<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 1998
REGISTRATION NO. 333-38755
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
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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DELAWARE 3576 77-0357037
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) 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
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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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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
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 , 1998
LOGO
2,400,000 SHARES
COMMON STOCK
Of the 2,400,000 shares of Common Stock offered hereby, 2,220,000 are being
sold by First Virtual Corporation ("First Virtual" or the "Company") and 180,000
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 $12.00 and $14.00 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(1) COMPANY(2) STOCKHOLDERS
- -----------------------------------------------------------------------------------------------------------------
Per Share.................... $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
Total(3)..................... $ $ $ $
=================================================================================================================
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $1,100,000.
(3) 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 , 1998.
BANCAMERICA ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
The date of this Prospectus is , 1998
<PAGE> 3
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."
<PAGE> 4
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............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 28
Management.................................................. 41
Certain Transactions........................................ 50
Principal and Selling Stockholders.......................... 51
Description Of Capital Stock................................ 53
Shares Eligible For Future Sale............................. 55
Underwriting................................................ 57
Legal Matters............................................... 59
Experts..................................................... 59
Change of Accountants....................................... 59
Additional Information...................................... 59
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
reincorporated in Delaware in December 1997. The Company's executive offices are
located at 3393 Octavius Drive, Santa Clara, California 95054, and its telephone
number is (408) 567-7200.
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<PAGE> 5
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 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 Internet
video networking solution for the Next Generation Internet ("NGI") that
integrates video with voice and data, while leveraging existing network
infrastructures. The Company combines its expertise in real-time network systems
and video technology to extend the capabilities of Quality of Service ("QoS")
across existing network architectures, including Internet Protocol ("IP"),
Asynchronous Transfer Mode ("ATM") and Ethernet. A network based on an
architecture that supports QoS can simultaneously carry multiple video streams,
as well as voice and data. First Virtual's broad product line enables it to
deliver end-to-end solutions for a wide range of NGI applications, such as
distance learning, telemedicine, video marketing and video manufacturing. A
critical element of the Company's technology is its Multimedia Operating
Software ("MOS"), designed to guarantee network resources for real-time video
applications in the presence of voice and bursts of data packets on any network
capable of supporting QoS. The Company's high quality, easy-to-use video
networking systems are scaleable to multiple locations and thousands of users.
First Virtual's solution addresses its customers' requirement for high quality
interactive visual communications through a broad range of Internet video server
and video access products.
The Internet was originally designed to support delay-tolerant data
transmission applications such as electronic mail. Until recently, the limited
bandwidth and QoS capabilities of this "first generation" Internet did not
support the implementation of interactive visual applications. The enhanced
communication enabled by interactive visual applications such as Internet video
networking can provide significant benefits in a broad range of environments.
These include distance learning, telemedicine, video marketing and video
manufacturing. As a result, the need for a "next generation" Internet to enable
end users at remote locations to learn and work across networks -- interactively
and in real time -- is becoming widely accepted. In response, network managers
have begun to implement Internet and Intranet networks with the considerably
greater bandwidth and support for QoS required to enable Internet video
networking applications. The Company collectively defines these implementations
of advanced networking infrastructures as the NGI. Current NGI implementations
include statewide ATM networks, campus and enterprise ATM backbones and ATM wide
area networks ("WANs") using T1, DS3 and OC3 links.
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 ("BANI"), British Telecommunications plc ("BT"),
Clover Communications, Inc., France Telecom, IBM Global Services, NEC
Corporation and Nippon Telephone and Telegraph ("NTT"). The Company has also
built a network of international distributors 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
government agencies, such as Virginia Tech (distance learning facilities); IBM
(headquarters facility in Armonk, New York); Peregrine Incorporated
(headquarters and multiple manufacturing facilities); and Shanghai Infoport
(government metropolitan network). In addition, the Company has recently
licensed technology from IBM to facilitate broadcast quality Internet video over
the NGI.
4
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THE OFFERING
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Common Stock offered by the Company..... 2,220,000 shares
Common Stock offered by the Selling
Stockholders.......................... 180,000 shares
Common Stock outstanding after the 15,050,627 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."
Nasdaq National Market symbol........... FVCX
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SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
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<CAPTION>
OCTOBER 20, 1993
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------
1993 1994 1995 1996 1997
---------------- ------- ------- ------- -------
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ -- $ -- $ 3,670 $12,093 $18,771
Cost of revenues............................ -- -- 2,874 6,547 10,466
------ ------- ------- ------- -------
Gross profit.............................. -- -- 796 5,546 8,305
------ ------- ------- ------- -------
Operating expenses:
Research and development.................. 16 1,208 2,582 2,930 5,420
Selling, general and administrative....... 56 1,419 3,603 4,886 6,997
------ ------- ------- ------- -------
Total operating expenses(2)....... 72 2,627 6,185 7,816 12,417
------ ------- ------- ------- -------
Loss from operations........................ (72) (2,627) (5,389) (2,270) (4,112)
Other income (expense), net................. -- 46 79 27 (216)
------ ------- ------- ------- -------
Net loss.................................... $ (72) $(2,581) $(5,310) $(2,243) $(4,328)
====== ======= ======= ======= =======
Basic net loss per share(3)................. -- $(13.95) $ (5.30) $ (1.14) $ (1.44)
Diluted net loss per share(3)............... -- $(13.95) $ (5.30) $ (1.14) $ (1.44)
Shares used in basic net loss per share
calculations(3)........................... -- 185 1,001 1,974 3,012
Shares used in diluted net loss per share
calculations(3)........................... -- 185 1,001 1,974 3,012
</TABLE>
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<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------------
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
-------- ------------ --------------
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 2,500 $ 2,500 $ 25,052
Working capital...................................... 1,891 1,891 26,451
Total assets......................................... 11,104 11,104 33,656
Total debt........................................... 3,466 3,466 278
Convertible preferred stock.......................... 8 -- --
Accumulated deficit.................................. (14,534) (14,534) (14,534)
Total stockholders' equity........................... 1,909 1,909 27,649
</TABLE>
- ---------------
(1) Based on 12,830,627 shares outstanding as of March 31, 1998. Excludes
2,394,103 and 185,936 shares issuable upon exercise of outstanding options
and warrants at weighted average exercise prices of $5.60 and $8.00 per
share, respectively. Excludes an additional 1,529,216 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 and $1.1 million for the years ended December 31, 1996 and 1997,
respectively
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net loss per share. Supplemental net loss per share
assuming $3.2 million in outstanding debt had been repaid at January 1, 1997
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 $13.00 (less underwriting discounts and
commissions), would be $1.27 for the year ended December 31, 1997.
(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 2,220,000 shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $13.00 per share. See "Use of
Proceeds."
5
<PAGE> 7
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
December 31, 1997, the Company had an accumulated deficit of $14.5 million. In
addition, as of December 31, 1997, the Company had gross deferred tax assets of
approximately $5.8 million, consisting primarily of net operating loss
carryforwards. 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 it is
more likely than not that the Company will not be able to realize its deferred
tax assets, and thus a full valuation reserve has been recorded as of December
31, 1997. 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. Revenues increased during
each of the quarters in 1997, due primarily to higher revenues from large end
user projects sold through Bay Networks in the OEM channel. There can be no
assurance that revenues will continue to increase on a quarterly basis or at
all. 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
6
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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 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 ATM BACKBONE TECHNOLOGY AND THE NEXT GENERATION INTERNET
Although ATM is becoming widely adopted as the backbone technology for NGI
networks, video networking over ATM networks is still an emerging market and the
NGI is still emerging. The Company currently derives a significant amount of its
revenues from its video networking products that function over the NGI and 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, as well as on the widespread emergence of
the NGI. 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 or in the event of the failure to achieve widespread
emergence of the NGI on a timely basis, or at all, the Company's business,
financial condition and results of operations could be materially adversely
affected.
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
year ended December 31, 1997, Bay Networks was the Company's most significant
OEM, representing 64% 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
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<PAGE> 9
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. In addition, in February
1998, the Company entered into a reference selling agreement with International
Business Machines ("IBM") pursuant to which IBM will refer customers to FVC or
recommend that FVC contact a particular customer. The Company expects, based on
its past experience, that new distribution relationships, such as the Nortel
relationship and the reference selling relationship with IBM, 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 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.
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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, 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 products for
Ethernet/IP-based networks, such as the V-Gate 323, 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 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
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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 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 video access 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 interactive video 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 compete
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 interactive video 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
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business combinations, resulting in competitors with larger market shares,
customer bases, sales forces, product offerings and technology and marketing
expertise.
The Company's principal method of competition is product performance. 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. There can be no assurance that the Company
will be able to compete effectively on these bases.
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 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. The Company's products are currently in compliance
with applicable regulatory requirements. However, there can be no assurance that
such regulatory requirements will not in the future impose additional or
different regulations or standards on sales of the Company's products. 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, or a delay
in or failure to comply with applicable regulatory requirements, 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 specifica-
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tions 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
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 PCB Assembly Corporation ("PCB"), 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
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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 75 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 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
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<PAGE> 15
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, although the
Company currently carries product liability insurance in the aggregate amount of
$2 million, there can be no assurance that such insurance would be adequate in
the event of a product liability claim brought against the Company as a result
of any such defects or that the Company will be able to maintain such insurance.
A product liability claim brought against the Company could have a material
adverse effect upon the Company's business, financial condition and results of
operations. 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% and 20% of
the Company's revenues for the years ended December 31, 1996 and 1997,
respectively. 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 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
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<PAGE> 16
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 7,636,657, or 49.9%,
of the outstanding shares of Common Stock (48.7% 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."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
This offering will provide substantial benefits to current stockholders of
the Company. Consummation of this offering is expected to create a public market
for the Common Stock held by the Company's current stockholders, including
directors and executive officers of the Company. Current stockholders paid
approximately $15.7 million for an aggregate of approximately 12,830,627 shares
of Common Stock as of March 31, 1998, of which the Company's directors,
executive officers and their respective affiliates beneficially own
approximately 7,671,657, or 58.6%, of the outstanding Common Stock prior to this
offering. This offering will result in a combined gross unrealized gain (not
including any realized gain by any such persons as Selling Stockholders) to such
stockholders in the aggregate amount of approximately $148.8 million, assuming
an initial public offering price of $13.00 per share. See "-- Absence of Prior
Public Market; Volatility of Stock Price," and "Dilution."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW
Upon completion of this offering, the Company's Board of Directors will
have 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 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
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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. 12,505,006 shares and an additional 691,504 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 145,621 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.
Additionally, 854,158 of the outstanding shares, that would otherwise be
eligible for sale as set forth above, are contractually restricted shares
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 10,749,153 shares of Common Stock and
warrants to purchase 185,936 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. 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
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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 $13.00 per share, investors purchasing shares of Common Stock in this
offering will incur immediate, substantial dilution of $11.17 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 leases prohibit the payment of dividends without the
consent of the respective lenders. See "Dividend Policy."
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs and
operating systems in its internal operations. The use of computer programs that
rely on two-digit date programs to perform computations and decision-making
functions may cause computer systems to malfunction in the year 2000 and lead to
significant business delays and disruptions. While the Company believes that its
software applications are year 2000 compliant, to the extent that these software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year 2000, some level of modification or possible replacement
of such source code or applications will be necessary. The Company is still
analyzing its software applications and, to the extent they are not fully year
2000 compliant, the costs necessary to update software or potential systems
interruptions may have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that the Company's suppliers and vendors are or will be year 2000
compliant. Failure of the Company's suppliers and vendors to achieve year 2000
compliance could have a material adverse effect on the Company's business,
financial condition and results of operations.
17
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be $25.7 million ($30.1 million if the
underwriters' over-allotment option is exercised in full) at an assumed initial
public offering price of $13.00 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 $5.2 million of the net proceeds
of the offering for the repayment of outstanding indebtedness, including $1.1
million to repay indebtedness to Hambrecht & Quist Guaranty Finance, LLC. See
"Underwriting." 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 leases prohibit the payment of
dividends without the respective lenders' consent.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth as of December 31, 1997, (i) actual
capitalization of the Company as of December 31, 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 2,220,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $13.00 per share,
after deduction of underwriting discounts and estimated offering expenses
payable by the Company, and the application of the estimated net proceeds
therefrom to repay borrowings outstanding as of December 31, 1997 of $3.2
million ($5.2 million as of March 31, 1998). 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>
DECEMBER 31, 1997
--------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
-------- ------------ -----------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term debt and line of
credit............................................. $ 2,154 $ 2,154 $ 146
======== ============ ===========
Long-term debt, less current portion................. $ 1,312 $ 1,312 $ 132
-------- ------------ -----------
Stockholders' equity(2):
Convertible Preferred Stock, $.001 par value;
10,000,000 shares authorized, actual; 5,000,000
authorized pro forma and as adjusted; 8,040,153
shares issued and outstanding, actual; no shares
issued and outstanding, pro forma and as
adjusted........................................ 8 -- --
Common Stock, $.001 par value; 30,000,000 shares
authorized, actual; 35,000,000 pro forma and as
adjusted; 4,824,684 shares issued and
outstanding, actual; 12,864,837 shares issued
and outstanding, pro forma; 15,084,837 shares
issued and outstanding, as adjusted............. 5 13 15
Additional paid-in capital...................... 17,267 17,267 43,005
Notes receivable from stockholders.............. (837) (837) (837)
Accumulated deficit............................. (14,534) (14,534) (14,534)
-------- ------------ -----------
Total stockholders' equity................. 1,909 1,909 27,649
-------- ------------ -----------
Total capitalization....................... $ 3,221 $ 3,221 $ 27,781
======== ============ ===========
</TABLE>
- ---------------
(1) Gives effect to the conversion of all outstanding Preferred Stock into
Common Stock.
(2) Excludes as of December 31, 1997, 2,129,798 and 60,936 shares issuable upon
exercise of outstanding options and warrants at weighted average exercise
prices of $5.71 (5.21 after giving effect to the cancellation and
replacement of certain options in February 1998) and $8.00 per share,
respectively. Excludes as of December 31, 1997, an additional 1,759,311
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, 8 and 10 of Notes to Consolidated Financial Statements.
19
<PAGE> 21
DILUTION
The pro forma net tangible book value of the Company as of December 31,
1997 was approximately $1,909,000, or $0.15 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 December 31, 1997, other than to give effect
to the receipt by the Company of the estimated net proceeds from the sale of
2,220,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $13.00 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 December 31, 1997,
would have been $27.6 million, or $1.83 per share, respectively. This represents
an immediate increase in the pro forma net tangible book value of $1.68 per
share to existing stockholders and an immediate dilution of $11.17 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............. $13.00
Pro forma net tangible book value per share before
offering............................................... $0.15
Increase per share attributable to new public
investors(1)........................................... 1.68
-----
Pro forma net tangible book value per share after
offering.................................................. 1.83
------
Dilution per share to new public investors.................. $11.17
======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1997, the difference between existing stockholders and purchasers of shares in
the offering (at an assumed initial public offering price of $13.00 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)......... 12,864,837 85.3% $15,717,000 35.3% $ 1.22
New public investors(2).......... 2,220,000 14.7 28,860,000 64.7 $13.00
---------- ----- ----------- -----
Total.................. 15,084,837 100.0% $44,577,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Excludes as of December 31, 1997, 2,129,798 and 60,936 shares issuable upon
exercise of outstanding options and warrants at weighted average exercise
prices of $5.71 (5.21 after giving effect to the cancellation and
replacement of certain options in February 1998) and $8.00 per share,
respectively. Excludes as of December 31, 1997, an additional 1,759,311
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, 8 and 10 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 12,684,837 shares, or approximately
84.1% 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 15.9%, of the total shares of Common Stock outstanding
after the offering. See "Principal and Selling Stockholders."
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data presented below for each of
the years ended December 31, 1995, 1996 and 1997 and the selected consolidated
balance sheet data as of December 31, 1996 and 1997 are derived from, and are
qualified by reference to, the consolidated financial statements of the Company
included elsewhere in this Prospectus. The consolidated statement of operations
data for the year ended December 31, 1994 and the selected consolidated balance
sheet data as of December 31, 1994 and 1995 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 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>
OCTOBER 20, 1993
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------
1993 1994 1995 1996 1997
---------------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ -- $ -- $ 3,670 $12,093 $18,771
Cost of revenues............................ -- -- 2,874 6,547 10,466
------ ------- ------- ------- -------
Gross profit.............................. -- -- 796 5,546 8,305
------ ------- ------- ------- -------
Operating expenses:
Research and development.................. 16 1,208 2,582 2,930 5,420
Selling, general and administrative....... 56 1,419 3,603 4,886 6,997
------ ------- ------- ------- -------
Total operating expenses(1)....... 72 2,627 6,185 7,816 12,417
------ ------- ------- ------- -------
Loss from operations........................ (72) (2,627) (5,389) (2,270) (4,112)
Other income (expense), net................. -- 46 79 27 (216)
------ ------- ------- ------- -------
Net loss.................................... $ (72) $(2,581) $(5,310) $(2,243) $(4,328)
====== ======= ======= ======= =======
Basic net loss per share(2)................. -- $(13.95) $ (5.30) $ (1.14) $ (1.44)
Diluted net loss per share(2)............... -- (13.95) (5.30) (1.14) (1.44)
Shares used in basic net loss per share
calculations(2)........................... -- 185 1,001 1,974 3,012
Shares used in diluted net loss per share
calculations(2)........................... -- 185 1,001 1,974 3,012
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
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 $ 2,500
Working capital........................ 417 2,410 1,452 1,046 1,891
Total assets........................... 492 2,998 4,516 5,432 11,104
Total debt............................. -- -- 392 1,312 3,466
Accumulated deficit.................... (72) (2,653) (7,963) (10,206) (14,534)
Total stockholders' equity............. 465 2,619 2,017 2,074 1,909
</TABLE>
- ---------------
(1) Operating expenses include non-cash employee stock compensation charges of
$339,000 and $1.1 million for the years ended December 31, 1996 and 1997,
respectively.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net loss per share. Supplemental net loss per share
assuming $3.2 million in outstanding debt had been repaid at January 1, 1997
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 $13.00 (less underwriting discounts and
commissions), would be $1.27 for the year ended December 31, 1997.
21
<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 reincorporated in Delaware in December 1997. 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 December 31, 1997, had an accumulated deficit of
$14.5 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 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 64% of the Company's revenues in 1996 and 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 price protection upon revenue recognition. To date,
returns and charges for price protection have not been material.
22
<PAGE> 24
Direct sales from shipments to customers outside of North America accounted
for approximately 36.0% and 20.0% of the Company's revenues in 1996 and 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 statements of operations as a percentage of total revenues for the
periods indicated. The data set forth below should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues............................................... 100.0% 100.0% 100.0%
Cost of revenues....................................... 78.3 54.1 55.8
------- ------ ------
Gross margin......................................... 21.7 45.9 44.2
------- ------ ------
Operating expenses:
Research and development............................. 70.4 24.2 28.9
Selling, general and administrative.................. 98.2 40.4 37.2
------- ------ ------
Total operating expenses..................... 168.6 64.6 66.1
------- ------ ------
Loss from operations................................... (146.9) (18.7) (21.9)
Other income (expense), net............................ 2.2 0.2 (1.2)
------- ------ ------
Net loss............................................... (144.7)% (18.5)% (23.1)%
======= ====== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenues. Revenues increased 55.2%, from $12.1 million in 1996 to $18.8
million in 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 236.0%, from $3.5
million in 1996 to $11.9 million in 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.
Gross profit increased 49.7%, from $5.5 million in 1996 to $8.3 million in
1997. Gross margin (gross profit as a percentage of revenues) remained
relatively constant, decreasing from 45.9% in 1996 to 44.2% in 1997.
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 85.0%, from $2.9 million in 1996 to
$5.4 million in 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
23
<PAGE> 25
increased from $174,000 in 1996 to $506,000 in 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
43.2%, from $4.9 million in 1996 to $7.0 million in 1997. As a percentage of
total revenues, selling, general and administrative expenses decreased from
40.4% in 1996 to 37.2% in 1997. The increase in absolute dollars 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 $165,000 in 1996 to
$631,000 in 1997. The decrease as a percentage of revenues was due to the
increase in revenues in 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 December 31, 1997, the Company had net operating loss
carryforwards for federal tax purposes of approximately $13.0 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 December 31, 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 December 31, 1997.
YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenues. 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
$2.6 million in 1995 to $2.9 million in 1996. The increases in research and
development expenses 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 $3.6 million in 1995 to $4.9 million in 1996. The
increases in selling, general and administrative expenses 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.
24
<PAGE> 26
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
eight quarters in the two years ended December 31, 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, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 1,569 $2,483 $4,099 $3,942 $ 2,730 $ 3,413 $ 4,980 $7,648
Cost of revenues.............. 907 1,386 2,418 1,836 1,577 1,898 3,002 3,989
------- ------ ------ ------ ------- ------- ------- ------
Gross profit................ 662 1,097 1,681 2,106 1,153 1,515 1,978 3,659
------- ------ ------ ------ ------- ------- ------- ------
Operating expenses:
Research and development.... 619 712 758 841 953 1,252 1,544 1,671
Selling, general and
administrative............ 1,070 1,201 1,096 1,519 1,350 1,598 2,030 2,019
------- ------ ------ ------ ------- ------- ------- ------
Total operating
expenses(1)........ 1,689 1,913 1,854 2,360 2,303 2,850 3,574 3,690
------- ------ ------ ------ ------- ------- ------- ------
Loss from operations.......... (1,027) (816) (173) (254) (1,150) (1,335) (1,596) (31)
Other income (expense), net
............................ 5 11 0 11 (16) (35) (96) (69)
------- ------ ------ ------ ------- ------- ------- ------
Net loss...................... $(1,022) $ (805) $ (173) $ (243) $(1,166) $(1,370) $(1,692) $ (100)
======= ====== ====== ====== ======= ======= ======= ======
</TABLE>
- ---------------
(1) Operating expenses include non-cash employee stock compensation charges of
$25,000, $56,000, $102,000, $156,000, $139,000, $112,000, $758,000 and
$128,000 during the quarters ended March 31, 1996, June 30, 1996, September
30, 1996, December 31, 1996, March 31, 1997, June 30, 1997 September 30,
1997 and December 31, 1997, respectively.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 100.0% 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 52.2
------ ------ ------ ------ ------ ------ ------ ------
Gross margin................ 42.2 44.2 41.0 53.4 42.2 44.4 39.7 47.8
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development.... 39.5 28.7 18.5 21.3 34.9 36.7 31.0 21.8
Selling, general and
administrative............ 68.2 48.4 26.7 38.5 49.5 46.8 40.8 26.4
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses........... 107.7 77.1 45.2 59.8 84.4 83.5 71.8 48.2
------ ------ ------ ------ ------ ------ ------ ------
Loss from operations.......... (65.5) (32.9) (4.2) (6.4) (42.2) (39.1) (32.1) (0.4)
Other income (expense), net... 0.3 0.4 -- 0.3 (0.6) (1.0) (1.9) (0.9)
------ ------ ------ ------ ------ ------ ------ ------
Net loss...................... (65.2)% (32.5)% (4.2)% (6.1)% (42.8)% (40.1)% (34.0)% (1.3)%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
25
<PAGE> 27
Revenues increased during each of the first three 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 each
of the quarters in 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. During the quarter
ended December 31, 1997, gross margins improved primarily due to shipments of
certain higher 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 1997, the Company is recognizing compensation charges of $2.1
million. The Company recognized $339,000 and $1.1 million of the compensation
charges in 1996 and 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.
YEAR 2000 COMPLIANCE
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
computer systems to malfunction in the year 2000 and lead to significant
business delays and disruptions. First Virtual has addressed the issue of year
2000 compliance in both its internal information systems and its products. The
Company also has made inquiries regarding the year 2000 issue of its suppliers
and vendors. Based upon such inquiries, the Company does not believe year 2000
compliance issues will have a material adverse impact upon its business.
However, failure of the Company's suppliers and vendors to achieve year 2000
compliance could have a material adverse effect on the Company's business,
financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through December 31, 1997, the Company has financed its
operations primarily through private placements of equity securities, raising an
aggregate of approximately $14.8 million, net of issuance costs. As of December
31, 1997, the Company had cash and cash equivalents of $2.5 million and working
capital of $1.9 million.
The Company has used cash in its operating activities primarily to fund
losses of $14.5 million incurred through December 31, 1997, and to finance its
working capital needs.
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 December 31, 1997, the Company's capital
expenditures aggregated $1.4 million and have consisted primarily of purchases
of computers, related equipment, furniture and fixtures.
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<PAGE> 28
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 December 31, 1997) plus 0.75%, are
secured by certain assets of the Company and are limited to certain percentages
of the Company's accounts receivable and inventory balances. As of December 31,
1997, borrowings under this line aggregated $1.3 million ($2.2 million as of
March 31, 1998) and an additional approximately $500,000 was available to the
Company. 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 December 31, 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 December 31, 1997.
In February 1998, the Company agreed in principle to enter into a
transaction with Hambrecht & Quist Guaranty Finance, LLC ("Guaranty Finance"),
whereby Guaranty Finance would loan the Company up to $5 million. Under the
related agreements which were executed on March 12, 1998, (i) Guaranty Finance
agreed to lend the Company up to $5 million at an interest rate of 12% per
annum, $1.1 million of which was loaned to the Company on March 13, 1998 (the
"Loan") and (ii) Guaranty Finance purchased from the Company for $1,250 a
warrant to purchase 125,000 shares of the Company's Common Stock at a purchase
price of $8.00 per share. The Company has an option to repurchase up to 62,500
shares dependent on the level of borrowings over the term of the financing
arrangement. The warrant is exercisable through March 1, 2003. The Company paid
a $100,000 fee to Guaranty Finance in consideration for entering into the
aforementioned loan transaction.
The Company anticipates that $5.2 million of the net proceeds of this
offering will be used to pay its outstanding indebtedness, including $2.2
million for borrowings under the working capital line of credit and $1.1 million
for the outstanding balance of the Loan.
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 Internet
video networking solution for the Next Generation Internet that integrates video
with voice and data, while leveraging existing network infrastructures. The
Company combines its expertise in real-time network systems and video technology
to extend the capabilities of QoS across existing network architectures,
including IP, ATM and Ethernet. A network based on an architecture that supports
QoS can simultaneously carry multiple video streams, as well as voice and data.
First Virtual's broad product line enables it to deliver end-to-end solutions
for a wide range of NGI applications, such as distance learning, telemedicine,
video marketing and video manufacturing. A critical element of the Company's
technology is its MOS software, designed to guarantee network resources for
real-time video applications in the presence of voice and bursts of data packets
on any network capable of supporting QoS. The Company's high quality,
easy-to-use video networking systems are scaleable to multiple locations and
thousands of users. First Virtual's solution addresses its customers'
requirement for high quality interactive visual communications through a broad
range of Internet video server and video access products.
The Internet was originally designed to support delay-tolerant data
transmission applications such as electronic mail. Until recently, the limited
bandwidth and QoS capabilities of this "first generation" Internet did not
support the implementation of interactive visual applications. The enhanced
communication enabled by interactive visual applications such as Internet video
networking can provide significant benefits in a broad range of environments.
These include distance learning, telemedicine, video marketing and video
manufacturing. As a result, the need for a "next generation" Internet to enable
end users at remote locations to learn and work across networks -- interactively
and in real time -- is becoming widely accepted. In response, network managers
have begun to implement Internet and Intranet networks with the considerably
greater bandwidth and support for QoS required to enable Internet video
networking applications. The Company collectively defines these implementations
of advanced networking infrastructures as the NGI. Current NGI implementations
include statewide ATM networks, campus and enterprise ATM backbones and ATM WANs
using T1, DS3 and OC3 links.
The Company has global OEM relationships with Bay Networks and Nortel and
has established relationships with a number of VARs and systems integrators,
including BANI, BT, Clover Communications, Inc., France Telecom, IBM Global
Services, NEC Corporation and NTT. The Company has also built a network of
international distributors 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 government agencies,
such as Virginia Tech (distance learning facilities); IBM (headquarters facility
in Armonk, New York); Peregrine Incorporated (headquarters and multiple
manufacturing facilities); and Shanghai Infoport (government metropolitan
network). In addition, the Company has recently licensed technology from IBM to
facilitate broadcast quality Internet video over the NGI.
INDUSTRY BACKGROUND
In recent years, deployment of the communications infrastructure that
constitutes the Internet has evolved to meet the requirements of new and
emerging Internet applications. The Internet was originally designed to support
delay-tolerant data transmission applications such as electronic mail. Until
recently, the limited bandwidth and QoS capabilities of this "first generation"
Internet did not support the delivery of applications such as interactive visual
communications. Specifically, because the technologies employed by first
generation Internet infrastructure were unable to differentiate between bursty
data transmissions and broadcast video streams, the first generation Internet
could not support high quality video networking applications. This situation
limited the deployment and use of interactive applications that allow end users
to simultaneously utilize high quality video and data applications.
The need for a "next generation" Internet to enable end users at remote
locations to work and learn across the network -- interactively and in real
time -- is becoming widely accepted. The
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enhanced communication enabled by high quality video networking can provide
significant benefits in a broad range of environments. All levels of educational
institutions can utilize distance learning facilities to enable experts to teach
in any classroom. Businesses can hold high quality, face-to-face meetings
without time consuming travel. Sales professionals can deliver presentations to
prospective customers in many cities in a single day. Hospitals can deploy
telemedicine to enable a team of doctors in different locations to diagnose and
treat patients remotely. Manufacturing companies can achieve efficiencies by
offering real-time instruction and support for workers on the factory floor.
Network managers have responded to the need to implement these types of
applications by deploying Intranet and Internet networks with considerably
greater support for bandwidth and QoS. Additional bandwidth permits greater
application scaleability and QoS provides the predictable latency essential for
quality Internet video. Bell Atlantic, driven by demands for multi-service
networks, incorporated voice, data and video capabilities into its core network
infrastructure. Similarly, the Federal Government has provided funding since
early 1997 for the deployment of a next generation Internet for applications
such as distance learning. Additionally, Internet2, an Internet Engineering Task
Force initiative, has provided new ways to implement QoS in an Internet Protocol
("IP") environment. Further, corporations are implementing high bandwidth
QoS-capable, video-enabled Intranets for learning and working in real time
across their networks. Together, these implementations of advanced networking
initiatives comprise what the Company defines as the NGI.
The initial NGI networks are being deployed as statewide ATM networks.
ATM-based transport for WANs allows implementation of high bandwidth networks
based on architectures that support QoS, simultaneous multiple video streams,
voice and data. Local area networks ("LANs") are typically based on Ethernet
running the IP protocol and provide a means of connecting end-user equipment
onto the NGI.
To achieve broad market acceptance, a video networking solution for the NGI
must offer high quality interactive video and access to live and stored video
while seamlessly integrating voice and data traffic. An effective video
networking solution must also be scaleable, easy to use, cost-effective, and
leverage an organization's existing investment in video equipment and in other
network infrastructures, including the ability to extend ATM QoS characteristics
to Ethernet and IP networks.
FIRST VIRTUAL'S SOLUTION
First Virtual provides a high quality, cost-effective video networking
solution for the NGI that integrates video with voice and data, while leveraging
existing network infrastructures. A critical element of First Virtual's
technology is its MOS software, designed to guarantee network resources for
real-time video applications in the presence of voice and bursts of data packets
on any network capable of supporting QoS. The Company combines its expertise in
real-time network systems and video technology to extend the capabilities of QoS
across existing network architectures, including IP, ATM and Ethernet. First
Virtual's broad product line enables it to deliver end-to-end solutions for a
wide range of NGI applications, such as distance learning, telemedicine, video
marketing and video manufacturing. First Virtual's high quality, easy-to-use
video networking systems are scaleable to multiple locations and thousands of
users. First Virtual's solution addresses its customers' requirement for high
quality interactive visual communications through a broad range of Internet
video server and video access products.
Internet Video Servers. -- the ability to deliver video services over
the network. First Virtual's video server products provide a range of
critical video services such as multicast, recording, storage and
translation over QoS-capable networks.
Internet Video Access -- the ability to connect interactive video
systems over the network. First Virtual's video access products enable
scaleable, cost-effective, high quality video collaboration by allowing the
efficient connection of desktop systems and traditional room-system
equipment, from vendors such as PictureTel Corporation ("PictureTel"),
Zydacron, Inc. ("Zydacron") and VTEL Corporation ("VTEL"), over a network
capable of supporting QoS.
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FIRST VIRTUAL'S STRATEGY
First Virtual's strategy is to enhance its leadership position in high
quality, cost-effective, video networking solutions in NGI Internet and Intranet
environments for education, business and governments, to 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 for the NGI and continue to gain market share
as demand for high quality Internet video increases.
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 interactive video equipment to operate on a wide range of
transmission standards such as IP, ISDN, T1/E1 and ATM. First Virtual's products
enable network managers to extend QoS across multiprotocol networks without
changes to interface cards or wiring. The Company has recently broadened its
product line to support IP/Ethernet networks and MPEG-II systems for broadcast
quality applications and is able to deliver high quality video over emerging
IP/SONET networks.
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 relationships with networking vendors, including Bay Networks,
IBM and Nortel, and vendors of interactive video equipment, such as PictureTel,
VideoServer, VTEL, and Zydacron. The Company has also established relationships
with network integrators, such as BANI and EDS, and 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, corporate and government marketplaces,
as well as for corporate meetings. These applications represent an attractive
market segment due to their growth rates and QoS-capable infrastructures. The
Company's marketing strategy is also oriented towards other vertical markets
that share these characteristics, such as telemedicine, video marketing and
real-time instruction and support. 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,
NEC 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 its high quality Internet video solution. The Company's video access products
facilitate the connection of traditional room-system and desktop video equipment
to NGI networks. The Company's video server products provide a range of critical
video services such as multicast, recording, storage and translation across NGI
architectures. 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 the
two product families developed by the Company: internet video servers and
internet video access.
LOGO
INTERNET VIDEO SERVER 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.
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."
V-Gate. The V-Gate joins interactive video systems connected via an ATM
network to an ISDN network. Connectivity to ISDN provides a widely accessible,
cost-effective means of communicating
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with others on remote networks. The V-Gate is able to operate at the higher data
rates required for very high quality video networking. The V-Gate supports T1/E1
Primary Rate and Basic Rate ISDN interfaces.
MOS Server Software. First Virtual's MOS server software is an integral
part of all of the Company's Internet video server products. The MOS server
software enables the server applications to access the QoS capabilities of NGI
networks.
V-MCU. The V-MCU is a highly specialized ATM attachment system specifically
architected to allow the connection of VideoServer's multi-point conferencing
unit ("MCU") directly to an ATM network. The V-MCU enables more than two
locations to participate in the same interactive video session.
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.
INTERNET VIDEO ACCESS PRODUCTS
V-Room. The V-Room attaches high-end room-system interactive video
equipment, such as the PictureTel Concorde, directly to an ATM network. The
ability to attach interactive video 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 interactive video 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") daughter cards to attach
video systems to the V-NIC. First Virtual has developed specific connectivity
solutions for the majority of the commercially available interactive video
systems, including those offered by Nortel, PictureTel, VCON Telecommunications
Ltd., VTEL and Zydacron.
Video Access Node ("VAN"). In October 1997, First Virtual entered into a
license agreement with IBM for IBM's VAN technology. This agreement has enabled
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.
MOS Client Software. First Virtual's MOS client software provides the means
of connecting client video applications to the QoS capabilities of NGI networks.
MOS supports Windows 95, Windows NT, OS/2 and Apple Macintosh operating systems.
MOS operates within popular web browsers such as Netscape Navigator and
Microsoft Internet Explorer.
V-Switch. The V-Switch is a 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 IP and ATM networks in the presence of voice and
bursts of data packets.
VSA-3000 V-NIC. The VSA-3000 is a low-cost ATM adapter card designed for
the IP video market.
V-Ether Module. The V-Ether is an Ethernet-to-ATM module for the V-Switch
that extends the QoS of ATM networks to IP/Ethernet clients. The V-Ether is
designed to provide high quality video from the Company's V-Cache and V-Caster
products to IP/Ethernet desktop clients.
PRODUCTS UNDER DEVELOPMENT
First Virtual is also developing additional products to further enhance its
leadership position as a provider of video products for the NGI, including the
following:
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V-Gate323. The V-Gate323 is designed to connect traditional interactive
video systems from manufacturers such as PictureTel, which use the H.320
standard, and systems which support the emerging H.323 standard for interactive
video on TCP/IP networks, including Microsoft's NetMeeting 2.0. The Company
expects to ship the V-Gate323 in the second quarter of 1998.
V-Locator. The V-Locator is a software application for Microsoft Windows NT
designed to enhance the ease-of-use of interactive video equipment. The
V-Locator enables fully interactive video sessions to be established between
network users with a simple "point and click" graphical user interface. The
V-Locator frees the user from the need to understand the operational
requirements of specific network video equipment, providing a consistent way of
making video calls from a wide variety of equipment. The Company expects to ship
the V-Locator in the second 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>
INTERNET VIDEO
SERVER PRODUCTS
V-Cache High speed disk storage 1995 $9,000 - $108,000 Supports MPEG-I and MPEG-II on ATM
system for video content and Ethernet clients for video-
on-demand applications.
V-Caster Live video broadcast on 1996 $26,400 - $32,000 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.
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.
V-MCU ATM to Multipoint 1997 $25,000 - $250,000 ATM-enabled VideoServer multipoint
Conferencing Unit conferencing system.
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.
INTERNET VIDEO
ACCESS PRODUCTS
V-Room ATM to room-system video 1997 $4,800 - $7,200 Supports H.320 room-systems on V.35
connectivity and X.21 interfaces. Supports H.320
MCU's from Lucent, BT and PictureTel.
V-NIC ATM Network Interface Card 1994 $495 - $6,000 Supports H.320 systems including
for attaching desktop/group- PictureTel: Live 100, Live 50, Live
system interactive video 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.
Video Access Node High-end video collaboration 1998 $44,000 Supports H.310 broadcast-quality
system video collaboration over ATM.
MOS Client Software Client QoS support and video 1995 $140 - $300 per Supports display of video-on-demand
application software user streams through the V-Player
application for Microsoft Windows 95
and NT. Supports the recording of
interactive video sessions to the
V-Cache via V-Recorder application.
V-Switch Switch system to connect 1995 $7,080 - $35,000 Supports modules for:
interactive video caching and ATM @ 25Mb/s
casting products ATM @ 155Mb/s
ATM @ T1
Ethernet/SNMP Management
VSA-3000 ATM NIC System for IP video 1997 $200 Supports WinSock-II and LANE.
V-Ether ATM to Ethernet module for 1998 $2,500 Supports display of high quality
V-Switch video on Ethernet clients.
FUTURE PRODUCTS
V-Gate323 H.320 - H.323 connectivity 1998 TBA Supports interactive video between
gateway H.320 and H.323 systems. Supports
PictureTel LiveLan 3.0 and Microsoft
NetMeeting 2.0.
V-Locator Enhance ease-of-use of 1998 TBA Supports interactive video from any
interactive video systems H.320 based system.
</TABLE>
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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 NGI 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 30 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)
Colorado University Miyagi University (Japan)
Old Dominion University Manchester Metropolitan
William Patterson University University (UK)
University of Massachusetts Ben Gurion University (Israel)
Virginia Tech Nice University (France)
School Districts
Bassett, California
Elizabeth Forward, Pennsylvania
Los Angeles, California
</TABLE>
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>
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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 statewide ATM-based NGI 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 NGI 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
$220,000. 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 interactive video 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 $700,000. 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 NGI 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.
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 sales force uses the Company's video technology
to directly qualify and stimulate end-user demand, as well as to manage the
Company's strategic relationships with its OEMs, VARs and systems integrators. 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 64% in 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 BANI, BT, Clover Communications, Inc., EDS, France Telecom, GTE
Corporation, NTT, IBM Global Services, Inc. and NEC Corporation.
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 France, operated by Tekelec Airtronic
GmbH; and First Virtual Asia, Korea and the United Kingdom, operated by private
36
<PAGE> 38
companies. In the years ended December 31, 1996 and 1997, approximately 36% and
20%, 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 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-Gate323 and First Virtual's V-Locator products.
The Company's research and development expenditures totaled $2.6 million,
$2.9 million and $5.4 million for the years ended December 31, 1995, 1996 and
1997, respectively. As of March 31, 1998, 35 full-time employees were engaged in
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
video access 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 interactive video area, the Company's
technology licensing agreement with IBM is intended to result in products which
may compete with
37
<PAGE> 39
products sold by companies such as Newbridge in the high-end H.310 interactive
video 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 also compete 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 interactive video 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.
The Company's principal method of competition is product performance. 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. There can be no assurance that the Company
will be able to compete effectively on these bases.
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."
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 PCB 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
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<PAGE> 40
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 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. 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 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
39
<PAGE> 41
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 March 31, 1998, the Company employed 71 individuals full-time. Of the
Company's total work force, 35 are engaged in engineering and research and
development activities, 15 are engaged in sales and marketing activities, and 21
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 25,200 square feet of facility
space in Santa Clara, California under two operating lease agreements, for
approximate monthly rental payments of $38,500. The terms of the leases expire
in August 1998. Rent expense under these facility leases for the year ended
December 31, 1997 was approximately $184,000. The Company believes that its
facilities will be adequate to meet the Company's needs for the foreseeable
future and is currently negotiating extensions of the leases.
40
<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
March 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ralph Ungermann 56 Chief Executive Officer, President and Director
James O. Mitchell 53 Vice President, Operations and Chief Financial Officer
Allwyn Sequeira 37 Vice President, Engineering and Chief Technical Officer
Alan J. McMillan 42 Vice President, Sales
James M. Nielsen 39 Vice President, Marketing
Neal M. Douglas(1) 39 Director
Pier Carlo Falotti 55 Director
David A. Norman(1) 62 Director
James R. Swartz(2) 55 Director
Enzo Torresi(2) 53 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., a computer networking company (now a
subsidiary of Newbridge Networks). Prior to his work at Ungermann-Bass, Mr.
Ungermann was the co-founder and Chief Operating Officer of Zilog, Inc., an
early leader in the microprocessor industry, where he introduced the Z80 product
line. 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
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<PAGE> 43
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 management 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 Netopia, 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 PictureTel Corporation. 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
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<PAGE> 44
qualification until the third annual meeting following election. In addition,
the Company's Certificate 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 accountants. 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 Non-Employee 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 years ended December 31, 1996 and 1997 to its President and
Chief Executive Officer and the Company's other executive officers who earned
more than $100,000 in salary and bonus during the fiscal year ended December 31,
1997 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
--------------------------- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Ralph Ungermann
Chairman, Chief Executive Officer
and President........................... 1997 $235,110 -- -- $4,770
1996 245,090 -- 300,000 5,400
James O. Mitchell
Vice President, Operations and Chief
Financial Officer....................... 1997 174,310 -- 25,000 2,440
1996 167,045 -- 66,666 2,440
Allwyn Sequeira
Vice President, Engineering and Chief
Technical Officer....................... 1997 197,884 -- 100,000 5,842
1996 120,947 $20,000 66,666 5,392
Alan J. McMillan
Vice President, Sales................... 1997 148,515 -- 15,000 2,200
1996 178,770 -- 66,666 2,378
James M. Nielsen
Vice President, Marketing............... 1997 137,939 -- 75,000 4,087
1996 22,119(2) -- 100,000 654
</TABLE>
- ---------------
(1) Represents insurance premiums paid by the Company with respect to group life
and health insurance for the benefit of the Named Executive Officer.
(2) Mr. Nielsen commenced employment with the Company in October 1996.
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<PAGE> 46
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED PRICE APPRECIATION FOR
UNDERLYING IN FISCAL EXERCISE OPTION TERM(4)
OPTIONS YEAR PRICE EXPIRATION -----------------------
NAME AND PRINCIPAL POSITION GRANTED(#)(1) (%)(2) ($/SH)(3) DATE 5%($) 10%($)
- --------------------------- ------------- --------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ralph Ungermann Chairman,
Chief Executive Officer
and President........... -- -- -- -- -- --
James O. Mitchell Vice
President, Operations and
Chief Financial
Officer................. 25,000 1.9% $11.00 09/24/07 $254,750 $ 566,750
Allwyn Sequeira Vice
President, Engineering
and Chief Technical
Officer................. 50,000 3.9 10.20 11/18/07 $549,500 $1,173,500
50,000 3.9 4.00 04/23/07 $859,500 $1,483,500
Alan J. McMillan Vice
President, Sales........ 15,000 1.2 11.00 09/24/07 $152,850 $ 340,050
James M. Nielsen Vice
President, Marketing.... 25,000 1.9 10.20 11/18/07 $224,350 $ 586,750
50,000 3.9 4.00 01/15/07 $859,500 $1,483,500
</TABLE>
- ---------------
(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 1,285,144 options granted to employees, consultants
and directors, including the Named Executive Officers, of the Company during
the fiscal year ended December 31, 1997 (includes 499,500 options which were
cancelled and replaced with lower-priced options in February 1998).
(3) The exercise price per share of each option was equal to 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 $13.00 per share
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price. The potential realizable value
computation is net of the applicable exercise price, but does not take into
account applicable federal or state income tax consequences and other
expenses of option exercises or sales of appreciated stock. Messrs.
Mitchell's, Sequeira's, McMillan's and Nielsen's options each have ten-year
terms.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND DECEMBER 31, 1997 OPTION VALUES
This table discloses the aggregate dollar value realized upon exercise of
stock options in the last fiscal year by the Named Executive Officers. For each
Named Executive Officer, the table also includes
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<PAGE> 47
the total number of unexercised options and the aggregate dollar value of
in-the-money unexercised options held at the end of the last completed fiscal
year, separately identifying the exercisable and unexercisable options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF IN-THE-MONEY
SHARES OPTIONS UNEXERCISED OPTIONS AS OF
ACQUIRED VALUE AS OF DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ON REALIZED --------------------------------- ---------------------------------
NAME EXERCISE # ($)(1) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
- --------------------- ----------- -------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Ralph Ungermann...... -- -- 86,072 213,928 882,228 3,075,000
James O. Mitchell 10,000 11,709 69,957 196,042 644,993
Allwyn Sequeira -- -- 31,052 135,614 308,148 1,289,993
Alan J. McMillan -- -- 47,539 19,127 200,833 699,993
James M. Nielsen 4,000 29,665 141,335 339,080 1,909,080
</TABLE>
- ---------------
(1) Based on the assumed initial public offering price of $13.00 per share,
minus the exercise price, multiplied by the number of shares underlying the
option.
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
March 31, 1998, the total number of authorized shares under the Incentive Plan
is 4,625,000 shares of Common Stock, of which approximately 1,178,466 shares
will be available for grant 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.
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
46
<PAGE> 48
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 March 31, 1998, 46,395 shares of Common Stock had been issued upon
the exercise of options granted under the 1996 Plans, options to purchase
2,344,103 shares of Common Stock at a weighted average exercise price of $5.48
were outstanding and 1,095,323 shares remained available for future grant under
the 1996 Plans. As of March 31, 1998, 3,235,079 shares (net of repurchases) of
Common Stock had been issued under the 1993 Plan and 59,921 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
47
<PAGE> 49
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% 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 March 31, 1998, 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.
1997 Restricted Stock Bonus Plan. In October 1997, the Board of Directors
of the Company adopted a stock bonus plan (the "1997 Restricted Stock Bonus
Plan"). The 1997 Restricted Stock Bonus Plan allows the Company to award Common
Stock to certain employees, directors, and consultants of the Company, in
consideration for services rendered to the Company. The 1997 Restricted Stock
Bonus Plan is administered by the Board, which determines recipients and the
terms of awards to be granted, including the number of shares subject to the
award.
Stock bonuses granted under the 1997 Restricted Stock Bonus Plan are
granted pursuant to a reacquisition option in favor of the Company, in
accordance with a vesting schedule. Rights under a stock bonus agreement may not
be transferred other than by will, the laws of descent and distribution or a
domestic relations order, during such period as the stock awarded pursuant to
such an agreement remains subject to a reacquisition option.
Upon certain changes in control of the Company, all outstanding awards
under the 1997 Restricted Stock Bonus Plan subject to a reacquisition option
shall either be assumed or substituted by the
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<PAGE> 50
surviving entity. If the surviving entity determines not to assume or substitute
such awards, then the awards subject to a reacquisition option shall be
terminated prior to such change in control.
There are currently an aggregate of 9,750 shares of Common Stock authorized
for issuance under the 1997 Restricted Stock Bonus Plan. Shares of Common Stock
subject to outstanding restricted stock bonus awards that have been reacquired
by the Company again become available for the grant of stock bonuses under the
plan. As of March 31, 1998, an aggregate of 9,000 shares of Common Stock,
subject to a repurchase option in favor of the Company, were outstanding
pursuant to the 1997 Restricted Stock Bonus Plan.
The 1997 Restricted Stock Bonus Plan will terminate upon the closing of the
offering.
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 or 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.
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<PAGE> 51
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 November 14, 1997, the Company issued an
aggregate of 1,351,778 shares of Series C Preferred Stock at a price per share
ranging from $4.00 to $11.00. Between August 29, 1996 and November 4, 1997, the
Company issued an aggregate of 488,375 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............ 353,750 -- -- 30,243 12,500 412,918
Allwyn Sequeira.............. 360,000 50,000 40,000 -- -- 107,750
Alan J. McMillan............. 177,250 -- -- 16,191 -- 174,646
James M. Nielsen............. 4,000 -- -- 218 -- 12,398
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 -- 30,333 5,000 -- 71,500
</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.
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<PAGE> 52
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998, after giving
effect to the conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this offering 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)................ 1,138,861 8.9% -- 1,138,861 7.6%
3000 Sand Hill Road
Suite 285
Building 7
Menlo Park, CA 94025
Entities Affiliated with Accel IV 2,288,861 17.8 2,288,861 15.2
L.P.(3).............................. --
One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Ralph Ungermann(4)..................... 2,708,236 20.9 25,000 2,683,236 17.7
James O. Mitchell(5)................... 415,736 3.2 -- 415,736 2.8
Allwyn Sequeira(6)..................... 495,940 3.9 10,000 485,940 3.2
Alan J. McMillan(7).................... 220,091 1.7 -- 220,091 1.5
James M. Nielsen(8).................... 52,849 * -- 52,849 *
Neal M. Douglas(2)..................... 1,138,861 8.9 -- 1,138,861 7.6
Pier Carlo Falotti(9).................. 91,361 * -- 91,361 *
David A. Norman(10).................... 143,028 1.1 -- 143,028 *
James R. Swartz(3)..................... 2,288,861 17.8 -- 2,288,861 15.2
Enzo Torresi(11)....................... 116,694 * -- 116,694 *
All directors and executive officers as 7,671,657 58.6 7,636,657 49.9
a group (10 persons)(12)............. 35,000
Other Selling Stockholders(13)......... 2,522,733 19.5 145,000 2,377,733 15.7
</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
12,830,627 shares of Common Stock outstanding as of March 31, 1998 and
15,650,627 shares of Common Stock outstanding after completion of this
offering.
(2) Includes 1,137,500 shares 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. Also includes 1,361 shares Mr.
Douglas has the right to acquire pursuant to an option exercisable within
60 days.
(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
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<PAGE> 53
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. Also includes
1,361 shares Mr. Swartz has the right to acquire pursuant to an option
exercisable within 60 days.
(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 110,737 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, 143,972 of which are subject to repurchase by the Company as of the
date hereof. Also includes 19,243 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, 61,827 of which are subject to repurchase by the Company as of the
date hereof. Also includes 45,940 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, 93,267 of which are subject to repurchase by the Company as of the
date hereof. Also includes 26,650 shares Mr. McMillan has the right to
acquire pursuant to an option exercisable within 60 days.
(8) Includes 48,631 shares Mr. Nielsen has the right to acquire pursuant to an
option exercisable within 60 days.
(9) Includes 1,361 shares Mr. Falotti has the right to acquire pursuant to an
option exercisable within 60 days.
(10) Includes 141,667 shares held in the name of David Arthur Norman and Mamie
R. Norman TTEE, Norman Family Revocable Trust, U/A DTD 8/20/87. Also
includes 1,361 shares Mr. Norman has the right to acquire pursuant to an
option exercisable within 60 days.
(11) Includes 1,361 shares Mr. Torresi has the right to acquire pursuant to an
option exercisable within 60 days.
(12) Includes 258,006 shares issuable upon exercise of options.
(13) Includes the following stockholders and the shares to be sold by such
stockholders in the offering: The Goldman Sachs Group, L.P. (29,547);
Kathryn M. Ungermann, Trustee or Successor Trustee of the Kathryn Mason
Ungermann Living Trust UAD May 18, 1988, as amended (34,208); Thomas J.
Leffingwell (10,000); Marlis Rossetta, Trustee or Successor Trustee under
the Marlis Rossetta Living Trust U/A/D April 28, 1995 (21,014); David G.
Norman (6,615); Luen-Wuu Wey (4,225); Mike L. Regli (1,000); Frank J. Chu
(5,030); Russell D. Erikson (2,955); Todd Wilde (2,880); Bill Gallmeister,
Trustee of the 1994 Gallmeister Family Trust (1,500); Mark S. Berkeland
(5,476); Hemant Vinchure (2,000); Michael Pham (1,500); Chris Lanier
(2,350); Birger Dalen (4,000); Michael Munoz (1,200); Alan Glowacki
(1,000); William B. Gunter (1,078); Patricia McBride (2,000); Michelle
LaVally, Trustee, The Jocelyn Jessica Williams Irrevocable Trust (1,000);
Steven Meredith (2,660); and Matthew J. Holley (1,762). Includes also
1,322,402 shares that certain Selling Stockholders acquired pursuant to
restricted stock awards, 265,783 of which are subject to repurchase by the
Company as of the date hereof. Also includes 77,862 shares that certain
Selling Stockholders have the right to acquire pursuant to options
exercisable within 60 days.
52
<PAGE> 54
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 March 31, 1998, there were 12,830,627 shares of Common Stock
outstanding held of record by 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 2,220,000 shares of Common
Stock offered by the Company hereby, there will be 15,050,627 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. Other than pursuant to the warrants described
in Note 7 of Notes to Consolidated Financial Statements, the Company has no
present plan to issue any shares of Preferred Stock.
WARRANTS
As of March 31, 1998, in connection with a capital equipment lease and loan
and security agreements, the Company had outstanding warrants to purchase 60,936
shares of Series D Preferred Stock, and an outstanding warrant to purchase
125,000 shares of Common Stock in connection with a loan financing, at exercise
prices of $8.00 per share. The warrants expire at various times from 3.0 to 5.0
years following the closing of this 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 or Common Stock, as applicable, purchasable, at the current
market value of the Preferred Stock or Common Stock, as applicable, by the
difference between the aggregate exercise price of the warrant and the value, at
the current market price per share of Preferred Stock or Common Stock, as
applicable, of the aggregate number of shares purchasable under the warrant.
Upon the closing of the offering, the warrants to purchase Series D Preferred
Stock will
53
<PAGE> 55
become warrants exercisable to purchase the same number of shares of Common
Stock at an exercise price of $8.00 per share.
REGISTRATION RIGHTS
Following this offering, holders (or their permitted transferees)
("Holders") of approximately 10,749,153 shares of Common Stock and warrants to
purchase 185,936 shares of Common Stock (assuming the conversion of all
outstanding Preferred Stock upon the closing of this offering) 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 April 1, 1998 (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
General Corporation 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.
54
<PAGE> 56
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 March 31, 1998, the Company will have outstanding an aggregate of
15,050,627 shares of Common Stock assuming (i) the issuance by the Company of
shares of Common Stock offered hereby, (ii) no issuance of 185,936 shares of
Common Stock relating to outstanding warrants, (iii) no exercise of exercisable
vested options (as of March 31, 1998) to purchase 461,570 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 12,650,627 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. 12,505,006
of these shares and an additional 691,504 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 145,621 of the outstanding shares will become eligible for sale at
various times after 180 days after the date of this Prospectus. Additionally,
854,158 of the outstanding shares, that would otherwise be eligible for sale as
set forth above, are contractually restricted shares 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 12,650,627 shares of Common Stock and exercisable vested
options to purchase 461,570 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
55
<PAGE> 57
to have been an affiliate of the Company at any time during the 180 days
immediately preceding the 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
185,936 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 10,749,153
shares of Common Stock and warrants to purchase 185,936 shares of Common Stock
(assuming the conversion of all outstanding Preferred Stock upon the closing of
this offering) 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."
56
<PAGE> 58
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, Bear, Stearns & Co. Inc. 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..............................
Bear, Stearns & Co. Inc.....................................
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 Stock 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
57
<PAGE> 59
to the expiration of the Lock-Up Period. The Company has agreed that during the
Lock-Up Period, the 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.
In February 1998, the Company agreed in principle to enter into a
transaction with Hambrecht & Quist Guaranty Finance, LLC ("Guaranty Finance"),
whereby Guaranty Finance would loan the Company up to $5 million. Under the
related agreements which were executed on March 12, 1998, (i) Guaranty Finance
agreed to lend the Company up to $5 million at an interest rate of 12% per
annum, $1.1 million of which was loaned to the Company on March 13, 1998 (the
"Loan") and (ii) Guaranty Finance purchased from the Company for $1,250 a
warrant to purchase 125,000 shares of the Company's Common Stock at a purchase
price of $8.00 per share. The Company has an option to repurchase up to 62,500
shares dependent on the level of borrowings over the term of the financing
arrangement. The warrant is exercisable through March 1, 2003. The Company paid
a $100,000 fee to Guaranty Finance in consideration for entering into the
aforementioned loan transaction. The Company anticipates that $1.1 million of
the net proceeds of this offering will be used to pay the outstanding balance of
the Loan. The majority equity holder of each of Guaranty Finance and Hambrecht &
Quist LLC is Hambrecht & Quist Group.
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.
Of the 2,220,000 shares to be sold by the Company, a portion may be offered
directly to corporate partners of the Company (the "Direct Purchasers") at the
price to the public indicated on the cover page of this Prospectus (the "Direct
Placement"). This purchase would be pursuant to an agreement between the Company
and the Direct Purchasers and not pursuant to the Underwriting Agreement.
58
<PAGE> 60
The Underwriters would not receive any fees or commissions in connection with
the Direct Placement.
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,
1996 and 1997 and for each of the three years in the period ended December 31,
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 said
firm as experts in auditing and accounting.
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.
59
<PAGE> 61
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> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
First Virtual Corporation
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, 1996 and 1997 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 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
January 30, 1998, except as to
Note 10, which is as of
March 13, 1998
F-2
<PAGE> 63
FIRST VIRTUAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------- DECEMBER 31,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 676 $ 2,500
Accounts receivable, less allowance of $215 at December
31, 1997............................................... 2,337 2,469
Inventory................................................. 1,230 4,178
Prepaid expenses and other current assets................. 59 627
-------- --------
Total current assets.............................. 4,302 9,774
Property and equipment, net................................. 913 1,043
Other assets................................................ 217 287
-------- --------
$ 5,432 $ 11,104
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under bank line of credit...................... $ 999 $ 1,306
Current portion of long term debt......................... 211 848
Accounts payable.......................................... 1,129 4,141
Accrued liabilities....................................... 637 1,326
Deferred revenue.......................................... 280 262
-------- --------
Total current liabilities......................... 3,256 7,883
-------- --------
Long-term debt.............................................. 102 1,312
-------- --------
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 $ --
Series B: 2,200,000 shares designated, issued and
outstanding actual; none issued and outstanding pro
forma (unaudited)..................................... 2 2 --
Series C: 1,375,000 shares designated; 1,331,260 and
1,351,778 shares issued and outstanding actual; none
issued and outstanding pro forma (unaudited).......... 1 1 --
Series D: 687,500 shares designated; 168,375 and
488,375 shares issued and outstanding actual; none
issued and outstanding pro forma (unaudited).......... -- 1 --
Common Stock, $.001 par value; 30,000,000 shares
authorized, actual; 35,000,000 shares authorized, pro
forma; 4,863,963 and 4,824,684 shares issued and
outstanding actual; 12,864,837 issued and outstanding
pro forma (unaudited).................................. 5 5 13
Additional paid-in capital................................ 13,192 17,267 17,267
Notes receivable from stockholders........................ (924) (837) (837)
Accumulated deficit....................................... (10,206) (14,534) (14,534)
-------- -------- --------
Total stockholders' equity........................ 2,074 1,909 $ 1,909
-------- -------- ========
$ 5,432 $ 11,104
======== ========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
F-3
<PAGE> 64
FIRST VIRTUAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $ 3,670 $12,093 $18,771
Cost of revenues............................................ 2,874 6,547 10,466
------- ------- -------
Gross profit.............................................. 796 5,546 8,305
------- ------- -------
Operating expenses:
Research and development.................................. 2,582 2,930 5,420
Selling, general and administrative....................... 3,603 4,886 6,997
------- ------- -------
Total operating expenses............................... 6,185 7,816 12,417
------- ------- -------
Loss from operations........................................ (5,389) (2,270) (4,112)
Interest income............................................. 117 118 79
Interest expense............................................ (38) (91) (295)
------- ------- -------
Net loss.................................................... $(5,310) $(2,243) $(4,328)
======= ======= =======
Basic net loss per share.................................... $ (5.30) $ (1.14) $ (1.44)
Diluted net loss per share.................................. $ (5.30) $ (1.14) $ (1.44)
Shares used in basic net loss per share calculations........ 1,001 1,974 3,012
Shares used in diluted net loss per share calculations...... 1,001 1,974 3,012
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (0.39)
Shares used in pro forma basic and diluted net loss per
share calculation (unaudited)............................. 11,052
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
F-4
<PAGE> 65
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,
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.................. 20,518 -- -- -- 137 -- -- 137
Issuance of Series D Preferred
Stock, net.................. 320,000 1 -- -- 2,548 -- -- 2,549
Exercise of stock options..... -- -- 32,700 -- 77 -- -- 77
Issuance (repurchase) of
Common Stock, net........... -- -- (71,979) -- 1,313 87 -- 1,400
Net loss...................... -- -- -- -- -- -- (4,328) (4,328)
--------- -- --------- -- ------- ----- -------- -------
Balance at December 31,
1997........................ 8,040,153 $8 4,824,684 $5 $17,267 $(837) $(14,534) $ 1,909
========= == ========= == ======= ===== ======== =======
</TABLE>
The accompanying notes are integral part of these conslidated financial
statements.
F-5
<PAGE> 66
FIRST VIRTUAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,310) $(2,243) $(4,328)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 156 342 566
Non-cash stock compensation.......................... -- 339 1,137
Other................................................ (6) (42) 215
Changes in assets and liabilities:........................
Accounts receivable.................................. (676) (1,660) (347)
Inventory............................................ (134) (1,025) (2,948)
Prepaid expenses and other current assets............ (21) (19) (568)
Other assets......................................... (32) (28) (12)
Accounts payable..................................... 377 601 3,012
Accrued liabilities.................................. 458 151 689
Deferred revenue..................................... 893 (813) (18)
------- ------- -------
Net cash used in operating activities............. (4,295) (4,397) (2,602)
------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment..................... (184) (504) (451)
Restricted cash........................................... (105) (30) --
------- ------- -------
Net cash used in investing activities............. (289) (534) (451)
------- ------- -------
Cash flows from financing activities:
Borrowings under line of credit........................... -- 999 801
Repayments under line of credit........................... -- -- (494)
Proceeds from notes payable............................... -- -- 2,250
Repayment of notes payable................................ -- -- (235)
Proceeds from issuance of stock, net...................... 4,714 2,003 2,793
Repayment of capital lease obligations.................... (42) (182) (238)
------- ------- -------
Net cash provided by financing activities......... 4,672 2,820 4,877
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 88 (2,111) 1,824
Cash and cash equivalents at beginning of year.............. 2,699 2,787 676
------- ------- -------
Cash and cash equivalents at end of year.................... $ 2,787 $ 676 $ 2,500
======= ======= =======
Supplemental cash flow information:
Interest paid............................................. $ 38 $ 78 $ 248
Equipment acquired under capital lease obligations........ 434 103 203
Warrants issued in conjunction with debt financing........ -- -- 233
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 67
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 reincorporated in Delaware in December 1997. The Company
develops, manufactures and markets video networking systems for use in business,
government and educational environments.
In October 1997, the Company's Board of Directors authorized, and the
stockholders subsequently approved, the reincorporation of the Company in
Delaware, which was effected on December 2, 1997. All per share amounts have
been adjusted in the accompanying consolidated financial statements to reflect
the reincorporation in Delaware. The Board also authorized and the stockholders
subsequently approved, an increase in the authorized shares of Common Stock to
35,000,000 and a decrease in the authorized shares of Preferred Stock to
5,000,000 to be effective upon the closing of the offering contemplated by this
prospectus (the "Offering").
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 intercompany 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, 1996 and 1997, the Company's other assets included
restricted cash of $135,000, representing collateral for an outstanding letter
of credit, which expires April 28, 1998.
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.
F-7
<PAGE> 68
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 employee 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.
Options and warrants granted to non-employees are accounted for using the fair
value method prescribed by Statement of Financial Accounting Standards No. 123
(FAS 123), "Accounting for Stock-Based Compensation." The Company also provides
additional pro forma disclosures as required under FAS 123. (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
F-8
<PAGE> 69
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Net Loss Per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128). FAS 128 requires the Company
to report both basic earnings (loss) per share, which is based on the
weighted-average number of common shares outstanding excluding contingently
issuable or returnable shares such as shares of unvested restricted Common
Stock, and diluted earnings (loss) per share, which is based on the
weighted-average number of common shares outstanding and dilutive potential
common shares outstanding. As a result of the losses incurred by the Company
during 1995, 1996 and 1997, all potential common shares were anti-dilutive and
excluded from the diluted net loss per share calculations.
The following table summarizes securities outstanding as of each period end
which were not included in the calculation of diluted net loss per share since
their inclusion would be anti-dilutive:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Unvested restricted Common Stock............................ 2,603 2,169 1,198
Preferred Stock............................................. 7,383 7,700 8,040
Preferred Stock warrants.................................... -- -- 61
Stock options............................................... -- 928 2,130
</TABLE>
Unvested restricted Common Stock represents stock that has been issued but
which is subject to repurchase to the extent the holder does not remain
associated with the Company until such shares are vested. Each share of
Preferred Stock is convertible into one share of Common Stock. The Preferred
Stock warrants are exercisable at $8.00 per share and expire at various times
from 3 to 4.3 years following the closing of an initial public offering. The
stock options outstanding at December 31, 1996 and 1997 had a weighted average
exercise price of $2.60 and $5.71, respectively, and expire beginning in July
2001 through December 2007.
Pro Forma Stockholders' Equity (unaudited)
If the Offering contemplated by this prospectus is consummated, all shares
of Preferred Stock outstanding at the closing date will automatically convert
into an aggregate of 8,040,153 shares of Common Stock. The pro forma effect of
such conversion has been reflected in the accompanying unaudited pro forma
stockholders' equity as of December 31, 1997.
Pro Forma Net Loss Per Share (unaudited)
Pro forma net loss per share for 1997 has been computed assuming the
conversion of 8,040,153 shares of Preferred Stock outstanding as of December 31,
1997 into shares of Common Stock which will occur upon completion of the
Offering.
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 with high quality financial institutions. 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
F-9
<PAGE> 70
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and 1997, revenues from one customer represented 29% and 64%
of total revenues, respectively.
The following table summarizes the percentage of total revenues accounted
for by shipments to customers outside North America:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Asia........................................................ 22% 17% 8%
Europe...................................................... 15% 19% 12%
--- --- ---
Total.................................................. 37% 36% 20%
=== === ===
</TABLE>
At December 31, 1996, outstanding receivables from two customers
represented 27% and 10% of accounts receivable. At December 31, 1997,
outstanding receivables from three customers represented 39%, 18% and 15% 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.
New Accounting Pronouncements
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 currently believes that FAS 130 and 131 will
not 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> 71
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Inventory:
Raw materials............................................. $ 711 $1,418
Finished goods............................................ 519 2,760
------ ------
$1,230 $4,178
====== ======
Prepaid expenses and other current assets:
Deferred initial public offering costs.................... $ -- $ 583
Other..................................................... 59 44
------ ------
$ 59 $ 627
====== ======
Property and equipment:
Computers and equipment................................... $1,137 $1,720
Furniture and fixtures.................................... 236 271
Leasehold improvements.................................... 73 109
------ ------
1,446 2,100
Less accumulated depreciation and amortization............ (533) (1,057)
------ ------
$ 913 $1,043
====== ======
Accrued liabilities:
Accrued employee compensation............................. $ 296 $ 642
Accrued warranty.......................................... 162 353
Other..................................................... 179 331
------ ------
$ 637 $1,326
====== ======
</TABLE>
As of December 31, 1996 and 1997, property and equipment recorded under
capital leases, consisting primarily of computers and equipment, totaled
$537,000, and $740,000, respectively, with related accumulated amortization of
$256,000, and $498,000, 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 December 31,
1997) plus 0.75%. 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 December 31, 1997 and an additional
approximately $500,000 was available to the Company. At December 31, 1997, the
Company was not in compliance with certain covenants, for which the bank issued
a waiver.
F-11
<PAGE> 72
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LONG-TERM DEBT:
Long-term debt comprises:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
---- -------
(IN THOUSANDS)
<S> <C> <C>
12% subordinated debt due in monthly installments of
$41,000 through May 2000.......................... $ -- $ 965
12% subordinated debt due in monthly installments of
$34,000 through October 2000...................... -- 917
Capitalized lease obligations........................ 313 278
---- -------
313 2,160
Less current portion................................. 211 848
---- -------
$102 $ 1,312
==== =======
</TABLE>
In 1997, the Company entered into subordinated debt agreements pursuant to
which the Company borrowed $2,250,000 ($2,096,000 net of issuance costs). The
debt is secured by certain assets of the Company, including accounts receivable,
inventory, property and equipment. Future principal payments of the subordinated
debt as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................ $ 702
1999................................................ 685
2000................................................ 495
------
$1,882
======
</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,
----------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $3,238 $4,589
Research and development credit carryforwards............... 311 753
Accruals and reserves....................................... 175 431
------ ------
Total deferred tax assets................................... 3,724 5,773
Valuation allowance......................................... (3,724) (5,773)
------ ------
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, 1996 and 1997.
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $13 million available to reduce future taxable
income. The federal net operating loss carryforwards expire from 2008 through
2012.
F-12
<PAGE> 73
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 noncancelable operating lease
agreements which expire 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 2001. Future
minimum lease payments under all noncancelable operating and capital leases as
of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year ending December 31,
1998...................................................... $ 326 $ 161
1999...................................................... 95 66
2000...................................................... -- 66
2001...................................................... -- 13
------ -------
Total minimum payments.................................... $ 421 306
======
Less amount representing interest......................... -- (28)
-------
Present value of capital lease obligations................ -- 278
Less current portion...................................... -- (146)
-------
Lease obligations, long-term.............................. -- $ 132
=======
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $110,000, $320,000 and $266,000, respectively.
NOTE 7 -- CONVERTIBLE PREFERRED STOCK:
As of December 31, 1997, the Company had issued 8,040,153 shares of
convertible Preferred Stock, of which 4,000,000 shares, 2,200,000 shares,
1,375,000 shares and 687,500 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 $11.00 per share.
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.
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
F-13
<PAGE> 74
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 1997, a total of 8,040,153 shares of
Common Stock have been reserved for issuance upon conversion of the Preferred
Stock.
Series D Preferred Stock Warrants
During 1997, the Company issued warrants to purchase 60,936 shares of its
Series D Preferred Stock at $8.00 per share in conjunction with certain
financing arrangements. The warrants are exercisable immediately and expire at
various times from 3 to 4.3 years following the closing of an initial public
offering. Upon closing of the Offering these warrants will become warrants to
purchase the same number of shares of Common Stock at an exercise price of $8.00
per share. As of December 31, 1997, no warrants had been exercised. The
aggregate value of these warrants was estimated by the Company, using the
Black-Scholes model, at approximately $233,000 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 December 31, 1997, a total of 3,295,000 shares of Common Stock had
been 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 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
December 31, 1997, a total of 3,787,068 shares of the Company's Common Stock had
been issued under the 1993 Plan, 504,084 shares had been repurchased or
cancelled pursuant to the Company's repurchase rights, and approximately
1,198,127 shares were subject to the Company's right of repurchase.
F-14
<PAGE> 75
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 1997, the Company issued 81,260 shares and 20,518
shares, respectively, of Series C at prices ranging from $4.00 to $11.00 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. The Board of Directors may, at its
discretion, terminate the Stock Option Plans at any time. As of December 31,
1997, 3,485,821 shares of Common Stock had been authorized under the Stock
Option Plans. 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 Plans 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.
In October 1997, the Board of Directors and stockholders 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. Under the restated plan, 4,625,000 shares of Common Stock may be
issued pursuant to stock awards.
1997 Non-Employee Directors' Stock Option Plan
In September 1997, the Company's Board of Directors approved the 1997
Non-Employee Director's Stock Option Plan (the "Directors' Plan") and reserved
250,000 shares of the Company's Common Stock for issuance thereunder.
The Directors' 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 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 Directors' Plan, at a price of $11.00
per share.
F-15
<PAGE> 76
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 Restricted Stock Bonus Plan
In October 1997, the Company's Board of Directors adopted a stock bonus
plan (the "1997 Restricted Stock Bonus Plan"). The 1997 Restricted Stock Bonus
Plan provides for the award of Common Stock to certain employees, directors and
consultants in consideration for services rendered to the Company. The 1997
Restricted Stock Bonus Plan is administered by the Board, which determines
recipients and the terms of awards to be granted, including the number of shares
subject to the award. Stock bonuses granted under the 1997 Restricted Stock
Bonus Plan are granted pursuant to a reacquisition option in favor of the
Company, in accordance with a vesting schedule.
An aggregate of 9,750 shares of Common Stock were authorized for issuance
under the 1997 Restricted Stock Bonus Plan. Shares of Common Stock subject to
outstanding restricted stock bonus awards that are reacquired by the Company
again become available for the grant of stock bonuses under the plan. As of
December 31, 1997, an aggregate of 9,000 shares of Common Stock were outstanding
pursuant to the 1997 Restricted Stock Bonus Plan, subject to a reacquisition
option in favor of the Company. The 1997 Restricted Stock Bonus Plan will
terminate upon the closing of an initial public offering of the Company's Common
Stock.
Option activity under the Stock Option Plans and the Directors' Plan is
summarized as follows:
<TABLE>
<CAPTION>
SHARES
SUBJECT WEIGHTED
TO OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------
<S> <C> <C>
Granted................................................... 927,998 $2.60
---------
Balance at December 31, 1996.............................. 927,998 $2.60
Granted................................................... 1,285,144 $7.79
Exercised................................................. (32,700) $2.73
Cancelled................................................. (50,644) $4.00
---------
Balance at December 31, 1997.............................. 2,129,798 $5.71
=========
Options vested at December 31, 1997....................... 347,416
=========
Options available for future grant at December 31, 1997... 1,573,323
=========
</TABLE>
With respect to certain options and restricted stock granted in 1996 and
1997, the Company is recognizing a compensation charge of $2,121,000. The
Company recognized $339,000 and $1,137,000 of said amount as compensation
expense during the years ended December 31, 1996 and 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.
F-16
<PAGE> 77
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant option groups outstanding at December 31, 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 EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE
- ------------- ----------- ----------- --------
<S> <C> <C> <C>
$2.50 585,398 8.67 $ 2.50
$2.75 300,000 3.50 $ 2.75
$3.50 14,700 8.83 $ 3.50
$4.00 500,200 9.19 $ 4.00
$10.20 - $11.00 729,500 9.74 $10.73
---------
$2.50 - $11.00 2,129,798 8.43 $ 5.71
=========
</TABLE>
Pro Forma Disclosures
Had compensation cost for the Company's Stock Option Plans been determined
based on the value of such options at the grant dates as prescribed by FAS No.
123, the Company's adjusted net loss would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1997
------------ -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net loss:
As reported.............................. $(2,243) $(4,328)
As adjusted.............................. (2,395) (4,912)
Net loss per share (basic and diluted):
As reported.............................. $ (1.14) $ (1.44)
As adjusted.............................. (1.21) (1.63)
</TABLE>
No pro forma information has been presented for 1995 since each of the
Company's various stock option plans were adopted in 1996 or 1997 and,
accordingly, no stock options were granted under the stock option plans prior to
1996. The weighted-average estimated grant-date minimum value for options
granted under the Company's various stock option plans during 1996 and 1997 was
$0.64 and $1.56, respectively. The minimum value of each option was estimated on
the date of grant with the following assumptions for grants during 1996 and
1997: annual dividend yield of 0.0% for both periods; risk-free annual interest
rates of 5.97% to 6.64% and 5.84% 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 and stockholders 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.
F-17
<PAGE> 78
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 during 1998 through 2001 or termination of
employment.
NOTE 10 -- SUBSEQUENT EVENTS
In early February 1998, after considering various factors including the
input provided by the Company's investment bankers, the Board of Directors of
the Company approved a plan under which 499,500 options previously granted at
prices of $10.20 and $11.00 to employees (excluding officers) were exchanged for
options at $8.50 per share, which the Board concluded was the fair value of the
Company's Common Stock at that time.
In February 1998, the Company agreed in principle to enter into a
transaction with Hambrecht & Quist Guaranty Finance, LLC ("Guaranty Finance")
whereby Guaranty Finance would loan the Company up to $5 million. Under the
related agreements which were executed on March 12, 1998, (i) Guaranty Finance
agreed to lend the Company up to $5 million at an interest rate of 12% per
annum, $1.1 million of which was loaned to the Company on March 13, 1998 (the
"Loan") and (ii) Guaranty Finance purchased from the Company for $1,250 a
warrant to purchase 125,000 shares of the Company's Common Stock at a purchase
price of $8.00 per share. The Company has an option to repurchase up to 62,500
shares dependent on the level of borrowings over the term of the financing
arrangement. The warrant is exercisable through March 1, 2003. The Company paid
a $100,000 fee to Guaranty Finance in consideration for entering into the
aforementioned loan transaction. The Loan agreement expires on December 31, 1998
at which time any outstanding borrowings must be repaid.
F-18
<PAGE> 79
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.
Internet Video Servers: The ability to deliver video services over the network.
First Virtual's video server products provide a range of critical
video services such as multi-cast, recording, storage and translation
over QoS-capable networks.
Internet Video Access: The ability to connect interactive video systems over the
network. First Virtual's video access products enable scaleable,
cost-effective, high quality video collaboration by allowing the
efficient connection of desktop systems and traditional room-system
video equipment over QoS-capable 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> 80
LOGO
<PAGE> 81
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........................... 90,500
Blue Sky Fees and Expenses.................................. 5,000
Accounting Fees............................................. 350,000
Legal Fees and Expenses..................................... 350,000
Transfer Agent and Registrar Fees........................... 7,500
Printing and Engraving...................................... 250,000
Miscellaneous............................................... 28,702
----------
Total............................................. $1,100,000
==========
</TABLE>
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 2,088,474 shares of
Common Stock (net of repurchases) to 82 employees, consultants and
non-employee directors at a weighted average purchase price of $.72 per
share.
2. Since April 18, 1996, the Company has granted stock options to
purchase 2,440,498 shares of Common Stock (net of cancellations) to a total
of 98 employees, consultants and non-employee directors at a weighted
average exercise price of $5.58 per share pursuant to the Company's stock
plans.
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.
II-1
<PAGE> 82
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 November 14, 1997, the Company issued and
sold pursuant to the Company's 1996 Employee Stock Purchase Bonus Plan, an
aggregate of 101,778 shares of Series C Preferred Stock to 34 employees at
purchase prices ranging from $4.00 to $11.00 per share.
6. From August 29, 1996 to November 4, 1997, the Company issued and
sold pursuant to a Series D Preferred Stock Purchase Agreement, an
aggregate of 488,375 shares of Series D Preferred Stock to 36 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 Silicon Valley Bank.
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 Comdisco, Inc.
9. On November 19, 1997, the Company issued a warrant to purchase
20,312 shares of Series D Preferred Stock at an exercise price of $8.00 per
share to Comdisco, Inc.
10. On March 12, 1998, the Company issued a warrant to purchase
125,000 shares of Common Stock at an exercise price of $8.00 per share to
Hambrecht & Quist Guaranty Finance, LLC.
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 Section 4(2), Regulation S or Rule 701
promulgated thereunder, in that the purchasers in each case represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof, received either adequate information about the
Registrant or had access, through employment or other relationship, to such
information, and the securities 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. 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.
The sales and issuances of securities in the transactions described in
paragraphs (3) through (4) and (6) through (10) 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 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as filed
October 29, 1997
**3.2 Bylaws of the Registrant
**3.3 Amended and Restated 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
</TABLE>
II-2
<PAGE> 83
<TABLE>
<C> <S>
**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 Form of 1997 Employee Stock Purchase Plan 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 Investors' Rights Agreement, dated as of April 1, 1998, among the
Registrant and the investors named therein
**10.9 Lease Agreement between the Registrant and John Arrillaga, or his successor Trustee, UTA
7/20/77, dated July 19, 1995
**10.9(i) Amendment No. 1 to Lease Agreement between the Registrant and John Arrillaga, or his
successor Trustee, UTA 7/20/77, dated November 7, 1997
**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"), dated April
30, 1997
**10.12 Subordinated Loan and Security Agreement between the Registrant and Comdisco
**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
**10.20 Subordinated Loan and Security Agreement between the Registrant and Comdisco, dated October
23, 1997
**10.21 Warrant issued to Comdisco, dated November 19, 1997
**10.22 Lease Agreement between the Registrant and John Arrillaga, or his successor Trustee, UTA
7/20/77, dated November 7, 1997
10.23* Letter Agreement between IBM Corporation and First Virtual Corporation, dated February 9,
1998
10.24 Loan and Security Agreement between the Registrant and Hambrecht & Quist Guaranty Finance,
LLC, dated March 12, 1998
</TABLE>
II-3
<PAGE> 84
<TABLE>
<C> <S>
10.25 Intellectual Property Security Agreement between the
Registrant and Hambrecht & Quist Guaranty Finance, LLC,
dated March 12, 1998
10.26 Common Stock Warrant Purchase Agreement between the
Registrant and Hambrecht & Quist Guaranty Finance, LLC,
dated March 12, 1998
10.27 Warrant issued to Hambrecht & Quist Guaranty Finance, LLC,
dated March 12, 1998
10.28 $5,000,000 Promissory Note, dated March 13, 1998, issued by
the Registrant to Hambrecht & Quist Guaranty Finance, LLC
**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>
- ---------------
* 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 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> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, First Virtual
Corporation has duly caused this Amendment No. 4 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 April 3,
1998.
FIRST VIRTUAL CORPORATION
By: /s/ RALPH K. UNGERMANN
------------------------------------
Ralph K. Ungermann
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 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>
/s/ RALPH K. UNGERMANN Chief Executive Officer and April 3, 1998
- --------------------------------- President (Principal Executive
Ralph K. Ungermann Officer)
/s/ JAMES O. MITCHELL Vice President, Operations and April 3, 1998
- --------------------------------- Chief Financial Officer
James O. Mitchell (Principal Financial and
Accounting Officer)
* Director April 3, 1998
- ---------------------------------
Neal Douglas
* Director April 3, 1998
- ---------------------------------
Pier Carlo Falotti
* Director April 3, 1998
- ---------------------------------
David A. Norman
* Director April 3, 1998
- ---------------------------------
James Swartz
* Director April 3, 1998
- ---------------------------------
Enzo Torresi
/s/ JAMES O. MITCHELL April 3, 1998
- ---------------------------------
James O. Mitchell
*(Attorney-in-fact)
</TABLE>
II-5
<PAGE> 86
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<C> <S>
**1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as filed
October 29, 1997
**3.2 Bylaws of the Registrant
**3.3 Amended and Restated 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 Form of 1997 Employee Stock Purchase Plan 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 Investors' Rights Agreement, dated as
of April 1, 1998 among the Registrant and the investors
named therein
**10.9 Lease Agreement between the Registrant and John Arrillaga,
or his successor Trustee, UTA 7/20/77, dated July 19, 1995
**10.9(i) Amendment No. 1 to Lease Agreement between the Registrant
and John Arrillaga, or his successor Trustee, UTA 7/20/77,
dated November 7, 1997
**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"), dated April 30, 1997
**10.12 Subordinated Loan and Security Agreement between the
Registrant and Comdisco
**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
**10.20 Subordinated Loan and Security Agreement between the
Registrant and Comdisco, dated October 23, 1997
**10.21 Warrant issued to Comdisco, dated November 19, 1997
**10.22 Lease Agreement between the Registrant and John Arrillaga,
or his successor Trustee, UTA 7/20/77, dated November 7,
1997
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<C> <S>
10.23* Letter Agreement between IBM Corporation and First Virtual
Corporation, dated February 9, 1998
10.24 Loan and Security Agreement between the Registrant and
Hambrecht & Quist Guaranty Finance, LLC, dated March 12,
1998
10.25 Intellectual Property Security Agreement between the
Registrant and Hambrecht & Quist Guaranty Finance, LLC,
dated March 12, 1998
10.26 Common Stock Warrant Purchase Agreement between the
Registrant and Hambrecht & Quist Guaranty Finance, LLC,
dated March 12, 1998
10.27 Warrant issued to Hambrecht & Quist Guaranty Finance, LLC,
dated March 12, 1998
10.28 $5,000,000 Promissory Note, dated March 13, 1998, issued by
the Registrant to Hambrecht & Quist Guaranty Finance, LLC
**16.1 Letter of KPMG Peat Marwick LLP
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1)
**24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Confidential treatment is being sought for portions of this exhibit. A
separate filing setting forth the Registrant's application for
confidential treatment has been made with the Commission.
** Previously filed as an Exhibit to the Registration Statement.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
FIRST VIRTUAL MERGER CORPORATION
I.
The name of the corporation is:
First Virtual Merger Corporation
II.
The address of the registered office of the corporation in the State
of Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware at such
address is National Registered Agents, Inc.
III.
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock to be
designated, respectively, Preferred Stock ("Preferred Stock") and Common Stock
("Common Stock"). The total number of shares of capital stock this corporation
shall have authority to issue is Forty Million (40,000,000). The total number of
shares of Preferred Stock this corporation shall have authority to issue is Ten
Million (10,000,000). The total number of shares of Common Stock this
corporation shall have authority to issue is Thirty Million (30,000,000). The
Preferred Stock and the Common Stock each shall have a par value of one tenth of
one cent ($.001) per share.
B. Four Million (4,000,000) of the authorized shares of Preferred
Stock are hereby designated "Series A Preferred Stock" (the "Series A
Preferred"). Two Million Two Hundred Thousand (2,200,000) of the authorized
shares of Preferred Stock are hereby designated "Series B Preferred Stock" (the
"Series B Preferred"). One Million Three Hundred Seventy-Five Thousand
(1,375,000) of the authorized shares of Preferred Stock are hereby designated
"Series C Preferred Stock" (the "Series C Preferred"). Six Hundred Eighty-Seven
Thousand Five Hundred (687,500) of the authorized shares of Preferred Stock are
hereby designated "Series D Preferred Stock" (the "Series D Preferred"). The
Series A Preferred, Series B Preferred, Series C Preferred, and Series D
Preferred are collectively referred to as the "Series A, B, C, and D Preferred."
1.
<PAGE> 2
The remaining shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors of the corporation (the
"Board of Directors") is expressly authorized to provide for the issue of all or
any of the remaining shares of the Preferred Stock in one or more series, and to
fix the number of shares and to determine or alter for each such series, such
voting powers, full or limited, or no voting powers, and such designations,
preferences, and relative, participating, optional, or other rights and such
qualifications, limitations, or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issue of such stock (a "Preferred Stock Designation") and as
may be permitted by the Delaware General Corporation Law. The Board of Directors
is also expressly authorized to increase or decrease (but not below the number
of shares of such series then outstanding) the number of shares of any series,
including the Series A Preferred, Series B Preferred, Series C Preferred, and
Series D Preferred, within the limits set forth above, subsequent to the issue
of shares of that series. In case the number of shares of any such series shall
be so decreased, the stock constituting such decrease shall resume the status
that it had prior to the adoption of the resolution originally fixing the number
of shares of such series.
C. The powers, preferences, rights, restrictions, and other matters
relating to the Series A, B, C, and D Preferred are as follows:
1. DIVIDENDS.
(a) The holders of Series A, B, C, and D Preferred shall be
entitled to receive dividends at the rate of (i) with respect to the Series A
Preferred, $0.05 per share (as adjusted for any stock dividends, combinations or
splits with respect to such stock) per annum, payable out of funds legally
available therefor, (ii) with respect to the Series B Preferred, $0.15 per share
(as adjusted for any stock dividends, combinations or splits with respect to
such stock) per annum, payable out of funds legally available therefor, (iii)
with respect to the Series C Preferred, $0.40 per share (as adjusted for any
stock dividends, combinations or splits with respect to such stock) per annum,
payable out of funds legally available therefor, and (iv) with respect to the
Series D Preferred, $0.80 per share (as adjusted for any stock dividends,
combinations or splits with respect to such stock) per annum, payable out of
funds legally available therefor. Such dividends shall be payable only when, as,
and if declared by the Board of Directors and shall be noncumulative.
No dividends (other than those payable solely in the Common Stock of
the corporation) shall be paid on any Common Stock of the corporation during any
fiscal year of the corporation until dividends at the aforesaid rates (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) on the Series A, B, C, and D Preferred shall have been paid or declared
and set apart during that fiscal year, and no dividends shall be paid on any
share of Common Stock unless a dividend (including the amount of any dividends
paid pursuant to the above provisions of this Section C. 1) is paid with respect
to all outstanding shares of Series A, B, C, and D Preferred in an amount for
each such share of Series A, B, C, and D Preferred equal to or greater than the
aggregate amount of such dividends for all shares of Common Stock into which
each such share of Series A, B, C, and D Preferred could then be converted.
2.
<PAGE> 3
No right shall accrue to holders of Series A, B, C, and D Preferred
by reason of the fact that dividends on said stock are not declared in any prior
year, nor shall any undeclared or unpaid dividend bear or accrue any interest.
(b) In the event the corporation shall declare a
distribution (other than any distribution described in Section C.2 or C.4)
payable in securities of other persons, evidences of indebtedness issued by the
corporation or other persons, assets (excluding cash dividends) or options or
rights to purchase any such securities or evidences of indebtedness, then, in
each such case the holders of Series A, B, C, and D Preferred shall be entitled
to a proportionate share of any such distribution as though the holders of
Series A, B, C, and D Preferred were the holders of the number of shares of
Common Stock of the corporation into which the respective shares of Series A, B,
C, and D Preferred are convertible as of the record date fixed for the
determination of the holders of Common Stock of the corporation entitled to
receive such distribution.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding
up of the corporation, whether voluntary or involuntary, the holders of the
Series A Preferred, the holders of Series B Preferred, the holders of Series C
Preferred, and the holders of Series D Preferred shall be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus
funds of the corporation to the holders of the Common Stock by reason of their
ownership thereof and in proportion to the liquidation preference of any other
outstanding series of Preferred Stock, the amount of $0.50 (the "Series A
Original Issue Price"), $1.50 (the "Series B Original Issue Price"), $4.00 (the
"Series C Original Issue Price"), and $8.00 (the "Series D Original Issue
price"), respectively (as adjusted for any stock dividends, combinations or
splits with respect to such stock), plus all accrued or declared but unpaid
dividends on such stock for each share of Series A, B, C, and D Preferred then
held by such holders. If upon the occurrence of such event, the assets and funds
thus distributed among the holders of Series A, B, C, and D Preferred shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amount, then the entire assets and funds of the corporation legally
available for distribution shall be distributed ratably among the holders of
Series A, B, C, and D Preferred in proportion to the preferential amount each
such holder is otherwise entitled to receive.
(b) After payment to the holders of Series A, B, C, and D
Preferred of the amounts set forth in Section C.2(a) above, the entire remaining
assets and funds of the corporation legally available for distribution, if any,
shall be distributed among the holders of the Common Stock and Series A, B, C,
and D Preferred in proportion to the shares of Common Stock then held by them
and the shares of Common Stock which they then have the right to acquire upon
conversion of the shares of Series A, B, C, and D Preferred then held by them,
up to a total return to the holders of Series A Preferred, Series B Preferred,
Series C Preferred, and Series D Preferred of two times the Series A Original
Issue Price, Series B Original Issue Price, Series C Original Issue Price, and
Series D Original Issue Price, respectively.
3.
<PAGE> 4
(c) For purposes of this Section C.2, (i) any acquisition
of the corporation by means of merger or other form of corporate reorganization
in which outstanding stock of the corporation is exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary (other than a mere reincorporation transaction) or (ii) a sale
of all or substantially all of the assets of the corporation, shall be treated
as a liquidation, dissolution or winding up of the corporation and shall entitle
the holders of Series A, B, C, and D Preferred and Common Stock to receive at
the closing in cash, securities or other property (valued as provided in Section
C.2(d) below) amounts as specified in Sections C.2(a) and C.2(b) above.
(d) Whenever the distribution provided for in this
Section C.2 shall be payable in securities or property other than cash, the
value of such distribution shall be the fair market value of such securities or
other property.
3. VOTING RIGHTS; DIRECTORS.
(a) Each holder of shares of Series A, B, C, and D
Preferred shall be entitled to the number of votes equal to the number of shares
of Common Stock into which such shares of Series A, B, C, and D Preferred could
be converted and shall have voting rights and powers equal to the voting rights
and powers of the Common Stock (except as otherwise expressly provided herein or
as required by law, voting together with the Common Stock as a single class) and
shall be entitled to notice of any stockholders' meeting in accordance with the
Bylaws of the corporation. Fractional votes shall not, however, be permitted and
any fractional voting rights resulting from the above formula (after aggregating
all stock into which shares of Series A, B, C, and D Preferred held by each
holder could be converted) shall be rounded to the nearest whole number (with
one-half being rounded upward). Each holder of Common Stock shall be entitled to
one (1) vote for each share of Common Stock held.
(b) In addition to any other vote or consent required
herein or by law, the vote or written consent of the holders of at least
two-thirds (2/3) of the outstanding shares of Series A Preferred shall be
necessary for any amendment, alteration, or repeal of any provision of the
Articles of Incorporation or the Bylaws of the Company (including any filing of
a Certificate of Determination), that affects adversely the voting powers,
preferences, or other special rights or qualifications, limitations, or
restrictions of the Series A Preferred.
(c) In addition to any other vote or consent required
herein or by law, the vote or written consent of the holders of at least
two-thirds (2/3) of the outstanding shares of Series B Preferred shall be
necessary for any amendment, alteration, or repeal of any provision of the
Articles of Incorporation or the Bylaws of the Company (including any filing of
a Certificate of Determination), that affects adversely the voting powers,
preferences, or other special rights or qualifications, limitations, or
restrictions of the Series B Preferred.
(d) In addition to any other vote or consent required
herein or by law, the vote or written consent of the holders of at least
two-thirds (2/3) of the outstanding shares of Series C Preferred shall be
necessary for any amendment, alteration, or repeal of any provision of the
Articles of Incorporation or the Bylaws of the Company (including any filing
4.
<PAGE> 5
of a Certificate of Determination), that affects adversely the voting powers,
preferences, or other special rights or qualifications, limitations, or
restrictions of the Series C Preferred.
(e) In addition to any other vote or consent required
herein or by law, the vote or written consent of the holders of at least
two-thirds (2/3) of the outstanding shares of Series D Preferred shall be
necessary for any amendment, alteration, or repeal of any provision of the
Articles of Incorporation or the Bylaws of the Company (including any filing of
a Certificate of Determination), that affects adversely the voting powers,
preferences, or other special rights or qualifications, limitations, or
restrictions of the Series D Preferred.
4. CONVERSION. The holders of Series A, B, C, and D Preferred
shall have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred,
Series B Preferred, Series C Preferred, and Series D Preferred shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Series A Original Issue Price,
Series B Original Issue Price, Series C Original Issue Price, and Series D
Original Issue Price, respectively, by the Conversion Price applicable to the
Series A Preferred, Series B Preferred, Series C Preferred, and Series D
Preferred, respectively, determined as hereinafter provided, in effect on the
date the certificate is surrendered for conversion. The price at which shares of
Common Stock shall be deliverable upon conversion of shares of Series A
Preferred (the "Series A Conversion Price") shall initially be $0.50 per share
of Common Stock. The price at which shares of Common Stock shall be deliverable
upon conversion of shares of Series B Preferred (the "Series B Conversion
Price") shall initially be $1.50 per share of Common Stock. The price at which
shares of Common Stock shall be deliverable upon conversion of shares of Series
C Preferred (the "Series C Conversion Price") shall initially be $4.00 per share
of Common Stock. The price at which shares of Common Stock shall be deliverable
upon conversion of shares of Series D Preferred (the "Series D Conversion
Price") shall initially be $8.00 per share of Common Stock. Such initial Series
A Conversion Price, Series B Conversion Price, and Series C Conversion Price,
and Series D Conversion Price shall be adjusted as hereinafter provided.
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred,
Series B Preferred, Series C Preferred, and Series D Preferred shall
automatically be converted into shares of Common Stock at the then-effective
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price,
and Series D Conversion Price, respectively, upon the earlier of (i) the date
specified by vote or written consent or agreement of holders of at least
two-thirds (2/3) of the shares of such series then outstanding, or (ii)
immediately upon the closing of the sale of the corporation's Common Stock in a
firm commitment, underwritten public offering registered under the Securities
Act of 1933, as amended (the "Securities Act"), other than a registration
relating solely to a transaction under Rule 145 under such Act (or any successor
thereto) or to an employee benefit plan of the corporation, at a public offering
price (prior to underwriters' discounts and expenses) equal to or exceeding
$8.00 per share of Common Stock (as adjusted for any stock dividends,
combinations or splits with respect to such stock) and the
5.
<PAGE> 6
aggregate proceeds to the corporation and/or any selling stockholders (after
deduction for underwriters' discounts) of which exceed $10,000,000.
(c) MECHANICS OF CONVERSION.
(i) Before any holder of Series A, B, C, or D
Preferred shall be entitled to convert the same into shares of Common Stock,
such holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the corporation or of any transfer agent for such
stock, and shall give written notice to the corporation at such office that such
holder elects to convert the same and shall state therein the name or names in
which such holder wishes the certificate or certificates for shares of Common
Stock to be issued. The corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such holder of Series A, B, C, or D
Preferred, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of surrender of the shares of Series A, B, C, or D Preferred to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(ii) If the conversion is in connection with an
underwritten offering of securities pursuant to the Securities Act, the
conversion may, at the option of any holder tendering shares of Series A, B, C,
or D Preferred for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock upon conversion of Series A,
B, C, or D Preferred shall not be deemed to have converted such Series A, B, C,
or D Preferred until immediately prior to the closing of such sale of
securities.
(d) ADJUSTMENTS TO THE SERIES A CONVERSION PRICE, SERIES B
CONVERSION PRICE, SERIES C CONVERSION PRICE, AND SERIES D CONVERSION PRICE FOR
CERTAIN DILUTING ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this
Section C.4(d), the following definitions apply:
(1) "Option" shall mean rights, options, or
warrants to subscribe for, purchase or otherwise acquire either Common
Stock or Convertible Securities (defined below).
(2) "Original Issue Date" shall mean the date on
which a share of Series D Preferred Stock was first issued.
(3) "Convertible Securities" shall mean any
evidences of indebtedness, shares (other than Common Stock, Series A,
Series B, Series C, and Series D Preferred) or other securities
convertible into or exchangeable for Common Stock.
6.
<PAGE> 7
(4) "Additional Shares of Common Stock" shall mean
all shares of Common Stock issued (or, pursuant to Section C.4(d)(iii),
deemed to be issued) by the corporation after the Original Issue Date,
other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Series A, B,
C, and D Preferred;
(B) to officers, directors or employees of, or
consultants to, the corporation pursuant to stock option or stock
purchase plans or agreements on terms approved by the Board of
Directors;
(C) to leasing companies or financial
institutions providing leasing or debt financing to the Company, but
not exceeding 200,000 shares of Common Stock, subject to adjustment for
all subdivisions and combinations;
(D) as a dividend or distribution on Series
A, B, C, and D Preferred; or
(E) for which adjustment of the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price,
and Series D Conversion Price is made pursuant to Section C.4(e).
(ii) NO ADJUSTMENT OF THE SERIES A CONVERSION PRICE,
SERIES B CONVERSION PRICE, SERIES C CONVERSION PRICE, OR SERIES D CONVERSION
PRICE. Any provision herein to the contrary notwithstanding, no adjustment in
the Series A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price or the Series D Conversion Price shall be made in respect of
the issuance of Additional Shares of Common Stock unless the consideration per
share (determined pursuant to Section C.4(d)(v) hereof) for an Additional Share
of Common Stock issued or deemed to be issued by the corporation is less than
the Series A Conversion Price, Series B Conversion Price, Series C Conversion
Price, or Series D Conversion Price, respectively, in effect on the date of, and
immediately prior to, such issue.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON
STOCK. In the event the corporation at any time or from time to time after the
Original Issue Date shall issue any Options or Convertible Securities or shall
fix a record date for the determination of holders of any class of securities
then entitled to receive any such Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein designed to protect against
dilution) of Common Stock issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date, provided
that in any such case in which Additional Shares of Common Stock are deemed to
be issued:
7.
<PAGE> 8
(1) no further adjustments in the Conversion Price
for the Series A, B, C, or D Preferred shall be made upon the
subsequent issue of Convertible Securities or shares of Common Stock
upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any
increase or decrease in the consideration payable to the corporation,
or decrease or increase in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the Series
A Conversion Price, Series B Conversion Price, Series C Conversion
Price, or Series D Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the rights
of conversion or exchange under such Convertible Securities (provided,
however, that no such adjustment of the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, or Series D
Conversion Price shall affect Common Stock previously issued upon
conversion of the Series A, B, C, or D Preferred);
(3) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities
which shall not have been exercised, the Series A Conversion Price, the
Series B Conversion Price, the Series C Conversion Price, and the
Series D Conversion Price computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if:
(A) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock
issued were the shares of Common Stock, if any, actually issued upon
the exercise of such Options or the conversion or exchange of such
Convertible Securities and the consideration received therefor was the
consideration actually received by the corporation for the issue of all
such Options, whether or not exercised, plus the consideration actually
received by the corporation upon such exercise, or for the issue of all
such Convertible Securities as the additional consideration, if any,
actually received by the corporation upon such conversion or exchange;
and
(B) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued
upon the exercise thereof were issued at the time of issue of such
Options, and the consideration received by the corporation for the
Additional Shares of Common Stock deemed to have been then issued was
the consideration actually received by the corporation for the issue of
all such Options, whether or not exercised, plus the consideration
deemed to have been received by the corporation (determined pursuant to
Section C.4(d)) upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
8.
<PAGE> 9
(4) no readjustment pursuant to clause (2) or (3)
above shall have the effect of increasing the Series A Conversion
Price, the Series B Conversion Price, the Series C Conversion Price, or
the Series D Conversion Price to an amount which exceeds the lower of
(a) the Series A Conversion Price, Series B Conversion Price, the
Series C Conversion Price, or the Series D Conversion Price,
respectively, on the original adjustment date, or (b) the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price,
or Series D Conversion Price, respectively, that would have resulted
from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date;
(5) in the case of any Options which expire by
their terms not more than 30 days after the date of issue thereof, no
adjustment of the Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price, or Series D Conversion Price, shall be made
until the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the same manner provided in clause (3)
above.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event this corporation, at any time
after the Original Issue Date, shall issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Section C.4(d)(iii)) without consideration or for a consideration per share less
than the Conversion Price for any series of Preferred Stock in effect on the
date of and immediately prior to such issue, then and in such event, the
Conversion Price for such series shall be reduced, concurrently with such issue,
to a price (calculated to the nearest cent) determined by multiplying the
Conversion Price for such series of Preferred Stock by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of shares of Common Stock which the
aggregate consideration received by the corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price for such series of Preferred Stock in effect immediately prior to such
issuance, and the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued. For the purpose of the above
calculation, the number of shares of Common Stock outstanding immediately prior
to such issue shall be calculated on a fully diluted basis, as if all shares of
Series A, B, C, and D Preferred and all Convertible Securities had been fully
converted into shares of Common Stock immediately prior to such issuance and any
outstanding Options had been fully exercised immediately prior to such issuance
(and the resulting securities fully convertible into shares of Common Stock, if
so convertible) as of such date, but not including in such calculation any
additional shares of Common Stock issuable with respect to shares of Series A,
B, C, and D Preferred, Convertible Securities, or outstanding Options, solely as
a result of the adjustment of the respective Conversion Prices (or other
conversion ratios) resulting from the issuance of the Additional Shares of
Common Stock causing the adjustment in question.
(v) DETERMINATION OF CONSIDERATION. For purposes of
this Section C.4(d), the consideration received by the corporation for the
issuance of any Additional Shares of Common Stock shall be computed as follows:
9.
<PAGE> 10
(1) CASH AND PROPERTY. Such consideration shall:
(A) Insofar as it consists of cash, be
computed at the aggregate amount of cash received by the corporation
excluding amounts paid or payable for accrued interest or accrued
dividends;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common
Stock are issued together with other stock or securities or other
assets of the corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in
clauses (A) and (B) above, as determined in good faith by the Board of
Directors.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the corporation for Additional
Shares of Common Stock deemed to have been issued pursuant to Section
C.4(d)(iii), relating to Options and Convertible Securities shall be
determined by dividing:
(A) the total amount, if any, received or
receivable by the corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein designed to
protect against dilution) payable to the corporation upon the exercise
of such Options or the conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible Securities, the
exercise of such Options for Convertible Securities and the conversion
or exchange of such Convertible Securities by
(B) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against the
dilution) issuable upon the exercise of such Options or conversion or
exchange of such Convertible Securities.
(e) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS
AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this
corporation at any time or from time to time after the Original Issue Date shall
declare or pay, without consideration, any dividend on the Common Stock payable
in Common Stock or in any right to acquire Common Stock for no consideration, or
shall effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right to
acquire Common Stock), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Conversion Price for any
series of Preferred Stock in effect immediately prior to such event shall,
concurrently with the effectiveness of such event, be proportionately decreased
or
10.
<PAGE> 11
increased, as appropriate. In the event that this corporation shall declare or
pay, without consideration, any dividend on the Common Stock payable in any
right to acquire Common Stock for no consideration, then the corporation shall
be deemed to have made a dividend payable in Common Stock in an amount of shares
equal to the maximum number of shares issuable upon exercise of such rights to
acquire Common Stock.
(f) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If
the Common Stock issuable upon conversion of Series A, B, C, or D Preferred
shall be changed into the same or a different number of shares of any other
class or classes of shares, whether by capital reorganization, reclassification
or otherwise (other than a subdivision or combination of shares provided for in
Section C.4(e) above or a merger or other reorganization referred to in Section
C.2(c) above), the Series A Conversion Price, the Series B Conversion Price, the
Series C Conversion Price, and the Series D Conversion Price then in effect
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series A Preferred,
the Series B Preferred, the Series C Preferred, and the Series D Preferred,
respectively, shall be convertible into, in lieu of the number of shares of
Common Stock which the holders would otherwise have been entitled to receive, a
number of shares of such other class or classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by the
holders upon conversion of the Series A Preferred, Series B Preferred, Series C
Preferred, and Series D Preferred, respectively, immediately before that change.
(g) NO IMPAIRMENT. The corporation will not, by amendment
of its Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section C.4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of Series
A, B, C, and D Preferred against impairment.
(h) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of any Conversion Price pursuant to this Section
C.4, the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A, B, C, and D Preferred a certificate executed by the
corporation's Chief Executive Officer or Chief Financial Officer setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The corporation shall, upon the written
request at any time of any holder of Series A, B, C, and D Preferred, furnish or
cause to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price for such series at the
time in effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of such series.
(i) NOTICES OF RECORD DATE. In the event that the
corporation shall propose at any time: (i) to declare any dividend or
distribution upon its Common Stock, whether
11.
<PAGE> 12
in cash, property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus; (ii) to offer for
subscription pro rata to the holders of any class or series of its stock any
additional shares of stock of any class or series or other rights; (iii) to
effect any reclassification or recapitalization of its Common Stock outstanding
involving a change in the Common Stock; or (iv) to merge or consolidate with or
into any other corporation, or sell, lease or convey all or substantially all of
its assets, or to liquidate, dissolve or wind up; then, in connection with each
such event, the corporation shall send to the holders of Series A, B, C, and D
Preferred:
(1) at least twenty (20) days' prior written
notice of the date on which a record shall be taken for such dividend,
distribution or subscription rights (and specifying the date on which
the holders of Common Stock shall be entitled thereto) or for
determining rights to vote, if any, in respect of the matters referred
to in (iii) and (iv) above; and
(2) in the case of the matters referred to in
(iii) and (iv) above, at least twenty (20) days' prior written notice
of the date when the same shall take place (and specifying the date on
which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon the
occurrence of such event).
(j) ISSUE TAXES. The corporation shall pay any and all
issue and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Series A, B, C, and D Preferred pursuant
hereto; provided, however, that the corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(k) RESERVATION OF SHARES ISSUABLE UPON CONVERSION. The
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A, B, C, and D Preferred, such number of
its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of Series A, B, C, and D Preferred; and
if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of Series A, B, C, and D Preferred, the corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose, including, without limitation, engaging in best
efforts to obtain the requisite stockholder approval of any necessary amendment
to this Certificate of Incorporation.
(l) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of any share or shares of Series A, B, C, or D Preferred.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series A, B, C, or D Preferred by a holder
thereof shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share
12.
<PAGE> 13
of Common Stock, the corporation shall, in lieu of issuing any fractional share,
pay the holder otherwise entitled to such fraction a sum in cash equal to the
fair market value of such fraction on the date of conversion (as determined in
good faith by the Board of Directors).
(m) NOTICES. Any notice required by the provisions of this
Section C.4 to be given to the holders of shares of Series A, B, C, or D
Preferred shall be deemed given if deposited in the United States mail, postage
prepaid, or if sent by facsimile or delivered personally by hand or nationally
recognized courier addressed to each holder of record at such holder's address
or facsimile number appearing on the books of the corporation.
5. INCREASING COMMON STOCK.
The number of authorized shares of Common Stock may be
increased or decreased (but not below the number of shares of Common Stock then
outstanding) by an affirmative vote of the holders of a majority of the
outstanding shares of Common Stock of the corporation.
6. NO REISSUANCE OF SERIES A, B, C, AND D PREFERRED.
Any share or shares of Series A, B, C, and D Preferred
acquired by the corporation by reason of redemption, purchase, conversion or
otherwise shall be restored to the status of authorized but unissued shares of
Preferred Stock.
V.
A. For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation and regulation
of the powers of the corporation, of its directors and of its stockholders or
any class thereof, as the case may be, it is further provided that:
(1) The management of the business and the conduct of the
affairs of the corporation shall be vested in its Board of Directors. The number
of directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
(2) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term
13.
<PAGE> 14
of three years. At the second annual meeting of stockholders following the
closing of the Initial Public Offering, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three years. At the third annual meeting of stockholders following the
closing of the Initial Public Offering, the term of office of the Class III
directors shall expire and Class III directors shall be elected for a full term
of three years. At each succeeding annual meeting of stockholders, directors
shall be elected for a full term of three years to succeed the directors of the
class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
(3) Subject to the rights of the holders of any series of
Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.
(4) Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
B. (1) Subject to paragraph (h) of Section 43 of the Bylaws, and
notwithstanding the fact that some lesser percentage may be specified law, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote
of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of the Voting Stock. The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.
(2) The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
(3) No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws or by written consent of stockholders in accordance
with the Bylaws prior to the closing of the Initial Public Offering. Following
the closing of the Initial Public Offering no action shall be taken by the
stockholders by written consent.
14.
<PAGE> 1
EXHIBIT 10.8
FIRST VIRTUAL CORPORATION
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
APRIL 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
1. DEFINITIONS.......................................................... 1
1.1 Certain Definitions........................................... 1
1.2 Restrictions on Transfer...................................... 3
1.3 Requested Registration........................................ 5
1.4 Company Registration.......................................... 7
1.5 Expenses of Registration...................................... 8
1.6 Registration on Form S-3...................................... 9
1.7 Registration Procedures....................................... 9
1.8 Indemnification............................................... 10
1.9 Information by Holder......................................... 12
1.10 Limitations on Subsequent Registration Rights................. 13
1.11 Rule 144 Reporting............................................ 13
1.12 Transfer or Assignment of Registration Rights................. 13
1.13 "Market Stand-Off" Agreement.................................. 13
1.14 Allocation of Registration Opportunities...................... 14
1.15 Delay of Registration......................................... 15
1.16 Termination of Registration Rights............................ 15
2. COVENANTS OF THE COMPANY............................................. 15
2.1 Basic Financial Information................................... 15
2.2 Additional Information and Rights............................. 16
2.3 Termination of Rights................................................ 17
3. MISCELLANEOUS............................................................... 17
3.1 Governing Law................................................. 17
3.2 Successors and Assigns........................................ 17
3.3 Entire Agreement; Amendment; Waiver........................... 17
3.4 Additional Series C Purchasers................................ 17
3.5 Notices, Etc.................................................. 18
3.6 Delays or Omissions........................................... 18
3.7 Rights; Separability.......................................... 18
3.8 Information Confidential...................................... 18
3.9 Titles and Subtitles.......................................... 18
3.10 Counterparts.................................................. 19
</TABLE>
i.
<PAGE> 3
FIRST VIRTUAL CORPORATION
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the "Agreement")
is made and entered into as of April 1, 1998 by and among FIRST VIRTUAL
CORPORATION, a California corporation (the "Company"), and the holders of the
Company's Series A Preferred Stock identified on Exhibit A hereto, the holders
of the Company's Series B Preferred Stock identified on Exhibit B hereto, the
holders of the Company's Series C Preferred Stock identified on Exhibit C
hereto, the holders of the Company's Series C Preferred Stock identified on
Exhibit D hereto (the "Employee Holders"), the purchasers of the Company's
Series D Preferred Stock identified on Exhibit E or Exhibit F hereto (purchasers
identified on Exhibit E or Exhibit F are collectively referred to herein as the
"Purchasers"), and Hambrecht & Quist Guaranty Finance, LLC ("H&Q"), the holder
of a warrant to purchase up to 125,000 shares of the Company's Common Stock (the
"H&Q Shares").
WHEREAS, certain of the shareholders of the Company (the "Shareholders")
hold shares of the Company's Series A Preferred Stock, shares of the Company's
Series B Preferred Stock, shares of the Company's Series C Preferred Stock
and/or shares of the Company's Series D Preferred Stock and possess registration
rights, information rights and other rights pursuant to an Amended and Restated
Investors' Rights Agreement dated as of August 29, 1996, as amended, between the
Company and such Shareholders (the "Prior Agreement"); and
WHEREAS, the Shareholders desire to terminate the Prior Agreement and to
accept the rights created pursuant hereto in lieu of the rights granted to them
under the Prior Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the Shareholders who are parties to the Prior Agreement hereby
agree that the Prior Agreement shall be superseded and replaced in its entirety
by this Agreement, and the parties hereto further agree as follows:
1. DEFINITIONS.
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth below:
1.
<PAGE> 4
(a) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(b) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(c) "Holder" shall mean any Investor who holds Registrable
Securities and any holder of Registrable Securities to whom the registration
rights conferred by this Agreement have been transferred in compliance with
Section 1.2 and Section 1.12 hereof.
(d) "Initiating Holders" shall mean any Holder or Holders
who in the aggregate hold not less than thirty-three and one-third percent (33
1/3%) of the outstanding Registrable Securities.
(e) "Investors" shall mean the Purchasers, the Employee
Shareholders, the Shareholders and H&Q.
(f) "Other Stockholders" shall mean persons other than
Holders who, by virtue of agreements with the Company, are entitled to include
securities in certain registrations hereunder.
(g) "Registrable Securities" shall mean (i) shares of
Common Stock issued or issuable pursuant to the conversion of the Shares, (ii)
any Common Stock issued as a dividend or other distribution with respect to, or
in exchange or in replacement of, the Shares referred to in clause (i) above,
(iii) shares of Common Stock issued pursuant to the Company's 1993 Employee,
Consultant and Director Stock Purchase Plan (the "1993 Stock Purchase Plan") to
the extent necessary for such holders to repay any promissory notes to the
Company in connection with an initial public offering of the Company's Common
Stock; and (iv) the H&Q Shares; provided, however, that Registrable Securities
shall not include any shares of Common Stock which have previously been
registered or which have been sold to the public, or which have been sold in a
private transaction in which the transferor's rights under this Agreement are
not assigned.
(h) The terms "register," "registered" and "registration"
shall refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act, and the declaration or ordering
of the effectiveness of such registration statement.
(i) "Registration Expenses" shall mean all expenses
incurred by the Company in effecting any registration pursuant to this
Agreement, including, without limitation, all registration, qualification, and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses, and expenses of any regular or
special audits incident to or required by any such registration, but shall not
include Selling Expenses, fees and disbursements of counsel for the Holders and
the compensation of regular employees of the Company (which shall be paid in any
event by the Company).
2.
<PAGE> 5
(j) "Regulation S" shall mean Rules 902 through 904 as
promulgated by the Commission under the Securities Act, as such rules may be
amended from time to time, or any similar successor rules that may be
promulgated by the Commission.
(k) "Regulation S Purchasers" shall mean the Purchasers
listed on Exhibit E hereto.
(l) "Restricted Securities" shall mean any Registrable
Securities required to bear one or more of the legends set forth in Section
1.2(a) hereof.
(m) "Rule 144" shall mean Rule 144 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(n) "Rule 415" shall mean Rule 415 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(o) "Securities Act" shall mean the Securities Act of
1933, as amended, or any similar federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the time.
(p) "Selling Expenses" shall mean all underwriting
discounts, selling commissions and stock transfer taxes applicable to the sale
of Registrable Securities and fees and disbursements of counsel for any Holder
(other than the fees and disbursements of counsel included in Registration
Expenses.).
(q) "Shares" shall mean the shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D
Preferred Stock of the Company.
(r) "U.S. Purchasers" shall mean the Purchasers listed on
Exhibit F hereto.
1.2 RESTRICTIONS ON TRANSFER. Each Holder agrees not to make any
disposition of all or any portion of the Registrable Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 1.2, provided and to the extent such Section is then applicable
and:
(i) There is then in effect a registration
statement under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement; or
(ii) (A) Such Holder shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the
3.
<PAGE> 6
circumstances surrounding the proposed disposition, and (B) if reasonably
requested by the Company, such Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such shares under the Securities
Act. It is agreed that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144 except in unusual circumstances.
(iii) Notwithstanding the provisions of paragraphs
(i) and (ii) above, no such registration statement or opinion of counsel shall
be necessary for a transfer by a Holder which is (A) a partnership to its
partners or retired partners in accordance with partnership interests, or (B) to
the Holder's family member or trust for the benefit of an individual Holder,
provided that (A) the transfer is in accordance with Regulation S, if
applicable, and (B) the transferee will be subject to the terms of this Section
1.2 to the same extent as if such transferee were an original Holder hereunder.
(a) Each certificate representing Registrable
Securities shall (unless otherwise permitted by the provisions of this
Agreement) be stamped or otherwise imprinted with a legend substantially similar
to the following (in addition to any legend required under applicable state
securities laws and except that the Regulation S legend shall be applied only to
those securities issued to Regulation S Purchasers):
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH
ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER
EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
PURSUANT TO REGULATION S OF THE SECURITIES ACT OF 1933 AND MAY NOT BE
SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT
IN ACCORDANCE THEREWITH.
(b) The Company shall be obligated to reissue promptly
unlegended certificates at the request of any Holder thereof if the Holder shall
have obtained an opinion, at such Holder's expense, of counsel (which counsel
may be counsel to the Company) reasonably acceptable to the Company to the
effect that the securities proposed to be disposed of may lawfully be so
disposed of without registration, qualification or legend.
(c) Each Regulation S Purchaser is aware that the Company
will, and the Company agrees that Company shall, to the extent required by
Regulation S, refuse to register any transfer of the Shares purchased by such
Purchaser that is not made in accordance with Regulation S.
4.
<PAGE> 7
(d) Any legend endorsed on an instrument pursuant to
applicable state securities laws and the stop-transfer instructions with respect
to such securities shall be removed upon receipt by the Company of an order of
the appropriate blue sky authority authorizing such removal.
1.3 REQUESTED REGISTRATION.
(a) REQUEST FOR REGISTRATION. If the Company shall
receive from Initiating Holders at any time or times not earlier than the
earlier of (i) five years after the date of this Agreement or (ii) one year
after the effective date of the first registration statement filed by the
Company covering an underwritten offering of any of its securities to the
general public, a written request that the Company effect any registration with
respect to all or a part of the Registrable Securities having an aggregate
offering price, net of underwriting discounts and expenses, equal to or
exceeding $10.00 per share of Common Stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares) and the aggregate proceeds
of which (after deduction for underwriter's discounts and expenses related to
the issuance) exceed $10,000,000 the Company will:
(i) promptly give written notice of the proposed
registration to all other Holders; and
(ii) as soon as practicable, use its best efforts
to effect such registration (including, without limitation, filing
post-effective amendments, appropriate qualifications under applicable blue sky
or other state securities laws, and appropriate compliance with the Securities
Act) and as would permit or facilitate the sale and distribution of all or such
portion of such Registrable Securities as are specified in a written request
received by the Company within ten (10) days after such written notice from the
Company is mailed or delivered.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 1.3:
(A) In any particular jurisdiction in
which the Company would be required to execute a general consent to service of
process in effecting such registration, qualification, or compliance, unless the
Company is already subject to service in such jurisdiction and except as may be
required by the Securities Act;
(B) After the Company has initiated two
such registrations pursuant to this Section 1.3(a) (counting for these purposes
only registrations which have been declared or ordered effective and pursuant to
which securities have been sold and registrations which have been withdrawn by
the Holders as to which the Holders have not elected to bear the Registration
Expenses pursuant to Section 1.5 hereof and would, absent such election, have
been required to bear such expenses);
5.
<PAGE> 8
(C) During the period starting with the date
sixty (60) days prior to the Company's good faith estimate of the date of filing
of, and ending on a date one hundred eighty (180) days after the effective date
of, a Company-initiated registration; provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective;
(D) If the Initiating Holders propose to
dispose of shares of Registrable Securities which may be immediately registered
on Form S-3 pursuant to a request made under Section 1.6 hereof;
(E) If the Initiating Holders do not request
that such offering be firmly underwritten by underwriters selected by the
Initiating Holders (subject to the consent of the Company, which consent will
not be unreasonably withheld); or
(F) If the Company and the Initiating
Holders are unable to obtain the commitment of the underwriter described in
clause (E) above to firmly underwrite the offer.
(b) Subject to the foregoing clauses (A) through (F), the
Company shall file a registration statement covering the Registrable Securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Initiating Holders; provided, however, that if (i) in
the good faith judgment of the Board of Directors of the Company, such
registration would be seriously detrimental to the Company and the Board of
Directors of the Company concludes, as a result, that it is essential to defer
the filing of such registration statement at such time, and (ii) the Company
shall furnish to such Holders a certificate signed by the Chief Executive
Officer of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company for
such registration statement to be filed in the near future and that it is,
therefore, essential to defer the filing of such registration statement, then
the Company shall have the right to defer such filing (except as provided in
clause (C) above) for a period of not more than one hundred eighty (180) days
after the receipt of the request of the Initiating Holders, and, provided
further, that the Company shall not defer its obligation in this manner more
than once in any twelve-month period.
The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Sections 1.3(b) and 1.14
hereof, include other securities of the Company, with respect to which
registration rights have been granted, and may include securities of the Company
being sold for the account of the Company.
(c) UNDERWRITING. The right of any Holder to registration
pursuant to Section 1.3 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting (unless otherwise mutually agreed by a majority in interest of
the Initiating Holders and such Holder with respect to such participation and
inclusion) to the extent provided herein. A Holder may elect to include in such
underwriting all or a part of the Registrable Securities such Holder holds.
6.
<PAGE> 9
(d) PROCEDURES. If the Company shall request inclusion in
any registration pursuant to Section 1.3 of securities being sold for its own
account, or if other persons shall request inclusion in any registration
pursuant to Section 1.3, the Initiating Holders shall, on behalf of all Holders,
offer to include such securities in the underwriting and may condition such
offer on their acceptance of the further applicable provisions of this Section 1
(including Section 1.13). The Company shall (together with all Holders and other
persons proposing to distribute their securities through such underwriting)
enter into an underwriting agreement in customary form with the representative
of the underwriter or underwriters selected for such underwriting by a majority
in interest of the Initiating Holders, which underwriters are reasonably
acceptable to the Company. Notwithstanding any other provision of this Section
1.3, if the representative of the underwriters advises the Initiating Holders in
writing that marketing factors require a limitation on the number of shares to
be underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 1.14 hereof. If a person
who has requested inclusion in such registration as provided above does not
agree to the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company, the underwriter or the Initiating
Holders. Any Registrable Securities or other securities excluded or withdrawn
from such underwriting shall also be withdrawn from such registration. If shares
are so withdrawn from the registration and if the number of shares to be
included in such registration was previously reduced as a result of marketing
factors pursuant to this Section 1.3(d), then the Company shall offer to all
Holders who have retained rights to include securities in the registration the
right to include additional securities in the registration in an aggregate
amount equal to the number of shares so withdrawn, with such shares to be
allocated among such Holders requesting additional inclusion in accordance with
Section 1.14.
1.4 COMPANY REGISTRATION.
(a) If the Company shall determine to register any of
its securities either for its own account or the account of a security holder or
holders exercising their respective demand registration rights (other than
pursuant to Section 1.3 or 1.6 hereof), other than a registration relating
solely to employee benefit plans, or a registration relating solely to a Rule
145 transaction, or a registration on any registration form that does not permit
secondary sales, the Company will:
(i) promptly give to each Holder written notice
thereof; and
(ii) use its best efforts to include in such
registration (and any related qualification under blue sky laws or other
compliance), except as set forth in Section 1.4(b) below, and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made by any Holder and received by the Company
within ten (10) days after the written notice from the Company described in
clause (i) above is mailed or delivered by the Company. Such written request may
specify all or a part of a Holder's Registrable Securities.
7.
<PAGE> 10
(b) UNDERWRITING. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section l.4(a)(i). In such event, the right of any Holder to
registration pursuant to this Section 1.4 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders of securities of the Company
with registration rights to participate therein distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected by the
Company.
Notwithstanding any other provision of this Section 1.4, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
representative may (subject to the limitations set forth below) exclude all
Registrable Securities from, or limit the number of Registrable Securities to be
included in, the registration and underwriting. The Company shall so advise all
Holders of securities requesting registration, and the number of shares of
securities that are entitled to be included in the registration and underwriting
shall be allocated first to the Company for securities being sold for its own
account and thereafter as set forth in Section 1.14. If any person does not
agree to the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company or the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such underwriting
shall also be withdrawn from such registration.
If shares are so withdrawn from the registration or if the number of
shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion in accordance
with Section 1.14 hereof.
1.5 EXPENSES OF REGISTRATION. All Registration Expenses incurred
in connection with any registration, qualification or compliance pursuant to
Sections 1.4 and 1.6 hereof, and the first two registrations pursuant to Section
1.3 hereof and reasonable fees of one counsel for the selling stockholders in
the case of registrations pursuant to Section 1.3 shall be borne by the Company;
provided, however, that if the Holders bear the Registration Expenses for any
registration proceeding begun pursuant to Section 1.3 and subsequently withdrawn
by the Holders registering shares therein, such registration proceeding shall
not be counted as a requested registration pursuant to Section 1.3 hereof.
Furthermore, in the event that a withdrawal by the Holders is based upon
material adverse information relating to the Company that is different from the
information known or available (upon request from the Company or otherwise) to
the Holders requesting registration at the time of their request for
registration under Section 1.3, such registration shall not be treated as a
counted registration for purposes of Section 1.3 hereof, even though the Holders
do not bear the Registration Expenses for such registration. All Selling
Expenses relating to securities so registered shall be borne by the
8.
<PAGE> 11
Holders of such securities pro rata on the basis of the number of shares of
securities so registered on their behalf, as shall any other expenses in
connection with the registration required to be borne by the Holders of such
securities.
1.6 REGISTRATION ON FORM S-3.
(a) After its initial public offering, the Company
shall use its best efforts to qualify for registration on Form S-3 or any
comparable or successor form or forms. After the Company has qualified for the
use of Form S-3, in addition to the rights contained in the foregoing provisions
of this Section 1, the Holders of Registrable Securities shall have the right to
request registrations on Form S-3 (such requests shall be in writing and shall
state the number of shares of Registrable Securities to be disposed of and the
intended methods of disposition of such shares by such Holder or Holders),
provided, however, that the Company shall not be obligated to effect any such
registration if (i) the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) on Form S-3 at an
aggregate price to the public of less than $1,000,000; or (ii) in the event that
the Company shall furnish the certification described in paragraph 1.3(b)(ii)
(but subject to the limitations set forth therein); or (iii) in a given
twelve-month period, the Company has effected one (1) such registration in such
period; or (iv) it is to be effected more than five (5) years after the
Company's initial public offering.
(b) If a request complying with the requirements of
Section 1.6(a) hereof is delivered to the Company, the provisions of Sections
1.3(a) and Section 1.3(b) hereof shall apply to such registration. If the
registration is for an underwritten offering, the provisions of Sections 1.3(c)
and 1.3(d) hereof shall apply to such registration.
1.7 REGISTRATION PROCEDURES. In the case of each registration
effected by the Company pursuant to Section 1, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of
one hundred twenty (120) days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto, whichever
first occurs; provided, however, that (i) such 120-day period shall be extended
for a period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 120-day period shall be extended,
if necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that Rule 145, or any successor rule
under the Securities Act, permits an offering on a continuous or delayed basis,
and provided further that applicable rules under the Securities Act governing
the obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment that (I) includes any prospectus required by Section
10(a)(3) of the Securities Act or (II) reflects facts or events
9.
<PAGE> 12
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of information
required to be included in (I) and (II) above to be contained in periodic
reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the
registration statement;
(b) Prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish such number of prospectuses and other
documents incident thereto, including any amendment of or supplement to the
prospectus, as a Holder from time to time may reasonably request;
(d) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed;
(e) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant to such registration statement and a
CUSIP number for all such Registrable Securities, in each case not later than
the effective date of such registration;
(f) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first month after the effective date of the
Registration Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act; and
(g) In connection with any underwritten offering pursuant
to a registration statement filed pursuant to Section 1.3 hereof, the Company
will enter into an underwriting agreement in form reasonably necessary to effect
the offer and sale of Common Stock, provided such underwriting agreement
contains customary underwriting provisions and provided further that if the
underwriter so requests the underwriting agreement will contain customary
contribution provisions.
1.8 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its
officers, directors and partners, legal counsel, and accountants and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification, or compliance has been
effected pursuant to this Section 1, and each underwriter, if any, and each
person who controls within the meaning of Section 15 of the Securities Act any
underwriter, against all expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof) arising out of or based
on any untrue statement
10.
<PAGE> 13
(or alleged untrue statement) of a material fact contained in any prospectus,
offering circular, or other document (including any related registration
statement, notification, or the like) incident to any such registration,
qualification, or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statement therein not misleading, or any violation by the Company of the
Securities Act or any rule or regulation thereunder applicable to the Company
and relating to action or inaction required of the Company in connection with
any such registration, qualification, or compliance, and will reimburse each
such Holder, each of its officers, directors, partners, legal counsel, and
accountants and each person controlling such Holder, each such underwriter, and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating and defending or
settling any such claim, loss, damage, liability, or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability, or expense arises out of or is based on any untrue
statement or omission based upon written information furnished to the Company by
such Holder or underwriter and stated to be specifically for use therein. It is
agreed that the indemnity agreement contained in this Section 1.8(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent has not been unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by
such Holder are included in the securities as to which such registration,
qualification, or compliance is being effected, indemnify the Company, each of
its directors, officers, partners, legal counsel, and accountants and each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of Section 15 of the Securities Act, each other such Holder and Other
Stockholder, and each of their officers, directors, and partners, and each
person controlling such Holder or Other Stockholder, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering circular, or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and such Holders, Other
Stockholders, directors, officers, partners, legal counsel, and accountants,
persons, underwriters, or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability, or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company by such Holder and
stated to be specifically for use therein provided, however, that the
obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages, or liabilities (or actions in
respect thereof) if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld); and provided that in
no event shall any indemnity under this Section 1.8 exceed the gross proceeds
from the offering received by such Holder.
11.
<PAGE> 14
(c) Each party entitled to indemnification under this
Section 1.8 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not unreasonably be withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Section
1, to the extent such failure is not prejudicial. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section
1.8 is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any loss, liability, claim, damage, or expense
referred to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party on the one hand and of the Indemnified Party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Indemnifying Party or by the Indemnified Party and the parties'
relative intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
1.9 INFORMATION BY HOLDER. Each Holder of Registrable Securities
shall furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 1.
12.
<PAGE> 15
1.10 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of a majority in interest of the Holders, enter into any
agreement with any holder or prospective holder of any securities of the Company
giving such holder or prospective holder any registration rights the terms of
which are more favorable than the registration rights granted to the Holders
hereunder.
1.11 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission that may permit the
sale of the Restricted Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) Make and keep public information regarding the
Company available as those terms are understood and defined in Rule 144 under
the Securities Act, at all times from and after ninety (90) days following the
effective date of the first registration under the Securities Act filed by the
Company for an offering of its securities to the general public;
(b) File with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act at any time after it has become subject to such reporting
requirements;
(c) So long as a Holder owns any Restricted Securities,
furnish to the Holder forthwith upon written request a written statement by the
Company as to its compliance with the reporting requirements of Rule 144 (at any
time from and after ninety (90) days following the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy, of the most
recent annual or quarterly report of the Company, and such other reports and
documents so filed as a Holder may reasonably request in availing itself of any
rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.
1.12 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to
cause the Company to register securities granted to a Holder by the Company
under this Section 1 may be transferred or assigned by a Holder only to a
transferee or assignee of not less than 50,000 shares of Registrable Securities
(as presently constituted and subject to subsequent adjustments for stock
splits, stock dividends, reverse stock splits, and the like), provided that the
Company is given written notice at the time of or within a reasonable time after
said transfer or assignment, stating the name and address of the transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned, and, provided further, that the
transferee or assignee of such rights assumes in writing the obligations of such
Holder under this Section 1.
1.13 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees
that such Holder shall not offer to sell, contract to sell or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") 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 Stock of the Company (collectively, "Securities") held by
such Holder (other than those included in the registration) for a period
specified by the representative of the underwriters of Common Stock (or other
securities) of the Company not to exceed one hundred eighty (180) days
following the effective date of a registration statement of the Company filed
under the Securities Act (the "Lock-Up Period"); provided that:
(i) such agreement shall apply only to the Company's first such
registration statement; and
(ii) all Holders and officers and directors of the Company enter
into similar agreements.
The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction that
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-Up Period even if such Securities would be disposed
of by someone other than the undersigned. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including without
limitation any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities.
Each Holder agrees to execute and deliver such other agreements
as may be reasonably requested by the Company or the underwriter which are
consistent with the foregoing or which are necessary to give further effect
thereto. In addition, if requested by the Company or the representative of the
underwriters of Common Stock (or other securities) of the Company, each Holder
shall provide, within ten (10) days of such request, such information as may be
required by the Company or such representative in connection with the
completion of any public offering of the Company's securities pursuant to a
registration statement filed under the Securities Act. The obligations
described in this Section 1.13 shall not apply to a registration relating
solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that
may be promulgated in the future, or a registration relating solely to a
Commission Rule 145 transaction on Form S-4 or similar forms that may be
promulgated in the future. The Company may impose stop-transfer instructions
with respect to the shares of Common Stock (or other securities) subject to the
foregoing restriction until the end of said one hundred eighty (180) day period.
13.
<PAGE> 16
1.14 ALLOCATION OF REGISTRATION OPPORTUNITIES. In any
circumstance in which all of the Registrable Securities and other shares of
Common Stock of the Company (including shares of Common Stock issued or issuable
upon conversion of shares of any currently unissued series of Preferred Stock of
the Company) with registration rights (the "Other Shares") requested to be
included in a registration on behalf of the Holders or other selling
stockholders cannot be so included as a result of limitations of the aggregate
number of shares of Registrable Securities and Other Shares that may be so
included, the number of shares of Registrable Securities and Other Shares that
may be so included shall be allocated among the Holders and other selling
stockholders requesting inclusion of shares pro rata on the basis of the number
of shares of Registrable Securities and Other Shares that would be held by such
Holders and other selling stockholders, assuming conversion; provided, however,
so that such allocation shall not operate to reduce the aggregate number of
Registrable Securities and Other Shares to be included in such registration, if
any Holder or other selling stockholder does not request inclusion of the
maximum number of shares of Registrable Securities and Other Shares allocated to
such person pursuant to the above-described procedure, the remaining portion of
such person's allocation shall be reallocated among those requesting Holders and
other selling stockholders whose allocations did not satisfy their requests pro
rata on the basis of the number of shares of Registrable Securities and Other
Shares which would be held by such Holders and other selling stockholders,
assuming conversion, and this procedure shall be repeated until all of the
shares of Registrable Securities and Other Shares which may be included in the
registration on behalf of the Holders and other selling stockholders have been
so allocated. The Company shall not limit the number of Registrable Securities
to be included in a registration pursuant to this Agreement in order to include
shares held by stockholders with no registration rights or to include founder's
stock or any other shares of stock issued to employees, officers, directors, or
consultants pursuant to the Company's 1993 Stock Purchase Plan except to the
extent necessary for the repayment of promissory notes issued to the Company by
holders of Common Stock issued to such holders under the 1993 Stock Purchase
Plan, or with respect to registrations under
14.
<PAGE> 17
Section 1.6 hereof, in order to include in such registration securities
registered for the Company's own account.
1.15 DELAY OF REGISTRATION. No Holder shall have any right to
take any action to restrain, enjoin, or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.16 TERMINATION OF REGISTRATION RIGHTS.
(a) Except as set forth in subparagraph (b) below, the
right of any Holder to request registration or inclusion in any registration
pursuant to Section 1.3, 1.4 or 1.6 shall terminate on the closing of the first
Company initiated registered public offering of Common Stock of the Company, if
all shares of Registrable Securities held or entitled to be held upon conversion
by such Holder may immediately be sold under Rule 144 during any 90-day period,
or on such date after the closing of the first Company-initiated registered
public offering of Common Stock of the Company as all shares of Registrable
Securities held or entitled to be held upon conversion by such Holder may
immediately be sold under Rule 144 during any 90-day period.
(b) The provisions of subparagraph (a) shall not apply to
any Holder who owns more than two percent (2%) of the Company's outstanding
stock until the earlier of (i) such time as such Holder owns less than two
percent (2%) of the outstanding stock of the Company, or (ii) the expiration of
three years after the closing of the first registered public offering of Common
Stock of the Company.
2. COVENANTS OF THE COMPANY.
The Company hereby covenants and agrees, so long as any Holder
owns any Registrable Shares, as follows:
2.1 BASIC FINANCIAL INFORMATION. The Company will furnish the
following reports to each Holder:
(a) As soon as practicable after the end of each fiscal
year of the Company, and in any event within ninety (90) days thereafter, a
consolidated balance sheet of the Company and its subsidiaries, if any, as at
the end of such fiscal year, and consolidated statements of income and cash
flows of the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles consistently applied
and setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail and certified by independent public
accountants of recognized national standing selected by the Company, and a
Company-prepared comparison to the Company's operating plan for such year.
(b) As soon as practicable after the end of the first,
second, and third quarterly accounting periods in each fiscal year of the
Company, and in any event within
15.
<PAGE> 18
forty-five (45) days thereafter, a consolidated balance sheet of the Company and
its subsidiaries, if any, as of the end of each such quarterly period, and
consolidated statements of income and cash flows of the Company and its
subsidiaries, if any, for such period and for the current fiscal year to date,
prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in comparative form the figures for the
corresponding periods of the previous fiscal year and to the Company's operating
plan then in effect and approved by its Board of Directors, subject to changes
resulting from normal year-end audit adjustments, all in reasonable detail,
except that such financial statements need not contain the notes required by
generally accepted accounting principles.
2.2 ADDITIONAL INFORMATION AND RIGHTS.
(a) The Company will permit any Holder, so long as such
Holder (or its representative) owns at least 500,000 Shares, or such number of
shares of Common Stock issued upon conversion of 500,000 or more Shares, or any
combination thereof (as presently constituted and subject to subsequent
adjustment for stock splits, stock dividends, reverse stock splits,
recapitalizations and the like) and to each Holder which represents that it is a
"venture capital operating company" for purposes of Department of Labor
Regulation Section 2510.3-101, who requests them (a "Significant Holder") (or a
representative of any Significant Holder) to visit and inspect any of the
properties of the Company, including its books of account and other records (and
make copies thereof and take extracts therefrom), and to discuss its affairs,
finances and accounts with the Company's officers and its independent public
accountants, all at such reasonable times and as often as any such person may
reasonably request.
(b) The Company will deliver to each Significant Holder,
who so requests in writing, annually (and in any event no later than ten (10)
days after adoption by the Board of Directors of the Company) the financial plan
of the Company, in such manner and form as approved by the Board of Directors of
the Company, which financial plan shall include at least a projection of income
and a projected cash flow statement for each month in such fiscal year and a
projected balance sheet as of the end of each fiscal quarter in such fiscal
year. Any material changes in such business plan shall be delivered to each
Significant Holder as promptly as practicable after such changes have been
approved by the Board of Directors of the Company.
(c) The Company will deliver to each Significant Holder,
who so requests in writing, within thirty (30) days after the end of each month,
a consolidated balance sheet of the Company and its subsidiaries, if any, as at
the end of each month, and consolidated statements of income and cash flows of
the Company and its subsidiaries, if any, for such month.
(d) The provisions of Section 2.1 and this Section 2.2
shall not be in limitation of any rights which any Holder or Significant Holder
may have with respect to the books and records of the Company and its
subsidiaries, or to inspect their properties or discuss their affairs, finances
and accounts, under the laws of the jurisdictions in which they are
incorporated.
16.
<PAGE> 19
(e) Anything in Section 2 to the contrary notwithstanding,
no Holder or Significant Holder by reason of this Agreement shall have access to
any trade secrets or classified information of the Company. Each Significant
Holder hereby agrees to hold in confidence and trust and not to misuse or
disclose any confidential information provided pursuant to this Section 2.2. The
Company shall not be required to comply with this Section 2.2 in respect of any
Holder whom the Company reasonably determines to be a competitor or an officer,
employee, director or greater than 10% stockholder of a competitor. For purposes
of this Section 2.2, AT&T Venture Company, L.P. ("AT&T Ventures") shall not be
considered a competitor of the Company; provided, however, that AT&T Ventures
hereby agrees not to disclose any confidential information of the Company to any
other person or entity.
(f) Each Holder who represents to the Company that such
Holder is a "venture capital operating company" for purposes of Department of
Labor Regulation Section 2510.3-101 shall in addition have the right to consult
with and advise the officers of the Company as to the management of the Company.
2.3 TERMINATION OF RIGHTS. In lieu of the rights granted to
Holders under Section 2.2 of this Agreement, from the date the Company becomes
subject to the reporting requirements of the Exchange Act, the Company will
provide to any Holder who requests such in writing, copies of the Company's
annual reports on Form 10-K and quarterly reports on Form 10-Q.
3. MISCELLANEOUS.
3.1 GOVERNING LAW. This Agreement shall be governed in all
respects by the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
3.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
3.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement
(including the Exhibits hereto) constitutes the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof. Neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated, except by a written instrument signed by the Company
and the holders of at least fifty percent (50%) of the Registrable Securities
and any such amendment, waiver, discharge or termination shall be binding on all
the Holders, but in no event shall the obligation of any Holder hereunder be
materially increased, except upon the written consent of such Holder.
3.4 ADDITIONAL SERIES C PURCHASERS. Any person who has purchased
or who purchases shares of the Company's Series C Preferred Stock pursuant to
the Company's 1996 Employee Stock Purchase Bonus Plan may execute a counterpart
copy of this Agreement and
17.
<PAGE> 20
shall thereupon become an "Employee Shareholder" and an "Investor" under this
Agreement, and shall have the rights and obligations of an "Investor" hereunder
and thereunder.
3.5 NOTICES, ETC. All notices and other communications required
or permitted hereunder shall be in writing and shall be mailed by first-class
mail, postage prepaid, sent by facsimile or delivered personally by hand or
nationally or internationally recognized courier (as the case may be) addressed
(a) if to a Holder, as indicated on the list of Holders attached hereto as
Exhibit A, Exhibit B, Exhibit C, Exhibit D, Exhibit E, or Exhibit F or at such
other address or facsimile number as such Holder or permitted assignee shall
have furnished to the Company in writing, or (b) if to the Company, at such
address or facsimile number as the Company shall have furnished to each Holder
in writing. All such notices and other written communications shall be effective
on the date of mailing, facsimile transfer or delivery.
3.6 DELAYS OR OMISSIONS. No delay or omission to exercise any
right, power or remedy accruing to any Holder, upon any breach or default of the
Company under this Agreement shall impair any such right, power or remedy of
such Holder nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default therefore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any Holder of any breach or default under this Agreement or any
waiver on the part of any Holder of any provisions or conditions of this
Agreement must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any Holder, shall be cumulative and
not alternative.
3.7 RIGHTS; SEPARABILITY. Unless otherwise expressly provided
herein, a Holder's rights hereunder are several rights, not rights jointly held
with any of the other Holders. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
3.8 INFORMATION CONFIDENTIAL. Each Holder acknowledges that the
information received by such Holder pursuant hereto may be confidential and for
such Holder's use only, and Holder will not use such confidential information in
violation of the Exchange Act or reproduce, disclose or disseminate such
information to any other person (other than its employees or agents having a
need to know the contents of such information, and its attorneys), except in
connection with the exercise of rights under this Agreement, unless the Company
has made such information available to the public generally or such Holder is
required to disclose such information by a governmental body.
3.9 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing or interpreting this Agreement.
18.
<PAGE> 21
3.10 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
19.
<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have executed this Investors'
Rights Agreement effective as of the day and year first above written.
FIRST VIRTUAL CORPORATION
By:___________________________________________
James O. Mitchell, Chief Financial Officer
Address: 3393 Octavius Drive, Suite 102
Santa Clara, CA 95054
Facsimile: (408) 988-7077
20.
<PAGE> 23
<TABLE>
<S> <C>
INVESTORS
ACCEL IV L.P.
By: Accel IV Associates L.P.
Its: General Partner
By:______________________________________
James Swartz, General Partner
Address: One Embarcadero Center
San Francisco, CA 94111
Facsimile: (408) 989-5554
ACCEL INVESTORS '93 L.P.
By:______________________________________
James Swartz, General Partner
One Embarcadero Center
San Francisco, CA 94111
Facsimile: (408) 989-5554
RALPH K. UNGERMANN, TRUSTEE OR ACCEL KEIRETSU L.P.
SUCCESSOR TRUSTEE OF THE RALPH K.
UNGERMANN LIVING TRUST UAD MAY 18, By: Accel Partners & Co., Inc.
1988, AS AMENDED Its: General Partner
Signature:_______________________________ By:______________________________________
James Swartz, General Partner
By: Ralph K. Ungermann, Trustee or
Successor Trustee Address: One Embarcadero Center
San Francisco, CA 94111
Address: 27240 Natoma Road Facsimile: (408) 989-5554
Los Altos Hills, CA 94022
(415) 941-3134
</TABLE>
<PAGE> 24
<TABLE>
<S> <C>
ELLMORE C. PATTERSON PARTNERS RICHARD T. PEERY SEPARATE PROPERTY
TRUST
By:______________________________________
Arthur C. Patterson, General Partner By:______________________________________
Richard T. Peery, Trustee
Address: Attn: Arthur C. Patterson
c/o Accel Partners Address: 2560 Mission College Blvd.
One Palmer Square Suite 101
Princeton, NJ 08542 Santa Clara, CA 95054-1291
Facsimile: (609) 683-0384 (408) 988-4893
AT&T VENTURE COMPANY, L.P.
PROSPER PARTNERS
By:______________________________________
Neal M. Douglas
By:______________________________________ General Partner
Carter Sednaoui, Attorney-in-Fact
Address: Building 4 - Suite 235
Address: Attn: G. Carter Sednaoui 3000 Sand Hill Road
c/o Accel Partners Menlo Park, CA 94025
One Palmer Square Facsimile: (415) 854-8083
Princeton, NJ 08542
Facsimile: (609) 683-0384
</TABLE>
<PAGE> 25
<TABLE>
<S> <C>
THE GOLDMAN, SACHS GROUP, L.P.
By:_______________________________________
Joseph Gleberman
Title: ___________________________________
Address: 85 Broad Street, 19th Floor
New York, New York 10004
Facsimile: (212) 902-3000
HAMBRECHT & QUIST
GUARANTY FINANCE, LLC
_______________________________________
(signature)
Title: President
_____________________________
</TABLE>
<PAGE> 26
EXHIBIT A
<TABLE>
<CAPTION>
Number of Shares of
Name Series A Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Ralph K. Ungermann, Trustee 900,000 27240 Natoma Road
or Successor Trustee of the Los Altos Hills, CA 94022
Ralph K. Ungermann Living Facsimile: (415) 941-3134
Trust UAD May 18, 1988,
as amended
Kathryn M. Ungermann, 300,000 27240 Natoma Road
Trustee or Successor Trustee Los Altos Hills, CA 94022
of the Kathryn Mason Ungermann Facsimile: (415) 941-3134
Living Trust UAD May 18, 1988,
as amended
Allwyn Sequeira 50,000 18580 Paseo Pueblo
Saratoga, CA 95070
Thomas J. Leffingwell 200,000 3393 Octavius Drive, Suite 102
Santa Clara, CA 95054
Elserino Piol 66,667 10015 Ivrea (TO) Italy
Via G. Jervis, 77
Italy
Providence Investment
Company Limited 66,667 Motte Chambers
St. Heller Jersey
Channel Islands, JE1 1BJ
Andrew Hopper 66,666 Old Addenbrooke Site
240 Trumpington Street
Cambridge CB2 1QA
England
Accel IV L.P. 1,557,200 One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Attn: Mr. James Swartz
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
Number of Shares of
Name Series A Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Accel Keiretsu L.P. 32,300 One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Attn: Mr. James Swartz
Accel Investors '93 L.P. 62,900 One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Attn: Mr. James Swartz
Ellmore C. Patterson Partners 37,400 One Palmer Square
Princeton, NJ 08542
Attn: Mr. G. Carter Sednaoui
Prosper Partners 10,200 One Palmer Square
Princeton, NJ 08542
Attn: Mr. G. Carter Sednaoui
John Arrillaga Separate
Property Trust 270,000 c/o Peery/Arrillaga
2560 Mission College Blvd.
Suite 101
Santa Clara, CA 95054-1291
Richard T. Peery Separate
Property Trust 270,000 c/o Peery/Arrillaga
2560 Mission College Blvd.
Suite 101
Santa Clara, CA 95054-1291
GC&H Investments 60,000 One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
Robert C. Harris, Jr. 20,000 c/o Unterberg Harris
275 Battery Street
29th Floor
San Francisco, CA 94111
David Norman 30,000 16101 Greenwood Road
Monte Sereno, CA 95030
</TABLE>
<PAGE> 28
EXHIBIT B
<TABLE>
<CAPTION>
Number of Shares of
Name Series B Preferred Address
- ---- ------------------- -------
<S> <C> <C>
AT&T Venture Company, L.P. 1,000,000 3000 Sand Hill Road
Building 4 - Suite 235
Menlo Park, CA 94025
Facsimile: (415) 854-8083
Accel IV L.P. 366,400 One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Attn: Mr. James Swartz
Accel Keiretsu L.P. 7,600 One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Attn: Mr. James Swartz
Accel Investors '93 L.P. 14,800 One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Attn: Mr. James Swartz
Ellmore C. Patterson Partners 8,800 One Palmer Square
Princeton, NJ 08542
Attn: Mr. G. Carter Sednaoui
Prosper Partners 2,400 One Palmer Square
Princeton, NJ 08542
Attn: Mr. G. Carter Sednaoui
GC&H Investments 33,333 One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
David Norman 66,667 16101 Greenwood Road
Monte Sereno, CA 95030
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
Number of Shares of
Name Series B Preferred Address
- ---- ------------------- -------
<S> <C> <C>
John Arrillaga Separate 100,000 c/o Peery/Arrillaga
Property Trust 2560 Mission College Blvd.
Suite 101
Santa Clara, CA 95054-1291
Richard T. Peery Separate 100,000 c/o Peery/Arrillaga
Property Trust 2560 Mission College Blvd.
Suite 101
Santa Clara, CA 95054-1291
Allwyn Sequiera 40,000 18580 Paseo Pueblo
Saratoga, CA 95070
Enzo Torresi 33,333 211 Tourney Loop
Los Gatos, CA 95032
Ralph K. Ungermann, Trustee 140,999 27240 Natoma Road
or Successor Trustee of the Los Altos Hills, CA 94022
Ralph K. Ungermann Living Facsimile: (415) 941-3134
Trust UAD May 18, 1988,
as amended
Kathryn M. Ungermann, 33,333 27240 Natoma Road
Trustee or Successor Trustee Los Altos Hills, CA 94022
of the Kathryn Mason Ungermann Facsimile: (415) 941-3134
Living Trust UAD May 18, 1988,
as amended
Mark Berkeland 6,667 389 Bay Street
San Jose, CA 95123
Kanwaldeep S. Bindra 11,000 225 Kansas Way
Fremont, CA 94539
Russell Erikson 6,667 1260 Lorelei Court
Campbell, CA 95008
Heather Gelormini 34,000 915 Oak Lane, #4
Menlo Park, CA 94025
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
Number of Shares of
Name Series B Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Diane Guthmann 6,667 5533 Yale Drive
San Jose, CA 95118
Joseph Lacombe 12,000 143 Wyndham Drive
Portola Valley, CA 94028
Thomas J. Leffingwell 20,001 3393 Octavius Drive, Suite 102
Santa Clara, CA 95054
Kathleen Lytle 16,667 3376 Shady Spring Lane
Mountain View, CA 94040
Patricia McBride 3,333 83 S. El Monte Avenue
Los Altos, CA 94022
David G. Norman 60,000 1748 Dorrance Drive
San Jose, CA 95125
Michael Pham 6,667 1987 Autumn Gold Drive
San Jose, CA 95131
Gernot Scheichl 20,000 101 First Street, Suite 273
Los Altos, CA 94022
Douglas W. Tsui 10,000 972 Michelangelo Drive
Sunnyvale, CA 94087
Hemant Vinchure 3,333 1875 Masuda Landing
San Jose, CA 95132
Luen Wuu Wey 23,333 711 Hebrides Way
Sunnyvale, CA 94087
Todd Wilde 12,000 10188 Ridgeway Drive
Cupertino, CA 95014
</TABLE>
<PAGE> 31
EXHIBIT C
<TABLE>
<CAPTION>
Number of Shares of
Name Series C Preferred Address
- ---- ------------------- -------
<S> <C> <C>
AT&T Venture Company, L.P. 75,000 3000 Sand Hill Road
Building 4 - Suite 235
Menlo Park, CA 94025
Facsimile: (415) 854-8083
Accel IV L.P. 114,500 One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Attn: Mr. James Swartz
Accel Keiretsu L.P. 4,625 One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Attn: Mr. James Swartz
Accel Investors '93 L.P. 2,375 One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Attn: Mr. James Swartz
Ellmore C. Patterson Partners 2,750 One Palmer Square
Princeton, NJ 08542
Attn: Mr. G. Carter Sednaoui
Prosper Partners 750 One Palmer Square
Princeton, NJ 08542
Attn: Mr. G. Carter Sednaoui
GC&H Investments 5,625 One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
John Arrillaga Separate 50,000 c/o Peery/Arrillaga
Property Trust 2560 Mission College Blvd.
Suite 101
Santa Clara, CA 95054-1291
</TABLE>
<PAGE> 32
<TABLE>
<CAPTION>
Number of Shares of
Name Series C Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Richard T. Peery Separate 50,000 c/o Peery/Arrillaga
Property Trust 2560 Mission College Blvd.
Suite 101
Santa Clara, CA 95054-1291
Enzo Torresi 5,000 211 Tourney Loop
Los Gatos, CA 95032
Ralph K. Ungermann, Trustee 75,000 27240 Natoma Road
or Successor Trustee of the Los Altos Hills, CA 94022
Ralph K. Ungermann Living Facsimile: (415) 941-3134
Trust UAD May 18, 1988,
as amended
Robert W. Wilmot and 125,000 Attn: Mary J. Wilmot
Mary J. Wilmot, trustees 10969 Wellworth Avenue
of the Wilmot Living Trust Apartment 312
u/d/t dated April 18, 1995 Westwood, CA 90024
Kanematsu Corporation 125,000 2-1 Shibaura 1-Chome
Minato-Ku, Tokyo 105-05
Bruce A. Wilford and 25,000 935 Eastwood Pl.
Ruth Wilford, Trustees, Los Altos, CA 94022-5022
or the Successor Trustee,
under the Bruce A. and
Ruth Wilford Revocable Living
Trust dated December 9, 1993
James O. Mitchell 25,000 c/o First Virtual Corporation
3393 Octavius Drive
Suite 102
Santa Clara, Ca 95054
Facsimile: (408) 988-7077
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
Number of Shares of
Name Series C Preferred Address
- ---- ------------------- -------
<S> <C> <C>
The Goldman, Sachs Group, L.P. 375,000 85 Broad Street, 19th Floor
New York, NY 10004
Farrokh Billimoria 10,000 23 Wield Court
Park Ridge, NJ 07656
Robert C. Harris, Jr . 10,000 c/o Unterberg Harris
275 Battery Street, 29th Floor
San Francisco, CA 94111
Laura K. Arrillaga 12,500 c/o Peery/Arrillaga
2560 Mission College Blvd.
Suite 101
Santa Clara, CA 95054
John Arrillaga, Jr. 12,500 c/o Peery/Arrillaga
2560 Mission College Blvd.
Suite 101
Santa Clara, CA 95054
The Richard T. Peery 25,000 c/o Peery/Arrillaga
1976 Children Trust 2560 Mission College Blvd.
Suite 101
Santa Clara, CA 95054
Jeannette Schirtzinger 2,500 15681 Lomas Lane
Los Gatos, CA 95030
Robert F. Mitro 25,000 20 East Main Street, #47
Los Gatos, CA 95032
Maureen B. Bannister 25,000 20 East Main Street, #47
Los Gatos, CA 95032
Jean-Claude Asscher 21,875 34 Avenue Raphael
75016 Paris
France
Pier Carlo Falotti 40,000 15 Chemin de Vignes
1299 Crans (VD)
Switzerland
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
Number of Shares of
Name Series C Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Eric Le Guinniec 5,000 5 Villa des Buttes Chaumont
75019 PARIS
France
</TABLE>
<PAGE> 35
EXHIBIT D
Name Address
- ---- -------
Kevin Asano 405 Fieldcrest Drive
San Jose, CA 95123
Kanwaldeep S. Bindra 225 Kansas Way
Fremont, CA 94539
Frank Chu 6388 Bancroft Way
San Jose, CA 93129
Russell Erickson 1260 Lorelei Court
Campbell, CA 95008
Bill Gallmeister 16210 Lilac Lane
Los Gatos, CA 95032
Heather Gelormini 915 Oak Lane, #4
Menlo Park, CA 94025
Alan Glowacki 6901 B Rodling Way
San Jose, CA 95138
William Gunter 6579 Cooperage Court
San Jose, CA 95120
Joseph H. Lacombe 143 Wyndham Drive
Portola Valley, CA 94028
Marlis Rossetta, 2117 Bush Street, Flat A
Trustee or Successor Trustee under San Francisco, CA 94115
the Marlis Rossetta Living Trust
U/A/D April 28, 1995
Alan J. McMillan 187 Bryant Street
Palo Alto, CA 94301
Michael Munoz 6921 B. Rodling Way
San Jose, CA 95138
David G. Norman 1748 Dorrance Drive
San Jose, CA 95125
Michael Pham 1987 Autumn Gold Drive
San Jose, CA 95131
<PAGE> 36
Name Address
- ---- -------
Ralph K. Ungermann, Trustee or c/o First Virtual Corporation
Successor Trustee of the Ralph K. 3393 Octavius Drive, Suite 102
Ungermann Living Trust ... May 18, Santa Clara, CA 95054
1988
Mike Regli 3393 Octavius Drive, Suite 102
Santa Clara, CA 95054
Andrew Schwartz 4212 17th Street
San Francisco, CA 94114
Douglas W. Tsui 972 Michelangelo Drive
Sunnyvale, CA 94087
Luen-Wuu Wey 711 Hebridges Way
Sunnyvale, CA 94087
Todd Wilde 2335 Amherst Drive
Palo Alto, CA 94024
Bruce Wilford 935 Eastwood Place
Los Altos, CA 94024
<PAGE> 37
EXHIBIT E
FIRST CLOSING
<TABLE>
<CAPTION>
Number of Shares of
Name Series D Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Jan Abercrombie 12,500 Ringslangweide 63
3437 VD Nieuwegein
The Netherlands
Jean Claude Fino 2,500 4 Villa Cour creuse
92140 CLAMART
France
Serge Feldmann 2,500 9 rue d'Odessa
75014 PARIS
France
Philippe Le Mestreallan 2,500 47 Avenue de la Division LECLERC
92320 CHATILLON
France
Eric Le Guinniec 1,250 5 Villa des Buttes Chaumont
75019 PARIS
France
Jean Claude Asscher 12,500 First Virtual Corporation (France)
c/o Tekelec Airtronic SA
5, rue Carle Vernet
92315 Sevres Cedex
France
Facsimile: 33-1-45072191
Muriel Asscher 12,500 First Virtual Corporation (France)
c/o Tekelec Airtronic SA
5, rue Carle Vernet
92315 Sevres Cedex
France
Facsimile: 33-1-45072191
Mike Carlucci 12,500 14 Chemin De La Mare Close
78240 Chambourcy
France
Facsimile: 33-1-30747229
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
Number of Shares of
Name Series D Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Gottfried Haederle 11,174 First Virtual Corporation (UK)
c/o INL
4th Floor, 25 City Road
London
United Kingdom EC1Y 1AA
Facsimile: 44 171 972 0019
Bruce Withington 12,500 First Virtual Corporation (UK)
c/o INL
4th Floor, 25 City Road
London
United Kingdom EC1Y 1AA
Facsimile: 44 171 972 0019
Camilla N. Withington 7,250 First Virtual Corporation (UK)
c/o INL
4th Floor, 25 City Road
London
United Kingdom EC1Y 1AA
Facsimile: 44 171 972 0019
Sohei Mori 1,000 Kanematsu Electronics Ltd.
17-5 Kyobashi 2-chome,
Chuo-ku, Tokyo 104
Japan
Facsmile: 81-3-5250-6178
Ryosuke Ichikawa 1,000 Attn: Sohei Mori
Kanematsu Electronics Ltd.
17-5 Kyobashi 2-chome,
Chuo-ku, Tokyo 104
Japan
Facsmile: 81-3-5250-6178
Almargen Pty Ltd 6,250 Attn: Philip Mellett
17 Bay Street
Brighton, Victoria
Australia 3186
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
Number of Shares of
Name Series D Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Insight Computer Systems Pty Ltd 6,250 Attn: Alan Gray
C/- Trevor Dumas Management
Services Pty Ltd
1st Floor, 8 The Highway
Mt Waverley, Victoria 3149
Australia
Facsimile: 011-61-3-96966483
</TABLE>
SECOND CLOSING
<TABLE>
<CAPTION>
Number of Shares of
Name Series D Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Bob Schuchard 3,750 van Aerssenstraat 124
2582 JS DEN HAAG
The Netherlands
Facsimile: 31-70-350-5108
Koen Gielen 2,500 Miraeusstrat 10
2018 ANTWERPEN
Belgium
Gottfried Haederle 326 First Virtual Corporation (UK)
c/o INL
4th Floor, 25 City Road
London
United Kingdom EC1Y 1AA
Facsimile: 44-171-972-0019
First Virtual (Asia) Ltd. 12,500 17B, 23 Braemar Hill
North Point, Hong Kong
Attn: Ratna Widjaja
</TABLE>
<PAGE> 40
EXHIBIT F
FIRST CLOSING
<TABLE>
<CAPTION>
Number of Shares of
Name Series D Preferred Address
- ---- ------------------- -------
<S> <C> <C>
Edwin A. Rodriguez and
Pamela R. Rodriguez, JTWRS 6,250 12308 Trayside Lane
Saratoga, CA 95070
Facsimile: (408) 255-2993
Joanne Clare Knight 1,375 793 View Street
Mountain View, CA 94041
Facsimile: (415) 960-0433
James O. Mitchell 12,500 3393 Octavius Drive, Suite 102
Santa Clara, CA 95054
Facsimile: (408) 988-7077
</TABLE>
SECOND CLOSING
<TABLE>
Number of Shares of
Name Series D Preferred Address
- ---- ------------------- -------
<S> <C> <C>
KPMG Peat Marwick LLP 12,500 3 Embarcadero Center, 20th Floor
San Francisco, CA 94111
Attn: Allen Holter, Partner
Facsimile: (415) 677-9145
Jinnes Technologies, Inc. 12,500 624 E. Evelyn Ave., Suite F
Sunnyvale, CA 94086
Attn: In Hong Kim
Facsimile: (408) 736-1433
</TABLE>
<PAGE> 1
Exhibit 10.23
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS,
IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE
SECURITIES ACT OF 1933, AS AMENDED.
February 9, 1998
James O. Mitchell
VP Operations and Chief Financial Officer
First Virtual Corporation
3393 Octavius Drive
Santa Clara, California
Re: IBM Reference Selling of FVC Products
Dear Jim,
This letter sets forth the terms and conditions under which International
Business Machines Corporation (IBM) will have the right to refer customers or
potential customers to First Virtual Corporation (FVC) in connection with IBM
marketing efforts where there is a potential opportunity for FVC to market FVC's
video products in conjunction with IBM's ATM based hardware and services
offerings.
1. RIGHT TO REFERENCE FVC
IBM shall have the right, but not the obligation, to refer customers to FVC or
recommend that FVC contact a particular customer in marketing situations where
IBM believes there may be a demand for a FVC video solution.
Each party shall sell their respective products pursuant to their own terms,
conditions and warranties. Neither party shall be considered an agent, reseller
or remarketer of the other party and neither party will make any statement or
representation to any customer or other third party that would imply or suggest
that the other party has any obligation to the customer concerning the selling
party's products.
2. COMPENSATION BY FVC
For all sales of FVC products to customers where the customer was referred to
FVC by IBM or to customers where IBM recommended that FVC contact the customer
as set forth in Section 1 above FVC shall pay IBM as set forth below. For
purposes of this Section sales shall include follow-on sales made to the
customer for a period of [*] after the initial sale.
FVC shall pay IBM as follows:
(a) [*] % of FVC's gross sales revenues, after adjusting for applicable
trade and volume discounts, on the products sold by FVC to the
customer shall be paid to IBM as a sales commission which IBM shall
pass along to the appropriate IBM sales representatives;
CONFIDENTIAL TREATMENT REQUESTED
1
<PAGE> 2
(b) [*] % of FVC's gross sales revenues, after adjusting for applicable
trade and volume discounts, on the products sold by FVC to the
customer shall be paid to IBM to be used for the funding of
education and training and other promotional efforts as set forth in
Section 3 below.
Payments under this section shall be made within 30 days after each calendar
quarter. The payment will be accompanied by a report detailing the sales
activity and related commission. Payment shall be mailed to the following
address:
IBM Corporation
Daniel Knepper
3039 Cornwallis Rd.
P.O. Box 12195
Building 656/E103
Research Triangle Park, NC 27709
3. TRAINING AND PROMOTIONAL EFFORTS
The [*] % commission set forth in 2(b) above will be used by IBM for training
and education of certain IBM sales personnel and for other promotional and
marketing efforts related to FVC products. The details of this training shall be
discussed between FVC and IBM provided however that IBM shall, at its own
discretion, determine the specific resources and personnel it will provide in
connection with any training and will have full discretion as to how the
commission dollars will be spent. The training may include, but shall not be
limited to, joint training with FVC to inform IBM sales personnel of the FVC
product line and the customer value of the combined FVC/IBM product set. Where
appropriate and possible IBM, at its discretion, may include FVC in sales
kickoff meetings, customer briefings, and industry shows. IBM may also utilize
the commission dollars to purchase or upgrade FVC demo equipment. IBM shall have
no obligation to expend any funds for purposes of this training and promotion in
excess of the [*] % commission received from FVC for product sales.
4. The representatives of each party who shall be responsible for the
coordination of this Agreement currently are:
For IBM: Nick Balafas
3039 Cornwallis Road
P.O. Box 12195
Building 660/D309
Research Triangle Park, NC 27709
For FVC: James O. Mitchell
3393 Octavius Drive
Suite 102
Santa Clara, California 95054
CONFIDENTIAL TREATMENT REQUESTED
2
<PAGE> 3
If a party changes a representative it shall notify the other party of the
change in writing. All notices or other communications under this Agreement
shall be mailed to each party's representative at the addresses set forth in
this Section.
5. Either party may terminate this Agreement upon 30 (thirty) days written
notice without any further obligation to the other party other than the payment
of money owing.
6. Neither party makes any representations or warranties to the other concerning
the success of any marketing efforts related to this Agreement or the products
of either party. This Agreement does not obligate either party to market or sell
the other party's products. IBM shall have full discretion in determining if and
when to refer a customer to FVC or recommend that FVC contact a customer and IBM
makes no representations or warranties that it will make any such references or
that any customers referred to FVC will make any purchases.
7. This Agreement shall be governed in all respects by the laws of the state of
New York as they apply to contracts executed and fully performed in New York.
IBM and FVC each waive the right to a jury trial in any proceeding arising under
or in connection with this Agreement.
8. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements, written
or oral, relating to the subject matter hereof. No amendments or modifications
hereof shall be valid or binding upon the parties, unless made in writing and
signed by authorized representatives of each party.
9. Neither party shall sell, transfer, or assign any right or obligation
hereunder without the prior written consent of the other party. Any attempted
act in derogation of the foregoing shall be null and void.
10. If any provision of this Agreement is held to be illegal, invalid, or
unenforceable, the remaining provisions shall not be affected.
11. Except as expressly noted elsewhere, each party shall bear its own costs and
expenses associated with the performance of this Agreement.
12. Except for FVC's obligation to pay commission hereunder either parties'
total liability for damages to the other for any and all causes whatsoever under
or in connection with this Agreement shall be limited to a total of [*] except
that in the case of a breach of the second paragraph in Section 1 entitled
"RIGHT TO REFERENCE FVC" the limitation of shall be [*].
IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, OR
INDIRECT DAMAGES, INCLUDING LOST PROFITS OR LOST SAVINGS EVEN IF ADVISED OF THE
POSSIBLITY OF SUCH DAMAGES. NEITHER
CONFIDENTIAL TREATMENT REQUESTED
3
<PAGE> 4
PARTY WILL BE LIABLE FOR ANY CLAIMS OR DAMAGES BASED UPON ANY THIRD PARTY
CLAIMS.
IN WITNESS OF THE FOREGOING, IBM AND FVC HAVE CAUSED THIS LETTER AGREEMENT TO BE
EXECUTED BY THEIR AUTHORIZED REPRESENTATIVES AS OF THE DAY AND YEAR LAST WRITTEN
BELOW.
ACCEPTED AND AGREED TO:
INTERNATIONAL BUSINESS FIRST VIRTUAL CORPORATION
MACHINES CORPORATION
By: /s/ James R. McHugh By: /s/ J.O. Mitchell
--------------------------------- -----------------------------
Name: James R. McHugh Name: J.O. Mitchell
Title: Manager, Sales Operations Title: COO/CFO
Date: 2/10/98 Date: 2/11/98
4
<PAGE> 1
EXHIBIT 10.24
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT between FIRST VIRTUAL CORPORATION,
having a mailing address at 3393 Octavius Drive, Santa Clara, CA 95054
("Debtor") and HAMBRECHT & QUIST GUARANTY FINANCE, LLC, a California limited
liability company, having a mailing address at One Bush Street, San Francisco,
California 94104 ("Secured Party") is made and executed on the following terms
and conditions. Debtor has applied to Secured Party for a loan or loans and
other financial accommodations. Debtor understands and agrees that: (a) in
granting, renewing, or extending any Loan, Secured Party is relying upon
Debtor's representations, warranties and agreements, as set forth in this
Agreement; (b) the granting, renewing, or extending of any Loan by Secured Party
after the initial Loan advance, and other advances of up to Five Million Dollars
cumulatively as may be made pursuant to the Promissory Note dated March 13,
1998, shall be at all times subject to Secured Party's sole judgment and
discretion; and (c) all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.
SECTION 1. CERTAIN DEFINITIONS.
The following words shall have the following meanings when used in this
Agreement. Terms not otherwise defined in this Agreement shall have the meanings
attributed to such terms in the California Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
"Affiliate" shall mean, with respect to any Person, a relative, partner,
shareholder holding 25% or more of the voting capital stock of such Person,
director, officer, or employee of such Person, or any parent or subsidiary of
such Person, or any Person controlling, controlled by or under common control
with such Person.
"Agreement" shall mean this Loan and Security Agreement, as may be
modified from time to time, together with all exhibits and schedules attached to
this Loan and Security Agreement from time to time.
"Change of Control" shall mean (a) the acquisition of ownership,
directly or indirectly, beneficially or of record, by any Person or group
(within the meaning of the Securities and Exchange Act of 1934 and the rules of
the Securities and Exchange Commission thereunder as in effect on the date
hereof) of shares representing more than 40% of the aggregate ordinary voting
power represented by the issued and outstanding capital stock of the Debtor; or
(b) occupation of a majority of the seats (other than vacant seats) on the board
of directors of the Debtor by Persons who were neither (i) nominated by the
board of directors of the Debtor nor (ii) appointed by directors so nominated.
"Collateral" means all right, title and interest of Debtor now owned or
hereafter acquired in and to all of its personal property including the
following: (a) all equipment and fixtures (including, without limitation,
furniture, vehicles and other machinery and office equipment), together with all
additions and accessions thereto and replacements therefor; (b) inventory
(including, without limitation, (i) raw materials, work in process and finished
goods and (ii) all such inventory which are returned to or repossessed by
Debtor), together with all additions and accessions thereto, replacements
therefor, products thereof and documents therefor; (c) all accounts, chattel
paper, contract rights and rights to the payment of money; (d) all general
intangibles, including, without limitation, customer and supplier lists and
contracts, books and records, insurance policies, tax refunds, contracts for the
purchase of real or personal property and goodwill of Debtor; (e) deposit
accounts, money, certificated securities, uncertificated securities, instruments
and documents; (f) Intellectual Property, as defined below; and (g) proceeds of
the foregoing (including, without limitation, whatever is receivable or received
when Collateral or proceeds is sold, collected, exchanged, returned, substituted
or otherwise disposed of, whether such disposition is voluntary or involuntary,
including rights to payment and return premiums and insurance proceeds under
insurance
- --------------------------------------------------------------------------------
Loan and Security Agreement, Page 1
<PAGE> 2
with respect to any Collateral, and all rights to payment with respect to any
cause of action affecting or relating to the Collateral).
"Contingent Obligation" means, as applied to any Person, without
duplication, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any Indebtedness, as defined below, of another
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable, or in respect of which that Person's assets are
pledged (valued, in the case of non-recourse assets pledged, at the lesser of
the fair market value of the encumbered assets or the amount of Indebtedness so
secured); (ii) any obligations with respect to undrawn letters of credit issued
for the account of that Person; and (iii) the aggregate net obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices.
"Debtor" shall mean First Virtual Corporation.
"Debtor's Locations" shall mean 3393 Octavius Drive, Santa Clara, CA
95054, and the locations set forth in Schedule I hereto, as updated by Debtor
from time to time.
"Event of Default" shall mean and include any of the Events of Default
set forth below in the section titled "Events of Default."
"GAAP" shall mean generally accepted accounting principles.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Intellectual Property" shall mean all right, title and interest of
Debtor now owned or hereafter acquired in and to all of its copyrights, patents
and trademarks whether registered or unregistered, foreign or domestic, and all
applications and recordings in the United States Copyright Office, the United
States Patent and Trademark Office or any similar office or agency of the United
States, any state thereof or any other country, and all continuations, renewals
or extensions of the same, and all trade secrets, inventions (whether or not
patentable), scientific processes, technologies, procedures, models and designs
(in whatever form maintained or recorded, including, without limitation,
computer software and programs), and all books relating thereto, and any and all
contracts, including rights to payment thereunder including accounts receivable,
deposit accounts, reserves, refunds, deposits, and all royalties, distributions,
fees, payments and other monetary obligations owing to Debtor and arising out of
the sale, transfer or licensing of goods and/or services, whether or not earned
by performance, and whether now existing or hereinafter arising, including,
without limitation, license agreements, joint venture agreements and other
collaborative agreements, in each case providing for the use or license of any
of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"Lien" shall mean any mortgage, lien, deed of trust, charge, pledge,
title retention arrangement, capital lease, security interest or other
encumbrance upon or with respect to any property of any kind, real or personal,
movable or immovable, now owned or hereafter acquired.
"Loan" or "Loans" shall mean and include any and all loans and financial
accommodations from Secured Party to Debtor, whether now or hereafter existing,
and
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Loan and Security Agreement, Page 2
<PAGE> 3
however evidenced including without limitation those loans and financial
accommodations described herein or described on any exhibit or schedule attached
to this agreement from time to time.
"Loan Obligations" shall mean and include all loans, advances, debts,
liabilities, obligations, or any other financial accommodations, owing by Debtor
to Secured Party arising under this Loan and Security Agreement, the Promissory
Note dated as of the date hereof any promissory note executed and delivered by
Debtor pursuant to this Loan and Security Agreement, the Security Agreement, any
Related Document, or any other agreement between Debtor and Secured Party of
every kind and description (whether or not evidenced by any note or other
instrument and whether or not for the payment of money), direct or indirect,
absolute or contingent, due or to become due, now existing or arising hereafter
including, without limitation, all interest, fees, charges, expenses, attorneys'
fees, and accountants' fees chargeable to Debtor or incurred by Secured Party in
connection with its dealings with Debtor.
"MAE" means (i) a material adverse effect on the assets, financial
condition, business affairs or prospects of Debtor and its Subsidiaries taken as
a whole, (ii) a material adverse effect on the ability of Debtor to repay the
Loan Obligations or otherwise perform its Loan Obligations, or (iii) a material
impairment of the value or priority of Secured Party's security interests in any
of the collateral pledged as security for the Loan Obligations.
"Maturity Date" means the maturity date evidenced on any Promissory
Note.
"Permitted Indebtedness" means (a) Indebtedness of Debtor in favor of
Secured Party arising under this Agreement, the Promissory Note(s) or the
Related Documents, (b) Indebtedness existing on the date of this Agreement and
disclosed in writing to Secured Party, (c) Indebtedness to trade creditors and
with respect to surety bonds and similar obligations incurred in the ordinary
course of business, (d) capital leases or indebtedness incurred solely to
purchase capital assets which are secured in accordance with clause (c) of
"Permitted Liens" below and is not in excess of the lesser of the purchase price
of such equipment or the fair market value of such equipment on the date of
acquisition and not to exceed One Million dollars ($1,000,000) outstanding in
the aggregate at any one time; (e) other Indebtedness not exceeding One Million
dollars ($1,000,000) in the aggregate outstanding at any time; (f) extensions,
refinancings, modifications, amendments and restatements of any of items of
Permitted Indebtedness (a) through (e) above, provided that the principal amount
thereof is not increased or the terms thereof are not modified to impose more
burdensome terms upon Debtor or its Subsidiary, as the case may be; (g)
Permitted Senior Indebtedness, (h) Indebtedness incurred to finance the premiums
on insurance policies, and (i) Prepaid royalities and deferred revenue in
connection with prepaid support services.
"Permitted Investment" means: (a) Investments existing on the date of
this Agreement and disclosed to Secured Party in writing; (b) marketable direct
obligations issued or unconditionally guaranteed by the United States of America
or any agency or any State thereof maturing within one (1) year from the date of
acquisition thereof, (c) commercial paper maturing no more than one (1) year
from the date of creation thereof and currently having the highest rating
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc., ("Moody's"), (d) certificates of deposit maturing no
more than one (1) year from the date of investment therein issued by a bank or
financial institution whose short term debt is rated "A-1" (or higher) by S&P or
"P-1" (or higher) by Moody's, (e) any Investments permitted by Debtor's
investment policy, as amended from time to time, provided that any amendment
after the date hereof to such investment policy has been approved by Secured
Party; (f) overnight Investments in a "sweep account" provided by a commercial
bank organized under the laws of the United States or any political subdivision
thereof and having a combined capital and surplus of at least $250 million; (f)
Investments consisting of the endorsement of negotiable instrument for deposit
or collection or similar transaction in the ordinary course of business; (g)
Investments consisting of (i) compensation of employees, officers and directors
of Debtor or its Subsidiaries so long as the Board of
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Loan and Security Agreement, Page 3
<PAGE> 4
Directors of Debtor determines that such compensation is in the best interests
of Debtor, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, and (iii) loans to
employees, officers or directors relating to the purchase of equity securities
of Debtor or its Subsidiaries pursuant to employee stock purchase plans approved
by Debtor's Board of Directors; (h) Investments pursuant to or arising under
currency agreements or interest rate agreements entered into in the ordinary
course of business; (i) depository and draft accounts maintained by Debtor in
the ordinary course of its business; and (j) other Investments not exceeding One
Million dollars ($1,000,000) in the aggregate outstanding at any time.
"Permitted Liens" means the following: (a) any Liens existing on the
date of this Agreement and disclosed in writing to Secured Party; (b) Liens for
taxes, fees, assessments or other governmental charges or levies, either not
delinquent or being contested in good faith by appropriate proceedings, provided
the same have no priority over any of Secured Party's security interests; (c)
Liens (i) upon or in any capital assets acquired or held by Debtor or any of its
Subsidiaries to secure the purchase price of such capital assets or indebtedness
incurred solely for the purpose of financing the acquisition or construction of
such capital assets, or (ii) existing on such capital assets at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, accessions thereto and the proceeds thereof;
(d) Liens on equipment leased by Debtor or any Subsidiary pursuant to an
operating lease in the ordinary course of business (including proceeds thereof
and accessions thereto); (e) easements, reservations, rights-of-way,
restrictions, minor defects or irregularities in title and other similar charges
or encumbrances affecting real property not resulting in an MAE; (f) Liens in
favor of customs and revenue authorities arising as a matter of law to secure
payments of customs duties in connection with the importation of goods; (g)
mechanics', materialmen's, warehousemen's, courier's and similar Liens incurred
in the ordinary course of Debtor's business securing obligations not past due;
(h) Liens incurred in connection with the extension, renewal or refinancing of
the indebtedness secured by Liens of the type described in clauses (a), (c) and
(d) above, provided that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal amount
of the indebtedness being extended, renewed or refinanced does not increase, (i)
Permitted Senior Liens, (j) Liens on insurance policies and the proceeds
thereof, securing the payment of the premiums with respect thereto, and (k)
Licenses of Debtor's Intellectual Property in the ordinary course of business
and licenses or similar arrangements and liens or other encumbrances on
Intellectual Property granted or existing in connection with any joint venture,
collaboration, strategic alliance, research and development partnerships or
arrangements, and any similar arrangements or agreements.
"Permitted Senior Liens" means liens securing Permitted Senior
Indebtedness.
"Permitted Senior Indebtedness" means and includes all Indebtedness from
Debtor to Senior Secured Lenders, up to a total amount equal to Three Million
Two Hundred Twenty Five Dollars ($3,250,000) under (i) a Loan and Security
Agreement between Silicon Valley Bank and Debtor dated July 3, 1996, (ii) a
Subordinated Loan and Security Agreement between Comdisco, Inc. and Debtor dated
April 30, 1997, and (iii) a Subordinated Loan and Security Agreement between
Comdisco, Inc. and Debtor dated October 23, 1997.
"Person" means any natural person, corporation, partnership, joint
venture, firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.
"Promissory Note(s)" means that certain Promissory Note, executed by
Debtor and dated as of even date herewith, including any amendment thereto, and
any other promissory note, if any, as may be executed by Debtor after the date
herewith and accepted by Secured Party in its sole judgment and discretion,
evidencing additional Loans under this Agreement.
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Loan and Security Agreement, Page 4
<PAGE> 5
"Related Documents" means and includes without limitation the Promissory
Note, the Security Agreement, all other promissory notes, credit agreements,
loan agreements, guaranties, security agreements, mortgages, deeds of trust, and
all other instruments and documents, whether now or hereafter existing, executed
in connection with any of the foregoing, provided however that the warrant
purchase agreement and warrant are not Related Documents.
"Security Agreement" means that certain Intellectual Property Security
Agreement between Debtor and Secured Party dated as of even date herewith, as
amended, modified and supplemented from time to time.
"Secured Obligations" shall have the meaning given the term set forth
below in the section titled "Grant of Security Interest".
"Secured Party" shall mean HAMBRECHT & QUIST GUARANTY FINANCE, LLC, its
successors and assigns.
"Senior Secured Lenders" shall mean Silicon Valley Bank and Comdisco,
Inc.
"Subsidiary" means, with respect to any Person, a corporation,
association or other business entity (i) of which outstanding capital stock
having at least the majority of votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more Subsidiaries of such Person, or (ii) of which at least a majority of voting
interest is owned, directly or indirectly, by such Person and/or one or more
Subsidiaries of such Person.
"Tenant Improvements" means additions, alterations, and improvements
that are installed or attached in such a manner as to become an integral part of
the premises of real property leased by Debtor, including heating, lighting,
electrical, air conditioning, floor to ceiling partitioning, drapery, carpeting,
and flooring, excluding, however, all other moveable furniture and trade
fixtures.
SECTION 2. TERM.
This Agreement shall be effective as of the day this Agreement is executed and
shall continue thereafter until all Loan Obligations of Debtor to Secured Party
have been performed in full.
SECTION 3. SECURITY
Section 3.1 Grant of Security Interest.
Debtor hereby assigns and pledges to Secured Party, and hereby grants to Secured
Party a security interest in and to the Collateral to secure the payment and
performance of all financial obligations of Debtor to Secured Party, however and
whenever arising, including the Loan Obligations (the "Secured Obligations").
Section 3.2 Security Interest Absolute.
All rights of Secured Party and security interests granted hereunder, and all
obligations of Debtor hereunder, shall be absolute and unconditional,
irrespective of:
(i) any lack of validity or enforceability of this Agreement or any of
the other Related Documents;
(ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations, or any other
amendment or waiver of or any consent to any departure from this
Agreement or any other of the Related Documents, including, without
limitation, any increase in the Secured Obligations resulting from
the extension of additional credit to Debtor, or any of its
Affiliates, or otherwise;
(iii) subject to compliance with applicable laws, any manner of
application of Collateral, or proceeds thereof, to all or any of
the Secured Obligations, or any
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Loan and Security Agreement, Page 5
<PAGE> 6
manner of sale or other disposition of any Collateral for all or
any of the Secured Obligations or any other assets of Debtor or any
of its Affiliates; and
(iv) any change, restructuring or termination of the corporate structure
or existence of Debtor or any of its Affiliates.
Section 3.3 Continuing Security Interest.
This Agreement shall create a continuing security interest in the Collateral and
shall (a) remain in full force and effect until payment in full of the Secured
Obligations and for so long as any of the covenants or agreements of Debtor
under the Related Documents remain unfulfilled, (b) be binding upon Debtor, its
successors and assigns, and (c) inure to the benefit of, and be enforceable by,
Secured Party, its successors and assigns. Upon payment in full of the Secured
Obligations and performance by Debtor of all of its covenants and agreements
contained in the Related Documents the security interest granted hereby shall
terminate and all rights to the Collateral shall revert to Debtor. Upon any such
termination, Secured Party shall upon request of Debtor execute and deliver to
Debtor a release or releases (including, without limitation, Uniform Commercial
Code termination statements and instruments of satisfaction, discharge, or
reconveyance) to release any liens under this Loan and Security Agreement and
any Related Documents with respect to such released Collateral.
Section 3.4 Limited Authorization.
Debtor hereby authorizes Secured Party to file one or more financing statements,
filings, reports, security agreements or continuation statements in respect
thereof, and amendments thereto, relating to all or any part of the Collateral
without the signature of Debtor where permitted by law, and names Secured Party
as its attorney in fact and authorizes it, if an Event of Default has occurred
and is continuing, to execute any and all financing statements on Debtor's
behalf solely to the extent necessary or advisable to perfect, continue or give
notice of the security interest granted to Security Party hereunder in any of
the Collateral. A photocopy or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
Debtor represents and warrants to Secured Party as of the date of this Agreement
the following:
Section 4.1. Capacity.
Debtor is duly organized, validly existing and in good standing under the laws
of the State of Delaware, and in every other state where failure to so qualify
is reasonably likely to have a MAE.. Debtor has full power, authority, and legal
right to own its properties and assets and to conduct its business as presently
conducted. Debtor does not have any Subsidiaries, other than First Virtual
Limited U.K.
Section 4.2. Authority.
Debtor has full power, authority and legal right to execute and deliver, and to
perform and observe the provisions of this Agreement and the Related Documents.
Debtor's execution, delivery and performance of this Agreement and the Related
Documents have been duly authorized by all necessary corporate action. When duly
executed and delivered by Debtor, this Agreement and the Related Documents will
be legal, valid, and binding obligations of Debtor enforceable in accordance
with their respective terms, except as enforceability may be limited by the
United States Bankruptcy Code, or other statutes affecting creditor's rights
generally or by general principles of equity.
Section 4.3. Compliance.
Debtor is not in material violation of, or in default under (i) any provision of
its certificate of incorporation, articles of incorporation, or bylaws, or (ii)
any material contract, instrument, indenture, judgment, order, writ or decree to
which it or any of its Subsidiaries is a party or by which it or any of them is
bound, or, to the best of its knowledge, of any provision of any federal or
state statute, rule or regulation applicable to the Debtor or any of its
Subsidiaries.
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Loan and Security Agreement, Page 6
<PAGE> 7
The execution, delivery, and performance of this Agreement and the Related
Documents will not, with or without the passage of time and giving of notice,
result in any such material violation, conflict or default, or an event that
results in the creation of any material Lien, charge or encumbrance upon any
assets of the Debtor or any of its Subsidiaries or the suspension, revocation,
impairment or forfeiture of any material permit, license, authorization, or
approval applicable to the Debtor or any of its Subsidiaries which is reasonably
likely to have a MAE.
Section 4.4. Financial Statements.
The audited financial statements for Debtor for the nine months ending 9/30/97
and the unaudited financial statement for Debtor that Debtor for the period
ending 1/31/98 supplied to Secured fairly present Debtor's financial condition
as of the date of the statements. Such financial statements have been prepared
in accordance with GAAP, subject, in the case of unaudited financials, to
year-end audit adjustments and footnotes.
Section 4.5. Material Adverse Events.
Since the most recent financial statements provided to Secured Party by Debtor
there has been no event or condition constituting a MAE.
Section 4.6. Taxes.
Each of Debtor and any of its Subsidiaries has filed or caused to be filed all
tax returns which are required to be filed by it. Each of Debtor and any of its
Subsidiaries has paid all taxes which have or may have become due pursuant to
said returns or otherwise or pursuant to an assessment received by Debtor,
except such taxes, if any, as are being contested in good faith and as to which
reserves have been created on the books of Debtor in accordance with GAAP. The
charges, accruals, and reserves in respect of income taxes on the books of
Debtor are adequate. Debtor knows of no proposed tax assessment against it or
any of its Subsidiaries and no extension of time for the assessment of federal,
state, or local taxes of Debtor or any of its Subsidiaries is in effect or has
been requested, except as disclosed in the financial statements furnished to
Secured Party.
Section 4.7. Patents and Trademarks
To the best of its knowledge, Debtor has sufficient title and ownership of all
patents, copyrights, trade secrets, information, proprietary rights and
processes necessary for its business as now conducted without any conflict with
or infringement of the rights of others, except that no representations are made
with respect to noninfringement of patents not issued as of the date hereof or
to any exclusive rights to trade secrets or know-how of the Debtor. Except as
disclosed in the Audited Financial Statements (as defined in Section 6.1) for
Debtor supplied to Secured Party, other than such matters as have been settled,
the Debtor has not received any communications alleging that the Debtor has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, tradenames, copyrights or trade secrets or
other proprietary rights of any other Person or entity, other than such
communication that would not result in a MAE.
Section 4.8. Priority Interest in Collateral.
Debtor is the legal and beneficial owner of the Collateral free and clear of any
Lien, except for Permitted Liens. This Agreement together with the filing of
financing statements creates a valid perfected, security interest in the
Collateral subject only to Permitted Liens to the extent that a security
interest can be perfected by the filing of Uniform Commercial Code financing
statements.
Section 4.9. Location of Collateral.
All of the Collateral of Debtor is located at the Debtor's Locations, except
moveable Collateral that is in transit in the ordinary course of business.
Section 4.10. Hazardous Substances.
None of Debtor's properties or assets has ever been used by Debtor or, to the
best of Debtor's knowledge, by previous owners or operators in the disposal of,
or to produce, store, handle, treat, release, or transport, any hazardous waste
or hazardous substance other than in
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Loan and Security Agreement, Page 7
<PAGE> 8
accordance with applicable law; to the best knowledge of Debtor none of Debtor's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no Lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Debtor; and Debtor has not received a summons, citation,
notice, or directive from the Environmental Protection Agency or any other
federal or state governmental agency concerning any action or omission by Debtor
resulting in the releasing, or otherwise disposing of hazardous waste or
hazardous substances into the environment.
Section 4.11. Litigation; Compliance with Laws and Agreements.
There are no actions or proceedings pending, or to the knowledge of Debtor
threatened, against or affecting Debtor which, if adversely determined, could
have a MAE. Debtor is not in default with respect to any writ, the breach of
which may have an MAE.
Section 4.12. Full Disclosure.
No representation, warranty or other statement made by Debtor in any certificate
or written statement furnished to Secured Party contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained in such certificates or statements not misleading in the
context made.
Section 4.13. Survival of Representation and Warranties.
Debtor understands and agrees that Secured Party is relying upon the above
representations and warranties in extending Loan advances to Debtor and each of
the above representations and warranties be true and correct as of the date of
each such extension, except as disclosed in writing to Secured Party from time
to time, provided however that if any exceptions have been disclosed to Secured
Party, Secured Party shall have no obligation to extend Loan advances to Debtor.
SECTION 5 CONDITIONS TO LOANS
Section 5.1 Conditions Precedent to Initial Loan.
The obligation of Secured Party to make the initial Loan is subject to the
condition precedent that Secured Party shall have received, in form and
substance satisfactory to Secured Party, the following:
(a) this Agreement; and
(b) a certificate of the Secretary of Debtor with respect to
bylaws, incumbency and resolutions authorizing the
execution and delivery of this Agreement; and
(c) one or more financing statements (Form UCC-1); and
(d) an insurance certificate evidencing Debtor's compliance
with Section 6.12 of this Agreement; and
(e) the Security Agreement; and
(f) such other documents, and completion of such other
matters, as Secured Party may reasonably deem necessary or
appropriate; and
(g) Opinion of Debtor's Counsel in form and substance
satisfactory to Secured Party in its discretion.
Section 5.2 Conditions Precedent to all Advances
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Loan and Security Agreement, Page 8
<PAGE> 9
The obligation of Secured Party to make each Loan, including the initial Loan,
is further subject to the condition precedent that the representations and
warranties contained in this Agreement and the Related Documents shall be true
and correct in all material respects on the date of each such Loan as though
made at and as of each such date, and no Event of Default (or event that with
the passage of time or the giving of notice would result in an Event of Default)
shall have occurred and be continuing, or would result from such Loan. The
making of each Loan shall be deemed to be a representation and warranty by
Debtor on the date of such Loan as to the accuracy of the facts referred to in
this Section 5.2.
Section 6. AFFIRMATIVE COVENANTS.
Debtor agrees to do the following:
Section 6.1. Financial Statements, Reports and Certifications.
Debtor will furnish to Secured Party, in form and substance satisfactory to
Secured Party:
(a) As soon as possible after the end of each fiscal year of
Debtor, a complete copy of its audited year-end financial statements
which shall include the balance sheet of Debtor as of the close of the
fiscal year, an income statement and a statement of cash flows for such
year, audited by certified public accountants selected by Debtor and
satisfactory to Secured Party.
(b) No later than thirty (30) days after the end of each month,
Debtor's balance sheet as of the close of that month and its income
statement and cash flow statement for that month certified as being
prepared in accordance with generally accepted accounting principles by
the chief financial officer of Debtor.
(c) Reports on receivable and payable agings, aged by invoice
date, within 10 days after the end of each month
(d) No later than ninety (90) days after the end of each fiscal
year, Debtor's new budget or operating plan for the then current fiscal
year.
(e) No later than thirty (30) days after the end of each fiscal
quarter, a certificate of the Debtor's chief financial officer, or other
equivalent officer, stating that there are no defaults by the Debtor
under any of its agreements with the Secured Party or describing any
existing default(s) and specific action being taken to cure such
default(s). The Debtor's chief financial officer, or other equivalent
officer, will, within five days after Debtor's obtaining knowledge of
the occurrence of an event of default under any of the foregoing, issue
a statement describing the default, and specific action being taken to
cure the default.
(f) Promptly after receipt thereof provide all audit reports
prepared by the Debtor's independent accountants, notice of any action
or preceding before any court or governmental agency, copies of all
federal and state patent, trademark or copy right applications and
registrations of the same, notice of any circumstance which may
reasonably be expected to have a MAE on the Debtor, and promptly after
request therefor such other information as the Secured Party may
reasonably request.
(g) If Debtor becomes a company the stock of which is traded on a
nationally recognized public stock exchange, Debtor's obligations
hereunder shall be satisfied by providing Secured Party with all
financial information filed with the Securities and Exchange Commission
within five (5) days after each filing, and by providing copies of all
press releases as soon as reasonably practicable after they are
published, and by providing, if requested in writing
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Loan and Security Agreement, Page 9
<PAGE> 10
by Secured Party, all of the information described in Sections 6.1(a)
and 6.1(b) within thirty (30) days of such written request.
Section 6.2 Other Information.
Debtor will (a) maintain books and records concerning its business that are
complete and accurate in all material respects, (b) upon request, furnish to
Secured Party such information, statements, lists of property and accounts,
lists of assets and liabilities, agings of receivables and payables, inventory
schedules, insurance certificates or reports, budgets, forecasts, or reports as
Secured Party may reasonably request with respect to the business, affairs, and
financial condition of Debtor, and (c) permit Secured Party or representatives
thereof, subject to the confidentiality provisions of Section 10.10, with
reasonable notice to Debtor, to inspect the properties of Debtor and any of its
Subsidiaries and to inspect, audit, make copies of, and make extracts from, the
books or accounts of Debtor and any of its Subsidiaries.
Section 6.3 Expenses.
Debtor will pay all reasonable out-of-pocket expenses of Secured Party
(including, but not limited to, reasonable fees and disbursements of Secured
Party's) incident to (a) the protection of the rights of Secured Party under
this Agreement and the Related Documents, including, but not limited to, the
perfection of Secured Party's Lien in Debtor's Collateral and any amendments,
extensions and renewals thereof or (b) defense by Secured Party against all
claims against Secured Party relating to any of its acts of commission or
omission directly or indirectly relating to this Agreement and the Related
Documents, all whether by judicial proceedings or otherwise (other than claims
which are (i) sustained by a court of competent jurisdiction, (ii)
non-appealable and (iii) predicated on Secured Party's gross negligence or
willful misconduct); or (c) otherwise incurred in connection with Debtor, this
Agreement, or any Related Document. Without limiting the generality of the
foregoing, Debtor shall reimburse Secured Party for all reasonable attorneys'
fees and all other reasonable costs incurred by Secured Party in order to do the
following; commence, intervene in, or defend any action or proceeding; initiate
any complaint to be relieved of the automatic stay in bankruptcy; file or
prosecute any bankruptcy claim, third-party claim, or other claim; examine,
audit, copy and inspect any of the Collateral or any of Debtor's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Secured Party's security interest in, the Collateral; and otherwise represent
Secured Party n any litigation relating to Debtor. If either Secured Party or
Debtor files any lawsuit against the other predicated on a breach of this
Agreement, the prevailing party in such action shall be entitled to recover its
reasonable costs and attorneys' fees including (but not limited to) reasonable
attorneys' fees and costs incurred in the enforcement of, execution upon or
defense of any order, decree award or judgment. All attorneys' fees and costs to
which Secured Party may be entitled pursuant to this Paragraph shall be part of
Debtor's Secured Obligations and shall bear interest at a rate equal to the
highest interest rate applicable to the Note. Debtor will also pay and save the
Secured Party harmless from any and all liability with respect to any stamp or
other taxes (other than income taxes based on Secured Party's income) which may
be determined to be payable in connection with the making of Loans, the entering
into of this Agreement and the Related Documents or any action of Secured Party
with respect to the Collateral, including, without limitation, transfer of the
Collateral to Secured Party's name or that of its nominee or the purchaser at a
foreclosure sale.
Section 6.4 Notice of Litigation.
Debtor will promptly give notice to Secured Party in writing of any proceedings,
claim, or dispute which may exist between Debtor and any Person, and which, if
adjudicated adversely to Debtor, could reasonably be expected to result in a MAE
or any labor controversy resulting in or threatening to result in a strike
against Debtor, or proposal by any public authority to acquire a material
portion of the assets or business of Debtor.
Section 6.5 Maintenance of Existence.
Subject to Section 7.3 hereof, Debtor will preserve and maintain its legal
existence and all rights, privileges and franchises of it or any of its
Subsidiaries necessary or desirable in the normal conduct of its or their
business, will conduct its or their business in an orderly,
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<PAGE> 11
efficient and regular manner, and will comply in all material respects with all
applicable laws and regulations and the terms of any indenture, note, agreement,
contract or other instrument to which it or any of its Subsidiaries may be a
party or under which it or any of its Subsidiaries or its or their properties
may be bound, the noncompliance with which could reasonably be expected to
result in a MAE.
Section 6.6 Maintenance of Properties, etc.
Debtor will maintain and preserve all of the properties of it or any of its
Subsidiaries, necessary or useful in the proper conduct of its or their business
in good working order and condition, ordinary wear and tear and dispositions of
obsolete equipment and other dispositions in the ordinary course of business
excepted.
Section 6.7 Material Adverse Change.
Promptly inform Secured Party in writing of an event or condition constituting
an MAE.
Section 6.8 Other Agreements.
Other than as otherwise allowed, comply (and cause each of its Subsidiaries to
comply) with all material terms and conditions of all other material agreements,
whether now or hereafter existing, between Debtor (and each of its Subsidiaries)
and any other party.
Section 6.9 Loan Proceeds.
Use all Loan proceeds solely for Debtor's business operations, working capital
and general corporate purposes and to make Permitted Investments.
Section 6.10 Further Assurances.
Make, execute and deliver to Secured Party such promissory notes, mortgages,
deed of trust, security agreements, financing statements, instruments, documents
and other agreements as Secured Party or its attorneys may reasonably request to
evidence and secure the Loan and to perfect Secured Party's Liens.
Section 6.11 Use of Collateral.
Debtor shall keep the Collateral located at the Debtor's Locations, other than
in ordinary course of Debtor's business. Debtor agrees to give Secured Party at
least thirty (30) days prior written notice before changing its name from that
set forth on the signature page hereof, before moving its chief executive office
or principal place of business from the address set forth on the signature page
hereof, or before using any trade names or styles in its business in California
other than the use of those trade names and styles described to Secured Party in
writing prior to the date of this Agreement.
Section 6.12 Insurance
Debtor shall, at its own cost and expense, maintain insurance with respect to
the Collateral against loss or damage by fire, theft, explosion and all other
hazards and risks ordinarily insured against by other owners or users of such
properties in similar business and comparable size for the full insurable value
of the Collateral, including earthquake insurance, except that earthquake
insurance shall not be required provided that Debtor records a duplicate copy of
all of the software used in Debtor's products at an off-site location no less
frequently than monthly. All such policies of insurance shall be in form and
substance reasonably satisfactory to, and shall be with insurers reasonably
acceptable to, Secured Party, and shall include a loss payable endorsement
naming Secured Party loss payee, as its interest may appear, all in form and
substance reasonably satisfactory to Secured Party, except in respect of
equipment financed or leased by third parties. Upon each renewal of such
insurance, Debtor shall, if so requested by Secured Party, deliver to Secured
Party, original or duplicate policies of such insurance and a report of a
reputable insurance broker with respect to such insurance
Section 6.13 Government Compliance
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<PAGE> 12
Debtor shall comply, and shall cause each Subsidiary to comply, with all
statutes, laws, ordinances and government rules and regulations to which it is
subject, noncompliance with which would reasonably be expected to result in a
MAE.
Section 6.14. Perfection and Priority of Security Interest;
Landlord Waivers
Debtor shall assist Secured Party at all times to have a first-priority
perfected and enforceable security interest in all of the Collateral, subject
only to the Permitted Liens, provided, however, that Debtor not be required to
perfect Secured Party's security interest in any Collateral located outside the
U.S., or perfect the registration of Intellectual Property outside of the U.S..
Debtor shall at all times defend Secured Party and the Collateral against all
claims of others, subject to Permitted Liens. Debtor is not and will not become
a lessee under any real property lease pursuant to which the lessor or any other
person may obtain any rights in any of the Collateral, other than Tenant
Improvements, and no such lease now prohibits, restrains, impairs or will
prohibit, restrain or impair Debtor's right to remove any Collateral, other than
Tenant Improvements, from the leased premises. Whenever any Collateral is
located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Debtor
shall, if requested by Secured Party, use its best efforts to cause such third
party to execute and deliver to Secured Party, in form acceptable to Secured
Party, such waivers, consents, agreements and subordination's as Secured Party
shall specify. Debtor will keep in full force and effect, and will comply with
all the terms of, any lease of real property where any of the collateral now or
in the future may be located.
SECTION 7. NEGATIVE COVENANTS.
Debtor covenants and agrees that, without the prior written consent of Secured
Party, which may be withheld in Secured Party's sole discretion, so long as any
credit hereunder shall be available and until payment in full of the outstanding
Loan Obligations or for so long as Secured Party may have any commitment to make
any Loans, Secured Party will not do any of the following:
Section 7.1 Indebtedness.
Create, incur, assume or be or remain liable with respect to any Indebtedness,
or permit any Subsidiary so to do, other than Permitted Indebtedness.
Section 7.2 Liens.
Create, incur, assume or suffer to exist any Lien with respect to any of its
property, or assign or otherwise convey any right to receive income, including
the sale of any accounts, or permit any of its Subsidiaries so to do, except for
Permitted Liens.
Section 7.3 Mergers or Acquisitions
Merge or consolidate with or into any other business organization, or acquire,
or permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person; provided that this Section 7.3
shall not apply to (i) transactions among Debtor and its Subsidiaries in which
the Debtor is the surviving entity, (ii) mergers and acquisitions entered into
for the purpose of changing the Debtor's or any Subsidiary's jurisdiction of
incorporation and (iii) acquisitions, the purchase price for which consists
solely of capital stock or the cash portion of the purchase price for which does
not exceed Five Million dollars ($5,000,000), other than the purchase of stock
in a Subsidiary, but Debtor shall give Secured Party at least 20 days advance
written notice of any transaction in clause (i), (ii), or (iii) above and shall
execute and deliver all such documents and instruments and take all such actions
as are necessary to continue in effect Secured Party's first-priority, perfected
security interest in the Collateral.
Section 7.4 Change in Business
Engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Debtor and its
Subsidiaries and any business substantially similar, related or ancillary
thereto.
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Section 7.5 Distributions.
Pay any dividends or make any other distribution or payment on account of or in
redemption, retirement or purchase of any capital stock; provided, that (i)
Debtor may declare and make any dividend payment or other distribution payable
in its equity securities, (ii) Debtor may convert any of its convertible
securities into other securities pursuant to the terms of such convertible
securities or otherwise in exchange therefor, and (iii) for so long as an Event
of Default has not occurred, Debtor may repurchase stock from former employees,
officers, consultants, business partners, and directors of Debtor in accordance
with the terms of it employee stock ownership plans or other agreements.
Section 7.6 Dispositions
Convey, sell, lease, transfer or otherwise dispose of (collectively, a
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than: (i) Transfers of inventory in the ordinary
course of business or otherwise; (ii) Transfers of non-exclusive licenses and
similar arrangements for the use of the Intellectual Property of Debtor or its
Subsidiaries; (iii) Transfers of worn-out or obsolete equipment, or equipment
financed by other vendors, (iv) Transfers of exclusive licenses and similar
arrangements with geographic region or time limitations or otherwise in
Borrower's discretion, and (v) Transfers of other assets not in excess of
$500,000 in any fiscal year during the term of this Agreement.
Section 7.7 Investments.
Directly or indirectly acquire or own, or make any Investment in or to any
Person, or permit any of its Subsidiaries so to do, other than Permitted
Investments.
Section 7.8 Transactions with Affiliates
Directly or indirectly enter into or permit to exist any material transaction
with any Affiliate of Debtor except for transactions that are in the ordinary
course of Debtor's business, upon fair and reasonable terms that are no less
favorable to Debtor than would be obtained in an arm's length transaction with a
nonaffiliated Person.
SECTION 8. EVENTS OF DEFAULT
If one or more of the following events shall occur ("Events of Default" or an
"Event of Default"):
(a) Debtor shall fail to pay principal or interest on any Loan
when due, or
(b) Debtor shall fail to pay any other Loan Obligation when due
and such failure shall continue for 3 business days; or
(c) Any representation or warranty made by Debtor in, or pursuant
to, this Agreement or any Related Document shall prove to have been
incorrect or misleading in any material respect when made or deemed
made; or
(d) Debtor shall be in default in the performance any term, or
provision of Section 7; or
(e) any breach of any of the provisions of Section 6.1, 6.2, or
6.10, which is not cured within 10 days following written notice of such
breach; or
(f) There shall be a default in any agreement to which Debtor is
a party with a third party or parties resulting in a right by such third
party or parties, whether or not exercised, to accelerate the maturity
of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that would reasonably be expected to have a MAE;
or
(g) An order for relief shall be entered against Debtor by any
United States Bankruptcy Court; or Debtor shall generally not pay its
debts as they become due (within the meaning of 11 U.S.C. 303(h) as at
any time amended or any
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Loan and Security Agreement, Page 13
<PAGE> 14
successor statute thereto) or make an assignment for the benefit of
creditors; or Debtor shall apply for or consent to the appointment of a
custodian, receiver, trustee, or similar officer for it or for all or
any substantial part of its property; or such custodian, receiver,
trustee, or similar officer shall be appointed without the application
or consent of Debtor and such appointment shall continue undischarged
for a period of sixty (60) days; or Debtor shall institute (by petition,
application, answer, consent, or otherwise) any bankruptcy, insolvency,
reorganization, moratorium, arrangement, readjustment of debt,
dissolution, liquidation or similar proceeding relating to it under the
laws of any jurisdiction; or any such proceeding shall be instituted (by
petition, application, or otherwise) against Debtor and shall remain
undismissed for a period of sixty (60) days; or
(h) This Agreement or any of the Related Documents ceases to be
in full force and effect (including failure of this Agreement or any
Related Document to create a valid and perfected first priority security
interest or lien subject to Permitted Liens in all the Collateral at any
time and for any reason); or
(i) Commencement of foreclosure, whether by judicial proceeding,
self-help, repossession or any other method, by any creditor of Debtor
against any Collateral with a fair market value of One Hundred Thousand
Dollars ($100,00) or more, or any creditor takes, attempts to take or
gives written or oral notice to Debtor of its intent to take any action
against the property of Debtor or any of its subsidiaries on or in which
Secured Party has a lien or security interest. This includes a
garnishment, attachment, or levy on or of any of Debtor's deposit
accounts; or
(j) There shall occur a MAE; or
(k) There shall occur a Change of Control; or
(l) Except for the events described in (a) through (j) above,
Debtor shall be in default in the performance of, or Debtor fails or
neglects to perform, keep, or observe, any term, provision, condition,
covenant, or agreement contained in this Agreement, or in any of the
Related Documents, and Debtor has failed to cure such default within
thirty (30) days from the occurrence thereof; or
(m) A judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least One Hundred
Thousand Dollars ($100,000) shall be rendered against Debtor and shall
remain unsatisfied and unstayed for a period of thirty (30) days;
SECTION 9 REMEDIES
Section 9.1 Rights and Remedies
Upon the occurrence and during the continuance of an Event of Default, Secured
Party may, at its election, without notice of its election and without demand,
do any one or more of the following, all of which are authorized by Debtor:
(a) Declare all Loan Obligations, whether evidenced by this
Agreement, by any of the Related Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8(g) all Loan Obligations shall become immediately due and payable
without any action by Secured Party);
(b) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Secured Party
reasonably considers advisable in the exercise of its reasonable credit
judgment;
(c) Without notice to or demand upon Debtor, make such payments
and do such acts as Secured Party considers necessary or reasonable to protect
its security interest
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Loan and Security Agreement, Page 14
<PAGE> 15
in the Collateral. Debtor agrees to assemble the Collateral if Secured Party so
requires, and to make the Collateral available to Secured Party as Secured Party
may designate. Debtor authorizes Secured Party to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any Lien which in
Secured Party's determination appears to be prior or superior to its security
interest and to pay all expenses incurred in connection therewith. With respect
to any of Debtor's owned premises, Debtor hereby grants Secured Party a license
to enter into possession of such premises and to occupy the same, without
charge, for up to one hundred twenty (120) days in order to exercise any of
Secured Party's rights or remedies provided herein, at law, in equity, or
otherwise;
(d) Without notice to Debtor, set off and apply to the Loan
Obligations any and all (i) balances and deposits of Debtor held by Secured
Party, or (ii) indebtedness at any time owing to or for the credit or the
account of Debtor held by Secured Party;
(e) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Secured Party is hereby granted a license or other
right, solely pursuant to the provisions of this Section 9.1, to use, without
charge, Debtor's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Secured Party's exercise of its rights under this Section 9.1,
Debtor's rights under all licenses and all franchise agreements shall inure to
Secured Party's benefit;
(f) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Debtor's premises) as Secured Party
determines is commercially reasonable;
(g) Secured Party may credit bid and purchase at any public sale;
(h) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Debtor.
Section 9.2 Increase Interest Rate
Upon Debtor's failure to pay all amounts declared due pursuant to this section,
including failure to pay upon final maturity, if permitted under applicable law,
(a) the interest rate on the Promissory Note(s) shall be increased up to fifteen
percent (15%) per annum, or, if lower, up to the maximum interest amount
allowable by applicable law, and (b) any unpaid accrued interest shall be added
to principal and such sum will bear interest therefrom until paid at the rate
herein provided.
Section 9.3 Additional Expenses
Debtor will, upon demand, pay to Secured Party the amount of any and all
reasonable expenses, including the reasonable fees and expenses of its counsel
and of any experts and agents, that Secured Party may incur in respect of Debtor
including without limitation those incurred in connection with (i) the custody,
preservation, use, or operation of, or the sale of, collection from, or other
realization upon, any of the Collateral, (ii) the exercise or enforcement of any
of the rights of Secured Party hereunder, or (iii) the failure by Debtor to
perform or observe any of the provisions hereof, (iv) any performance by Secured
Party under Section 9.5, and the reasonable expenses of Secured Party incurred
in connection therewith.
Section 9.4 Secured Party Appointed Attorney-in-Fact.
So long as any Event of Default is continuing, Debtor hereby irrevocably
appoints Secured Party as Debtor's attorney-in-fact, with full authority in the
place and stead of Debtor or otherwise, from time to time in Secured Party's
good-faith discretion to take any action and to execute any instrument that
Secured Party may reasonably deem necessary or advisable to
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Loan and Security Agreement, Page 15
<PAGE> 16
accomplish the purposes of this Agreement, in a manner consistent with the terms
hereof, including, without limitation:
(a) to obtain and adjust insurance required to be paid to Secured Party
pursuant to Section 6.12 hereof; and
(b) to ask, demand, collect, sue for, recover, compromise, receive, and give
acquaintance and receipts for moneys due and to become due under or in
connection with the Collateral; and
(c) to file any claims or take any action or institute any proceedings that
Secured Party may deem necessary or desirable for the collection or
perfection of a security interest in any of the Collateral or otherwise
to enforce the rights of Secured Party with respect to any of the
Collateral; and
(d) to execute any and all applications, documents, papers and instruments
for Secured Party to use any of the Collateral, to grant or issue any
exclusive or nonexclusive license with respect to any of the Collateral,
and to assign, convey or otherwise transfer title to or dispose of any
of the Collateral.
Section 9.5 Secured Party May Perform.
If Debtor fails to perform any agreement contained herein, Secured Party may
itself perform, or cause the performance of, such agreement. Secured Party and
any representatives of Secured Party shall have, in addition to all its other
rights under this Agreement, the right to obtain access to Debtor's data
processing equipment, computer hardware and software relating to the Collateral
and to use all of the foregoing and the information contained therein in any
manner Secured Party deems necessary for the purpose of effectuating its rights
under this Agreement and any other of the Related Documents. Debtor agrees that
Secured Party has no obligation to preserve rights to the Collateral against any
other.
Section 9.6 Secured Party's Duties.
The powers conferred on Secured Party hereunder are solely to protect its
interest in the Collateral and shall not impose any duty upon Secured Party to
exercise any such powers. Except for the safe custody of any Collateral in the
possession of Secured Party, and the accounting for moneys and for other
properties actually received by Secured Party hereunder, Secured Party shall
have no duty as to any Collateral or as to the taking of any necessary steps to
preserve rights against prior parties or any other rights pertaining thereto.
Section 9.7 Other Rights and Remedies
Secured Party may exercise in respect of the Collateral, in addition to other
rights and remedies provided for herein, all the rights and remedies of a
secured party on default under the Uniform Commercial Code of the State of
California (the "Code") in effect at that time (whether or not the Code then
applies to the affected Collateral), and remedies granted to it under any of the
other Related Documents, at law, in equity or otherwise available.
SECTION 10. MISCELLANEOUS PROVISIONS.
The following miscellaneous provision are a part of this Agreement:
Section 10.1 Amendments.
This Agreement, together with any Related Documents, constitutes the entire
understanding and agreement of the parties as to the matters set forth in this
Agreement. No alteration of or amendment to this Agreement shall be effective
unless given in writing and signed by the party or parties sought to be charged
or bound by the alteration or amendment.
Section 10.2 Applicable Law.
This Agreement has been executed, delivered and accepted by each party hereto in
the State of California, and this Agreement shall be governed by and construed
in accordance with the laws of the State of California.
Section 10.3 Caption Headings.
Caption headings in this Agreement are for convenience purposes only and are not
to be used to interpret or define the provisions of this Agreement.
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Section 10.4 Successors and Assigns.
This Agreement shall bind and inure to the benefit of the respective successors
and permitted assigns of each of the parties; provided, however, that neither
this Agreement nor any rights hereunder may be assigned by Debtor without
Secured Party's prior written consent, which consent may be granted or withheld
in Secured Party's sole discretion. Secured Party shall have the right at any
time with or without the consent of Debtor to sell, transfer, or negotiate all
or any part of, or any interest in the Loan Obligations, this Agreement or any
of the Related Agreements, and upon any such sale, transfer or negotiation, the
assignee thereof shall be entitled to all of the right title and interest of the
Secured Party so transferred.
Section 10.5 Consent to Loan Participation.
Debtor agrees to and consents to Secured Party's sale, or transfer, whether now
or later, of one or more participation interest in the Loans to one or more
purchasers, whether related or unrelated to Secured Party; provided, that in no
event shall Secured Party sell or transfer a participation to any competitor of
Debtor. Secured Party may provide, without any limitation whatsoever, to any one
or more purchasers, or potential purchasers, any information or knowledge
Secured Party may have about Debtor or about any other matter relating to the
Loan, and Debtor hereby waives any rights to privacy it may have with respect to
such matters; provided such purchasers agree to the confidentiality provisions
hereof. Debtor additionally waives any and all notices of sale of participation
interest, as well as all notices of any repurchase or such participation
interest in the Loans. Debtor further waives all rights of offset or
counterclaim that it may have now or later against Secured Party or against any
purchaser of a participation interest and unconditionally agrees that either
Secured Party or such purchaser may enforce Debtor's obligation under the Loan
irrespective of the failure or insolvency of any holder of any interest in the
Loans. Debtor further agrees that the purchaser of a participation interest may
enforce its interest irrespective of any personal claims or defenses that Debtor
may have against Secured Party. Any costs associated with the attempt to arrange
any such participation interest will be borne by Secured Party.
Section 10.6 Indemnification.
Debtor hereby indemnifies and saves and holds Secured Party and any participant
(or any persons, employees, officers or agents designated by Secured Party and
any participant) harmless from and against any and all claims, damages, loss,
liability or judgments which may be incurred or sustained by Secured Party, any
participant, and such designees or asserted against Secured Party, any
participant, and such designees, directly or indirectly, in connection with the
existence of or the exercise of any of the rights of Secured Party under this
Security Agreement or any of the of the Related Documents except to the extent
the same arises by reason of the gross negligence or willful misconduct of the
Person seeking indemnification.
Section 10.7 Notices.
All notices required to be given under this Agreement shall be given in writing
and shall be effective when actually received or five days after being deposited
in the United States mail, first class, postage prepaid, addressed to the party
to whom the notice is to be given at the address shown above. Any party may
change its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is to
change the party's address. To the extent permitted by applicable law, if there
is more than one Debtor, notice to any Debtor will constitute notice to all
Debtors. For notice purposes, Debtor agrees to keep Secured Party informed at
all times of Debtor's current address(es).
Section 10.8. Severability.
If a court of competent jurisdiction finds any provision of this Agreement to be
invalid or unenforceable as to any person or circumstances, such finding shall
not render that provision invalid or unenforceable as to any other persons or
circumstances. If feasible, any such offending provision shall be deemed to be
modified to be within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain valid and
enforceable.
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Section 10.9 Waiver.
Secured Party shall not be deemed to have waived any rights under this
Agreement, unless such waiver is given in writing and signed by Secured Party.
No delay or omission on the part of Secured Party in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Secured Party
of a provision of this Agreement shall not prejudice or constitute a waiver of
Secured Party's right otherwise to demand strict compliance with that provision
or any other provision of this Agreement. No prior waiver by Secured Party, nor
any course of dealing between Secured Party and Debtor, shall constitute a
waiver of any of Secured Party's rights or of any obligations of Debtor as to
any future transactions. Whenever the consent of Secured Party is required under
this Agreement, the granting of such consent by Secured Party in any instance
shall not constitute continuing consent in subsequent instances where such
consent is required and in all cases such consent may be granted or withheld in
the sole discretion of Secured Party.
Section 10.10. Confidentiality.
In handling any confidential information Secured Party shall exercise the same
degree of care that it exercises with respect to its own proprietary information
of the same types to maintain the confidentiality of any non-public information
thereby received or received pursuant to or in connection with this Agreement
except that disclosure of such information may be made (i) to the Subsidiaries
of Affiliates of Secured Party in connection with their present or prospective
business relations with Debtor, provided that they have entered into a
comparable confidentiality agreement in favor of Debtor and have delivered a
copy to Debtor, (ii) to prospective transferees or purchasers of any interest in
the Loans, provided that they have entered into a comparable confidentiality
agreement in favor of Debtor and have delivered a copy to Debtor, (iii) as
required by law, regulations, rule or order, subpoena, judicial order or similar
order and (iv) as may be required in connection with the examination, audit or
similar investigation of Secured Party. Confidential information hereunder shall
not include information that either: (a) is in the public domain or in the
knowledge or possession of Secured Party when disclosed to Secured Party, or
becomes part of the public domain after disclosure to Secured Party through no
fault of Secured Party; or (b) is disclosed to Secured Party by any third party,
provided Secured Party does not have actual knowledge that such third party is
prohibited from disclosing such information.
Section 10.11. Counterparts.
This Agreement may be executed in any number of counterparts, each of which when
so executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument.
SECTION 10.12. WAIVER OF JURY TRIAL.
DEBTOR AND SECURED PARTY EACH HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT, ANY RELATED AGREEMENT OR ANY OF THE LOAN OBLIGATIONS. EACH OF
DEBTOR AND SECURED PARTY HEREBY ACKNOWLEDGES THAT IT AND THE OTHER PARTY HERETO
HAVE BEEN INDUCED TO ENTER TO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION.
Section 10.13 Subordination Agreements.
Secured Party hereby agrees to execute a form of subordination agreement of each
Senior Secured Creditor.
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<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement as of the 12th day
of March, 1998:
DEBTOR:
FIRST VIRTUAL CORPORATION
By: /s/ J.O. MITCHELL
--------------------------------
Title: CFO
-----------------------------
SECURED PARTY:
HAMBRECHT & QUIST GUARANTY FINANCE, LLC:
By: /s/ ANDREW W. KAHN
----------------------------------
Title: President
-------------------------------
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Loan and Security Agreement, Page 19
<PAGE> 1
Exhibit 10.25
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This INTELLECTUAL PROPERTY SECURITY AGREEMENT (this "Security
Agreement"), dated as of March 12, 1998, is executed by First Virtual
Corporation, a Delaware corporation ("Debtor"), in favor of Hambrecht & Quist
Guaranty Finance, LLC, a California limited liability company ("Secured Party").
RECITALS
A. Debtor and Secured Party have entered into (i) a Loan and
Security Agreement (the "Agreement") dated the date hereof, and (ii) a
Promissory Note (the "Note") dated as of March 13, 1998, pursuant to which
Secured Party has made Loan(s) available to Debtor.
B. In order to induce Secured Party to enter into the Agreement
and the Note, Debtor has agreed to enter into this Security Agreement and to
grant the security interest in the Collateral described below.
AGREEMENT
NOW, THEREFORE, in consideration described in the above recitals
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, Debtor hereby agrees with Secured Party as follows:
1. Definitions and Interpretation. Unless otherwise defined
herein, all capitalized terms used herein and defined in the Agreement shall
have the respective meanings given to those terms in the Agreement.
2. Grant of Security Interest. As security for the Loan
Obligations, Debtor hereby pledges and assigns to Secured Party and grants to
Secured Party a security interest in all of its right, title and interests in
and to the following property now owned or hereafter acquired (collectively and
severally, the "Collateral"):
(a) All copyrights including all original works of authorship
fixed in any tangible medium of expression, all right, title and interest
therein and thereto, and all registrations and recordings thereof, including all
applications, registrations and recordings in the United States Copyright Office
or any successor office or agency thereto (the "Copyright Office") or in any
similar office or agency of the United States, any state thereof, or any foreign
country or any political subdivision thereof, all whether now owned or hereafter
acquired by Debtor, including those described on Attachment I hereto
(collectively, the "Copyrights");
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(b) All patentable inventions, patent rights, shop rights,
letters patent of the United States or any other country, all right, title and
interest therein and thereto, and all registrations and recordings thereof,
including all patent registrations and recordings in the United States Patent
and Trademark Office or any successor office or agency thereto (the "Patent and
Trademark Office") or in any similar office or agency of the United States, any
state thereof or any foreign country or political subdivision thereof, all
whether now owned or hereafter acquired by Debtor, including those described in
Attachment I hereto (collectively, the "Patents");
(c) All trademarks, trade names, trade styles and service marks,
and all prints and labels on which said trademarks, trade names, trade styles
and service marks have appeared or appear, and all designs and general
intangibles of like nature, now existing or hereafter adopted or acquired, all
right, title and interest therein and thereto, all registrations and recordings
thereof, including all applications, registrations and recordings in the Patent
and Trademark Office or in any similar office or agency of the United States,
any state thereof, or any foreign country or any political subdivision thereof,
all whether now owned or hereafter acquired by Debtor, including those described
in Attachment I hereto (collectively, the "Trademarks");
(d) All goodwill of Debtor's business symbolized by the
Trademarks and all customer lists and other records of Debtor relating to the
distribution of products or provision of services bearing or covered by the
Trademarks;
(e) All information, including formulas, patterns, compilations,
programs, devices, methods, techniques or processes, that derives independent
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by other persons who can obtain
economic value from its disclosure or use, all whether now owned or hereafter
acquired by the Debtor (collectively, the "Trade Secrets").
(f) All claims by Debtor against any Person for past, present or
future infringement of the Patents, Trademarks, Copyrights, or Trade Secrets;
(g) All proceeds of the foregoing (including, without limitation,
whatever is receivable or received when Collateral or proceeds are sold,
collected, exchanged, returned, substituted or otherwise disposed of, whether
such disposition is voluntary or involuntary, including rights to payment and
return premiums and insurance proceeds under insurance with respect to any
Collateral, and all rights to payment with respect to any cause of action
affecting or relating to the Collateral).
(h) Notwithstanding anything to the contrary herein, in the
Agreement, or in any other Related Document, Debtor shall not be restricted in
any respect as to its ability to pursue and make arrangements or agreements of
any sort relating to its research and development efforts or its Intellectual
Property. Licenses of Debtor's Intellectual Property in the ordinary course of
business and licenses or similar arrangements and liens or other encumbrances on
Intellectual Property granted or existing in connection with any joint venture,
collaboration, strategic alliance, research and development partnerships or
arrangements, and any similar arrangements or agreements shall not be subject to
any agreement of Debtor, herein, in the Agreement, or in any other Related
Documents, to refrain from pledging, transferring or otherwise encumbering
Debtor's personal property.
3. Representations and Warranties. Debtor represents and warrants
to Secured Party that (a) Debtor is the owner of the Collateral (or, in the case
of after-acquired Collateral, at the time Debtor acquires rights in the
Collateral, will be the owner thereof) and that no other Person has any
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right, title, claim or interest (by way of Lien or otherwise) in, against or to
the Collateral other than Permitted Liens; (b) Secured Party has or, in the case
of after-acquired Collateral, will have, a perfected first-priority security
interest in the Collateral subject to Permitted Liens; and (c) Debtor does not
own any Patents, Trademarks, Copyrights registered in, or the subject of pending
applications in, the Patent and Trademark Office, the Copyright Office or any
similar offices or agencies in any other country or any political subdivision
thereof, other than those described in Attachment I hereto.
4. Covenants Relating to Collateral. Debtor hereby agrees (a) to
perform all commercially reasonable acts that may be necessary to maintain,
preserve, protect and perfect the Collateral, the Lien granted to Secured Party
therein and the first priority of such Lien, subject to Permitted Liens,
provided, however, that Debtor not be required to perfect Secured Party's
security interest in any Collateral located outside the U.S., or perfect the
registration of Intellectual Property outside of the U.S.(b) to appear in and
defend any action or proceeding which may affect its title to or Secured Party's
interest in the Collateral; (c) to promptly register prior to shipment of
product relating thereto the most recent version of Debtor's material
Copyrights, if not so already registered, as Secured Party may reasonably
request from time to time; (d) on a continuing basis, but not more frequently
than once per calendar quarter to make, execute and acknowledge and deliver
appropriate filings with the Patent and Trademark Office and the Copyright
Office, including one or more Powers of Attorney substantially in the form of
Attachment II hereto. Secured Party agrees not to use the Powers of Attorney
unless an Event of Default has occurred and is continuing.
5. Notice of Patent, Trademark or Copyrights. Debtor will
promptly notify Secured Party upon (a) the filing by Debtor of an application
for the registration of any Patent, Trademark or Copyright with the United
States Patent and Trademark Office or the United States Copyright Office or any
similar office or agency or any political subdivision thereof, or (b) the
acquisition by Debtor of any Patent, Trademark or Copyright that is filed with
the United States Patent and Trademark Office or the United States Copyright
Office or any similar office or agency in any other country or any political
subdivision thereof.
6. Successors and Assigns. This Security Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Debtor without Secured Party's prior written
consent, which consent may be granted or withheld in Secured Party's sole
discretion. Secured Party shall have the right at any time with the consent of
Debtor, not to be unreasonably withheld to sell, transfer, or negotiate all or
any part of, or any interest in the Loan Obligations, this Agreement or any of
the Related Agreements, and upon any such sale, transfer or negotiation, the
assignee thereof shall be entitled to all of the right title and interest of the
Secured Party so transferred.
7. Severability. If a court of competent jurisdiction finds any
provision of this Security Agreement to be invalid or unenforceable as to any
person or circumstances, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any such
offending provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so
modified, it shall be stricken and all other provisions of this Security
Agreement in all other respects shall remain valid and enforceable.
8. Waiver. Secured Party shall not be deemed to have waived any
rights under this Security Agreement, unless such waiver is given in writing and
signed by Secured Party. No delay or omission on the part of Secured Party in
exercising any right shall operate as a waiver of such right or any other right.
A waiver by Secured Party of a provision of this Agreement shall not prejudice
or
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constitute a waiver of Secured Party's right otherwise to demand strict
compliance with that provision or any other provision of this Security
Agreement. No prior waiver by Secured Party, nor any course of dealing between
Secured Party and Debtor, shall constitute a waiver of any of Secured Party's
rights or of any obligations of Debtor as to any future transactions. Whenever
the consent of Secured Party is required under this Security Agreement, the
granting of such consent by Secured Party in any instance shall not constitute
continuing consent in subsequent instances where such consent is required and in
all cases such consent may be granted or withheld in the sole discretion of
Secured Party.
9. Counterparts. This Security Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
and the same instrument.
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IN WITNESS WHEREOF, Debtor has caused this Security Agreement to
be executed as of the day and year first above written.
First Virtual Corporation
By /s/ J.O. MITCHELL
---------------------------------
Name:
Title:
AGREED:
HAMBRECHT & QUIST GUARANTY
FINANCE, LLC
By /s/ ANDREW W. KAHN
---------------------------
Name: Andrew W. Kahn
Title: President
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EXHIBIT 10.26
COMMON STOCK WARRANT PURCHASE AGREEMENT
THIS COMMON STOCK WARRANT PURCHASE AGREEMENT (the "Agreement") is made
and entered into as of the 12th day of March, 1998 by and among FIRST VIRTUAL
CORPORATION, a Delaware Company (the "Company") and Hambrecht & Quist Guaranty
Finance, LLC., a California limited liability company ("H&QGF"). H&QGF shall be
referred to herein as the "Investor." As used in this Agreement, the term
"Shares" shall mean the shares of Common Stock issuable upon exercise of the
Warrant, as defined in Section 1.1 below, or upon exercise of the right to
convert the Warrant, as provided under Section 7 of the Warrant (the "Conversion
Right").
The parties hereto agree as follows:
Article 1. Sale and Purchase of Warrant; Closing.
1.1 Sale and Purchase of Warrant. The Company agrees to sell to
the Investor and the Investor agrees to purchase from the Company for a purchase
price of $1,250.00, a warrant in the form attached hereto as Exhibit A to
purchase 125,000 shares of the Company's Common Stock (the "Common Stock") at an
initial per share exercise price of $8.00 at any time on or before March 1,
2003. The warrant to be issued to H&QGF hereunder shall be referred to herein as
the "Warrant".
1.2 Closing. The issuance of the Warrant shall take place on the
even date hereof, or on such other date as the parties shall mutually agree (the
"Closing"). At the Closing, the Company shall cause to be delivered to the
Investor the Warrant issued in the name of such Investor and Investor shall pay
the Company $1,250.00.
Article 2. Representations and Warranties of the Company. The Company
hereby agrees and represents and warrants to the Investor as follows:
2.1 Corporate Status. The Company is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware and has all requisite legal and corporate power and authority to own,
lease and operate its properties and assets and to carry on its business as now
conducted and as proposed to be conducted.
2.2 Capitalization. Immediately prior to the Closing, the
authorized and outstanding capitalization of the Company will consist of that
which is described on Schedule 1. Except as provided in Schedule 1, there are no
outstanding rights, options, warrants or agreements for the purchase or
acquisition from the Company of any shares of its capital stock. The Company is
not a party or subject to any agreement, and, to the best of its knowledge,
there is no agreement or understanding between any other persons, which relates
to the voting or giving of written consents with respect to any security or by a
director of the Company.
2.3 Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby or thereby, including the
authorization, issuance and delivery of the Warrant, the reservation of the
Shares issuable upon the exercise thereof, and the grant of registration rights
to the Investor, has been taken or will be taken prior to Closing. The person
signing this Agreement has full power and authority to enter into this Agreement
on behalf of the Company. When executed and delivered, this Agreement will
constitute a valid and binding obligation of the Company except as
enforceability may be limited by the general laws of general application
relating to bankruptcy, insolvency and the
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relief of debtors and the rules of law or principles at equity governing
specific performance, injunctive relief and other equitable remedies.
2.4 Corporate Power. The Company has all requisite legal and
corporate power and authority to enter into this Agreement and all requisite
legal and corporate power and authority to issue and deliver the Warrant and the
Shares and to carry out and perform its obligations under the terms and
conditions of this Agreement.
2.5 Validity of Warrant. The Warrant to be issued and delivered
pursuant to this Agreement shall constitute valid and binding obligations of the
Company. The Shares have been duly and validly reserved, and when issued in
accordance with the Warrant shall be duly authorized, validly issued, fully paid
and free of any liens or encumbrances except for restrictions on transfer
provided for under applicable federal and state securities laws. During the
period within which the purchase rights represented by the Warrant may be
exercised, the Company shall at all times have authorized, and reserved for
issuance upon exercise of the Warrant or upon exercise of the Conversion Right,
a sufficient number of shares of Common Stock to provide for the issuance of the
Shares. The issuance of such Common Stock is not and will not be subject to any
preemptive rights or rights of first refusal except such as have been
effectively waived.
2.6 Compliance with Other Instruments. The Company is not in
violation of, conflict with or default under (i) any provision of its amended
and restated certificate of incorporation or bylaws, or (ii) any contract,
instrument, judgment, order, writ or decree to which it or any of its
subsidiaries is a party or by which it or any of them is bound, or, to the best
of its knowledge, of any provision of any federal or state statute, rule or
regulation applicable to the Company or any of its subsidiaries except as would
not have a material adverse effect on the assets, condition, affairs or
prospects of the Company and its subsidiaries taken as a whole, financial or
otherwise (a "MAE"). The Execution, delivery and performance of this Agreement,
and the consummation of the transactions contemplated hereby and thereby,
including the authorization, issuance and delivery of the Warrant, the
reservation of the Shares issuable upon exercise thereof and the grant of
registration rights to the Investor, will not, with or without the passage of
time and giving of notice, result in any such violation, conflict or default, or
an event that results in the creation of any material lien, charge or
encumbrance upon any assets of the Company or any of its subsidiaries or the
suspension, revocation, impairment or forfeiture of any material permit,
license, authorization, or approval applicable to the Company or any of its
subsidiaries which is reasonably likely to have a MAE.
Article 3. Representations and Warranties of the Investor. The Investor
represents and warrants to the Company that:
3.1 Authorization. The person signing this Agreement has full
power and authority to enter into this Agreement on behalf of the Investor. When
executed and delivered, this Agreement will constitute the Investor's valid and
legally binding obligation.
3.2 Investment Representations.
(a) The Investor understands that the Warrant and the Shares have
not been registered under the Securities Act of 1933, as amended (the
"Act") and will be issued pursuant to an exemption from registration
contained in the Act based in part upon the representations of the
Investor contained herein and that the Company's reliance on such
exemption as predicated on the representations set forth in this Section
3.2.
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(b) The Investor is acquiring the Warrant and the Shares for
investment purposes only, solely for its own account and not as a
nominee for any other party and not with a view toward the resale or
distribution thereof.
(c) The Investor is a sophisticated investor experienced in
venture capital investing and able to fend for itself. The Investor is
able to bear the economic risk of the purchase of the Warrant and the
Shares, including a complete loss of the Investor's investment. The
Investor has been afforded an opportunity to ask such questions of the
Company's officers, employees, agents, accountants and representatives
concerning the Company's business, operations, financial condition,
assets, liabilities and other relevant matters as it has deemed
necessary or desirable.
(d) Investor understands that if the Company does not register
the Shares with the Securities and Exchange Commission pursuant to
Section 12 of the 1933 Act, or file reports pursuant to Section 15(d) of
the Securities Exchange Act of 1934 ( the "1934 Act"), or if a
registration statement covering the securities under the 1933 Act is not
in effect when it desires to sell (i) the rights to purchase Common
Stock pursuant to the Warrant, or (ii) the Common Stock issuable upon
exercise of the right to purchase, it may be required to hold such
securities for an indefinite period. Investor also understands that any
sale of the rights of the Investor to purchase Common Stock which might
be made by it in reliance upon Rule 144 under the 1933 Act may be made
only in accordance with the terms and conditions of that Rule.
(e) Investor is an "accredited investor" within the meaning of
Rule 501 of Regulation D under the Act, as presently in effect.
(f) Investor is a resident of the State of California.
Article 4. Conditions of the Investor's Obligations at the Closing. The
obligation of the Investor to purchase the Warrant is subject to the fulfillment
to its satisfaction, or its written waiver thereof, prior to or at the Closing,
of each of the following conditions:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Article 2 hereof shall be true and
correct on and as of the Closing.
4.2 Corporate Action. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby shall have been taken.
4.3 Opinion of Counsel. There shall have been delivered to the
Investor an opinion of the Company's counsel dated as of the date of the Closing
in substantially the form attached hereto as Exhibit B.
4.4 Delivery of Warrant. There shall have been delivered to the
Investor the Warrant.
4.5 Governmental Consents. All permits, consents, approvals,
orders and authorizations, if any, which the Company is required to obtain from,
and all registrations, qualifications, designations, declarations and filings
which the Company is required to make with, any federal or state governmental
authority of the United States in connection with the execution, delivery or
performance of this Agreement, the consummation of the transactions contemplated
hereby or the issuance and delivery of the Warrant to the Investor pursuant to
this Agreement, except post-sale filings which may be required under the Blue
Sky laws of any
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applicable states (which the Company hereby agrees to make in accordance with
such laws), shall have been duly obtained or made and shall be effective on and
as of the Closing.
4.6 Registration Rights. Within 30 days of the date of this
Agreement, the Company will obtain the requisite consent of stockholders of the
Company to amend the Amended and Restated Investors' Rights Agreement between
the Company and the investors named therein, dated as of August 29, 1996 (the
"Investors Rights Agreement"), to make the Investor a party to the Investors'
Rights Agreement and to include the Shares as Registrable Securities as defined
in the Investors' Rights Agreement.
Article 5. Conditions of the Company's Obligations at the Closing. The
obligation of the Company to issue the Warrant to the Investor is subject to the
fulfillment to its satisfaction, or its written waiver thereof, prior to or at
the Closing, of the following conditions:
5.1 Representations and Warranties. The representations and
warranties of the Investor contained in Article 3 hereof shall be true and
correct on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have paid the
Company an aggregate of $1,250.00.
5.3 Governmental Consents. All permits, consents, approvals,
orders and authorizations, if any, which the Company is required to obtain from,
and all registrations, qualifications, designations, declarations and filings
which the Company is required to make with, any Federal or state governmental
authority of the United States in connection with the execution, delivery or
performance of this Agreement, the consummation of the transactions contemplated
hereby or the issuance and delivery of the Warrant to the Investor pursuant to
this Agreement, except post-sale filings which may be required under the Blue
Sky laws of any applicable states (which the Company hereby agrees to make in
accordance with such laws), shall have been duly obtained or made and shall be
effective on and as of the Closing.
Article 6. Financial Statements. So long as the Investor continues to
hold a Warrant or any Shares, the Company shall deliver to the Investor as soon
as practicable (i) after the end of each fiscal year, the Company will provide
the Investor with annual audited consolidated financial statements (consisting
of a consolidated profit or loss statement of profit or loss for such fiscal
year, a consolidated balance sheet of the Company as of the end close of the
fiscal year, and a consolidated statement of cash flows for such fiscal year,
certified by independent public accountants of recognized national standing
selected by the Company and satisfactory to Investor) and (ii) as soon as
practicable after the end of each of the first three fiscal quarters and in any
event within forty-five (45) days thereafter, the Company will provide the
Investor with quarterly unaudited consolidated financial statements (consisting
of an unaudited consolidated profit or loss statement for such fiscal quarter
and an unaudited consolidated balance sheet, and an unaudited consolidated
statement of cash flows, as of the end of such fiscal quarter). The right to
receive financial statements under this Section 8 may be transferred to any
subsequent holder of a Warrant who acquires not less than twenty-five (25%) of
the Shares acquired pursuant to this Agreement.
Article 7. Miscellaneous
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7.1 Agreement Is Entire Contract. This Agreement, including the
Exhibits, Appendices and Schedule 1 hereto, constitutes the entire contract
between the parties hereto with respect to the subject matter hereof.
7.2 Expenses. Each party to this Agreement shall bear its own
expenses incurred in connection with the negotiation, preparation, execution and
consummation of this Agreement and the Warrant.
7.3 Survival of Representations and Warranties. The
representations, warranties, covenants and agreements of the Company and the
Investor contained herein or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing.
7.4 Severability. If one or more provisions of this Agreement are
held to be invalid, illegal or unenforceable under applicable law, portions of
such provisions, or such provisions in their entirety, to the extent necessary,
shall be severed from this Agreement, and the balance of this Agreement shall be
enforceable in accordance with its terms.
7.5 Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.
7.6 Modification and Waiver. This Agreement and any provision
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against whom enforcement of the same is sought.
7.7 Notices. Any notice, request or other document required or
permitted to be given or delivered to the Company or the Investor shall be
delivered or shall be sent by certified mail, postage prepaid, to the Investor
at its address as shown on the books of the Company or to the Company at 3393
Octavius Drive, Suite 102, Santa Clara, CA 95054, Attention: Chief Financial
Officer, or such other address as either may from time to time provide to the
other.
7.8 Descriptive Headings and Governing Law. The description
headings of the several sections and paragraphs of this Agreement are inserted
for convenience only and do not constitute a part of this Agreement. This
Agreement shall be construed and enforced in accordance with, and the rights of
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the parties shall be governed by, the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
FIRST VIRTUAL CORPORATION HAMBRECHT & QUIST
GUARANTY FINANCE, LLC
By: /s/ J.O. MITCHELL By: /s/ ANDREW W. KAHN
----------------- ------------------
(Signature) (Signature)
Name: J.O. Mitchell Name: Andrew W. Kahn
--------------- ----------------
Title: CFO Title: President
-------------- ---------------
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EXHIBIT 10.27
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS FOR SUCH LAWS AS MAY THEN BE IN EFFECT, OR AN OPINION
OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
Company: First Virtual Corporation (the "Company"), and any
corporation that shall succeed to the obligations
of the Company under this Warrant.
Number of Shares: 125,000
Class of Stock: Common Stock
Initial Warrant Price: $8.00 per share
Expiration Date: March 1, 2003
Date of Grant: March 12, 1998
THIS CERTIFIES THAT, for value received, Hambrecht & Quist Guaranty
Finance, LLC, a California limited liability company, or nominees, is entitled
to purchase the above number (as adjusted pursuant to Section 5 hereof) of fully
paid and nonassessable shares of the above Class of Stock of the Company at the
Initial Warrant Price above (as adjusted pursuant to Section 5 hereof), subject
to the provisions and upon the terms and conditions set forth herein.
1. Definitions.
As used herein, the following terms, unless the context otherwise
requires, shall have the following meanings:
(a) "Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations thereunder, as shall
be in effect at the time.
(b) "Average Amount Unborrowed" shall mean Five Million Dollars
($5,000,000) minus the average principal balance outstanding under the Loan
Agreement from the date of the Loan Agreement through December 31, 1998.
(c) "Common Stock" shall mean shares of the presently authorized
common stock of the Company and any stock into which such common stock may
hereafter by exchanged.
(d) "Eligible Shares" shall mean fifty percent (50%) of the
Number of Shares Holder is originally entitled to purchase (125,000), as that
Number of Shares is adjusted pursuant to Section 5.
<PAGE> 2
(e) "Holder" shall mean any person who shall at the time be the
holder of this Warrant.
(f) "Loan Agreement" shall mean that Loan and Security Agreement
between the Company, as Debtor, and Holder, as Secured Party dated as of even
date herewith.
(g) "Shares" shall mean the shares of the Class of Stock that the
Holder is entitled to purchase upon exercise of this Warrant, as adjusted
pursuant to Section 5 hereof.
(h) "Warrant Price" shall mean the Initial Warrant Price at which
this Warrant may be exercised, as adjusted pursuant to Section 5 hereof.
2. Exercisability, Duration and Term of Warrant.
2.1. Repurchase Right. A portion of the purchase rights under
this Warrant may be repurchased by the Company (the "Repurchase Right") at any
time after December 31, 1998 and before January 15, 1999, if less than
$5,000,000 of principal is outstanding on one or more days beginning on the date
of the Loan Agreement and until December 31, 1998, as further described herein.
(a) The number of shares subject to the Repurchase Right (the
"Repurchasable Shares") shall be equal to the product of [A] Eligible Shares,
times [B] Average Amount Unborrowed, divided by [C] $5,000,000, as those terms
are defined herein.
(b) The Company may elect to exercise its Repurchase Right as to
Repurchasable Shares by giving written notice to Holder and paying Holder a fee
equal to one cent ($0.01) for each Repurchaseable Share the Company elects to
repurchase, at any time after December 31, 1998 and before January 15, 1999 (the
"Election Notice").
(c) Upon receipt by Holder of an Election Notice, Holder will
surrender this Warrant at the principal office of Company, and a new Warrant
(with the same Date of Grant as the Date of Grant hereof) representing the
portion of the Shares with respect to which this Warrant shall not then have
been subject to an election to repurchase shall also be issued to the Holder
within such thirty (30) day period.
2.2. Term. The purchase right represented by this Warrant, that
is not subject to the Repurchase Right, is exercisable, in whole or in part, on
or before the Expiration Date. The purchase right for the shares represented by
this Warrant that are subject, or may be subject, to the Repurchase Right
pursuant to Section 2.1(a) above may not be exercised prior to January 16, 1999,
which date is the date following the expiration of the Repurchase Right.
2.3 Automatic Repurchase Prior to Expiration of Repurchase Right.
To the extent that the Repurchase Right is not exercised by the Company on or
prior to January 15, 1999, then the Repurchase Right shall be deemed
automatically exercised pursuant to this Section 2 immediately prior to the
expiration of the Repurchase Right. To the extent that the Repurchase Right is
exercised in accordance with this Section 2, the Company will pay Holder a fee
of one cent ($0.01) for each Repurchaseable Share repurchased and issue a
replacement Warrant to the Holder for the remaining number of Shares subject to
the purchase rights represented by this Warrant.
<PAGE> 1
Exhibit 10.28
PROMISSORY NOTE
================================================================================
Borrower: Lender:
FIRST VIRTUAL CORPORATION HAMBRECHT & QUIST GUARANTY FINANCE, LLC
3393 Octavius Drive One Bush Street
Santa Clara, CA 95054 San Francisco, CA 94104
================================================================================
Principal Amount: Up to $5,000,000 Interest Rate: 12.0% Date 3/13/98
PROMISE TO PAY. FIRST VIRTUAL CORPORATION ("Borrower") promises to pay to
HAMBRECHT & QUIST GUARANTY FINANCE, LLC ("Lender"), in lawful money of the
United States of America, the principal amount of Five Million Dollars
($5,000,000) or so much as may be outstanding together with interest on the
unpaid outstanding principal balances from the date of this Note first written
above, until paid in full.
MATURITY: On December 31, 1998, Borrower will pay any and all remaining fees,
principal and interest accrued on this Note.
PAYMENT: Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to collection costs
and late charges, then fees, and then to accrued unpaid interest, and any
remaining amount to principal.
FIXED INTEREST RATE. The interest rate on this Note is Twelve percent (12.0%)
per annum, or, if lower, the maximum rate of interest allowed by applicable law.
INTEREST ONLY PAYMENTS: Borrower will pay interest in arrears on the principal
amount outstanding on this Note with monthly payments beginning on March 31,
1998, and continuing on the last day of each month thereafter through and
including December 31, 1998.
LOAN FEE: This Note is subject to a One Hundred Thousand Dollar ($100,000) loan
fee, of which One Hundred Thousand Dollars ($100,000) shall be paid on the date
of this loan. Borrower agrees that all loan fees are earned fully as of the date
of the loan and will not be subject to refund upon early payment (whether
voluntary or as a result of default), except as otherwise required by law.
ADVANCES AND REPAYMENT OF PRINCIPAL Five Million Dollars ($5,000,000) of
principal is originally available to Borrower under this Note (the "Available
Amount"). On the Date of this Note, Borrower borrowed $1,000,000.00 of the
Available Amount. Borrower may pay without penalty (except that loan fees are
fully earned on the date of the loan) all or a portion of the amount owed
earlier than it is due. Prior to June 15, 1998, provided that no Event of
Default has occurred and is continuing under the Loan and Security Agreement or
any Related Documents, as Related Documents is defined in the Loan and Security
Agreement, , the Available Amount less all principal amounts outstanding shall
be available to Borrower for future advances, upon three business days after
written notice to Lender. On and after June 15, 1998, any principal amount
repaid or not borrowed shall not be available to Borrower for future advances,
except as may be approved by Lender in its sole discretion.
LOAN AND SECURITY AGREEMENT. This Note is subject to and shall be governed by
all the terms and conditions of the Loan and Security Agreement dated as of the
Date of this Note first written above between the Borrower and Lender as amended
from time to time (the "Loan and Security Agreement").
COLLATERAL: This Note is secured by certain collateral of the Borrower as more
thoroughly described in the Loan and Security Agreement and the Intellectual
Property Security Agreement dated as of the Date of this Note first written
above, between Borrower and Lender.
- --------------------------------------------------------------------------------
Promissory Note, Page 1
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 4 to the Registration Statement on Form S-1 of our report dated
January 30, 1998, except as to Note 10 which is as of March 13, 1998, 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
April 2, 1998
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<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 676,000 1,506,000
<SECURITIES> 0 0
<RECEIVABLES> 2,337,000 3,067,000
<ALLOWANCES> 0 (211,000)
<INVENTORY> 1,230,000 1,672,000
<CURRENT-ASSETS> 4,302,000 6,079,000
<PP&E> 1,446,000 1,934,000
<DEPRECIATION> (533,000) (912,000)
<TOTAL-ASSETS> 5,432,000 7,389,000
<CURRENT-LIABILITIES> 3,256,000 5,778,000
<BONDS> 0 0
0 0
7,000 7,000
<COMMON> 5,000 5,000
<OTHER-SE> 2,062,000 887,000
<TOTAL-LIABILITY-AND-EQUITY> 5,432,000 7,389,000
<SALES> 0 0
<TOTAL-REVENUES> 12,093,000 11,123,000
<CGS> 6,547,000 6,477,000
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 7,816,000 8,727,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 27,000 (147,000)
<INCOME-PRETAX> (2,243,000) (4,228,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,243,000) (4,228,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,243,000) (4,228,000)
<EPS-PRIMARY> (.17) (.31)
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