A $24M Online Investment

A pioneer of electronic commerce over the Internet, First Virtual Holding Co., has filed for an initial public stock offering to pay for the development of its services.

First Virtual plans to sell 3 million shares for between $11 and $13 each in an offering that values the company at about $185 million. First Virtual will receive about $32 million from the IPO, if the share price is $12, according to the prospectus.

The company will spend $10 million to expand its marketing and sales operation, $8 million on capital programs, including $6 million to upgrade its trading system, First Virtual Internet Payment Systems (FVIPS); $5 million to upgrade financial and administrative functions, including $2 million on its internal information system; and $1.4 million to repay debt.

As part of that $6 million upgrade to FVIPS, First Virtual will install in the first half of next year a relational database system so that it can manage its own operations and expected growth. Sybase Inc. probably will be the supplier since it owns a piece of First Virtual and Robert Epstein, a Sybase executive vice president is a First Virtual director.

Until last July, Electronic Data Systems Inc. (EDS) managed First Virtual's database, including the entry of new customer and merchant account information as well as the processing of financial transactions.

First Virtual, San Diego, plans to increase the capacity of its servers and to upgrade the software that manages FVIPS, to avoid roadblocks on its system and to open another data center in San Diego to back up existing facilities in San Diego and Dallas. The additional facilities could help avoid a repeat of a 78-hour disruption in First Virtual's system in August 1995 that knocked out services to both merchants and customers.

First Virtual also said that electronic commerce over the Internet has not been successful so far because consumer interest has not been properly stimulated by effective advertising and marketing. The prospectus notes that First Virtual's limited experience shows that a "substantial percentage" of customers "have failed to make repeated usage of their VirtualPINs."

Some merchants also have dropped off the service, such as Apple Computer, which used to sell QuickTime from its Web site using FVIPS. Apple now offers it free of charge. And PC Quote, a stock trading and information service, also dropped FVIPS to use another payment system.

Ads, Sales and Payments

The company plans to introduce in the first quarter of next year an interactive multimedia service called VirtualTAG that will combine advertising, selling and payment in one application. VirtualTAG, now in beta, will use Java or Shockwave environments to create stimulating, interactive advertisements within banners to let buyers initiate a purchase and payment, and arrange for delivery without leaving the Web page.

First Virtual introduced its FVIPS service in October 1994. Although it is based on the Internet, transactions do not actually occur over the Net. Customers who want to buy something from a particular vendor submit a VirtualPIN, a unique series of letters and numbers, to a merchant who asks First Virtual to verify the validity of the order.

First Virtual sends an E-mail message to the customer to confirm the transaction and First Virtual handles the financial transactions through normal credit card networks.

Batch processing of orders is done off-line using proprietary protocols over a dedicated lease-line connection. Until July the company relied on EDS for processing of transactions, but has since begun managing its system. It has not been a painless move.

According to the prospectus after the move, First Virtual discovered that during a batch process with the Automated Clearing House, a file created to ACH specifications did not clear. Deposits destined for merchants' bank accounts were delayed until the problem was solved 34 hours later.

First Virtual said that it had more than 2,650 sellers and 180,000 buyers in 166 countries registered as of Sept. 30. The company said it had processed more than 260,000 FVIPS transactions as of Sept. 30.

Registration Fees

The company charges a first-year registration fee of $2 for buyers and $10 for smaller merchants it calls Pioneer Sellers, who do not qualify as credit card accounts; and $350 for established merchants called Express Sellers. Funds due to Pioneer Sellers are held in escrow for 91 days until the transactions are verified.

First Virtual charges merchants a fee of 2 percent of the purchase price and 29 cents per transaction. Transactions of less than $10 are accumulated until they total more than $10 or are older than 10 days before they are sent to credit card companies.

The largest shareholder in the company is First USA Merchant Services Inc., which owns 32 percent of First Virtual's stock. First USA Merchant is a subsidiary of First USA Paymentech Inc., which provides merchant transaction services to First Virtual. Sybase owns about 5 percent of First Virtual.

Copyright 1996 CMP Media Inc.