<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1998
REGISTRATION NO. 333-38755
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
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)
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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. [ ]
CALCULATION OF REGISTRATION FEE
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========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
Common Stock ($.001 par value) 552,000 $14.00 $7,728,000 $2,280
========================================================================================================================
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(1) Includes 72,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option and excludes 2,760,000 shares of Common
Stock covered in the Registration Statement previously filed with the
Commission on October 24, 1997 for which the registration fee has already
been paid.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
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 APRIL 3, 1998
LOGO
2,880,000 SHARES
COMMON STOCK
------------------------
Of the 2,880,000 shares of Common Stock offered hereby, 2,700,000 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 $1,200,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 432,000 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
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------------------------
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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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, Inc., 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..... 2,700,000 shares
Common Stock offered by the Selling
Stockholders.......................... 180,000 shares
Common Stock outstanding after the 15,530,627 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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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
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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 $ 30,755
Working capital...................................... 1,891 1,891 32,154
Total assets......................................... 11,104 11,104 39,359
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 33,352
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- ---------------
(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 $11.36 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 2,700,000 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
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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
7
<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 has agreed to refer customers to
First Virtual or recommend that First Virtual 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 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 new supplier. There can be no assurance that these
existing suppliers will continue to meet the
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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 has resulted in products which
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 business combinations, resulting in
competitors with larger market shares, customer bases, sales forces, product
offerings and technology and marketing expertise.
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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 specifications may limit the Company's opportunities to
provide proprietary product features. The Company currently licenses certain
technology from third parties and plans to continue to do so in the future.
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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
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."
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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
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
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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
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
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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 48.4%,
of the outstanding shares of Common Stock (47.1% 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 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
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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
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 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
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<PAGE> 18
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 $10.86 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, as well as its products. 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 the software applications that it
uses or has developed are year 2000 compliant, to the extent that any of 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 has analyzed the software applications that it uses or has developed
and, as a result, the Company at this time does not anticipate any significant
expense in ensuring that they are year 2000 compliant. However, until the year
2000 arrives, the Company cannot be absolutely certain that its analysis is
correct. Additionally, there can be no assurance that the Company's suppliers,
vendors or other enterprises with which the Company interacts are or will be
year 2000 compliant. Failure of third-party enterprises with which the Company
interacts 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 $31.4 million ($36.7 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 $6.7 million of the net proceeds
of the offering for the repayment of outstanding indebtedness, including $2.6
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 2,700,000 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; 15,564,837 shares
issued and outstanding, as adjusted............. 5 13 16
Additional paid-in capital...................... 17,267 17,267 48,707
Notes receivable from stockholders.............. (837) (837) (837)
Accumulated deficit............................. (14,534) (14,534) (14,534)
-------- ------------ -----------
Total stockholders' equity................. 1,909 1,909 33,352
-------- ------------ -----------
Total capitalization....................... $ 3,221 $ 3,221 $ 33,484
======== ============ ===========
</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 $11.36 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
2,700,000 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
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)), the pro forma net tangible book value of the Company as of December
31, 1997, would have been $33.4 million, or $2.14 per share, respectively. This
represents an immediate increase in the pro forma net tangible book value of
$1.99 per share to existing stockholders and an immediate dilution of $10.86 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)........................................... 1.99
-----
Pro forma net tangible book value per share after
offering.................................................. 2.14
------
Dilution per share to new public investors.................. $10.86
======
</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 82.7% $15,717,000 30.9% $ 1.22
New public investors(2).......... 2,700,000 17.3 35,100,000 69.1 $13.00
---------- ----- ----------- -----
Total.................. 15,564,837 100.0% $50,817,000 100.0%
========== ===== =========== =====
</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
81.5% of the total shares of Common Stock outstanding after this offering,
and will increase the number of shares held by new investors to 2,880,000,
or approximately 18.5%, 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.
Income Taxes. No provision for income taxes has been recorded, as the
Company has incurred losses since inception.
24
<PAGE> 26
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>
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
25
<PAGE> 27
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, 1997 and 1998, the Company is recognizing compensation charges of
approximately $3.4 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 Notes 8 and 10 of Notes to
Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs and
operating systems in its internal operations, as well as its products. 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 the software applications that it
uses or has developed are year 2000 compliant, to the extent that any of 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 has analyzed the software applications that it uses or has developed
and, as a result, the Company at this time does not anticipate any significant
expense in ensuring that they are year 2000 compliant. However, until the year
2000 arrives, the Company cannot be absolutely certain that its analysis is
correct. Additionally, there can be no assurance that the Company's suppliers,
vendors or other enterprises with which the Company interacts are or will be
year 2000 compliant. Failure of third-party enterprises with which the Company
interacts 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.
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<PAGE> 28
The Company has not made significant outlays for capital expenditures since
inception because of its strategy to outsource manufacturing and certain other
functions. From inception through 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.
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 and subsequently
amended on April 24, 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 and $1.5 million of which was loaned to
the Company in April 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 per share purchase price equal to the initial public offering
price. The warrant is exercisable through March 1, 2003. The fair value of this
warrant is estimated to be approximately $550,000 and will be expensed as an
additional financing cost in 1998. The Company paid a $100,000 fee to Guaranty
Finance in consideration for entering into the aforementioned loan transaction.
The Company anticipates that $6.7 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 $2.6 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 12 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.
27
<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, Inc., 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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<PAGE> 30
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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<PAGE> 31
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 Electronic Data Systems Corporation
("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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<PAGE> 32
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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<PAGE> 33
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.
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<PAGE> 34
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:
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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<PAGE> 35
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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<PAGE> 36
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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<PAGE> 37
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 products 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 has resulted in products which may
compete with products
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<PAGE> 39
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.
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<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 Corporation). 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, 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, 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, Marketing of the Company in
October 1997. From April 1996 to Octo-
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<PAGE> 43
ber 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 1999; Class II, whose term will expire at the annual
meeting of stockholders to be held in 2000; and Class III, whose term will
expire at the annual meeting of stockholders to be held in 2001. The Class I
directors will be Mr. Torresi and Mr. Falotti, the Class II directors will be
Mr. Norman and Mr. Douglas, and the Class III directors will be 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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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 ten-year term and
will vest over a period of five years, with ten percent 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 2,192,773
James O. Mitchell 10,000 105,000 11,709 69,957 100,987 543,995
Allwyn Sequeira -- -- 31,052 135,614 308,148 981,835
Alan J. McMillan -- -- 19,127 62,539 200,833 529,160
James M. Nielsen 4,000 42,000 29,665 141,335 297,080 1,230,921
</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 or the 1993 Plan 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 and 1993
Plan, respectively, 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 ten 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 12 months after an optionee's relationship
with the Company and its affiliates ceases due to disability and up to 18
46
<PAGE> 48
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 ten-year term and will vest over a period of five
years, with ten percent 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
48
<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.
49
<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.
50
<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 7.3
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 14.7
L.P.(3).............................. --
428 University Avenue
Palo Alto, CA 94301
Ralph Ungermann(4)..................... 2,708,236 20.9 25,000 2,683,236 17.2
James O. Mitchell(5)................... 415,736 3.2 -- 415,736 2.7
Allwyn Sequeira(6)..................... 495,940 3.9 10,000 485,940 3.1
Alan J. McMillan(7).................... 220,091 1.7 -- 220,091 1.4
James M. Nielsen(8).................... 52,849 * -- 52,849 *
Neal M. Douglas(2)..................... 1,138,861 8.9 -- 1,138,861 7.3
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 14.7
Enzo Torresi(11)....................... 116,694 * -- 116,694 *
All directors and executive officers as 7,671,657 58.6 7,636,657 48.4
a group (10 persons)(12)............. 35,000
Other Selling Stockholders(13)......... 2,522,733 19.5 145,000 2,377,733 15.2
</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
15,530,627 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
51
<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 2,700,000 shares of Common
Stock offered by the Company hereby, there will be 15,530,627 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
Upon completion of this offering, the Board of Directors will have 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 and the initial public offering price per share, respectively.
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
53
<PAGE> 55
offering, the warrants to purchase Series D Preferred Stock will 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
15,530,627 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 432,000 shares of Common Stock. Of these shares, 2,880,000 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
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 and 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 that for a period of 180 days after the date of this Prospectus, they
will not, directly or indirectly, offer, sell, contract to sell, grant any
option to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock or securities convertible into or exchangeable for, or any rights
to purchase or acquire, Common Stock, without the prior written consent of
BancAmerica Robertson Stephens or, in certain instances, the Company. The
Company has agreed with BancAmerica Robertson Stephens not to release any
stockholder from any lock-up agreement between the stockholder and the Company
without the consent of BancAmerica Robertson Stephens.
In general, under Rule 144 as currently in effect, beginning 180 days after
the date of this Prospectus, an affiliate of the Company, or person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
that were not acquired from the Company or an affiliate of the Company within
the previous one year, will be entitled to sell in any three-month period a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Company's Common Stock or (ii) the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission. Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
person whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 180 days immediately preceding the
55
<PAGE> 57
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.
Generally, 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................................................ 2,880,000
=========
</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 432,000 additional shares of Common Stock at the
same price per share as will be paid for the 2,880,000 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 2,880,000 shares offered hereby. If purchased,
such additional shares will be sold by the Underwriters on the same terms as
those on which the 2,880,000 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 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,
57
<PAGE> 59
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 and subsequently
amended on April 24, 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 and $1.5 million of which was loaned to
the Company in April 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 per share purchase price equal to the initial public offering
price. 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 $2.6 million of
the net proceeds of this offering will be used to pay the outstanding balance of
the Loan. Guaranty Finance has agreed, for a period of one year following the
effective date of the offering, subject to certain exceptions, not to offer to
sell, contract to sell, or otherwise sell, dispose of, lien, pledge or grant any
rights with respect to the warrant and underlying shares of Common Stock. 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.
58
<PAGE> 60
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
April 28, 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.
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,
F-17
<PAGE> 78
FIRST VIRTUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The Company will recognize a compensation
charge of approximately $1.3 million with respect to the 499,500 repriced stock
options and 278,000 additional stock options granted in early February 1998 at
$8.50 per share, computed based on a deemed value of $10.20 per share of Common
Stock. The charge will be recognized over the vesting period of the options,
which is generally five years.
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 and subsequently
amended on April 24, 1998, (i) Guaranty Finance agreed to lend the Company up to
$5 million at an interest rate of 12% per annum, 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 per share purchase price equal to the initial
public offering price. The warrant is exercisable through March 1, 2003. The
fair value of this warrant, computed in accordance with FAS 123, is estimated to
be approximately $550,000 and will be expensed as an additional financing cost
in 1998. The Company also 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........................................ $ 15,662
NASD Filing Fee............................................. 5,689
Nasdaq National Market Filing Fee........................... 90,500
Blue Sky Fees and Expenses.................................. 5,000
Accounting Fees............................................. 400,000
Legal Fees and Expenses..................................... 390,000
Transfer Agent and Registrar Fees........................... 7,500
Printing and Engraving...................................... 250,000
Miscellaneous............................................... 35,649
----------
Total............................................. $1,200,000
==========
</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 to Hambrecht & Quist
Guaranty Finance, LLC a warrant to purchase 125,000 shares of Common Stock
at an exercise price per share equal to the initial public offering price.
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
**3.3 Amended and Restated Certificate of Incorporation to be
effective upon closing of the offering
**3.4 Bylaws of the Registrant
**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. 6 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
28, 1998.
FIRST VIRTUAL CORPORATION
By: /s/ JAMES O. MITCHELL
------------------------------------
James O. Mitchell
Vice President, Operations and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 6 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>
* Chief Executive Officer and April 28, 1998
- --------------------------------- President (Principal Executive
Ralph K. Ungermann Officer)
/s/ JAMES O. MITCHELL Vice President, Operations and April 28, 1998
- --------------------------------- Chief Financial Officer
James O. Mitchell (Principal Financial and
Accounting Officer)
* Director April 28, 1998
- ---------------------------------
Neal Douglas
* Director April 28, 1998
- ---------------------------------
Pier Carlo Falotti
* Director April 28, 1998
- ---------------------------------
David A. Norman
* Director April 28, 1998
- ---------------------------------
James Swartz
* Director April 28, 1998
- ---------------------------------
Enzo Torresi
/s/ JAMES O. MITCHELL April 28, 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
**3.3 Amended and Restated Certificate of Incorporation to be
effective upon closing of the offering
**3.4 Bylaws of the Registrant
**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
[COOLEY GODWARD LETTERHEAD]
EXHIBIT 5.1
April 29, 1998
First Virtual Corporation
3393 Octavius Drive, Suite 102
Santa Clara, CA 95054
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by First Virtual Corporation (the "Company"), of a Registration
Statement on Form S-1, as amended (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"), covering the
underwritten public offering of up to an aggregate of 3,312,000 shares of the
Company's common stock (the "Common Stock") (including 432,000 shares of
Common Stock for which the underwriters will be granted an over-allotment
option), 3,132,000 of which are being sold by the Company (the "Company
Shares") and 180,000 of which are being sold by certain stockholders of the
Company (the "Selling Stockholder Shares").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related prospectus included therein (the
"Prospectus"), the Company's Certificate of Incorporation and Bylaws, and the
originals or copies certified to our satisfaction of such records, documents,
certificates, memoranda and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below, (ii) assumed
that the Amended and Restated Certificate of Incorporation, as set forth in
Exhibit 3.3 of the Registration Statement, shall have been duly approved and
filed with the office of the Delaware Secretary of State, and (iii) assumed
that the shares of the Common Stock will be sold by the underwriters at a price
established by the Pricing Committee of the Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Company Shares and the Selling Stockholder Shares, when sold, issued
and paid for in accordance with the Registration Statement and related
Prospectus, will be validly issued, fully paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Lee F. Benton
-------------------------
Lee F. Benton
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 6 to the Registration Statement on Form S-1 of our report dated
January 30, 1998, except as to Note 10 which is as of April 28, 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 28, 1998
