<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the period from _______ to _______.
Commission File Number: 000-21751
FIRST VIRTUAL HOLDINGS INCORPORATED
(Exact Name of Registrant as specified in its charter)
Delaware 33-0612860
- ------------------------------ ---------------------------------------
(State or jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4104 SORRENTO VALLEY BLVD. #200
SAN DIEGO, CA 92121
(Address, including zip code, of principal executive offices)
(619) 410-3700
(Registrant's telephone number, including area code)
11975 EL CAMINO REAL #300
SAN DIEGO, CA 92130
(Former name, former address & former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents
and reports to be filed by sections 12,13, or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by the court. Yes [ ] No [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, $0.001 Par Value - 31,215,599 shares as of June 30, 1998.
1
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FIRST VIRTUAL HOLDINGS INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 3
Statements of Operations for the three months (unaudited) and six months
(unaudited) ended June 30, 1998 and 1997 4
Statements of Cash Flows for the six months (unaudited) ended
June 30, 1998 and 1997 5
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Factors Affecting Operating Results & Market Price of Stock 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST VIRTUAL HOLDINGS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
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' 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 December 31, 1997 and 1996 -- --
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.
3
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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.
4
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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
5
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FIRST VIRTUAL HOLDINGS INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim unaudited financial statements included herein have been prepared by
First Virtual Holdings Incorporated ("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.
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<PAGE> 7
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 shareholders of First Virtual, the successful completion of due
diligence procedures, 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 plans on ceasing its Internet payment services in
August 1998.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This 10-Q report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the subsection entitled "Factors
Affecting Operating Results and Market Price of Stock" commencing on page 14 .
Certain sections in this report have been identified as containing
forward-looking statements. The reader is cautioned that other sections and
other sentences not so identified may also contain forward-looking information.
First Virtual's objective is to develop and provide market-leading interactive
messaging services for electronic commerce with intelligent messaging and
interactive transactional advertisements.
The Company completed development of its first release of the IMP and started
commercial use of the IMP in July 1998. The IMP is a service that enables the
development and deployment of interactive multimedia e-mail messaging solutions.
The IMP has been designed to be an extensible and scaleable infrastructure for
online interactive communications, payment and data warehousing. The IMP has
also been designed to allow for intelligent e-mail communications to take place
between companies and their customers. It integrates customer service and sales
and marketing functions into transactional e-mail messages, that includes the
ability to integrate systems for secure payments and the use of highly
graphical, animated and interactive elements. The IMP is interoperable with
primarily all e-mail platforms and protocols and is expected to integrate the
Company's VirtualRECEIPT, VirtualALERT and VirtualMAIL services.
In December 1997, the Company introduced the VirtualADz Software Development Kit
("Virtual ADz SDK"). The VirtualADz SDK uses the Java programming language to
create a cross-platform multimedia environment for developing stimulating,
interactive advertisements embedded within banner ads and is designed to allow
consumers to initiate the purchase and payment and arrange for the delivery of a
product being advertised without leaving the Web page on which the advertisement
appears. The VirtualADz SDK is also being designed to be embedded within an
e-mail message, allowing targeted interactive advertisements to be delivered
directly to the customers. The Company's VirtualADz SDK application is designed
to provide an interactive and engaging message by combining sound and motion,
which is activated by the consumer as the cursor is moved near or on the
advertisement.
The Company is currently enhancing the IMP with development of three new
capabilities.* VirtualMAIL is designed to allow customized direct e-mail that is
tailored to the individual profiles of the recipient consumer. The
VirtualRECEIPT is designed to allow 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 designed to notify the consumer of
shipment, billing or other critical information regarding a product or service.
The Company believes the VirtualMAIL, VirtualRECEIPT and VirtualALERT
applications will enable merchants to directly market and merchandise their
products and services to consumers.*
During the second quarter of 1998, the Company continued to operate the FVIPS.
FVIPS, a secure and easy-to-use payment system introduced in October 1994, was
the Company's first application of the VirtualPIN architecture. The Company will
cease its FVIPS operations in August 1998 and is currently encouraging its
merchants and consumers to migrate to alternative Internet payment systems.
- -------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the actual future results will meet the Company's
current expectations. Investors are strongly encouraged to review the section
entitled "Factors Affecting Operating Results and Market Price of Stock"
commencing on page 14, for a discussion of factors that could affect future
performance. The reader is cautioned that other sections not so identified may
also contain forward looking information.
8
<PAGE> 9
The Company has incurred net operating losses in each quarter since inception.
As of June 30, 1998, the Company had an accumulated deficit of approximately
$37.5 million. To date, the Company has not generated significant revenues.
There can be no assurance that the Company's future revenues will increase and
the Company's ability to generate significant future revenues is subject to
substantial uncertainty. In addition, as the Company introduces the IMP and
explores opportunities to merge with or acquire complementary businesses and
technologies, the Company expects to continue to incur significant operating
losses for the foreseeable future.
RESULTS OF OPERATIONS
Revenues
The Company generates revenues from the IMP, FVIPS, consulting and interactive
advertising development. In August 1998, FVIPS operations and related revenues
will cease. In December 1997, 1 Virtual Place, the Company's on-line shopping
mall, was closed and merchandising sales ceased. Revenue was earned as detailed
in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interactive Messaging Platform $ 25,700 $ -- $ 25,700 $ --
First Virtual Internet Payment System 111,925 274,367 352,594 410,164
Consulting 80,000 98,750 120,000 221,250
Interactive advertising development -- 10,000 -- 115,000
Merchandising -- 9,950 -- 39,570
-------- -------- -------- --------
Total revenues $217,625 $393,067 $498,294 $785,984
======== ======== ======== ========
</TABLE>
For the three months ended June 30, 1998, revenues were $217,625 as compared to
$393,067 for the three months ended June 30, 1997. Revenues from FVIPS and
interactive advertising development decreased as the Company decided to focus
its efforts primarily on the IMP and the VirtualADz SDK starting in December
1997. The Company suspended producing VirtualTAGs while focusing efforts on the
VirtualADz SDK. Starting in the current quarter, the Company began to recognize
both IMP revenue and IMP related consulting revenue as the IMP became ready for
commercial use and pilot programs commenced. The Company is in the process of
ceasing its FVIPS operations and is encouraging its merchants and consumers to
migrate to alternative Internet payment systems.
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 the Company
decided to focus its efforts primarily on developing the IMP and the VirtualADz
SDK starting in December 1997.
- -------------
*Certain sections in this report have been identified as containing forward
looking statements. Although none of the sections on this page are so
identified, the reader is cautioned that such sections may contain forward
looking information.
9
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Cost of Revenues
The Company's cost of revenues from IMP, FVIPS, interactive advertising
development and merchandising were incurred as detailed in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interactive Messaging Platform $ -- $ -- $ -- $ --
First Virtual Internet Payment System 16,037 46,748 34,637 88,818
Interactive advertising development -- 4,000 -- 46,000
Merchandising -- 9,723 -- 37,167
-------- -------- -------- --------
Total revenues $ 16,037 $ 60,471 $ 34,637 $171,985
======== ======== ======== ========
</TABLE>
For the three months ended June 30, 1998, the cost of revenues related to FVIPS
decreased to 14.3% as compared with 17.0% for the three months ended June 30,
1997. This decrease came from enhancements in the FVIPS which allowed for
replacement of services provided by third parties and the Company's ability to
negotiate more favorable processing agreements with outside service providers.
The Company will continue to incur costs related to the FVIPS through the
remainder of the year as final payouts are made to merchants from the system. In
December 1997, the Company decided to close its merchandising segment and
suspend production of VirtualTAGs while focusing its efforts primarily on the
IMP and the VirtualADz SDK. Although costs were incurred from the IMP pilot
programs, they were expensed as development expenses since these programs were
run while the system was still in the development stage.
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 three
month cost of revenue narrative.
Operating Expenses
Standard operating expenses consist of marketing and sales, research,
development and engineering, and general and administrative expenses. In
addition to standard operating expenses, the Company also incurred restructuring
expenses in the second quarter of 1998. The Company expects operating expenses
to continue to be substantial as development and enhancement of more robust
capabilities associated with the IMP are created.* The Company also expects
operating expenses needed for the introduction and promotion of such products to
be substantial.* In addition, the Company 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, decreased to $420,965 for the three months ended
June 30, 1998, as compared to $1.1 million for the three months ended June 30,
1997. This decrease resulted primarily from decreases in salaries, wages and
payroll taxes of approximately $540,000, a decrease in consulting fees of
approximately $45,000, a decrease in travel related expenses of approximately
$30,000 and a general decrease in spending of approximately $64,000. The Company
expects that marketing and sales expenses will increase in the future as the
Company implements its sales and marketing plan to introduce its IMP.*
- ------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the actual future results will meet the Company's
current expectations. Investors are strongly encouraged to review the section
entitled "Factors Affecting Operating Results and Market Price of Stock"
commencing on page 14, for a discussion of factors that could affect future
performance. The reader is cautioned that other sections not so identified may
also contain forward looking information.
10
<PAGE> 11
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 fees 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 the Company's products
and services, decreased to $1.3 million for the three months ended June 30,
1998, as compared to $1.6 million for the three months ended June 30, 1997. This
decrease resulted primarily from decreases in salaries, wages and payroll taxes
of approximately $210,000, a decrease in travel related expenses of
approximately $48,000 and a general decrease in spending of approximately
$42,000. To date, all of the Company's software development costs have been
expensed as incurred. The Company anticipates that research, development and
engineering expenses will increase in future periods as the Company commercially
introduces and enhances its IMP.*
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 the
Company. For the three months ended June 30, 1998, general and administrative
expenses decreased to $1.2 million as compared to $1.4 million for the three
months ended June 30, 1997. This decrease resulted primarily from decreases in
salaries, wages and payroll taxes of approximately $270,000, a general reduction
in spending of approximately $75,000 offset by an increase in legal expenses of
approximately $145,000.
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, the Company took further
steps to focus its efforts on the 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 FVIPS and incurred expenses of
approximately $95,500 related to moving the corporate office to less expensive
office space.
- ------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the actual future results will meet the Company's
current expectations. Investors are strongly encouraged to review the section
entitled "Factors Affecting Operating Results and Market Price of Stock"
commencing on page 14, for a discussion of factors that could affect future
performance. The reader is cautioned that other sections not so identified may
also contain forward looking information.
11
<PAGE> 12
The Company expects to experience significant fluctuations in its future
quarterly operating results.* These fluctuations will be due to several factors,
many of which are beyond the control of the Company, including, among others,
market response to the Company's 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 the Company's products and
services; the degree of acceptance of the Internet as an advertising and
merchandising medium; the timing and effectiveness of collaborative marketing
efforts initiated by the Company's strategic partners; the timing of the
introduction of new products and services offered by the Company; the timing of
the release of enhancements to the Company's products and services; product
introductions and service offerings by the Company's competitors; the mix of the
products and services provided by the Company; the timing and rate at which the
Company increases its expenses to support projected growth; the cost of
compliance with applicable government regulations; competitive conditions in the
Company's marketplace; and general economic conditions. In addition, the fees
charged by the Company for advertising, messaging, and consulting services, are
subject to change as the Company introduces the IMP and assesses its marketing
strategy and competitive position.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $6.3 million in cash and cash equivalents. On
June 23, 1998, at the Company's Annual Meeting, the Company's stockholders
approved an investment in the Company by SOFTBANK and 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 with 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 their
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.
The Company believes that existing cash resources will be sufficient to support
the Company's currently anticipated working capital and capital expenditure
requirements through year end 1998.* However, the Company anticipates that it
will need to raise additional funds through the public or private sale of its
equity or debt securities or from other sources before the end of 1998 to ensure
that the Company remains in compliance with the requirements of the Nasdaq
National Market for continued listing. As of this filing, the Company has
initiated efforts to raise additional capital. The timing and amount of the
Company's capital requirements will depend on a number of factors, including
demand for the Company's products and services, the need to develop new or
enhanced products and services, competitive pressures and the availability of
complementary businesses or technologies that the Company may wish to acquire.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of the Company's stockholders will be diluted and such
equity securities may have rights, preferences or privileges
- ------------
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the actual future results will meet the Company's
current expectations. Investors are strongly encouraged to review the section
entitled "Factors Affecting Operating Results and Market Price of Stock"
commencing on page 14, for a discussion of factors that could affect future
performance. The reader is cautioned that other sections not so identified may
also contain forward looking information.
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<PAGE> 13
senior to those of the holders of the Company's common stock. There can be no
assurance that additional financing will be available when needed or that, if
available, such financing will include terms favorable to the Company or its
stockholders. If adequate funds are not available on acceptable terms, the
Company may be unable to develop or enhance its products and services, take
advantage of opportunities or respond to competition and the Nasdaq National
Market may decide to discontinue the listing of the Company's common stock, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
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 the Company's operations and management information systems.*
Capital expenditures were $263,400 and $528,900 for the six months ended June
30, 1998 and 1997, respectively. Furniture and equipment are stated at cost and
depreciated over three to five years using the straight line method.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although the Company believes that it is Year 2000 compliant, there
can be no assurance that coding errors or other defects will not be discovered
in the future. Any Year 2000 compliance problem of the Company, its service
providers, its customers or the Internet infrastructure could result in a
material adverse effect on the Company's business, operating results and
financial conditions.
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*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the actual future results will meet the Company's
current expectations. Investors are strongly encouraged to review the section
entitled "Factors Affecting Operating Results and Market Price of Stock"
commencing on page 14, for a discussion of factors that could affect future
performance. The reader is cautioned that other sections not so identified may
also contain forward looking information.
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<PAGE> 14
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
First Virtual operates in a rapidly changing environment that involves a number
of uncertainties, some of which are beyond the Company's control. In addition to
the uncertainties described elsewhere in this report, these uncertainties
include:
HISTORY OF OPERATING LOSSES AND ANTICIPATED FUTURE LOSSES;
LIMITED OPERATING HISTORY
The Company has incurred net operating losses in each quarter since its
inception in March 1994. As of June 30, 1998, the Company had an accumulated
deficit of approximately $37.5 million. To date, the Company has not generated
significant revenues. There can be no assurance that the Company's revenues will
increase in the future. In addition, as a result of the anticipated significant
investment that the Company is making and plans to continue to make in its
systems, sales, marketing, research, development and engineering and
administrative infrastructure over the near term, the Company expects to
continue to incur significant operating losses on both a quarterly and an annual
basis for the foreseeable future. For these and other reasons, there can be no
assurance that the Company will ever achieve or be able to sustain
profitability. The Company and its business prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in the new and rapidly evolving market for Internet products and
services. There can be no assurance that the Company will succeed in addressing
any or all of these risks, and the failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company commenced operations in March 1994, and accordingly the Company has
a limited operating history upon which to base an evaluation of its business and
prospects. To date, substantially all of the Company's revenues have been
attributable to the receipt of registration fees from consumers and merchants,
transaction processing fees, merchandising fees, sales of VirtualTAGs and
consulting fees associated with FVIPS. The Company will cease its FVIPS
operations in August 1998 and is currently encouraging its merchants and
consumers to migrate to alternative Internet payment systems. The Company has
determined to dedicate all its resources to developing and implementing its IMP
and related services and technologies. The Company's future financial
performance will depend significantly on the successful introduction and
customer acceptance of the IMP and other new and enhanced products and services.
Demand for new product categories such as the IMP is inherently difficult to
predict, and the Company believes that its prior experience in developing and
operating FVIPS does not offer a meaningful basis to assess the future prospects
of the IMP and related products and services. Accordingly, there is no assurance
that a significant market for the IMP or for any other technologies or services
of the Company will develop or that the Company will be successful in marketing
the IMP or any new or enhanced products or services.
INTEGRATION OF POTENTIAL ACQUISITIONS
As a part of its business strategy, the Company may make acquisitions of, or
significant investments in, complementary companies, products or technologies.
On July 13, 1998, First Virtual announced that it entered into a non-binding
letter of intent with Email Publishing Inc. to acquire 100% of the outstanding
stock of EMP. This and any such future acquisition would be accompanied by the
risks commonly encountered in acquisitions of companies. Such risks include,
among other things, the difficulty of assimilating the operations and personnel
of the acquired companies, the potential disruption of the Company's ongoing
business, the inability of management to maximize the financial and strategic
position of the Company through the successful incorporation of acquired
technology and rights into the Company's products and services, additional
expense associated with amortization of acquired intangible assets, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of any
integration of new management personnel. There can be no assurance that the
Company would be successful in overcoming these risks or any other problems
encountered in connection with such acquisitions.
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NEED FOR ADDITIONAL CAPITAL; UNCERTAINTY OF ADDITIONAL FINANCING; UNCERTAINTY OF
NASDAQ NATIONAL MARKET LISTING
The Company will need to raise additional funds to fund its operations, as well
as to develop new or enhanced services, to respond to competitive pressures or
to acquire complementary businesses or technologies. If adequate funds cannot be
obtained or are not available on acceptable terms, the Company may be unable to
develop or enhance its products and services, take advantage of important
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Also, as additional funds are raised through the issuance
of equity securities, the percentage ownership of the stockholders of the
Company will be further reduced, stockholders may experience significant
additional dilution and such equity securities may also have rights, preferences
or privileges senior to those of the holders of the Company's common stock.
The Company filed a form 8-K on June 26, 1998, as required by the Nasdaq
National Market to show that the SOFTBANK transaction would put the Company back
into compliance with all requirements for continued listing. However, should the
Nasdaq National Market in the future decide to discontinue the listing of the
Company's common stock, such actions by the Nasdaq National Market would
adversely affect the liquidity and market price of the common stock.
ANTICIPATED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
As a result of the early stage of development of Internet commerce, the IMP and
the Company's limited operating history, the Company's revenue expectations are
based almost entirely on internal estimates of future demand and not on actual
experience. In particular, it is difficult to forecast revenue expectations for
the IMP, which was released for commercial use in July 1998. Moreover, the
Company has only limited historical financial data for quarterly or annual
periods on which to base planned operating expenses. The Company's expense
levels have been established in large part due to its current expectations for
future revenues and its expected development and marketing requirements. In the
event market demand and revenues do not meet expectations, the Company may be
unable to adjust its spending levels on a timely basis to compensate for
unexpected revenue shortfalls. To a certain extent, the Company has encountered
this problem to date. As a result, the Company has not and may not be able to
take advantage of revenue opportunities as quickly as it would hope, because of
an effort to scale down its infrastructure to match lower than expected
revenues. There can be no assurance that revenues associated with use of the IMP
or Internet related consulting will increase significantly, or at all. Any
material shortfall of demand for the Company's products and services would have
a material adverse effect on the Company's business and financial condition and
could cause significant fluctuations in the Company's results of operations.
The Company expects its future operating results over both the short and the
long term will be subject to annual and quarterly fluctuations due to several
factors, many of which are beyond the control of the Company, including, among
others, market response to the Company's IMP; difficulties encountered in the
development or deployment of products or services, including interactive
messaging; market acceptance of Internet commerce in general and the IMP concept
in particular; fluctuating market demand for the Company's products and
services; the degree of acceptance of the Internet as an advertising and
merchandising medium; the timing and effectiveness of collaborative marketing
efforts initiated by the Company's strategic partners; the timing of the
introduction of new products and services offered by the Company; the timing of
the release of enhancements to the Company's products and services; product
introductions and service offerings by the Company's competitors; the mix of the
products and services provided by the Company; the timing and rate at which the
Company increases its expenses to support projected growth; the cost of
compliance with applicable government regulations; competitive conditions in the
Company's marketplace; and general economic conditions. In addition, the fees
charged by the Company for advertising, messaging, and consulting services are
subject to change as the Company introduces the IMP and assesses its marketing
strategy and competitive position. The Company believes that period-to-period
comparisons of its operating results are not meaningful and should not be relied
upon as any indication of future performance. Due to the foregoing factors,
among others, it is probable and possible that the Company's future quarterly or
annual operating results from time to time will not meet the
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<PAGE> 16
expectations of market analysts or investors, which may have a material adverse
effect on the price of the Company's common stock.
RISKS RELATED TO PRODUCT TRANSITION
The Company has derived substantially all of it revenues to date from FVIPS,
VirtualTAGs and related services. In the second quarter of fiscal 1997, the
Company determined to refocus it resources on developing and commercializing the
IMP. Since the IMP has just recently been completed, and since the IMP has only
been implemented on a limited basis, no assurance can be given that the IMP will
be successful or that the cost of future enhancements will not exceed future
revenues generated by the IMP. In addition, there is no assurance that the
Company's current server capacity and communications systems will be adequate to
support high volumes of IMP usage. A key element of the Company's strategy is to
generate a high volume of messages and associated transactions through the IMP.
Accordingly, the performance of the Company's products and services is critical
to the Company's ability to achieve market acceptance and continued use of these
products and services. Significant increases in the volume of messages processed
by the Company's systems could strain the capacity of the Company's software or
hardware, which could lead to slower response time or system failures. Any
additional investment in enhancing the capacity of the Company's server and
communications systems may adversely affect the Company's financial condition
and operating results and may result in service delays and interruptions that
would adversely impact the Company's revenues and reputation. In the event that
the IMP is not successfully introduced and marketed and revenues from the IMP
are not sufficient to return the cost of its operation and future enhancements,
the Company's business, financial condition and results of operation will be
materially and adversely affected.
UNCERTAIN ACCEPTANCE OF INTERACTIVE MESSAGING SERVICES
The Company's future success depends to a significant degree on the Company's
ability to successfully market the IMP and related services. The first phase of
the IMP has just recently been commercially introduced and to date, the Company
has not secured any significant customer commitments to license, use or
implement the IMP. Moreover, market demand for new product and service
categories such as interactive messaging is inherently uncertain. The IMP
represents a departure from the traditional methods of marketing and information
exchange employed by the Company's target customers, who have typically relied
predominantly on advertising and direct mail to attract new customers and
maintain customer relationships. Acceptance of the IMP will require a transition
to new ways of conducting business by enterprises that have already made
substantial investments in other means of conducting commerce and exchanging
information. Accordingly, the market prospects for the IMP are highly uncertain.
Moreover, although the Company believes that the IMP will prove to be an
efficient and cost-effective marketing and relationship-management vehicle for a
broad variety of customers, there is no assurance that prospective customers
will be able to implement the IMP without substantial additional cost, or that
the cost-efficiency of the IMP will compare favorably with traditional methods
of marketing and information exchange for most customers. Failure of the IMP to
meet customers' demands for efficacy and cost-efficiency may result in a decline
in use of the Company's interactive messaging services over time and would
materially adversely affect the Company's business, financial condition and
results of operations.
DEPENDENCE ON DISTRIBUTION RELATIONSHIPS, COLLATERAL SYSTEMS AND EXPANSION OF
DIRECT SALES FORCE
A key element of the Company's current business and marketing strategy is to
establish, develop and maintain relationships with financial institutions,
catalog companies, direct marketers and travel services, which include airlines,
rental cars agencies and hotel operators, to promote the Company's products and
services to their merchant and consumer customers. Although the Company has
established relationships with such entities in an effort to enhance the
Company's ability to penetrate the market for interactive messaging, such
relationships are nonexclusive and have not resulted in any comprehensive or
measurable increase in the Company's revenues to date. No assurance can be given
that the Company will be able to develop strategic relationships or that any
such relationship will prove to be effective in creating demand for the IMP. In
addition, there can be no assurance that the Company's existing or potential
marketing partners, most of whom have significantly greater financial and
marketing resources than the Company, will not
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<PAGE> 17
change their business strategies or discontinue their relationships with the
Company, develop and market products and services that compete with the
Company's products and services in the future or form collaborative marketing
relationships with one or more of the Company's competitors that offer
alternative Internet commerce solutions.
The operation of the IMP is dependent on the continued availability and
reliability of the Internet and collateral telecommunications. The Company is
substantially dependent on several third party providers of Internet
connectivity and collateral telecommunication services. There can be no
assurance that these companies will continue to provide services to the Company
without disruptions in service, at the current cost, or at all. Although the
Company believes that such services could be obtained from other sources in due
course if required, reengineering the Company's computer systems and
telecommunications infrastructure to accommodate a new service provider could
only be accomplished at significant cost and with significant delay. Any
interruption of such service providers also would be likely to result in the
disruption of the operation of the IMP with an attendant loss of revenues and
potential loss of customers. Such losses could have a material adverse effect on
the Company's business, financial condition and results of operations.
In order to promote the use of the IMP, the Company will be required to
significantly expand its direct sales force and marketing organization and
manage such personnel effectively. Establishing required marketing and sales
capability will require substantial efforts and significant management and
financial resources. The Company's management has very limited experience in
recruiting, developing or managing a marketing and sales force. There can be no
assurance that the Company will be able to recruit and retain direct marketing
and sales personnel in order to build an effective marketing and sales
organization, that building such a marketing and sales organization will be cost
effective or that the Company's marketing and sales efforts will be successful.
UNDEVELOPED AND RAPIDLY CHANGING MARKETS
The markets for the Company's products and services are at a very early stage of
development, are rapidly changing and are characterized by an increasing number
of market entrants that have introduced or are developing competing products and
services for use on the Internet and the Web. As is typical for a new and
rapidly evolving industry, demand for and market acceptance of recently
introduced products and services are subject to a high level of uncertainty and
risk. Acceptance and usage of the IMP is dependent on continued growth in use of
e-mail as a primary means of communications by businesses and consumers.
Increased usage of interactive messaging is also contingent on acceptance of
e-mail as a vehicle for targeted marketing of products and services and on the
ability of the Company to successfully differentiate its services from random
mass e-mailing products and services which have encountered substantial
resistance from consumers. Businesses that already have invested substantial
resources in traditional or other methods of conducting business may be
reluctant to adopt new commercial methodologies or strategies that may limit or
compete with their existing businesses. Individuals with established patterns of
purchasing goods and services may be reluctant to alter those patterns.
Accordingly, it is not assured that sufficient demand for the Company's products
and services will develop to sustain the Company's business.
The Company's success is critically dependent on the significant expansion of
the Internet infrastructure in order to provide adequate Internet access, the
proper management of Internet traffic and a substantial amount of public
education to, among other things, increase confidence in the integrity and
security of Internet commerce. There can be no assurance that use of e-mail as a
primary method of communication or commerce over the Internet will become
widespread, that a market for the Company's products and services will emerge or
that the IMP or other applications using the VirtualPIN architecture will be
generally adopted. If the market fails to develop, or develops more slowly than
expected, if the Internet infrastructure is not adequately expanded or managed,
or if the Company's products and services do not achieve market acceptance by a
significant number of individuals, businesses and financial institutions, then
the Company's business, financial condition and results of operations will be
materially and adversely affected.
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<PAGE> 18
COMPETITION
The market for products and services that enable interactive messaging
capabilities and the sale of goods and services over the Internet is intensely
competitive, and, to the extent that commercial activity over the Internet
increases, the Company expects competition to increase significantly. There are
no substantial barriers to entry into the Company's business, and the Company
expects established and new entities to enter the market for interactive
messaging services and interactive Internet communications in the near future.
It is possible that a single supplier will dominate one or more market segments.
Furthermore, since there are many potential entrants to the field, it is
extremely difficult to assess which companies are likely to offer competitive
products and services in the future, and in some cases it is difficult to
discern whether an existing service is competitive with the Company's current
services.
The Company's principal competitors in the interactive messaging services arena
include providers of e-mail based services such as PostX Corporation, Axciom,
ReplyNet, InfoBeat, Inc., Email Publishing Inc., and Cyber Data Systems, Inc.
The Company also competes with Narrative Communication in the interactive
advertising arena and with BroadVision Inc., Intellipost Corporation and E-Care
Group, Inc. for one-to-one marketing, as well as with traditional advertising,
merchandising and direct marketing companies that use more conventional means of
delivering information and marketing messages to consumers.
The Company may experience additional competition from Internet service
providers, advertising and direct marketing agencies and other large established
businesses who enter the market for either interactive messaging services.
Companies such as America Online, Microsoft Corp., IBM Corp., Integrion, AT&T,
Hewlett-Packard Company, Netscape Communications Corporation, Harte-Hanks Data
Technology, ADVO, The Interpublic Group of Companies, Inc. and Foote, Cone and
Belding, which possess large, existing customer bases, substantial financial
resources and established distribution channels, could develop, market or resell
a number of messaging services or payment alternatives. Such potential
competitors may also choose to enter the market for messaging services by
acquiring one of the Company's existing competitors or by forming strategic
alliances with such competitors, either of which may impede the Company's
ability to compete effectively.
Several of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases, more
diversified lines of products and services and significantly greater financial,
technical, marketing and other resources than the Company. Such competitors may
be able to undertake more extensive marketing campaigns, adopt more aggressive
pricing policies and make more attractive offers to individuals, businesses and
financial institutions. In addition, many of the Company's current or potential
competitors have broad distribution channels that may be used to bundle
competing products or services directly to end-users or purchasers. If such
competitors were to bundle competing products or services for their customers,
the demand, if any, for the Company's products and services might be
substantially reduced, and the ability of the Company to successfully effect the
distribution of its products and the utilization of its services would be
substantially diminished. As a result of the foregoing or other factors, there
can be no assurance that the Company will compete effectively with current or
future competitors or that the competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE UPON PRODUCT AND SERVICE DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS
The Company's success depends upon its ability to develop the IMP and other new
products and services that satisfy evolving customer requirements including
potential applications for Internet advertising, merchandising and direct
marketing. The market for the Company's services is characterized by rapidly
changing technology, emerging industry standards and customer requirements that
have been changing every few months. There can be no assurance that the Company
will successfully identify new product and service opportunities and develop and
bring to market new products and services in a timely manner. Failure of the
Company, for technological or other reasons, to develop and introduce the IMP
and other new
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<PAGE> 19
products and services that are compatible with emerging industry standards and
that satisfy customer requirements would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company or its competitors may announce enhancements to existing products or
services, or new products or services embodying new technologies, emerging
industry standards or customer requirements that render the Company's existing
products and services obsolete and unmarketable. There can be no assurance that
the announcement or introduction of new products or services by the Company or
its competitors or any change in emerging industry standards will not cause
customers to terminate use of the Company's existing products and services,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's products and services are designed around current technical
standards, and the Company's current and future revenues are dependent on
continued industry acceptance of such standards. While the Company intends to
provide compatibility with the standards promulgated by leading industry
participants and groups, widespread adoption of a proprietary or closed standard
could preclude the Company from effectively doing so. There can be no assurance
that the Company's products and services will achieve market acceptance, that
the Company will be successful in developing and introducing new products and
services that meet changing customer needs and respond to technological changes
or emerging industry standards in a timely manner, if at all, that the standards
upon which the Company's products and services are or will be based will be
accepted by the industry or that products, services or technologies developed by
others will not render the Company's products and services noncompetitive or
obsolete. The inability of the Company to respond to changing market conditions,
technological developments, emerging industry standards or changing customer
requirements or the development of competing technologies or products that
render the Company's products and services noncompetitive or obsolete would have
a material adverse effect on the Company's business, financial condition and
results of operations.
RISKS OF DEFECTS AND DEVELOPMENT DELAYS
Products and services based on sophisticated software and computing systems
often encounter development delays, and the underlying software may contain
undetected errors and failures when introduced or when usage increases. The
Company may experience delays in the development of the software and computing
systems underlying the Company's services. In addition, there can be no
assurance that, despite testing by the Company and its clients, errors will not
be found in the underlying software or that the Company will not experience
development delays, resulting in delays in the commercial release of its
products and services or in the market acceptance of its products and services,
each of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF CAPACITY CONSTRAINTS
A key element of the Company's strategy is to generate a high volume of messages
and associated transactions through the company's IMP. Accordingly, the
performance of the Company's products and services is critical to the Company's
ability to achieve market acceptance and continued use of these products and
services. Significant increases in the volume of messages could strain the
capacity of the Company's software or hardware, which could lead to slower
response time or system failures. The Company has and intends to 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 the Company's products
and services will be able to meet this demand. The Company and its customers are
also dependent upon Web browsers, e-mail clients and Internet and online service
providers for access to its services, and users have experienced difficulties
due to system failures unrelated to the Company's system, products or services.
To the extent that the capacity constraints described above are not effectively
addressed by the Company, such constraints could have a material adverse effect
on the Company's business, financial condition and results of operations.
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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 the
Company's products and services. Accordingly, there can be no assurance that
e-mail messaging or Internet commerce will become widespread or that sustainable
markets for the Company's products and services will develop. If such markets
fail to develop, develop more slowly than expected or become dominated by one or
more competitors, the Company's business, financial condition and results of
operations will be materially and adversely affected. Furthermore, if the
Internet becomes unable to support the demands of its users, the Internet could
lose its viability due to delays in the development or adoption of new standards
and protocols or due to increased governmental regulation. If the necessary
infrastructure, complementary services or facilities are not developed, or if
the Internet does not become a viable commercial marketplace, the Company's
business, financial condition and results of operations will be materially and
adversely affected.
MANAGEMENT OF POTENTIAL GROWTH; RISKS ASSOCIATED WITH MANAGEMENT TEAM
The rapid development necessary for the Company to exploit the market
opportunity for the IMP and its other services requires an effective planning
and management process. The Company has recently experienced significant changes
in its senior management. Lee H. Stein, the Company's Chairman and Chief
Executive Officer resigned from his position as an officer of the Company on
June 30, 1998, although Mr. Stein continues to serve on the Company's Board of
Directors and continues to serve as a consultant to the Company. In addition,
John M. Stachowiak, the Company's Vice President, Finance and Administration and
Chief Financial Officer resigned from his position as an officer of the Company
on May 15, 1998 and Dr. Carolyn Turbyfill, the Company's VP of Engineering and
Operations resigned from her position as an officer of the Company on June 15,
1998. At the time of this filing, the Company has not designated successors for
Mr. Stein, Mr. Stachowiak or Ms. Turbyfill. The Company's future success will
depend to a significant extent on the Company's ability to recruit new
management talent and on the ability of its executive officers and other members
of its management to operate effectively, both individually and as a group.
There can be no assurance that the Company will satisfactorily allocate
responsibilities and that the executive team will succeed in these roles in a
timely and efficient manner. The Company has experienced some difficulty, and
will most likely continue to experience difficulty in integrating or replacing
members of a management team from a variety of industry backgrounds. It is
uncertain whether current or future members of the management team can be
successfully assimilated or replaced. The Company's failure to attract, retain
and assimilate qualified personnel, or the failure of any of the executives to
perform effectively, or the loss of any such personnel, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, the Company believes that its future success will depend upon its
continuing ability to identify, attract, train and retain other highly skilled
managerial, engineering, sales and marketing and other personnel. Competition
for such personnel is intense. There can be no assurance that the Company will
be successful in identifying, attracting, training and retaining the necessary
personnel, and the failure to do so
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could have a material adverse effect on the Company's business, financial
condition and results of operations.
The introduction of the IMP and the Company's efforts to grow the Company's
customer base have placed, and are expected to continue to place, a significant
strain on the Company's managerial, operational and financial resources. There
can be no assurance that the Company will be able to effectively manage the
expansion of its operations, that the Company's systems, procedures and controls
will be adequate to support the Company's operations or that Company's
management will be able to achieve the rapid execution necessary to exploit the
market opportunity for the Company's products and services. Any inability of the
Company to effectively manage available resources could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS OF SYSTEMS FAILURES; LACK OF INSURANCE AND SECURITY RISKS
The Company's services are dependent on the Company's ability to protect its
computer equipment and the information stored in its data centers against loss
or damage that may be caused by system overloads, fire, power loss,
telecommunications failures, unauthorized intrusion, infection by computer
viruses and similar events. The Company's data centers and servers are currently
located in San Diego, California, and at a facility in Dallas, Texas. There can
be no assurance that a system failure at either of these locations would not
materially and adversely affect the Company's ability to provide its products
and services.
The Company currently retains highly confidential customer information in a
secure database server that the Company believes to be isolated from the
Internet. Although the server is protected by firewalls and proprietary, one-way
batch protocols along with regular Company reviews of the system for security
weaknesses, there can be no assurance that unauthorized individuals could not
obtain access to this database server. Any unauthorized penetration of the
Company's servers could result in the theft confidential customer information,
e-mail addresses, and comprehensive transaction histories. Unauthorized
penetration could lead to attempts to use such information for fraudulent
purposes. Although the Company believes that the its system's architecture
should thwart attempts to use misappropriated information, widespread attempts
to effect such transactions would require the Company to devote substantial
resources to counteracting such attempts and could result in a compromise of the
system or the interruption of the Company's ability to provide its products and
services and may result in adverse publicity to the Company and consequently
have a material adverse effect on the Company's business, financial condition
and results of operations. It is also possible that an employee of the Company
could attempt to misuse confidential customer information, exposing the Company
to legal liability. Furthermore, although the Company employs disclaimers and
limitation of warranty provisions in its client agreements to attempt to limit
its liability to clients, including liability arising out of systems failure,
there can be no assurance that such provisions will be enforceable, or will
otherwise prove effective in limiting the Company's exposure to damage claims.
Although the Company carries property, errors and omissions, crime and business
interruption insurance, its coverage may not be adequate to compensate the
Company for all losses that may occur. The Company is in the process of
increasing its server capacity, improving its security mechanisms and taking
other precautions to protect itself and its customers from events that could
interrupt delivery of the Company's products and services or result in a loss of
transaction or customer data. However, these measures will not eliminate a
significant risk to the Company's operations from a natural disaster or systems
failure. There can be no assurance that these measures would protect the Company
from an organized effort to inundate the Company's servers with massive
quantities of e-mail or other Internet message traffic which could overload the
Company's systems and result in a significant interruption of service. Any
systems failure that causes a significant interruption to or increases response
time of the Company's products and services could reduce use of the Company's
products and services and would reduce the attractiveness of the Company's
products and services to current and future customers. The Company's business
interruption insurance would not fully compensate the Company for lost revenues,
income, additional costs or increased costs experienced by the Company during
the occurrence of any disruption of its computer systems, nor is there any
assurance that the Company will be able to obtain such coverage on reasonable
terms or at all in the
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future. Significant service interruptions could also damage the Company's
reputation and result in the loss of a significant portion of its clients, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
LIMITED INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, copyright and trademark
laws, nondisclosure agreements, and other contractual provisions and technical
measures to protect its proprietary rights. The Company believes that, due to
the rapid pace of technological innovation for Internet products, the Company's
ability to establish and maintain a position of technology leadership in the
industry depends more on the skills of its development personnel than upon the
legal protections afforded its existing technology. There can be no assurance
that trade secret, copyright and trademark protections will be adequate to
safeguard the proprietary software underlying the Company's products and
services, or that its agreements with employees, consultants and others who
participate in the development of its software will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known. Moreover, notwithstanding the Company's
efforts to protect its intellectual property, there is no assurance that
competitors will not be able to develop functionally equivalent interactive
messaging technologies without infringing any of the Company's intellectual
property rights. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
products or technology that the Company considers proprietary, and third parties
may attempt to develop similar technology independently. In addition, effective
protection of intellectual property rights may be unavailable or limited in
certain countries. Accordingly, there can be no assurance that the Company's
means of protecting its proprietary rights will be adequate or that the
Company's competitors will not independently develop similar technology.
As the volume of Internet commerce increases, and the number of products and
service providers that support Internet commerce increases, the Company believes
that Internet commerce technology providers may become increasingly subject to
infringement claims. There can be no assurance that infringement claims will not
be filed by plaintiffs in the future. Any such claims, with or without merit,
could be time consuming, result in costly litigation, disrupt or delay the
enhancement or shipment of the Company's products and services or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable or favorable
to the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation to determine the validity of any claims
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation is determined in favor of the Company. In the event of an
adverse ruling in any such litigation, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology. The failure of the Company to develop or license a
substitute technology could have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company believes it is not currently subject to direct regulation by any
government agency in the U.S., other than regulations generally applicable to
businesses, and there are currently few laws or regulations directly applicable
to access to, or commerce on, the Internet. However, no assurance can be given
that federal, state or foreign agencies will not attempt in the near future to
begin to regulate the market for Internet commerce. In addition, if a government
agency were to challenge the Company's position with respect to the
applicability of regulations to its activities, responding to such a challenge
could result in significant expenditures of the Company's financial and
management resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. More
generally,
22
<PAGE> 23
due to the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations will be adopted with respect to the Internet,
covering issues such as user privacy, pricing, taxation and characteristics and
quality of products and services. For example, the Telecommunications Reform Act
of 1996 may subject certain Internet content providers to criminal penalties for
the transmission of certain information and could also result in liability to
Internet service providers, Web hosting sites and transaction facilitators such
as the Company. Various foreign jurisdictions have also moved to regulate access
to the Internet and to strictly control Web content. Even if the Company's
business is not directly subject to regulation, the adoption of any such laws or
regulations may inhibit the growth of the Internet, or the businesses of the
users of the Company's products and services, which could in turn adversely
affect the Company's business, financial condition and results of operations.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, libel, taxation and personal privacy is uncertain.
Such uncertainty creates the risk that such laws could be interpreted in a
manner that could generally inhibit commerce on the Internet and adversely
impact the Company's business.
Due to the growth of Internet commerce, Congress has considered regulating
providers of services and transactions in this market, and federal or state
authorities could enact laws, rules or regulations affecting the Company's
business or operations. Government agencies may promulgate rules and regulations
affecting the Company's activities or those of the users of its products and
services. Any or all of these potential actions could result in increased
operating costs for the Company or for the principal users of its services and
could also reduce the convenience and functionality of the Company's services,
possibly resulting in reduced market acceptance which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 22, 1998, First Virtual reached a settlement agreement with
the claimant who filed a complaint for breach of contract which
sought the sum of $66,488.71 from First Virtual for financial
investor relations work performed by the claimant. The Company
settled with such claimant for $40,000.
On June 23, 1998, the holders of certain promissory notes, who had
filed a civil lawsuit against the Company on February 5, 1998,
seeking to recover the principal and interest which they alleged was
due, signed a release on the writ of attachment that had been
previously been allowed by the court, releasing approximately $1.5
million of the Company's cash back into the Company's bank account.
ITEM 2. CHANGES IN SECURITIES
On April 2, 1998, the Company issued 605 shares of its common stock
to Curt Weaver, a consultant, for past services rendered to the
Company at an average price of $4.44 per share.
On April 14, 1998, the Company issued 3,503 shares of its common
stock to Pierre Wolff, a consultant, for past services rendered to
the Company at an average price of $0.86 per share.
On April 16, 1998, the Company issued 5,839 shares of its common
stock to Beverly Parenti, a consultant, for past services rendered
to the Company at an average price of $0.86 per share.
On May 18, 1998, the Company issued 3,582 shares of its common stock
to Pierre Wolff, a consultant, for past services rendered to the
Company at an average price of $0.84 per share.
On May 18, 1998, the Company issued 5,969 shares of its common stock
to Beverly Parenti, a consultant, for past services rendered to the
Company at an average price of $0.84 per share.
On June 1, 1998, the Company issued 1,861 shares of its common stock
to Pierre Wolff, a consultant, for past services rendered to the
Company at an average price of $1.61 per share.
On June 3, 1998, the Company issued 3,101 shares of its common stock
to Beverly Parenti, a consultant, for past services rendered to the
Company at an average price of $1.61 per share.
On June 8, 1998, the Company issued 1,614 shares of its common stock
to Curt Weaver, a consultant, for past services rendered to the
Company at an average price of $0.9063 per share.
Such issuances were made without registration under the Securities
Act of 1933 pursuant to Section 4 (2). No underwriter or placement
agent was involved in these issuances.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
24
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Stockholders (the "Meeting")
on June 23, 1998. Proxies were solicited for the meeting.
The matters described below were voted on at the Meeting. Of the
11,777,548 shares of common stock and 655 shares of Series A
preferred stock eligible to vote at the Meeting, 11,157,895 shares
of common stock and 0 shares of Series A were actually voted and the
results of the votes taken at such meeting were as follows:
1. Of 11,157,895 shares voted, 8,964,169 shares voted to ratify and
approve the issuance of up to 19,282,880 shares of the Company's
common stock to SOFTBANK Technology Ventures IV L.P. a Delaware
limited partnership and SOFTBANK Holdings, Inc., a Delaware
Corporation. There were 50,760 votes against such ratification
and 5,090 votes abstaining.
2. Of 11,157,895 shares voted, 8,963,540 shares voted to approve an
amendment to the Company's Certificate of Incorporation to
eliminate the classification of the Company's Board of Directors
such that each director will stand for election annually. There
were 50,889 votes against such ratification and 5,590 votes
abstaining.
3. Of 11,157,895 shares voted, 11,120,256 shares voted to elect
Ronald D. Fisher as a director; 11,135,256 shares voted to elect
both Gary E. Rieschel and Bradley A. Feld as directors. Each
director is to serve until their successors are duly elected and
qualified. There were 37,639 votes withheld for Ronald D. Fisher
and 22,639 votes withheld for both Gary E. Rieschel and Bradley
A. Feld
4. Of 11,157,895 shares voted, 8,942,437 shares voted to ratify and
approve the issuance of 1,000 shares of the Company's Series A
preferred stock and warrants to purchase shares of the Company's
common stock and shares of common stock issuable upon conversion
or exercise thereof. There were 72,167 votes against such
ratification and 5,415 votes abstaining.
5. Of 11,157,895 shares voted, 8,736,867 shares voted to amend the
Company's 1995 Stock Option Plan to increase the number of shares
available for the issuance thereunder by 1,000,000 to an
aggregate of 4,000,000 shares. There were 277,887 votes against
such ratification and 5,265 votes abstaining.
6. Of 11,157,895 shares voted, 11,111,745 shares voted to ratify the
appointment of Ernst & Young LLP, as independent auditors of the
Company for the fiscal year ending December 31, 1998. There were
38,460 votes against such ratification and 7,690 votes
abstaining.
ITEM 5. OTHER INFORMATION
The management of the Company is not aware of any events required to
be reported hereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit Index
Exhibit 27.1 - Financial Data Schedule
(B) Exhibit 10.36 - Form 8-K Pro forma Balance Sheet dated June 26,
1998
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<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST VIRTUAL HOLDINGS INCORPORATED
Dated: August 3, 1998 By: /s/ Keith S. Kendrick
------------------------------------
Keith S. Kendrick
President
(Principal Executive Officer)
Dated: August 3, 1998 By: /s/ Thomas Huppert
------------------------------------
Thomas Huppert
Chief Accounting Officer
(Principal Financial and
Accounting Officer)
26
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<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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