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UNITED STATES

FORM 10-K

[X]

For the fiscal year ended December 31, 1999

OR

       [   ] 

	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the transition period from           to           

COMMISSION FILE NUMBER: 0-27470

CYBERCASH, INC.

2100 Reston Parkway

(703) 620-4200

Securities pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference on Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 10, 2000, was approximately $238,665,132 based upon the last sale price reported for such date on the Nasdaq National Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

The number of shares outstanding of the Registrant’s Common Stock outstanding as of March 10, 2000 was 24,702,586.

PART I

ITEM 1.  BUSINESS

      THIS ANNUAL REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS ABOUT OUR INDUSTRY, OUR BUSINESS, AND OUR FUTURE PROSPECTS AND FINANCIAL PERFORMANCE. THESE STATEMENTS REFLECT ONLY OUR CURRENT EXPECTATIONS, AND THEY INVOLVE CONSIDERABLE RISK AND UNCERTAINTY. ACTUAL EVENTS OR RESULTS MAY TURN OUT TO BE MATERIALLY DIFFERENT. IN EVALUATING THESE STATEMENTS, YOU SHOULD CONSIDER THE VARIOUS FACTORS IDENTIFIED THROUGHOUT THIS REPORT, INCLUDING BUT NOT LIMITED TO THE MATTERS SET FORTH BELOW UNDER THE CAPTION “RISK FACTORS”.

Overview

      CyberCash, Inc. develops and provides a complete line of Internet payment services and software products enabling a wide variety of users to accept electronic payments and funds transfers through a range of applications tailored to fit their specific needs. Our online services and products are used throughout the world by businesses, governments, universities, non-profit organizations, and other enterprises that depend on us for secure, dependable, cost effective payment processing. We are a Delaware corporation organized on August 29, 1994. We completed our initial public offering in February 1996. We currently operate principally in the United States but we are committed to international expansion and have established joint venture or licensing arrangements in Japan, Germany, the United Kingdom, and the Asia Pacific Region. We operate large development centers domestically as well as in Bangalore, India.

      Until recently, merchants desiring to accept credit cards for the payment of goods and services had to rely almost exclusively on expensive, hard-wired cash registers and proprietary credit card reader terminals. The advent of the Internet and advances in personal computing are making it increasingly convenient for merchants to process credit card and payment transactions through flexible, inexpensive open architecture software-based solutions on personal computers or PC-based electronic cash registers.

      Responding to this trend towards Internet commerce and flexible, PC-based payment processing, in 1994 we began providing payment services to Internet merchants, offering them a secure, convenient means of accepting payments using credit cards, checks, and other payment instruments. Our internet payment service utilizes internally developed, proprietary technology, including our own state-of-the-art encryption software that ensures the integrity, security and privacy of all payment data.

      In 1998 we added a line of software products to supplement our payment processing service by acquiring ICVerify, Inc. Through ICVerify, which offers such well-known payment software products as ICVERIFY®, PCVERIFY™ and EZCHARGE™, we gained a software product targeting businesses that process their own payment transactions over a wide variety of point-of-sale applications, including retail check-out registers, mail order operations and telemarketing call centers. In 1999, we expanded our ability to service the burgeoning e-commerce industry by acquiring Tellan Software, Inc. Through Tellan, which offers the Internet-based WebAuthorize™ software product, we began to construct a suite of software products that are specifically tailored to facilitate e-commerce.

Business Strategy

      Our business strategy is to expand the markets for, and maximize the profitability of, our core online payment services and software products businesses. Consistent with this strategy, we will increasingly focus on marketing value-added “Transaction Management” services and products, such as fraud detection, to our existing service subscribers and software users. These value-added capabilities are marketed in tandem with our core offerings to enhance the value and utility of our online services and products and increase our revenue per transaction, thereby generating more revenue for each transaction processed. Because of the architecture of our service delivery system, in most cases we expect to be able to begin delivering new services without any

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Principal Services and Products

      Our Internet payment services and software payment products provide a wide range of flexible, secure, cost effective payment processing options to businesses, governments, universities and non-profit organizations worldwide. We offer a proven solution for virtually any application involving the electronic transfer of credit or funds. Organizationally, we conduct our business in three segments along functional lines: Internet payment services, software payment products, and customization engineering services.

      Certain financial information relating to each of these segments is set forth in Note 13 to the Company’s financial statements contained elsewhere in this report.

Internet Payment Services

      With over 20,000 merchant subscribers, our Internet payment service is one of the leading online secure payment processing services available today. By subscribing to our service, Internet merchants who do not process their own payments with our IC VERIFY® or WebAuthorize™ software products can interface their websites directly with our processing servers through an easily installed merchant connection kit (“MCK”). Subscribing to our payment service is simple, inexpensive and allows merchants to begin processing credit payments quickly. Once installed, each subscriber’s MCK routes all payment transactions to our secure, state-of-the-art payment processing system where the transactions are authorized, captured and settled with the cardholder’s bank directly into the merchant’s designated bank account. Merchants are charged a fee per transaction processed, subject to certain minimums. The merchant’s MCK encrypts all payment transactions using our proprietary DES 3 encryption technology to ensure the integrity and privacy of all data.

      Our Internet payment service is a simple, cost-effective solution for merchants that want to begin accepting payments over the Internet with minimal up-front investment. Since most of the functionality and storage is performed by our host servers, the service simplifies the process for merchants to begin accepting payment transactions and minimizes the number of software updates that a merchant needs to install on its client server. The client software underlying our Internet payment service is designed to integrate easily with storefront software packages, and is scalable for various levels of transaction volumes. In addition, the service accommodates multiple electronic points-of-sale and allows commerce service providers to provide payment processing functionality to multiple merchants as part of a merchant store hosting solution.

      Our Internet payment service provides merchant subscribers with the same functionality available through leading merchant-operated software solutions such as WebAuthorize™. Subscribers can authorize, settle and capture VISA, MasterCard, JCB, American Express, and Discover/ Novus transactions to their bank accounts, in real-time or offline batch mode. Subscribers can accept payments from consumers’ checking accounts using the Automated Clearing House system. Through the system, subscribers are provided connectivity with most U.S.-based financial institutions and payment processors, including First Data Corporation, American Express, Paymentech, Global Payment Systems (Novus), NOVA, Vital Processing Services (VisaNet), NDC and Wells Fargo Bank. Moreover, subscribers can access their transaction data for reporting or tracking on a real-time basis. The service also supports address verification services offered by some payment processors to reduce the risk of fraudulent transactions.

      Revenues from our Internet payment service consist of transaction processing fees, monthly access fees, set up fees, and to a lesser extent, fees for consulting and training services. We derived approximately 40% of our 1999 revenue from our online payment service, representing a growth rate over the prior year of 90%.

Software Payment Products

      Through the use of our software payment products, businesses and other users can accept credit cards and other forms of payment for the payment of goods or services, receive reporting on their business transactions,

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      The flagship of our e-commerce software offerings is WebAuthorize™. WebAuthorize™ was designed specifically for use by either Internet commerce service providers who host e-commerce sites for merchants or by large, highly sophisticated merchants who host their own e-commerce sites. WebAuthorize™ users communicate directly with bank processing networks through the Internet instead of relying on slower and/or more expensive dial-up or dedicated telephone lines. Communication on the Internet allows WebAuthorize™ users to enjoy materially faster response times and greater transaction processing capacity. WebAuthorize™ operates on Windows and we offer a MacAuthorize™ product which operates on MacIntosh personal computers.

      The platform for our general application product line is ICVERIFY®. ICVERIFY® is among the most comprehensive payment processing software product offerings available. Designed to be flexible, ICVERIFY® operates on either a personal computer or an electronic cash register, and functions equally well in point-of-sale checkout applications as well as in mail order and telemarketing centers. Using ICVERIFY®, merchants and other users can communicate through a dial-up or dedicated line directly with the credit card processor of their choice to obtain real-time credit authorization and funds capture for all major credit cards, ATM/debit cards, corporate purchase cards, and private label cards.

      Merchants can also integrate PCVERIFY™, which provides corporate purchasing data functionality, or Net VERIFY™, which enables Internet communication directly with bank processing networks. ICVERIFY®operates on a number of popular operating system platforms, including Windows, DOS, SCO, HP-UX, Solaris, and AIX; NetVERIFY™ operates on Windows, Solaris and AIX; PCVERIFY™ operates on Windows. The products also support a variety of open platform magnetic stripe card readers, PIN pads and magnetic ink check readers, as well as address verification services (AVS) provided by some payments processors to reduce the risk of fraudulent transactions. European translated versions of IC VERIFY® and PCVERIFY™ meeting European processor specifications for credit and debit card transactions are currently marketed in Germany and the United Kingdom.

      Revenues from sales of software consist primarily of license fees and maintenance fees, and to a lesser extent from fees for consulting and training services. We derived approximately 53% of our 1999 revenue from our software payment products, representing a growth rate of 65% over 1998.

Customization Engineering Services

      Our customization engineering services group performs development and application customization under contracts with our channel partners and our domestic and international joint ventures. The services which we provide are generally comprised of engineering to customize the graphical interface viewed by the user of our payment service to include a brand or special functionality, and engineering to translate our services to accommodate foreign languages and financial systems. In the future we intend to increase our emphasis on standardization in order to allow us to focus our resources on our core Internet payment service and payment software.

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      Revenues from our customization engineering services are comprised principally of hourly fees charged for contract services performed for third parties and related-party joint ventures. We derived $1,469,000 in revenues from our engineering activities during 1999. We anticipate that customization services will assume an increasingly minor role in our operations.

Other Products and Services

      In a “card not present” transaction (like a call center or the Internet) merchants bear much of the loss resulting from the fraudulent use of stolen or phony credit cards. The increasing volume of commerce conducted over the Internet increases a merchant’s financial exposure to credit card fraud. We have contracted with HNC Software, Inc., a leader in algorithmic fraud-detection metrics, to begin offering participating subscribers to our online payment system an optional fraud-detection scoring service. This service will assess each payment processed with a score utilizing HNC’s proprietary algorithmic predictive models. The score assigned each transaction is then compared against a sensitivity threshold predetermined by the submitting merchant to determine whether the transaction represents an acceptable fraud risk. Participating subscribers can adjust their exposure by increasing or decreasing their predetermined sensitivity threshold. Although the service does not ensure the legitimacy of any transaction in particular, it does afford participating subscribers a systemic, statistically valid means of controlling their overall exposure to fraud-related charge backs. Participating merchants pay a per transaction fee for the service, subject to certain minimums. We anticipate this fraud-detection service to be available to merchants in the second quarter of 2000.

      We are continuing to develop applications of our Agile Wallet™technology and InstaBuy™ service designed to help subscribers to our Internet payment service increase their sales and profitability. We are also exploring secondary applications of our technology that, while not directly related to our core software and payments service business, could allow us to monetize portions of our investment in technology. Our Agile Wallet™ technology is a stored consumer profile application that streamlines the online purchase and payment process by eliminating the need for the consumer to re-enter the consumer’s name, address and credit card information for each purchase. The technology is intended to make the purchase process more convenient, allowing for more spontaneous consumer purchases, thereby increasing the propensity of consumers to make purchases from merchant websites that have integrated our Agile Wallet™ technology.

      The ultimate success of the Agile Wallet™ technology and InstaBuy™ service is contingent upon widespread merchant integration of our technology into their websites and broad consumer acceptance of electronic wallets as a secure, convenient purchasing tool. We are currently attempting to encourage customer acceptance of wallet technology through pilot programs with leading credit card issuing financial institutions. The Agile Wallet™ offers financial institutions a way to provide customers with a convenient utility to make shopping easier and to project their brand on the Internet. By making it easier for consumers to shop, and by promoting the use of their credit cards within the branded user interface, credit card issuers may be able to increase card usage and cardholder loyalty. Agile Wallets bearing the brands of the sponsoring financial institutions are currently being offered to consumers by Visa U.S.A. and a number of Visa member institutions including People’s Bank, BankOne, US Bank and The Associates Financial Group. Sponsoring financial institutions typically pay us a set-up fee for customizing their wallet, a usage fee that depends on the number of wallets we are operating, and, in some cases, fees for providing customer support to wallet users.

      A limited number of merchants have integrated our InstaBuy™ functionality into their websites in pilot programs. We intend to begin increased marketing of the service to merchants in 2000 and hope to have a more accurate understanding of the consumer and merchant demand for the service by year-end.

      Introduced late in 1997, the PayNow™ Secure Electronic Check Service enables billers to accept real-time payment from consumer checking accounts of bills presented on the Internet. PayNow™ is built on the

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International Operations

      We have small sales subsidiaries in Germany and the United Kingdom that focus primarily on marketing our software in Europe. We also market our Internet payment services in the United Kingdom through a relationship with Barclays Bank. We market our transaction management services in Japan and Germany through joint ventures in those countries. In 1999 we established a new relationship with a company headquartered in Hong Kong that plans to market our services in China, Singapore, and elsewhere in Asia.

      Certain financial information relating to our international operations is set forth in Note 13 to the Company’s financial statements contained elsewhere in this report.

Marketing and Distribution

      We market our software products and services to merchants directly and through the considerable number of marketing channels we have established. Our marketing channels include:

	•	Payment processors in the United States, including First Data Corporation (including CardNet, Envoy, FDR, NaBANCO and Telemoney), Paymentech, Global Payment Systems (including National Data Corporation, MAPP and Modular Data, Inc.), NOVA, Novus and Vital Processing Services;
	•	Financial institutions and independent sales organizations, some of which resell our products and services, and others that sell the products and services under private label;
	•	Value-added resellers, hardware vendors and developers of “store-builder” software packages that integrate our payment capabilities into their products; and
	•	Our own internal telemarketing and outside sales forces.

Competition

      Although still relatively new, the market for Internet payment services and software products is intensely competitive and evolving rapidly. Moreover, the field in which we compete is diverse and includes a growing number of alternative methods for processing payment transactions. Although we manage our business in distinct product segments, our services and products actually compete against other applications, including to some extent other CyberCash offerings, within the broader market of payment solutions. Potential customers have a variety of options for processing payment transactions, including proprietary, closed-architecture systems, Internet payment services and payment processing software.

      A number of companies, including Verifone (a subsidiary of Hewlett-Packard Company) and HyperCom Corporation, market closed-architecture point-of-sale terminals that compete against our services and products. While proprietary systems such as Verifone’s often involve higher set-up costs and require dedicated communication lines, they are well accepted, involve little maintenance and are simple to operate.

      Our direct competition in Internet payment services is highly fragmented. For larger merchants wishing to establish direct gateways to their payment processors, our competitors include software vendors like Clear Commerce Corporation, IBM and Open Market, Inc. Some larger merchants elect to develop their own solutions for all or part of the transaction management process. Whether or not they rely on software or services developed by third parties, these solutions tend to be more expensive, and require a greater investment in onsite maintenance than most small- to medium-sized merchants can afford. We have numerous competitors in that segment of the market, including CyberSource, Authorize.net, Signio (a subsidiary of

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      Our principal competitors in the market for Internet payment software are Go Software and Atomic Software. We also compete to some extent with ClearCommerce and Paylinx, although the solutions of these two companies are designed primarily for the largest Internet merchants.

      We expect competition from all of these channels to continue to increase in the future. Many of our current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources than we do. In addition, some of our competitors have broad distribution channels that enable them to bundle competing products and services for delivery directly to end-users or purchasers. We also compete against custom payment solutions built by in-house information technology engineers. We cannot assure that we will be able to compete effectively with current or future competition, or that the competitive pressures we face will not have a material adverse effect on our business, financial condition or operating results.

Research and Development

      We intend to remain competitive by continuing to invest in research and development. In 2000, we expect to focus on consolidating and simplifying the core architecture of our payment products and developing enhancements to our transaction management services. In addition, we intend to continue to adapt our technologies to local processor specifications, currency and other requirements for use in some non-U.S. markets, including Canada, Europe and Asia; however, we intend to perform only a limited amount of development consulting work. Our programmers and software engineering facilities are located in Reston, Virginia and Bangalore, India.

      Research and development expenses were approximately $10,543,000, $9,066,000 and $9,656,000 for the years ended December 31, 1999, 1998, and 1997, respectively. To date, we have expensed all software development costs as incurred. We do not anticipate that our research and development costs will increase substantially in 2000.

Employees

      As of December 31, 1999, we had a total of 330 employees, 203 of whom are based in the United States, 118 of whom are based in Bangalore, India and the remaining nine are based in other international locations. None of our employees is represented by a labor union. We consider our relations with our employees to be good.

Trademarks and Patents

      The CyberCash logo, ICVERIFY®, PCVERIFY™, NetVERIFY™, PCAuthorize™, WebAuthorize™, MacAuthorize™, and PayNow™ Secure Electronic Check Service are registered trademarks or service marks of CyberCash or its affiliates in the United States and other countries. CyberCash, PayNow™, InstaBuy™ and Agile Wallet™ are trademarks of CyberCash in the United States and other countries. Any other trademarks, service marks and registered trademarks and service marks that we reference in this report belong to their respective owners.

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Risk Factors

      We are a relatively new business and our revenues are not currently sufficient for us to achieve profitability. We were founded in August 1994 and we have not yet operated at a profit. Our limited operating history offers little information to serve as a basis for evaluating us and our long-term prospects. You should consider our prospects in light of the risks, expenses and difficulties that companies in their earlier stage of development encounter, particularly companies in new and rapidly evolving markets. Our success depends upon our ability to address those risks successfully, which include, among other things:

	•	Whether we can continue to build and maintain a strong management structure that can develop and execute our business strategy, and respond effectively to changes in the markets for our services and software products;
	•	Whether we can respond quickly and effectively to technological changes and competitive forces in our markets;
	•	Whether we will be able to assemble and maintain the necessary resources, especially talented software programmers, we will need to develop and upgrade our technology to meet evolving market demands;
	•	Whether we will be successful in continuing to evolve and successfully implement a sales and marketing strategy;
	•	Whether we will be able to develop and manage strategic relationships to maximize widespread acceptance of our products and services;  and
	•	Whether the effect of the volatility of the market price of our stock will adversely affect our ability to sell our products and services, develop strategic relationships, attract and maintain qualified employees, and raise additional capital if necessary.

      If we do not succeed in addressing these risks, our business likely will be materially and adversely affected.

      Since our inception in 1994, our revenues have been substantially less than the fixed costs associated with marketing and delivering our services and products. As a result, we have incurred substantial losses in the past and anticipate continuing to incur losses for the next two years. At December 31, 1999, our accumulated deficit was $138,012,293 and our accumulated other comprehensive loss was $487,432.

      To become profitable, we must greatly increase the number of transactions that we are processing in order to absorb our fixed costs. Our payment processing systems are designed to process many more transactions than we are currently handling. Maintaining our payment services and software infrastructure involves large fixed expenditures for staffing, development, and customer support even though we are processing at only a fraction of our total capacity. Moreover, marketing our services and software products involves substantial expenditures for sales personnel and advertising. The payment processing and payment software sectors in which we operate are becoming increasingly competitive. In the future, we anticipate that it will become increasingly difficult to increase our market share and that we may experience erosion in the price of our services and products. It is, therefore, uncertain when we will attain a sufficient volume of transactions on attractive terms to become profitable and viable as a long-term enterprise.

            We have limited capital resources and cannot ensure access to additional capital if needed.

      Our historical operating losses have required us to seek additional capital through the issuance of our Common Stock on a number of occasions. If we continue to sustain operating losses in future periods, we could be forced to seek additional capital to fund our operations. We do not know whether we will be able to obtain additional capital if we need it or on what terms the capital would be available. Depending on market

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      The electronic payments area is evolving rapidly and new payment technologies, products and methods are developing at an increasing rate. Wide-scale implementation of a new technology or payment method, such as stored-value cards, electronic cash equivalents or wireless communications, could force us to modify our payment services or software to remain competitive, and could potentially render one or more of our services or products obsolete. The cost of any adaptations or the loss of revenue from a displaced service or product would have a material adverse effect on us. We are continuing to develop new products and services such as our Agile Wallet and InstaBuy service that we hope will ensure the continued usage of our offerings in the future. However, no one can predict what new technologies and payment methods may evolve in the future, or whether our current products or systems will be compatible.

      A substantial portion of our services and products require connectivity through the Internet. Although online usage has expanded rapidly in recent years, the Internet is still immature and is evolving rapidly. Critical issues concerning the Internet such as security, reliability, cost, ease of use and quality of service, remain unresolved and may limit the growth of electronic commerce. Delays in the deployment of improvements to the infrastructure for Internet access, including:

	•	higher speed modems and other access devices,
	•	adequate capacity, and
	•	a reliable network backbone

also could hinder the development of the Internet as a viable commercial marketplace. For all of these reasons, it remains uncertain whether commerce over the Internet will continue to grow, whether a significant market for our products and services will emerge, or whether our products and services will become generally adopted. Even if such a market does develop, competitive pressures may make it difficult, or impossible, for us to operate profitably.

  The nature of our business makes it difficult to predict our revenues and operating results, which may negatively affect our stock price.

      Our revenues and operating results have varied significantly from period to period. Although our earnings are becoming more predictable as the market for our services and products begins to mature, our revenues and operating results can be expected to fluctuate somewhat for a variety of reasons beyond our control:

	•	The burgeoning e-commerce phenomenon is relatively new and rapidly evolving.
	•	No reliable data exists upon which to budget for growth and seasonality, making planning very difficult.
	•	We are dependent for our planning purposes on sales and other information provided by a large number of intermediary “resellers,” many of whom account for transactions sporadically.
	•	Many of our licensing arrangements involve large, one-time royalty payments or significant up-front custom engineering work the recognition of which varies and contributes to our fluctuations in revenues.
	•	Many of our distribution channels integrate our services with other electronic commerce solutions. The timing for these channels to complete the integration and deploy their solutions into their distribution channel is unpredictable.

      For these reasons, period-to-period comparisons of our results of operations are not necessarily a reliable indication of future performance. Because of all of the foregoing factors, it is possible that our quarterly

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      We compete with a number of companies in both our Internet payment services and payment software businesses. We expect this competition to intensify in the future, with new competitors, and competitive services and products regularly entering the market. Many of these current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources than us. In addition, many of our current or potential competitors, such as Microsoft, have broad distribution channels that they may use to bundle competing products directly to end-users or purchasers. If these competitors were to bundle competing products for their customers, it could adversely affect our ability to market our services.

      This competitive environment will make it increasingly difficult for us to increase our market share and may force us to reduce the prices for some of our services and products. Unless we can increase our volume or reduce our costs, any such reductions would have an adverse effect on our profitability.

      Broad acceptance of our products and services and their use in large numbers is critical to our success because a large portion of our revenues derive from one-time fees we charge to customers buying our products and services. In addition, our ability to earn significant revenues from our Agile Wallet or InstaBuy services will depend in part on their acceptance by a substantial number of prominent online merchants. One obstacle to widespread market acceptance for our products and services is that widely adopted technological standards for accepting and processing payments over the Internet have not yet emerged. As a result, merchants and financial institutions have been slow to select which service to use. Until one or more dominant standards emerge, we must design, develop, test, introduce and support new services to meet changing customer needs and respond to other technological developments. Our technologies have not been accepted as standards. To be successful, we must obtain widespread acceptance of our technologies, or modify our products and services to meet whatever industry standards do ultimately develop. It is not certain that we will be able to do either.

      Services based on sophisticated software and computing systems often encounter development delays, and the underlying software may contain undetected errors or failures when introduced or when the volume of services provided increases. We may experience delays in the development of our software products or the software and computing systems underlying our services. In addition, despite rigorous testing our software may nevertheless contain errors. Any material development delays or errors could damage the reputation of the service or software effected, as well as our customer relations, which could have a material adverse effect on our business.

      We would be unable to deliver our payment processing services if our system infrastructure breaks down or is otherwise interrupted. Events that could cause system interruptions are:

	•	fire,
	•	earthquake,
	•	power loss,
	•	telecommunications failure, and
	•	unauthorized entry or other events.

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      We maintain redundant systems within our operations center designed to prevent data loss or other disruption as a result of an internal system failure. Our operating center is located in a secured, climate controlled area. These measures will not necessarily ensure the continued, uninterrupted operation of our processing capabilities in the event of a regional natural disaster, power outage, communications interruption, or other catastrophic event. We intend to establish an off-site back-up data center during the second half of the year to provide an additional level of protection against catastrophic risks. Also, we have experienced growing transaction volumes that have from time to time stressed the capacity of our systems. There is a possibility that our existing systems may be inadequate and cause serious failures of our services. Finally, although we regularly back up data from operations, and take other measures to protect against loss of data, there is still some risk of such losses. A system outage or data loss could materially and adversely affect our business.

      Despite the security measures we maintain, our infrastructure may be vulnerable to computer viruses, hackers, rogue employees or similar sources of disruption. Any damage or failure that causes interruptions in our operations could have a material adverse effect on our business. Any problem of this nature could result in significant liability to customers or financial institutions and also may deter potential customers from using our services. We attempt to limit this sort of liability through back-up systems, contractual provisions and insurance. However, we cannot assure you that these contractual limitations on liability would be enforceable, or that our insurance coverage would be adequate to cover any liabilities we did sustain.

      The e-commerce industry is intensely focused on the need for Internet security, particularly with respect to the transmission and storage of confidential personal and financial data. Our competitive position is largely dependent upon our existing and potential customers’ confidence in our ability to safeguard the data that we process. We rely on public key cryptography, an encryption method that utilizes two keys, a public and a private key, for encoding and decoding data, and digital certificate technology, or identity verification, to provide the security and authentication necessary for secure transmission of confidential information. Regulatory and export restrictions may prohibit us from using the strongest and most secure cryptographic protection available and thereby expose us to a risk of data interception. Although our security measures are state-of-the-art, a party who is able to circumvent our safeguards could misappropriate proprietary information or interrupt our operations. Any compromise or elimination of our security could erode customer confidence in our systems and could result in lower demand for our services.

      We anticipate the ongoing need to expend significant capital and other resources to address security issues and safeguard the confidentiality of our customers’ data. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the Internet and other online services generally, and the Web in particular, especially as a means of conducting commercial transactions.

      We are dependent upon the operation of our software and computer systems to provide our Internet payment services. Moreover, we derive substantial revenue from our sale of payment software. As a result, our operations are vulnerable to systemic defects, such as the well-publicized year 2000 date roll-over problem, or “Y2K bug.” Although we experienced no material technical errors in any of our computer software, operating systems, or embedded processors as a result of the year 2000 roll over, we remain on guard for any delayed or latent systems problems related to Y2K or related problems. We expended significant financial and human resources during 1999 and early 2000 ensuring that our systems were year 2000 compliant and would continue to operate after the roll over. Despite the absence of material Y2K problems identified in our infrastructure to date, we cannot assure you that problems related to the roll over, or some similar systemic shortcoming, will not manifest itself in the future. Should a systemic defect disrupt our operations or affect our software products in the future, it could substantially disrupt our ability to generate revenue and force us to expend substantial financial and managerial resources, which could have a material adverse effect on our business and prospects.

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  Our results may suffer if we are unable to attract and maintain qualified management and technical personnel.

      Our performance is substantially dependent on the performance of our executive officers and key employees. We depend on our ability to retain and motivate high quality personnel, especially our management and highly skilled development teams. We do not have “key person” life insurance policies on any of our employees. The loss of the services of any of our key employees, particularly our founder and chairman of the Board, William N. Melton, or our president and chief executive officer, James J. Condon, could have a material adverse effect on us. Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel. Competition for these employees is intense and increasing. We may not be able to attract, assimilate or retain qualified technical and managerial personnel in the future, and the failure to do so would have a material adverse effect on our business.

      We have only a limited number of sales and marketing employees and, therefore, we rely heavily on distribution channels for sales of our products and payment services. Because of the rapidly evolving nature of electronic commerce, we are not certain that the distribution channels with which we are working will provide an adequate distribution network for us to achieve our goals, or that we will be able to develop alternative channels.

  We may be unable to protect our proprietary rights, permitting competitors to duplicate our products and services.

      Our success and ability to compete is dependent in part upon our proprietary technology. We rely primarily on copyright, trade secret and trademark law to protect our technology. We hold one United States patent, and have applied for several others in the United States and foreign countries. We intend to continue to file patent applications on inventions that we may make in the future. There can be no assurance that any of these patents will be granted, or that if granted these patents would survive a legal challenge to their validity, or provide meaningful levels of protection.

      The source code for our proprietary software is protected both as a trade secret and as a copyrighted work. We generally enter into confidentiality and assignment agreements with our employees, consultants and vendors, and generally control access to and distribution of our software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products, services or technology without authorization, or to develop similar products, services or technology independently. In addition, effective copyright and trade secret protection may be unenforceable or limited in certain foreign countries, and the global nature of the Internet makes it difficult to control the ultimate destinations of our products or services. To license our products or services, we often rely on “on-screen” licenses that are not manually signed by the end-users and, therefore, may be unenforceable under some laws.

      Despite our efforts to protect our proprietary rights, third parties may attempt to copy aspects of our products and services or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products and services is difficult, particularly in the global environment in which we operate, and the laws of other countries may afford us little or no effective protection of our intellectual property. We cannot assure you that the steps that we have taken will prevent others from misappropriating our technology or that these agreements will be enforceable.

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      We may engage in litigation related to our intellectual property for a number of reasons, including to:

	•	enforce our intellectual property rights,
	•	protect our trade secrets,
	•	determine the validity and scope of the proprietary rights of others, or
	•	defend against claims of infringement or invalidity.

      This litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources, either of which could have a material adverse effect on our business, financial condition or operating results.

  Our products and services may infringe claims of third party patents, which could adversely affect our business and profitability.

      We are aware of various patents held by independent third parties in the area of electronic payment systems. It is possible that the holders of rights under these patents could assert them against us. In fact, we have already received notices of claims of infringement of other parties’ proprietary rights. We cannot assure you that our products and services are not within the scope of patents held by others, either now or in the future. If any such claims are asserted, we may seek to obtain a license under a third party’s intellectual property rights. There can be no assurance that such a license would be available on reasonable terms or at all. We may also decide to defend against a claim of infringement, but litigation, even if successful, is costly and may have a material adverse effect on us regardless of the eventual outcome.

      We also rely on certain technology which we license from third parties, including software which is integrated with internally developed software and used in our software to perform key functions. We cannot assure you that third party technology licenses will continue to be available to us on commercially reasonable terms or at all. The loss of or inability to maintain any of these technology licenses could result in delays in introduction of our services, which could have a material adverse effect on our business, financial condition or operating results.

      Our operations are subject to various state and federal regulations. Because electronic commerce in general, and most of our products and services in particular, are so new, the application of many of these regulations is uncertain and difficult to interpret. The agencies responsible for the interpretation and enforcement of these regulations could amend those regulations or issue new interpretations of existing regulations. It is also possible that new legislation may be passed that imposes additional burdens. Any such change could lead to increased operating costs and could also reduce the convenience and functionality of our products or services, possibly resulting in reduced market acceptance. It is possible that new laws and regulations may be enacted with respect to the Internet, covering issues such as user privacy, pricing, content, characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our products or services and increase our cost of doing business or could otherwise have a material adverse effect on our business, financial condition or operating results.

      A component of our strategy is to expand our operations into international markets. We have created joint ventures in Japan and Germany and have arranged with Barclays Bank for the delivery of certain of our services in the United Kingdom. The majority of our revenues in 1999 were derived from licensing fees and customization work charged to these joint ventures and strategic allies located outside the United States. We anticipate that revenues derived from customization work and initial licensing fees from these international

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  We may be unable to successfully acquire new businesses, products or technologies needed to effectively compete, or to make these acquisitions profitable once acquired.

      As our business evolves, we may acquire complementary products, technologies, and businesses. Any significant acquisition would entail a risk that we would not be successful in integrating and operating the acquired business, product or technology. A failure to do so could have a material adverse effect on us.

      The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events and factors, such as:

	•	quarterly variations in operating results,
	•	variances of our quarterly results of operations from securities analyst estimates,
	•	announcements of technological innovations, new products, acquisitions, capital commitments or strategic alliances by CyberCash or our competitors,
	•	changes in financial estimates and recommendations by securities analysts,
	•	the operating and stock price performance of other companies that investors may deem comparable to us, and
	•	news reports relating to trends in our markets.

      In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of the companies affected by these fluctuations. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. Securities class action litigation has often been instituted against companies that have experienced periods of volatility in the market price for their securities. If we were to become the target of this kind of litigation, the cost in dollars and management attention could be substantial, and the diversion of management’s attention and resources could have a material adverse affect on our business.

  Effecting a change of control of CyberCash would be difficult, which may discourage offers for shares of our common stock and depress the value of our common stock.

      Our certificate of incorporation authorizes our board of directors to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our 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. We also have a stockholders rights plan. It provides for the issuance of rights if an acquiror purchases 15 percent or more of our common stock without the approval of our board of directors. The rights plan may have the effect of delaying, deterring, or preventing changes in control or management of CyberCash, which may discourage potential acquirors who otherwise might wish to acquire CyberCash without the consent of our board of directors. The certificate of incorporation provides for staggered terms for members of CyberCash’s board of directors. Certain provisions implicated in a change of control of the company in our bylaws, capital stock, certificate of incorporation, warrants and other derivative securities, as well as applicable provisions of Delaware law could have a depressive effect on our stock price or discourage a hostile bid in which stockholders could receive a premium for their shares. In addition, these provisions could

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  The common stock we are committed to issue and may issue in the future will increase the amount of our common stock on the public market, possibly causing our stock price to decline.

      As of March 10, 2000, there were no issued or outstanding shares of preferred stock. As of March 10, 2000, we had granted warrants, investment options and stock options to acquire an aggregate of 9,140,129 shares of our common stock. We granted these securities and entered into these commitments in connection with acquiring technologies, raising capital in private placement transactions, entering into strategic alliances and providing incentives to employees, consultants and non-employee directors under our stock option plans. The issuance of preferred stock, or sales in the public market of substantial amounts of shares acquired upon exercise of the foregoing warrants and options, or the prospect of such sales, could adversely affect the market price of our common stock.

ITEM 2.  PROPERTIES

      The Company’s corporate offices and processing facility is located in Reston, Virginia. The Company’s principal sales office is located in Alameda, California. The Company also maintains a development operation in Bangalore, India. In addition, the Company maintains offices in Michigan, Florida, Connecticut, Maryland, North Carolina, Massachusetts, New York, Tennessee, Ohio, California, London, England, and Munich, Germany.

      The Company leases its office space and processing facilities. The Company occupies approximately 52,000 square feet in Reston, Virginia, under leases expiring through 2003. The Company occupies approximately 26,000 square feet in Alameda, California, under a lease expiring 2004. The Company believes that its existing Reston and Alameda facilities will be adequate through at least 2000 and that sufficient additional space will be available thereafter as needed on terms acceptable to the Company.

      The Company’s processing facility presently has the capacity to process a substantially greater volume of transactions than are currently being received. The system is physically housed in secured, climate-controlled rooms. Payment processing is done on redundant systems with frequent data backups. These redundant systems are designed to provide an effective level of protection against internal system failures but would not necessarily ensure continued operation in the case of a regional natural disaster, power outage or telecommunication interruption. We intend to establish an off-site back-up data center during the second half of the year.

ITEM 3.  LEGAL PROCEEDINGS

      Not applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable.

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PART II

      CyberCash’s common stock is traded on the Nasdaq National Market under the symbol “CYCH”. The following table sets forth the high and low sales prices for our common stock for the indicated periods during 1999 and 1998 as reported by the Nasdaq National Market. On March 10, 2000, the closing price of our common stock as reported by the Nasdaq National Market was $13.6875 per share. As of March 10, 2000, there were 325 holders of record of the common stock.

      We have never paid cash dividends on our capital stock. We currently intend to retain earnings, if any, for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

      In 1999, the Company privately placed 914,634 Units, each consisting of one share of common stock and a warrant to purchase 0.75 of a share of common stock, for aggregate proceeds of approximately $15 million. The initial exercise price of the warrants was $20.00, which was reset to $9.7656 on January 6, 2000. As a result of the adjustment to the exercise price, the warrants are now exercisable for 1,404,883 shares of common stock. Of these warrants, 936,588 expire on January 6, 2004 and 468,295 expire on March 31, 2004.

      In July 1999, the Company acquired all of the outstanding stock of Tellan Software, Inc., which had a value of $11,260,000 for $1,032,000 in cash and the issuance of 1,105,024 shares of common stock.

      Also in 1999, Mr. Melton purchased 1,186,240 shares of common stock for an aggregate purchase price of $10 million.

      In consideration for certain advertising services provided in 1999, the Company issued 15,000 shares of common stock, valued at approximately $210,000 to Donino White & Partners, Inc.

      All of the above transactions were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act.

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ITEM 6.  SELECTED FINANCIAL DATA

      The following table summarizes selected financial data derived from the Company’s consolidated statements of operations for the fiscal years ended December 31, 1999, 1998, 1997, 1996 and 1995, and consolidated balance sheet at December 31, 1999, 1998, 1997, 1996 and 1995. This data should be read in conjunction with all of the other financial and operational information in this report, including the Company’s financial statements and the notes thereto, and the discussions under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” These are historical operating results and are not necessarily indicative of future operating results.

(1)	Includes the results of operations of Tellan Software, Inc. commencing upon its acquisition on July 23, 1999.
(2)	Includes the results of operations of ICVerify, Inc. commencing upon its acquisition on April 30, 1998.
(3)	Includes Tellan Software, Inc., acquired during 1999 and ICVerify, Inc., acquired during 1998.
(4)	Includes ICVerify, Inc., acquired in 1998.

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Results of Operations

      You should read the following discussion in conjunction with the accompanying consolidated financial statements and the notes thereto in this report. Our reported results for the year ended December 31, 1999, and the relationship between those results and the results for prior periods, are not necessarily indicative of our results in the future. This discussion contains, in addition to historical information, forward-looking statements about our current plans and expectations for the future. These forward-looking statements relate to our present plans and reflect our assumptions about future events and contingencies. They are, therefore, subject to numerous risks and uncertainties. The rapidly evolving industry in which we operate necessitates management’s continuous re-evaluation of our business plans. Moreover, the outcome of future events and our actual results cannot be predicted and could differ significantly from our current expectations. The following discussion and the section under the caption entitled “Risk Factors” elsewhere in this report describe some, but not all, of the factors that could cause these differences.

Overview

      Although in its infancy, electronic commerce, or “e-commerce”, is emerging as a viable industry and continues to grow and change rapidly. In this environment, our success will depend largely on our ability to continue to expand our established Internet payment service and software payments businesses, and to develop and successfully market new products and services in a continuously evolving, increasingly competitive business environment. In order to become profitable, and emerge as a viable long-term enterprise, our product and service offerings must achieve a sufficiently widespread market acceptance to generate an adequate return on the level of investment made in our technology. Our future operating performance will depend in large part on:

	•	the rate of growth and changes in the electronic commerce market;
	•	our success in broadening our offerings by adding new products and services;
	•	our ability to identify, develop, and deliver products and services that meet market demands;
	•	our ability to maintain and expand our distribution channels;
	•	strategic decisions by major participants in the industry;
	•	competitive pricing pressures;
	•	legal and regulatory developments;
	•	general economic conditions; and
	•	our ability to develop and maintain key strategic and channel partnerships.

      Most of the Company’s efforts from inception to 1998 were devoted to business development and marketing in preparation for, and anticipation of, the growth in e-commerce. During 1998 and 1999, we made significant investments to expand our technological infrastructure to support the growth of our payment services and to ensure our systems were Year 2000 compliant. In addition, we increased our marketing and sales expenditures, as we concentrated on expanding our merchant base. As a result, during 1999, the Company invested in an advertising and corporate branding campaign to promote merchant acquisition and CyberCash name awareness. We continued our efforts during 1998 and 1999 to establish a strong market position and expand our payment systems offerings by acquiring ICVerify, Inc. and Tellan Software, Inc., companies that develop and market payment software.

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Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

      Our revenues for the year ended December 31, 1999 were $20,254,000 compared with $12,588,000 for the year ended December 31, 1998. During 1999, we generated 40% of our revenue from our Internet services business, 53% from our payment software business and 7% from our customization Services business. During 1998, we generated approximately 34% of our revenues from our Internet services business, 52% from our Payments Software business, and 14% from customization services. We grew our revenue stream from our Internet payment service business by approximately 90% from 1998. This growth was a function of a 111% increase in our base of merchant customers and a 94% increase in our transaction volume during the year. Our payment software business grew by 65% year over year, of which 30% was related to the acquisition of Tellan Software in July of 1999 and the remainder was related to the expansion of our merchant base. In 1999 and 1998, we continued to reduce our reliance on revenues from our customization services business, which are comprised principally of licensing and development fees paid by our strategic allies or joint venture partners.

      Our revenues from both Internet payment services and payment software are subject to some seasonal variation. During the busy year-end holiday season, merchants traditionally tend to focus their attention on selling, making them reluctant to modify their payment systems. As a result, sales of payment services and software are typically slower during that period. We anticipate that revenues from sales of our payment software business will continue to represent a substantial portion of our total revenue for the foreseeable future even though the market for Internet payment services is likely to grow faster than the market for payment software products. Although we expect revenues from our Internet payment services to grow as Internet commerce continues to develop, we anticipate the growth rate of our Internet payment service business will be less than that the Internet industry as a whole due to substantial increases in competition in our market. Increasing competitive pressures can be expected to affect our market share and exert downward pressure on prices for our Internet payment services. We also expect our sales of payment software to continue to grow, but at a rate more consistent with growth of commerce in the physical “brick and mortar” world than that of commerce on the Internet. We do not expect revenues from our customization services to be a significant portion of our overall revenues in the future.

      Cost of Revenues. Cost of revenues consist primarily of the cost of operations to provide transaction processing, customer service and the software and hardware components for our software products. Cost of revenues increased by 56% in 1999, from $7,517,000 for the year ended December 31, 1998 to $11,697,000 for the year ended December 31, 1999. This increase resulted primarily from higher costs incurred to produce and distribute our software products, higher compensation expenses from expanding our customer service and network operations staffs, and increased investment in computers, networking systems and telecommunications equipment to support our rapidly growing Internet payment service business and to ensure that our systems were Year 2000 compliant.

      Research and Development. Research and development expenses consist primarily of compensation expense and consulting fees to support the development of our service and product offerings and technologies. Research and development expenses increased 16% over the prior year, from $9,066,000 for the year ended December 31, 1998 to $10,543,000 for the year ended December 31, 1999. This increase was due to enhancing our technological offerings, adding the development team of Tellan Software and ensuring Year 2000 compliancy. We plan to continue to make significant investments in research and development. To date, all of our software development costs have been expensed as incurred. We will continue to expense similar costs until we can demonstrate that we may realize future benefits from costs incurred to develop our software.

      Sales and Marketing. Sales and marketing expenses consist primarily of compensation expense and advertising and marketing costs. Sales and marketing expenses increased $7,998,000 from $14,652,000 for the year ended December 31, 1998 to $22,650,000 for the year ended December 31, 1999. A large portion of 1999 and 1998 sales and marketing expense was related to raising brand awareness of CyberCash through multi-media campaigns. In addition during both years we increased the size of our direct sales force. We expect our

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      General and Administrative. General and administrative expenses consist primarily of compensation expense for management and support personnel and fees for professional services and other expenses associated with our general management and administration and not attributable to a particular source of revenue, or type of expense. General and administrative expenses increased $1,414,000 from $7,026,000 for the year ended December 31, 1998 to $8,441,000 for the year ended December 31, 1999. This increase primarily reflects an increase in executive compensation, shareholder related and SEC filing costs, and the acquisition of Tellan Software. We anticipate that our general and administrative expenses will continue to be significant as we continue to develop and expand our operations.

      Amortization of Intangibles. We accounted for the acquisitions of ICVerify and Tellan Software as purchases. Accordingly, we allocated the purchase price to the assets and liabilities acquired at their estimated fair value as of the date of acquisition. Intangible assets are being amortized using the straight-line method over their estimated useful lives. During 1998 and 1999, we recognized $5,164,000 and $8,477,000 in amortization expense, respectively.

      Restructuring Charges. We routinely evaluate and realign our organizational structure in order to respond appropriately to the ever-changing electronic commerce market space and to take advantage of cost-reduction opportunities related to acquisitions. During 1998 and 1999, we recognized $609,000 and $775,000 in restructuring charges, respectively.

      Interest Income, Net. Interest income decreased $244,000 from $915,000 for the year ended December 31, 1998 to $671,000 for the year ended December 31, 1999. We funded the acquisition of Tellan, the investment in Commission Junction, the multi-media advertising campaigns and operating activities out of cash generated from the Company’s private placements in 1999.

      Loss from Investments and Equity in Losses of Affiliates. For the year ended December 31, 1998, we recognized a loss of $101,000 related to our share of the net losses of our affiliates. For the year ended December 31, 1999 we recognized a loss of $1,000,000 related to the write-off of an investment that went out of business during 1999.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

      Our revenues for the year ended December 31, 1998 were $12,588,000 compared to $4,487,000 for the year ended December 31, 1997. During 1998, we generated approximately 34% of our revenues from our Internet payment services business, 52% from our payments software business, and 14% from customization services. In contrast, the majority of our revenues in 1997 derived from our customization services business in which we licensed our Internet payment technology and received fees for development work associated with these licensing activities. We grew our revenue stream from our Internet payment service business by approximately 35% from 1997. This growth resulted in part from increasing our base of merchant customers by approximately 150% and in part from implementing a new fee structure, under which we charge merchants a set-up and monthly access fee in addition to transaction fees. During 1998, we acquired ICVerify, Inc., which accounted for the new business line of payment software.

      Cost of Revenues. Cost of revenues increased by $3,859,000 from $3,658,000 for the year ended December 31, 1997 to $7,517,000 for the year ended December 31, 1998 primarily as a result of costs incurred to produce and distribute our software products, increasing the size of our customer service to support our payment software business and expanding our technological infrastructure to support growing transactions volumes for our service offerings.

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      Research and Development. Research and development expenses decreased $590,000 from $9,656,000 for the year ended December 31, 1997 to $9,066,000 for the year ended December 31, 1998. This decrease was primarily due to our ability to shift portions of our U.S.-based research and development efforts to our Bangalore, India development subsidiary, where the cost of labor is less expensive.

      Sales and Marketing. Sales and marketing expenses increased $5,049,000 from $9,603,000 for the year ended December 31, 1997 to $14,652,000 for the year ended December 31, 1998. A large portion of 1998 and 1997 sales and marketing expense was related to raising brand awareness of CyberCash through television and magazine advertisements. In addition, during 1998, we almost tripled the size of our direct sales force primarily through the acquisition of ICVerify.

      General and Administrative. General and administrative expenses increased $1,186,000 from $5,840,000 for the year ended December 31, 1997 to $7,026,000 for the year ended December 31, 1998. This increase primarily reflects an increase in employees during 1998 as a result of acquiring ICVerify and internal growth.

      Amortization of Intangibles. We accounted for the acquisition of ICVerify as a purchase. During 1998, the Company had $5,164,000 in amortization expense.

      Restructuring Charges. During 1998 and 1997, we recorded restructuring charges of $609,000 and $344,000, respectively, as a result of realigning our organization structure to respond to changes in the electronic commerce market place.

      Write-off of Technology License. In 1997, we entered into a technology licensing agreement with Carnegie Mellon University (“CMU”) whereby we acquired the exclusive worldwide rights to CMU’s NetBill technology for use in network-based electronic commerce. Due to the uncertainty associated with the realizability of the license acquired, we recorded a non-cash charge to operations of $2,163,000 during 1997 for the cost of this license.

      Interest Income, Net. Interest income decreased $546,000 from $1,461,000 for the year ended December 31, 1997 to $915,000 for the year ended December 31, 1998. We funded the acquisition of ICVerify and operating activities out of cash generated from the Company’s private placements in 1998.

      Loss from Investments and Equity in Losses of Affiliates. For the years ended December 31, 1998 and 1997, we recognized losses of $101,000 and $905,000, respectively, related to our share of the net losses of our affiliates.

      At December 31, 1999, we had cash and cash equivalents of $18,176,000 compared to December 31, 1998 when we had $10,903,000 in cash and cash equivalents. The increase in cash of $7,273,000 was primarily a result of cash inflows from private placements during 1999 which resulted in net cash proceeds of $43,729,000, reduced by cash used in operating activities of $25,609,000, and cash used to purchase investments and property and equipment of $7,250,000 and $4,750,000, respectively. At December 31, 1999, the Company had no material commitments for capital expenditures.

      We anticipate that our current available cash resources combined with future cash flows from operations will be sufficient to meet our presently anticipated cash needs, including our working capital requirements. As a result, we have rescinded our shelf registration on file with the Securities and Exchange Commission. As the electronic commerce marketplace continues to emerge and change and as we respond to the growth and the evolving nature of the market, we may need to raise additional funds in order to:

	•	fund more rapid expansion;
	•	develop new or enhanced services;
	•	respond to competitive pressures; or
	•	acquire complementary businesses or technologies.

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      If we do raise additional funds through the issuance of equity securities, the percentage ownership of the stockholders will be reduced, stockholders may experience additional dilution, or equity securities issued may have rights, preferences or privileges senior to those of common stockholders. We cannot assure you that additional financing will be available now or in the future. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our services, take advantage of future opportunities, or respond to competitive pressures, which could have a material adverse effect on our business, financial condition or operating results. See “Business — Risk Factors.” The common stock we are committed to sell and may sell in the future will increase the amount of our common stock on the public market, which could cause our stock price to decline.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      Not applicable.

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ITEM 8.  FINANCIAL STATEMENTS

REPORT OF INDEPENDENT AUDITORS

The Board of Directors

      We have audited the accompanying consolidated balance sheets of CyberCash, Inc. as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 1999. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CyberCash, Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.

/s/  Ernst & Young LLP

McLean, Virginia

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CYBERCASH, INC.

See notes to consolidated financial statements.

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CYBERCASH, INC.

See notes to consolidated financial statements.

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CYBERCASH, INC.

[Additional columns below]

[Continued from above table, first column(s) repeated]

			Unearned
			Compensatory				Total
			Stock				Equity
			Options				(Deficit)
Balance at December  31,
	1996		$	(360,476	)		$	38,109,486
Sale of Common Stock				—				132,500
Exercise of Common Stock options				—				530,635
Common Stock and Warrants issued in Connection with acquisition of NetBill technology license				—				2,162,500
Common Stock issued in connection with Employee Stock Purchase Plan				—				441,568
Common Stock issued in connection with the conversion of Series C
	Preferred Stock			—				1,507,192
Accretion of Series  C
	Preferred Stock			—				(282,739	)
Repayment of receivable from sale of Common Stock				—				64,227
Accrued interest on receivable from sale of Common Stock				—				(47,332	)
Compensation expense in connection with stock options				—				274,571
Amortization of deferred compensation				237,391				166,577
Comprehensive loss
	Net loss			—				(26,221,910	)
	Foreign currency translation adjustment			—				(244,719	)
	Comprehensive loss							(26,466,629	)
Balance at December  31,
	1997			(123,085	)			16,592,556
Balance at December  31,
	1997			(123,085	)			16,592,556
Sale of Common Stock								3,800,000
Issuance of Common Stock in connection with the acquisition of ICVerify,
	Inc.			—				54,230,954
Exercise of Common Stock options				—				649,819
Common Stock issued in connection with Employee Stock Purchase Plan				—				442,910
Common Stock issued in connection with the conversion of Series C and Series  D Preferred Stock				—				42,999,214
Accretion of Series  C and D
	Preferred Stock			—				(723,064	)
Repayment of receivable from sale of Common Stock				—				558,978
Accrued interest on receivable from sale of Common
	Stock			—				(23,364	)
Amortization of deferred compensation				122,260				99,112
Comprehensive loss
	Net loss			—				(30,944,448	)
	Foreign currency translation adjustment			—				(88,462	)
	Comprehensive loss							(31,032,910	)
Balance at December  31,
	1998		$	(825	)		$	87,594,205

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)

																							Receivable
																							from				Accumulated
			Common Stock								Additional												Sale of				Other
											Paid-in				Accumulated				Treasury				Common				Comprehensive
			Shares				Amount				Capital				Deficit				Stock				Stock				Loss
Balance at December  31, 1998				19,129,722			$	19,130			$	183,265,162			$	(94,880,788	)		$	(120,000	)		$	(267,724	)		$	(420,750	)
Sale of Common Stock				4,231,964				4,232				43,926,350
Issuance of Common Stock in connection with the acquisition of Tellan				1,105,024				1,105				9,944,111				—				—				—				—
Common Stock issued in connection with Stock Bonus Plan				22,800				23				285,877				—				—				—				—
Common Stock issued in connection with Employee Stock Purchase Plan				48,233				48				431,417				—				—				—				—
Exercise of Common Stock Options				163,799				164				1,459,297				—				—				—				—
Amortization of compensatory stock options				—				—				1,141,312				—				—				—				—
Expense incurred by principal shareholder for the benefit of the Company				—				—				600,000				—				—				—				—
Repayment of receivable from sale of Common Stock				—				—				—				—				—				14,170				—
Accrued interest on receivable from sale of Common Stock				—				—				—				—				—				(15,355	)			—
Comprehensive loss
	Net loss			—				—				—				(43,131,505	)			—				—				—
	Foreign currency translation adjustment			—				—				—				—				—				—				(66,682	)
	Comprehensive loss
Balance at December  31, 1999				24,701,542			$	24,702			$	241,053,526			$	(138,012,293	)		$	(120,000	)		$	(268,909	)		$	(487,432	)