<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
REGISTRATION NO. 333-38755
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FIRST VIRTUAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA (PRIOR TO 3576 77-0357037
REINCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER IDENTIFICATION
DELAWARE (AFTER REINCORPORATION) INDUSTRIAL NUMBER)
(STATE OR OTHER JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR ORGANIZATION) NUMBER)
</TABLE>
3393 OCTAVIUS DRIVE
SUITE 102
SANTA CLARA, CA 95054
(408) 567-7200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES O. MITCHELL
CHIEF FINANCIAL OFFICER
FIRST VIRTUAL CORPORATION
3393 OCTAVIUS DRIVE
SUITE 102
SANTA CLARA, CA 95054
(408) 567-7200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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LEE F. BENTON, ESQ. NEIL J. WOLFF, ESQ.
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI
FIVE PALO ALTO SQUARE PROFESSIONAL CORPORATION
3000 EL CAMINO REAL 650 PAGE MILL ROAD
PALO ALTO, CA 94306-2155 PALO ALTO, CA 94304-1050
(650) 843-5000 (650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Amendment No. 1 to the Registration Statement is being filed solely
for the purpose of filing Exhibit 10.13(i) to the Registration Statement and to
correct footnote number two and footnote number one on page five and page 20,
respectively, of the Registration Statement.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 3, 1997
2,400,000 SHARES
LOGO
COMMON STOCK
Of the 2,400,000 shares of Common Stock offered hereby, 2,200,000 are being
sold by First Virtual Corporation ("First Virtual" or the "Company") and 200,000
shares are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $14.00 and $16.00 per
share. See "Underwriting" for information relating to the method of determining
the initial public offering price.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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=================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------
Per Share........ $ $ $ $
- -------------------------------------------------------------------------------------------------
Total(2)......... $ $ $ $
=================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $900,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 360,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco, California
on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS HAMBRECHT & QUIST
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 4
[DESCRIPTIONS OF ARTWORK TO COME]
[CAPTIONS TO ARTWORK TO COME]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANS-
ACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON
STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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<PAGE> 5
No dealer, sales representative or other person has been authorized to give
any information or to make any representations in connection with this offering
other than those contained in this Prospectus, and if given or made, such
information or representations must not be relied upon as having been authorized
by the Company, any Selling Stockholder or any Underwriter. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than registered securities to which it relates or an offer to,
or a solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company since the date hereof or
that the information contained herein is correct as of any time subsequent to
the date hereof.
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
------------------------
TABLE OF CONTENTS
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PAGE
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Summary................................................................................ 4
Risk Factors........................................................................... 6
Use of Proceeds........................................................................ 17
Dividend Policy........................................................................ 17
Capitalization......................................................................... 18
Dilution............................................................................... 19
Selected Consolidated Financial Data................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 21
Business............................................................................... 27
Management............................................................................. 40
Certain Transactions................................................................... 48
Principal and Selling Stockholders..................................................... 49
Description Of Capital Stock........................................................... 51
Shares Eligible For Future Sale........................................................ 53
Underwriting........................................................................... 55
Legal Matters.......................................................................... 56
Experts................................................................................ 56
Change of Accountants.................................................................. 57
Additional Information................................................................. 57
Index To Consolidated Financial Statements............................................. F-1
</TABLE>
First Virtual and the First Virtual Corporation logo are trademarks of the
Company. This prospectus also includes trade names and trademarks of companies
other than First Virtual.
The Company was incorporated in California in October 1993 and intends to
reincorporate in Delaware prior to effectiveness of this offering. The Company's
executive offices are located at 3393 Octavius Drive, Santa Clara, California
95054, and its telephone number is (408) 567-7200.
3
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option and gives effect to: (i) a reincorporation
of the Company in Delaware prior to this offering and (ii) the conversion of all
outstanding shares of the Company's Preferred Stock into Common Stock
automatically upon the completion of this offering. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
First Virtual Corporation provides a high quality, cost-effective video
networking solution that integrates video with voice and data. The Company
combines its expertise in real-time network systems, network quality of service
("QoS") and video technology to extend QoS across existing network
architectures, such as ATM, Ethernet, ISDN, T1/E1 and xDSL. Its easy-to-use
video networking systems are scaleable to multiple locations and thousands of
users. First Virtual's broad product line enables it to deliver end-to-end
solutions for a wide range of customer applications, such as distance learning,
telemedicine, video marketing and video manufacturing. The Company believes that
high quality video over networks can enhance the efficiency with which
organizations work and learn.
Improved communications technology is driving today's global economy by
making accurate information readily available to individuals and groups, often
at distant locations. Organizations increasingly connect individuals at remote
locations through videoconferencing and use stored and live video content,
delivered to multiple locations, to give personnel ready access to fully
featured, visual information. To date, existing network architectures have
constrained the delivery of high quality live and stored video. For example,
Ethernet, Token Ring and Frame Relay networks, when used to deliver real-time
video traffic, typically transmit blurred images without life-like motion and
limit the ability of users on these networks to simultaneously access high
quality live video and data applications. Network managers responding to these
limitations have implemented separate, parallel networks designed for video,
typically using a wide-area transmission technology called ISDN. However, the
deployment of ISDN within the customer premise has proven difficult to integrate
with other network architectures, costly to implement, and limited in its
ability to scale to the transfer rates required for high quality video. To
deliver high quality video across networks, organizations have begun to
implement ATM-based networks that support QoS, enabling them to simultaneously
carry multiple video streams, as well as voice and data.
The Company is driven by its customers' needs for the three critical
aspects of high quality video networking: Conferencing, Caching, and Casting.
First Virtual's conferencing products enable true video collaboration between
desktop systems and traditional videoconferencing equipment, from vendors such
as PictureTel Corporation ("PictureTel"); its caching products facilitate the
use of high quality stored video on networks; and its casting products enable
broadcast of high quality live video on networks. At the center of the Company's
product family is its Multimedia Operating Software ("MOS"), which is designed
to guarantee network resources for real-time video, voice and data applications
on any QoS-capable network. In addition, the Company has recently licensed
technology from International Business Machines Corporation ("IBM") to allow
First Virtual to enter the broadcast quality video networking market.
The Company has global OEM relationships with Bay Networks, Inc. ("Bay
Networks") and Northern Telecom, Inc. ("Nortel") and has established
relationships with a number of VARs and systems integrators, including Bell
Atlantic Network Integration, British Telecommunications plc ("BT"), Electronic
Data Systems Corporation ("EDS") and IBM Global Services. The Company has also
built a network of international distributors to enable it to sell, service and
support its products in more than 40 countries worldwide. The Company's
solutions have been deployed by a broad range of educational institutions,
corporations and governmental agencies, such as IBM (headquarters facility in
Armonk, New York); Peregrine Incorporated (headquarters and multiple
manufacturing facilities); Shanghai Infoport (government metropolitan area
network); and Virginia Tech (distance learning facilities).
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THE OFFERING
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Common Stock offered by the Company...... 2,200,000 shares
Common Stock offered by the Selling
Stockholders........................... 200,000 shares
Common Stock outstanding after the 14,931,100 shares(1)
offering...............................
Use of proceeds.......................... For repayment of outstanding indebtedness,
research and development activities, working
capital and general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol... FVCX
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
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<CAPTION>
OCTOBER 20, 1993 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------------- -------------------
1993 1994 1995 1996 1996 1997
---------------- ------- ------- -------- -------- --------
(in thousands, except per share data)
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues......................... $ -- $ -- $ 3,670 $ 12,093 $ 8,151 $ 11,123
Cost of revenues................. -- -- 2,874 6,547 4,711 6,477
---- ------- ------- -------- -------- --------
Gross profit................... -- -- 796 5,546 3,440 4,646
---- ------- ------- -------- -------- --------
Operating expenses:
Research and development....... 16 1,208 2,582 2,930 2,089 3,749
Selling, general and
administrative.............. 56 1,419 3,603 4,886 3,367 4,978
---- ------- ------- -------- -------- --------
Total operating
expenses(2).......... 72 2,627 6,185 7,816 5,456 8,727
---- ------- ------- -------- -------- --------
Loss from operations............. (72) (2,627) (5,389) (2,270) (2,016) (4,081)
Other income (expense), net...... -- 46 79 27 16 (147)
---- ------- ------- -------- -------- --------
Net loss......................... $ (72) $(2,581) $(5,310) $ (2,243) $ (2,000) $ (4,228)
==== ======= ======= ======== ======== ========
Pro forma net loss per
share(3)....................... $ (0.17) $ (0.15) $ (0.31)
======== ======== ========
Shares used in computing pro
forma net loss per share(3).... 13,321 13,212 13,647
======== ======== ========
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AS OF SEPTEMBER 30, 1997
--------------------------------------------
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
-------- ------------ --------------
(IN THOUSANDS)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 1,506 $ 1,506 $ 28,833
Working capital...................................... 301 301 29,491
Total assets......................................... 7,389 7,389 34,716
Total debt........................................... 2,591 2,591 128
Convertible preferred stock.......................... 7 -- --
Accumulated deficit.................................. (14,434) (14,434) (14,434)
Total stockholders' equity........................... 899 899 30,689
</TABLE>
- ---------------
(1) Based on 12,731,100 shares outstanding as of September 30, 1997. Excludes
1,857,698, 40,624 and 100,000 shares issuable upon exercise of outstanding
options, warrants and purchase rights at weighted average exercise prices of
$4.90, $8.00 and $8.00 per share, respectively. Excludes an additional
549,577 shares reserved for issuance under the Company's stock option and
purchase plans. See "Management -- Stock Plans" and "Description of Capital
Stock" and Notes 7 and 8 of Notes to Consolidated Financial Statements.
(2) Operating expenses include non-cash employee stock compensation charges of
$339,000 for the year ended December 31, 1996 and $183,000 and $1.0 million
for the nine month periods ended September 30, 1996 and 1997, repectively.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of pro forma net loss per share. Supplemental net loss
per share assuming $2.4 million in outstanding debt had been repaid at
January 1, 1996 or the date of issuance of the debt, if later, and assuming
that an equivalent amount was financed through the sale of equity securities
at the assumed offering price of $15.00 (less underwriting discounts and
commissions), would be $(0.16) for the year ended December 31, 1996 and
$(0.15) and $(0.30) for the nine month periods ended September 30, 1996 and
1997, respectively.
(4) Gives effect to the conversion of all outstanding Preferred Stock into
Common Stock.
(5) Adjusted to give effect to the receipt of the estimated net proceeds from
the sale of 2,200,000 shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $15.00 per share. See "Use of
Proceeds."
5
<PAGE> 8
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered by this Prospectus.
LIMITED OPERATING HISTORY; CUMULATIVE LOSSES
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company was incorporated in October
1993 and first shipped its video networking products in 1995. The Company's
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets and companies experiencing rapid
growth and expansion. To address these risks, the Company must, among other
things, continue to achieve market acceptance for its products, maintain
technological leadership, respond to evolving markets and competition and
attract, retain and motivate qualified employees. There can be no assurance that
the Company will be successful in addressing these risks. The Company has
incurred substantial net losses in each quarter since its inception. As of
September 30, 1997, the Company had an accumulated deficit of $14.4 million. The
Company's ability to achieve a consistent, profitable level of operations
depends on a number of factors, many of which are beyond the control of the
Company. There can be no assurance that the Company will be able to achieve
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced, and will in the future experience,
fluctuations in revenues, gross margins and operating results. For example, the
Company adopted a strategy in the fourth quarter of 1996 to focus on a limited
number of substantial end-user projects, rather than on sales of a large number
of pilot and demonstration projects. The initial impact of this change in
strategy was a decrease in revenues from $3.9 million in the fourth quarter of
1996 to $2.7 million in the first quarter of 1997. The Company's gross margins
have historically fluctuated from period to period and are expected to continue
to fluctuate in the future. Gross margins are significantly influenced by a
variety of factors, including product mix, percentage of revenues derived from
original equipment manufacturers ("OEMs") versus distributors or resellers,
pricing within the video networking industry and the prices of significant
components used in the Company's products.
Various factors, in addition to those discussed above, contribute to the
fluctuations in revenues, gross margins and operating results, including
development of the market for video networking and for the Company's products,
the Company's success in developing, introducing and shipping new products and
product enhancements, the Company's success in accurately forecasting demand for
new orders (which may have short lead-times before required shipment), new
product introductions and price reductions by its competitors, production
volumes and quality levels, seasonality, changes in material costs, the efforts
of OEMs, distributors, resellers, contract manufacturers and component suppliers
on behalf of the Company, the Company's ability to attract, retain and motivate
qualified personnel, the timing and amount of research and development and
selling, general and administrative expenditures, and general economic
conditions.
Further, a significant portion of the Company's expenses are fixed in
advance. The Company expects that operating expenses will increase in the future
to fund expanded operations. To the extent these increased expenses are not
accompanied by an increase in revenues, the Company's business, financial
condition and results of operations could be materially adversely affected. If
revenues or gross margins are below Company expectations in any given period,
the Company's inability to adjust operating expenses in response would adversely
affect operating results. Due to all the foregoing
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factors, it is likely that in some future quarter, the Company's results of
operations will be below the expectations of public market analysts and
investors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
MARKET ACCEPTANCE OF VIDEO NETWORKING
The Company's success depends on the market acceptance of video networking.
Potential end-users must accept video applications as a viable alternative to
face-to-face meetings and conventional classroom based learning. New
applications, such as the use of video in marketing, selling and manufacturing,
are in an early stage of development and have not been widely accepted to date.
Early video networking equipment designed for local area networks ("LANs")
suffered from poor video quality, as has traditional Integrated Services Digital
Network ("ISDN") based video conferencing, adversely affecting widespread
acceptance of video networking applications. The Company must overcome this
negative perception. Potential end-users must be educated in the use and
benefits of video networking. If video networking fails to achieve broad
commercial acceptance or such acceptance is delayed, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "Business -- Industry Background."
DEPENDENCE ON DISTRIBUTION RELATIONSHIPS
The Company currently focuses on sales through OEMs, distributors and
resellers ("distribution relationships"). The Company's future performance will
depend in large part on sales of its products through its distribution
relationships, such as Bay Networks, Nortel, and other key partners. During the
nine months ended September 30, 1997, Bay Networks was the Company's most
significant OEM, representing 57% of the Company's revenues. In November 1995,
the Company granted Bay Networks the worldwide non-exclusive right to market and
sell certain of the Company's products. In September 1996, the Company granted
Bay Networks the worldwide non-exclusive right to market and sell all of the
Company's current and future products under both the Company's and Bay Networks'
names. In May 1997, the Company granted similar rights to Nortel to market the
Company's products under the Company's name. The Company expects, based on its
past experience, that new distribution relationships such as the Nortel
relationship generally will not result in significant sales in the short term,
but only after a period during which the Company trains the partners' sales
forces and helps identify sales opportunities. Agreements with Bay Networks,
Nortel and other distribution partners generally provide for discounts based on
the Company's list prices, and do not require minimum purchases. These
agreements do not restrict development or distribution of competitive products.
Therefore, some of the entities which distribute the Company's products may
compete with the Company. The Company cannot assure that an OEM, distributor or
reseller will dedicate sufficient resources or give sufficient priority to
selling the Company's products. While the Company plans to seek additional
distribution relationships, these relationships could compete with and adversely
affect sales by the Company's existing OEMs, distributors or resellers. The
Company depends on its distribution relationships for most customer support, and
expends significant resources to train its OEMs, distributors and resellers to
support their customers. These entities can generally terminate the distribution
relationship upon 30 days notice for a material breach. The loss of a
distribution relationship or a decline in the efforts of a material distributor
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business -- Marketing, Sales and Customer
Support."
LIMITED NUMBER OF LARGE PROJECTS; LENGTHY SALES AND IMPLEMENTATION CYCLE
The Company depends on a limited number of large end-user projects for a
majority of its revenues, which has resulted in, and may in the future result
in, significant fluctuations in quarterly revenues. For example, a sale to IBM's
corporate headquarters represented nine percent of the Company's revenues in the
second quarter of 1997. The Company expects that revenues from the sale of
products to large end-users will continue to account for a significant
percentage of its revenues in
7
<PAGE> 10
any particular quarter for the foreseeable future. Additionally, a significant
portion of the Company's sales of video networking products has historically
been to government-related agencies, such as military and educational
institutions, or third parties using the Company's products on behalf of
government agencies. Such government-related customers are often subject to
budgetary pressures and may from time to time reduce their expenditures and/or
cancel orders. The loss of any major customer, or any reduction or delay in
orders by such customer, or the failure of the Company or its distribution
partners to market its products successfully to new customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Customers and Applications."
Sales of the Company's products require an extended sales effort. The
Company must first train the entities with which it has distribution
relationships to market the Company's products. These entities then must
identify appropriate video networking opportunities and compete for prospective
customers' scarce management attention and resources. Since the Company's
products are often used as part of a larger project and must be installed
without adversely affecting the performance of the customer's existing network,
end-users often require time to decide whether to undertake the project. Due to
operating procedures in many large organizations, particularly government
agencies, an extended time period may elapse after key decision makers have
selected the Company's products and before a contract to purchase the Company's
products can be signed. As a result, the period from an initial sales call to an
end-user agreement typically ranges from six to twelve months, and can be
longer. Therefore, the timing of revenues may be unpredictable. This could have
a material adverse effect on the Company's business, financial condition and
results of operations.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS
The markets for the Company's products are characterized by rapid
technological change and evolving industry standards. The Company's success will
depend, in part, on its ability to maintain its technological leadership, to
enhance and expand its existing product offerings and to develop and introduce
in a timely manner new products which achieve market acceptance. The development
of new, technologically advanced products is a complex and uncertain process
requiring high levels of innovation, as well as the accurate anticipation of
technological and market trends. The Company has experienced delays in the
introduction of new products in the past and may in the future experience such
delays.
As technology changes, the Company's success will also depend in part upon
its ability and the ability of its strategic partners to comply with evolving
industry standards. Transmission Control Protocol/Internet Protocol ("TCP/IP")
industry standards, such as H.323, Resource Reservation Protocol ("RSVP") and
Real-Time Protocol ("RTP"), are evolving. These standards potentially afford an
alternative to the Company's current video networking solutions. Industry
standards for Asynchronous Transfer Mode ("ATM"), such as H.321, LAN Emulation
("LANE"), Multi-Protocol Over ATM ("MPOA") and Private Network-Network Interface
("PNNI") are also still evolving. As standards evolve, the Company must modify
its products, or develop and support new versions of its products. The failure
of the Company's products to comply, or delays in achieving compliance, with
various evolving industry standards could delay introduction of the Company's
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's ability to compete
successfully is also dependent upon the continued compatibility and
interoperability of its products with products and architectures offered by
various vendors. The Company's business, financial condition and results of
operations would be materially adversely affected if it were to incur
significant delays or be unsuccessful in developing new products or
enhancements, if any such products or enhancements did not gain market
acceptance or if the Company is unable to effectively address the compatibility
and interoperability issues raised by technological changes in a timely manner,
or if a delay in the creation of industry standards resulted in customers
deciding not to deploy, or to delay deployment of, the Company's products. In
addition,
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there can be no assurance that products or technologies developed by others will
not render the Company's products noncompetitive or obsolete.
From time to time, the Company may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycle of the
Company's existing product offerings. The announcement of product enhancements
or new product offerings could cause customers to defer purchasing the Company's
products. For example, the Company is currently developing its V-Ether and
V-Gate323 products for Ethernet/IP-based networks, which may delay or defer
implementation of the Company's existing ATM-based products. The failure of the
Company to introduce new products or product enhancements effectively and on a
timely basis, customer delays in purchasing products in anticipation of new
product introductions and any inability of the Company to respond effectively to
technological changes, or to comply with the various existing and evolving
industry standards, or product announcements by competitors, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- First Virtual's Products and Technology"
and "-- Research and Development."
DEPENDENCE ON ATM BACKBONE TECHNOLOGY
Although ATM is becoming widely adopted for high-speed wide-area
networking, video networking over ATM networks is still an emerging market. The
Company currently derives a significant amount of its revenues from its video
networking products that function over ATM backbones, and sales of these video
networking products are expected to continue to account for a significant amount
of the Company's revenues for the foreseeable future. The Company's business
strategy is based on the assumption that ATM backbone technology will be a
widely accepted networking backbone solution. Accordingly, the Company's
business, financial condition and results of operations are dependent on
continued growth and market acceptance of ATM technology as a networking
backbone. The market acceptance of ATM technology may be adversely influenced by
the availability, performance and price of competing technologies such as Fast
Ethernet and Gigabit Ethernet. There can be no assurance that there will be
continued growth and market acceptance of ATM technology or the Company's video
networking products. In the event that ATM backbone networks fail to achieve
broad commercial acceptance, the Company's business, financial condition and
results of operations could be materially adversely affected.
DEPENDENCE ON SUPPLIERS
Several of the critical components used in the Company's products,
including certain custom and programmable semiconductors, such as the Pisces
ASIC, the SESAR ASIC and an ATM adapter, are currently available only from
Lucent Technologies Inc. ("Lucent"), Integrated Telecom Technology, Inc. ("IgT")
and Integrated Device Technologies, Inc. ("IDT"), respectively. The Company does
not have long-term agreements with these suppliers, and they are not obligated
to provide components to the Company for any specific period, in any specific
quantity or at any specific price, except as may be provided in a particular
purchase order. Qualifying additional suppliers is a time consuming and
expensive process, and there is a greater likelihood of problems arising during
a transition period to a new supplier. There can be no assurance that these
existing suppliers will continue to meet the Company's requirements for these
components. Any interruption in the supply of these components, or the inability
of the Company to procure these components from alternate sources at acceptable
prices and within a reasonable period of time, or any excessive rework costs
associated with defective components or process errors, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company uses a product sales forecast based on anticipated product
orders to determine its components requirements. As a result of the relatively
short lead-time on certain orders, however, this forecast may not be accurate.
Certain components used in the Company's products require an order lead time of
up to 16 weeks. Other components that currently are readily available may become
difficult to obtain in the future. Failure of the Company to predict accurately
its required quantities of these components could result in either shortages or
excess inventory of such components, as well as cause the Company to delay
shipments of its products in response to orders, which could have
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<PAGE> 12
a material adverse effect on the Company's business, financial condition and
results of operations. The Company has from time to time experienced shortages
of certain other key components. These component shortages have resulted in
delays in the shipment of the Company's products, and the component shortages
have also resulted in higher component costs. When these components are in short
supply, the Company must compete for them with companies that have greater
purchasing power and often have longer established relationships with their
vendors. There can be no assurance that the Company will not experience
shortages in component supplies in the future, which would have a material
adverse affect on the Company's business, financial condition and results of
operations.
COMPETITION; INDUSTRY CONSOLIDATION
The video networking industry is becoming increasingly competitive. As an
end-to-end high quality ATM-based video networking solution, First Virtual's
products face actual and potential competition in different market segments. The
Company's most direct competitors also currently offer video networking over
ATM, including FORE Systems, Inc. ("FORE") and Newbridge Networks Corporation
("Newbridge"). The Company's video networking products also compete with systems
based on other technologies, such as the ISDN-based video networking products
offered by Madge Networks, N.V. ("Madge"). The Company's network infrastructure
products, when sold by its distribution partners such as Bay Networks, are used
to compete with ATM-based infrastructure products sold by companies such as
Cisco Systems, Inc. ("Cisco") and 3Com Corporation ("3Com"). In the
videoconferencing area, the Company's technology licensing agreement with IBM is
intended to result in products which would compete with products sold by
companies such as Newbridge in the high-end H.310 videoconferencing market. In
video storage, the Company's V-Cache products face competition from companies
which offer high-performance servers that can store video, such as Silicon
Graphics, Inc. ("SGI"), Starlight Networks Inc. ("Starlight"), Sun Microsystems,
Inc. ("Sun") and The Network Connection ("TNC"). In the video broadcast area,
the Company's products may compete in the future with system and software
products of companies which provide "streamed" video over IP/Ethernet networks,
such as Optivision, Inc. ("Optivision") and Precept Software, Inc. ("Precept
Software"). The Company faces potential competition from large companies which
have products in related areas, such as Intel Corporation ("Intel")and Microsoft
Corporation ("Microsoft"). The Company could encounter new competition if
companies which distribute First Virtual's products, or whose videoconferencing
equipment is used together with the Company's products, develop or acquire video
networking technologies or products. There can be no assurance that the Company
will be able to compete successfully in this environment.
Many of the Company's actual and potential competitors have greater name
recognition; a larger installed base of networking products and strong
relationships with end users; more extensive engineering, manufacturing,
marketing and distribution capabilities; and greater financial, technological
and personnel resources than the Company. The networking industry is undergoing
a period of consolidation in which companies, including some of the Company's
competitors, are participating in business combinations, resulting in
competitors with larger market shares, customer bases, sales forces, product
offerings and technology and marketing expertise.
In addition, the Company expects price competition to escalate in the video
networking industry. Although the Company has rarely lowered product prices in
the past, anticipated competition may force the Company in the future to lower
product prices on a regular basis and add new products and features without
increasing prices. There can be no assurance that the Company will be able to
compete successfully in such a price competitive environment. If such pricing
pressures are not mitigated by cost reduction or changes in product mix, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business -- Competition."
COMPLIANCE WITH INDUSTRY STANDARDS AND REGULATIONS
The Company's products must meet a significant number of video, voice and
data communications regulations and standards, some of which are evolving as new
technologies are deployed. In the United
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<PAGE> 13
States, the Company's products must comply with various regulations defined by
the Federal Communications Commission and Underwriters Laboratories.
Internationally, the Company's products must comply with standards established
by telecommunications authorities in various countries, as well as with
recommendations of the International Telecommunications Union. In addition,
telecommunications service providers require that equipment connected to their
networks comply with their own standards, which may vary from industry
standards. A delay in obtaining, or the failure to obtain, certification of its
products domestically or in countries outside of the United States could delay
or preclude the Company's marketing and sales efforts, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
TCP/IP industry standards, such as H.323, RSVP and RTP, are evolving. These
standards potentially afford an alternative to the Company's current video
networking solution. Industry standards for ATM, such as H.321, LANE, MPOA and
PNNI, are also still evolving. As these standards evolve, the Company must
modify its products, or develop and support new versions of its products. The
failure of the Company's products to comply, or delays in achieving compliance,
with the various existing and evolving industry standards could delay
introduction of the Company's products, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Government regulatory policies are likely to continue to have a major
impact on the pricing of services over existing and new public ATM network
infrastructures and, therefore, are expected to affect demand for applications
such as video networking. Tariff rates, whether determined autonomously by
telecommunications service providers or in response to regulatory directives,
may affect the cost effectiveness of deploying public ATM network services.
Tariff policies are under continuous review and are subject to change. User
uncertainty regarding future policies could decrease demand for
telecommunications products, including the Company's products, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.
RELIANCE ON INTELLECTUAL PROPERTY
The Company's success and ability to compete in the video networking
industry depends, in part, upon its ability to protect its proprietary
technology and to operate without infringing the proprietary rights of others.
The Company does not rely on patent protection for, and does not hold, any
patents relating to its products. The Company's adherence to industry-wide
technical standards and specifications may limit the Company's opportunities to
provide proprietary product features. The Company currently licenses certain
technology from third parties and plans to continue to do so in the future. The
commercial success of the Company will also depend, in part, on the Company not
breaching its current and future licenses of third-party technology used in
certain of the Company's products.
The Company currently relies upon a combination of trade secret, copyright
and trademark laws and contractual restrictions to establish and protect
proprietary rights in its products. The Company also enters into confidentiality
and invention assignment agreements with its employees and enters into
non-disclosure agreements with its suppliers, distributors and customers to
limit access to and disclosure of its proprietary information. There can be no
assurance that these statutory and contractual arrangements will be sufficient
to deter misappropriation of the Company's proprietary technologies or that
independent third-parties will not develop similar or superior technologies. The
development of alternative technologies by third parties could adversely affect
the competitiveness of the Company's products. In addition, the laws of some
countries do not provide the same degree of protection of the Company's
proprietary information as do the laws of the United States.
The Company is also subject to the risk of litigation alleging infringement
of third party intellectual property rights from both its licensed and
proprietary technology. A number of companies have developed technologies or
received patents on technologies that may be related to or be competitive with
the Company's technologies. The Company has not conducted a patent search
relating to the technology used in its products. In addition, since patent
applications in the United States are not publicly disclosed until the patent
issues, applications may have been filed which, if issued as patents, would
relate to the Company's products. Many of these companies have significantly
11
<PAGE> 14
greater resources than the Company. Given the rapid development of technology in
the video networking industry, there can be no assurance that the Company's
existing or future products will not infringe upon the existing or future
proprietary rights of others. Further, the Company's lack of patents may inhibit
the Company's ability to negotiate or obtain licenses from or oppose patents of
third parties, if necessary. The Company could incur substantial costs in
defending itself and its customers against any such claims, regardless of the
merits of such claims. The Company may be required by contract or by statutory
implied warranties to indemnify its distribution partners and end-users against
third-party infringement claims. Parties making such claims may be able to
obtain injunctive or other equitable relief which could effectively block the
Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a successful
claim of infringement, the Company, its customers and end-users may be required
to obtain one or more licenses from third parties. There can be no assurance
that the Company or its customers could obtain necessary licenses from third
parties at a reasonable cost, or at all. The defense of any lawsuit could result
in time-consuming and expensive litigation, damages, license fees, royalty
payments and restrictions on the Company's ability to sell its products, any of
which could have a material adverse effect on the Company's business, financial
condition, and results of operations. See "Business -- Intellectual Property."
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING
The Company currently outsources the manufacturing of its products. The
Company relies on three vendors, Tanon Manufacturing, Inc. ("Tanon"), Empac
International Corporation ("Empac") and Sanmina Corporation ("Sanmina"), to
turnkey manufacture certain of its products. If one or more of these
manufacturers experiences quality or other problems, product shipments by the
Company may be delayed. The Company has experienced such delays in the past and
may in the future experience delays. If the Company is required to find
replacements for its manufacturers, such change in manufacturers could result in
short-term cost increases and delays in delivery, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company maintains a safety stock of critical components and
reserve inventory, which would not be sufficient to meet increases in demand
occurring simultaneously with delayed deliveries from manufacturers. There can
be no assurance that the Company will be able to negotiate acceptable
arrangements with its existing or any future manufacturers, or, if negotiated,
that such arrangements will be on terms favorable to the Company. See
"Business -- Manufacturing."
MANAGEMENT OF GROWTH; DEPENDENCE ON THIRD PARTY OUTSOURCING
The Company's growth, both in sales and in the number of its employees, has
placed, and is expected to continue to place, a significant strain on its
managerial, financial and personnel resources. The Company presently has fewer
than 60 full-time employees. The Company's ability to compete effectively and to
manage future growth, if any, will require the Company to continue to improve
its financial and management controls, reporting systems and procedures on a
timely basis, to expand, train and manage its employees, and to respond rapidly
to customer needs, including providing support for the Company's products. There
can be no assurance that the Company will be able to compete effectively and
manage future growth.
The Company currently outsources certain human resources and financial
responsibilities. The Company's accounting and data processing functions are
performed by KPMG Peat Marwick LLP ("KPMG"). While the Company has experienced
turnover with respect to the persons providing the services on behalf of KPMG,
such turnover has not had a material impact on the Company's operations. There
can be no assurance that such turnover will not have a material impact in the
future, or that such relationship will not be terminated by KPMG. As part of the
responsibilities of becoming a public company, the Company may need to transfer
certain finance functions back to the Company or transition from KPMG to another
service provider, both of which may have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company
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<PAGE> 15
may in the future acquire additional businesses, products or technologies. There
can be no assurance that the Company will be able to manage its expansion or
integrate the operations of any businesses, products or technologies it may in
the future acquire. The failure to do so could materially adversely affect the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN PERSONNEL
The Company's success to date has been significantly dependent on the
contributions of a number of its key personnel, including Ralph Ungermann,
President and Chief Executive Officer, Allwyn Sequeira, Vice President,
Engineering and Chief Technical Officer and James O. Mitchell, Vice President,
Operations and Chief Financial Officer. The loss of the services of Messrs.
Ungermann, Sequeira or Mitchell could have a material adverse effect on the
Company. The Company's success also depends, to a significant extent, upon other
key employees, consultants and advisors. The loss of the services of one or more
of these key employees or consultants and advisors could have a material adverse
effect on the Company. None of the Company's employees, including its senior
management, is bound by an employment or non-competition agreement, and the
Company does not maintain "key person" life insurance on any employee.
The Company believes that its future success will also depend upon its
ability to attract and retain additional highly-skilled technical, managerial,
manufacturing, sales and marketing personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be able to anticipate
accurately, or to obtain, the personnel that it may require in the future. The
failure to obtain personnel, when necessary, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management."
RISK OF PRODUCT DEFECTS
Products as complex as those offered by the Company frequently contain
undetected errors or defects, especially when first introduced or when new
versions or enhancements are released. Despite product testing by the Company
and its customers, the Company has in the past shipped product releases with
some defects, and has discovered other errors in its products after their
commercial shipment. Certain providers of the hardware and software used in the
Company's products in the past have changed their specifications, adversely
affecting the performance of the Company's products. For example, in the third
quarter of 1997, a semiconductor device supplier changed the design of its chip
without notifying the Company, halting production of certain of the Company's
products until the board incorporating this chip could be redesigned and
adversely affecting the Company's revenues for the quarter. There can be no
assurance that, despite testing by the Company and by current and potential
customers, defects and errors will not be found in new products or in new
versions or enhancements of existing products after commencement of commercial
shipments, or that the Company will not have to devote significant financial
resources and personnel to correct the defects. In addition, the Company's
products incorporate and are used with third party products. Defects, including
those of third parties, discovered in the future could result in adverse
customer reaction, negative publicity regarding the Company and its products,
delays in implementation of the Company's products, or delays in or failure to
achieve market acceptance of the Company's products, any of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
RISK OF INTERNATIONAL SALES AND CURRENCY FLUCTUATIONS
Sales outside of North America accounted for approximately 36% of the
Company's revenues for the year ended December 31, 1996 and approximately 22% of
the Company's revenues for the nine months ended September 30, 1997. There can
be no assurance that revenues from international sales will continue to
constitute a significant portion of the Company's business. A decline in
international sales could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, while the
Company's current products are designed to meet relevant
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<PAGE> 16
regulatory requirements in markets outside of the United States in which they
are sold, any inability to obtain any such required regulatory approvals on a
timely basis could have a material adverse effect on the Company. Conducting
business outside of the United States is subject to certain risks, including
seasonality, longer payment cycles, changes in regulatory requirements and
tariffs, reduced protection of intellectual property rights, difficulties in
distribution, the burden of complying with a variety of foreign laws and
political or economic constraints on international trade or instability. There
can be no assurance that any of these factors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
All of the Company's sales are denominated in United States dollars.
Therefore, an increase in the value of the dollar relative to local currency
could increase the price in local currencies of the Company's products in
markets outside of the United States and make the Company's products relatively
more expensive than competitive products denominated in local currencies, which
could materially adversely affect the Company's business, financial condition
and results of operations.
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active market will develop
or be maintained. The initial public offering price will be negotiated between
the Company and the representatives of the Underwriters and may not be
indicative of future market prices. See "Underwriting" for information related
to the method of determining the initial public offering price. The market price
of the shares of the Company's Common Stock, like that of the common stock of
many other high technology companies, is likely to be highly volatile. Factors
such as the Company's operating results, developments in the Company's
relationships with strategic partners, developments affecting the Company's
strategic partners, regulatory action or regulatory approval with respect to the
Company, its competitors or their products, announcements of new products by the
Company or its competitors, developments related to proprietary rights by the
Company or its competitors, changes in the recommendation of securities analysts
with respect to the Company's Common Stock, and market conditions for high
technology stocks in general may cause the market price of the Company's Common
Stock to fluctuate, perhaps substantially. The Company expects that operating
results will fluctuate from quarter to quarter and that such fluctuations may be
substantial. In addition, in recent years the stock market in general, and the
shares of high technology companies in particular, have experienced extreme
price fluctuations. Fluctuations in operating results, as well as these broad
market and industry fluctuations, may have a material adverse effect on the
market price of the Company's Common Stock.
CONTROL BY EXISTING STOCKHOLDERS
After this offering, the Company's named executive officers, directors and
principal stockholders will beneficially own approximately 7,523,407, or 49.8%,
of the outstanding shares of Common Stock (48.6% if the underwriters'
overallotment option is exercised in full). As a result, such persons may have
the ability to effectively control the Company and direct its affairs and
business, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may also have the effect
of delaying, deferring or preventing a change in control of the Company, and
making certain transactions more difficult or impossible absent the support of
such stockholders, including proxy contests, mergers involving the Company,
tender offers, open-market purchase programs or other purchases of Common Stock
that could give stockholders of the Company the opportunity to realize a premium
over the then prevailing market price for shares of Common Stock. See "Principal
and Selling Stockholders."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
stockholders. The rights of the holders of Common Stock will be
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<PAGE> 17
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. Any such issuance, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could affect adversely the voting power of holders of
Common Stock and the likelihood that such holders will receive payments upon
liquidation. Additionally, the issuance of Preferred Stock could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company and may discourage bids for the Common
Stock at a premium over the market price of the Common Stock and may affect
adversely the market price of and the voting and other rights of the holders of
the Common Stock. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of the Company. The Company's Certificate of Incorporation also provides for
staggered terms for the members of the Board of Directors. These provisions, and
other provisions of the Certificate of Incorporation, the Company's Bylaws and
Delaware corporate law, may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price for the
Company's Common Stock. The number of shares of Common Stock available for sale
in the public market is limited by (i) restrictions under the Securities Act of
1933, as amended (the "Securities Act"), and (ii) 180-day lock-up agreements
pursuant to which all directors, officers and other stockholders of the Company
have agreed not to sell or otherwise dispose of any of their shares without the
prior written consent of BancAmerica Robertson Stephens or, in certain
instances, the Company. The Company has agreed with BancAmerica Robertson
Stephens not to release any stockholder from any lock-up agreement between the
stockholder and the Company without the prior written consent of BancAmerica
Robertson Stephens. Approximately 11,443,033 shares and an additional 536,623
shares issuable upon exercise of outstanding vested options will be eligible for
sale 180 days after the date of this Prospectus upon expiration of the lock-up
agreements and in compliance with certain limitations set forth in the
Securities Act. An additional approximately 282,602 of the outstanding shares
will become eligible for sale at various times after 180 days after the date of
this Prospectus, over a period of less than one year, pursuant to Rule 144 and
Rule 701 under the Securities Act. The remaining approximately 805,465 shares
outstanding will be subject to rights of repurchase in favor of the Company that
expire at various dates through July 25, 2001 pursuant to vesting requirements.
After this offering, the holders of approximately 10,435,500 shares of Common
Stock will be entitled to certain demand and piggyback registration rights with
respect to registration of such shares under the Securities Act. If such
holders, by exercising their demand or piggyback registration rights, cause a
large number of securities to be registered and sold in the public market, such
sales could have an adverse effect on the market price for the Company's Common
Stock. If the Company were to include in a Company initiated registration shares
held by such holders pursuant to the exercise of their piggyback registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Shares Eligible For Future Sale" and "Description of
Capital Stock -- Registration Rights."
NO SPECIFIC PLAN FOR SIGNIFICANT PORTION OF PROCEEDS
The Company currently has no specific plans for a significant portion of
the net proceeds of the offering. As a consequence, the Company's management
will have the discretion to allocate this portion of the net proceeds of this
offering to uses that the stockholders may not deem desirable, and there can be
no assurance that these proceeds can or will be invested to yield a significant
return.
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Substantially all of the proceeds of the offering will be invested in
short-term, interest-bearing, investment grade securities for an indefinite
period of time. See "Use of Proceeds."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources
combined with the net proceeds of this offering, together with funds from the
Company's existing line of credit, will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. Thereafter, the Company may need to raise additional funds.
The Company may need to raise additional funds sooner in order to fund more
rapid expansion, to develop new or enhanced services, to respond to competitive
pressures or to acquire complementary businesses or technologies. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the stockholders of the Company will be reduced, stockholders may
experience additional dilution, or such equity securities may have rights,
preferences or privileges 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 on terms favorable to the Company or at all. If adequate funds are
not available or are not available on acceptable terms, the Company may be
unable to develop or enhance its services, take advantage of future
opportunities or respond to competitive pressures, which could have a material
adverse effect on the Company's business, financial condition or operating
results. See "Dilution" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DILUTION; ABSENCE OF DIVIDENDS
The initial public offering price will be substantially higher than the
book value per share of Common Stock. Assuming an initial public offering price
of $15.00 per share, investors purchasing shares of Common Stock in this
offering will incur immediate, substantial dilution of $12.94 per share in the
net tangible book value of Common Stock. Additional dilution will occur upon the
exercise of outstanding options and warrants. See "Dilution." The Company has
never declared or paid any cash dividends and does not anticipate paying cash
dividends in the foreseeable future. The Company's loan and security agreement
and capital equipment lease prohibit the payment of dividends without the
consent of the respective lenders. See "Dividend Policy."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be $29.8 million ($34.8 million if the
underwriters' over-allotment option is exercised in full) at an assumed initial
public offering price of $15.00 per share after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders.
The Company intends to use approximately $2.4 million of the net proceeds
of the offering for the repayment of outstanding indebtedness. The balance of
the net proceeds of the offering are expected to be used for research and
development activities, working capital and general corporate purposes. These
corporate purposes may include the purchase of technology assets and licenses.
The Company has no present understandings, commitments or arrangements with
respect to the purchase of any technology assets or licenses, and the amount and
timing of these expenditures will depend on numerous factors, including the
progress of the Company's research programs and its ability to attract
additional strategic partners. Pending application of the net proceeds of the
offering as described above, the Company intends to invest such proceeds in
short-term, investment-grade, interest-bearing financial instruments.
The Company anticipates that its existing resources, together with the net
proceeds of this offering, and projected interest income, will enable the
Company to maintain its current and planned operations through at least the next
12 months. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. The Company's loan and
security agreement and capital equipment lease prohibit the payment of dividends
without the respective lenders' consent.
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CAPITALIZATION
The following table sets forth as of September 30, 1997, (i) actual
capitalization of the Company as of September 30, 1997, (ii) the pro forma
capitalization of the Company giving effect to the conversion of all outstanding
shares of Preferred Stock into Common Stock and (iii) the pro forma
capitalization as adjusted to give effect to the receipt by the Company of the
estimated net proceeds from the sale of the 2,200,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $15.00 per share,
after deduction of underwriting discounts and estimated offering expenses
payable by the Company. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
PRO AS
ACTUAL FORMA(1) ADJUSTED
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term debt and line of credit......... $ 1,879 $ 1,879 $ 16
======== ========
Long-term debt, less current portion......................... 712 712 112
-------- --------
Stockholders' equity(2):
Convertible Preferred stock, $.001 par value; 10,000,000
shares authorized, actual; 5,000,000 authorized pro
forma and as adjusted; 7,937,182 shares issued and
outstanding, actual; no shares issued and outstanding,
pro forma and as adjusted............................... 7 -- --
Common stock, $.001 par value; 30,000,000 shares
authorized, actual; 35,000,000 pro forma and as
adjusted; 4,793,918 shares issued and outstanding,
actual; 12,731,100 shares issued and outstanding, pro
forma; 14,931,100 shares issued and outstanding, as
adjusted................................................ 5 12 14
Additional paid-in capital.............................. 16,165 16,165 45,953
Notes receivable from stockholders...................... (844) (844) (844)
Accumulated deficit.......................................... (14,434) (14,434) (14,434)
-------- --------
Total stockholders' equity......................... 899 899 30,689
-------- --------
Total capitalization............................... $ 1,611 $ 1,611 $ 30,801
======== ========
</TABLE>
- ---------------
(1) Gives effect to the conversion of all outstanding Preferred Stock into
Common Stock.
(2) Excludes 1,857,698, 40,624 and 100,000 shares issuable upon exercise of
outstanding options, warrants and purchase rights at weighted average
exercise prices of $4.90, $8.00 and $8.00 per share, respectively. Excludes
an additional 549,577 shares reserved for issuance under the Company's stock
option and purchase plans. See "Management -- Stock Plans" and "Description
of Capital Stock" and Notes 7 and 8 of Notes to Consolidated Financial
Statements.
18
<PAGE> 21
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 was approximately $899,000, or $0.07 per share of Common Stock. Pro forma
net tangible book value per share is determined by dividing the net tangible
book value (tangible assets less total liabilities) of the Company by the number
of shares of Common Stock outstanding at that date, including shares of Common
Stock from the conversion of the Preferred Stock immediately prior to the
consummation of the offering. Without taking into account any other changes in
the net tangible book value after September 30, 1997, other than to give effect
to the receipt by the Company of the estimated net proceeds from the sale of
2,200,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $15.00 per share (after deduction of
underwriting discounts and estimated offering expenses payable by the Company),
the pro forma net tangible book value of the Company as of September 30, 1997,
would have been $30.7 million, or $2.06 per share, respectively. This represents
an immediate increase in the pro forma net tangible book value of $1.99 per
share to existing stockholders and an immediate dilution of $12.94 per share to
new public investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $15.00
Pro forma net tangible book value per share before offering....... $0.07
Increase per share attributable to new public investors(1)........ 1.99
-----
Pro forma net tangible book value per share after offering.......... 2.06
------
Dilution per share to new public investors.......................... $12.94
======
</TABLE>
The following table summarizes, on a pro forma basis, as of September 30,
1997, the difference between existing stockholders and purchasers of shares in
the offering (at an assumed initial public offering price of $15.00 per share
and before deducting underwriting discounts and estimated offering expenses
payable by the Company) with respect to the number of shares of Common Stock
purchased from the Company, the total consideration paid or payable and the
average price per share paid or payable:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)......... 12,731,100 85.3% $14,518,000 30.6% $ 1.14
New public investors(2).......... 2,200,000 14.7 33,000,000 69.4 $ 15.00
---------- ----- ----------- -----
Total.................. 14,931,100 100.0% $47,518,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Excludes 1,857,698, 40,624 and 100,000 shares issuable upon exercise of
outstanding options, warrants and purchase rights at weighted average
exercise prices of $4.90, $8.00 and $8.00 per share, respectively. Excludes
an additional 549,577 shares reserved for issuance under the Company's stock
option and purchase plans. To the extent that options, warrants or purchase
rights are exercised and shares of Common Stock are issued, there will be
further dilution to new investors. See "Management -- Stock Plans" and
"Description of Capital Stock" and Notes 7 and 8 of Notes to Consolidated
Financial Statements.
(2) Sales by the Selling Stockholders in the offering will reduce the number of
shares held by existing stockholders to 12,531,100 shares, or approximately
83.9% of the total shares of Common Stock outstanding after this offering,
and will increase the number of shares held by new investors to 2,400,000,
or approximately 16.1%, of the total shares of Common Stock outstanding
after the offering. See "Principal and Selling Stockholders."
19
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data presented below, for each of
the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1997 and the selected consolidated balance sheet data as of
December 31, 1995 and 1996 and September 30, 1997 are derived from, and are
qualified by reference to, the consolidated financial statements of the Company
included elsewhere in this Prospectus. The selected consolidated balance sheet
data as of December 31, 1994 are derived from the audited consolidated financial
statements of the Company not included herein. The consolidated statement of
operations data for the period from October 20, 1993 (inception) to December 31,
1993 and the selected balance sheet data as of December 31, 1993 are derived
from unaudited consolidated financial statements of the Company not included
herein. The consolidated statement of operations data for the nine months ended
September 30, 1996 are derived from unaudited consolidated financial statements
included elsewhere in this Prospectus. The unaudited consolidated financial
statements include all adjustments that the Company considers necessary for a
fair presentation of the financial position and results of operations for these
periods. The consolidated statement of operations data for the nine months ended
September 30, 1997, are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1997. The data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
OCTOBER 20, 1993 ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30
DECEMBER 31, ------------------------- ----------------
1993 1994 1995 1996 1996 1997
---------------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues................................. $ -- $ -- $ 3,670 $12,093 $ 8,151 $11,123
Cost of revenues......................... -- -- 2,874 6,547 4,711 6,477
---- ------- ------- ------- ------- -------
Gross profit........................... -- -- 796 5,546 3,440 4,646
---- ------- ------- ------- ------- -------
Operating expenses:
Research and development............... 16 1,208 2,582 2,930 2,089 3,749
Selling, general and administrative.... 56 1,419 3,603 4,886 3,367 4,978
---- ------- ------- ------- ------- -------
Total operating expenses(1).... 72 2,627 6,185 7,816 5,456 8,727
---- ------- ------- ------- ------- -------
Loss from operations..................... (72) (2,627) (5,389) (2,270) (2,016) (4,081)
Other income (expense), net.............. -- 46 79 27 16 (147)
---- ------- ------- ------- ------- -------
Net loss................................. $(72) $(2,581) $(5,310) $(2,243) $(2,000) $(4,228)
==== ======= ======= ======= ======= =======
Pro forma net loss per share(2).......... $ (0.17) $ (0.15) $ (0.31)
======= ======= =======
Shares used in computing pro forma net
loss per share(2)...................... 13,321 13,212 13,647
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- SEPT. 30,
1993 1994 1995 1996 1997
---- ------- ------- ------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................... $405 $ 2,699 $ 2,787 $ 676 $ 1,506
Working capital............................. 417 2,410 1,452 1,046 301
Total assets................................ 492 2,998 4,516 5,432 7,389
Total debt.................................. -- -- 392 1,312 2,591
Accumulated deficit......................... (72) (2,653) (7,963) (10,206) (14,434)
Total stockholders' equity.................. 465 2,619 2,017 2,074 899
</TABLE>
- ---------------
(1) Operating expenses include non-cash employee stock compensation charges of
$339,000 for the year ended December 31, 1996 and $183,000 and $1.0 million
for the nine month periods ended September 30, 1996 and 1997, respectively.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of pro forma net loss per share. Supplemental net loss
per share assuming $2.4 million in outstanding debt had been repaid at
January 1, 1996 or the date of issuance of the debt, if later, and assuming
that an equivalent amount was financed through the sale of equity securities
at the assumed offering price of $15.00 (less underwriting discounts and
commissions), would be $(0.16) for the year ended December 31, 1996 and
$(0.15) and $(0.30) for the nine month periods ended September 30, 1996 and
1997, respectively.
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
First Virtual provides a high quality, cost-effective video networking
solution that integrates video with voice and data, while leveraging existing
network infrastructures. The Company was incorporated in California in October
1993 and will be reincorporated in Delaware prior to the closing of the
offering. The Company first shipped its video networking products in 1995.
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company has incurred net losses
since inception and, as of September 30, 1997, had an accumulated deficit of
$14.4 million. The Company has in the past, and may from time to time in the
future, experience quarterly fluctuations in revenues and operating results. The
Company adopted a strategy in the fourth quarter of 1996 to focus on a limited
number of substantial end-user projects, rather than on the implementation of a
large number of evaluation and demonstration projects. The initial impact of
this change of strategy was a decrease in revenues from $3.9 million in the
fourth quarter of 1996 to $2.7 million in the first quarter of 1997. The
Company's focus on a limited number of large large end-user projects has
resulted in, and may in the future result in, significant fluctuations in
quarterly revenues. Furthermore, a significant portion of the Company's expenses
are fixed in advance. If revenues are below Company expectations in any given
period, the Company's inability to adjust operating expenses in response to such
decreased revenues would affect operating results.
Gross margins are significantly influenced by a variety of factors,
including product mix, percentage of revenues derived from OEMs versus
distributors or resellers, pricing within the video networking industry and the
prices of significant components used in the Company's products. The Company
generally recognizes higher margins from video products and value added switch
modules and lower margins from base model V-Switches and adapter cards. The
Company's gross margins have fluctuated from period to period and are expected
to continue to do so in the future.
The Company sells its products worldwide through OEM partners, distributors
and resellers. The Company established strategic relationships with Bay Networks
in November 1995 and Nortel in May 1997. In November 1995, the Company granted
Bay Networks the worldwide non-exclusive right to market and sell certain of the
Company's products. In September 1996, the Company granted Bay Networks the
worldwide non-exclusive right to market and sell all of the Company's current
and future products, under both the Company's and Bay Networks' names. In May
1997, the Company granted similar rights to Nortel to market the Company's
products under the Company's name. Sales through Bay Networks represented 29%
and 57% of the Company revenues in 1996 and for the nine months ended September
30, 1997, respectively. Sales by Nortel have not been significant to date. The
Company also plans to enter into additional distribution agreements. See "Risk
Factors -- Dependence on Distribution Relationships."
The Company recognizes revenues upon shipment of products to customers,
provided that no significant obligations remain and collectability is probable.
The OEM partners generally have no rights of return and have historically
carried limited amounts of inventories of the Company's products. Agreements
with certain distribution partners contain price protection provisions and
certain return rights. Accordingly, the Company records a provision for
estimated future returns and
21
<PAGE> 24
price protection upon revenue recognition. To date, returns and charges for
price protection have not been material.
Direct sales from shipments to customers outside of North America accounted
for approximately 36.0% and 22.0% of the Company's revenues in 1996 and for the
nine months ended September 30, 1997, respectively. The Company expects that
direct sales from shipments to customers outside of North America will continue
to represent a significant portion of its future revenues. In addition, the
Company believes that a small portion of its sales through Bay Networks and
other distribution partners is sold to international end-users. Revenues from
the Company's international operations are subject to various risks. To date,
the Company has not engaged in any foreign currency hedging activity. See "Risk
Factors -- Risk of International Sales and Currency Fluctuations."
The Company outsources certain functions to independent service providers.
The Company's products are manufactured primarily by Tanon and accounting and
data processing functions are performed by KPMG.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statement of operations as a percentage of total revenues for the
period indicated. The table does not include data for the year ended December
31, 1994 because no revenue was recognized. The data set forth below should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -----------------
1995 1996 1996 1997
------- ------ ------ ------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues..................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................. 78.3 54.1 57.8 58.2
----- ---- ---- ----
Gross margin............................... 21.7 45.9 42.2 41.8
----- ---- ---- ----
Operating expenses:
Research and development................... 70.4 24.2 25.6 33.7
Selling, general and administrative........ 98.2 40.4 41.3 44.8
----- ---- ---- ----
Total operating expenses........... 168.6 64.6 66.9 78.5
----- ---- ---- ----
Loss from operations......................... (146.9) (18.7) (24.7) (36.7)
Other income (expense), net.................. 2.2 0.2 0.2 (1.3)
----- ---- ---- ----
Net loss..................................... (144.7)% (18.5)% (24.5)% (38.0)%
===== ==== ==== ====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Revenues. Revenues increased 36.5%, from $8.2 million in the nine months
ended September 30, 1996 to $11.1 million in the nine months ended September 30,
1997. The increase in revenues resulted from wider acceptance of the Company's
products as a result of marketing efforts of the Company and its strategic
partners. Sales through Bay Networks increased 156.0%, from $2.5 million in the
nine months ended September 30, 1996 to $6.4 million in the nine months ended
September 30, 1997.
Gross Profit. Gross profit consists of revenues less the cost of revenues,
which consists primarily of costs associated with the manufacture of the
Company's products by Tanon and other manufacturers and related costs of
freight, inventory obsolescence, royalty and warranty. These manufacturers
procure the majority of materials, except for certain key components which the
Company purchases from third party vendors.
22
<PAGE> 25
Gross profit increased 35.1%, from $3.4 million in the nine months ended
September 30, 1996 to $4.6 million in the nine months ended September 30, 1997.
Gross margin (gross profit as a percentage of revenues) remained relatively
constant, decreasing from 42.2% to 41.8% for those periods.
Research and Development. Research and development expenses consist
primarily of personnel costs, cost of contracts and outside consultants,
supplies and material expenses, equipment depreciation and overhead costs.
Research and development expenses increased 79.5%, from $2.1 million in the nine
months ended September 30, 1996 to $3.7 million in the nine months ended
September 30, 1997. The increase was the result of hiring additional engineers
and consultants for product development and non-cash compensation charges
relating to the Company's employee stock plans, which increased from $91,000 in
the nine months ended September 30, 1996 to $457,000 in the nine months ended
September 30, 1997. The Company believes that research and development expenses
will continue to increase for the foreseeable future. However, such expenses
will fluctuate depending on various factors, including the status of development
projects.
Selling, General and Administrative. Selling, general and administrative
expenses include personnel and related overhead costs for sales, marketing,
finance, human resources and general management. Such expenses also include
costs of outside contractors, advertising, trade shows and other marketing and
promotional expenses. Selling, general and administrative expenses increased
47.8%, from $3.4 million in the nine months ended September 30, 1996 to $5.0
million in the nine months ended September 30, 1997. As a percentage of total
revenues, selling, general and administrative expenses increased from 41.3% to
44.8% for the same periods. The increase was the result of expanding the
Company's sales and marketing infrastructure, in addition to higher marketing
and selling costs and to non-cash compensation charges relating to the Company's
employee stock plans, which increased from $92,000 in the nine months ended
September 30, 1996 to $552,000 in the nine months ended September 30, 1997. The
Company anticipates that selling, general and administrative expenses will
continue to increase in absolute dollars in the foreseeable future as the
Company expands its selling and marketing efforts and incurs the administrative
costs associated with being a publicly-held company.
Income Taxes. As of September 30, 1997, the Company had net operating loss
carryforwards for federal tax purposes of approximately $11.7 million. These
carryforwards, if not utilized to offset future taxable income, will expire at
various dates beginning in 2008. Under the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, the amount of and benefit from
the net operating losses that can be carried forward may be impaired or limited
in certain circumstances. See Note 5 of Notes to Consolidated Financial
Statements. As of September 30, 1997, the Company had gross deferred tax assets
of approximately $5.8 million. The Company has incurred losses since inception.
The Company believes that, based on the history of such losses and other
factors, the weight of available evidence indicates that it is more likely than
not that it will not be able to realize its deferred tax assets, and thus a full
valuation reserve has been recorded as of September 30, 1997.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Revenues. The Company had no revenues from inception through the year ended
December 31, 1994. The Company's revenues increased from $3.7 million in 1995 to
$12.1 million in 1996. The increase primarily resulted from development of the
market for, and increased acceptance of, the Company's products.
Gross Profit. Gross profit increased from $796,000 in 1995 to $5.5 million
in 1996. Gross margin increased from 21.7% in 1995 to 45.9% in 1996. The
increase in gross profit and gross margin resulted from cost reductions
associated with higher volume of product shipments. Additionally, gross profit
and gross margin in 1995 were adversely affected by higher costs associated with
initial production runs of the Company's products.
Research and Development. Research and development expenses increased from
$1.2 million in 1994 to $2.6 million in 1995 and $2.9 million in 1996. The
increases in research and development
23
<PAGE> 26
expense during each of the three years were primarily a result of increased
headcount and associated expenses incurred to develop, expand and enhance the
Company's products. Research and development expenses for 1996 also include
non-cash compensation charges relating to the Company's employee stock plans of
$174,000.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $1.4 million in 1994 to $3.6 million in 1995 and $4.9
million in 1996. The increases in selling, general and administrative expenses
during each of the three years were primarily due to an increase in headcount,
and in marketing, advertising, travel and related overhead costs incurred by the
Company to manage and support its efforts to develop the market for its products
and support its growth. Selling, general and administrative expenses for 1996
also include non-cash compensation charges relating to the Company's employee
stock plans of $165,000.
Income Taxes. No provision for income taxes has been recorded, as the
Company has incurred losses since inception.
QUARTERLY RESULTS
The following table sets forth selected unaudited consolidated statement of
operations data, in dollars and as a percentage of revenues, for each of the
seven quarters in the period ended September 30, 1997. The data set forth has
been derived from unaudited consolidated financial statements of the Company and
has been prepared on the same basis as the audited consolidated financial
statements contained in this Prospectus, and in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information for the periods presented.
Such statement of operations data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. The Company's results of operations have fluctuated, and are likely
to continue to fluctuate, significantly from quarter to quarter. Results of
operations in any period should not be considered indicative of the results to
be expected in any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
--------- -------- --------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... $ 1,569 $2,483 $ 4,099 $3,942 $ 2,730 $ 3,413 $ 4,980
Cost of revenues....................... 907 1,386 2,418 1,836 1,577 1,898 3,002
------- ------- ------- ------- ------- ------- -------
Gross profit......................... 662 1,097 1,681 2,106 1,153 1,515 1,978
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............. 619 712 758 841 953 1,252 1,544
Selling, general and
administrative..................... 1,070 1,201 1,096 1,519 1,350 1,598 2,030
------- ------- ------- ------- ------- ------- -------
Total operating expenses(1)... 1,689 1,913 1,854 2,360 2,303 2,850 3,574
------- ------- ------- ------- ------- ------- -------
Loss from operations................... (1,027) (816) (173) (254) (1,150) (1,335) (1,596)
Other income (expense), net ........... 5 11 0 11 (16) (35) (96)
------- ------- ------- ------- ------- ------- -------
Net loss............................... $(1,022) $ (805) $ (173) $ (243) $(1,166) $(1,370) $(1,692)
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Operating expenses include non-cash employee stock compensation charges of
$25,000, $56,000, $102,000, $156,000, $139,000, $112,000, and $758,000
during the quarters ended March 31, 1996, June 30, 1996, September 30, 1996,
December 31, 1996, March 31, 1997, June 30, 1997 and September 30, 1997,
respectively.
24
<PAGE> 27
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
--------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 57.8 55.8 59.0 46.6 57.8 55.6 60.3
----- ----- ----- ----- ----- ----- -----
Gross margin......................... 42.2 44.2 41.0 53.4 42.2 44.4 39.7
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research and development............. 39.5 28.7 18.5 21.3 34.9 36.7 31.0
Selling, general and
administrative..................... 68.2 48.4 26.7 38.5 49.5 46.8 40.8
----- ----- ----- ----- ----- ----- -----
Total operating expenses...... 107.7 77.1 45.2 59.8 84.4 83.5 71.8
----- ----- ----- ----- ----- ----- -----
Loss from operations................... (65.5) (32.9) (4.2) (6.4) (42.2) (39.1) (32.1)
Other income (expense), net............ 0.3 0.4 -- 0.3 (0.6) (1.0) (1.9)
----- ----- ----- ----- ----- ----- -----
Net loss............................... (65.2)% (32.5)% (4.2)% (6.1)% (42.8)% (40.1)% (34.0)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Revenues increased during each of the quarters in 1996 due to increased
shipments of the Company's products. The Company's quarterly revenues are
affected by the size and timing of orders received by customers. During the
fourth quarter of 1996, the Company adopted a strategy of focusing on a limited
number of substantial end-user projects, rather than on sales of a large number
of demonstration projects. The initial impact of the change of strategy was a
decrease in revenues from $3.9 million in the quarter ended December 31, 1996 to
$2.7 million in the quarter ended March 31, 1997. Revenues increased during the
second and third quarters of 1997, due primarily to higher revenues from large
end-user projects sold through Bay Networks in the OEM channel. Gross margins
ranged from 39.7% to 53.4% during the periods presented, due primarily to
product mix and mix of sales through OEM versus distributors. In particular,
during the quarter ended December 31, 1996, the gross margin increased as a
result of sales to end-users of high margin products. During the quarter ended
September 30, 1997, gross margins were adversely impacted by a higher
concentration of OEM sales and the timing of shipments of certain lower margin
products. Operating expenses generally increased during the periods presented
due to costs associated with increased headcount and marketing and selling
expenses incurred by the Company.
The Company has in the past experienced, and believes that it may from time
to time experience, fluctuations in revenues and operating results from quarter
to quarter due to a combination of factors, many of which are outside of the
Company's control. See "Risk Factors -- Fluctuations in Operating Results."
STOCK BASED COMPENSATION
With respect to certain stock options and restricted stock grants made
during 1996 and the nine months ended September 30, 1997, the Company is
recognizing compensation charges of $2.1 million. The Company recognized
$339,000 and $1.0 million of the compensation charges in 1996 and the nine
months ended September 30, 1997, respectively, and will recognize the remainder
over the related vesting period. The future compensation charges are subject to
reduction for any employee who terminates employment prior to the expiration of
such employee's vesting period. See Note 8 of Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through September 30, 1997, the Company has financed its
operations primarily through private placements of equity securities, raising an
aggregate of approximately $13.8 million, net of issuance costs. As of September
30, 1997, the Company had cash and cash equivalents of $1.5 million and working
capital of $301,000.
The Company has used cash in its operating activities primarily to fund
losses of $14.4 million incurred through September 30, 1997, and to finance its
working capital needs.
25
<PAGE> 28
The Company has not made significant outlays for capital expenditures since
inception because of its strategy to outsource manufacturing and certain other
functions. From inception through September 30, 1997, the Company's capital
expenditures aggregated $1.3 million and have consisted primarily of purchases
of computers, related equipment, furniture and fixtures. The Company currently
anticipates that capital expenditures in the remainder of 1997 will be less than
$500,000.
The Company has a working capital line of credit with a bank which provides
for borrowings of up to $3.0 million. Borrowings under the line of credit bear
interest at the bank's prime rate (8.5% at September 30, 1997) plus 0.5%, are
secured by certain assets of the Company and are limited to certain percentages
of the Company's receivable and inventory balances. As of September 30, 1997,
borrowings under this line aggregated $1.3 million and an additional
approximately $800,000 was available to the Company. The Company currently
expects to repay approximately $2.4 million of outstanding debt, including the
$1.3 million of borrowings under this line, from the proceeds of this offering.
The line expires in April 1998, and requires the Company to comply with certain
financial ratios and covenants and limits the Company's ability to pay
dividends. As of September 30, 1997, the Company was not in compliance with
certain financial covenants contained in the line of credit agreement. The bank
waived the Company's noncompliance with these covenants as of September 30,
1997.
The Company believes that the net proceeds from this offering, together
with existing sources of liquidity, will provide adequate cash to fund its
operations for at least the next twelve months. Thereafter, if cash generated by
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may be required to sell additional equity or debt securities or increase
its lines of credit. The sale of additional equity or convertible debt
securities may result in additional dilution to the Company's stockholders.
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<PAGE> 29
BUSINESS
OVERVIEW
First Virtual Corporation provides a high quality, cost-effective video
networking solution that integrates video with voice and data. The Company
combines its expertise in real-time network systems, network quality of service
("QoS") and video technology to extend QoS across existing network
architectures, such as ATM, Ethernet, ISDN, T1/E1 and xDSL. Its easy-to-use
video networking systems are scaleable to multiple locations and thousands of
users. First Virtual's broad product line enables it to deliver end-to-end
solutions for a wide range of customer applications, such as distance learning,
telemedicine, video marketing and video manufacturing. The Company believes that
high quality video over networks can enhance the efficiency with which
organizations work and learn.
The Company is driven by its customers' needs for the three critical
aspects of high quality video networking: Conferencing, Caching, and Casting.
First Virtual's conferencing products enable true video collaboration between
desktop systems and traditional videoconferencing equipment from vendors such as
PictureTel; its caching products facilitate the use of high quality stored video
on networks; and its casting products enable broadcast of high quality live
video on networks. At the center of the Company's product family is its MOS
software, which is designed to guarantee network resources for real-time video,
voice and data applications on any QoS-capable network. In addition, First
Virtual has recently licensed technology from IBM to allow the Company to enter
the broadcast quality video networking market.
The Company has global OEM relationships with Bay Networks and Nortel and
has established relationships with a number of VARs and systems integrators,
including Bell Atlantic Network Integration, BT, EDS and IBM Global Services.
The Company has also built a network of international distributors to enable it
to sell, service and support its products in more than 40 countries worldwide.
The Company's solutions have been deployed by a broad range of educational
institutions, corporations and governmental agencies, such as IBM (headquarters
facility in Armonk, New York); Peregrine Systems Inc. (headquarters and multiple
manufacturing facilities); Shanghai Infoport (government metropolitan area
network); and Virginia Tech (distance learning facilities).
INDUSTRY BACKGROUND
Improved communications technology is driving today's global economy by
making accurate information readily available to individuals and groups, often
at distant locations. Enterprises must deploy their skilled personnel
effectively to compete in a marketplace that demands rapid product development,
close collaboration on marketing and sales, and extensive training. While voice
mail, e-mail and file sharing have become essential business and educational
tools, many situations both within and outside an organization still require
face-to-face communication. In today's global economy, business travel requires
progressively more time and has become pervasive for staff at many levels,
particularly for multinational corporations. Educational institutions,
corporations and government agencies are seeking to eliminate the high cost and
time requirements of travel, through the increased use of video. These
organizations increasingly connect individuals through videoconferencing and use
stored and live video content delivered to multiple locations, to give personnel
ready access to fully featured, visual information.
High quality video networking has the ability to provide the benefits of
enhanced communication in a broad range of environments. Universities and local
school districts can leverage video networking to deliver stored instructional
content to students at their desks. Hospitals using high quality video
networking can deploy telemedicine to enable a team of doctors in different
locations to diagnose and treat patients remotely. Sales professionals with
access to high quality video networking systems can deliver potent video-enabled
presentations to prospective customers in many cities in a single day.
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Manufacturing companies can achieve efficiencies by offering workers on the
factory floor just-in-time video training focused on a single part or assembly
process.
While the utility of video has generally been recognized, "video
networking" has not yet become widespread, despite the investment in local and
wide area networking equipment, primarily due to quality and ease-of-use
constraints. To date, existing network architectures have constrained the
delivery of high quality live and stored video. For example, Ethernet, Token
Ring and Frame Relay networks were designed to transport data which can be
delivered after a time lag, such as printing and e-mail. When used to deliver
real-time video traffic, these networks typically transmit blurred images
without life-like motion. In addition, video traffic on these networks can
significantly disrupt the transport of traditional data traffic. Technologies
such as Ethernet cannot distinguish between real-time streams of video and
bursts of data packets, thus limiting the ability of users on these networks to
simultaneously access high quality live video while accessing data applications.
Network managers responding to these architectural limitations implemented
high quality video delivery over a separate, parallel network designed for
video, typically using a wide-area transmission technology called ISDN. ISDN
enabled the evolution of traditional videoconferencing, using equipment such as
room-systems by PictureTel and multipoint conferencing units ("MCUs") by
VideoServer, Inc. ("VideoServer"). However, the deployment of ISDN within the
customer premise has proven inflexible because it is difficult to integrate with
other network architectures. ISDN is also costly to implement, as it often
requires new wiring and a multiplexing device for each video-enabled
workstation. In addition, ISDN has been difficult to use for broadcast-quality
video because it does not scale to the required transfer rates.
To deliver multiple types of high quality video across their networks,
corporations, government and educational institutions have begun to implement
networks that support QoS. A network based on an architecture that supports QoS
can simultaneously carry multiple video streams, as well as voice and data. The
only commercially available technology that enables comprehensive QoS is ATM,
which was developed to allow a single network to concurrently transmit
information with widely varying QoS requirements. An ATM-based network can
dynamically allocate the network resources required by video, voice and data
traffic to ensure that they do not interfere with one another. However, early
ATM-based networking equipment could not extend QoS characteristics to other
network architectures, such as Ethernet and ISDN.
To achieve broad market acceptance, a video networking solution based on
QoS must offer high-quality videoconferencing and access to live and stored
video while seamlessly integrating voice and data traffic. A cost-effective
solution must also be scaleable, offer ease of use, and leverage an
organization's existing investment in videoconferencing equipment and in
Ethernet, ISDN and other network infrastructures.
FIRST VIRTUAL'S SOLUTION
First Virtual provides a high quality, cost-effective video networking
solution that integrates video with voice and data, while leveraging existing
network infrastructures. The Company combines its expertise in real-time network
systems, network quality of service and video technology to extend QoS across
existing network architectures, including ATM, Ethernet, ISDN, T1/E1 and xDSL.
Its easy-to-use video networking systems are scaleable to multiple locations and
thousands of users. First Virtual's broad product line enables it to deliver
end-to-end solutions for a wide range of customer applications, such as distance
learning, telemedicine, video marketing and video manufacturing. A critical
element of First Virtual's product family is its MOS software, designed to
guarantee network resources for real-time video applications on any QoS capable
network in the presence of voice and bursts of data packets. The Company is
driven by its customers' needs for the three critical aspects of high quality
video networking: Conferencing, Caching, and Casting.
Conferencing -- the ability to meet face-to-face and in real-time over the
network. First Virtual's video networking products provide scaleable,
cost-effective, high quality video collaboration by
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allowing the efficient connection of desktop systems and traditional
videoconferencing equipment, from vendors such as PictureTel, Zydacron,
Inc. ("Zydacron") and VTEL Corporation ("VTEL"), over an ATM network.
Caching -- the ability to use high quality stored video over the network,
also called video on demand. Caching is the cornerstone of all distance
learning applications. First Virtual's caching products allow concurrent
access to high quality stored video on ATM and Ethernet networks.
Casting -- the ability to broadcast high quality live video over the
network. First Virtual's casting products enable applications such as
real-time broadcast delivery of lectures to students at multiple desktops
across ATM and Ethernet networks.
FIRST VIRTUAL'S STRATEGY
First Virtual's strategy is to enhance its leadership position in high
quality, cost-effective, video networking solutions for educational, corporate
and government environments. The Company believes that high quality video over
networks can enhance the efficiency with which organizations work and learn. The
key elements of the Company's strategy are:
Extend leadership position in video networking. First Virtual intends to
extend its leadership position as a provider of end-to-end systems for the
delivery of high quality video over networks that support QoS. By concentrating
on its core competencies in real-time network systems, QoS and video technology,
the Company believes it has the speed and flexibility to remain at the forefront
of high quality video networking and continue to gain market share as the market
expands.
Extend technology base. First Virtual leverages current LAN and WAN
infrastructures to provide a solution that is easy to deploy, easy to use and
cost-effective. The Company's MOS software and system products allow the large
installed base of videoconferencing equipment from manufacturers such as
PictureTel to operate on a wide range of transmission standards such as ISDN,
T1/E1 and ATM. First Virtual's products empower network managers to extend QoS
across multiprotocol networks without changes to interface cards or wiring. The
Company is broadening its product line to support Ethernet/IP networks and
MPEG-II systems for broadcast quality applications.
Leverage and broaden strategic relationships. To penetrate the market
quickly, First Virtual combines its core competencies in rapid product
development and deployment with the resources of industry leaders to market,
implement and support complex video applications on a global basis. The Company
has established successful relationships with networking vendors, including Bay
Networks, IBM and Nortel, and videoconferencing vendors, such as PictureTel,
VideoServer, VTEL, and Zydacron. The Company has an active program to establish
additional OEM, co-developer, reseller and co-marketing relationships with
technology leaders worldwide.
Maintain focus on large installations. First Virtual has been successful at
focusing its selling efforts on large installations for applications such as
learning in the higher education, K-12 and corporate marketplaces. These
applications represent an attractive market segment due to their growth rates,
well-developed network infrastructures and desire to leverage existing personnel
resources. The Company's marketing strategy is also oriented towards other
vertical markets which share these characteristics, such as telemedicine, video
marketing and just-in-time training. The Company expects to deliver video
networking solutions efficiently within each vertical market by replicating
successful installations for similar end-users.
Expand global distribution presence. First Virtual enjoys the benefit of
the global distribution reach of its strategic partners, such as Bay Networks
and Nortel. The Company also has regional representatives which market and sell
its products in Europe and Asia, including companies such as BT, France Telecom,
Nippon Telegraph and Telephone Corporation ("NTT"), Telia AB in Sweden and
Telenor Online AS in Norway. The Company intends to continue to use a broad
variety of global distribution channels to introduce and maintain the presence
of its products in markets worldwide through a combination of OEMs, VARs and
systems integrators.
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FIRST VIRTUAL'S PRODUCTS AND TECHNOLOGY
First Virtual offers an extensive line of products for the implementation
of the three core aspects of video networking: Conferencing, Caching and
Casting. The Company's conferencing products enable real-time video
collaboration between desktop systems and traditional videoconferencing
equipment; its caching products facilitate the use of high quality stored video
on networks; and its casting products enable broadcast of high quality live
video on networks. At the center of First Virtual's product family is its MOS
software, which is designed to guarantee network resources for real-time video
applications on any QoS-capable network. The following diagram illustrates a
typical implementation of First Virtual's products and demonstrates the breadth
of the Company's product line.
LOGO
CONFERENCING PRODUCTS
V-Room. The V-Room attaches high-end room-system videoconferencing
equipment, such as the PictureTel Concorde, directly to an ATM network. The
ability to attach H.320 videoconferencing equipment directly to an ATM switch
using switched virtual circuits is a significant capability of the Company. The
V-Room system also enables connectivity of MCUs made by manufacturers such as
Lucent and BT to connect to an ATM network. The V-Room is available as a
stand-alone unit or as a module for the V-Switch.
V-NIC. The V-NIC is a 25Mb/s ATM interface card designed to attach both
desktop and group-system H.320 videoconferencing units to an ATM network. The
V-NIC can be used in data-only environments, but is typically used with the
Company's Multi-Vendor Interface Protocol ("MVIP")
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daughter cards to attach a videoconferencing system to the V-NIC. First Virtual
has developed specific connectivity solutions for the majority of the
commercially available videoconferencing systems, including those offered by
Nortel, PictureTel, VCON Telecommunications Ltd., VTEL and Zydacron.
V-MCU. The V-MCU is a highly specialized ATM attachment system specifically
architected to allow the connection of VideoServer's MCU directly to an ATM
network. The V-MCU enables more than two locations to participate in the same
videoconferencing session.
V-Gate. The V-Gate joins videoconferencing systems connected via an ATM
network to an ISDN network. Connectivity to ISDN provides a widely accessible,
cost effective means of communicating with videoconferencing participants on
remote networks. The V-Gate is able to operate at higher data rates required for
very high quality video networking. The V-Gate supports T1/E1 Primary Rate and
Basic Rate ISDN interfaces.
CACHING PRODUCTS
V-Cache. The V-Cache is a high capacity disk storage system designed to
stream stored MPEG-I and MPEG-II video across LANs and WANs. When connected
directly to an ATM network, the V-Cache can provide video streaming services to
both ATM and Ethernet desktop clients. The V-Cache can deliver up to 50
concurrent streams of MPEG-I video, with a low per-stream cost. The V-Cache is
sold in "Hours of Video," with pre-configured systems ranging from three hours
to 100 hours of MPEG-I video. The V-Cache's modular nature also enables First
Virtual to construct video storage systems with capacity of many hundreds of
hours.
MOS Client Software for the V-Cache. First Virtual's MOS client software
for the V-Cache includes V-Player and V-Recorder. The V-Player is used to
display video streams from the V-Cache. The V-Recorder is used to record video
to the V-Cache. The Company's MOS client software for V-Cache can be implemented
within both Microsoft Windows 95 and Windows NT as discrete applications or can
be executed within popular web browsers, such as Netscape Communications Inc.'s
("Netscape") Navigator and Microsoft's Internet Explorer.
V-Server. The V-Server is a web-server application designed to provide
simplified access to a "farm" of the Company's V-Caches. The V-Server provides
enhanced ease of use and transparent access to video content stored on a V-Cache
anywhere on the network.
CASTING PRODUCTS
V-Caster. The V-Caster is designed to transport high quality live video
across a LAN or WAN. The V-Caster supports NTSC (United States television
standard) or PAL (European television standard) video streams from external
sources such as a security camera, cable television or a commercial information
feed. The V-Caster transcodes analog video into either MPEG-I or MPEG-II digital
format for transport across an ATM network. The V-Caster is available in models
that support either one or three video "channels."
MOS Client Software for V-Caster. First Virtual's MOS client software for
V-Caster is the V-TV, which displays live video streams from the V-Caster. The
Company's MOS client software for V-Caster client applications can be
implemented within both Microsoft Windows 95 and Windows NT as discrete
applications or can be executed within popular web browsers, such as Netscape's
Navigator and Microsoft's Internet Explorer.
INFRASTRUCTURE PRODUCTS
V-Switch. The V-Switch is an ATM switching system based on a modular
chassis and targeted at workgroup and remote office environments. First Virtual
has developed a broad range of connectivity modules for the V-Switch in order to
connect video equipment to an ATM network in the presence of voice and bursts of
data packets.
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VSA-3000 V-NIC. The VSA-3000 is a low-cost ATM adapter card designed for
the IP video market.
PRODUCTS UNDER DEVELOPMENT
First Virtual is currently developing the following products to enable
delivery of high quality video on Ethernet/IP networks and broadcast quality
video on ATM networks.
V-Ether Module. The V-Ether is an Ethernet-to-ATM module for the V-Switch
intended to extend the QoS of ATM networks to Ethernet/IP clients. The V-Ether
is designed to provide high quality video from the Company's V-Cache and
V-Caster products to Ethernet desktop clients. First Virtual expects to ship the
V-Ether module in the first half of 1998.
V-Gate323. The V-Gate323 is designed to connect traditional
videoconferencing systems from manufacturers such as PictureTel, which use the
H.320 standard, and systems which support the emerging H.323 standard for
videoconferencing on TCP/IP networks, including Microsoft's NetMeeting 2.0. The
Company expects to ship the V-Gate323 in the first half of 1998.
Video Access Node ("VAN"). In October 1997, First Virtual entered into a
non-exclusive license agreement with IBM for IBM's VAN technology. This
agreement will enable the Company to develop the First Virtual Video Access
Node, an H.310 video networking system designed to allow very high-end video
collaboration using MPEG-II over ATM networks. The Company expects to ship the
VAN in the first quarter of 1998.
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The following chart summarizes First Virtual's currently available products
and products under development.
FIRST VIRTUAL'S PRODUCTS
<TABLE>
<CAPTION>
NAME FUNCTION SHIP DATE LIST PRICE FEATURES
- -------------------- ---------------------------- --------- ------------------ -------------------------------------
<S> <C> <C> <C> <C>
CONFERENCING
PRODUCTS
V-Room ATM to room-system 1997 $4,500 - $6,000 Supports H.320 room-systems on V.35
videoconferencing and X.21 interfaces. Supports H.320
connectivity MCU's from Lucent, BT and PictureTel.
V-NIC ATM Network Interface Card 1994 $360 - $6,000 Supports H.320 systems including
for attaching desktop/group- PictureTel: Live 100, Live 50, Live
system videoconferencing 200p, Venue 2000 VTEL: TC, LC,
units to an ATM network Smartstation Zydacron: Z240, Z250,
Z350 VCON: Armada Cruiser 100, 150
Nortel: Symposium. Supports H.323
systems including Zydacron: Z360
PictureTel: LiveLan 3.0 Microsoft:
NetMeeting 2.0.
V-MCU ATM to Multipoint 1997 $9,000 Supports the VideoServer range of
Conferencing Unit multipoint conferencing units.
connectivity
V-Gate ISDN to ATM connectivity 1995 $12,600 - $14,400 Supports simple access between ATM
and ISDN at a range of speeds
including 384Kb/s, 768Kb/s and
1152Kb/s; and T/E1 PRI, BRI physical
interfaces.
- --------------------
CACHING PRODUCTS
V-Cache High speed disk storage 1995 $9,000 - $100,000 Supports MPEG-I and MPEG-II on ATM
system for video content and Ethernet clients for video-
on-demand applications.
MOS Client Software Stored video-on-demand 1995 $360 - $14,000 Supports display of video-on-demand
application software streams through the V-Player
application for Microsoft Windows 95
and NT. Supports the recording of
videoconferences to the V-Cache via
V-Recorder application.
V-Server Web server application for 1997 $10,000 Supports location-independent access
browser-based V-Cache "farm" to video content via a web browser.
access Enhances V-Cache ease of use.
- ---------------------------------------------------------------------------------------------------------------------
CASTING PRODUCTS
V-Caster Live video broadcast on 1996 $26,000 - $33,000 Supports delivery of live MPEG-I
(MPEG-I) networks video to ATM or Ethernet clients from
any NTSC or PAL source.
V-Caster (MPEG-II) Live video broadcast on 1997 $40,000 - $70,000 Supports delivery of live MPEG-II
networks video to ATM clients from any NTSC or
PAL source.
MOS Client Software Live video-on-demand 1995 $360 - $14,000 Supports display of live MPEG-I or
application software MPEG-II video via V-TV application.
</TABLE>
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FIRST VIRTUAL'S PRODUCTS (CONTINUED)
<TABLE>
<CAPTION>
NAME FUNCTION SHIP DATE LIST PRICE FEATURES
- -------------------- ------------------------ ------------- ------------------ -------------------------------------
<S> <C> <C> <C> <C>
INFRASTRUCTURE
PRODUCTS
V-Switch Switch system to connect 1995 $7,080 - $35,000 Supports modules for:
videoconferencing, ATM @ 25Mb/s
caching and casting ATM @ 155Mb/s
products ATM @ T1
Ethernet/SNMP Management
VSA-3000 ATM NIC System for IP 1997 $200 Supports WinSock-II and LANE.
video
- --------------------
PRODUCTS UNDER
DEVELOPMENT
V-Ether ATM to Ethernet module 1998 TBA Supports display of high quality
for V-Switch video on Ethernet clients.
V-Gate323 H.320 - H.323 1998 TBA Supports video conferencing between
connectivity gateway H.320 and H.323 systems. Supports
PictureTel LiveLan 3.0 and Microsoft
NetMeeting 2.0.
Video Access Node High-end video 1998 TBA Supports H.310 broadcast-quality
collaboration system video collaboration over ATM.
</TABLE>
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation. New products may contain
undetected errors or defects and are subject to delays. See "Risk
Factors -- Rapid Technological Change; Dependence on New Products: and "-- Risk
of Product Defects."
CUSTOMERS AND APPLICATIONS
The Company believes that a significant growth area for its video
networking products is the "distance learning" marketplace in education,
government and business environments. First Virtual's products take advantage of
the QoS-capable networks being implemented in these environments to achieve high
quality video transmission. The Company believes that high quality video is
essential for the successful deployment of learning and training applications.
To date, the Company's products have been purchased for more than 15 video
networking installations for distance learning applications. Representative
distance learning installations include:
DISTANCE LEARNING INSTALLATIONS
<TABLE>
<S> <C>
UNITED STATES INTERNATIONAL
Government Gifu University (Japan)
Air National Guard Korean Primary School System
Army National Guard Monash University (Australia)
Universities Toulouse University (France)
Indiana University UKM University (Malaysia)
Old Dominion University
Virginia Tech
School Districts
Bassett, California
Elizabeth Forward, Pennsylvania
Los Angeles, California
</TABLE>
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In addition to distance learning, other applications for the Company's
products include telemedicine, video-enabled marketing and sales, and
just-in-time video training for manufacturing environments. The Company's
products are used by organizations in such diverse industries as airline,
banking, education, consumer products, government, health care, retail and
telecommunications, including the following representative end-users:
INDUSTRY INSTALLATIONS
<TABLE>
<S> <C>
British Airways plc Airline
BT Telecommunications
City of El Paso, Texas Law Enforcement
IBM Computer Systems
The Limited, Inc. Retail
NTT Telecommunications
Nortel Telecommunications
Peregrine Incorporated Automotive
Shanghai Infoport Government
</TABLE>
A Case Study: Video in Distance Learning
First Virtual recently sold a multi-site video network that enabled a major
university in the eastern United States to implement a "virtual classroom"
environment across a state-wide ATM network. The university had experienced
rapidly escalating communications costs due to the increasing use of data, voice
and video applications over a separate network for each type of traffic. The
move to an ATM network, made available by the university's local carriers,
enabled the university to deploy all applications on an integrated network at a
much lower cost. The university purchased video networking equipment from the
Company, including V-Switches, V-Rooms and V-NICs, as well as T1 WAN equipment,
at aggregate revenues to First Virtual of approximately $350,000. The Company's
products are being used to create a virtual classroom environment that links all
parts of the statewide campus, enabling delivery of live lectures to students
across an ATM network. First Virtual's equipment enables VTEL videoconferencing
equipment to operate at high data rates, providing very high quality video
transmission. Additionally, the university is currently investing in the
Company's V-Caster product to enable lectures to be stored and replayed across
the network.
A Case Study: Video in Manufacturing
A major United States auto parts manufacturer recently implemented a
multi-location, 1000-plus user video network to enable it to move faster than
its global competitors. The manufacturer implemented an extensive video network
based on the Company's V-Switch and V-NIC products, at aggregate revenues to
First Virtual of approximately $500,000. The auto parts manufacturing business
has experienced great pressure on its product cycle times, which have moved from
years to months in the last decade. The manufacturer implemented an extensive
ATM network based on the Company's V-Switch ATM infrastructure products to allow
simultaneous delivery of video and data. The Chief Executive Officer and other
executives of this company use First Virtual's video networking products to
collaborate face-to-face and make business decisions in real-time. This end-user
implemented an ATM infrastructure to allow video and data to be carried
simultaneously on the network without slowing data transfer or compromising
video quality. This customer is currently investing in First Virtual's V-Cache
products to enable its executives to make more compelling presentations and to
implement factory floor learning.
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MARKETING, SALES AND CUSTOMER SUPPORT
First Virtual markets its products to business customers, government users
and educational providers through its internal sales force and indirect sales
channels. The Company's internal video sales force directly qualifies and
stimulates end-user demand, while also managing the Company's strategic
relationships with its OEMs, VARs and systems integrators, using First Virtual's
video networking products. A large portion of the Company's sales to date have
been fulfilled through the Company's OEMs, including Bay Networks. Sales through
Bay Networks represented approximately 29% of the Company's total sales in 1996
and 57% in the nine months ended September 30, 1997. These OEMs in turn work
with leading systems integrators to install the Company's products. Systems
integrators qualified to install First Virtual's products include Bell Atlantic
Network Integration, BT, Clover Communications, Inc., EDS, France Telecom, GTE
Corporation and NTT.
The Company has a formal training program in place to train its OEMs' and
resellers' sales personnel. This program focuses on developing their ability to
feature First Virtual's video products as a key part of a differentiated
offering. First Virtual also highlights the potential for its OEMs and resellers
to use the Company's product to seed sales of the OEMs' and resellers'
respective core networking products.
In addition to its global OEM relationships with Bay Networks and Nortel,
the Company maintains a network of distributors in Europe and Asia licensed to
sell its products under the First Virtual name. The Company's international
distributors are known as First Virtual Japan, operated by Kanematsu
Corporation; First Virtual France, operated by Tekelec Airtronic Gmbh; and First
Virtual Asia, Korea and the United Kingdom, operated by private companies. In
the year ended December 31, 1996 and the nine months ended September 30, 1997,
approximately 36% and 22%, respectively, of the Company's sales were generated
from customers outside of North America.
First Virtual provides service and support to its customers through its
OEMs, distributors and resellers in more than 40 countries worldwide. The
Company employs a support model that trains its business partners to enable them
to identify and resolve basic problems (level one and level two support). The
Company provides level three technical support to its OEMs and VARs.
First Virtual's service strategy for a majority of its product line is
predicated on designing products with extensive diagnostic capabilities. These
remote diagnostic capabilities often allow the Company's Technical Support
Center personnel to cost-effectively service its products without requiring
on-site service visits. First Virtual generally warrants its products to be free
of defects in materials and workmanship for periods ranging from three months to
36 months from date of shipment. To date, warranty expense and product returns
have not been material.
RESEARCH AND DEVELOPMENT
Since its inception, First Virtual has recognized that a strong technical
base is essential to its long-term success and has made a substantial investment
in research and development. To date, the Company has aggressively brought a
wide range of products into the marketplace. First Virtual intends to make
substantial investments in product development and to participate in the
development of industry standards. The Company monitors changing customer needs
and works closely with its OEM partners, end-user customers and market research
organizations to track changes in the marketplace, including emerging industry
standards in both networking and video. The Company intends to maintain its
focus on broadening its product line to include emerging video technologies,
such as MPEG-II at the high end and IP video at the low end. As part of this
strategy, First Virtual's near term development efforts include commercial
introduction of the V-Ether module, V-Gate323 and First Virtual's VAN products.
The Company's research and development expenditures totaled $2.6 million,
$2.9 million and $3.7 million for the years ended December 31, 1995 and 1996,
and for the nine months ended September 30, 1997, respectively. As of September
30, 1997, 27 full-time employees were engaged in
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<PAGE> 39
research and product development. First Virtual performs its research and
product development activities at its headquarters. The Company also hires
engineers located in India on a contract basis from time to time. First Virtual
is seeking to hire additional skilled development engineers, which are currently
in short supply. The Company's business, operating results and financial
condition could be adversely affected it if encounters delays in hiring required
engineers.
COMPETITION
The video networking industry is becoming increasingly competitive. First
Virtual believes that its principal competitive advantage in the video
networking market is the Company's ability to provide easy to use,
cost-effective, high quality video networking solutions that integrate video
with voice and data, while leveraging existing network infrastructures. Working
at the intersection of the video and networking markets provides First Virtual
with the potential to establish strategic relationships with a wide range of
companies. However, this also results in competition from many companies in
certain segments of the video networking area.
As an end-to-end high quality ATM-based video networking solution, First
Virtual's products face actual and potential competition in different market
segments. The Company's most direct competitors also currently offer video
networking over ATM, including FORE and Newbridge. The Company's video
networking products also compete with systems based on other technologies, such
as the ISDN-based video networking products offered by Madge. First Virtual's
network infrastructure products, when sold by its distribution partners such as
Bay Networks, are used to compete with ATM-based infrastructure products sold by
companies such as Cisco and 3Com. In the videoconferencing area, the Company's
technology licensing agreement with IBM is intended to result in products which
may compete with products sold by companies such as Newbridge in the high-end
H.310 videoconferencing market. In video storage, the Company's V-Cache products
face competition from companies which offer high-performance servers that can
store video, such as SGI, Starlight, Sun and TNC. In the video broadcast area,
First Virtual's products may compete in the future with systems and software
products of companies which provide "streamed" video over IP/Ethernet networks,
such as Optivision, and Precept Software. The Company faces potential
competition from large companies which have products in related areas, such as
Microsoft and Intel. The Company could encounter new competition if companies
which distribute First Virtual's products, or whose videoconferencing equipment
are used together with the Company's products, develop or acquire video
networking technologies or products. There can be no assurance that the Company
will be able to compete successfully in this environment.
Many of the Company's actual and potential competitors have greater name
recognition; a larger installed base of networking products and strong
relationships with end users; more extensive engineering, manufacturing,
marketing and distribution capabilities; and greater financial, technological
and personnel resources than First Virtual. The networking industry is
undergoing a period of consolidation in which companies, including some of the
Company's competitors, are participating in business combinations, creating
competitors with larger market shares, customer bases, sales forces, product
offerings and technology and marketing expertise.
To compete effectively, First Virtual must continue to offer an end-to-end
solution, provide high-performance products which comply with applicable
standards and are easy to use, and expand its product distribution channels
domestically and internationally.
In addition, the Company expects price competition to escalate in the video
networking industry. Although First Virtual has rarely lowered product prices in
the past, anticipated competition may force it in the future to lower product
prices on a regular basis and add new products and features without increasing
prices. There can be no assurance that the Company will be able to compete
successfully in such a price competitive environment. If such pricing pressures
are not mitigated by cost reduction or changes in product mix, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "Risk Factors -- Competition; Industry Consolidation."
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<PAGE> 40
MANUFACTURING
First Virtual uses third-party manufacturers to perform materials planning,
production scheduling, mechanical assembly, board testing, system integration,
burn-in and final system testing of its products. The Company currently
outsources manufacturing to Tanon, Empac and Sanmina as turnkey manufacturers of
certain of its products. The Company's operations staff develops manufacturing
strategies and qualifies manufacturing processes and suppliers. First Virtual
and its contract manufacturers work together to reduce manufacturing costs and
to resolve quality control issues. The manufacturer ships the products directly
to the customer, without any further testing by the Company. First Virtual's
contract manufacturers are IS0 9002 qualified. The Company's manufacturing
strategy enables it to leverage the manufacturing capabilities of its
third-party manufacturers, while allowing the Company to focus on its core
competencies of rapid product development and deployment. If one or more of
First Virtual's manufacturers experiences quality or other problems, product
shipments by the Company may be delayed. The Company has experienced such delays
in the past and may in the future experience delays. If the Company is required
to find replacements for its manufacturers, such change in manufacturers could
result in short-term cost increases and delays in delivery, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. First Virtual maintains a safety stock of critical
components and reserve inventory, which would not be sufficient to meet
increases in demand occurring simultaneously with delayed deliveries from
manufacturers. There can be no assurance that the Company will be able to
negotiate acceptable arrangements with its existing or any future manufacturers,
or, if negotiated, that such arrangements will be on terms favorable to the
Company. See "Risk Factors -- Dependence on Third Parties for Manufacturing."
INTELLECTUAL PROPERTY
First Virtual believes that its future success depends primarily upon its
ability to rapidly bring new products to market to enable it to remain at the
forefront of high quality video networking. The Company's success and ability to
compete in the networking industry also depends, in part, upon its ability to
protect its proprietary technology and operating without infringing the
proprietary rights of others.
The Company does not rely on patent protection for, and does not hold any
patents relating to, its products. In addition, First Virtual's adherence to
industry-wide technical standards and specifications may limit its opportunities
to provide proprietary product features capable of protection. The Company
currently relies upon a combination of trade secret, copyright and trademark
laws and contractual restrictions to establish and protect proprietary rights in
its products. First Virtual also enters into confidentiality and invention
assignment agreements with its employees and enters into non-disclosure
agreements with its suppliers, distributors and customers to limit access to and
disclosure of its proprietary information. There can be no assurance that these
statutory and contractual arrangements will be sufficient to deter
misappropriation of the Company's proprietary technologies or that independent
third-parties will not develop similar or superior technologies. The development
of alternative technologies by third parties could adversely affect the
competitiveness of the Company's products. In addition, the laws of some
countries do not provide the same degree of protection of First Virtual's
proprietary information as do the laws of the United States.
The commercial success of First Virtual will also depend, in part, on its
ability to obtain licenses to third-party technology and on its not breaching
its existing and future licenses of third-party technology used in certain of
First Virtual's products. The Company entered into a license agreement for
certain technology with Advanced Telecommunications Modules Limited ("ATML") in
February 1994. The agreement provides First Virtual with a perpetual
non-exclusive license to certain ATML technology. The agreement can be
terminated by either party upon 60 days notice for material breach. In addition,
the Company entered into a non-exclusive technology license agreement with IBM
in October 1997 for IBM's VAN technology. The Company plans to integrate this
technology into its video networking systems. This agreement may be terminated
by IBM for material breach by First
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<PAGE> 41
Virtual. In addition, IBM has the right to acquire any First Virtual
intellectual property based on the licensed technology under certain
circumstances, including a material breach by the Company.
The Company is also subject to the risk of litigation alleging infringement
of third party intellectual property rights. A number of companies have
developed technologies or received patents on technologies that may be related
to or be competitive with First Virtual's technologies. The Company has not
conducted a patent search relating to the technology used in its products. In
addition, since patent applications in the United States are not publicly
disclosed until the patent issues, applications may have been filed which, if
issued as patents, would relate to the Company's products. Many of these
companies have significantly greater resources than the Company. Given the rapid
development of technology in the video networking industry, there can be no
assurance that First Virtual's existing or future products will not infringe
upon the existing or future proprietary rights of others. Further, the Company's
lack of patents may inhibit its ability to negotiate cross-licenses or oppose
patents of third parties, if necessary. The Company could incur substantial
costs in defending itself and its customers against any such claims, regardless
of the merits of such claims. The Company may be required by contract or by
statutory implied warranties to indemnify its distribution partners and
end-users against third-party infringement claims. Parties making such claims
may be able to obtain injunctive or other equitable relief which could
effectively block the Company's ability to sell its products in the United
States and abroad, and could result in an award of substantial damages. In the
event of a successful claim of infringement, the Company, its customers and
end-users may be required to obtain one or more licenses from third parties.
There can be no assurance that the Company or its customers could obtain
necessary licenses from third parties at a reasonable cost, or at all. The
defense of any lawsuit could result in time-consuming and expensive litigation,
damages, license fees, royalty payments and restrictions on the Company's
ability to sell its products, any of which could have a material adverse effect
on the Company's business, financial condition, and results of operations. See
"Risk Factors -- Reliance on Intellectual Property."
EMPLOYEES
As of September 30, 1997, the Company employed 54 individuals full-time. Of
the Company's total work force, 27 are engaged in engineering and research and
development activities, 14 are engaged in sales and marketing activities, and 13
are engaged in operating activities, including finance and administration. In
addition, the Company employs a number of temporary contract employees. The
Company's employees are not represented by a collective bargaining agreement.
The Company believes its relationships with its employees are good.
In keeping with its philosophy to concentrate on its core competencies, the
Company contracts with third parties for data processing, accounting and human
resource functions.
FACILITIES
The Company currently leases approximately 13,000 square feet in Santa
Clara, California. The term of the lease expires in August 1998. The Company
believes that its facilities will be adequate to meet the Company's needs for
the next three to six months and is currently in the process of negotiating for
additional space.
39
<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Ralph Ungermann 55 Chief Executive Officer, President and Director
James O. Mitchell 52 Vice President, Operations and Chief Financial Officer
Allwyn Sequeira 36 Vice President, Engineering and Chief Technical Officer
Alan J. McMillan 42 Vice President, Sales
James M. Nielsen 38 Vice President, Marketing
Neal M. Douglas(1) 39 Director
Pier Carlo Falotti 55 Director
David A. Norman(1) 61 Director
James R. Swartz(2) 54 Director
Enzo Torresi(2) 52 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Ralph Ungermann has been a director and has served as the Company's Chief
Executive Officer and President since co-founding First Virtual in October 1993.
From July 1979 to July 1993, Mr. Ungermann was Chief Executive Officer and
co-founder of Ungermann-Bass, Inc. (now a subsidiary of Newbridge Networks), a
computer networking company. Mr. Ungermann obtained a B.S.E.E. in Communications
from the University of California at Berkeley and a M.S.E.E. in Computer
Architecture from the University of California at Irvine.
James O. Mitchell has served as the Company's Chief Financial Officer and
acted as its head of operations since June 1995. He was elected Vice President,
Operations in October 1997. From June 1989 to October 1994, Mr. Mitchell was
President and Chief Executive Officer of General Electric Computer Service, an
electronics service company and a division of General Electric Capital Services,
Inc., which is a division of General Electric Company. Mr. Mitchell holds a
Bachelor's degree in Industrial Management from Purdue University.
Allwyn Sequeira has headed the Company's product operations and acted as
the Company's Chief Technical Officer since co-founding First Virtual in October
1993. He was elected Vice President of Engineering and Chief Technical Officer
in October 1997. From February 1990 to October 1993, Mr. Sequeira served as
Business Unit Director at Ungermann-Bass, Inc. Mr. Sequeira holds a Bachelor's
degree in Computer Science from Indian Institute of Technology, Bombay, India,
and a Master's degree in Computer Science from the University of Wisconsin.
Alan J. McMillan has headed the Company's sales operations since September
1995. He was elected as the Company's Vice President of Sales in October 1997.
From June 1994 to September 1995, Mr. McMillan was a principal with Regis
McKenna, a consulting firm. From July 1992 to April 1994, Mr. McMillan was Vice
President of North American Sales at Software Publishing Corporation, a software
publishing company. Mr. McMillan holds an Associate Degree from Ohio University
and was a Sloan fellow at the Massachusetts Institute of Technology, where he
received an M.S. in Management Science.
James M. Nielsen has headed the Company's marketing operations since
October 1996. He was elected as Vice President of Marketing of the Company in
October 1997. From April 1996 to October 1996, Mr. Nielsen was Director of
Marketing at FORE, a computer networking company. From May 1991 to April 1996,
Mr. Nielsen held several product management and marketing manage-
40
<PAGE> 43
ment roles at Bay Networks, a computer networking company, and SynOptics
Communications, Inc., a computer networking company that merged with Wellfleet
Communications Inc. to form Bay Networks in 1994. Mr. Nielsen holds a Bachelors
degree in Computer Science from Deakin University, Victoria, Australia.
Neal M. Douglas has been a director of the Company since November 1994.
Since January 1993, he has been a General Partner of AT&T Ventures, a venture
capital firm. From May 1989 to January 1993, he was a partner of New Enterprise
Associates, a venture capital firm. Mr. Douglas also serves as a director of
Cellnet Data Systems and several privately held companies. He received a B.S.
degree from Cornell University, an M.S. degree from Stanford University, and an
M.B.A. from the University of California at Los Angeles.
Pier Carlo Falotti has served as a director of the Company since April
1996. Since September 1996, Mr. Falotti has been a Senior Vice President at
Oracle Corp., a database software company. From February 1994 to September 1996,
Mr. Falotti was President and Chief Executive Officer of AT&T's European, Middle
Eastern and African Operations and subsequently Executive Vice President of its
International Operations. From April 1992 to February 1994, he was President and
Chief Executive Officer of The ASK Group, Inc., a database and software company.
Mr. Falotti is also a director of Logitech International S.A. He holds a degree
in Electrical Engineering from the Institute Avogadro, Torino, Italy.
David A. Norman has served as a director of the Company since March 1994.
From October 1993 to the present, Mr. Norman has been Chairman and Chief
Executive Officer of Technically Elite, Inc., formally known as Network
Application Technology, Inc., a computer network monitoring company. From 1992
to October 1993, Mr. Norman was an independent consultant. From 1982 to 1992,
Mr. Norman was founder, President and Chief Executive Officer of Businessland,
Inc. Mr. Norman also founded Dataquest, Inc. in 1972. He holds a B.S.M.E. from
the University of Minnesota and an M.S.I.A. from Stanford University.
James R. Swartz has been a director of the Company since December 1993. Mr.
Swartz is a Managing Partner of Accel Partners, a venture capital investment
firm he co-founded in 1983. Mr. Swartz is also a director of Farallon
Communications, Inc., Polycom, Inc., Remedy Corporation, and a number of private
companies. Mr. Swartz holds an A.B. degree in Engineering Sciences and Applied
Physics from Harvard University and an M.S.I.A. degree from Carnegie Mellon
University.
Enzo Torresi, has been a director of the Company since November 1994. He
has been Chairman, co-founder, and Chief Executive Officer of ICAST Corporation,
an IP broadcast software company, since October 1996. From October 1994 to
November 1996, Mr. Torresi was Chairman of the Board and a co-founder of Power
Computing Corporation, a PC manufacturer. From January 1989 to October 1994, Mr.
Torresi was President, Chief Executive Officer, and co-founder of NetFRAME
Systems Incorporated, a network server company. Mr. Torresi is also a director
of SCO Incorporated and PictureTel. Mr. Torresi holds a Ph.D. in Electronics
Engineering from the Polytechnic Institute in Torino, Italy.
BOARD COMPOSITION
The Company currently has authorized six directors. In accordance with the
terms of the Company's Certificate of Incorporation, effective upon the closing
of this offering, the terms of office of the Board of Directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 1998; Class II, whose term will expire at the annual
meeting of stockholders to be held in 1999; and Class III, whose term will
expire at the annual meeting of stockholders to be held in 2000. The Class I
directors are Mr. Torresi and Mr. Falotti, the Class II directors are Mr. Norman
and Mr. Douglas, and the Class III directors are Mr. Ungermann and Mr. Swartz.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, the Company's Certificate
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<PAGE> 44
of Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of the Board of Directors may
have the effect of delaying or preventing changes in control or management of
the Company. Although directors of the Company may be removed for cause by the
affirmative vote of the holders of a majority of the Common Stock, the Company's
Certificate of Incorporation provides that holders of two-thirds of the Common
Stock must vote to approve the removal of a director without cause. There are no
family relationships among any of the directors and executive officers of the
Company.
BOARD COMMITTEES
The Audit Committee of the Board of Directors, currently consisting of
Messrs. Douglas and Norman, reviews the internal accounting procedures of the
Company and consults with and reviews the services provided by the Company's
independent auditors. The Compensation Committee of the Board of Directors,
currently consisting of Messrs. Swartz and Torresi, reviews and recommends to
the Board of Directors the compensation and benefits of all officers of the
Company and reviews general policies relating to compensation and benefits of
employees of the Company.
DIRECTOR COMPENSATION
The Company does not currently compensate directors for services in such
capacity, but directors may be reimbursed for certain expenses in connection
with attendance at Board and Committee meetings. The Company may compensate
non-employee directors in the future.
All of the Company's non-employee directors are entitled to receive
non-discretionary annual stock option grants under the Company's 1997
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"), adopted in
September 1997 (the "Effective Date"). Under the Directors' Plan, each current
non-employee director was automatically granted an option to purchase 10,000
shares of Common Stock upon the Effective Date. Messrs. Torresi, Douglas,
Swartz, Norman and Falotti were each granted an option to purchase 10,000 shares
of the Company's Common Stock at an exercise price of $11.00 per share. Each new
non-employee director who is subsequently elected for the first time will
automatically be granted an option to purchase 30,000 shares of Common Stock at
the time he or she is first elected to the Board of Directors. Each non-employee
director will additionally be granted an option to purchase 10,000 shares of
Common Stock on each anniversary of each such director's original grant under
the Directors' Plan. Options granted under the Directors' Plan are granted at
the fair market value of the Common Stock on the date of grant. Options granted
to non-employee directors under the Directors' Plan have a 10-year term and will
vest over a period of five years, with 10% of the shares vesting after six
months and the remaining shares vesting ratably on a daily basis thereafter. See
"Stock Plans -- 1997 NonEmployee Directors' Stock Option Plan."
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<PAGE> 45
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
Company during the year ended December 31, 1996 to its President and Chief
Executive Officer and the Company's other executive officers who earned more
than $100,000 in salary and bonus during the fiscal year ended December 31, 1996
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------------------------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
Ralph Ungermann
Chairman, Chief Executive Officer
and President.............................. $245,090 -- 300,000 $ 5,400(1)
James O. Mitchell
Vice President, Operations and Chief
Financial Officer.......................... 167,045 -- 66,666 2,440(1)
Allwyn Sequeira
Vice President, Engineering and Chief
Technical Officer.......................... 120,947 $20,000 66,666 5,392(1)
Alan J. McMillan
Vice President, Sales...................... 178,770 -- 66,666 2,378(1)
</TABLE>
- ---------------
(1) Represents insurance premiums paid by the Company with respect to group life
and health insurance for the benefit of the Named Executive Officer.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1996 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM(4)
NAME AND PRINCIPAL OPTIONS FISCAL YEAR PRICE EXPIRATION -----------------------
POSITION GRANTED(#)(1) (%)(2) ($/SH)(3) DATE 5%($) 10%($)
- ------------------------- ------------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ralph Ungermann Chairman,
Chief Executive Officer
and President.......... 300,000 32.3% $2.75 07/23/01 $4,918,267 $6,422,295
James O. Mitchell Vice
President, Operations
and Chief Financial
Officer................ 66,666 7.2 2.50 07/23/06 1,462,213 2,427,052
Allwyn Sequeira Vice
President, Engineering
and Chief Technical
Officer................ 66,666 7.2 2.50 07/23/06 1,462,213 2,427,052
Alan J. McMillan Vice
President, Sales....... 66,666 7.2 2.50 07/23/06 1,462,213 2,427,052
</TABLE>
- ---------------
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<PAGE> 46
(1) 10% of the options generally become exercisable six months after the vesting
commencement date and .0548% each day thereafter for 54 months. The term of
each option granted is generally the earlier of (i) ten years or (ii) 30
days after termination of the holder.
(2) Based on an aggregate of 927,998 options granted to employees, consultants
and directors, including the Named Executive Officers, of the Company during
the fiscal year ended December 31, 1996.
(3) The exercise price per share of each option, other than the options granted
to Mr. Ungermann, was equal to the fair market value of the Common Stock on
the date of grant as determined by the Board of Directors. Mr. Ungermann's
exercise price per share for his options was equal to 110% of the fair
market value of the Common Stock on the date of grant, as determined by the
Board of Directors.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
option term will be at the assumed 5% or 10% levels or at any other defined
level. Unless the market price of the Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers. The potential realizable value is calculated by assuming
that the assumed initial public offering price of $15.00 per share
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price. The potential realizable value
computation is net of the applicable exercise price, but does not take into
account applicable federal or state income tax consequences and other
expenses of option exercises or sales of appreciated stock. Mr. Ungermann's
options have a five-year term and Messrs. Mitchell's, Sequeira's and
McMillan's options each have ten-year terms.
AGGREGATE OPTION EXERCISES IN FISCAL 1996 AND DECEMBER 31, 1996 OPTION VALUES
There were no exercises of options by any Named Executive Officer in the
fiscal year ended December 31, 1996.
STOCK PLANS
1997 Equity Incentive Plan. The Company's 1997 Equity Incentive Plan (the
"Incentive Plan"), to be effective upon the closing of the offering, was adopted
by the Board of Directors in October 1997 as an amendment and restatement of the
Company's 1996 Stock Option Plan, 1996 Stock Option Plan No. 2 (collectively,
the "1996 Plans") and the Company's 1993 Employee, Consultant and Director Stock
Purchase Plan (the "1993 Plan"). Except with respect to then outstanding stock
purchase grants and options, the 1996 Plans and the 1993 Plan, in their
respective current forms, will terminate upon the effectiveness of the Incentive
Plan. Upon effectiveness of the offering, no further grants will be made under
the 1996 Plans as currently in effect. Future stock and option grants to
employees, directors and consultants will be made under the successor Incentive
Plan. Outstanding options and grants under the 1996 Plans will continue to be
governed by their existing terms, which generally contain substantially the same
terms and conditions as those described below for the Incentive Plan. As of the
date of this Prospectus, the total number of authorized shares under the
Incentive Plan is 4,625,000 shares of Common Stock, of which approximately
1,669,205 shares will be available for grants under the Incentive Plan upon its
effectiveness.
The Incentive Plan provides for the grant of incentive stock options under
the Internal Revenue Code of 1986, as amended (the "Code"), to employees
(including officers and employee-directors) and nonstatutory stock options,
restricted stock purchase awards and stock bonuses to employees, directors and
consultants. The Incentive Plan is administered by the Board of Directors or a
committee appointed by the Board, which determines recipients and types of
awards to be granted, including the exercise price, number of shares subject to
the award and the exercisability thereof.
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<PAGE> 47
The terms of stock options granted under the Incentive Plan generally may
not exceed 10 years. The exercise price of options granted under the Incentive
Plan is determined by the Board of Directors, provided that the exercise price
for an incentive stock option cannot be less than 100% of the fair market value
of the Common Stock on the date of the option grant and the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of option grant. Options granted under the
Incentive Plan vest at the rate specified in the option agreement. No stock
option may be transferred by the optionee other than by will or the laws of
descent or distribution, provided that a nonstatutory stock option may be
transferable if provided in the option agreement, and provided further that an
optionee may designate a beneficiary who may exercise the option following the
optionee's death. An optionee whose relationship with the Company or any related
corporation ceases for any reason (other than by death or permanent and total
disability) may exercise options in the 30-day period following such cessation
(unless such options terminate or expire sooner or later by their terms).
Options may be exercised for up to twelve months after an optionee's
relationship with the Company and its affiliates ceases due to disability and up
to eighteen months after an optionee's relationship with the Company and its
affiliates ceases due to death (unless such options expire sooner or later by
their terms).
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the option
does not exceed five years from the date of grant. The aggregate fair market
value, determined at the time of grant, of the shares of Common Stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year (under all such plans of the Company and
its affiliates) may not exceed $100,000. Upon the expiration of the transition
rule extending the effective date of Code Section 162(m) for newly public
companies, no person shall be eligible to receive options under the Incentive
Plan covering more than 500,000 shares in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full (or vested in the case of restricted stock
awards) shall again become available for the grant of awards under the Incentive
Plan, including shares subject to currently outstanding options and restricted
stock issued under the 1993 Plan and the 1996 Plans.
The Board of Directors has the authority to reprice outstanding options and
to offer optionees the opportunity to replace outstanding options with new
options for the same or a different number of shares.
Restricted stock purchase awards granted under the Incentive Plan may be
accompanied by a
repurchase option in favor of the Company in accordance with a vesting schedule
and at a price determined by the Board of Directors. Restricted stock purchases
must be at a price equal to at least 85% of the stock's fair market value on the
award date, but stock bonuses may be awarded without a purchase payment. Rights
under a stock bonus or restricted stock bonus agreement may not be transferred
other than by will, the laws of descent and distribution or a qualified domestic
relations order while the stock awarded pursuant to such an agreement remains
subject to the agreement.
Upon a change in control of the Company, any options shall remain
outstanding, be assumed by the acquiror or be substituted with similar options.
In the event the acquiror refuses to assume, substitute or continue any options,
then vested options shall be terminated if not exercised prior to the change of
control. For purposes of this Incentive Plan, "change in control" means: any
consolidation or merger of the Company with or into any other entity or person,
or any other corporate reorganization, in which the Company is not the
continuing or surviving entity, or any transaction or series of related
transactions by the Company in which in excess of 50% of the Company's voting
power is transferred, or any sale, lease, license or other disposition of all or
substantially all of the assets of the Company.
As of September 30, 1997, 300 shares of Common Stock had been issued upon
the exercise of options granted under the 1996 Plans, options to purchase
1,807,698 shares of Common Stock at a
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<PAGE> 48
weighted average exercise price of $4.73 were outstanding and 322,002 shares
remained available for future grant under the 1996 Plans. As of September 30,
1997, 3,293,618 shares of Common Stock had been issued under the 1993 Plan and
1,382 shares remained available for future grant under the 1993 Plan. The
Incentive Plan will terminate in October 2007 unless sooner terminated by the
Board of Directors.
Employee Stock Purchase Plan. In October 1997, the Company's Board of
Directors approved the Employee Stock Purchase Plan (the "Purchase Plan")
covering an aggregate of 150,000 shares of Common Stock. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Code. Under the Purchase Plan, the Board of Directors may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the Purchase Plan. The offering period for
any offering will be no more than 27 months.
Under the Purchase Plan, employees are eligible to participate if they are
employed by the Company or an affiliate of the Company designated by the Board
of Directors and are employed at least 20 hours per week and five months per
year. Employees who participate in an offering will have the right to purchase
up to the number of shares of Common Stock purchasable with a percentage
designated by the Board of Directors, up to 15%, of an employee's earnings
withheld pursuant to the Purchase Plan and applied, on specified dates
determined by the Board of Directors, to the purchase of shares of Common Stock.
The price of Common Stock purchased under the Purchase Plan will be equal to 85%
of the lower of the fair market value of the Common Stock on the commencement
date of each offering period or the relevant purchase date. Employees may end
their participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
In the event of certain changes of control, the Company and the Board of
Directors has discretion to provide that each right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor corporation,
or the Board may shorten the offering period and provide for all sums collected
by payroll deductions to be applied to purchase stock immediately prior to the
change in control. The Purchase Plan will terminate at the Board's discretion.
1997 Non-Employee Directors' Stock Option Plan. In September 1997, the
Company's Board of Directors adopted the Directors' Plan to provide for the
automatic grant of options to purchase shares of Common Stock to non-employee
directors of the Company. The Directors' Plan is administered by the Board,
unless the Board delegates administration to a Committee comprised of members of
the Board.
The Directors' Plan provides for the issuance of up to 250,000 shares of
Common Stock. The Directors' Plan provides that each current non-employee
director will automatically be granted an option to purchase 10,000 shares of
Common Stock upon the Effective Date of the Plan, and each person who is
subsequently elected for the first time to be a non-employee director will
automatically be granted an option to purchase 30,000 shares of Common Stock
upon the date of his or her election to the Company's Board of Directors. In
addition, on each anniversary of each directors' initial grant under the
Directors' Plan, each non-employee director will automatically be granted an
option to purchase an additional 10,000 shares of Common Stock. Options under
the Directors' Plan have a 10-year term and will vest over a period of five
years, with 10.0% of the shares subject to the option vesting on the date six
months following the grant date and the remaining shares vesting ratably on a
daily basis over the next four and one half years. The exercise price of options
under the Directors' Plan must equal the fair market value of the Common Stock
on the date of grant. Options granted under the Directors' Plan are generally
nontransferable. Unless otherwise terminated by the Board of Directors, the
Directors' Plan will terminate in September 2007.
As of September 30, 1997, options to purchase 50,000 shares of Common Stock
with a weighted average exercise price of $11.00 per share were outstanding
under the Directors' Plan.
46
<PAGE> 49
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required to permitted to indemnify. Pursuant to this provision, the Company will
enter into indemnification agreements with each of its directors and executive
officers.
The Company has obtained officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act. In addition, the Company's Certificate of
Incorporation provides that, to the fullest extent permitted by Delaware law,
the Company's directors will not be liable for monetary damages for breach of
the directors' fiduciary duty of care to the Company and its stockholders. This
provision in the Certificate of Incorporation does not eliminate the duty of
care, and in appropriate circumstances, equitable remedies such as an injunction
or other forms of non-monetary relief would remain available under Delaware law.
Under current Delaware law, a director's liability to the Company or its
stockholders may not be limited with respect to any breach of the director's
duty of loyalty to the Company or its stockholders, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, for improper transactions between the director and the Company, and for
improper distributions to stockholders and loans to directors and officers. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.
47
<PAGE> 50
CERTAIN TRANSACTIONS
Between December 28, 1993 and February 17, 1994, the Company issued an
aggregate of 4,000,000 shares of Series A Preferred Stock at a price per share
of $0.50. Between October 13, 1994 and November 30, 1994, the Company issued an
aggregate of 2,200,000 shares of Series B Preferred Stock at a price per share
of $1.50. Between June 28, 1995 and August 15, 1997, the Company issued an
aggregate of 1,348,807 shares of Series C Preferred Stock at a price per share
ranging from $4.00 to $6.00. Between August 29, 1996 and July 25, 1997, the
Company issued an aggregate of 388,375 shares of Series D Preferred Stock at a
price per share of $8.00. All of the Series A, Series B, Series C and Series D
Preferred Stock issued by the Company will convert into Common Stock on a
one-for-one basis upon the closing of the offering.
Listed below are the directors, executive officers and five percent
stockholders who have made equity investments in the Company to purchase shares
of the Company's Preferred Stock or Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING PRE-OFFERING
---------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D AGGREGATE
COMMON PREFERRED PREFERRED PREFERRED PREFERRED CONSIDERATION
INVESTOR STOCK STOCK STOCK STOCK STOCK ($)
- ------------------------- --------- --------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Venture Fund I,
L.P.(1)................ -- -- 1,000,000 75,000 62,500 $ 2,300,000
Entities affiliated with
Accel IV L.P.(2)....... -- 1,700,000 400,000 125,000 62,500 2,450,000
Ralph Ungermann(3)....... 1,499,000 900,000 120,999 77,500 -- 978,974
James O. Mitchell........ 343,750 -- -- 29,351 12,500 378,106
Allwyn Sequeira.......... 360,000 50,000 40,000 -- -- 107,750
Alan J. McMillan......... 177,250 -- -- 16,191 -- 174,646
Neal M. Douglas(1)....... -- -- 1,000,000 75,000 62,500 2,300,000
Pier Carlo Falotti....... 50,000 -- -- 40,000 -- 197,500
David A. Norman(3)....... 50,000 30,000 61,667 -- -- 108,750
James R. Swartz(2)....... -- 1,700,000 400,000 125,000 62,500 2,450,000
Enzo Torresi............. 80,000 -- 33,333 5,000 -- 76,000
</TABLE>
- ---------------
(1) Share amounts shown for Mr. Douglas and Venture Fund I, L.P. have been
aggregated. See "Principal and Selling Stockholders."
(2) Share amounts shown for Mr. Swartz and entities affiliated with Accel IV
L.P. have been aggregated. See "Principal and Selling Stockholders."
(3) Share amounts shown for Messrs. Ungermann and Norman are held in trust. See
"Principal and Selling Stockholders."
Holders of Preferred Stock and certain holders of Common Stock are entitled
to certain registration rights with respect to the Common Stock issued or
issuable upon conversion thereof. See "Description of Capital
Stock -- Registration Rights."
The Company intends to enter into indemnification agreements with its
directors and executive officers for the indemnification of and advancement of
expenses to such persons to the full extent permitted by law. The Company also
intends to execute such agreements with its future directors and executive
officers.
The Company believes that the foregoing transactions were in its best
interest and were made on terms no less favorable to the Company than could have
been obtained from unaffiliated third parties. All future transactions between
the Company and any of its officers, directors or principal stockholders will be
approved by a majority of the independent and disinterested members of the Board
of Directors, will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and will be in connection with bona
fide business purposes of the Company.
48
<PAGE> 51
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997 and as adjusted
to reflect the sale of the Common Stock being offered hereby by: (i) each
stockholder who is known by the Company to own beneficially more than 5% of the
Common Stock; (ii) each Named Executive Officer of the Company; (iii) each
director of the Company; (iv) all directors and executive officers of the
Company as a group; and (v) each selling stockholder. Unless otherwise indicated
below, to the knowledge of the Company, all persons listed below have sole
voting and investment power with respect to their shares of Common Stock,
subject to community property laws where applicable:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED NUMBER OF OWNED
PRIOR TO OFFERING(1) SHARES AFTER OFFERING(1)
---------------------- BEING ----------------------
BENEFICIAL OWNER NUMBER PERCENT(%) OFFERED NUMBER PERCENT(%)
- --------------------------------------- --------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Venture Fund I, L.P.(2)................ 1,137,500 8.9% -- 1,137,500 8.9%
3000 Sand Hill Road
Suite 235
Menlo Park, CA 94025
Entities Affiliated with Accel IV 2,287,500 18.0% 2,287,500 15.3
L.P.(3).............................. --
One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Ralph Ungermann (4).................... 2,678,308 20.9% 25,000 2,653,308 17.7
James O. Mitchell (5).................. 403,558 3.2% -- 403,558 2.7
Allwyn Sequeira (6).................... 479,006 3.8% 25,000 454,006 3.0
Alan J. McMillan (7)................... 211,398 1.7% 4,899 206,499 1.4
Neal M. Douglas (2).................... 1,137,500 8.9% -- 1,137,500 7.6
Pier Carlo Falotti..................... 90,000 * -- 90,000 *
David A. Norman (8).................... 141,667 1.1% -- 141,667 *
James R. Swartz (3).................... 2,287,500 18.0% -- 2,287,500 15.3
Enzo Torresi........................... 118,333 *
All directors and executive officers as 7,578,306 58.7% 7,523,407 49.8
a group (10 persons)(9).............. 54,899
Other Selling Stockholders............. 2,902,843 22.7% 145,101 2,757,742 18.4%
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Beneficial ownership also
includes shares of stock subject to options and warrants currently
exercisable or convertible, or exercisable or convertible within 60 days of
the date of this table. Percentage of beneficial ownership is based on
12,731,100 shares of Common Stock outstanding as of September 30, 1997 and
14,931,100 shares of Common Stock outstanding after completion of this
offering.
(2) Shares are held in the name of Venture Fund I, L.P., of which Mr. Douglas is
a general partner. Mr. Douglas disclaims beneficial ownership of all shares
owned by Venture Fund I, L.P., except to the extent of his pro rata interest
in the partnership.
(3) Includes 2,095,350 shares held by Accel IV L.P., 84,638 shares held by Accel
Investors '93 L.P., 50,324 shares held by Ellmore C. Patterson Partners,
43,463 shares held by Accel Keiretsu L.P., and 13,725 shares held by Prosper
Partners. Mr. Swartz is a general partner of partnerships which are the
general partner of various Accel and certain other partnerships and, as
such, may be deemed to share voting and investment power with respect to
such Shares. Mr. Swartz disclaims beneficial ownership of all shares held by
such entities except to the extent of his pro rata interests in such
partnerships.
49
<PAGE> 52
(4) Includes 2,597,499 shares held in the name of Ralph Ungermann, Trustee or
Successor Trustee of the Ralph K. Ungermann Living Trust U/A/D May 18, 1988,
as amended. Also includes 80,809 shares Mr. Ungermann has the right to
acquire pursuant to an option exercisable within 60 days.
(5) Includes 343,750 shares Mr. Mitchell acquired pursuant to restricted stock
awards, 173,865 of which are subject to repurchase by the Company as of the
date hereof. Also includes 17,957 shares Mr. Mitchell has the right to
acquire pursuant to an option exercisable within 60 days.
(6) Includes 360,000 shares Mr. Sequeira acquired pursuant to restricted stock
awards, 94,543 of which are subject to repurchase by the Company as of the
date hereof. Also includes 29,006 shares Mr. Sequeira has the right to
acquire pursuant to an option exercisable within 60 days.
(7) Includes 177,250 shares Mr. McMillan acquired pursuant to restricted stock
awards, 110,699 of which are subject to repurchase by the Company as of the
date hereof. Also includes 17,957 shares Mr. McMillan has the right to
acquire pursuant to an option exercisable within 60 days.
(8) Shares are held in the name of David Arthur Norman and Mamie R. Norman TTEE,
Norman Family Revocable Trust, U/A DTD 8/20/87.
(9) Includes 176,765 shares issuable upon exercise of options.
50
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of the
Company will consist of 35,000,000 shares of Common Stock, $.001 par value, and
5,000,000 shares of Preferred Stock, $.001 par value.
COMMON STOCK
As of September 30, 1997, there were 12,731,100 shares of Common Stock
outstanding held of record by approximately 149 stockholders, after giving
effect to the conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this offering. Based upon the number of shares
outstanding as of that date and giving effect to the issuance of the 2,200,000
shares of Common Stock offered by the Company hereby, there will be 14,931,100
shares of Common Stock outstanding on the closing of this offering.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock, $.001 par
value, 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, sinking fund terms and the
number of shares constituting any series or the designation of such series,
without any further vote or action by stockholders. The issuance of Preferred
Stock could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. Except for the purchase of Preferred Stock by
NEC Corporation ("NEC") described below, the Company has no present plan to
issue any shares of Preferred Stock.
WARRANTS AND SUBSCRIPTION RIGHT
As of September 30, 1997, in connection with a capital equipment lease, and
loan and security agreements, the Company had outstanding warrants to purchase
40,624 shares of Series D Preferred Stock at an exercise price of $8.00 per
share. The warrants expire at various times from 3.0 to 4.3 years following the
closing of this initial public offering. Each warrant contains provisions for
the adjustment of the exercise price and the aggregate number of shares issuable
upon the exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganizations, reclassifications, consolidations and
certain dilutive sales of the securities for which the warrant is exercisable at
prices below the then existing exercise price. Each warrant may be exercised,
without the payment of cash, for the number of shares of Preferred Stock
purchasable, at the current market value of the Preferred Stock, by the
difference between the aggregate exercise price of the warrant and the value, at
the current market price per share of Preferred Stock of the aggregate number of
shares purchasable under the warrant. Upon the closing of the offering, such
warrants will become warrants exercisable to purchase the same number of shares
of Common Stock at an exercise price of $8.00 per share.
In conjunction with the last round of the Series D Preferred Stock
financing completed by the Company in July 1997, the Company granted NEC,
pursuant to a subscription agreement dated
51
<PAGE> 54
August 18, 1997, the right to acquire, by October 31, 1997, 100,000 shares of
Series D Preferred Stock at a purchase price of $8.00 per share. If NEC
exercises this right, the shares of Series D Preferred Stock will automatically
be converted into 100,000 shares of Common Stock upon the closing of the
offering.
REGISTRATION RIGHTS
Following this offering, holders (or their permitted transferees)
("Holders") of approximately 10,435,500 shares of Common Stock (assuming the
conversion of all outstanding Preferred Stock upon the closing of this offering)
and warrants to purchase 40,624 shares of Common Stock will be entitled to
certain rights with respect to the registration of their shares under the
Securities Act. Under the terms of that certain Amended and Restated Investor
Rights Agreement dated August 29, 1996, as amended October 17, 1997 (the
"Investor Rights Agreement"), if the Company proposes to register any of its
securities under the Securities Act, either for its own account or the account
of others, subject to certain restrictions, the Holders are entitled to notice
of such registration and are entitled to include all or part of their shares of
Common Stock; provided, among other conditions, that the underwriters of any
offering have the right to limit the number of such shares included in such
registration or exclude such shares entirely. The Holders may also require the
Company, beginning one year after the date of this Prospectus, on not more than
two occasions, to file a registration statement under the Securities Act at the
Company's expense with respect to their shares of Common Stock, and the Company
is required to use its best efforts to effect such registration, subject to
certain conditions and limitations. Further, the Holders may also require the
Company, at the Company's expense, to register all or a portion of their shares
of Common Stock on Form S-3 when such form becomes available to the Company,
subject to certain conditions and limitations.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
Law, an anti-takeover law. In general, the statute prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The Company's Certificate of Incorporation and Bylaws also require that,
effective upon the closing of this offering, any action required or permitted to
be taken by stockholders of the Company must be effected at a duly called annual
or special meeting of the stockholders and may not be effected by a consent in
writing. In addition, special meetings of the stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer of the Company or by any person or persons holding shares
representing at least 50% of the outstanding capital stock. The Company's
Certificate of Incorporation also provides for the classification of the Board
of Directors into three classes, only one of which will be elected at each
annual meeting, and specifies that the authorized number of directors may be
changed only by resolution of the Board of Directors. These provisions, which
require the vote of stockholders holding at least two-thirds of the outstanding
shares to amend, may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company. See "Management -- Board
Composition."
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc. has been appointed as the
transfer agent and registrar for the Company's Common Stock.
52
<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the Common
Stock of the Company. Further sales of substantial amounts of Common Stock in
the open market may adversely affect the market price of the Common Stock
offered hereby. Furthermore, since only a limited number of shares will be
available for sale shortly after this offering because of certain contractual
and legal restrictions on resale described below, sales of Common Stock in the
market after the restrictions lapse could adversely affect the prevailing market
price and the ability of the Company to raise equity capital in the future.
Upon completion of this offering, based on the number of shares outstanding
as of September 30, 1997, the Company will have outstanding an aggregate of
14,931,100 shares of Common Stock assuming (i) the issuance by the Company of
shares of Common Stock offered hereby, (ii) no issuance of 40,624 shares of
Common Stock relating to outstanding warrants, (iii) no exercise of exercisable
vested options (as of September 30, 1997) to purchase 252,951 shares of Common
Stock, and (iv) no exercise of the Underwriters' over-allotment option to
purchase 360,000 shares of Common Stock. Of these shares, 2,400,000 shares sold
in this offering will be freely tradable without restriction or further
registration under the Securities Act, except for shares held by "affiliates" of
the Company as that term is defined in Rule 144 under the Securities Act (whose
sales would be subject to certain limitations and restrictions described below)
and the regulations promulgated thereunder.
The remaining 12,531,100 outstanding shares of the Company's Common Stock
were sold by the Company to officers, directors, employees, consultants and
other stockholders of the Company in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted" securities
within the meaning of Rule 144 and Rule 701 under the Securities Act. 11,443,033
of these shares and an additional 536,623 shares issuable upon exercise of
outstanding vested options will be eligible for sale 180 days after the date of
this Prospectus upon expiration of the lock-up agreements described below and in
compliance with certain limitations set forth in the Securities Act. An
additional 282,602 of the outstanding shares will become eligible for sale at
various times after 180 days after the date of this Prospectus. The remaining
805,465 outstanding shares will be subject to rights of repurchase in favor of
the Company that expire at various dates through July 25, 2001 pursuant to
monthly vesting.
Each officer, director and other stockholders of the Company, who together
hold an aggregate of 12,531,100 shares of Common Stock and options to purchase
252,951 shares of Common Stock not being sold in the offering, have agreed with
the representatives of the Underwriters or the Company for a period of 180 days
after the date of this Prospectus, they will not, directly or indirectly, offer,
sell, contract to sell, grant any option to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock or securities convertible
into or exchangeable for, or any rights to purchase or acquire, Common Stock,
without the prior written consent of BancAmerica Robertson Stephens or, in
certain instances, the Company. The Company has agreed with BancAmerica
Robertson Stephens not to release any stockholder from any lock-up agreement
between the stockholder and the Company without the consent of BancAmerica
Robertson Stephens.
In general, under Rule 144 as currently in effect, beginning 180 days after
the date of this Prospectus, an affiliate of the Company, or person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
that were not acquired from the Company or an affiliate of the Company within
the previous one year, will be entitled to sell in any three-month period a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Company's Common Stock or (ii) the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission. Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
person whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 180 days immediately preceding the
53
<PAGE> 56
sale and who beneficially owns restricted securities is entitled to sell such
shares pursuant to Rule 144(k) without regard to the limitations described
above; provided that at least two years have elapsed since the later of the date
the shares were acquired from the Company or from an affiliate of the Company.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits affiliates and
non-affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 180 days after the
date of this Prospectus. In addition, non-affiliates may sell Rule 701 shares
without complying with public information, volume and notice provisions of Rule
144.
The Company intends to file a registration statement under the Securities
Act to register 4,625,000, 250,000 and 150,000 shares of Common Stock reserved
for issuance under the Incentive Plan, Directors' Plan and the Purchase Plan,
respectively, thus permitting the resale of such shares by nonaffiliates in the
public market without restriction under the Securities Act. Such registration
statement will become effective immediately upon filing.
As of the date of this Prospectus, warrants to purchase an aggregate of
40,624 shares of Common Stock were outstanding, all of which are subject to the
180-day lock-up.
In addition, after this offering, the holders of approximately 10,435,500
shares will be entitled to certain rights with respect to registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company, which will be subject to certain restrictions) immediately upon
the effectiveness of such registration. See "Description of Capital
Stock -- Registration Rights."
54
<PAGE> 57
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens and Hambrecht & Quist LLC (the
"Representatives"), have severally agreed with the Company and the Selling
Stockholders, subject to the terms and conditions of the Underwriting Agreement,
to purchase the number of shares of Common Stock set forth opposite their
respective names below. The Underwriters are committed to purchase and pay for
all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
BancAmerica Robertson Stephens....................................
Hambrecht & Quist LLC.............................................
-------
Total...................................................... 2,400,000
=======
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession of not more
than $ per share, of which $ may be reallowed to other
dealers. After the public offering, the initial public offering price,
concession and reallowance to dealers may be reduced by the Representatives. No
such reduction shall change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, solely to cover
over-allotments, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 360,000 additional shares of Common Stock at the
same price per share as will be paid for the 2,400,000 shares that the
Underwriters have agreed to purchase. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above table
represents as a percentage of the 2,400,000 shares offered hereby. If purchased,
such additional shares will be sold by the Underwriters on the same terms as
those on which the 2,400,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement.
Each officer and director and certain holders of shares of the Company's
Common Stock have agreed with the Representatives, for a period of 180 days
after the date of this Prospectus (the "Lock-Up Period"), subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Sock owned as
of the date of this Prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of BancAmerica Robertson
Stephens. However, BancAmerica Robertson Stephens may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. There are no agreements between the
Representatives and any of the Company's stockholders providing consent by the
Representatives to the sale of shares prior to the expiration of the Lock-Up
Period. The Company has agreed that during the Lock-Up Period, the
55
<PAGE> 58
Company will not, subject to certain exceptions, without the prior written
consent of BancAmerica Robertson Stephens, (i) consent to the disposition of any
shares held by stockholders prior to the expiration of the Lock-Up Period or
(ii) issue, sell, contract to sell or otherwise dispose of, any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into, exercisable for or exchangeable for shares of
Common Stock, other than the Company's sale of shares in this offering, the
issuance of Common Stock upon the exercise of outstanding options and warrants
and the Company's issuance of options and stock under existing stock option and
stock purchase plans. See "Shares Eligible for Future Sale."
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby will be determined through negotiations between the
Company and the Representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward LLP ("Cooley Godward"), Palo Alto, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. As of the date of this Prospectus, certain members and
associates of Cooley Godward own through an investment partnership an aggregate
of 98,958 shares of Common Stock of the Company.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and September 30, 1997, for each of the three years in the period
ended December 31, 1996 and for the nine months ended September 30, 1997,
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of such
firm as experts in accounting and auditing.
56
<PAGE> 59
CHANGE OF ACCOUNTANTS
On July 19, 1996, as a result of a decision by the Company to outsource to
KPMG its accounting and data processing functions, KPMG resigned as the
Company's independent accountants. On November 1, 1996, Price Waterhouse LLP was
engaged as the Company's independent accountants. The resignation of KPMG and
appointment of Price Waterhouse LLP was approved by the Company's Board of
Directors. Prior to November 1, 1996, the Company had not consulted with Price
Waterhouse LLP on items which included the Company's accounting principles or
the form of audit report to be issued on the Company's financial statements.
The reports of KPMG on the financial statements of the Company for the two
years ended December 31, 1994 and 1995, did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles.
In connection with the audits by KPMG of the two years of the Company ended
December 31, 1995, and during the subsequent interim period through July 19,
1996, there were no disagreements between the Company and KPMG on any matter of
accounting principles or practice, financial statement disclosure or auditing
scope or procedures, which if not solved to the satisfaction of KPMG, would have
caused them to make reference to the matter in their report. KPMG has not
audited or reported on any financial statements of the Company subsequent to
December 31, 1995.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission (the "Commission"), Washington, D.C. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules thereto. A copy of the Registration Statement may be
inspected by anyone without charge at the Commission's principal office in
Washington, D.C. and copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, upon payment of certain fees prescribed by the
Commission. In addition, the Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission through the Electronic Data Gathering, Analysis, and Retrieval
("EDGAR") system.
57
<PAGE> 60
FIRST VIRTUAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
First Virtual Corporation
The reincorporation described in Note 10 to the consolidated financial
statements has not been consummated at October 24, 1997. When it has been
consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of First Virtual Corporation and its subsidiary at December 31,
1995 and 1996 and September 30, 1997 and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1996 and for the nine month period ended September 30, 1997,
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 audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, 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."
PRICE WATERHOUSE LLP
San Jose, California
October 22, 1997
F-2
<PAGE> 62
FIRST VIRTUAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 2,787 $ 676 $ 1,506
Accounts receivable, less allowance of $211 at September 30,
1997..................................................... 677 2,337 2,856
Inventory................................................... 205 1,230 1,672
Prepaid expenses and other current assets................... 40 59 45
------- ------- --------
Total current assets................................ 3,709 4,302 6,079
Property and equipment, net................................... 648 913 1,022
Other assets.................................................. 159 217 288
------- ------- --------
$ 4,516 $ 5,432 $ 7,389
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under bank line of credit........................ $ -- $ 999 $ 1,306
Current portion of long term debt........................... 150 211 573
Accounts payable............................................ 528 1,129 2,488
Accrued liabilities......................................... 486 637 1,169
Deferred revenue............................................ 1,093 280 242
------- ------- --------
Total current liabilities........................... 2,257 3,256 5,778
------- ------- --------
Long-term debt................................................ 242 102 712
------- ------- --------
Commitments (Note 6)
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 10,000,000
shares authorized actual; 5,000,000 shares authorized pro
forma (unaudited):
Series A: 4,000,000 shares designated, issued and
outstanding actual; none issued and outstanding pro
forma (unaudited)...................................... 4 4 4 $ --
Series B: 2,200,000 shares designated, issued and
outstanding actual; none issued and outstanding pro
forma (unaudited)...................................... 2 2 2 --
Series C: 1,375,000 shares designated; 1,183,125,
1,331,260 and 1,348,807 shares issued and outstanding
actual; none issued and outstanding pro forma
(unaudited)............................................ 1 1 1 --
Series D: 687,500 shares designated; 0, 168,375 and
388,375 shares issued and outstanding actual; none
issued and outstanding pro forma (unaudited)........... -- -- -- --
Common Stock, $.001 par value; 30,000,000 shares authorized,
actual; 35,000,000 shares authorized, pro forma;
4,261,999, 4,863,963 and 4,793,918 shares issued and
outstanding actual; 12,731,100 issued and outstanding pro
forma (unaudited)........................................ 4 5 5 12
Additional paid-in capital.................................. 10,156 13,192 16,165 16,165
Notes receivable from stockholders.......................... (187) (924) (844) (844)
Accumulated deficit......................................... (7,963) (10,206) (14,434) (14,434)
------- ------- -------- --------
Total stockholders' equity.......................... 2,017 2,074 899 $ 899
========
------- ------- --------
$ 4,516 $ 5,432 $ 7,389
======= ======= ========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
F-3
<PAGE> 63
FIRST VIRTUAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ -- $ 3,670 $12,093 $ 8,151 $11,123
Cost of revenues................................. -- 2,874 6,547 4,711 6,477
------- ------- ------- ------- -------
Gross profit................................... -- 796 5,546 3,440 4,646
------- ------- ------- ------- -------
Operating expenses:
Research and development....................... 1,208 2,582 2,930 2,089 3,749
Selling, general and administrative............ 1,419 3,603 4,886 3,367 4,978
------- ------- ------- ------- -------
Total operating expenses.................... 2,627 6,185 7,816 5,456 8,727
------- ------- ------- ------- -------
Loss from operations............................. (2,627) (5,389) (2,270) (2,016) (4,081)
Interest income.................................. 46 117 118 81 52
Interest expense................................. -- (38) (91) (65) (199)
------- ------- ------- ------- -------
Net loss......................................... $(2,581) $(5,310) $(2,243) $(2,000) $(4,228)
======= ======= ======= ======= =======
Pro forma net loss per share (unaudited)......... $ (0.17) $ (0.15) $ (0.31)
======= ======= =======
Shares used in pro forma per share calculations
(unaudited).................................... 13,321 13,212 13,647
======= ======= =======
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
F-4
<PAGE> 64
FIRST VIRTUAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
------------------ ------------------ PAID-IN FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY
--------- ------ --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993........................ 1,000,000 $1 2,000,000 $2 $ 547 $ (13) $ (72) $ 465
Issuance of Common Stock,
net......................... -- -- 1,058,000 1 43 (38) -- 6
Issuance of Series A Preferred
Stock, net.................. 3,000,000 3 -- -- 1,483 -- -- 1,486
Issuance of Series B Preferred
Stock, net.................. 2,200,000 2 -- -- 3,241 -- -- 3,243
Net loss...................... -- -- -- -- -- (2,581) (2,581)
-- --
--------- --------- ------- ----- -------- -------
Balance at December 31,
1994........................ 6,200,000 6 3,058,000 3 5,314 (51) (2,653) 2,619
Issuance of Common Stock,
net......................... -- -- 1,203,999 1 138 (136) -- 3
Issuance of Series C Preferred
Stock, net.................. 1,183,125 1 -- -- 4,704 -- -- 4,705
Net loss...................... -- -- -- -- -- (5,310) (5,310)
-- --
--------- --------- ------- ----- -------- -------
Balance at December 31,
1995........................ 7,383,125 7 4,261,999 4 10,156 (187) (7,963) 2,017
Issuance of Common Stock,
net......................... -- -- 601,964 1 1,085 (737) -- 349
Issuance of Series C Preferred
Stock, net.................. 148,135 -- -- -- 637 -- -- 637
Issuance of Series D Preferred
Stock, net.................. 168,375 -- -- -- 1,314 -- -- 1,314
Net loss...................... -- -- -- -- -- (2,243) (2,243)
-- --
--------- --------- ------- ----- -------- -------
Balance at December 31,
1996........................ 7,699,635 7 4,863,963 5 13,192 (924) (10,206) 2,074
Issuance of Series C Preferred
Stock, net.................. 17,547 -- -- -- 104 -- -- 104
Issuance of Series D Preferred
Stock, net.................. 220,000 -- -- -- 1,749 -- -- 1,749
Exercise of stock options..... -- -- 300 -- 1 -- -- 1
Issuance (repurchase) of
Common Stock, net........... -- -- (70,345) -- 1,119 80 -- 1,199
Net loss...................... -- -- -- -- -- -- (4,228) (4,228)
-- --
--------- --------- ------- ----- -------- -------
Balance at September 30,
1997........................ 7,937,182 $7 4,793,918 $5 $ 16,165 $ (844) $ (14,434) $ 899
========= == ========= == ======= ===== ======== =======
</TABLE>
The accompanying notes are integral part of these conslidated financial
statements.
F-5
<PAGE> 65
FIRST VIRTUAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1994 1995 1996 1997
------- ------- ------- 1996 -------
-------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(2,581) $(5,310) $(2,243) $(2,000) $(4,228)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 48 156 342 236 379
Non-cash stock compensation............ -- -- 339 183 1,009
Other.................................. (1) (6) (42) -- 211
Changes in assets and liabilities:..........
Accounts receivable.................... -- (676) (1,660) (1,004) (730)
Inventory.............................. (71) (134) (1,025) (127) (442)
Prepaid expenses and other current
assets.............................. 413 (21) (19) 3 14
Other assets........................... (1) (32) (28) (36) --
Accounts payable....................... 133 377 601 468 1,359
Accrued liabilities.................... 20 458 151 367 532
Deferred revenue....................... 200 893 (813) (615) (38)
------- ------- ------- ------- -------
Net cash used in operating
activities........................ (1,840) (4,295) (4,397) (2,525) (1,934)
------- ------- ------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment....... (207) (184) (504) (270) (376)
Restricted cash............................. -- (105) (30) (30) --
------- ------- ------- ------- -------
Net cash used in investing
activities........................ (207) (289) (534) (300) (376)
------- ------- ------- ------- -------
Cash flows from financing activities:
Borrowings under line of credit............. -- -- 999 -- 801
Repayments under line of credit............. -- -- -- -- (494)
Proceeds from note payable.................. -- -- -- -- 1,250
Repayment of note payable................... -- -- -- -- (141)
Proceeds from issuance of stock, net........ 4,736 4,714 2,003 1,904 1,885
Repayment of capital lease obligations...... -- (42) (182) (135) (161)
------- ------- ------- ------- -------
Net cash provided by financing
activities........................ 4,736 4,672 2,820 1,769 3,140
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................. 2,689 88 (2,111) (1,056) 830
Cash and cash equivalents at beginning of the
period...................................... 10 2,699 2,787 2,787 676
------- ------- ------- ------- -------
Cash and cash equivalents at end of the
period...................................... $ 2,699 $ 2,787 $ 676 $ 1,731 $ 1,506
======= ======= ======= ======= =======
Supplemental cash flow information:
Interest paid............................... $ -- $ 38 $ 78 $ 60 $ 185
Equipment acquired under capital lease
obligations.............................. -- 434 103 103 112
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 66
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
First Virtual Corporation (the "Company") was incorporated in California in
October 1993 and has subsequently reincorporated in Delaware (see Note 10). The
Company develops, manufactures and markets video networking systems for use in
business, government and educational environments.
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
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant inter-company accounts and
transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
using the first-in, first-out method.
Restricted Cash
As of December 31, 1995 and 1996 and September 30, 1997, the Company's
other assets included restricted cash of $105,000, $135,000, and $135,000,
respectively, representing collateral for an outstanding letter of credit, which
expires October 30, 1997 and is expected to be renewed.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term.
Long-Term Assets
The Company periodically reviews the recoverability of long-term assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable.
Revenue Recognition
Revenues are recognized upon shipment of product to customers, provided no
significant obligations remain and collectibility is probable. Revenues from
sales to certain of the Company's distributors are subject to agreements
allowing rights of return and price protection. Accordingly, the
F-7
<PAGE> 67
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company provides for estimated future returns and credits for price protection
upon revenue recognition. Such reserves are estimated based upon historical
rates of returns and allowances, distributor inventory levels, the Company's
estimates of expected sell-through by distributors and other related factors.
Actual results could differ from these estimates.
Advance payments received from customers are recorded as deferred revenue
and are recognized as revenue upon shipment of product.
The Company on occasion receives nonrecurring engineering funding for
development projects. Revenues from such funding are recognized over the term of
the respective contract using the percentage of completion method. Amounts
received under such projects have not been material to date.
A provision is made upon revenue recognition for the estimated cost to
repair or replace products under warranty arrangements. The Company provides a
limited amount of telephone technical support to customers. These activities are
generally considered insignificant customer support obligations and related
costs are accrued upon revenue recognition.
Software Development Costs
Software development costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the product are capitalized, if material. To date, all software
development costs have been expensed as incurred.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation." (See Note 8)
Income Taxes
Income taxes are accounted for using an asset and liability approach. The
asset and liability approach requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of currently enacted tax law; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
Pro forma net loss per share (unaudited)
Pro forma net loss per share is computed using the weighted average number
of shares of common stock, preferred stock (on an as converted basis) and common
equivalent shares outstanding during the periods (using the treasury stock
method, if dilutive). Pursuant to the requirements of the Securities and
Exchange Commission, common equivalent shares relating to Preferred Stock (using
the as converted method) and stock options and warrants (using the treasury
stock method and assuming the initial public offering price) issued subsequent
to September 30, 1996 have been included in the computations for all periods
presented.
F-8
<PAGE> 68
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Historical net loss per share data has not been presented since such
amounts are not deemed to be meaningful due to the significant change in the
Company's capital structure which will occur upon the completion of the
Offering.
Pro forma stockholders' equity (unaudited)
If the Offering contemplated by this prospectus (the "Offering") is
consummated, all shares of Preferred Stock outstanding at the closing date will
automatically convert into an aggregate of 7,937,182 shares of Common Stock. The
pro forma effect of such conversion has been reflected in the accompanying
unaudited pro forma stockholders' equity as of September 30, 1997.
Interim results (unaudited)
The accompanying statements of operations and cash flows for the nine
months ended September 30, 1996 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results for the interim
period.
Concentration of Credit Risk and Geographic Distribution of Revenues
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents and
trade accounts receivable. The Company places its cash and cash equivalents
primarily in market rate accounts. The Company sells its products to original
equipment manufacturers, distributors, value added resellers and end-user
customers throughout the world. The Company performs ongoing credit evaluations
of its customers' financial condition and generally requires no collateral from
its customers. The Company provides an allowance for uncollectible accounts
receivable based upon the expected collectibility of such receivables. To date,
the Company has not experienced any significant bad debts.
In 1995, revenues from two customers represented 24% and 17% of total
revenues. In 1996, revenues from one customer represented 29% of total revenues.
For the nine months ended September 30, 1997, revenues from one customer
represented 57% of total revenues.
Revenues from shipments to customers outside North America represented
approximately 37% of total revenues in 1995, approximately 36% of total revenues
in 1996, and approximately 22% of total revenues for the nine months ended
September 30, 1997.
At December 31, 1995, outstanding receivables from two customers
represented 17% and 10% of accounts receivable. At December 31, 1996,
outstanding receivables from two customers represented 27% and 10% of accounts
receivable. At September 30, 1997, outstanding receivables from one customer
represented 59% of accounts receivable.
Fair value of financial instruments
The carrying amount of cash and cash equivalents and other current assets
and liabilities such as accounts receivable, accounts payable and accrued
liabilities, as presented in the financial statements, approximates fair value
based on the short-term nature of these instruments. The recorded amount of
long-term debt approximates fair value as the actual interest rates approximate
current competitive rates.
F-9
<PAGE> 69
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS 128). This
Statement is effective from the quarter ending December 31, 1997. The Statement
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic earnings
per share and fully diluted earnings per share is replaced by diluted earnings
per share.
If the Company had adopted FAS 128, for the year ended 1996 and the nine
month period ended September 30, 1997, the Company's pro forma loss per share
would have been as follows:
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------
1996 1996 1997
------------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C>
Basic loss per share..................... $(0.18) $ (0.16) $(0.33)
Diluted loss per share................... (0.17) (0.15) (0.31)
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FAS
130) and No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (FAS 131). The Company does not believe that FAS 130 and 131 will
have any material impact on its financial statement reporting requirements.
Dependence on Suppliers
The Company's ability to timely deliver its products is dependent upon the
availability of quality components and subsystems used in these products. The
Company depends in part upon subcontractors to manufacture, assemble and deliver
certain items in a timely and satisfactory manner. The Company obtains certain
components and subsystems from single or a limited number of sources. A
significant interruption in the delivery of such items could have a material
adverse effect on the Company's financial condition and results of operations.
F-10
<PAGE> 70
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
----- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Inventory:
Raw materials........................................ $ 124 $ 711 $ 1,113
Finished goods....................................... 81 519 559
----- ------ -------
$ 205 $1,230 $ 1,672
===== ====== =======
Property and equipment:
Computers and equipment.............................. $ 697 $1,137 $ 1,590
Furniture and fixtures............................... 80 236 244
Leasehold improvements............................... 62 73 100
----- ------ -------
839 1,446 1,934
Less accumulated depreciation and amortization....... (191) (533) (912)
----- ------ -------
$ 648 $ 913 $ 1,022
===== ====== =======
Accrued liabilities:
Accrued employee compensation........................ $ 286 $ 296 $ 478
Accrued warranty..................................... 72 162 359
Other................................................ 128 179 332
----- ------ -------
$ 486 $ 637 $ 1,169
===== ====== =======
</TABLE>
As of December 31, 1995 and 1996 and September 30, 1997, property and
equipment recorded under capital leases, consisting primarily of computers and
equipment, totaled $434,000, $537,000, and $650,000, respectively, with related
accumulated amortization of $50,000, $256,000, and $430,000, respectively.
NOTE 3 -- LINE OF CREDIT:
The Company has a working capital line of credit agreement with a bank
which provides for borrowings of up to $3,000,000. Borrowings under the line of
credit are limited to a specified percentage of eligible accounts receivable and
inventory, and are secured by substantially all of the assets of the Company.
Interest on borrowings is set at the bank's prime rate (8.5% at September 30,
1997) plus 0.5%. Among other provisions, the Company is required to maintain
certain financial covenants and is prohibited from paying dividends. The line of
credit agreement expires in April 1998. Borrowings outstanding under the line of
credit totaled $1,306,000 as of September 30, 1997 and an additional
approximately $800,000 was available to the Company. At September 30, 1997, the
Company was not in compliance with certain covenants, for which the bank issued
a waiver.
F-11
<PAGE> 71
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LONG-TERM DEBT:
Long-term debt comprises:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
12% Subordinated debt due in monthly
installments of $41,000 through 2000.... $ -- $ -- $ 1,021
Capitalized lease obligations.............. 392 313 264
---- ---- ------
392 313 1,285
Less current portion....................... 150 211 573
---- ---- ------
$242 $102 $ 712
==== ==== ======
</TABLE>
In April 1997, the Company entered into a subordinated debt agreement
pursuant to which the Company borrowed $1,250,000. The debt is secured by
certain assets of the Company, including accounts receivables, inventory,
property and equipment. Future principal payments of the subordinated debt as of
September 30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1997 (three months)................................. $ 82
1998................................................ 363
1999................................................ 414
2000................................................ 162
------
$1,021
======
</TABLE>
NOTE 5 -- INCOME TAXES:
No provision or benefit for income taxes has been recognized for any of the
periods presented as the Company has incurred net operating losses for income
tax purposes and has no carryback potential.
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carryforwards and capitalized start-up
costs..................................................... $3,238 $3,825 $ 4,636
Research and development credit carryforwards............... 311 518 753
Accruals and reserves....................................... 175 297 419
------ ------ ------
Total deferred tax assets................................... 3,724 4,640 5,808
Valuation allowance......................................... (3,724) (4,640) (5,808)
------ ------ ------
Net deferred tax assets..................................... $ -- $ -- $ --
====== ====== ======
</TABLE>
Based on a number of factors, including the lack of a history of profits
and the fact that the Company competes in a developing market that is
characterized by rapidly changing technology, management believes that the
weight of available evidence indicates that it is more likely than not that the
Company will not be able to realize its deferred tax assets and thus a full
valuation allowance has been provided at December 31, 1995 and 1996 and
September 30, 1997.
At September 30, 1997, the Company had federal net operating loss
carryforwards of approximately $11.7 million available to reduce future taxable
income. The federal net operating loss carryforwards expire from 2008 through
2012.
F-12
<PAGE> 72
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be limited in certain
circumstances including, but not limited to, a cumulative stock ownership change
of more than 50% over a three-year period, as defined.
NOTE 6 -- COMMITMENTS:
Leases
The Company leases its facility under a noncancelable operating lease
agreement which expires in 1998. In addition, the Company leases certain
equipment under long-term lease agreements that are classified as capital
leases. These capital leases terminate at various dates through 1998. Future
minimum lease payments under all noncancelable operating and capital leases as
of September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year ending December 31,
1997 (three months)........................................... $ 47 $ 96
1998.......................................................... 118 117
1999.......................................................... -- 37
2000.......................................................... -- 37
2001.......................................................... -- 3
------- -------
Total minimum payments........................................ $ 165 290
=======
Less amount representing interest............................. -- (26)
-------
Present value of capital lease obligations.................... -- 264
Less current portion.......................................... -- (191)
-------
Lease obligations, long-term.................................. -- $ 73
=======
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996, and for
the nine months ended September 30, 1997 was approximately $20,000, $110,000,
$320,000 and $171,000, respectively.
NOTE 7 -- CONVERTIBLE PREFERRED STOCK:
As of September 30, 1997 the Company had issued 7,937,182 shares of
convertible Preferred Stock, of which 4,000,000 shares, 2,200,000 shares,
1,348,807 shares and 388,375 shares, have been designated as Series A, B, C and
D, respectively. The convertible Preferred Stock has been issued at prices
ranging from $0.50 per share to $8.00 per share.
In August 1997, in conjunction with the last round of Series D Preferred
Stock, under a stock subscription agreement, the Company agreed to issue 100,000
shares of Series D Preferred Stock to an investor at $8.00 per share for cash.
The stock subscription agreement expires on October 31, 1997.
The rights, preferences and privileges with respect to the Series A, B, C
and D Preferred Stock (collectively "Preferred Stock") are as follows:
Dividends
Holders of Preferred Stock are entitled to receive noncumulative,
preferential dividends of $0.05, $0.15, $0.40 and $0.80, respectively, per
annum, when and if declared by the Board of Directors. No such dividends have
been declared.
F-13
<PAGE> 73
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of the Preferred Stock are
entitled to a per share distribution in preference to holders of Common Stock
equal to $0.50, $1.50, $4.00 and $8.00 per share, respectively, plus any
declared but unpaid dividends. In the event funds are sufficient to make a
complete distribution to holders of Preferred Stock as described above, the
remaining assets will be distributed to the holders of Common Stock and
Preferred Stock based upon the number of shares of Common Stock held by each,
assuming conversion of all Preferred Stock, until the holders of Preferred Stock
receive two times their original per share preference. Thereafter, the remaining
assets will be distributed to the holders of Common Stock.
Voting Rights
The holders of Preferred Stock have one vote for each share of Common Stock
into which such Preferred Stock may be converted.
Conversion
Each share of Preferred Stock is convertible at any time into one share of
Common Stock at the option of the holder, subject to adjustment for dilution.
Such conversion is automatic upon the earlier of the date specified by vote,
written consent or agreement of holders of at least two-thirds of such series
then outstanding or immediately upon the closing date of a public offering of
the Company's Common Stock for which the aggregate net proceeds exceed
$10,000,000 and the per share offering price equals or exceeds $8.00, subject to
adjustment for dilution. At September 30, 1997, a total of 8,037,182 shares of
Common Stock have been reserved for issuance upon conversion of the Preferred
Stock.
Series D Preferred Stock Warrants
In conjunction with certain financing arrangements, during the nine months
ended September 30, 1997 the Company issued warrants to purchase 40,624 shares
of its Series D Preferred Stock at $8.00 per share. The warrants are exercisable
immediately and expire at various times from 3 to 4.3 years following the
closing of an initial public offering. As of September 30, 1997, no warrants
have been exercised. The aggregate value of these warrants was estimated by the
Company, using the Black-Scholes models, at approximately $159,000 and is being
expensed as additional cost of financing over the term of the related
borrowings.
NOTE 8 -- STOCK PLANS:
1993 Employee, Consultant and Director Stock Purchase Plan
In December 1993, the Company adopted a stock purchase plan (the "1993
Plan"). As of September 30, 1997, 3,295,000 shares of Common Stock were
authorized for issuance of stock purchase rights awarded under the 1993 Plan.
The 1993 Plan, which expires in 2003 unless terminated earlier, is administered
by the Board of Directors and provides for the granting of rights to purchase
the Company's Common Stock. All awards have been made at a purchase price equal
to at least 100% of the fair value of the stock as determined by the Board of
Directors on the date of grant. Stock purchase rights granted under the 1993
Plan must be exercised at the time of grant. Common Stock issued under the 1993
Plan generally vests 10% after six months and ratably each month over the
remaining fifty-four month period, provided that the grantee remains associated
with the Company. In the event that the grantee's continuous status as an
employee, director or consultant terminates, the Company has the
F-14
<PAGE> 74
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
right to repurchase all unvested shares of Common Stock issued upon exercise of
an award at a repurchase price equal to the original issuance price of such
shares. As of September 30, 1997, a total of 3,293,618 shares of the Company's
Common Stock have been issued under the 1993 Plan, 493,450 shares had been
repurchased or cancelled pursuant to the Company's repurchase rights, and
approximately 1,185,541 shares were subject to repurchase.
1996 Stock Purchase Bonus Plan
In February 1996, the Company adopted an employee stock purchase bonus plan
(the "1996 Plan") and reserved 125,000 shares of Series C Preferred Stock
("Series C") for issuance to eligible employees upon the exercise of stock
purchase rights awarded under the 1996 Plan. The 1996 Plan, which expires in
2006 unless terminated earlier, is administered by the Board of Directors and
provides for the grant of rights to purchase shares of Series C (the "Offering")
at a purchase price equal to 100% of the fair value of the stock as determined
by the Board of Directors on each offering date. Offering periods begin on the
first day of the second month following the end of each calendar quarter (the
"Offering Date") and end ten business days later. On each Offering Date,
eligible employees are granted the right to purchase the number of shares of
Series C purchasable with up to 100% of such employee's bonus amount
attributable to the calendar quarter ended immediately prior to the Offering
Date. Each Offering contains a single purchase date occurring ten business days
following the Offering Date of such Offering. During 1996, and the nine months
ended September 30, 1997 the Company issued 81,260 shares and 17,547 shares,
respectively, of Series C at prices ranging from $4.00 to $6.00 per share under
the 1996 Plan.
1996 Stock Option Plans
The Company has two stock option plans which were adopted in 1996 (the
"Stock Option Plans"). The Stock Option Plans, which expire in 2006, provide for
the grant of incentive stock options and nonstatutory stock options to
employees, directors and consultants. As of September 30, 1997, 2,130,000 shares
of Common Stock were authorized under the Stock Option Plans. The Board of
Directors may, at its discretion, terminate the Stock Option Plans at any time.
Options granted under the Stock Option Plans are for periods not to exceed ten
years, and must be issued at prices not less than 100% and 85% for incentive and
nonstatutory stock options, respectively, of the fair value of the stock, as
determined by the Board of Directors on the date of grant. Options granted to
stockholders who own greater than 10% of the outstanding stock are for periods
not to exceed five years and must be issued at prices not less than 110% of the
fair value of the stock, as determined by the Board of Directors on the date of
grant. Options granted under the Stock Option Plan are exercisable immediately
and generally vest 10% after six months and ratably each month over the
remaining fifty-four month period, provided that the optionee remains associated
with the Company. In the event that the optionee's continuous status as an
employee, director or consultant terminates, the Company has the right to
repurchase all unvested shares of Common Stock issued upon exercise of an option
at a repurchase price equal to the exercise price of such shares. Additionally,
all unvested options terminate and any vested options must be exercised within
30 days.
1997 Non-Employee Directors' Stock Option Plan
On September 25, 1997, the Company's Board of Directors approved the 1997
Non-Employee Director Stock Option Plan (the "Director's Plan") and reserved
250,000 shares of the Company's Common Stock for issuance thereunder.
The Director Plan provides for the grant of options to purchase 30,000
shares of Common Stock to each director upon initial election to the Board of
Directors and subsequent automatic grants of
F-15
<PAGE> 75
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options to purchase 10,000 shares of Common Stock on each anniversary of a
previous grant. An initial grant of 10,000 shares was made to each of the five
non-employee directors of the Company in September 1997 upon inception of the
Director's Plan, at a price of $11.00 per share.
Option activity under the Company's various currently effective stock
option plans is summarized as follows:
<TABLE>
<CAPTION>
SHARES
SUBJECT
TO WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
--------- --------------
<S> <C> <C>
Granted................................................... 927,998 $ 2.60
---------
Balance at December 31, 1996.............................. 927,998 $ 2.60
Granted................................................... 980,644 $ 7.03
Exercised................................................. (300) $ 3.50
Cancelled................................................. (50,644) $ 4.00
---------
Balance at September 30, 1997............................. 1,857,698 $ 4.90
=========
Options vested at September 30, 1997...................... 252,951
=========
Options available for future grant at September 30,
1997.................................................... 522,002
=========
</TABLE>
With respect to certain options and restricted stock granted in 1996 and
the nine months ended September 30, 1997, the Company is recognizing a
compensation charge of $2,121,000. The Company recognized $339,000 and
$1,009,000 of said amount as compensation expense in the year ended December 31,
1996 and the nine months ended September 30, 1997, respectively. The Company
will recognize the balance of this deferred compensation over the related
vesting period of the options. The future compensation charges are subject to
reduction for any employee who terminates employment prior to the expiration of
such employee's option vesting period.
Significant option groups outstanding at September 30, 1997 and related
weighted average exercise price and contractual life information are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED
RANGE OF CONTRACTUAL AVERAGE
EXERCISE NUMBER LIFE (IN EXERCISE
PRICES OUTSTANDING YEARS) PRICE
- ----------- ----------- ----------- --------
<S> <C> <C> <C>
$2.50 612,998 8.89 $ 2.50
$2.75 300,000 3.75 $ 2.75
$3.50 14,700 9.08 $ 3.50
$4.00 505,000 9.49 $ 4.00
$11.00 425,000 9.92 $11.00
=======
$2.50 - $11.00 1,857,698 9.10 $ 4.90
=======
</TABLE>
F-16
<PAGE> 76
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value Disclosures
Had compensation cost for the Company's Stock Option Plan been determined
based on the minimum value of such options at the grant dates as prescribed by
FAS No. 123, the Company's pro forma net loss would have been as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
(UNAUDITED)
<S> <C> <C> <C>
Net loss:
As reported.............................. $ (2,243) $(2,000) $(4,228)
Pro Forma as adjusted.................... (2,395) (2,056) (4,551)
Pro Forma net loss per share:
As reported.............................. $ (0.17) $ (0.15) $ (0.31)
As adjusted.............................. (0.18) (0.16) (0.33)
</TABLE>
No pro forma information has been presented for 1995 since the Stock Option
Plan was adopted in 1996 and, accordingly, no stock options were granted under
the Stock Option Plan prior to 1996. The weighted-average estimated grant-date
minimum value for options granted under the Stock Option Plan during 1996 and
during the nine months ended September 30, 1997 was $0.70 and $0.97,
respectively. The minimum value of each option is estimated on the date of grant
with the following assumptions for grants during 1996 and the nine months ended
September 30, 1997: annual dividend yield of 0.0% for both periods; risk-free
annual interest rates of 5.97% to 6.64% and 6.00% to 6.61%, respectively; and an
expected option term of five years for both periods.
1997 Employee Stock Purchase Plan
The Company's 1997 Stock Purchase Plan (the "Purchase Plan") was approved
by the Board of Directors in October 1997 and will become effective upon the
closing of the Offering. Under the Purchase Plan a total of 150,000 shares of
Common Stock have been reserved for issuance to participating employees who meet
eligibility requirements.
The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 15% of an employee's base
compensation, including commissions, bonuses and overtime, at a price equal to
85% of the fair market value of the Common Stock at the beginning of each
offering period or the end of the purchase period, whichever is lower.
NOTE 9 -- NOTES RECEIVABLE FROM STOCKHOLDERS:
During the period from January 1994 through October 1996, the Company made
full recourse loans to certain executives and employees pursuant to the
Company's 1993 Stock Purchase Plan. The loans bear interest at rates ranging
from 4.92% to 7.96% per annum and interest on the notes accrues monthly. The
loans are due on the earlier of various dates from January 1998 through October
2001 or termination of employment.
NOTE 10 -- SUBSEQUENT EVENTS
On October 22, 1997, the Company's Board of Directors authorized management
of the Company to file a Registration Statement with the Securities and Exchange
Commission covering the proposed sale of shares of its Common Stock to the
public. In addition, the Company's Board of Directors authorized, subject to
stockholder approval, the reincorporation of the Company in Delaware to be
effected prior to the effective date of the Registration Statement. The Board
also, subject to stockholder approval, increased the authorized shares of Common
Stock to 35,000,000, decreased the
F-17
<PAGE> 77
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
authorized shares of Preferred Stock to 5,000,000, and increased the number of
options authorized and available under the Company's 1996 Stock Option Plans.
Additionally, the Board of Directors approved the consolidation and restatement
of the Company's 1993 Plan and Stock Option Plans into the 1997 Equity Incentive
Plan to be effective upon the closing of the Offering. All per share amounts
have been adjusted in the accompanying consolidated financial statements to
reflect the reincorporation in Delaware.
F-18
<PAGE> 78
Appendix -- Description of Graphics
Top caption: VIDEO NETWORKING
Company Logo
INSIDE FRONT COVER
Top Left Graphic: illustration of a teacher conducting a class using
video networking tools.
Caption: DISTANCE LEARNING
Enhancing the quality of distance learning. Conducting simultaneous
classes in multiple locations. Teaching a broad array of subjects
requiring visual reinforcement.
Top Right Graphic: illustration of surgeons performing an operation on a
patient using video networking tools.
Caption: TELEMEDICINE
Bringing doctors and patients together for remote
consultation. Conferencing during in-progress surgery. Enabling
training seminars with close-up precision imaging.
Bottom Left Graphic: illustration of a business person delivering a
presentation to a group of people using video networking tools.
Caption: VIDEO MARKETING
Enabling face-to-face communication without travel. Delivering live
presentations to several locations simultaneously.
Bottom Right Graphic: illustration of workers at a factory reviewing the
configuration of machinery using video networking tools.
Caption: VIDEO MANUFACTURING
Enabling remote floor maintenance, inspection and supervision.
Providing just-in-time training and efficient technology transfer.
Lower caption:
First Virtual's broad product line delivers end-to-end solutions for a
wide range of customer applications including distance learning,
telemedicine, video marketing and video manufacturing.
GATE FOLD (left side)
Graphic: Computer screen showing video networking graphical interfaces. The
computer screen is linked via lines to a rack containing First
Virtual equipment.
Caption:
Conferencing: The ability to meet face-to-face in real-time over the
network. First Virtual's products provide high quality, cost effective
and scaleable video collaboration over an ATM network and allow the
efficient connection of traditional ISDN conferencing.
Caching: The ability to use high quality stored video over the network, also
called video on demand. Caching is the cornerstone of all distance
learning applications. First Virtual's caching products allow
concurrent access to high quality stored video on ATM and Ethernet
networks.
Casting: The ability to broadcast high quality live video over the network.
First Virtual's casting products enable applications such as real-time
delivery of lectures to be broadcast to students over multiple
desktops across both ATM and Ethernet networks.
GATE FOLD (right side)
Graphic: Network diagram depicting the First Virtual
product set interconnected by lines. The graphic shows the Company's
V-Caster, V-Switch, V-MCU, V-Gate323, V-Switch
and V-Cache.
Caption: First Virtual provides a high quality cost effective, video networking
solution that integrates video with voice and data, and leverages
existing network infrastructures including Ethernet, ISDN, ATM and
T1/E1. The Company's Multimedia Operating Software (MOS) is designed
to guarantee network resources for real-time video applications
on any QoS capable network in the presence of voice and bursts
of data packets.
Company Logo
Page 30:
Graphic: Network diagram depicting First Virtual's product set
interconnected by lines. The graphic shows the Company's
V-Caster, V-Switch, V-MCU, V-Gate323, V-Switch and V-Cache.
Caption:
First Virtual provides a high quality cost effective, video networking
solution that integrates video with voice and data, and leverages
existing network infrastructures including Ethernet, ISDN, ATM and T1.
The Company's Multimedia Operating Software (MOS) is designed to
guarantee network resources for real-time video applications on any
QoS-capable network in the presence of voice and bursts of data
packets.
OUTSIDE BACK COVER
Company logo
<PAGE> 79
LOGO
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the distribution of the Common Stock being registered. All amounts are
estimated, except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq
National Market Filing Fee:
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 13,382
NASD Filing Fee................................................... 4,916
Nasdaq National Market Filing Fee................................. *
Blue Sky Fees and Expenses........................................ 5,000
Accounting Fees................................................... *
Legal Fees and Expenses........................................... *
Transfer Agent and Registrar Fees................................. *
Printing and Engraving............................................ 175,000
Miscellaneous..................................................... *
----------
Total................................................... $900,000
==========
</TABLE>
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation provides that directors of
the Registrant shall not be personally liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director, to
the fullest extent permitted by the General Corporation Law of the State of
Delaware. The Registrant's Bylaws provide for indemnification of officers and
directors to the full extent and in the manner permitted by Delaware law.
Section 145 of the Delaware General Corporation Law makes provision for such
indemnification in terms sufficiently broad to cover officers and directors
under certain circumstances for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act").
The Registrant intends to enter into indemnification agreements with each
director and certain executive officers which provide indemnification under
certain circumstances for acts and omissions which may not be covered by any
directors' and officers' liability insurance.
The form of Underwriting Agreement, filed as Exhibit 1.1 to the
Registration Statement, provides for indemnification of the Registrant and its
controlling persons against certain liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since October 24, 1994, the Company has issued and sold the following
securities:
1. Since October 24, 1994, the Company issued 2,546,759 shares of
Common Stock (net of repurchases) to 68 employees, consultants and
non-employee directors at a weighted average purchase price of $.64 per
share.
2. Since April 18, 1996, the Company has granted stock options to
purchase 1,857,698 shares of Common Stock (net of cancellations) to a total
of 74 employees, consultants and non-employee directors at a weighted
average exercise price of $4.90 per share pursuant to the Company's stock
plans.
II-1
<PAGE> 81
3. From October 13, 1994 to November 30, 1994, the Company issued and
sold, pursuant to a Series B Preferred Stock Purchase Agreement, an
aggregate of 2,200,000 shares of Series B Preferred Stock to 30 private
investors at a purchase price of $1.50 per share.
4. From June 28, 1995 to April 23, 1996, the Company issued and sold
pursuant to a Series C Preferred Stock Purchase Agreement, an aggregate of
1,250,000 shares of Series C Preferred Stock to 28 private investors at a
purchase price of $4.00 per share.
5. From March 11, 1996 to August 15, 1997, the Company issued and sold
pursuant to the Company's 1996 Employee Stock Purchase Bonus Plan, an
aggregate of 98,807 shares of Series C Preferred Stock to 30 employees at
purchase prices ranging from $4.00 to $6.00 per share.
6. From August 29, 1996 to July 25, 1997, the Company issued and sold
pursuant to a Series D Preferred Stock Purchase Agreement, an aggregate of
388,375 shares of Series D Preferred Stock to 35 private investors at a
purchase price of $8.00 per share.
7. On April 11, 1997, the Company issued a warrant to purchase 18,750
shares of Series D Preferred Stock at an exercise price of $8.00 per share
to a financial institution.
8. On April 30, 1997, the Company issued warrants to purchase 21,874
shares of Series D Preferred Stock at an exercise price of $8.00 per share
to a financial institution.
The sales and issuances of securities in the transactions described in
paragraphs (1), (2) and (5) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to a written compensatory benefit
plan or pursuant to a written contract relating to compensation as provided by
Rule 701.
The sales and issuances of securities in the transactions described in
paragraphs (3) through (4) and (6) through (8) above were deemed to be exempt
from registration under the Securities Act by virtue of Section 4(2), Regulation
D or Regulation S promulgated thereunder. The purchasers in each case
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends are affixed to
the stock certificates issued in such transactions. Similar legends were imposed
in connection with any subsequent sales of any such securities. All recipients
received either adequate information about the Registrant or had access, through
employment or other relationships, to such information.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1+ Underwriting Agreement
**3.1 Amended and Restated Articles of Incorporation of the Registrant as filed
June 6, 1997
**3.2 Bylaws of the Registrant
3.3+ Certificate of Incorporation to be effective upon closing of the offering
3.4+ Bylaws of the Registrant to be effective upon the closing of the offering
4.1+ Specimen Common Stock Certificate
5.1+ Opinion of Cooley Godward LLP as to legality of the Common Stock
10.1+ 1997 Equity Incentive Plan
10.2+ Form of Incentive Stock Option Grant
10.3+ Form of Non-Incentive Stock Option Grant
10.4+ 1997 Employee Stock Purchase Plan
10.5+ 1997 Employee Stock Purchase Offering
10.6+ 1997 Non-Employee Directors' Stock Option Plan
</TABLE>
II-2
<PAGE> 82
<TABLE>
<C> <S>
**10.7 Form of Indemnification Agreement between the Registrant and its directors
and executive officers
**10.8 Amended and Restated Investor Rights Agreement, dated as of August 29,
1996 among the Registrant and the investors named therein, as amended
October 17, 1997
**10.9 Lease Agreement between the Registrant and John Arrillaga, or his
successor Trustee, UTA 7/20/77, dated July 19, 1995
**10.10 Loan and Security Agreement between the Registrant and Silicon Valley Bank
("SVB"), dated July 3, 1996, as amended
**10.11 Master Lease Agreement between the Registrant and Comdisco, Inc.
("Comdisco")
**10.12 Subordinated Loan and Security Agreement between the Registrant and
Comdisco, dated April 30, 1997
**10.13* Original Equipment Manufacturing Agreement between the Registrant and Bay
Networks, Inc., dated November 3, 1995, as amended through April 9, 1997
10.13(i)* Fourth Amendment to OEM Agreement, between the Registrant and Bay
Networks, Inc., dated October 26, 1997
**10.14* OEM Reseller Agreement between the Registrant and Northern Telecom Inc.,
dated May 1, 1997
**10.15* Development and License Agreement between the Registrant and Advanced
Telecommunications Modules Limited, dated February 25, 1994, as amended
**10.16* Equipment Manufacturing OEM Agreement between the Registrant and VTEL
Corporation, dated August 20, 1997
**10.17 Technology Licensing Agreement between IBM Corporation and First Virtual
Corporation, dated October 16, 1997
**10.18 Warrant issued to SVB, dated April 11, 1997
**10.19 Warrants issued to Comdisco, each dated April 30, 1997
**11.1 Statement re computation of net loss per share
**16.1 Letter of KPMG Peat Marwick LLP
23.1 Consent of Price Waterhouse LLP
23.2+ Consent of Cooley Godward LLP (included in Exhibit 5.1)
**24.1 Power of Attorney (see page II-5)
**27.1 Financial Data Schedule
</TABLE>
- ---------------
+ To be filed by amendment.
* Confidential treatment is being sought for portions of this exhibit. A
separate filing setting forth the Registrant's application for
confidential treatment has been made with the Commission.
** Previously filed as an Exhibit to the Registration Statement.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable, or because the
information is included in the Financial Statements or the Notes thereto.
ITEM 17. UNDERTAKINGS
A. The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is
II-3
<PAGE> 83
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
C. The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, First Virtual
Corporation has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf, by the undersigned, thereunto duly authorized, in
the City of Santa Clara, County of Santa Clara, State of California, on October
31, 1997.
FIRST VIRTUAL CORPORATION
By: RALPH K. UNGERMANN
------------------------------------
Ralph K. Ungermann
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- ---------------------------------- -----------------
<S> <C> <C>
RALPH K. UNGERMANN Chief Executive Officer and October 31, 1997
- ---------------------------------- President (Principal Executive
Ralph K. Ungermann Officer)
JAMES O. MITCHELL Vice President, Operations and October 31, 1997
- ---------------------------------- Chief Financial Officer (Principal
James O. Mitchell Financial and Accounting Officer)
* Director October 31, 1997
- ----------------------------------
Neal Douglas
* Director October 31, 1997
- ----------------------------------
Pier Carlo Falotti
* Director October 31, 1997
- ----------------------------------
David A. Norman
* Director October 31, 1997
- ----------------------------------
James Swartz
* Director October 31, 1997
- ----------------------------------
Enzo Torresi
/s/ JAMES O. MITCHELL
- ----------------------------------
James O. Mitchell
*(Attorney-in-fact)
</TABLE>
II-5
<PAGE> 85
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
1.1+ Underwriting Agreement
**3.1 Amended and Restated Articles of Incorporation of the Registrant as filed June
6, 1997
**3.2 Bylaws of the Registrant
3.3+ Certificate of Incorporation to be effective upon closing of the offering
3.4+ Bylaws of the Registrant to be effective upon the closing of the offering
4.1+ Specimen Common Stock Certificate
5.1+ Opinion of Cooley Godward LLP as to legality of the Common Stock
10.1+ 1997 Equity Incentive Plan
10.2+ Form of Incentive Stock Option Grant
10.3+ Form of Non-Incentive Stock Option Grant
10.4+ 1997 Employee Stock Purchase Plan
10.5+ 1997 Employee Stock Purchase Offering
10.6+ 1997 Non-Employee Directors' Stock Option Plan
**10.7 Form of Indemnification Agreement between the Registrant and its directors and
executive officers
**10.8 Amended and Restated Investor Rights Agreement, dated as of August 29, 1996
among the Registrant and the investors named therein, as amended October 17,
1997
**10.9 Lease Agreement between the Registrant and John Arrillaga, or his successor
Trustee, UTA 7/20/77, dated July 19, 1995
**10.10 Loan and Security Agreement between the Registrant and Silicon Valley Bank
("SVB"), dated July 3, 1996, as amended
**10.11 Master Lease Agreement between the Registrant and Comdisco, Inc. ("Comdisco")
**10.12 Subordinated Loan and Security Agreement between the Registrant and Comdisco,
dated April 30, 1997
**10.13* Original Equipment Manufacturing Agreement between the Registrant and Bay
Networks, Inc., dated November 3, 1995, as amended through April 9, 1997
10.13(i)* Fourth Amendment to OEM Agreement, between the Registrant and Bay Networks,
Inc., dated October 26, 1997
**10.14* OEM Reseller Agreement between the Registrant and Northern Telecom Inc., dated
May 1, 1997
**10.15* Development and License Agreement between the Registrant and Advanced
Telecommunications Modules Limited, dated February 25, 1994, as amended
**10.16* Equipment Manufacturing OEM Agreement between the Registrant and VTEL
Corporation, dated August 20, 1997
**10.17 Technology Licensing Agreement between IBM Corporation and First Virtual
Corporation, dated October 16, 1997
**10.18 Warrant issued to SVB, dated April 11, 1997
**10.19 Warrants issued to Comdisco, each dated April 30, 1997
**11.1 Statement re computation of net loss per share
**16.1 Letter of KPMG Peat Marwick LLP
23.1 Consent of Price Waterhouse LLP
23.2+ Consent of Cooley Godward LLP (included in Exhibit 5.1)
**24.1 Power of Attorney (see page II-5)
**27.1 Financial Data Schedule
</TABLE>
- ---------------
+ To be filed by amendment.
* Confidential treatment is being sought for portions of this exhibit. A
separate filing setting forth the Registrant's application for
confidential treatment has been made with the Commission.
** Previously filed as an Exhibit to the Registration Statement.
<PAGE> 1
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED.
EXHIBIT 10.13(i)
This Fourth Amendment ("Fourth Amendment") to the Original Equipment
Manufacturing Agreement dated November 3, 1997 ("Agreement") is effective as of
October 26, 1997 by and between Bay Networks, Inc. ("Bay") and First Virtual
Corporation ("FVC").
The parties agree as follows:
1. DEFINITIONS
Unless otherwise defined herein, capitalized terms used in this Fourth
Amendment shall have the same meaning as those used in the Agreement.
2. MODIFICATIONS TO THE AGREEMENT
2.1 DELIVERY OF PRODUCTS IN RESPONSE TO ORDERS.
FVC shall use best efforts to drive down lead time for the products to [*]
by January 1, 1998 via material leadtime compression and/or alternate
sourcing of materials or contract manufacturing. Commencing February 1,
1998, the first paragraph of Section 2.5 of the Agreement shall be deemed
deleted and replace with the following:
FVC will deliver the product in the quantities ordered by Bay within
[*] of the date the corresponding order is received by FVC (unless a
later shipment date is specified in Buyer's order), provided that the
terms of the order comply with the requirements specified above. The
foregoing [*] delivery commitment shall not apply to orders in excess
of 200% of the amount in the Month One Forecast (as defined below)
covering that month unless FVC agrees in writing to larger quantities.
The parties acknowledge that time is the essence of this Agreement.
In the event that FVC fails to deliver the product within the time
period described in this subsection, or for any other delivery date
specified by Bay and agreed to by FVC for a specific order, Bay shall
be entitled to a credit against the corresponding order in the amount
calculated from the table below applied against the quantity of the
product which was not delivered within the specified time period,
subject to adjustment as provided below:
<TABLE>
<CAPTION>
Percentage of
Actual delivery date price credited
-------------------- --------------
<S> <C>
[*] from the delivery date specified in Bay's order No discount
[*] from the delivery date specified in Bay's order [*]
[*] from the delivery date specified in Bay's order [*]
</TABLE>
FVC shall respond to Bay purchase orders with written Acknowledgment
of the purchase order within 48 hours of receiving each purchase
order.
[*]--CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE> 2
2.2 FORECASTING.
Rolling Forecasts: To assist FVC in delivering product in response to Bay's
request, by the tenth day of each month, Bay will deliver to FVC its good faith
rolling 6-month forecast of Bay's estimated demand of the products for such
time period. Except for the "Month One Forecast" portion of such rolling
forecast as set forth below, the submission of a forecast shall not require Bay
to make any purchases and does not constitute an order, and shall not expose
Bay to liability of any kind.
Fixed Forecast: The forecast for the period from the date of the forecast
through one month thereafter (the "Month One Forecast") shall be considered a
fixed forecast and Bay shall be obligated to place orders for the quantity of
products forecast for such period.
Example:
November 10:
-- FVC receives Bays 6 month forecast detailing December to May
-- Month 1 (December) set at 1000 units of x and is fixed
December 10:
-- FVC receives Bays 6 month forecast detailing January to June
-- Month 1 (January) set at 2000 units of x and is fixed
Increases in the Forecast: In the event Bay increases its forecast on its
monthly rolling forecast submittal whereby the Month One Forecast exceeds the
amount forecast for that same time period on Bay's immediately previous monthly
rolling forecast by more than 100%, such excess forecasted amount over the 100%
increase shall not be used in determining late delivery penalties under Section
2.1 above unless FVC has agreed in writing and has committed to delivery for
the excess product ordered.
In the event no forecast is provided by Bay in a given month, the previous
months forecast will be deemed valid for the given period, and all other
provisions of the Agreement relative to cancellations and upside and downside
flexibility will apply.
2.3 REDUCTION IN BOM PRICES/LEAD TIMES.
Price and Lead Time Review: Bay Networks and FVC will review material costs
and transfer pricing quarterly, including sharing cost information and lead and
process time requirements. All such information disclosed shall be considered
confidential information and protected pursuant to Section 12 of the Agreement.
Purchased Material Price Decreases from Bay: Bay will attempt to arrange for
FVC to have the ability to acquire certain materials required for manufacture
of the product from Bay's suppliers at Bay's pricing. In the event a COGS
decrease results through use of Bay's supplier relationships, [*] of the COGS
decrease shall be passed on to Bay through either a reduction in the pricing
for the products to Bay or by an equivalent monthly credit to Bay of such
amount. FVC agrees that it will use such materials acquired directly from Bay's
suppliers, at pricing arranged by Bay, solely for production of product ordered
by Bay unless authorized by both Bay and its supplier. All pricing and COGS
information of Bay and FVC or their suppliers shall be considered confidential
information and subject to Section 12 of the Agreement.
[*]--CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
2.
<PAGE> 3
2.4 PRODUCT CHANGES AND DISCONTINUANCE
FVC shall notify Bay Networks 90 days prior to the discontinuation of
any FVC product which Bay has the right to acquire under the Agreement.
FVC shall notify Bay Networks 90 days prior to, or as soon as FVC
becomes aware of, any material changes, software revision changes, and
hardware revision changes to any FVC product which Bay has the right to
acquire under the Agreement. In the event Bay Networks is in possession
of FVC product which has been deemed by FVC to require mandatory rework
for any reason, FVC shall rework all affected product and assume
responsibility for the associated cost of the rework as part of standard
warranty to Bay.
2.5 PAYMENT FOR PRODUCTS
Section 2.6 of the Agreement shall be modified such that until February
1, 1998, payment for the products shall be due within 15 days following
Bay's receipt of both the products and the proper invoice for the
products.
2.6 EXTENSION OF AGREEMENT
Unless earlier terminated in accordance with the terms, the Agreement
shall continue for an additional one year period ending November 3,
1998.
2.7 GOOD FAITH NEGOTIATIONS
The parties agree that they shall enter into good faith negotiations and
use all reasonable efforts to reach agreement within the next 120 days
with respect to further modification of the Agreement in the following
areas:
Upside and downside flexibility percentages related to "month 2" of
Bays forecast;
Warranty and repair and duration;
Safety Stock;
Technical Assistance, Support and Training;
Additional methods of COGS reductions and margin improvements; targets
and methodologies.
3 PRECEDENCE
In the event of conflict between this Fourth Amendment and the Agreement,
Amendment 1, Amendment 2 or Amendment 3, this Fourth Amendment shall take
precedence.
First Virtual Corporation Bay Networks, Inc.
/s/ JAMES N. NIELSEN /s/ WILLIAM R. SNOW
- ---------------------------------- -----------------------------------
Authorized Signature Authorized Signature
James N. Nielsen, VP Marketing William R. Snow, Vice President
- ---------------------------------- -----------------------------------
Printed Name and Title Printed Name and Title
3.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-1 of our report dated
October 22, 1997 relating to the Financial Statements of First Virtual
Corporation, which appears in such Prospectus. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
San Jose, California
November 3, 1997
