Colorado 80302
Attention: Michael L. Platt, Esq.
If to the Escrow Agent:
Chase Manhattan Bank and Trust Company, National Association
101 California Street, Suite 2725
San Francisco, CA 94111-5830
Attention: James Nagy
Any Party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
Parties ten (10) days' advance written notice to the other parties pursuant to
the provisions above.
12.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of California without giving
effect to any choice or conflict of law provision or rule (whether of the State
of California or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of California.
12.9 Forum Selection; Consent to Jurisdiction. All disputes arising out of
or in connection with this Agreement (other than matters subject to arbitration
pursuant to the terms of this Agreement or the other agreements delivered by the
Parties pursuant hereto) shall be solely and exclusively resolved by a court of
competent jurisdiction in the State of California. The Parties hereby consent to
the jurisdiction of the Superior Court of the State of California and the United
States District Courts of California and waive any objections or rights as to
forum nonconvenience, lack of personal jurisdiction or similar grounds with
respect to any dispute relating to this Agreement.
12.10 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by FV,
EPub and a majority-in-interest of the Majority Stockholders. No waiver by any
Party of any default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend to any prior to
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent occurrence.
12.11 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
12.12 Expenses. Each of FV, EPub and the Majority Stockholders will bear
its or their own costs and expenses (including legal and accounting fees and
expenses) incurred in connection with this Agreement and the transactions
contemplated hereby. FV acknowledges that EPub's legal fees and expenses of
Cooley Godward LLP and auditing fees and expenses of PricewaterhouseCoopers LLP
shall be borne by EPub. Notwithstanding the foregoing, in the event that this
Agreement is terminated prior to consummation of the Merger due to a failure to
satisfy the condition set forth in Section 9.1(o) or 9.1(k) hereof, FV shall pay
the reasonable out-of-pocket legal and accounting fees and expenses and travel
expenses of EPub up to a total of $150,000, upon presentment of invoices
therefor.
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<PAGE> 192
12.13 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
12.14 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
12.15 Attorneys' Fees. If any legal proceeding or other action relating to
this Agreement is brought or otherwise initiated, the prevailing party shall be
entitled to recover reasonable attorneys fees, costs and disbursements (in
addition to any other relief to which the prevailing party may be entitled).
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<PAGE> 193
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on as
of the date first above written.
<TABLE>
<S> <C>
EPUB: EMAIL PUBLISHING INC.
By: /s/ ANDREW CURRIE
--------------------------------------
Andrew Currie, President and CEO
FV: FIRST VIRTUAL HOLDINGS INCORPORATED
By: /s/ KEITH S. KENDRICK
--------------------------------------
Keith S. Kendrick, President
SUB: EPUB HOLDINGS, INC.
By: /s/ KEITH S. KENDRICK
--------------------------------------
Escrow Agent: CHASE MANHATTAN BANK
AND TRUST COMPANY,
NATIONAL ASSOCIATION
By: /s/ JAMES NAGY
--------------------------------------
Majority Stockholders:
/s/ ANDREW CURRIE
------------------------------------------
Andrew Currie
/s/ BRIAN MAKARE
------------------------------------------
Brian Makare
/s/ BRADLEY FELD
------------------------------------------
Bradley Feld
/s/ DAN LYNCH
------------------------------------------
Dan Lynch
/s/ JOHN STRAUSS
------------------------------------------
John Strauss
</TABLE>
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<PAGE> 194
<TABLE>
<S> <C>
Softven No. 2 Investment Enterprise
Partnership
By: /s/ YOSHITAKA KITAO
--------------------------------------
Name: Yoshitaka Kitao
Title: President
Catalyst Infotech Development Fund, L.P.
By: Catalyst Venture Management, L.L.C.
By: /s/ CRAIG F. DAWSON
--------------------------------------
Name: Craig F. Dawson
Title: Manager
WHP Family Limited Partnership
By: /s/ WILLIAM H. PAYNE
--------------------------------------
Name: William H. Payne
Title: General Partner
Grandhaven L.L.C.
By: Hexagon Investments, Inc.
By: /s/ SCOTT J. REIMER
--------------------------------------
Scott J. Reimer, President
Hexagon Investments L.L.C.
By: /s/ SCOTT J. REIMER
--------------------------------------
Scott J. Reimer, President
Labyrinth Enterprises L.L.C.
By: Hexagon Investments, Inc.
By: /s/ SCOTT J. REIMER
--------------------------------------
Scott J. Reimer, President
Legacy Enterprises L.L.C.
By: Hexagon Investments, Inc.
By: /s/ SCOTT J. REIMER
--------------------------------------
Scott J. Reimer, President
</TABLE>
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<PAGE> 195
ANNEX B
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of a merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market systems security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further provided that
no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not
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more than 10 days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
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(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
120, L. '97, eff. 7-1-97.)
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ANNEX C
August 19, 1998
Board of Directors
First Virtual Holdings, Incorporated
4104 Sorrento Valley Boulevard, Suite 200
San Diego, CA 92121
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to First Virtual Holdings, Inc. (the "Company" or "First Virtual") of
the transaction (the "Transaction") contemplated by the terms of the Agreement
and Plan of Reorganization dated as of August 20, 1998 (the "Agreement"), by and
among the Company, EPub Holdings, Inc. (a wholly-owned subsidiary of the
Company), Email Publishing, Inc. ("EPI") and certain other parties. The
Agreement provides for and contemplates, among other things, the acquisition of
EPI by the Company pursuant to a merger of EPub Holdings, Inc. with and into
EPI, in which each share of capital stock of EPI issued and outstanding
immediately prior to the effective time of such merger will be converted into
the right to receive a number of shares of First Virtual common stock equal to
6,000,000 shares divided by the aggregate number of shares of common stock of
EPI outstanding as of the effective time or issuable upon exercise of all
outstanding Stock Rights (as defined in the Agreement).
In connection with our review of the Transaction and the preparation of our
opinion herein, we have examined: (a) the Agreement; (b) the unaudited
historical financial statements of EPI for the six months ended June 30, 1998;
(c) the unaudited historical financial statements of EPI and the audited
historical financial statements of the Company for the fiscal year ended
December 31, 1997; (d) the unaudited historical financial statements of EPI and
the audited historical financial statements of the Company for the fiscal year
ended December 31, 1996; (e) certain internal financial information including
various forecast scenarios prepared by EPI's management; and (f) certain other
public and non-public information available concerning EPI and the Company. We
have also held discussions with members of senior management and directors of
the Company and their advisors, as well as representatives of EPI and their
advisors with respect to the terms of the Agreement and to discuss the foregoing
and have considered other matters which we have deemed relevant to our inquiry.
We have not assumed responsibility for the accuracy and completeness of any
financial or other information and have not attempted to verify independently
any of such information, nor have we made or obtained an independent appraisal
of the assets of the Company or EPI. With respect to financial forecasts, we
have assumed that such forecasts have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of EPI's
management as to the future financial performance of EPI. Except as otherwise
set forth herein, our opinion herein is based upon circumstances existing and
disclosed to us and can be evaluated as of the date of this letter.
In rendering our opinion, we have assumed that the Transaction will be
consummated on the terms described in the Agreement, without any waiver of any
material terms or conditions by the Company. We have also assumed that the final
form of the Agreement, including exhibits thereto, as and when executed, will be
substantially similar to the draft thereof reviewed by us.
In conducting our investigation and analyses and in arriving at our opinion
expressed herein, we have taken into account such accepted financial and
investment banking procedures and considerations as we have deemed relevant,
including (a) historical revenues, operating earnings (losses), operating cash
flows, net losses, working capital position (positive or negative),
capitalization and retained earnings (deficit) as to EPI, the Company and
certain private and publicly held companies; (b) the current financial position,
results of operations and financial prospects of EPI and the Company; (c) the
historical market prices and trading volumes of First Virtual common stock from
the commencement of public trading through the period ending
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<PAGE> 200
five days prior to the public announcement of the Transaction; and (d) the
general condition of the securities markets.
William Blair & Company has been engaged in the investment banking business
since 1935. We undertake the valuation of investment securities in connection
with public offerings, private placements, business combinations, estate and
gift tax valuations and similar transactions. For our services relating to the
Transaction, including the rendering of this opinion, the Company will pay us a
fee and indemnify us against certain liabilities. In the ordinary course of
business, we may for our own account and the accounts of our customers at any
time hold a long or short position in the securities of the Company.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with its consideration of the transactions contemplated by the
Agreement. Our opinion is limited to the fairness, from a financial point of
view, of the Transaction to the Company. We do not address the merits of the
underlying decision by the Company to engage in the Transaction and this opinion
does not constitute a recommendation of how any common stockholder should vote
at any meeting of stockholders of the Company to consider the Transaction. This
opinion may be reproduced in full in any Proxy or Information Statement
delivered to the common stockholders but may not otherwise be disclosed or
referred to without our prior written consent.
We are not expressing any opinion hereby as to the prices at which the
First Virtual common stock will trade following the closing of the Transaction,
which may vary depending upon, among other factors, changes in interest rates,
currency exchange rates, dividend rates, market conditions, general economic
conditions and other factors that generally influence the price of securities.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that the Transaction is fair, from a financial point of view, to First
Virtual.
Very truly yours,
/s/ William Blair & Company, L.L.C.
--------------------------------------
WILLIAM BLAIR & COMPANY, L.L.C.
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<PAGE> 201
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FIRST VIRTUAL HOLDINGS INCORPORATED
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
December 9, 1998
The undersigned stockholder of First Virtual Holdings Incorporated (the
"Company") hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement for the Special Meeting of Stockholders of the
Company to be held on December 9, 1998 at 9:00 a.m., local time, at the
Company's principal place of business, 4104 Sorrento Valley Blvd., Suite 200,
San Diego, California 92121 (telephone (619) 410-3700), and hereby revokes all
previous proxies and appoints Keith Kendrick and Bert Klein, or either of them,
with full power of substitution, Proxies and Attorneys-in-Fact, on behalf and in
the name of the undersigned, to vote and otherwise represent all of the shares
registered in the name of the undersigned at said Special Meeting, or any
adjournment thereof, with the same effect as if the undersigned were present and
voting such shares, on the matters and in the manner specified on the reverse
side:
(Continued and to be signed on reverse side)
<PAGE> 202
[X] Please mark your
votes as in this
example
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED FOR THE MERGER PROPOSAL AND THE OTHER PROPOSALS, AND FOR
SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING AS THE PROXYHOLDERS
DEEM ADVISABLE.
TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE MARK, SIGN AND DATE
THIS PROXY AND RETURN IT AS PROMPTLY AS POSSIBLE.
1. Proposal to (i) approve and adopt the Agreement and Plan of
Reorganization, dated as of August 20, 1998, among the Company, Email
Publishing Inc., a Delaware corporation ("EPub"), EPub Holdings, Inc.,
a Delaware corporation and wholly-owned subsidiary of the Company
("Sub"), certain stockholders of EPub and Chase Manhattan Bank & Trust
Company, N.A., as escrow agent and (ii) approve the merger of Sub with
and into EPub pursuant to which EPub will become a wholly-owned
subsidiary of the Company and all outstanding shares of EPub capital
stock will be converted into shares of the Company's common stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Proposal to approve an amendment to the Company's Certificate of
Incorporation that will change the Company's name to MessageMedia,
Inc.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Proposal to approve an amendment to the Company's Certificate of
Incorporation that will increase the number of authorized shares of the
Company's common stock from 40,000,000 to 100,000,000 shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. Proposal to amend the Company's 1995 Stock Plan to increase the number
of shares of common stock available for issuance thereunder by
2,000,000 shares to an aggregate of 6,000,000 shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion, the Proxies are entitled to vote upon such other matters as
may properly come before the meeting or any adjournments thereof.
I Plan to attend the meeting: [ ]
SIGNATURE(S) _________________________________________ DATED _______, 1998
(This proxy should be marked, dated and signed by each stockholder exactly as
such stockholder's name appears hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. A
corporation is requested to sign its name by its President or other authorized
officer, with the office held designated. If shares are held by joint tenants or
as community property, both holders should sign.)
