<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:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] 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):
[ ] 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.
[X] 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: N/A
(2) Form, Schedule, or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
<PAGE> 2
PRELIMINARY COPY
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ____________, 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 ____________, 1998 at _____ 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 Certificate of Incorporation that will
(i) change FV's corporate name and (ii) increase the number of
authorized shares of FV common stock from 40,000,000 to 100,000,000
shares.
3. 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.
4. 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 August 13, 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
_______________, 1998
<PAGE> 3
[FV LOGO] [EPUB LOGO]
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"). In accordance with the
Reorganization Agreement, Sub will merge into EPub, EPub will become a
wholly-owned subsidiary of FV 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 being referred to herein collectively as
the "Merger").
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.
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____________, 1998, at FV's executive offices, 4104
Sorrento Valley Blvd., Suite 200, San Diego, California 92121, commencing at
_____ a.m., local time, and at any adjournment or postponement thereof (the "FV
Stockholders Meeting").
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 to the proposed Merger.
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 _______, __, 1998, the closing price
of the FV Common Stock was $____ 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.
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 ____________, 1998.
----------------------
The date of this Proxy Statement/Information Statement is____________
___, 1998.
<PAGE> 4
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 17.
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>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
AVAILABLE INFORMATION ................................................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ......................................................... 1
SUMMARY ................................................................................................. 3
SELECTED FINANCIAL INFORMATION .......................................................................... 14
RISK FACTORS ............................................................................................ 17
Risks Related to FV's Business ..................................................................... 17
Risks Related to EPub's Business ................................................................... 27
Risks Related to the Merger ........................................................................ 32
COMPARATIVE PER SHARE DATA .............................................................................. 35
MARKET PRICE INFORMATION ................................................................................ 36
FV STOCKHOLDERS MEETING ................................................................................. 38
Date, Time and Place of FV Stockholders Meeting .................................................... 38
Purpose ............................................................................................ 38
Record Date and Outstanding Shares ................................................................. 38
Vote Required ...................................................................................... 38
Voting and Solicitation ............................................................................ 39
Quorum; Abstentions; Broker Nonvotes................................................................ 39
Stockholder Proposals............................................................................... 40
FV Auditors......................................................................................... 40
Recommendation of FV Board ......................................................................... 40
EPUB ACTION BY WRITTEN CONSENT OF THE STOCKHOLDERS....................................................... 41
Purpose............................................................................................. 41
Record Date and Outstanding Shares.................................................................. 41
Vote Required....................................................................................... 41
Recommendation of EPub Board........................................................................ 41
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS ......................................................... 42
FV's Reasons for the Merger ........................................................................ 42
EPub's Reasons for the Merger ...................................................................... 43
Material Contacts and Board Deliberations .......................................................... 45
Opinion of Financial Advisor........................................................................ 46
Interests of Certain Persons in the Merger ......................................................... 50
Certain Federal Income Tax Considerations .......................................................... 52
Anticipated Accounting Treatment ................................................................... 53
EPub Options and Warrants........................................................................... 53
Regulatory Matters.................................................................................. 54
Appraisal Rights.................................................................................... 55
FV MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 58
EPUB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 65
BUSINESS OF EPUB ........................................................................................ 68
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
</TABLE>
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<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
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
Anti-Dilution Rights................................................................................ 81
Co-Sale Agreement................................................................................... 81
Noncompetition and Employment Agreements ........................................................... 82
Restrictions on Transfer ........................................................................... 83
Registration Rights ................................................................................ 84
Voting Agreement.................................................................................... 84
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS........................................................ 85
COMPARISON OF CAPITAL STOCK ............................................................................. 92
Description of FV Capital Stock .................................................................... 92
Description of EPub Capital Stock .................................................................. 93
Comparison of Capital Stock ........................................................................ 97
FV STOCKHOLDER PROPOSAL NO. 2............................................................................ 102
FV STOCKHOLDER PROPOSAL NO. 3............................................................................ 104
LEGAL MATTERS ........................................................................................... 108
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
ANNEX B--Delaware Appraisal Rights Provisions
ANNEX C--Opinion of William Blair & Company
</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.
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 dated January 29, 1998, April 29,
1998, May 1, 1998, June 26, 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.
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
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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 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 __________, 1998.
This Proxy Statement/Information Statement contains trademarks of FV
and EPub and may contain trademarks of others.
2
<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.
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.
THE COMPANIES
First Virtual Holdings Incorporated
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 its
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 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.
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 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. EPub sends e-mail only to people who have
requested delivery of messages and information by e-mail.
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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's clients include Intuit, CMP Media, Cahners Publishing, Centrobe
and GeoCities. 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
____________, 1998 at ____ 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 (i) change FV's
corporate name and (ii) increase the number of authorized shares of FV Common
Stock to 100,000,000 shares and (3) 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
August 13, 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. 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
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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
209 stockholders of record of FV Common Stock and 31,388,076 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 73.9% of the FV Common Stock, have
entered into a certain voting agreement with EPub pursuant to which such
stockholders have agreed to vote, subject to a certain exception, 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. See "FV Stockholders Meeting--Vote Required."
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" and "FV Stockholder Proposal No. 3."
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 RELATED REQUIRED
DOCUMENTATION BY FACSIMILE NO LATER THAN ____________ 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 ____________. 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 August 17, 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
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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. 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" and "?Material
Contacts and Board Deliberations."
RISK FACTORS
See "Risk Factors" beginning on page 17 for a discussion of certain
factors pertaining to the Merger and the businesses of FV and EPub.
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 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."
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<PAGE> 13
CERTAIN 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. See "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 Financial Advisor" and Annex C hereto.
THE MERGER
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
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<PAGE> 14
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. 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."
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 __________,
1998, the closing price per share of FV Common on Nasdaq was $______. See
"Market Price Information." Based on the capitalization of EPub as of August __,
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.
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 _________, 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.
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<PAGE> 15
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 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
(excluding certain EPub stockholders referred to in the Reorganization
Agreement) are required to indemnify FV, its officers,
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<PAGE> 16
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 EPub stockholders (excluding certain EPub
stockholders referred to in the Reorganization Agreement); 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 17.14% of the value of the Merger Consideration;
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."
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 that 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."
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<PAGE> 17
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 the Proxy Statement or (2) October 31, 1998 in
the event the SEC determines to not undertake a review 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 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
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<PAGE> 18
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, a certain number of such shares of
FV Common Stock to be issued to EPub stockholders in connection with the Merger
will be subject to certain contractual restrictions on transfer preventing EPub
stockholders from selling or otherwise disposing of such shares prior to the
first anniversary of the closing of the Merger. 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 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
73.9% of the FV Common Stock, have entered into a certain voting agreement with
EPub pursuant to which such stockholders have agreed to vote, subject to a
certain exception, 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. 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 certain 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."
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<PAGE> 19
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 __________,
1998, the closing price of FV Common Stock as reported on the Nasdaq was $_____
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.
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<PAGE> 20
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 ... 375,117 1,292,781 4,237,638 4,377,688 2,573,242 2,230,721
Restructuring charge ......... -- -- -- -- -- 812,166
Depreciation and amortization. -- 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 ...................... -- $ (0.50) $ (1.66) $ (1.94) $ (0.84) $ (0.69)
Shares used in per share
Computation, basic and
diluted ...................... 4,530,008 6,431,893 8,842,367 8,803,463 11,183,418
</TABLE>
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<PAGE> 21
<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
Amounts payable to stockholders, net of current portion .......... 125,000
Stockholders' equity ............................................. 5,482,188
</TABLE>
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
Notes and amounts payable .................... 12,103 88,840
Stockholders' equity ......................... 180,274 178,382
</TABLE>
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
The selected unaudited pro forma combined financial information of FV
and EPub gives effect to the Merger 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. The pro forma data does not reflect any
additional shares issued since June 30, 1998.
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<PAGE> 22
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 had been consummated as of the beginning
of the periods presented, nor is it necessarily indicative of future operating
results or financial position.
<TABLE>
<CAPTION>
YEAR
ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ ----------------------------
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 ........................ 6,759,027 3,081,321 2,973,177
General and administrative ................................... 4,793,620 2,771,219 2,582,988
Restructuring charge ......................................... -- -- 812,166
Depreciation and amortization ................................ 10,837,716 5,417,033 5,710,075
------------ ------------ ------------
Total operating expenses ........................................ 27,929,696 13,471,508 13,520,707
------------ ------------ ------------
Loss from operations ......................................... (26,413,883) (12,775,192) (12,446,334)
Interest income .............................................. 554,587 349,683 55,761
Interest expense ............................................. (92,511) (46,294) (72,478)
------------ ------------ ------------
Net Loss ........................................................ (25,951,807) (12,471,803) (12,463,051)
Dividends imputed on preferred stock ......................... (1,250,000) -- (153,126)
------------ ------------ ------------
Net loss applicable to common shares ............................ $(27,201,807) $(12,471,803) $(12,616,177)
============ ============ ============
Net loss per share, basic and diluted ........................... $ (1.89) $ (0.87) $ (0.75)
Shares used in per share computation, basic and diluted ......... 14,425,052 14,386,148 16,766,103
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA (1): JUNE 30, 1998
-----------
<S> <C>
Cash, cash equivalents and short-term investments ............... $ 6,363,762
Furniture, equipment, software and information technology, net .. $ 1,753,935
Total assets .................................................... $28,218,420
Current liabilities ............................................. $ 3,364,010
Amounts payable to stockholders, net of current portion.......... $ 213,840
Stockholders' equity ............................................ $24,640,570
</TABLE>
(1) FV and EPub estimate that they will incur merger-related costs,
consisting primarily of transaction costs for attorneys, accountants,
financial printing and other related charges, of approximately $350,000
for FV and $150,000 for EPub. 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.
-16-
<PAGE> 23
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. 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 FV'S BUSINESS
History of Operating Losses and Anticipated Future Losses; Limited
Operating History
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.
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
-17-
<PAGE> 24
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.
Need for Additional Capital; Uncertainty of Additional Financing;
Uncertainty of Nasdaq National Market Listing
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. Moreover, FV anticipates that it will need to
raise additional funds before the end of 1998 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.
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
-18-
<PAGE> 25
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 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
-19-
<PAGE> 26
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 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.
-20-
<PAGE> 27
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.
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
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<PAGE> 28
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, 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
-22-
<PAGE> 29
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, 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
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<PAGE> 30
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, Mr. Stachowiak 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, telecommunications
failures, unauthorized intrusion, infection by computer viruses and similar
events. FV's
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<PAGE> 31
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
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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 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. 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 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.
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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 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 the date code field. Beginning in the
year 2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although FV 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 FV, its service providers, its
customers or the Internet infrastructure could result in a material adverse
effect on FV's business, operating results and financial conditions.
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
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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 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
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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. 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.
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.
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.
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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.
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. In March 1998, a competitor of EPub wrote a letter to EPub
alleging that EPub's services could be deemed an infringement of such company's
pending patent application. EPub responded to the allegations by letter in April
1998 and requested more information regarding the alleged infringement. The
other company responded that it would send such information once its patent has
been issued. There has been no further correspondence with regard to such
matter. There can be no assurance that the pending patent, if issued, 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.
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.
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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
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
If the proposed Merger is not consummated, EPub expects that it will be
required to raise additional funds. No assurance can be given that additional
funding, if necessary, 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.
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 two years, computer systems and/or 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
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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.
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 the integration of 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.
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 Additional Financing;
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.
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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
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EPub stockholders will be received without recognition of gain or loss. See "The
Merger--Certain Federal Income Tax Consequences."
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 certain
EPub stockholders referred to in the Reorganization Agreement) at the Effective
Time will be placed in escrow to secure the indemnity obligations of EPub and
the Majority 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."
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<PAGE> 41
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 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>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ------------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL -- FV
Net loss per share diluted ......... $ (0.50) $ (1.66) $ (1.94) $ (0.84) $ (0.69)
Cash dividends per share diluted ... -- -- -- -- --
Book value per share (at period
end)(1) $ 0.18 $ 1.70 $ (0.06) $ 0.87 $ 0.18
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ------------------------
1995 1996(3) 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL -- EPUB
Net loss per share .................... N/A $ (0.04) $ (0.14) $ (0.09) $ (0.03)
Cash dividends per share .............. N/A -- -- -- --
Book value per share (at period end)(1) N/A $ 0.08 $ 0.06 $ 0.10 $ 0.09
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ------------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED LOSS PER
SHARE - DILUTED:
Per FV Share........................... N/A N/A $ (1.89) $ (0.87) $ (0.75)
Equivalent EPub Share.................. N/A N/A $ (4.15) $ (1.91) $ (1.66)
PRO FORMA COMBINED BOOK VALUE PER SHARE(2):
Per FV Share........................... N/A N/A $ 1.28 N/A $ 1.47
Equivalent EPub Share.................. N/A N/A $ 2.82 N/A $ 3.23
</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.
(3) Inception through December 31, 1996.
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<PAGE> 42
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 (through __________, 1998) 6 1/2
</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 __________, 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
__________, 1998 ...................
</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
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<PAGE> 43
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 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.
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<PAGE> 44
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 ____________,
1998 at ____ 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 (i) change FV's corporate name and (ii) increase the number of
authorized shares of FV Common Stock from 40,000,000 to 100,000,000 shares, (3)
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
(4) 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 209 stockholders of record holding an
aggregate of approximately 31,388,076 shares of FV Common Stock.
This Proxy Statement/Information Statement is being mailed on or about
September __, 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 74.0% 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 his affiliates), who collectively beneficially own
an aggregate of 73.9% of the FV Common Stock, have entered into a certain voting
agreement (the "Voting Agreement") with EPub
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<PAGE> 45
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 ____________, 1998, together with the Notice of Special Meeting of
Stockholders.
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<PAGE> 46
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.
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" and "FV Stockholder Proposal No.
3."
-40-
<PAGE> 47
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
__________, 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.
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<PAGE> 48
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. 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 4, 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
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<PAGE> 49
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.
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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<PAGE> 50
- 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 [______, 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 other risks described above under "Risk Factors."
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.
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<PAGE> 51
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, Bradley Feld,
Andrew Currie and Brian Makare, Vice President of Engineering and Product
Development of EPub, met to initiate preliminary deal term discussions.
On October 17, 1997, Keith Kendrick, then Vice President of Marketing of
FV, and Andrew Currie, President and CEO of EPub, 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 __, 1997, Lee Stein, Philip Bane, then Secretary and General Counsel
of FV, and Bradley Feld, Chairman of EPub, met in Los Angeles to further discuss
the possibility of FV and EPub merging.
On November 7 and 8, 1997, Keith Kendrick, President of FV, John
Stachowiak and Philip Bane met with Andrew Currie in Boulder, CO, at the offices
of Vstream 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 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, Brian Makare met with Lee Stein, Keith Kendrick,
Carolyn Turbyfill and FV's engineering team 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.
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<PAGE> 52
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.
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 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 draft
Reorganization Agreement dated as of July 23, 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.
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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.
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) a draft dated July 23, 1998 of 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
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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 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
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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 emails 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-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,
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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.
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
63% 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
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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 Chairman. Mr. Feld is also the Chairman of the EPub Board
and beneficially owns 225,726 shares of EPub common stock. Ronald D. Fisher, a
member 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. 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, subject to certain exceptions, 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, (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 subject to
certain geographical restrictions. 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,
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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 Employee Equity
Benefit Plans--EPub 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.
CERTAIN 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, 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
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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.
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
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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.
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
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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
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 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
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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
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,
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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 17.
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.(1)
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.
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RESULTS OF OPERATIONS
REVENUES
FV generates revenues from the IMP, FVIPS, interactive advertising
development and consulting. In August 1998, FVIPS operations and related
revenues will cease. 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>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED 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>
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. This increase is
attributable to a general increase in all categories of revenue. Revenues from
FVIPS benefited from bulk sales of consumer and merchant registrations that
occurred at the end of the first quarter 1997. Also, in August 1997, FV
increased the consumer registration fees 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 began
selling on-line merchandise in December 1996 and VirtualTAGs in January 1997.
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.
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COST OF REVENUES
FV incurred cost of revenues from FVIPS, merchandising, and interactive
advertising development, as detailed in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED 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.(1) FV also
expects operating expenses needed for the introduction and promotion of such
products to be substantial.(1) In addition, 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 increases in salaries, wages and
payroll taxes of approximately
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$1.7 million, an increase in advertising and promotional expenses of $785,000, a
consulting expense increase of approximately $580,000, a recruiting and
relocation expense increase of approximately $110,000, a travel expense increase
of approximately $70,000, 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 resulted primarily from an increase in salaries, wages
and payroll taxes of approximately $870,000, an increase in recruiting and
relocation costs of $80,000, a travel expense increase of $150,000, a consulting
expense increase of $240,000, 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 resulted primarily from decreases in salaries,
wages and payroll taxes of approximately $800,000, a decrease in consulting of
approximately $56,000, a decrease in travel related expenses of approximately
$63,000, a decrease in recruiting and relocation expenses of approximately
$61,000 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
resulted primarily from increases in salaries, wages and payroll taxes of
approximately $1.7 million, 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. 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.(1)
For the year ended December 31, 1996, research and development 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 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 resulted primarily from decreases in
salaries, wages and payroll taxes of approximately $90,000, a decrease 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, and an increase of
approximately $520,000 in promotional expenses, 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 resulted primarily from increases in
salaries, wages and payroll taxes of approximately $1.1 million, a consulting
expense increase of approximately $435,000 and an increase in spending of
approximately $365,000 to support the general 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 resulted primarily from decreases in
salaries, wages and payroll taxes of approximately $545,000, a general reduction
in spending of approximately $80,000, offset by an increase in legal expenses of
approximately $225,000.
Restructuring expenses. In the second quarter 1998, FV took further
steps to focus its efforts on the IMP. In doing so, FV incurred expenses
totalling $812,000 which consisted of approximately $545,000 for severance
compensation packages related to a reduction in staff and consultants,
approximately $170,000 related to the shut down of the FVIPS, approximately
$95,500 to move the corporate office to less expensive office space and $40,000
to settle an outstanding arbitration case with a claimant who filed a complaint
for breach of contract against FV.
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
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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.
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. After giving effect
to these transactions and the private purchase of the 1.2 million shares of FV
Common Stock, SOFTBANK owns approximately 19.5 million shares of FV Common Stock
and holds a majority of the votes on the FV Board that was elected at the annual
meeting.
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 1998.(1) 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 1998 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.
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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 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.(1)
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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately 1 1/2 years, computer systems 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 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 FV, its service providers, its
customers or the Internet infrastructure could result in a material adverse
effect on FV's business, operating results and financial conditions.
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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 one 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>
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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.
EPup recognizes revenue from service contracts monthly over the period of the
contract.
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.
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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
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. On July 10, 1998, EPub entered
into a letter of intent for the sale of EPub in a transaction involving the
exchange of all to its outstanding shares for FV stock. If the Merger is not
consummated, EPub intends to fund its future cash requirements, to the extent
not provided by operations, by seeking additional equity or debt financing.
Year 2000 Compliance
Many currently installed computer systems and software products are
coding 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 1/2 years, computer systems 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. EPub sends e-mail only to people who have
requested delivery of messages and information by e-mail.
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's
clients include Intuit, CMP Media, Canhers Publishing, Centrobe and GeoCities.
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.
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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 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. 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. Representative customers of EPub include Intuit, CMP Media,
Cahners Publishing, Centrobe and GeoCities.
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:
o E-mail magazine editions to complement print or Web publications
o Periodic customer newsletters
o Distribution of magazine renewal or requalification notices
o Customer or industry "alert" messages
o New product or product upgrade announcements
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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 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
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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. In addition, 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 competitors pending patent application. No assurance can
be given as to the applicability of such 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.
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. The other company
responded that it would send such information once its patent has been issued.
There has been no further correspondence with regard
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to such matter. There can be no assurance that the pending patent, if issued,
will not have a material adverse effect on EPub or that EPub 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>
NUMBER OF PERCENTAGE OF
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF COMMON AND OUTSTANDING
COMMON OUTSTANDING PREFERRED OUTSTANDING PREFERRED COMMON AND
SHARES COMMON 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.
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 ______________, 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.
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
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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 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.
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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 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.
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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
(excluding certain EPub stockholders referred to in the Reorganization
Agreement) 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 ("Escrow Fund") consisting of 20 percent of
the shares of FV Common Stock issued to EPub stockholders (excluding certain
EPub stockholders referred to in the Reorganization Agreement); 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 17.14 percent of the value of the Merger
Consideration; 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 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
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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 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
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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
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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), (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
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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.
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 certain EPub
stockholders granting such stockholders
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certain co-sale rights with respect to such shares of the 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, certain 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. 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"), subject to limited exceptions, 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,
in each case subject to certain geographical restrictions. 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, in each case subject to
certain geographical restrictions. 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
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
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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 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
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<PAGE> 90
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 73.9% of the FV Common Stock, have entered into
a certain voting agreement with EPub pursuant to which such stockholders have
agreed to vote, subject to a certain exception, 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. See "FV
Stockholders Meeting--Vote Required."
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<PAGE> 91
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, using the purchase method
of accounting. The pro forma combined balance sheet assumes the Merger took
place on June 30, 1998. The pro forma combined statements of operations assume
the Merger took place as of the beginning of each of the periods presented.
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, and the unaudited financial statements of EPub for
the twelve months ended December 31, 1997 and for the six months ended June 30,
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 management, contain all
adjustments, consisting only of normal recurring accruals, necessary for the
fair presentation of the results of operations for such periods.
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 occurred at the beginning of the periods presented, 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. They should be read in conjunction with
the historical financial statements and notes thereto and narrative sections
included elsewhere herein.
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<PAGE> 92
FIRST VIRTUAL HOLDINGS INCORPORATED AND
EMAIL PUBLISHING INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA COMBINED
FV EPUB ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................. $ 6,301,489 $ 62,273 $ 6,363,762
Accounts receivable ........................ 64,060 138,895 -- 202,955
Prepaid expenses and other ................. 246,136 9,989 -- 256,125
------------ ------------ ------------ ------------
Total current assets ........................... 6,611,685 211,157 -- 6,822,842
Furniture, equipment & software, net ........... 1,533,383 220,552 -- 1,753,935
Organization and other costs, net .............. 64,061 -- -- 64,061
Intangibles .................................... -- -- 19,480,000 (d) 19,480,000
Other assets ................................... 86,962 10,620 -- 97,582
------------ ------------ ------------ ------------
Total assets ................................... $ 8,296,091 $ 442,329 $ 19,480,000 $ 28,218,420
============ ============ ============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable ........................... $ 1,157,784 $ 60,911 $ 500,000 (e) $ 1,718,695
Accrued compensation & related liabilities.. 176,513 30,705 -- 207,218
Deferred revenue ........................... 184,536 -- -- 184,536
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 -- 36,141
------------ ------------ ------------ ------------
Total current liabilities ...................... 2,688,903 175,107 500,000 $ 3,364,010
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 -- 46,225
------------ ------------ ------------ ------------
Total long term liabilities .................... 125,000 88,840 -- 213,840
Total liabilities .............................. 2,813,903 263,947 500,000 3,577,850
Stockholders' equity:
Preferred stock ............................ -- 632 (632)(a) --
Common stock ............................... 31,216 1,897 632 (a) 34,345
600 (b)
Additional paid in capital ................. 41,869,894 1,017,735 19,885,649 (b) 62,773,278
Warrants ................................... 1,080,828 -- -- 1,080,828
Deferred compensation ...................... (65,694) (448,131) -- (513,825)
Accumulated deficit ........................ (37,434,056) (393,751) (906,249)(c) (38,734,056)
------------ ------------ ------------ ------------
Total stockholders' equity ..................... 5,482,188 178,382 18,980,000 24,640,570
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity ..... $ 8,296,091 $ 442,329 $ 19,480,000 $ 28,218,420
============ ============ ============ ============
</TABLE>
(a) Equity adjustment relates to the conversion of all outstanding preferred
stock into common stock.
(b) Adjustments relate to the elimination of existing EPub equity and the
recording of FV equity based on the purchase transaction as described
elsewhere.
(c) Adjustment consists of the elimination of EPub accumulated deficit of
$393,751 and the write off of EPub's in-process technology of $1,300,000.
(d) To record goodwill and other intangibles resulting from the Merger, which
will be amortized over two years as a result of the Merger.
(e) To record estimated Merger costs to be incurred by FV.
See accompanying notes to unaudited pro forma combined financial statements.
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<PAGE> 93
FIRST VIRTUAL HOLDINGS INCORPORATED AND
EMAIL PUBLISHING INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA COMBINED
FV EPUB ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <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 & sales ....................... 1,213,499 228,802 -- 1,442,301
Research, development, & engineering..... 2,896,745 76,432 -- 2,973,177
General & administrative ................ 2,230,721 352,267 -- 2,582,938
Restructuring charge .................... 812,166 -- -- 812,166
Depreciation and amortization ........... 840,075 -- 4,870,000(a) 5,710,075
------------ ------------ ------------ ------------
Total operating expenses .................. 7,993,206 657,501 4,870,000 13,520,707
------------ ------------ ------------ ------------
Loss from operations ...................... (7,529,549) (46,785) (4,870,000) (12,446,334)
Interest income ......................... 55,761 -- -- 55,761
Interest expense ........................ (64,258) (8,220) -- (72,478)
------------ ------------ ------------ ------------
Net loss .................................. (7,538,046) (55,005) (4,870,000) (12,463,051)
Preferred stock dividend .................. (153,126) -- -- (153,126)
------------ ------------ ------------ ------------
Net loss applicable to common shares ....... $ (7,691,172) $ (55,005) $ (4,870,000) $(12,616,177)
============ ============ ============ ============
Net loss per share, basic and diluted....... $ (0.69) $ (0.03) $ (0.75)
============ ============ ============
Shares used in per share computation,
basic and diluted ........................ 11,183,418 1,891,033 3,691,652(b) 16,766,103
</TABLE>
(a) Adjustment to reflect the six-month amortization of goodwill based on the
allocation of the assumed purchase price in the June 30, 1998 pro forma
balance sheet.
(b) Adjustment to the average common shares outstanding for the elimination of
EPub's shares and the issuance of 5,582,685 shares of FV Common Stock.
The above pro forma combined statement of operations does not include a $1.3
million in-process technology charge to be recorded by FV 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.
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<PAGE> 94
FIRST VIRTUAL HOLDINGS INCORPORATED AND
EMAIL PUBLISHING INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA COMBINED
FV EPUB ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <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 & sales ..................... 5,424,110 115,223 -- 5,539,333
Research, development, & engineering... 6,687,177 71,850 -- 6,759,027
General & administrative .............. 4,377,688 415,932 -- 4,793,620
Depreciation and amortization ......... 1,097,716 -- 9,740,000(a) 10,837,716
------------ ------------ ------------ ------------
Total operating expenses ................ 17,586,691 603,005 9,740,000 27,929,696
------------ ------------ ------------ ------------
Loss from operations .................... (16,406,509) (267,374) (9,740,000) (26,413,883)
Interest income ....................... 554,587 -- -- 554,587
Interest expense ...................... (95,360) 2,849 -- (92,511)
------------ ------------ ------------ ------------
Net loss ................................ (15,947,282) (264,525) (9,740,000) (25,951,807)
Dividend imputed on preferred stock ..... (1,250,000) -- -- (1,250,000)
------------ ------------ ------------ ------------
Net loss applicable to common shares .... $(17,197,282) $ (264,525) $ (9,740,000) $(27,201,807)
============ ============ ============ ============
Net loss per share, basic and diluted.... $ (1.94) $ (0.14) $ (1.89)
============ ============ ============
Shares used in per share computation,
basic and diluted ..................... 8,842,367 1,877,646 3,705,039(b) 14,425,052
</TABLE>
(a) Adjustment to reflect the twelve-month amortization of goodwill based on
the allocation of the assumed purchase price in the June 30, 1998 pro forma
balance sheet.
(b) Adjustment to the average common shares outstanding for the elimination of
EPub's shares and the issuance of 5,582,685 shares of FV Common Stock.
The above pro forma combined statement of operations does not include a $1.3
million in-process technology charge to be recorded by FV 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.
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<PAGE> 95
FIRST VIRTUAL HOLDINGS INCORPORATED AND
EMAIL PUBLISHING INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA COMBINED
FV EPUB ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <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 & sales ..................... 2,171,371 30,564 -- 2,201,935
Research, development, & engineering... 3,058,821 22,500 -- 3,081,321
General & administrative .............. 2,573,242 197,977 -- 2,771,219
Depreciation and amortization ......... 547,033 -- 4,870,000(a) 5,417,033
------------ ------------ ------------ ------------
Total operating expenses ................ 8,350,467 251,041 4,870,000 13,471,508
------------ ------------ ------------ ------------
Loss from operations .................... (7,736,468) (168,724) (4,870,000) (12,775,192)
Interest income ....................... 349,683 -- -- 349,683
Interest expense ...................... (48,944) 2,650 -- (46,294)
------------ ------------ ------------ ------------
Net loss applicable to common shares .... $ (7,435,729) $ (166,074) $ (4,870,000) $(12,471,803)
============ ============ ============ ============
Net loss per share, basic and diluted.... $ (0.84) $ (0.09) $ (0.87)
============ ============ ============
Shares used in per share computation,
basic and diluted ..................... 8,803,463 1,873,424 3,709,261(b) 14,386,148
</TABLE>
(a) Adjustment to reflect the six-month amortization of goodwill based on the
allocation of purchase price assumed in the June 30, 1998 pro forma balance
sheet.
(b) Adjustment to the average common shares outstanding for the elimination of
EPub's shares and the issuance of 5,582,685 shares of FV Common Stock.
The above pro forma combined statement of operations does not include a $1.3
million in-process technology charge to be recorded by FV 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.
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<PAGE> 96
FIRST VIRTUAL HOLDINGS INCORPORATED
AND EMAIL PUBLISHING INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1.
The pro forma combined balance sheet reflects the proposed acquisition of all of
the 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. The purchase price is
preliminarily valued at $20,280,000 based on an assumed fair market value of
$3.38 per share of FV Common Stock. The purchase price was determined using the
average closing market price of FV Common Stock over a 10 day period ending 5
days after the signing of the Reorganization Agreement on August 20, 1998. The
estimated Merger costs of $500,000 are also included in the purchase price. This
purchase price was allocated as follows based upon a preliminary valuation of
the tangible and intangible assets, including acquired technology and in-process
technology, by an independent appraiser, as well as management's best estimate.
<TABLE>
<S> <C>
Developed technology $ 900,000
In-process technology 1,300,000
Goodwill 18,580,000
</TABLE>
NOTE 2.
The allocation of the purchase price was applied to the historical balance sheet
or historical statements of operations of FV and EPub to arrive at the pro forma
combined balance sheet and statements of operations. The developed technology
and goodwill will be amortized over their estimated useful lives of two years.
The pro forma combined statements of operations for the year ended December 31,
1997 and the six months ended June 30, 1997 and 1998 reflect amortization
expense of $9,740,000, $4,870,000 and $4,870,000, respectively. Intangible
assets reflect the $19,480,000 in goodwill and developed technology shown above.
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<PAGE> 97
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,
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<PAGE> 98
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 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
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<PAGE> 99
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 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
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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 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
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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.
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.
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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 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.
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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 or group of holders controlling a
majority in interest of a corporation's capital
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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.
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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
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
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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 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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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 AND INCREASE THE NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK TO 100,000,000 SHARES.
The Board of Directors is proposing an amendment (the "Amendment") to
FV's Amended and Restated Certificate of Incorporation (the "Restated
Certificate") to (i) change the name of the corporation to "Message Media" and
(ii) increase the number of authorized shares of FV Common Stock from 40,000,000
shares to 100,000,000.
CHANGE OF CORPORATE NAME
The FV Board of Directors is proposing that the FV stockholders approve
an amendment to the Restated Certificate to change the name of the corporation
to "Message Media." The 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 Internet 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
Board of Directors believes that adoption of the name "Message Media" will serve
to heighten market awareness of FV's Internet Messaging Platform and related
services and technologies and to enhance customer brand recognition.
INCREASE IN AUTHORIZED CAPITAL STOCK
At the FV Stockholders Meeting, FV is also proposing that the FV
Stockholders approve an amendment 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. 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,
31,388,076 of the 40,000,000 authorized shares of Common Stock were issued and
outstanding, and an additional 5,724,835 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 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.
-101-
<PAGE> 108
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 the Amendment.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDMENT AND
RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE AMENDMENT.
-102-
<PAGE> 109
FV STOCKHOLDER PROPOSAL NO. 3
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
-103-
<PAGE> 110
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
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
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<PAGE> 111
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.
(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
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<PAGE> 112
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 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.
-106-
<PAGE> 113
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 ______ 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.
-107-
<PAGE> 114
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FIRST VIRTUAL HOLDINGS INCORPORATED
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 the Financial Statements for the year ended December 31, 1997................................... F-7
Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997..................................... F-18
Statements of Operations for the three months and six months ended
June 30, 1998 and 1997 (unaudited)..................................................................... F-19
Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (unaudited)..................... F-20
Notes to the Financial Statements for the six months ended June 30, 1998 (unaudited)..................... F-21
EMAIL PUBLISHING, INC.
Report of PricewaterhouseCoopers LLP, Independent Auditors............................................... F-23
Balance Sheets as of June 30, 1997 and 1998.............................................................. F-24
Statements of Operations 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
Statements of Stockholders' Equity (Deficit) for the years ended June 30, 1997 and 1998.................. F-27
Notes to the Financial Statements........................................................................ F-28
</TABLE>
F-1
<PAGE> 115
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> 116
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> 117
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) $ (1.66) $ (0.50)
Shares used in per share computation, basic
and diluted.................................... 8,842,367 6,431,893 4,530,008
</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> 118
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> 119
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......................................... (10,769,912) 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> 120
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. Should the Company be unable
to raise sufficient funds, it may be required to file for bankruptcy.
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-
F-7
<PAGE> 121
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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
F-8
<PAGE> 122
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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. In addition, the
calculation of the shares used in computing net loss per share includes shares
of convertible preferred stock that converted into common stock in conjunction
with the Company's initial public offering, as if they had converted into common
stock as of the original dates of issuance.
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,
F-9
<PAGE> 123
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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.
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.
F-10
<PAGE> 124
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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.
F-11
<PAGE> 125
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 adjustments, the 2,273,441
shares of preferred stock outstanding prior to the offering were converted to
2,333,317 shares of common stock.
F-12
<PAGE> 126
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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> 127
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
F-14
<PAGE> 128
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
at $6.30 per share to an officer and director of the Company. The options vested
immediately and expire on 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) $(1.74) $(0.50)
</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
F-15
<PAGE> 129
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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.
F-16
<PAGE> 130
FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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-17
<PAGE> 131
FIRST VIRTUAL HOLDINGS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS (Unaudited)
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-18
<PAGE> 132
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-19
<PAGE> 133
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-20
<PAGE> 134
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 exercisabilty. 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-21
<PAGE> 135
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-22
<PAGE> 136
REPORT OF PRICEWATERHOUSECOOPERS LLP,
INDEPENDENT AUDITORS
August 13, 1998
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
F-23
<PAGE> 137
EMAIL PUBLISHING INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
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-24
<PAGE> 138
EMAIL PUBLISHING INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 11,
1996
(INCEPTION)
THROUGH YEAR ENDED
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-25
<PAGE> 139
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 400,000 400 199,600 200,000
stock
Issuance of Series A-1 232,558 232 199,768 200,000
preferred stock
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 1,366 1,366
compensation
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 83,029 83,029
compensation
Issuance of Series A-1 67,355 67,355
preferred warrants
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-26
<PAGE> 140
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-27
<PAGE> 141
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.
F-28
<PAGE> 142
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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
</TABLE>
F-29
<PAGE> 143
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C>
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>
(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 $ -- $150,000
in monthly installments of $6,250 through June 2000; secured
by business assets
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
F-30
<PAGE> 144
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-31
<PAGE> 145
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 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.
F-32
<PAGE> 146
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-33
<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>
F-34
<PAGE> 148
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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.
(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-35
<PAGE> 149
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
<S> <C> <C>
1. Certain Definitions..........................................................................................1
2. The Merger...................................................................................................3
2.1 Merger; Effective Time of the Merger...............................................................3
2.2 Closing............................................................................................3
2.3 Effect of the Merger...............................................................................3
2.4 Tax-Free Reorganization............................................................................4
3. Effect of Merger on the Capital Stock of the Constituent Corporations; Exchange of Certificates;
Additional Payments..........................................................................................4
3.1 Exchange of Stock; Rights to Additional Payments...................................................4
3.2 EPub Options.......................................................................................4
3.3 Fractional Shares..................................................................................5
3.4 Exchange of Certificates...........................................................................5
3.5 Taking of Necessary Action; Further Action.........................................................6
3.6 Escrow Account.....................................................................................6
3.7 Dissenters' Rights.................................................................................7
4. Securities Act Compliance....................................................................................7
4.1 Securities Act Exemption...........................................................................7
4.2 Stock Restrictions.................................................................................7
5. Representations and Warranties of EPub.......................................................................8
5.1 Organization, Qualification, and Corporate Power...................................................8
5.2 Authorization......................................................................................8
5.3 Capitalization.....................................................................................9
5.4 Noncontravention..................................................................................10
5.5 Fees..............................................................................................10
5.6 Financial Statements..............................................................................10
5.7 Subsidiaries......................................................................................10
5.8 Title to Assets...................................................................................10
5.9 Events Subsequent to Most Recent Fiscal Period End................................................11
5.10 Undisclosed Liabilities...........................................................................13
5.11 Legal Compliance..................................................................................13
5.12 Tax Matters.......................................................................................14
5.13 Properties........................................................................................15
5.14 Intellectual Property.............................................................................16
5.15 Tangible Assets...................................................................................17
5.16 Inventory.........................................................................................17
5.17 Contracts.........................................................................................18
5.18 Notes and Accounts Receivable.....................................................................19
5.19 Power of Attorney.................................................................................19
</TABLE>
i
<PAGE> 150
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
5.20 Insurance.........................................................................................20
5.21 Litigation........................................................................................20
5.22 Product Warranty..................................................................................20
5.23 Product Liability.................................................................................20
5.24 Employees.........................................................................................20
5.25 Employee Benefits.................................................................................21
5.26 Guaranties........................................................................................23
5.27 Environment, Health, and Safety...................................................................23
5.28 Certain Business Relationships With EPub..........................................................24
5.29 No Adverse Developments...........................................................................25
5.30 Full Disclosure...................................................................................25
6. Representations and Warranties of FV and Sub................................................................25
6.1 Organization, Qualification, and Corporate Power..................................................25
6.2 Authorization.....................................................................................25
6.3 Capitalization....................................................................................26
6.4 Noncontravention..................................................................................26
6.5 SEC Filings.......................................................................................26
6.6 Brokers' Fees.....................................................................................27
7. Pre-Closing Covenants.......................................................................................27
7.1 General...........................................................................................27
7.2 Notices and Consents..............................................................................27
7.3 Operation of Business.............................................................................27
7.4 Preservation of Business..........................................................................28
7.5 Access to Information.............................................................................28
7.6 Notice of Developments............................................................................28
7.7 Preparation of the Proxy/Information Statement....................................................28
7.8 Solicitation of Proxy Statements and Written Consents.............................................28
7.9 Exclusivity.......................................................................................29
8. Post-Closing Covenants......................................................................................29
8.1 General...........................................................................................29
8.2 Litigation Support................................................................................29
8.3 Transition........................................................................................30
8.4 Confidentiality...................................................................................30
8.5 Company Employee Matters..........................................................................30
8.6 FIRPTA Compliance.................................................................................30
8.7 Stockholder Certificate...........................................................................30
9. Conditions to Obligations to Close..........................................................................31
</TABLE>
ii
<PAGE> 151
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
9.1 Conditions to FV's and Sub's Obligation to Close..................................................31
9.2 Conditions to EPub's Obligation...................................................................33
10. Survival of Representations, Warranties and Covenants; Escrow...............................................34
10.1 Survival of Representations and Warranties........................................................34
10.2 Escrow Arrangements...............................................................................34
11. Termination.................................................................................................42
11.1 Termination of the Agreement......................................................................42
11.2 Effect of Termination.............................................................................43
12. Miscellaneous...............................................................................................43
12.1 Press Releases and Public Announcements...........................................................43
12.2 No Third-Party Beneficiaries......................................................................43
12.3 Entire Agreement..................................................................................43
12.4 Succession and Assignment.........................................................................44
12.5 Counterparts......................................................................................44
12.6 Headings..........................................................................................44
12.7 Notices...........................................................................................44
12.8 Governing Law.....................................................................................45
12.9 Forum Selection; Consent to Jurisdiction..........................................................45
12.10 Amendments and Waivers............................................................................46
12.11 Severability......................................................................................46
12.12 Expenses..........................................................................................46
12.13 Construction......................................................................................46
12.14 Incorporation of Exhibits and Schedules...........................................................46
12.15 Attorneys' Fees...................................................................................46
</TABLE>
iii
<PAGE> 152
TABLE OF CONTENTS
(Continued)
<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>
iv
<PAGE> 153
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.
<PAGE> 154
"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, 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).
2
<PAGE> 155
"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
3
<PAGE> 156
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.
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
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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 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
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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.
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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 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."
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"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. 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
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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
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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.
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
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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 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;
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(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);
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(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;
(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
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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
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"Affiliated Group") filing a consolidated federal Income Tax Return (other than
a group the common 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.
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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.
(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
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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;
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(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 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.
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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
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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.
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
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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 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
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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 which is now or
hereafter regulated under any
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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.
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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.
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
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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, 1997
(collectively, the "FV SEC Reports"). The FV SEC Reports (i) were prepared in
accordance with the requirements of the Exchange Act,
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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
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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 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
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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
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defense, all at the sole cost and 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.
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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 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;
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(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.
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(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.
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;
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(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 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
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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
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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 (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
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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.
(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
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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 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
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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
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<PAGE> 192
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.
(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
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<PAGE> 193
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 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.
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<PAGE> 194
(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
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<PAGE> 195
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).
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
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<PAGE> 196
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
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<PAGE> 197
Facsimile: 650-493-6811
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.
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<PAGE> 198
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.
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> 199
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on as
of the date first above written.
EPUB: EMAIL PUBLISHING INC.
By: /s/ ANDREW CURRIE
------------------------------------
Andrew Currie, President
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
[AGREEMENT AND PLAN OF REORGANIZATION SIGNATURE PAGE]
<PAGE> 200
/s/ BRIAN MAKARE
----------------------------------------
Brian Makare
/s/ BRADLEY FELD
----------------------------------------
Bradley Feld
/s/ DAN LYNCH
----------------------------------------
Dan Lynch
/s/ JOHN STRAUSS
----------------------------------------
John Strauss
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
---------------------------------
[AGREEMENT AND PLAN OR REORGANIZATION SIGNATURE PAGE]
<PAGE> 201
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
<PAGE> 202
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;
-1-
<PAGE> 203
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.
(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 ten 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
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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 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.
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(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.
(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
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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 draft Agreement
and Plan of Reorganization dated as of July 23, 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) a draft dated July 23, 1998 of 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.
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<PAGE> 208
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 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.
This opinion is for the sole use and benefit of the Board of Directors of the
Company. 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> 209
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FIRST VIRTUAL HOLDINGS INCORPORATED
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
___________, 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 _________, 1998 at _______ 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 ________ and __________, 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> 210
[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 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, certain
stockholders of EPub and Chase Manhattan Bank & Trust Company, N.A.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Proposal to approve an amendment to the Company's Certificate of
Incorporation that will (i) change the Company's name and (ii) increase
the number of authorized shares of the Company's common stock from
40,000,000 to 100,000,000 shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. 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.)
