<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SOFTWARE.NET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 7375 94-3212136
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
3031 TISCH WAY, STE. 900
SAN JOSE, CALIFORNIA 95128
(408) 556-9300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
WILLIAM S. MCKIERNAN
CHAIRMAN OF THE BOARD
SOFTWARE.NET CORPORATION
3031 TISCH WAY, STE. 900
SAN JOSE, CALIFORNIA 95128
(408) 556-9300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE
AGENT FOR SERVICE, SHOULD BE SENT TO:
<TABLE>
<S> <C>
RICHARD SCUDELLARI DONALD M. KELLER, JR.
SHANE M. BYRNE GLEN R. VAN LIGTEN
JACKSON TUFTS COLE & BLACK, LLP VENTURE LAW GROUP
60 SOUTH MARKET STREET, 10TH FLOOR A PROFESSIONAL CORPORATION
SAN JOSE, CALIFORNIA 95113 2800 SAND HILL ROAD
(408) 998-1952 MENLO PARK, CALIFORNIA 94025
(650) 854-4488
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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
<TABLE>
<CAPTION>
==========================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM
SECURITIES TO BE AGGREGATE OFFERING AMOUNT OF
REGISTERED PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.001 per share................ $51,750,000 $15,340
==========================================================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(c) 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 WHICH 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 SUPPLEMENT 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, PROSPECTUS DATED APRIL 27, 1998
[SOFTWARE.NET CORPORATION LOGO]
- --------------------------------------------------------------------------------
SHARES
COMMON STOCK
- --------------------------------------------------------------------------------
All of the shares of Common Stock, par value $0.001 per share
("Common Stock"), are being sold by software.net Corporation ("software.net" or
the "Company"). Prior to this offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Company has applied to have the Common Stock approved for listing on
the Nasdaq National Market under the symbol "SDOT."
FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $ , payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to
approval of certain legal matters by counsel and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or part. Delivery of the shares of Common Stock offered
hereby to the Underwriters is expected to be made in New York, New York on or
about , 1998.
DEUTSCHE MORGAN GRENFELL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
C.E. UNTERBERG, TOWBIN
The date of this Prospectus is , 1998.
<PAGE> 3
[INSIDE FRONT COVER -- GRAPHICS, LOGOS ETC.]
The Company has applied for Federal registration of the mark "SOFTWARE.NET." All
other trademarks or service marks appearing in this Prospectus are trademarks or
service marks of the respective companies that utilize them.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR
IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
Except as otherwise noted, all information in this Prospectus, including share
and per share information, (i) assumes no exercise of the Underwriters'
over-allotment option, (ii) assumes the reincorporation of the Company in
Delaware, (iii) reflects the automatic conversion of each outstanding share of
the Company's Series A and Series B Preferred Stock into two shares of Common
Stock and each outstanding share of the Company's Series C and Series D
Preferred Stock into one share of Common Stock upon the consummation of this
offering (the "Preferred Stock Conversion"), and (iv) reflects an increase in
the number of authorized shares of Common Stock from 30,000,000 to 50,000,000
and an increase in the number of authorized shares of Preferred Stock from
10,000,000 to 23,176,404, to be effected prior to the consummation of this
offering.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
software.net Corporation (the "Company") is a leading online reseller of
commercial off-the-shelf computer software ("Software") to the consumer, small
business and large enterprise markets. Through its online store
(www.software.net), the Company offers customers a comprehensive selection of
Software, customer service and competitive pricing. The Company believes that
the software.net site is one of the most widely known and used sites on the
World Wide Web for the purchase of Software. The Company fulfills a customer
purchase either through physical delivery of the shrink-wrapped Software package
or through electronic software delivery ("ESD"). The Company believes it
provides superior value to its customers by offering one of the largest
selections of brand-name, high quality Software available online and the
convenience of shopping from home or office, twenty-four-hours-a-day,
seven-days-a-week.
software.net's business is based on scaleable technology that permits the
sale, order processing and delivery of Software with limited human intervention.
This technology, combined with significant operational experience, enables the
Company to address the complex process of real time ESD. The Company has
developed relationships with approximately 300 leading Software publishers which
have granted the Company the right to distribute approximately 2,800 Software
stock-keeping units via ESD. The Company has also established strategic
marketing alliances with America Online, Inc., Excite, Inc. and Netscape
Communications Corporation.
THE OFFERING
Common Stock offered........................ shares
Common Stock to be outstanding after the
offering.................................... shares(1)
Use of Proceeds............................. Working capital, payment of
obligations and general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol...... SDOT
CONSOLIDATED SUMMARY FINANCIAL DATA
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
-------------------------- ---------------
1995 1996 1997 1997 1998
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $1,003 $ 5,858 $16,806 $3,158 $6,192
Gross profit................................................ 380 721 1,933 375 1,003
Total operating expenses.................................... 898 1,585 3,843 584 2,877
Loss from continuing operations............................. (511) (779) (1,743) (169) (1,849)
Net loss.................................................... (511) (1,515) (5,359) (752) (1,849)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
PROFORMA
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,232
Working capital (deficiency)................................ 1,296
Total assets................................................ 8,388
Redeemable convertible preferred stock...................... 15,257
Stockholders' equity (net capital deficiency)............... (13,065)
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1998. Includes
shares of Common Stock to be issued to AOL immediately prior to the
consummation of this offering assuming an initial public offering price of
$ per share. Excludes as of the date of this Prospectus: (i) 3,721,055
shares of Common Stock issuable upon exercise of options outstanding under
the Company's 1995 and 1998 Stock Option Plans, as amended (collectively,
the "Plans"), at a weighted average exercise price of $2.42 per share; (ii)
1,000,000 shares of Common Stock issuable upon exercise of outstanding
options granted outside of the Plans at a weighted average exercise price of
$0.004 per share; (iii) 1,188,945 shares of Common Stock reserved for future
issuance under the Plans; and (iv) shares of Common Stock
reserved for issuance pursuant to the exercise of a warrant issued by the
Company to AOL at an exercise price of $ per share (assuming an initial
public offering price of $ per share). See "Certain Transactions,"
"Description of Capital Stock" and Notes 3 and 7 of Notes to Consolidated
Financial Statements.
(2) Adjusted to give effect to the sale by the Company of the shares of Common
Stock offered hereby at an assumed initial public offering price of
$ per share and after deducting the estimated underwriting
discount and offering expenses, and the receipt of the net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
3
<PAGE> 5
THE COMPANY
software.net Corporation ("software.net" or the "Company") is a leading
online reseller of commercial off-the-shelf computer software ("Software") to
the consumer, small business and large enterprise markets. Through its online
store (www.software.net), the Company offers customers a comprehensive selection
of Software, customer service and competitive pricing. The Company believes that
the software.net site is one of the most widely known and used sites on the
World Wide Web (the "Web") for the purchase of Software. The Company fulfills a
customer purchase either through physical delivery of the shrink-wrapped
Software package or through electronic software delivery ("ESD"). The Company
believes it provides superior value to its customers by offering one of the
largest selections of brand-name, high quality Software available online, and
the convenience of shopping from home or office, twenty-four-hours-a-day,
seven-days-a-week ("24x7").
The Company believes that the Internet is an ideal medium for the sale and
delivery of Software for several reasons: (i) the demographics of Internet users
overlap one-to-one with the demographics of potential Software purchasers; (ii)
many Software titles and their related stock-keeping units ("SKUs") can be
delivered via ESD, providing instant gratification to the customer; and (iii)
large enterprise customers can use ESD to achieve efficient and cost effective
distribution of Software. software.net's business is based on scaleable
technology that permits the sale, order processing and delivery of Software with
limited human intervention. This technology, combined with significant
operational experience, enables the Company to address the complex process of
real time ESD. The Company has developed relationships with approximately 300
leading Software publishers which have granted the Company the right to
distribute approximately 2,800 Software SKUs via ESD. The Company has also
established strategic marketing alliances with America Online, Inc. ("AOL"),
Excite, Inc. ("Excite") and Netscape Communications Corporation ("Netscape").
The Software reselling industry is large and growing. According to
International Data Corporation ("IDC"), total Software sales to consumers and
corporate end users in the United States were estimated to be approximately $16
billion in 1997 and are expected to grow to approximately $29 billion in 2001,
representing a compound annual growth rate of approximately 16%. Jupiter
Communications, Inc. ("Jupiter") estimates that online PC software sales revenue
in 1997 were $69 million and are projected to grow to $2.3 billion in 2002. In
addition, the Company believes that the Software reselling industry is highly
fragmented with many participants, including regional and national chains of
superstores, systems integrators, VARs and small single location stores.
The Company intends to extend its momentum as a "first mover" in online
Software reselling to deliver outstanding value to its customers and to leverage
the online store model to achieve economies of scale. The Company's strategy is
to enhance recognition of its brand, promote ESD, leverage and further develop
its strategic relationships and capitalize on opportunities in the consumer,
small business and large enterprise markets while creating an economic model
that is superior to that of traditional Software reselling businesses. Since the
launch of its Web site in November 1994, the Company has sold Software products
to approximately 140,000 customers and has distributed freeware and trial
download products to tens of thousands of additional users. The Company's sales
increased from approximately $6 million in 1996 to approximately $17 million in
1997.
The Company (formerly CyberSource Corporation), was incorporated in 1994
under the laws of the State of California. Prior to the completion of this
offering, the Company intends to reincorporate under the laws of the State of
Delaware. In December 1997, in order to focus on its core business of selling
Software over the Internet, the Company spun-off its Internet commerce services
business to a new Delaware corporation which now operates under the name
CyberSource Corporation ("CyberSource"). See "Certain Transactions." Unless the
context otherwise requires, the term "Company" or "software.net" refers to
software.net Corporation and its California predecessor.
The Company's executive offices are located at 3031 Tisch Way, Suite 900,
San Jose, California 95128, its telephone number is (408) 556-9300 and its Web
site address is www.software.net. Information contained on the Company's Web
site is not part of this Prospectus.
4
<PAGE> 6
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock offered by this Prospectus. When used in this
Prospectus, the words "expects," "anticipates," "intends," "plans," "estimates"
and similar expressions are intended to identify forward looking statements.
Such statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below and elsewhere in
this Prospectus. Actual results could differ materially from those projected in
the forward looking statements as a result of the risk factors discussed below
and elsewhere in this Prospectus.
Limited Operating History; History of Net Operating Losses; Accumulated
Deficit. Since inception, the Company has incurred significant losses, and as
of March 31, 1998, the Company had an accumulated deficit of approximately $13.1
million. The Company incurred net losses of $511,000, $1.5 million, $5.4 million
and $1.8 million in the periods ended December 31 1995, 1996, 1997 and the first
quarter of 1998, respectively. The Company was founded in August 1994 and began
selling Software on its Web site in November 1994. Accordingly, the Company has
a limited operating history on which to base an evaluation of its business and
prospects. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as online commerce. To address these risks, the Company must, among other
things, maintain and increase its customer base, maintain and develop
relationships with Software publishers, implement and successfully execute its
business and marketing strategy, continue to develop and upgrade its technology
and transaction-processing systems, improve its Web site, provide superior
customer service and order fulfillment, respond to competitive developments, and
attract, retain and motivate qualified personnel. There can be no assurance that
the Company will be successful in addressing such risks, and the failure to do
so could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Anticipated Losses and Negative Cash Flow. The Company intends to expend
significant financial and management resources on brand development, marketing
and promotion, site content development, strategic relationships, and technology
and operating infrastructure, including ESD capabilities. Because the Company
has relatively low gross margins, achieving profitability given planned
investment levels depends upon the Company's ability to generate and sustain
substantially increased levels of net revenue. As a result, the Company expects
to incur additional losses and continued negative cash flow from operations for
the foreseeable future, and such losses are anticipated to increase
significantly from current levels. There can be no assurance that the Company's
revenues will increase or even continue at their current level or that the
Company will achieve or maintain profitability or generate cash from operations
in future periods. The Company's current and future expense levels are to a
large extent fixed and are based on its operating plans and estimates of future
revenues. Sales and operating results generally depend on the volume and timing
of orders received, which are difficult to forecast. The Company may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues would have an
immediate adverse effect on the Company's business, financial condition and
results of operations. In view of the rapidly evolving nature of the Company's
business and its limited operating history in the online Software reselling
business, the Company is unable to accurately forecast its revenues and believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Unpredictability of Future Operating Results. The Company expects to
experience significant fluctuations in its revenues due to a variety of factors,
many of which are outside the Company's
5
<PAGE> 7
control. Factors that could have a material adverse effect on the business,
financial condition and results of operations of the Company include: (i) the
Company's ability to retain existing customers, attract new customers at a
steady rate and maintain customer satisfaction; (ii) the announcement or
introduction of new sites, services and products by the Company and its
competitors; (iii) price competition; (iv) the level of use of the Internet and
online services and decreased consumer acceptance of the Internet and other
online services for the purchase of consumer products such as those offered by
the Company; (v) the Company's ability to upgrade and develop its systems and
infrastructure and attract new personnel in a timely and effective manner; (vi)
the level of traffic on the Company's Web site; (vii) the termination of any
strategic marketing alliances such as those with AOL, Excite or Netscape
pursuant to which the Company has exposure to traffic on third-party Web sites,
or the termination of contracts with major purchasers, particularly United
States government agencies (the "U.S. government"); (viii) technical
difficulties, system downtime or Internet brownouts; (ix) the failure of
Internet bandwidth to increase significantly over time and/or an increase in the
cost to consumers of obtaining or utilizing Internet bandwidth; (x) the amount
and timing of operating costs and capital expenditures relating to expansion of
the Company's business, operations and infrastructure; (xi) the number of
popular Software titles introduced during the period; (xii) certain government
regulations; and (xiii) general economic conditions and economic conditions
specific to the Internet, online commerce and the Software Industry.
The Company's future success, and in particular its revenues and operating
results, depends upon its ability to successfully execute several key aspects of
its business plan. The Company must increase the dollar volume of Software sales
through its online sites, either by generating significantly higher and
continuously increasing levels of traffic to its online sites or by increasing
the percentage of visitors to its online sites who purchase Software, or through
some combination thereof. The Company must also increase the number of repeat
purchasers of Software through its online sites. Although the Company has
implemented strategies, including its relationships with AOL, Excite and
Netscape, designed to accomplish these objectives, there can be no assurance
that the Company will be able to increase the dollar volume of Software sales
through its online sites, increase traffic to its online sites, increase the
percentage of visitors who purchase Software or increase the number of repeat
purchasers. The failure to do one or more of the foregoing would likely have a
material adverse effect on the Company's business, financial condition and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company may experience seasonality in its business, reflecting seasonal
fluctuations in the Software industry, Internet and commercial online service
usage and traditional retail, government and corporate seasonal spending
patterns and advertising expenditures. In particular, Internet and online
service usage and the rate of growth of such usage may decline in the summer.
Such seasonality may cause quarterly fluctuations in the Company's operating
results and could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's gross margins may be impacted by a number of factors,
including the mix of revenues from sales of shrink-wrap products and revenues
from ESD products, the mix of Software products sold, the mix of revenues among
sales to government, corporate and consumer purchasers, the mix of revenues
derived from its relationships with strategic partners such as AOL, Excite,
Netscape and the Company's Web site, and the amount of advertising or
promotional revenues received during a period. The Company realizes higher gross
margins from advertising and promotional revenues than it does from Software
product sales. The Company typically realizes higher gross margins on ESD
Software product sales than it does on sales of shrink-wrap Software products,
and also on sales of specialty Software products as compared to those on sales
of widely available commodity Software products. In addition, the Company
typically realizes higher gross margins on sales to consumer purchasers than it
does on sales to government or corporate purchasers. The Company also may from
time to time offer discount pricing, which periodically may
6
<PAGE> 8
reduce its gross margins. Any change in one or more of the foregoing factors
could materially adversely affect the Company's gross margins and operating
results in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Due to the foregoing factors, the Company's annual or quarterly operating
results may fall below the expectations of securities analysts and investors. In
such event, the trading price of the Common Stock would likely be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on the Internet and Internet Infrastructure Development. The
increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers and suppliers has only recently begun to
develop, and the Company's success will depend in large part on continued growth
in, and the use of, the Internet. Critical issues concerning the commercial use
of the Internet, including security, reliability, cost, ease of access, quality
of service and necessary increases in bandwidth availability, remain unresolved
and are likely to affect the development of the market for the Company's
services. The adoption of the Internet for information retrieval and exchange,
commerce and communications, particularly by those enterprises that have
historically relied upon traditional means of commerce and communications,
generally will require the acceptance by these entities of a new medium of
conducting business and exchanging information. Such acceptance is likely only
in the event that the Internet provides these entities with greater efficiency
and an improved area of commerce and communication. Demand and market acceptance
of the Internet are subject to a high level of uncertainty and are dependent on
a number of factors, including the growth in consumer access to and acceptance
of new interactive technologies, the development of technologies that facilitate
interactive communication between organizations and targeted audiences and
increases in user bandwidth. If the Internet as a commercial or business medium
fails to develop or develops more slowly than expected, the Company's business,
results of operations and financial condition could be materially adversely
affected. The recent growth in the use of the Internet has caused frequent
periods of performance degradation, requiring the upgrade of routers and
switches, telecommunications links and other components forming the
infrastructure of the Internet by Internet service providers and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of the
Company's services. The Company's ability to increase the speed with which it
provides services to customers and to increase the scope of such services
ultimately is limited by and reliant upon the speed and reliability of the
networks operated by third parties. Consequently, the emergence and growth of
the market for the Company's services is dependent on improvements being made to
the entire Internet infrastructure to alleviate overloading and congestion.
Online Commerce Security Risks; Credit Card Fraud. A significant barrier
to online commerce and communications is the secure transmission of confidential
information over public networks. The Company relies on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. There can be no assurance
that advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments will not result in a compromise or
breach of the algorithms used by the Company to protect customer transaction
data. If any such compromise were to occur, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
A party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
operations. The Company may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by such breaches. Concerns over the security of transactions conducted on
the Internet and other online services and the privacy of users may also inhibit
the growth of the Internet and other online services generally, and online
commerce in particular. To the extent that activities of the Company or third
party contractors involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage the
Company's reputa-
7
<PAGE> 9
tion and expose the Company to a risk of loss or litigation and possible
liability. There can be no assurance that the Company's security measures will
prevent security breaches or that a failure to prevent such security breaches
will not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company has suffered
losses as a result of orders placed with fraudulent credit card data, even
though the payment of such orders had been approved by the associated financial
institution. Under current credit card practices, a merchant is liable for
fraudulent credit card transactions where, as is the case with the transactions
processed by the Company, no cardholder signature is obtained. There can be no
assurance that the Company will not suffer significant losses as a result of
fraudulent use of credit card data in the future, a situation which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Technology."
Risks Associated with Electronic Software Delivery. The Company's success
will depend in large part on customer acceptance of ESD as a method of buying
Software. In addition, the Company typically derives higher gross margins from
sales of Software via ESD than it does on sales of shrink-wrap Software. ESD is
a relatively new method of selling Software products and the growth and market
acceptance of ESD is highly uncertain and subject to a number of factors. These
factors include: the availability of sufficient network bandwidth to enable
purchasers to rapidly download Software, the impact of time-based Internet
access fees, the number of Software SKUs that are available for purchase through
electronic delivery as compared to those available through traditional methods,
the level of consumer comfort with the process of downloading Software and the
relative ease of such process and concerns about transaction security. If ESD
does not achieve widespread market acceptance, the Company's business, financial
condition and results of operations will be materially adversely affected. Even
if ESD achieves widespread acceptance, there can be no assurance that the
Company will overcome the substantial existing and future technical challenges
associated with electronically delivering Software reliably and consistently on
a long-term basis. A failure by the Company to do so would also materially and
adversely affect the Company's business, financial condition and results of
operations. See "Business -- Products."
Reliance on Strategic Marketing Alliances with America Online, Excite and
Netscape. The Company has entered into marketing agreements with AOL, Excite
and Netscape. The AOL agreement (the "AOL Agreement") provides that the Company
shall be the exclusive and semi-exclusive reseller of Software on certain
screens on the AOL network and AOL's Web site, aol.com. Under the terms of the
Excite agreement (the "Excite Agreement"), the Company has the right to display
banner advertisements and links to the Company's Web site on certain screens on
Excite Web sites, and Excite cannot display paid promotional links or banner
advertisements of any other Software reseller on specified screens of the Excite
Web site related to Software. Each of AOL and Excite is obligated, under its
respective agreement with the Company, to deliver minimum numbers of screen
views with links to the Company's Web site ("Impressions"). The Company's
current agreement with AOL provides for fixed payments to AOL totalling
approximately $21 million. In addition, the Company's agreement with Excite
provides for substantial payments to Excite during the three year term of that
agreement. In addition, the Company is obligated to pay AOL and Excite a
percentage of certain transactional revenues and, in the case of AOL,
advertising revenues earned by the Company in excess of specified thresholds.
The AOL Agreement terminates in August 2001, or earlier in the event of a
material breach, and the Excite Agreement terminates when Excite has satisfied
certain obligations with respect to delivery of Impressions, but no earlier than
April 2001, other than in the event of a material breach.
In June 1997, the Company entered into an agreement with Netscape for a
term of 24 months pursuant to which the Company created and manages a Web site,
the "Netscape Software Depot by software.net." This Web site is an online
Software store accessible through Netscape's Internet site, created for the
purpose of marketing and distributing Software products which are compatible
with the Netscape ONE platform. Under the terms of the Netscape agreement, sales
and advertising revenues generated from this online store are allocated between
the parties in accordance with
8
<PAGE> 10
specified percentages. In connection with this agreement, the Company made an
initial prepayment to Netscape for a license to use certain Netscape trademarks.
The Netscape agreement terminates on July 31, 1999, and can also be terminated
by either party in the event that certain specified Impressions and net revenue
milestones have not been met.
There can be no assurance that the Company will achieve sufficient online
traffic, or generate sufficient sales to realize economies of scale that justify
the Company's significant fixed financial obligations to AOL and Excite, or to
satisfy its contractual obligations necessary to prevent termination of the AOL,
Excite or Netscape agreements. The failure of the Company to do so would likely
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, neither the AOL, Excite nor Netscape
agreements provides the Company with automatic renewal rights upon expiration of
its respective term. There can be no assurance that such agreements will be
renewed on commercially acceptable terms, or at all. Furthermore, the Company's
significant investment in the AOL, Excite and Netscape relationships is based on
the continued positive market presence, reputation and anticipated growth of
AOL, Excite and Netscape, as well as the commitment by each of AOL, Excite and
Netscape to deliver specified numbers of Impressions. Any decline in the
significant market presence, business or reputation of AOL, Excite or Netscape,
or the failure of any of AOL, Excite or Netscape to deliver the specified
numbers of Impressions, will reduce the value of these strategic agreements to
the Company and will likely have a material adverse effect on the business,
results of operations and financial condition of the Company. In addition, AOL
and the Company have the right to separately pursue and sell advertising in the
Company's content areas distributed through AOL. There can be no assurance that
the Company and AOL will not compete for limited software reseller advertising
revenues. The Company's arrangements with AOL, Excite and Netscape are expected
to represent significant distribution channels for the Company's Software sales,
and any termination of either or all of the Company's agreements with AOL,
Excite and Netscape would likely have a material adverse effect on the Company's
business, results of operations and financial condition. See "Use of Proceeds,"
"Business -- Strategic Relationships" and Note 3 of Notes to Consolidated
Financial Statements.
Need for Additional Capital. The Company requires substantial working
capital to fund its business and expects to use a portion of the net proceeds of
this offering to fund its operating losses. Since inception, the Company has
experienced negative cash flow from operations and expects to continue to
experience significant negative cash flow from operations for the foreseeable
future. The Company currently anticipates that the net proceeds of this
offering, together with its existing capital resources, will be sufficient to
meet the Company's capital requirements through the next twelve months, although
there can be no assurance that the Company will not have additional capital
needs prior to the end of such period. Thereafter, the Company may be required
to raise additional funds, in part to fund its financial obligations to AOL and
Excite. There can be no assurance that such financing will be available when
required by the Company on terms acceptable to the Company, or at all. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Competition. The online commerce market is new, rapidly evolving and
intensely competitive, and the Company expects competition to intensify in the
future. Barriers to entry are minimal, and current and new competitors can
launch new Web sites at a relatively low cost. In addition, the Software
reselling industry is intensely competitive. The Company currently competes
primarily with traditional Software resellers and other online Software
resellers. In the online market, the Company competes with online Software
resellers and vendors that maintain similar commercial Web sites, including
CompUSA, CNET, Cyberian Outpost and Egghead.com, and a growing number of
Software publishers that sell their Software products directly online. The
Company also anticipates that it may in the near future compete with other
Software publishers, including Microsoft, that plan to sell their products
directly to customers online, and with indirect competitors that specialize in
online commerce or derive a substantial portion of their revenues from online
commerce, including AOL, Netscape, Amazon.com and Yahoo!. These entities may
themselves offer, or others may offer
9
<PAGE> 11
through such entities, Software products. In addition, entities experienced in
mail-order and/or direct marketing of computer products (including cataloguers
such as Micro Warehouse and manufacturers such as Dell Computer and Gateway),
major Software product distributors such as Ingram Micro and Tech Data, and
other major retailers of products, such as OfficeMax, Staples and Office Depot,
have established, or may establish in the near future, commercial Web sites
offering Software products. Competitive pressures created by any one of these
current or future competitors, or by the Company's competitors collectively,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company believes that the principal competitive factors in its market
are brand recognition, selection, convenience, price, speed and accessibility,
customer service, quality of site content, and reliability and speed of
fulfillment. In addition to the foregoing, the large enterprise market focuses
on compatibility of products, administration and reporting, single source
supply, security and cost-effective deployment. Many of the Company's current
and potential competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than the Company. In addition, larger, well-established and
well-financed entities may acquire, invest in or form joint ventures with online
competitors as the use of the Internet and other online services increases.
Certain of the Company's actual or potential competitors, such as Ingram Micro
and Tech Data, may be able to secure merchandise from vendors on more favorable
terms, devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing or inventory availability policies and devote
substantially more resources to Web site and systems development than the
Company. Certain of the Company's competitors such as Software Spectrum, GTSI
and Corporate Software & Technology have greater experience in selling Software
to the large enterprise market. In addition, new technologies and the expansion
of existing technologies, such as price comparison programs that select specific
titles from a variety of Web sites and may direct customers to online Software
resellers that compete with the Company, may increase competitive pressures on
the Company. Increased competition may result in reduced operating margins, as
well as a loss of both market share and brand recognition. Further, as a
strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on its business,
financial condition and results of operations. In addition, companies that
control access to Internet transactions through network access or Web browsers
could promote the Company's competitors or charge the Company a substantial fee
for inclusion in their product or service offerings. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, and any inability to do so could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business -- Competition."
Reliance on Software Publishers and Distributors. The Company is entirely
dependent upon the Software publishers and distributors that supply it with
Software for resale, and the availability of such Software is unpredictable. In
1997 and the first quarter of 1998, a substantial portion of the Company's
revenues were derived from sales of Software collectively supplied by Microsoft
and a major software distributor. As is common in the industry, the Company has
no long-term or exclusive contracts or arrangements with any publisher or
distributor that guarantees the availability of Software for resale. There can
be no assurance that the publishers or distributors that currently supply
Software to the Company will continue to do so or that the Company will be able
to establish new relationships with publishers and distributors. The Company
also relies on software distributors to ship shrink-wrap Software to customers
that do not utilize ESD. The Company has limited control over the shipping
procedures of its distributors, and shipments by these distributors have in the
past been, and may in the future be, subject to delays. Although most Software
sold by the Company carries a warranty supplied by the publisher, the Company
has accepted returns from customers for which the Company did not receive
reimbursements from its publishers or distributors. If the Company is unable to
develop and maintain satisfactory relationships with publishers and distributors
on acceptable commercial terms, if the Company is unable to obtain sufficient
quantities of
10
<PAGE> 12
Software (including ESD products), particularly from Microsoft or the major
distributor noted above, if the quality of service provided by such publishers
or distributors falls below a satisfactory standard or if the Company's level of
returns exceeds its expectations, the Company's business, results of operations
and financial condition could be materially adversely affected.
Customer Concentration; Risks Associated with Reliance on United States
Government Contracts. The Company has entered into three contracts with United
States government agencies (the "U.S. government"). Collectively, these
agreements accounted for approximately 33.2% and 43.1% of the Company's revenues
in 1997 and the quarter ended March 31, 1998, respectively. These agreements
will expire in June 1998, July 1998, and August 1999. The Company expects that
these three contracts will continue to account for a substantial portion of the
Company's revenues for the foreseeable future. Each of these contracts is
subject to annual review and renewal by the applicable government entity, and
may be terminated, without cause, at any time. Accordingly, there can be no
assurance that the Company will derive revenue from sales of Software to the
U.S. government in any given future period. In the event that any one of these
contracts is not renewed or is otherwise terminated by the U.S. government, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business -- Products."
Management of Potential Growth; New Management Team; Limited Senior
Management Resources. The Company has rapidly and significantly expanded its
operations, and anticipates that further significant expansion will be required
to address potential growth in its customer base and market opportunities. This
expansion has placed, and is expected to continue to place, a significant strain
on the Company's managerial, operational and financial resources. The majority
of the Company's senior management joined the Company within the last two
months, including the Company's President and Chief Executive Officer and the
Company's Chief Financial Officer. The Chairman of the Company's Board of
Directors, William S. McKiernan, serves as the President and Chief Executive
Officer of CyberSource and, accordingly, plays a limited role in the Company's
management. The Company's new employees include a number of key managerial,
technical and operations personnel who have not yet been fully integrated into
the Company, and the Company expects to add additional key personnel in the near
future. To manage the expected growth of its operations and personnel, the
Company will be required to improve existing and implement new transaction
processing, operational and financial systems, procedures and controls, and to
expand, train and manage its growing employee base, including its finance,
administrative and operations staff. There can be no assurance that the
Company's current or planned personnel, systems, procedures and controls will be
adequate to support the Company's future operations, that management will be
able to hire, train, retain, motivate and manage required personnel or that the
Company's management will be able to successfully identify, manage and exploit
existing and potential market opportunities. If the Company is unable to manage
growth effectively, its business, financial condition and results of operations
would be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business --
Employees," and "Management."
Dependence on Key Personnel; Need for Additional Personnel. The Company's
performance is substantially dependent on the continued services and on the
performance of its senior management and other key personnel, particularly
William S. McKiernan, Chairman of the Company's Board of Directors, Mark L.
Breier, its President and Chief Executive Officer, and John P. Pettitt, its
Executive Vice President and Chief Technology Officer. The Company's performance
also depends on the Company's ability to retain and motivate its other officers
and key employees. The loss of the services of any of its executive officers or
other key employees could have a material adverse effect on the Company's
business, financial condition and results of operations. The Chairman of the
Company's Board of Directors, William S. McKiernan, is the President and Chief
Executive Officer of CyberSource and, accordingly, will play a limited role in
the Company's management. The Company does not have long-term employment
agreements with any of its key personnel. The Company's future success also
depends on its ability to identify, attract, hire, train, retain and motivate
other
11
<PAGE> 13
highly skilled technical, managerial, editorial, merchandising, marketing and
customer service personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to successfully attract,
assimilate or retain sufficiently qualified personnel. In particular, skilled
technical employees are highly sought after in the Silicon Valley area, and
there can be no assurance that the Company will be able to retain or attract
such employees. The failure to retain and attract the necessary technical,
managerial, merchandising, marketing and customer service personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Employees" and "Management."
Risk of Capacity Constraints; Reliance on Internally Developed Systems;
System Development Risks. A key element of the Company's strategy is to
generate a high volume of traffic on, and use of, its Web site. The Company's
revenues depend on the number of customers who use its Web site to purchase
Software. Accordingly, the satisfactory performance, reliability and
availability of the Company's Web site, transaction-processing systems and
network infrastructure are critical to the Company's operating results, as well
as to its reputation and its ability to attract and retain customers and
maintain adequate customer service levels. Any systems interruptions that result
in the unavailability of the Company's Web site or reduced order fulfillment
performance would reduce the volume of goods sold and the attractiveness of the
Company's product and service offerings, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has experienced periodic system interruptions, which it
believes will continue to occur from time to time. The Company is continually
enhancing and expanding its technology and transaction-processing systems, and
network infrastructure and other technologies to accommodate a substantial
increase in the volume of traffic on the Company's Web site. There can be no
assurance that the Company will be successful in these efforts or that the
Company will be able to accurately project the rate or timing of increases, if
any, in the use of its Web site or timely expand and upgrade its systems and
infrastructure to accommodate such increases. In addition, there can be no
assurance that additional network capacity will be available from third party
suppliers as it is needed by the Company. There can be no assurance that the
Company's or its suppliers' network will be able to timely achieve or maintain a
sufficiently high capacity of data transmission, especially if the customer
usage of the Company's Web site increases. The Company's failure to achieve or
maintain high capacity data transmission could significantly reduce consumer
demand for its services and have a material adverse effect on its business,
financial condition and results of operations. See "-- Risks Associated with
Dependence on CyberSource Corporation; Relationship with CyberSource
Corporation" and "Business -- Technology."
Risks Associated with Dependence on CyberSource Corporation; Relationship
with CyberSource Corporation. The Company is dependent upon CyberSource for
certain services such as credit card processing, fraud screening, export
control, sales tax computation, electronic licensing, hosting of electronic
downloads and fulfillment messaging. In addition, pursuant to the terms of an
Inter-Company Cross License Agreement between the Company and CyberSource, the
Company licenses certain technology, including Sm@rtCert, from CyberSource on a
non-exclusive basis subject to certain limitations. Any discontinuation of such
services or termination of such license or any reduction in performance that
requires the Company to replace such services or internally develop or license
such technology from a third party, would be disruptive to the Company's
business and could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any failure by
CyberSource to ensure that such software complies with year 2000 requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations. CyberSource also provides these services
and licenses such technology to other customers, including competitors of the
Company.
Certain former members of the Company's management have joined CyberSource
in executive management positions including William S. McKiernan, the Chairman
of the Company's Board of Directors, who serves as President and Chief Executive
Officer of CyberSource. Furthermore, five of
12
<PAGE> 14
the six members of the Company's Board of Directors serve on the CyberSource
Board of Directors. Nothing in the Company's agreements with CyberSource
prohibit CyberSource from competing directly with the Company or being acquired
by a third party, either of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Technology," "Certain Transactions" and "Management -- Compensation
Committee Interlocks and Insider Participation."
Risk of System Failure; Single Site. The Company's success, in particular
its ability to successfully receive and fulfill orders and provide high quality
customer service, largely depends on the efficient and uninterrupted operation
of its computer and communications systems. Substantially all of the Company's
development and management systems are located at a single facility leased by
the Company in San Jose, California. The Company contracts with a third party
for facilities for the Company's production, computer and communications
hardware systems and for mission critical Internet connectivity, and these
systems are located at a single location in Santa Clara, California. The
Company's systems and operations are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. The Company does not have a formal disaster recovery plan and
does not carry sufficient business interruption insurance to compensate it for
losses that may occur. Furthermore, there can be no assurance that either the
security mechanisms of the Company or of the Company's other suppliers will
prevent security breaches or service breakdowns. Despite the implementation of
these security measures by the Company, its servers may be vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays, loss of data or the inability to
accept and fulfill customer orders. The occurrence of any of the foregoing risks
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Technology" and
"-- Facilities."
Risks Associated With Global Expansion. Although the Company sells
Software to customers outside the United States, the Company does not currently
have any overseas fulfillment or distribution facility or arrangement or any Web
site content localized for foreign markets, and there can be no assurance that
the Company will be able to expand its global presence. In addition, there are
certain risks inherent in doing business on a global level, such as regulatory
requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, difficulties in
protecting intellectual property rights, longer payment cycles, problems in
collecting accounts receivable, political instability, fluctuations in currency
exchange rates and potentially adverse tax consequences, which could adversely
impact the success of the Company's global operations. In addition, the export
of certain Software from the United States is subject to export restrictions as
a result of the encryption technology in such Software and may give rise to
liability to the extent the Company violates such restrictions. There can be no
assurance that the Company will be able to successfully market, sell and
distribute its products in local markets or that one or more of such factors
will not have a material adverse effect on the Company's future global
operations, and consequently, on the Company's business, financial condition and
results of operations.
Uncertain Acceptance of the Company's Brand. The Company believes that
establishing, maintaining and enhancing the Company's brand is a critical aspect
of its efforts to attract and expand its online traffic. The growing number of
Internet sites that offer competing products and services, many of which already
have well-established brands in online services or the Software industry
generally, increase the importance of establishing and maintaining brand name
recognition. Promotion of the Company's brand will depend largely on the
Company's success in providing a high quality online experience supported by
dedicated customer service which cannot be assured. In addition, to attract and
retain online users and to promote and maintain the Company's brand in response
to competitive pressures, the Company may find it necessary to increase
substantially its financial commitment to creating and maintaining a strong
brand loyalty among customers. If the Company is unable to provide high quality
online services or customer support, or otherwise fails to
13
<PAGE> 15
promote and maintain its brand, or if the Company incurs excessive expenses in
an attempt to promote and maintain its brand, the Company's business, financial
condition and results of operations would be materially adversely affected.
Rapid Technological Change. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of the software.net online store. The Internet and the online commerce industry
are characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions
embodying new technologies and the emergence of new industry standards and
practices that could render the Company's existing Web site and proprietary
technology and systems obsolete. The Company's success will depend, in part, on
its ability to both license and internally develop leading technologies useful
in its business, enhance its existing services, develop new services and
technology that address the increasingly sophisticated and varied needs of its
prospective customers, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The
development of Web site and other proprietary technology entails significant
technical and business risks. There can be no assurance that the Company will
successfully use new technologies effectively or adapt its Web site, proprietary
technology and transaction-processing systems to customer requirements or
emerging industry standards. If the Company is unable, for technical, legal,
financial or other reasons, to adapt in a timely manner to changing market
conditions, customer requirements or emerging industry standards, its business,
financial condition and results of operations could be materially adversely
affected. See "Business -- Technology."
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruptions of operations including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company utilizes
third-party equipment and software that may not be Year 2000 compliant. The
Company is in the early stages of conducting an audit of its third-party
suppliers as to the Year 2000 compliance of their systems. Failure of the
Company's internal computer systems or of such third-party equipment or
software, or of systems maintained by the Company's suppliers, to operate
properly with regard to the Year 2000 and thereafter could require the Company
to incur unanticipated expenses to remedy any problems, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, the purchasing patterns of customers or
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
from the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risks Associated with Acquisitions and Entry into New Business Areas. The
Company has experienced substantial changes in the expansion of its business and
operations since inception. The Company may choose to expand its operations by
developing new Web sites, promoting new or complementary products or sales
formats, expanding the breadth and depth of products and services offered or
expanding its market presence through relationships with third parties. In
addition, the Company may broaden the scope and content of its online store
through the acquisition of existing online services, or content and businesses
specializing in ESD and Software distribution. Although no such acquisitions are
currently being negotiated, any future acquisitions would expose the Company to
increased risks, including risks associated with the assimilation of new
operations, sites and personnel, the diversion of resources from the Company's
existing businesses, sites and technologies, the inability to generate revenues
from new sites or content
14
<PAGE> 16
sufficient to offset associated acquisition costs, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and customers as a result of any integration of new management
personnel. Acquisitions may also result in additional expenses associated with
amortization of acquired intangible assets or potential businesses. There can be
no assurance that the Company would be successful in overcoming these risks or
any other problems encountered in connection with such acquisitions, and its
inability to overcome such risks could have a material adverse effect on the
Company's business, financial condition and results of operations.
Uncertain Protection of Intellectual Property. The Company regards its
copyrights, service marks, trademarks, trade dress, trade secrets and similar
intellectual property as critical to its success, and relies on trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, partners and others to protect its
proprietary rights. The Company pursues the registration of its trademarks and
service marks in the U.S., and has applied for the registration of certain of
its trademarks and service marks. The Company applied for Federal registration
of the service mark "SOFTWARE.NET" on August 24, 1994, and there can be no
assurance that a Federal registration of this service mark or any other service
mark will issue. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which the Company's products
and services are made available online. The Company has licensed in the past,
and expects that it may license in the future, certain of its proprietary
rights, such as trademarks or copyrighted material, to third parties. While the
Company attempts to ensure that the quality of its brand is maintained by such
licensees, there can be no assurance that such licensees will not take actions
that might materially adversely affect the value of the Company's proprietary
rights or reputation, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the steps taken by the Company to protect its proprietary
rights will be adequate or that third parties will not infringe or
misappropriate the Company's trade secrets, copyrights, trademarks, trade dress
and similar proprietary rights. In addition, there can be no assurance that
others will not independently develop substantially equivalent intellectual
property. A failure by the Company to protect its intellectual property in a
meaningful manner could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of management and technical resources, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, there can be no assurance that other parties will not assert
infringement claims against the Company. From time to time, the Company has
received, and may receive in the future, notice of claims of infringement of
other parties' proprietary rights. There can be no assurance that such claims
will not be asserted or prosecuted against the Company in the future or that any
past or future assertions or prosecutions will not materially adversely affect
the Company's business, financial condition and results of operations. The
defense of any such claims, whether such claims are with or without merit, could
be time-consuming, result in costly litigation and diversion of technical and
management personnel, cause product shipment delays or require the Company to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, or at all. In the event of a successful claim of
product infringement against the Company and the failure or inability of the
Company to develop non-infringing technology or license the infringed or similar
technology on a timely basis, the Company's business, financial condition and
results of operations could be materially adversely affected. See
"Business -- Legal Proceedings" and "-- Intellectual Property."
15
<PAGE> 17
Government Regulation and Legal Uncertainties. The Company is not
currently subject to direct regulation by any domestic or foreign governmental
agency, other than regulations applicable to businesses generally, export
control laws and laws or regulations directly applicable to online commerce.
However, due to the increasing popularity and use of the Internet and other
online services, it is possible that a number of laws and regulations may be
adopted with respect to the Internet or other online services covering issues
such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for online commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. The adoption of certain additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for the Company's products and
services and increase the Company's cost of doing business, or otherwise have an
adverse effect on the Company's business, financial condition and results of
operations.
Applicability to the Internet of existing laws governing issues such as
property ownership, copyrights and other intellectual property issues, taxation,
libel, obscenity and personal privacy is uncertain. The vast majority of such
laws were adopted prior to the advent of the Internet and related technologies
and, as a result, do not contemplate or address the unique issues of the
Internet and related technologies. Changes to such laws intended to address
these issues, including some recently proposed changes, could create uncertainty
in the Internet marketplace which could reduce demand for the services of the
Company or increase the cost of doing business as a result of costs of
litigation or increased service delivery costs, or could in some other manner
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition, as the Company's services are available over the Internet in
multiple states and foreign countries, such jurisdictions may claim that the
Company is required to qualify to do business as a foreign corporation in each
such state or foreign country. The Company is qualified to do business only in
California and Virginia, and failure by the Company to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject the
Company to taxes and penalties for the failure to qualify and could result in
the inability of the Company to enforce contracts in such jurisdictions. Any
such new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet and other
online services could have a material adverse effect on the Company's business,
financial condition and results of operations.
Liability for Internet Content. The Company believes that its future
success will depend in part upon its ability to deliver original and compelling
descriptive content about the Software products it sells on the Internet. As a
publisher of online content, the Company faces potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that the Company publishes
or distributes. Such claims have been brought, and sometimes successfully
litigated, against online services. In addition, in the event that the Company
implements a greater level of interconnectivity on its site, the Company will
not and cannot practically screen all of the content generated or accessed by
its users, and the Company could be exposed to liability with respect to such
content. Although the Company carries general liability insurance, the Company's
insurance may not cover claims of these types or may not be adequate to
indemnify the Company for all liability that may be imposed. Any imposition of
liability, particularly liability that is not covered by insurance or is in
excess of insurance coverage, could have a material adverse effect on the
Company's reputation and its business, financial condition and results of
operations.
Sales and Other Taxes. The Company does not currently collect sales or
other similar taxes in respect of shipments of goods or ESD sales into states
other than California and Virginia. However, one or more local, state or foreign
jurisdictions may seek to impose sales tax collection obligations on out of
state companies, such as the Company, which engage in online commerce. In
addition, any new operation in states outside California and Virginia could
subject shipments into such states
16
<PAGE> 18
to state sales taxes under current or future laws. A successful assertion by one
or more states or any foreign country that the Company should collect sales or
other taxes on the sale of merchandise could have a material adverse effect on
the Company's business, financial condition and results of operations.
Control of the Company. Upon completion of this offering, the Company's
directors and executive officers and their respective affiliates will
beneficially own in the aggregate approximately % of the outstanding Common
Stock. In particular, William S. McKiernan, the Chairman of the Company's Board
of Directors, will hold approximately % of the outstanding Common Stock. As
a result, these stockholders, if they act together, will be able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership also may have the effect of delaying, preventing
or deterring a change in control of the Company which could have an adverse
effect on the market price of the Common Stock. See "Management," "Certain
Transactions" and "Principal Stockholders."
No Prior Public Market; Possible Volatility of Stock Price. The trading
price of the Common Stock is likely to be highly volatile and could be subject
to wide fluctuations in response to factors such as actual or anticipated
variations in quarterly operating results, announcements of technological
innovations, new sales formats or new products or services by the Company or its
competitors, changes in financial estimates by securities analysts, conditions
or trends in the Internet and online commerce industries, changes in the
economic performance and/or market valuations of other Internet, online service
or retail companies, announcements by the Company of significant acquisitions,
strategic partnerships, joint ventures or capital commitments, additions or
departures of key personnel, sales of Common Stock and other events or factors,
many of which are beyond the Company's control. In addition, the stock market in
general, and the Nasdaq National Market and the market for Internet-related and
technology companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many technology companies'
stocks are at or near historical highs and reflect price earnings ratios
substantially above historical levels. There can be no assurance that these
trading prices and price earnings ratios will be sustained. These broad market
and industry factors may materially and adversely affect the market price of the
Common Stock, regardless of the Company's actual operating performance. In the
past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
such companies. Such litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.
Shares Eligible For Future Sale. Sales of significant amounts of Common
Stock in the public market after the offering or the perception that such sales
will occur could materially and adversely affect the market price of the Common
Stock or the future ability of the Company to raise capital through an offering
of its equity securities. The 21,288,962 shares of Common Stock held by existing
stockholders immediately prior to the closing of the offering will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"). Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 promulgated under the
Securities Act. Beginning 180 days after the date of this Prospectus, upon
expiration of lock-up agreements (the "Lock-up Agreements") between the
Representatives of the Underwriters and all the officers, directors and
stockholders of the Company, approximately 2,464,778 shares will be eligible for
sale without restriction under Rule 144(k) and 17,670,338 shares will be
eligible for sale subject to compliance with the volume and other restrictions
of Rule 144. The remaining 1,153,846 shares will be eligible for sale at various
times over a period of 1 year from the expiration of the Lock-up Agreements,
subject in some cases to the volume and other restrictions of Rule 144. In
addition, there are outstanding options to purchase 3,721,055 shares of Common
Stock which will be eligible
17
<PAGE> 19
for sale in the public market from time to time upon the expiration of the
Lock-up Agreements, subject to vesting and in some cases the volume and other
restrictions of Rule 144. In addition, (i) certain stockholders, representing
approximately 21,198,962 shares of Common Stock and (ii) AOL in respect of (a)
the shares of Common Stock to be issued to AOL immediately prior to the
consummation of this offering and the shares of Common Stock issuable to AOL
pursuant to a Warrant to be issued by the Company to AOL immediately prior to
the consummation of this offering have the right, subject to certain conditions,
to include their shares in future registration statements relating to the
Company's securities and/or to cause the Company to register certain shares of
Common Stock owned by them.
After the date of this Prospectus, the Company intends to file a Form S-8
registration statement under the Securities Act to register all shares of Common
Stock issuable under the Company's 1995 and 1998 Stock Option Plans. Such
registration statement is expected to become effective immediately upon filing,
and shares covered by that registration statement will thereupon be eligible for
sale in the public markets, subject to certain lock-up agreements and Rule 144
limitations applicable to affiliates. See "Management -- Stock Option Plans,"
"Description of Capital Stock -- Registration Rights," "Shares Eligible for
Future Sale," and "Underwriting."
Anti-Takeover Effect Of Certain Charter Provisions. Upon the closing of
this offering, the Company's Board of Directors will have the authority to issue
up to 15,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the 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. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the voting and other rights
of the holders of Common Stock. The Company has no present plans to issue shares
of Preferred Stock. Further, certain provisions of the Company's Certificate of
Incorporation and Bylaws and Delaware law could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. See "Description of
Capital Stock."
Immediate and Substantial Dilution. The initial public offering price is
substantially higher than the value per outstanding share of Common Stock.
Accordingly, purchasers in this offering will suffer an immediate and
substantial dilution of $ per share in the net tangible value of the Common
Stock from the initial public offering price. Additional dilution will occur
upon exercise of outstanding options granted by the Company. See "Dilution."
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of Common Stock offered hereby, assuming an initial public offering price of
$ per share, are estimated to be approximately $
(approximately $ million if the Underwriters' over-allotment
option is exercised in full), after deducting the estimated underwriting
discount and offering expenses.
The principal purposes of this offering are to obtain additional capital,
to create a public market for the Common Stock, to facilitate future access by
the Company to public equity markets, and to provide increased visibility and
credibility in a marketplace where many of the Company's current and potential
competitors are or will be publicly held companies. The Company intends to use a
portion of the net proceeds to pay for a portion of its obligations to AOL and
Excite pursuant to the Company's agreements with these parties, which total
approximately $25 million over the next three years, and of which approximately
$14 million must be paid within the next twelve months. In addition, the Company
may, when the opportunity arises, use an unspecified portion of the net proceeds
to acquire or invest in complementary businesses, products and technologies.
From time to time, in the ordinary course of business, the Company expects to
evaluate potential acquisitions of such businesses, products or technologies.
However, the Company has no present understandings, commitments or agreements
with respect to any material acquisition or investment. The Company has no
specific plan for use of the remaining proceeds and expects to use such proceeds
for general corporate purposes, including working capital to fund anticipated
operating losses and capital expenditures. Pending use of the net proceeds for
the above purposes, the Company intends to invest such funds in short-term,
interest bearing, investment grade securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Risk Factors -- Need for Additional Capital."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. However, in connection with the Spin-off of the Company's Internet
commerce service business on December 31, 1997, the Company's shareholders were
issued shares of capital stock of Internet Commerce Services Corporation
(currently operating as CyberSource Corporation ("CyberSource")) in
consideration of the transfer by the Company to CyberSource of all of the assets
and liabilities of the Company's Internet commerce business. The Company
currently intends to retain all available funds and any future earnings of its
business for use in the operation of its business and does not anticipate paying
any cash or other dividends in the foreseeable future. See "Certain
Transactions."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth as of March 31, 1998: (i) the actual
capitalization of the Company; (ii) the proforma capitalization of the Company
giving effect to the conversion of the outstanding Preferred Stock into Common
Stock upon the closing of this offering, including 276,466 shares of Series D
Preferred Stock issued in April 1998 into an aggregate of 12,198,962 shares of
Common Stock; and (iii) the proforma capitalization of the Company as adjusted
to reflect the receipt of the estimated net proceeds from the sale of the
shares of Common Stock offered hereby at the initial public
offering price of $ per share, after deducting estimated
underwriting discounts and offering expenses and the sale of
shares of Common Stock at $ per share to AOL immediately prior to
the consummation of this offering. This table should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------
(IN THOUSANDS)
PROFORMA AS
ACTUAL PROFORMA ADJUSTED
-------- -------- -----------
<S> <C> <C> <C>
Long-term obligations, net of current maturities....... $ 33 $ 33 $ 33
Redeemable Convertible Preferred Stock; no par value,
10,000,000 shares authorized actual and proforma;
7,899,938 shares issued and outstanding, actual; no
shares authorized, issued or outstanding proforma and
proforma as adjusted................................. 15,257 -- --
Stockholders' equity:
Preferred Stock, no par value, no shares authorized,
issued or outstanding actual; 23,176,404 shares
authorized proforma and proforma as adjusted; no
shares issued or outstanding proforma and proforma
as adjusted....................................... -- -- --
Common Stock, no par value: 30,000,000 shares
authorized actual; 50,000,000 shares, authorized
proforma and proforma as adjusted; 9,090,000
shares issued and outstanding actual;
shares authorized, 21,288,962
shares issued and outstanding proforma;
shares issued and outstanding
proforma as adjusted(1)........................... 47 16,022
Accumulated deficit.................................. (13,112) (13,112) (13,112)
-------- -------- --------
Total stockholders' equity (net capital
deficiency)..................................... (13,065) 2,910
-------- -------- --------
Total capitalization......................... $ 2,225 $ 2,943 $
======== ======== ========
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1998. Includes
shares of Common Stock to be issued to AOL immediately prior to the
consummation of this offering assuming an initial public offering price of
$ per share. Excludes as of the date of this Prospectus: (i) 3,721,055
shares of Common Stock issuable upon exercise of options outstanding under
the Company's 1995 and 1998 Stock Option Plans, as amended (collectively,
the "Plans"), at a weighted average exercise price of $2.42 per share; (ii)
1,000,000 shares of Common Stock issuable upon exercise of outstanding
options granted outside of the Plans at a weighted average exercise price of
$0.004 per share; (iii) 1,188,945 shares of Common Stock reserved for future
issuance under the Plans, and (iv) shares of Common Stock
reserved for issuance pursuant to the exercise of a warrant issued by the
Company to AOL at an exercise price of $ per share (assuming an initial
public offering price of $ per share). See "Certain Transactions,"
"Description of Capital Stock" and Notes 3 and 7 of Notes to Consolidated
Financial Statements.
20
<PAGE> 22
DILUTION
The proforma net tangible book value of the Company at March 31, 1998 was
$1.7 million, or $0.08 per share. Proforma net tangible book value per share
represents the amount of total tangible assets of the Company reduced by the
Company's total liabilities, divided by the proforma number of shares of Common
Stock outstanding, after giving effect to the automatic conversion of all
outstanding shares of Preferred Stock as of March 31, 1998, and 276,466 shares
of Series D Preferred Stock issued in April 1998, into an aggregate of
12,198,962 shares of Common Stock upon the closing of this offering. After
giving effect to the sale by the Company of the shares of Common
Stock offered hereby at an assumed initial public offering price of
$ per share (after deducting estimated underwriting discounts and
offering expenses), the adjusted proforma net tangible book value of the Company
at March 31, 1998 would have been $ million, or $
per share. This represents an immediate increase in proforma net tangible book
value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share............. $
-------
Proforma net tangible book value per share at March 31,
1998................................................... $ 0.08
Increase per share attributable to new investors.......... $
-------
Adjusted proforma net tangible book value per share after
this offering............................................. $
-------
Dilution per share to new investors......................... $
=======
</TABLE>
The following table sets forth on a proforma basis at March 31, 1998, after
giving effect to the automatic conversion of all outstanding shares of Preferred
Stock as of March 31, 1998, and 276,466 shares of Series D Preferred Stock
issued in April 1998, into an aggregate of 12,198,962 shares of Common Stock
upon the closing of this offering, the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price paid per share by existing stockholders and by investors
purchasing Common Stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)..... 21,288,962 -- $15,740 $0.74
New Investors................
---------- -------- ------- -------- -----
Total..............
========== ======== ======= ======== =====
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1998. Includes
shares of Common Stock to be issued to AOL immediately prior to the
consummation of this offering assuming an initial public offering price of
$ per share. Excludes as of the date of this Prospectus: (i) 3,721,055
shares of Common Stock issuable upon exercise of options outstanding under
the Company's 1995 and 1998 Stock Option Plans, as amended (collectively,
the "Plans"), at a weighted average exercise price of $2.42 per share; (ii)
1,000,000 shares of Common Stock issuable upon exercise of outstanding
options granted outside of the Plans, at a weighted average exercise price
of $0.004 per share; (iii) 1,188,945 shares of Common Stock reserved for
future issuance under the Plans; and (iv) shares of Common Stock
reserved for issuance pursuant to the exercise of a warrant issued by the
Company to AOL at an exercise price of $ per share (assuming an initial
public offering price of $ per share). See "Certain Transactions,"
"Description of Capital Stock" and Notes 3 and 7 of Notes to Consolidated
Financial Statements.
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The consolidated statement of
operations data for the years ended December 31, 1995, 1996 and 1997 and the
consolidated balance sheet data at December 31, 1996 and 1997 are derived from
the Consolidated Financial Statements of the Company which have been audited by
Ernst & Young LLP, independent auditors, and are included elsewhere in this
Prospectus, and are qualified by reference to such Consolidated Financial
Statements and the Notes thereto. The consolidated statement of operations data
for the period from August 12, 1994 (date of incorporation) to December 31, 1994
and the consolidated balance sheet data at December 31, 1995 are derived from
the consolidated financial statements of the Company not included herein which
have been audited by Ernst & Young LLP, independent auditors. The consolidated
balance sheet data as of December 31, 1994, are derived from unaudited financial
statements of the Company not included herein. The selected consolidated
financial data as of March 31, 1998, and for the quarters ended March 31, 1997
and 1998, are derived from unaudited consolidated financial statements of the
Company, which in the opinion of management include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial information set forth therein. The historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
PERIOD FOR
AUGUST 12, 1994
(DATE OF
INCORPORATION) QUARTER ENDED
TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------- ----------------
1994 1995 1996 1997 1997 1998
--------------- ------ ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues........................... $ 40 $1,003 $ 5,858 $16,806 $3,158 $ 6,192
Cost of revenues....................... 3 623 5,137 14,873 2,783 5,189
----- ------ ------- ------- ------ -------
Gross profit........................... 37 380 721 1,933 375 1,003
Operating expenses
Research and development............. 164 388 431 1,060 155 602
Sales and marketing.................. 57 407 704 1,696 265 1,694
General and administrative........... 43 103 450 1,087 164 581
----- ------ ------- ------- ------ -------
Total operating expenses........... 264 898 1,585 3,843 584 2,877
----- ------ ------- ------- ------ -------
Loss from operations................... (227) (518) (864) (1,910) (209) (1,874)
Interest income, net................... -- 7 85 167 40 25
----- ------ ------- ------- ------ -------
Loss from continuing operations........ (227) (511) (779) (1,743) (169) (1,849)
Loss from discontinued operations...... -- -- (736) (3,616) (583) --
----- ------ ------- ------- ------ -------
Net loss............................... $(227) $ (511) $(1,515) $(5,359) $ (752) $(1,849)
===== ====== ======= ======= ====== =======
Proforma basic and diluted net loss per
share from continuing operations..... $ (0.10) $ (0.09)
Proforma basic and diluted net loss per
share from discontinued operations... (0.20) --
------- -------
Proforma basic and diluted net loss per
share................................ $ (0.30) $ (0.09)
======= =======
Shares used in computation of pro forma
net loss per share amounts........... 17,828 20,252
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ MARCH 31,
1994 1995 1996 1997 1998
------ ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 12 $ 255 $ 3,737 $ 2,571 $ 2,232
Working capital (deficiency)....................... (89) (106) 3,543 1,093 1,296
Total assets....................................... 36 579 5,691 9,586 8,388
Long-term obligations, net of current portion...... 105 105 105 99 33
Redeemable convertible preferred stock............. -- 651 6,395 12,565 15,257
Stockholders' equity (net capital deficiency)...... $ (181) $ (793) $(2,409) $(11,191) $(13,065)
</TABLE>
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and the other
information included elsewhere in this Prospectus. Certain statements in this
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" are forward looking statements. The forward looking statements
contained herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements. For a more detailed discussion of
these and other business risks, see "Risk Factors."
OVERVIEW
software.net is a leading online reseller of Software to the consumer,
small business and large enterprise markets. The Company operates its own Web
site and delivers Software to its customers over the Internet through electronic
software delivery ("ESD") and through physical delivery in shrink-wrap packages.
The Company launched its Web site in November 1994 and, in addition to selling
Software, the Company initially charged Software publishers a fee to list their
products on the Company's Web site. The Company ceased this practice in 1996. In
July of 1996, the Company expanded its business by entering into its first
contract with a U.S. government agency for the sale of Software products and
provision of related services. In July 1997, the Company expanded its third
party sales channel by entering into an agreement with Netscape pursuant to
which the Company created, manages and maintains the Netscape Software Depot Web
site.
In March 1998, the Company further expanded its third party sales channel
by entering into strategic relationships with AOL and Excite. The AOL agreement
(the "AOL Agreement") establishes the Company as the exclusive and
semi-exclusive reseller of Software on certain screens on the AOL network and
AOL's Web site aol.com. Under the terms of the Excite agreement (the "Excite
Agreement"), the Company has the right to display banner advertisements and
links to the Company's Web site on certain Excite screens and Excite cannot
display paid promotional links or banner advertisements of any other Software
reseller on specified Excite screens related to Software. Each of AOL and Excite
is obligated, under their respective agreements with the Company, to deliver
minimum numbers of screen views with links to the Company's Web site
("Impressions"). The AOL Agreement provides for fixed payments totalling
approximately $21 million. In addition, the Company's agreement with Excite
provides for substantial payments to Excite during the three year term of that
agreement. In addition, the Company is obligated to pay AOL and Excite a
percentage of certain transactional revenues and, in the case of AOL,
advertising revenues earned by the Company in excess of specified thresholds.
The AOL Agreement terminates in August 2001, and the Excite Agreement terminates
when Excite has satisfied certain obligations with respect to delivery of
Impressions, but no earlier than April 2001. The Company's arrangements with
Netscape, AOL and Excite are expected to represent significant distribution
channels for the Company, and termination of one or more of such agreements
would likely have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Reliance on Strategic
Marketing Alliances with America Online, Excite and Netscape" and
"Business -- Strategic Relationships."
In order to focus on its core business of selling Software products online,
the Company spun off its Internet commerce related services business (which
included credit card processing, fraud screening, export control, territory
management, and electronic fulfillment) to CyberSource (the "Spin-off"). As a
result of the Spin-off, the Company's results of operations during 1996 and 1997
reflect a loss from discontinued operations in the amount of $736,000 and $3.6
million, respectively. Under the terms of an Internet commerce services
agreement, the Company uses services supplied by CyberSource on a non-exclusive
basis for credit card processing, fraud screening, export control, sales tax
computation, electronic licensing, hosting of electronic downloads and
fulfillment notification. The Company is also a party to a license agreement
with CyberSource pursuant to
23
<PAGE> 25
which the Company licenses certain technology, including Sm@rtCert, from
CyberSource on a non-exclusive, perpetual basis subject to certain limitations.
In addition, certain former members of the Company's executive management have
joined CyberSource in executive management positions. In particular, William S.
McKiernan, the Chairman of the Company's Board of Directors, serves as the
President and Chief Executive Officer of CyberSource. In addition, five out of
six members of the Company's Board of Directors serve on CyberSource's Board of
Directors. See "Risk Factors -- Risks Associated with Dependence on CyberSource
Corporation; Relationship with CyberSource Corporation,"
"Business -- Relationship with CyberSource Corporation" and "Certain
Transactions."
The Company's revenues are primarily derived from sales of Software to
customers using credit cards, to corporate customers that are invoiced directly
under credit terms, to various U.S. government agencies pursuant to contractual
arrangements and, to a lesser extent, amounts received from Software publishers
for advertising and promotion. Revenues from the sale of Software, net of
estimated returns, are recognized upon either shipment of the physical product
or delivery of the electronic product. Net revenues associated with the sale of
Software pursuant to contracts with the U.S. government that require continuing
service, support, and performance by the Company, are deferred and recognized
over the period that the service, support, and performance are provided.
Revenues derived from Software publishers for advertising and promotional
activities are recognized as the services are provided. The Company's U.S.
government contracts are subject to annual review and renewal by the applicable
government agency and are terminable without cause without prior notice.
Accordingly, there can be no assurance that the Company will generate revenues
from U.S. government contracts in any future period. See "Risk
Factors -- Customer Concentration; Risks Associated with Reliance on United
States Government Contracts."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's consolidated statement of
operations to total net revenues.
<TABLE>
<CAPTION>
QUARTER ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(UNAUDITED)
----------------
<S> <C> <C> <C> <C> <C>
Net Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................... 62.1 87.7 88.5 88.1 83.8
------ ------ ------ ------ ------
Gross profit............................... 37.9 12.3 11.5 11.9 16.2
Operating expenses:
Research and development................. 38.7 7.3 6.3 4.9 9.7
Sales and marketing...................... 40.6 12.0 10.1 8.4 27.4
General and administrative............... 10.2 7.7 6.5 5.2 9.4
------ ------ ------ ------ ------
Total operating expenses................. 89.5 27.0 22.9 18.5 46.5
------ ------ ------ ------ ------
Loss from operations....................... (51.6) (14.7) (11.4) (6.6) (30.3)
Interest income, net....................... 0.7 1.4 1.0 1.3 0.4
------ ------ ------ ------ ------
Loss from continuing operations............ (50.9) (13.3) (10.4) (5.3) (29.9)
Loss from discontinued operations.......... 0.0 (12.6) (21.5) (18.5) --
------ ------ ------ ------ ------
Net loss................................... (50.9)% (25.9)% (31.9)% (23.8)% (29.9)%
====== ====== ====== ====== ======
</TABLE>
QUARTERS ENDED MARCH 31, 1997 AND 1998
Net Revenues. Net revenues increased from $3.2 million in the quarter
ended March 31, 1997 to $6.2 million in the quarter ended March 31, 1998,
primarily as a result of new U.S. government contracts and increased sales to
consumer and corporate customers.
24
<PAGE> 26
Cost of Revenues. Cost of revenues consists primarily of the costs of
Software sold to consumer and corporate customers and related credit card
processing fees, as well as the costs of Software licenses and Software updates
provided to the U.S. government. Total cost of revenues increased from $2.8
million in the quarter ended March 31, 1997 to $5.2 million in the quarter ended
March 31, 1998, as a result of increased Software sales.
Gross Margin. Gross margin (gross profit as a percentage of net revenues)
increased from 11.9% in the quarter ended March 31, 1997 to 16.2% in the quarter
ended March 31, 1998. This increase primarily was due to a shift in the
Company's revenue mix, resulting from an increased level of higher margin
advertising and promotional revenues received from Software publishers. The
Company may in the future expand or increase the discounts it offers to its
customers and may otherwise alter its pricing structures and policies. Such
actions may have an adverse impact on gross margin in future periods. In
addition, the Company's gross margin in future periods may decline to the extent
that revenues from sales to the U.S. government or sales to large enterprise
customers increase as a percentage of the Company's total net revenues.
Research and Development Expenses. Research and development expenses
primarily consist of personnel and other expenses associated with developing and
enhancing the Company's Web sites, as well as associated facilities-related
expenses. Research and development expenses increased from $155,000 in the
quarter ended March 31, 1997 to $602,000 in the quarter ended March 31, 1998.
Research and development expenses as a percentage of net revenues increased from
4.9% in the quarter ended March 31, 1997 to 9.7% in the quarter ended March 31,
1998. Research and development expenses increased in absolute dollars and as a
percentage of net revenues primarily due to an increase in personnel and
equipment-related costs. The Company believes that continued investment in
research and development is critical to attaining its strategic objectives and,
as a result, expects research and development expenses to increase significantly
in absolute dollars in future periods.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of personnel and related expenses, promotional expenditures and costs
associated with operating the Company's Web sites. In addition, sales and
marketing expenses include the expenditures associated with the Company's
strategic marketing alliances. Sales and marketing expenses increased from
$265,000 in the quarter ended March 31, 1997 to $1.7 million in the quarter
ended March 31, 1998. Sales and marketing expenses as a percentage of net
revenues were 8.4% in the quarter ended March 31, 1997 and 27.4% in the quarter
ended March 31, 1998. Sales and marketing expenses increased in absolute dollars
and as a percentage of net revenues primarily due to costs associated with the
Company's strategic marketing alliances, as well as an increase in personnel and
advertising expenditures. The Company's current strategic marketing alliances
with AOL, Excite and Netscape provide for payments totaling approximately $26
million in accordance with the terms of these agreements. The costs associated
with these agreements will be expensed ratably over their respective terms. The
Company may enter into similar strategic marketing alliances requiring
significant minimum payments in the future and, as a result, may experience
substantial increases in its sales and marketing expenses. In addition, the
Company intends to pursue an aggressive branding and marketing campaign and
therefore expects sales and marketing expenses to increase significantly in
absolute dollars in future periods. See Note 3 of Notes to Consolidated
Financial Statements.
General and Administrative Expenses. General and administrative expenses
primarily consist of personnel expenses, legal expenses and facilities-related
expenses. General and administrative expenses increased from $164,000 in the
quarter ended March 31, 1997 to $581,000 in the quarter ended March 31, 1998.
General and administrative expenses as a percentage of net revenues were 5.2% in
the quarter ended March 31, 1997 and 9.4% in the quarter ended March 31, 1998.
General and administrative expenses increased in absolute dollars and as a
percentage of net revenues primarily due to increased personnel-related costs
and facilities-related expenses associated with the hiring of additional
personnel as well as increased bad debt reserves associated with the
25
<PAGE> 27
increase in net revenues. The Company expects general and administrative
expenses to increase in absolute dollars as the Company builds its
infrastructure and as a result of the costs associated with being a public
company.
Interest Income, Net. Interest income, net, consists of earnings on the
Company's cash and cash equivalents, net of interest expense. Interest income,
net, decreased from $40,000 in the quarter ended March 31, 1997 to $25,000 in
the quarter ended March 31, 1998, due to reduced earnings on lower average cash
and cash equivalents balances during the quarter.
Income Taxes. The Company has recorded a net loss for the quarters ended
March 31, 1997 and March 31, 1998. As a result, no provision for income taxes
has been recorded in either of these quarters.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1996 AND 1997
Net Revenues. Net revenues increased from $5.9 million in 1996 to $16.8
million in 1997, primarily as a result of increased sales to consumer and
corporate customers and new U.S. government contracts.
Cost of Revenues. Cost of revenues increased from $5.1 million in 1996 to
$14.9 million in 1997, due to the execution of additional U.S. government
contracts and increased product sales to consumer and corporate customers.
Gross Margin. Gross margin decreased from 12.3% in 1996 to 11.5% in 1997.
This decrease was due primarily to a shift in the Company's revenue mix,
resulting from an increased level of lower margin U.S. government contract
revenues as a percentage of total net revenues. The decrease in overall gross
margin was partially offset by an increase in higher margin advertising and
promotional revenues received from Software publishers.
Research and Development Expenses. Research and development expenses
increased from $431,000 in 1996 to $1.1 million in 1997. Research and
development expenses as a percentage of net revenues decreased from 7.3% in 1996
to 6.3% in 1997. The absolute dollar increase in research and development
expenses from 1996 to 1997 was primarily attributable to an increase in
personnel-related costs. The decrease in research and development expenses as a
percentage of net revenues was primarily attributable to the substantial
increase in net revenues in 1997.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$704,000 in 1996 to $1.7 million in 1997. Sales and marketing expenses as a
percentage of net revenues were 12.0% in 1996 and 10.1% in 1997. The absolute
dollar increase in sales and marketing expenses from 1996 to 1997 primarily was
attributable to an increase in personnel and advertising expenditures, as well
as costs associated with a strategic marketing alliance. The decrease in sales
and marketing expenses as a percentage of net revenues primarily was
attributable to the substantial increase in net revenues in 1997.
General and Administrative Expenses. General and administrative expenses
increased from $450,000 in 1996 to $1.1 million in 1997. General and
administrative expenses as a percentage of net revenues were 7.7% in 1996 and
6.5% in 1997. The increase in general and administrative spending on an absolute
dollar basis in 1997 primarily was due to increased salaries and facilities-
related expenses associated with the hiring of additional personnel, increased
legal expenses associated with the settlement of certain litigation, and
increased bad debt reserves associated with the increase in net revenues. The
decrease in general and administrative expenses as a percentage of net revenues
primarily was attributable to the substantial increase in net revenues in 1997.
Interest Income, Net. Interest income, net, increased from $85,000 in 1996
to $167,000 in 1997 due to earnings on higher average cash and cash equivalents
balances in 1997.
Income Taxes. The Company had a net loss for both 1996 and 1997.
Accordingly, no provision for income taxes has been recorded in either of such
years. As of December 31, 1997, the Company
26
<PAGE> 28
had approximately $7.2 million of net operating loss carryforwards for Federal
income tax purposes, which expire between 2009 and 2012. Given the Company's
limited operating history, losses incurred to date and the difficulty in
accurately forecasting the Company's future results, management does not believe
that the realization of the related deferred income tax assets meets the
criteria required by generally accepted accounting principles and, accordingly,
a full 100% valuation allowance has been recorded to reduce the deferred income
tax assets to $0. Furthermore, as a result of changes in the Company's equity
ownership from the Company's Preferred Stock financings and this offering,
utilization of the net operating losses and tax credits may be subject to
substantial annual limitations due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
tax credits before utilization. See Note 10 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995 AND 1996
Net Revenues. Net revenues increased from $1.0 million in 1995 to $5.9
million in 1996 due primarily to the growth of the Company's consumer and
corporate customer base.
Cost of Revenues. Cost of revenues increased from $623,000 in 1995 to $5.1
million in 1996, primarily reflecting an increase in product sales to consumer
and corporate customers.
Gross Margin. Gross margin decreased from 37.9% in 1995 to 12.3% in 1996.
This decrease was due primarily to a shift in the Company's business model.
During 1995, a number of Software publishers made certain payments to the
Company in exchange for the Company's inclusion of these publishers' products in
its online store. During 1996, the Company moved to its current Software
reseller model, resulting in the substantial reduction of such payments and the
associated decrease in gross margin.
Research and Development Expenses. Research and development expenses
increased from $388,000 in 1995 to $431,000 in 1996. Research and development
expenses as a percentage of net revenues decreased from 38.7% in 1995 to 7.3% in
1996. The absolute dollar increase in research and development expenses from
1995 to 1996 primarily was attributable to an increase in personnel-related
costs. The decrease in research and development expenses as a percentage of net
revenues primarily was attributable to the substantial increase in net revenues
in 1996.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$407,000 in 1995 to $704,000 in 1996. Sales and marketing expenses as a
percentage of net revenues were 40.6% in 1995 and 12.0% in 1996. The absolute
dollar increase in sales and marketing expenses from 1995 to 1996 was primarily
attributable to an increase in personnel-related costs. The decrease in sales
and marketing expenses as a percentage of net revenues was primarily
attributable to the substantial increase in net revenues in 1996.
General and Administrative Expenses. General and administrative expenses
increased from $103,000 in 1995 to $450,000 in 1996. General and administrative
expenses as a percentage of net revenues were 10.2% in 1995 and 7.7% in 1996.
The increase in general and administrative spending on an absolute dollar basis
in 1996 primarily was due to increased salaries and facilities-related expenses
associated with the hiring of additional personnel, increased professional fees,
and increased bad debt reserves associated with the increase in net revenues.
The decrease in general and administrative expenses as a percentage of net
revenues primarily was attributable to the substantial increase in net revenues
in 1996.
Interest Income, Net. Interest income, net, increased from $7,000 in 1995
to $85,000 in 1996 due to earnings on higher average cash and cash equivalents
balances in 1996.
Income Taxes. The Company has recorded a net loss for the years ended
December 31, 1995 and 1996. Accordingly, no provision for income taxes has been
recorded in either of such years.
27
<PAGE> 29
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly consolidated
statement of operations data for each of the four quarters during the year ended
December 31, 1997 as well as the quarter ended March 31, 1998. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited financial statements appearing elsewhere in this Prospectus, and
all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the unaudited
quarterly results. The quarterly data should be read in conjunction with the
audited Consolidated Financial Statements of the Company and the Notes thereto
appearing elsewhere in this Prospectus. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues............................. $3,158 $3,434 $ 4,825 $ 5,389 $ 6,192
Cost of revenues......................... 2,783 2,892 4,295 4,903 5,189
------ ------ ------- ------- -------
Gross profit............................. 375 542 530 486 1,003
Operating expenses:
Research and development............... 155 184 302 419 602
Sales and marketing.................... 265 332 442 657 1,694
General and administrative............. 164 247 265 411 581
------ ------ ------- ------- -------
Total operating expense........ 584 763 1,009 1,487 2,877
------ ------ ------- ------- -------
Loss from operations..................... (209) (221) (479) (1,001) (1,874)
Interest income, net..................... 40 32 24 71 25
------ ------ ------- ------- -------
Loss from continuing operations.......... (169) (189) (455) (930) (1,849)
Loss from discontinued operations........ (583) (455) (1,036) (1,542) --
------ ------ ------- ------- -------
Net loss................................. $ (752) $ (644) $(1,491) $(2,472) $(1,849)
====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
-------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 88.1 84.2 89.0 91.0 83.8
------ ------- ------- ------- -------
Gross profit............................ 11.9 15.8 11.0 9.0 16.2
Operating expenses:
Research and development.............. 4.9 5.4 6.3 7.8 9.7
Sales and marketing................... 8.4 9.7 9.2 12.2 27.4
General and administrative............ 5.2 7.2 5.4 7.6 9.4
------ ------- ------- ------- -------
Total operating expense............... 18.5 22.3 20.9 27.6 46.5
------ ------- ------- ------- -------
Loss from operations.................... (6.6) (6.5) (9.9) (18.6) (30.3)
Interest income, net.................... 1.3 0.9 0.5 1.3 0.4
------ ------- ------- ------- -------
Loss from continuing operations......... (5.3) (5.6) (9.4) (17.3) (29.9)
Loss from discontinued operations....... (18.5) (13.2) (21.5) (28.6) --
------ ------- ------- ------- -------
Net loss................................ (23.8)% (18.8)% (30.9)% (45.9)% (29.9)%
====== ======= ======= ======= =======
</TABLE>
The Company's net revenues have increased significantly in each consecutive
quarter presented due to increased sales to consumer and corporate customers and
the execution of new U.S. government contracts. The Company's gross margins
fluctuated on a quarterly basis during these quarters, primarily as a result of
changes in the Company's product mix. In particular, the Company's gross margin
increased in the second quarter of 1997 and in the first quarter of 1998
primarily due to an increase in advertising and promotional revenues as a
percentage of the
28
<PAGE> 30
Company's net revenues during such periods. Research and development and general
and administrative expenses increased in absolute dollars in each quarter
presented primarily due to personnel-related costs. Sales and marketing expenses
also increased on a quarterly basis in each quarter presented due to increases
in personnel-related costs and significantly increased in the first quarter of
1998 due to expenditures associated with the Company's strategic marketing
alliances. Sales and marketing expenses and general and administrative expenses
each increased in absolute dollars in the third quarter of 1997, but declined as
a percentage of net revenues due to the increase in the Company's net revenues
during such period.
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company may be unable to
accurately forecast its revenues. The Company's current and future expense
levels are to a large extent fixed and are based on its operating plans and
estimates of future revenues. Sales and operating results generally depend on
the volume and timing of orders received, which are difficult to forecast. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues in relation to the Company's planned expenditures would have an
immediate adverse effect on the Company's business, financial condition and
results of operations. Further, as a strategic response to changes in the
competitive environment, the Company may from time to time make certain pricing,
service or marketing decisions that could have a material adverse effect on its
business, financial condition and results of operations. See "Risk
Factors -- Limited Operating History; History of Net Operating Losses;
Accumulated Deficit," "-- Unpredictability of Future Operating Results" and
"Business -- Competition."
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside of the Company's control. Factors that may adversely affect the
Company's quarterly operating results include (i) the Company's ability to
retain existing customers, attract new customers and maintain customer
satisfaction; (ii) the announcement or introduction of new sites, services and
products by the Company and its competitors: (iii) price competition; (iv) the
level of use of the Internet and online services and increasing consumer
acceptance of the Internet and other online services for the purchase of
consumer products such as those offered by the Company; (v) the Company's
ability to upgrade and develop its systems and infrastructure and attract new
personnel in a timely and effective manner; (vi) the level of traffic on the
Company's Web site; (vii) the termination of any strategic marketing alliances
such as those with AOL, Excite or Netscape pursuant to which the Company has
exposure to traffic on third party Web sites, or the termination of contracts
with major purchasers, particularly U.S. government agencies; (viii) technical
difficulties, system downtime or Internet brownouts; (ix) the failure of
Internet bandwidth to increase significantly over time and/or an increase in the
cost to consumers of exploiting Internet bandwidth; (x) the amount and timing of
operating costs and capital expenditures relating to expansion of the Company's
business, operations and infrastructure; (xi) the number of popular Software
titles introduced during the period; (xii) certain government regulations; and
(xiii) general economic conditions and economic conditions specific to the
Internet, online commerce and the Software industry. The Company expects that it
may experience seasonality in its business, reflecting a combination of seasonal
fluctuations in Internet usage and traditional retail, governmental and
corporate entity seasonal spending patterns. "Risk Factors -- Unpredictability
of Future Operating Results."
Gross margins may be impacted by a number of different factors, including
the mix of revenues from sales of shrink-wrap products versus revenues from ESD
product sales, the mix of Software products sold, the mix of revenues among
sales to government, corporate and consumer purchasers and the mix of revenues
from strategic partners such as AOL, Excite, Netscape and the Company's Web
site. The Company typically derives higher gross margins from advertising and
promotional revenues than from Software product sales. The Company typically
realizes higher gross margins on ESD Software product sales than on sales of
shrink-wrap Software products and lower gross margins on sales of widely
available commodity Software products than on sales of
29
<PAGE> 31
specialty Software products. In addition, the Company typically realizes higher
gross margins on sales to consumer purchasers than on sales to government or
corporate purchasers. In addition, the Company also may from time to time offer
attractive pricing programs, which may reduce its gross margins periodically.
Any change in one or more of the foregoing factors could materially adversely
affect the Company's gross margins and operating results in future periods. See
"Risk Factors -- Unpredictability of Future Operating Results."
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company does not believe that period-to-period
comparisons of its operating results will necessarily be meaningful and should
not be relied upon as indicators of future performance. In one or more future
quarters the Company's operating results may fall below the expectations of
securities analysts and investors. In such event, the trading price of the
Common Stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1998, the Company has financed its
operations primarily through private sales of Preferred Stock through which the
Company raised net cash proceeds totaling $14.1 million.
Net cash used in operating activities was $299,000 for the year ended
December 31, 1997 and $2.3 million for the first quarter of 1998. Cash used in
operating activities in 1997 was attributable to a net loss of $5.4 million and
increases in costs of deferred revenue, partially offset by increases in
accounts payable, deferred revenue, and the loss from discontinued operations.
Cash used in operating activities for the first quarter of 1998 resulted from a
net loss of $1.8 million and a decrease in deferred revenue, largely offset by
decreases in cost of deferred revenue. Net cash used in investing activities of
$4.9 million for the year ended December 31, 1997 was primarily attributable to
cash used for discontinued operations. Net cash used in investing activities for
the first quarter of 1998 of $165,000 were attributable to purchases of property
and equipment.
Net cash provided by financing activities of $4.1 million and $2.2 for the
year ended December 31, 1997 and the first quarter of 1998, respectively,
primarily consisted of proceeds from the issuance of Preferred Stock, which was
partially offset for the year ended December 31, 1997 by cash used for
discontinued operations.
As of March 31, 1998, the Company had approximately $2.2 million of cash
and cash equivalents. The Company's current strategic marketing alliances
provide for payments of approximately $6.9 million in the remainder of 1998,
approximately $8.3 million in 1999, approximately $9.0 million in the year 2000
and approximately $500,000 million in the year 2001. The Company currently has
no other material commitments other than those under its operating leases and
for certain equipment leases.
The Company believes that the net proceeds from this offering, together
with its current cash and cash equivalents, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures through at
least the next twelve months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or debt securities or to obtain a credit
facility, in part to fund its financial obligations to AOL and Excite. The sale
of additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
See "Risk Factors -- Need for Additional Capital."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to
30
<PAGE> 32
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruptions of operations including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company utilizes
third-party equipment and software that may not be Year 2000 compliant. The
Company is in the early stages of conducting an audit of its third-party
suppliers as to the Year 2000 compliance of their systems. The Company does not
believe it will incur significant costs in order to comply with Year 2000
requirements. However, failure of the Company's internal computer systems or of
such third-party equipment or software, or of systems maintained by the
Company's suppliers, to operate properly with regard to the Year 2000 and
thereafter could require the Company to incur unanticipated expenses to remedy
any problems, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Year 2000 Compliance."
31
<PAGE> 33
BUSINESS
software.net Corporation ("software.net" or the "Company") is a leading
online reseller of commercial off-the-shelf computer software ("Software") to
the consumer, small business and large enterprise markets. Through its online
store (www.software.net), the Company offers customers a comprehensive selection
of Software, customer service and competitive pricing. The Company believes that
the software.net site is one of the most widely known and used sites on the
World Wide Web (the "Web") for the purchase of Software. The Company fulfills a
customer purchase either through physical delivery of the shrink-wrapped
Software package or through electronic software delivery ("ESD"). The Company
believes it provides superior value to its customers by offering one of the
largest selections of brand-name, high quality Software available online, and
the convenience of shopping from home or office, twenty-four-hours-a-day,
seven-days-a-week ("24x7").
The Company believes that the Internet is an ideal medium for the sale and
delivery of Software for several reasons: (i) the demographics of Internet users
overlap one-to-one with the demographics of potential Software purchasers; (ii)
many Software titles and their related stock-keeping units ("SKUs") can be
delivered via ESD, providing instant gratification to the customer; and (iii)
large enterprise customers can use ESD to achieve efficient and cost effective
distribution of Software. software.net's business is based on scaleable
technology that permits the sale, order processing and delivery of Software with
limited human intervention. This technology, combined with significant
operational experience, enables the Company to address the complex process of
real time ESD. The Company has developed relationships with approximately 300
leading Software publishers which have granted the Company the right to
distribute approximately 2,800 Software SKUs via ESD.
The Company also has established strategic marketing alliances with America
Online, Inc. ("AOL"), Excite, Inc. ("Excite") and Netscape Communications
Corporation ("Netscape"). According to RelevantKnowledge, Inc., an
Internet-focused market research firm, the Web sites of these companies are each
among the five most visited sites on the Internet. The agreements with these
companies provide software.net with prominent display space on certain screens
on each of these Web sites. The Company believes these alliances have enabled it
to further consolidate its position as a leading online Software reseller. Since
the launch of its Web site in November 1994, the Company has sold Software
products to approximately 140,000 customers and has distributed freeware and
trial download products to tens of thousands of additional users. The Company's
sales increased from approximately $6 million in 1996, to approximately $17
million in 1997.
INDUSTRY BACKGROUND
Growth of the Internet and Online Commerce
The Web and commercial online services such as AOL have emerged as
significant global communications media, enabling millions of people to share
information and conduct business electronically. International Data Corporation
("IDC") projects that the total value of goods and services purchased over the
Web will increase from approximately $12.4 billion in 1997 to approximately $425
billion by 2002. A number of factors have contributed to the growth of the
Internet and its commercial use, including: (i) the large and growing installed
base of advanced personal computers in the home and workplace; (ii) improvements
in network infrastructure and bandwidth; (iii) easier and cheaper access to the
Internet; (iv) increased awareness of the Internet among consumer and business
users; and (v) the rapidly expanding availability of online content and commerce
which increases the value to users of being connected to the Internet. According
to IDC, the number of Web users worldwide will grow from approximately 69
million at the end of 1997 to approximately 320 million by 2002. In addition,
IDC estimates that the percentage of such users buying goods and services on the
Internet is projected to grow from 26% in December 1997 to 40% in December 2002.
The Internet also has emerged as an attractive medium for the purchase and
32
<PAGE> 34
distribution of Software. Jupiter estimates that revenues from online sales of
PC software in 1997 were $69 million and are projected to grow to $2.3 billion
in 2002.
Traditional Software Industry
The Software reselling industry is large and growing. According to IDC,
total Software sales to consumer and corporate end users in the United States
were estimated to be approximately $16 billion in 1997 and are expected to grow
to approximately $29 billion in 2001, representing a compound annual growth rate
of approximately 16%. In addition, the Company believes that the Software
reselling industry is highly fragmented with many participants, including
regional and national chains of superstores, cataloguers, systems integrators,
VARs and small single location stores.
The two primary categories of Software purchasers are (i) consumers and
small businesses and (ii) large enterprises such as corporations, government
agencies and universities. These two market segments have different requirements
and are served by different sales channels. For the consumer and small business
market, Software publishers primarily sell their Software through a network of
distributors and resellers and, to a lesser extent, directly to consumers. There
are many Software resellers in the United States serving the consumer and small
business market. These resellers vary in size from large regional and national
chains of superstores, such as CompUSA, ComputerCity and Office Depot, which may
carry hundreds of Software titles in a single store, to cataloguers such as
Micro Warehouse and CDW Computer Centers that also offer several thousand
Software titles, to small, single location stores carrying only a limited number
of titles. For the large enterprise market, publishers typically sell direct or
through large corporate and value-added resellers, including Software Spectrum
and Corporate Software and Technology. Large distributors, such as Ingram Micro,
Merisel and Tech Data, serve as the primary suppliers for most resellers and
carry extensive inventories of leading Software titles.
Several characteristics of the traditional Software reselling industry
create inefficiencies for all industry participants. In the consumer and small
business market, physical store-based resellers must make significant
investments in real estate, inventory (which is limited due to space constraints
and cost) and personnel for each retail location. Cataloguers are constrained by
practical catalog size limitations (limiting both the number of products and the
information on those products that can be included in the catalog), printing
expenses, mailing costs and inherent delays in reacting rapidly to price and
product changes. In each case, these constraints limit the Software product
selection available to consumers. The traditional Software reselling model also
creates inefficiencies for participants in the large enterprise market.
Publishers, resellers and the purchasing enterprises are each challenged by the
logistical complexities, administrative burden and costs of distributing and
tracking Software titles and updates across a large and dispersed user base.
Under the traditional model, publishers face additional inefficiencies. In
addition to only being able to offer a fraction of their total available titles
in retail stores and catalogs, publishers typically must grant their resellers
and distributors generous rights of return because of the high cost of inventory
and risk of product obsolescence that would otherwise be borne by their channel
partners. Therefore, publishers effectively bear the risk of customer demand
forecasting, creating administrative costs and significant revenue recognition
and restatement issues associated with any difference between projected and
actual sales. Finally, publishers, distributors, and traditional Software
resellers cannot easily obtain demographic and behavioral data about end users,
which limits the opportunities for direct marketing and personalized services.
33
<PAGE> 35
THE SOFTWARE.NET SOLUTION
software.net is a leading online reseller of Software to the consumer,
small business and large enterprise markets, and offers a solution to many of
the inefficiencies inherent in the traditional Software reselling industry. Key
components of the software.net solution include:
Customer Convenience. software.net provides enhanced customer convenience
by enabling customers to purchase Software online (24x7) from home or office.
Additionally, Software purchased online from software.net can be delivered in
shrink-wrap packages or immediately downloaded and installed via ESD. ESD also
enables large enterprise customers to achieve more efficient internal
distribution and tracking of Software and updates relative to the alternative
distribution methods.
Selection. software.net has the capacity for unlimited online shelf space
and offers customers an extensive selection of titles, SKUs and related product
information without the expense of maintaining a physical store-based
infrastructure. The Company carries approximately 30,000 Software SKUs, as well
as approximately 2,800 SKUs that can be delivered to customers via ESD.
Customized Service. The Company captures significant customer preference
data during each customer session from its online site and can use this
information to customize a user's shopping experience on subsequent visits. As
an online reseller, the Company also is better able to educate the customer
about Software products through online product reviews, trial downloads,
additional product information and online customer support.
Publisher Benefits. Because the Company is not constrained by the inherent
limitations of physical stores, the Company enables publishers to offer all of
their available titles to customers in its online store. In addition, by
offering products for ESD through software.net's publishers can reduce the risk
of customer demand forecasting, and the associated administrative costs and
significant revenue recognition and restatement concerns. Finally, publishers
can work with the Company to obtain demographic and behavioral data about end
users, which expands publishers' opportunities for marketing and targeted
services.
STRATEGY
The Company's objective is to be the dominant reseller of Software to
consumers, small businesses and large enterprises. The Company intends to
capitalize on and extend its market position as one of the "first movers" in
online Software reselling through the following key strategies:
Enhance Brand Recognition. The Company believes that building brand
awareness of its Web site is critical to attracting and expanding its Internet
customer base. The Company intends to promote, advertise and increase its brand
recognition through a variety of marketing and promotional techniques, including
co-marketing agreements with major online sites and services and through
customer service. The Company also intends to promote its brand through
advertising on leading Web sites and other media, conducting an ongoing public
relations campaign and developing other business alliances and partnerships.
Promote Electronic Software Delivery. The Company is currently a leader in
ESD, with approximately 2,800 Software SKUs available for ESD from the
software.net store direct to the end user's personal computer. ESD offers
convenience to customers and economic advantages to the Company and Software
publishers which the Company believes are superior to traditional methods of
Software delivery. By working with Software publishers on ESD initiatives,
enhancing its own technology and systems and implementing ESD promotional
activities, the Company is focused on increasing the number of Software SKUs
available for purchase by ESD and the number of customers who utilize ESD.
34
<PAGE> 36
Leverage and Further Develop Strategic Relationships. The Company intends
to continue to leverage its strategic marketing alliances with AOL, Excite and
Netscape to enhance brand recognition and increase customer acquisitions and
sales. The Company also intends to expand its online visibility and may enter
into relationships with additional Internet access providers, search engines and
other high-traffic Web sites.
Capitalize on Large Enterprise Opportunities. In addition to targeting
consumer and small business customers, the Company will also market its services
to large enterprise customers such as major corporations, government agencies
and universities. The Company believes that the speed, convenience and cost
advantages offered by ESD make ESD an attractive alternative method of
purchasing for large enterprises. The Company intends to capitalize on its
success in supplying the needs of its government customers to become the online
reseller of choice for large enterprise customers.
Maintain Technology Focus and Expertise. The Company intends to leverage
its scaleable, state-of-the-art, interactive commerce platform to enhance
software.net's service offering and expand the benefits of online Software
reselling. The Company's internal development group continues to expend
substantial efforts developing, purchasing, licensing and implementing
technology-driven enhancements to its Web site and transaction-processing
systems.
Leverage Superior Economic Model; Focus on Online Environment. The Company
believes it has an inherent economic advantage relative to Software resellers
operating from physical stores or through catalogs because it is not burdened by
the cost or legacy of a physical store network and related personnel or the
costs and limitations of selling through printed catalogs. The Company further
believes that the demographics of Internet users overlap one-to-one with the
demographics of potential Software purchasers, providing an exceptional target
market for online Software sales. The Company intends to leverage its online
model and focus on delivering an increasing number of Software products via ESD
to achieve cost and margin advantages as compared to traditional Software
resellers.
Strengthen First-Mover Advantages. The Company believes that significant
barriers exist that make it increasingly difficult to enter the online Software
marketplace in a cost-effective manner. These barriers include: (i) the
necessary up-front investment in technology and technical infrastructure, such
as that required for real time processing of both payment and order fulfillment;
(ii) the time and expense required to build a brand that effectively draws
customers to a Web site; (iii) the time, expense and expertise necessary to
develop publisher and distributor relationships; and (iv) the need to develop
strategic alliances with high-traffic, high-profile Web sites. The Company
intends to extend its first-mover advantages in each of these areas.
THE SOFTWARE.NET ONLINE SOFTWARE STORE
Customers enter the software.net store through the Company's simple,
intuitive and easy to use Web site. The Web site instantly recognizes the
browser type of the customer's computer and tailors the format of the
software.net store to that system. With customized pages for particular browsers
and for large enterprise accounts, the Company's goal is to make the shopping
process as easy as possible for customers. Users accessing the software.net
store generally fall into one of two categories: (i) individuals who know what
product they want to buy and seek to purchase it immediately in a highly
convenient manner; or (ii) individuals who are browsing the store and seeking an
entertaining and informative shopping experience. The software.net store is
designed to satisfy both types of users in a simple, intuitive fashion.
Presently, customers can conduct targeted searches through a catalog of
approximately 30,000 Software SKUs, browse from among featured titles and
special offers, participate in promotions and check order status. The
software.net site also offers visitors a variety of highlighted subject areas
and special features, including features of topical or current-event interest,
such as the Windows 95 Center, the Macintosh Center and the 1997 Tax Center. The
site also periodically offers previews of
35
<PAGE> 37
new or upcoming releases, such as Windows 98. The Company expects to implement
further improvements to its store which may include specialty sections within
the site, product reviews, greater interactivity and customer-specific product
presentations based on demonstrated customer preferences.
Shoppers purchase products by simply clicking on a button to add products
to their virtual shopping baskets. Customers can add and subtract products from
their shopping baskets as they browse, prior to making a final purchase
decision, just as in a physical store. To execute orders, customers click on the
buy button and are prompted to supply shipping and, in the case of consumers,
credit card details, either by email or by telephone. The store design enables
purchasers to buy several products at once, rather than having to repeat the
same purchase process for each desired product. All customer information is
stored on the Company's secure server, and repeat customers are presented with a
customized order form. The Company's system automatically confirms each
physically shipped order by email to the customer within minutes after the order
is placed and advises customers by email shortly after orders are shipped.
Company representatives handle customer service and support and general
questions about software.net and provide product information over the telephone,
fax and via email. The Company believes that these representatives are a
valuable source of feedback regarding customer satisfaction, which the Company
uses to improve its services. Customers of the Company are not currently charged
for service and support services. See "-- Products" and "-- Marketing and
Sales."
PRODUCTS
The Company's software.net store carries approximately 30,000 Software SKUs
from leading Software publishers for physical delivery. The efficiencies of
online inventory permit the software.net store to offer a broad selection of
hard-to-find and specialty titles which may not be available in traditional
Software stores. A single Software title often has multiple SKUs depending upon
operating systems (i.e. MacIntosh, Windows, Windows NT); media (i.e. CD-Rom,
floppy disk) or license type (i.e. single or multi-user licenses). The Company
also offers approximately 2,800 SKUs from approximately 300 publishers for
immediate delivery via ESD, including popular titles by Adobe, Cybermedia,
FileMaker Pro Inc. (formerly Claris), IBM, JavaSoft, Lotus, Microsoft, Network
Associates (formerly McAfee), QUALCOMM, Sun Microsystems and Symantec.
The Company has focused on making available via ESD as many major Software
titles as practical. As a result of the limited bandwidth and relatively slow
modem speeds now available, the size of many popular Software titles currently
makes them unsuitable for ESD. However, as Internet infrastructure and bandwidth
improvements and advancements are made, such as cable modems and digital
subscriber line technologies, the Company believes that the demand for products
delivered via ESD will increase. However, if ESD does not achieve widespread
market acceptance, the Company's business, financial condition and results of
operations will be materially adversely affected. Even if ESD achieves
widespread acceptance, there can be no assurance that the Company will overcome
the substantial existing and future technical challenges associated with
electronically delivering Software reliably and consistently on a long-term
basis. A failure by the Company to do so would materially and adversely affect
the Company's business, financial condition and results of operations. See "Risk
Factors -- Risks Associated with Dependence on Electronic Software Delivery."
The Company sources physical product from traditional distributors and
sources the substantial majority of its ESD titles directly from Software
publishers. The Company does not carry any inventory and relies on rapid
fulfillment of physical products from distributors directly to customers. When a
customer places an order for shrink-wrap Software, the order information is
instantly transmitted to the distributor for processing and rapid fulfillment. A
major Software distributor supplied the Company with Software that accounted for
a substantial portion of the Company's total Software sales in 1997 and in the
first quarter of 1998. The Company has developed customized information systems
and automated ordering processes to enable it to offer an extensive selection
36
<PAGE> 38
of products, avoid the high costs and capital requirements associated with
owning and warehousing product inventory, and escape the significant operational
effort associated with same day processing and shipment. As is common in the
Software industry, the Company does not have long-term contracts or arrangements
with its vendors that would ensure the availability of SKUs, and there can be no
assurance that the Company's current vendors will continue to supply SKUs to the
Company. See "Risk Factors -- Reliance on Software Publishers and Distributors."
The Company has entered into three contracts with departments of United
States government agencies (the "U.S. government"). Collectively, these
agreements accounted for approximately 33.2% and 43.1% of the Company's revenues
in 1997 and the first quarter of 1998, respectively. A substantial portion of
the Software sold pursuant to these agreements is supplied to the Company by
Microsoft. Each of these contracts is subject to annual review and renewal with
the U.S. government, and may be terminated without cause at any time.
Accordingly, there can be no assurance that the Company will derive revenue from
sales of Software to the U.S. government in any given future period. The
Company's contract with Microsoft is terminable without cause upon limited
notice. In the event that any one of these agreements is not renewed or is
otherwise terminated by the U.S. government or if Microsoft does not supply its
Software product to the Company for resale to the U.S. government pursuant to
these agreements, the Company's business, financial condition and results of
operations would be materially adversely affected. The Company does not have any
other customers that accounted for more than 10% of the Company's revenues in
1997 or the first quarter of 1998. See "Risk Factors -- Reliance on Software
Publishers and Distributors; and -- Customer Concentration; Risks Associated
with Reliance on United States Government Contracts."
MARKETING AND SALES
Strategic Relationships
software.net pursues strategic relationships to expand the Company's online
presence, increase its access to online customers and build brand recognition.
In pursuing these relationships, the Company seeks exclusive or semi-exclusive
positioning for the sale of Software on key screens of major Web sites. To date,
the Company has established the following strategic marketing alliances:
America Online. software.net and AOL, the leading online service provider
with approximately twelve million members, entered into an agreement (the "AOL
Agreement") in March 1998 for a term of 42 months, pursuant to which AOL has
agreed to promote software.net as the exclusive and semi-exclusive reseller of
Software products on certain screens in the AOL network and AOL's Web site,
aol.com (the "AOL Online Area"). AOL will promote software.net as the exclusive
Software reseller on certain screens in the Computing Channel, the AOL Personal
Finance Channel Tax Planning and the Games Channel areas, among others. AOL also
will promote software.net as a Software reseller on a semi-exclusive basis on
certain screens in the Computing Channel and the Entertainment Web Channel,
among others, of the AOL Online Area. The exclusivity rights set forth above are
subject to a number of significant exceptions, including, Software products sold
by or on behalf of publishers and AOL "pop-ups." Over the term of the AOL
Agreement, subject to certain limitations or adjustment to the payments required
of the Company, AOL is obligated to deliver a specified number of screen views
with links to the Company's Web site ("Impressions"). The Company is obligated
to make minimum payments totaling $21 million to AOL by March 1, 2000, and over
the term of the AOL Agreement, is obligated to pay a percentage of certain
transactional revenues earned by the Company on Software sales to AOL members in
excess of certain thresholds. The Company has the right to sell advertising on
its promotional screens in the AOL Online Area, subject to the Company's
obligation to pay a percentage of certain advertising revenues above certain
threshold amounts to AOL. AOL has the right, in its sole discretion, to reduce
or cease placements of the promotions granted under this agreement, or restrict
access
37
<PAGE> 39
from the AOL network to the Company's Web site, in certain circumstances,
including, if the functional integrity of the AOL network is compromised or the
ability of AOL to service its users is adversely affected. Subject to adjustment
to the payments required of the Company, AOL may also change its business model
so that a substantially larger number of AOL members pay hourly charges for
general access and use of the AOL service, which may have a material adverse
effect on the sale of the Company's products. The Company's agreement with AOL
expires in August 2001, or earlier in the event of a material breach and AOL has
the right to renew this agreement for two successive one-year terms, during
which time AOL has no exclusivity obligations to the Company. Subject to certain
conditions, (i) AOL has also agreed to purchase shares of the Company's Common
Stock at a price per share equal to the initial public offering price (less the
underwriters' discount) for an aggregate purchase price of $2 million and (ii)
the Company has agreed to concurrently issue to AOL a warrant for a number of
shares of Common Stock equal to 1.5 times the number of shares of Common Stock
purchased by AOL in the aforementioned investment at a per share exercise price
equal to the initial public offering price (less the underwriters' discount), in
each case in a private placement transaction that will close immediately prior
to the consummation of the offering contemplated by this Prospectus. The Company
has also granted AOL certain registration rights. See "Certain Transactions" and
"Description of Capital Stock -- Registration Rights."
Excite. software.net and Excite, a leading search engine provider with
over two million visitors a day, entered into an agreement in March 1998 for a
term of at least 36 months, under which Excite agreed, subject to certain
limitations, not to display paid promotional links or banner advertisements of
other specified types of resellers of Software products on certain screens
within certain channels of Excite's Excite.com Web site (the "Excite Online
Area"). These screens include certain screens in Excite.com's Computers and
Internet Channel and the Computers and Software Department of the Shopping
Channel. In addition, the Company has the right to display links to the
Company's Web site on certain other screens within the Excite Online Area. Over
the term of the Excite Agreement, Excite is obligated to deliver a specified
number of Impressions. Over the first three years of the agreement, the Company
is obligated to make substantial payments to Excite as well as pay a percentage
of certain transactional revenues earned by the Company in excess of certain
thresholds. The Company's arrangement with Excite terminates when Excite has
satisfied certain obligations with respect to delivery of Impressions, but no
earlier than April 2001 except in the event of a material breach.
Netscape. software.net and Netscape, a leading provider of open software
for linking people and information over enterprise networks and the Internet,
entered into an agreement in June 1997 for a term of 24 months from August 1,
1997, to create the "Netscape Software Depot by software.net." This Web site is
an online Software store, created for the purpose of marketing and distributing
Software products which are compatible with the Netscape ONE platform Internet
Site. Under the terms of the Netscape agreement, sales and advertising revenues
generated from this online store are allocated in accordance with specified
percentages. In connection with this agreement, the Company made an initial
payment to Netscape for license to use of certain Netscape trademarks. The
Netscape agreement terminates on July 31, 1999 and can also be terminated by
either party in the event that certain specified Impressions and net revenue
milestones have not been met.
There can be no assurance that the Company will achieve sufficient online
traffic, or generate sufficient sales to realize economies of scale that justify
the Company's significant fixed financial obligations to AOL and Excite, or to
satisfy its contractual obligations necessary to prevent termination of the AOL,
Excite or Netscape agreements. The failure of the Company to do so would likely
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, neither the AOL, Excite nor Netscape
agreements provides the Company with automatic renewal rights upon expiration of
their respective terms. There can be no assurance that such agreements will be
renewed on commercially acceptable terms, or at all. Furthermore, the
38
<PAGE> 40
Company's significant investment in the AOL, Excite and Netscape relationships
is based on the continued positive market presence, reputation and anticipated
growth of AOL, Excite and Netscape, as well as the commitment by each of AOL and
Excite to deliver specified numbers of Impressions. Any decline in the
significant market presence, business or reputation of AOL, Excite or Netscape,
or the failure of any of AOL and Excite to deliver the specified numbers of
Impressions, will reduce the value of these strategic agreements to the Company
and will likely have a material adverse effect on the business, results of
operations and financial condition of the Company. In addition, AOL and the
Company have the right to separately pursue and sell advertising in the
Company's content areas distributed through AOL. There can be no assurance that
the Company and AOL will not compete for limited software reseller advertising
revenues. The Company's arrangements with AOL, Excite and Netscape are expected
to represent significant distribution channels for the Company's Software sales,
and any termination of either or all of the Company's agreements with AOL,
Excite and Netscape would likely have a material adverse effect on the Company's
business, results of operations and financial condition. See "Risk
Factors -- Reliance on Strategic Marketing Alliances with America Online, Excite
and Netscape," "Use of Proceeds" and Note 3 of Notes to Consolidated Financial
Statements.
Co-branded Sites. software.net has also sought to increase sales by
creating and managing co-branded stores such as CMP's TechShopper Software Store
(http:// www.techweb.com/shopper/softwarestore), Computer Currents Interactive
Software Shop (http://currents.software.net), and Gate Software Store
(http://sfgate.software.net) and others. These co-branded stores are intended to
further the software.net brand and access additional Internet traffic.
Information contained on these aforementioned Web sites is not a part of this
Prospectus.
Direct Marketing
The Company believes that the demographics of Internet users overlap
one-to-one with the demographics of potential Software purchasers and that the
Internet provides additional opportunities for one-to-one marketing to the
Company's customers through a variety of mechanisms. The Company is exploring
such direct marketing opportunities as store customization to present each
customer with a customized merchandise assortment based on historic purchasing
patterns and equipment type. The Company is also investigating opportunities to
use direct marketing techniques to target new and existing customers with
customized offers such as an email newsletter that includes purchase
recommendations based on demonstrated customer preferences or prior purchases.
Online Advertising
In addition to its primary strategic alliances, the Company utilizes
numerous online sales and marketing techniques to increase brand recognition and
drive traffic to the Company's online stores, including purchasing banner
advertising on search engine Web sites and Internet directories and direct links
from publisher home pages. Such banner advertisements can be permanently
displayed for designated periods of time or displayed when a user searches for
information relating to certain keywords (such as "software") and programs, as
well as the names of publishers. Direct links from certain publishers' home
pages enable customers electing to purchase Software directly from the publisher
to be automatically linked to the software.net order form.
Traditional Advertising
To date, the Company has engaged in limited advertising utilizing
traditional media. However, the Company believes there is an opportunity to
promote its online stores through a proactive advertising program which will
target customers through national media outlets such as magazines, newspapers,
and radio and television broadcasts.
39
<PAGE> 41
Customer Service and Support
The Company believes its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases
depends, in part, on the strength of its customer support and service. Customer
support and service personnel are responsible for handling general customer
inquiries, answering customer questions about the ordering process and
investigating the status of orders, shipments and payments. The Company has
automated certain of the tools used by its customer support and service staff
including tracking screens that enable its support staff to track a transaction
by any of a variety of information sources. At any point in the purchasing
process, customers can access the Company's support staff by fax or email by
following prompts located throughout the software.net store, or by calling the
Company's toll-free telephone line. Customers who are reluctant to enter their
credit card numbers through the Web site are also invited to utilize the
toll-free line for purchases. The Company currently employs a staff of full-time
customer support and service personnel and also outsources its first level of
customer support and services through a leading provider of customer support
services.
A substantial portion of the Company's Software sales is made to the U.S.
government and corporate purchasers and the Company maintains specialized
support staffs for these departments. In addition to providing standard support
services, the Company's government and corporate support staffs target
particular government and corporate customers for specific new product releases
and version enhancements. The Company intends to continue to expand its sales
and marketing efforts with respect to both government and corporate purchasers.
See "Risk Factors -- Customer Concentration; Risks Associated with Reliance on
United States Government Contracts."
TECHNOLOGY
The Company uses complex proprietary and commercially licensed technology
to make both the customer experience and the management reporting process as
seamless and simple as possible. To that end, the Company has developed
technologies and systems to support scaleable, flexible and seamless online
reselling in a secure and easy to use manner. By using a combination of
proprietary solutions and commercially available licensed technologies, the
Company has deployed systems for online content dissemination, online
transaction processing, customer service, market analysis and electronic data
interchange. The Company has integrated these proprietary and commercially
available systems into a unified Software sales and reporting system. Research
and development expenses were $388,000, $431,000, $1.1 million and $602,000 in
1995, 1996, 1997 and the first quarter of 1998, respectively.
Scaleability and Flexibility. The architecture of the Company's hardware
and software is built upon a distributed transaction-processing model which
allows the processing load to be distributed among multiple parallel servers.
This architecture allows the Company to scale by either adding new servers or
increasing the capacity of existing servers. The Company's hardware and software
configuration is designed to scale to support growth while maintaining user
performance and minimizing the cost per transaction. In the rapidly changing
Internet environment, the ability to update this system in order to stay current
with new technologies is important. The system's template technology and modular
database design allow the addition or replacement of software components, page
layout templates and search and retrieval engines with minimal effort and
disruption. This architecture also enables low-cost, rapid deployment of
additional, co-branded Web sites that integrate with the software.net store.
Seamlessness. The Company's multiple hardware and software systems
integrate seamlessly to manage real time transactions with limited human
intervention. Orders for downloadable Software are automatically processed to
completion. Orders for products that must be shipped are automatically routed
electronically to one of the Company's distributors. The transaction is
completed and the customer's credit card charged after shipment of the product
has been confirmed. Orders
40
<PAGE> 42
requiring human intervention are automatically routed for processing by customer
service representatives.
Components of Company Technology
The Company uses commercially available software as well as its own
internally developed proprietary software. The Company has a policy of limiting
the number of hardware and software vendors whose products are used in
production systems in order to facilitate integration, maintenance, performance
and upgrades.
Store Engine Architecture. The Company's hardware and software systems are
based upon a distributed transaction-processing model that allows applications
and data to be distributed among multiple parallel servers. Many of the software
components, and the pages of the Company's Web site, are developed in a manner
that enables the separation of the page look and feel from the individual data
elements and their associated database lookups. This separation permits frequent
changes to product pricing information, reduces Software updates for Web site
changes, and minimizes the engineering required to maintain a growing amount of
items and content. The Company utilizes proprietary technology that also enables
Web sites with different formats to integrate the software.net store elements
such as search, vendor and product pages. This technology allows the Company to
maintain several Web storefronts over a single order processing and customer
service system.
Enterprise Download Manager. For the large enterprise environment, the
Company has developed technology to aid in the distribution of both large
Software products (in terms of number of bytes) as well as large numbers of
Software products. This technology comprises server software, which maintains a
cache of downloaded Software at key locations behind a customer's firewall and
an enhanced version of the Sm@rtCert technology licensed on a non-exclusive
basis from CyberSource which the Company offers as an integrated service
(collectively, the "Enterprise Download Manager"). By distributing caches of
Software (many of which would normally be considered too large to download) to
key locations within an enterprise, a large enterprise can ensure that the
current release of Software is available to staff with minimal management
intervention. By providing a dedicated server with Enterprise Download Manager
to manage and receive the download, typical problems of failed download and lost
connections can be overcome. By using a local cache, the Enterprise Download
Manager satisfies the majority of requests for Software updates internally with
a resultant significant reduction in network traffic. This technology is used to
deliver products electronically together with marketing and promotional
information. Enterprise Download Manager tracks the transmission of Software via
ESD. If the transmission is interrupted for any reason, Enterprise Download
Manager re-initiates the transmission and completes the interrupted download
without the need to restart the entire download. See "Business -- Relationship
with CyberSource Corporation" and "Certain Transactions."
Back Office Processing. The real time nature of fulfilling downloaded
Software orders adds significant complexity to the design of the Company's back
office system. Typical transaction processing systems assume that a physical
process must take place to deliver the product. The time required for physical
delivery obviates the need to process orders in real time (as well as the
customer's expectation of real time processing). In a Web-based sale of Software
to be delivered by ESD, the customer expects to be able to start downloading
within seconds of confirming the transaction. This need for almost instant
initiation of delivery impacts the design and operation of the Company's entire
back office system. Every element of a sale must be fully automated, as the time
needed for human intervention is not available.
The Company believes that its sophisticated back office transaction
processing system, which successfully processes, manages and fulfills Software
orders for ESD with limited human intervention in real time, is a significant
competitive advantage. The system incorporates commercially available database
components purchased from leading vendors, proprietary software products
41
<PAGE> 43
developed by the Company, and Internet commerce services supplied by
CyberSource. This system accepts orders captured by the store engine and
processes them according to pre-coded rules. Each order is validated, screened
for possible fraud and its payment method authorized. Once an order is approved,
it is fulfilled either by electronically messaging the Company's distributor for
physical delivery or by allowing the customer to download the product via ESD.
The entire history of any order or customer is accessible to customer service
representatives online via a Web-based interface. All actions needed to manage
an order may be performed from within this interface. All actions of customer
service representatives are logged with the identity of the representative, the
action and a time stamp. See "Business -- Relationship with CyberSource
Corporation."
Data Warehouse. The Company utilizes a database management system to
index, retrieve and manipulate product information, content, product catalogs,
orders and transactions, and customer information. This system allows for rapid
searching, sorting, viewing and distribution of a large volume of content. The
Company deploys a data warehouse that enables it to access detailed transaction
and customer interaction data and perform proprietary market analysis. The data
warehouse provides a unified platform for the store engine and back office
systems. This data warehouse system incorporates commercially available hardware
and software with proprietary software of the Company in a configuration
developed by the Company. Any reduction in performance, disruption in the
Internet access or discontinuation of services provided by CyberSource could
have a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company's
transaction-processing systems and network infrastructure will be able to
accommodate increases in traffic in the future, or that the Company will, in
general, be able to accurately project the rate or timing of such increases or
upgrade its systems and infrastructure to accommodate future traffic levels on
its online sites. In addition, there can be no assurance that the Company will
be able in a timely manner to effectively upgrade and expand its
transaction-processing systems or to successfully integrate any newly developed
or purchased modules with its existing systems. There can be no assurance that
the Company will successfully utilize new technologies or adapt its online
sites, proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards.
Substantially all of the Company's hardware associated with its development
and management system are located at a single facility leased by the Company in
San Jose, California. The Company contracts with a third party for facilities to
host the Company's production, computer and communications hardware systems and
for mission critical Internet connections, and these systems are located at a
single location in Santa Clara, California. The Company's systems and operations
are vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. The
Company currently does not have a formal disaster recovery plan and does not
carry sufficient business interruption insurance to compensate it for losses
that may occur. The occurrence of any of the foregoing could have a material
adverse effect on the Company's business financial conditions and results of
operations. See "Risk Factors -- Risks of System Failure, Single Site."
SECURITY
Customer Reassurance. A critical issue for the success of online retailing
is maintaining the integrity of information, particularly the security of
information such as credit card numbers. The Company believes that its existing
security systems are at least as secure as those used for traditional
transactions (i.e., in-store or mail order purchases) and that it has a
comprehensive security strategy. The Company's system automatically monitors
each purchase and confirms each order by email to the customer within minutes
after the order is placed and advises customers by email shortly after physical
orders are shipped.
Fault Tolerance and Scaleable Internet Access. The Company's systems are
designed for automatic transfer to "hot" spare systems in the event of failure
and are equipped with fully automated reporting tools. These tools provide
automated trouble notification and detailed event
42
<PAGE> 44
logging. The Company maintains a minimum of two of each critical production
system. In the case of distributed systems such as Web servers, as many as nine
systems may be active. A load distribution system monitors traffic to each
server, should a system fail to respond to a request the automated distribution
system will redistribute traffic among the remaining machines with no loss of
user functionality. Both the Company's firewall and the load distribution system
are backed by standby systems that monitor the health of the live machine, and
automatically take over in the event of a failure. After correcting the problem
these automated systems then notify technical staff by pager so the failed
system may be replaced or repaired.
The Company contracts with a Web site provider that specializes in
providing scaleable business solutions to high volume Internet sites for mission
critical Internet connectivity. The Company has contracted with the provider to
deliver a secure platform for server hosting with uninterruptible power supply
and back-up generators, fire suppression, raised floors, HVAC, separate cooling
zones, seismically braced racks, 24x7 operations and high levels of physical
security. The Company's systems are connected to a high speed Internet
connection with multiple, redundant interconnects to key backbone locations.
Notwithstanding these precautions, there can be no assurance that either
the security mechanisms of the Company's Internet provider, the Company or the
Company's other suppliers will prevent security breaches or service breakdowns.
Despite the implementation of network security measures by the Company, its
servers may be vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions, which could lead to interruptions, delays, loss of data
or the inability to accept and fulfill customer orders and have a material
adverse effect on the Company's finances, financial condition and results of
operations.
RELATIONSHIP WITH CYBERSOURCE CORPORATION
In December 1997, in order to focus on its core business of selling
Software over the Internet, the Company spun-off its Internet commerce services
business (the "Spin-off") to a new Delaware Corporation which now operates under
the name CyberSource Corporation ("CyberSource").
In connection with the Spin-off, the Company and CyberSource have entered
into certain agreements for the purpose of defining the ongoing relationship
between the two companies. Five out of six of the Company's directors are also
directors of CyberSource and certain other members of the Company's management
team joined CyberSource as executive officers. Accordingly, these agreements may
not be deemed the result of arm's length negotiations.
Pursuant to the terms of a Conveyance Agreement dated December 31, 1997,
the Company transferred to CyberSource the technology (including rights to
patent applications, trademarks and other intellectual property rights of the
Company relating thereto), contracts and licenses with third parties and certain
tangible assets relating to or utilized by the Company in connection with credit
card processing, fraud screening, export control, territory management and
electronic fulfillment notification. In addition, the Company's employees who
were engaged in the Company's internet commerce services business were
transferred to CyberSource after the Spin-off.
In addition, pursuant to the terms of an Inter-Company Cross License
Agreement dated as of April 23, 1998 between the Company and CyberSource (the
"Cross License Agreement"), the Company granted to CyberSource a non-exclusive,
worldwide, perpetual, irrevocable royalty-free license to internally use the
Company's Cache Manager technology and to use and sublicense the Company's
customer database for certain limited purposes. Under the Cross-License
Agreement, CyberSource granted the Company a worldwide, perpetual, irrevocable
royalty-free license to internally use CyberSource's Sm@rtCert technology with
the right to modify such technology for purposes of embedding such technology
into software developed by the Company for subsequent sublicense, sale or use by
enterprises and governmental agencies, the Company's Enterprise Download
Manager. The Cross License Agreement further provides that the parties shall
have joint ownership of certain utility tools and allocates between the Company
and CyberSource ownership
43
<PAGE> 45
of certain inventions made by each party on or before June 30, 1998 and the
ownership of certain improvements, enhancements and modifications made by the
parties to Sm@rtCert and Cache Manager technology during 1999. Each party has
agreed to indemnify the other against any third party claims regarding the use
of the licensed technology by such licensee that results in a claim against the
licensor, except to the extent that such claim is based upon a claim that the
licensed technology infringes upon any third party's technology rights.
CyberSource and the Company also entered into an Internet Commerce Services
Agreement (the "Services Agreement"), pursuant to which CyberSource has agreed
to provide certain services including credit card processing, fraud screening,
export control, territory management and electronic fulfillment, in a "back
office" capacity. This Agreement expires on April 23, 1999 and automatically
renews for an additional one year term, unless otherwise terminated by either
party.
Any discontinuation of the services provided to the Company by CyberSource
under the Services Agreement, or termination of the Cross License Agreement, or
any reduction in performance that requires the Company to replace such services
or internally develop or license such technology from a third party, would be
disruptive to the Company's business, financial condition and results of
operations. CyberSource provides the services it provides to the Company under
the Services Agreement to other customers, including competitors of the Company.
In addition, certain former members of the Company's management hold executive
management positions with CyberSource including William S. McKiernan, the
Chairman of the Company's Board of Directors, who serves as President and Chief
Executive Officer of CyberSource. Currently, five of the Company's six members
of the Company's Board of Directors serve on the CyberSource Board of Directors.
Nothing in the Company's agreements with CyberSource prohibit CyberSource from
competing directly with the Company, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Management of Potential Growth; New Management
Team; Limited Senior Management Resources;" "-- Risks Associated with Dependence
on CyberSource Corporation; Relationship with CyberSource Corporation" and
"Certain Transactions."
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future.
Barriers to entry are minimal, and current and new competitors can launch new
Web sites at a relatively low cost. In addition, the retail Software reselling
industry is intensely competitive. The Company currently competes primarily with
traditional Software resellers and other online Software resellers and vendors.
In the online market, the Company competes with online Software sellers and
vendors that maintain similar commercial Web sites, including CompUSA, CNET,
Cyberian Outpost and Egghead.com, and a growing number of Software publishers
that sell their Software products directly online. The Company also anticipates
that it may in the near future compete with other Software publishers, including
Microsoft, that plan to enter the online market and with indirect competitors
that specialize in online commerce or derive a substantial portion of their
revenues from online commerce, including AOL, Netscape, Amazon.com and Yahoo!.
These entities may themselves offer, or others may offer through such entities,
Software. In addition, entities experienced in mail-order and/or direct
marketing of computer products (including cataloguers such as Micro Warehouse
and manufacturers such as Dell Computer and Gateway), major Software product
distributors such as Ingram Micro, or Tech Data, and other major retailers of
products, such as OfficeMax, Staples, and Office Depot, have established, or may
establish in the near future, commercial Web sites offering Software products.
Competitive pressures created by any one of these current or future competitors,
or by the Company's competitors collectively, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that the principal competitive factors in its market
are brand recognition, selection, convenience, price, speed and accessibility,
customer service, quality of site content, and
44
<PAGE> 46
reliability and speed of fulfillment. In addition to the foregoing, the large
enterprise market focuses on compatibility of products, administration and
reporting, single source supply, security and cost-effective deployment. Many of
the Company's current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than the Company. In addition, larger,
well-established and well-financed entities may acquire, invest in or form joint
ventures with online competitors as the use of the Internet and other online
services increases. Certain of the Company's potential competitors, such as
Ingram Micro and Tech Data, may be able to secure merchandise from vendors on
more favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and
devote substantially more resources to Web site and systems development than the
Company. Certain of the Company's competitors such as Software Spectrum, GTSI,
and Corporate Software & Technology have greater experience in selling to the
large enterprise market. In addition, new technologies and expansion of existing
technologies, such as price comparison programs that select specific vendors
based on price from a variety of Web sites and may increase competitive
pressures on the Company. Increased competition may result in reduced operating
margins, as well as a loss of both market share and brand recognition. Further,
as a strategic response to changes in the competitive environment, the Company
may from time to time make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on its business,
financial condition and results of operations. In addition, companies that
control access to Internet transactions through network access or Web browsers
could promote the Company's competitors or charge the Company a substantial fee
for inclusion in their product or service offerings. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, and any inability to do so could have a material adverse effect on
the Company's business, operating results and financial condition. See "Risk
Factors -- Competition."
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. The Company presently is
not subject to any material legal proceedings.
INTELLECTUAL PROPERTY
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success, and
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks and service marks in the U.S., and has applied
for the registration of certain of its trademarks and service marks. The Company
applied for Federal registration of the service mark "SOFTWARE.NET" on August
24, 1994, and there can be no assurances that a Federal registration of the
service mark will issue in respect of SOFTWARE.NET. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which the Company's products and services are made available online.
The Company has licensed in the past, and expects that it may license in the
future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. While the Company attempts to ensure that the
quality of its brand is maintained by such licensees, there can be no assurance
that such licensees will not take actions that might materially adversely affect
the value of the Company's proprietary rights or reputation, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate or that third parties
will not infringe or misappropriate the Company's trade secrets, copyrights,
trademarks, trade dress and similar proprietary rights. In addition, there can
be no assurance that others will not independently develop substantially
equivalent intellectual property. A failure by the Company to protect its
intellectual
45
<PAGE> 47
property in a meaningful manner could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of management and technical resources,
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, there can be no assurance that other parties will not assert
infringement claims against the Company. From time to time, the Company has
received, and may receive in the future, notice of claims of infringement of
other parties' proprietary rights. There can be no assurance that such claims
will not be asserted or prosecuted against the Company in the future or that any
past or future assertions or prosecutions will not materially adversely affect
the Company's business, financial condition and results of operations. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause product
shipment delays or require the Company to develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. In the event of a successful claim of product infringement
against the Company and the failure or inability of the Company to develop non-
infringing technology or license the infringed or similar technology on a timely
basis, the Company's business, financial condition and results of operations
could be materially adversely affected. See "Risk Factors -- Uncertain
Protection of Intellectual Property."
EMPLOYEES
As of April 15, 1998, the Company employed 68 employees including twelve in
administration, 16 in research and development and 40 in sales and marketing.
The Company also employs independent contractors and other temporary employees.
None of the Company's employees is represented by a labor union, and the Company
considers its employee relations to be good. Competition for qualified personnel
in the Company's industry is intense, particularly among software development
and other technical staff. The Company believes that its future success will
depend in part on its continued ability to attract, hire and retain qualified
personnel. See "Risk Factors -- Management of Potential Growth; New Management
Team; Limited Senior Management Resources" and "-- Dependence on Key Personnel;
Need for Additional Personnel."
FACILITIES
The Company's principal administrative, engineering, marketing and customer
service facilities total approximately 9,000 square feet and are located in San
Jose, California under a lease that expires in September 2002. The Company
anticipates that it will require additional facilities for administrative and
customer service within the next 12 months. There can be no assurance that any
such additional space will be available on commercially reasonable terms or at
all.
46
<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of April 20, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
William S. McKiernan...................... 41 Chairman of the Board of Directors
Mark L. Breier............................ 38 President, Chief Executive Officer and
Director
John P. Pettitt........................... 35 Executive Vice President and Chief
Technology Officer
Michael J. Praisner....................... 52 Vice President of Finance & Administration
and Chief Financial Officer
William C. Holtzman....................... 45 Vice President of Site Marketing
Alan C. DeClerck.......................... 43 Vice President of Sales
Hubert E. Kolde(1)(2)..................... 43 Director
Linda Fayne Levinson(1)(2)................ 56 Director
Steven P. Novak(1)(2)..................... 50 Director
Richard Scudellari(1)(2).................. 41 Secretary and Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
WILLIAM S. MCKIERNAN is a co-founder of the Company and has served as
Chairman of the Board of Directors of the Company since March 1998. Since the
Company's inception in 1994 to March 1998, Mr. McKiernan served as President and
Chief Executive Officer of the Company. Mr. McKiernan also currently serves as a
director and Chief Executive Officer of CyberSource Corporation. From 1992 to
1994, Mr. McKiernan held a number of positions at McAfee Associates, Inc. (now
known as Network Associates), including President and Chief Operating Officer,
the positions he held during its initial public offering in October 1992. Prior
to joining McAfee Associates in 1992, Mr. McKiernan was Vice President of
Princeton Venture Research, Inc., an investment banking and venture consulting
firm from 1990 to 1992. Mr. McKiernan has also held management positions with
IBM/ROLM and Price Waterhouse. Mr. McKiernan received his M.B.A. from the
Harvard University Graduate School of Business.
MARK L. BREIER joined the Company in March 1998, as a director, President
and Chief Executive Officer. From January 1997 until he joined the Company, Mr.
Breier served as Vice President of Marketing of Amazon.com, Inc. From March 1994
to September 1996, Mr. Breier served as Vice President of Marketing of Cinnabon
World Famous Cinnamon Rolls. Mr. Breier was involved in product management and
introduction at Dreyer's Grand Ice Cream from October 1988 to March 1994, at
Kraft Foods, Inc., a multinational consumer products company, from April 1986 to
October 1988, and at Parker Brothers, a worldwide manufacturer of toys and
games, from August 1985 to March 1986. Mr. Breier received his B.A. in Economics
from Stanford University and his M.B.A. from the Stanford University Graduate
School of Business.
JOHN P. PETTITT is a co-founder of the Company and has served as Executive
Vice President and Chief Technology Officer since its inception in 1994. From
1992 to 1994, Mr. Pettitt consulted on a number of Internet and Intranet
projects including a national medical imaging network. From 1986 to 1992, Mr.
Pettitt served as Group Vice President and Technical Director of Specialix PLC,
a leading supplier of communications controllers for UNIX systems. While at
Specialix, Mr. Pettitt received the 1992 British Design Award for designing a
new distributed, fault tolerant data switch. Mr. Pettitt also co-founded the
United Kingdom Internet Consortium.
47
<PAGE> 49
MICHAEL J. PRAISNER joined the Company as Vice President of Finance and
Administration and Chief Financial Officer in April 1998. From 1995 to 1997, Mr.
Praisner served as Vice President, Finance and Administration, Chief Financial
Officer, and Secretary of Silicon Storage Technology, Inc., a supplier of flash
memory devices. From 1994 to 1995, he served as Vice President, Finance and
Chief Financial Officer of MicroModule Systems, Inc., a manufacturer of
multichip modules for computer and telecommunications applications. From 1992 to
1993, he served as Vice President, Finance and Chief Financial Officer of
Electronics for Imaging, Inc., a manufacturer of color desktop publishing
computer systems. During part of 1991, he served as Vice President, Finance and
Chief Financial Officer of Digital Link Corp., a computer communications
equipment company. From 1989 to 1991, he served as Corporate Controller of
Applied Materials Inc., a manufacturer of semiconductor wafer fabrication
equipment. Mr. Praisner received his B.A. in liberal arts and his M.B.A. from
Southern Methodist University and is a Certified Public Accountant.
WILLIAM C. HOLTZMAN joined the Company as Vice President of Site Marketing
in January 1998. From 1995 to 1997, Mr. Holtzman served as Vice President of
Field Marketing and Vice President of Asia-Latin America at Macromedia. From
1993 to 1995, Mr. Holtzman served as Director of European Marketing at Creative
Labs Europe. From 1991 to 1993, Mr. Holtzman served as Vice President of
Marketing at Trace Corporation. From 1987 to 1991, Mr. Holtzman served as
General Manager of Claris Asia-Latin America. From 1986 to 1987, Mr. Holtzman
served as Macintosh Launch Manager at Apple Computer International. Mr. Holtzman
received his B.S. in Journalism from Boston University.
ALAN C. DECLERCK joined the Company in April 1998 as Vice President of
Sales. From August 1995 until he joined the Company, Mr. DeClerck served as
International Director, ISVs & Integrators, for Sun Microsystems Computer
Corporation. From January 1989 until August 1995, Mr. DeClerck served other
roles at Sun Microsystems, including Director, Corporate Business Development,
Director of Marketing and Business Development at FirstPerson, a Sun
Microsystems subsidiary that developed the initial Java technology, and various
sales and sales management roles. Mr. DeClerck was involved in marketing and
sales roles from 1980 until 1989 at Network Equipment Technologies, Industrial
Networking, Inc., and General Motors Corporation. Mr. DeClerck received his A.B.
in International Relations from Brown University, his M. Phil. in International
Relations from Oxford University and his M.B.A. from Stanford University
Graduate School of Business.
HUBERT E. KOLDE, a director of the Company since July 1996, serves as a
director, Vice President, Treasurer and Secretary of Vulcan Ventures Inc., Vice
Chairman of the Portland Trail Blazers, Seattle Seahawks, Oregon Arena
Corporation and First and Goal Corporation, and as President of the Paul G.
Allen Virtual Education Foundation and the Paul G. Allen Forest Protection
Foundation. Mr. Kolde co-founded Asymetrix Learning Systems, Inc. in 1985, and
serves as Chairman of its Board of Directors. Mr. Kolde also serves as a
director of MetaCreations Corporation, Precision Systems, Inc. and CyberSource
Corporation. Mr. Kolde received his B.A. in Business Administration from
Washington State University and his M.B.A. from the University of Washington.
LINDA FAYNE LEVINSON, a director of the Company since September 1997, has
served as a principal of Global Retail Partners, L.P. since April 1997. From
1994 to 1997, she served as President of Fayne Levinson Associates, an
independent general management consulting firm that advises major corporations
and start-up entrepreneurial ventures. In 1993, Ms. Levinson was an executive
with Creative Artists Agency, Inc. where she played a lead role in the
restructuring of MGM. From 1989 to 1992, Ms. Levinson was a partner of Wings
Partners, Inc., a merchant banking firm. From 1984 to 1987, Ms. Levinson was a
Senior Vice President of American Express Travel Related Services, Inc. Ms.
Levinson presently serves as a Director of NCR Corporation, Genentech, Inc.,
Administaff, Inc. and Jacobs Engineering Group, Inc. as well as several
privately-held companies including CyberSource Corporation. Ms. Levinson
received her A.B. from Barnard College in Russian Studies, her M.A. from Harvard
in Russian Literature and her M.B.A. from New York University.
48
<PAGE> 50
STEVEN P. NOVAK, a director of the Company since January 1995, is a
Managing Director and Director of Research of C.E. Unterberg, Towbin. From
February 1993 to January 1998, Mr. Novak served as Co-founder, President, and
Chief Investment Officer of C.E. Unterberg, Towbin Advisors, a registered
investment advisor. Mr. Novak also serves as a director of several privately
held companies including CyberSource Corporation. Mr. Novak's prior affiliations
include among others Forstmann-Leff Associates, Sanford C. Bernstein & Company,
Inc., and Harris Bankcorp. Mr. Novak received his B.S. from Purdue University
and his M.B.A. from the Harvard University Graduate School of Business.
RICHARD SCUDELLARI has served as a director and Secretary of the Company
since its inception in 1994. Mr. Scudellari has been a partner at Jackson Tufts
Cole & Black, LLP, since 1990. Mr. Scudellari serves as a director of several
privately held companies, including CyberSource Corporation. Mr. Scudellari
received his B.S. and J.D. from Boston College.
BOARD COMPOSITION
The Company currently has authorized six directors. The Company's executive
officers are appointed by, and serve at the discretion of, the Board of
Directors. Each of the Company's officers and directors, excluding non-employee
directors and Mr. McKiernan who serves as Chief Executive Officer of
CyberSource, devotes substantially full time to the affairs of the Company. The
Company's non-employee directors devote such time to the affairs of the Company
as is necessary to discharge their duties. There are no family relationships
among any of the directors, officers or key employees of the Company. Five of
the six members of the Company's Board of Directors also serve as directors of
CyberSource. See "Risk Factors -- Management of Potential Growth; New Management
Team; Limited Senior Management Resources" and "Certain Transactions."
BOARD COMMITTEES
The Audit Committee reviews, acts on and reports to the Board of Directors
with respect to various auditing and accounting matters, including the selection
of the Company's independent accountants, the scope of the annual audits, fees
to be paid to the independent accountants, the performance of the Company's
independent accountants and the accounting practices of the Company.
The Compensation Committee establishes salaries, incentives and other forms
of compensation for officers and other employees of the Company and administers
the incentive compensation and benefit plans of the Company.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their
services as directors or members of committees of the Board of Directors, but
are reimbursed for their reasonable expenses incurred in attending meetings of
the Board of Directors. In April 1995, the Company granted to each of Messrs.
Novak and Scudellari a nonqualified stock option to purchase 20,000 shares of
Common Stock and 40,000 shares of Common Stock, respectively, at an exercise
price of $0.008 per share. In January 1996, the Company granted each of Messrs.
Novak and Scudellari a nonqualified stock option to purchase 20,000 shares at an
exercise price of $0.033 per share. In January 1997, the Company granted each of
Messrs. Novak, Scudellari and Kolde an option to purchase 10,000 shares of
Common Stock at an exercise price of $0.1125 per share. In January 1998, the
Company granted Ms. Levinson and each of Messrs. Novak, Scudellari and Kolde, an
option to purchase 10,000 shares of Common Stock at an exercise price of $0.50
per share. Until April 4, 1998, under the terms of the Company's 1995 Stock
Option Plan, each non-employee director of the Company received options to
purchase 10,000 shares of Common Stock upon initial election or appointment to
the Board of Directors and thereafter annually on January 1 of each year
following April 4, 1998,
49
<PAGE> 51
the Company's 1998 Stock Option Plan provides for such grants. See "Certain
Transactions" and "Management -- Stock Option Plans."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of
directors to the full extent permitted by Delaware law. Delaware law provides
that a corporation's certificate of incorporation may contain a provision
eliminating or limiting the personal liability of directors for monetary damages
for breach of their fiduciary duties as directors, except for liability (i) for
any breach of their duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law (the "DGCL"), or (iv) for any transaction from
which the director derived an improper personal benefit. The Company's Bylaws
provide that the Company shall indemnify its directors and officers and may
indemnify its employees and agents to the fullest extent permitted by law. The
Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties.
The Company has entered into agreements to indemnify its directors and
executive officers. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by such persons in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee (effective upon the
consummation of this offering) is an officer or employee of the Company with the
exception of Richard Scudellari who is the Secretary of the Company. Five of the
six members of the Company's Board of Directors also serve as members of the
Board of Directors of CyberSource. Vulcan Ventures Inc., a holder of Series B,
C, and D Preferred Stock, maintains a limited partner interest in Global Retail
Partners L.P., a holder of Series C and D Preferred Stock. Other than this
relationship and the CyberSource board memberships, no interlocking relationship
exists between the Company's Board of Directors or Compensation Committee and
the board of directors or compensation committee of any other company, nor has
such an interlocking relationship existed in the past.
EXECUTIVE COMPENSATION
The following table sets forth certain estimated compensation awarded or
paid by the Company during the fiscal year ended December 31, 1997 ("Last Fiscal
Year") to its President and Chief Executive Officer and its Executive Vice
President and Chief Technology Officer (together, the "Named Executives") and
certain individuals hired subsequent to the conclusion of the last fiscal year.
In March 1998, Mr. McKiernan resigned from the position of President and Chief
Executive
50
<PAGE> 52
Officer of the Company and commenced service as the Chairman of the Company's
Board of Directors, in which capacity he presently earns a salary of $100,000
per annum.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ------------
AWARDS
------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- ------------------------------ --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
William S. McKiernan......... 165,000 -- -- -- --
Chairman of the Board
John P. Pettitt.............. 130,000 100 -- -- --
Executive Vice President
and Chief Technology
Officer
</TABLE>
- ---------------
(1) Mark L. Breier, the President, Chief Executive Officer and a director of the
Company, was hired in March 1998. Mr. Breier's annualized salary for the
1998 fiscal year is $200,000. In addition, Mr. Breier will receive a bonus
of $50,000 and relocation allowance payments totalling $77,000 during the
1998 fiscal year. Mr. Breier also received an option to acquire 1,000,000
shares of Common Stock, subject to vesting over four years, unless earlier
accelerated. Michael J. Praisner, the Company's Vice President of Finance &
Administration and Chief Financial Officer, was hired in April 1998. Mr.
Praisner's annualized salary for the 1998 fiscal year is $165,000. In
addition, Mr. Praisner received an option to acquire 200,000 shares of
Common Stock, subject to vesting over four years. Alan C. DeClerck, the
Company's Vice President of Sales, was hired in April 1998. Mr. DeClerck's
annualized salary for the 1998 fiscal year is $165,000. In addition, Mr.
DeClerck received an option to acquire 180,000 shares of Common Stock,
subject to vesting over four years.
OPTION GRANTS
No Named Executive received stock option grants in the fiscal year ended
December 31, 1997.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning the year-end number
and value of unexercised options with respect to each of the Named Executives.
No options and no stock appreciation rights were exercised by the Named
Executives in fiscal year 1997, and no stock appreciation rights were
outstanding at the end of that year.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
DECEMBER 31, 1997 DECEMBER 31, 1997
---------------------- ------------------------
VESTED UNVESTED VESTED UNVESTED
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
William S. McKiernan.................. -0- -0- N/A N/A
John P. Pettitt....................... 1,250,000 -0- $619,750(2) -0-
</TABLE>
- ---------------
(1) Mark L. Breier, Michael J. Praisner and Alan C. DeClerck received options to
acquire 1,000,000 shares, 200,000 shares and 180,000 shares of Common Stock,
respectively, during 1998. None of such options are vested.
(2) Based on fair market value of the Company's Common Stock at fiscal year-end
(December 31, 1997), as determined by the Company's Board of Directors less
exercise price payable for such shares.
STOCK OPTION PLANS
The Company's Board of Directors and stockholders adopted the 1995 Stock
Option Plan in January 1995, and have reserved an aggregate of 3,000,000 shares
of Common Stock for grants of stock options under such plan. In addition, on
April 4, 1998 the Company's Board of Directors and stockholders adopted the 1998
Stock Option Plan (collectively with the 1995 Stock Option Plan, the
51
<PAGE> 53
"Plans") and reserved an aggregate of 2,000,000 shares of Common Stock for
grants of stock options under such plan. The purpose of the 1995 and 1998 Stock
Option Plans is to enhance the long-term stockholder value of the Company by
offering opportunities to employees, directors, officers, consultants, agents,
advisors and independent contractors of the Company to participate in the
Company's growth and success, and to encourage them to remain in the service of
the Company and acquire and maintain stock ownership in the Company.
As of April 26, 1998, options to purchase 3,721,055 shares of Common Stock
were outstanding under the Plans with exercise prices ranging from $0.004 to
$5.50 per share. As of April 26, 1998, options to purchase 6,445 shares were
available for grant and options for 90,000 shares had been exercised under the
1995 Plan. As of the date of this Prospectus, under the 1998 Stock Option Plan,
options to purchase 1,182,500 shares were available for grant and no shares had
been exercised.
The Plans are administered by the Compensation Committee, as may be
appointed by the Board of Directors (the "Compensation Committee"), which has
the authority to select individuals who are to receive options under such plans
and to specify the terms and conditions of each option so granted (incentive or
nonqualified), the vesting provisions, the option term and the exercise price.
The exercise price of incentive stock options granted under such plans shall
equal the fair market value of the Company's Common Stock on the date of grant
(except in the case of grants to any person holding more than 10% of the total
combined voting power of all classes of the Company's, or any parent's or
subsidiary's, stock (a "Ten Percent Holder"), in which case the exercise price
shall equal 110% of the fair market value on the date of grant). The exercise
price of nonqualified stock options shall be 85% of the fair market value on the
date of grant. Payment for shares upon exercise of an option may be made in cash
or other consideration, including a promissory note, as approved by the
Compensation Committee. Generally, options granted under the Plans (other than
those issued to non-employee directors as described below) vest at a rate of 25%
of the shares underlying the option after one year and the remaining shares vest
monthly in equal portions over the following 36 months, such that all shares are
vested after four years. Unless otherwise provided by the Compensation
Committee, an option granted under such plans generally expires ten years from
the date of grant (five years in the case of an incentive stock option granted
to a Ten Percent Holder) or, if earlier, 30 days after the optionee's
termination of employment or service with the Company or an affiliate of the
Company for any reason other than termination for death or disability, or one
year after termination for death or disability. Options granted under the Plans
are not generally transferable by the optionee except by will or the laws of
descent and distribution and generally are exercisable during the lifetime of
the optionee only by such optionee. As of the date of this Prospectus, options
to purchase approximately 299,445 shares of Common Stock were held by employees
of CyberSource. See "Certain Transactions."
In the event of (i) the merger or consolidation of the Company in which it
is not the surviving corporation, (other than a merger in which holders of the
Company's Common Stock immediately before the merger have the same proportionate
ownership of the capital stock of the surviving corporation immediately after
the merger) or (ii) the sale of all or substantially all of the Company's
assets, the Plans will be assumed or substituted by the successor corporation or
the successor corporation shall provide substantially similar consideration to
optionees as is provided to the stockholders. In the event the successor
corporation refuses to assume or substitute outstanding options as provided
above, or in the event of a dissolution or liquidation of the Company,
outstanding options shall expire on a date specified in a written notice sent by
the Compensation Committee to all optionees (which date shall be at least 20
days after the date of such notice).
The 1998 Stock Option Plan also provides for automatic grants to
non-employee directors. Each non-employee director, upon initial election or
appointment to the Board of Directors, is entitled to receive options to
purchase 10,000 shares of Common Stock, provided that such election or
appointment does not occur within the last quarter of a given year. Thereafter,
each non-employee director is entitled to receive options to purchase 10,000
shares of Common Stock annually on January 1 of each year, provided he or she is
a non-employee director on the date of
52
<PAGE> 54
grant and has continuously been an active member of the Board of Directors for
the year prior to the grant date. Options granted to non-employee directors
pursuant to the automatic grant provisions of the 1998 Stock Option Plan are
nonqualified stock options with an exercise price equal to the fair market value
of the Company's Common Stock as of the date of grant and fully vest nine months
after the date of grant. Grants to non-employee directors are subject to the
general requirements of the 1998 Stock Option Plan. Identical grants had been
authorized under the 1995 Stock Option Plan, however as of April 4, 1998 such
grants ceased and were replaced with grants under the 1998 Stock Option Plan.
Stock options previously granted under the 1995 Stock Option Plan to the
executives and directors are described above under "Executive Compensation." The
number of shares of Common Stock that may be subject to options granted in the
future to executive officers and other officers, key employees and directors of
the Company under the 1998 Stock Option Plan is not determinable at this time.
401(K) RETIREMENT PLAN
Effective January 1997, the Company established a 401(k) defined
contribution retirement plan (the "Retirement Plan") covering all
salaried/full-time employees with greater than one months' service. The
Retirement Plan provides for voluntary employee contributions from 1% to 15% of
annual compensation, subject to a maximum limit allowed by Internal Revenue
Service guidelines ($10,000 for 1998). The Company may contribute such amounts
to the accounts of participants in the Retirement Plan as determined by the
Board of Directors. However, to date, the Company has not made any contribution
to the Retirement Plan.
53
<PAGE> 55
CERTAIN TRANSACTIONS
STOCK AND WARRANT ISSUANCES
Since January 1, 1995, the Company has issued shares of Common Stock to
certain insiders and shares of Preferred Stock in private placement transactions
each as set forth below.
In January 1995 and February 1996, the Company issued shares of Series A
Preferred Stock (the "Series A Financing") in private placements to certain
investors. Of such shares of Series A Preferred Stock, 500,000 shares were
issued to C.E. Unterberg Towbin Capital Partners I, L.P. (formerly Unterberg
Harris Capital Partners I, L.P., "Unterberg Partners I") at a purchase price of
$0.40 per share and 253,131 shares were issued to Unterberg Partners I at a
purchase price of $0.91 per share ($0.33 and $0.76 per share, respectively, as
adjusted for the Spin-off). An aggregate of 753,131 shares of Series A Preferred
Stock held by Unterberg Partners I will convert into 1,505,262 shares of Common
Stock upon consummation of this offering. In connection with the Series A
Financing, the holders of Series A Preferred Stock were given the right to
designate one director of the Company (the "Series A Director"). Steven P.
Novak, the Series A Director, is a Managing Director of C.E. Unterberg, Towbin
("Unterberg"), an affiliate of the general partner of Unterberg Partners I. Mr.
Novak disclaims beneficial ownership of the shares of Series A Preferred Stock
issued to Unterberg Partners I, except for his proportional interest therein.
The holders of certain of such shares of Series A Preferred Stock are entitled
to certain registration rights with respect to the Common Stock issuable upon
conversion thereof. See "Description of Capital Stock -- Registration Rights."
In July 1996, the Company issued shares of Series B Preferred Stock (the
"Series B Financing") in a private placement to certain investors, including
925,926 shares to Vulcan Ventures Inc. ("Vulcan"), at a purchase price of $2.70
per share ($2.25 as adjusted for the Spin-off). In connection with the Series B
Financing, the holders of Series B Preferred Stock were given the right to
designate one director of the Company. Hubert E. Kolde, the Series B Director,
serves as a director, Vice President, Treasurer and Secretary of Vulcan, as well
as President of the Paul G. Allen Virtual Education Foundation and the Paul G.
Allen Forest Protection Foundation, and as a director of several other companies
controlled by Mr. Allen, who maintains a controlling interest of Vulcan. Mr.
Kolde disclaims beneficial ownership of the shares of Series B Preferred Stock
issued to Vulcan, except for his proportional interest therein, if any. All of
the outstanding shares of Series B Preferred Stock will convert on a two-for-one
basis into an aggregate of 4,074,076 shares of Common Stock upon the
consummation of this offering. The holders of certain of such shares of Series B
Preferred Stock are entitled to certain registration rights with respect to the
Common Stock issuable upon conversion thereof. See "Description of Capital
Stock -- Registration Rights."
In September and October 1997, the Company issued shares of Series C
Preferred Stock (the "Series C Financing") in private placements to certain
investors at a purchase price of $2.04 per share ($1.70 as adjusted for the
Spin-off), including issuances to the following entities in the number of shares
specified thereafter: (i) Global Retail Partners and its affiliates (1,470,588)
(each an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and collectively "GRP"); (ii) UT Capital Partners International, LDC
(formerly UH Capital Partners International, LDC) (59,914); UT Technology
Partners, LDC (formerly UH Technology Partners, LDC) (185,184); Unterberg Harris
Private Equity Partners, LP (201,961); Unterberg Harris Private Equity Partners,
CV (43,137) (collectively, the "Unterberg Affiliates"); and (iii) Vulcan
(716,666). In connection with the Series C Financing, the holders of Series C
Preferred Stock were given the right to designate one director of the Company
(the "Series C Director"). Linda Fayne Levinson, the Series C Director, is a
principal of Global Retail Partners, L.P., an affiliate of DLJ. Messrs. Novak
and Kolde and Ms. Levinson disclaim beneficial ownership of the shares of Series
C Preferred Stock issued to the Unterberg Affiliates, Vulcan and GRP,
respectively, except for any proportional interest held therein, if any. All of
the outstanding shares of Series C Preferred Stock will convert into an
aggregate of 3,000,000 shares of Common Stock upon consummation of this
offering. The holders
54
<PAGE> 56
of certain of such shares of Series C Preferred Stock are entitled to certain
registration rights with respect to the Common Stock issuable upon conversion
thereof. See "Description of Capital Stock -- Registration Rights."
In March and April 1998, the Company issued shares of Series D Preferred
Stock (the "Series D Financing") in private placements to certain investors at a
purchase price of $2.60 per share, including issuances to the following entities
in the number of shares specified thereafter: GRP (458,106); certain of the
Unterberg Affiliates (229,052); and Vulcan (458,106), which shares in the
aggregate will convert into 1,145,264 shares of Common Stock upon the
consummation of this offering. Messrs. Novak and Kolde and Ms. Levinson, each a
director of the Company, disclaim beneficial ownership of the shares of Series D
Preferred Stock issued to the Unterberg Affiliates, Vulcan and GRP,
respectively, except for any proportional interest held therein, if any. All of
the outstanding shares of Series D Preferred Stock will convert into an
aggregate of 1,153,846 shares of Common Stock upon consummation of this
offering. The holders of certain of such shares of Series D Preferred Stock are
entitled to certain registration rights with respect to the Common Stock
issuable upon conversion thereof. See "Description of Capital
Stock -- Registration Rights."
In March and April of 1998, and concurrently with the sale of Series D
Preferred Stock, each of the holders of Series C Preferred and Series D
Preferred (collectively, the "Series C/D Holders") and the Company entered into
the Shareholders' Agreement (the "Shareholders' Agreement"), whereby the parties
agreed to the following: (A) the Series C/D Holders agreed to vote for the
person selected by GRP as the director designated by the holders of the Series C
and Series D Preferred Stock, and (B) the Company agreed to not permit the
transfer of any of the Series C or Series D Preferred Stock (or Common Stock
issuable upon conversion thereof) covered by the Shareholders' Agreement on its
books or issue a new certificate representing any such shares until the person
to whom such shares are to be transferred has executed a written agreement
substantially in the form of the Shareholders' Agreement and has agreed to be
bound by the terms thereof. This Shareholders' Agreement superseded the Series C
Shareholders' Agreement dated as of September 26, 1997, pursuant to which (A)
certain holders of Series C Preferred Stock agreed to vote for the person
selected by GRP as the director designated by the holders of the Series C
Preferred Stock, and (B) Vulcan agreed not to elect to redeem its shares of
Series B Preferred Stock until the holders of Series C Preferred Stock have the
right to seek redemption of their Series C Preferred Stock pursuant to the
Company's Certificate of Incorporation. The Shareholders' Agreement will
terminate upon the consummation of this offering.
In March 1998, the Company entered into an agreement with AOL pursuant to
which, subject to certain limited exceptions, AOL agreed to buy shares of the
Company's Common (the "AOL Shares") Stock at a price per share equal to the
initial public offering price (less the Underwriters' discount) for an aggregate
purchase price of $2,000,000 (the "Common Stock and Warrants Subscription
Agreement"). Based on an initial public offering price of $ per
share, AOL will purchase shares of Common Stock immediately prior
to the consummation of this offering. Concurrent with the purchase of the shares
of Common Stock by AOL immediately prior to the consummation of this offering,
the Company will issue to AOL a Warrant for a number of shares of Common Stock
equal to 1.5 times the number of shares of Common Stock purchased by AOL in the
aforementioned investment at a per share exercise price equal to the initial
public offering price (less the Underwriters' discount) which will vest in
increments of 1/36th per month commencing March 1, 1998. Based on an offering
price of $ per share, the AOL Warrant will be for
shares of Common Stock immediately prior to the consummation of this offering.
AOL also received certain registration rights pursuant to a registration rights
agreement entered into concurrently with the Common Stock and Warrants
Subscription Agreement. See "Description of Capital Stock -- Registration
Rights."
In March 1998, the Company also issued a Warrant to AOL to purchase 369,578
shares of the Company's Series D Preferred Stock at a price of $2.60 per share
vesting in increments of 1/36th per month commencing March 1, 1998, provided
however, that this Warrant is not exercisable until
55
<PAGE> 57
after August 31, 1999, except in the event of a change of control of the Company
(as defined therein). This Warrant will terminate in accordance with its terms
immediately prior to the consummation of this offering.
OPTION GRANTS AND AGREEMENTS WITH EXECUTIVE OFFICERS AND DIRECTORS
In March 1995, the Company granted options to purchase 1,000,000 shares of
Common Stock to John P. Pettitt in consideration of services provided to the
Company by Mr. Pettitt. Mr. Pettitt's options have an exercise price of $0.004
as adjusted for the Spin-off) and are fully vested. Mr. Pettitt's option rights
expire upon the earlier to occur of the date Mr. Pettitt ceases to be employed
by the Company or December 31, 2000. Upon termination of Mr. Pettitt's
employment for any reason except death or disability, the options must be
exercised within 30 days of the termination date or such options will be
forfeited. In the event of termination due to death or disability, Mr. Pettitt's
options shall be forfeited unless exercised within six months of the termination
date. In the event of certain corporate reorganizations or other specific
corporate transactions affecting the Common Stock of the Company, proportional
adjustments may be made to the number of shares available for Mr. Pettitt's
grant and to the number of shares and price awards made prior to the event. Mr.
Pettitt's grants are intended as non-qualifying options. In April 1995, the
Company granted options to purchase 250,000 shares of Common Stock to Mr.
Pettitt under the 1995 Stock Option Plan. These options have an exercise price
of $0.004 per share and are fully vested. As of the date of this Prospectus, Mr.
Pettitt had vested options to purchase 1,250,000 shares of Common Stock, 250,000
of which were issued under the 1995 Stock Option Plan and are subject to the
general requirements of such Plan.
In December 1997, Richard Scudellari, a director and Secretary of the
Company and a partner of Jackson Tufts Cole & Black, LLP, the Company's counsel,
exercised options granted under the 1995 Stock Option Plan to purchase 70,000
shares of the Company's Common Stock for an aggregate purchase price of $1,950.
In January 1998, Mr. Scudellari was granted an option to purchase 10,000 shares
of the Company's Common Stock at an exercise price of $.50 per share.
In January 1998 William Holtzman, the Company's Vice President of Site
Marketing, was granted an option to purchase 120,000 shares of Common Stock at
an exercise price of $1.20 per share and are generally governed by the terms of
the 1995 Stock Option Plan.
On March 30, 1998 the Company granted an option to purchase 1,000,000
shares of Common Stock to Mark L. Breier, its President and Chief Executive
Officer, under the 1995 Stock Option Plan. This option has an exercise price of
$2.60 per share and is governed generally by the terms of the 1995 Stock Option
Plan, with certain limited exceptions. In the event that: (i) the Company is
sold or is party to a merger with another company resulting in the Company's
stockholders immediately prior to such transaction owning less than 50% of the
successor company's voting capital stock immediately following such transaction;
or (ii) Mr. Breier resigns due to (A) a material reduction in title or
responsibilities, or (B) the Company requires Mr. Breier's ongoing and regular
duties to be performed at a location more than 60 miles from the Company's
current headquarters (each, an "Accelerating Event") occurring prior to
September 30, 1999, a number of shares equal to the number exercisable one year
after the Accelerating Event will be immediately exercisable. In the event of an
Accelerating Event occurring after September 30, 1999, a number of shares equal
to the sum of the number of shares exercisable and one-half of the shares not
exercisable as of the Accelerating Event will be immediately exercisable. In the
event that Mr. Breier is terminated prior to March 30, 1999 for any reason,
125,000 shares will be immediately exercisable.
In March, 1998, Steven P. Novak, a director of the Company and a Managing
Director of C.E. Unterberg, Towbin, exercised options under the Company's 1995
Stock Option Plan to purchase 20,000 shares of the Company's Common Stock for an
aggregate purchase price of $200. In addition, Mr. Novak received an option to
purchase 20,000 of the Company's Common Stock at an exercise price of $0.0333
per share in January 1996; an option to purchase 10,000 shares in
56
<PAGE> 58
January 1997 at an exercise price of $0.1125 per share; and an option to
purchase 10,000 shares in January 1998 at an exercise price of $0.50 per share.
In April 1998, the Company granted an option to purchase 200,000 shares of
Common Stock to Michael J. Praisner, its Vice President of Finance and
Administration and Chief Financial Officer under the 1998 Stock Option Plan.
These options have an exercise price of $4.36 per share and are governed
generally by the terms of the 1998 Stock Option Plan.
In April 1998 Alan C. DeClerck, the Company's Vice President of Sales, was
granted an option to purchase 180,000 shares of Common Stock under the 1998
Stock Option Plan. These option have an exercise price of $4.96 per share and
are governed generally by the terms of the 1998 Stock Option Plan.
RELATIONSHIP WITH CYBERSOURCE CORPORATION
In December 1997, in order to focus on its core business of selling
Software over the Internet, the Company spun-off (the "Spin-off") its internet
commerce services business to a new Delaware Corporation which operates under
the name CyberSource Corporation ("CyberSource") In connection with the
Spin-off, CyberSource issued capital stock to the stockholders of the Company
such that, following consummation of the Spin-off and the transactions
contemplated thereby, each stockholder of the Company was the holder of shares
of capital stock of CyberSource in equal number and ownership proportion and
with the same rights as such stockholder had as a stockholder of the Company. On
the date of the Spin-off, employees of the Company maintained their outstanding
options to purchase Common Stock of the Company and were granted additional
stock options in CyberSource based on the extent to which the employees original
options were vested. Employees of CyberSource immediately following the Spin-off
maintained their outstanding vested incentive stock options in the Company and
were granted additional stock options in CyberSource. The exercise prices of the
original and additional option grants were adjusted to reflect the allocation of
the current fair market per share price between the Company's and CyberSource's
Common Stock. Options held by the CyberSource employees that had not vested as
of the date of the Spin-off were canceled.
The Company and CyberSource have entered into certain agreements for the
purpose of defining the ongoing relationship between the two companies. Five out
of six of the Company's directors are also directors of CyberSource and certain
other members of the Company's management team joined CyberSource as executive
officers. Accordingly, these agreements are not the result of arm's length
negotiations between independent parties. The following discussion of the
agreements between the Company and CyberSource are qualified in their entirety
by reference to the agreements, which have been filed as exhibits hereto.
Pursuant to the terms of a Conveyance Agreement dated December 31, 1997,
the Company transferred to CyberSource the technology (including rights to all
patent applications, trademarks and other intellectual property rights of the
Company relating thereto), contracts and licenses with third parties and certain
tangible assets relating to or utilized by the Company in connection with credit
card processing, fraud screening, export control, territory management and
electronic fulfillment services. In addition, those of the Company's employees
engaged in the Company's internet commerce services business were transferred to
CyberSource in connection with the Spin-off.
In connection with such transfer, the Company and CyberSource entered into
an Inter-Company Cross-License Agreement (the "Cross License Agreement")
pursuant to which the Company granted to CyberSource a non-exclusive, worldwide,
perpetual, irrevocable, royalty-free license to internally use the Company's
Cache Manager technology and to use and sublicense the Company's customer
database for certain limited purposes. Under the Cross License Agreement,
CyberSource granted the Company a worldwide, perpetual, irrevocable,
royalty-free license to internally use CyberSource's Sm@rtCert technology with
the right to modify such technology for purposes of embedding such technology
into Software developed by the Company for subsequent sublicense,
57
<PAGE> 59
sale or use by enterprises and governmental agencies, subject to certain
limitations. The Cross License Agreement further provides that the parties shall
have joint ownership of certain utility tools made by the parties and allocates
between the Company and CyberSource the ownership of improvements, enhancements
and modifications made by the parties to the Sm@rtCert and Cache Manager
Technology during 1999. The Cross License Agreement also allocates between the
Company and CyberSource the ownership of certain inventions made by each party
on or before June 30, 1998. Each party has agreed to indemnify the other against
any third party claims regarding the use of the licensed technology by such
licensee that results in a claim against the licensor, except to the extent that
such claim is based upon a claim that the licensed technology infringes upon any
third party's technology rights.
CyberSource and the Company also entered into an Internet Commerce Services
Agreement, pursuant to which CyberSource has agreed to provide certain services
including credit card processing, fraud screening, export control, territory
management and electronic fulfillment, in a "back office" capacity. This
Agreement expires on April 23, 1999 and automatically renews for an additional
one year term, unless otherwise terminated by either party. See "Risk
Factors -- Risks Associated with Dependence on CyberSource Corporation;
Relationship with CyberSource Corporation" and "Business -- Relationship with
CyberSource Corporation."
In connection with the Spin-off, the Board of Directors of the Company and
the stockholders of the Company approved loans in amounts equal to the adverse
incremental income tax incurred by any stockholder as a result of the Spin-off
and the transactions contemplated thereby. In April 1998, the Company loaned
$270,000 to William S. McKiernan, the sole stockholder incurring such adverse
tax consequences, so as to offset Mr. McKiernan's incremental 1997 income tax.
The loan to Mr. McKiernan is secured by 129,808 shares of Common Stock held by
Mr. McKiernan and will be due and payable no later than 18 months from the
consummation of this offering.
The Company has entered into indemnification agreements with each of its
executive officers and directors. See "Management -- Limitation of Liability and
Indemnification Matters."
58
<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of April 20, 1998, and as
adjusted to reflect the sale of the Common Stock offered hereby for (i) each of
the Named Executives of the Company, (ii) each director of the Company, (iii)
each person or entity known by the Company to beneficially own more than 5% of
the Common Stock, and (iv) all of the Company's directors and executive officers
as a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING(1)
NUMBER OF SHARES ---------------------
BENEFICIALLY PRIOR TO AFTER
NAMED EXECUTIVE OFFICERS AND DIRECTORS OWNED(1) OFFERING OFFERING
-------------------------------------- ---------------- -------- ---------
<S> <C> <C> <C>
William S. McKiernan(2).............................. 8,996,154 42.3%
John P. Pettitt(3)................................... 1,250,000 5.5%
Vulcan Ventures Inc.(4).............................. 3,036,624 14.3%
110 110th Avenue NE,
Suite 550
Bellevue, Washington 98004
Entities affiliated with C. E. Unterberg,
Towbin(5).......................................... 2,275,510 10.7%
Swiss Bank Tower
10 East 50th Street,
22nd Floor
New York, New York 10002
Global Retail Partners, L.P. and its affiliates(6)... 1,928,694 9.1%
2121 Avenue of the Stars
Los Angeles, California 90067
Hubert E. Kolde(7)................................... 3,036,624 14.3%
Linda Fayne Levinson(8).............................. 1,928,694 9.1%
Steven P. Novak(9)................................... 2,275,510 10.7%
Richard Scudellari(10)............................... 70,000 *
WA&H Investments..................................... 1,153,321 5.4%
First Bank Place
601 Second Ave. South,
31st Floor
Minneapolis, MN 55402
All Directors and Executive Officers as a Group (10
Persons)(11):........................................ 17,556,982 77.8%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1% of the Company's
outstanding equity.
(1) Number of shares beneficially owned is determined based on: (i) 21,288,962
shares outstanding as of April 20, 1998; (ii) shares
outstanding after this offering; and (iii) assumes no exercise of the
Underwriters' over-allotment option and includes shares of Common
Stock to be issued to AOL immediately prior to the consummation of this
offering assuming an initial public offering price of $ per share.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially
owned by a person includes shares of Common Stock subject to options held
by that person that are currently exercisable or exercisable within 60
days of April 20, 1998. Such shares issuable pursuant to such options are
deemed outstanding for computing the percentage ownership of the person
holding such options but not deemed outstanding for the purposes of
computing the percentage ownership of each other person. Accordingly,
executive officers of the Company Mark L. Breier, Michael J. Praisner,
Alan C. DeClerck and William C. Holtzman, holders of options to purchase
1,000,000, 200,000, 180,000 and 120,000 shares of Common Stock,
respectively, none of which are exercisable within 60 days of April 20,
1998, are not listed in this table. To the Company's knowledge, the
persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as owned by them, subject to
community property laws where applicable and except as indicated in the
other footnotes to this table. Unless otherwise indicated, the address of
each of the individuals named above is: c/o software.net Corporation, 3031
Tisch Way, Ste. 900, San Jose, California 95128.
59
<PAGE> 61
(2) Includes 8,938,464 shares held by Mr. McKiernan and 57,690 shares held by
members of Mr. McKiernan's immediate family. Mr. McKiernan disclaims
beneficial ownership of the shares held by his immediate family.
(3) Represents 1,250,000 shares issuable upon exercise of options immediately
exercisable.
(4) Represents 3,026,624 shares held by Vulcan Ventures Inc. ("Vulcan") and
options to purchase 10,000 shares of Common Stock, exercisable
immediately, held by Hubert E. Kolde, a Director of the Company and a
director, Vice President, Secretary and Treasurer of Vulcan. Mr. Kolde
disclaims beneficial ownership of the shares owned by Vulcan, except for
his proportional interest therein; if any.
(5) Includes 59,914 shares held by UT Capital Partners International, LDC
(formerly U.H Capital Partners International, LDC), 368,426 shares held by
UT Technology Partners, LDC (formerly UH Technology Partners, LDC);
1,506,262 shares held by C. E. Unterberg Towbin Capital Partners I, L.P.
(formerly Unterberg Harris Capital Partners); 239,708 shares held by
Unterberg Harris Private Equity Partners, L.P. and 51,200 shares held by
Unterberg Harris Private Equity Partners, CV (collectively, the "Unterberg
Affiliates") and 20,000 shares of Common Stock, and options to purchase
30,000 shares of Common Stock that are exercisable within 60 days of April
20, 1998, held by Steven P. Novak, a Managing Director of Unterberg. Mr.
Novak disclaims beneficial ownership of all shares owned by the Unterberg
Affiliates.
(6) Represents 1,928,694 shares held by Global Retail Partners, L.P. and its
affiliates (collectively, "GRP"), each an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ").
(7) Represents options to purchase 10,000 shares of Common Stock held by
Hubert E. Kolde, a Director of the Company and a director, the Vice
President, Secretary and Treasurer of Vulcan, all of which are exercisable
immediately, and 3,026,624 shares held by Vulcan. Mr. Kolde disclaims
beneficial ownership of the shares owned by Vulcan, except for his
proportional interest therein, if any.
(8) Represents 1,928,694 shares of Common Stock held, in the aggregate, by
GRP. Linda Fayne Levinson, the Series C Director, is a principal of Global
Retail Partners, L.P. Ms. Levinson disclaims beneficial ownership of all
shares owned by GRP, except for any proportional interest held therein.
(9) Represents 20,000 shares of Common Stock and options to purchase 30,000
shares of Common Stock held by Mr. Novak, all of which are exercisable
immediately, and 2,225,510 shares held, in the aggregate, by the Unterberg
Affiliates. Mr. Novak, a Director of the Company, is a Managing Director
of Unterberg. Mr. Novak disclaims beneficial ownership of all shares owned
by the Unterberg Affiliates.
(10) Represents 70,000 shares of Common Stock held by Mr. Scudellari.
(11) Includes options to purchase 1,290,000 shares of Common Stock that vest
within 60 days of April 20, 1998 held by all directors and executive
officers of the Company.
60
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $0.001 par value per
share, and 23,176,404 shares of undesignated Preferred Stock, $0.001 par value
per share.
COMMON STOCK
As of April 20, 1998, there were 9,090,000 shares of Common Stock
outstanding held of record by 15 stockholders. There will be
shares of Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options) after giving
effect to the sale of Common Stock offered to the public hereby. Subject to
preferences that may be applicable to any outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
for the payment of dividends. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and liquidation preferences of any outstanding shares of Preferred
Stock. Holders of Common Stock have no preemptive rights or other subscription
rights 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 and the shares of Common Stock to be issued
upon completion of this offering will be fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into 12,198,962 shares of Common Stock and automatically
retired. Thereafter, pursuant to the Company's Certificate of Incorporation, the
Board of Directors will have the authority, without further action by the
stockholders, to issue up to 15,000,000 shares of Preferred Stock in one or more
series and to fix the designations, powers, preferences, privileges and
relative, participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Common Stock. The Board of
Directors, without stockholder approval, can issue Preferred Stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
the Company or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of the
holders of Common Stock. The Company has no plans to issue any Preferred Stock.
WARRANTS
In March 1998, the Company entered into the Common Stock and Warrants
Subscription Agreement with AOL pursuant to which, subject to certain limited
exceptions, AOL agreed to buy AOL shares of Common Stock at a price per share
equal to the initial public offering price (less the Underwriters' discount) for
an aggregate purchase price of $2,000,000. Based on an initial public offering
price of $ per share, AOL will purchase shares of
Common Stock immediately prior to the consummation of this offering. Concurrent
with the purchase of the shares of Common Stock by AOL immediately prior to the
consummation of this offering, the Company will issue to AOL a Warrant for a
number of shares of Common Stock equal to 1.5 times the number of shares of
Common Stock purchased by AOL in the aforementioned investment (the "AOL Warrant
Shares") at a per share exercise price equal to the initial public offering
price (less the Underwriters' discount) which will vest in increments of 1/36th
per month commencing March 1, 1998. Based
61
<PAGE> 63
on an offering price of $ per share, the Company will issue to AOL
a warrant for shares of Common Stock immediately prior to the
consummation of this offering.
In March 1998, the Company also issued a warrant to AOL (the "AOL Warrant")
to purchase 369,578 shares of the Company's Series D Preferred Stock at a price
of $2.60 per share vesting in increments of 1/36th per month commencing March 1,
1998; provided, however, that the AOL Warrant is not exercisable until after
August 31, 1999, except in the event of a change of control of the Company. The
AOL Warrant will terminate in accordance with its terms immediately prior to the
consummation of this offering.
AOL also received certain registration rights with respect to the foregoing
shares of Common Stock, Warrant and the AOL Warrant Shares.
REGISTRATION RIGHTS
Pursuant to agreements among the Company and the holders of an aggregate of
8,176,404 shares of Preferred Stock which will automatically convert in the
aggregate to 12,198,962 shares of Common Stock upon consummation of this
offering and the holders of 9,000,000 shares of Common Stock (the "Registration
Rights Holders"), the Registration Rights Holders are entitled to certain rights
with respect to the registration of such shares under the Securities Act. If the
Company proposes to register any of its securities under the Security Act,
either for its own account or for the account of other security holders, the
Registration Rights Holders are entitled to notice of such registration and to
include shares of Common Stock in such registration at the Company's expense
(subject to an underwriter's cutback). The Registration Rights Holders are
entitled to certain demand registration rights pursuant to which they may
require the Company 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 commercially reasonable efforts to effect such
registration (a "Requested Registration"). All of these registration rights are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration and the right of the Company not to effect a Requested Registration
in certain specific situations. The Company is required to bear all registration
expenses (other than underwriting discounts and commissions and fees, and
certain fees and disbursements of counsel of the Registration Rights Holders,
subject to certain limitations) and has agreed to indemnify the Registration
Rights Holders against, and provide contribution with respect to, certain
liabilities under the Securities Act in connection with such registration.
Pursuant to a registration rights agreement with AOL, the Company has
granted AOL certain registration rights with respect to the AOL Shares and AOL
Warrant Shares, including incidental registration rights if the Company files a
registration statement covering any of its securities under the Securities Act
(with the exception of an offering pursuant to a registration statement on Forms
S-1, S-8 or S-4). These registration rights include the right to require the
Company, subject to certain limitations, to register the AOL shares and the AOL
Warrant Shares for resale by filing a shelf registration statement at any time
180 days following the effective date of the Company's registration statement
covering its initial public offering and to continuously maintain the
effectiveness of such registration statement at least 90 days. The Company is
required to bear registration expenses (other than underwriting discounts and
commissions and fees) up to a specified limited and thereafter to bear its pro
rata share of such costs to the extent that the Company is selling shares in
such offering. The Company has also agreed to indemnify AOL against, and provide
contribution with respect to, certain liabilities under the Securities Act in
connection with incidental and demand registrations. AOL has agreed that it
shall not, to the extent requested by the Company and its underwriters and
subject to certain limitations, sell or otherwise dispose or transfer any
securities of the Company for a period of 180 days following the effective date
of the first registration statement of the Company filed under the Securities
Act.
62
<PAGE> 64
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION
As noted above, the Company's Board of Directors, without stockholder
approval, has the authority under the Company's Certificate of Incorporation to
issue Preferred Stock with rights superior to the rights of the holders of
Common Stock. As a result, Preferred Stock could be issued quickly and easily,
could adversely affect the rights of holders of Common Stock and could be issued
with terms calculated to delay or prevent a change in control of the Company or
make removal of management more difficult.
Section 203 of the Delaware General Corporation Law ("DGCL") contains
certain provisions that may make more difficult the acquisition of control of
the Company by means of a tender offer, open market purchase, a proxy fight or
otherwise. These provisions are designed to encourage persons seeking to acquire
control of the Company to negotiate with the Board of Directors. However, these
provisions could have the effect of discouraging a prospective acquiror from
making a tender offer or otherwise attempting to obtain control of the Company.
To the extent that these provisions discourage takeover attempts, they could
deprive stockholders of opportunities to realize takeover premiums for their
shares or could depress the market price of the Common Stock.
Section 203 of the DGCL prohibits certain "business combination"
transactions between a publicly held Delaware corporation, such as the Company
after this offering, and any "interested stockholder" for a period of three
years after the date on which the latter became an interested stockholder,
unless (i) prior to that date either the proposed business combination or the
proposed acquisition of stock resulting in its becoming an interested
stockholder is approved by the board of directors of the corporation, (ii) in
the same transaction in which it becomes an interested stockholder, the
interested stockholder acquires at least 85% of those shares of the voting stock
of the corporation which are not held by the directors, officers or certain
employee stock plans or (iii) the business combination with the interested
stockholder is approved by the Board of Directors and also approved at a
stockholders' meeting by the affirmative vote of the holders of at least two
thirds of the outstanding shares of the corporation's voting stock other than
shares held by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
The transfer agent's address is 150 Royall Street, Canton, Massachusetts 02021
and telephone number is (781) 575-2000.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the Common Stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of the Common Stock of the Company in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through an offering of its equity securities.
Upon completion of this offering, the Company will have outstanding
shares of Common Stock. Of these shares, the
shares offered hereby (plus any shares issued upon exercise of the Underwriters'
over-allotment option) will be freely tradable in the public market without
restriction under the Securities Act, unless such shares are held by
"Affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act.
The remaining 21,288,962 shares of Common Stock outstanding upon completion
of this offering will be "restricted securities," as that term is defined in
Rule 144 ("Restricted Shares").
63
<PAGE> 65
The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act. Restricted Shares may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act, which are summarized
below.
Pursuant to certain "Lock-up Agreements," all the executive officers,
directors, stockholders and employees of the Company have agreed not to offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of any
such shares for a period of 180 days from the date of this Prospectus without
the prior written consent of Deutsche Morgan Grenfell Inc. ("DMG").
Beginning 180 days after the date of this Prospectus, upon expiration of
the Lock-up Agreements, approximately 2,464,778 of the Restricted Shares will be
eligible for sale without restriction under Rule 144(k) and 17,670,338 of the
Restricted Shares will be eligible for sale subject to compliance with the
volume and other restrictions of Rule 144. The remaining 1,153,846 Restricted
Shares will be eligible for sale at various times over a period of one year from
the expiration of the Lock-up Agreements, subject in some cases to the volume
and other restrictions of Rule 144.
In general, under Rule 144, beginning approximately 90 days after the
effective date of the Registration Statement of which this Prospectus is a part,
a stockholder, including an Affiliate, who has beneficially owned his or her
restricted securities (as that term is defined in Rule 144) for at least one
year from the later of the date such securities were acquired from the Company
or (if applicable) the date they were acquired from an Affiliate, is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately shares immediately after this offering) or the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an Affiliate) is entitled to sell the shares immediately
without compliance with the foregoing requirements of Rule 144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted prior
to this offering) are also restricted securities and, beginning 90 days after
the date of this Prospectus, may be sold by stockholders other than Affiliates
of the Company subject only to the manner of sale provisions of Rule 144 and by
an Affiliate under Rule 144 without compliance with its one-year holding period
requirement. Presently 90,000 shares of Common Stock issued pursuant to the
exercise of options granted in reliance on Rule 701 are outstanding and held by
Affiliates. Therefore, these shares are not subject to the one-year holding
period requirement of Rule 144 and may be sold following the expiration of the
lock-up agreements subject only to the volume restrictions of Rule 144. As of
the date of this Prospectus, the holders of options exercisable into
approximately 3,721,055 shares of Common Stock will be eligible to sell their
shares upon the expiration of transfer restrictions specified in the Plans 180
days after the date of this Prospectus, subject in certain cases to vesting of
such options.
The Company intends to file after the effective date of this offering a
Registration Statement on Form S-8 to register approximately 3,000,000 shares of
Common Stock reserved for issuance under the 1995 Stock Option Plan, 2,000,000
shares of Common Stock reserved for issuance under the 1998 Stock Option Plan
and 1,000,000 shares reserved for issuance outside such plans. Such Registration
Statement will become effective automatically upon filing. Shares issued under
the foregoing option plans and option grant outside the plan, after the filing
of a Registration Statement on Form S-8, may be sold in the open market,
subject, in the case of certain holders, to the Rule 144
64
<PAGE> 66
limitations applicable to Affiliates, the above-referenced lock-up agreements
and vesting restrictions imposed by the Company.
In addition, following this offering, the holders of 9,000,000 shares of
outstanding Common Stock will, under certain circumstances, have rights to
require the company to register their shares for future sale. See "Description
of Capital Stock -- Registration Rights."
Of the shares of Common Stock offered hereby,
shares (assuming an initial public offering price of
$ per share) are being reserved for sale to AOL, which has agreed
to purchase such shares from the Company at the initial public offering price
less the Underwriters' discounts. Upon completion of this offering, the Company
will also issue a warrant to AOL for the future purchase of up to
additional shares of Common Stock (assuming an initial public
offering price of $ per share) at the initial public offering
price per share (less the Underwriters' discount). See "Description of Capital
Stock -- Warrants."
65
<PAGE> 67
UNDERWRITING
The Underwriters named below, for whom Deutsche Morgan Grenfell Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch & Co. and C.
E. Unterberg, Towbin are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement (the form of which will be filed as an exhibit to the
Company's Registration Statement, of which this Prospectus is a part), to
purchase from the Company the respective number of shares of Common Stock
indicated below opposite their respective names. The Underwriters are committed
to purchase all of the shares, if they purchase any.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Deutsche Morgan Grenfell Inc................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
C. E. Unterberg, Towbin.....................................
Total.............................................
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions.
The Representatives have advised the Company that the Underwriters
initially propose to offer the Common Stock to the public on the terms set forth
on the cover page of this Prospectus. The Underwriters may allow selected
dealers (who may include the Underwriters) a concession of not more than
$ per share below the initial public offering price. The selected dealers
may re-allow a concession of not more than $ per share to certain other
dealers. After the initial public offering, the price and concessions and
re-allowances to dealers and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part. The Underwriters do not intend to sell any of
the shares of Common Stock offered hereby to accounts for which they exercise
discretionary authority.
The Company has granted an option to the Underwriters to purchase up to a
maximum of additional shares of Common Stock to cover over-allotments, if
any, at the initial public offering price, less the Underwriters' discount set
forth on the cover page of this Prospectus. Such option may be exercised at any
time until 30 days after the date of the Underwriting Agreement. To the extent
the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
The officers and directors who are stockholders of the Company, other
existing stockholders of the Company and existing option holders have agreed,
subject to certain exceptions, that they will not, without the prior written
consent of DMG, offer, sell or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities exchangeable
for or convertible into shares of Common Stock owned by them during the 180-day
period following the date of the final Prospectus. The Company has agreed that
it will not, without the prior written consent of DMG, offer, sell or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock or securities exchangeable for or convertible into shares of Common
Stock during the 180-day period following the date of the final Prospectus,
except that the Company may issue shares upon the exercise of options granted
prior to the date hereof, and may grant additional options, provided that,
without the prior written consent of DMG such additional options shall not be
exercisable during such period.
66
<PAGE> 68
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, as amended, or will contribute to payments the
Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company and the Representatives. The principal factors to be
considered in determining the public offering price include the information set
forth in this Prospectus and otherwise available to the Representatives; the
history and the prospects for the industry in which the Company will compete;
the ability of the Company's management; the prospects for future earnings of
the Company; the present state of the Company's development and its current
financial condition; the general condition of the securities markets at the time
of this offering; and the recent market prices of, and the demand for,
publicly-traded common stock of generally comparable companies. Each of the
Representatives has informed the Company that it currently intends to make a
market in the shares subsequent to the effectiveness of this offering, but there
can be no assurance that the Representatives will take any action to make a
market in any securities of the Company.
The Underwriters have reserved for sale, at the initial public offering
price, up to 7% of the Common Stock offered hereby (including shares of Common
Stock subject to the Underwriters' over-allotment option) for certain
individuals who have expressed an interest in purchasing such shares of Common
Stock in the offering. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares not so purchased will be offered by the Underwriters to the
general public on the same basis as other shares offered hereby.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which otherwise might prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate-covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with this
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate-covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
Affiliates of C. E. Unterberg, Towbin are stockholders of the Company, and
Steven P. Novak, the Series A Director and stockholder of the Company, is a
Managing Director of C. E. Unterberg, Towbin. Global Retail Partners, L.P. and
its affiliates, each an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") are stockholders of the Company, and Linda Fayne Levinson,
the Series C Director, is a principal of Global Retail Partners, L.P., an
affiliate of DLJ and a stockholder of the Company. See "Management," "Certain
Transactions" and "Principal Stockholders."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
LEGAL MATTERS
Certain legal matters will be passed on for the Company by its counsel,
Jackson Tufts Cole & Black, LLP, San Jose, California. As of April 15, 1998,
Richard Scudellari, a partner in that firm and a director of the Company owned
70,000 shares of Company's Common Stock and held options to purchase 10,000
shares of the Company's Common Stock. See "Principal Stockholders" and
67
<PAGE> 69
"Certain Transactions." Certain legal matters will be passed on for the
Underwriters by Venture Law Group, A Professional Corporation, Menlo Park,
California.
EXPERTS
The Consolidated Financial Statements of software.net at December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement, of
which this Prospectus constitutes a part, under the Securities Act with respect
to the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information with
respect to the Company and the Common Stock offered hereby. Statements contained
herein concerning the provisions of any documents are not necessarily complete,
and in each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. The Registration Statement, including exhibits filed
therewith, may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, such as the
Company, that file electronically with the Commission. Information concerning
the Company is also available for inspection at the offices of the Nasdaq
National Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
Statements contained in this Prospectus as to the contents of any contract
or other document to which reference is made are summaries of the material terms
of such contracts or documents, 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.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing updated summary financial information for each of
the first three quarters of each fiscal year.
68
<PAGE> 70
SOFTWARE.NET CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency)... F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 71
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
software.net Corporation
We have audited the accompanying consolidated balance sheets of
software.net Corporation as of December 31, 1996 and 1997, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity (net capital deficiency), and cash flows for each of
the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of software.net
Corporation at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
March 25, 1998
F-2
<PAGE> 72
SOFTWARE.NET CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ MARCH 31, MARCH 31,
1996 1997 1998 1998
------- -------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 3,737 $ 2,571 $ 2,232
Accounts receivable, net of allowances of $65,
$275, and $400 at December 31, 1996 and 1997,
and March 31, 1998........................... 431 1,181 1,785
Prepaid expenses and other current assets....... 76 516 932
Cost of deferred revenue........................ 819 4,938 2,510
Net current assets of discontinued operations... 80 -- --
------- -------- --------
Total current assets.................... 5,143 9,206 7,459
Property and equipment, net....................... 66 380 504
Net noncurrent assets of discontinued
operations...................................... 482 -- --
Intangible assets................................. -- -- 425
------- -------- --------
Total assets............................ $ 5,691 $ 9,586 $ 8,388
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable................................ $ 536 $ 2,256 $ 2,227
Other accrued liabilities....................... 97 270 705
Current obligations under capital leases........ -- 18 17
Deferred revenue................................ 967 5,569 3,214
------- -------- --------
Total current liabilities............... 1,600 8,113 6,163
Note payable to a shareholder and director........ 105 60 --
Noncurrent obligations under capital leases....... -- 39 33
Commitments
Redeemable convertible preferred stock, no par
value, issuable in series:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 4,022,558 in
1996, 7,022,558 in 1997, 7,899,938 in 1998,
and none pro forma (liquidation preference
of $10,428 and $12,709 at December 31, 1997
and March 31, 1998, respectively).......... 6,395 12,565 15,257 $ --
Stockholders' equity (net capital deficiency):
Common stock, no par value:
Authorized shares -- 30,000,000
Issued and outstanding shares -- 9,000,000 in
1996, 9,070,000 in 1997, 9,090,000 in 1998,
and 21,012,496 pro forma................... 45 47 47 15,304
Accumulated deficit............................. (2,454) (11,238) (13,112) (13,112)
------- -------- -------- --------
Total stockholders' equity (net capital
deficiency)........................... (2,409) (11,191) (13,065) $ 2,192
------- -------- -------- ========
Total liabilities and stockholders'
equity (net capital deficiency)....... $ 5,691 $ 9,586 $ 8,388
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 73
SOFTWARE.NET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ----------------
1995 1996 1997 1997 1998
------ ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................ $1,003 $ 5,858 $16,806 $3,158 $ 6,192
Cost of revenues........................ 623 5,137 14,873 2,783 5,189
------ ------- ------- ------ -------
Gross profit............................ 380 721 1,933 375 1,003
Operating expenses:
Research and development.............. 388 431 1,060 155 602
Sales and marketing................... 407 704 1,696 265 1,694
General and administrative............ 103 450 1,087 164 581
------ ------- ------- ------ -------
Total operating expenses...... 898 1,585 3,843 584 2,877
------ ------- ------- ------ -------
Loss from operations.................... (518) (864) (1,910) (209) (1,874)
Interest income......................... 7 96 173 40 27
Interest expense........................ -- (11) (6) -- (2)
------ ------- ------- ------ -------
Loss from continuing operations......... (511) (779) (1,743) (169) (1,849)
Loss from discontinued operations....... -- (736) (3,616) (583) --
------ ------- ------- ------ -------
Net loss................................ $ (511) $(1,515) $(5,359) $ (752) $(1,849)
====== ======= ======= ====== =======
Pro forma basic and diluted net loss per
share from continuing operations...... $ (0.10) $ (0.09)
Pro forma basic and diluted net loss per
share from discontinued operations.... (0.20) --
------- -------
Pro forma basic and diluted net loss per
share................................. $ (0.30) $ (0.09)
======= =======
Shares used in computing pro forma basic
and diluted net loss per
share................................. 17,828 20,252
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
SOFTWARE.NET CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
-------------------------------------------------
REDEEMABLE TOTAL
CONVERTIBLE STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK EQUITY
------------------- ------------------ ACCUMULATED (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT DEFICIT DEFICIENCY)
--------- ------- --------- ------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... -- $ -- 9,000,000 $45 $ (226) $ (181)
Issuance of Series A redeemable
convertible preferred stock
at $0.40 per share, net of
issuance costs of $25........ 1,312,500 500 -- -- -- --
Issuance of Series A redeemable
convertible preferred stock
at $0.40 per share in
exchange for professional
services received............ 125,000 50 -- -- -- --
Accretion of premium on
redemption of redeemable
convertible preferred stock
in excess of purchase
price........................ -- 101 -- -- (101) (101)
Net loss....................... -- -- -- -- (511) (511)
--------- ------- --------- --- -------- --------
Balance at December 31, 1995..... 1,437,500 651 9,000,000 45 (838) (793)
Issuance of Series A redeemable
convertible preferred stock
at $0.91 per share........... 164,835 150 -- -- -- --
Issuance of Series A redeemable
convertible preferred stock
at $0.91 per share for the
conversion of notes payable
and accrued interest and for
services received............ 383,185 349 -- -- -- --
Issuance of Series B redeemable
convertible preferred stock
at $2.70 per share, net of
issuance costs of $356....... 2,037,038 5,144 -- -- -- --
Accretion of premium on
redemption of redeemable
convertible preferred stock
in excess of purchase
price........................ -- 101 -- -- (101) (101)
Net loss....................... -- -- -- -- (1,515) (1,515)
--------- ------- --------- --- -------- --------
Balance at December 31, 1996..... 4,022,558 6,395 9,000,000 45 (2,454) (2,409)
Issuance of Series C redeemable
convertible preferred stock
at $2.04 per share, net of
issuance costs of $51........ 3,000,000 6,069 -- -- -- --
Issuance of common stock upon
exercise of options under
employee stock option plan at
$0.03 per share.............. -- -- 70,000 2 -- 2
Accretion of premium on
redemption of redeemable
convertible preferred stock
in excess of purchase
price........................ -- 101 -- -- (101) (101)
</TABLE>
F-5
<PAGE> 75
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
-------------------------------------------------
REDEEMABLE TOTAL
CONVERTIBLE STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK EQUITY
------------------- ------------------ ACCUMULATED (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT DEFICIT DEFICIENCY)
--------- ------- --------- ------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Spin-off of CyberSource to
software.net(TM) preferred
and common stockholders on
December 31, 1997............ -- -- -- -- (3,324) (3,324)
Net loss....................... -- -- -- -- (5,359) (5,359)
--------- ------- --------- --- -------- --------
Balance at December 31, 1997..... 7,022,558 12,565 9,070,000 47 (11,238) (11,191)
Issuance of common stock upon
exercise of options under
employee stock option plan at
$0.01 per share (unaudited).. -- -- 20,000 -- -- --
Issuance of Series D redeemable
convertible preferred stock
at $2.60 per share, net of
issuance costs of $50
(unaudited).................. 877,380 2,231
Issuance of warrant to purchase
369,578 shares of Series D
redeemable convertible
preferred stock
(unaudited).................. -- 436 -- -- -- --
Accretion of premium on
redemption of redeemable
convertible preferred stock
in excess of purchase price
(unaudited).................. -- 25 -- -- (25) (25)
Net loss (unaudited)........... -- -- (1,849) (1,849)
--------- ------- --------- --- -------- --------
Balance at March 31, 1998
(unaudited).................... 7,899,938 $15,257 9,090,000 $47 $(13,112) $(13,065)
========= ======= ========= === ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
SOFTWARE.NET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------- -----------------
1995 1996 1997 1997 1998
----- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................. $(511) $(1,515) $(5,359) $ (752) $(1,849)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 14 19 79 12 51
Services received and accrued interest in exchange for
Series A redeemable convertible preferred stock...... 50 49 -- -- --
Net loss of discontinued operations.................... -- 736 3,616 583 --
Changes in assets and liabilities:
Accounts receivable.................................... (217) (202) (750) (394) (604)
Prepaid expenses and other current assets.............. (26) (50) (440) (55) (415)
Cost of deferred revenue............................... -- (819) (4,120) 136 2,428
Accounts payable....................................... 150 345 1,720 349 (29)
Other accrued liabilities.............................. 54 (28) 172 (57) 435
Deferred revenue....................................... -- 967 4,602 (161) (2,355)
Cash provided by (used for) discontinued operations.... -- (6) 181 108 --
----- ------- ------- ------- -------
Net cash used in operating activities.................... (486) (504) (299) (231) (2,338)
INVESTING ACTIVITIES
Purchases of property and equipment...................... (71) (16) (333) (60) (165)
Cash used for discontinued operations.................... -- (1,292) (4,611) (702) --
----- ------- ------- ------- -------
Net cash used in investing activities.................. (71) (1,308) (4,944) (762) (165)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable.................. 300 -- -- -- --
Repayment of note payable to related party............... -- -- (45) -- (60)
Repayment of capital leases.............................. -- -- (3) -- (7)
Proceeds from sale of redeemable convertible preferred
stock.................................................. 500 5,294 6,069 -- 2,231
Proceeds from exercise of stock options.................. -- -- 2 -- --
Cash used for discontinued operations.................... -- -- (1,946) -- --
----- ------- ------- ------- -------
Net cash provided by financing activities................ 800 5,294 4,077 -- 2,164
----- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents..... 243 3,482 (1,166) (993) (339)
Cash and cash equivalents at beginning of period......... 12 255 3,737 3,737 2,571
----- ------- ------- ------- -------
Cash and cash equivalents at end of period............... $ 255 $ 3,737 $ 2,571 $ 2,744 $ 2,232
===== ======= ======= ======= =======
SUPPLEMENTAL SCHEDULES OF CASH FLOW INFORMATION
Interest paid............................................ $ -- $ -- $ 6 $ -- $ 2
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Fixed assets acquired under capital leases............... $ -- $ -- $ 60 $ -- $ --
Issuance of Series A redeemable preferred stock upon
conversion of notes payable............................ $ -- $ 300 $ -- $ -- $ --
Issuance of warrant to purchase Series D redeemable
convertible preferred stock............................ $ -- $ -- $ -- $ -- $ 436
</TABLE>
See accompanying notes.
F-7
<PAGE> 77
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Organization
software.net Corporation (formerly CyberSource Corporation) (the "Company")
was incorporated in the state of California on August 12, 1994. The Company is
engaged in the resale of commercial off-the-shelf software ("Software") via the
Internet. On December 31, 1997, the Company distributed the assets of its wholly
owned subsidiary, CyberSource Corporation ("CyberSource"), in the form of a
dividend to all existing stockholders of the Company. The accompanying
consolidated financial statements have been prepared to reflect CyberSource as a
discontinued operation (see Note 2).
Interim Financial Statements
In the opinion of management, the unaudited interim consolidated financial
statements at March 31, 1998 and for the three months ended March 31, 1997 and
1998 include all adjustments, consisting only of normal recurring accruals,
necessary to present fairly the Company's financial position at March 31, 1998,
and results of operations and cash flows for the three months ended March 31,
1997 and 1998. Results for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire year.
Use of Estimates in the Preparation of Financial Statements
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 the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenues are primarily derived from sales of Software to
customers using credit cards, to corporate customers that are invoiced directly
under credit terms, to various U.S. government agencies pursuant to contractual
arrangements and, to a lesser extent, amounts received from Software publishers
for advertising and promotion. Revenue from the sale of Software, net of
estimated returns, is recognized upon either shipment of the physical product or
delivery of electronic product. Revenue from the sale of Software under
contracts with the U.S. government require continuing service, support and
performance by the Company, and accordingly, the related revenues and costs are
deferred and recognized over the period the service, support, and performance
are provided. Revenues derived from Software publishers for advertising and
promotion are recognized as the services are provided. Costs of deferred revenue
relates to Software licenses purchased from Software publishers for U.S.
government agencies.
Research and Development
Research and development expenditures are generally charged to operations
as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. In the Company's case,
capitalization would begin upon completion of a working model as the Company
F-8
<PAGE> 78
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
does not prepare detailed program designs as part of the development process.
Through December 31, 1997 and March 31, 1998, there were no significant
capitalizable software development costs incurred and, as a result, all such
costs have been expensed as incurred.
Advertising Expense
The cost of advertising is recorded as an expense when incurred.
Advertising costs for the years ended December 31, 1995, 1996, and 1997 and the
three months ended March 31, 1998, were approximately $50,000, $98,000,
$178,000, and $62,000, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity from the date of purchase of three months or less to be cash
equivalents. As of December 31, 1996 and 1997 and March 31, 1998, cash
equivalents consist primarily of investments in money market accounts and cost
approximates fair market value. The Company places its cash and cash equivalents
in high-quality U.S. financial institutions and, to date, has not experienced
losses on any of its investments.
Concentration of Credit Risk and Other Risks
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and accounts
receivables. The Company operates in one business segment and sells Software and
advertising to consumers, various companies across several industries and
certain U.S. government agencies. The Company generally does not require
collateral. The Company maintains allowances for credit losses, and such losses
have been within management's expectations. For the year ended December 31, 1997
and for the three months ended March 31, 1998, U.S. government agencies,
principally the Defense Logistics Agency, accounted for 33% and 43% of revenues,
respectively. There were no customers accounting for greater than 10% of
revenues in 1995 and 1996.
The Company's contracts with the U.S. government are subject to annual
review and renewal by the applicable government entity, and may be terminated,
without cause, at any time.
The Company's success depends in large part on electronic software delivery
("ESD") as a method of selling Software over the Internet. If ESD does not
achieve widespread market acceptance, the Company's results of operations will
be materially adversely affected. In addition, there can be no assurance that
the Company will overcome the substantial existing and future technical
challenges associated with ESD reliably and consistently on a long-term basis.
Property and Equipment
Property and equipment are stated at cost and are depreciated on a
straight-line basis over estimated useful lives of three years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful lives.
F-9
<PAGE> 79
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1996 1997 1998
---- ----- ---------
<S> <C> <C> <C>
Computer equipment and software............................. $98 $ 257 $ 347
Furniture and fixtures...................................... -- 122 154
Office equipment............................................ -- 70 107
Leasehold improvements...................................... -- 29 35
--- ----- -----
98 478 643
Less accumulated depreciation and amortization.............. (32) (98) (139)
--- ----- -----
$66 $ 380 $ 504
=== ===== =====
</TABLE>
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 7, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB Opinion No.
25, when the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. See proforma disclosures of applying FAS 123 included in
Note 7.
Net Loss Per Share
Net loss per share is presented under Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128). FAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Earnings per share amounts for all
periods have been presented to conform to FAS 128 requirements. Potentially
dilutive securities have been excluded from the computation as their effect is
antidilutive.
Pro Forma Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity
Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of redeemable convertible preferred shares not included above that
will automatically convert upon completion of the Company's initial offering
(using the if-converted method). If the offering contemplated by this Prospectus
is consummated, all of the redeemable convertible preferred stock outstanding as
of March 31, 1998 will automatically be converted into an aggregate of
11,922,496 shares of common stock, based on the shares of redeemable convertible
preferred stock outstanding at March 31, 1998. Unaudited pro forma stockholders'
equity at March 31, 1998, as adjusted for the conversion of redeemable
convertible preferred stock, is disclosed on the balance sheet.
F-10
<PAGE> 80
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
Historical and pro forma basic and diluted net loss per share is as follows
(in thousands, except per share amount):
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- -----------------
1995 1996 1997 1997 1998
------ ------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Historical:
Net loss applicable to common stockholders:
Net loss............................................... $ (511) $(1,515) $(5,359) $ (752) $ (1,849)
Accretion of premium on redemption of redeemable
convertible preferred stock in excess of purchase
price................................................ (101) (101) (101) (25) (25)
------ ------- ------- ------ --------
Net loss applicable to common stockholders............. $ (612) $(1,616) $(5,460) $ (777) $ (1,874)
====== ======= ======= ====== ========
Weighted average shares of common stock outstanding
used in computing basic and diluted net per loss
share................................................ 9,000 9,000 9,000 9,000 9,080
====== ======= ======= ====== ========
Basic and diluted net loss per share................... $(0.07) $ (0.18) $ (0.61) $(0.09) $ (0.21)
====== ======= ======= ====== ========
Proforma:
Net loss............................................... $ (511) $(1,515) $(5,359) $ (752) $ (1,849)
====== ======= ======= ====== ========
Shares used in computing basic and diluted net loss per
share (from above)................................... 9,000 9,080
Adjusted to reflect the effect of the assumed
conversion of redeemable convertible preferred stock
from the date of issuance............................ 8,828 11,172
------- --------
Weighted average shares used in computing pro forma
basic and diluted net loss per share................. 17,828 20,252
======= ========
Pro forma basic and diluted net loss per share......... $ (0.30) $ (0.09)
======= ========
</TABLE>
If the Company had reported net income, diluted earnings per share would
have included the shares used in the computation of pro forma net loss per share
as well as an additional approximately 959,000, 1,577,000, 1,879,000, 1,787,000,
and 2,046,000 common equivalent shares related to the outstanding options and
warrants not included above (determined using the treasury stock method at the
estimated fair value) for the years ended December 31, 1995, 1996 and 1997 and
for the three months ended March 31, 1997 and 1998, respectively.
Income Taxes
Income taxes are calculated under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS
109, the liability method is used in accounting for income taxes, which includes
the effects of temporary differences between financial and taxable amounts of
assets and liabilities.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company adopted FAS 130 in the three months ended March 31, 1998.
There was no impact to the Company as a result of the adoption of FAS 130, as
there is no
F-11
<PAGE> 81
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
difference between the Company's net loss reported and the comprehensive net
loss under FAS 130 for the periods presented.
Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 will change the way
companies report selected segment information in annual financial statements and
requires companies to report selected segment information in interim financial
reports to shareholders. FAS 131 is effective for the Company's fiscal year
ended December 31, 1998. The Company has not reached a conclusion as to the
appropriate segments, if any, it will be required to report to comply under FAS
131.
Software Revenue Recognition
In May 1997, the Financial Accounting Standards Board approved the American
Institute of Certified Public Accountants Statement of Position, "Software
Revenue Recognition" (SOP 97-2). SOP 97-2 provides revised and expanded guidance
on software revenue recognition and applies to all entities that earn revenue
from licensing, selling, or otherwise marketing computer software. SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997. The application of SOP 97-2 has not had a material impact on its
results of operations.
2. DISCONTINUED OPERATIONS
On December 31, 1997, the Company and its stockholders approved a
distribution of the assets of its wholly owned subsidiary, CyberSource (the
"Spin-off"), in the form of a dividend to its existing stockholders on a pro
rata basis such that the stockholders of CyberSource were the same as the
stockholders of the Company at the time of the distribution. Revenues of
CyberSource were none, $170,000, $1,128,000 and $96,000 for the years ended
December 31, 1995, 1996, and 1997 and for the three months ended March 31, 1997,
respectively. The results of operation of the discontinued business have been
presented as a loss from discontinued operations.
The components of net assets at December 31, 1996 and at the time of the
Spin-off on December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents............................. $ -- $2,000
Accounts receivable................................... 150 606
Prepaid expenses and other assets..................... 71 118
Property and equipment................................ 482 1,152
Less liabilities:
Accounts payable and accrued liabilities.............. 141 397
Deferred revenue and other............................ -- 155
---- ------
Net assets................................................. $562 $3,324
==== ======
</TABLE>
F-12
<PAGE> 82
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. MARKETING AGREEMENTS
During 1997 and during the quarter ended March 31, 1998, the Company
entered into marketing agreements with America Online, Inc. ("AOL"), Excite,
Inc. ("Excite") and Netscape Communications Corporation ("Netscape").
The AOL Agreement is for a term of 42 months, unless earlier terminated,
and provides for a marketing relationship between AOL and the Company. Pursuant
to this agreement, the Company will be the exclusive provider of electronically
delivered Software on AOL's Web site to AOL customers through links to the
Company's Web site from various AOL Web pages. During the term, AOL is obligated
to deliver a cumulative number of Impressions (as defined in the agreement),
with various cumulative targets throughout the duration of the agreement term.
If AOL does not provide certain cumulative targeted Impressions, AOL will be
required to refund a portion of the fees paid by the Company under this
agreement (or under some circumstances, as outlined in this agreement, AOL will
have the option to extend the term and deliver the Impressions by the end of
that extended term). Upon conclusion of the initial 42 month term, AOL will have
the right to renew the agreement for two successive one year terms.
The Excite agreement is for a term of 36 months under pursuant to which the
Company will be the exclusive Software reseller on certain screens within
certain channels of Excite's Web site.
The Netscape agreement is for a term of 24 months pursuant to which the
Company created and manages an online Software store accessible through
Netscape's Internet site.
These marketing agreements provide for payments totalling $7,863,000 in
1998, $8,338,000 in 1999, $8,963,000 in 2000 and $536,000 in 2001. The Company
has paid $1,000,000 of the payments due in 1998 as of March 31, 1998.
Under these agreements, once the Company has generated a certain cumulative
net gross margin from Software sales, the Company will pay specified percentages
of the gross transaction margins from all subsequent software sales transactions
and a percentage of certain advertising revenues.
The amounts paid under these agreements are being amortized to sales and
marketing expenses on a straight-line basis over the applicable contract terms.
The Company has expensed $104,000 and $563,000 related to these agreements in
1997 and the quarter ended March 31, 1998, respectively.
The Company also entered into a Common Stock and Warrants Subscription
Agreement which provides for the sale of $2,000,000 of common stock to AOL on or
immediately prior to the closing of an initial public offering ("IPO") at the
price paid by the Underwriters in the IPO. The agreement also provides for the
issuance of a warrant to purchase the Company's stock. This warrant will expire
upon the IPO. This warrant is for the purchase of 369,578 shares of Series D
preferred stock at an exercise price of $2.60 per share vesting in increments of
1/36 per month commencing March 1, 1998, provided, however that the warrant is
not exercisable until after August 31, 1999, if it does not expire prior to this
in connection with an IPO. In the event the Company initiates an IPO and as a
result the Series D warrant expires, the Company is obligated to deliver a new
warrant (the "IPO Warrant"). The Company is only required to issue this warrant,
however, if AOL purchases the $2,000,000 worth of common stock discussed above
at the time of the IPO.
The IPO Warrant will be for the purchase of 1.5 times the number of shares
of common stock purchased by AOL pursuant to the Stock Agreement at an exercise
price per share equal to the IPO
F-13
<PAGE> 83
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
price less the underwriter discount. The IPO warrant will vest in increments of
1/36 per month commencing March 1, 1998.
The Company has determined the value of the Series D warrant to be
approximately $436,000 and has recorded this amount as additional purchase price
for the marketing rights under the marketing agreement. The value of the warrant
is being amortized on a consistent basis with the marketing rights as described
above.
4. LONG-TERM DEBT
In 1994, the Company issued a non-interest bearing note payable of $105,000
in exchange for costs incurred by and cash received from a founder of the
Company. The note payable has been repaid by the Company as of March 31, 1998.
In September 1995, the Company issued notes payable of $300,000. In
February 1996, the $300,000 of principal and $11,000 of accrued interest were
converted into 341,426 shares of Series A preferred stock at a price of $0.91
per share.
5. LEASE COMMITMENTS
Operating Leases
The Company leases its primary facilities and certain equipment under
noncancelable operating leases expiring at various dates through 2002. Rental
expense was approximately $23,000, $101,000, $266,000, and $84,000 for the years
ended December 31, 1995, 1996, and 1997 and for the three months ended March 31,
1998, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
1998........................................................ $ 344
1999........................................................ 298
2000........................................................ 279
2001........................................................ 279
2002........................................................ 240
------
Total minimum lease payments................................ $1,440
======
</TABLE>
Capital Leases
The Company also leases certain equipment under noncancelable lease
agreements that are accounted for as capital leases. Equipment under capital
lease arrangements, included in property and equipment, aggregated approximately
$60,000 at December 31, 1997 and March 31, 1998, respectively. Related
accumulated amortization was approximately $3,000 and $8,000 at December 31,
1997 and March 31, 1998, respectively. Amortization expense related to assets
under capital leases is included with depreciation expense.
F-14
<PAGE> 84
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
Future minimum lease payments under noncancelable capital leases are as
follows: (in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
1998........................................................ $24
1999........................................................ 24
2000........................................................ 20
---
Total minimum payments...................................... 68
Less amount representing interest........................... 11
---
57
Less current portion........................................ 18
---
$39
===
</TABLE>
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock at December 31, 1996 and 1997 and
March 31, 1998 is as follows by series:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
---------------------------------
DECEMBER 31,
DESIGNATED --------------------- MARCH 31,
SHARES 1996 1997 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
A................................... 1,985,520 1,985,520 1,985,520 1,985,520
B................................... 2,500,000 2,037,038 2,037,038 2,037,038
C................................... 3,000,000 -- 3,000,000 3,000,000
D................................... 1,523,424 -- -- 877,380
--------- --------- --------- ---------
Total preferred stock............... 9,008,944 4,022,558 7,022,558 7,899,938
========= ========= ========= =========
</TABLE>
On April 3, 1998, the Company sold an additional 276,466 shares of Series D
redeemable convertible preferred stock at $2.60 per share.
Holders of Series A, B, C, and D redeemable convertible preferred stock are
entitled to receive annual noncumulative dividends at the rate of $0.040,
$0.2268, $0.1714, and $0.26 per share, respectively, plus, with respect to the
Series B, C and D redeemable convertible preferred stock, cumulative dividends
at a rate of $0.01323, $0.009996 and $0.0152 per share, per month, respectively,
when and if declared by the Board of Directors, payable in preference to common
stock dividends. There have been no dividends declared or payable by the Company
at December 31, 1997 or March 31, 1998.
Each share of preferred stock is convertible at any time at the option of
the holder into shares of common stock at the then effective conversion price.
Each outstanding share of Series A, B, C, and D redeemable convertible preferred
stock is convertible into 2.00, 2.00, 1.00, and 1.00 shares of common stock,
respectively, and is subject to adjustment as specified in the Articles of
Incorporation. The preferred stock will automatically convert into common stock
immediately prior to the consummation of a firm commitment underwritten public
offering under the Securities Act of 1933 in which the sale price to the public
is not less than $3.43 per share, in which the aggregate offering
F-15
<PAGE> 85
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
price to the public is not less than $15,000,000, or at such time as the Company
receives the consent of not less than two-thirds of the holders of the preferred
stock.
Each preferred share has voting rights equal to the number of common shares
into which it is convertible. Upon liquidation, the holders of the Series A, B,
C, and D redeemable convertible preferred stock are entitled to receive $0.336,
$2.268, $1.7136, and $2.60 per share, respectively, plus any declared but unpaid
dividends, before any distribution may be made to the holders of common shares.
At any time on or after January 5, 2000, the holders of a majority of the
then outstanding shares of Series A preferred stock may request the redemption
of all outstanding shares of Series A preferred stock. The Company shall redeem
such shares at a price per share of $0.63, plus accrued dividends, if any, for
Series A preferred stock. At any time on the sixth anniversary of the Series B
original issue date, the holders of at least two-thirds of the then outstanding
shares of Series B, C and D preferred stock may request the redemption of all of
the outstanding shares of Series B, C and D preferred stock. The Company shall
redeem such shares at a price per share of $2.268, $1.7136 and $2.60,
respectively, plus accrued dividends, if any.
7. STOCKHOLDERS' EQUITY
Common Shares
The Company is authorized to issue 30,000,000 shares of common stock.
Holders of common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders of the Company. Subject to the preferences that
may be applicable to any outstanding shares of preferred stock, the holders of
common stock are entitled to receive ratably such dividends, if any, that may be
declared by the Board of Directors.
The Company has reserved shares of common stock for future issuance as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
<S> <C> <C>
1995 Stock Option Plan (the Plan):
Options outstanding.................................... 1,016,455 2,686,055
Options available for future grants.................... 913,545 223,945
Options outside of the Plan.............................. 1,000,000 1,000,000
Redeemable convertible preferred stock................... 11,045,116 11,922,496
Outstanding warrants..................................... -- 369,578
========== ==========
13,975,116 16,202,074
========== ==========
</TABLE>
1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "Plan") was adopted by the
Company on January 5, 1995. There are 3,000,000 shares of common stock
authorized for issuance under the Plan. The Plan provides for the issuance of
common stock and granting of options to employees, officers, directors,
consultants, independent contractors, and advisors of the Company. The exercise
price of a nonqualifying stock option and an incentive stock option shall not be
less than 85% and 100%, respectively, of the fair value of the underlying shares
on the date of grant. Options granted under the Plan generally vest over four
years at the rate of 25% one year from the grant date and ratably every month
thereafter.
F-16
<PAGE> 86
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
In conjunction with the Spin-off of CyberSource on December 31, 1997,
employees of the Company maintained their outstanding options to purchase common
shares of the Company and were granted additional incentive stock options in
CyberSource based on the extent that the employees original options were vested.
Employees of CyberSource immediately following the Spin-off maintained their
outstanding vested incentive stock options in the Company (although these stock
options will now be treated as nonqualified stock options subsequent to the
Spin-off) and were granted additional incentive stock options in CyberSource.
The exercise prices of the original and additional option grants were adjusted
to reflect the allocation of the current fair market value per share price
between the Company's and CyberSource's common stock based on an independent
valuation of the respective fair market value of such shares of common stock.
Options to purchase common shares of the Company held by the CyberSource
employees that had not vested as of the date of the Spin-off were canceled. The
following table summarizes option activity for the period from January 5, 1995
(date of adoption of the Plan) to December 31, 1995, the years ended December
31, 1996 and 1997, and the three months ended March 31, 1998, and has been
adjusted to retroactively reflect the change in exercise prices of options to
purchase common shares of the Company. The adjustments and Spin-off of options
were accounted for and in compliance with the guidelines in Emerging Issues Task
Force Issue No. 90-9.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES NUMBER PRICE PER
AVAILABLE OF SHARES SHARE
---------- --------- ----------
<S> <C> <C> <C>
Shares reserved...................................... 1,300,000 --
Options granted...................................... (530,000) 530,000 $0.010
---------- ---------
Balance at December 31, 1995........................... 770,000 530,000 $0.010
Additional shares reserved........................... 700,000 -- $ --
Options granted...................................... (618,500) 618,500 $0.052
---------- ---------
Balance at December 31, 1996........................... 851,500 1,148,500 $0.033
Options granted...................................... (750,700) 750,700 $0.156
Options exercised.................................... -- (70,000) $0.031
Options canceled..................................... 110,000 (110,000) $0.135
Cancellation of unvested options held by CyberSource
employees......................................... 702,745 (702,745) $0.097
---------- ---------
Balance at December 31, 1997........................... 913,545 1,016,455 $0.068
Additional shares reserved (unaudited)............... 1,000,000 -- --
Options granted (unaudited).......................... (1,689,600) 1,689,600 $2.253
Options exercised (unaudited)........................ (20,000) $0.008
---------- ---------
Balance at March 31, 1998 (unaudited).................. 223,945 2,686,055 $1.442
========== =========
</TABLE>
F-17
<PAGE> 87
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
The following table summarizes information about options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED NUMBER OF
OPTIONS AVERAGE OPTIONS
OUTSTANDING WEIGHTED REMAINING EXERCISABLE WEIGHTED
AT AVERAGE CONTRACTUAL AT AVERAGE
EXERCISE DECEMBER 31, EXERCISE LIFE DECEMBER 31, EXERCISE
PRICE 1997 PRICE (YEARS) 1997 PRICE
-------- ------------ -------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.004 -- $0.038 669,375 $0.02 7.44 611,667 $0.02
$0.113 233,050 $0.11 9.29 54,781 $0.11
$0.170 79,530 $0.17 9.84 -- $ --
$0.50 34,500 $0.50 9.95 -- $ --
--------- -------
1,016,455 $0.068 666,448 $0.03
========= =======
</TABLE>
At December 31, 1995 and 1996, 194,686 and 573,498 options were exercisable
at a weighted average exercise price of $0.01 and $0.03, respectively.
Options Outside of the 1995 Stock Option Plan
On January 5, 1995, the Company granted options outside of the Plan to its
Chief Technical Officer to purchase 1,000,000 shares of common stock of the
Company at an exercise price of $0.004 per share. None of the options have been
exercised as of March 31, 1998. The remaining contractual life of the options is
approximately four years as of December 31, 1997. The options vested over
approximately fifteen months from the grant date at the rate of 25% one month
from the grant date and ratably every month thereafter. As of December 31, 1997
and March 31, 1998, all options were exercisable.
Stock-Based Compensation
Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted during the period from January 5, 1995 (date
of adoption of the Plan) through December 31, 1995 (1995) and the years ended
December 31, 1996 and 1997 under the fair value method of FAS 123. The fair
value for these options was estimated at the date of grant using the minimum
value method with the following weighted average assumptions: a risk-free
interest rate of 6.3%, 5.6%, and 6.1% for 1995, 1996, and 1997, respectively, no
dividend yield or volatility factors of the expected market price of the
Company's common stock, and a weighted average expected life of the option of
four years.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum
F-18
<PAGE> 88
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
value method of FAS 123, the Company's net loss and pro forma basic and diluted
net loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1995 1996 1997
----- ------- -------
<S> <C> <C> <C>
Pro forma net loss (in thousands)..................... $(511) $(1,515) $(5,364)
Pro forma basic and diluted net loss per share........ ($ 0.30)
</TABLE>
The weighted average fair value of options granted, which is the value
assigned to the options under FAS 123, was $0.01, $0.04 and $0.04 for options
granted during 1995, 1996, and 1997, respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 1995, 1996, and 1997 is not representative of the effects on net
income (loss) for future years, as future years will include the effects of
options vesting as well as the impact of multiple years of stock option grants.
The effect of FAS 123 will not be fully reflected until 1998.
8. RELATED PARTY TRANSACTIONS
Pursuant to the terms of an agreement entered into in connection with the
Spin-off of CyberSource, the Company uses services supplied to the Company by
CyberSource on a non-exclusive basis. These services relate to credit card
processing, fraud screening, export control, sales tax computation, electronic
licensing, hosting of electronic downloads and fulfillment notification. Any
discontinuation of such services, or any reduction in performance that requires
the Company to replace such services, would be disruptive to the Company's
business. The Company also received a non-exclusive license to certain
CyberSource Technology. Under the services agreement, the Company is obligated
to compensate CyberSource on a basis of services used per order or transaction.
The Company recorded expenses of approximately $200,000 related to such services
in the quarter ended March 31, 1998.
During the years ended December 31, 1995, 1996, and 1997 and the three
months ended March 31, 1998, legal fees incurred were approximately $24,000,
$112,000, $304,000, and $100,000, respectively, relating to a law firm in which
a current director of the Company is a partner. As of December 31, 1996 and 1997
and March 31, 1998, amounts owed to the law firm were approximately $27,000,
$89,000, and $100,000, respectively.
9. LITIGATION
In August 1995, the Company was named as a defendant in a lawsuit for
patent infringement alleging infringement of a patent by selling and
distributing Software over the Internet. The lawsuit was settled in 1997 for an
immaterial amount.
From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. The Company believes that
there are no claims or actions pending or threatened against the Company, the
ultimate disposition of which would have a material impact on the Company's
financial position or results of operations.
10. INCOME TAXES
No provision for income taxes has been recorded due to operating losses
with no current tax benefit.
F-19
<PAGE> 89
SOFTWARE.NET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND RELATING TO
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $7,200,000. The Company also had federal
research and development tax credit carryforwards of approximately $26,000. The
net operating losses and credit card carryforwards will expire at various dates
beginning in 2009 through 2012, if not utilized. The net operating loss
carryforwards differ from the accumulated deficit primarily as a result of the
accounting for the Spin-off of CyberSource to the Company's preferred and common
stockholders on December 31, 1997.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 816,000 $2,952,000
Research credit carryforwards............................. 17,000 43,000
Reserves and accruals..................................... 109,000 151,000
--------- ----------
Total deferred tax assets......................... 942,000 3,146,000
Valuation allowance......................................... (942,000) (3,146,000)
--------- ----------
Net deferred tax assets..................................... $ -- $ --
========= ==========
</TABLE>
Under Statement of Financial Accounting Standards No. 109, (FAS 109),
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Based upon the weight of available evidence, which
includes the Company's historical operating performance, the reported net losses
in 1995, 1996, and 1997, and the uncertainties regarding future results of
operations of the Company, the Company has provided a full valuation allowance
against its net deferred tax assets as it is more likely than not that the
deferred tax assets will not be realized. The valuation allowance increased by
$571,000 during 1996 and increased by $2,204,000 during 1997.
11. SUBSEQUENT EVENTS (UNAUDITED)
On April 4, 1998, the Company's Board of Directors and stockholders adopted
the 1998 Stock Option Plan and reserved an aggregate of 2,000,000 shares of
Common Stock for grants of stock options under such plan.
In April 1998, the Company granted options to purchase 1,035,000 shares of
common stock at a weighted average exercise price of $4.94. The Company expects
to record the estimated difference between the exercise price of the options and
the deemed fair value of approximately $700,000 over the vesting period of the
options.
F-20
<PAGE> 90
DESCRIPTION OF GRAPHICS
The graphic will depict the Company's Web Site, its customer value
proposition and its relationships with it key marketing partners, AOL, Netscape
and Excite.
<PAGE> 91
NO 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 OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. 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 ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 19
Dividend Policy....................... 19
Capitalization........................ 20
Dilution.............................. 21
Selected Consolidated Financial
Data................................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 32
Management............................ 47
Certain Transactions.................. 54
Principal Stockholders................ 59
Description of Capital Stock.......... 61
Shares Eligible for Future Sale....... 63
Underwriting.......................... 66
Legal Matters......................... 67
Experts............................... 68
Additional Information................ 68
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
UNTIL , 1998, (25 DAYS FROM 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 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.
- ---------------------------------------------------------
[LOGO]
[ ] SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO
C.E. UNTERBERG, TOWBIN
PROSPECTUS
APRIL , 1998
<PAGE> 92
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 the
underwriting discount, payable by the registrant in connection with the sale of
the Common Stock being registered hereby. All amounts shown are estimates,
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............... $ 15,340
NASD filing fee............................................. 5,500
Nasdaq National Market listing fee.......................... 1,000
Blue Sky fees and expenses.................................. 5,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 200,000
Directors and Officers insurance............................
Transfer Agent and Registrar fees........................... 25,000
Miscellaneous...............................................
--------
Total............................................. $
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation -- a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
charter, bylaws, disinterested director vote, stockholder vote, agreement or
otherwise.
Section of the registrant's Bylaws (Exhibit 3.2 hereto)
requires indemnification to the full extent permitted under Delaware law as it
now exists or may hereafter be amended. Subject to any restrictions imposed by
Delaware law, the Bylaws provide an unconditional right to indemnification for
all expense, liability and loss (including attorneys' fees, judgment, fines,
ERISA excise taxes or penalties and amounts paid in settlement) actually and
reasonably incurred or suffered by any person in connection with any actual or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative (including, to the extent permitted by law, any derivative
action) by reason of the fact that such person is or was serving as a director
or officer of the registrant or that, being or having been a director or officer
of the registrant, such person is or was serving at the request of the
registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan. The Bylaws also provide that the registrant
may, by action of its Board of
II-1
<PAGE> 93
Directors, provide indemnification to its employees and agents with the same
scope and effect as the foregoing indemnification of directors and officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) payments of unlawful dividends or unlawful
stock repurchases or redemptions, or (iv) any transaction from which the
director derived an improper personal benefit.
Article of the registrant's Certificate of Incorporation
(Exhibit 3.1 hereto) provides that to the full extent that the DGCL, as it now
exists or may hereafter be amended, permits the limitation or elimination of the
liability of directors, a director of the registrant shall not be liable to the
registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director. Any amendment to or repeal of such Article shall
not adversely affect any right or protection of a director of the registrant for
or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
The registrant has entered into certain indemnification agreements with its
officers and directors, the form of which is attached as Exhibit
to this Registration Statement and incorporated herein by reference. The
indemnification agreements provide the registrant's officers and directors with
further indemnification to the maximum extent permitted by the DGCL. Reference
is made to the Underwriting Agreement (Exhibit hereto), in which
the Underwriters have agreed to indemnify the officers and directors of the
registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1995, the registrant has issued and sold unregistered
securities as follows:
(1) On January 9, 1995, the registrant issued an aggregate of 1,437,500
shares of Series A Preferred Stock which are convertible into 2,875,000 shares
of Common Stock, to ten investors for a consideration of $0.40 per share of
Series A Preferred Stock ($0.33 per share as adjusted for the Spin-off), or an
aggregate of $575,000. The purchasers consisted of one investor that is
presently related to a director who purchased 500,000 shares and nine
unaffiliated investors who purchased 937,000 shares.
(2) On February 27, 1996, the registrant issued an aggregate of 548,020
shares of Series A Preferred Stock which are convertible into 1,096,040 shares
of Common Stock, to three investors for a consideration of $0.91 per share of
Series A Preferred Stock ($0.76 per share as adjusted for the Spin-off), or an
aggregate of $498,697. The purchasers consisted of one investor that is
presently related to a director who purchased 253,131 shares and two
unaffiliated investors who purchased 294,889 shares. Each of the purchasers had
previously purchased Series A Preferred Stock in January, 1995.
(3) On July 24, 1996, the registrant issued an aggregate of 2,037,038
shares of Series B Preferred Stock which are convertible into 4,074,076 shares
of Common Stock, to eleven investors for a consideration of $2.70 per share of
Series B Preferred Stock ($2.25 per share as adjusted for the Spin-off), or an
aggregate of approximately $5,500,000. The purchasers consisted of one investor
that is presently related to a director who purchased 925,926 shares and ten
unaffiliated investors who purchased 1,111,112 shares.
(4) On September 26, 1997, September 30, 1997 and December 5, 1997 the
registrant issued an aggregate of 3,000,000 shares of Series C Preferred Stock
which are convertible into 3,000,000 shares of Common Stock, to 18 investors for
a consideration of $2.04 per share of Series C Preferred Stock ($1.70 per share
as adjusted for the Spin-off), or an aggregate of approximately $6,120,000. The
purchasers consisted of eleven investors that are presently related to certain
II-2
<PAGE> 94
directors who purchased 2,677,450 shares and eight unaffiliated investors who
purchased 322,550 shares.
(5) On March 18, 1997, and April 3, 1998, the registrant issued an
aggregate of 1,153,846 shares of Series D Preferred Stock which are convertible
into 1,153,846 shares of Common Stock to eleven investors for a consideration of
$2.60 per share, or an aggregate of approximately $3,000,000. The purchasers
consisted of ten investors that are presently related to certain directors who
purchased 1,145,264 shares and one unaffiliated investor who purchased 8,582
shares.
(6) In March 1998, the Company entered in an agreement with AOL pursuant to
which, subject to certain limited exception, AOL agreed to buy shares of the
Company's Common Stock at a price per share equal to the initial public offering
price (less Underwriters' discount) for an aggregate purchase price of
$2,000,000. Based on an initial public offering price of $ per
share, AOL will purchase shares of Common Stock immediately prior
to the consummation of this offering. Concurrent with the purchase of the shares
of Common Stock by AOL, the Company will issue to AOL a Warrant for an amount of
Common Stock equal to 1.5 times the number of shares purchased by AOL in the
aforementioned investment at a per share exercise price equal to the initial
public offering price (less Underwriters' discount) which will vest in
increments of 1/36th per month commencing March 1, 1998. Based on an offering
price of $ per share, the Company will issue to AOL a Warrant for
shares of Common Stock immediately prior to the consummation of
this offering.
(7) In March 1998, the registrant also issued to AOL a Warrant to purchase
369,578 shares of the registrant's Series D Preferred Stock at a price of $2.60
per share vesting in increments of 1/36th per month commencing March 1, 1998;
provided, however, that the Warrant is not exercisable until after August 31,
1999, except in the event of a change of control (as defined therein). This
Warrant will terminate in accordance with its terms immediately prior to the
consummation of this offering.
Each of the foregoing purchases and sales were exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) thereof on the basis that the transactions did not involve public
offerings.
(8) From January 5, 1995 through the date of this Prospectus, the
registrant granted stock options to purchase 3,896,055 shares of Common Stock,
with exercise prices ranging from $0.04 to $5.50 per share, to employees,
consultants, and directors pursuant to its 1995 and 1998 Stock Option Plans. Of
these options, options for 85,000 have been canceled without being exercised,
options for 90,000 shares have been exercised and options for 3,721,055 shares
remain outstanding. From January 5, 1995 through the date of the Prospectus, the
registrant also granted stock options outside of any plan to purchase 1,000,000
shares of the registrant's Common Stock, with an exercise price of $0.004 per
share. Of these options, none have been canceled, none have been exercised and
1,000,000 remain outstanding.
The sales and issuances of these securities were exempt from registration
under the Securities Act pursuant to either Rule 701 promulgated thereunder on
the basis that these options were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to a written contract relating to
consideration, as provided by Rule 701, or pursuant to Section 4(2) thereof on
the basis that the transactions did not involve a public offering.
II-3
<PAGE> 95
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
* 1.1 -- Form of Underwriting Agreement.
* 3.1 -- Form of Certificate of Incorporation of the Registrant.
* 3.2 -- Form of Bylaws of the Registrant.
* 4.1 -- Specimen of Certificate for Common Stock.
* 5.1 -- Opinion of Jackson Tufts Cole & Black, LLP.
9.1 -- Shareholders Agreement dated March 18, 1998, by and between
the Registrant and each of the holders of the Registrant's
Series C and Series D Preferred Stock
*10.1 -- Form of Indemnification Agreement.
10.2 -- 1995 Stock Option Plan as amended.
10.3 -- 1998 Stock Option Plan.
10.4 -- Stock Option Agreement dated as of March 31, 1995, by and
between the Registrant and John Pettitt.
10.5 -- Series A Preferred Stock Purchase Agreement, as amended.
10.6 -- Series B Preferred Stock Purchase Agreement.
10.7 -- Series C Preferred Stock Purchase Agreement.
10.8 -- Series D Preferred Stock Purchase Agreement.
10.9 -- Common Stock and Warrants Subscription Agreement dated as of
March 18, 1998, by and between the Registrant and America
Online, Inc.
10.10 -- Conveyance Agreement dated as of December 31, 1997, by and
between the Registrant and Internet Commerce Services
Corporation (now known as CyberSource Corporation).
*10.11 -- Interactive Marketing Agreement dated as of March 1, 1998,
by and between the Registrant and America Online, Inc.
*10.12 -- Sponsorship Agreement dated as of March 30, 1998, by and
between the Registrant and Excite, Inc.
*10.13 -- Co-Marketing Services Agreement dated as of June 23, 1997,
by and between the Registrant and Netscape Communications
Corporation.
10.14 -- Trademark License Agreement dated as of June 23, 1997, by
and between the Registrant and Netscape Communications
Corporation.
*10.15 -- Electronic Software Distribution ClearingHouse Agreement
dated as of July 1, 1996, by and between the Registrant and
Microsoft Corporation.
*10.16 -- Letter Agreement for Resale and Electronic Distribution
dated as of October 13, 1995, by and between the Registrant
and Microsoft Corporation.
*10.17 -- IBM Assistance Agreement dated as of October 13, 1995, by
and between the Registrant and IBM Corporation.
10.18 -- Agreement dated as of July 3, 1996, by and between the
Registrant and the United States Department of Defense,
Defense Mapping Agency
(#N00140-96-C-2410).
10.19 -- Agreement dated as of June 12, 1997, by and between the
Registrant and the United States Department of Defense,
Defense Logistics Agency
(#N00140-97-D-1756).
*10.20 -- Inter-Company Cross License Agreement dated as of April 23,
1998, by and between the Registrant and Internet Commerce
Services (now known as CyberSource Corporation).
10.21 -- Promissory Note dated as of April 15, 1998, by and between
the Registrant and William S. McKiernan.
10.22 -- Pledge Agreement as of April 15, 1998, by and between the
Registrant and William S. McKiernan.
*10.23 -- Internet Services and Products Agreement by and between the
Registrant and Exodus Communications, Inc.
*10.24 -- Internet Commerce Services Agreement dated as of April 23,
1998, by and between the Registrant and CyberSource
Corporation.
*10.25 -- Office Building Lease dated as of July 8, 1997, as amended,
by and between the Registrant and PGP-South Bay Office
Towers, Inc.
</TABLE>
II-4
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
*23.2 -- Consent of Jackson Tufts Cole & Black, LLP (included in
Exhibit 5.1)
24.1 -- Power(s) of Attorney (see page II-7).
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules
II. VALUATION AND QUALIFYING ACCOUNTS
SOFTWARE.NET CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTION/ END OF
DESCRIPTION OF PERIOD EXPENSES WRITEOFF PERIOD
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Accounts receivable allowances.................. $ -- $ -- $ -- $ --
Year ended December 31, 1996
Accounts receivable allowances.................. $ -- $ 77 $(12) $ 65
Year ended December 31, 1997
Accounts receivable allowances.................. $ 65 $240 $(30) $275
Period ended March 31, 1998
Accounts receivable allowances.................. $275 $134 $ (9) $400
</TABLE>
All schedules omitted are inapplicable or the requested information is
shown in the financial statements of the registrant or related notes thereto.
ITEM 17. UNDERTAKINGS
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, 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.
The undersigned 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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
II-5
<PAGE> 97
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 the purpose of determining any liability under the Securities
Act of 1933, 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-6
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, hereunto duly authorized in San Jose, California, on April 27,
1998.
software.net Corporation
By: /s/ WILLIAM S. MCKIERNAN
------------------------------------
William S. McKiernan
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, William S.
McKiernan and Michael J. Praisner, and each of them, individually and without
the other, his or her true and lawful attorney-in-fact and agent, each acting
alone, with full power of substitution and resubstitution, for him or her and
his or her name, place and stead, in any and all capacities, to sign any or all
amendments to this Registration Statement (including post-effective amendments
and any amendments or abbreviated registration statements pursuant to Rule
462(b) increasing the amount of securities for which registration is sought) and
to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, hereby granting unto
said attorney-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each of
said attorney-in-fact and agent, or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 27th day of April, 1998.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
Principal Executive Officer:
By: /s/ WILLIAM S. MCKIERNAN Chairman of the Board April 27, 1998
-------------------------------------------------
William S. McKiernan
Principal Financial Officer and Principal Accounting Officer:
By: /s/ MICHAEL J. PRAISNER Vice President for Finance & April 27, 1998
------------------------------------------------- Administration and Chief
Michael J. Praisner Financial Officer
Additional Directors:
By: /s/ MARK L. BREIER President, Chief Executive April 27, 1998
------------------------------------------------- Officer and Director
Mark L. Breier
By: /s/ LINDA FAYNE LEVINSON Director April 27, 1998
-------------------------------------------------
Linda Fayne Levinson
By: /s/ HUBERT E. KOLDE Director April 27, 1998
-------------------------------------------------
Hubert E. Kolde
By: /s/ STEVEN P. NOVAK Director April 27, 1998
-------------------------------------------------
Steven P. Novak
By: /s/ RICHARD SCUDELLARI Director April 27, 1998
-------------------------------------------------
Richard Scudellari
</TABLE>
II-7
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
* 1.1 -- Form of Underwriting Agreement.
* 3.1 -- Form of Certificate of Incorporation of the Registrant.
* 3.2 -- Form of Bylaws of the Registrant.
* 4.1 -- Specimen of Certificate for Common Stock.
* 5.1 -- Opinion of Jackson Tufts Cole & Black, LLP.
9.1 -- Shareholders Agreement dated March 18, 1998, by and between
the Registrant and each of the holders of the Registrant's
Series C and Series D Preferred Stock
*10.1 -- Form of Indemnification Agreement.
10.2 -- 1995 Stock Option Plan as amended.
10.3 -- 1998 Stock Option Plan.
10.4 -- Stock Option Agreement dated as of March 31, 1995, by and
between the Registrant and John Pettitt.
10.5 -- Series A Preferred Stock Purchase Agreement, as amended.
10.6 -- Series B Preferred Stock Purchase Agreement.
10.7 -- Series C Preferred Stock Purchase Agreement.
10.8 -- Series D Preferred Stock Purchase Agreement.
10.9 -- Common Stock and Warrants Subscription Agreement dated as of
March 18, 1998, by and between the Registrant and America
Online, Inc.
10.10 -- Conveyance Agreement dated as of December 31, 1997, by and
between the Registrant and Internet Commerce Services
Corporation (now known as CyberSource Corporation).
*10.11 -- Interactive Marketing Agreement dated as of March 1, 1998,
by and between the Registrant and America Online, Inc.
*10.12 -- Sponsorship Agreement dated as of March 30, 1998, by and
between the Registrant and Excite, Inc.
*10.13 -- Co-Marketing Services Agreement dated as of June 23, 1997,
by and between the Registrant and Netscape Communications
Corporation.
10.14 -- Trademark License Agreement dated as of June 23, 1997, by
and between the Registrant and Netscape Communications
Corporation.
*10.15 -- Electronic Software Distribution ClearingHouse Agreement
dated as of July 1, 1996, by and between the Registrant and
Microsoft Corporation.
*10.16 -- Letter Agreement for Resale and Electronic Distribution
dated as of October 13, 1995, by and between the Registrant
and Microsoft Corporation.
*10.17 -- IBM Assistance Agreement dated as of October 13, 1995, by
and between the Registrant and IBM Corporation.
10.18 -- Agreement dated as of July 3, 1996, by and between the
Registrant and the United States Department of Defense,
Defense Mapping Agency
(#N00140-96-C-2410).
10.19 -- Agreement dated as of June 12, 1997, by and between the
Registrant and the United States Department of Defense,
Defense Logistics Agency
(#N00140-97-D-1756).
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
*10.20 -- Inter-Company Cross License Agreement dated as of April 23,
1998, by and between the Registrant and Internet Commerce
Services (now known as CyberSource Corporation).
10.21 -- Promissory Note dated as of April 15, 1998, by and between
the Registrant and William S. McKiernan.
10.22 -- Pledge Agreement as of April 15, 1998, by and between the
Registrant and William S. McKiernan.
*10.23 -- Internet Services and Products Agreement by and between the
Registrant and Exodus Communications, Inc.
*10.24 -- Internet Commerce Services Agreement dated as of April 23,
1998, by and between the Registrant and CyberSource
Corporation.
*10.25 -- Office Building Lease dated as of July 8, 1997, as amended,
by and between the Registrant and PGP-South Bay Office
Towers, Inc.
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
*23.2 -- Consent of Jackson Tufts Cole & Black, LLP (included in
Exhibit 5.1)
24.1 -- Power(s) of Attorney (see page II-7).
27.1 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 9.1
SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT (the "Agreement") is made as of March 18,
1998 by and among CyberSource Corporation, a California corporation (the
"Company") (only with respect to Section 3 of the Agreement) with its principal
office at 3031 Tisch Way, Suite 900, San Jose, CA 95128, and the holders of the
Company's Series C Preferred Stock and Series D Preferred Stock listed on the
signature pages attached hereto (each individually an "Investor," and
collectively, the "Investors").
RECITALS
A. Pursuant to that certain Series C Preferred Stock Purchase Agreement,
dated as of September 26, 1997, certain of the Investors purchased shares of the
Company's Series C Preferred Stock (the "Series C Preferred").
B. Concurrently with the execution and delivery of this Agreement,
certain of the Investors are purchasing shares of the Company's Series D
Preferred Stock (the "Series D Preferred") pursuant to that certain Series D
Preferred Stock Purchase Agreement.
C. The Investors wish to agree among themselves as to the designation of
the person to be elected to the Board (as set forth in the Fourth Amended and
Restated Articles of Incorporation of the Company (the "Articles") by the
holders of the Company's Series C and Series D Preferred Stock, and to set forth
their agreements and understandings with respect to certain other matters, as
set forth herein.
AGREEMENT
NOW, THEREFORE, the parties hereby agree as follows:
1. Shares Subject to Agreement. Each Investor agrees to hold all of its
shares of Series C Preferred, Series D Preferred and any Common Stock issuable
upon conversion thereof (hereinafter referred to as the "Voting Shares") subject
to, and to vote such Voting Shares in accordance with, the provisions of this
Agreement.
2. Board of Directors. Each time the shareholders of the Company meet or
act by written consent in lieu of meeting in accordance with the California
Corporations Code for the purpose of electing directors, each of the Investors
agrees to vote its Voting Shares in a manner that would elect as the director
designated by holders of the Series C Preferred and Series D Preferred (the
"Series C/D Director") the person designated (the "GRP Designee") by Global
Retail Partners, L.P. (together with its affiliates, "GRP"). Each of the
Investors also agrees to vote its Voting Shares in a manner that (i) at GRP's
request, would remove and replace the Series C/D Director with a new GRP
Designee and (ii) in the event of a vacancy in the Series C/D Director, fill
such vacancy with a new GRP Designee.
<PAGE> 2
(a) Termination. This Agreement shall terminate upon the closing of
an Initial Registered Public Offering (as defined in the Articles).
3. Successors in Interest.
(a) The provisions of this Agreement shall be binding upon the
successors in interest to any of the Voting Shares. The Company shall not permit
the transfer of any of the Voting Shares on its books or issue a new certificate
representing any of the Voting Shares unless and until the person to whom such
security is to be transferred shall have executed a written agreement,
substantially in the form of this Agreement, pursuant to which such person
becomes a party to this Agreement and agrees to be bound by all the provisions
hereof.
(b) Each certificate representing any of the Voting Shares shall be
marked by the Company with a legend reading as follows:
"THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT (A
COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER) AND BY ACCEPTING
ANY INTEREST IN SUCH SHARES THE PERSON SHALL BE DEEMED TO AGREE
TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING
AGREEMENT."
4. Third Parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party, other than the parties hereto, and their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
5. Authority. Each party hereto represents and warrants that this
Agreement has been duly authorized, executed and delivered on behalf of such
party.
6. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements entered into
and performed in the State of California solely by residents thereof.
7. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8. Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be deemed effective (i) upon personal
delivery or upon delivery by confirmed facsimile or electronic transmission
(with duplicate original sent by United States mail), (ii) if sent by overnight
courier, one (1) business day after deposit with the overnight courier service,
or (iii) if sent by United States mail, three (3) business days after deposit
with the United States Post Office, by registered or certified mail, postage
prepaid, and addressed (a) if to an Investor, at such Investor's address set
forth in the Series D Stock Purchase Agreement, or at such other address as such
Investor shall have furnished to the Company in writing, or (b) if to
2
<PAGE> 3
the Company, at the address set forth on the first page of this Agreement
addressed to the attention of the Corporate Secretary, or at such other address
as the Company shall have furnished to the Investors.
9. Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
10. Amendment and Waiver. Any provision of this Agreement may be amended
with the written consent of GRP and a majority in interest of the other
Investors. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each Investor and the Company.
11. Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on he part of any party of any provisions or conditions
of this Agreement, must be made in writing and shall be effective only to the
extent specifically set forth in such writing. All remedies, either under this
Agreement, or by law or otherwise afforded to any holder, shall be cumulative
and not alternative.
12. Entire Agreement. This Agreement contains the entire agreement among
the parties with respect to the transactions contemplated by this Agreement and
supersede all prior agreements or understandings among the parties. The Series C
Shareholders Agreement, dated September 26, 1997, is expressly superseded, void
and no longer of any force or effect.
(Remainder of this page intentionally left blank)
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Shareholders
Agreement as of the date first written above.
CYBERSOURCE CORPORATION, a California VULCAN VENTURES INCORPORATED
corporation
By: /s/ WILLIAM D. SAVOY
--------------------------------
By: /s/ WILLIAM S. MCKIERNAN Name: William D. Savoy
----------------------------- -----------------------------
Name: William S. McKiernan Title: Vice President
-------------------------- -----------------------------
Title: President & CEO
--------------------------
GLOBAL RETAIL PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By:
--------------------------------
Name:
------------------------------
Its:
-------------------------------
GLOBAL RETAIL PARTNERS FUNDING, INC.
By:
--------------------------------
Name:
------------------------------
Its:
-------------------------------
GRP PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By:
--------------------------------
Name:
------------------------------
Its:
-------------------------------
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Shareholders
Agreement as of the date first written above.
CYBERSOURCE CORPORATION, a California VULCAN VENTURES INCORPORATED
corporation
By:
--------------------------------
By: Name:
----------------------------- -----------------------------
Name: Title:
-------------------------- -----------------------------
Title:
--------------------------
GLOBAL RETAIL PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By: /s/ OSAMU WATANABE
--------------------------------
Name: Osamu Watanabe
------------------------------
Its: Vice President
-------------------------------
GLOBAL RETAIL PARTNERS FUNDING, INC.
By: /s/ OSAMU WATANABE
--------------------------------
Name: Osamu Watanabe
------------------------------
Its: Vice President
-------------------------------
GRP PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By: /s/ OSAMU WATANABE
--------------------------------
Name: Osamu Watanabe
------------------------------
Its: Vice President
-------------------------------
-4-
<PAGE> 6
DLJ DIVERSIFIED PARTNERS, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.
General Partner
By: /s/ OSAMU WATANABE
--------------------------------
Name: Osamu Watanabe
------------------------------
Its: Vice President
-------------------------------
DLJ DIVERSIFIED PARTNERS-A, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.
General Partner
By: /s/ OSAMU WATANABE
--------------------------------
Name: Osamu Watanabe
------------------------------
Its: Vice President
-------------------------------
DLJ FIRST ESC, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION, General Partner
By: /s/ OSAMU WATANABE
--------------------------------
Name: Osamu Watanabe
------------------------------
Its: Vice President
-------------------------------
DLJ ESC II, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION, General Partner
By: /s/ OSAMU WATANABE
--------------------------------
Name: Osamu Watanabe
------------------------------
Its: Vice President
-------------------------------
-5-
<PAGE> 7
UH TECHNOLOGY PARTNERS, LDC
By: [SIG]
-----------------------------------------
General Partner of its Investment Manager,
Unterberg Harris Capital Management, LP
UH CAPITAL PARTNERS INTERNATIONAL, LDC
By: [SIG]
-----------------------------------------
General Partner of its Investment Manager,
Unterberg Harris Capital Management, LP
UNTERBERG HARRIS PRIVATE EQUITY PARTNERS, LP
By: [SIG]
-----------------------------------------
Member of its Investment General Partner,
Unterberg Harris LLC
UNTERBERG HARRIS PRIVATE EQUITY PARTNERS, CV
By: [SIG]
-----------------------------------------
Member of its Investment General Partner,
Unterberg Harris LLC
RAINBOW TRADING PARTNERS, LTD.
By:
-----------------------------------------
Name:
---------------------------------------
-6-
<PAGE> 8
UH TECHNOLOGY PARTNERS, LDC
By:
-----------------------------------------
General Partner of its Investment Manager,
Unterberg Harris Capital Management, LP
UH CAPITAL PARTNERS INTERNATIONAL, LDC
By:
-----------------------------------------
General Partner of its Investment Manager,
Unterberg Harris Capital Management, LP
UNTERBERG HARRIS PRIVATE EQUITY PARTNERS, LP
By:
-----------------------------------------
Member of its Investment General Partner,
Unterberg Harris LLC
UNTERBERG HARRIS PRIVATE EQUITY PARTNERS, CV
By:
-----------------------------------------
Member of its Investment General Partner,
Unterberg Harris LLC
RAINBOW TRADING PARTNERS, LTD.
By: /s/ STANFORD C. FINNEY, JR.
-----------------------------------------
Name: Stanford C. Finney, Jr.
---------------------------------------
President
-6-
<PAGE> 9
Its: President
----------------------------------------
RAINBOW TRADING VENTURE PARTNERS, L.P.
By: /s/ STANFORD C. FINNEY, JR.
-----------------------------------------
Name: Stanford C. Finney, Jr.
---------------------------------------
Its: President
----------------------------------------
WA&H INVESTMENTS, L.L.C.
By: Wessels, Arnold & Henderson Group, L.L.C. its
managing member
By:
---------------------------------------------
Name:
-------------------------------------------
Its:
--------------------------------------------
WILBLAIRCO ASSOCIATES, L.P.
By:
---------------------------------------------
Name:
-------------------------------------------
Its:
--------------------------------------------
FARLEY INDUSTRIES, INC.
By:
---------------------------------------------
Name:
-------------------------------------------
Its:
--------------------------------------------
FARLEY INC.
By:
---------------------------------------------
Name:
-------------------------------------------
Its:
--------------------------------------------
PACIFIC ASSET PARTNERS
-7-
<PAGE> 10
RAINBOW TRADING VENTURE PARTNERS, L.P.
By:
-----------------------------------------
Name:
---------------------------------------
Its:
----------------------------------------
WA&H INVESTMENTS, L.L.C.
By: Wessels, Arnold & Henderson Group, L.L.C. its
managing member
By: [SIG]
---------------------------------------------
Name: THOMAS BRIGL
-------------------------------------------
Its: CFO
--------------------------------------------
WILBLAIRCO ASSOCIATES, L.P.
By:
---------------------------------------------
Name:
-------------------------------------------
Its:
--------------------------------------------
FARLEY INDUSTRIES, INC.
By:
---------------------------------------------
Name:
-------------------------------------------
Its:
--------------------------------------------
-7-
<PAGE> 11
Its:
----------------------------------------
RAINBOW TRADING VENTURE PARTNERS, L.P.
By:
-----------------------------------------
Name:
---------------------------------------
Its:
----------------------------------------
WA&H INVESTMENTS, L.L.C.
By: Wessels, Arnold & Henderson Group, L.L.C. its
managing member
By:
---------------------------------------------
Name:
-------------------------------------------
Its:
--------------------------------------------
WILBLAIRCO ASSOCIATES, L.P.
By: /s/ STEPHEN CAMPBELL
---------------------------------------------
Name: Stephen Campbell
-------------------------------------------
Its: Partner
--------------------------------------------
FARLEY INDUSTRIES, INC.
By:
---------------------------------------------
Name:
-------------------------------------------
Its:
--------------------------------------------
FARLEY INC.
By:
---------------------------------------------
Name:
-------------------------------------------
Its:
--------------------------------------------
PACIFIC ASSET PARTNERS
-7-
<PAGE> 12
By: /s/ ROBERT M. STAFFORD
---------------------------------------
Name: Robert M. Stafford
-------------------------------------
Its: General Partner
-------------------------------------
------------------------------------
STANFORD C. FINNEY, JR.
-8-
<PAGE> 13
By:
---------------------------------------
Name:
-------------------------------------
Its:
-------------------------------------
BVP INVESTORS I, L.L.C.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
/s/ STANFORD C. FINNEY, JR.
------------------------------------
STANFORD C. FINNEY, JR.
-8-
<PAGE> 1
EXHIBIT 10.2
CYBERSOURCE CORPORATION
1995 STOCK OPTION PLAN
1. PURPOSE. This 1995 Stock Option Plan(1)("Plan") is established as a
compensatory plan to attract, retain and provide equity incentives to selected
persons to promote the financial success of CyberSource Corporation, a
California corporation (the "Company"). Capitalized terms not previously defined
herein are defined in Section 18 of this Plan.
2. TYPES OF OPTIONS AND SHARES. Options granted under this Plan (the
"Options") may be either (a) incentive stock options ("ISOs") within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
(b) nonqualified stock options ("NQSOs"), as designated at the time of grant.
The shares of stock that may be purchased upon exercise of Options granted under
this Plan (the "Shares") are shares of Common Stock of the Company ("Common
Stock").
3. NUMBER OF SHARES. The aggregate number of Shares that may be issued
pursuant to Options granted under this Plan is 3,000,000 Shares, subject to
adjustment as provided in this Plan. If any Option expires or is terminated
without being exercised in whole or in part, the unexercised or released Shares
from such Option shall be available for future grant and purchase under this
Plan. At all times during the term of this Plan, the Company shall reserve and
keep available such number of Shares as shall be required to satisfy the
requirements of outstanding Options under this Plan.
4. ELIGIBILITY.
(a) GENERAL RULES OF ELIGIBILITY. Options may be granted to
employees, officers, directors, consultants, independent contractors and
advisors (provided such consultants, contractors and advisors render bona fide
services not in connection with the offer and sale of securities in a
capital-raising transaction) of the Company or any Parent, Subsidiary or
Affiliate of the Company. ISOs may be granted only to employees (including
officers and directors who are also employees) of the Company or a Parent or
Subsidiary of the Company. The Committee (as defined in Section 15) in its sole
discretion shall select the recipients of Options ("Optionees"). An Optionee may
be granted more than one Option under this Plan.
(b) COMPANY ASSUMPTION OF OPTIONS. The Company may also, from
time to time, assume outstanding options granted by another company, whether in
- ----------------
(1) Approved by the Company's Board of Directors and shareholders on
January 5, 1995. Amended and Approved by the Company's Board of Directors
and shareholders on July 3, 1996. Sections 3 and 18(c) Amended and Approved
by the Company's Board of Directors on March 17, 1998.
-1-
<PAGE> 2
connection with an acquisition of such other company or otherwise, by either (i)
granting an Option under this Plan in replacement of the option assumed by the
Company, or (ii) treating the assumed option as if it had been granted under
this Plan if the terms of such assumed option could be applied to an option
granted under this Plan. Such assumption shall be permissible if the holder of
the assumed option would have been eligible to be granted an option hereunder if
the other company had applied the rules of this Plan to such grant.
5. TERMS AND CONDITIONS OF OPTIONS. The Committee shall determine
whether each Option is to be an ISO or an NQSO, the number of Shares subject to
the Option, the exercise price of the Option, the period during which the Option
may be exercised, and all other terms and conditions of the Option, subject to
the following:
(a) FORM OF OPTION GRANT. Each Option granted under this Plan
shall be evidenced by a written Stock Option Grant (the "Grant") in
substantially the form attached hereto as Exhibit A or such other form as shall
be approved by the Committee.
(b) DATE OF GRANT. The date of grant of an Option shall be the
date on which the Committee makes the determination to grant such Option unless
otherwise specified by the Committee and subject to applicable provisions of the
Code. The Grant representing the Option will be delivered to the Optionee with a
copy of this Plan within a reasonable time after the date of grant; provided,
however, that if, for any reason, including a unilateral decision by the Company
not to execute an agreement evidencing such option, a written Grant is not
executed within sixty (60) days after the date of grant, such option shall be
deemed null and void. No Option shall be exercisable until such Grant is
executed by the Company and the Optionee.
(c) EXERCISE PRICE. The exercise price of an NQSO shall be not
less than eighty-five percent (85%) of the Fair Market Value of the Shares on
the date the Option is granted. The exercise price of an ISO shall be not less
than one hundred percent (100%) of the Fair Market Value of the Shares on the
date the Option is granted. The exercise price of any Option granted to a person
owning more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary of the Company ("Ten
Percent Shareholders") shall not be less than one hundred ten percent (110%) of
the Fair Market Value of the Shares on the date the Option is granted.
(d) EXERCISE PERIOD. Options shall be exercisable within the
times or upon the events determined by the Committee as set forth in the Grant;
provided, however, that each Option must become exercisable at a rate of at
least twenty percent (20%) per year over five (5) years from the date the Option
is granted; provided further, that no Option shall be exercisable after the
expiration of ten (10) years from the date the Option is granted; and provided
further, that no ISO granted to a Ten Percent Shareholder
-2-
<PAGE> 3
shall be exercisable after the expiration of five (5) years from the date the
Option is granted.
(e) LIMITATIONS ON OPTIONS. The aggregate Fair Market Value
(determined as of the time an Option is granted) of stock with respect to which
ISOs are exercisable for the first time by an Optionee during any calendar year
(under this Plan or under any other incentive stock option plan of the Company
or any Parent or Subsidiary of the Company) shall not exceed one hundred
thousand dollars ($100,000). To the extent that the Fair Market Value of stock
with respect to which ISOs are exercisable for the first time by an Optionee
during any calendar year exceeds $100,000, such Options shall be treated as
NQSOs. The foregoing shall be applied by taking options into account in the
order in which they were granted. In the event that the Code or the regulations
promulgated thereunder are amended after the effective date of this Plan to
provide for a different limit on the Fair Market Value of Shares permitted to be
subject to ISOs, such different limit shall be incorporated herein and shall
apply to any Options granted after the effective date of such amendment. In
addition, the number of Shares (i) subject to Options granted under this Plan,
and (ii) issued upon exercise of an Option granted under this Plan for any
Optionee may not exceed, in the aggregate, 500,000. In the event Section 162(m)
of the Code or any proposed or final regulations promulgated thereunder are
amended after the effective date of this Plan to eliminate the requirement of a
per Optionee limit on the number of Options which may be granted, then the
restriction in the immediately preceding sentence shall not apply to any Options
granted after the effective date of such amendment.
(f) OPTIONS NON-TRANSFERABLE. Options granted under this Plan,
and any interest therein, shall not be transferable or assignable by the
Optionee, and may not be made subject to execution, attachment or similar
process, otherwise than by will or by the laws of descent and distribution and
shall be exercisable during the lifetime of the Optionee only by the Optionee or
any permitted transferee.
(g) ASSUMED OPTIONS. In the event the Company assumes an option
granted by another company in accordance with Section 4(b) above, the terms and
conditions of such Option shall remain unchanged (except the exercise price and
the number and nature of shares issuable upon exercise, which will be adjusted
appropriately pursuant to Section 424 of the Code and the Treasury Regulations
applicable thereto). In the event the Company elects to grant a new Option
rather than assuming an existing option (as specified in Section 4), such new
Option need not be granted at Fair Market Value on the date of grant and may
instead be granted with a similarly adjusted exercise price.
6. DIRECTOR FORMULA OPTION GRANTS. Non-Employee Directors of the Company
shall receive Options in accordance with the following terms:
(a) FORMULA GRANT. Upon the adoption of this Plan by the Board of
Directors, each Non-Employee Director shall receive a NQSO for 20,000 shares.
-3-
<PAGE> 4
Following the date of adoption of this Plan, upon initial election or
appointment to the Company's Board of Directors, provided that such election or
appointment is not during the Company's last quarter of a year, the elected or
appointed Non-Employee Director shall receive a NQSO for 10,000 shares on the
first business day following the election or appointment of such Non-Employee
Director. Thereafter, annually on January 1, each Non-Employee Director shall
receive a NQSO for 10,000 shares.
(b) TERMS OF GRANT. Options granted pursuant to this Section 6
shall be subject to the following terms:
(i) Exercise Price and Payment Terms. The exercise price
for the Options granted pursuant to this Section 6 shall be equal to one hundred
per cent (100%) of the Fair Market Value of the Shares on the date of the grant,
(excepting Ten Percent Shareholders in respect of whom the exercise price for
the Options granted pursuant to this Section 6 shall be equal to one hundred ten
percent (110%)) payable in cash or otherwise in accordance with the alternatives
specified in clauses (i), (ii), (iv), (v) and (vi) of Section 7(b) of this Plan.
(ii) Term. The term of the Options shall be ten (10) years
from the date the Option is granted (excepting Ten Percent Shareholders in
respect of whom the term of the Options shall be five (5) years).
(iii) Exercise Period. The Options shall be exercisable at
any time on or after nine (9) months after the date of the grant.
(iv) Other Terms. In order to be eligible for the annual
automatic option grants, the Non-Employee Director shall be on the date of
grant, and shall have maintained for the prior year, continuous status as an
active member of the Board of Directors. If, for any reason, a Non-Employee
Director ceases to be a member of the Board, such director shall be ineligible
for that year's grant.
(c) AMENDMENTS. Notwithstanding Section 17 of this plan, the
provisions of this Section 6 shall not be amended more frequently than permitted
for formula plans meeting the conditions of Rule 16b-3 as promulgated by the
Securities and Exchange Commission ("Rule 16b-3").
7. EXERCISE OF OPTIONS.
(a) NOTICES. Options may be exercised only by delivery to the
Company of a written exercise agreement in a form approved by the Committee
(which need not be the same for each Optionee), stating the number of Shares
being purchased, the restrictions imposed on the Shares, if any, and such
representations and agreements regarding the Optionee's investment intent and
access to information, if any, as may be required by the Company to comply with
applicable securities laws, together with payment in full of the exercise price
for the number of Shares being purchased.
-4-
<PAGE> 5
(b) PAYMENT. Payment for the Shares may be made in cash (by
check) or, where permitted by law any of the following methods approved by the
Committee at the date of grant of this option, or any combination thereof: (i)
by cancellation of indebtedness of the Company to the Optionee; (ii) by
surrender of shares of Common Stock of the Company already owned by the
Optionee, having a Fair Market Value equal to the exercise price of the Option;
(iii) by waiver of compensation due or accrued to Optionee for services
rendered; (iv) through delivery of a promissory note for the full exercise price
bearing interest at such rate with the note due at such time, on a secured or
unsecured basis, as determined by the Committee; (v) provided that a public
market for the Company's stock exists, through a "same day sale" commitment from
the Optionee and a broker-dealer that is a member of the National Association of
Securities Dealers, Inc. (an "NASD Dealer") whereby the Optionee irrevocably
elects to exercise the Option and to sell a portion of the Shares so purchased
to pay for the exercise price and whereby the NASD Dealer irrevocably commits
upon receipt of such Shares to forward the exercise price directly to the
Company; (vi) provided that a public market for the Company's stock exists,
through a "margin" commitment from the Optionee and an NASD Dealer whereby the
Optionee irrevocably elects to exercise the Option and to pledge the Shares so
purchased to the NASD Dealer in a margin account as security for a loan from the
NASD Dealer in the amount of the exercise price, and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to forward the exercise price
directly to the Company.
(c) WITHHOLDING TAXES. Prior to issuance of the Shares upon
exercise of an Option, the Optionee shall pay or make adequate provision for any
federal or state withholding obligations of the Company, if applicable. Where
approved by the Committee in its sole discretion, the Optionee may provide for
payment of withholding taxes upon exercise of the Option by requesting that the
Company retain Shares with a Fair Market Value equal to the minimum amount of
taxes required to be withheld. In such case, the Company shall issue the net
number of Shares to the Optionee by deducting the Shares retained from the
Shares exercised. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
in accordance with Section 83 of the Code (the "Tax Date"). All elections by
Optionees to have Shares withheld for this purpose shall be made in writing in a
form acceptable to the Committee and shall be subject to the following
restrictions:
(i) the election must be made on or prior to the
applicable Tax Date;
(ii) once made, the election shall be irrevocable as to
the particular Shares as to which the election is made;
(iii) all elections shall be subject to the consent or
disapproval of the Committee;
-5-
<PAGE> 6
(iv) if the Optionee is an officer or director of the
Company or other person (in each case, an "Insider") whose transactions in the
Company's Common Stock are subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and if the Company is subject to
Section 16(b) of the Exchange Act, the election must comply with Rule 16b-3 as
promulgated by the Securities and Exchange Commission ("Rule 16b 3").
(d) LIMITATIONS ON EXERCISE. Notwithstanding anything else to the
contrary in the Plan or any Grant, no Option may be exercisable later than the
expiration date of the Option.
8. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Grant (a) a right of
first refusal to purchase all Shares that an Optionee (or a subsequent
transferee) may propose to transfer to a third party and/or (b) for so long as
the Company's stock is not publicly traded, a right to repurchase a portion of
or all Shares held by an Optionee upon the Optionee's termination of employment
or service with the Company or its Parent, Subsidiary or Affiliate of the
Company for any reason within a specified time as determined by the Committee at
the time of grant at the higher of (i) the Optionee's original purchase price
or, (ii) the Fair Market Value of such Shares.
9. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Committee shall
have the power to modify, extend or renew outstanding Options and to authorize
the grant of new Options in substitution therefor, provided that any such action
may not, without the written consent of the Optionee, impair any rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered shall be treated in accordance with Section 424(h)
of the Code. The Committee shall have the power to reduce the exercise price of
outstanding options; provided, however, that the exercise price per share may
not be reduced below the minimum exercise price that would be permitted under
Section 5(c) of this Plan for options granted on the date the action is taken to
reduce the exercise price.
10. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the
rights of a shareholder with respect to any Shares subject to an Option until
such Option is properly exercised. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to such date,
except as provided in this Plan. The Company shall provide to each Optionee,
regardless of the reports provided to shareholders in general, a copy of the
annual financial statements of the Company within a reasonable time frame
following the end of the fiscal year of the Company.
11. NO OBLIGATION TO EMPLOY; NO RIGHT TO FUTURE GRANTS. Nothing in this
Plan or any Option granted under this Plan shall confer on any Optionee any
right (a) to continue in the employ of, or other relationship with, the Company
or any Parent or Subsidiary of the Company or limit in any way the right of the
-6-
<PAGE> 7
Company or any Parent, Subsidiary or Affiliate of the Company to terminate the
Optionee's employment or other relationship at any time, with or without cause,
or (b) to have any Option(s) granted to such Optionee under this Plan, or any
other plan, or to acquire any other securities of the Company, in the future.
12. ADJUSTMENT OF OPTION SHARES. In the event that the number of
outstanding shares of Common Stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration, or
if a substantial portion of the assets of the Company are distributed, without
consideration in a spin-off or similar transaction, to the shareholders of the
Company, the number of Shares available under this Plan and the number of Shares
subject to outstanding Options and the exercise price per share of such Options
shall be proportionately adjusted, subject to any required action by the Board
or shareholders of the Company and compliance with applicable securities laws;
provided, however, that a fractional share shall not be issued upon exercise of
any Option and any fractions of a Share that would have resulted shall either be
cashed out at Fair Market Value or the number of Shares issuable under the
Option shall be rounded down to the nearest whole number, as determined by the
Committee; and provided further that the exercise price may not be decreased to
below the par value, if any, for the Shares.
13. ASSUMPTION OF OPTIONS BY SUCCESSORS.
(a) In the event of (i) a merger or consolidation in which the
Company is not the surviving corporation (other than a merger or consolidation
with a wholly-owned subsidiary or where there is no substantial change in the
shareholders of the corporation and the Options granted under this Plan are
assumed by the successor corporation), or (ii) the sale of all or substantially
all of the assets of the Company, any or all outstanding Options shall be
assumed by the successor corporation, which assumption shall be binding on all
Optionees, an equivalent option shall be substituted by such successor
corporation or the successor corporation shall provide substantially similar
consideration to Optionees as was provided to shareholders (after taking into
account the existing provisions of the Optionees' options such as the exercise
price and the vesting schedule), and, in the case of outstanding shares subject
to a repurchase option, issue substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Optionee.
(b) In the event such successor corporation, if any, refuses to
assume or substitute, as provided above, pursuant to an event described in
subsection (a) above, or in the event of a dissolution or liquidation of the
Company, the Options shall, notwithstanding any contrary terms in the Grant,
expire on a date specified in a written notice given by the Committee to the
Optionees specifying the terms and conditions of such termination (which date
shall be at least twenty (20) days after the date the Committee gives the
written notice).
-7-
<PAGE> 8
14. ADOPTION AND SHAREHOLDER APPROVAL. This Plan shall become effective
on the date that it is adopted by the Board of Directors of the Company (the
"Board"). This Plan shall be approved by the shareholders of the Company, in any
manner permitted by applicable corporate law, within twelve (12) months before
or after the date this Plan is adopted by the Board. Thereafter, after the
Company becomes subject to Section 16(b) of the Exchange Act, the Company will
comply with the requirements of Rule 16b-3 (or its successor) with respect to
shareholder approval.
15. ADMINISTRATION. This Plan may be administered by the Board or a
Committee appointed by the Board (the "Committee"). At all times during which
the Company is registered under the Exchange Act, the Committee shall be
comprised solely of two or more Non-Employee Directors. As used in this Plan,
references to the "Committee" shall mean either such Committee or the Board if
no committee has been established. The interpretation by the Committee of any of
the provisions of this Plan, any related agreements, or any Option granted under
this Plan shall be final and binding upon the Company and all persons having an
interest in any Option or any Shares purchased pursuant to an Option.
16. TERM OF PLAN. Options may be granted pursuant to this Plan from time
to time on or prior to January 4, 2005, a date which is less than ten years
after the earlier of the date of approval of this Plan by the Board or the
shareholders of the Company pursuant to Section 14 of this Plan.
17. AMENDMENT OR TERMINATION OF PLAN. The Board or Committee may, at any
time, amend, alter, suspend or discontinue the Plan, but no amendment,
alteration, suspension or discontinuation shall be made which would impair the
rights of any Optionee under any Option theretofore granted, without his or her
consent, or which, without the approval of the shareholders of the Company
would:
(a) except as provided in Section 12 of the Plan, increase the
total number of Shares reserved for the purposes of the Plan;
(b) extend the duration of the Plan;
(c) extend the period during and over which Options may be
exercised under the Plan; or
(d) change the class of persons eligible to receive Options
granted hereunder (except as may be required to comport with changes in the
Code, ERISA or regulations promulgated thereunder).
Without limiting the foregoing, the Board or Committee may at any time
or from time to time authorize the Company, with the consent of the respective
Optionees, to issue new Options in exchange for the surrender and cancellation
of any or all outstanding Options.
-8-
<PAGE> 9
18. CERTAIN DEFINITIONS. As used in this Plan, the following terms shall
have the following meanings:
(a) "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of the
granting of the Option, each of the corporations other than the Company owns
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
(b) "SUBSIDIARY" means any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if, at the time
of the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
(c) "AFFILIATE" means Internet Commerce Services Corporation, a
Delaware corporation, and any corporation that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is under common
control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to cause the direction of the management and policies of
the corporation, whether through the ownership of voting securities, by contract
or otherwise.
(d) "NONEMPLOYEE DIRECTORS" shall have the meaning set forth in
Rule 16b-3(b)(3) as promulgated by the Securities and Exchange Commission under
Section 16(b) of the Exchange Act, as such rule is amended from time to time and
as interpreted by the Securities and Exchange Commission.
(e) "FAIR MARKET VALUE" shall mean the fair market value of the
Shares as determined by the Committee from time to time in good faith. If a
public market exists for the Shares, the Fair Market Value shall be the average
of the last reported bid and asked prices for Common Stock of the Company on the
last trading day prior to the date of determination or, in the event the Common
Stock of the Company is listed on a stock exchange or is a NASDAQ National
Market security, the Fair Market Value shall be the closing price on such
exchange or quotation system on the last trading day prior to the date of
determination.
19. APPLICABLE LAW AND REGULATIONS. The obligations of the Company under
this Plan are subject to the approval of state and federal authorities or
agencies with jurisdiction over the subject matter hereof. The Company shall not
be obligated to issue or deliver shares under this Plan if such issuance or
delivery would violate applicable state or federal securities laws.
-9-
<PAGE> 10
EXHIBIT A
STOCK OPTION GRANT
Optionee: ___________________________________________________
Address: ____________________________________________________
Total Shares Subject to Option: _____________________________
Exercise Price Per Share: ___________________________________
Date of Grant: ______________________________________________
Expiration Date of Option: __________________________________
Type of Stock Option: Incentive: _____________
Nonqualified: _____________
1. GRANT OF OPTION. CyberSource Corporation, a California corporation
(the "Company"), hereby grants to the optionee named above ("Optionee") an
option (this "Option") to purchase the total number of shares of Common Stock
("Common Stock") of the Company set forth above (the "Shares") at the exercise
price per share set forth above (the "Exercise Price"), subject to all of the
terms and conditions of this Grant and the Company's 1995 Stock Option Plan, as
amended to the date hereof (the "Plan"). If designated as an Incentive Stock
Option above, this Option is intended to qualify as an "incentive stock option"
("ISO") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). Unless otherwise defined herein, capitalized terms used
herein shall have the meanings ascribed to them in the Plan.
2. EXERCISE PERIOD OF OPTION
(a) (ISOs). The Optionee has option rights hereunder to purchase
a total of ___________ Shares which shall become exercisable during the time
periods as set forth in this Section 2. On and after ______________ [one year
from date of grant], this Option may be exercised by the Optionee for the
purchase of ________ [fraction] of the Shares covered by this Option (_______
Shares), or any portion thereof. On or after the last day of each full month
following __________ [one year from the date of grant] this Option may be
exercised by the Optionee for the purchase of an additional ________ [fraction]
of the Shares covered by this Option (_________ Shares), or any portion thereof.
Once a portion of this Option becomes exercisable it shall remain exercisable
Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 11
until the Expiration Date, or until it terminates pursuant to the terms of
Section 4 hereof, whichever is first to occur.
(b) (NQSOs). The Optionee has option rights hereunder to purchase
a total of ___________ Shares which shall become exercisable by the Optionee at
any time on or after nine (9) months after _____________ . Once a portion of
this Option becomes exercisable it shall remain exercisable until the Expiration
Date, or until it terminates pursuant to the terms of Section 4 hereof,
whichever is first to occur.
(c) The minimum number of Shares that may be purchased upon any
partial exercise of this Option is one hundred (100) shares; and
(d) In all events, this Option shall expire on the Expiration
Date set forth above and must be exercised, if at all, on or before the
Expiration Date. The portion of Shares as to which an Option is exercisable in
accordance with the above schedule as of the applicable dates shall be deemed
"Vested Options."
3. RESTRICTION ON EXERCISE. This Option may not be exercised unless such
exercise is in compliance with the Securities Act of 1933, as amended, and all
applicable state securities laws, as they are in effect on the date of exercise,
and the requirements of any stock exchange or over-the-counter market on which
the Company's Common Stock may be listed or quoted at the time of exercise.
Optionee understands that the Company is under no obligation to register,
qualify or list the Shares with the Securities and Exchange Commission, any
state securities commission or any stock exchange to effect such compliance.
4. TERMINATION OF OPTION. Except as provided below in this Section 4,
this Option shall terminate and may not be exercised if Optionee ceases to be
employed by, or provide services to, the Company or by any Parent or Subsidiary
of the Company (or, in the case of a nonqualified stock option, by or to any
Affiliate of the Company). Optionee shall be considered to be employed by the
Company for all purposes under this Section 4 if Optionee is an officer,
director or full-time employee of the Company or any Parent, Subsidiary or
Affiliate of the Company or if the Committee determines that Optionee is
rendering substantial services as a part-time employee, consultant, contractor
or advisor to the Company or any Parent, Subsidiary or Affiliate of the Company.
The Committee shall have discretion to determine whether Optionee has ceased to
be employed by the Company or any Parent, Subsidiary or Affiliate of the Company
and the effective date on which such employment terminated (the "Termination
Date").
(a) TERMINATION GENERALLY. If Optionee ceases to be employed by
the Company and all Parents, Subsidiaries or Affiliates of the Company for any
reason except death or disability, the Vested Options, to the extent (and only
to the extent) exercisable by Optionee on the Termination Date, may be exercised
by Optionee, but only within thirty (30) days after the Termination Date;
provided that this Option may not be exercised in any event after the Expiration
Date.
Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 12
(b) DEATH OR DISABILITY. If Optionee's employment with the
Company and all Parents, Subsidiaries and Affiliates of the Company is
terminated because of the death of Optionee or the disability of Optionee,
including, without limitation, such disability as defined in Section 22(e)(3) of
the Code, the Vested Options, to the extent (and only to the extent) exercisable
by Optionee on the Termination Date, may be exercised by Optionee (or Optionee's
legal representative), but only within twelve (12) months after the Termination
Date; provided that this Option may not be exercised in any event later than the
Expiration Date.
(c) NO RIGHT TO EMPLOYMENT. Nothing in the Plan or this Grant
shall confer on Optionee any right to continue in the employ of, or other
relationship with, the Company or any Parent, Subsidiary or Affiliate of the
Company or limit in any way the right of the Company or any Parent, Subsidiary
or Affiliate of the Company to terminate Optionee's employment or other
relationship at any time, with or without cause.
5. MANNER OF EXERCISE.
(a) EXERCISE AGREEMENT. This Option shall be exercisable by
delivery to the Company of an executed written Stock Option Exercise Agreement
in the form attached hereto as Exhibit 1, or in such other form as may be
approved by the Company, which shall set forth Optionee's election to exercise
some or all of this Option, the number of Shares being purchased, any
restrictions imposed on the Shares and such other representations and agreements
as may be required by the Company to comply with applicable securities laws.
(b) EXERCISE PRICE. The Stock Option Exercise Agreement shall be
accompanied by full payment of the Exercise Price for the Shares being
purchased. Payment for the Shares may be made in cash (by check), or, where
permitted by law, by any of the following methods approved by the Committee at
the date of grant of this Option, or any combinations thereof:
[ ] (i) by cancellation of indebtedness of the Company to
the Optionee;
[ ] (ii) by surrender of shares of Common Stock of the
Company already owned by the Optionee, or which were obtained by Optionee in the
open public market, having a Fair Market Value equal to the exercise price of
the Option;
[ ] (iii) by waiver of compensation due or accrued to
Optionee for services rendered;
[ ] (iv) provided that a public market for the Company's
stock exists, through a "same day sale" commitment from the Optionee and a
broker dealer that is a member of the National Association of Securities
Dealers, Inc. (an "NASD Dealer") whereby the Optionee irrevocably elects to
exercise the Option and to sell a portion of the Shares so purchased to pay for
the exercise price and whereby the NASD Dealer
Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 13
irrevocably commits upon receipt of such Shares to forward the exercise price
directly to the Company; or
[ ] (v) provided that a public market for the Company's
stock exists, through a "margin" commitment from the Optionee and an NASD Dealer
whereby the Optionee irrevocably elects to exercise this option and to pledge
the Shares so purchased to the NASD Dealer in a margin account as security for a
loan from the NASD Dealer in the amount of the exercise price, and whereby the
NASD Dealer irrevocably commits upon receipt of such Shares to forward the
exercise price directly to the Company.
(c) Withholding Taxes. Prior to the issuance of the Shares upon
exercise of this Option, Optionee must pay or make adequate provision for any
applicable federal or state withholding obligations of the Company. The Optionee
may provide for payment of Optionee's minimum statutory withholding taxes upon
exercise of the Option by requesting that the Company retain Shares with a Fair
Market Value equal to the minimum amount of taxes required to be withheld, all
as set forth in Section 6(c) of the Plan. In such case, the Company shall issue
the net number of Shares to the Optionee by deducting the Shares retained from
the Shares exercised.
(d) Issuance of Shares. Provided that such Stock Option Exercise
Agreement and payment are in form and substance satisfactory to counsel for the
Company, the Company shall cause the Shares to be issued in the name of Optionee
or Optionee's legal representative.
6. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after exercise of the ISO with respect to the Shares to be sold or disposed
of, the Optionee shall immediately notify the Company in writing of such
disposition. Optionee acknowledges and agrees that Optionee may be subject to
income tax withholding by the Company on the compensation income recognized by
the Optionee from any such early disposition by payment in cash or out of the
current wages or other earnings payable to the Optionee.
7. NONTRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner other than by will or by the laws of descent and distribution and may
be exercised during the lifetime of Optionee only by Optionee or any permitted
transferee. The terms of this Option shall be binding upon the executors,
administrators, successors and assigns of the Optionee.
8. REPURCHASE OF OPTIONS. The Company and the Company's shareholders
have certain rights of first refusal that are set forth in Article X of the
Company's Bylaws. A copy of Article X of the Bylaws is available upon request
from the Secretary of the Company. The Company reserves to itself (a) the right
of first refusal to purchase all Shares that Optionee (or a subsequent
transferee) may propose to transfer to a third party
Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 14
and/or (b) for so long as the Company's stock is not publicly traded, the right
to repurchase within one year of the Optionee's termination of employment or
service with the Company or its Parent, Subsidiary or Affiliate of the Company,
a portion of or all Shares held by an Optionee at the higher of (i) the
Optionee's original purchase price or, (ii) the Fair Market Value of such
Shares.
9. FEDERAL TAX CONSEQUENCES. Set forth below is a brief summary as of
the date this form of Option Grant was adopted of some of the federal tax
consequences of exercise of this Option and disposition of the Shares. THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT
TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION
OR DISPOSING OF THE SHARES.
(a) Exercise of ISO. If this Option qualifies as an ISO, there
will be no regular federal income tax liability upon the exercise of this
Option, although the excess, if any, of the Fair Market Value of the Shares on
the date of exercise over the Exercise Price will be treated as an adjustment to
alternative minimum taxable income for federal income tax purposes and may
subject the Optionee to an alternative minimum tax liability in the year of
exercise.
(b) Exercise of Nonqualified Stock Option. If this Option does
not qualify as an ISO (a "Nonqualified Stock Option"), there may be a regular
federal income tax liability upon the exercise of the Option. The Optionee will
be treated as having received compensation income (taxable at ordinary income
tax rates) equal to the excess, if any, of the Fair Market Value of the Shares
on the date of exercise over the Exercise Price. The Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(c) Disposition of Shares. In the case of a nonqualified stock
option, if Shares are held for at least one year before disposition, any gain on
disposition of the Shares will be treated as long-term capital gain for federal
and California income tax purposes. In the case of an ISO, if Shares are held
for at least one year after the date of exercise and at least two years after
the Date of Grant, any gain on disposition of the Shares will be treated as
long-term capital gain for federal and California income tax purposes. If Shares
acquired pursuant to an ISO are disposed of within such one-year or two-year
periods (a "disqualifying disposition"), gain on such disqualifying disposition
will be treated as compensation income (taxable at ordinary income rates) to the
extent of the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price (the "Spread"). Any gain in excess of the
Spread shall be treated as capital gain.
10. INTERPRETATION. Any dispute regarding the interpretation of this
Grant shall be submitted by Optionee or the Company to the Company's Board of
Directors or the Committee, which shall review such dispute at its next regular
meeting. The
Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 15
resolution of such a dispute by the Board or Committee shall be final and
binding on the Company and on Optionee
11. ENTIRE AGREEMENT. The Plan and the Stock Option Exercise Agreement
attached hereto as Exhibit 1 are incorporated herein by this reference. This
Grant, the Plan and the Stock Option Exercise Agreement constitute the entire
agreement of the parties hereto and supersede all prior undertakings and
agreements with respect to the subject matter hereof.
BY:______________________________
NAME:___________________________
TITLE:_____________________________
Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 16
ACCEPTANCE
Optionee hereby acknowledges receipt of a copy of the Plan,
represents that Optionee has read and understands the terms and provisions
thereof, and accepts this Option subject to all the terms and conditions of the
Plan and this Stock Option Grant. Optionee acknowledges that there may be
adverse tax consequences upon exercise of this Option or disposition of the
Shares and that Optionee should consult a tax adviser prior to such exercise or
disposition.
OPTIONEE
-----------------------------------
Signature
-----------------------------------
Print Name
Date:_______________________________
Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 17
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
EXHIBIT 1
TO STOCK OPTION GRANT
STOCK OPTION EXERCISE AGREEMENT
This Agreement is made this _____ day of ________________, 19___
between ___________________, a California corporation (the "Company"), and the
optionee named below ("Optionee").
Optionee: _____________________________________________________
Social Security Number: _______________________________________
Address: ______________________________________________________
Number of Shares Purchased: ___________________________________
Price Per Share: ______________________________________________
Aggregate Purchase Price: _____________________________________
Date of Option Grant: _________________________________________
Type of Stock Option: Incentive: _______________
Nonqualified: _______________
Optionee hereby delivers to the Company the Aggregate Purchase
Price, to the extent permitted in the Option Grant, as follows [check as
applicable and complete]:
[ ] cash (check) in the amount of $___________, receipt of which is
acknowledged by the Company;
[ ] by delivery of ____________ fully-paid, nonassessable and vested shares
of the Common Stock of the Company owned by Optionee and owned free and
clear of all liens, claims, encumbrances or security interests, valued
at the current fair market value of $_________ per share (determined in
accordance with the Plan);
[ ] by the waiver hereby of compensation due or accrued for services
rendered in the amount of $______________;
[ ] by delivery of a "same day sale" commitment from the Optionee and a
broker dealer that is a member of the National Association of Securities
Dealers, Inc. (an "NASD Dealer") whereby the Optionee irrevocably elects
to exercise the Option and to sell a portion of the Shares so purchased
to pay for the exercise price of $_________ and whereby the NASD Dealer
irrevocably commits upon receipt of
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 18
such Shares to forward the exercise price directly to the Company (this
payment method may be used only if a public market for the Company's
stock exists); or
[ ] by delivery of a "margin" commitment from the Optionee and an NASD
Dealer whereby the Optionee irrevocably elects to exercise this option
and to pledge the Shares so purchased to the NASD Dealer in a margin
account as security for a loan from the NASD Dealer in the amount of the
exercise price, and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price of $_________
directly to the Company (this payment method may be used only if a
public market for the Company's stock exists).
The Company and Optionee hereby agree as follows:
1. PURCHASE OF SHARES. On this date and subject to the terms and
conditions of this Agreement, Optionee hereby exercises the Stock Option Grant
between the Company and Optionee dated as of the Date of Option Grant set forth
above (the "Grant"), with respect to the Number of Shares Purchased set forth
above of the Company's Common Stock (the "Shares") at an aggregate purchase
price equal to the Aggregate Purchase Price set forth above (the "Purchase
Price") and the Price per Share set forth above (the "Purchase Price Per
Share"). The term "Shares" refers to the Shares purchased under this Agreement
and includes all securities received (a) in replacement of the Shares, and (b)
as a result of stock dividends or stock splits in respect of the Shares.
Capitalized terms used herein that are not defined herein have the definitions
ascribed to them in the Plan or the Grant.
2. REPRESENTATIONS OF PURCHASER. Optionee represents and warrants to the
Company that:
(a) Optionee has received, read and understood the Plan and the
Grant and agrees to abide by and be bound by their terms and conditions.
(b) Optionee is capable of evaluating the merits and risks of
this investment, has the ability to protect Optionee's own interests in this
transaction and is financially capable of bearing a total loss of this
investment.
(c) Optionee is fully aware of (i) the highly speculative nature
of the investment in the Shares; (ii) the financial hazards involved; and (iii)
the lack of liquidity of the Shares and the restrictions on transferability of
the Shares (e.g., that Optionee may not be able to sell or dispose of the Shares
or use them as collateral for loans).
(d) Optionee is purchasing the Shares for Optionee's own account
for investment purposes only and not with a view to, or for sale in connection
with, a
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 19
distribution of the Shares within the meaning of the Securities Act of 1933, as
amended (the "1933 Act").
(e) Optionee has no present intention of selling or otherwise
disposing of all or any portion of the Shares.
3. COMPLIANCE WITH SECURITIES LAWS. Optionee understands and
acknowledges that the Shares have not been registered under the 1933 Act and
that, notwithstanding any other provision of the Grant to the contrary, the
exercise of any rights to purchase any Shares is expressly conditioned upon
compliance with the 1933 Act and all applicable state securities laws. Optionee
agrees to cooperate with the Company to ensure compliance with such laws. The
Shares are being issued under the 1933 Act pursuant to [THE COMPANY WILL CHECK
THE APPLICABLE BOX]:
[ ] the exemption provided by Rule 701;
[ ] the exemption provided by Rule 504;
[ ] Section 4(2) of the 1933 Act;
[ ] other:
4. Federal Restrictions on Transfer. Optionee understands that the
Shares must be held indefinitely unless they are registered under the 1933 Act
or unless an exemption from such registration is available and that the
certificate(s) representing the Shares will bear a legend to that effect.
Optionee understands that the Company is under no obligation to register the
Shares, and that an exemption may not be available or may not permit Optionee to
transfer Shares in the amounts or at the times proposed by Optionee.
(a) Rule 144. Optionee has been advised that Rule 144 promulgated
under the 1933 Act, which permits certain resales or unregistered securities, is
not presently available with respect to the Shares and, in any event, requires
that a minimum of one (1) year elapse between the date of acquisition of Shares
from the Company or an affiliate of the Company and any resale under Rule 144.
Prior to an initial public offering of the Company's stock, "nonaffiliates"
(i.e. persons other than officers, directors and major shareholders of the
Company) may resell only under Rule 144(k), which requires that a minimum of two
(2) years elapse between the date of acquisition of Shares from the Company or
an affiliate of the Company and any resale under Rule 144(k). Rule 144(k) is not
available to affiliates.
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 20
(b) Rule 701. If the exemption relied upon for exercise of the
Shares is Rule 701, the Shares will become freely transferable, subject to
limited conditions regarding the method of sale, by nonaffiliates ninety (90)
days after the first sale of common stock of the Company to the general public
pursuant to a registration statement filed with and declared effective by the
Securities and Exchange Commission (the "SEC"), subject to any lengthier market
standoff agreement contained in this Agreement or entered into by Optionee.
Affiliates must comply with the provisions (other than the holding period
requirements) of Rule 144.
5. State Law Restrictions on Transfer. Optionee understands that
transfer of the Shares may be restricted by applicable state securities laws,
and that the certificate(s) representing the Shares may bear a legend or legends
to that effect.
6. Market Standoff Agreement. Optionee agrees in connection with any
registration of the Company's securities that, upon the request of the Company
or the underwriters managing any public offering of the Company's securities,
Optionee will not sell or otherwise dispose of any Shares without the prior
written consent of the Company or such underwriters, as the case may be, for a
period of time (not to exceed one hundred eighty (180) days) from the effective
date of such registration as the Company or the underwriters may specify for
employee shareholders generally.
7. Legends. Optionee understands and agrees that the certificate(s)
representing the Shares will bear a legend in substantially the following forms,
in addition to any other legends required by applicable law:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE 'SECURITIES ACT'), AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE SECURITIES ACT OR, IN THE OPINION OF COUNSEL,
PREPARED AT ISSUER'S REQUEST AND EXPENSE, IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH."
8. Stop-Transfer Notices. Optionee understands and agrees that, in order
or ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop-transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 21
9. Tax Consequences. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER
ADVERSE TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF
THE SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX
CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR
DISPOSITION OF THE SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR
ANY TAX ADVICE.
10. Repurchase Options. The Company and the Company's shareholders have
certain rights of first refusal that are set forth in Article X of the Company's
Bylaws. A copy of Article X of the Bylaws is available upon request from the
Secretary of the Company. The Company reserves to itself (a) the right of first
refusal to purchase all Shares that Optionee (or a subsequent transferee) may
propose to transfer to a third party and/or (b) for so long as the Company's
stock is not publicly traded, the right to repurchase within one year of the
Optionee's termination of employment or service with the Company or its Parent,
Subsidiary or Affiliate, a portion of or all Shares held by an Optionee at the
higher of (i) the Optionee's original purchase price or, (ii) the Fair Market
Value of such Shares.
11. Entire Agreement. The Plan and Grant are incorporated herein by
reference. This Agreement, the Plan and the Grant constitute the entire
agreement of the parties and supersede in their entirety all prior undertakings
and agreements of the Company and Optionee with respect to the subject matter
hereof, and are governed by California law except for that body of law
pertaining to conflict of laws.
Submitted By: Accepted By:
OPTIONEE:____________________________ _______________________________
[print name]
_____________________________________ By: ___________________________
[signature]
Its:___________________________
Dated: ______________________________ Dated: ________________________
Address: ____________________________
____________________________
____________________________
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1995 Stock Option Plan
<PAGE> 1
EXHIBIT 10.3
CYBERSOURCE CORPORATION
1998 STOCK OPTION PLAN
1. PURPOSE. This 1998 Stock Option Plan(1) ("Plan") is established as a
compensatory plan to attract, retain and provide equity incentives to selected
persons to promote the financial success of CyberSource Corporation, a
California corporation (also known as software.net Corporation, the "Company").
Capitalized terms not previously defined herein are defined in Section 18 of
this Plan.
2. TYPES OF OPTIONS AND SHARES. Options granted under this Plan (the
"Options") may be either (a) incentive stock options ("ISOs") within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
(b) nonqualified stock options ("NQSOs"), as designated at the time of grant.
The shares of stock that may be purchased upon exercise of Options granted under
this Plan (the "Shares") are shares of Common Stock of the Company ("Common
Stock").
3. NUMBER OF SHARES. The aggregate number of Shares that may be issued
pursuant to Options granted under this Plan is 2,000,000 Shares, subject to
adjustment as provided in this Plan. If any Option expires or is terminated
without being exercised in whole or in part, the unexercised or released Shares
from such Option shall be available for future grant and purchase under this
Plan. At all times during the term of this Plan, the Company shall reserve and
keep available such number of Shares as shall be required to satisfy the
requirements of outstanding Options under this Plan.
4. ELIGIBILITY.
(a) GENERAL RULES OF ELIGIBILITY. Options may be granted to
employees, officers, directors, consultants, independent contractors and
advisors (provided such consultants, contractors and advisors render bona fide
services not in connection with the offer and sale of securities in a
capital-raising transaction) of the Company or any Parent, Subsidiary or
Affiliate of the Company. ISOs may be granted only to employees (including
officers and directors who are also employees) of the Company or a Parent or
Subsidiary of the Company. The Committee (as defined in Section 15) in its sole
discretion shall select the recipients of Options ("Optionees"). An Optionee may
be granted more than one Option under this Plan.
(b) COMPANY ASSUMPTION OF OPTIONS. The Company may also, from time to
time, assume outstanding options granted by another company, whether in
connection with an acquisition of such other company or otherwise, by either (i)
granting an Option under this Plan in replacement of the Option assumed by the
Company, or (ii) treating the assumed option as if it had been granted under
this Plan if the terms of such
- -----------
(1) Approved by the Company's Board of Directors and shareholders on
April 4, 1998.
-1-
<PAGE> 2
assumed option could be applied to an Option granted under this Plan. Such
assumption shall be permissible if the holder of the assumed option would have
been eligible to be granted an Option hereunder if the other company had applied
the rules of this Plan to such grant.
5. TERMS AND CONDITIONS OF OPTIONS. The Committee shall determine
whether each Option is to be an ISO or an NQSO, the number of Shares subject to
the Option, the exercise price of the Option, the period during which the Option
may be exercised, and all other terms and conditions of the Option, subject to
the following:
(a) FORM OF OPTION GRANT. Each Option granted under this Plan shall
be evidenced by a written Stock Option Grant (the "Grant") in substantially the
form attached hereto as Exhibit A or such other form as shall be approved by the
Committee.
(b) DATE OF GRANT. The date of grant of an Option shall be the date
on which the Committee makes the determination to grant such Option unless
otherwise specified by the Committee and subject to applicable provisions of the
Code. The Grant representing the Option will be delivered to the Optionee with a
copy of this Plan within a reasonable time after the date of grant; provided,
however, that if, for any reason, including a unilateral decision by the Company
not to execute an agreement evidencing such option, a written Grant is not
executed within sixty (60) days after the date of grant, such option shall be
deemed null and void (at the discretion of the Company). No Option shall be
exercisable until such Grant is executed by the Company and the Optionee.
(c) EXERCISE PRICE. The exercise price of an NQSO shall be not less
than eighty-five percent (85%) of the Fair Market Value of the Shares on the
date the Option is granted. The exercise price of an ISO shall be not less than
one hundred percent (100%) of the Fair Market Value of the Shares on the date
the Option is granted. The exercise price of any Option granted to a person
owning more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary of the Company ("Ten
Percent Shareholders") shall not be less than one hundred ten percent (110%) of
the Fair Market Value of the Shares on the date the Option is granted.
(d) EXERCISE PERIOD. Options shall be exercisable within the times or
upon the events determined by the Committee as set forth in the Grant; provided,
however, that each Option must become exercisable at a rate of at least twenty
percent (20%) per year over five (5) years from the date the Option is granted;
provided further, that no Option shall be exercisable after the expiration of
ten (10) years from the date the Option is granted; and provided further, that
no ISO granted to a Ten Percent Shareholder shall be exercisable after the
expiration of five (5) years from the date the Option is granted.
-2-
<PAGE> 3
(e) LIMITATIONS ON OPTIONS. The aggregate Fair Market Value
(determined as of the time an Option is granted) of stock with respect to which
ISOs are exercisable for the first time by an Optionee during any calendar year
(under this Plan or under any other incentive stock option plan of the Company
or any Parent or Subsidiary of the Company) shall not exceed one hundred
thousand dollars ($100,000). To the extent that the Fair Market Value of stock
with respect to which ISOs are exercisable for the first time by an Optionee
during any calendar year exceeds $100,000, the Options for the amount in excess
of $100,000 shall be treated as not being ISOs and shall be treated as NQSOs.
The foregoing shall be applied by taking Options into account in the order in
which they were granted. In the event that the Code or the regulations
promulgated thereunder are amended after the effective date of this Plan to
provide for a different limit on the Fair Market Value of Shares permitted to be
subject to ISOs, such different limit shall be incorporated herein and shall
apply to any Options granted after the effective date of such amendment. The
foregoing provisions of this Plan notwithstanding, no Optionee shall be granted
Options under this Plan in any one fiscal year which in the aggregate shall
permit the Optionee to purchase more than 1,000,000 shares of Common Stock,
provided that a newly-hired Optionee may in addition receive a one-time Option
grant to purchase up to an additional 500,000 shares of Common Stock. To the
extent the Board of Directors of the Company determines that limitations such as
the provisions of this Section 5(e) are no longer required to preserve the
deductibility for the Company of option-related compensation under Section
162(m) of the Code, the Board of Directors may modify or eliminate the
limitations contained in this Section 5(e).
(f) OPTIONS NON-TRANSFERABLE. Options granted under this Plan, and
any interest therein, shall not be transferable or assignable by the Optionee,
and may not be made subject to execution, attachment or similar process,
otherwise than by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionee only by the Optionee or any
permitted transferee.
(g) ASSUMED OPTIONS. In the event the Company assumes an option
granted by another company in accordance with Section 4(b) above, the terms and
conditions of such option shall remain unchanged (except the exercise price and
the number and nature of shares issuable upon exercise, which will be adjusted
appropriately pursuant to Section 424 of the Code and the Treasury Regulations
applicable thereto). In the event the Company elects to grant a new Option
rather than assuming an existing option (as specified in Section 4), such new
Option need not be granted at Fair Market Value on the date of grant and may
instead be granted with a similarly adjusted exercise price.
(h) TERMINATION OF OPTIONS. Except as otherwise provided in an
Optionee's Grant, Options granted under the Plan shall terminate and may not be
exercised if the Optionee ceases to be employed by, or provide services to, the
Company or any Parent or Subsidiary of the Company (or, in the case of a NQSO,
by or to any Affiliate of the Company). An Optionee shall be considered to be
employed by the
-3-
<PAGE> 4
Company for all purposes under this Section 5(h) if the Optionee is an officer,
director or full-time employee of the Company or any Parent, Subsidiary or
Affiliate of the Company or if the Committee determines that the Optionee is
rendering substantial services as a part-time employee, consultant, contractor
or advisor to the Company or any Parent, Subsidiary or Affiliate of the Company.
The Committee shall have discretion to determine whether an Optionee has ceased
to be employed by the Company or any Parent, Subsidiary or Affiliate of the
Company and the effective date on which such employment terminated (the
"Termination Date").
(i) TERMINATION GENERALLY. If an Optionee ceases to be employed
by the Company and all Parents, Subsidiaries or Affiliates of the
Company for any reason except death or disability, the Options which are
then exercisable (and only to the extent exercisable)(the "Vested
Options") by the Optionee on the Termination Date, may be exercised by
the Optionee, but only within three months after the Termination Date or
such shorter period of time as provided in the Grant, but in no event
less than thirty (30) days; provided that Options may not be exercised
in any event after the Expiration Date.
(ii) DEATH OR DISABILITY. If an Optionee's employment with the
Company and all Parents, Subsidiaries and Affiliates of the Company is
terminated because of the death of the Optionee or the permanent and
total disability of the Optionee within the meaning of Section 22(e)(3)
of the Code, the Vested Options, as determined on the Termination Date,
may be exercised by the Optionee (or the Optionee's legal
representative), but only within twelve (12) months after the
Termination Date; and provided further that Options may not be exercised
in any event later than the Expiration Date. If an Optionee's employment
with the Company and all Parents, Subsidiaries and Affiliates of the
Company is terminated because of a disability of the Optionee which is
not permanent and total within the meaning of Section 22(e)(3) of the
Code, the Vested Options, as determined on the Termination Date, may be
exercised by the Optionee or the Optionee's legal representative, but
only within six (6) months after the Termination Date; and provided
further that Options may not be exercised in any event later than the
Expiration Date.
6. DIRECTOR FORMULA OPTION GRANTS. In addition to discretionary grants
of Options granted pursuant to other terms of this Plan, Non-Employee Directors
of the Company shall receive Options in accordance with the following terms:
(a) FORMULA GRANT. Following the date of adoption of this Plan, upon
initial election or appointment to the Company's Board of Directors, provided
that such election or appointment is not during the Company's last quarter of a
year, the elected or appointed Non-Employee Director shall receive a NQSO for
10,000 shares on the first business day following the election or appointment of
such Non-Employee Director.
-4-
<PAGE> 5
Thereafter, annually on January 1, each Non-Employee Director shall receive a
NQSO for 10,000 shares.
(b) TERMS OF GRANT. Options granted pursuant to this Section 6 shall
be subject to the following terms:
(i) Exercise Price and Payment Terms. The exercise price for the
Options granted pursuant to this Section 6 shall be equal to one hundred per
cent (100%) of the Fair Market Value of the Shares on the date of the grant,
(excepting Ten Percent Shareholders in respect of whom the exercise price for
the Options granted pursuant to this Section 6 shall be equal to one hundred ten
percent (110%)) payable in cash or otherwise in accordance with the alternatives
specified in clauses (i), (ii), (iv), (v) and (vi) of Section 7(b) of this Plan.
(ii) Term. The term of the Options shall be ten (10) years from
the date the Option is granted (excepting Ten Percent Shareholders in respect of
whom the term of the Options shall be five (5) years).
(iii) Exercise Period. The Options shall be exercisable at any
time on or after nine (9) months after the date of the grant.
(iv) Other Terms. In order to be eligible for the annual
automatic option grants, the Non-Employee Director shall be on the date of
grant, and shall have maintained for the prior year, continuous status as an
active member of the Board of Directors. If, for any reason, a Non-Employee
Director ceases to be a member of the Board, such director shall be ineligible
for that year's grant.
7. EXERCISE OF OPTIONS.
(a) NOTICES. Options may be exercised only by delivery to the Company
of a written exercise agreement in a form approved by the Committee (which need
not be the same for each Optionee), stating the number of Shares being
purchased, the restrictions imposed on the Shares, if any, and such
representations and agreements regarding the Optionee's investment intent and
access to information, if any, as may be required by the Company to comply with
applicable securities laws, together with payment in full of the exercise price
for the number of Shares being purchased.
(b) PAYMENT. Payment for the Shares may be made in cash (by check)
or, where permitted by law any of the following methods approved by the
Committee at the date of grant of this option, or any combination thereof: (i)
by cancellation of indebtedness of the Company to the Optionee; (ii) by
surrender of shares of Common Stock of the Company already owned by the
Optionee, having a Fair Market Value equal to the exercise price of the Option;
(iii) by waiver of compensation due or accrued to Optionee for services
rendered; (iv) through delivery of a promissory note for the full
-5-
<PAGE> 6
exercise price bearing interest at such rate with the note due at such time, on
a secured or unsecured basis, as determined by the Committee; (v) provided that
a public market for the Company's stock exists, through a "same day sale"
commitment from the Optionee and a broker-dealer that is a member of the
National Association of Securities Dealers, Inc. (an "NASD Dealer") whereby the
Optionee irrevocably elects to exercise the Option and to sell a portion of the
Shares so purchased to pay for the exercise price and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to forward the exercise price
directly to the Company; and/or (vi) provided that a public market for the
Company's stock exists, through a "margin" commitment from the Optionee and an
NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and
to pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the exercise price directly to the Company.
(c) WITHHOLDING TAXES. Prior to issuance of the Shares upon exercise
of an Option, the Optionee shall pay or make adequate provision for any federal
or state withholding obligations of the Company, if applicable. Where approved
by the Committee in its sole discretion, the Optionee may provide for payment of
withholding taxes upon exercise of the Option by requesting that the Company
retain Shares with a Fair Market Value equal to the minimum amount of taxes
required to be withheld. In such case, the Company shall issue the net number of
Shares to the Optionee by deducting the Shares retained from the Shares
exercised. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
in accordance with Section 83 of the Code (the "Tax Date"). All elections by
Optionees to have Shares withheld for this purpose shall be made in writing in a
form acceptable to the Committee and shall be subject to the following
restrictions:
(i) the election must be made on or prior to the applicable Tax
Date;
(ii) once made, the election shall be irrevocable as to the
particular Shares as to which the election is made;
(iii) all elections shall be subject to the consent or
disapproval of the Committee;
(iv) if the Optionee is an officer or director of the Company or
other person (in each case, an "Insider") whose transactions in the Company's
Common Stock are subject to Section 16(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and if the Company is subject to
Section 16(b) of the Exchange Act, the election must comply with Rule 16b-3 as
promulgated by the Securities and Exchange Commission ("Rule 16b 3").
-6-
<PAGE> 7
(d) LIMITATIONS ON EXERCISE. Notwithstanding anything else to the
contrary in the Plan or any Grant, no Option may be exercisable later than the
expiration date of the Option.
8. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Grant (a) a right of
first refusal to purchase all Shares that an Optionee (or a subsequent
transferee) may propose to transfer to a third party and/or (b) for so long as
the Company's stock is not publicly traded, a right to repurchase a portion of
or all Shares held by an Optionee upon the Optionee's termination of employment
or service with the Company or its Parent, Subsidiary or Affiliate of the
Company for any reason within a specified time as determined by the Committee at
the time of grant at the higher of (i) the Optionee's original purchase price
or, (ii) the Fair Market Value of such Shares.
9. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Committee shall
have the power to modify, extend or renew outstanding Options and to authorize
the grant of new Options in substitution therefor, provided that any such action
may not, without the written consent of the Optionee, impair any rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered shall be treated in accordance with Section 424(h)
of the Code. The Committee shall have the power to reduce the exercise price of
outstanding options; provided, however, that the exercise price per share may
not be reduced below the minimum exercise price that would be permitted under
Section 5(c) of this Plan for options granted on the date the action is taken to
reduce the exercise price.
10. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the
rights of a shareholder with respect to any Shares subject to an Option until
such Option is properly exercised. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to such date,
except as provided in this Plan. The Company shall provide to each Optionee,
regardless of the reports provided to shareholders in general, a copy of the
annual financial statements of the Company within a reasonable time frame
following the end of the fiscal year of the Company.
11. NO OBLIGATION TO EMPLOY; NO RIGHT TO FUTURE GRANTS. Nothing in this
Plan or any Option granted under this Plan shall confer on any Optionee any
right (a) to continue in the employ of, or other relationship with, the Company
or any Parent or Subsidiary of the Company or limit in any way the right of the
Company or any Parent, Subsidiary or Affiliate of the Company to terminate the
Optionee's employment or other relationship at any time, with or without cause,
or (b) to have any Option(s) granted to such Optionee under this Plan, or any
other plan, or to acquire any other securities of the Company, in the future.
12. ADJUSTMENT OF OPTION SHARES. In the event that the number of
outstanding shares of Common Stock of the Company is changed by a stock
dividend,
-7-
<PAGE> 8
stock split, reverse stock split, combination, reclassification or similar
change in the capital structure of the Company without consideration, or if a
substantial portion of the assets of the Company are distributed, without
consideration in a spin-off or similar transaction, to the shareholders of the
Company, the number of Shares available under this Plan and the number of Shares
subject to outstanding Options and the exercise price per share of such Options
shall be proportionately adjusted, subject to any required action by the Board
or shareholders of the Company and compliance with applicable securities laws;
provided, however, that a fractional share shall not be issued upon exercise of
any Option and any fractions of a Share that would have resulted shall either be
cashed out at Fair Market Value or the number of Shares issuable under the
Option shall be rounded down to the nearest whole number, as determined by the
Committee; and provided further that the exercise price may not be decreased to
below the par value, if any, for the Shares.
13. ASSUMPTION OF OPTIONS BY SUCCESSORS.
(a) In the event of (i) a merger or consolidation as a result of
which the holders of voting securities of the Company prior to the transaction
hold shares representing less than 51% of the voting securities of the Company
after giving effect to the transaction (other than a merger or consolidation
with a wholly-owned subsidiary or where there is no substantial change in the
shareholders of the corporation and the Options granted under this Plan are
assumed by the successor corporation), or (ii) the sale of all or substantially
all of the assets of the Company, any or all outstanding Options shall be
assumed by the successor corporation, which assumption shall be binding on all
Optionees, an equivalent option shall be substituted by such successor
corporation or the successor corporation shall provide substantially similar
consideration to Optionees as was provided to shareholders (after taking into
account the existing provisions of the Optionees' options such as the exercise
price and the vesting schedule), and, in the case of outstanding shares subject
to a repurchase option, issue substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Optionee.
(b) In the event such successor corporation, if any, refuses to
assume or substitute, as provided above, pursuant to an event described in
subsection (a) above, or in the event of a dissolution or liquidation of the
Company, the Options shall, notwithstanding any contrary terms in the Grant,
expire on a date specified in a written notice given by the Committee to the
Optionees specifying the terms and conditions of such termination (which date
shall be at least twenty (20) days after the date the Committee gives the
written notice).
14. ADOPTION AND SHAREHOLDER APPROVAL. This Plan shall become effective
on the date that it is adopted by the Board of Directors of the Company (the
"Board"). This Plan shall be approved by the shareholders of the Company, in any
manner permitted by applicable corporate law, within twelve (12) months before
or after the date this Plan is adopted by the Board.
-8-
<PAGE> 9
15. ADMINISTRATION. This Plan may be administered by the Board or a
Committee appointed by the Board (the "Committee"). At all times during which
the Company is registered under the Exchange Act, the Committee shall be
comprised solely of two or more Non-Employee Directors. As used in this Plan,
references to the "Committee" shall mean either such Committee or the Board if
no committee has been established. The interpretation by the Committee of any of
the provisions of this Plan, any related agreements, or any Option granted under
this Plan shall be final and binding upon the Company and all persons having an
interest in any Option or any Shares purchased pursuant to an Option.
16. TERM OF PLAN. Options may be granted pursuant to this Plan from time
to time on or prior to April 3, 2008, a date which is less than ten years after
the earlier of the date of approval of this Plan by the Board or the
shareholders of the Company pursuant to Section 14 of this Plan.
17. AMENDMENT OR TERMINATION OF PLAN. The Board or Committee may, at any
time, amend, alter, suspend or discontinue the Plan, but no amendment,
alteration, suspension or discontinuation shall be made which would impair the
rights of any Optionee under any Option theretofore granted, without his or her
consent, or which, without the approval of the shareholders of the Company
would:
(a) except as provided in Section 12 of the Plan, increase the total
number of Shares reserved for the purposes of the Plan;
(b) extend the duration of the Plan;
(c) extend the period during and over which Options may be exercised
under the Plan; or
(d) change the class of persons eligible to receive Options granted
hereunder (except as may be required to comport with changes in the Code, ERISA
or regulations promulgated thereunder).
Without limiting the foregoing, the Board or Committee may at any time
or from time to time authorize the Company, with the consent of the respective
Optionees, to issue new Options in exchange for the surrender and cancellation
of any or all outstanding Options.
18. CERTAIN DEFINITIONS. As used in this Plan, the following terms shall
have the following meanings:
(a) "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of the
granting of the Option, each of the corporations other than the Company owns
stock possessing fifty
-9-
<PAGE> 10
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
(b) "SUBSIDIARY" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time of
the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
(c) "AFFILIATE" means any corporation that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to cause the direction of the management and policies of
the corporation, whether through the ownership of voting securities, by contract
or otherwise.
(d) "NON-EMPLOYEE DIRECTORS" shall have the meaning set forth in
Rule 16b-3(b)(3) as promulgated by the Securities and Exchange Commission under
Section 16(b) of the Exchange Act, as such rule is amended from time to time and
as interpreted by the Securities and Exchange Commission.
(e) "FAIR MARKET VALUE" shall mean the fair market value of the
Shares as determined by the Committee from time to time in good faith. If a
public market exists for the Shares, the Fair Market Value shall be the average
of the last reported bid and asked prices for Common Stock of the Company on the
last trading day prior to the date of determination or, in the event the Common
Stock of the Company is listed on a stock exchange or is a Nasdaq National
Market security, the Fair Market Value shall be the closing price on such
exchange or quotation system on the last trading day prior to the date of
determination.
19. APPLICABLE LAW AND REGULATIONS. The obligations of the Company under
this Plan are subject to the approval of state and federal authorities or
agencies with jurisdiction over the subject matter hereof. The Company shall not
be obligated to issue or deliver shares under this Plan if such issuance or
delivery would violate applicable state or federal securities laws.
-10-
<PAGE> 11
EXHIBIT A
STOCK OPTION GRANT
Optionee: ______________________________________________________________
Address: _______________________________________________________________
Total Shares Subject to Option: ________________________________________
Exercise Price Per Share: ______________________________________________
Date of Grant: _________________________________________________________
Expiration Date of Option: _____________________________________________
Type of Stock Option: Incentive: ___________________
Nonqualified: ________________
1. GRANT OF OPTION. CyberSource Corporation, a California corporation
(also known as software.net Corporation, the "Company"), hereby grants to the
optionee named above ("Optionee") an option (this "Option") to purchase the
total number of shares of Common Stock ("Common Stock") of the Company set forth
above (the "Shares") at the exercise price per share set forth above (the
"Exercise Price"), subject to all of the terms and conditions of this Grant and
the Company's 1998 Stock Option Plan, as amended to the date hereof (the
"Plan"). If designated as an Incentive Stock Option above, this Option is
intended to qualify as an "incentive stock option" ("ISO") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
Unless otherwise defined herein, capitalized terms used herein shall have the
meanings ascribed to them in the Plan.
2. EXERCISE PERIOD OF OPTION
(a) (ISOS). The Optionee has option rights hereunder to purchase a
total of ___________ Shares which shall become exercisable during the time
periods as set forth in this Section 2. On and after ______________ [one year
from date of grant], this Option may be exercised by the Optionee for the
purchase of ________ [fraction] of the Shares covered by this Option (_______
Shares), or any portion thereof. On or after the last day of each full month
following __________ [one year from the date of grant] this Option may be
exercised by the Optionee for the purchase of an additional ________ [fraction]
of the Shares covered by this Option (_________ Shares), or any portion
Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 12
thereof. Once a portion of this Option becomes exercisable it shall remain
exercisable until the Expiration Date, or until it terminates pursuant to the
terms of Section 4 hereof, whichever is first to occur.
(b) (NQSOS). The Optionee has option rights hereunder to purchase a
total of ___________ Shares which shall become exercisable by the Optionee at
any time on or after nine (9) months after _____________ . Once a portion of
this Option becomes exercisable it shall remain exercisable until the Expiration
Date, or until it terminates pursuant to the terms of Section 4 hereof,
whichever is first to occur.
(c) The minimum number of Shares that may be purchased upon any
partial exercise of the Option is one hundred (100) shares; and
(d) This Option shall expire on the Expiration Date set forth above
and must be exercised, if at all, on or before the Expiration Date. The portion
of Shares as to which an Option is exercisable in accordance with the above
schedule as of the applicable dates shall be deemed "Vested Options."
3. RESTRICTION ON EXERCISE. This Option may not be exercised unless such
exercise is in compliance with the Securities Act of 1933, as amended, and all
applicable state securities laws, as they are in effect on the date of exercise,
and the requirements of any stock exchange or over-the-counter market on which
the Company's Common Stock may be listed or quoted at the time of exercise.
Optionee understands that the Company is under no obligation to register,
qualify or list the Shares with the Securities and Exchange Commission, any
state securities commission or any stock exchange to effect such compliance.
4. TERMINATION OF OPTION. Except as provided below in this Section 4,
this Option shall terminate and may not be exercised if Optionee ceases to be
employed by, or provide services to, the Company or by any Parent or Subsidiary
of the Company (or, in the case of a nonqualified stock option, by or to any
Affiliate of the Company). Optionee shall be considered to be employed by the
Company for all purposes under this Section 4 if Optionee is an officer,
director or full-time employee of the Company or any Parent, Subsidiary or
Affiliate of the Company or if the Committee determines that Optionee is
rendering substantial services as a part-time employee, consultant, contractor
or advisor to the Company or any Parent, Subsidiary or Affiliate of the Company.
The Committee shall have discretion to determine whether Optionee has ceased to
be employed by the Company or any Parent, Subsidiary or Affiliate of the Company
and the effective date on which such employment terminated (the "Termination
Date").
(a) TERMINATION GENERALLY. If Optionee ceases to be employed by
the Company and all Parents, Subsidiaries or Affiliates of the Company for any
reason except death or disability, the Vested Options, to the extent (and only
to the extent) exercisable by Optionee on the Termination Date, may be exercised
by Optionee, but
Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 13
only within thirty (30) days after the Termination Date; provided that this
Option may not be exercised in any event after the Expiration Date.
(b) DEATH OR DISABILITY. If Optionee's employment with the Company
and all Parents, Subsidiaries and Affiliates of the Company is terminated
because of the death of Optionee or the disability of Optionee, including,
without limitation, such disability as defined in Section 22(e)(3) of the Code,
the Vested Options, to the extent (and only to the extent) exercisable by
Optionee on the Termination Date, may be exercised by Optionee (or Optionee's
legal representative), but only within twelve (12) months after the Termination
Date; provided that this Option may not be exercised in any event later than the
Expiration Date.
(c) NO RIGHT TO EMPLOYMENT. Nothing in the Plan or this Grant shall
confer on Optionee any right to continue in the employ of, or other relationship
with, the Company or any Parent, Subsidiary or Affiliate of the Company or limit
in any way the right of the Company or any Parent, Subsidiary or Affiliate of
the Company to terminate Optionee's employment or other relationship at any
time, with or without cause.
5. MANNER OF EXERCISE.
(a) EXERCISE AGREEMENT. This Option shall be exercisable by delivery
to the Company of an executed written Stock Option Exercise Agreement in the
form attached hereto as Exhibit 1, or in such other form as may be approved by
the Company, which shall set forth Optionee's election to exercise some or all
of this Option, the number of Shares being purchased, any restrictions imposed
on the Shares and such other representations and agreements as may be required
by the Company to comply with applicable securities laws.
(b) EXERCISE PRICE. The Stock Option Exercise Agreement shall be
accompanied by full payment of the Exercise Price for the Shares being
purchased. Payment for the Shares may be made in cash (by check), or, where
permitted by law, by any of the following methods approved by the Committee at
the date of grant of this Option, or any combinations thereof:
[ ] (i) by cancellation of indebtedness of the Company to the Optionee;
[ ] (ii) by surrender of shares of Common Stock of the Company already owned
by the Optionee, or which were obtained by Optionee in the open
public market, having a Fair Market Value equal to the exercise price
of the Option;
[ ] (iii) by waiver of compensation due or accrued to Optionee for services
rendered;
[ ] (iv) by delivery of a promissory note in the amount of $__________
with such terms as determined by the Committee;
Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 14
[ ] (v) provided that a public market for the Company's stock exists, through
a "same day sale" commitment from the Optionee and a broker dealer
that is a member of the National Association of Securities Dealers,
Inc. (an "NASD Dealer") whereby the Optionee irrevocably elects to
exercise the Option and to sell a portion of the Shares so purchased
to pay for the exercise price and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the exercise price
directly to the Company; or
[ ] (vi) provided that a public market for the Company's stock exists, through
a "margin" commitment from the Optionee and an NASD Dealer whereby
the Optionee irrevocably elects to exercise this option and to pledge
the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the
exercise price, and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price directly to the
Company.
(c) WITHHOLDING TAXES. PRIOR TO THE ISSUANCE OF THE SHARES UPON
EXERCISE OF THIS OPTION, OPTIONEE MUST PAY OR MAKE ADEQUATE PROVISION FOR ANY
APPLICABLE FEDERAL OR STATE WITHHOLDING OBLIGATIONS OF THE COMPANY. THE OPTIONEE
MAY PROVIDE FOR PAYMENT OF OPTIONEE'S MINIMUM STATUTORY WITHHOLDING TAXES UPON
EXERCISE OF THE OPTION BY REQUESTING THAT THE COMPANY RETAIN SHARES WITH A FAIR
MARKET VALUE EQUAL TO THE MINIMUM AMOUNT OF TAXES REQUIRED TO BE WITHHELD, ALL
AS SET FORTH IN SECTION 6(c) OF THE PLAN. IN SUCH CASE, THE COMPANY SHALL ISSUE
THE NET NUMBER OF SHARES TO THE OPTIONEE BY DEDUCTING THE SHARES RETAINED FROM
THE SHARES EXERCISED.
(d) ISSUANCE OF SHARES. Provided that such Stock Option Exercise
Agreement and payment are in form and substance satisfactory to counsel for the
Company, the Company shall cause the Shares to be issued in the name of Optionee
or Optionee's legal representative.
6. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after exercise of the ISO with respect to the Shares to be sold or disposed
of, the Optionee shall immediately notify the Company in writing of such
disposition. Optionee acknowledges and agrees that Optionee may be subject to
income tax withholding by the Company on the compensation income recognized by
the Optionee from any such early disposition by payment in cash or out of the
current wages or other earnings payable to the Optionee.
7. NONTRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner other than by will or by the laws of descent and distribution and may
be exercised during the lifetime of Optionee only by Optionee or any permitted
transferee. The terms of this Option shall be binding upon the executors,
administrators, successors and assigns of the Optionee.
Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 15
8. RESTRICTIONS ON SHARES. The Company and the Company's shareholder
have certain rights of first refusal that are set forth in Article X of the
Company's Bylaws. A copy of Article X of the Bylaws is available upon request
from the Secretary of the Company. The Company reserves to itself for so long as
the Company's stock is not publicly traded (a) the right of first refusal to
purchase all Shares that Optionee (or a subsequent transferee) may propose to
transfer to a third party and/or (b) the right to repurchase within one year of
the Optionee's termination of employment or service with the Company or its
Parent, Subsidiary or Affiliate of the Company, a portion of or all Shares held
by an Optionee at the higher of (i) the Optionee's original purchase price or,
(ii) the Fair Market Value of such Shares.
9. FEDERAL TAX CONSEQUENCES. Set forth below is a brief summary as of
the date this form of Option Grant was adopted of some of the federal tax
consequences of exercise of this Option and disposition of the Shares. THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT
TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION
OR DISPOSING OF THE SHARES.
(a) EXERCISE OF ISO. If this Option qualifies as an ISO, there will
be no regular federal income tax liability upon the exercise of this Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to
alternative minimum taxable income for federal income tax purposes and may
subject the Optionee to an alternative minimum tax liability in the year of
exercise.
(b) EXERCISE OF NONQUALIFIED STOCK OPTION. If this Option does not
qualify as an ISO (a "nonqualified stock option"), there may be a regular
federal income tax liability upon the exercise of the Option. The Optionee will
be treated as having received compensation income (taxable at ordinary income
tax rates) equal to the excess, if any, of the Fair Market Value of the Shares
on the date of exercise over the Exercise Price. The Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(c) DISPOSITION OF SHARES. In the case of a nonqualified stock
option, if Shares are held for at least one year before disposition, any gain on
disposition of the Shares will be treated as long-term capital gain for federal
and California income tax purposes. In the case of an ISO, if Shares are held
for at least one year after the date of exercise and at least two years after
the Date of Grant, any gain on disposition of the Shares will be treated as
long-term capital gain for federal and California income tax purposes. If Shares
acquired pursuant to an ISO are disposed of within such one-year or two-year
periods (a "disqualifying disposition"), gain on such disqualifying disposition
will be treated as compensation income (taxable at ordinary income rates) to the
extent of the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the
Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 16
Exercise Price (the "Spread"). Any gain in excess of the Spread shall be treated
as capital gain.
10. INTERPRETATION. Any dispute regarding the interpretation of this
Grant shall be submitted by Optionee or the Company to the Company's Board of
Directors or the Committee, which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Board or Committee shall be
final and binding on the Company and on Optionee
11. ENTIRE AGREEMENT. The Plan and the Stock Option Exercise Agreement
attached hereto as Exhibit 1 are incorporated herein by this reference. This
Grant, the Plan and the Stock Option Exercise Agreement constitute the entire
agreement of the parties hereto and supersede all prior undertakings and
agreements with respect to the subject matter hereof.
CYBERSOURCE
CORPORATION, A CALIFORNIA CORPORATION
By: ____________________________________
Name: __________________________________
Title: _________________________________
Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 17
ACCEPTANCE
Optionee hereby acknowledges receipt of a copy of the Plan,
represents that Optionee has read and understands the terms and provisions
thereof, and accepts this Option subject to all the terms and conditions of the
Plan and this Stock Option Grant. Optionee acknowledges that there may be
adverse tax consequences upon exercise of this Option or disposition of the
Shares and that Optionee should consult a tax adviser prior to such exercise or
disposition.
OPTIONEE
By: ____________________________________
Name: __________________________________
Date: __________________________________
Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 18
EXHIBIT 1
TO STOCK OPTION GRANT
STOCK OPTION EXERCISE AGREEMENT
This Agreement is made this _____ day of ________________, 19___ between
CyberSource Corporation, a California corporation (the "Company"), and the
optionee named below ("Optionee").
Optionee: ______________________________________________________________
Social Security Number: ________________________________________________
Address: _______________________________________________________________
________________________________________________________________________
Number of Shares Purchased: ____________________________________________
Price Per Share: _______________________________________________________
Aggregate Purchase Price: ______________________________________________
Date of Option Grant: __________________________________________________
Type of Stock Option: Incentive: ________________
Nonqualified: _____________
Optionee hereby delivers to the Company the Aggregate Purchase Price, to
the extent permitted in the Option Grant, as follows [CHECK AS APPLICABLE AND
COMPLETE]:
[ ] cash (check) in the amount of $___________, receipt of which is
acknowledged by the Company;
[ ] by delivery of ____________ fully-paid, nonassessable and vested shares
of the Common Stock of the Company owned by Optionee and owned free and
clear of all liens, claims, encumbrances or security interests, valued
at the current fair market value of $_________ per share (determined in
accordance with the Plan);
[ ] by the waiver hereby of compensation due or accrued for services
rendered in the amount of $______________;
[ ] through delivery of a promissory note in the amount of $_________ with
such terms as determined by the Committee;
[ ] by delivery of a "same day sale" commitment from the Optionee and a
broker dealer that is a member of the National Association of Securities
Dealers, Inc. (an "NASD Dealer") whereby the Optionee irrevocably elects
to exercise the Option
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 19
and to sell a portion of the Shares so purchased to pay for the exercise
price of $_________ and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price directly to the
Company (this payment method may be used only if a public market for the
Company's stock exists); or
[ ] by delivery of a "margin" commitment from the Optionee and an NASD
Dealer whereby the Optionee irrevocably elects to exercise this option
and to pledge the Shares so purchased to the NASD Dealer in a margin
account as security for a loan from the NASD Dealer in the amount of the
exercise price, and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price of $_________
directly to the Company (this payment method may be used only if a
public market for the Company's stock exists).
The Company and Optionee hereby agree as follows:
1. PURCHASE OF SHARES. On this date and subject to the terms and
conditions of this Agreement, Optionee hereby exercises the Stock Option Grant
between the Company and Optionee dated as of the Date of Option Grant set forth
above (the "Grant"), with respect to the Number of Shares Purchased set forth
above of the Company's Common Stock (the "Shares") at an aggregate purchase
price equal to the Aggregate Purchase Price set forth above (the "Purchase
Price") and the Price per Share set forth above (the "Purchase Price Per
Share"). The term "Shares" refers to the Shares purchased under this Agreement
and includes all securities received (a) in replacement of the Shares, and (b)
as a result of stock dividends or stock splits in respect of the Shares.
Capitalized terms used herein that are not defined herein have the definitions
ascribed to them in the Plan or the Grant.
2. REPRESENTATIONS OF PURCHASER. Optionee represents and warrants to the
Company that:
(a) Optionee has received, read and understood the Plan and the Grant
and agrees to abide by and be bound by their terms and conditions.
(b) Optionee is capable of evaluating the merits and risks of this
investment, has the ability to protect Optionee's own interests in this
transaction and is financially capable of bearing a total loss of this
investment.
(c) Optionee is fully aware of (i) the highly speculative nature of
the investment in the Shares; (ii) the financial hazards involved; and (iii) the
lack of liquidity of the Shares and the restrictions on transferability of the
Shares (e.g., that Optionee may not be able to sell or dispose of the Shares or
use them as collateral for loans).
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 20
(d) Optionee is purchasing the Shares for Optionee's own account for
investment purposes only and not with a view to, or for sale in connection with,
a distribution of the Shares within the meaning of the Securities Act of 1933,
as amended (the "1933 Act").
(e) Optionee has no present intention of selling or otherwise
disposing of all or any portion of the Shares.
3. COMPLIANCE WITH SECURITIES LAWS. Optionee understands and
acknowledges that the Shares have not been registered under the 1933 Act and
that, notwithstanding any other provision of the Grant to the contrary, the
exercise of any rights to purchase any Shares is expressly conditioned upon
compliance with the 1933 Act and all applicable state securities laws. Optionee
agrees to cooperate with the Company to ensure compliance with such laws. The
Shares are being issued under the 1933 Act pursuant to [THE COMPANY WILL CHECK
THE APPLICABLE BOX]:
[ ] the exemption provided by Rule 701;
[ ] the exemption provided by Rule 504;
[ ] Section 4(2) of the 1933 Act;
[ ] other: __________________________________________________________
4. FEDERAL RESTRICTIONS ON TRANSFER. Optionee understands that the
Shares must be held indefinitely unless they are registered under the 1933 Act
or unless an exemption from such registration is available and that the
certificate(s) representing the Shares will bear a legend to that effect.
Optionee understands that the Company is under no obligation to register the
Shares, and that an exemption may not be available or may not permit Optionee to
transfer Shares in the amounts or at the times proposed by Optionee.
(a) Rule 144. Optionee has been advised that Rule 144 promulgated
under the 1933 Act, which permits certain resales or unregistered securities, is
not presently available with respect to the Shares and, in any event, requires
that a minimum of one (1) year elapse between the date of acquisition of Shares
from the Company or an affiliate of the Company and any resale under Rule 144.
Prior to an initial public offering of the Company's stock, "nonaffiliates"
(i.e. persons other than officers, directors and major shareholders of the
Company) may resell only under Rule 144(k), which requires that a minimum of two
(2) years elapse between the date of acquisition of Shares from the Company or
an affiliate of the Company and any resale under Rule 144(k). Rule 144(k) is not
available to affiliates.
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 21
(b) Rule 701. If the exemption relied upon for exercise of the Shares
is Rule 701, the Shares will become freely transferable, subject to limited
conditions regarding the method of sale, by nonaffiliates ninety (90) days after
the first sale of common stock of the Company to the general public pursuant to
a registration statement filed with and declared effective by the Securities and
Exchange Commission (the "SEC"), subject to any lengthier market standoff
agreement contained in this Agreement or entered into by Optionee. Affiliates
must comply with the provisions (other than the holding period requirements) of
Rule 144.
5. STATE LAW RESTRICTIONS ON TRANSFER. Optionee understands that
transfer of the Shares may be restricted by applicable state securities laws,
and that the certificate(s) representing the Shares may bear a legend or legends
to that effect.
6. MARKET STANDOFF AGREEMENT. Optionee agrees in connection with any
registration of the Company's securities that, upon the request of the Company
or the underwriters managing any public offering of the Company's securities,
Optionee will not sell or otherwise dispose of any Shares without the prior
written consent of the Company or such underwriters, as the case may be, for a
period of time (not to exceed one hundred eighty (180) days) from the effective
date of such registration as the Company or the underwriters may specify for
employee shareholders generally.
7. LEGENDS. Optionee understands and agrees that the certificate(s)
representing the Shares will bear a legend in substantially the following forms,
in addition to any other legends required by applicable law:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE 'SECURITIES ACT'), AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE SECURITIES ACT OR, IN THE OPINION OF COUNSEL,
PREPARED AT ISSUER'S REQUEST AND EXPENSE, IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH."
8. STOP-TRANSFER NOTICES. Optionee understands and agrees that, in order
or ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop-transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
<PAGE> 22
9. TAX CONSEQUENCES. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER
ADVERSE TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF
THE SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX
CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR
DISPOSITION OF THE SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR
ANY TAX ADVICE.
10. REPURCHASE OPTIONS. The Company and the Company's shareholders have
certain rights of first refusal that are set forth in Article X of the Company's
Bylaws. A copy of Article X of the Bylaws is available upon request from the
Secretary of the Company. The Company reserves to itself for so long as the
Company's stock is not publicly traded (a) the right of first refusal to
purchase all Shares that Optionee (or a subsequent transferee) may propose to
transfer to a third party and/or (b) the right to repurchase within one year of
the Optionee's termination of employment or service with the Company or its
Parent, Subsidiary or Affiliate of the Company, a portion of or all Shares held
by an Optionee at the higher of (i) the Optionee's original purchase price or,
(ii) the Fair Market Value of such Shares.
11. ENTIRE AGREEMENT. The Plan and Grant are incorporated herein by
reference. This Agreement, the Plan and the Grant constitute the entire
agreement of the parties and supersede in their entirety all prior undertakings
and agreements of the Company and Optionee with respect to the subject matter
hereof, and are governed by California law except for that body of law
pertaining to conflict of laws.
Submitted By: Accepted By:
OPTIONEE: __________________________ ______________________________
[print name]
____________________________________ By: __________________________
[signature]
Its: _________________________
Dated: _____________________________ Dated: _______________________
Address: ___________________________
___________________________
___________________________
Exhibit 1 to Exhibit A
to
CyberSource Corporation 1998 Stock Option Plan
S
<PAGE> 1
EXHIBIT 10.4
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Agreement") is entered into by and between
CYBERSOURCE CORPORATION, a California corporation (the "Company"), and JOHN
PETTITT, a independent contractor of the Company (the "Option Holder").
RECITALS
WHEREAS, the Company has engaged Option Holder's services as an
independent contractor of the Company; and
WHEREAS, the Board of Directors of the Company has determined that it
would be to the advantage and interest of the Company and its shareholders to
grant to the Option Holder the option rights provided for herein as an
inducement to render services to the Company as an independent contractor, has
approved of the granting to the Option Holder of the option rights evidenced by
this Agreement, has advised the Company thereof and instructed the undersigned
officer to issue the option rights as provided for herein:
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Grant of Option Rights. Subject to the terms and conditions
contained herein, the Company hereby grants to the Option Holder the option
rights specified herein:
1.1 The number and class of shares of the Company's currently
authorized but unissued stock subject to the option rights granted hereunder are
an aggregate of 500,000 shares of the Company's common stock.
1.2 The option exercise price is $.01 per share.
1.3 The Option Holder has option rights hereunder to purchase a
total of 500,000 shares of the Company's common stock which shall become
exercisable during the time periods as set forth in this Section 1.3. On and
after February 15, 1995, this option may be exercised by the Optionee for the
purchase of one-quarter of the shares covered by this option (125,000 shares),
or any portion thereof. On or after the last day of each full month following
February 15, 1995, this option may be exercised by the Optionee for the purchase
of an additional one eighteenth (1/18) of the shares covered by this option
(27,778 shares), or any portion thereof. Once a portion of this option becomes
exercisable it shall remain exercisable until the Expiration Date, or until it
terminates pursuant to the terms of Section 4 hereof, whichever is first to
occur.
(d) Notwithstanding the provisions of subparagraph 1(c) above, (i)
the minimum number of shares which may be
<PAGE> 2
purchased upon any partial exercise of the option rights granted hereunder is
100 shares; and (ii) this Option shall expire on the Expiration Date set forth
below, and must be exercised, if at all on or before the Expiration Date.
Notwithstanding the foregoing, the Board of Directors of the Company in
its sole discretion may, upon written notice to the Option Holder, accelerate
the earliest date on which any of the option rights granted hereunder are
exercisable.
The granting of option rights hereunder shall impose no obligation on the
Company to continue to engage the services of the Option Holder, and shall not
lessen or affect the right of the Company to terminate such engagement or to
change the duties, compensation, or other terms thereof. The parties agree that
either of them may terminate the arrangement under which Option Holder is
performing services at any time for any reason or no reason.
2. Fractional Shares; Compliance with Laws. In no event shall the
Company be required to issue fractional shares upon the exercise of any option
rights granted hereunder.
No option rights granted hereunder may be exercised, and the Company shall
not be required to issue or deliver any certificate or certificates for shares
purchased upon the exercise of option rights granted hereunder until there has
been compliance with all then applicable requirements of law, including such
registration or other proceedings under federal and state securities laws as may
in the Company's opinion be necessary or appropriate. The Option Holder
understands that the Company is under no obligation to register, qualify or list
the shares with the Securities and Exchange Commission, any state securities
commission or any stock exchange to effect such compliance.
3. Date of Grant; Expiration of Option Rights. The option rights
granted hereunder shall be deemed to have been granted on the date set forth
below. The option rights granted hereunder, to the extent such rights have not
then expired or been exercised, shall terminate and become null and void on
December 31, 2000 ("Expiration Date").
4. Termination of Option. Except as provided in this Paragraph 4, this
option shall terminate and may not be exercised if Option Holder ceases to be
engaged as an independent contractor or employed by the Company. Option Holder
shall be considered to be engaged as an independent contractor or employed by
the Company for all purposes under this Paragraph 4 if Option Holder is an
officer, director or full-time employee of the Company or if Option Holder is
rendering substantial services (defined herein to mean more than 35 hours per
week) as a consultant, contractor or advisor to the Company. The date on which
the Option Holder has ceased to be engaged as an
- 2 -
<PAGE> 3
independent contractor or employed by the Company shall be referred herein as
the "Termination Date".
4.1 Termination Generally. If Option Holder ceases to be engaged
as an independent contractor or employed by the Company for any reason except
death or disability, this option, to the extent (and only to the extent) that it
wold have been exercisable by Option Holder on the Termination Date, may be
exercised by Option Holder, but only within thirty (30) days after the
Termination Date; provided that this option may not be exercised in any event
after the Expiration Date.
4.2 Death or Disability. If Option Holder's engagement as an
independent contractor or employment with the Company is terminated because of
the death of Option Holder or the permanent and total disability of Option
Holder within the meaning of Section 22(e)(3) of the Internal Revenue Code of
1986 (as amended) ("Code"), this option, to the extent (and only to the extent)
that it would have been exercisable by Option Holder on the Termination Date,
may be exercised by Option Holder (or Option Holder's legal representative), but
only within six (6) months after the Termination Date, provided that this option
may not be exercised in any event later than the Expiration Date.
5. Nonassignability of Option Rights. The option rights granted
hereunder (i) shall be exercisable only by the Option Holder, except in the
event of the death of the Option Holder, the Option Holder's personal
representative or any person who acquires such rights by bequest or inheritance
may exercise the rights set forth herein as set forth in Paragraph 4 hereof,
(ii) shall not be transferred, assigned, pledged or hypothecated in any manner
whatsoever, whether voluntarily, involuntarily or by operation of law, and (iii)
shall not be subject to execution, attachment or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of the
said option rights contrary to the provisions hereof, the said option rights
shall immediately terminate and become null and void.
6. Adjustments. Appropriate proportionate adjustments shall be made by
the Company in the number and class of shares of stock subject to the option
rights granted hereunder and the exercise price of the option rights granted
hereunder in the event that (i) the common stock of the Company is changed by
reason of any stock split, reverse stock split, recapitalization, or other
similar change in the capital structure of the Company, or (ii) the outstanding
number of shares of common stock of the Company is increased through payment of
a stock dividend; provided, however, that the Company shall not be required to
issue fractional shares as a result of any such adjustment. Any such adjustment
shall be made upon approval by the Board of Directors of the Company, whose
determination shall be conclusive. No adjustments shall be required by reason of
the issuance or sale by the Company for cash or other consideration of
additional
- 3 -
<PAGE> 4
shares of its capital stock or securities convertible into or exchangeable for
shares of its capital stock.
New option rights may be substituted for the option rights granted
hereunder, or the Company's duties under this Agreement may be assumed by a
successor corporation other than the Company, or by an affiliate of such
successor corporation, in connection with any merger, consolidation,
acquisition, separation, reorganization, liquidation, or like occurrence, in
which the Company is involved, and to the full extent permitted thereby.
Notwithstanding the foregoing provisions of this paragraph 6, in the event such
successor corporation, or affiliate of such successor corporation, refuses to
substitute new option rights for, and substantially equivalent to, the option
rights granted hereunder, or to assume the option rights granted hereunder, or
if the Board of Directors of the Company determines, in its sole discretion,
that option rights outstanding under this Agreement should not then continue to
be outstanding, the option rights granted hereunder shall terminate and
thereupon become null and void (i) upon the dissolution or liquidation of the
Company, or similar occurrence, or (ii) upon any merger, consolidation,
acquisition, or separation, or similar occurrence, provided, however, that the
Option Holder shall be given notice of such dissolution, liquidation, merger,
consolidation, acquisition, separation or similar occurrence and shall have the
right, for a period of thirty (30) days after such notice is sent by the
Company, to exercise any unexpired option rights granted hereunder, to the
extent such option rights are then exercisable.
7. Method of Exercise; Rights of Option Holder in Stock. The option
rights granted hereunder shall be exercisable upon written notice of election to
exercise to the Company specifying the number of shares being purchased,
accompanied by payment to the Company of the option exercise price as to the
shares being purchased. Payment of the option exercise price shall be in cash.
Neither the Option Holder nor his personal representatives, heirs, or legatees
shall have any rights or privileges of a stockholder of the Company in respect
to the shares issuable upon the exercise of the option rights granted hereunder,
unless and until certificates representing such shares shall have been issued
and delivered in accordance with the terms hereof. As a condition to the
exercise of this option, the Option Holder, or his personal representatives,
heirs or legatees, shall make arrangements as the Company may require for the
satisfaction of any federal, state or local withholding tax obligations that may
arise in connection with such exercise.
8. Notices. Any notice to be given under the terms of this Agreement
shall be mailed, telecopied, or delivered to the Company, in care of its
Secretary, at the principal office of the Company, and any notice to be given to
the Option Holder shall be mailed, telecopied, or delivered to him at the
address given beneath his signature hereto, or at such other address as either
party may hereafter designate in writing to the other. Any such
- 4 -
<PAGE> 5
notice shall be deemed to have been duly given forty-eight (48) hours after the
deposit thereof in the United States mail, addressed as aforesaid, registered or
certified and postage and registry or certification fee prepaid.
9. Securities Law Compliance. The Option Holder represents and agrees
that the option rights hereunder are, and the shares to be acquired upon
exercising the option rights will be, acquired for investment, and not with a
view to the sale or distribution thereof. The Option Holder also represents and
agrees that he (i) has a preexisting personal or business relationship with the
Company or one or more of its officers, directors or controlling persons, which
relationship consists of personal or business contacts of a nature and duration
such that Option Holder is aware of the character, business acumen, and general
business and financial circumstance of the person with whom the relationship
exists, or (ii) by reason of his business or financial experience is capable of
evaluating the risks and merits of an investment in the Company and of
protecting his own interests in connection with an investment in the Company, or
(iii) is an officer, director or controlling person, including a promoter, of
the Company. Option Holder understands and acknowledges that the option rights
hereunder and the underlying shares have not been registered under the
Securities Act of 1933, as amended (the "Act") or qualified under any state
securities laws and that, notwithstanding any other provision in this Agreement
to the contrary, the exercise of any rights to purchase shares hereunder is
expressly conditioned upon compliance with the Act and all applicable state
securities laws. In the event that the sale of shares is not registered under
the Act or is not registered or qualified under applicable state securities
laws, but an exemption is available which requires an investment representation
or other representation, the Option Holder shall represent and agree at the time
of exercise that the shares being acquired upon exercising the option rights are
being acquired for investment, and not with a view to the sale or distribution
thereof, and shall make such other representations as are deemed necessary or
appropriate by the Company and its counsel. Certificates evidencing shares
acquired under this Agreement in an unregistered transaction may (as deemed
necessary by counsel to the Company) bear the following restrictive legend (and
such other restrictive legends as are required or deemed advisable under the
provisions of any applicable law):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO OR IN CONNECTION WITH THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933."
- 5 -
<PAGE> 6
10. Persons Bound. Subject to the provisions against assignment set
forth herein, and to the provisions of paragraph 6 hereof, this Agreement shall
be binding upon and inure to the benefit of any successor or successors of the
Company, and the personal representatives, heirs, and legatees of the Option
Holder.
11. Right of First Refusal. All shares acquired upon exercise of this
option shall be subject to certain rights of first refusal as specified in the
Company's Bylaws and certificates representing such shares shall bear the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON PUBLIC RESALE AND TRANSFER AND RIGHT OF FIRST REFUSAL
OPTIONS HELD BY THE ISSUER AND/OR ITS ASSIGNEE(S) AND MAY NOT BE
TRANSFERRED EXCEPT AS SET FORTH IN THE ISSUER'S BYLAWS, A COPY OF WHICH
MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER
RESTRICTIONS AND RIGHTS OF FIRST REFUSAL ARE BINDING ON ANY TRANSFEREE OF
THESE SHARES."
12. Tax Liability. THE OPTION HOLDER UNDERSTANDS THAT THIS IS A
NON-QUALIFIED OPTION UNDER FEDERAL TAX LAWS AND THAT OPTION HOLDER MAY SUFFER
ADVERSE CONSEQUENCES AS A RESULT OF OPTION HOLDER'S PURCHASE OR DISPOSITION OF
THE UNDERLYING SHARES. The Option Holder understands that, under current law,
Option Holder will recognize ordinary income in the year or years that the
option rights hereunder are exercised and is advised to seek the advice of his
tax counsel or other tax advisor with respect to the precise treatment of the
exercise of the rights hereunder and the sale of the underlying shares.
13. Miscellaneous.
13.1 This Agreement constitutes the entire contract between the
parties hereto with regard to the services to be provided by Option Holder and
may be modified or amended only by written agreement of the Option Holder and
the Company.
13.2 This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California, as such laws are applied
to contracts entered into and performed in such State.
- 6 -
<PAGE> 7
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
in its behalf by one of its officers as of the date set forth below, and the
Option Holder has hereunto set his hand on or as of said date, which date is the
date such option rights were approved for grant by the Board of Directors of the
Company, and by such execution represents that the address set forth below is
his bona fide place or residence and domicile.
Date: 3/31/95 CYBERSOURCE CORPORATION
By: /s/ WILLIAM S. McKIERNAN
------------------------------------
Name: William S. McKiernan
Title: President & CEO
OPTION HOLDER
[SIG]
----------------------------------------
(Signature)
Name: /s/ JOHN PETTITT
----------------------------------
Address:________________________________
________________________________________
________________________________________
- 7 -
<PAGE> 1
EXHIBIT 10.5
CYBERSOURCE CORPORATION
SERIES A PREFERRED
STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is
made as of the 6th day of January, 1995 by and between CYBERSOURCE CORPORATION,
a California corporation (the "Company"), WILLIAM S. MCKIERNAN ("McKiernan"),
(solely with respect to Sections 7.1--7.15 and 8.5 hereof) and the purchasers
listed on the signature pages hereto under the heading "Investors", each of whom
is herein referred to as an "Investor".
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereby agree as follows:
1. Purchase and Sale of Series A Preferred Stock.
1.1 Sale and Issuance of Series A Preferred Stock.
(a) The Board of Directors of the Company shall adopt
and file with the Secretary of State of the State of California on or before the
Closing (as defined below) the Certificate of Determination of Rights,
Preferences and Privileges (the "Certificate of Determination") in substantially
the form attached hereto as Exhibit A designating 3,000,000 shares of Preferred
Stock as Series A Preferred Stock.
(b) Subject to the terms and conditions of this
Agreement, each Investor agrees severally to purchase, and the Company agrees to
sell and issue to each Investor, the number of shares of Series A Preferred
Stock (the "Preferred Shares"), set forth opposite such Investor's name on the
Schedule of Investors attached as Exhibit B to this Agreement (the "Schedule of
Investors"), for an aggregate of 1,437,500 Preferred Shares at a purchase price
of $0.40 per share, for the purchase price shown opposite such Investor's name
on the Schedule of Investors (for an aggregate purchase price of $575,000).
1.2 Closing. The purchase and sale of the Preferred Shares shall
take place at the offices of Jackson, Tufts, Cole & Black, 60 S. Market Street,
San Jose, California 95113 on January 6, 1995, or at such other time and place
an the Company and Investors mutually agree upon (which time and place are
designated as the "Closing"). At the Closing, the Company will deliver to the
Investors stock certificates representing 1,437,500 Preferred Shares against
payment of the purchase price therefor of $0.40 per share by checks payable to
the order of the Company or wire transfers of funds. The Investors acknowledge
that the Company intends to sell and issue up to an additional
<PAGE> 2
1,437,500 Preferred Shares, but no assurance can be given by the Company as to
when, or even if, such sale and issuance will occur.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Investor, except as set forth on the Schedule of
Exceptions attached hereto as Exhibit C, which exceptions shall be deemed to be
representations and warranties as if made hereunder as follows:
2.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure so to qualify would have a
material adverse effect on its business or properties. A copy of the Company's
Articles of Incorporation (as amended) and the Company's Bylaws (as amended)
have been delivered to each Investor.
2.2 Capitalization.
(a) Immediately prior to the Closing the authorized capital
of the Company consists, or will consist of:
(i) Preferred Stock. 4,000,000 shares of Preferred
Stock, 3,000,000 of which have been designated Series A Preferred Stock, no par
value. No shares of Series A Preferred Stock were issued and outstanding
immediately prior to the First Closing. The rights, preferences and privileges
of the Series A Preferred Stock will be as stated in the Company's Certificate
of Determination attached hereto as Exhibit A.
(ii) Common Stock. 10,000,000 shares of Common Stock,
4,500,000 shares of Common Stock of which were issued and outstanding.
(b) All such issued and outstanding shares have been duly
authorized and validly issued, are fully paid and non-assessable and have been
issued in compliance with all applicable state and federal laws concerning the
issuance of securities.
(c) Agreements for Purchase of Shares. Except for:
(i) the conversion privileges and preemptive rights of
the Series A Preferred Stock; and
(ii) options issued pursuant to the Company's stock
option plan and other agreements (as of the Closing, options for 500,000 shares
are presently outstanding and
- 2 -
<PAGE> 3
an additional 650,000 shares are available for grant under the Company's stock
option plan);
prior to the Closing there will not be any outstanding options, warrants, rights
(including conversion, preemptive rights or rights of first offer) or agreements
for the purchase or acquisition from the Company of any shares of its capital
stock.
2.3 Subsidiaries. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association,
partnership or other business entity.
2.4 Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance (or
reservation for issuance) and delivery of the Preferred Shares being sold
hereunder and the Common Stock issuable upon conversion of the Preferred Shares,
has been taken or will be taken on or prior to the Closing, and this Agreement
constitutes a valid and legally binding obligation of the Company enforceable in
accordance with its terms, except as affected by (i) bankruptcy or insolvency
laws, or (ii) equitable principles.
2.5 Valid Issuance of Preferred Stock. The Preferred shares, when
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable and, based in part upon the representations of the Investors set
forth in Section 3 of this Agreement, will be issued in compliance with all
applicable federal and state securities laws free and clear of all restrictions
on transfer (other than those arising from application of the securities laws).
The Common Stock issuable upon conversion of the Preferred Shares purchased
under this Agreement have been duly and validly reserved for issuance.
2.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any United States federal, state, local or provincial governmental
authority on the part of the Company is required in connection with:
(a) the Company's valid execution, delivery, or performance
of this Agreement; and
(b) the offer, sale, or issuance of the Preferred Shares by
the Company hereunder or (assuming the exemption provided by Section 3(a)(9) of
the Securities Act of 1933, as amended, in its current form is available and no
commission is paid in conjunction therewith) the issuance of Common Stock upon
conversion of the Preferred Shares;
- 3 -
<PAGE> 4
except such filings as have been made prior to the Closing, and except for any
notices of sale required to be filed with the Securities and Exchange Commission
under Regulation D of the Securities Act of 1933, as amended (the "Securities
Act"), or such post-closing filings as may be required under applicable state
securities laws, which will be timely filed within the applicable periods
therefor.
2.7 Litigation. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company which
questions the validity of this Agreement or the right of the company to enter
into this Agreement, or to consummate the transactions contemplated hereby, or
which might result, either individually or in the aggregate, in any material
adverse change in the assets or condition of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing. The Company is not
a party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company, currently pending or which the
Company intends to initiate.
2.8 Patents and Trademarks. To the best of the Company's
knowledge, the Company's business as now conducted and as presently proposed to
be conducted does not conflict with or infringe upon anyone's patents,
copyrights, trademarks, trade secrets, or other proprietary rights. To the best
of the Company's knowledge, the Company owns, or has the right to use, all
patents, trademarks, trade secrets or other proprietary rights necessary for the
conduct of its business as it is presently conducted without infringing on any
patents, trademarks, trade secrets or other proprietary rights of others.
2.9 Compliance with Other Instruments. The Company is not in
material violation or default of any provisions of its Articles of Incorporation
or Bylaws or of any instrument, judgment, order, writ, decree or contract to
which it is a party or by which it is bound or, to its knowledge, of any
provision of federal or state statute, rule or regulation applicable to the
company, which violation or default would be materially adverse to the Company.
The execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby will not result in any such violation or
be in conflict with or constitute, with or without the passage of time and
giving of notice, either a default under any such provision, instrument,
judgment, order, writ, decree or contract or an event which results in the
creation of any material lion, charge or encumbrance upon any assets of the
Company, which violation, default, conflict or event would be materially adverse
to the Company.
2.10 Agreements; Action.
- 4 -
<PAGE> 5
(a) There are no agreements, understandings, instruments,
contracts or proposed transactions to which the Company is a party or by which
it is bound which involve (i) obligations of, or payments to the Company in
excess of, $75,000, or (ii) the license of any patent, copyright, trade secret
or other proprietary right of the Company.
(b) The Company has not (i) declared or paid any dividends,
or authorized or made any distribution upon or with respect to any class or
series of its capital stock, (ii) incurred any indebtedness for money borrowed
or incurred any other liabilities individually in excess of $25,000 or in excess
of $75,000 in the aggregate, other than obligations or liabilities of the
Company for compensation under employment, advisor or consulting agreements,
(iii) made any loans or advances to any person, other than in the ordinary
course of its business or (iv) sold, exchanged or otherwise disposed of any of
its assets or rights, other than in the ordinary course of its business.
2.11 Registration Rights. Except as provided in Section 7 of this
Agreement, the Company has not granted or agreed to grant any registration
rights, including piggy-back rights, to any person or entity.
2.12 Title to Property and Assets. The Company owns its property
and assets free and clear of all mortgages, liens, loans and encumbrances,
except such encumbrances and liens which arise in the ordinary course of
business and do not materially impair the Company's ownership or use of such
property or assets. With respect to the property and assets it leases, the
Company is in compliance with such leases and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances,
which liens, claims or encumbrances would be materially adverse to the Company.
2.13 Voting Arrangements. To the Company's knowledge, there are
no outstanding shareholder agreements, voting trusts, proxies or other
arrangements or understandings among the shareholders of the Company relating to
the voting of their respective shares.
2.14 Financial Statements. The Company has delivered to each
Investor: (i) its unaudited financial statements (balance sheet and profit and
loss statement) at and for the period ended September 30, 1994 (the "Financial
Statements"). The Financial Statements are complete and correct in all material
respects and have been prepared on a consistent basis throughout the period
indicated. The Financial statements fairly present the financial condition and
operating results of the Company as of the dates, and for the period, indicated
therein, subject to normal year-end audit adjustments.
2.15 Changes. since September 30, 1994, there has not been any
change in the assets, liabilities, financial condition
- 5 -
<PAGE> 6
or operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business which have not
been, in the aggregate, materially adverse.
2.16 Proprietary Information. To the best of the Company's
knowledge, it has done nothing to compromise the secrecy, confidentiality or
value of any of its trade secrets, know-how, inventions, prototypes, designs,
processes or technical data required to conduct its business as now conducted or
as proposed to be conducted. All of the Company's employees have executed a
non-disclosure/invention assignments agreement. To the Company's knowledge, no
employee of the Company in connection with such employee's employment with the
Company, has violated the terms of any agreement with a previous employer.
2.17 Permits. The Company has all franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses, or other similar authority.
2.18 Shareholder Agreements. There are presently no outstanding
shareholder agreements, voting trusts, proxies or other arrangements or
understandings between the Company and its shareholders, or among any of the
shareholders of the Company, relating to either the voting or the disposition of
their respective shares.
2.19 Brokers or Finders. The Company has not engaged any broker,
investment banker or finder in connection with the sale of the Preferred Shares.
2.20 Disclosure. The Company has provided each Investor with all
information that such Investor has requested in connection with such Investor's
decision to invest in the Preferred Shares. To the best of the Company's
knowledge, neither this Agreement nor any other written statement made or
delivered in connection herewith contains any untrue statement of a material
fact or, taking this Agreement and all such written statements as a whole, omits
to state a material fact necessary to make statements herein or therein
misleading; provided, however, with respect to any projections or expressions of
opinion or predictions, the Company represents only that such projections or
expressions of opinions and predictions were made in good faith and that the
Company believes that there is a reasonable basis therefor.
- 6 -
<PAGE> 7
3. Representations and Warranties of Each Investor. Each Investor
hereby severally and not jointly represents and warrants that:
3.1 Authorization. This Agreement constitutes such Investor's
valid and legally binding obligation, enforceable in accordance with its terms
except as affected by (i) bankruptcy or insolvency laws, and (ii) equitable
principles. Each Investor who is not a natural person, hereby represents that
the person executing this Agreement on its behalf is duly authorized to do SO.
3.2 Purchase Entirely for Own Account. This Agreement is made
with each Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Preferred Shares to be received by such Investor
hereunder will be acquired for investment for such Investor's own account, not
as a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that such Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, each Investor purchasing Preferred Shares hereunder further
represents that such Investor does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Preferred Shares, or
any portion thereof. Each Investor that is an entity represents that it has full
power and authority to enter into this Agreement.
3.3 Disclosure of Information. Each Investor believes he or it
has received all the information he or it considers necessary or appropriate for
deciding whether to purchase the Preferred Shares. Each such Investor further
represents that he or it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Preferred Shares. The foregoing does not modify the Company's
representations and warranties set forth herein or the Investor's right to rely
thereon.
3.4 Investment Experience. Each Investor is an investor in
securities of companies in the development stage and acknowledges that he or it
is able to fend for himself or itself, can bear the economic risk of his or its
investment and has such knowledge and experience in financial or business
matters that he or it is capable of evaluating the merits and risks of the
investment in the Preferred Shares. If other than an individual, Investor also
represents it has not been organized solely for the purpose of acquiring the
Preferred Shares.
3.5 Restricted Securities. Each Investor purchasing Preferred
Shares hereunder understands that the Preferred Shares are characterized as
"restricted securities" under the federal
- 7 -
<PAGE> 8
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such Preferred Shares may be resold without registration
under the Securities Act only in certain limited circumstances. In this
connection each Investor represents that he or it is familiar with Securities
and Exchange Commission ("SEC") Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Securities Act.
Each Investor who is a resident of Pennsylvania agrees not to sell the Preferred
Shares within twelve (12) months of the closing, unless permitted under Section
204.011 of Pennsylvania's Blue Sky Regulations.
3.6 Further Limitations on Disposition. Without in any way
limiting the representations set forth above, each Investor purchasing Preferred
Shares hereunder further agrees not to make any disposition of all or any
portion of the Preferred Shares (or the Common Stock issuable upon the
conversion of the Preferred Shares) unless and until:
(a) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, (ii) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such Preferred Shares under
the Securities Act and (iii) if reasonably requested by the Company, the
transferee shall have furnished to the Company its agreement to abide by the
restrictions on transfer set forth herein as if it were a purchaser hereunder.
3.7 Accredited Investor. The term "Accredited Investor" as used
in Sections 3.7, 3.8 and 3.9 refers to a person or entity who:
(a) is a director or executive officer of the Company; or
(b) is a natural person whose individual net worth, or joint
net worth with his or her spouse, at the time of purchase exceeds $1,000,000,
and the total purchase price does not exceed ten percent (10%) of his or her
individual not worth, or joint net worth with his or her spouse, at the time of
sale; or
(c) is a natural person who had an individual income in
excess of $200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000
- 8 -
<PAGE> 9
in each of those years and reasonably expects to reach the same income level in
the current year, and the total purchase price does not exceed ten percent (10%)
of his or her individual net worth, or joint net worth with his or her spouse,
at the time of sale; or
(d) is a private business development company as defined in
section 202(a)(22) of the Investment Advisors Act of 1940; or
(e) is either (i) a bank as defined in section 3(a)(2) of
the Securities Act, or a savings and loan association or other institution as
defined in section 3(a)(5)(A) of the Securities Act whether acting in its
individual or fiduciary capacity; (ii) a broker or dealer registered pursuant to
section 15 of the Securities Exchange Act of 1934; (iii) an insurance company as
defined in section 2(13) of the Securities Act; (iv) an investment company
registered under the Investment Company Act of 1940 or a business development
company as defined in section 2(a)(48) of that Act; (v) a Small Business
Investment Company licensed by the U.S. Small Business Administration under
section 301(c) or (d) of the Small Business Investment Act of 1958; or (vi) an
employee benefit plan within the meaning of Title I of the Employee Retirement
Income Security Act of 1974, if the investment decision is made by a plan
fiduciary, as defined in section 3(21) of such Act, which is either a bank,
savings and loan association, insurance company, or registered investment
adviser, or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions made solely by
persons that are Accredited Investors; or
(f) is any organization described in section 501(c)(3) of
the Internal Revenue Code, corporation, Massachusetts or similar business trust,
or partnership, not formed for the specific purpose of acquiring the Shares
offered, with total assets in excess of $5,000,000; or
(g) is any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the Shares offered, whose
purchase is directed by a sophisticated person as described in Regulation
230.506(b)(2)(ii) promulgated under the Securities Act; or
(h) is an entity in which all of its equity owners meet one
or more of the standards set forth in (a) through (g) above.
As used in this Section 3.7 the term "net worth" means the excess of
total assets over total liabilities, and "income" means actual economic income,
which may differ from adjusted gross income for federal income tax purposes.
- 9 -
<PAGE> 10
3.8 Representations and Warranties as to Accredited Investors and
Excluded Purchasers Status. Each Investor as to himself or itself, severally and
not jointly, further represents to the Company that such Investor is (i) an
Accredited Investor and (ii) an excluded purchaser (as such term is described in
Section 260.102.13 of Title 10 of the California Code of Regulations or section
25102(f) of the California corporate Securities Law of 1968).
3.9 Legends. To the extent applicable, each certificate or other
document evidencing any of the Preferred Shares issued hereunder or any Common
Stock issued upon conversion of the Preferred Shares shall be endorsed with the
legends set forth below, and such Investor covenants that, except to the extent
such restrictions are waived by the Company, such Investor shall not transfer
the securities without complying with the restrictions on transfer described in
the legends endorsed thereon;
(a) The following legend under the Securities Act:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE
REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144
PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT
SUCH REGISTRATION IS REQUIRED."
(b) If required by the authorities of any state in
connection with the issuance or sale of the Preferred Shares, the legend
required by such state authority.
The Company shall not be required (i) to transfer on its books any
Preferred Shares which shall have been transferred in violation of any of the
provisions set forth in this Agreement, or (ii) to treat as owner of such
Preferred Shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such Preferred Shares shall have been so
transferred.
3.10 Removal of Legends.
(a) Any legend endorsed on a certificate pursuant to Section
3.09(a) or (b) hereof shall be removed (i) if Preferred Shares represented by
such certificate shall have been effectively registered under the Securities Act
or otherwise lawfully sold in a public transaction, (ii) if such Preferred
Shares may be transferred in compliance with Rule 144(k) promulgated under the
Securities Act, or (iii) if the holder of such Preferred Shares shall have
provided the Company with an opinion from counsel, in form and substance
acceptable to the
- 10 -
<PAGE> 11
Company and from attorneys reasonably acceptable to the Company, stating that a
public sale, transfer or assignment of such Preferred Shares may be made without
registration.
(b) Any legend endorsed on a certificate pursuant to Section
3.9(b) hereof shall be removed if the Company receives an order of the
appropriate state authority authorizing such removal or if the holder of the
Preferred Shares provides the Company with an opinion of counsel, in form and
substance acceptable to the Company and from attorneys reasonably acceptable to
the Company, stating that such state legend may be removed.
4. California Commissioner of Corporations.
4.1 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES EXEMPT FROM
QUALIFICATION BY Section 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
5. Conditions of Investor's Obligations at Closing. The obligations of
each Investor under subsection 1.1(b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
in writing thereto:
5.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
5.2 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
The entering into, delivery and performance of this Agreement by the Company
shall have been duly authorized by all necessary corporate action.
5.3 Compliance Certificate. At the Closing, the Chief Executive
Officer of the Company shall deliver to the Investors a certificate certifying
that the conditions set forth in Sections 5.1 and 5.2 have been fulfilled.
5.4 Qualifications. The Commissioner of Corporations of the State
of California and any applicable United States state securities regulatory
authority shall have issued permits quali-
- 11 -
<PAGE> 12
fying the offer and sale of the Preferred Shares to the Investors pursuant to
this Agreement, or such offer and sale shall be exempt from such qualification
under the California Corporate Securities Law of 1968, as amended, and any other
applicable state blue-sky law.
5.5 certificate of Determination. The Company shall have adopted
and filed with the Secretary of State of the State of California on or before
the date of the Closing, the Certificate of Determination.
5.6 Legal Investment. At the time of such Closing, the purchase
of the Preferred Shares by the Investors shall be legally permitted by all laws
and regulations to which such Investors and the Company are subject.
5.7 Opinion of Counsel. At the Closing, the investors shall have
received an opinion of Jackson, Tufts, Cole & Black, counsel for the Company,
regarding the matters set forth an Exhibit D hereto.
5.8 Minimum Investment. The Investors shall have subscribed for a
minimum of 1,250,000 Preferred Shares at an aggregate purchase price of
$500,000.
6. Conditions of the Company's obligations at Closing. The obligations
of the Company to each Investor purchasing Preferred Shares hereunder are
subject to the fulfillment on or before the Closing of each of the following
conditions by such Investor:
6.1 Representations and Warranties. The representations and
warranties of the Investor contained in Section 3 hereof shall be true on and as
of the date of the Closing with the same effect as though such representations
and warranties had been made on and as of the Closing.
6.2 Payment of Purchase Price. Each Investor shall have delivered
the purchase price specified in Section 1.2.
6.3 California Qualification. The Commissioner of Corporations of
the State of California and any applicable United States state regulatory
authority shall have issued permits qualifying the offer and sale to the
Investors of the Preferred shares or such offer and sale shall be exempt from
such qualification under the California Corporate Securities Law of 1968, as
amended, and any other applicable state blue-sky law.
6.4 Certificate of Determination. The Company shall have adopted
and filed with the Secretary of State of the State of California on or before
the Closing, the Certificate of Determination.
- 12 -
<PAGE> 13
6.5 Legal Investment. At the time of such Closing, the purchase
of the Preferred Shares by the Investors shall be legally permitted by-all laws
and regulations to which the Investors and the Company are subject.
7. Registration Rights. The Company covenants and agrees as follows:
7.1 Definitions. For purposes of this Section 7:
(a) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document;
(b) The term "Registrable Securities" means (i) the Common
Stock issuable or issued upon conversion of the Preferred Shares, (ii) all
Common Stock owned by McKiernan (or transferred by McKiernan to his ancestors,
descendants or spouse or to trusts for the benefit of such persons) (the
"McKiernan Common Stock") and (iii) any Common Stock of the Company issued as
(or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, such Preferred Shares or McKiernan
Common Stock, excluding in all cases, however, any Registrable Securities sold
by a person in a transaction in which his registration rights are not assigned;
(c) The number of shares of Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to the exercisable or convertible securities which are exercisable or
convertible into, Registrable Securities; and
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 7.12 hereof.
7.2 Request for Registration.
(a) If the Company shall receive at any time after one year
following the closing of the Company's initial public offering of securities a
written request from Holders holding at least forty percent (40%) of the
Registrable Securities then outstanding (the "Initiating Holders") that the
Company file a registration statement under the Securities Act covering the
registration of at least 40% of the Registrable Securities then outstanding and
such registration would cover sales having an anticipated aggregate offering
price, not of underwriting discounts and commissions, equal or more than
$7,500,000, then the Company shall, within twenty-one (21) days
- 13 -
<PAGE> 14
of the receipt thereof, give written notice of such request to all Holders and
shall, subject to the limitations of subsection 7.2(b), file as soon as
practicable a registration statement under the Securities Act covering all
Registrable Securities which the Holders request to be registered within twenty
(20) days of the mailing of such notice by the Company in accordance with
Section 9.6.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action to effect any such registration pursuant to this
Section 7.2:
(i) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act;
(ii) if the Company shall have initiated one
registration pursuant to this Section 7.2; or
(iii) anytime after five (5) years immediately
following the Closing and one year following the Company's initial registered
firm commitment public offering on Form S-1 with an aggregate offering price of
at least $7,500,000.
(c) (i) Subject to the foregoing paragraph 7.2(b), the
Company shall file a registration statement as soon as possible after receipt of
the request or requests of the Initiating Holders under this Section 7.2;
provided, however, that if the Company shall furnish to such Initiating Holders
within ninety (90) days of receipt of such request a certificate signed by the
President of the Company stating that in the good faith judgment of the Board of
Directors of the Company it would be detrimental to the Company and its
shareholders for such registration statement to be filed on or before the date
filing would be required and it is therefore essential to defer the filing of
such registration statement, the Company shall have the right to defer such
filing to a date not later than one hundred twenty (120) days after receipt of
such request.
(d) The underwriting shall be managed by an underwriter or
underwriters of national reputation selected by the Initiating Holders, which
selection shall be subject to the consent of the Company, which consent shall
not be unreasonably withheld. The right of any Holder to registration pursuant
to Section 7.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting. The Company shall (together with all Holders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected as above provided. Notwithstanding any other provision of this Section
7.2, if the underwriters advise the Initiating
- 14 -
<PAGE> 15
Holders and the Company in writing that marketing factors require a limitation
of the number of shares to be underwritten and that the total amount of
securities that all Holders (initiating and noninitiating) request pursuant to
this Section 7.2(d) to be included in such offering exceeds the amount of
securities that the underwriters reasonably believe compatible with the success
of the offering, the Company shall so advise all Holders and all of the shares
to be included in the registration shall be allocated among all Holders
requesting inclusion (initiating and noninitiating) pro rata according to the
total amount of securities entitled to be included in such registration owned by
each Holder requesting inclusion (initiating or non-initiating) or in such other
proportions as shall be mutually agreed by such selling shareholders; provided
however, that in the event of such an allocation McKiernan may not include more
than 35% of the shares to be included in such registration statement by all
selling shareholders without the consent of the holders of the majority of the
shares requesting inclusion in the registration.
If any person does not agree to the terms of any such underwriting, he
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration. If
shares are so withdrawn from the registration, the Company shall then offer to
all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion pro rata
according to the total amount of securities entitled to be included in such
registration owned by each such person or in such other proportions as shall be
mutually agreed by such selling shareholders.
7.3 Company Registration. If (but without any obligation to do
so) at any time after the date of the Closing hereunder the Company proposes to
register (including for this ,purpose a registration effected by the Company for
shareholders other than the Holders) any of its stock or other securities under
the Securities Act in connection with the public offering of such securities
solely for cash (other than a registration relating solely to the sale of
securities to participants in a Company stock plan, or a registration relating
to shares to be issued in connection with the acquisition of another company, or
a registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty (20) days after the
effectiveness of such notice by the Company in accordance with Section 9.6, the
Company shall, subject to the provisions of Section 7.8, cause to be registered
under the Securities Act all
- 15 -
<PAGE> 16
of the Registrable Securities that each such Holder has requested to be
registered.
7.4 Obligations of the Company. Whenever required under this
Section 7 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred twenty (120) days;
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them;
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions; and
(a) Enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the managing
underwriter of such offering. Each Holder participating in such underwriting
shall also enter into and perform its obligations under such an agreement.
7.5 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 7 that
the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities hold by them, and the intended method of
disposition of such securities as shall be required to effect the registration
of the Registrable Securities.
7.6 Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in
- 16 -
<PAGE> 17
connection with registrations, filings or qualifications pursuant to Section
7.2, including (without limitation) all registration, filing and qualification
fees, printers' and accounting fees, fees and disbursements of counsel for the
Company, and the reasonable fees and disbursements of one counsel for the
selling Holders shall be borne by the Company; provided, however, that the
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to Section 7.2 if the registration request is
subsequently withdrawn at the request of the Holders (initiating and
noninitiating) holding a majority of the Registrable Securities to be registered
(in which case all participating Holders shall bear such expenses), unless the
Holders of at least 66-2/3% of the Registrable Securities agree to forfeit their
right to initiate their demand registration pursuant to Section 7.2.
7.7 Expenses of Company Registration. The Company shall bear and
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 7.3 for each Holder (which right may be assigned as provided
in Section 7.12), including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees relating or apportionable
thereto and the fees and disbursements. of one counsel for the selling Holders
selected by them, but excluding underwriting discounts and commissions relating
to Registrable Securities.
7.8 Underwriting Requirements. In connection with any offering
involving an underwriting of shares being issued by the Company, the Company
shall not be required under Section 7.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it, and then
only in such quantity as will not, in the opinion of the underwriters,
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by shareholders to be
included in an offering (other than a registration affected pursuant to Section
7.2) exceeds the amount of securities sold other than by the Company that the
underwriters reasonably believe compatible with the success of the offering,
then the Company shall be required to include in the offering only that number
of such securities, including Registrable Securities, which the underwriters
believe will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling shareholders according to
the total amount of securities entitled to be included therein owned by each
selling shareholder or in such other proportions an shall mutually be agreed to
by such selling shareholders; provided, however, that in the event of such an
apportionment, McKiernan may not include more than 35% of the shares to be
included in such registration by all selling shareholders, without the consent
of the holders of the majority of the shares requesting inclusion in the
registration). The
- 17 -
<PAGE> 18
underwriters, pursuant to the preceding sentence, may completely exclude the
Holder's securities from such underwriting if no other selling shareholders'
securities are so included.
If any person does not agree to the terms of any such underwriting, he
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration. If
shares are so withdrawn from the registration, the Company shall then offer to
all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion pro rata
according to the total amount of securities entitled to be included in such
registration owned by each such person or in such other proportions as shall be
mutually agreed by such selling shareholders.
For purposes of the immediately preceding parenthetical concerning
apportionment, for any selling shareholder which is a holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and shareholders of such holder, or the estates and family members of
any such partners and retired partners, and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "selling shareholder," and
any pro rata reduction with respect to such "selling shareholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "selling shareholder," as defined in
this sentence.
7.9 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 7.
7.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 7:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the officers, directors, partners and
legal counsel of each Holder, and each person, if any, who controls such Holder
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), against any losses, claims, damages or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, rule or
regulation insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively, a "Violation"): (i) any untrue
- 18 -
<PAGE> 19
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary to make the statements therein not misleading, or (iii) any
violation or alleged violation by the Company of the Securities Act, the
Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law; and the
Company will reimburse each such Holder, officer, director, partner, legal
counsel, underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this subsection 7.10(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company, nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
officer, partner, director, legal counsel or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors and officers, its
legal counsel, each person, if any, who controls the Company within the meaning
of the Securities Act, and any other Holder selling securities in such
registration statement or any of such other Holder's directors, legal counsel or
officers or any person who controls such Holder, against any losses, claims,
damages or liabilities (joint or several) to which the Company or any such
director, officer, legal counsel, or controlling person, or other such Holder or
director, officer, legal counsel or controlling person of such other Holder may
become subject, under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, legal counsel, controlling person, other Holder, or
officer, director, legal counsel, or controlling person of such other Holder in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 7.10(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Investor.
- 19 -
<PAGE> 20
(c) Promptly after receipt by an indemnified party under
this Section 7.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 7.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel at its own expense if it so desires.
Notwithstanding the foregoing, if the indemnified party and the indemnifying
party have conflicting interests with respect to the action so that joint
counsel for them would be inappropriate, (as determined by counsel to the
indemnified party and counsel to the indemnifying party), then the indemnifying
party shall pay reasonable fees and expenses of one counsel to the indemnified
party. The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action, if prejudicial to its
ability to defend such action, shall relieve such indemnifying party of any .
liability to the indemnified party under this Section 7.10, but the omission to
deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 7.10.
(d) If the indemnification provided for in this Section 7.10
is held by a court of competent jurisdiction to be unavailable to an indemnified
party, then each indemnifying party, in lieu of indemnifying such indemnified
party thereunder, hereby agrees to contribute to the amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other.
(e) The obligations of the Company and Holders under this
Section 7.10 shall survive the completion of any offering of, Registrable
Securities in a registration statement under this Section 7, and otherwise.
7.11 Reports Under Securities Exchange Act of 1934. with a view
to making available to the Investors purchasing Shares hereunder the benefits of
Rule 144 promulgated under the Securities Act and any other rule or regulation
of the SEC that may at any time permit a Holder to sell securities of the
Company to the public without registration, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after ninety (90)
days after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
- 20 -
<PAGE> 21
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the securities Act and the
Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), and (ii) a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed by the Company.
7.12 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 7 may be
assigned by a Holder to a transferee or assignee who (i) is not a competitor of
the Company and acquires at least fifty thousand (50,000) shares (as adjusted
for stock splits, combinations, etc.) of Registrable Securities, (ii) is an
Investor as defined hereunder, or (iii) is a partner or equity holder of an
Investor (or a third party duly authorized to act on behalf of an Investor or
its partners or equity holders), provided that such partner or equity holder has
appointed such Investor (or such duly authorized third party) as its lawful
attorney-in-fact to receive notices, vote and otherwise make binding decisions
under the terms of this Section 7; provided, in each case, the Company is,
within a reasonable period of time after such transfer, furnished with written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned; and provided,
further, that such assignment shall be effective only if immediately following
such transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act.
7.13 "Market Stand-Off" Agreement. Each Holder hereby agrees that
it shall not,, to the extent requested by the Company and an underwriter of
Common Stock (or other securities) of the company, sell or otherwise transfer or
dispose of any securities of the Company (other than securities registered in
the offering) whether or not acquired by such Holder under this Agreement during
a reasonable and customary period of time (not to exceed one hundred twenty
(120) days), as agreed to by the Company and the underwriters, following the
effective date of a registration statement of the Company filed under the
Securities Act; provided, however, that:
(a) such agreement shall be applicable only to the first
such registration statement of the Company which covers shares (or securities)
to be sold on its behalf to the public in an underwritten offering; and
- 21 -
<PAGE> 22
(b) all officers and directors of the Company, holders of 5%
or more of the Company's issued and outstanding capital stock and all other
persons with registration rights (whether or not pursuant to this Agreement)
similarly agree not to sell or transfer.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such reasonable and customary period.
7.14 Amendment of Registration Rights. Any provision of this
Section 7 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least 66-2/3% of the Registrable Securities. Any amendment or waiver effected
in accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
7.15 Termination of Registration Rights. The company's
obligations pursuant to this Section 7 shall terminate four years from the date
of consummation of the Company's sale of its Common Stock in a bona fide, firm
commitment underwriting pursuant to a registration statement on Form S-1 under
the Securities Act which results in gross offering proceeds to the Company of at
least $7,500,000.
8. Covenants.
8.1 Delivery of Financial Statements. The Company shall deliver
to each Investor:
(a) as soon as practicable, but in any event within one
hundred twenty (120) days after the and of each fiscal year of the Company, an
income statement for such fiscal year, a balance shoot of the Company as of the
and of such year, and a cash flow statement, such year-end financial reports to
be in reasonable detail, prepared in accordance with generally accepted
accounting principles ("GAAP"); and
(b) within forty-five (45) days of the end of each quarter,
a statement of operations, cash flow analysis and balance sheet for and as of
the end of such quarter, in reasonable detail; such quarterly statements shall
also compare actual performance to budget and to the prior year's comparable
period.
8.2 Inspections. The Company shall permit each Investor, at such
Investor's expense, to visit and inspect the
- 22 -
<PAGE> 23
Company's properties, to examine its books of account and records and to discuss
the Company's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by the investor; provided, however, that
the Company shall not be obligated pursuant to this Section 8.2 to provide
access to any information which it reasonably considers to be a trade secret or
similar confidential information.
8.3 Termination of Covenants. The covenants set forth in Section
8.1 and 8.2 shall terminate and be of no further force or effect when the sale
of securities pursuant to a registration statement filed by the Company under
the Securities Act in connection with the firm commitment underwritten offering
of its securities to the general public is consummated or when the Company first
becomes subject to the periodic reporting requirements of section 13(a) or 15(d)
of the Exchange Act, whichever event shall first occur.
8.4 Election of Director. For so long as any Preferred Shares are
outstanding, the Preferred Shares, shall be entitled to elect one member of the
Company's Board of Directors. Upon the Closing, Unterberg Harris Capital
Management ("UHCM") shall designate the individual to serve as the member of
the Board of Directors elected by the holders of the Preferred Shares ("UHCM
Designee") and the Company's Board of Directors shall elect such UHCM Designee
to the Board of Directors. The Investors acknowledge and agree that the UHCM
Designee shall join the Company's Board of Directors upon the Closing. Upon the
closing of the sale of additional Preferred Shares, or shares of any other
series of Preferred Stock, the UHCM Designee shall resign and the holders of the
shares of the Company's Preferred Stock then outstanding, as a group, shall
elect a new Board designee. The UHCM Designee may be so elected by the holders
of the Company's Preferred Stock.
8.5 Co-Sale Rights. McKiernan agrees that during the period
ending upon the earlier of (i) the Company's initial public offering of
securities or the sale or merger of the Company (where the Company is not the
surviving entity and where there is a change in control); or (ii) five (5) years
from the date hereof, he will not sell any shares of McKiernan Common Stock
without notifying the Investors twenty (20) or more days prior to the closing of
such-sale and permitting the Investors to participate (through the sale of
shares of Common Stock) in such sale on a pro rata basis, treating the McKiernan
Common Stock and all of the Preferred Shares (on an as converted to Common Stock
basis) as a group. Each Investor must notify McKiernan in writing that such
Investor will participate in such sale (and sell such Investor's shares of
common Stock in strict accordance with the terms and conditions of such sale as
described in the notice) on or before ten (10) business days before the
anticipated closing of such sale, or such Investor will have no right to
participate in such sale. This Section 8.5 shall not
- 23 -
<PAGE> 24
pertain to any transfers by McKiernan to his ancestors, descendants or spouse or
to trusts for the benefit of such persons, or any bona fide gift by McKiernan;
provided, however, any shares of McKiernan Common Stock transferred in a
transaction described in this sentence shall continue to be subject to the same
co-sale obligations set forth in this Section 8.5 as if McKiernan continued to
own such shares.
8.6 Right of First Refusal on Preferred Shares. As long as
Preferred Shares are outstanding, in the event any Investor ("Selling Investor")
desires to sell his or its Preferred Shares in a bona fide sales transaction,
such Investor will notify the Company and all other Investors then owning
Preferred Shares ("Other Investors") of the terms and conditions of such sale
and each other Investor shall have the right to purchase his or its pro rata
share (based on the total Preferred Shares owned by the Other Investors) of the
Selling Investor's Preferred Shares pursuant to such terms and conditions.
Within ten (10) business days after receipt of such notice, each Other Investor
shall notify the Company and the Selling Investor of the amount of his or its
pro rata. share of the Selling Investor's Preferred Shares they desire to
purchase. In the event any Other Investor does not elect to purchase his or its
full pro rata share, the remaining Other Investors shall have the right to
purchase such shares on a pro rata basis. Notice of such additional purchases
shall be delivered to the Company and Selling Investor within twenty (20)
business days following the initial notice given by the Selling Investor. This
right of first refusal comes before the right of first refusal in the Company's
Bylaws and the Company's Bylaws will be so amended prior to the Closing.
8.7 Additional Covenants. For a period of six months from the
date hereof, the Company shall not sell additional capital stock pursuant to an
agreement containing covenants which are in addition, or greater or superior, to
those set forth herein without the approval of the Investors holding a majority
of the Preferred Shares being sold hereunder. For a period of six months from
the date hereof, the Company shall not sell shares of capital stock at a price
less than $0.40 per share without the approval of the Investors holding a
majority of the Preferred Shares being sold hereunder; provided, however, the
foregoing approval does not pertain to the shares referred to in Section
2.2(c)(ii) hereof. As long as Preferred Shares remain outstanding, the Company
shall not grant registration rights superior to those granted to the Investors
in Sections 7.1 -- 7.15 hereof without the consent of the Investors holding a
majority of the Preferred Shares outstanding.
9. Miscellaneous.
9.1 Survival of Warranties. The warranties, representations and
covenants of the Company and the Investors contained in or made pursuant to this
Agreement shall survive the
- 24 -
<PAGE> 25
execution and delivery of this Agreement and the Closing and shall in no way be
affected by any investigation of the subject matter thereof made by or on behalf
of the Investors or the Company.
9.2 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
9.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California.,
9.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
9.6 Notices. Except as otherwise expressly provided herein, any
notice required or permitted hereunder shall be given in writing and it or any
certificates or other documents delivered hereunder shall be deemed effectively
given or delivered (as the case may be) upon personal delivery (professional
courier permissible) or when mailed by receipted United states certified mail
delivery, five (5) business days after deposit in the United States mail. Such
certificates, documents or notice may be personally delivered or sent to the
following address: (a) if to a Investor, to the address set forth with respect
to such investor on Exhibit B attached hereto, or to such other address of which
such investor shall have given notice pursuant hereto the Company, or (b) if to
the Company, to CyberSource Corporation, 1050 Chestnut Street, Menlo Park,
California 94025, or to such other address of which the Company shall have given
notice pursuant hereto.
9.7 Finder's Fee. Each Investor severally agrees to indemnify and
hold harmless the Company from any liability for any commission or compensation
in the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which such investor or any of its
officers, partners, employees or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of
- 25 -
<PAGE> 26
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
9.8 Expenses. Each party to this Agreement shall bear its own
expenses incurred in connection with the negotiation, preparation, execution and
consummation of this Agreement, including the fees, expenses and disbursements
of its respective legal counsel incurred in connection herewith.
9.9 Amendments and Waivers. Except as specified in Section 7.14,
any term of this Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and the holders of at least 66-2/3% of shares of the Common Stock issued or
issuable upon conversion of the Preferred Shares; provided, however, the
conditions to Closing set forth in Section 5 hereof may only be amended by
unanimous agreement of the Investors.
9.10 Severability. If one or more provision of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
9.11 Aggregation of Stock. All Preferred Shares (or Common Stock
issued on conversion thereof) hold or acquired by affiliated entities or persons
shall be aggregated together for the purpose of determining the availability of
any rights under this Agreement.
9.12 Confidentiality Agreement. Each Investor and any successor
or assign of such Investor who receives from the Company or its agents, directly
or indirectly, any information which the Company has not made generally
available to the public, pursuant to the preparation and execution of this
Agreement or disclosure in connection therewith or pursuant to the provisions of
Section 8 hereof, acknowledges and agrees that such information is confidential
and for its use only in connection with evaluating its investment in the
company, and further agrees that it will not disseminate such information to any
person other than its accountant, investment advisor or attorney and that such
dissemination shall be only for purposes of evaluating its investment.
9.13 Entire Agreement. This Agreement and the other documents and
agreements delivered pursuant hereto constitute the full and entire
understanding and agreement among the parties with regard to the subjects hereof
and thereof and supersedes any prior agreements (including any memorandum of
understanding or
- 26 -
<PAGE> 27
letters of intent) between the parties regarding the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
Solely with respect to the "Company"
agreements made in Sections
7.1--7.15 and 8.5 hereof: CYBERSOURCE CORPORATION, a
California corporation
- ------------------------------ By:
William S. McKiernan -------------------------------
Name:
-----------------------------
Title:
----------------------------
"Investors"
UNTERBERG HARRIS CAPITAL MANAGEMENT
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
WA&H INVESTMENT, L.L.C.
BY: WESSELS, ARNOLD & HENDERSON
GROUP, L.L.C., MANAGING MEMBER
By:
--------------------------------------
Kenneth J. Wessels
Title: CEO
MIEHAUS RYAN HALLER
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
-----------------------------------------
MARTIN J. MANNION
-----------------------------------------
JAMES M. BALLENGEE
-----------------------------------------
R. WILLIAM BURGESS, JR.
/s/ DAVID READERMAN
-----------------------------------------
DAVID READERMAN
/s/ ANDREW KESSLER
-----------------------------------------
ANDREW KESSLER
-----------------------------------------
W. DANA LA FORGE
/s/ ROBERT C. HARRIS, JR.
-----------------------------------------
Robert C. Harris, Jr.
- 27 -
<PAGE> 28
CYBERSOURCE CORPORATION
SERIES A PREFERRED
STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is
made as of the 27th day of February 1996 by and between CYBERSOURCE CORPORATION,
a California corporation (the "Company") and the purchasers listed on the
signature pages hereto under the heading "Investors," each of whom is herein
referred to as an "Investor."
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereby agree as follows:
1 . Purchase and Sale of Series A Preferred Stock.
1.1. Sale and Issuance of Series A Preferred Stock. Subject to
the terms and conditions of this Agreement, each Investor agrees severally to
purchase, and the Company agrees to sell and issue to each Investor, the number
of shares of Series A Preferred Stock (the "Preferred Shares"), set forth
opposite such Investor's name on the Schedule of Investors attached as Exhibit A
to this Agreement (the "Schedule of Investors"), for an aggregate of 548,020
Preferred Shares at a purchase price of $0.91 per share, for the purchase price
shown opposite such Investor's name on the Schedule of Investors (for an
aggregate purchase price of $498,697).
1.2. Closing.
(a) The purchase and sale of the Preferred Shares shall take
place at the offices of Jackson Tufts Cole & Black, LLP, 60 S. Market Street,
San Jose, California 95113 on 199 or at such other time and place as
the Company and Investors mutually agree upon (which time and place are
designated as the "Closing"). At the Closing, the Company will deliver to the
Investors stock certificates representing 548,020 Preferred Shares against
payment of the purchase price therefor of $0.91 per share by wire transfers of
funds or cancellation of indebtedness as set forth on the Schedule of Investors.
(b) Any cancellation of indebtedness in accordance with
subsection (a) of this Section 1.2 shall be effected by means of surrender to
the Company at the Closing of the debt instrument evidencing such indebtedness
(if any), which instrument together with any rights or claims pursuant to such
instrument shall be cancelled and extinguished upon such surrender without any
further action on the part of the Company or the Investor.
<PAGE> 29
2. Representations and Warranties of Each Investor. Each Investor
hereby severally and not jointly represents and warrants that:
2.1. Purchase Entirely for Own Account. This Agreement is made
with each Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Preferred Shares to be received by such Investor
hereunder will be acquired for investment for such Investor's own account, not
as a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that such Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, each Investor purchasing Preferred Shares hereunder further
represents that such Investor does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Preferred Shares, or
any portion thereof. Each Investor that is an entity represents that it has full
power and authority to enter into this Agreement.
2.2. Disclosure of Information. Each Investor believes he or it
has received all the information it considers necessary or appropriate for
deciding whether to purchase the Preferred Shares. Each such Investor further
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of the
Preferred Shares.
2.3. Investment Experience. Each Investor is an investor in
securities of companies in the development stage and acknowledges that it is
able to fend for itself, can bear the economic risk of its investment and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Preferred
Shares. If other than an individual, Investor also represents it has not been
organized solely for the purpose of acquiring the Preferred Shares.
2.4. Restricted Securities. Each Investor purchasing Preferred
Shares hereunder understands that the Preferred Shares are characterized as
"restricted securities" under the federal securities laws inasmuch as they are
being acquired from the Company in a transaction not involving a public offering
and that under such laws and applicable regulations such Preferred Shares may be
resold without registration under the Securities Act only in certain limited
circumstances. In this connection each Investor represents that he or it is
familiar with Securities and Exchange Commission ("SEC") Rule 144, as presently
in effect, and understands the resale limitations imposed thereby and by the
Securities Act.
2.5. Further Limitations on Disposition. Without in any way
limiting the representations set forth above, each Investor purchasing Preferred
Shares hereunder further agrees not to make any disposition of all or any
portion of the Preferred Shares (or the common stock issuable upon the
conversion of the Preferred Shares) unless and until:
(a) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
- 2 -
<PAGE> 30
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, (ii) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such Preferred Shares under
the Securities Act and (iii) if reasonably requested by the Company, the
transferee shall have furnished to the Company its agreement to abide by the
restrictions on transfer set forth herein as if it were a purchaser hereunder.
2.6. Accredited Investor. The term "Accredited Investor" as used
in Sections 2.6. 2.7 and 2.8 refers to a person or entity who:
(a) is a director or executive officer of the Company; or
(b) is a natural person whose individual net worth, or joint
net worth with his or her spouse, at the time of purchase exceeds $1,000,000,
and the total purchase price does not exceed ten percent (10%) of his or her
individual net worth, or joint net worth with his or her spouse, at the time of
sale; or
(c) is a natural person who had an individual income in
excess of $200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years and reasonably
expects to reach the same income level in the current year, and the total
purchase price does not exceed ten percent (10%) of his or her individual net
worth, or joint net worth with his or her spouse, at the time of sale; or
(d) is a private business development company as defined in
section 20(b)(22) of the Investment Advisors Act of 1940; or
(e) is either (i) a bank as defined in section 3(a)(2) of
the Securities Act, or a savings and loan association or other institution as
defined in section 3(a)(5)(A) of the Securities Act whether acting in its
individual or fiduciary capacity; (ii) a broker or dealer registered pursuant to
section 15 of the Securities Exchange Act of 1934; (iii) an insurance company as
defined in section 2(13) of the Securities Act; (iv) an investment company
registered under the Investment Company Act of 1940 or a business development
company as defined in section 2(a)(48) of that Act; (V) a Small Business
Investment Company licensed by the U.S. Small Business Administration under
section 301(c) or (d) of the Small Business Investment Act of 1958; or (vi) an
employee benefit plan within the meaning of Title I of the Employee Retirement
Income Security Act of 1974, if the investment decision is made by a plan
fiduciary, as defined in section 3(21) of such Act, which is either a bank,
savings and loan association, insurance company, or registered investment
adviser, or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions made solely by
persons that are Accredited Investors; or
(f) is any organization described in section 501(c)(3) of
the Internal Revenue Code, corporation, Massachusetts or similar business trust,
or partnership, not formed
- 3 -
<PAGE> 31
for the specific purpose of acquiring the Shares offered, with total assets in
excess of $5,000,000; or
(g) is any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the Shares offered, whose
purchase is directed by a sophisticated person as described in Regulation
230.506(b)(2)(ii) promulgated under the Securities Act; or
(h) is an entity in which all of its equity owners meet one
or more of the standards set forth in (a) through (g) above.
As used in this Section 2.6, the term "net worth" means the excess of
total assets over total liabilities, and "income" means actual economic income,
which may differ from adjusted gross income for federal income tax purposes.
2.7. Representations and Warranties as to Accredited Investors and
Excluded Purchasers Status. Each Investor as to himself or itself, severally and
not jointly, further represents to the Company that such Investor is (i) an
Accredited Investor and (ii) an excluded purchaser (as such term is described in
Section 260.102.13 of Title 10 of the California Code of Regulations or section
25102(f) of the California Corporate Securities Law of 1968).
2.8. Legends. To the extent applicable, each certificate or other
document evidencing any of the Preferred Shares issued hereunder or any Common
Stock issued upon conversion of the Preferred Shares shall be endorsed with the
legends set forth below, and such Investor covenants that, except to the extent
such restrictions are waived by the Company, such Investor shall not transfer
the securities without complying with the restrictions on transfer described in
the legends endorsed thereon:
(a) The following legend under the Securities Act:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE
REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144
PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT
SUCH REGISTRATION IS NOT REQUIRED."
(b) If required by the authorities of any state in
connection with the issuance or sale of the Preferred Shares, the legend
required by such state authority.
The Company shall not be required (i) to transfer on its books any
Preferred Shares which shall have been transferred in violation of any of the
provisions set forth in this Agreement, or
- 4 -
<PAGE> 32
(ii) to treat as owner of such Preferred Shares or to accord the right to vote
as such owner or to pay dividends to any transferee to whom such Preferred
Shares shall have been so transferred.
2.9. Removal of Legends.
(a) Any legend endorsed on a certificate pursuant to Section
2.8 hereof shall be removed (i) if Preferred Shares represented by such
certificate shall have been effectively registered under the Securities Act or
otherwise lawfully sold in a public transaction, (ii) if such Preferred Shares
may be transferred in compliance with Rule 144(k) promulgated under the
Securities Act, or (iii) if the holder of such Preferred Shares shall have
provided the Company with an opinion from counsel, in form and substance
acceptable to the Company and from attorneys reasonably acceptable to the
Company, stating that a public sale, transfer or assignment of such Preferred
Shares may be made without registration.
(b) Any legend endorsed on a certificate pursuant to Section
2.8(b) hereof shall be removed if the Company receives an order of the
appropriate state authority authorizing such removal or if the holder of the
Preferred Shares provides the Company with an opinion of counsel, in form and
substance acceptable to the Company and from attorneys reasonably acceptable to
the Company, stating that such state legend may be removed.
3. California Commissioner of Corporations.
3.1. Corporate Securities Law. THE SALE OF THE SECURITIES WHICH
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS, OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
4. Miscellaneous.
4.1. Survival of Warranties. The warranties, representations and
covenants of the Investors contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and the Closing.
4.2. Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
- 5 -
<PAGE> 33
4.3. Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California.
4.4. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.5. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
4.6. Notices. Except as otherwise expressly provided herein, any
notice required or permitted
4.7. Finder's Fee. Each Investor severally agrees to indemnify
and hold harmless the Company from any liability for any commission or
compensation in the nature of a finder's fee (and the costs and expenses of
defending against such liability or asserted liability) for which such Investor
or any of its officers, partners, employees or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from any
liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
4.8. Expenses. Each party to this Agreement shall bear its own
expenses incurred in connection with the negotiation, preparation, execution and
consummation of this Agreement, including the fees, expense disbursements
of its respective legal counsel incurred in connection herewith.
4.9. Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least 66-2/3% of shares of the Common Stock issued or issuable upon
conversion of the Preferred Shares.
4.10. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
4.11. Entire Agreement. This Agreement and Amendment No. I to
Series A Preferred Stock Purchase Agreement of even date herewith and the other
documents and agreements delivered pursuant hereto constitute the full and
entire understanding and agreement among the parties with regard to the subjects
hereof and thereof and supersedes any prior agreements (including any memorandum
of understanding or letters of intent) between the parties regarding the subject
matter hereof.
- 6 -
<PAGE> 34
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"Company"
CYBERSOURCE CORPORATION, a California
corporation
By:_____________________________________
Name:___________________________________
Title:__________________________________
"Investors"
UNTERBERG HARRIS CAPITAL PARTNERS I,
L.P.
By:_____________________________________
Name:___________________________________
Title:__________________________________
WA&H INVESTMENT, INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
NEIHAUS RYAN HALLER PUBLIC RELATIONS,
INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
- 7 -
<PAGE> 35
CYBERSOURCE CORPORATION
AMENDMENT NO. I SERIES A PREFERRED
STOCK PURCHASE AGREEMENT
REFERENCE IS HEREBY MADE TO THAT CERTAIN SERIES A PREFERRED STOCK
PURCHASE AGREEMENT (the "Agreement") dated as of the 6th day of January, 1995 by
and between CYBERSOURCE CORPORATION, a California corporation (the "Company"),
WILLIAM S. MCKIERNAN ("McKiernan"), Unterberg Harris Capital Partners I, L.P.
("Unterberg"), WA&H Investment L.L.C. ("WA&H") and each of the other purchasers
listed on the signature pages thereto under the heading "Investors"
(collectively with Unterberg and WA&H, the "Investors"). All capitalized terms
used herein and not otherwise defined shall have the meaning ascribed to them in
the Agreement.
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereby agree as follows:
1. Section 7.1 (b) of the Agreement is hereby deleted and the following
is substituted in its place: "(b) The term "Registrable
Securities" means (i) the Common Stock issuable or issued upon
conversion of any shares of Series A Preferred Stock, (ii) all
Common Stock owned by McKiernan (or transferred by McKiernan to
his ancestors, descendants or spouse or to trusts for the benefit
of such persons) (the "McKiernan Common Stock") and (iii) any
Common Stock of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such shares of
Series A Preferred Stock or McKiernan Common Stock, excluding in
all cases, however, any Registrable Securities sold by a person
in a transaction in which his registration rights are not
assigned;"
2. Section 8.6 of the Agreement is hereby deleted and the following is
substituted in its place: "Right of First Refusal on Shares of
Series A Preferred Stock. As long as shares of Series A Preferred
Stock are outstanding, in the event any Investor ("Selling
Investor") desires to sell his or its shares of Series A
Preferred Stock in a bona fide sales transaction, such Investor
will notify the Company and all other Investors then owning
shares of Series A Preferred Stock ("Other Investors") of the
terms and conditions of such sale and each Other Investor shall
have the right to purchase his or its pro rata share (based on
the total number of shares of Series A Preferred Stock owned by
the Other Investors) of the Selling Investor's shares of Series A
Preferred Stock pursuant to such terms and conditions. Within ten
(10) business days after receipt of such notice, each Other
Investor shall notify the Company and the Selling Investor
<PAGE> 36
terms and conditions. Within ten (10) business days after receipt
of such notice, each Other Investor shall notify the Company and
the Selling Investor of the amount of his or its pro rata share
of the Selling Investor's shares of Series A Preferred Stock they
desire to purchase. In the event any Other Investor does not
elect to purchase his or its full pro rata share, the remaining
Other Investors shall have the right to purchase such shares on a
pro rata basis. Notice of such additional purchases shall be
delivered to the Company and Selling Investor within twenty (20)
business days following the initial notice given by the Selling
Investor. This right of first refusal comes before the right of
first refusal in the Company's Bylaws."
3. The Agreement as amended by this Amendment is in full force and
effect and is hereby in all respects ratified and confirmed. References in the
Agreement to "this Agreement" and to the words such as "herein," "hereinafter,"
"hereof," "hereunder," and any words of similar import shall refer to the
Agreement as amended by this Amendment No. 1.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
th day of 199 ,
"Company"
CYBERSOURCE CORPORATION, a California
corporation
_____________________________________
William S. McKiernan
By:_______________________________________
Name:_____________________________________
Title:____________________________________
"Investors"
UNTERBERG HARRIS CAPITAL MANAGEMENT
By:_______________________________________
Name:_____________________________________
Title:____________________________________
WA&H INVESTMENT, L.L.C.
BY: WESSELS, ARNOLD & HENDERSON
GROUP, L.L.C., MANAGING MEMBER
By:_______________________________________
NIEHAUS RYAN HALLER PUBLIC RELATIONS, INC.
By: /s/ WILLIAM RYAN
---------------------------------------
Name: William Ryan
--------------------------------------
Title: Chairman
------------------------------------
-------------------------------------------
MARTIN J. MANNION
-------------------------------------------
JAMES M. BALLENGEE
-------------------------------------------
R. WILLIAM BURGESS, JR.
-------------------------------------------
DAVID READERMAN
-------------------------------------------
ANDREW KESSLER
/s/ ANDREW KESSLER
-------------------------------------------
ANDREW KESSLER
-------------------------------------------
W. DANA LA FORGE
-------------------------------------------
ROBERT C. HARRIS, JR.
- 2 -
<PAGE> 37
CYBERSOURCE CORPORATION
AMENDMENT NO. 2 TO SERIES A PREFERRED
STOCK PURCHASE AGREEMENT
REFERENCE IS HEREBY MADE TO THAT CERTAIN SERIES A PREFERRED STOCK
PURCHASE AGREEMENT dated as of the day of , 199 by and between
CYBERSOURCE CORPORATION, a California corporation (the "Company"), WILLIAM S.
MCKIERNAN ("McKiernan"), Unterberg Harris Capital Partners I, L.P.
("Unterberg"), WA&H Investment L.L.C. ("WA&H") and each of the other purchasers
listed on the signature pages thereto under the heading "Investors"
(collectively with Unterberg and WA&H, the "Investors"), as amended by Amendment
No. I thereto dated as of , 199 (the "Agreement"). All capitalized
terms used herein and not otherwise defined shall have the meaning ascribed to
them in the Agreement.
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereby agree
as follows:
1. Section 8.5 of the Agreement is hereby deleted and the following is
substituted in its place:
"McKiernan agrees that during the period ending upon the earlier of
(i) the Company's initial public offering of securities or the sale or
merger of the Company (where the Company is not the surviving entity
and where there is a change in control); or (ii) five (5) years from
the date hereof, he will not sell any shares of McKiernan Common Stock
without notifying the Investors twenty (20) or more days prior to the
closing of such sale and permitting the Investors to participate
(through the sale of shares of Common Stock) in such sale on a pro
rata basis, treating the McKiernan Common Stock, all of the Preferred
Shares (on an as converted to Common Stock basis) and all of the
issued and outstanding shares of the Company's Series B Preferred
Stock (the "Series B Preferred Stock") (on an as converted to Common
Stock basis) as a group. Each Investor must notify McKiernan in
writing that such Investor will participate in such sale (and sell
such Investor's shares of Common Stock in strict accordance with the
terms and conditions of such sale as described in the notice) on or
before ten (10) business days before the anticipated closing of such
sale, or such Investor will have no right to participate in such sale.
This Section 8.5 shall not pertain to any transfers by McKiernan to
his ancestors, descendants or spouse or to trusts for the benefit of
such persons, or any bona fide gift by McKiernan; provided, however,
any shares of McKiernan Common Stock transferred in a transaction
described in this sentence shall continue to be subject to the same
co-sale obligations set forth in this Section 8.5 as if McKiernan
continued
<PAGE> 38
to own such shares."
2. Section 8.6 of the Agreement is hereby deleted and the following is
substituted in its place:
"Right of First Refusal on Shares of Series A Preferred Stock. As long
as shares of Series A Preferred Stock are outstanding, in the event
any Investor ("Selling Investor") desires to sell his or its shares of
Series A Preferred Stock in a bona fide sales transaction, such
Investor will notify the Company, all other Investors then owning
shares of Series A Preferred Stock and all holders of shares of the
Company's Series B Preferred Stock (collectively, "Other Investors")
of the terms and conditions of such sale and each Other Investor shall
have the right to purchase his or its pro rata share (based on the
total number of shares of Series A Preferred Stock or Series B
Preferred Stock owned by the Other Investors) of the Selling
Investor's shares of Series A Preferred Stock pursuant to such terms
and conditions. Within ten (10) business days after receipt of such
notice, each Other Investor shall notify the Company and the Selling
Investor of the amount of his or its pro rata share of the Selling
Investor's shares of Series A Preferred Stock they desire to purchase.
In the event any Other Investor does not elect to purchase his or its
full pro rata share, the remaining Other Investors shall have the
right to purchase such shares on a pro rata basis. Notice of such
additional purchases shall be delivered to the Company and Selling
Investor within twenty (20) business days following the initial notice
given by the Selling Investor. This right of first refusal comes
before the right of first refusal in the Company's Bylaws."
3.The Agreement as amended by this Amendment is in full force and
effect and is hereby in all respects ratified and confirmed. References in the
Agreement to "this Agreement" and to the words such as "herein," "hereinafter,"
"hereof," "hereunder," and any words of similar import shall refer to the
Agreement as amended by this Amendment No. 2.
- 2 -
<PAGE> 39
IN WITNESS WHEREOF, the parties have executed this Agreement as of the ___th day
of 199
"Company"
CYBERSOURCE CORPORATION, a California
corporation
__________________________________________
William S. McKiernan
By:_______________________________________
Name:_____________________________________
Title:____________________________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
- 3 -
<PAGE> 40
CYBERSOURCE CORPORATION
AMENDMENT NO.3 TO SERIES A PREFERRED
STOCK PURCHASE AGREEMENT
REFERENCE IS HEREBY MADE TO THAT CERTAIN SERIES A PREFERRED STOCK
PURCHASE AGREEMENT dated as of the day of 199 by and between
CYBERSOURCE CORPORATION, a California corporation (the "Company"), WILLIAM S.
MCKIERNAN ("McKiernan"), Niehaus Ryan Haller Public Relations, Inc. and each of
the other purchasers listed on the signature pages thereto under the heading
"Investors" (collectively, the "Investors"), as amended by Amendment No. I
thereto dated as of , 199 and Amendment No. 2 thereto dated as
of , 199 (the "Agreement"). All capitalized terms used herein and not
otherwise defined shall have the meaning ascribed to them in the Agreement.
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereby agree
as follows:
Section 7 of the Agreements hereby deleted in its entirety and the
following is substituted in its place:
7. Registration Rights. The Company covenants and agrees as follows:
7.1. Definitions. For purposes of this Section 7:
(a) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document;
(b) The term "Registrable Securities" means (i) the Common
Stock issuable or issued upon conversion of the Preferred Shares being purchased
hereunder (ii) any Common Stock of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, such Preferred Shares, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which his
registration rights are not assigned and (iii) all shares of Common Stock which
the Investors and their permitted assignees may hereafter purchase (or shares of
Common Stock issuable upon exercise or conversion of securities hereafter
purchased) pursuant to their rights of first refusal or otherwise;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number
<PAGE> 41
of shares of Common Stock issuable pursuant to the exercisable or convertible
securities which are exercisable or convertible into, Registrable Securities;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 7.12 hereof. It is acknowledged and agreed by the parties that the
registration rights contained in this Section 7 are pari-passu with and are not
superior to the registration rights granted pursuant to the Series B Purchase
Agreements;
(e) The term "Series B Holder" shall mean a Holder under
that certain Series B Preferred Stock Purchase Agreement dated as of ,
199 by and among the Company and the "Investors" set forth therein or any
subsequent Series B Preferred Stock Purchase Agreement entered into by the
Company in respect of the sale of shares of its Series Preferred Stock.
7.2. Request for Registration.
(a) If the Company shall receive at any time after one (1)
year following the closing of the Company's initial public offering of
securities a written request from Holders holding at least forty percent (40%)
of the Registrable Securities then outstanding (the "Initiating Holders") that
the Company file a registration statement under the Securities Act covering the
registration in an underwritten public offering of at least 40% of the
Registrable Securities then outstanding and such registration would cover sales
having an anticipated aggregate offering price, net of underwriting discounts
and commissions, equal to or more than $7,500,000, then the Company shall,
within twenty-one (21) days of the receipt thereof, give written notice of such
request to all Holders and Series B Holders and shall, subject to the
limitations of subsection 7.2(b), file as soon as practicable a registration
statement under the Securities Act covering all Registrable Securities which the
Holders and Series B Holders request to be registered within twenty (20) days of
the mailing of such notice by the Company in accordance with Section 9.6.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action to effect any such registration pursuant to this
Section 7.2:
(i) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act;
(ii) if the Company shall have initiated one (1)
registration pursuant to this Section 7.2 and the applicable registration
statement has been declared effective by the SEC and remained effective until
the earlier of (A) such time as all of the Registrable Securities included by
the Holders in such registration have been sold or disposed of by them or (B)
the expiration of the period described in Section 7.4(a). In addition, a request
for registration shall not be deemed to constitute a registration for purposes
of this subparagraph if: (I) the conditions to closing specified in the purchase
agreement or underwriting agreement entered into in connection with such
registration are not satisfied other than by reason of some act or omission by
the Holders requesting such registration; (II) the Company voluntarily takes any
action that would result in the Holder not being able to sell such Registrable
Securities covered thereby during the period during which the registration
statement must be kept effective; or (III) if, after
- 2 -
<PAGE> 42
it has become effective, such registration becomes subject to any stop order,
injunction or other order or requirement of the SEC or other governmental
agency or court and such order, injunction or requirement is not promptly
withdrawn or lifted, and such registration has not otherwise remained effective
for the relevant period (including effective periods both before and after the
order, injunction or requirement is made or imposed); or
(iii) any time after five (5) years immediately
following the Closing and one year following the Company's initial registered
firm commitment public offering on Form S-1 with an aggregate offering price of
at least $7,500,000.
(c) Subject to the foregoing paragraph 7.2(b), the Company
shall file a registration statement as soon as possible after receipt of the
request or requests of the Initiating Holders under this Section 7.2; provided,
however, that if the Company shall furnish to such Initiating Holders within
sixty (60) days of receipt of such request a certificate signed by the President
of the Company stating that in the good faith judgment of the Board of Directors
of the Company (as evidenced by a board resolution) it would be significantly
detrimental to the Company and its shareholders for such registration statement
to be filed on or before the date filing would be required and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer such filing to a date not later than one hundred twenty
(120) days after receipt of such request, provided that the Company will not
exercise this right more than once in any twelve-month period.
(d) The underwriting shall be managed by an underwriter or
underwriters of national reputation selected by the Initiating Holders, which
selection shall be subject to the consent of the Company, which consent shall
not be unreasonably withheld. The right of any Holder to registration pursuant
to Section 7.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting. The Company shall (together with all Holders and Series B Holders
proposing to distribute their securities through such underwriting) enter into
an underwriting agreement in customary form with the underwriter or underwriters
selected as above provided. Notwithstanding any other provision of this Section
7.2, if the underwriters advise the Initiating Holders and the Company in
writing that marketing factors require a limitation of the number of shares to
be underwritten and that the total amount of securities that all Holders and
Series B Holders (initiating and non-initiating) request pursuant to this
Section 7.2(d) to be included in such offering exceeds the amount of securities
that the underwriters reasonably believe compatible with the success of the
offering, the Company shall so advise all Holders and all of the shares to be
included in the registration shall be allocated among all Holders and Series B
Holders requesting inclusion (initiating and non-initiating) pro rata. according
to the total amount of securities entitled to be included in such registration
owned by each Holder and each Series B Holder requesting inclusion (initiating
or non-initiating) or in such other proportions as shall be mutually agreed by
such selling shareholders; provided, however, that in the event of such an
allocation McKiernan may not include more than 35% of the shares to be included
in such registration statement by all selling shareholders without the consent
of the holders of the majority of the shares requesting inclusion in the
registration. For the purposes of this Section 7.2(d) and Section 7.8 of this
Agreement, the language in such sections referring to McKiernan's right to
participate as a selling shareholder at the 35% level means that all McKiernan
Shares (as defined in this Agreement) included in such a registration, whether
held by McKiernan or a transferee of McKiernan, shall be counted against such
35% limit. In addition, the language in Section 7.2 (d) and Section 7.8 of this
Agreement referring to the ability of the holders of a
- 3 -
<PAGE> 43
majority of the shares requesting inclusion in a registration to waive such 35%
limit means that only the holders of a majority of such shares, calculated
without regard to any McKiernan shares, may effect such a waiver.
If any person does not agree to the terms of any such underwriting, he
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration. If
shares are so withdrawn from the registration, the Company shall then offer to
all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion pro rata
according to the total amount of securities entitled to be included in such
registration owned by each such person or in such other proportions as shall be
mutually agreed by such selling shareholders.
7.3. Company Registration. If (but without any obligation to do so) at
any time after the date of the Closing hereunder the Company proposes to
register (including for this purpose a registration effected by the Company for
shareholders other than the Holders of Registrable Securities except a
registration in which the Holders have the right to include Registrable
Securities under Section 7.2) any of its stock or other securities under the
Securities Act in connection with the public offering of such securities solely
for cash (other than a registration relating solely to the sale of securities to
participants in a Company stock plan, or a registration relating to shares to be
issued in connection with the acquisition of another company, or a registration
on any form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale of the
Registrable Securities), the Company shall, at such time, promptly give each
Holder of Registrable Securities written notice of such registration. Upon the
written request of each Holder of Registrable Securities given within twenty
(20) days after the effectiveness of such notice by the Company in accordance
with Section 9.6, the Company shall, subject to the provisions of Section 7.8,
cause to be registered under the Securities Act all of the Registrable
Securities that each such Holder of Registrable Securities has requested to be
registered.
7.4. Obligations of the Company. Whenever required under this Section
7 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective (but in no event later than 120
days after the initial request for registration), and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred twenty (120) days,
plus a period equal to any period during which the Holders are prohibited from
making sales because of any stop order, injunction or other order or requirement
of the SEC or any other governmental agency or court or a period during which
the happening of any event which makes any statement made in the registration
statement, the prospectus or any document incorporated therein by reference
untrue or misleading in any material respect until a curative amendment or
supplement is filed and furnished to the Holders; provided, however, that before
filing a registration statement or prospectus or any amendments or supplements
thereto (including documents that would be incorporated or deemed to be
incorporated therein by reference) the Company will furnish to the
- 4 -
<PAGE> 44
Holders of the Registrable Securities covered by such registration and, the
underwriters, and any attorney, accountant or other agent retained by the
Holders of Registrable Securities covered by such registration statement or
underwriters copies of all such documents proposed to be filed, which documents
will be subject to the reasonable and timely review and comment of such Holders,
such counsel and underwriters, if any, and the Company will not file any
registration statement or any amendment thereto or any prospectus or any
supplement thereto filed in connection with a registration pursuant to Section
7.2 (including such documents incorporated by reference and proposed to be filed
after the initial filing of the registration statement) to which the Holders of
a majority of the Registrable Securities covered by such registration statement
or the underwriters, if any, shall reasonably and timely object;
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus and all amendments and
supplements thereto, in conformity with the requirements of the Securities Act,
and such other documents as they may reasonably request in order to facilitate
the disposition of Registrable Securities owned by them;
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders of Registrable Securities, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions; and
(e) Enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the managing
underwriter of such offering. Each Holder of Registrable Securities
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
7.5. Furnish Information. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Section 7
that the selling Holders of Registrable Securities shall furnish to the Company
such information regarding themselves, the Registrable Securities held by them,
and the intended method of disposition of such securities as shall be required
to effect the registration of the Registrable Securities.
7.6. Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 7.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements (not to exceed $35,000) of one counsel for the
selling Holders and selling Series B Holders shall be borne by the Company;
provided, however, that the Company shall not be required to pay for any
expenses of any registration proceeding begun pursuant to Section 7.2 if the
registration request is subsequently withdrawn at the request of the Holders
(initiating and non-initiating) holding a majority of the Registrable Securities
to be registered (in which case all participating Holders shall bear such
expenses), unless the Holders of at least 66-2/3% of the Registrable Securities
agree to forfeit their right to initiate one demand
- 5 -
<PAGE> 45
registration pursuant to Section 7.2. (provided that if immediately prior to
the time of such withdrawal, the Holders have learned of a materially adverse
change in the condition, business or prospects of the Company from that known to
the Holders at the time of their request, then the Holders shall not be required
to pay any such expenses and shall retain their rights pursuant to Section 7.2).
7.7. Expenses of Company Registration. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 7.3 for each Holder (which right may be assigned as provided
in Section 7.12), including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees relating or apportionable
thereto and the fees and disbursements of one counsel (not to exceed $35,000)
for the selling Holders and selling Series B Holders selected by them, but
excluding underwriting discounts and commissions relating to Registrable
Securities.
7.8. Underwriting Requirements. In connection with any offering
involving an underwriting of shares being issued by the Company, the Company
shall not be required under Section 7.3 to include any of the Holders'
Registrable Securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
it, and then only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. If the
total amount of securities, including Registrable Securities, requested by
shareholders to be included in an offering (other than a registration effected
pursuant to Section 7.2) exceeds the amount of securities sold other than by the
Company that the underwriters reasonably believe compatible with the success of
the offering, then the Company shall be required to include in the offering only
that number of such securities, including Registrable Securities, which the
underwriters believe will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling
shareholders, including Series B Holders, according to the total amount of
securities entitled to be included therein owned by each selling shareholder or
in such other proportions as shall mutually be agreed to by such selling
shareholders). The underwriters, pursuant to the preceding sentence, may
completely exclude the Holder's Registrable Securities from such underwriting if
no other selling shareholders' securities are so included.
If any person does not agree to the terms of any such underwriting, he
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration. If
shares are so withdrawn from the registration, the Company shall then offer to
all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion pro rata
according to the total amount of securities entitled to be included in such
registration owned by each such person or in such other proportions as shall be
mutually agreed by such selling shareholders.
For purposes of the immediately preceding parenthetical concerning
apportionment, for any selling shareholder which is a holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and shareholders of such holder, or the estates and family members of
any such partners and retired partners, and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "selling shareholder," and
any pro rata
- 6 -
<PAGE> 46
reduction with respect to such "selling shareholder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "selling shareholder," as defined in this
sentence.
7.9. Delay of Registration. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 7.
7.10. Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 7:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless: (i) each Holder, the officers, directors, agents,
partners and legal counsel of each Holder of Registrable Securities, and (ii)
each person, if any, who controls such Holder within the meaning of the
Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the officers, directors, agents, partners and legal counsel of such
control person, against any losses, claims, damages or liabilities (joint or
several) to which they may become subject under the Securities Act, the Exchange
Act or other federal or state law, rule or regulation insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (A) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (B) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading, or (C) any violation or alleged violation by
the Company of the Securities Act, the Exchange Act, any state securities law
or any rule or regulation promulgated under the Securities Act, the Exchange Act
or any state securities law; and the Company will reimburse each such Holder,
officer, agent, director, partner, legal counsel, underwriter or controlling
person each officer, director, agent, partner and legal counsel of such
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this subsection 7.10(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company (which shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Holder, officer, partner, director, agent, legal counsel or controlling
person.
(b) To the extent permitted by law, each selling Holder
will, severally but not jointly, indemnify and hold harmless (i) the Company;
each of its officers, directors, agents, partners and legal counsel; and (ii)
each person, if any, who controls the Company within the meaning of the
Securities Act and the officers, directors, agents, partners and legal counsel
of such control person, and any other Holder selling securities in such
registration statement or any of such other Holder's officers, directors,
agents, partners, legal counsel or any person who controls such Holder, against
any losses, claims, damages or liabilities (joint or several) to which the
Company or any officer, director, agent, partner, legal counsel, or controlling
person, or other such Holder or director, officer, legal counsel or controlling
person of such other Holder may
- 7 -
<PAGE> 47
become subject, under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will
reimburse any legal or other expenses reasonably incurred by the Company or any
officer, director, agent, partner, legal counsel, controlling person, other
Holder, or officer, director, agent, partner, legal counsel or controlling
person of such other Holder in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 7.10(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Investor (which
consent shall not be unreasonably withheld) and provided further that in no
event shall the liability of any selling Holder hereunder be greater in amount
than the dollar amount of the proceeds (net of the payment of underwriting
discounts and commissions payable by such selling Holder) received by any such
selling Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Promptly after receipt by an indemnified party under
this Section 7.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party, under this Section 7.10, deliver
to the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel at its own expense if it so desires.
Notwithstanding the foregoing, if the indemnified party and the indemnifying
party have conflicting interests with respect to the action so that joint
counsel for them would be inappropriate, (as determined by counsel to the
indemnified party and counsel to the indemnifying party), then the indemnifying
party shall pay reasonable fees and expenses of one counsel to the indemnified
party. The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action, if prejudicial to its
ability to defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 7.10, but the omission to
deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 7.10. No indemnifying party, in the defense of any such action, shall,
except with the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from liability in respect of such action.
(d) If the indemnification provided for in this Section 7.10
is held by a court of competent jurisdiction to be unavailable to an indemnified
party, then, except to the extent that contribution is not permitted under
Section 11(f) of the Securities Act, each indemnifying party, in lieu of
indemnifying such indemnified party thereunder, hereby agrees to contribute to
the amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other. The parties hereto agree that it
would not be just and equitable if contribution pursuant to this Section 7.1O(d)
were determined by pro rata allocation or by any other method of allocation that
does not take into account the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this Section
7.1O(d), no
- 8 -
<PAGE> 48
indemnifying party that is a selling Holder shall be required to contribute any
amount in excess of the amount by which the net proceeds received by such
selling Holder from the sale of Registrable Securities exceeds the amount of any
damages that such selling Holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The indemnity and contribution
agreements contained in this Section 7.10 are in addition to any liability
that the indemnifying parties may have to the indemnified parties.
(e) The obligations of the Company and Holders under this
Section 7.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 7, and otherwise.
7.11. Reports Under Securities Exchange Act of 1934. With a view
to making available to the Investors purchasing Shares hereunder the benefits of
Rule 144 promulgated under the Securities Act and any other rule or regulation
of the SEC that may at any time permit a Holder to sell securities of the
Company to the public without registration, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after ninety (90)
days after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), and (ii) a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed by the Company.
7.12. Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 7 may be
assigned by a Holder to a transferee or assignee who (i) is not a competitor of
the Company and acquires at least fifty thousand (50,000) shares (as adjusted
for stock splits, combinations, etc.) of Registrable Securities, (ii) is an
Investor as defined hereunder, or (iii) is a partner or equity holder or an
affiliate of an Investor (or a third party duly authorized to act on behalf of
an Investor or its partners or equity holders), provided that such partner or
equity holder or affiliate has appointed such Investor (or such duly authorized
third party) as its lawful attorney-in-fact to receive notices, vote and
otherwise make binding decisions under the terms of this Section 7; provided, in
each case, the Company is, within thirty days of such transfer, furnished with
written notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being assigned;
and provided, further, that such assignment shall be effective only if
immediately
- 9 -
<PAGE> 49
following such transfer the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act.
7.13. "Market Stand-Off" Agreement. Each Holder of Registrable
Securities hereby agrees that it shall not, to the extent requested by the
Company and an underwriter of Common Stock (or other securities) of the Company,
sell or otherwise transfer or dispose of any securities of the Company (other
than securities registered in the offering) whether or not acquired by such
Holder under this Agreement during a reasonable and customary period of time
(not to exceed one hundred twenty (120) days, as agreed to by the Company and
the underwriters, following the effective date of a registration statement of
the Company filed under the Securities Act; provided, however, that:
(a) such agreement shall be applicable only to the first
such registration statement of the Company which covers shares (or securities)
to be sold on its behalf to the public in an underwritten offering; and
(b) all officers and directors of the Company, holders of 5%
or more of the Company's issued and outstanding capital stock and all other
persons with registration rights (whether or not pursuant to this Agreement)
similarly agree not to sell or transfer.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such reasonable and customary period.
7.14. Amendment of Registration Rights. Any provision of this
Section 7 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least 66-2/3% of the Registrable Securities. Any amendment or waiver effected
in accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
7.15. Termination of Registration Rights. The Company's
obligations pursuant to this Section 7 shall terminate with respect to each
Holder of Registrable Securities on the earlier to occur of (i) four years from
the date of consummation of the Company's sale of its Common Stock in a bona
fide, firm commitment underwriting pursuant to a registration statement on Form
S-1 under the Securities Act at a price equal to or greater than $2.70 per share
which results in gross offering proceeds to the Company of at least $15,000,000
or (ii) such time as such Holder is eligible to sell all of its Registrable
Securities pursuant to Rule 144 in a single three (3) month period (other than
pursuant to Rule 144(k)) under the Securities Act provided that the Company has
been continually subject to the reporting requirements of the Exchange Act for
at least two years immediately prior to the time of the sale.
- 10 -
<PAGE> 50
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
____ day of __________________ 199
"Company"
CYBERSOURCE CORPORATION, a California
corporation
_____________________________________
William S. McKiernan
By:_____________________________________
Name:___________________________________
Title:__________________________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
- 11 -
<PAGE> 1
EXHIBIT 10.6
CYBERSOURCE CORPORATION
SERIES B PREFERRED
STOCK PURCHASE AGREEMENT
THIS SERIES B PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is made
as of the 12th day of July, 1996 by and among CYBERSOURCE CORPORATION, a
California corporation (the "Company"), William S. McKiernan ("McKiernan")
(solely with respect to Sections 7.1 through 7.17 and 8.7 hereof) and the
purchasers listed on the signature pages hereto under the heading "Investors",
each of whom is herein referred to as an "Investor".
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereby agree as follows:
1. Purchase and Sale of Series B Preferred Stock.
1.1 Sale and Issuance of Series B Preferred Stock.
(a) The Board of Directors of the Company shall adopt and
file with the Secretary of State of the State of California on or
before the Closing (as defined below) the Amended and Restated
Articles of Incorporation and the Certificate of Amendment of such
Amended and Restated Articles of Incorporation (collectively, the
"Restated Articles") in substantially the form attached hereto as
Exhibit A-1 and Exhibit A-2 respectively.
(b) Subject to the terms and conditions of this Agreement,
each Investor agrees severally and not jointly to purchase, and the
Company agrees to sell and issue to each Investor, severally and not
jointly, at the Closing (as defined below) the number of shares of
Series B Preferred Stock (the "Preferred Shares"), set forth
opposite such Investor's name on the Schedule of Investors attached
as Exhibit B to this Agreement (the "Schedule of Investors"), for an
aggregate of 2,037,038 Preferred Shares at a purchase price of $2.70
per share, for the purchase price shown opposite such Investor's
name on the Schedule of Investors (for an aggregate purchase price
of $5,500,002.60).
1.2 Closing. The purchase and sale of the Preferred Shares shall
take place at the offices of Jackson Tufts Cole & Black, LLP, 60 S. Market
Street, San Jose, California 95113 on July 17, 1996, or at such other time
and place as the Company and Investors mutually agree upon (which time and
place are designated as the "Closing"). At the Closing, the Company will
deliver to the Investors stock certificates representing 2,037,038
Preferred Shares against payment of the purchase price therefor of $2.70
per share by wire transfers of immediately available funds.
<PAGE> 2
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Investor, except as set forth on the Schedule of
Exceptions attached hereto as Exhibit C, which exceptions shall be deemed to be
representations and warranties as if made hereunder as follows:
2.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under
the laws of the State of California and has all requisite corporate power
and authority to carry on its business as now conducted and as proposed to
be conducted. The Company has full corporate power and authority to enter
into and perform its obligations under this Agreement and to carry out the
transactions contemplated by this Agreement. The Company is duly qualified
to transact business and is in good standing in each jurisdiction in which
the failure so to qualify would have a material adverse effect on its
business or properties. A copy of the Company's Articles of Incorporation
(as amended) and the Company's Bylaws (as amended) have been delivered to
each Investor.
2.2 Capitalization.
(a) Immediately prior to the Closing the authorized capital
of the Company consists, or will consist of:
(i) Preferred Stock. 10,000,000 shares of Preferred
Stock, 1,985,520 of which have been designated Series A
Preferred Stock, no par value (the "Series A Preferred
Stock"), of which 1,985,520 shares are issued and outstanding,
and 2,500,000 of which have been designated Series B Preferred
Stock, no par value. No shares of Series B Preferred Stock
were issued and outstanding immediately prior to the Closing.
The rights, preferences and privileges of the Series A
Preferred Stock and the Series B Preferred Stock will be as
stated in the Restated Articles.
(ii) Common Stock. 30,000,000 shares of Common Stock,
9,000,000 shares of Common Stock of which were issued and
outstanding.
(b) The list set forth in item 2.2(b) of the Schedule of
Exceptions hereto is a complete and correct list of all security
holders of the Company, showing their holdings of issued and
outstanding shares of Series A Preferred Stock, Common Stock and
other Company securities (including options and warrants) as of the
date of this Agreement. To the best knowledge of the Company, each
such holder is the sole beneficial owner of all of the shares as to
which such holder is the record holder. Except as set forth in Item
2.2 of the Schedule of Exceptions hereto, holders of shares of the
Company's Series A Preferred Stock and Common Stock have no
preemptive rights. True and complete copies of the Series A
Preferred Stock Purchase Agreements (as defined in Section 2.11 of
this Agreement), have been furnished to each Investor requesting
them prior to the date hereof. All such issued and outstanding
shares have been duly authorized and validly issued, are fully paid
and nonassessable
- 2 -
<PAGE> 3
and have been issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(c) Agreements for Purchase of Shares. Except for:
(i) the conversion privileges and preemptive rights of
the Series A Preferred Stock and the Series B Preferred Stock;
and
(ii) options issued pursuant to the Company's stock
option plan and other agreements (as of the Closing and after
giving effect to the stock split contemplated by the Restated
Articles, options for 2,010,000 shares, including options for
1,000,000 shares issued outside of the Company's stock option
plan, are presently outstanding and an additional 990,000
shares are available for grant under the Company's stock
option plan, as amended, in each case after giving effect to
the stock split under the Restated Articles);
prior to the Closing there will not be any outstanding options,
warrants, rights (including conversion, preemptive rights or rights
of first offer) or agreements for the purchase or acquisition from
the Company of any shares of its capital stock.
2.3 Subsidiaries. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation,
association, partnership or other business entity.
2.4 Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the performance
of all obligations of the Company hereunder and the authorization,
issuance (or reservation for issuance) and delivery of the Preferred
Shares being sold hereunder and the Common Stock issuable upon conversion
of the Preferred Shares, has been taken or will be taken on or prior to
the Closing, and this Agreement constitutes a valid and legally binding
obligation of the Company enforceable in accordance with its terms, except
as affected by (i) bankruptcy or insolvency laws, or (ii) equitable
principles or public policy.
2.5 Valid Issuance of Preferred Stock. The Preferred Shares, when
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be duly and validly issued, fully
paid and nonassessable and, based in part upon the representations of the
Investors set forth in Section 3 of this Agreement, will be issued in
compliance with all applicable federal and state securities laws free and
clear of all restrictions on transfer (other than those arising from
application of the securities laws). The Common Stock issuable upon
conversion of the Preferred Shares purchased under this Agreement have
been duly and validly reserved for issuance and when issued and delivered
in accordance with the Restated Articles will be duly and validly issued,
fully paid and non-assessable.
- 3 -
<PAGE> 4
2.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration
or filing with, any United States federal, state, local or provincial
governmental authority on the part of the Company is required in
connection with:
(a) the Company's valid execution, delivery, or performance
of this Agreement; and
(b) the offer, sale, or issuance of the Preferred Shares by
the Company hereunder or (assuming the exemption provided by Section
3(a)(9) of the Securities Act of 1933, as amended, in its current
form is available and no commission is paid in conjunction
therewith) the issuance of Common Stock upon conversion of the
Preferred Shares;
except such filings as have been made prior to the Closing, and except for
any notices of sale required to be filed with the Securities and Exchange
Commission under Regulation D of the Securities Act of 1933, as amended
(the "Securities Act"), or such post-closing filings as may be required
under applicable state securities laws, which will be timely filed within
the applicable periods therefor. To the best knowledge of the Company,
neither the Company nor anyone acting on its behalf has offered any of the
Series B Preferred Stock being sold hereunder or substantially similar
securities of the Company for sale to, or solicited offers to buy any
securities of the Company from, or otherwise approached or negotiated with
respect thereto with any prospective purchaser other than the Investors
and other persons whom the Company believes to be Accredited Investors as
(as defined in Section 3.7 of this Agreement). The Company agrees that
neither the Company nor anyone acting on its behalf will offer such
securities of the Company or any part thereof or any similar securities
for issuance or sale to, or solicit any offer to acquire any of the same
from, anyone so as to make the issuance and sale of the Preferred Shares
being sold hereunder not exempt from the registration requirements of
Section 5 of the Securities Act. None of the shares of the Company's
capital stock issued and outstanding has been offered or sold in such a
manner as to make the issuance and sale of such shares or the Preferred
Shares being sold hereunder not exempt from such registration
requirements, and all such shares of capital stock have been offered and
sold in compliance with all applicable federal and state securities laws.
2.7 Litigation. Except as disclosed in Item 2.7 of the Schedule of
Exceptions, there is no action, suit, proceeding or investigation pending
or currently threatened against the Company which questions the validity
of this Agreement or the right of the Company to enter into this
Agreement, or to consummate the transactions contemplated hereby, or which
might result, either individually or in the aggregate, in any material
adverse change in the assets, prospects, business, operations, or
condition (financial or otherwise) of the Company or any change in the
current equity ownership of the Company, nor is the Company aware that
there is any basis for the foregoing. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no
- 4 -
<PAGE> 5
action, suit, proceeding or investigation by the Company currently pending
or which the Company intends to initiate.
2.8 Patents and Trademarks.
(a) The list set forth in Item 2.8 of the Schedule of
Exceptions is a true and complete list and summary description of
all patents, patent applications, registered trademarks, registered
service marks, registered trade names and registered copyrights, and
licenses and rights to the foregoing presently owned or held by the
Company, none of which is in dispute or in any conflict with the
right of any other person or entity except as indicated on Item 2.7
of the Schedule of Exceptions.
(b) The Company's business as now conducted and as presently
proposed to be conducted does not conflict with or infringe upon
anyone's patents, copyrights, trademarks, trade secrets, trade
dress, know how, processes, or other proprietary rights. The Company
owns, or has the unrestricted right to use free and clear of all
material liens, claims and restrictions, all patents, copyrights,
trademarks, trade secrets, trade dress or other proprietary rights
necessary for the conduct of its business as it is presently
conducted or currently contemplated to be conducted, without
infringing on the right or claim of any person, any patents,
copyrights, trademarks, trade secrets, trade dress, know how,
processes, or other proprietary rights of others. Notwithstanding
any other provision of this Agreement, the exceptions described in
the Schedule of Exceptions do not apply to this subparagraph (b) of
Section 2.8.
2.9 Compliance with Laws and Other Instruments. The Company is not
in violation or default of any provisions of its Articles of Incorporation
or Bylaws or of any instrument, judgment, order, writ, decree or contract
to which it is a party or by which it is bound or, to its knowledge, of
any provision of federal or state statute, rule or regulation applicable
to the Company or any of its property, which violation or default would be
materially adverse to the assets, properties, prospects, business,
operations, or condition (financial or otherwise) of the Company. To the
best knowledge of the Company, there is no contamination of any real
property leased or operated by the Company that could subject the Company
to liability in the aggregate in excess of $10,000 under any environmental
laws or regulations. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby
will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice,
either a default under any such provision, instrument, judgment, order,
writ, decree or contract or an event which results in the creation of any
lien, charge or encumbrance upon any assets of the Company, which
violation, default, conflict or event would be materially adverse to the
assets, properties, prospects, business, operations, or condition
(financial or otherwise) of the Company.
2.10 Agreements; Action.
(a) Except as set forth in Item 2.10 of the Schedule of
Exceptions, there are no agreements, understandings, instruments,
contracts or proposed transactions to
- 5 -
<PAGE> 6
which the Company is a party or by which it is bound which involve
(i) obligations of, or payments to the Company in excess of,
$25,000; (ii) the license of any patent, copyright, trade secret or
other proprietary right of the Company; (iii) material restrictions
on the Company's business; or (iv) material proprietary rights of
the Company.
(b) The Company has not (i) declared or paid any dividends,
or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness
for money borrowed or incurred any other liabilities or obligations
(absolute or contingent), individually in excess of $10,000 or in
excess of $25,000 in the aggregate not reflected in the balance
sheet dated April 30, 1996 other than obligations or liabilities of
the Company for compensation under employment, advisor or consulting
agreements, or other than obligations or liabilities incurred in the
ordinary course of business, (iii) made any loans or advances to any
person, other than in the ordinary course of its business. Without
limiting the generality of the foregoing, the Company does not know
of any basis for the assertion against the Company of any material
liabilities of the Company (not provided for in the documents listed
in Item 2.10 of the Schedule of Exceptions or the Financial
Statements).
2.11 Registration Rights. Except as set forth in (i) that certain
Series A Preferred Stock Purchase Agreement dated as of the 6th day of
January 1995, as amended as of (A) the 27th day of February, 1996, (B) the
3rd day of July, 1996, and (C) the 12th day of July, 1996, and (ii) that
certain Series A Preferred Stock Purchase Agreement dated as of the 27th
day of February, 1996 (collectively, the "Series A Stock Purchase
Agreements"), and except as provided in Section 7 of this Agreement, the
Company has not granted or agreed to grant any registration rights,
including piggy-back rights, to any person or entity.
2.12 Title to Property and Assets. The Company has good and
marketable title to the property and assets it purports to own free and
clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property
or assets. With respect to the property and assets it leases, the Company
is in compliance with such leases and holds a valid leasehold interest
free of any liens, claims or encumbrances, which liens, claims or
encumbrances would be materially adverse to the Company. Except as set
forth in Item 2.12 of the Schedule of Exceptions, the Company owns or has
the right to use all assets (tangible and intangible), necessary for the
conduct of its business as presently conducted and believes it can acquire
the right to use or the ownership of all assets, necessary for the conduct
of its business as it is proposed to be conducted, except for such assets
that are individually or in the aggregate immaterial to the business of
the Company. The Company knows of no assets required for the conduct of
its business as it is presently conducted; or as it is proposed to be
conducted, the right to use or ownership of which it is unlikely to
obtain, except for such assets that are individually or in the aggregate
immaterial to the business of the Company. Notwithstanding any other
provision of this Agreement, except as set forth in Item 2.12 of the
Schedule of Exceptions, the exceptions described in the Schedule of
Exceptions do not apply to this Section 2.12.
- 6 -
<PAGE> 7
2.13 Financial Statements. The Company has delivered to each
Investor its unaudited financial statements (balance sheet and profit and
loss statement) at and for the periods ended December 31, 1995, March 31,
1996 and April 30, 1996 (the "Financial Statements"). The Financial
Statements are complete and correct in all material respects and have been
prepared in accordance with generally accepted accounting principles on a
consistent basis throughout the periods indicated. The Financial
Statements fairly present the financial condition and operating results of
the Company as of the dates, and for the period, indicated therein,
subject to normal year-end adjustments. All accounts receivable shown on
the balance sheet constitute accounts receivable resulting from the sale
of goods and services in the ordinary course of business, and, to the best
knowledge of the Company, such accounts receivable are subject to no
conditions as to payment, offsets, counterclaims, defenses of any kind,
returns, allowances, or credits other than to the extent of the allowance
for doubtful accounts shown thereon, and other than warranty claims that
in the aggregate do not exceed $5,000. The Company has not received any
material customer complaints concerning its products or services.
2.14 Changes. Since April 30, 1996, there has not been (i) any
change in the assets, liabilities, condition (financial or otherwise),
business, or operating results, or to the best of the Company's knowledge,
prospects of the Company from that reflected in the Financial Statements,
except changes in the ordinary course of business which have not been, in
the aggregate, materially adverse; (ii) any damage, destruction or loss,
whether or not covered by insurance, affecting in any material way the
assets, properties, condition (financial or otherwise), operating results,
prospects or business of the Company (as such business is presently
conducted and as it is proposed to be conducted); (iii) any waiver by the
Company of a material right or of a material debt owed to it or any
satisfaction or discharge of any material lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business; (iv) any change or amendment in any material respect to a
material contract or agreement by which the Company or any of its assets
or properties is bound or subject; or (v) any change in any compensation
arrangement or agreement with any officer, director or key employee. For
the purposes of this Section 2.14 only, prospects shall not include
general economic or industry trends. Notwithstanding any other provision
of this Agreement, the exceptions described in the Schedule of Exceptions
do not apply to this Section 2.14.
2.15 Proprietary Information. To the best of the Company's
knowledge, it has done nothing to compromise the secrecy, confidentiality
or value of any of its trade secrets, know-how, inventions, prototypes,
designs, processes or technical data required to conduct its business as
now conducted or as proposed to be conducted and has taken security
measures to protect the secrecy, confidentiality and value of all the
intellectual property which it believes are reasonable and customary in
the industry in which it operates. All of the Company's employees and
consultants have executed a non-disclosure/invention assignments agreement
in the form attached as Annex III to the Schedule of Exceptions. To the
Company's knowledge, no employee of the Company in connection with such
employee's employment with the Company, has violated the terms of any
agreement with a previous employer.
- 7 -
<PAGE> 8
2.16 Permits. The Company has all franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now
being conducted by it, the lack of which could materially and adversely
affect the business, properties, prospects, or financial condition of the
Company and believes it can obtain, without undue burden or expense, any
similar authority for the conduct of its business as planned to be
conducted. The Company is not in default in any material respect under any
of such franchises, permits, licenses, or other similar authority.
2.17 Shareholder Agreements. Except as set forth in the Series A
Preferred Stock Purchase Agreements, there are presently no outstanding
shareholder agreements, voting trusts, proxies or other arrangements or
understandings between the Company and its shareholders, or among any of
the shareholders of the Company, relating to either the voting or the
disposition of their respective shares.
2.18 Brokers or Finders. The Company has not engaged any broker,
investment banker or finder other than William Blair & Company, L.L.C. in
connection with the sale of the Preferred Shares.
2.19 Disclosure. The Company has provided each Investor with all
information that such Investor has requested in connection with such
Investor's decision to invest in the Preferred Shares. To the best of the
Company's knowledge after due inquiry, neither this Agreement nor any
other written statement made or delivered in connection herewith
(including without limitation the Private Placement Offering Memorandum)
contains any untrue statement of a material fact or, taking this Agreement
and all such written statements as a whole, omits to state a material fact
necessary to make statements herein or therein misleading; provided,
however, with respect to any projections or expressions of opinion or
predictions, the Company represents only that such projections or
expressions of opinions and predictions were made in good faith and that
the Company believes that there is a reasonable basis therefor.
2.20 Insurance. Set forth in Item 2.20 of the Schedule of
Exceptions is a true and complete list of all current insurance policies
of the Company, all of which are in full force and effect.
2.21 Taxes. The Company has accurately prepared and timely filed
all federal, state and local reports, returns, estimates, declarations,
information returns and statements with respect to taxes (together, "Tax
Returns") that are required to be filed by it and has paid or made
provision for the payment of all taxes due with respect to the periods
covered by such Tax Returns. No such Tax Returns of the Company have been
audited by any taxing authority, and there are no waivers in effect of the
applicable statute of limitations for any period. No deficiency assessment
or proposed adjustment of federal income taxes or state or municipal taxes
or the Company is pending and the Company has no knowledge of any proposed
liability for any tax to be imposed. There are no tax sharing agreements
or similar contracts or arrangements to which the Company is a party. The
Company has not been a member of an affiliated group (within the meaning
of
- 8 -
<PAGE> 9
Section 1504 of the Internal Revenue Code), filing a consolidated federal
income Tax Return. No closing agreement pursuant to Section 7121 of the
Internal Revenue Code, or similar provision of any state or local law, has
been entered into by or with respect to the Company. For the purpose of
this Section 2.21, "tax" or "taxes" shall mean all federal, state, local
or foreign taxes, including but not limited to income, gross receipts,
windfall profits, alternative minimum, value added, severance, property,
production, sales, use, license, excise, franchise, employment,
withholding or similar taxes, together with any interest, additions or
penalties with respect thereto and any interest in respect of such
additions or penalties.
2.22 ERISA. Except as listed in Item 2.22 of the Schedule of
Exceptions, the Company does not maintain, sponsor, or contribute to any
program or arrangement that is an "employee pension benefit plan" (a
"Pension Plan"), and "employee welfare benefit plan" or a "multiemployer
plan", as those terms are defined in Section 3(2), 3(1), and 3(37) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Except as listed in Item 2.22 of the Schedule of Exceptions, the Company
has no other incentive or benefit arrangements. Each plan listed on Item
2.22 of the Schedule of Exceptions which is subject to ERISA is in
substantial compliance with ERISA. Each plan listed on Section 2.22 of the
Schedule of Exceptions which is a Pension Plan intended to be qualified
under Section 401(a) of the Internal Revenue Code of 1986, as amended, has
been amended to comply with the qualification provisions of the Tax Reform
Act of 1986 and subsequent legislation before the expiration of the
applicable remedial amendment period and has received a favorable
determination letter form the Internal Revenue Service, and the Company is
not aware of circumstances likely to result in the revocation of any such
favorable determination letter.
2.23 Labor Agreements and Actions. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject
to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or has
sought to represent any of the employees, representatives or agents of the
Company. There is no strike or other labor dispute involving the Company
pending, or to the best knowledge of the Company threatened, which could
have a material adverse effect on the assets, properties, condition
(financial or otherwise), operating results, prospects or business of the
Company (as such business is presently conducted and as it is proposed to
be conducted), nor is the Company aware of any labor organization activity
involving its employees. The Company is not aware that any officer, key
employee, key consultant or key contractor, or that any group of key
employees, intends to terminate such person's employment or relationship
with the Company, as the case may be, nor does the Company have a present
intention to terminate the employment of or relationship with any of the
foregoing persons.
2.24 Qualified Small Business Stock. To the best of the Company's
knowledge, the Preferred Shares will meet each of the requirements for
qualification as "qualified small business stock" set forth in Section
1202(c) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Company (and any predecessor):
- 9 -
<PAGE> 10
(a) is and will be a domestic C corporation;
(b) will not have made any purchases of its own stock
described in Code Section 1202(c)(3)(B) during the one year period
preceding the Closing;
(c) will not have made any purchases of its own stock
described in Code Section 1202(c)(3)(A) during the two year period
preceding the Closing; and
(d) has maintained and will maintain aggregate gross assets,
as defined by Code Section 1202(d)(2), at all times between August
10, 1993 and through the Closing of less than $50 million, taking
into account the assets of any corporation required to be aggregated
with the Company in accordance with Code Section 1202(d)(3).
3. Representations and Warranties of Each Investor. Each Investor
hereby severally and not jointly represents and warrants that:
3.1 Authorization. This Agreement constitutes such Investor's
valid and legally binding obligation, enforceable in accordance with its
terms except as affected by (i) bankruptcy or insolvency laws, and (ii)
equitable principles or public policy. Each Investor who is not a natural
person, hereby represents that the person executing this Agreement on its
behalf is duly authorized to do so.
3.2 Purchase Entirely for Own Account. This Agreement is made with
each Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such
Investor hereby confirms, that the Preferred Shares to be received by such
Investor hereunder will be acquired for investment for such Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that such Investor has no present
intention of otherwise distributing the same. By executing this Agreement,
each Investor purchasing Preferred Shares hereunder further represents
that such Investor does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to
such person or to any third person, with respect to any of the Preferred
Shares, or any portion thereof. Each Investor that is an entity represents
that it has full power and authority to enter into this Agreement.
3.3 Disclosure of Information. Each Investor believes he or it has
received all the information he or it considers necessary or appropriate
for deciding whether to purchase the Preferred Shares. Each such Investor
further represents that he or it has had an opportunity to ask questions
and receive answers from the Company regarding the terms and conditions of
the offering of the Preferred Shares. The foregoing does not modify the
Company's representations and warranties set forth herein or the
Investor's right to rely thereon.
- 10 -
<PAGE> 11
3.4 Investment Experience. Each Investor is an investor in
securities of companies in the development stage and acknowledges that he
or it is able to fend for himself or itself, can bear the economic risk of
his or its investment and has such knowledge and experience in financial
or business matters that he or it is capable of evaluating the merits and
risks of the investment in the Preferred Shares. If other than an
individual, Investor also represents it has not been organized solely for
the purpose of acquiring the Preferred Shares.
3.5 Restricted Securities. Each Investor purchasing Preferred
Shares hereunder understands that the Preferred Shares are characterized
as "restricted securities" under the federal securities laws inasmuch as
they are being acquired from the Company in a transaction not involving a
public offering and that under such laws and applicable regulations such
Preferred Shares may be resold without registration under the Securities
Act only in certain limited circumstances. In this connection each
Investor represents that he or it is familiar with Securities and Exchange
Commission ("SEC") Rule 144, as presently in effect, and understands the
resale limitations imposed thereby and by the Securities Act
3.6 Further Limitations on Disposition. Without in any way
limiting the representations set forth above, each Investor purchasing
Preferred Shares hereunder further agrees not to make any disposition of
all or any portion of the Preferred Shares (or the Common Stock issuable
upon the conversion of the Preferred Shares) unless and until:
(a) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement;
or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition, (ii) if reasonably requested by the Company,
such Investor shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such Preferred Shares
under the Securities Act and (iii) if reasonably requested by the
Company, the transferee shall have furnished to the Company its
agreement to abide by the restrictions on transfer set forth herein
as if it were a purchaser hereunder.
3.7 Accredited Investor. The term "Accredited Investor" as used in
this Agreement means a person or entity who:
(a) is a director or executive officer of the Company; or
(b) is a natural person whose individual net worth, or joint
net worth with his or her spouse, at the time of purchase exceeds
$1,000,000, and the total purchase price does not exceed ten percent
(10%) of his or her individual net worth, or joint net worth with
his or her spouse, at the time of sale; or
- 11 -
<PAGE> 12
(c) is a natural person who had an individual income in
excess of $200,000 in each of the two most recent years or joint
income with that person's spouse in excess of $300,000 in each of
those years and reasonably expects to reach the same income level in
the current year, and the total purchase price does not exceed ten
percent (10%) of his or her individual net worth, or joint net worth
with his or her spouse, at the time of sale; or
(d) is a private business development company as defined in
section 202(a)(22) of the Investment Advisors Act of 1940; or
(e) is either (i) a bank as defined in section 3(a)(2) of
the Securities Act, or a savings and loan association or other
institution as defined in section 3(a)(5)(A) of the Securities Act
whether acting in its individual or fiduciary capacity; (ii) a
broker or dealer registered pursuant to section 15 of the Securities
Exchange Act of 1934; (iii) an insurance company as defined in
section 2(13) of the Securities Act; (iv) an investment company
registered under the Investment Company Act of 1940 or a business
development company as defined in section 2(a)(48) of that Act; (v)
a Small Business Investment Company licensed by the U.S. Small
Business Administration under section 301(c) or (d) of the Small
Business Investment Act of 1958; or (vi) an employee benefit plan
within the meaning of Title I of the Employee Retirement Income
Security Act of 1974, if the investment decision is made by a plan
fiduciary, as defined in section 3(21) of such Act, which is either
a bank, savings and loan association, insurance company, or
registered investment adviser, or if the employee benefit plan has
total assets in excess of $5,000,000 or, if a self-directed plan,
with investment decisions made solely by persons that are Accredited
Investors; or
(f) is any organization described in section 501(c)(3) of
the Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific purpose
of acquiring the Shares offered (and, in the case of an Investor
located in Washington, operating for not less than twelve months),
with total assets in excess of $5,000,000 (or, in the case of an
Investor located in the State of Washington, $10,000,000); or
(g) is any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the Shares offered,
whose purchase is directed by a sophisticated person as described in
Regulation 230.506(b)(2)(ii) promulgated under the Securities Act;
or
(h) is an entity in which all of its equity owners meet one
or more of the standards set forth in (a) through (g) above.
As used in this Section 3.7, the term "net worth" means the excess of
total assets over total liabilities, and "income" means actual economic income,
which may differ from adjusted gross income for federal income tax purposes.
- 12 -
<PAGE> 13
3.8 Representations and Warranties as to Accredited Investors and
Excluded Purchasers Status. Each Investor as to himself or itself,
severally and not jointly, further represents to the Company that such
Investor is (i) an Accredited Investor and (ii) an excluded purchaser (as
such term is described in Section 260.102.13 of Title 10 of the California
Code of Regulations or section 25102(f) of the California Corporate
Securities Law of 1968).
3.9 Legends. To the extent applicable, each certificate or other
document evidencing any of the Preferred Shares issued hereunder or any
Common Stock issued upon conversion of the Preferred Shares shall be
endorsed with the legends set forth below, and such Investor covenants
that, except to the extent such restrictions are waived by the Company,
such Investor shall not transfer the securities without complying with the
restrictions on transfer described in the legends endorsed thereon;
(a) The following legend under the Securities Act:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE
REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144
PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION
OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED."
(b) If required by the authorities of any state in
connection with the issuance or sale of the Preferred Shares, the
legend required by such state authority.
The Company shall not be required (i) to transfer on its books any
Preferred Shares which shall have been transferred in violation of any of
the provisions set forth in this Agreement, or (ii) to treat as owner of
such Preferred Shares or to accord the right to vote as such owner or to
pay dividends to any transferee to whom such Preferred Shares shall have
been so transferred.
3.10 Removal of Legends.
(a) Any legend endorsed on a certificate pursuant to Section
3.09(a) or (b) hereof shall be removed (i) if Preferred Shares
represented by such certificate shall have been effectively
registered under the Securities Act or otherwise lawfully sold in a
public transaction, (ii) if such Preferred Shares may be transferred
in compliance with Rule 144(k) promulgated under the Securities Act,
or (iii) if the holder of such Preferred Shares shall have provided
the Company with an opinion from counsel, in form and substance
reasonably acceptable to the Company and from attorneys reasonably
acceptable to the Company, stating that a
- 13 -
<PAGE> 14
public sale, transfer or assignment of such Preferred Shares may be
made without registration.
(b) Any legend endorsed on a certificate pursuant to Section
3.9(b) hereof shall be removed if the Company receives an order of
the appropriate state authority authorizing such removal or if the
holder of the Preferred Shares provides the Company with an opinion
of counsel, in form and substance reasonably acceptable to the
Company and from attorneys reasonably acceptable to the Company,
stating that such state legend may be removed.
4. California Commissioner of Corporations.
4.1 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF
SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105
OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING
OBTAINED, UNLESS THE SALE IS SO EXEMPT.
5. Conditions of Each Investor's Obligations at Closing. The
obligations of each Investor under subsection 1.1(b) of this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions, the waiver of which shall not be effective against any Investor who
does not consent in writing thereto:
5.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing.
5.2 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or
before the Closing. The entering into, delivery and performance of this
Agreement by the Company shall have been duly authorized by all necessary
corporate action.
5.3 Consents, etc. The Company shall have secured all permits,
consents and authorizations that shall be necessary or required lawfully
to consummate this Agreement, to issue the Preferred Shares to be
purchased by the Investors hereunder and to issue the Common Stock into
which it may be converted, including without limitation the waiver of
rights of first refusal granted to holders of Series A Preferred Stock by
such holders of Series A Preferred Stock as are satisfactory to Vulcan
Ventures, Inc., the consent of the required majority of the holders of the
Series A Preferred Stock, and
- 14 -
<PAGE> 15
amendment of the Series A Preferred Stock Purchase Agreements to permit
the Company to grant to the Investors the registration rights and co-sale
rights contained herein.
5.4 Compliance Certificate. At the Closing, the Chief Executive
Officer of the Company shall deliver to the Investors a certificate
certifying that the conditions set forth in Sections 5.1, 5.2 and 5.3 have
been fulfilled.
5.5 Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be in
substance and form reasonably satisfactory to Vulcan Ventures, Inc., and
its counsel, and such Investor and its counsel shall have received all
such counterpart originals or certified or other copies of such documents
as such Investor or its counsel may reasonably request.
5.6 Qualifications. The Commissioner of Corporations of the State
of California and any applicable United States state securities regulatory
authority shall have issued permits qualifying the offer and sale of the
Preferred Shares to the Investors pursuant to this Agreement, or such
offer and sale shall be exempt from such qualification under the
California Corporate Securities Law of 1968, as amended, and any other
applicable state blue-sky law.
5.7 Restated Articles. The Company shall have adopted and filed
with the Secretary of State of the State of California on or before the
date of the Closing, the Restated Articles.
5.8 Legal Investment. At the time of such Closing, the purchase of
the Preferred Shares by the Investors shall be legally permitted by all
laws and regulations to which such Investors and the Company are subject.
5.9 Opinion of Counsel. At the Closing, the Investors shall have
received an opinion of Jackson Tufts Cole & Black, LLP., counsel for the
Company dated the Closing Date and substantially in the form of Exhibit D
hereto.
5.10 Minimum Investment. The Investors shall have subscribed for a
minimum of 2,037,038 Preferred Shares at an aggregate purchase price of
$5,500,002.60.
6. Conditions of the Company's Obligations at Closing. The obligations
of the Company to each Investor purchasing Preferred Shares hereunder are
subject to the fulfillment on or before the Closing of each of the following
conditions by such Investor:
6.1 Representations and Warranties. The representations and
warranties of the Investor contained in Section 3 hereof shall be true on
and as of the date of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing.
- 15 -
<PAGE> 16
6.2 Payment of Purchase Price. Each Investor shall have delivered
the purchase price specified in Section 1.2.
6.3 California Qualification. The Commissioner of Corporations of
the State of California and any applicable United States state regulatory
authority shall have issued permits qualifying the offer and sale to the
Investors of the Preferred Shares or such offer and sale shall be exempt
from such qualification under the California Corporate Securities Law of
1968, as amended, and any other applicable state blue-sky law.
6.4 Restated Articles. The Company shall have adopted and filed
with the Secretary of State of the State of California on or before the
Closing, the Restated Articles.
6.5 Legal Investment. At the time of such Closing, the purchase of
the Preferred Shares by the Investors shall be legally permitted by all
laws and regulations to which the Investors and the Company are subject.
7. Registration Rights. The Company covenants and agrees as follows:
7.1 Definitions. For purposes of this Section 7:
(a) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the
Securities Act, and the declaration or ordering of effectiveness of
such registration statement or document;
(b) The term "Registrable Securities" means (i) the Common
Stock issuable or issued upon conversion of the Preferred Shares
being purchased hereunder (ii) any Common Stock of the Company
issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or
other distribution with respect to, or in exchange for or in
replacement of, such Preferred Shares, excluding in all cases,
however, any Registrable Securities sold by a person in a
transaction in which his registration rights are not assigned and
(iii) all shares of Common Stock which the Investors and their
permitted assignees may hereafter purchase (or shares of Common
Stock issuable upon exercise or conversion of securities hereafter
purchased) pursuant to their rights of first refusal or otherwise;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common
Stock outstanding which are, and the number of shares of Common
Stock issuable pursuant to the exercisable or convertible securities
which are exercisable or convertible into, Registrable Securities;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in
accordance with Section
- 16 -
<PAGE> 17
7.13 hereof. It is acknowledged and agreed by the parties that the
registration rights contained in this Section 7 are pari-passu with
and are not superior to the registration rights granted pursuant to
the Series A Purchase Agreements;
(e) The term "Series A Holder" shall mean a Holder under the
Series A Purchase Agreements.
7.2 Request for Registration.
(a) If the Company shall receive (i) at any time after six
(6) months following the closing of the Company's initial public
offering of securities a written request from Holders holding at
least forty percent (40%) of the Registrable Securities then
outstanding (the "Initiating Holders") that the Company file a
registration statement under the Securities Act covering the
registration in an underwritten public offering of at least 40% of
the Registrable Securities then outstanding and such registration
would cover sales having an anticipated aggregate offering price,
net of underwriting discounts and commissions, equal to or more than
$7,500,000 or (ii) the requisite notice from the Series A Holders of
a demand registration, then the Company shall, within twenty-one
(21) days of the receipt thereof, give written notice of such
request to all Holders and Series A Holders and shall, subject to
the limitations of subsection 7.2(b), file as soon as practicable a
registration statement under the Securities Act covering all
Registrable Securities which the Holders and Series A Holders
request to be registered within twenty (20) days of the mailing of
such notice by the Company in accordance with Section 9.6.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action to effect any such registration
pursuant to this Section 7.2:
(i) in any particular jurisdiction in which the
Company would be required to execute a general consent to
service of process in effecting such registration, unless the
Company is already subject to service in such jurisdiction and
except as may be required by the Securities Act; or
(ii) if the Company shall have initiated two (2)
registrations pursuant to this Section 7.2 and the applicable
registration statement has been declared effective by the SEC
and remained effective until the earlier of (A) such time as
all of the Registrable Securities included by the Holders in
such registration have been sold or disposed of by them or (B)
the expiration of the period described in Section 7.4(a). In
addition, a request for registration shall not be deemed to
constitute a registration for purposes of this subparagraph
if: (I) the conditions to closing specified in the purchase
agreement or underwriting agreement entered into in connection
with such registration are not satisfied other than by reason
of some act or omission by the Holders requesting such
registration; (II) the Company voluntarily takes any action
that would result in the Holder not
- 17 -
<PAGE> 18
being able to sell such Registrable Securities covered thereby
during the period during which the registration statement must
be kept effective; or (III) if, after it has become effective,
such registration becomes subject to any stop order,
injunction or other order or requirement of the SEC or other
governmental agency or court and such order, injunction or
requirement is not promptly withdrawn or lifted, and such
registration has not otherwise remained effective for the
relevant period (including effective periods both before and
after the order, injunction or requirement is made or
imposed).
(c) Subject to the foregoing paragraph 7.2(b), the Company
shall file a registration statement as soon as possible after
receipt of the request or requests of the Initiating Holders under
this Section 7.2; provided, however, that if the Company shall
furnish to such Initiating Holders within sixty (60) days of receipt
of such request a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors of
the Company (as evidenced by a board resolution) it would be
significantly detrimental to the Company and its shareholders for
such registration statement to be filed on or before the date filing
would be required and it is therefore essential to defer the filing
of such registration statement, the Company shall have the right to
defer such filing to a date not later than one hundred twenty (120)
days after receipt of such request, provided that the Company will
not exercise this right more than once in any twelve-month period.
(d) The underwriting shall be managed by an underwriter or
underwriters of national reputation selected by the Initiating
Holders, which selection shall be subject to the consent of the
Company, which consent shall not be unreasonably withheld. The right
of any Holder to registration pursuant to Section 7.2 shall be
conditioned upon such Holder's participation in such underwriting
and the inclusion of such Holder's Registrable Securities in the
underwriting. The Company shall (together with all Holders and
Series A Holders proposing to distribute their securities through
such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected as above
provided. Notwithstanding any other provision of this Section 7.2,
if the underwriters advise the Initiating Holders and the Company in
writing that marketing factors require a limitation of the number of
shares to be underwritten and that the total amount of securities
that all Holders and Series A Holders (initiating and
non-initiating) request pursuant to this Section 7.2(d) to be
included in such offering exceeds the amount of securities that the
underwriters reasonably believe compatible with the success of the
offering, the Company shall so advise all Holders and all of the
shares to be included in the registration shall be allocated among
all Holders and Series A Holders requesting inclusion (initiating
and non-initiating) pro rata according to the total amount of
securities entitled to be included in such registration owned by
each Holder and each Series A Holder requesting inclusion
(initiating or non-initiating) or in such other
- 18 -
<PAGE> 19
proportions as shall be mutually agreed by such selling
shareholders; provided, however, that in the event of such an
allocation McKiernan may not include more than 35% of the shares to
be included in such registration statement by all selling
shareholders without the consent of the holders of the majority of
the shares requesting inclusion in the registration. For the
purposes of this Section 7.2(d) and Section 7.8 of this Agreement,
the language in such sections referring to McKiernan's right to
participate as a selling shareholder at the 35% level means that all
McKiernan Shares (as defined in the Series A Stock Purchase
Agreements) included in such a registration, whether held by
McKiernan or a transferee of McKiernan, shall be counted against
such 35% limit. In addition, the language in Section 7.2(d) and
Section 7.8 referring to the ability of the holders of a majority of
the shares requesting inclusion in a registration to waive such 35%
limit means that only the holders of a majority of such shares,
calculated without regard to any McKiernan shares, may effect such a
waiver.
If any person does not agree to the terms of any such underwriting,
he shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such
registration. If shares are so withdrawn from the registration, the
Company shall then offer to all persons who have retained the right to
include securities in the registration the right to include additional
securities in the registration in an aggregate amount equal to the number
of shares so withdrawn, with such shares to be allocated among the persons
requesting additional inclusion pro rata according to the total amount of
securities entitled to be included in such registration owned by each such
person or in such other proportions as shall be mutually agreed by such
selling shareholders.
7.3 Company Registration. If (but without any obligation to do so)
at any time after the date of the Closing hereunder the Company proposes
to register (including for this purpose a registration effected by the
Company for shareholders other than the Holders of Registrable Securities
except a registration in which the Holders have the right to include
Registrable Securities under Section 7.2) any of its stock or other
securities under the Securities Act in connection with the public offering
of such securities solely for cash (other than a registration relating
solely to the sale of securities to participants in a Company stock plan,
or a registration relating to shares to be issued in connection with the
acquisition of another company, or a registration on any form which does
not include substantially the same information as would be required to be
included in a registration statement covering the sale of the Registrable
Securities), the Company shall, at such time, promptly give each Holder of
Registrable Securities written notice of such registration. Upon the
written request of each Holder of Registrable Securities given within
twenty (20) days after the effectiveness of such notice by the Company in
accordance with Section 9.6, the Company shall, subject to the provisions
of Section 7.8, cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder of Registrable Securities has
requested to be registered.
- 19 -
<PAGE> 20
7.4 Obligations of the Company. Whenever required under this
Section 7 to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective (but in no
event later than 120 days after the initial request for
registration), and, upon the request of the Holders of a majority of
the Registrable Securities registered thereunder, keep such
registration statement effective for up to one hundred twenty (120)
days, plus a period equal to any period during which the Holders are
prohibited from making sales because of any stop order, injunction
or other order or requirement of the SEC or any other governmental
agency or court or a period during which the happening of any event
which makes any statement made in the registration statement, the
prospectus or any document incorporated therein by reference untrue
or misleading in any material respect until a curative amendment or
supplement is filed and furnished to the Holders; provided, however,
that before filing a registration statement or prospectus or any
amendments or supplements thereto (including documents that would be
incorporated or deemed to be incorporated therein by reference) the
Company will furnish to the Holders of the Registrable Securities
covered by such registration and, the underwriters, and any
attorney, accountant or other agent retained by the Holders of
Registrable Securities covered by such registration statement or
underwriters copies of all such documents proposed to be filed,
which documents will be subject to the reasonable and timely review
and comment of such Holders, such counsel and underwriters, if any,
and the Company will not file any registration statement or any
amendment thereto or any prospectus or any supplement thereto filed
in connection with a registration pursuant to Section 7.2 (including
such documents incorporated by reference and proposed to be filed
after the initial filing of the registration statement) to which the
Holders of a majority of the Registrable Securities covered by such
registration statement or the underwriters, if any, shall reasonably
and timely object;
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used
in connection with such registration statement as may be necessary
to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration
statement;
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus and all amendments
and supplements thereto, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably
request in order to facilitate the disposition of Registrable
Securities owned by them;
- 20 -
<PAGE> 21
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as shall be
reasonably requested by the Holders of Registrable Securities,
provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions; and
(e) Enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the
managing underwriter of such offering. Each Holder of Registrable
Securities participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
7.5 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 7
that the selling Holders of Registrable Securities shall furnish to the
Company such information regarding themselves, the Registrable Securities
held by them, and the intended method of disposition of such securities as
shall be required to effect the registration of the Registrable
Securities.
7.6 Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 7.2,
including (without limitation) all registration, filing and qualification
fees, printers' and accounting fees, fees and disbursements of counsel for
the Company, and the reasonable fees and disbursements (not to exceed
$35,000) of one counsel for the selling Holders and selling Series A
Holders shall be borne by the Company; provided, however, that the Company
shall not be required to pay for any expenses of any registration
proceeding begun pursuant to Section 7.2 if the registration request is
subsequently withdrawn at the request of the Holders (initiating and
non-initiating) holding a majority of the Registrable Securities to be
registered (in which case all participating Holders shall bear such
expenses), unless the Holders of at least 66-2/3% of the Registrable
Securities agree to forfeit their right to initiate one demand
registration pursuant to Section 7.2. (provided that if immediately prior
to the time of such withdrawal, the Holders have learned of a materially
adverse change in the condition, business or prospects of the Company from
that known to the Holders at the time of their request, then the Holders
shall not be required to pay any such expenses and shall retain their
rights pursuant to Section 7.2).
7.7 Expenses of Company Registration. The Company shall bear and
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 7.3 for each Holder (which right may be assigned as
provided in Section 7.13), including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees
relating or apportionable thereto and the fees and disbursements of one
counsel (not to exceed $35,000) for the selling Holders and selling Series
A Holders selected by them, but excluding underwriting discounts and
commissions relating to Registrable Securities.
- 21 -
<PAGE> 22
7.8 Underwriting Requirements. In connection with any offering
involving an underwriting of shares being issued by the Company, the
Company shall not be required under Section 7.3 to include any of the
Holders' Registrable Securities in such underwriting unless they accept
the terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, and then only in such quantity as will not,
in the opinion of the underwriters, jeopardize the success of the offering
by the Company. If the total amount of securities, including Registrable
Securities, requested by shareholders to be included in an offering (other
than a registration effected pursuant to Section 7.2) exceeds the amount
of securities sold other than by the Company that the underwriters
reasonably believe compatible with the success of the offering, then the
Company shall be required to include in the offering only that number of
such securities, including Registrable Securities, which the underwriters
believe will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling shareholders,
including Series A Holders, according to the total amount of securities
entitled to be included therein owned by each selling shareholder or in
such other proportions as shall mutually be agreed to by such selling
shareholders). The underwriters, pursuant to the preceding sentence, may
completely exclude the Holder's Registrable Securities from such
underwriting if no other selling shareholders' securities are so included.
If any person does not agree to the terms of any such underwriting,
he shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such
registration. If shares are so withdrawn from the registration, the
Company shall then offer to all persons who have retained the right to
include securities in the registration the right to include additional
securities in the registration in an aggregate amount equal to the number
of shares so withdrawn, with such shares to be allocated among the persons
requesting additional inclusion pro rata according to the total amount of
securities entitled to be included in such registration owned by each such
person or in such other proportions as shall be mutually agreed by such
selling shareholders.
For purposes of the immediately preceding parenthetical concerning
apportionment, for any selling shareholder which is a holder of
Registrable Securities and which is a partnership or corporation, the
partners, retired partners and shareholders of such holder, or the estates
and family members of any such partners and retired partners, and any
trusts for the benefit of any of the foregoing persons shall be deemed to
be a single "selling shareholder," and any pro rata reduction with respect
to such "selling shareholder" shall be based upon the aggregate amount of
shares carrying registration rights owned by all entities and individuals
included in such "selling shareholder," as defined in this sentence.
7.9 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any
- 22 -
<PAGE> 23
controversy that might arise with respect to the interpretation or
implementation of this Section 7.
7.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 7:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless: (i) each Holder, the officers,
directors, agents, partners and legal counsel of each Holder of
Registrable Securities, and (ii) each person, if any, who controls
such Holder within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the officers, directors, agents, partners and legal counsel of
such control person, against any losses, claims, damages or
liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange Act or other federal or state
law, rule or regulation insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (A) any untrue statement or alleged
untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (B) the
omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements
therein not misleading, or (C) any violation or alleged violation by
the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the
Securities Act, the Exchange Act or any state securities law; and
the Company will reimburse each such Holder, officer, agent,
director, partner, legal counsel, underwriter or controlling person
each officer, director, agent, partner and legal counsel of such
controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 7.10(a)
shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected
without the consent of the Company (which shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any
such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance
upon and in conformity with written information furnished expressly
for use in connection with such registration by any such Holder,
officer, partner, director, agent, legal counsel or controlling
person.
(b) To the extent permitted by law, each selling Holder
will, severally but not jointly, indemnify and hold harmless (i) the
Company; each of its officers, directors, agents, partners and legal
counsel; and (ii) each person, if any, who controls the Company
within the meaning of the Securities Act and the officers,
directors, agents, partners and legal counsel of such control
person, and any other Holder selling securities in such registration
statement or any of such other
- 23 -
<PAGE> 24
Holder's officers, directors, agents, partners, legal counsel or any
person who controls such Holder, against any losses, claims, damages
or liabilities (joint or several) to which the Company or any
officer, director, agent, partner, legal counsel, or controlling
person, or other such Holder or director, officer, legal counsel or
controlling person of such other Holder may become subject, under
the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation
occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such
registration; and each such Holder will reimburse any legal or other
expenses reasonably incurred by the Company or any officer,
director, agent, partner, legal counsel, controlling person, other
Holder, or officer, director, agent, partner, legal counsel or
controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability,
or action; provided, however, that the indemnity agreement contained
in this subsection 7.10(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Investor
(which consent shall not be unreasonably withheld) and provided
further that in no event shall the liability of any selling Holder
hereunder be greater in amount than the dollar amount of the
proceeds (net of the payment of underwriting discounts and
commissions payable by such selling Holder) received by any such
selling Holder upon the sale of the Registrable Securities giving
rise to such indemnification obligation.
(c) Promptly after receipt by an indemnified party under
this Section 7.10 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if
a claim in respect thereof is to be made against any indemnifying
party under this Section 7.10, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying
party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel at
its own expense if it so desires. Notwithstanding the foregoing, if
the indemnified party and the indemnifying party have conflicting
interests with respect to the action so that joint counsel for them
would be inappropriate, (as determined by counsel to the indemnified
party and counsel to the indemnifying party), then the indemnifying
party shall pay reasonable fees and expenses of one counsel to the
indemnified party. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 7.10, but the omission to
deliver written notice to the indemnifying party will not relieve it
of any liability that it may have to any indemnified party otherwise
than
- 24 -
<PAGE> 25
under this Section 7.10. No indemnifying party, in the defense of
any such action, shall, except with the consent of each indemnified
party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release
from liability in respect of such action.
(d) If the indemnification provided for in this Section 7.10
is held by a court of competent jurisdiction to be unavailable to an
indemnified party, then, except to the extent that contribution is
not permitted under Section 11(f) of the Securities Act, each
indemnifying party, in lieu of indemnifying such indemnified party
thereunder, hereby agrees to contribute to the amount paid or
payable by such indemnified party in such proportion as is
appropriate to reflect the relative fault of the indemnifying party
on the one hand and of the indemnified party on the other. The
parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7.10(d) were determined by pro
rata allocation or by any other method of allocation that does not
take into account the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of
this Section 7.10(d), no indemnifying party that is a selling Holder
shall be required to contribute any amount in excess of the amount
by which the net proceeds received by such selling Holder from the
sale of Registrable Securities exceeds the amount of any damages
that such selling Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The indemnity and contribution agreements
contained in this Section 7.10 are in addition to any liability that
the indemnifying parties may have to the indemnified parties.
(e) The obligations of the Company and Holders under this
Section 7.10 shall survive the completion of any offering of
Registrable Securities in a registration statement under this
Section 7, and otherwise.
7.11 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Investors purchasing Shares hereunder the benefits
of Rule 144 promulgated under the Securities Act and any other rule or
regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration, the Company
agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after
ninety (90) days after the effective date of the first registration
statement filed by the Company for the offering of its securities to
the general public;
- 25 -
<PAGE> 26
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and
the Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written
statement by the Company that it has complied with the reporting
requirements of SEC Rule 144 (at any time after ninety (90) days
after the effective date of the first registration statement filed
by the Company), the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements),
and (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the
Company.
7.12 Form S-3 Registration. In case the Company shall receive
written request or requests from Holders of the Registrable Securities
then outstanding, that the Company effect a registration on Form S-3 and
any related qualification or compliance with respect to all or a part of
the Registrable Securities owned by such Holder or Holders, the Company
will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all
other Holders of Registrable Securities; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as
would permit or facilitate the sale and distribution of all such
portion of such Holder's or Holders' Registrable Securities as are
specified in such request, together with all or such portion of the
Registrable Securities of any other Holder or Holders joining in
such request as are specified in a written request given within 20
days after effectiveness of such written notice from the Company
pursuant to Section 9.6 hereof; provided, however, that the Company
shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 7.12: (i) if
Form S-3 is not available for such offering by the Holders; (ii) if
the Holders, together with the holders of any other securities of
the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at
any aggregate price to the public of less than $1,000,000; (iii) if
the Company shall furnish to the Holders a certificate signed by the
Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors of the Company it would be
seriously detrimental to the Company and its stockholders for such
Form S-3 Registration to be effected at such time, in which event
the Company shall have the right to defer the filing of the Form S-3
Registration Statement for a period of not more than one hundred
twenty (120) days after receipt of the request of the Holder or
Holders under this Section 7.12; provided, however, that the Company
shall not utilize this right more than once in any 12 month period;
(iv) if the Company within the twelve
- 26 -
<PAGE> 27
month period preceding the date of such request, already has
effected one registration on Form S-3 for the Holders pursuant to
this Section 7.12 or within the 48 month period preceding the date
of such request already has effected five such registrations and
other similar provisions granting rights to the registration on Form
S-3; or (v) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration,
qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable
after receipt of the request or requests of the Holders. All
expenses, other than underwriting discounts and commissions,
incurred in connection with requested pursuant to Section 7.12,
including (without limitation) all other registration, filing,
qualification, printer's and accounting fees shall be borne by the
selling Holders of Registrable Securities.
7.13 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 7 may
be assigned by a Holder to a transferee or assignee who (i) is not a
competitor of the Company and acquires at least fifty thousand (50,000)
shares (as adjusted for stock splits, combinations, etc.) of Registrable
Securities, (ii) is an Investor as defined hereunder, or (iii) is a
partner or equity holder or an affiliate of an Investor (or a third party
duly authorized to act on behalf of an Investor or its partners or equity
holders), provided that such partner or equity holder or affiliate has
appointed such Investor (or such duly authorized third party) as its
lawful attorney-in-fact to receive notices, vote and otherwise make
binding decisions under the terms of this Section 7; provided, in each
case, the Company is, within thirty days of such transfer, furnished with
written notice of the name and address of such transferee or assignee and
the securities with respect to which such registration rights are being
assigned; and provided, further, that such assignment shall be effective
only if immediately following such transfer the further disposition of
such securities by the transferee or assignee is restricted under the
Securities Act.
7.14 "Market Stand-Off" Agreement. Each Holder of Registrable
Securities hereby agrees that it shall not, to the extent requested by the
Company and an underwriter of Common Stock (or other securities) of the
Company, sell or otherwise transfer or dispose of any securities of the
Company (other than securities registered in the offering) whether or not
acquired by such Holder under this Agreement during a reasonable and
customary period of time (not to exceed one hundred twenty (120) days), as
agreed to by the Company and the underwriters, following the effective
date of a registration statement of the Company filed under the Securities
Act; provided, however, that:
(a) such agreement shall be applicable only to the first
such registration statement of the Company which covers shares (or
securities) to be sold on its behalf to the public in an
underwritten offering; and
- 27 -
<PAGE> 28
(b) all officers and directors of the Company, holders of 5%
or more of the Company's issued and outstanding capital stock and
all other persons with registration rights (whether or not pursuant
to this Agreement) similarly agree not to sell or transfer.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such reasonable and customary period.
7.15 Amendment of Registration Rights. Any provision of this
Section 7 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the
holders of at least 66-2/3% of the Registrable Securities. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon
each holder of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities are
convertible), each future holder of all such securities, and the Company.
7.16 Rights That May Be Granted to Subsequent Investors.
(a) Within the limitations prescribed by this paragraph (a),
but not otherwise, the Company may grant to subsequent investors in
the Company rights of incidental registration (such as those
provided in Section 7.3). Such rights may only pertain to shares of
Common Stock, including shares of Common Stock into which any other
securities may be converted. Such rights may be granted with respect
to (i) registrations actually requested by Initiating Holders
pursuant to Section 7.2 or by Series A Holders pursuant to Section
7.2 of the Series A Purchase Agreement, but only in respect of that
portion of any such registration as remains after inclusion of all
registrable securities requested by Holders and Series A Holders,
and (ii) registrations initiated by the Company, but only in respect
of that portion of such registration as is available under the
limitations set forth in Section 7.8 (which limitations shall apply
pro-rata to all Holders and Series A Holders) and such rights shall
be limited in all cases to sharing pro-rata in the available portion
of the registration in question with Holders and the Series A
Holders, such sharing to be based on the number of shares of Common
Stock held by the respective Holders and the Series A Holders and
held by such other investors, plus the number of shares of Common
Stock into which other securities held by the Holders and Series A
Holders and such other investors are convertible, which are entitled
to registration rights. With respect to registrations which are for
underwritten public offerings, "available portion" shall mean the
portion of the underwritten shares which is available as specified
in clauses (i) and (ii) of the third sentence of this paragraph (a).
Shares not included in such underwriting shall not be registered.
- 28 -
<PAGE> 29
(b) The Company may not grant to subsequent investors in the
Company rights of registration upon request (such as those provided
in Section 7.2) unless (i) such rights are limited to shares of
Common Stock, (ii) all Holders and the Series A Holders are given
enforceable contractual rights to participate in registrations
requested by such subsequent investors on a pro-rata basis with such
subsequent investors such participation to be on a pro-rata basis,
and subject to the limitations, described in the final three
sentences of paragraph (a) of this Section 7.16, (iii) such rights
shall not become effective prior to one hundred eighty (180) days
after the effective date of the first registration pursuant to
Section 7.2 and (iv) such rights shall not be more favorable than
those granted to the Holders.
7.17 Termination of Registration Rights. The Company's obligations
pursuant to this Section 7 shall terminate with respect to each Holder of
Registrable Securities on the earlier to occur of (i) four years from the
date of consummation of the Company's sale of its Common Stock in a bona
fide, firm commitment underwriting pursuant to a registration statement on
Form S-1 under the Securities Act at a price equal to or greater than
$2.70 per share which results in gross offering proceeds to the Company of
at least $15,000,000 or (ii) such time as such Holder is eligible to sell
all of its Registrable Securities pursuant to Rule 144 (other than
pursuant to Rule 144(k)) under the Securities Act in a single three (3)
month period provided that the Company has been continually subject to the
reporting requirements of the Exchange Act for at least two years
immediately prior to the time of such sale.
8. Covenants.
8.1 Delivery of Financial Statements. The Company shall deliver to
each Investor for as long as such Investor (together with its affiliates)
holds not less than 100,000 Preferred Shares (or Common Stock into which
such Preferred Shares have been converted), as adjusted for stock splits,
stock dividends, reclassifications and similar events:
(a) as soon as practicable, but in any event within one
hundred twenty (120) days after the end of each fiscal year of the
Company, an income statement for such fiscal year, a balance sheet
of the Company as of the end of such year, and a cash flow
statement, such year-end financial reports to be in reasonable
detail, prepared in accordance with generally accepted accounting
principles ("GAAP") audited by independent public accountants of
recognized national standing; and
(b) within forty-five (45) days of the end of each quarter,
a statement of operations, cash flow analysis and balance sheet for
and as of the end of such quarter, in reasonable detail; such
quarterly statements shall also compare actual performance to budget
and to the prior year's comparable period.
- 29 -
<PAGE> 30
8.2 Inspections. The Company shall permit each Investor or its
authorized representatives, at such Investor's expense, to visit and
inspect the Company's properties, to examine its books of account and
records and to discuss the Company's affairs, finances and accounts with
its officers, all at such reasonable times as may be requested by the
investor; provided, however, that the Company shall not be obligated
pursuant to this Section 8.2 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential
information.
8.3 Director Elected by Holders of Series B Preferred Stock. The
Investors will consult with the Company with respect to any director
elected from time to time by the holders of Series B Preferred Stock and
will make reasonable efforts to elect a director acceptable to the
Company.
8.4 Termination of Covenants. The covenants set forth in Section
8.1 and 8.2 shall terminate and be of no further force or effect when the
sale of securities pursuant to a registration statement filed by the
Company under the Securities Act in connection with the firm commitment
underwritten offering of its securities to the general public is
consummated or when the Company first becomes subject to the periodic
reporting requirements of section 13(a) or 15(d) of the Exchange Act,
whichever event shall first occur.
8.5 Insurance. The Company shall keep and maintain in full force
and effect (i) fire and casualty insurance policies, with extended
coverage, reasonably sufficient in amount to allow it to replace any of
its properties that might be damaged or destroyed and (ii) general
liability insurance in amounts customary for entities in similar business
and at a similar stage of development.
8.6 Litigation. The Company will proceed with the Action (as
defined in Item 2.7 of the Schedule of Exceptions) in the manner described
in the Schedule of Exceptions.
8.7 Co-Sale Rights. McKiernan agrees that during the period ending
on the Company's initial public offering of securities or immediately
after the closing of the sale or merger of the Company (where the Company
is not the surviving entity and where there is a change of control), he
will not sell any shares of McKiernan's Common Stock without notifying the
Investors twenty (20) or more days prior to the closing of such sale and
permitting the Investors and the holders of the Series A Preferred Stock
then entitled to similar rights to participate (through the sale of shares
of Common Stock) in such sale on a pro-rata basis, treating McKiernan's
Common Stock and all of the Preferred Shares (on an as converted to Common
Stock basis) and such Series A Preferred Stock (on an as converted to
Common Stock basis) as a group. Each Investor must notify McKiernan in
writing that such Investor will participate in such sale (and sell such
Investor's shares of Common Stock in strict accordance with the terms and
conditions of such sale as described in the notice) on or before ten (10)
business days before the anticipated closing of such sale, or such
Investor will have no right to participate in such sale. This Section
- 30 -
<PAGE> 31
8.7 shall not pertain to any transfers by McKiernan to his ancestors,
descendants or spouse or to trusts for the benefit of such persons, or any
bona fide gift by McKiernan; provided, however, any shares of McKiernan's
Common Stock transferred in a transaction described in this sentence shall
continue to be subject to the same co-sale obligations set forth in this
Section 8.7 as if McKiernan continued to own such shares.
8.8 Qualified Small Business Status. The Company shall use it best
efforts not to and shall not knowingly, without the prior written consent
or affirmative vote or written consent of the holders of at least a
majority of the total outstanding shares of Series B Preferred Stock who
purchased such shares of Series B Preferred Stock from the Company
pursuant to this Agreement, voting separately as a class, take any action
affecting, or permit any action, other than a Permitted Action (as defined
below), to affect, the capital structure (including purchases of its own
stock) or operation of its business which would cause the Preferred Shares
not to qualify as "qualified small business stock" under Code Section
1202. As used in this Agreement, "Permitted Action" shall mean a merger of
the Company with or into any other corporation or corporations (other than
a mere reincorporation transaction), a sale of all or substantially all of
the assets of the Company or a transaction or series of related
transactions in which the Company issues shares representing more than 50%
of the voting power of the Company immediately after giving effect to such
transaction.
9. Miscellaneous.
9.1 Survival of Warranties; Indemnification. The warranties,
representations and covenants of the Company and the Investors contained
in or made pursuant to this Agreement shall survive the execution and
delivery of this Agreement and the Closing and shall in no way be affected
by any investigation of the subject matter thereof made by or on behalf of
the Investors or the Company. The Company agrees to indemnify and hold
harmless each Investor from any losses or damages (including without
limitation reasonable attorneys fees) suffered arising out of a breach of
any representation, warranty or covenant of the Company under this
Agreement.
9.2 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties, including permitted transferees of
the Preferred Shares and the Common Stock into which it has been
converted. Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities
under or by reason of this Agreement, except as expressly provided in this
Agreement.
9.3 Governing Law. This Agreement shall be governed by and
construed under the internal substantive laws (but not the choice of law
rules) of the State of California.
- 31 -
<PAGE> 32
9.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
9.6 Notices. Except as otherwise expressly provided herein, any
notice required or permitted hereunder shall be given in writing and it or
any certificates or other documents delivered hereunder shall be deemed
effectively given or delivered (as the case may be) upon personal delivery
(professional courier permissible) or when mailed by receipted United
States certified mail delivery, five (5) business days after deposit in
the United States mail. Such certificates, documents or notice may be
personally delivered or sent to the following address: (a) if to a
Investor, to the address set forth with respect to such investor on
Exhibit B-2 attached hereto, or to such other address of which such
investor shall have given notice pursuant hereto the Company, or (b) if to
the Company, to CyberSource Corporation, 1050 Chestnut Street, Menlo Park,
California 94025, or to such other address of which the Company shall have
given notice pursuant hereto.
9.7 Finder's Fee. Each Investor severally agrees to indemnify and
hold harmless the Company from any liability for any commission or
compensation in the nature of a finder's fee (and the costs and expenses
of defending against such liability or asserted liability) for which such
investor or any of its officers, partners, employees or representatives is
responsible. The Company agrees to indemnify and hold harmless each
Investor from any liability for any commission or compensation in the
nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
9.8 Expenses. Each party to this Agreement shall bear its own
expenses incurred in connection with the negotiation, preparation,
execution and consummation of this Agreement, including the fees, expenses
and disbursements of its respective legal counsel incurred in connection
herewith except that the Company will pay the reasonable fees and
disbursements of one counsel (not to exceed $25,000) for the Investors.
9.9 Amendments and Waivers. Except as specified in Section 7.14,
any term of this Agreement may be amended and the observance of any term
of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the holders of at least 66-2/3% of shares of
the Common Stock issued or issuable upon conversion of the Preferred
Shares; provided, however, the conditions to Closing set forth in Section
5 hereof may only be amended by unanimous agreement of the Investors.
9.10 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this
- 32 -
<PAGE> 33
Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance
with its terms.
9.11 Aggregation of Stock. All Preferred Shares (or Common Stock
issued on conversion thereof) held or acquired by affiliated entities or
persons shall be aggregated together for the purpose of determining the
availability of any rights under this Agreement.
9.12 Confidentiality Agreement. Each Investor and any successor or
assign of such Investor who receives from the Company or its agents,
directly or indirectly, any information which the Company has not made
generally available to the public, pursuant to the preparation and
execution of this Agreement or disclosure in connection therewith or
pursuant to the provisions of Section 8 hereof, acknowledges and agrees
that such information is confidential and for its use only in connection
with evaluating its investment in the Company, and further agrees that it
will not disseminate such information to any person other than its
accountant, investment advisor or attorney and that such dissemination
shall be only for purposes of evaluating its investment.
9.13 Enforcement.
(a) Remedies at Law or in Equity. If the Company or any
Investor shall default in any of its obligations under this
Agreement or if any representation or warranty made by or on behalf
of the Company or any Investor, as the case may be, in this
Agreement or in any certificate, report or other instrument
delivered under or pursuant to any term hereof shall be untrue or
misleading in any material respect as of the date of this Agreement
or as of the Closing or as of the date it was made, furnished or
delivered, the Company or such Investor may proceed to protect and
enforce its rights, including by way of suit in equity or action at
law, whether for the specific performance of any term contained in
this Agreement or the Restated Articles of the Company or for an
injunction against the breach of any such term or in furtherance of
the exercise of any power granted in this Agreement or such Restated
Articles, or for damages or to enforce any other legal or equitable
right of such Investor (including Investor's right to
indemnification under Section 9.1) or to take any one or more of
such actions. In the event such an action is brought, the prevailing
party in such dispute shall be entitled to recover from the losing
party all fees, costs and expenses of enforcing any right of such
prevailing party under or with respect to this Agreement or the
Restated Articles of the Company, including without limitation such
reasonable fees and expenses of attorneys and accountants, which
shall include, without limitation, all fees, costs and expenses of
appeals.
(b) Remedies Cumulative; Waiver. No remedy referred to
herein is intended to be exclusive, but each shall be cumulative and
in addition to any other remedy referred to above or otherwise
available to the Company or any Investor at law or in equity. No
express or implied waiver by the Company or any Investor
- 33 -
<PAGE> 34
of any default shall be a waiver of any future or subsequent default
as to such party. The failure or delay of the Company or any party
in exercising any rights granted it hereunder shall not constitute a
waiver of any such right and any single or partial exercise of any
particular right by such party shall not exhaust the same or
constitute a waiver of any other right provided herein.
9.14 Entire Agreement. This Agreement and the other documents and
agreements delivered pursuant hereto constitute the full and entire
understanding and agreement among the parties with regard to the subjects
hereof and thereof and supersedes any prior agreements (including any
memorandum of understanding or letters of intent) between the parties
regarding the subject matter hereof.
- 34 -
<PAGE> 35
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Solely with respect to the agreements "Company"
made in Sections 7.1 - 7.17 and 8.7
hereof:
CYBERSOURCE CORPORATION, a California
corporation
___________________________________ By: ___________________________________
WILLIAM S. MCKIERNAN Name: WILLIAM S. MCKIERNAN
Title: President and Chief Executive
Officer
"Investors"
VULCAN VENTURES, INC.
110 110th Avenue NE, Suite 550
Bellevue, WA 98004
By: ________________________________
Name: ________________________________
Title: ________________________________
BVP INVESTORS I, L.L.C.
303 West Madison St., Suite 1110
Chicago, IL 60606-3309
By: ________________________________
Name: ________________________________
Title: ________________________________
FARLEY INDUSTIRES, INC.
Sears Tower, Suite 5000
Chicago, IL 60606
By: ________________________________
Name: ________________________________
Title: ________________________________
- 35 -
<PAGE> 36
CRAIG J. DUCHOSSOIS AS TRUSTEE
FOR THE CRAIG J. DUCHOSSOIS TRUST
c/o Duchossois Industries, Inc.
845 Larch Avenue
Elmhurst, IL 60126
By: ________________________________
Name: ________________________________
Title: ________________________________
RICHARD L. DUCHOSSOIS AS TRUSTEE FOR THE
RICHARD L. DUCHOSSOIS REVOCABLE TRUST
c/o Duchossois Industries, Inc.
845 Larch Avenue
Elmhurst, IL 60126
By: ________________________________
Name: ________________________________
Title: ________________________________
PACIFIC ASSET PARTNERS
222 Kearny St., Suite 204
San Francisco, CA 94108
By: ________________________________
Name: ________________________________
Title: ________________________________
----------------------------------------
STANFORD C. FINNEY, JR.
c/o Heather Evans Gilker
8201 Preston Rd., Suite 400
Dallas, TX 75225
- 36 -
<PAGE> 37
RAINBOW TRADING PARTNERS, LTD.
8201 Preston Rd., Suite 400
Dallas, TX 75225
By: ________________________________
Name: ________________________________
Title: ________________________________
RAINBOW TRADING VENTURE PARTNERS, L.P.
8201 Preston Rd., Suite 400
Dallas, TX 75225
By: ________________________________
Name: ________________________________
Title: ________________________________
FARLEY INC.
Sears Tower, Suite 5000
Chicago, IL 60606
By: ________________________________
Name: ________________________________
Title: ________________________________
WILBLAIRCO ASSOCIATES, L.P.
c/o William Blair & Company, L.L.C.
222 West Adams St.
Chicago, IL 60606
By: ________________________________
Name: ________________________________
Title: ________________________________
- 37 -
<PAGE> 38
EXHIBIT B-1
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
"INVESTORS" PURCHASE PRICE NO. OF SHARES PURCHASED
<S> <C> <C>
Vulcan Ventures, Inc. $ 2,500,000.20 925,926
BVP Investors I, L.L.C. $ 1,174,999.50 435,185
Farley Industries, Inc. $ 250,001.10 92,593
Craig J. Duchossois as Trustee for $ 124,999.20 46,296
the Craig J. Duchossois Trust
Richard L. Duchossois as Trustee for $ 124,999.20 46,296
the Richard L. Duchossois Revocable
Trust
Stanford C. Finney, Jr. $ 99,999.90 37,037
Rainbow Trading Partners, Ltd. $ 99,999.90 37,037
Rainbow Trading Venture Partners, L.P. $ 99,999.90 37,037
Pacific Asset Partners $ 150,001.20 55,556
Farley Inc. $ 250,001.10 92,593
Wilblairco Associates, L.P. $ 625,001.40 231,482
TOTAL $ 5,500,002.60 2,037,038
</TABLE>
-i-
<PAGE> 39
EXHIBIT B-2
VULCAN VENTURES, INC.
William D. Savoy
110 110th Avenue NE
Suite 550
Bellevue, WA 98004
Telephone: (206) 453-1940
Facsimile: (206) 453-1985
WITH A COPY TO:
Robert Steinberg, Esq.
Irell & Manella
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067-4276
BVP INVESTORS I, L.L.C.
Leonard A. Batterson
303 W. Madison Street, Suite 1110
Chicago, IL 60606-3309
Telephone: (312) 269-0300
Facsimile: (312) 269-0021
WITH A COPY TO:
Edward T. Swan, Esq.
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Telephone: (312) 861-2465
Facsimile: (312) 861-2200
-i-
<PAGE> 40
FARLEY INDUSTRIES, INC..
Mr. David Vogel
Sears Tower, Suite 5000
Chicago, IL 60606
Telephone: (312) 993-1772
Facsimile: (312) 993-1749
FARLEY INC.
Mr. David Vogel
Sears Tower, Suite 5000
Chicago, Illinois 60606
Telephone: (312) 993-1772
Facsimile: (312) 993-1749
TRUSTEE FOR CRAIG J. DUCHOSSOIS TRUST
Craig J. Duchossois
c/o Duchossois Industries, Inc.
845 Larch Avenue
Elmhurst, IL 60126
Telephone: (708) 530-6099
Facsimile: (708) 530-6057
TRUSTEE FOR THE RICHARD L. DUCHOSSOIS REV. TRUST
Mr. Richard L. Duchossois
c/o Duchossois Industries, Inc.
845 Larch Avenue
Elmhurst, IL 60126
Telephone: (708) 530-6099
Facsimile: (708) 530-6057
-ii-
<PAGE> 41
STANFORD C. FINNEY, JR.
Ms. Heather Evans Gilker
8201 Preston Road, Suite 400
Dallas, TX 75225
Telephone: (214) 890-8887
Facsimile: (214) 890-8832
RAINBOW TRADING PARTNERS, LTD.
Ms. Heather Evans Gilker
8201 Preston Road, Suite 400
Dallas, TX 75225
Telephone: (214) 890-8887
Facsimile: (214) 890-8832
RAINBOW TRADING VENTURE PARTNERS, L.P.
Ms. Heather Evans Gilker
8201 Preston Road, Suite 400
Dallas, TX 75225
Telephone: (214) 890-8887
Facsimile: (214) 890-8832
WILBLAIRCO ASSOCIATES, L.P.
Mr. Stephen Campbell
c/o William Blair & Company, L.L.C.
222 W. Adams Street
Chicago, IL 60606
Telephone: (312) 236-1600
Facsimile: (312) 368-9418
-iii-
<PAGE> 42
PACIFIC ASSET PARTNERS
Mr. Robert M. Stafford
222 Kearny Street, Suite 204
San Francisco, CA 94108
Telephone: (415) 362-6120
Facsimile: (415) 362-3048
-iv-
<PAGE> 1
EXHIBIT 10.7
CYBERSOURCE CORPORATION
SERIES C PREFERRED
STOCK PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is made
as of the 26th day of September, 1997 by and among CYBERSOURCE CORPORATION, a
California corporation (the "Company"), William S. McKiernan ("McKiernan")
(solely with respect to Sections 7.1 through 7.17, 8.6 and 8.7 hereof) and the
purchasers listed on the signature pages hereto under the heading "Investors",
each of whom is herein referred to as an "Investor").
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereby agree as follows:
1. Purchase and Sale of Series C Preferred Stock.
1.1. Sale and Issuance of Series C Preferred Stock.
(a) The Board of Directors of the Company shall adopt
and file with the Secretary of State of the State of
California on or before the Initial Closing (as defined below)
the Second Amended and Restated Articles of Incorporation
(collectively, the "Restated Articles") in substantially the
form attached hereto as Exhibit A-1.
(b) Subject to the terms and conditions of this
Agreement, each Investor agrees severally and not jointly to
purchase, and the Company agrees to sell and issue to each
Investor, severally and not jointly, at the Closings (as
defined below) the number of shares of Series C Preferred
Stock (the "Preferred Shares"), set forth opposite the
Investor's name on the Schedule of Investors attached as
Exhibit B to this Agreement (the "Schedule of Investors"), for
up to an aggregate of 3,000,000 Preferred Shares at a purchase
price of $2.04 per share, for the purchase price shown
opposite such Investor's name on the Schedule of Investors
(for an aggregate purchase price of approximately $6,120,000).
1.2. Closings. The purchase and sale of the Preferred Shares shall
take place in three closings, the first of which will occur on September 26,
1997 (the "Initial Closing"), the second of which will occur on September 30,
1997 (the "Second Closing"), and the third of which will occur on October 6,
1997 (the "Final Closing") each at the offices of Jackson Tufts Cole & Black,
LLP, 60 S. Market Street, San Jose, California, or at such other time and place
as the parties mutually agree upon (each such time and place to designated as a
"Closing" with respect to the Investors tendering funds in exchange for
Preferred Shares at that time, and collectively as the "Closings" ). At the
Closings, in the aggregate, the Company will deliver to
<PAGE> 2
the Investors stock certificates representing 3,000,000 Preferred Shares against
payment of the purchase price therefor of $2.04 per share by wire transfers of
immediately available funds.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Investor, except as set forth on the Schedule of
Exceptions attached hereto as Exhibit C, which exceptions shall be deemed to be
representations and warranties as if made hereunder as follows:
2.1. Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to own and hold its properties, carry on its business as now conducted
and as proposed to be conducted. The Company has full corporate power and
authority to enter into and perform its obligations under this Agreement and to
carry out the transactions contemplated by this Agreement. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure so to qualify would have a material adverse effect on its
business or properties. A copy of the Company's Articles of Incorporation (as
amended) and the Company's Bylaws (as amended) have been delivered to each
Investor each of which are true and correct in full force and effect and have
not been amended.
2.2. Capitalization.
(a) Immediately prior to the Initial Closing the
authorized capital of the Company consists, or will consist of:
(i) Preferred Stock. 10,000,000 shares of
Preferred Stock, 1,985,520 of which have been designated
Series A Preferred Stock, no par value (the "Series A
Preferred Stock"), of which 1,985,520 shares are issued and
outstanding, 2,500,000 of which have been designated Series B
Preferred Stock, no par value (the "Series B Preferred Stock")
of which 2,037,038 shares are issued and outstanding and
3,000,000 of which have been designated Series C Preferred
Stock, no par value. No shares of Series C Preferred Stock
were issued and outstanding immediately prior to the Initial
Closing. The rights, preferences and privileges of the Series
A Preferred Stock, the Series B Preferred Stock, and the
Series C Preferred Stock will be as stated in the Restated
Articles.
(ii) Common Stock. 30,000,000 shares of Common
Stock, 9,000,000 shares of which were issued and outstanding.
(b) The list set forth in Item 2.2(b) of the Schedule
of Exceptions hereto is a complete and correct list of all security
holders of the Company, showing their holdings of issued and
outstanding shares of
- 2 -
<PAGE> 3
Series A Preferred Stock, Series B Preferred Stock, Common Stock and
other Company securities (including options and warrants) as of the
date of this Agreement. To the best knowledge of the Company, each
such holder is the sole beneficial owner of all of the shares as to
which such holder is the record holder. Except as set forth in Item
2.2 of the Schedule of Exceptions hereto, holders of shares of the
Company's Series A Preferred Stock, Series B Preferred Stock and
Common Stock have no preemptive rights. True and complete copies of
the Series A Preferred Stock Purchase Agreements (as defined in
Section 2.11 of this Agreement) and Series B Preferred Stock
Purchase Agreements (as defined in Section 2.11 of this Agreement)
have been furnished to each Investor requesting them prior to the
date hereof. All such issued and outstanding shares have been duly
authorized and validly issued, are fully paid and nonassessable and
have been issued in compliance with all applicable state and federal
laws concerning the issuance of securities.
(c) Agreements for Purchase of Shares. Except for:
(i) the conversion privileges and preemptive
rights of the Series A Preferred Stock, the Series B Preferred
Stock, and the Series C Preferred Stock; and
(ii) options issued pursuant to the Company's
stock option plan and other agreements (as of the Initial
Closing options for 2,579,200 shares, including options for
1,000,000 shares issued outside of the Company's stock option
plan, are presently outstanding and an additional 420,800
shares are available for grant under the Company's stock
option plan, as amended.
prior to the Initial Closing there will not be any outstanding
options, warrants, rights (including conversion, preemptive rights
or rights of first offer) or agreements for the purchase or
acquisition from the Company of any shares of its capital stock.
2.3. Subsidiaries. Except as set forth in Item 2.3 of the Schedule
of Exceptions, the Company does not presently own or control, directly or
indirectly, any interest in any other corporation, association, partnership or
other business entity.
2.4. Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance (or
reservation for issuance) and delivery of the Preferred Shares being sold
hereunder and the Common Stock issuable upon conversion of the Preferred Shares,
has been taken or will be taken on or prior to each Closing, and this Agreement
constitutes a valid and legally binding
- 3 -
<PAGE> 4
obligation of the Company enforceable in accordance with its terms, except as
affected by (i) bankruptcy or insolvency laws, or (ii) equitable principles or
public policy.
2.5. Valid Issuance of Preferred Stock. The Preferred Shares, when
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable and, based in part upon the representations of the Investors set
forth in Section 3 of this Agreement, will be issued in compliance with all
applicable federal and state securities laws free and clear of all restrictions
on transfer (other than those arising from application of the securities laws).
The Common Stock issuable upon conversion of the Preferred Shares purchased
under this Agreement have been duly and validly reserved for issuance and when
issued and delivered in accordance with the Restated Articles will be duly and
validly issued, fully paid and nonassessable.
2.6. Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any United States federal, state, local or provincial governmental
authority on the part of the Company is required in connection with:
(a) the Company's valid execution, delivery, or
performance of this Agreement; and
(b) the offer, sale, or issuance of the Preferred
Shares by the Company hereunder or (assuming the exemption provided
by Section 3(a)(9) of the Securities Act of 1933, as amended, in its
current form is available and no commission is paid in conjunction
therewith) the issuance of Common Stock upon conversion of the
Preferred Shares;
except such filings as have been made prior to the Closings, and except
for any notices of sale required to be filed with the Securities and
Exchange Commission under Regulation D of the Securities Act of 1933, as
amended (the "Securities Act"), or such post-closing filings as may be
required under applicable state securities laws, which will be timely
filed within the applicable periods therefor. To the best knowledge of the
Company, neither the Company nor anyone acting on its behalf has offered
any of the Series C Preferred Stock being sold hereunder or substantially
similar securities of the Company for sale to, or solicited offers to buy
any securities of the Company from, or otherwise approached or negotiated
with respect thereto with any prospective purchaser other than the
Investors and other persons whom the Company believes to be Accredited
Investors as (as defined in Section 3.7 of this Agreement). The Company
agrees that neither the Company nor anyone acting on its behalf will offer
such securities of the Company or any part thereof or any similar
securities for issuance or sale to, or solicit any offer to acquire any of
the same from, anyone so as to make the issuance and sale of the Preferred
Shares being sold hereunder not exempt from the registration requirements
of Section 5 of the Securities Act. None of the shares of the Company's
capital stock issued and outstanding has been offered or sold in such a
manner as to make the issuance and sale of such shares or the Preferred
Shares being sold hereunder not exempt from such
- 4 -
<PAGE> 5
registration requirements, and all such shares of capital stock have been
offered and sold in compliance with all applicable federal and state
securities laws.
2.7. Litigation. Except as disclosed in Item 2.7 of the Schedule of
Exceptions, there is no action, suit, proceeding or investigation pending or
currently threatened against the Company which questions the validity of this
Agreement or the right of the Company to enter into this Agreement, or to
consummate the transactions contemplated hereby, or which might result, either
individually or in the aggregate, in any material adverse change in the assets,
prospects, business, operations, or condition (financial or otherwise) of the
Company or any change in the current equity ownership of the Company, nor is the
Company aware that there is any basis for the foregoing. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or which the
Company intends to initiate.
2.8. Patents and Trademarks.
(a) The list set forth in Item 2.8 of the Schedule of
Exceptions is a true and complete list and summary description of
all patents, patent applications, registered trademarks, registered
service marks, registered trade names and registered copyrights, and
licenses and rights to the foregoing presently owned or held by the
Company, none of which is in dispute or in any conflict with the
right of any other person or entity except as indicated on Item 2.7
of the Schedule of Exceptions.
(b) The Company's business as now conducted and as
presently proposed to be conducted does not conflict with or
infringe upon anyone's patents, copyrights, trademarks, trade
secrets, trade dress, know how, processes, or other proprietary
rights. The Company owns, or has the unrestricted right to use free
and clear of all material liens, claims and restrictions, all
patents, copyrights, trademarks, trade secrets, trade dress or other
proprietary rights necessary for the conduct of its business as it
is presently conducted or currently contemplated to be conducted,
without infringing on the right or claim of any person, any patents,
copyrights, trademarks, trade secrets, trade dress, know how,
processes, or other proprietary rights of others. Notwithstanding
any other provision of this Agreement, the exceptions described in
the Schedule of Exceptions do not apply to this subparagraph (b) of
Section 2.8.
2.9. Compliance with Laws and Other Instruments. The Company is not
in violation or default of any provisions of its Articles of Incorporation or
Bylaws or of any instrument, judgment, order, writ, decree or contract to which
it is a party or by which it is bound or, to its knowledge, of any provision of
federal or state statute, rule or regulation applicable to the Company or any of
its property, which violation or default would be materially adverse to the
assets, properties, prospects, business, operations, or condition (financial or
otherwise) of the Company. To the best
- 5 -
<PAGE> 6
knowledge of the Company, there is no contamination of any real property leased
or operated by the Company that could subject the Company to liability in the
aggregate in excess of $10,000 under any environmental laws or regulations. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not result in any such violation or be
in conflict with or constitute, with or without the passage of time and giving
of notice, either a default under any such provision, instrument, judgment,
order, writ, decree or contract or an event which results in the creation of any
lien, charge or encumbrance upon any assets of the Company, which violation,
default, conflict or event would be materially adverse to the assets,
properties, prospects, business, operations, or condition (financial or
otherwise) of the Company.
2.10. Agreements; Action.
(a) Except as set forth in Item 2.10 of the Schedule
of Exceptions, there are no agreements, understandings, instruments,
contracts or proposed transactions to which the Company is a party
or by which it is bound which involve (i) obligations of, or
payments to the Company in excess of, $25,000; (ii) the license of
any patent, copyright, trade secret or other proprietary right of
the Company; (iii) material restrictions on the Company's business;
or (iv) material proprietary rights of the Company.
(b) The Company has not (i) declared or paid any
dividends, or authorized or made any distribution upon or with
respect to any class or series of its capital stock, (ii) incurred
any indebtedness for money borrowed or incurred any other
liabilities or obligations (absolute or contingent), individually in
excess of $10,000 or in excess of $25,000 in the aggregate not
reflected in the balance sheet dated June 30, 1997 other than
obligations or liabilities of the Company for compensation under
employment, advisor or consulting agreements, or other than
obligations or liabilities incurred in the ordinary course of
business, (iii) made any loans or advances to any person, other than
in the ordinary course of its business. Without limiting the
generality of the foregoing, the Company does not know of any basis
for the assertion against the Company of any material liabilities of
the Company (not provided for in the documents listed in Item 2.10
of the Schedule of Exceptions or the Financial Statements).
2.11. Registration Rights. Except as set forth in (i) that certain
Series A Preferred Stock Purchase Agreement dated as of the 6th day of January
1995, as amended as of (A) the 27th day of February, 1996, (B) the 3rd day of
July, 1996, (C) the 12th day of July, 1996; (ii) that certain Series A Preferred
Stock Purchase Agreement dated as of the 27th day of February, 1996
(collectively, the "Series A Stock Purchase Agreements"), and (iii) that certain
Series B Preferred Stock Purchase Agreement dated as of the 12th day of July,
1996 and except as provided in Section 7 of this Agreement, the Company has not
granted or agreed to grant any registration rights, including piggy-back rights,
to any person or entity.
- 6 -
<PAGE> 7
2.12. Title to Property and Assets. The Company has good and
marketable title to the property and assets it purports to own free and clear of
all mortgages, liens, loans and encumbrances, except such encumbrances and liens
which arise in the ordinary course of business and do not materially impair the
Company's ownership or use of such property or assets. With respect to the
property and assets it leases, the Company is in compliance with such leases and
holds a valid leasehold interest free of any liens, claims or encumbrances,
which liens, claims or encumbrances would be materially adverse to the Company.
Except as set forth in Item 2.12 of the Schedule of Exceptions, the Company owns
or has the right to use all assets (tangible and intangible), necessary for the
conduct of its business as presently conducted and believes it can acquire the
right to use or the ownership of all assets, necessary for the conduct of its
business as it is proposed to be conducted, except for such assets that are
individually or in the aggregate immaterial to the business of the Company. The
Company knows of no assets required for the conduct of its business as it is
presently conducted, or as it is proposed to be conducted, the right to use or
ownership of which it is unlikely to obtain, except for such assets that are
individually or in the aggregate immaterial to the business of the Company.
2.13. Financial Statements. The Company has delivered to each
Investor its audited financial statements (income statement, balance sheet and
cash flow statement) at and for the periods ended December 31, 1994, December
31, 1995 and December 31, 1996 and unaudited financial statements (balance sheet
and profit and loss statement) at and for the period ended June 30, 1997 (the
"Financial Statements"). The Financial Statements are complete and correct in
all material respects and have been prepared in accordance with generally
accepted accounting principles on a consistent basis throughout the periods
indicated. The Financial Statements fairly present the financial condition and
operating results of the Company as of the dates, and for the periods, indicated
therein, subject to normal year-end adjustments. All accounts receivable shown
on the balance sheet constitute accounts receivable resulting from the sale of
goods and services in the ordinary course of business, and, to the best
knowledge of the Company, such accounts receivable are subject to no conditions
as to payment, offsets, counterclaims, defenses of any kind, returns,
allowances, or credits other than to the extent of the allowance for doubtful
accounts shown thereon, and other than warranty claims that in the aggregate do
not exceed $5,000. The Company has not received any material customer complaints
concerning its products or services.
2.14. Changes. Since June 30, 1997, there has not been (i) any
change in the assets, liabilities, condition (financial or otherwise), business,
or operating results, or to the best of the Company's knowledge, prospects of
the Company from that reflected in the Financial Statements, except changes in
the ordinary course of business which have not been, in the aggregate,
materially adverse; (ii) any damage, destruction or loss, whether or not covered
by insurance, affecting in any material way the assets, properties, condition
(financial or otherwise), operating results, prospects or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted); (iii) any waiver by the Company of a material right or of a material
debt owed to it or any satisfaction or discharge of any material lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business; (iv) any change or amendment in any material respect to a
material contract or agreement by which the Company or any of its assets or
properties is bound or subject; or (v) any change in any compensation
arrangement or agreement with any officer, director or key employee. For the
purposes of this Section 2.14 only, prospects shall not
- 7 -
<PAGE> 8
include general economic or industry trends. Notwithstanding any other provision
of this Agreement, the exceptions described in the Schedule of Exceptions do not
apply to this Section 2.14.
2.15. Proprietary Information. To the best of the Company's
knowledge, it has done nothing to compromise the secrecy, confidentiality or
value of any of its trade secrets, know-how, inventions, prototypes, designs,
processes or technical data required to conduct its business as now conducted or
as proposed to be conducted and has taken security measures to protect the
secrecy, confidentiality and value of all the intellectual property which it
believes are reasonable and customary in the industry in which it operates. All
of the Company's employees and consultants have executed a
non-disclosure/invention assignments agreement in the form attached as Annex III
to the Schedule of Exceptions. To the Company's knowledge, no employee of the
Company in connection with such employee's employment with the Company, has
violated the terms of any agreement with a previous employer.
2.16. Permits. The Company has all franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses, or other similar authority.
2.17. Shareholder Agreements. Except as set forth in the Series A
Preferred Stock Purchase Agreements and Series B Preferred Stock Purchase
Agreements, there are presently no outstanding shareholder agreements, voting
trusts, proxies or other arrangements or understandings between the Company and
its shareholders, or among any of the shareholders of the Company, relating to
either the voting or the disposition of their respective shares.
2.18. Brokers or Finders. The Company has not engaged any broker,
investment banker or finder in connection with the sale of the Preferred Shares.
2.19. Disclosure. The Company has provided each Investor with all
information that such Investor has requested in connection with such Investor's
decision to invest in the Preferred Shares. To the best of the Company's
knowledge after due inquiry, neither this Agreement nor any other written
statement made or delivered in connection herewith contains any untrue statement
of a material fact or, taking this Agreement and all such written statements as
a whole, omits to state a material fact necessary to make statements herein or
therein misleading; provided, however, with respect to any projections or
expressions of opinion or predictions, the Company represents only that such
projections or expressions of opinions and predictions were made in good faith
and that the Company believes that there is a reasonable basis therefor.
2.20. Insurance. Set forth in Item 2.20 of the Schedule of
Exceptions is a true and complete list of all current insurance policies of the
Company, all of which are in full force and effect.
- 8 -
<PAGE> 9
2.21. Taxes. The Company has accurately prepared and timely filed
all federal, state and local reports, returns, estimates, declarations,
information returns and statements with respect to taxes (together, "Tax
Returns") that are required to be filed by it and has paid or made provision for
the payment of all taxes due with respect to the periods covered by such Tax
Returns. The provision for taxes in the financial statements is sufficient for
the payment of all accrued and unpaid taxes. No such Tax Returns of the Company
have been audited by any taxing authority, and there are no waivers in effect of
the applicable statute of limitations for any period. No deficiency assessment
or proposed adjustment of federal income taxes or state or municipal taxes of
the Company is pending and the Company has no knowledge of any proposed
liability for any tax to be imposed. There are no tax sharing agreements or
similar contracts or arrangements to which the Company is a party. The Company
has not been a member of an affiliated group (within the meaning of Section 1504
of the Internal Revenue Code), filing a consolidated federal income Tax Return.
No closing agreement pursuant to Section 7121 of the Internal Revenue Code, or
similar provision of any state or local law, has been entered into by or with
respect to the Company. For the purpose of this Section 2.21, "tax" or "taxes"
shall mean all federal, state, local or foreign taxes, including but not limited
to income, gross receipts, windfall profits, alternative minimum, value added,
severance, property, production, sales, use, license, excise, franchise,
employment, withholding or similar taxes, together with any interest, additions
or penalties with respect thereto and any interest in respect of such additions
or penalties.
2.22. ERISA. Except as listed in Item 2.22 of the Schedule of
Exceptions, the Company does not maintain, sponsor, or contribute to any program
or arrangement that is an "employee pension benefit plan" (a "Pension Plan"), an
"employee welfare benefit plan" or a "multiemployer plan", as those terms are
defined in Section 3(2), 3(1), and 3(37) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). Except as listed in Item 2.22 of the
Schedule of Exceptions, the Company has no other incentive or benefit
arrangements. Each plan listed on Item 2.22 of the Schedule of Exceptions which
is subject to ERISA is in substantial compliance with ERISA. Each plan listed on
Item 2.22 of the Schedule of Exceptions which is a Pension Plan intended to be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended,
has been amended to comply with the qualification provisions of the Tax Reform
Act of 1986 and subsequent legislation before the expiration of the applicable
remedial amendment period and has received a favorable determination letter from
the Internal Revenue Service, and the Company is not aware of circumstances
likely to result in the revocation of any such favorable determination letter.
Other than as set forth in Item 2.22, there are no other deferred compensation,
bonus, incentive, profit sharing, retirement or other employee compensation
arrangements or plans.
2.23. Labor Agreements and Actions. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or has sought to represent any
of the employees, representatives or agents of the Company. There is no strike
or other labor dispute involving the Company pending, or to the best knowledge
of the Company threatened, which could have a material adverse effect on the
assets, properties, condition (financial or otherwise), operating results,
prospects or business of
- 9 -
<PAGE> 10
the Company (as such business is presently conducted and as it is proposed to be
conducted), nor is the Company aware of any labor organization activity
involving its employees. The Company is not aware that any officer, key
employee, key consultant or key contractor, or that any group of key employees,
intends to terminate such person's employment or relationship with the Company,
as the case may be, nor does the Company have a present intention to terminate
the employment of or relationship with any of the foregoing persons.
2.24. Qualified Small Business Stock. To the best of the Company's
knowledge, the Preferred Shares will meet each of the requirements for
qualification as "qualified small business stock" set forth in Section 1202(c)
of the Internal Revenue Code of 1986, as amended (the "Code"). The Company (and
any predecessor):
(a) is and will be a domestic C corporation;
(b) will not have made any purchases of its own stock
described in Code Section 1202(c)(3)(B) during the one year period
preceding the Closings;
(c) will not have made any purchases of its own stock
described in Code Section 1202(c)(3)(A) during the two year period
preceding the Closings; and
(d) has maintained and will maintain aggregate gross
assets, as defined by Code Section 1202(d)(2), at all times between
August 10, 1993 and through the Closings of less than $50 million,
taking into account the assets of any corporation required to be
aggregated with the Company in accordance with Code Section
1202(d)(3).
3. Representations and Warranties of Each Investor. Each Investor
hereby severally and not jointly represents and warrants that:
3.1. Authorization. This Agreement constitutes such Investor's
valid and legally binding obligation, enforceable in accordance with its terms
except as affected by (i) bankruptcy or insolvency laws, and (ii) equitable
principles or public policy. Each Investor who is not a natural person, hereby
represents that the person executing this Agreement on its behalf is duly
authorized to do so.
3.2. Purchase Entirely for Own Account. This Agreement is made with
each Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Preferred Shares to be received by such Investor hereunder
will be acquired for investment for such Investor's own account, not as a
nominee or agent, and not with a view to the resale or distribution of any part
thereof, and that such Investor has no present intention of otherwise
distributing the same. By executing this Agreement, each Investor purchasing
Preferred Shares hereunder further represents that such Investor does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
- 10 -
<PAGE> 11
respect to any of the Preferred Shares, or any portion thereof. Each Investor
that is an entity represents that it has full power and authority to enter into
this Agreement. Notwithstanding the foregoing, in certain limited circumstances,
Global Retail Partners, L.P., DLJ Diversified Partners, L.P., DLJ Diversified
Partners-A, L.P., GRP Partners, L.P., Global Retail Partners Funding, Inc., and
DLJ First ESC L.L.C. (collectively, the "DLJ Affiliates") may be contractually
obligated to transfer certain of the Preferred Shares owned by them to a limited
number of affiliates, each of whom is an Accredited Investor as defined in
Section 3.7 hereof.
3.3. Disclosure of Information. Each Investor believes he or it has
received all the information he or it considers necessary or appropriate for
deciding whether to purchase the Preferred Shares. Each such Investor further
represents that he or it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Preferred Shares. The foregoing does not modify the Company's
representations and warranties set forth herein or the Investor's right to rely
thereon.
3.4. Investment Experience. Each Investor is an investor in
securities of companies in the development stage and acknowledges that he or it
is able to fend for himself or itself, can bear the economic risk of his or its
investment and has such knowledge and experience in financial or business
matters that he or it is capable of evaluating the merits and risks of the
investment in the Preferred Shares. If other than an individual, Investor also
represents it has not been organized solely for the purpose of acquiring the
Preferred Shares.
3.5. Restricted Securities. Each Investor purchasing Preferred
Shares hereunder understands that the Preferred Shares are characterized as
"restricted securities" under the federal securities laws inasmuch as they are
being acquired from the Company in a transaction not involving a public offering
and that under such laws and applicable regulations such Preferred Shares may be
resold without registration under the Securities Act only in certain limited
circumstances. In this connection each Investor represents that he or it is
familiar with Securities and Exchange Commission ("SEC") Rule 144, as presently
in effect, and understands the resale limitations imposed thereby and by the
Securities Act
3.6. Further Limitations on Disposition. Without in any way
limiting the representations set forth above, each Investor purchasing Preferred
Shares hereunder further agrees not to make any disposition of all or any
portion of the Preferred Shares (or the Common Stock issuable upon the
conversion of the Preferred Shares) unless and until:
(a) There is then in effect a registration statement
under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement;
or
(b) (i) Such Investor shall have notified the Company
of the proposed disposition, (ii) if reasonably requested by the
Company, such Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such Preferred
Shares under the Securities Act and (iii) if reasonably requested by
the Company, the transferee shall have
- 11 -
<PAGE> 12
furnished to the Company its agreement to abide by the restrictions
on transfer set forth herein as if it were a purchaser hereunder.
3.7. Accredited Investor. The term "Accredited Investor" as used in
this Agreement means a person or entity who:
(a) is a director or executive officer of the Company;
or
(b) is a natural person whose individual net worth, or
joint net worth with his or her spouse, at the time of purchase
exceeds $1,000,000, and the total purchase price does not exceed ten
percent (10%) of his or her individual net worth, or joint net worth
with his or her spouse, at the time of sale; or
(c) is a natural person who had an individual income
in excess of $200,000 in each of the two most recent years or joint
income with that person's spouse in excess of $300,000 in each of
those years and reasonably expects to reach the same income level in
the current year, and the total purchase price does not exceed ten
percent (10%) of his or her individual net worth, or joint net worth
with his or her spouse, at the time of sale; or
(d) is a private business development company as
defined in section 202(a)(22) of the Investment Advisors Act of
1940; or
(e) is either (i) a bank as defined in section 3(a)(2)
of the Securities Act, or a savings and loan association or other
institution as defined in section 3(a)(5)(A) of the Securities Act
whether acting in its individual or fiduciary capacity; (ii) a
broker or dealer registered pursuant to section 15 of the Securities
Exchange Act of 1934; as amended (the "Exchange Act"), (iii) an
insurance company as defined in section 2(13) of the Securities Act;
(iv) an investment company registered under the Investment Company
Act of 1940 or a business development company as defined in section
2(a)(48) of that Act; (v) a Small Business Investment Company
licensed by the U.S. Small Business Administration under section
301(c) or (d) of the Small Business Investment Act of 1958; or (vi)
an employee benefit plan within the meaning of Title I of ERISA, if
the investment decision is made by a plan fiduciary, as defined in
section 3(21) of ERISA, which is either a bank, savings and loan
association, insurance company, or registered investment adviser, or
if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are Accredited Investors; or
(f) is any organization described in section 501(c)(3)
of the Internal Revenue Code of 1986, as amended ("Internal Revenue
- 12 -
<PAGE> 13
Code"), corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
Shares offered (and, in the case of an Investor located in
Washington, operating for not less than twelve months), with total
assets in excess of $5,000,000 (or, in the case of an Investor
located in the State of Washington, $10,000,000); or
(g) is any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
Shares offered, whose purchase is directed by a sophisticated person
as described in Regulation 230.506(b)(2)(ii) promulgated under the
Securities Act; or
(h) is an entity in which all of its equity owners
meet one or more of the standards set forth in (a) through (g)
above.
As used in this Section 3.7, the term "net worth" means the excess of
total assets over total liabilities, and "income" means actual economic income,
which may differ from adjusted gross income for federal income tax purposes.
3.8. Representations and Warranties as to Accredited Investors and
Excluded Purchasers Status. Each Investor as to himself or itself, severally and
not jointly, further represents to the Company that such Investor is (i) an
Accredited Investor and (ii) an excluded purchaser (as such term is described in
Section 260.102.13 of Title 10 of the California Code of Regulations or section
25102(f) of the California Corporate Securities Law of 1968, as amended).
3.9. Legends. To the extent applicable, each certificate or other
document evidencing any of the Preferred Shares issued hereunder or any Common
Stock issued upon conversion of the Preferred Shares shall be endorsed with the
legends set forth below, and such Investor covenants that, except to the extent
such restrictions are waived by the Company, such Investor shall not transfer
the securities without complying with the restrictions on transfer described in
the legends endorsed thereon;
(a) The following legend under the Securities Act:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH
RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
- 13 -
<PAGE> 14
(b) If required by the authorities of any state in
connection with the issuance or sale of the Preferred Shares, the
legend required by such state authority.
The Company shall not be required (i) to transfer on its books any
Preferred Shares which shall have been transferred in violation of any of
the provisions set forth in this Agreement, or (ii) to treat as owner of
such Preferred Shares or to accord the right to vote as such owner or to
pay dividends to any transferee to whom such Preferred Shares shall have
been so transferred.
3.10. Removal of Legends.
(a) Any legend endorsed on a certificate pursuant to
Section 3.9(a) or (b) hereof shall be removed (i) if Preferred
Shares represented by such certificate shall have been effectively
registered under the Securities Act or otherwise lawfully sold in a
public transaction, (ii) if such Preferred Shares may be transferred
in compliance with Rule 144(k) promulgated under the Securities Act,
or (iii) if the holder of such Preferred Shares shall have provided
the Company with an opinion from counsel, in form and substance
reasonably acceptable to the Company and from attorneys reasonably
acceptable to the Company, stating that a public sale, transfer or
assignment of such Preferred Shares may be made without
registration.
(b) Any legend endorsed on a certificate pursuant to
Section 3.9(b) hereof shall be removed if the Company receives an
order of the appropriate state authority authorizing such removal or
if the holder of the Preferred Shares provides the Company with an
opinion of counsel, in form and substance reasonably acceptable to
the Company and from attorneys reasonably acceptable to the Company,
stating that such state legend may be removed.
4. California Commissioner of Corporations.
4.1. Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
5. Conditions of Each Investor's Obligations at Closing. The
obligations of each Investor under Section 1.1(b) of this Agreement are subject
to the fulfillment on or before the
- 14 -
<PAGE> 15
Closing of its investment of each of the following conditions, the waiver of
which shall not be effective against any Investor who does not consent in
writing thereto:
5.1. Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
5.2. Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
The entering into, delivery and performance of this Agreement by the Company
shall have been duly authorized by all necessary corporate action.
5.3. Consents, etc. The Company shall have secured all permits,
consents and authorizations that shall be necessary or required lawfully to
consummate this Agreement, to issue the Preferred Shares to be purchased by the
Investors hereunder and to issue the Common Stock into which it may be
converted, including without limitation to (i) the waiver of rights of first
refusal granted to holders of Series A Preferred Stock by such holders of Series
A Preferred Stock, the consent of the required majority of the holders of the
Series A Preferred Stock, and (ii) the waiver of rights of first refusal granted
to holders of Series B Preferred Stock by such holders of Series B Preferred
Stock, the consent of the required majority of the holders of the Series B
Preferred Stock.
5.4. Compliance Certificate. At the Closing, the Chief Executive
Officer of the Company shall deliver to the Investors a certificate certifying
that the conditions set forth in Sections 5.1, 5.2 and 5.3 have been fulfilled.
5.5. Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be in substance
and form reasonably satisfactory to Vulcan Ventures, Inc., and its counsel, and
such Investor and its counsel shall have received all such counterpart originals
or certified or other copies of such documents as such Investor or its counsel
may reasonably request.
5.6. Qualifications. The Commissioner of Corporations of the State
of California and any applicable United States state securities regulatory
authority shall have issued permits qualifying the offer and sale of the
Preferred Shares to the Investors pursuant to this Agreement, or such offer and
sale shall be exempt from such qualification under the California Corporate
Securities Law of 1968, as amended, and any other applicable state blue-sky law.
5.7. Restated Articles. The Company shall have adopted and filed
with the Secretary of State of the State of California on or before the date of
the Closing, the Restated Articles.
- 15 -
<PAGE> 16
5.8. Legal Investment. At the time of such Closing, the purchase of
the Preferred Shares by the Investors shall be legally permitted by all laws and
regulations to which such Investors and the Company are subject.
5.9. Opinion of Counsel. At the Closing, the Investors shall have
received an opinion of Jackson Tufts Cole & Black, LLP., counsel for the Company
dated as of the date of the Initial Closing and substantially in the form of
Exhibit D hereto.
5.10. Minimum Investment. Upon the consummation of the Initial
Closing, the Investors shall have subscribed for a minimum of 1,470,588
Preferred Shares at an aggregate purchase price of approximately $3,000,000.
Upon the consummation of the Second Closing, the Investors shall have subscribed
for a minimum of 2,941,176 Preferred Shares at an aggregate purchase price of
approximately $6,000,000. Upon consummation of the Final Closing the Investors
shall have subscribed for a minimum of 2,941,176 Preferred Shares at an
aggregate purchase price of approximately $6,120,000.
5.11. Key Man Insurance. The Company shall have made application for
Key Man life insurance on McKiernan in the face amount of not less than
$1,000,000.
5.12. Shareholders Agreement. Prior to the obligation of the DLJ
Affiliates to close, a Shareholders Agreement (the "Shareholders Agreement")
shall have been executed by and between Vulcan Ventures, Inc. ('Vulcan"), the
DLJ Affiliates and the Company pursuant to which (A) Vulcan agrees to (i) vote
for the Series C Preferred Board of Director nominee selected by the DLJ
Affiliates, and (ii) not elect to redeem its shares of Series B Preferred Stock
until such time that holders of the Preferred Shares have a right to seek
redemption of the Preferred Shares pursuant to the Restated Articles, and (B)
the Company agrees to not permit the transfer of any of the Preferred Shares (or
Common Stock issuable upon conversion thereof) owned by Vulcan or the DLJ
Affiliates on its books or issue a new certificate representing any such shares
until the person to whom such shares are to be transferred has executed a
written agreement substantially in the form of the Shareholders Agreement and
has agreed to be bound by the terms thereof.
6. Conditions of the Company's Obligations at Closing. The obligations
of the Company to the Investors purchasing Preferred Shares hereunder are
subject to the fulfillment on or before the Closing of each Investor's
investment of each of the following conditions by such Investor:
6.1. Representations and Warranties. The representations and
warranties of the Investors contained in Section 3 hereof shall be true on and
as of the date of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing.
6.2. Payment of Purchase Price. Each Investor shall have delivered
the purchase price specified in Section 1.2.
- 16 -
<PAGE> 17
6.3. Legal Investment. At the time of such Closing, the purchase of
the Preferred Shares by the Investors shall be legally permitted by all laws and
regulations to which the Investors and the Company are subject.
7. Registration Rights. The Company covenants and agrees as follows:
7.1. Definitions. For purposes of this Section 7:
(a) The terms "register," "registered," and
"registration" refer to a registration effected by preparing and
filing a registration statement or similar document in compliance
with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document;
(b) The term "Registrable Securities" means (i) the
Common Stock issuable or issued upon conversion of the Preferred
Shares being purchased hereunder (ii) any Common Stock of the
Company issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in
replacement of, such Preferred Shares, excluding in all cases,
however, any Registrable Securities sold by a person in a
transaction in which his registration rights are not assigned and
(iii) all shares of Common Stock which the Investors and their
permitted assignees may hereafter purchase (or shares of Common
Stock issuable upon exercise or conversion of securities hereafter
purchased) pursuant to their rights of first refusal or otherwise;
(c) The number of shares of "Registrable Securities
then outstanding" shall be determined by the number of shares of
Common Stock outstanding which are, and the number of shares of
Common Stock issuable pursuant to the exercisable or convertible
securities which are exercisable or convertible into, Registrable
Securities;
(d) The term "Holder" means any person owning or
having the right to acquire Registrable Securities or any assignee
thereof in accordance with Section 7.13 hereof. It is acknowledged
and agreed by the parties that the registration rights contained in
this Section 7 are pari-passu with and are not superior to the
registration rights granted pursuant to the Series A Purchase
Agreements or the Series B Purchase Agreement;
(e) The term "Series A Holder" shall mean a Holder
under the Series A Purchase Agreements.
(f) The term "Series B Holder" shall mean a Holder
under the Series B Purchase Agreement.
- 17 -
<PAGE> 18
7.2. Request for Registration.
(a) If the Company shall receive (i) at any time
following the first to occur of December 31, 2001 or the date that
is six (6) months after the date of consummation of the Company's
sale of its Common Stock in a bona fide, firm commitment
underwriting pursuant to a registration statement on Form S-1 under
the Securities Act (a" Qualifying IPO") a written request from
Holders holding at least fifty percent (50%) of the Registrable
Securities then outstanding (the "First Initiating Holders") that
the Company file a registration statement under the Securities Act
covering the registration in an underwritten public offering of the
sale of Registrable Securities then outstanding having an
anticipated aggregate offering price, net of underwriting discounts
and commissions, equal to or more than $5,000,000 (the "Initial
Demand Registration"); or (ii) at any time after the consummation of
the Initial Demand Registration, a written request from Holders
holding at least twenty five percent (25%) of the Registrable
Securities then outstanding (the "Second Initiating Holders") that
the Company file a registration statement under the Securities Act
covering the registration in an underwritten public offering of the
sale of at least 25% of the Registrable Securities then outstanding
having an anticipated aggregate offering price, net of underwriting
discounts and commissions, equal to or more than $1,000,000 (the
"Second Demand Registration"), (iii) at any time after the
consummation of the Second Demand Registration a written request
from Holders holding at least fifty percent (50%) of the Registrable
Securities then outstanding (the "Third Initiating Holders"
collectively with the First Initiating Holders and the Second
Initiating Holders, the "Initiating Holders") that the Company file
a registration statement under the Securities Act covering the
registration in an underwritten public offering of the sale of at
least 50% of the Registrable Securities then outstanding having an
anticipated aggregate offering price, net of underwriting discounts
and commissions, equal to or more than $1,000,000; or (iv) the
requisite notice from the Series A Holders or the Series B Holders
of a demand registration, then the Company shall, within twenty-one
(21) days of the receipt thereof, give written notice of such
request to all Holders, Series A Holders and Series B Holders and
shall, subject to the limitations of subsection 7.2(b), file as soon
as practicable a registration statement under the Securities Act
covering all Registrable Securities which the Holders, Series A
Holders and Series B Holders request to be registered within twenty
(20) days of the mailing of such notice by the Company in accordance
with Section 9.6.
(b) Notwithstanding the foregoing, the Company shall
not be obligated to take any action to effect any such registration
pursuant to this Section 7.2:
- 18 -
<PAGE> 19
(i) in any particular jurisdiction in which the
Company would be required to execute a general consent to
service of process in effecting such registration, unless the
Company is already subject to service in such jurisdiction and
except as may be required by the Securities Act; or
(ii) if the Company shall have initiated three
(3) registrations pursuant to this Section 7.2 and the
applicable registration statement has been declared effective
by the SEC and remained effective until the earlier of (A)
such time as all of the Registrable Securities included by the
Holders in such registration have been sold or disposed of by
them or (B) the expiration of the period described in Section
7.4(a). In addition, a request for registration shall not be
deemed to constitute a registration for purposes of this
subparagraph if: (I) the conditions to closing specified in
the purchase agreement or underwriting agreement entered into
in connection with such registration are not satisfied other
than by reason of some act or omission by the Holders
requesting such registration; (II) the Company voluntarily
takes any action that would result in the Holder not being
able to sell such Registrable Securities covered thereby
during the period during which the registration statement must
be kept effective; or (III) if, after it has become effective,
such registration becomes subject to any stop order,
injunction or other order or requirement of the SEC or other
governmental agency or court and such order, injunction or
requirement is not promptly withdrawn or lifted, and such
registration has not otherwise remained effective for the
relevant period (including effective periods both before and
after the order, injunction or requirement is made or
imposed).
(c) Subject to the foregoing paragraph 7.2(b), the
Company shall file a registration statement as soon as possible
after receipt of the request or requests of the Initiating Holders
under this Section 7.2; provided, however, that if the Company shall
furnish to such Initiating Holders within sixty (60) days of receipt
of such request a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors of
the Company (as evidenced by a board resolution) it would be
significantly detrimental to the Company and its shareholders for
such registration statement to be filed on or before the date filing
would be required and it is therefore essential to defer the filing
of such registration statement, the Company shall have the right to
defer such filing to a date not later than one hundred twenty (120)
days after receipt of such request, provided that the Company will
not exercise this right more than once in any twelve-month period.
- 19 -
<PAGE> 20
(d) The underwriting shall be managed by an
underwriter or underwriters of national reputation selected by the
Initiating Holders, which selection shall be subject to the consent
of the Company, which consent shall not be unreasonably withheld.
The right of any Holder to registration pursuant to Section 7.2
shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting. The Company shall (together with all
Holders, Series A Holders and Series B Holders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected as above provided. Notwithstanding any other
provision of this Section 7.2, if the underwriters advise the
Initiating Holders and the Company in writing that marketing factors
require a limitation of the number of shares to be underwritten and
that the total amount of securities that all Holders, Series A
Holders, and Series B Holders (initiating and non-initiating)
request pursuant to this Section 7.2(d) to be included in such
offering exceeds the amount of securities that the underwriters
reasonably believe compatible with the success of the offering, the
Company shall so advise all Holders and all of the shares to be
included in the registration shall be allocated among all Holders,
Series A Holders, and Series B Holders requesting inclusion
(initiating and non-initiating) pro rata according to the total
amount of securities entitled to be included in such registration
owned by each Holder, each Series A Holder, and each Series B Holder
requesting inclusion (initiating or non-initiating) or in such other
proportions as shall be mutually agreed by such selling
shareholders; provided, however, that in the event of such an
allocation McKiernan may not include more than 35% of the shares to
be included in such registration statement by all selling
shareholders without the consent of the holders of the majority of
the shares requesting inclusion in the registration. For the
purposes of this Section 7.2(d) and Section 7.8 of this Agreement,
the language in such sections referring to McKiernan's right to
participate as a selling shareholder at the 35% level means that all
McKiernan Shares (as defined in the Series A Stock Purchase
Agreements and the Series B Stock Purchase Agreements) included in
such a registration, whether held by McKiernan or a transferee of
McKiernan, shall be counted against such 35% limit. In addition, the
language in Section 7.2(d) and Section 7.8 referring to the ability
of the holders of a majority of the shares requesting inclusion in a
registration to waive such 35% limit means that only the holders of
a majority of such shares, calculated without regard to any
McKiernan shares, may effect such a waiver.
If any person does not agree to the terms of any such underwriting, he
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such
- 20 -
<PAGE> 21
registration. If shares are so withdrawn from the registration, the Company
shall then offer to all persons who have retained the right to include
securities in the registration the right to include additional securities in the
registration in an aggregate amount equal to the number of shares so withdrawn,
with such shares to be allocated among the persons requesting additional
inclusion pro rata according to the total amount of securities entitled to be
included in such registration owned by each such person or in such other
proportions as shall be mutually agreed by such selling shareholders.
7.3. Company Registration. If (but without any obligation to do so)
at any time after the date of the Final Closing hereunder the Company proposes
to register (including for this purpose a registration effected by the Company
for shareholders other than the Holders of Registrable Securities except a
registration in which the Holders have the right to include Registrable
Securities under Section 7.2) any of its stock or other securities under the
Securities Act in connection with the public offering of such securities solely
for cash (other than a registration relating solely to the sale of securities to
participants in a Company stock plan, or a registration relating to shares to be
issued in connection with the acquisition of another company, or a registration
on any form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale of the
Registrable Securities), the Company shall, at such time, promptly give each
Holder of Registrable Securities written notice of such registration. Upon the
written request of each Holder of Registrable Securities given within twenty
(20) days after the effectiveness of such notice by the Company in accordance
with Section 9.6, the Company shall, subject to the provisions of Section 7.8,
cause to be registered under the Securities Act all of the Registrable
Securities that each such Holder of Registrable Securities has requested to be
registered.
7.4. Obligations of the Company. Whenever required under this
Section 7 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become
effective (but in no event later than 120 days after the initial
request for registration), and, upon the request of the Holders of a
majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred twenty
(120) days, plus a period equal to any period during which the
Holders are prohibited from making sales because of any stop order,
injunction or other order or requirement of the SEC or any other
governmental agency or court or a period during which the happening
of any event which makes any statement made in the registration
statement, the prospectus or any document incorporated therein by
reference untrue or misleading in any material respect until a
curative amendment or supplement is filed and furnished to the
Holders; provided, however, that before filing a registration
statement or prospectus or any amendments or supplements thereto
(including documents that would be incorporated or
- 21 -
<PAGE> 22
deemed to be incorporated therein by reference) the Company will
furnish to the Holders of the Registrable Securities covered by such
registration and, the underwriters, and any attorney, accountant or
other agent retained by the Holders of Registrable Securities
covered by such registration statement or underwriters copies of all
such documents proposed to be filed, which documents will be subject
to the reasonable and timely review and comment of such Holders,
such counsel and underwriters, if any, and the Company will not file
any registration statement or any amendment thereto or any
prospectus or any supplement thereto filed in connection with a
registration pursuant to Section 7.2 (including such documents
incorporated by reference and proposed to be filed after the initial
filing of the registration statement) to which the Holders of a
majority of the Registrable Securities covered by such registration
statement or the underwriters, if any, shall reasonably and timely
object;
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used
in connection with such registration statement as may be necessary
to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration
statement;
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus and all amendments
and supplements thereto, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably
request in order to facilitate the disposition of Registrable
Securities owned by them;
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as shall be
reasonably requested by the Holders of Registrable Securities,
provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions; and
(e) Enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the
managing underwriter of such offering. Each Holder of Registrable
Securities participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
7.5. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 7 that
the selling Holders of Registrable Securities shall furnish to the Company such
information regarding themselves, the Registrable
- 22 -
<PAGE> 23
Securities held by them, and the intended method of disposition of such
securities as shall be required to effect the registration of the Registrable
Securities.
7.6. Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 7.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements (not to exceed $35,000) of one counsel for the
selling Holders, selling Series A Holders, and selling Series B Holders shall be
borne by the Company; provided, however, that the Company shall not be required
to pay for any expenses of any registration proceeding begun pursuant to Section
7.2 if the registration request is subsequently withdrawn at the request of the
Holders (initiating and non-initiating) holding a majority of the Registrable
Securities to be registered (in which case all participating Holders shall bear
such expenses), unless the Holders of at least 66-2/3% of the Registrable
Securities agree to forfeit their right to initiate one demand registration
pursuant to Section 7.2. (provided that if immediately prior to the time of such
withdrawal, the Holders have learned of a materially adverse change in the
condition, business or prospects of the Company from that known to the Holders
at the time of their request, then the Holders shall not be required to pay any
such expenses and shall retain their rights pursuant to Section 7.2).
7.7. Expenses of Company Registration. The Company shall bear and
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 7.3 for each Holder (which right may be assigned as provided
in Section 7.13), including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees relating or apportionable
thereto and the fees and disbursements of one counsel (not to exceed $35,000)
for the selling Holders, selling Series A Holders, and selling Series B Holders
selected by them, but excluding underwriting discounts and commissions relating
to Registrable Securities.
7.8. Underwriting Requirements. In connection with any offering
involving an underwriting of shares being issued by the Company, the Company
shall not be required under Section 7.3 to include any of the Holders'
Registrable Securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
it, and then only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. If the
total amount of securities, including Registrable Securities, requested by
shareholders to be included in an offering (other than a registration effected
pursuant to Section 7.2) exceeds the amount of securities sold other than by the
Company that the underwriters reasonably believe compatible with the success of
the offering, then the Company shall be required to include in the offering only
that number of such securities, including Registrable Securities, which the
underwriters believe will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling
shareholders, including Series A Holders and Series B Holders, according to the
total amount of securities entitled to be included therein owned by each selling
shareholder or in such other proportions as shall mutually be agreed to by such
selling shareholders). The underwriters,
- 23 -
<PAGE> 24
pursuant to the preceding sentence, may completely exclude the Holder's
Registrable Securities from such underwriting if no other selling shareholders'
securities are so included.
If any person does not agree to the terms of any such underwriting, he
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration. If
shares are so withdrawn from the registration, the Company shall then offer to
all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion pro rata
according to the total amount of securities entitled to be included in such
registration owned by each such person or in such other proportions as shall be
mutually agreed by such selling shareholders.
For purposes of the immediately preceding parenthetical concerning
apportionment, for any selling shareholder which is a holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and shareholders of such holder, or the estates and family members of
any such partners and retired partners, and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "selling shareholder," and
any pro rata reduction with respect to such "selling shareholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "selling shareholder," as defined in
this sentence.
7.9. Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 7.
7.10. Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 7:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless: (i) each Holder, the officers,
directors, agents, partners and legal counsel of each Holder of
Registrable Securities, and (ii) each person, if any, who controls
such Holder within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the officers, directors, agents, partners and legal counsel of
such control person, against any losses, claims, damages or
liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange Act or other federal or state
law, rule or regulation insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (A) any untrue statement or alleged
untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto,
- 24 -
<PAGE> 25
(B) the omission or alleged omission to state therein a material
fact required to be stated therein, or necessary to make the
statements therein not misleading, or (C) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act,
any state securities law or any rule or regulation promulgated under
the Securities Act, the Exchange Act or any state securities law;
and the Company will reimburse each such Holder, officer, agent,
director, partner, legal counsel, underwriter or controlling person
each officer, director, agent, partner and legal counsel of such
controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the indemnity agreement contained
in this subsection 7.10(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Company
(which shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability
or action to the extent that it primarily arises out of or is based
upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection
with such registration by any such Holder, officer, partner,
director, agent, legal counsel or controlling person.
(b) To the extent permitted by law, each selling
Holder will, severally but not jointly, indemnify and hold harmless
(i) the Company; each of its officers, directors, agents, partners
and legal counsel; and (ii) each person, if any, who controls the
Company within the meaning of the Securities Act and the officers,
directors, agents, partners and legal counsel of such control
person, and any other Holder selling securities in such registration
statement or any of such other Holder's officers, directors, agents,
partners, legal counsel or any person who controls such Holder,
against any losses, claims, damages or liabilities (joint or
several) to which the Company or any officer, director, agent,
partner, legal counsel, or controlling person, or other such Holder
or director, officer, legal counsel or controlling person of such
other Holder may become subject, under the Securities Act, the
Exchange Act or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereto)
primarily arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished
by such Holder expressly for use in connection with such
registration; and each such Holder will reimburse any legal or other
expenses reasonably incurred by the Company or any officer,
director, agent, partner, legal counsel, controlling person, other
Holder, or officer, director, agent, partner, legal counsel or
controlling person of such other Holder in connection with
investigating or defending any such loss, claim,
- 25 -
<PAGE> 26
damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 7.10(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the
consent of the Investor (which consent shall not be unreasonably
withheld) and provided further that in no event shall the liability
of any selling Holder hereunder be greater in amount than the dollar
amount of the proceeds (net of the payment of underwriting discounts
and commissions payable by such selling Holder) received by any such
selling Holder upon the sale of the Registrable Securities giving
rise to such indemnification obligation.
(c) Promptly after receipt by an indemnified party
under this Section 7.10 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if
a claim in respect thereof is to be made against any indemnifying
party under this Section 7.10, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying
party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel at
its own expense if it so desires. Notwithstanding the foregoing, if
the indemnified party and the indemnifying party have conflicting
interests with respect to the action so that joint counsel for them
would be inappropriate, (as determined by counsel to the indemnified
party and counsel to the indemnifying party), then the indemnifying
party shall pay reasonable fees and expenses of one counsel to the
indemnified party. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of
any such action, if it materially adversely effects the ability to
defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 7.10, but the
omission to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 7.10. No indemnifying party,
in the defense of any such action, shall, except with the consent of
each indemnified party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified
party of a release from liability in respect of such action.
(d) If the indemnification provided for in this
Section 7.10 is held by a court of competent jurisdiction to be
unavailable to an indemnified party, then, except to the extent that
contribution is not permitted under Section 11(f) of the Securities
Act, each indemnifying party, in lieu of indemnifying such
indemnified party thereunder, hereby
- 26 -
<PAGE> 27
agrees to contribute to the amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect
the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other. The parties hereto agree that it
would not be just and equitable if contribution pursuant to this
Section 7.10(d) were determined by pro rata allocation or by any
other method of allocation that does not take into account the
equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 7.10(d),
no indemnifying party that is a selling Holder shall be required to
contribute any amount in excess of the amount by which the net
proceeds received by such selling Holder from the sale of
Registrable Securities exceeds the amount of any damages that such
selling Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
indemnity and contribution agreements contained in this Section 7.10
are in addition to any liability that the indemnifying parties may
have to the indemnified parties.
(e) The obligations of the Company and Holders under
this Section 7.10 shall survive the completion of any offering of
Registrable Securities in a registration statement under this
Section 7, and otherwise.
7.11. Reports Under Securities Exchange Act of 1934. With a view to
making available to the Investors purchasing Shares hereunder the benefits of
Rule 144 promulgated under the Securities Act and any other rule or regulation
of the SEC that may at any time permit a Holder to sell securities of the
Company to the public without registration, the Company agrees to:
(a) make and keep public information available, as
those terms are understood and defined in SEC Rule 144, at all times
after ninety (90) days after the effective date of the first
registration statement filed by the Company for the offering of its
securities to the general public;
(b) file with the SEC in a timely manner all reports
and other documents required of the Company under the Securities Act
and the Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns
any Registrable Securities, forthwith upon request (i) a written
statement by the Company that it has complied with the reporting
requirements of SEC Rule 144 (at any time after ninety (90) days
after the effective date of
- 27 -
<PAGE> 28
the first registration statement filed by the Company), the
Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), and (ii) a copy of the most
recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company.
7.12. Form S-3 Registration. In case the Company shall receive
written request or requests from Holders owning a majority of the Registrable
Securities then outstanding, that the Company effect a registration on Form S-3
and any related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all
other Holders of Registrable Securities; and
(b) as soon as practicable, effect such registration
and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all
such portion of such Holder's or Holders' Registrable Securities as
are specified in such request, together with all or such portion of
the Registrable Securities of any other Holder or Holders joining in
such request as are specified in a written request given within 20
days after effectiveness of such written notice from the Company
pursuant to Section 9.6 hereof; provided, however, that the Company
shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 7.12: (i) if
Form S-3 is not available for such offering by the Holders; (ii) if
the Holders, together with the holders of any other securities of
the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at
any aggregate price to the public of less than $1,000,000; (iii) if
the Company shall furnish to the Holders a certificate signed by the
Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors of the Company it would be
seriously detrimental to the Company and its stockholders for such
Form S-3 Registration to be effected at such time, in which event
the Company shall have the right to defer the filing of the Form S-3
Registration Statement for a period of not more than one hundred
twenty (120) days after receipt of the request of the Holder or
Holders under this Section 7.12; provided, however, that the Company
shall not utilize this right more than once in any 12 month period;
(iv) if the Company within the twelve month period preceding the
date of such request, already has effected two registrations on Form
S-3 for the Holders pursuant to this Section 7.12, or (v) if the
Company has completed a Qualifying IPO within the preceding 180
days, or (vi) in any particular jurisdiction in which the Company
would be required to qualify to do
- 28 -
<PAGE> 29
business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable
after receipt of the request or requests of the Holders. All
expenses, other than underwriting discounts and commissions,
incurred in connection with requested pursuant to Section 7.12,
including (without limitation) all other registration, filing,
qualification, printer's and accounting fees shall be borne by the
Company, including up to $35,000 of reasonable fees and disbursement
for one counsel for the Selling Shareholders.
7.13. Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 7 may be
assigned by a Holder to a transferee or assignee who (i) is not a competitor of
the Company and acquires at least fifty thousand (50,000) shares (as adjusted
for stock splits, combinations, etc.) of Registrable Securities, (ii) is an
Investor as defined hereunder, or (iii) is a partner or equity holder or an
affiliate of an Investor (or a third party duly authorized to act on behalf of
an Investor or its partners or equity holders), provided that such partner or
equity holder or affiliate has appointed such Investor (or such duly authorized
third party) as its lawful attorney-in-fact to receive notices, vote and
otherwise make binding decisions under the terms of this Section 7; provided, in
each case, the Company is, within thirty days of such transfer, furnished with
written notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being assigned;
and provided, further, that such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Securities Act.
7.14. "Market Stand-Off" Agreement. Each Holder of Registrable
Securities hereby agrees that it shall not, to the extent requested by the
Company and an underwriter of Common Stock (or other securities) of the Company,
sell or otherwise transfer or dispose of any securities of the Company (other
than securities registered in the offering) whether or not acquired by such
Holder under this Agreement during a reasonable and customary period of time
(not to exceed one hundred twenty (120) days), as agreed to by the Company and
the underwriters, following the effective date of a registration statement of
the Company filed under the Securities Act; provided, however, that:
(a) such agreement shall be applicable only to the
first such registration statement of the Company which covers shares
(or securities) to be sold on its behalf to the public in an
underwritten offering; and
(b) all officers and directors of the Company, holders
of 5% or more of the Company's issued and outstanding capital stock
and all
- 29 -
<PAGE> 30
other persons with registration rights (whether or not pursuant to
this Agreement) similarly agree not to sell or transfer.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such reasonable and customary period.
7.15. Amendment of Registration Rights. Any provision of this
Section 7 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least 66-2/3% of the Registrable Securities. Any amendment or waiver effected
in accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
7.16. Rights That May Be Granted to Subsequent Investors.
(a) Within the limitations prescribed by this
paragraph (a), but not otherwise, the Company may grant to
subsequent investors in the Company rights of incidental
registration (such as those provided in Section 7.3). Such rights
may only pertain to shares of Common Stock, including shares of
Common Stock into which any other securities may be converted. Such
rights may be granted with respect to (i) registrations actually
requested by Initiating Holders pursuant to Section 7.2 or by Series
A Holders pursuant to Section 7.2 of the Series A Purchase Agreement
or by Series B Holders pursuant to Section 7.2 of the Series B
Purchase Agreement, but only in respect of that portion of any such
registration as remains after inclusion of all Registrable
Securities requested by Holders, Series A Holders, and Series B
Holders and (ii) registrations initiated by the Company, but only in
respect of that portion of such registration as is available under
the limitations set forth in Section 7.8 (which limitations shall
apply pro-rata to all Holders, Series A Holders, and Series B
Holders) and such rights shall be limited in all cases to sharing
pro-rata in the available portion of the registration in question
with Holders, Series A Holders and the Series B Holders, such
sharing to be based on the number of shares of Common Stock held by
the respective Holders, Series A Holders, and the Series B Holders
and held by such other investors, plus the number of shares of
Common Stock into which other securities held by the Holders, Series
A Holders, and Series B Holders and such other investors are
convertible, which are entitled to registration rights. With respect
to registrations which are for underwritten public offerings,
"available portion" shall mean the portion of the underwritten
shares which is available as specified in clauses (i) and
- 30 -
<PAGE> 31
(ii) of the third sentence of this paragraph (a). Shares not
included in such underwriting shall not be registered.
(b) The Company may not grant to subsequent investors
in the Company rights of registration upon request (such as those
provided in Section 7.2) unless (i) such rights are limited to
shares of Common Stock, (ii) all Holders, Series A Holders, and the
Series B Holders are given enforceable contractual rights to
participate in registrations requested by such subsequent investors
on a pro-rata basis with such subsequent investors such
participation to be on a pro-rata basis, and subject to the
limitations, described in the final three sentences of paragraph (a)
of this Section 7.16, (iii) such rights shall not become effective
prior to one hundred eighty (180) days after the effective date of
the first registration pursuant to Section 7.2 and (iv) such rights
shall not be more favorable than those granted to the Holders.
7.17. Termination of Registration Rights. The Company's obligations
pursuant to this Section 7 shall terminate with respect to each Holder of
Registrable Securities on the earlier to occur of (i) five years from the date
of consummation a Qualifying IPO or (ii) such time as such Holder is eligible to
sell all of its Registrable Securities pursuant to Rule 144 (other than pursuant
to Rule 144(k)) under the Securities Act in a single three (3) month period
provided that the Company has been continually subject to the reporting
requirements of the Exchange Act for at least two years immediately prior to the
time of such sale.
8. Covenants.
8.1. Delivery of Financial Statements. The Company shall deliver to
each Investor for as long as such Investor (together with its affiliates) holds
not less than 100,000 Preferred Shares (or Common Stock into which such
Preferred Shares have been converted), as adjusted for stock splits, stock
dividends, reclassifications and similar events:
(a) as soon as practicable, but in any event within
one hundred twenty (120) days after the end of each fiscal year of
the Company, an income statement for such fiscal year, a balance
sheet of the Company as of the end of such year, and a cash flow
statement, such year-end financial reports to be in reasonable
detail, prepared in accordance with generally accepted accounting
principles ("GAAP") audited by independent public accountants of
recognized national standing; and
(b) within forty-five (45) days of the end of each
quarter, a statement of operations, cash flow analysis and balance
sheet for and as of the end of such quarter, in reasonable detail;
such quarterly statements shall also compare actual performance to
budget and to the prior year's comparable period.
- 31 -
<PAGE> 32
8.2. Inspections. On a quarterly basis, the Company shall permit
each Investor or its authorized representatives, at such Investor's expense, to
visit and inspect the Company's properties, to examine its books of account and
records and to discuss the Company's affairs, finances and accounts with its
senior management at reasonable times as may be requested by the Investor;
provided, however, that the Company shall not be obligated pursuant to this
Section 8.2 to provide access to any information which it reasonably considers
to be a trade secret or similar confidential information.
8.3. Director Elected by Holders of Series C Preferred Stock. The
Investors will consult with the Company with respect to any director elected
from time to time by the holders of Series C Preferred Stock and will make
reasonable efforts to elect a director reasonably acceptable to the Company.
8.4. Termination of Covenants. The covenants set forth in Section
8.1 and 8.2 shall terminate and be of no further force or effect upon the
consummation of a Qualifying IPO or the Company first becomes subject to the
periodic reporting requirements of section 13(a) or 15(d) of the Exchange Act,
whichever event shall first occur.
8.5. Insurance. The Company shall keep and maintain in full force
and effect (i) fire and casualty insurance policies, with extended coverage,
reasonably sufficient in amount to allow it to replace any of its properties
that might be damaged or destroyed and (ii) general liability insurance in
amounts customary for entities in similar business and at a similar stage of
development.
8.6. Co-Sale Rights. McKiernan agrees that during the period ending
on the consummation of a Qualifying IPO or immediately after the closing of the
sale or merger of the Company (where the Company is not the surviving entity or
where there otherwise is a change of control), he will not sell any shares of
Common Stock of the Company owned by him (the "McKiernan Common Stock') without
notifying the Investors twenty (20) or more days prior to the closing of such
sale and permitting the Investors and the holders of the Series A Preferred
Stock and Series B Preferred Stock then entitled to similar rights to
participate (through the sale of shares of Common Stock) in such sale on a
pro-rata basis, treating McKiernan's Common Stock and all of the Preferred
Shares (on an as converted to Common Stock basis), and such Series A Preferred
Stock and Series B Preferred Stock (on an as converted to Common Stock basis) as
a group. Each Investor must notify McKiernan in writing that such Investor will
participate in such sale (and sell such Investor's shares of Common Stock in
strict accordance with the terms and conditions of such sale as described in the
notice) on or before ten (10) business days before the anticipated closing of
such sale, or such Investor will have no right to participate in such sale. This
Section 8.6 shall not pertain to any transfers by McKiernan to his ancestors,
descendants or spouse or to trusts for the benefit of such persons, or any bona
fide gift by McKiernan; provided, however, any shares of McKiernan's Common
Stock transferred in a transaction described in this sentence shall continue to
be subject to the same co-sale obligations set forth in this Section 8.6 as if
McKiernan continued to own such shares.
- 32 -
<PAGE> 33
8.7. Rights of First Offer on Transfers by McKiernan. McKiernan
agrees that during the period ending on the consummation of a Qualifying IPO or
immediately after the closing of the sale or merger of the Company (where the
Company is not the surviving entity or where there otherwise is a change of
control), he will not sell any shares of McKiernan 's Common Stock without
notifying the Investors twenty (20) or more days prior to the closing of such
sale and permitting such Investors the right to purchase all (but not less than
all) such McKiernan Common Stock. Each Investor may purchase his or its pro rata
share (which proportion is to be determined by dividing the number of shares of
Common Stock issued or issuable upon conversion of the Series C Preferred Stock
held by such Investor by all of the Company's Common Stock then outstanding or
issuable upon conversion of the Series C Preferred Stock) of such McKiernan
Common Stock on the same terms and conditions as McKiernan is offering such
McKiernan Common Stock to other persons. Prior to any sale by McKiernan of any
McKiernan Common Stock subject to this right of first offer, McKiernan shall
notify the Investors, in writing, of his intention to sell such McKiernan Common
Stock, setting forth the terms under which he proposes to make such sale. Within
ten (10) days after receipt of such notice, each Investor shall notify McKiernan
as to whether he or it desires to purchase any or all of his or its pro rata
share of such McKiernan Common Stock for the price and on the general terms
specified in the notice. In the event any Investor elects not to purchase such
holder's pro rata share of such McKiernan Common Stock, the remaining Investors
shall have the right to purchase their pro rata share of such available shares
on the terms described above. McKiernan shall promptly notify the remaining
Investors of the shares available for purchase ("Remaining McKiernan Shares").
If, within ten (10) days after McKiernan gives his aforesaid notice, an Investor
has not notified McKiernan of the number of Remaining McKiernan Shares he or it
desires to purchase upon the terms and conditions set forth in such notice (in
the event such shares are over subscribed each Investor will be entitled to
purchase on a pro-rata basis), McKiernan may, during a period of one hundred
twenty (120) days following the end of such ten (10) day period, sell such
Remaining McKiernan Shares at a price and upon terms and conditions no more
favorable to such purchasers than those set forth in such notice, subject to
compliance with the Co-Sale rights of the Investors set forth in Section 8.6
hereof. If the Investors elect to purchase all of the McKiernan Common Stock
offered, the Investors so purchasing shall pay for the McKiernan Common Stock by
a wire transfer of immediately available funds against delivery of the
securities at the executive offices of the Corporation at the time of the
scheduled closing therefor. McKiernan shall take all such action as may be
reasonably required by any regulatory authority in connection with the exercise
by the Investors of the right to purchase McKiernan Common Stock as set forth
herein. The right of first refusal contained in this Section 8.7 shall not apply
to (i) securities sold by McKiernan in connection with an underwritten offering
pursuant to a registration statement filed under the Securities Act or in
connection with the sale or merger of the Company, or (ii) any transfers by
McKiernan to his ancestors, descendants or spouse or to trusts for the benefit
of such persons, or any bona fide gift by McKiernan; provided, however, any
shares of McKiernan Common Stock transferred in a transaction described in this
sentence shall continue to be subject to the same right of first offer
obligations set forth in this Section 8.7 as if McKiernan continued to own such
shares.
- 33 -
<PAGE> 34
8.8. Qualified Small Business Status. The Company shall use its
commercially reasonable efforts not to and shall not knowingly, without the
prior written consent or affirmative vote or written consent of the holders of
at least a majority of the total outstanding shares of Series C Preferred Stock
who purchased such shares of Series C Preferred Stock from the Company pursuant
to this Agreement, voting separately as a class, take any action affecting, or
permit any action, other than a Permitted Action (as defined below), to affect,
the capital structure (including purchases of its own stock) or operation of its
business which would cause the Preferred Shares not to qualify as "qualified
small business stock" under Code Section 1202. As used in this Agreement,
"Permitted Action" shall mean a merger of the Company with or into any other
corporation or corporations (other than a mere reincorporation transaction), a
sale of all or substantially all of the assets of the Company or a transaction
or series of related transactions in which the Company issues shares
representing more than 50% of the voting power of the Company immediately after
giving effect to such transaction.
9. Miscellaneous.
9.1. Survival of Warranties; Indemnification. The warranties,
representations and covenants of the Company and the Investors contained in or
made pursuant to this Agreement shall survive the execution and delivery of this
Agreement and the Final Closing and shall in no way be affected by any
investigation of the subject matter thereof made by or on behalf of the
Investors or the Company. The Company agrees to indemnify and hold harmless each
Investor from any losses or damages (including without limitation reasonable
attorneys fees) suffered arising out of a breach of any representation, warranty
or covenant of the Company under this Agreement.
9.2. Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties, including permitted transferees of the
Preferred Shares and the Common Stock into which it has been converted. Nothing
in this Agreement, express or implied, is intended to confer upon any party
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
9.3. Governing Law. This Agreement shall be governed by and
construed under the internal substantive laws (but not the choice of law rules)
of the State of California.
9.4. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.5. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
9.6. Notices. Except as otherwise expressly provided herein, any
notice required or permitted hereunder shall be given in writing and it or any
certificates or other
- 34 -
<PAGE> 35
documents delivered hereunder shall be deemed effectively given or delivered (as
the case may be) upon personal delivery (professional courier permissible) or
when mailed by receipted United States certified mail delivery, five (5)
business days after deposit in the United States mail. Such certificates,
documents or notice may be personally delivered or sent to the following
address: (a) if to a Investor, to the address set forth with respect to such
investor on Exhibit B-2 attached hereto, or to such other address of which such
investor shall have given notice pursuant hereto the Company, or (b) if to the
Company, to CyberSource Corporation, 550 S. Winchester Blvd., Suite 301, San
Jose, California 95128, or to such other address of which the Company shall have
given notice pursuant hereto.
9.7. Finder's Fee. Each Investor severally agrees to indemnify and
hold harmless the Company from any liability for any commission or compensation
in the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which such investor or any of its
officers, partners, employees or representatives is responsible. The Company
agrees to indemnify and hold harmless each Investor from any liability for any
commission or compensation in the nature of a finder's fee (and the costs and
expenses of defending against such liability or asserted liability) for which
the Company or any of its officers, employees or representatives is responsible.
9.8. Expenses. Each party to this Agreement shall bear its own
expenses incurred in connection with the negotiation, preparation, execution and
consummation of this Agreement, including the fees, expenses and disbursements
of its respective legal counsel incurred in connection herewith.
9.9. Amendments and Waivers. Except as specified in Section 7.14,
any term of this Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and the holders of at least 66-2/3% of shares of the Common Stock issued or
issuable upon conversion of the Preferred Shares; provided, however, the
conditions to Closing set forth in Section 5 hereof may only be amended by
unanimous agreement of the Investors.
9.10. Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
9.11. Aggregation of Stock. All Preferred Shares (or Common Stock
issued on conversion thereof) held or acquired by affiliated entities or persons
shall be aggregated together for the purpose of determining the availability of
any rights under this Agreement.
9.12. Confidentiality Agreement. Each Investor and any successor or
assign of such Investor who receives from the Company or its agents, directly or
indirectly, any information which the Company has not made generally available
to the public, pursuant to the preparation and execution of this Agreement or
disclosure in connection therewith or pursuant to the provisions of Section 8
hereof, acknowledges and agrees that such information is confidential
- 35 -
<PAGE> 36
and for its use only in connection with evaluating its investment in the
Company, and further agrees that it will not disseminate such information to any
person other than its accountant, investment advisor or attorney and that such
dissemination shall be only for purposes of evaluating its investment.
9.13. Enforcement.
(a) Remedies at Law or in Equity. If the Company or
any Investor shall default in any of its obligations under this
Agreement or if any representation or warranty made by or on behalf
of the Company or any Investor, as the case may be, in this
Agreement or in any certificate, report or other instrument
delivered under or pursuant to any term hereof shall be untrue or
misleading in any material respect as of the date of this Agreement
or as of the Closing of such investment or as of the date it was
made, furnished or delivered, the Company or such Investor may
proceed to protect and enforce its rights, including by way of suit
in equity or action at law, whether for the specific performance of
any term contained in this Agreement or the Restated Articles of the
Company or for an injunction against the breach of any such term or
in furtherance of the exercise of any power granted in this
Agreement or such Restated Articles, or for damages or to enforce
any other legal or equitable right of such Investor (including
Investor's right to indemnification under Section 9.1) or to take
any one or more of such actions. In the event such an action is
brought, the prevailing party in such dispute shall be entitled to
recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect
to this Agreement or the Restated Articles of the Company, including
without limitation such reasonable fees and expenses of attorneys
and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
(b) Remedies Cumulative; Waiver. No remedy referred to
herein is intended to be exclusive, but each shall be cumulative and
in addition to any other remedy referred to above or otherwise
available to the Company or any Investor at law or in equity. No
express or implied waiver by the Company or any Investor of any
default shall be a waiver of any future or subsequent default as to
such party. The failure or delay of the Company or any party in
exercising any rights granted it hereunder shall not constitute a
waiver of any such right and any single or partial exercise of any
particular right by such party shall not exhaust the same or
constitute a waiver of any other right provided herein.
9.13.2. Entire Agreement. This Agreement and the other documents and
agreements delivered pursuant hereto constitute the full and entire
understanding and agreement among the parties with regard to the subjects
hereof and thereof and
- 36 -
<PAGE> 37
supersedes any prior agreements (including any memorandum of understanding
or letters of intent) between the parties regarding the subject matter
hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Solely with respect to the agreements "Company"
made in Sections 7.1 - 7.17, 8.6 and CYBERSOURCE CORPORATION, a
8.7 hereof: California corporation
_______________________________ By: ___________________________________
WILLIAM S. MCKIERNAN Name: WILLIAM S. MCKIERNAN
Title: President and Chief Executive
Officer
"Investors"
VULCAN VENTURES, INC.
110 110th Avenue NE, Suite 550
Bellevue, WA 98004
By: ___________________________________
Name: _________________________________
Title: ________________________________
- 38 -
<PAGE> 38
GLOBAL RETAIL PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By: ___________________________________
Name: _________________________________
Title: ________________________________
GLOBAL RETAIL PARTNERS FUNDING, INC.
By: ___________________________________
Name: _________________________________
Title: ________________________________
GRP PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By: ___________________________________
Name: _________________________________
Title: ________________________________
- 39 -
<PAGE> 39
DLJ DIVERSIFIED PARTNERS, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.
General Partner
By: ___________________________________
Name: _________________________________
Title: ________________________________
DLJ DIVERSIFIED PARTNERS-A, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.
General Partner
By: ___________________________________
Name: _________________________________
Title: ________________________________
DLJ FIRST ESC L.L.C.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION, Manager
By: ___________________________________
Name: _________________________________
Title: ________________________________
WA&H INVESTMENT, L.L.C.
By: Wessels, Arnold & Henderson Group,
L.L.C. its managing member
By:_____________________________________
Name: Thomas J. Brigl
Title: CFO/Managing Director
FARLEY INDUSTRIES, INC.
Sears Tower, Suite 5000
Chicago, IL 60606
By: ___________________________________
Name: _________________________________
Title: ________________________________
- 40 -
<PAGE> 40
PACIFIC ASSET PARTNERS
222 Kearny Street, Suite 204
San Francisco, CA 94108
By: ___________________________________
Name: _________________________________
Title: ________________________________
----------------------------------------
STANFORD C. FINNEY, JR.
c/o Heather Evans Gilker
8201 Preston Road, Suite 400
Dallas, TX 75225
RAINBOW TRADING PARTNERS, LTD.
8201 Preston Road, Suite 400
Dallas, TX 75225
By: ___________________________________
Name: _________________________________
Title: ________________________________
RAINBOW TRADING VENTURE PARTNERS, L.P.
8201 Preston Road, Suite 400
Dallas, TX 75225
By: ___________________________________
Name: _________________________________
Title: ________________________________
FARLEY INC.
Sears Tower, Suite 5000
Chicago, IL 60606
By: ___________________________________
Name: _________________________________
Title: ________________________________
- 41 -
<PAGE> 41
UH TECHNOLOGY PARTNERS, LDC
By: ____________________________________
General Partner of its Investment
Manager, Unterberg Harris Capital
Management, LP
UH CAPITAL PARTNERS INTERNATIONAL, LDC
By: ____________________________________
General Partner of its Investment
Manager, Unterberg Harris Capital
Management, LP
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, LP
By: ____________________________________
Member of its Investment General
Partner, Unterberg Harris LLC
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, CV
By: ____________________________________
Member of its Investment General
Partner, Unterberg Harris LLC
- 42 -
<PAGE> 42
WILBLAIRCO ASSOCIATES, L.P.
By: ____________________________________
Name: Stephen Cambell
Its: General Partner
- 43 -
<PAGE> 43
EXHIBIT A-1
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
- 44 -
<PAGE> 44
EXHIBIT B-1
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
NO. OF SHARES
"INVESTOR" PURCHASE PRICE PURCHASED
<S> <C> <C>
Global Retail Partners, L.P. $ 1,923,444.60 942,865
Vulcan Ventures, Inc. $ 1,461,998.64 716,666
UH Technology Partners, LDC $ 377,775.36 185,184
UH Capital Partners International, LDC $ 122,224.56 59,914
Unterberg Harris Private Equity Partners, LP $ 412,000.44 201,961
Unterberg Harris Private Equity Partners, CV $ 87,999.48 43,137
DLJ Diversified Partners, L.P. $ 573,146.16 280,954
DLJ Diversified Partners-A, L.P. $ 212,847.48 104,337
GRP Partners, L.P. $ 125,035.68 61,292
Global Retail Partners Funding, Inc. $ 132,420.48 64,912
DLJ First ESC L.L.C $ 33,105.12 16,228
WA&H Investment, L.L.C $ 300,000.36 147,059
Farley Industries, Inc. $ 65,000.52 31,863
Farley, Inc. $ 65,000.52 31,863
Pacific Asset Partners $ 30,000.24 14,706
Stanford C. Finney, Jr $ 25,999.80 12,745
Rainbow Trading Partners, Ltd. $ 25,999.80 12,745
Rainbow Trading Venture Partners, L.P. $ 25,999.80 12,745
TOTAL $ 5,999,999.04 2,941,176
</TABLE>
<PAGE> 45
EXHIBIT B-2
NOTICES
WITH A COPY TO:
Robert Kunold, Esq.
Foster Pepper & Shefelman PLLC
1111 Third Avenue, Suite 3400
Seattle, WA 98101
WITH A COPY TO:
Heather Gilker
Rainbow Trading Partner, Ltd.
8201 Preston Road, Suite 440
Dallas, TX 75225
WITH A COPY TO:
Heather Gilker
Rainbow Trading Venture Partners, L.P.
8201 Preston Road, Suite 440
Dallas, TX 75225
WITH A COPY TO:
Stanford C. Finney, Jr.
c/o Heather Gilker
8201 Preston Road, Suite 400
Dallas, TX 75225
WITH A COPY TO:
Robert Stafford
Pacific Assets Partners
222 Kearny Street, Suite 204
San Francisco, CA 94108
<PAGE> 46
WITH A COPY TO:
Tom Brigl
WA&H Investment
901 Marquette Avenue
Minneapolis, MN 55402
WITH A COPY TO:
Steven P. Novak
Unterberg Harris Capital Partners
10 East 50th Street
New York, NY 10022
WITH A COPY TO:
David Vogel
FTL Investment, Inc.
Sears Tower, Suite 5000
Chicago, IL 60606
WITH A COPY TO:
David Vogel
Farley, Inc.
Sears Tower, Suite 5000
Chicago, IL 60606
WITH A COPY TO:
Osamu Watanabe
Global Retail Partners, L.P.
2121 Avenue of the Stars, 30th Floor
Los Angeles, CA 90067
WITH A COPY TO:
Ivy Dodes
DLI Diversified Partners, L.P.
277 Park Avenue, 23rd Floor
New York, NY 10172
- 2 -
<PAGE> 47
WITH A COPY TO:
Osamu Watanabe
GRP Partners, L.P.
2121 Avenue of the Stars, 30th Floor
Los Angeles, CA 90067
WITH A COPY TO:
Osamu Watanabe
Global Retail Partners Funding, Inc.
2121 Avenue of the Stars, 30th Floor
Los Angeles, CA 90067
WITH A COPY TO:
Ivy Dodes
DLJ First ESC L.L.C.
277 Park Avenue, 23rd Floor
New York, NY 10172
- 3 -
<PAGE> 48
EXHIBIT C
SCHEDULE OF EXCEPTIONS
<PAGE> 1
EXHIBIT 10.8
CYBERSOURCE CORPORATION
SERIES D PREFERRED
STOCK PURCHASE AGREEMENT
THIS SERIES D PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is
made as of the 18th day of March, 1998 by and among CYBERSOURCE CORPORATION, a
California corporation (the "Company"), William S. McKiernan ("McKiernan")
(solely with respect to Sections 7.1 through 7.17, 8.6 and 8.7 hereof) and the
purchasers listed on the signature pages hereto under the headings "Initial
Closing Investors" and "Second Closing Investors," each of whom is herein
referred to as an "Investor").
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereby agree as follows:
1. Purchase and Sale of Series D Preferred Stock.
1.1. Sale and Issuance of Series D Preferred Stock.
(a) The Board of Directors of the Company shall adopt and
file with the Secretary of State of the State of California on or
before the Initial Closing (as defined below) the Fourth Amended and
Restated Articles of Incorporation (collectively, the "Restated
Articles") in substantially the form attached hereto as Exhibit A-1.
(b) Subject to the terms and conditions of this Agreement,
each Investor agrees severally and not jointly to purchase, and the
Company agrees to sell and issue to each Investor, severally and not
jointly, at the Closings (as defined below) the number of shares of
Series D Preferred Stock (the "Preferred Shares"), set forth
opposite the Investor's name on the Schedule of Investors attached
as Exhibits B-1A and B-1B to this Agreement (the "Schedule of
Investors"), for up to an aggregate of 1,153,846 Preferred Shares at
a purchase price of $2.60 per share, for the purchase price shown
opposite such Investor's name on the Schedule of Investors (for an
aggregate total purchase price of not less than $3,000,000);
provided, that each Investor that participates in the Initial
Closing, as defined below (each as "Initial Closing Investor")
agrees to invest such amount as is necessary to ensure that all
Investors collectively invest not less than an aggregate of
$3,000,000 in the Closing.
1.2. Closings. The purchase and sale of the Preferred Shares
shall take place in up to two closings, the first of which will occur on March
18th, 1998 (the "Initial Closing") and the second of which will occur on April
3, 1998 (unless the Investors and the Company agree to complete the sale of the
Preferred Shares at the Initial Closing) (the "Second Closing"), each at the
offices of Jackson Tufts Cole & Black, LLP, 60 South Market Street, San Jose,
California, or at such other time and place as the parties mutually agree upon
(each such time and place designated as a "Closing" with respect to the
Investors tendering funds in exchange for Preferred Shares at that time, and
collectively as the "Closings" ). At the Closings, in the aggregate, the
<PAGE> 2
Company will deliver to the Investors stock certificates representing 1,153,846
Preferred Shares against payment of the purchase price therefor of $2.60 per
share by wire transfers of immediately available funds. The Closings of the
purchase and sale of the Preferred Shares shall only take place upon the
Investors entering into that certain Internet Commerce Services Corporation
Series D Preferred Stock Purchase Agreement (the "ICS Purchase Agreement") and
consummating the purchase and sale of Internet Commerce Services Corporation
Series D Preferred Stock pursuant to the terms of the ICS Purchase Agreement.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Investor, except as set forth on the Schedule of
Exceptions attached hereto as Exhibit C, which exceptions shall be deemed to be
representations and warranties as if made hereunder as follows:
2.1. Organization, Good Standing and Qualification. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to own and hold its properties, carry on its business as now conducted
and as proposed to be conducted. The Company has full corporate power and
authority to enter into and perform its obligations under this Agreement and to
carry out the transactions contemplated by this Agreement. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure so to qualify would have a material adverse effect on its
business or properties. A copy of the Company's Restated Articles and the
Company's Bylaws (as amended) have been delivered to each Investor each of which
are true and correct in full force and effect and have not been amended.
2.2. Capitalization.
(a) Immediately prior to the Initial Closing the authorized
capital of the Company consists, or will consist of:
(i) Preferred Stock. 10,000,000 shares of Preferred Stock,
1,985,520 of which have been designated Series A Preferred Stock, no
par value (the "Series A Preferred Stock"), of which 1,985,520
shares are issued and outstanding, 2,500,000 of which have been
designated Series B Preferred Stock, no par value (the "Series B
Preferred Stock") of which 2,037,038 shares are issued and
outstanding, 3,000,000 of which have been designated Series C
Preferred Stock, no par value (the "Series C Preferred Stock") of
which 3,000,000 shares are issued and outstanding and 1,523,424
shares of which have been designated Series D Preferred Stock. No
shares of Series D Preferred Stock were issued and outstanding
immediately prior to the Initial Closing. The rights, preferences
and privileges of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock, and the Series D
Preferred Stock will be as stated in the Restated Articles.
(ii) Common Stock. 30,000,000 shares of Common Stock,
9,070,000 shares of which were issued and outstanding.
-2-
<PAGE> 3
(b) The list set forth in Item 2.2(b) of the Schedule of
Exceptions hereto is a complete and correct list of all security
holders of the Company, showing their holdings of issued and
outstanding shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Common Stock and other Company
securities (including options and warrants) as of the date of this
Agreement. To the best knowledge of the Company, each such holder is
the sole beneficial owner of all of the shares as to which such
holder is the record holder. Except as set forth in Item 2.2 of the
Schedule of Exceptions hereto, holders of shares of the Company's
Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, and Common Stock have no preemptive rights. True
and complete copies of the Series A Preferred Stock Purchase
Agreements (as defined in Section 2.11 of this Agreement), the
Series B Preferred Stock Purchase Agreement (as defined in Section
2.11 of this Agreement), and the Series C Preferred Stock Purchase
Agreement (as defined in Section 2.11 of this Agreement) have been
furnished to each Investor requesting them prior to the date hereof.
All such issued and outstanding shares have been duly authorized and
validly issued, are fully paid and nonassessable and have been
issued in compliance with all applicable state and federal laws
concerning the issuance of securities.
(c) Agreements for Purchase of Shares. Except for:
(i) the conversion privileges and preemptive rights of the
Series A Preferred Stock, the Series B Preferred Stock, and the
Series C Preferred Stock; and
(ii) options issued pursuant to the Company's stock option
plan and other agreements, as of the Initial Closing options for
2,782,397 shares, including options for 1,000,000 shares issued
outside of the Company's stock option plan, are presently
outstanding and an additional 1,217,603 shares are available for
grant under the Company's stock option plan, as amended.
prior to the Initial Closing there will not be any outstanding options,
warrants, rights (including conversion, preemptive rights or rights of first
offer) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock.
2.3. Subsidiaries. Except as set forth in Item 2.3 of the
Schedule of Exceptions, the Company does not presently own or control, directly
or indirectly, any interest in any other corporation, association, partnership
or other business entity.
2.4. Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance (or
reservation for issuance) and delivery of the Preferred Shares being sold
hereunder and the Common Stock issuable upon conversion of the Preferred Shares,
has been taken or will be taken on or prior to each Closing, and this Agreement
constitutes a valid and legally binding obligation of the Company enforceable in
accordance with its terms, except as affected by (i) bankruptcy or insolvency
laws, or (ii) equitable principles or public policy.
-3-
<PAGE> 4
2.5. Valid Issuance of Preferred Stock. The Preferred Shares,
when issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable and, based in part upon the representations of the Investors set
forth in Section 3 of this Agreement, will be issued in compliance with all
applicable federal and state securities laws free and clear of all restrictions
on transfer (other than those arising from application of the securities laws).
The Common Stock issuable upon conversion of the Preferred Shares purchased
under this Agreement have been duly and validly reserved for issuance and when
issued and delivered in accordance with the Restated Articles will be duly and
validly issued, fully paid and nonassessable.
2.6. Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any United States federal, state, local or provincial governmental
authority on the part of the Company is required in connection with:
(a) the Company's valid execution, delivery, or performance
of this Agreement; and
(b) the offer, sale, or issuance of the Preferred Shares by
the Company hereunder or (assuming the exemption provided by Section
3(a)(9) of the Securities Act of 1933, as amended, in its current
form is available and no commission is paid in conjunction
therewith) the issuance of Common Stock upon conversion of the
Preferred Shares;
except such filings as have been made prior to the Closings, and except for any
notices of sale required to be filed with the Securities and Exchange
Commission under Regulation D of the Securities Act of 1933, as amended (the
"Securities Act"), or such post-closing filings as may be required under
applicable state securities laws, which will be timely filed within the
applicable periods therefor. To the best knowledge of the Company, neither the
Company nor anyone acting on its behalf has offered any of the Series D
Preferred Stock being sold hereunder or substantially similar securities of the
Company for sale to, or solicited offers to buy any securities of the Company
from, or otherwise approached or negotiated with respect thereto with any
prospective purchaser other than the Investors and other persons whom the
Company believes to be Accredited Investors as (as defined in Section 3.7 of
this Agreement). The Company agrees that neither the Company nor anyone acting
on its behalf will offer such securities of the Company or any part thereof or
any similar securities for issuance or sale to, or solicit any offer to acquire
any of the same from, anyone so as to make the issuance and sale of the
Preferred Shares being sold hereunder not exempt from the registration
requirements of Section 5 of the Securities Act. None of the shares of the
Company's capital stock issued and outstanding has been offered or sold in such
a manner as to make the issuance and sale of such shares or the Preferred
Shares being sold hereunder not exempt from such registration requirements, and
all such shares of capital stock have been offered and sold in compliance with
all applicable federal and state securities laws.
-4-
<PAGE> 5
2.7. Litigation. Except as disclosed in Item 2.7 of the Schedule
of Exceptions, there is no action, suit, proceeding or investigation pending or
currently threatened against the Company which questions the validity of this
Agreement or the right of the Company to enter into this Agreement, or to
consummate the transactions contemplated hereby, or which might result, either
individually or in the aggregate, in any material adverse change in the assets,
prospects, business, operations, or condition (financial or otherwise) of the
Company or any change in the current equity ownership of the Company, nor is the
Company aware that there is any basis for the foregoing. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or which the
Company intends to initiate.
2.8. Patents and Trademarks.
(a) The list set forth in Item 2.8 of the Schedule of
Exceptions is a true and complete list and summary description of
all patents, patent applications, registered trademarks, registered
service marks, registered trade names and registered copyrights, and
licenses and rights to the foregoing presently owned or held by the
Company, none of which is in dispute or in any conflict with the
right of any other person or entity except as indicated on Item 2.7
of the Schedule of Exceptions.
(b) The Company's business as now conducted and as presently
proposed to be conducted does not conflict with or infringe upon
anyone's patents, copyrights, trademarks, trade secrets, trade
dress, know how, processes, or other proprietary rights. The Company
owns, or has the unrestricted right to use free and clear of all
material liens, claims and restrictions, all patents, copyrights,
trademarks, trade secrets, trade dress or other proprietary rights
necessary for the conduct of its business as it is presently
conducted or currently contemplated to be conducted, without
infringing on the right or claim of any person, any patents,
copyrights, trademarks, trade secrets, trade dress, know how,
processes, or other proprietary rights of others. Notwithstanding
any other provision of this Agreement, the exceptions described in
the Schedule of Exceptions do not apply to this subparagraph (b) of
Section 2.8.
2.9. Compliance with Laws and Other Instruments. The Company is
not in violation or default of any provisions of its Articles of Incorporation
or Bylaws or of any instrument, judgment, order, writ, decree or contract to
which it is a party or by which it is bound or, to its knowledge, of any
provision of federal or state statute, rule or regulation applicable to the
Company or any of its property, which violation or default would be materially
adverse to the assets, properties, prospects, business, operations, or condition
(financial or otherwise) of the Company. To the best knowledge of the Company,
there is no contamination of any real property leased or operated by the Company
that could subject the Company to liability in the aggregate in excess of
$10,000 under any environmental laws or regulations. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in any such violation or be in conflict with
or constitute, with or without the passage of time and giving of notice, either
a default under any such provision, instrument, judgment, order, writ, decree or
contract or an event which
-5-
<PAGE> 6
results in the creation of any lien, charge or encumbrance upon any assets of
the Company, which violation, default, conflict or event would be materially
adverse to the assets, properties, prospects, business, operations, or condition
(financial or otherwise) of the Company.
2.10. Agreements; Action.
(a) Except as set forth in Item 2.10 of the Schedule of
Exceptions, there are no agreements, understandings, instruments,
contracts or proposed transactions to which the Company is a party
or by which it is bound which involve (i) obligations of, or
payments to the Company in excess of, $25,000; (ii) the license of
any patent, copyright, trade secret or other proprietary right of
the Company; (iii) material restrictions on the Company's business;
or (iv) material proprietary rights of the Company.
(b) The Company has not (i) declared or paid any dividends,
or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness
for money borrowed or incurred any other liabilities or obligations
(absolute or contingent), individually in excess of $10,000 or in
excess of $25,000 in the aggregate not reflected in the balance
sheet dated December 31, 1997 other than obligations or liabilities
of the Company for compensation under employment, advisor or
consulting agreements, or other than obligations or liabilities
incurred in the ordinary course of business, (iii) made any loans or
advances to any person, other than in the ordinary course of its
business. Without limiting the generality of the foregoing, the
Company does not know of any basis for the assertion against the
Company of any material liabilities of the Company (not provided for
in the documents listed in Item 2.10 of the Schedule of Exceptions
or the Financial Statements).
2.11. Registration Rights. Except as set forth in (i) that
certain Series A Preferred Stock Purchase Agreement dated as of the 6th day of
January 1995, as amended as of (A) the 27th day of February, 1996, (B) the 3rd
day of July, 1996, (C) the 12th day of July, 1996; (ii) that certain Series A
Preferred Stock Purchase Agreement dated as of the 27th day of February, 1996
(collectively, the "Series A Stock Purchase Agreements"), (iii) that certain
Series B Preferred Stock Purchase Agreement dated as of the 12th day of July,
1996, and (iv) that certain Series C Preferred Stock Purchase Agreement dated as
of the 26th day of September, 1997, and except as provided in Section 7 of this
Agreement, the Company has not granted or agreed to grant any registration
rights, including piggy-back rights, to any person or entity.
2.12. Title to Property and Assets. The Company has good and
marketable title to the property and assets it purports to own free and clear of
all mortgages, liens, loans and encumbrances, except such encumbrances and liens
which arise in the ordinary course of business and do not materially impair the
Company's ownership or use of such property or assets. With respect to the
property and assets it leases, the Company is in compliance with such leases and
holds a valid leasehold interest free of any liens, claims or encumbrances,
which liens, claims or encumbrances would be materially adverse to the Company.
Except as set forth in Item 2.12 of the Schedule of Exceptions, the Company owns
or has the right to use all assets (tangible and intangible), necessary
-6-
<PAGE> 7
for the conduct of its business as presently conducted and believes it can
acquire the right to use or the ownership of all assets, necessary for the
conduct of its business as it is proposed to be conducted, except for such
assets that are individually or in the aggregate immaterial to the business of
the Company. The Company knows of no assets required for the conduct of its
business as it is presently conducted, or as it is proposed to be conducted, the
right to use or ownership of which it is unlikely to obtain, except for such
assets that are individually or in the aggregate immaterial to the business of
the Company.
2.13. Financial Statements. The Company has delivered to each
Investor its audited financial statements (income statement, balance sheet and
cash flow statement) at and for the periods ended December 31, 1995, December
31, 1996, and unaudited financial statements (balance sheet and profit and loss
statement) at and for the period ended December 31, 1997 (the "Financial
Statements"). The Financial Statements are complete and correct in all material
respects and have been prepared in accordance with generally accepted accounting
principles on a consistent basis throughout the periods indicated. The Financial
Statements fairly present the financial condition and operating results of the
Company as of the dates, and for the periods, indicated therein, subject to
normal year-end adjustments. All accounts receivable shown on the balance sheet
constitute accounts receivable resulting from the sale of goods and services in
the ordinary course of business, and, to the best knowledge of the Company, such
accounts receivable are subject to no conditions as to payment, offsets,
counterclaims, defenses of any kind, returns, allowances, or credits other than
to the extent of the allowance for doubtful accounts shown thereon, and other
than warranty claims that in the aggregate do not exceed $5,000. The Company has
not received any material customer complaints concerning its products or
services.
2.14. Changes. Since December 31, 1997, there has not been (i)
any change in the assets, liabilities, condition (financial or otherwise),
business, or operating results, or to the best of the Company's knowledge,
prospects of the Company from that reflected in the Financial Statements, except
changes in the ordinary course of business which have not been, in the
aggregate, materially adverse; (ii) any damage, destruction or loss, whether or
not covered by insurance, affecting in any material way the assets, properties,
condition (financial or otherwise), operating results, prospects or business of
the Company (as such business is presently conducted and as it is proposed to be
conducted); (iii) any waiver by the Company of a material right or of a material
debt owed to it or any satisfaction or discharge of any material lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business; (iv) any change or amendment in any material respect to a
material contract or agreement by which the Company or any of its assets or
properties is bound or subject; or (v) any change in any compensation
arrangement or agreement with any officer, director or key employee. For the
purposes of this Section 2.14 only, prospects shall not include general economic
or industry trends. Notwithstanding any other provision of this Agreement, the
exceptions described in the Schedule of Exceptions do not apply to this Section
2.14.
2.15. Proprietary Information. To the best of the Company's
knowledge, it has done nothing to compromise the secrecy, confidentiality or
value of any of its trade secrets, know-how, inventions, prototypes, designs,
processes or technical data required to conduct its business as now conducted or
as proposed to be conducted and has taken security measures to protect the
secrecy, confidentiality and value of all the intellectual property which it
believes are reasonable and
-7-
<PAGE> 8
customary in the industry in which it operates. All of the Company's employees
and consultants have executed a non-disclosure/invention assignments agreement
in the form attached as Annex III to the Schedule of Exceptions. To the
Company's knowledge, no employee of the Company in connection with such
employee's employment with the Company, has violated the terms of any agreement
with a previous employer.
2.16. Permits. The Company has all franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses, or other similar authority.
2.17. Shareholder Agreements. Except as set forth in the Series A
Preferred Stock Purchase Agreements, the Series B Preferred Stock Purchase
Agreement, and the Series C Preferred Stock Purchase Agreement, and in that
certain Shareholders' Agreement of even date herewith between and among the
Company, various holders of Series C Preferred Stock and various Investors (the
"Shareholders' Agreement"), there are presently no outstanding shareholder
agreements, voting trusts, proxies or other arrangements or understandings
between the Company and its shareholders, or among any of the shareholders of
the Company, relating to either the voting or the disposition of their
respective shares.
2.18. Brokers or Finders. The Company has not engaged any broker,
investment banker or finder in connection with the sale of the Preferred Shares.
2.19. Disclosure. The Company has provided each Investor with all
information that such Investor has requested in connection with such Investor's
decision to invest in the Preferred Shares. To the best of the Company's
knowledge after due inquiry, neither this Agreement nor any other written
statement made or delivered in connection herewith contains any untrue statement
of a material fact or, taking this Agreement and all such written statements as
a whole, omits to state a material fact necessary to make statements herein or
therein misleading; provided, however, with respect to any projections or
expressions of opinion or predictions, the Company represents only that such
projections or expressions of opinions and predictions were made in good faith
and that the Company believes that there is a reasonable basis therefor.
2.20. Insurance. Set forth in Item 2.20 of the Schedule of
Exceptions is a true and complete list of all current insurance policies of the
Company, all of which are in full force and effect.
2.21. Taxes. The Company has accurately prepared and timely filed
all federal, state and local reports, returns, estimates, declarations,
information returns and statements with respect to taxes (together, "Tax
Returns") that are required to be filed by it and has paid or made provision for
the payment of all taxes due with respect to the periods covered by such Tax
Returns. The provision for taxes in the financial statements is sufficient for
the payment of all accrued and unpaid taxes. No such Tax Returns of the Company
have been audited by any
-8-
<PAGE> 9
taxing authority, and there are no waivers in effect of the applicable statute
of limitations for any period. No deficiency assessment or proposed adjustment
of federal income taxes or state or municipal taxes of the Company is pending
and the Company has no knowledge of any proposed liability for any tax to be
imposed. There are no tax sharing agreements or similar contracts or
arrangements to which the Company is a party. The Company has not been a member
of an affiliated group (within the meaning of Section 1504 of the Internal
Revenue Code), filing a consolidated federal income Tax Return. No closing
agreement pursuant to Section 7121 of the Internal Revenue Code, or similar
provision of any state or local law, has been entered into by or with respect to
the Company. For the purpose of this Section 2.21, "tax" or "taxes" shall mean
all federal, state, local or foreign taxes, including but not limited to income,
gross receipts, windfall profits, alternative minimum, value added, severance,
property, production, sales, use, license, excise, franchise, employment,
withholding or similar taxes, together with any interest, additions or penalties
with respect thereto and any interest in respect of such additions or penalties.
2.22. ERISA. Except as listed in Item 2.22 of the Schedule of
Exceptions, the Company does not maintain, sponsor, or contribute to any program
or arrangement that is an "employee pension benefit plan" (a "Pension Plan"), an
"employee welfare benefit plan" or a "multiemployer plan", as those terms are
defined in Section 3(2), 3(1), and 3(37) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). Except as listed in Item 2.22 of the
Schedule of Exceptions, the Company has no other incentive or benefit
arrangements. Each plan listed on Item 2.22 of the Schedule of Exceptions which
is subject to ERISA is in substantial compliance with ERISA. Each plan listed on
Item 2.22 of the Schedule of Exceptions which is a Pension Plan intended to be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended,
has been amended to comply with the qualification provisions of the Tax Reform
Act of 1986 and subsequent legislation before the expiration of the applicable
remedial amendment period and has received a favorable determination letter from
the Internal Revenue Service, and the Company is not aware of circumstances
likely to result in the revocation of any such favorable determination letter.
Other than as set forth in Item 2.22, there are no other deferred compensation,
bonus, incentive, profit sharing, retirement or other employee compensation
arrangements or plans.
2.23. Labor Agreements and Actions. The Company is not bound by
or subject to (and none of its assets or properties is bound by or subject to)
any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and no labor union has requested or has sought to
represent any of the employees, representatives or agents of the Company. There
is no strike or other labor dispute involving the Company pending, or to the
best knowledge of the Company threatened, which could have a material adverse
effect on the assets, properties, condition (financial or otherwise), operating
results, prospects or business of the Company (as such business is presently
conducted and as it is proposed to be conducted), nor is the Company aware of
any labor organization activity involving its employees. The Company is not
aware that any officer, key employee, key consultant or key contractor, or that
any group of key employees, intends to terminate such person's employment or
relationship with the Company, as the case may be, nor does the Company have a
present intention to terminate the employment of or relationship with any of the
foregoing persons.
-9-
<PAGE> 10
2.24. Qualified Small Business Stock. To the best of the
Company's knowledge, the Preferred Shares will meet each of the requirements for
qualification as "qualified small business stock" set forth in Section 1202(c)
of the Internal Revenue Code of 1986, as amended (the "Code"). The Company (and
any predecessor):
(a) is and will be a domestic C corporation;
(b) will not have made any purchases of its own stock
described in Code Section 1202(c)(3)(B) during the one year period
preceding the Closings;
(c) will not have made any purchases of its own stock
described in Code Section 1202(c)(3)(A) during the two year period
preceding the Closings; and
(d) has maintained and will maintain aggregate gross assets,
as defined by Code Section 1202(d)(2), at all times between August
10, 1993 and through the Closings of less than $50 million, taking
into account the assets of any corporation required to be aggregated
with the Company in accordance with Code Section 1202(d)(3).
3. Representations and Warranties of Each Investor. Each Investor hereby
severally and not jointly represents and warrants that:
3.1. Authorization. This Agreement constitutes such Investor's
valid and legally binding obligation, enforceable in accordance with its terms
except as affected by (i) bankruptcy or insolvency laws, and (ii) equitable
principles or public policy. Each Investor who is not a natural person, hereby
represents that the person executing this Agreement on its behalf is duly
authorized to do so.
3.2. Purchase Entirely for Own Account. This Agreement is made
with each Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Preferred Shares to be received by such Investor
hereunder will be acquired for investment for such Investor's own account, not
as a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that such Investor has no present intention of otherwise
distributing the same. By executing this Agreement, each Investor purchasing
Preferred Shares hereunder further represents that such Investor does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Preferred Shares, or any portion thereof. Each Investor
that is an entity represents that it has full power and authority to enter into
this Agreement. Notwithstanding the foregoing, in certain limited circumstances,
Global Retail Partners, L.P., DLJ Diversified Partners, L.P., DLJ Diversified
Partners-A, L.P., GRP Partners, L.P., Global Retail Partners Funding, Inc., and
DLJ ESC II, L.P. (collectively, the "DLJ Affiliates") may be contractually
obligated to transfer certain of the Preferred Shares owned by them to a limited
number of affiliates, each of whom is an Accredited Investor as defined in
Section 3.7 hereof.
-10-
<PAGE> 11
3.3. Disclosure of Information. Each Investor believes he or it
has received all the information he or it considers necessary or appropriate for
deciding whether to purchase the Preferred Shares. Each such Investor further
represents that he or it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Preferred Shares. The foregoing does not modify the Company's
representations and warranties set forth herein or the Investor's right to rely
thereon.
3.4. Investment Experience. Each Investor is an investor in
securities of companies in the development stage and acknowledges that he or it
is able to fend for himself or itself, can bear the economic risk of his or its
investment and has such knowledge and experience in financial or business
matters that he or it is capable of evaluating the merits and risks of the
investment in the Preferred Shares. If other than an individual, Investor also
represents it has not been organized solely for the purpose of acquiring the
Preferred Shares.
3.5. Restricted Securities. Each Investor purchasing Preferred
Shares hereunder understands that the Preferred Shares are characterized as
"restricted securities" under the federal securities laws inasmuch as they are
being acquired from the Company in a transaction not involving a public offering
and that under such laws and applicable regulations such Preferred Shares may be
resold without registration under the Securities Act only in certain limited
circumstances. In this connection each Investor represents that he or it is
familiar with Securities and Exchange Commission ("SEC") Rule 144, as presently
in effect, and understands the resale limitations imposed thereby and by the
Securities Act
3.6. Further Limitations on Disposition. Without in any way
limiting the representations set forth above, each Investor purchasing Preferred
Shares hereunder further agrees not to make any disposition of all or any
portion of the Preferred Shares (or the Common Stock issuable upon the
conversion of the Preferred Shares) unless and until:
(a) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement;
or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition, (ii) if reasonably requested by the Company,
such Investor shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such Preferred Shares
under the Securities Act and (iii) if reasonably requested by the
Company, the transferee shall have furnished to the Company its
agreement to abide by the restrictions on transfer set forth herein
as if it were a purchaser hereunder.
3.7. Accredited Investor. The term "Accredited Investor" as used
in this Agreement means a person or entity who:
(a) is a director or executive officer of the Company; or
-11-
<PAGE> 12
(b) is a natural person whose individual net worth, or joint
net worth with his or her spouse, at the time of purchase exceeds
$1,000,000, and the total purchase price does not exceed ten percent
(10%) of his or her individual net worth, or joint net worth with
his or her spouse, at the time of sale; or
(c) is a natural person who had an individual income in
excess of $200,000 in each of the two most recent years or joint
income with that person's spouse in excess of $300,000 in each of
those years and reasonably expects to reach the same income level in
the current year, and the total purchase price does not exceed ten
percent (10%) of his or her individual net worth, or joint net worth
with his or her spouse, at the time of sale; or
(d) is a private business development company as defined in
section 202(a)(22) of the Investment Advisors Act of 1940; or
(e) is either (i) a bank as defined in section 3(a)(2) of the
Securities Act, or a savings and loan association or other
institution as defined in section 3(a)(5)(A) of the Securities Act
whether acting in its individual or fiduciary capacity; (ii) a
broker or dealer registered pursuant to section 15 of the Securities
Exchange Act of 1934; as amended (the "Exchange Act"), (iii) an
insurance company as defined in section 2(13) of the Securities Act;
(iv) an investment company registered under the Investment Company
Act of 1940 or a business development company as defined in section
2(a)(48) of that Act; (v) a Small Business Investment Company
licensed by the U.S. Small Business Administration under section
301(c) or (d) of the Small Business Investment Act of 1958; or (vi)
an employee benefit plan within the meaning of Title I of ERISA, if
the investment decision is made by a plan fiduciary, as defined in
section 3(21) of ERISA, which is either a bank, savings and loan
association, insurance company, or registered investment adviser, or
if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are Accredited Investors; or
(f) is any organization described in section 501(c)(3) of the
Internal Revenue Code of 1986, as amended ("Internal Revenue Code"),
corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
Shares offered (and, in the case of an Investor located in
Washington, operating for not less than twelve months), with total
assets in excess of $5,000,000 (or, in the case of an Investor
located in the State of Washington, $10,000,000); or
(g) is any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the Shares offered,
whose purchase is directed by a sophisticated person as described in
Regulation 230.506(b)(2)(ii) promulgated under the Securities Act;
or
(h) is an entity in which all of its equity owners meet one
or more of the standards set forth in (a) through (g) above.
-12-
<PAGE> 13
As used in this Section 3.7, the term "net worth" means the excess of
total assets over total liabilities, and "income" means actual economic income,
which may differ from adjusted gross income for federal income tax purposes.
3.8. Representations and Warranties as to Accredited Investors
and Excluded Purchasers Status. Each Investor as to himself or itself, severally
and not jointly, further represents to the Company that such Investor is (i) an
Accredited Investor and (ii) an excluded purchaser (as such term is described in
Section 260.102.13 of Title 10 of the California Code of Regulations or section
25102(f) of the California Corporate Securities Law of 1968, as amended).
3.9. Legends. To the extent applicable, each certificate or other
document evidencing any of the Preferred Shares issued hereunder or any Common
Stock issued upon conversion of the Preferred Shares shall be endorsed with the
legends set forth below, and each Investor covenants that, except to the extent
such restrictions are waived by the Company, such Investor shall not transfer
the securities without complying with the restrictions on transfer described in
the legends endorsed thereon;
(a) The following legend under the Securities Act:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR
HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH
ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT
SUCH REGISTRATION IS NOT REQUIRED."
(b) If required by the authorities of any state in connection
with the issuance or sale of the Preferred Shares, the legend
required by such state authority.
The Company shall not be required (i) to transfer on its
books any Preferred Shares which shall have been transferred in
violation of any of the provisions set forth in this Agreement, or
(ii) to treat as owner of such Preferred Shares or to accord the
right to vote as such owner or to pay dividends to any transferee to
whom such Preferred Shares shall have been so transferred.
3.10. Removal of Legends.
(a) Any legend endorsed on a certificate pursuant to Section
3.9(a) or (b) hereof shall be removed (i) if Preferred Shares
represented by such certificate shall have been effectively
registered under the Securities Act or otherwise lawfully sold in a
public transaction, (ii) if such Preferred
-13-
<PAGE> 14
Shares may be transferred in compliance with Rule 144(k) promulgated
under the Securities Act, or (iii) if the holder of such Preferred
Shares shall have provided the Company with an opinion from counsel,
in form and substance reasonably acceptable to the Company and from
attorneys reasonably acceptable to the Company, stating that a
public sale, transfer or assignment of such Preferred Shares may be
made without registration.
3.11. Any legend endorsed on a certificate pursuant to Section
3.9(b) hereof shall be removed if the Company receives an order of the
appropriate state authority authorizing such removal or if the holder of the
Preferred Shares provides the Company with an opinion of counsel, in form and
substance reasonably acceptable to the Company and from attorneys reasonably
acceptable to the Company, stating that such state legend may be removed.
4. California Commissioner of Corporations.
4.1. Corporate Securities Law. THE SALE OF THE SECURITIES WHICH
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
5. Conditions of Each Investor's Obligations at Closing. The obligations
of each Investor under Section 1.1(b) of this Agreement are subject to the
fulfillment on or before the Closing of its investment of each of the following
conditions, the waiver of which shall not be effective against any Investor who
does not consent in writing thereto:
5.1. Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
5.2. Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
The entering into, delivery and performance of this Agreement by the Company
shall have been duly authorized by all necessary corporate action.
5.3. Consents, etc. The Company shall have secured all permits,
consents and authorizations that shall be necessary or required lawfully to
consummate this Agreement, to issue the Preferred Shares to be purchased by the
Investors hereunder and to issue the Common Stock into which it may be
converted, including without limitation to (i) the waiver of rights of first
refusal granted to holders of Series A Preferred Stock by such holders of Series
A Preferred Stock, the consent of the required majority of the holders of the
Series A Preferred Stock, (ii) the waiver of rights of first refusal granted to
holders of Series B Preferred Stock by such holders of Series B Preferred Stock,
the consent of the required majority of the holders of the Series B
-14-
<PAGE> 15
Preferred Stock, and (iii) the waiver of rights of first refusal granted to
holders of Series C Preferred Stock by such holders of Series C Preferred Stock,
and the consent of the required majority of the holders of the Series C
Preferred Stock.
5.4. Compliance Certificate. At the Closing, the Chief Executive
Officer of the Company shall deliver to the Investors a certificate certifying
that the conditions set forth in Sections 5.1, 5.2 and 5.3 have been fulfilled.
5.5. Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated by this Agreement
and all documents and instruments incident to such transactions shall be in
substance and form reasonably satisfactory to Vulcan Ventures, Inc., and its
counsel, and such Investor and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as such
Investor or its counsel may reasonably request.
5.6. Qualifications. The Commissioner of Corporations of the
State of California and any applicable United States state securities regulatory
authority shall have issued permits qualifying the offer and sale of the
Preferred Shares to the Investors pursuant to this Agreement, or such offer and
sale shall be exempt from such qualification under the California Corporate
Securities Law of 1968, as amended, and any other applicable state blue-sky law.
5.7. Restated Articles. The Company shall have adopted and filed
with the Secretary of State of the State of California on or before the date of
the Closing, the Restated Articles.
5.8. Legal Investment. At the time of such Closing, the purchase
of the Preferred Shares by the Investors shall be legally permitted by all laws
and regulations to which such Investors and the Company are subject.
5.9. Opinion of Counsel. At the Closing, the Investors shall have
received an opinion of Jackson Tufts Cole & Black, LLP., counsel for the Company
dated as of the date of the Initial Closing and substantially in the form of
Exhibit D hereto.
5.10. Minimum Investment. Upon the consummation of the Initial
Closing, the Initial Closing Investors shall have subscribed for a minimum of
____________ Series D Preferred Shares at an aggregate purchase price of
approximately $_____________. Upon the consummation of the Second Closing, if
applicable, the Initial Closing Investors, and all additional Investors
participating in the Second Closing (if any), shall have collectively subscribed
for a minimum of 1,153,846 Series D Preferred Shares at an aggregate purchase
price of approximately $3,000,000.
5.11. Shareholders Agreement. Prior to the obligation of the DLJ
Affiliates to close, an amended and restated Shareholders Agreement (the
"Shareholders Agreement") shall have been executed by the Company and the
shareholders named therein in the form of Exhibit E hereto.
-15-
<PAGE> 16
6. Conditions of the Company's Obligations at Closing. The obligations
of the Company to the Investors purchasing Preferred Shares hereunder are
subject to the fulfillment on or before the Closing of each Investor's
investment of each of the following conditions by such Investor:
6.1. Representations and Warranties. The representations and
warranties of the Investors contained in Section 3 hereof shall be true on and
as of the date of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing.
6.2. Payment of Purchase Price. Each Investor shall have
delivered the purchase price specified in Sections 1.2 and 1.1(b).
6.3. Legal Investment. At the time of such Closing, the purchase
of the Preferred Shares by the Investors shall be legally permitted by all laws
and regulations to which the Investors and the Company are subject.
7. Registration Rights. The Company covenants and agrees as follows:
7.1. Definitions. For purposes of this Section 7:
(a) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the
Securities Act, and the declaration or ordering of effectiveness of
such registration statement or document;
(b) The term "Registrable Securities" means (i) the Common
Stock issuable or issued upon conversion of the Preferred Shares
being purchased hereunder (ii) any Common Stock of the Company
issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or
other distribution with respect to, or in exchange for or in
replacement of, such Preferred Shares, excluding in all cases,
however, any Registrable Securities sold by a person in a
transaction in which his registration rights are not assigned and
(iii) all shares of Common Stock which the Investors and their
permitted assignees may hereafter purchase (or shares of Common
Stock issuable upon exercise or conversion of securities hereafter
purchased) pursuant to their rights of first refusal or otherwise;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common
Stock outstanding which are, and the number of shares of Common
Stock issuable pursuant to the exercisable or convertible securities
which are exercisable or convertible into, Registrable Securities;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in
accordance with Section 7.13 hereof. It is acknowledged and agreed
by the parties that the registration rights contained in this
Section 7 are pari-passu with and are not superior to the
registration rights granted
-16-
<PAGE> 17
pursuant to the Series A Purchase Agreements, the Series B Purchase
Agreement or the Series C Purchase Agreement;
(e) The term "Series A Holder" shall mean a Holder under the
Series A Purchase Agreements;
(f) The term "Series B Holder" shall mean a Holder under the
Series B Purchase Agreement;
(g) The term "Series C Holder" shall mean a Holder under the
Series C Purchase Agreement;
(h) The term "Series D Holder" shall mean a Holder under this
Series D Purchase Agreement.
7.2. Request for Registration.
(a) If the Company shall receive (i) at any time following
the first to occur of December 31, 2001 or the date that is six (6)
months after the date of consummation of the Company's sale of its
Common Stock in a bona fide, firm commitment underwriting pursuant
to a registration statement on Form S-1 under the Securities Act (a
"Qualifying IPO") a written request from Holders holding at least
fifty percent (50%) of the Registrable Securities then outstanding
(the "First Initiating Holders") that the Company file a
registration statement under the Securities Act covering the
registration in an underwritten public offering of the sale of
Registrable Securities then outstanding having an anticipated
aggregate offering price, net of underwriting discounts and
commissions, equal to or more than $5,000,000 (the "Initial Demand
Registration"); or (ii) at any time after the consummation of the
Initial Demand Registration, a written request from Holders holding
at least twenty five percent (25%) of the Registrable Securities
then outstanding (the "Second Initiating Holders") that the Company
file a registration statement under the Securities Act covering the
registration in an underwritten public offering of the sale of at
least 25% of the Registrable Securities then outstanding having an
anticipated aggregate offering price, net of underwriting discounts
and commissions, equal to or more than $1,000,000 (the "Second
Demand Registration"); or (iii) at any time after the consummation
of the Second Demand Registration a written request from Holders
holding at least fifty percent (50%) of the Registrable Securities
then outstanding (the "Third Initiating Holders" collectively with
the First Initiating Holders and the Second Initiating Holders, the
"Initiating Holders") that the Company file a registration statement
under the Securities Act covering the registration in an
underwritten public offering of the sale of at least 50% of the
Registrable Securities then outstanding having an anticipated
aggregate offering price, net of underwriting discounts and
commissions, equal to or more than $1,000,000; or (iv) the requisite
notice from the Series A Holders, the Series B Holders, or the
Series C Holders of a demand registration, then the Company shall,
within twenty-one (21) days of the receipt thereof, give written
notice of such request to all Holders, and shall, subject to the
limitations of subsection 7.2(b), file as soon as practicable a
registration statement under
-17-
<PAGE> 18
the Securities Act covering all Registrable Securities which the
Holders, or the Series A Holders, Series B Holders and Series C
Holders request to be registered within twenty (20) days of the
mailing of such notice by the Company in accordance with Section
9.6.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action to effect any such registration
pursuant to this Section 7.2:
(i) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process
in effecting such registration, unless the Company is already
subject to service in such jurisdiction and except as may be
required by the Securities Act; or
(ii) if the Company shall have initiated three (3)
registrations pursuant to this Section 7.2 and the applicable
registration statement has been declared effective by the SEC and
remained effective until the earlier of (A) such time as all of the
Registrable Securities included by the Holders in such registration
have been sold or disposed of by them or (B) the expiration of the
period described in Section 7.4(a). In addition, a request for
registration shall not be deemed to constitute a registration for
purposes of this subparagraph if: (I) the conditions to closing
specified in the purchase agreement or underwriting agreement
entered into in connection with such registration are not satisfied
other than by reason of some act or omission by the Holders
requesting such registration; (II) the Company voluntarily takes any
action that would result in the Holder not being able to sell such
Registrable Securities covered thereby during the period during
which the registration statement must be kept effective; or (III)
if, after it has become effective, such registration becomes subject
to any stop order, injunction or other order or requirement of the
SEC or other governmental agency or court and such order, injunction
or requirement is not promptly withdrawn or lifted, and such
registration has not otherwise remained effective for the relevant
period (including effective periods both before and after the order,
injunction or requirement is made or imposed).
(c) Subject to the foregoing paragraph 7.2(b), the Company
shall file a registration statement as soon as possible after
receipt of the request or requests of the Initiating Holders under
this Section 7.2; provided, however, that if the Company shall
furnish to such Initiating Holders within sixty (60) days of receipt
of such request a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors of
the Company (as evidenced by a board resolution) it would be
significantly detrimental to the Company and its shareholders for
such registration statement to be filed on or before the date filing
would be required and it is therefore essential to defer the filing
of such registration statement, the Company shall have the right to
defer such filing to a date not later than one hundred twenty (120)
days after receipt of such request, provided that the Company will
not exercise this right more than once in any twelve-month period.
(d) The underwriting shall be managed by an underwriter or
underwriters of national reputation selected by the Initiating
Holders, which selection
-18-
<PAGE> 19
shall be subject to the consent of the Company, which consent shall
not be unreasonably withheld. The right of any Holder to
registration pursuant to Section 7.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of
such Holder's Registrable Securities in the underwriting. The
Company shall (together with all Holders, Series A Holders, Series B
Holders and Series C Holders proposing to distribute their
securities through such underwriting) enter into an underwriting
agreement in customary form with the underwriter or underwriters
selected as above provided. Notwithstanding any other provision of
this Section 7.2, if the underwriters advise the Initiating Holders
and the Company in writing that marketing factors require a
limitation of the number of shares to be underwritten and that the
total amount of securities that all Holders, Series A Holders,
Series B Holders and Series C Holders (initiating and
non-initiating) request pursuant to this Section 7.2(d) to be
included in such offering exceeds the amount of securities that the
underwriters reasonably believe compatible with the success of the
offering, the Company shall so advise all Holders and all of the
shares to be included in the registration shall be allocated among
all Holders, Series A Holders, Series B Holders and Series C Holders
requesting inclusion (initiating and non-initiating) pro rata
according to the total amount of securities entitled to be included
in such registration owned by each Holder, each Series A Holder,
each Series B Holder and each Series C Holder requesting inclusion
(initiating or non-initiating) or in such other proportions as shall
be mutually agreed by such selling shareholders; provided, however,
that in the event of such an allocation McKiernan may not include
more than twenty percent (20%) of the shares to be included in such
registration statement by all selling shareholders without the
consent of the holders of the majority of the shares requesting
inclusion in the registration. For the purposes of this Section
7.2(d) and Section 7.8 of this Agreement, the language in such
sections referring to McKiernan's right to participate as a selling
shareholder at the twenty percent (20%) level means that all
McKiernan Shares (as defined in the Series A Stock Purchase
Agreements and the Series B Stock Purchase Agreement) included in
such a registration, whether held by McKiernan or a transferee of
McKiernan, shall be counted against such twenty percent (20%) limit.
In addition, the language in Section 7.2(d) and Section 7.8
referring to the ability of the holders of a majority of the shares
requesting inclusion in a registration to waive such twenty percent
(20%) limit means that only the holders of a majority of such
shares, calculated without regard to any McKiernan Shares, may
effect such a waiver.
If any person does not agree to the terms of any such underwriting, such
person shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration. If
shares are so withdrawn from the registration, the Company shall then offer to
all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion pro rata
according to the total amount of securities entitled to be included in such
registration owned by each such person or in such other proportions as shall be
mutually agreed by such selling shareholders.
-19-
<PAGE> 20
7.3. Company Registration. If (but without any obligation to do
so) at any time after the date of the Second Closing hereunder the Company
proposes to register (including for this purpose a registration effected by the
Company for shareholders other than the Holders of Registrable Securities except
a registration in which the Holders have the right to include Registrable
Securities under Section 7.2) any of its stock or other securities under the
Securities Act in connection with the public offering of such securities solely
for cash (other than a registration relating solely to the sale of securities to
participants in a Company stock plan, or a registration relating to shares to be
issued in connection with the acquisition of another company, or a registration
on any form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale of the
Registrable Securities), the Company shall, at such time, promptly give each
Holder of Registrable Securities written notice of such registration. Upon the
written request of each Holder of Registrable Securities given within twenty
(20) days after the effectiveness of such notice by the Company in accordance
with Section 9.6, the Company shall, subject to the provisions of Section 7.8,
cause to be registered under the Securities Act all of the Registrable
Securities that each such Holder of Registrable Securities has requested to be
registered.
7.4. Obligations of the Company. Whenever required under this
Section 7 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective (but in no
event later than one hundred twenty (120) days after the initial
request for registration), and, upon the request of the Holders of a
majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred twenty
(120) days, plus a period equal to any period during which the
Holders are prohibited from making sales because of any stop order,
injunction or other order or requirement of the SEC or any other
governmental agency or court or a period during which the happening
of any event which makes any statement made in the registration
statement, the prospectus or any document incorporated therein by
reference untrue or misleading in any material respect until a
curative amendment or supplement is filed and furnished to the
Holders; provided, however, that before filing a registration
statement or prospectus or any amendments or supplements thereto
(including documents that would be incorporated or deemed to be
incorporated therein by reference) the Company will furnish to the
Holders of the Registrable Securities covered by such registration
and, the underwriters, and any attorney, accountant or other agent
retained by the Holders of Registrable Securities covered by such
registration statement or underwriters copies of all such documents
proposed to be filed, which documents will be subject to the
reasonable and timely review and comment of such Holders, such
counsel and underwriters, if any, and the Company will not file any
registration statement or any amendment thereto or any prospectus or
any supplement thereto filed in connection with a registration
pursuant to Section 7.2 (including such documents incorporated by
reference and proposed to be filed after the initial filing of the
registration statement) to
-20-
<PAGE> 21
which the Holders of a majority of the Registrable Securities
covered by such registration statement or the underwriters, if any,
shall reasonably and timely object;
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used
in connection with such registration statement as may be necessary
to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration
statement;
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus and all amendments
and supplements thereto, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably
request in order to facilitate the disposition of Registrable
Securities owned by them;
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as shall be
reasonably requested by the Holders of Registrable Securities,
provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions; and
(e) Enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the
managing underwriter of such offering. Each Holder of Registrable
Securities participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
7.5. Furnish Information. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Section 7
that the selling Holders of Registrable Securities shall furnish to the Company
such information regarding themselves, the Registrable Securities held by them,
and the intended method of disposition of such securities as shall be required
to effect the registration of the Registrable Securities.
7.6. Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 7.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements (not to exceed $35,000) of one counsel for the
selling Holders, selling Series A Holders, selling Series B Holders and selling
Series C Holders shall be borne by the Company; provided, however, that the
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to Section 7.2 if the registration request is
subsequently withdrawn at the request of the Holders (initiating and non-
initiating) holding a majority of the Registrable Securities to be registered
(in which case all participating Holders shall bear such expenses), unless the
Holders of at least 66-2/3% of the Registrable Securities agree to forfeit their
right to initiate one demand registration pursuant to Section 7.2. (provided
that if immediately prior to the time of such withdrawal, the Holders have
learned of a materially adverse change in the condition, business or prospects
of the Company from that known to the
-21-
<PAGE> 22
Holders at the time of their request, then the Holders shall not be required to
pay any such expenses and shall retain their rights pursuant to Section 7.2).
7.7. Expenses of Company Registration. The Company shall bear and
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 7.3 for each Holder (which right may be assigned as provided
in Section 7.13), including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees relating or apportionable
thereto and the fees and disbursements of one counsel (not to exceed $35,000)
for the selling Holders, selling Series A Holders, selling Series B Holders and
selling Series C Holders selected by them, but excluding underwriting discounts
and commissions relating to Registrable Securities.
7.8. Underwriting Requirements. In connection with any offering
involving an underwriting of shares being issued by the Company, the Company
shall not be required under Section 7.3 to include any of the Holders'
Registrable Securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
it, and then only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. If the
total amount of securities, including Registrable Securities, requested by
shareholders to be included in an offering (other than a registration effected
pursuant to Section 7.2) exceeds the amount of securities sold other than by the
Company that the underwriters reasonably believe compatible with the success of
the offering, then the Company shall be required to include in the offering only
that number of such securities, including Registrable Securities, which the
underwriters believe will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling
shareholders, including Series A Holders, Series B Holders and Series C Holders,
according to the total amount of securities entitled to be included therein
owned by each selling shareholder or in such other proportions as shall mutually
be agreed to by such selling shareholders). The underwriters, pursuant to the
preceding sentence, may completely exclude the Holder's Registrable Securities
from such underwriting if no other selling shareholders' securities are so
included.
If any person does not agree to the terms of any such underwriting, he
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration. If
shares are so withdrawn from the registration, the Company shall then offer to
all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion pro rata
according to the total amount of securities entitled to be included in such
registration owned by each such person or in such other proportions as shall be
mutually agreed by such selling shareholders.
For purposes of the immediately preceding parenthetical concerning
apportionment, for any selling shareholder which is a holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and shareholders of such holder, or the estates and
-22-
<PAGE> 23
family members of any such partners and retired partners, and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "selling
shareholder," and any pro rata reduction with respect to such "selling
shareholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling shareholder," as defined in this sentence.
7.9. Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 7.
7.10. Indemnification. In the event any Registrable Securities
are included in a registration statement under this Section 7:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless: (i) each Holder, the officers,
directors, agents, partners and legal counsel of each Holder of
Registrable Securities, and (ii) each person, if any, who controls
such Holder within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the officers, directors, agents, partners and legal counsel of
such control person, against any losses, claims, damages or
liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange Act or other federal or state
law, rule or regulation insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (A) any untrue statement or alleged
untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (B) the
omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements
therein not misleading, or (C) any violation or alleged violation by
the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the
Securities Act, the Exchange Act or any state securities law; and
the Company will reimburse each such Holder, officer, agent,
director, partner, legal counsel, underwriter or controlling person
each officer, director, agent, partner and legal counsel of such
controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the indemnity agreement contained
in this subsection 7.10(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Company
(which shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability
or action to the extent that it primarily arises out of or is based
upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection
with such registration by any such Holder, officer, partner,
director, agent, legal counsel or controlling person.
-23-
<PAGE> 24
(b) To the extent permitted by law, each selling Holder will,
severally but not jointly, indemnify and hold harmless (i) the
Company; each of its officers, directors, agents, partners and legal
counsel; and (ii) each person, if any, who controls the Company
within the meaning of the Securities Act and the officers,
directors, agents, partners and legal counsel of such control
person, and any other Holder selling securities in such registration
statement or any of such other Holder's officers, directors, agents,
partners, legal counsel or any person who controls such Holder,
against any losses, claims, damages or liabilities (joint or
several) to which the Company or any officer, director, agent,
partner, legal counsel, or controlling person, or other such Holder
or director, officer, legal counsel or controlling person of such
other Holder may become subject, under the Securities Act, the
Exchange Act or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereto)
primarily arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished
by such Holder expressly for use in connection with such
registration; and each such Holder will reimburse any legal or other
expenses reasonably incurred by the Company or any officer,
director, agent, partner, legal counsel, controlling person, other
Holder, or officer, director, agent, partner, legal counsel or
controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability,
or action; provided, however, that the indemnity agreement contained
in this subsection 7.10(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Holder (which
consent shall not be unreasonably withheld) and provided further
that in no event shall the liability of any selling Holder hereunder
be greater in amount than the dollar amount of the proceeds (net of
the payment of underwriting discounts and commissions payable by
such selling Holder) received by any such selling Holder upon the
sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Promptly after receipt by an indemnified party under this
Section 7.10 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under
this Section 7.10, deliver to the indemnifying party a written
notice of the commencement thereof and the indemnifying party shall
have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel at
its own expense if it so desires. Notwithstanding the foregoing, if
the indemnified party and the indemnifying party have conflicting
interests with respect to the action so that joint counsel for them
would be inappropriate, (as determined by counsel to the indemnified
party and counsel to the indemnifying party), then the indemnifying
party shall pay reasonable fees and expenses of one counsel to the
indemnified party. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of
any such action, if it materially adversely effects the ability to
defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 7.10, but
-24-
<PAGE> 25
the omission to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 7.10. No
indemnifying party, in the defense of any such action, shall, except
with the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from liability in respect of
such action.
(d) If the indemnification provided for in this Section 7.10
is held by a court of competent jurisdiction to be unavailable to an
indemnified party, then, except to the extent that contribution is
not permitted under Section 11(f) of the Securities Act, each
indemnifying party, in lieu of indemnifying such indemnified party
thereunder, hereby agrees to contribute to the amount paid or
payable by such indemnified party in such proportion as is
appropriate to reflect the relative fault of the indemnifying party
on the one hand and of the indemnified party on the other. The
parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7.10(d) were determined by pro
rata allocation or by any other method of allocation that does not
take into account the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of
this Section 7.10(d), no indemnifying party that is a selling Holder
shall be required to contribute any amount in excess of the amount
by which the net proceeds received by such selling Holder from the
sale of Registrable Securities exceeds the amount of any damages
that such selling Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The indemnity and contribution agreements
contained in this Section 7.10 are in addition to any liability that
the indemnifying parties may have to the indemnified parties.
(e) The obligations of the Company and Holders under this
Section 7.10 shall survive the completion of any offering of
Registrable Securities in a registration statement under this
Section 7, and otherwise.
7.11. Reports Under Exchange Act. With a view to making available
to the Investors purchasing Shares hereunder the benefits of Rule 144
promulgated under the Securities Act and any other rule or regulation of the SEC
that may at any time permit a Holder to sell securities of the Company to the
public without registration, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after
ninety (90) days after the effective date of the first registration
statement filed by the Company for the offering of its securities to
the general public;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and
the Exchange Act; and
-25-
<PAGE> 26
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written
statement by the Company that it has complied with the reporting
requirements of SEC Rule 144 (at any time after ninety (90) days
after the effective date of the first registration statement filed
by the Company), the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements),
and (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the
Company.
7.12. Form S-3 Registration. In case the Company shall receive
written request or requests from Holders owning a majority of the Registrable
Securities then outstanding, that the Company effect a registration on Form S-3
and any related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all
other Holders of Registrable Securities; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as
would permit or facilitate the sale and distribution of all such
portion of such Holder's or Holders' Registrable Securities as are
specified in such request, together with all or such portion of the
Registrable Securities of any other Holder or Holders joining in
such request as are specified in a written request given within 20
days after effectiveness of such written notice from the Company
pursuant to Section 9.6 hereof; provided, however, that the Company
shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 7.12: (i) if
Form S-3 is not available for such offering by the Holders; (ii) if
the Holders, together with the holders of any other securities of
the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than $1,000,000; (iii) if the
Company shall furnish to the Holders a certificate signed by the
Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors of the Company it would be
seriously detrimental to the Company and its shareholders for such
Form S-3 Registration to be effected at such time, in which event
the Company shall have the right to defer the filing of the Form S-3
Registration Statement for a period of not more than one hundred
twenty (120) days after receipt of the request of the Holder or
Holders under this Section 7.12; provided, however, that the Company
shall not utilize this right more than once in any 12 month period;
(iv) if the Company within the twelve month period preceding the
date of such request, already has effected two registrations on Form
S-3 for the Holders pursuant to this Section 7.12, or (v) if the
Company has completed a Qualifying IPO within the preceding one
hundred eighty (180) days, or (vi) in any particular jurisdiction in
which the Company would be required to qualify to do business or to
execute a general consent to service of process in effecting such
registration, qualification or compliance.
-26-
<PAGE> 27
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable
after receipt of the request or requests of the Holders. All
expenses, other than underwriting discounts and commissions,
incurred in connection with requested pursuant to Section 7.12,
including (without limitation) all other registration, filing,
qualification, printer's and accounting fees shall be borne by the
Company, including up to $35,000 of reasonable fees and disbursement
for one counsel for the selling Holders, Series A Holders, Series B
Holders and Series C Holders.
7.13. Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 7 may be
assigned by a Holder to a transferee or assignee who (i) is not a competitor of
the Company and acquires at least fifty thousand (50,000) shares (as adjusted
for stock splits, combinations, etc.) of Registrable Securities, (ii) is an
Investor as defined hereunder, or (iii) is a partner or equity holder or an
affiliate of an Investor (or a third party duly authorized to act on behalf of
an Investor or its partners or equity holders), provided that such partner or
equity holder or affiliate has appointed such Investor (or such duly authorized
third party) as its lawful attorney-in-fact to receive notices, vote and
otherwise make binding decisions under the terms of this Section 7; provided, in
each case, the Company is, within thirty days of such transfer, furnished with
written notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being assigned;
and provided, further, that such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Securities Act.
7.14. "Market Stand-Off" Agreement. Each Holder of Registrable
Securities hereby agrees that it shall not, to the extent requested by the
Company and an underwriter of Common Stock (or other securities) of the Company,
sell or otherwise transfer or dispose of any securities of the Company (other
than securities registered in the offering) whether or not acquired by such
Holder under this Agreement during a reasonable and customary period of time
(not to exceed one hundred twenty (120) days), as agreed to by the Company and
the underwriters, following the effective date of a registration statement of
the Company filed under the Securities Act; provided, however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers shares (or
securities) to be sold on its behalf to the public in an
underwritten offering; and
(b) all officers and directors of the Company, holders of 5%
or more of the Company's issued and outstanding capital stock and
all other persons with registration rights (whether or not pursuant
to this Agreement) similarly agree not to sell or transfer.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such reasonable and customary period.
-27-
<PAGE> 28
7.15. Amendment of Registration Rights. Any provision of this
Section 7 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least 66-2/3% of the Registrable Securities. Any amendment or waiver effected
in accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
7.16. Rights That May Be Granted to Subsequent Investors.
(a) Within the limitations prescribed by this paragraph (a),
but not otherwise, the Company may grant to subsequent investors in
the Company rights of incidental registration (such as those
provided in Section 7.3). Such rights may only pertain to shares of
Common Stock, including shares of Common Stock into which any other
securities may be converted. Such rights may be granted with respect
to (i) registrations actually requested by Initiating Holders
pursuant to Section 7.2 or by Series A Holders pursuant to Section
7.2 of the Series A Purchase Agreements or by Series B Holders
pursuant to Section 7.2 of the Series B Purchase Agreement, but only
in respect of that portion of any such registration as remains after
inclusion of all Registrable Securities requested by Holders, Series
A Holders, Series B Holders and Series C Holders and (ii)
registrations initiated by the Company, but only in respect of that
portion of such registration as is available under the limitations
set forth in Section 7.8 (which limitations shall apply pro-rata to
all Holders, Series A Holders, Series B Holders and Series C
Holders) and such rights shall be limited in all cases to sharing
pro-rata in the available portion of the registration in question
with Holders, Series A Holders, Series B Holders and Series C
Holders, such sharing to be based on the number of shares of Common
Stock held by the respective Holders, Series A Holders, Series B
Holders and Series C Holders and held by such other investors, plus
the number of shares of Common Stock into which other securities
held by the Holders, Series A Holders, Series B Holders and Series C
Holders and such other investors are convertible, which are entitled
to registration rights. With respect to registrations which are for
underwritten public offerings, "available portion" shall mean the
portion of the underwritten shares which is available as specified
in clauses (i) and (ii) of the third sentence of this paragraph (a).
Shares not included in such underwriting shall not be registered.
(b) The Company may not grant to subsequent investors in the
Company rights of registration upon request (such as those provided
in Section 7.2) unless (i) such rights are limited to shares of
Common Stock, (ii) all Holders, Series A Holders, Series B Holders
and Series C Holders are given enforceable contractual rights to
participate in registrations requested by such subsequent investors
on a pro-rata basis with such subsequent investors such
participation to be on a pro-rata basis, and subject to the
limitations, described in the final three sentences of paragraph (a)
of this Section 7.16, (iii) such rights shall not become effective
prior to one hundred eighty (180) days after the effective date of
the first registration pursuant to Section 7.2 and (iv) such rights
shall not be more favorable than those granted to the Holders.
-28-
<PAGE> 29
7.17. Termination of Registration Rights. The Company's
obligations pursuant to this Section 7 shall terminate with respect to each
Holder of Registrable Securities on the earlier to occur of (i) five years from
the date of consummation a Qualifying IPO or (ii) such time as such Holder is
eligible to sell all of its Registrable Securities pursuant to Rule 144 (other
than pursuant to Rule 144(k)) under the Securities Act in a single three (3)
month period provided that the Company has been continually subject to the
reporting requirements of the Exchange Act for at least two years immediately
prior to the time of such sale.
8. Covenants.
8.1. Delivery of Financial Statements. The Company shall deliver
to each Investor for as long as such Investor (together with its affiliates)
holds not less than 100,000 Preferred Shares (or Common Stock into which such
Preferred Shares have been converted), as adjusted for stock splits, stock
dividends, reclassifications and similar events:
(a) as soon as practicable, but in any event within one
hundred twenty (120) days after the end of each fiscal year of the
Company, an income statement for such fiscal year, a balance sheet
of the Company as of the end of such year, and a cash flow
statement, such year-end financial reports to be in reasonable
detail, prepared in accordance with generally accepted accounting
principles ("GAAP") audited by independent public accountants of
recognized national standing; and
(b) within forty-five (45) days of the end of each quarter, a
statement of operations, cash flow analysis and balance sheet for
and as of the end of such quarter, in reasonable detail; such
quarterly statements shall also compare actual performance to budget
and to the prior year's comparable period.
8.2. Inspections. On a quarterly basis, the Company shall permit
each Investor or its authorized representatives, at such Investor's expense, to
visit and inspect the Company's properties, to examine its books of account and
records and to discuss the Company's affairs, finances and accounts with its
senior management at reasonable times as may be requested by the Investor;
provided, however, that the Company shall not be obligated pursuant to this
Section 8.2 to provide access to any information which it reasonably considers
to be a trade secret or similar confidential information.
8.3. Director Elected by Holders of Series C and Series D
Preferred Stock. The Investors will consult with the Company with respect to any
director elected from time to time by the holders of Series C Preferred Stock
and the Series D Preferred Stock and will make reasonable efforts to elect a
director reasonably acceptable to the Company; provided that any Senior Officer
of Global Retail Partners shall be acceptable to the Company.
8.4. Termination of Covenants. The covenants set forth in Section
8.1 and 8.2 shall terminate and be of no further force or effect upon the
consummation of a Qualifying IPO or the Company first becomes subject to the
periodic reporting requirements of section 13(a) or 15(d) of the Exchange Act,
whichever event shall first occur.
-29-
<PAGE> 30
8.5. Insurance. The Company shall keep and maintain in full force
and effect (i) fire and casualty insurance policies, with extended coverage,
reasonably sufficient in amount to allow it to replace any of its properties
that might be damaged or destroyed and (ii) general liability insurance in
amounts customary for entities in similar business and at a similar stage of
development.
8.6. Co-Sale Rights. McKiernan agrees that during the period
ending on the consummation of a Qualifying IPO or immediately after the closing
of the sale or merger of the Company (where the Company is not the surviving
entity or where there otherwise is a change of control), he will not sell any
shares of Common Stock of the Company owned by him (the "McKiernan Common
Stock") without notifying the Investors twenty (20) or more days prior to the
closing of such sale and permitting the Investors to participate (through the
sale of shares of Common Stock) in such sale on a pro-rata basis. An Investor's
pro-rata share shall be that number of shares of stock equal to the product
obtained by multiplying the aggregate number of shares proposed to be sold in
such transaction by a fraction, the numerator of which is the number of shares
of Common Stock then owned by such Investor (on as as-converted basis), and the
denominator of which is the total number of share of common Stock then owned by
McKiernan and the holders of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock (on an as-converted
basis). It is understood that McKiernan has granted similar co-sale rights to
holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock pursuant to prior agreements, that the calculation of the
Investors' pro-rata participation rights in accordance with the preceding
sentence shall be made without reference to such other co-sale rights, and that
McKiernan shall be responsible for honoring all co-sale rights in accordance
with the respective agreements. Each Investor must notify McKiernan in writing
that such Investor will participate in such sale (and sell such Investor's
shares of Common Stock in strict accordance with the terms and conditions of
such sale as described in the notice) on or before ten (10) business days before
the anticipated closing of such sale, or such Investor will have no right to
participate in such sale. This Section 8.6 shall not pertain to any transfers by
McKiernan to his ancestors, descendants or spouse or to trusts for the benefit
of such persons, or any bona fide gift by McKiernan; provided, however, any
shares of McKiernan's Common Stock transferred in a transaction described in
this sentence shall continue to be subject to the same co-sale obligations set
forth in this Section 8.6 as if McKiernan continued to own such shares.
8.7. Rights of First Offer on Transfers by McKiernan. McKiernan
agrees that during the period ending on the consummation of a Qualifying IPO or
immediately after the closing of the sale or merger of the Company (where the
Company is not the surviving entity or where there otherwise is a change of
control), he will not sell any shares of McKiernan Common Stock without
notifying the Investors twenty (20) or more days prior to the closing of such
sale and permitting such Investors the right to purchase all (but not less than
all) such McKiernan Common Stock. Each Investor shall be entitled to purchase
its pro rata share of such McKiernan Common Stock on the same terms and
conditions as McKiernan is offering such McKiernan Common Stock to other
persons. An Investor's pro-rata share shall be that number of shares of stock
equal to the product obtained by multiplying the aggregate number of shares
proposed to be sold in such transaction by a fraction, the numerator of which is
the number of shares of
-30-
<PAGE> 31
common Stock then owned by such Investor (on an as-converted basis), and the
denominator of which is the total number of shares of common Stock then owned by
the holders of Series C Preferred Stock and Series D Preferred Stock (on an as-
converted basis). It is understood that McKiernan has granted rights of refusal
to holders of Series C Preferred Stock pursuant to a prior agreement, that the
calculation of the Investors' pro-rata rights in accordance with the preceding
sentence shall be made without reference to such other rights, and that
McKiernan shall make sufficient shares of Common Stock available to honor the
rights of refusal of all holders of Preferred Stock in accordance with their
terms. Prior to any sale by McKiernan of any McKiernan Common Stock subject to
this right of first offer, McKiernan shall notify the Investors, in writing, of
his intention to sell such McKiernan Common Stock, setting forth the terms under
which he proposes to make such sale. Within ten (10) days after receipt of such
notice, each Investor shall notify McKiernan as to whether he or it desires to
purchase any or all of his or its pro rata share of such McKiernan Common Stock
for the price and on the general terms specified in the notice. In the event any
Investor elects not to purchase such holder's pro rata share of such McKiernan
Common Stock, the remaining Investors shall have the right to purchase their pro
rata share of such available shares on the terms described above. McKiernan
shall promptly notify the remaining Investors of the shares available for
purchase ("Remaining McKiernan Shares"). If, within ten (10) days after
McKiernan gives his aforesaid notice, an Investor has not notified McKiernan of
the number of Remaining McKiernan Shares he or it desires to purchase upon the
terms and conditions set forth in such notice (in the event such shares are over
subscribed each Investor will be entitled to purchase on a pro-rata basis),
McKiernan may, during a period of one hundred twenty (120) days following the
end of such ten (10) day period, sell such Remaining McKiernan Shares at a price
and upon terms and conditions no more favorable to such purchasers than those
set forth in such notice, subject to compliance with the Co-Sale rights of the
Investors set forth in Section 8.6 hereof. If the Investors elect to purchase
all of the McKiernan Common Stock offered, the Investors so purchasing shall pay
for the McKiernan Common Stock by a wire transfer of immediately available funds
or in accordance with the notice against delivery of the securities at the
executive offices of the Corporation at the time of the scheduled closing
therefore; provided that if the notice provides for payment of non-cash
consideration, then each Investor, at its option, may pay the consideration in
cash equal to the present fair market value of the non-cash consideration
offered, which shall be determined by mutual agreement between the parties.
McKiernan shall take all such action as may be reasonably required by any
regulatory authority in connection with the exercise by the Investors of the
right to purchase McKiernan Common Stock as set forth herein. The right of first
refusal contained in this Section 8.7 shall not apply to (i) securities sold by
McKiernan in connection with an underwritten offering pursuant to a registration
statement filed under the Securities Act or in connection with the sale or
merger of the Company, or (ii) any transfers by McKiernan to his ancestors,
descendants or spouse or to trusts for the benefit of such persons, or any bona
fide gift by McKiernan; provided, however, any shares of McKiernan Common Stock
transferred in a transaction described in this sentence shall continue to be
subject to the same right of first offer obligations set forth in this Section
8.7 as if McKiernan continued to own such shares.
8.8. Qualified Small Business Status. The Company shall use its
commercially reasonable efforts not to and shall not knowingly, without the
prior written consent or affirmative
-31-
<PAGE> 32
vote or written consent of the holders of at least a majority of the total
outstanding shares of Series D Preferred Stock who purchased such shares of
Series D Preferred Stock from the Company pursuant to this Agreement, voting
separately as a class, take any action affecting, or permit any action, other
than a Permitted Action (as defined below), to affect, the capital structure
(including purchases of its own stock) or operation of its business which would
cause the Preferred Shares not to qualify as "qualified small business stock"
under Code Section 1202. As used in this Agreement, "Permitted Action" shall
mean a merger of the Company with or into any other corporation or corporations
(other than a mere reincorporation transaction), a sale of all or substantially
all of the assets of the Company or a transaction or series of related
transactions in which the Company issues shares representing more than 50% of
the voting power of the Company immediately after giving effect to such
transaction.
9. Miscellaneous.
9.1. Survival of Warranties; Indemnification. The warranties,
representations and covenants of the Company and the Investors contained in or
made pursuant to this Agreement shall survive the execution and delivery of this
Agreement and the Second Closing and shall in no way be affected by any
investigation of the subject matter thereof made by or on behalf of the
Investors or the Company. The Company agrees to indemnify and hold harmless each
Investor from any losses or damages (including without limitation reasonable
attorneys fees) suffered arising out of a breach of any representation, warranty
or covenant of the Company under this Agreement.
9.2. Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties, including permitted transferees of the
Preferred Shares and the Common Stock into which it has been converted. Nothing
in this Agreement, express or implied, is intended to confer upon any party
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
9.3. Governing Law. This Agreement shall be governed by and
construed under the internal substantive laws (but not the choice of law rules)
of the State of California.
9.4. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.5. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
9.6. Notices. Except as otherwise expressly provided herein, any
notice required or permitted hereunder shall be given in writing and it or any
certificates or other documents delivered hereunder shall be deemed effectively
given or delivered (as the case may be) upon personal delivery (professional
courier permissible) or when mailed by receipted United
-32-
<PAGE> 33
States certified mail delivery, five (5) business days after deposit in the
United States mail. Such certificates, documents or notice may be personally
delivered or sent to the following address: (a) if to a Investor, to the address
set forth with respect to such investor on Exhibit B-2 attached hereto, or to
such other address of which such investor shall have given notice pursuant
hereto the Company, or (b) if to the Company, to CyberSource Corporation, 3031
Tisch Way, Suite 900, San Jose, California 95128, or to such other address of
which the Company shall have given notice pursuant hereto.
9.7. Finder's Fee. Each Investor severally agrees to indemnify
and hold harmless the Company from any liability for any commission or
compensation in the nature of a finder's fee (and the costs and expenses of
defending against such liability or asserted liability) for which such investor
or any of its officers, partners, employees or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from any
liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
9.8. Expenses. Each party to this Agreement shall bear its own
expenses incurred in connection with the negotiation, preparation, execution and
consummation of this Agreement, including the fees, expenses and disbursements
of its respective legal counsel incurred in connection herewith, provided the
Company will pay the reasonable legal fees of one counsel to the Investors.
9.9. Amendments and Waivers. Except as specified in Section 7.15,
any term of this Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and the holders of at least 66-2/3% of shares of the Common Stock issued or
issuable upon conversion of the Preferred Shares; provided, however, the
conditions to Closing set forth in Section 5 hereof may only be amended by
unanimous agreement of the Investors.
9.10. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
9.11. Aggregation of Stock. All Preferred Shares (or Common Stock
issued on conversion thereof) held or acquired by affiliated entities or persons
shall be aggregated together for the purpose of determining the availability of
any rights under this Agreement.
9.12. Confidentiality Agreement. Each Investor and any successor
or assign of such Investor who receives from the Company or its agents, directly
or indirectly, any information which the Company has not made generally
available to the public, pursuant to the preparation and execution of this
Agreement or disclosure in connection therewith or pursuant to the provisions of
Section 8 hereof, acknowledges and agrees that such information is confidential
and for its use only in connection with evaluating its investment in the
Company, and further
-33-
<PAGE> 34
agrees that it will not disseminate such information to any person other than
its accountant, investment advisor or attorney and that such dissemination shall
be only for purposes of evaluating its investment.
9.13. Enforcement.
(a) Remedies at Law or in Equity. If the Company or any
Investor shall default in any of its obligations under this
Agreement or if any representation or warranty made by or on behalf
of the Company or any Investor, as the case may be, in this
Agreement or in any certificate, report or other instrument
delivered under or pursuant to any term hereof shall be untrue or
misleading in any material respect as of the date of this Agreement
or as of the Closing of such investment or as of the date it was
made, furnished or delivered, the Company or such Investor may
proceed to protect and enforce its rights, including by way of suit
in equity or action at law, whether for the specific performance of
any term contained in this Agreement or the Restated Articles of the
Company or for an injunction against the breach of any such term or
in furtherance of the exercise of any power granted in this
Agreement or such Restated Articles, or for damages or to enforce
any other legal or equitable right of such Investor (including
Investor's right to indemnification under Section 9.1) or to take
any one or more of such actions. In the event such an action is
brought, the prevailing party in such dispute shall be entitled to
recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect
to this Agreement or the Restated Articles of the Company, including
without limitation such reasonable fees and expenses of attorneys
and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
(b) Remedies Cumulative; Waiver. No remedy referred to herein
is intended to be exclusive, but each shall be cumulative and in
addition to any other remedy referred to above or otherwise
available to the Company or any Investor at law or in equity. No
express or implied waiver by the Company or any Investor of any
default shall be a waiver of any future or subsequent default as to
such party. The failure or delay of the Company or any party in
exercising any rights granted it hereunder shall not constitute a
waiver of any such right and any single or partial exercise of any
particular right by such party shall not exhaust the same or
constitute a waiver of any other right provided herein.
9.13.2. Entire Agreement. This Agreement and the other
documents and agreements delivered pursuant hereto constitute the
full and entire understanding and agreement among the parties with
regard to the subjects hereof and thereof and supersedes any prior
agreements (including any memorandum of understanding or letters of
intent) between the parties regarding the subject matter hereof.
[Remainder of page intentionally left blank.]
-34-
<PAGE> 35
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Solely with respect to the agreements "COMPANY"
made in Sections 7.1 - 7.17, 8.6
and 8.7 hereof:
CYBERSOURCE CORPORATION,
a California corporation
By:___________________________
WILLIAM S. MCKIERNAN Name:WILLIAM S. MCKIERNAN
Title: President and Chief
Executive Officer
"INITIAL CLOSING INVESTORS"
VULCAN VENTURES INCORPORATED
110 110th Avenue NE, Suite 550
Bellevue, WA 98004
By:___________________________
Name:______________________
Title:_____________________
GLOBAL RETAIL PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By:___________________________
Name:______________________
Title:_____________________
GLOBAL RETAIL PARTNERS FUNDING, INC.
By:___________________________
Name:______________________
Title:_____________________
GRP PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By:___________________________
Name:______________________
Title:_____________________
-35-
<PAGE> 36
DLJ DIVERSIFIED PARTNERS, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.,
General Partner
By:___________________________
Name:______________________
Title:_____________________
DLJ DIVERSIFIED PARTNERS-A, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.,
General Partner
By:___________________________
Name:______________________
Title:_____________________
DLJ ESC II, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION, General Partner
By:___________________________
Name:______________________
Title:_____________________
UH TECHNOLOGY PARTNERS, LDC
By:___________________________
General Partner of its Investment
Manager, Unterberg Harris Capital
Management, LP
UH CAPITAL PARTNERS INTERNATIONAL,
LDC
By:___________________________
General Partner of its Investment
Manager, Unterberg Harris Capital
Management, LP
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, LP
By:___________________________
Name:______________________
Title:_____________________
Member of its Investment General
Partner, Unterberg Harris LLC
-36-
<PAGE> 37
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, CV
By:___________________________
Member of its Investment General
Partner, Unterberg Harris LLC
"SECOND CLOSING INVESTORS"
VULCAN VENTURES INCORPORATED
110 110th Avenue NE, Suite 550
Bellevue, WA 98004
By:___________________________
Name:______________________
Title:_____________________
GLOBAL RETAIL PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By:___________________________
Name:______________________
Title:_____________________
GLOBAL RETAIL PARTNERS FUNDING, INC.
By:___________________________
Name:______________________
Title:_____________________
GRP PARTNERS, L.P.
By: GLOBAL RETAIL PARTNERS, INC.
General Partner
By:___________________________
Name:______________________
Title:_____________________
DLJ DIVERSIFIED PARTNERS, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.,
General Partner
By:___________________________
Name:______________________
Title:_____________________
-37-
<PAGE> 38
DLJ DIVERSIFIED PARTNERS-A, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.,
General Partner
By:___________________________
Name:______________________
Title:_____________________
DLJ ESC II, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION, General Partner
By:___________________________
Name:______________________
Title:_____________________
UH TECHNOLOGY PARTNERS, LDC
By:___________________________
General Partner of its Investment
Manager, Unterberg Harris Capital
Management, LP
UH CAPITAL PARTNERS INTERNATIONAL,
LDC
By:___________________________
General Partner of its Investment
Manager, Unterberg Harris Capital
Management, LP
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, LP
By:___________________________
Member of its Investment General
Partner, Unterberg Harris LLC
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, CV
By:___________________________
Member of its Investment General
Partner, Unterberg Harris LLC
-38-
<PAGE> 39
PACIFIC ASSET PARTNERS
By:___________________________
Name:______________________
Title:_____________________
-39-
<PAGE> 40
EXHIBIT A-1
FOURTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE> 41
EXHIBIT B-1A
SCHEDULE OF INITIAL CLOSING INVESTORS
<TABLE>
<CAPTION>
NO. OF SHARES
"INVESTOR" PURCHASE PRICE PURCHASED
---------- -------------- ---------
<S> <C> <C>
Vulcan Ventures Incorporated $ 912,475.12 350,952
UH Technology Partners, LDC $ 364,990.60 140,381
Unterberg Harris Private Equity Partners, LP $ 75,186.80 28,918
Unterberg Harris Private Equity Partners, CV $ 16,060.20 6,177
DLJ Diversified Partners, L.P. $ 174,327.51 67,049
DLJ Diversified Partners-A, L.P. $ 64,740.04 24,900
DLJ ESC II, L.P. $ 10,067.21 3,872
GRP Partners, L.P. $ 38,030.22 14,627
Global Retail Partners Funding, Inc. $ 40,279.22 15,492
Global Retail Partners, L.P. $ 585,031.53 225,012
TOTAL $2,281,188.45 877,380
</TABLE>
<PAGE> 42
EXHIBIT B-1B
SCHEDULE OF SECOND CLOSING INVESTORS
<TABLE>
<CAPTION>
NO. OF SHARES
"INVESTOR" PURCHASE PRICE PURCHASED
---------- -------------- ---------
<S> <C> <C>
Vulcan Ventures Incorporated $ 278,599.12 107,154
UH Technology Partners, LDC $ 111,439.66 42,861
Unterberg Harris Private Equity Partners, LP $ 22,956.57 8,829
Unterberg Harris Private Equity Partners, CV $ 4,903.35 1,886
DLJ Diversified Partners, L.P. $ 53,226.95 20,472
DLJ Diversified Partners-A, L.P. $ 19,765.11 7,602
DLJ ESC II, L.P. $ 3,073.19 1,182
GRP Partners, L.P. $ 11,611.55 4,466
Global Retail Partners Funding, Inc. $ 12,297.94 4,730
Global Retail Partners, L.P. $ 178,624.37 68,702
Pacific Asset Partners $ 22,312.80 8,582
TOTAL $ 718,810.61 276,466
</TABLE>
- ii -
<PAGE> 43
EXHIBIT B-2
NOTICES
WITH A COPY TO:
Christopher W. Wright, Esq.
Foster Pepper & Shefelman PLLC
1111 Third Avenue, Suite 3400
Seattle, WA 98101
WITH A COPY TO:
Steven P. Novak
Unterberg Harris Capital Partners
10 East 50th Street
New York, NY 10022
WITH A COPY TO:
Osamu Watanabe
Global Retail Partners, L.P.
2121 Avenue of the Stars, 30th Floor
Los Angeles, CA 90067
WITH A COPY TO:
Ivy Dodes
DLI Diversified Partners, L.P.
277 Park Avenue, 23rd Floor
New York, NY 10172
WITH A COPY TO:
Osamu Watanabe
GRP Partners, L.P.
2121 Avenue of the Stars, 30th Floor
Los Angeles, CA 90067
WITH A COPY TO:
Osamu Watanabe
Global Retail Partners Funding, Inc.
2121 Avenue of the Stars, 30th Floor
Los Angeles, CA 90067
WITH A COPY TO:
Ivy Dodes
DLJ ESC II, L.P.
277 Park Avenue, 23rd Floor
New York, NY 10172
WITH A COPY TO:
Robert M. Stafford
Pacific Asset Partners
222 Kearney Street, Suite 204
San Francisco, CA 94108
<PAGE> 44
EXHIBIT C
SCHEDULE OF EXCEPTIONS
<PAGE> 45
EXHIBIT D
OPINION OF COUNSEL
<PAGE> 46
EXHIBIT E
SHAREHOLDERS AGREEMENT
<PAGE> 1
EXHIBIT 10.9
COMMON STOCK AND WARRANTS SUBSCRIPTION AGREEMENT
This COMMON STOCK AND WARRANTS SUBSCRIPTION AGREEMENT, dated as of March
18, 1998 (this "Agreement"), is entered into between CyberSource Corporation,
a/k/a "software.net," a California corporation (the "Company") and America
Online, Inc., a Delaware corporation ("AOL").
RECITALS
WHEREAS, AOL wishes to subscribe for and purchase, and the Company
wishes to issue and sell, to AOL shares (the "Shares") of common stock, no par
value, of the Company ("Common Stock") in an amount and on the terms and subject
to the conditions set forth herein; and
WHEREAS, both AOL and the Company desire that the Company issue warrant
certificates to AOL for the future purchase of shares of Common Stock or shares
of Series D Preferred Stock (individually a "Warrant Certificate," collectively
the "Warrant Certificates") in conjunction with the purchase of the Shares in
the amounts and on the terms set forth herein; and
WHEREAS, in connection therewith, the Company and AOL have agreed to
enter into an agreement (the "Registration Rights Agreement") providing for
certain registration rights for the Shares and the shares of Common Stock
underlying the Warrant Certificates, or issuable upon conversion of shares of
Series D Preferred Stock (the "Series D Preferred Stock") of the Company
underlying the Warrant Certificates (collectively the "Warrant Shares");
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto hereby agree as
follows:
I. Subscription for Common Stock and Warrant Certificates.
A. The Common Stock and IPO Warrant Certificate. The Company has
authorized the issuance and sale pursuant to the terms of this Agreement of the
Shares and the simultaneous issuance of a Warrant Certificate to AOL in the form
attached hereto as Exhibit A (the "IPO Warrant Certificate"). On the terms and
subject to the conditions of this Agreement, AOL hereby agrees to purchase from
the Company, and the Company hereby agrees to sell to AOL, the number of Shares
provided for in Section I.D.(1) below for an aggregate purchase price of
$2,000,000. AOL shall not be obligated to purchase any of the Shares unless the
conditions set forth in Article II hereof shall have been satisfied or waived by
AOL on or prior to the Closing Date (as defined below). The Company shall not be
obligated to sell any of the Shares to AOL or issue the IPO Warrant Certificate
to AOL unless the conditions set forth in Article III hereof shall have been
satisfied or waived by the Company or prior to the Closing Date.
<PAGE> 2
B. The Private Placement Warrant Certificate. Simultaneously with the
execution and delivery of this Agreement the Company is issuing a Warrant
Certificate to AOL in the form attached hereto as Exhibit B (the "Private
Placement Warrant Certificate") which by its term shall expire upon the IPO (as
defined below).
C. The Registration Rights Agreement. Simultaneously with the execution
and delivery of this Agreement the Company and AOL are entering into the
Registration Rights Agreement in the form attached hereto as Exhibit C (the
"Registration Rights Agreement").
D. The closing (the "Closing") of the transactions contemplated by this
Agreement shall take place as follows:
(1) At the Closing, on the terms and subject to the conditions of
this Agreement and on the basis of the representations and warranties herein set
forth, the Company will sell to AOL, and AOL will purchase from the Company, on
or immediately prior to the closing of the IPO (as defined below) (the "Closing
Date"), a number of Shares determined by dividing (i) the purchase price per
share of Common Stock paid to the Company by the underwriters in the IPO into
(ii) $2,000,000, in exchange for payment of an aggregate purchase price of
$2,000,000 (the "Purchase Price"). The Purchase Price shall be payable, by wire
transfer of immediately available funds to such account or accounts as to which
the Company may notify AOL.
(2) At the Closing, on the terms and subject to the conditions of this
Agreement and on the basis of the representations and warranties herein set
forth, the Company will deliver to, or at the direction of, AOL or a
representative thereof, a certificate registered in the name of AOL representing
the Shares to be purchased by AOL and the IPO Warrant Certificate, against
payment of the Purchase Price by AOL and the return of the Private Placement
Warrant Certificate. The Closing will take place at the offices where the
closing of the Company's IPO is held, on the Closing Date.
II. Conditions to the Obligations of AOL. The obligation of AOL to purchase
Common Stock under this Agreement is subject to the satisfaction at or prior to
the Closing Date of each of the following conditions:
A. Accuracy of Representations and Warranties. All representations and
warranties of the Company contained herein shall be true and correct in all
respects on the date hereof and shall be true and correct in material respects
on and as of the Closing Date as if made on and as of the Closing Date.
B. Performance of Agreements; Regulatory Approvals.
(1) The Company shall have performed all obligations and agreements,
and complied with all covenants and conditions contained in this Agreement to be
performed or complied with by it prior to or at the Closing Date.
(2) The Company shall have executed and delivered the IPO Warrant
Certificate.
-2-
<PAGE> 3
(3) The Company shall have obtained all corporate authorizations and
approvals and all consents and approvals of third parties and regulatory bodies
and authorities necessary to issue the Shares and the IPO Warrant Certificate
and to enter into and perform this Agreement, the Registration Rights Agreement
and the IPO Warrant Certificate and to consummate the transactions contemplated
hereby and thereby.
C. Consummation of IPO. The Company shall have consummated on or prior
to November 15, 1998 an initial public offering on a firm commitment basis (the
underwriting of which shall be managed or co-managed by either a top tier
national underwriter such as PaineWebber, Merrill Lynch, Donaldson Lufkin &
Jenrette or Goldman Sachs, a regional firm such as Robertson Humphreys or
Raymond James or a recognized technology firm such as Hambrecht & Quist or
Unterberg Harris) of Common Stock (which stock will be listed on a national
stock exchange or the Nasdaq National Market) pursuant to a registration
statement on Form S-1 filed with the Securities and Exchange Commission with net
proceeds to the Company of not less than $20,000,000, and which would result in
a post-offering market capitalization of the Company of not less than
$125,000,000 based on the offering price to the public (the "IPO").
D. Delivery of Certificates. At the Closing, the Company shall deliver
to AOL a certificate signed by a senior executive officer of the Company
certifying as to each of the matters set forth above and the Company shall
deliver all other certificates customarily delivered in transactions of this
type.
E. Opinion of Jackson Tufts Cole & Black, LLP. Jackson Tufts Cole &
Black, LLP, counsel for the Company, shall have delivered to AOL an opinion
dated the Closing Date in form and substance reasonably satisfactory to AOL.
F. Marketing Agreement in Full Force and Effect. Neither AOL nor the
Company shall have terminated that certain Interactive Marketing Agreement dated
as of March 1, 1998 between the Company and AOL (the "Marketing Agreement").
If at or prior to the Closing all of the conditions of this Article II have not
been satisfied, AOL may elect to waive such conditions or to be relieved of all
further obligations hereunder.
III. Conditions to the Company's Obligations. The obligation of the Company to
issue and sell the Common Stock and the IPO Warrant Certificate under this
Agreement is subject to the satisfaction at the Closing Date of each of the
following conditions:
A. Accuracy of Representations and Warranties. All representations and
warranties of AOL contained herein shall be true and correct in all material
respects on and as of the Closing Date as if made on and as of the Closing Date.
B. Performance of Agreements. AOL shall have performed all obligations
and agreements, and complied with all covenants and conditions, contained in
this Agreement to be performed or complied with by it prior to or at the Closing
Date.
C. Payment for the Common Stock. AOL shall have delivered to the Company
and the Company shall have received full payment of the Purchase Price.
-3-
<PAGE> 4
D. Marketing Agreement in Full Force and Effect. Neither AOL nor the
Company shall have terminated the Marketing Agreement.
E. Consummation of IPO. The Company shall have consummated the IPO on or
prior to August 31, 1999.
F. Return of Private Placement Warrant Certificate. AOL shall have
returned the Private Placement Warrant Certificate to the Company for
cancellation.
If at or prior to the Closing all of the conditions of this Article III have not
been satisfied, the Company may elect to waive such conditions or to be relieved
of all further obligations hereunder.
IV. Representations; Warranties and Covenants of the Company. The Company hereby
represents and warrants to AOL as of the date of this Agreement and as of the
Closing Date, except as set forth on the Schedule of Exceptions attached hereto
as Exhibit D, which exceptions shall be deemed to be representations and
warranties as if made hereunder as follows:
A. Organization, Good Standing and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California and has all requisite corporate power and authority to own
and hold its properties, carry on its business as now conducted and as proposed
to be conducted. The Company has full corporate power and authority to enter
into and perform its obligations under this Agreement, the Registration Rights
Agreement and the Warrant Certificates and to carry out the transactions
contemplated by this Agreement, the Registration Rights Agreement and the
Warrant Certificates. The Company is duly qualified to transact business and is
in good standing in each jurisdiction in which the failure so to qualify would
have a material adverse effect on its business or properties. A copy of the
Company's Restated Articles and the Company's Bylaws (as amended) have been
delivered to AOL each of which are true and correct in full force and effect and
have not been amended.
B. Capitalization.
(a) Immediately prior to the date of this Agreement the
authorized capital of the Company consists, or will consist of:
(i) Preferred Stock. 10,000,000 shares of Preferred
Stock, 1,985,520 of which have been designated Series A
Preferred Stock, no par value (the "Series A Preferred Stock"),
of which 1,985,520 shares are issued and outstanding, 2,500,000
of which have been designated Series B Preferred Stock, no par
value (the "Series B Preferred Stock") of which 2,037,038 shares
are issued and outstanding, 3,000,000 of which have been
designated Series C Preferred Stock, no par value (the "Series C
Preferred Stock") of which 3,000,000 shares are issued and
outstanding and 1,523,424 shares of which have been designated
Series D Preferred Stock of which no shares are issued and
outstanding immediately prior to the date of this Agreement. The
rights, preferences and privileges of the Series
-4-
<PAGE> 5
A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock, and the Series D Preferred Stock are as stated
in the Restated Articles.
(ii) Common Stock. 30,000,000 shares of Common Stock,
9,070,000 shares of which were issued and outstanding.
(b) All issued and outstanding shares of the Company are validly
issued, fully paid and nonassessable.
(c) The list set forth in Item 2.2(b) of the Schedule of
Exceptions hereto is a complete and correct list of all security holders
of the Company, showing their holdings of issued and outstanding shares
of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Common Stock and other
Company securities (including options and warrants) as of the date of
this Agreement. To the best knowledge of the Company, each such holder
is the sole beneficial owner of all of the shares as to which such
holder is the record holder. Except as set forth in Item 2.2 of the
Schedule of Exceptions hereto, holders of shares of the Company's Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Common Stock have no preemptive rights.
True and complete copies of the Series A Preferred Stock Purchase
Agreements (as defined in Section IV. K of this Agreement), the Series B
Preferred Stock Purchase Agreement (as defined in Section IV. K of this
Agreement), the Series C Preferred Stock Purchase Agreement (as defined
in Section IV. K of this Agreement) and the Series D Preferred Stock
Purchase Agreement (as defined in Section IV. K of this Agreement) have
been furnished to AOL prior to the date hereof. All such issued and
outstanding shares have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with all
applicable state and federal laws concerning the issuance of securities.
(d) Agreements for Purchase of Shares. Except for:
(i) the conversion privileges and preemptive rights of
the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock; and
(ii) options issued pursuant to the Company's stock
option plan and other agreements, as of the date of this
Agreement options for 782,397 shares, including options for
1,000,000 shares issued outside of the Company's stock option
plan, are presently outstanding and an additional 1,217,603
shares are available for grant under the Company's stock option
plan, as amended.
prior to the date of this Agreement there will not be any outstanding options,
warrants, rights (including conversion, preemptive rights or rights of first
offer) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock.
-5-
<PAGE> 6
C. Subsidiaries. Except as set forth in Item 2.3 of the Schedule of
Exceptions, the Company does not presently own or control, directly or
indirectly, any interest in any other corporation, association, partnership or
other business entity.
D. Authorization. All corporate action on the part of the Company, its
officers, directors and shareholders necessary for the authorization, execution
and delivery of this Agreement, the Registration Rights Agreement and the
Warrant Certificates, the performance of all obligations of the Company
hereunder and thereunder and the authorization, issuance (or reservation for
issuance) and delivery of the Shares and the Warrant Certificates being sold
hereunder of the Series D Preferred stock issuable upon the exercise of the
Private Placement Warrant and the Common Stock issuable upon conversion of the
Preferred Shares and the Common Stock issuable upon the exercise of the IPO
Warrant, has been taken or will be taken on or prior to each Closing, and each
of this Agreement, the Registration Rights Agreement and the Warrant
Certificates constitutes a valid and legally binding obligation of the Company
enforceable in accordance with its terms, except as affected by (i) bankruptcy
or insolvency laws, or (ii) equitable principles or public policy.
E. Valid Issuance of the Shares, Warrant Certificates and Series D
Preferred Stock. The Shares and each of the Warrant Certificates, when issued,
sold and delivered in accordance with the terms hereof for the consideration
expressed herein, will be duly and validly issued, fully paid and nonassessable
and, based in part upon the representations of AOL set forth in Section V of
this Agreement, will be issued in compliance with all applicable federal and
state securities laws free and clear of all restrictions on transfer (other than
those arising from application of the securities laws). The shares of Series D
Preferred issuable upon the exercise of the Private Placement Warrant
Certificate and the Common Stock issuable upon conversion of the Series D
Preferred Stock issuable upon the exercise of the Private Placement Warrant and
the Common Stock issuable upon the exercise of the IPO Warrant have been duly
and validly reserved for issuance and when issued and delivered in accordance
with the Warrant Certificates or the Restated Articles, as applicable, will be
duly and validly issued, fully paid and nonassessable.
F. Governmental Consents. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
United States federal, state, local or provincial governmental authority on the
part of the Company is required in connection with:
(a) the Company's valid execution, delivery, or performance of
this Agreement, the Registration Rights Agreement and the Warrant
Certificates; and
(b) the offer, sale, or issuance of the Shares or the Warrant
Certificates by the Company hereunder or (assuming the exemption
provided by Section 3(a)(9) of the Securities Act of 1933, as amended,
in its current form is available and no commission is paid in
conjunction therewith) the issuance of Shares or shares of Series D
Preferred Stock upon the exercise of the Private Placement Warrant
Certificate and the issuance of Common Stock upon conversion of the
shares of Series D Preferred Stock or upon the exercise of the IPO
Warrant;
-6-
<PAGE> 7
except such filings as have been made prior to the Closing, and except for any
notices of sale required to be filed with the Securities and Exchange Commission
under Regulation D of the Securities Act of 1933, as amended (the "Securities
Act"), or such post-closing filings as may be required under applicable state
securities laws, which will be timely filed within the applicable periods
therefor. To the best knowledge of the Company, neither the Company nor anyone
acting on its behalf has offered any of the Shares or Warrant Certificates being
sold hereunder or substantially similar securities of the Company for sale to,
or solicited offers to buy any securities of the Company from, or otherwise
approached or negotiated with respect thereto with any prospective purchaser
other than AOL. The Company agrees that neither the Company nor anyone acting on
its behalf will offer such securities of the Company or any part thereof or any
similar securities for issuance or sale to, or solicit any offer to acquire any
of the same from, anyone so as to make the issuance and sale of the Shares or
Warrant Certificates being sold hereunder not exempt from the registration
requirements of Section 5 of the Securities Act. None of the shares of the
Company's capital stock issued and outstanding has been offered or sold in such
a manner as to make the issuance and sale of such shares or the Shares or
Warrant Certificates being sold hereunder not exempt from such registration
requirements, and all such shares of capital stock have been offered and sold in
compliance with all applicable federal and state securities laws.
G. Litigation. Except as disclosed in Item 2.7 of the Schedule
of Exceptions, there is no action, suit, proceeding or investigation
pending or currently threatened against the Company which questions the
validity of this Agreement, the Registration Rights Agreement or the
Warrant Certificates or the right of the Company to enter into this
Agreement, or to consummate the transactions contemplated hereby, or
which might result, either individually or in the aggregate, in any
material adverse change in the assets, prospects, business, operations,
or condition (financial or otherwise) of the Company or any change in
the current equity ownership of the Company, nor is the Company aware
that there is any basis for the foregoing. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by the Company currently
pending or which the Company intends to initiate.
H. Patents and Trademarks.
(a) The list set forth in Item 2.8 of the Schedule of Exceptions
is a true and complete list and summary description of all patents,
patent applications, registered trademarks, registered service marks,
registered trade names and registered copyrights, and licenses and
rights to the foregoing presently owned or held by the Company, none of
which is in dispute or in any conflict with the right of any other
person or entity except as indicated on Item 2.7 of the Schedule of
Exceptions.
(b) The Company's business as now conducted and as presently
proposed to be conducted does not conflict with or infringe upon
anyone's patents, copyrights, trademarks, trade secrets, trade dress,
know how, processes, or other proprietary rights. The Company owns, or
has the unrestricted right to use free and clear of all material liens,
claims and restrictions, all patents, copyrights, trademarks, trade
secrets, trade dress or other proprietary rights necessary for the
conduct of its business as it is presently
-7-
<PAGE> 8
conducted or currently contemplated to be conducted, without infringing
on the right or claim of any person, any patents, copyrights,
trademarks, trade secrets, trade dress, know how, processes, or other
proprietary rights of others. Notwithstanding any other provision of
this Agreement, the exceptions described in the Schedule of Exceptions
do not apply to this subparagraph (b) of this Section IV. H.
I. Compliance with Laws and Other Instruments. The Company is not in
violation or default of any provisions of its Restated Articles or Bylaws or of
any instrument, judgment, order, writ, decree or contract to which it is a party
or by which it is bound or, to its knowledge, of any provision of federal or
state statute, rule or regulation applicable to the Company or any of its
property, which violation or default would be materially adverse to the assets,
properties, prospects, business, operations, or condition (financial or
otherwise) of the Company. To the best knowledge of the Company, there is no
contamination of any real property leased or operated by the Company that could
subject the Company to liability in the aggregate in excess of $10,000 under any
environmental laws or regulations. The execution, delivery and performance of
this Agreement, the Registration Rights Agreement or the Warrant Certificates
and the consummation of the transactions contemplated hereby will not result in
any such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company, which violation, default, conflict or event would be materially adverse
to the assets, properties, prospects, business, operations, or condition
(financial or otherwise) of the Company.
J. Agreements; Action.
(a) Except as set forth in Item 2.10 of the Schedule of
Exceptions, there are no agreements, understandings, instruments,
contracts or proposed transactions to which the Company is a party or by
which it is bound which involve (i) obligations of, or payments to the
Company in excess of, $25,000; (ii) the license of any patent,
copyright, trade secret or other proprietary right of the Company; (iii)
material restrictions on the Company's business; or (iv) material
proprietary rights of the Company.
(b) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or
series of its capital stock, (ii) incurred any indebtedness for money
borrowed or incurred any other liabilities or obligations (absolute or
contingent), individually in excess of $10,000 or in excess of $25,000
in the aggregate not reflected in the balance sheet dated December 31,
1997 other than obligations or liabilities of the Company for
compensation under employment, advisor or consulting agreements, or
other than obligations or liabilities incurred in the ordinary course of
business, (iii) made any loans or advances to any person, other than in
the ordinary course of its business. Without limiting the generality of
the foregoing, the Company does not know of any basis for the assertion
against the Company of any material liabilities of the Company (not
provided for in the documents listed in Item 2.10 of the Schedule of
Exceptions or the Financial Statements).
-8-
<PAGE> 9
K. Registration Rights. Except as set forth in (i) that certain Series A
Preferred Stock Purchase Agreement dated as of the 6th day of January 1995, as
amended as of (A) the 27th day of February, 1996, (B) the 3rd day of July, 1996,
and (C) the 12th day of July, 1996; (ii) that certain Series A Preferred Stock
Purchase Agreement dated as of the 27th day of February, 1996 (collectively, the
"Series A Stock Purchase Agreements"), (iii) that certain Series B Preferred
Stock Purchase Agreement dated as of the 12th day of July, 1996, (iv) that
certain Series C Preferred Stock Purchase Agreement dated as of the 26th day of
September, 1997, and (v) that certain Series D Preferred Stock Purchase
Agreement (the "Series D Stock Purchase Agreement") and except as provided in
the Registration Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggy-back rights, to any person or
entity.
L. Title to Property and Assets. The Company has good and marketable
title to the property and assets it purports to own free and clear of all
mortgages, liens, loans and encumbrances, except such encumbrances and liens
which arise in the ordinary course of business and do not materially impair the
Company's ownership or use of such property or assets. With respect to the
property and assets it leases, the Company is in compliance with such leases and
holds a valid leasehold interest free of any liens, claims or encumbrances,
which liens, claims or encumbrances would be materially adverse to the Company.
Except as set forth in Item 2.12 of the Schedule of Exceptions, the Company owns
or has the right to use all assets (tangible and intangible), necessary for the
conduct of its business as presently conducted and believes it can acquire the
right to use or the ownership of all assets, necessary for the conduct of its
business as it is proposed to be conducted, except for such assets that are
individually or in the aggregate immaterial to the business of the Company. The
Company knows of no assets required for the conduct of its business as it is
presently conducted, or as it is proposed to be conducted, the right to use or
ownership of which it is unlikely to obtain, except for such assets that are
individually or in the aggregate immaterial to the business of the Company.
M. Financial Statements. The Company has delivered to AOL its audited
financial statements (income statement, balance sheet and cash flow statement)
at and for the periods ended December 31, 1995, December 31, 1996, and unaudited
financial statements (balance sheet and profit and loss statement) at and for
the period ended December 31, 1997 (the "Financial Statements"). The Financial
Statements are complete and correct in all material respects and have been
prepared in accordance with generally accepted accounting principles on a
consistent basis throughout the periods indicated. The Financial Statements
fairly present the financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, subject to normal year-end
adjustments. All accounts receivable shown on the balance sheet constitute
accounts receivable resulting from the sale of goods and services in the
ordinary course of business, and, to the best knowledge of the Company, such
accounts receivable are subject to no conditions as to payment, offsets,
counterclaims, defenses of any kind, returns, allowances, or credits other than
to the extent of the allowance for doubtful accounts shown thereon, and other
than warranty claims that in the aggregate do not exceed $5,000. The Company has
not received any material customer complaints concerning its products or
services.
N. Changes. Since December 31, 1997, there has not been (i) any change
in the assets, liabilities, condition (financial or otherwise), business, or
operating results, or to the best of the Company's knowledge, prospects of the
Company from that reflected in the Financial Statements,
-9-
<PAGE> 10
except changes in the ordinary course of business which have not been, in the
aggregate, materially adverse; (ii) any damage, destruction or loss, whether or
not covered by insurance, affecting in any material way the assets, properties,
condition (financial or otherwise), operating results, prospects or business of
the Company (as such business is presently conducted and as it is proposed to be
conducted); (iii) any waiver by the Company of a material right or of a material
debt owed to it or any satisfaction or discharge of any material lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business; (iv) any change or amendment in any material respect to a
material contract or agreement by which the Company or any of its assets or
properties is bound or subject; or (v) any change in any compensation
arrangement or agreement with any officer, director or key employee. For the
purposes of this Section IV. N only, prospects shall not include general
economic or industry trends. Notwithstanding any other provision of this
Agreement, the exceptions described in the Schedule of Exceptions do not apply
to this Section IV. N.
O. Proprietary Information. To the best of the Company's knowledge, it
has done nothing to compromise the secrecy, confidentiality or value of any of
its trade secrets, know-how, inventions, prototypes, designs, processes or
technical data required to conduct its business as now conducted or as proposed
to be conducted and has taken security measures to protect the secrecy,
confidentiality and value of all the intellectual property which it believes are
reasonable and customary in the industry in which it operates. All of the
Company's employees and consultants have executed a non-disclosure/invention
assignments agreement in the form attached as Annex III to the Schedule of
Exceptions. To the Company's knowledge, no employee of the Company in connection
with such employee's employment with the Company, has violated the terms of any
agreement with a previous employer.
P. Permits. The Company has all franchises, permits, licenses, and any
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses, or other similar authority.
Q. Shareholder Agreements. Except as set forth in the Series A Preferred
Stock Purchase Agreements, the Series B Preferred Stock Purchase Agreement, the
Series C Preferred Stock Purchase Agreement, and the Series D Stock Purchase
Agreement and in that certain Shareholders' Agreement of even date with the
Series D Stock Purchase Agreement between and among the Company, various holders
of Series C Preferred Stock and the Series D Preferred Stock and various
Investors (the "Shareholders' Agreement"), there are presently no outstanding
shareholder agreements, voting trusts, proxies or other arrangements or
understandings between the Company and its shareholders, or among any of the
shareholders of the Company, relating to either the voting or the disposition of
their respective shares.
R. Brokers or Finders. The Company has not engaged any broker,
investment banker or finder in connection with the sale of the Shares or the
Warrant Certificates.
S. Disclosure. The Company has provided AOL with all information that
AOL has requested in connection with AOL's decision to invest in the Shares and
the Warrant Certificates.
-10-
<PAGE> 11
To the best of the Company's knowledge after due inquiry, neither this Agreement
nor any other written statement made or delivered in connection herewith
contains any untrue statement of a material fact or, taking this Agreement and
all such written statements as a whole, omits to state a material fact necessary
to make statements herein or therein misleading; provided, however, with respect
to any projections or expressions of opinion or predictions, the Company
represents only that such projections or expressions of opinions and predictions
were made in good faith and that the Company believes that there is a reasonable
basis therefor.
T. Insurance. Set forth in Item 2.20 of the Schedule of Exceptions is a
true and complete list of all current insurance policies of the Company, all of
which are in full force and effect.
U. Taxes. The Company has accurately prepared and timely filed all
federal, state and local reports, returns, estimates, declarations, information
returns and statements with respect to taxes (together, "Tax Returns") that are
required to be filed by it and has paid or made provision for the payment of all
taxes due with respect to the periods covered by such Tax Returns. The provision
for taxes in the financial statements is sufficient for the payment of all
accrued and unpaid taxes. No such Tax Returns of the Company have been audited
by any taxing authority, and there are no waivers in effect of the applicable
statute of limitations for any period. No deficiency assessment or proposed
adjustment of federal income taxes or state or municipal taxes of the Company is
pending and the Company has no knowledge of any proposed liability for any tax
to be imposed. There are no tax sharing agreements or similar contracts or
arrangements to which the Company is a party. The Company has not been a member
of an affiliated group (within the meaning of Section 1504 of the Internal
Revenue Code), filing a consolidated federal income Tax Return. No closing
agreement pursuant to Section 7121 of the Internal Revenue Code, or similar
provision of any state or local law, has been entered into by or with respect to
the Company. For the purpose of this Section IV.U, "tax" or "taxes" shall mean
all federal, state, local or foreign taxes, including but not limited to income,
gross receipts, windfall profits, alternative minimum, value added, severance,
property, production, sales, use, license, excise, franchise, employment,
withholding or similar taxes, together with any interest, additions or penalties
with respect thereto and any interest in respect of such additions or penalties.
V. ERISA. Except as listed in Item 2.22 of the Schedule of Exceptions,
the Company does not maintain, sponsor, or contribute to any program or
arrangement that is an "employee pension benefit plan" (a "Pension Plan"), an
"employee welfare benefit plan" or a "multiemployer plan", as those terms are
defined in Section 3(2), 3(1), and 3(37) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). Except as listed in Item 2.22 of the
Schedule of Exceptions, the Company has no other incentive or benefit
arrangements. Each plan listed on Item 2.22 of the Schedule of Exceptions which
is subject to ERISA is in substantial compliance with ERISA. Each plan listed on
Item 2.22 of the Schedule of Exceptions which is a Pension Plan intended to be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended,
has been amended to comply with the qualification provisions of the Tax Reform
Act of 1986 and subsequent legislation before the expiration of the applicable
remedial amendment period and has received a favorable determination letter from
the Internal Revenue Service, and the Company is not aware of circumstances
likely to result in the revocation of any such favorable determination letter.
Other than as set forth in Item 2.22, there are no other deferred
-11-
<PAGE> 12
compensation, bonus, incentive, profit sharing, retirement or other employee
compensation arrangements or plans.
W. Labor Agreements and Actions. The Company is not bound by or subject
to (and none of its assets or properties is bound by or subject to) any written
or oral, express or implied, contract, commitment or arrangement with any labor
union, and no labor union has requested or has sought to represent any of the
employees, representatives or agents of the Company. There is no strike or other
labor dispute involving the Company pending, or to the best knowledge of the
Company threatened, which could have a material adverse effect on the assets,
properties, condition (financial or otherwise), operating results, prospects or
business of the Company (as such business is presently conducted and as it is
proposed to be conducted), nor is the Company aware of any labor organization
activity involving its employees. The Company is not aware that any officer, key
employee, key consultant or key contractor, or that any group of key employees,
intends to terminate such person's employment or relationship with the Company,
as the case may be, nor does the Company have a present intention to terminate
the employment of or relationship with any of the foregoing persons.
X. Additional Representations and Warranties. All representations and
warranties of the Company contained in an underwriting agreement entered into by
the Company in connection with the IPO (the "Underwriting Agreement"), between
the Company and the several underwriters named therein (the "Underwriters"),
except those that refer specifically to the Underwriting Agreement or
arrangements with the Underwriters that are not germane to the placement of the
Shares or the IPO Warrant Certificate (other than those related generally to the
IPO), shall, effective upon the Closing Date, be deemed incorporated herein by
reference and made a part hereof as if set forth herein in their entirety and
AOL shall be entitled to fully rely thereon.
Y. Private Placement. The offer and sale of the Shares and the Warrant
Certificates by the Company are being accomplished in a transaction exempt from
registration under Section 5 of the Securities Act and from registration or
qualification under all applicable state securities and "Blue-Sky" laws.
V. Representations of AOL. AOL hereby represents and warrants to the Company as
of the date of this Agreement and as of the Closing Date as follows:
A. Due Organization, Good Standing and Authority of the Purchaser and
the Founders. AOL is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. AOL has full right, power and
authority to enter into this Agreement, the Registration Rights Agreement and
the Warrant Certificates and perform its obligations hereunder and thereunder.
B. Authorization and Validity of Agreements. This Agreement and the
Registration Rights Agreement have been duly authorized, executed and delivered
by AOL and, assuming the due authorization, execution and delivery by the
Company, constitute valid and binding obligations of AOL enforceable against AOL
in accordance with their terms, except as affected by (i) bankruptcy or
insolvency laws or (ii) equitable principles or public policy.
-12-
<PAGE> 13
C. No Conflict with Other Instruments; No Approvals Required Except as
Have Been Obtained. The execution and delivery of this Agreement and the
Registration Rights Agreement by AOL and compliance by AOL with the terms and
conditions hereof and thereof, will not violate, with or without the giving of
notice or the lapse of time, or both, or require any registration,
qualification, approval or filing under, any provision of law, statute,
ordinance or regulation applicable to AOL and will not conflict with, or require
any consent or approval under, or result in the breach or termination of any
provision of, or constitute a default under, or result in the acceleration of
the performance of the obligations of AOL under, or result in the creation of
any claim, lien, charge or encumbrance upon any of the properties, assets or
businesses of AOL pursuant to the Certificate of Incorporation or By-laws of AOL
or any order, judgment, decree, law, ordinance or regulation applicable to the
AOL, or any contract, instrument, agreement or restriction to which AOL is a
party or by which AOL or any of its assets or properties is bound, in each case,
that would prevent AOL from entering into this Agreement or the Registration
Rights Agreement or from consummating the transactions contemplated in
accordance with the terms hereof.
D. Purchaser Awareness. AOL acknowledges, agrees and is aware that the
Shares, the Warrant Certificates and the shares of Common Stock to be issued
upon the exercise thereof (the "Warrant Shares") have not been registered under
the Securities Act, as amended, or under the securities laws of any other
jurisdiction, including any state of the United States. An offer or sale of the
Shares or the Warrant Shares by AOL in the absence of registration under such
securities laws will require the availability of an exemption thereunder. A
restrictive legend in substantially the form set forth in Section VI hereof
shall be placed on the certificates representing the Shares, the Warrant
Certificates and the Warrant Shares and a notation shall be made in the
appropriate records of the Company indicating that the securities representing
the Shares and the Warrant Shares are subject to restrictions on transfer.
E. Receipt of Information, Access to Information, Investment Intent. AOL
acknowledges that it:
(1) has been furnished with sufficient information regarding the
Company and its prospects such that it has been able to understand and evaluate
the risks of a purchase of the Company's securities;
(2) has been given the opportunity to ask questions of, and receive
answers from, the Company concerning the terms and conditions of the offering of
the Company's securities hereunder and other matters pertaining to an investment
therein, has been given the opportunity to obtain such additional information
necessary to evaluate the merits and risks of a purchase of the securities to
the extent the Company possesses such information, and has received all
documents and information that it has requested relating to an investment in the
securities provided, however, that the foregoing shall not derogate from or
diminish the representations and warranties of the Company contained or to be
incorporated herein or the right of AOL to rely thereon;
-13-
<PAGE> 14
(3) has carefully considered and has, to the extent AOL believes
such discussion necessary, discussed with its professional legal, financial and
tax advisors, the suitability of an investment in the securities;
(4) understands that the Shares and Warrant Certificates to be
received by AOL hereunder will be acquired for investment for AOL's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that AOL has no present intention of otherwise
distributing the same, except pursuant to an effective registration statement
under the Securities Act or an exempt transaction. By executing this Agreement,
AOL further represents that AOL does not have any contract, undertaking,
agreement or arrangement with any person (other than the Company) to sell,
transfer or grant participations to such person or to any third person, with
respect to such securities, or any portion thereof;
(5) is an investor in securities of companies in the development
stage and acknowledges that it is able to fend for itself, can bear the economic
risk of its investment and has such knowledge and experience in financial or
business matters that it is capable of evaluating the merits and risks of the
investment in the Shares and Warrant Certificates; and
(6) understands that the Shares and the Warrant Certificates are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such Shares and the Warrant Certificates may be resold without registration
under the Securities Act only in certain limited circumstances. In this
connection AOL represents that it is familiar with Securities and Exchange
Commission ("SEC") Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act.
F. Accredited Investor Status. AOL is an Accredited Investor as such
term is defined in Regulation D under the Securities Act.
VI. Restrictions on Transfer. The Shares, the Warrant Certificates and the
Warrant Shares shall not be transferable except upon the conditions specified in
this Article VI, which are intended to insure compliance with the provisions of
the Securities Act in respect of the transfer of any of the Shares, the Warrant
Certificates or Warrant Shares and, with respect to the Private Placement
Warrant Certificate and the shares of Common Stock to be issued upon the
exercise thereof, to insure compliance with the Bylaws of the Company.
A. Restrictive Legends. Each certificate representing the Shares or the
Warrant Shares shall (unless otherwise permitted by the provisions of this
Article VI) be stamped or otherwise imprinted with a legend in substantially the
following form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR UNDER THE
SECURITIES LAWS OF ANY JURISDICTION AND MAY NOT BE TRANSFERRED,
SOLD OR OTHERWISE DISPOSED OF UNLESS A REGISTRATION STATEMENT IS
IN EFFECT UNDER THE SECURITIES ACT AND
-14-
<PAGE> 15
ANY APPLICABLE SECURITIES LAWS WITH RESPECT TO SUCH SECURITIES OR
A WRITTEN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
IS PROVIDED TO THE COMPANY TO THE EFFECT THAT NO REGISTRATIONS
ARE REQUIRED UNDER SUCH SECURITIES LAWS."
provided, however, that the following additional language shall be added to the
foregoing legend with respect to the Private Placement Warrant Certificate and
the shares of Common Stock to be issued upon the exercise thereof:
"AND ARE SUBJECT TO RESTRICTIONS UPON TRANSFER SET FORTH IN THE
BYLAWS OF THE COMPANY AND MAY NOT BE TRANSFERRED, ASSIGNED,
PLEDGED OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE TERMS OF
SUCH BYLAWS."
B. Notice of Proposed Transfers.
(1) The holder of the Shares or Warrant Shares bearing a restrictive
legend set forth in Section VI.A above ("Restricted Common Stock"), by
acceptance thereof, agrees that, unless a registration statement is in effect
under the Securities Act and under applicable securities laws with respect to
such Restricted Common Stock, prior to any transfer or attempted transfer of
such Restricted Common Stock, such holder will give the Company (i) written
notice describing the proposed transfer of any Restricted Common Stock in
reasonable detail, (ii) such other information about the proposed transfer of
such Restricted Common Stock or the proposed transferee of such Restricted
Common Stock as the Company may reasonably request and (iii) an opinion of
counsel (both counsel and opinion reasonably satisfactory to the Company) to the
effect that the proposed transfer of such Restricted Common Stock may be
effected without registration of such Restricted Common Stock under the
Securities Act and under other applicable securities laws.
(2) If the holder of the Restricted Common Stock delivers to the Company
an opinion of counsel that subsequent transfers of such Restricted Common Stock
will not require registration or qualification under the Securities Act or under
other applicable securities laws, the Company will or will cause the transfer
agent for such Restricted Common Stock promptly (but in any event within 3
business days) after such contemplated transfer to deliver new certificates for
such Restricted Common Stock that do not bear that section of the restrictive
legend set forth in Section VI.A above imposed by the Securities Act and under
other applicable securities laws of any other jurisdictions. If the foregoing
conditions entitling the holder to effect a proposed transfer of such Restricted
Common Stock without registration under the Securities Act and under other
applicable securities laws have not been satisfied, AOL shall not transfer the
Restricted Common Stock, and the Company will cause the transfer agent not to
transfer such Restricted Common Stock on its books or issue any certificates
representing such Restricted Common Stock. Any purported transfer of Restricted
Common Stock not in accordance with applicable securities laws shall be void.
-15-
<PAGE> 16
(3) The restrictions imposed by this Agreement with respect to the
Securities Act and under other applicable securities laws of any other
jurisdictions upon the transferability of any particular shares of Restricted
Common Stock shall cease and terminate when such shares of Restricted Common
Stock have been sold pursuant to an effective registration statement under the
Securities Act or under other applicable securities laws or transferred pursuant
to Rule 144 promulgated under the Securities Act or need not bear the legend
under Rule 144(k). The holder of any Restricted Common Stock as to which such
restrictions shall have terminated shall be entitled to receive from the
Company, without expense, a new certificate representing Common Stock that does
not bear the restrictive legend set forth above imposed by the Securities Act
and under other applicable securities laws of any other jurisdictions.
(4) As used in this Agreement, the term "transfer" encompasses any
sale, transfer, pledge or other disposition of any Common Stock referred to
herein.
C. Additional Covenants.
(1) Delivery of Financial Statements. The Company shall deliver to
AOL for as long as AOL (together with its affiliates) holds, or has the right to
acquire upon exercise or exchange of Warrant Certificates, not less than 100,000
Warrant Shares, as adjusted for stock splits, stock dividends, reclassifications
and similar events:
(i) as soon as practicable, but in any event within one hundred
twenty (120) days after the end of each fiscal year of the Company, an
income statement for such fiscal year, a balance sheet of the Company as
of the end of such year, and a cash flow statement, such year-end
financial reports to be in reasonable detail, prepared in accordance
with generally accepted accounting principles ("GAAP") audited by
independent public accountants of recognized national standing; and
(ii) within forty-five (45) days of the end of each quarter, a
statement of operations, cash flow analysis and balance sheet for and as
of the end of such quarter, in reasonable detail; such quarterly
statements shall also compare actual performance to budget and to the
prior year's comparable period.
(2) Termination of Covenants. The covenants set forth in Section
C(1) above shall terminate and be of no further force or effect upon the
consummation of the IPO or the Company first becomes subject to the periodic
reporting requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, whichever event shall first occur.
(3) Insurance. The Company shall keep and maintain in full force and
effect (i) fire and casualty insurance policies, with extended coverage,
reasonably sufficient in amount to allow it to replace any of its properties
that might be damaged or destroyed and (ii) general liability insurance in
amounts customary for entities in similar business and at a similar stage of
development.
D. California Commissioner of Corporations. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
-16-
<PAGE> 17
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
VII. Miscellaneous.
A. Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants of the parties contained in this
Agreement and in any document delivered or to be delivered pursuant to this
Agreement and in connection with the Closing hereunder shall survive the
Closing. The parties have made no representations or warranties other than those
that are expressly set forth or incorporated by reference in this Agreement.
B. Entire Agreement. This Agreement (including the Schedules, Exhibits
and Annexes hereto), together with the Registration Rights Agreement and the
Warrant Certificates to which any of the parties hereto are parties, constitutes
the entire agreement between the parties hereto and supersede all prior
agreements and understandings, oral and written, between the parties hereto with
respect to the subject matter hereof.
C. Severability. Any provision of this Agreement that is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or lack of authorization without invalidating the remaining provisions hereof or
affecting the validity, unenforceability or legality of such provision in any
other jurisdiction.
D. Binding Effect; Benefit. This Agreement shall inure to the benefit of
and be binding upon the parties hereto, and their respective successors, legal
representatives and permitted assigns. Nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto, and
their respective successors, legal representatives and permitted assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
E. Amendment; Waiver. No provision of this Agreement may be amended,
waived or otherwise modified except by an instrument in writing executed by the
parties hereto.
F. Expenses. Each party shall pay its own fees and expenses, including
attorney's fees, incurred in connection with this Agreement and the other
agreements and transactions contemplated hereby.
G. Assignment. Neither party can assign this Agreement without the prior
written consent of the other provided that AOL may assign this Agreement to an
affiliate and provided, further, that in the event of a party's sale,
consolidation, or merger, or the sales of substantially all of such party's
assets the other party's prior approval shall not be required.
-17-
<PAGE> 18
H. Headings. The Articles and Section headings contained in this
Agreement are for convenience only and shall not affect the meaning or
interpretation of this Agreement.
I. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
J. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of California without giving effect to the principles
of conflicts of laws thereof.
K. Remedies. The remedies provided in this Agreement are cumulative and
not exclusive of any remedies provided by law.
L. Notices and Payment.
(1) All notices, requests, demands and other communications
hereunder shall be in writing and, except to the extent otherwise provided in
this Agreement, shall be deemed to have been duly given if delivered by same day
or next day courier or mailed, registered mail, return receipt requested, or
transmitted by telegram, telex or facsimile:
if to AOL:
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Fax No.: (703) 265-1202
Attention: David Colburn and the General Counsel
with a copy to:
Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
New York, NY 10103
Attention: Martin H. Levenglick
if to the Company
CyberSource Corporation
a/k/a "software.net"
3031 Tisch Way, Suite 900
San Jose, CA 95128
Fax No.: (408) 241-8258
Attention: President
-18-
<PAGE> 19
with a copy to:
Jackson Tufts Cole & Black, LLP
60 South Market Street, 10th Floor
San Jose, CA 95113
Fax No.: (408) 998-4889
Attention: Richard Scudellari, Esq.
A notice hereunder shall be deemed to have been given on the day such notice is
sent or transmitted; provided, however, that if such notice is sent by next-day
courier it shall be deemed to have been given the day following sending and, if
by registered mail, five business days following sending and if sent by
facsimile, when receipt is acknowledged by recipient's facsimile machine
operator.
(2) Unless otherwise provided in this Agreement, payments hereunder
shall be made by wire transfer of immediately available funds.
-19-
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
CYBERSOURCE CORPORATION,
a California corporation
By [SIG]
-------------------------------------
Name:
Title:
AMERICA ONLINE, INC., a
Delaware Corporation
By
-------------------------------------
Name:
Title:
-20-
<PAGE> 21
EXHIBIT A TO COMMON STOCK
AND WARRANTS SUBSCRIPTION AGREEMENT
FORM OF IPO WARRANT CERTIFICATE
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR UNDER THE
SECURITIES LAWS OF ANY JURISDICTION AND MAY NOT BE
TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF UNLESS A
REGISTRATION STATEMENT IS IN EFFECT UNDER THE SECURITIES ACT
AND ANY APPLICABLE SECURITIES LAWS WITH RESPECT TO SUCH
SECURITIES OR A WRITTEN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY IS PROVIDED TO THE COMPANY TO THE
EFFECT THAT NO REGISTRATIONS ARE REQUIRED UNDER SUCH
SECURITIES LAWS.
Warrant No. ___ [__________](1) Warrants
(Subject to Adjustment
as Provided Herein)
CYBERSOURCE CORPORATION
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for
value received AMERICA ONLINE, INC., 22000 AOL Way, Dulles, Virginia 20166, or
its registered assigns (the "Holder") is the owner of the number of warrants
("Warrants") specified above, each of which entitles the Holder thereof to
purchase one fully paid and non-assessable share of Common Stock, no par value
("Common Stock"), of CyberSource Corporation a/k/a "software.net", a California
corporation (the "Company"), at a purchase price of $______________2 per share
of Common Stock in lawful money of the United States of America in cash or by
certified or cashier's check or a combination of cash and certified or cashier's
check (subject to adjustment as hereinafter provided).
- ------------------
(1) 1.5 times the number of shares of Common Stock purchased by AOL
pursuant to the Common Stock and Warrants Subscription
Agreement.
(2) Price per share paid by the public in the IPO (as defined in the
Common Stock and Warrants Subscription Agreement) less
underwriter discount.
<PAGE> 22
1. Warrant; Purchase Price. Each Warrant shall entitle the Holder
initially to purchase one share of Common Stock of the Company and the purchase
price payable upon exercise of the Warrants shall initially be $___________ per
share of Common Stock (the "Purchase Price"). The Purchase Price and number of
shares of Common Stock issuable upon exercise of each Warrant are subject to
adjustment as provided in Article 6. The shares of Common Stock issuable upon
exercise of the Warrants (and/or other shares of Common Stock so issuable by
reason of any adjustments pursuant to Article 6) are sometimes referred to
herein as the "Warrant Shares."
2. Exercise; Expiration Date.
2.1. The Warrants are exercisable, at the option of the Holder,
in whole or in part at any time and from time to time in an amount up to
[_____](3) Warrants for each full month following March ____, 1998 and ending,
in each case, on the Expiration Date, upon surrender of this Warrant Certificate
to the Company together with a duly completed Notice of Exercise, in the form
attached hereto as Exhibit A, and payment of an amount equal to the Purchase
Price times the number of Warrants to be exercised. In the case of exercise of
less than all the Warrants represented by this Warrant Certificate, the Company
shall cancel the Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Warrant Certificate for the balance of such Warrants.
Notwithstanding the foregoing provisions of this Section 2.1, in the event of a
Change of Control (as hereafter defined), any outstanding Warrants granted
hereunder that are not then exercisable, in accordance with the vesting
provisions set forth in this Section 2.1, shall become immediately exercisable.
For purposes of this Section 2.1, a Change of Control shall mean (i) at such
time as any person (other than existing shareholders of the Company) obtains the
right to designate a majority of the members of the Company's Board of Directors
or acquires sufficient shares of the Company's outstanding voting stock to cause
the election of a majority of the seats on the Company's Board of Directors,
(ii) the Company merges with another entity and the Company's stockholders prior
to the merger do not retain control of the combined entity, or (iii) the Company
sells substantially all of its assets or capital stock.
2.2. The term "Expiration Date" shall mean 5:00 p.m. California
time on March ___, 200__(4) or if such day shall in the State of California be a
holiday or a day on which banks are authorized to close, then 5:00 p.m.
California time the next following day which in the State of California is not a
holiday or a day on which banks are authorized to close.
3. Registration and Transfer on Company Books.
3.1. The Company shall maintain books for the registration and
transfer of the Warrants and the registration and transfer of the Warrant
Shares.
(1) One thirty-sixth of total Warrants issued.
(2) Seven years from date of issuance.
-2-
<PAGE> 23
3.2. Prior to due presentment for registration of transfer of
this Warrant Certificate, or the Warrant Shares, the Company may deem and treat
the registered Holder as the absolute owner thereof.
4. Reservation of Shares. The Company covenants that it will at all
times reserve and keep available out of its authorized capital stock, solely for
the purpose of issue upon exercise of the Warrants, such number of shares of
capital stock as shall then be issuable upon the exercise or exchange of all
outstanding Warrants and upon conversion of shares issuable upon exercise of
such Warrants. The Company covenants that all shares of capital stock which
shall be issuable upon exercise of the Warrants shall be duly and validly issued
and fully paid and non-assessable and free from all taxes, liens and charges
with respect to the issue thereof, and that upon issuance such shares shall be
listed on each national securities exchange, if any, or the Nasdaq National
Market on which the other shares of such outstanding capital stock of the
Company are then listed or traded.
5. Loss or Mutilation. Upon receipt by the Company of reasonable
evidence of the ownership of and the loss, theft, destruction or mutilation of
any Warrant Certificate and, in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Company (provided that if Holder is an
institutional investor or a nominee of an institutional investor, such
institutional investor's own unsecured agreement of indemnity shall be deemed to
be satisfactory for such purpose), or, in the case of mutilation, upon surrender
and cancellation of the mutilated Warrant Certificate, the Company shall execute
and deliver in lieu thereof a new Warrant Certificate representing an equal
number of Warrants.
6. Adjustment of Purchase Price and Number of Shares Deliverable.
6.1. The number of Warrant Shares purchasable upon the exercise
of each Warrant and the Purchase Price with respect to the Warrant Shares shall
be subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend or
make a distribution on its Common Stock payable in shares of its capital stock,
(ii) subdivide its outstanding shares of Common Stock through stock split or
otherwise, (iii) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or (iv) issue by reclassification of its
Common Stock (including any reclassification in connection with a consolidation
or merger in which the Company is the continuing corporation) other securities
of the Company, the number and/or nature of Warrant Shares purchasable upon
exercise of each Warrant immediately prior thereto shall be adjusted so that the
Holder shall be entitled to receive the kind and number of Warrant Shares or
other securities of the Company which it would have owned or have been entitled
to receive after the happening of any of the events described above, had such
Warrant been exercised immediately prior to the happening of such event or any
record date with respect thereto. Any adjustment made pursuant to this paragraph
(a) shall become effective retroactively as of the record date of such event.
(b) In case the Company shall issue rights, options or
warrants or securities convertible into or exercisable or exchangeable directly
or indirectly into Common
-3-
<PAGE> 24
Stock to all holders of its shares of Common Stock, entitling them to subscribe
for or purchase shares of Common Stock at a price per share which (together with
the value of the consideration, if any, payable for such rights, options,
warrants or convertible securities) is lower on the record date referred to
below than the then Market Price Per Share of such Common Stock (as determined
pursuant to Section 9.2) the number of Warrant Shares thereafter purchasable
upon the exercise of each Warrant shall be determined by multiplying the number
of Warrant Shares immediately theretofore purchasable upon exercise of each
Warrant by a fraction, of which the numerator shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock offered for subscription or purchase, and of which the
denominator shall be the number of shares of Common Stock outstanding on such
record date plus the number of shares which the aggregate offering price of the
total number of shares of Common Stock so offered would purchase at the then
Market Price Per Share of such Common Stock. Such adjustment shall be made
whenever such rights, options, warrants or convertible securities are issued,
and shall become effective retroactively as of the record date for the
determination of shareholders entitled to receive such rights, options, warrants
or convertible securities. In the case such subscription price may be paid in
consideration, part of which or all which is in a form other than cash, the
value of such consideration shall be determined in good faith by the Board of
Directors of the Company.
(c) In case the Company shall distribute to all holders of
its shares of Common Stock, or all holders of Common Stock shall otherwise
become entitled to receive, shares of capital stock of the Company (other than
dividends or distributions on its Common Stock referred to in paragraph (a)
above), evidences of its indebtedness or rights, options, warrants or
convertible securities providing the right to subscribe for or purchase any
shares of the Company's capital stock or evidences of its indebtedness (other
than any rights, options, warrants or convertible securities referred to in
paragraph (b) above), then in each case the number of Warrant Shares thereafter
purchasable upon the exercise of each Warrant shall be determined by multiplying
the number of Warrant Shares theretofore purchasable upon the exercise of each
Warrant, by a fraction, of which the numerator shall be the then Market Price
Per Share of the Warrant Shares (as determined pursuant to Section 9.2) on the
record date mentioned below in this paragraph (c), and of which the denominator
shall be the then Market Price Per Share of the Warrant Shares on such record
date, less the then fair value (as determined by the Board of Directors of the
Company, in good faith) of the portion of the shares of the Company's capital
stock other than Common Stock, evidences of indebtedness, or of such rights,
options, warrants or convertible securities, distributable with respect to each
Warrant Share. Such adjustment shall be made whenever any such distribution is
made, and shall become effective retroactively as of the record date for the
determination of shareholders entitled to receive such distribution.
(d) In the event of any capital reorganization or any
reclassification of the capital stock of the Company or in case of the
consolidation or merger of the Company with another corporation (other than a
consolidation or merger in which the outstanding shares of the Company's Common
Stock are not converted into or exchanged for other rights or interests), or in
the case of any sale, transfer or other disposition to another corporation of
all or substantially all the properties and assets of the Company, the Holder of
each Warrant shall thereafter be entitled to purchase (and it shall be a
condition to the consummation of any such reorganization,
-4-
<PAGE> 25
reclassification, consolidation, merger, sale, transfer or other disposition
that appropriate provisions shall be made so that such Holder shall thereafter
be entitled to purchase) the kind and amount of shares of stock and other
securities and property (including cash) which the Holder would have been
entitled to receive had such Warrants been exercised immediately prior to the
effective date of such reorganization, reclassification, consolidation, merger,
sale, transfer or other disposition; and in any such case appropriate
adjustments shall be made in the application of the provisions of this Article 6
with respect to rights and interest thereafter of the Holder of the Warrants to
the end that the provisions of this Article 6 shall thereafter be applicable, as
near as reasonably may be, in relation to any shares or other property
thereafter purchasable upon the exercise of the Warrants. The provisions of this
Section 6.1(d) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales, transfers or other
dispositions.
(e) Whenever the number of Warrant Shares purchasable upon
the exercise of each Warrant is adjusted, as provided in this Section 6.1, the
Purchase Price with respect to the Warrant Shares shall be accordingly adjusted
in order to reflect the number of Warrant Shares then and thereafter issuable.
6.2. In the event the Company shall declare a dividend, or make a
distribution to the holders of its Series D Preferred generally, whether in
cash, property or assets of any kind, including any dividend payable in stock or
securities of any other issuer owned by the Company (excluding any dividend or
distribution referred to in Section 6.1(a) or (c) above), the Purchase Price of
each Warrant shall be reduced, without any further action by the parties hereto,
by the Per Share Value (as hereinafter defined) of the dividend. For purposes of
this Section 6.2, the "Per Share Value" of a cash dividend or other distribution
shall be the dollar amount of the distribution on each share of Series D
Preferred and the "Per Share Value" of any dividend or distribution other than
cash shall be equal to the fair market value of such non-cash distribution on
each share of Series D Preferred as determined in good faith by the Board of
Directors of the Company.
6.3. No adjustment in the number of Warrant Shares purchasable
under the Warrants, or in the Purchase Price with respect to the Warrant Shares,
shall be required unless such adjustment would require an increase or decrease
of at least 1% in the number of Warrant Shares issuable upon the exercise of
such Warrant, or in the Purchase Price thereof; provided, however, that any
adjustments which by reason of this Section 6.3 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All final results of adjustments to the number of Warrant Shares and the
Purchase Price thereof shall be rounded to the nearest share or the nearest
cent, as the case may be. Anything in this Section 6 to the contrary
notwithstanding, the Company shall be entitled, but shall not be required, to
make such changes in the number of Warrant Shares purchasable upon the exercise
of each Warrant, or in the Purchase Price thereof, in addition to those required
by such Section, as it in its discretion shall determine to be advisable in
order that any dividend or distribution in shares of Common Stock, subdivision,
reclassification or combination of shares of Common Stock, issuance of rights,
warrants or options to purchase Common Stock, or distribution of shares of stock
other than Common Stock, evidences of indebtedness or assets (other than
distributions of cash out of retained earnings) or convertible or exchangeable
securities hereafter made by the Company to the
-5-
<PAGE> 26
holders of its Common Stock shall not result in any tax to the holders of its
Common Stock or securities convertible into Common Stock.
6.4. Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant or the Purchase Price of such Warrant Shares is
adjusted, as herein provided, the Company shall mail to the Holder, at the
address of the Holder shown on the books of the Company, a notice of such
adjustment or adjustments, prepared and signed by the Chief Financial Officer or
Secretary of the Company, which sets forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Purchase Price of such
Warrant Shares after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was made.
6.5. In the event that at any time prior to the expiration of the
Warrants and prior to their exercise:
(a) the Company shall declare any distribution (other than
a cash dividend or a dividend payable in securities of the Company with respect
to the Common Stock); or
(b) the Company shall offer for subscription to the
holders of the Common Stock (as a class) any additional shares of stock of any
class or any other securities convertible into Common Stock or any rights to
subscribe thereto; or
(c) the Company shall declare any stock split, stock
dividend, subdivision, combination, or similar distribution with respect to the
Common Stock, regardless of the effect of any such event on the outstanding
number of shares of Common Stock; or
(d) the Company shall declare a dividend, other than a
dividend payable in shares of the Company's own Common Stock; or
(e) there shall be any capital change in the Company as
set forth in Section 6.1(d); or
(f) there shall be a voluntary or involuntary dissolution,
liquidation, or winding up of the Company (other than in connection with a
consolidation, merger, or sale of all or substantially all of its property,
assets and business as an entity); (each such event hereinafter being referred
to as a "Notification Event"); or
the Company shall cause to be mailed to the Holder, not less than 20 days prior
to the record date, if any, in connection with such Notification Event
(provided, however, that if there is no record date, or if 20 days prior notice
is impracticable, as soon as practicable) written notice specifying the nature
of such event and the effective date of, or the date on which the books of the
Company shall close or a record shall be taken with respect to, such event.
Such notice shall also set forth facts indicating the effect of such action (to
the extent such effect may be known at the date of such notice) on the Purchase
Price and the kind and amount of the shares of stock or other securities or
property deliverable upon exercise of the Warrants.
-6-
<PAGE> 27
6.6. The form of Warrant Certificate need not be changed because
of any change in the Purchase Price, the number of Warrant Shares issuable upon
the exercise of a Warrant or the number of Warrants outstanding pursuant to this
Section 6, and Warrant Certificates issued before or after such change may state
the same Purchase Price, the same number of Warrants, and the same number of
Warrant Shares issuable upon exercise of Warrants as are stated in the Warrant
Certificates theretofore issued pursuant to this Agreement. The Company may,
however, at any time, in its sole discretion, make any change in the form of
Warrant Certificate that it may deem appropriate and that does not affect the
substance thereof, and any Warrant Certificates thereafter issued or
countersigned, whether in exchange or substitution for an outstanding Warrant
Certificate or otherwise, may be in the form as so changed.
7. Conversion Rights.
7.1. In lieu of exercising of any portion of the Warrants as
provided in Section 2.1 hereof, the Warrants represented by this Warrant
Certificate (or any portion thereof) may, at the election of the Holder, be
converted into the nearest whole number of shares of Common Stock equal to: (1)
the product of (a) the number of shares of Common Stock then issuable upon the
exercise of each Warrant multiplied by (b) the excess, if any, of (i) the Market
Price Per Share (as determined pursuant to Section 9.2) with respect to the date
of conversion over (ii) the Purchase Price in effect on the business day next
preceding the date of conversion, divided by (2) the Market Price Per Share with
respect to the date of conversion.
7.2. The conversion rights provided under this Section 7 may be
exercised in whole or in part and at any time and from time to time while any
Warrants remain outstanding, provided that they are at the time currently
exercisable. In order to exercise the conversion privilege, the Holder shall
surrender to the Company, at its offices, this Warrant Certificate accompanied
by a duly completed Notice of Conversion in the form attached hereto as Exhibit
B. The Warrants (or so much thereof as shall have been surrendered for
conversion) shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Warrant Certificate for
conversion in accordance with the foregoing provisions. As promptly as
practicable on or after the conversion date, the Company shall issue and shall
deliver to the Holder (i) a certificate or certificates representing the number
of shares of Common Stock to which the Holder shall be entitled as a result of
the conversion, and (ii) if the Warrant Certificate is being converted in part
only, a new certificate of like tenor and date for the balance of the
unconverted portion of the Warrant Certificate.
8. Voluntary Adjustment by the Company. The Company may, at its option,
at any time during the term of the Warrants, reduce the then current Purchase
Price to any amount deemed appropriate by the Board of Directors of the Company
and/or extend the date of the expiration of the Warrants.
9. Fractional Shares and Warrants; Determination of Market Price Per
Share.
9.1. Anything contained herein to the contrary notwithstanding,
the Company shall not be required to issue any fraction of a share of Common
Stock in connection with the
-7-
<PAGE> 28
exercise of Warrants. Warrants may not be exercised in such number as would
result (except for the provisions of this paragraph) in the issuance of a
fraction of a share of Common Stock unless the Holder is exercising all Warrants
then owned by the Holder. In such event, the Company shall, upon the exercise of
all of such Warrants, issue to the Holder the largest aggregate whole number of
shares of Common Stock called for thereby upon receipt of the Purchase Price for
all of such Warrants and pay a sum in cash equal to the remaining fraction of a
share of Common Stock, multiplied by its Market Price Per Share (as determined
pursuant to Section 9.2 below) as of the last business day preceding the date on
which the Warrants are presented for exercise.
9.2. As used herein, the "Market Price Per Share" with respect to
any class or series of Common Stock on any date shall mean the average closing
price per share of the Company's Common Stock for the five trading days
immediately preceding such date. The closing price for each such day shall be
the last sale price regular way or, in case no such sale takes place on such
day, the average of the closing bid and asked prices regular way, in either case
on the principal securities exchange on which the shares of such Common Stock of
the Company are listed or admitted to trading or, if applicable, the last sale
price, or in case no sale takes place on such day, the average of the closing
bid and asked prices of such Common Stock on Nasdaq National Market or any
comparable system, or if such Common Stock is not reported on Nasdaq National
Market or a comparable system, the average of the closing bid and asked prices
as furnished by two members of the National Association of Securities Dealers,
Inc. selected from time to time by the Company for that purpose. If such bid and
asked prices are not available, then "Market Price Per Share" shall be equal to
the fair market value of such Common Stock as determined in good faith by the
Board of Directors of the Company.
10. Registration and Information Rights. The Holder shall be entitled to
the registration rights, the special covenants of the Company relating to
certain rights to information, and other covenants contained in that certain
Registration Rights Agreement dated as of March ___, 1998, between the Holder
and the Company and Common Stock and Warrant Subscription Agreement dated as of
March ___, 1998, between the Holder and the Company (the "Subscription
Agreement").
11. Transferability of Warrant. THIS WARRANT CERTIFICATE AND/OR THE
WARRANTS MAY ONLY BE TRANSFERRED UPON COMPLIANCE WITH THE TERMS OF THE
SUBSCRIPTION AGREEMENT.
12. Amendments.
12.1. Any term of this Warrant Certificate may be amended and the
observance of any term of the Warrant Certificate may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holder.
12.2. No waivers of, or exceptions to, any term, condition or
provision of this Warrant Certificate, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of any such term,
condition or provision.
-8-
<PAGE> 29
13. Governing Law. This Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of California.
-9-
<PAGE> 30
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed by its officers thereunto duly authorized and its corporate
seal to be affixed hereon, as of this ___ day of _____________, 199__
CYBERSOURCE CORPORATION, a California corporation.
By: ___________________________________________
Name: ___________________________________________
Title: ___________________________________________
Acknowledged and Agreed
this ___ day of _________, 199_
AMERICAN ONLINE, INC., a
Delaware Corporation
By: ______________________________________________
Name: ____________________________________________
Title: ___________________________________________
-10-
<PAGE> 31
EXHIBIT A
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise, pursuant to
Section 2 of the Warrant Certificate accompanying this Notice of Exercise,
_______ Warrants of the total number of Warrants owned by the undersigned
pursuant to the accompanying Warrant Certificate, and herewith makes payment of
the Purchase Price of such shares in full.
By: __________________________________
Name: __________________________________
Address: __________________________________
__________________________________
__________________________________
-11-
<PAGE> 32
EXHIBIT B
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert, pursuant to
Section 7 of the Warrant Certificate accompanying this Notice of Conversion,
_________ Warrants of the total number of Warrants owned by the undersigned
pursuant to the accompanying Warrant Certificate into shares of the Common Stock
of the Company (the "Shares"). The number of Shares to be received by the
undersigned shall be calculated in accordance with the provisions of Section 7.1
of the accompanying Warrant Certificate.
By: __________________________________
Name: __________________________________
Address: __________________________________
__________________________________
-12-
<PAGE> 33
EXHIBIT B TO COMMON STOCK
AND WARRANTS SUBSCRIPTION AGREEMENT
FORM OF PRIVATE PLACEMENT WARRANT CERTIFICATE
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR UNDER THE
SECURITIES LAWS OF ANY JURISDICTION AND MAY NOT BE TRANSFERRED,
SOLD OR OTHERWISE DISPOSED OF UNLESS A REGISTRATION STATEMENT IS
IN EFFECT UNDER THE SECURITIES ACT AND ANY APPLICABLE SECURITIES
LAWS WITH RESPECT TO SUCH SECURITIES OR A WRITTEN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY IS PROVIDED TO THE
COMPANY TO THE EFFECT THAT NO REGISTRATIONS ARE REQUIRED UNDER
SUCH SECURITIES LAWS AND ARE SUBJECT TO RESTRICTIONS UPON
TRANSFER SET FORTH IN THE BYLAWS OF THE COMPANY AND MAY NOT BE
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED EXCEPT IN
COMPLIANCE WITH THE TERMS OF SUCH BYLAWS.
Warrant No. 1 369,578 Warrants
(Subject to Adjustment
as Provided Herein)
CYBERSOURCE CORPORATION
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for
value received AMERICA ONLINE, INC., 22000 AOL Way, Dulles, Virginia 20166, or
its registered assigns (the "Holder") is the owner of the number of warrants
("Warrants") specified above, each of which entitles the Holder thereof to
purchase, one fully paid and non-assessable share of Series D Preferred Stock,
no par value ("Series D Preferred"), of CyberSource Corporation a/k/a
"software.net", a California corporation (the "Company"), at a purchase price
per share of Series D Preferred $2.60 (the "Purchase Price"). The Purchase Price
shall be payable in lawful money of the United States of America in cash or by
certified or cashier's check or a combination of cash and certified or cashier's
check (subject to adjustment as hereinafter provided). As used in this
Agreement, Private Financing means any private placement by the Company of its
securities (other than pursuant to a short-term interim bridge financing) with
investors in exchange for an investment of new capital.
<PAGE> 34
1. Warrant; Purchase Price. The Purchase Price and number of shares of
Series D Preferred issuable upon exercise of each Warrant are subject to
adjustment as provided in Article 6. The shares of Series D Preferred issuable
upon exercise of the Warrants (and/or other shares of Series D Preferred so
issuable by reason of any adjustments pursuant to Article 6) are sometimes
referred to herein as the "Warrant Shares."
2. Exercise; Expiration Date.
2.1. The Warrants are exercisable, at the option of the Holder,
in whole or in part at any time and from time to time in an amount up to 10,266
Warrants for each full month following March 1, 1998 and ending, in each case,
on the Expiration Date, upon surrender of this Warrant Certificate to the
Company together with a duly completed Notice of Exercise, in the form attached
hereto as Exhibit A, and payment of an amount equal to the Purchase Price times
the number of Warrants to be exercised. In the case of exercise of less than all
the Warrants represented by this Warrant Certificate, the Company shall cancel
the Warrant Certificate upon the surrender thereof and shall execute and deliver
a new Warrant Certificate for the balance of such Warrants. Notwithstanding the
foregoing provisions of this Section 2.1, under no circumstances will any
Warrants be exercisable until after August 31, 1999 except in the event of a
Change of Control (as hereafter defined), in which case any outstanding Warrants
granted hereunder that are not then exercisable, in accordance with the vesting
provisions set forth in this Section 2.1, shall become immediately exercisable.
For purposes of this Section 2.1, a Change of Control shall mean (i) any person
(other than existing shareholder(s) of the Company) obtains the right to
designate a majority of the members of the Company's Board of Directors or
acquires sufficient shares of the Company's outstanding voting stock to cause
the election of a majority of the seats on the Company's Board of Directors,
(ii) the Company merges with another entity and the Company's stockholders prior
to the merger do not retain control of the combined entity, or (iii) the Company
sells substantially all of its assets or capital stock.
2.2. The term "Expiration Date" shall mean the earlier to occur
of (i) 5:00 p.m. California time on March ___, 2006 or if such day shall in the
State of California be a holiday or a day on which banks are authorized to
close, then 5:00 p.m. California time the next following day which in the State
of California is not a holiday or a day on which banks are authorized to close
and (ii) immediately prior to the consummation of the IPO (as defined in the
Marketing Agreement).
3. Registration and Transfer on Company Books.
3.1. The Company shall maintain books for the registration and
transfer of the Warrants and the registration and transfer of the Warrant
Shares.
3.2. Prior to due presentment for registration of transfer of
this Warrant Certificate, or the Warrant Shares, the Company may deem and treat
the registered Holder as the absolute owner thereof.
4. Reservation of Shares. The Company covenants that it will at all
times reserve and keep available out of its authorized capital stock, solely for
the purpose of issue upon exercise of
-2-
<PAGE> 35
the Warrants, such number of shares of Series D Preferred as shall then be
issuable upon the exercise or exchange of all outstanding Warrants and such
number of shares of Common Stock as shall be issuable upon conversion of shares
of Series D Preferred. The Company covenants that all shares of capital stock
which shall be issuable upon exercise of the Warrants shall be duly and validly
issued and fully paid and non-assessable and free from all taxes, liens and
charges with respect to the issue thereof, and that upon issuance, and
conversion of any shares of Series D Preferred in shares of Common Stock, such
shares shall be listed on each national securities exchange, if any, on which
the other shares of such outstanding capital stock of the Company are then
listed.
5. Loss or Mutilation. Upon receipt by the Company of reasonable
evidence of the ownership of and the loss, theft, destruction or mutilation of
any Warrant Certificate and, in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Company (provided that if Holder is an
institutional investor or a nominee of an institutional investor, such
institutional investor's own unsecured agreement of indemnity shall be deemed to
be satisfactory for such purpose), or, in the case of mutilation, upon surrender
and cancellation of the mutilated Warrant Certificate, the Company shall execute
and deliver in lieu thereof a new Warrant Certificate representing an equal
number of Warrants.
6. Adjustment of Purchase Price and Number of Shares Deliverable.
6.1. The number of Warrant Shares purchasable upon the exercise
of each Warrant and the Purchase Price with respect to the Warrant Shares shall
be subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend or
make a distribution on its shares of Series D Preferred payable in shares of its
capital stock, (ii) subdivide its outstanding shares of Series D Preferred
through stock split or otherwise, (iii) combine its outstanding shares of Series
D Preferred into a smaller number of shares of Series D Preferred, or (iv) issue
by reclassification of its Series D Preferred (including any reclassification in
connection with a consolidation or merger in which the Company is the continuing
corporation) other securities of the Company, the number and/or nature of
Warrant Shares purchasable upon exercise of each Warrant immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which it
would have owned or have been entitled to receive after the happening of any of
the events described above, had such Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. Any
adjustment made pursuant to this paragraph (a) shall become effective
retroactively as of the record date of such event.
(b) In case the Company shall distribute to all holders of
its shares of Series D Preferred, or all holders of shares of Series D Preferred
shall otherwise become entitled to receive, shares of capital stock of the
Company (other than dividends or distributions on its shares of Series D
Preferred referred to in paragraph (a) above), evidences of its indebtedness or
rights, options, warrants or convertible securities providing the right to
subscribe for or purchase any shares of the Company's capital stock or evidences
of its indebtedness, then in each case the number of Warrant Shares thereafter
purchasable upon the exercise of each Warrant shall be
-3-
<PAGE> 36
determined by multiplying the number of Warrant Shares theretofore purchasable
upon the exercise of each Warrant, by a fraction, of which the numerator shall
be the then Market Price Per Share of the Warrant Shares (as determined pursuant
to Section 9.2) on the record date mentioned below in this paragraph (b), and of
which the denominator shall be the then Market Price Per Share of the Warrant
Shares on such record date, less the then fair value (as determined by the Board
of Directors of the Company, in good faith) of the portion of the shares of the
Company's capital stock other than Common Stock, evidences of indebtedness, or
of such rights, options, warrants or convertible securities, distributable with
respect to each Warrant Share. Such adjustment shall be made whenever any such
distribution is made, and shall become effective retroactively as of the record
date for the determination of shareholders entitled to receive such
distribution.
(c) In the event of any capital reorganization or any
reclassification of the capital stock of the Company or in case of the
consolidation or merger of the Company with another corporation (other than a
consolidation or merger in which the outstanding shares of the Company's Series
D Preferred are not converted into or exchanged for other rights or interests),
or in the case of any sale, transfer or other disposition to another corporation
of all or substantially all the properties and assets of the Company, the Holder
of each Warrant shall thereafter be entitled to purchase (and it shall be a
condition to the consummation of any such reorganization, reclassification,
merger, sale, transfer or other disposition that approriate provisions shall be
made so that such holder shall be entitled to purchase) the kind and amount of
shares of stock and other securities and property (including cash) which the
Holder would have been entitled to receive had such Warrants been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, sale, transfer or other disposition;
and in any such case appropriate adjustments shall be made in the application of
the provisions of this Article 6 with respect to rights and interest thereafter
of the Holder of the Warrants to the end that the provisions of this Article 6
shall thereafter be applicable, as near as reasonably may be, in relation to any
shares or other property thereafter purchasable upon the exercise of the
Warrants. The provisions of this Section 6.1(c) shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers, sales,
transfers or other dispositions.
(d) Whenever the number of Warrant Shares purchasable upon
the exercise of each Warrant is adjusted, as provided in this Section 6.1, the
Purchase Price with respect to the Warrant Shares shall be accordingly adjusted
in order to reflect the number of Warrant Shares then and thereafter issuable.
6.2. In the event the Company shall declare a dividend, or make a
distribution to the holders of its Series D Preferred generally, whether in
cash, property or assets of any kind, including any dividend payable in stock or
securities of any other issuer owned by the Company (excluding any dividend or
distribution referred to in Section 6.1(a) or (c) above), the Purchase Price of
each Warrant shall be reduced, without any further action by the parties hereto,
by the Per Share Value (as hereinafter defined) of the dividend. For purposes of
this Section 6.2, the "Per Share Value" of a cash dividend or other distribution
shall be the dollar amount of the distribution on each share of Series D
Preferred and the "Per Share Value" of any dividend or distribution other than
cash shall be equal to the fair market value of such non-cash distribution on
-4-
<PAGE> 37
each share of Series D Preferred as determined in good faith by the Board of
Directors of the Company.
6.3. No adjustment in the number of Warrant Shares purchasable
under the Warrants, or in the Purchase Price with respect to the Warrant Shares,
shall be required unless such adjustment would require an increase or decrease
of at least 1% in the number of Warrant Shares issuable upon the exercise of
such Warrant, or in the Purchase Price thereof; provided, however, that any
adjustments which by reason of this Section 6.2 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All final results of adjustments to the number of Warrant Shares and the
Purchase Price thereof shall be rounded to the nearest share or the nearest
cent, as the case may be. Anything in this Section 6 to the contrary
notwithstanding, the Company shall be entitled, but shall not be required, to
make such changes in the number of Warrant Shares purchasable upon the exercise
of each Warrant, or in the Purchase Price thereof, in addition to those required
by this Section 6, as it in its discretion shall determine to be advisable in
order that any dividend or distribution in shares of Series D Preferred,
subdivision, reclassification or combination of shares of Series D Preferred,
issuance of rights, warrants or options to purchase Series D Preferred, or
distribution of shares of stock other than Series D Preferred, evidences of
indebtedness or assets (other than distributions of cash out of retained
earnings) or convertible or exchangeable securities hereafter made by the
Company to the holders of its Series D Preferred shall not result in any tax to
the holders of its Series D Preferred or securities convertible into Series D
Preferred.
6.4. Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant or the Purchase Price of such Warrant Shares is
adjusted, as herein provided, the Company shall mail to the Holder, at the
address of the Holder shown on the books of the Company, a notice of such
adjustment or adjustments, prepared and signed by the Chief Financial Officer or
Secretary of the Company, which sets forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Purchase Price of such
Warrant Shares after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was made.
6.5. In the event that at any time prior to the expiration of the
Warrants and prior to their exercise:
(a) the Company shall declare any distribution (other than
a cash dividend or a dividend payable in securities of the Company with respect
to the Series D Preferred); or
(b) the Company shall offer for subscription to the
holders of the Series D Preferred (as a class) any additional shares of stock of
any class or any other securities convertible into Series D Preferred or any
rights to subscribe thereto; or
(c) the Company shall declare any stock split, stock
dividend, subdivision, combination, or similar distribution with respect to the
Series D Preferred, regardless of the effect of any such event on the
outstanding number of shares of Series D Preferred; or
-5-
<PAGE> 38
(d) the Company shall declare a dividend, other than a
dividend payable in shares of the Company's own Series D Preferred; or
(e) there shall be any capital change in the Company as
set forth in Section 6.1(c); or
(f) there shall be a voluntary or involuntary dissolution,
liquidation, or winding up of the Company (other than in connection with a
consolidation, merger, or sale of all or substantially all of its property,
assets and business as an entity); (each such event hereinafter being referred
to as a "Notification Event"),
the Company shall cause to be mailed to the Holder, not less than 20 days prior
to the record date, if any, in connection with such Notification Event
(provided, however, that if there is no record date, or if 20 days prior notice
is impracticable, as soon as practicable) written notice specifying the nature
of such event and the effective date of, or the date on which the books of the
Company shall close or a record shall be taken with respect to, such event. Such
notice shall also set forth facts indicating the effect of such action (to the
extent such effect may be known at the date of such notice) on the Purchase
Price and the kind and amount of the shares of stock or other securities or
property deliverable upon exercise of the Warrants.
6.6. The form of Warrant Certificate need not be changed because
of any change in the Purchase Price, the number of Warrant Shares issuable upon
the exercise of a Warrant or the number of Warrants outstanding pursuant to this
Section 6, and Warrant Certificates issued before or after such change may state
the same Purchase Price, the same number of Warrants, and the same number of
Warrant Shares issuable upon exercise of Warrants as are stated in the Warrant
Certificates theretofore issued pursuant to this Agreement. The Company may,
however, at any time, in its sole discretion, make any change in the form of
Warrant Certificate that it may deem appropriate and that does not affect the
substance thereof, and any Warrant Certificates thereafter issued or
countersigned, whether in exchange or substitution for an outstanding Warrant
Certificate or otherwise, may be in the form as so changed.
7. Conversion Rights.
7.1. In lieu of exercising of any portion of the Warrants as
provided in Section 2.1 hereof, the Warrants represented by this Warrant
Certificate (or any portion thereof) may, at the election of the Holder, be
converted into the nearest whole number of shares of Common Stock equal to: (1)
the product of (a) the number of shares of Common Stock issuable upon conversion
of the shares of Series D Preferred then issuable upon the exercise of each
Warrant multiplied by (b) the excess, if any, of (i) the Market Price Per Share
(as determined pursuant to Section 9.2) with respect to the date of conversion
over (ii) the Purchase Price in effect on the business day next preceding the
date of conversion, divided by (2) the Market Price Per Share with respect to
the date of conversion.
7.2. The conversion rights provided under this Section 7 may be
exercised in whole or in part and at any time and from time to time while any
Warrants remain outstanding,
-6-
<PAGE> 39
provided that they are at the time currently exercisable. In order to exercise
the conversion privilege, the Holder shall surrender to the Company, at its
offices, this Warrant Certificate accompanied by a duly completed Notice of
Conversion in the form attached hereto as Exhibit B. The Warrants (or so much
thereof as shall have been surrendered for conversion) shall be deemed to have
been converted immediately prior to the close of business on the day of
surrender of such Warrant Certificate for conversion in accordance with the
foregoing provisions. As promptly as practicable on or after the conversion
date, the Company shall issue and shall deliver to the Holder (i) a certificate
or certificates representing the number of shares of Series D Preferred to which
the Holder shall be entitled as a result of the conversion, and (ii) if the
Warrant Certificate is being converted in part only, a new certificate of like
tenor and date for the balance of the unconverted portion of the Warrant
Certificate.
8. Voluntary Adjustment by the Company. The Company may, at its option,
at any time during the term of the Warrants, reduce the then current Purchase
Price to any amount deemed appropriate by the Board of Directors of the Company
and/or extend the date of the expiration of the Warrants.
9. Fractional Shares and Warrants; Determination of Market Price Per
Share.
9.1. Anything contained herein to the contrary notwithstanding,
the Company shall not be required to issue any fraction of a share of Series D
Preferred in connection with the exercise of Warrants. Warrants may not be
exercised in such number as would result (except for the provisions of this
paragraph) in the issuance of a fraction of a share of Series D Preferred unless
the Holder is exercising all Warrants then owned by the Holder. In such event,
the Company shall, upon the exercise of all of such Warrants, issue to the
Holder the largest aggregate whole number of shares of Series D Preferred called
for thereby upon receipt of the Purchase Price for all of such Warrants and pay
a sum in cash equal to the remaining fraction of a share of Series D Preferred,
multiplied by its Market Price Per Share (as determined pursuant to Section 9.2
below) as of the last business day preceding the date on which the Warrants are
presented for exercise.
9.2. As used herein, the "Market Price Per Share" with respect to
any class or series of Common Stock on any date shall mean the average closing
price per share of the Company's Common Stock for the five trading days
immediately preceding such date. The closing price for each such day shall be
the last sale price regular way or, in case no such sale takes place on such
day, the average of the closing bid and asked prices regular way, in either case
on the principal securities exchange on which the shares of such Common Stock of
the Company are listed or admitted to trading or, if applicable, the last sale
price, or in case no sale takes place on such day, the average of the closing
bid and asked prices of such Common Stock on Nasdaq National Market or any
comparable system, or if such Common Stock is not reported on Nasdaq National
Market or a comparable system, the average of the closing bid and asked prices
as furnished by two members of the National Association of Securities Dealers,
Inc. selected from time to time by the Company for that purpose. If such bid and
asked prices are not available, then "Market Price Per Share" shall be equal to
the fair market value of such Series D Preferred or Common Stock as determined
in good faith by the Board of Directors of the Company taking into account any
prior issuances of securities of the Company to investors and, in the event of a
Change of Control, the
-7-
<PAGE> 40
price per share of Series D Preferred or Common Stock to be paid in connection
with such Change of Control.
10. Registration and Information Rights. The Holder shall be entitled to
the registration rights, the special covenants of the Company relating to
certain rights to information, and other covenants contained in that certain
Registration Rights Agreement dated as of March 18, 1998, between the Holder and
the Company and the Common Stock and Warrants Subscription Agreement dated as of
March 18, 1998, between the Holder and the Company (the "Subscription
Agreement").
11. Transferability of Warrant. THIS WARRANT CERTIFICATE AND/OR THE
WARRANTS MAY ONLY BE TRANSFERRED UPON COMPLIANCE WITH THE TERMS OF THE
SUBSCRIPTION AGREEMENT.
12. Amendments.
12.1. Any term of this Warrant Certificate may be amended and the
observance of any term of the Warrant Certificate may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holder.
12.2. No waivers of, or exceptions to, any term, condition or
provision of this Warrant Certificate, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of any such term,
condition or provision.
13. Governing Law. This Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of California.
-8-
<PAGE> 41
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed by its officers thereunto duly authorized and its corporate
seal to be affixed hereon, as of this ___ day of March, 1998
CYBERSOURCE CORPORATION, a
Delaware corporation.
By: [SIG]
---------------------------
Name:
-------------------------
Title:
------------------------
Acknowledged and Agreed
this ___ day of March, 1998
AMERICAN ONLINE, INC., a
Delaware Corporation
By:
---------------------------
Name:
-------------------------
Title:
------------------------
-9-
<PAGE> 42
EXHIBIT A
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise, pursuant to
Section 2 of the Warrant Certificate accompanying this Notice of Exercise,
_______ Warrants of the total number of Warrants owned by the undersigned
pursuant to the accompanying Warrant Certificate, and herewith makes payment of
the Purchase Price of such shares in full.
By:
----------------------------
Name:
-------------------------
Address:
----------------------
-10-
<PAGE> 43
EXHIBIT B
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert, pursuant to
Section 7 of the Warrant Certificate accompanying this Notice of Conversion,
_________ Warrants of the total number of Warrants owned by the undersigned
pursuant to the accompanying Warrant Certificate into shares of Series D
Preferred Stock of the Company (the "Shares"). The number of Shares to be
received by the undersigned shall be calculated in accordance with the
provisions of Section 7.1 of the accompanying Warrant Certificate.
By:
----------------------------
Name:
-------------------------
Address:
----------------------
-11-
<PAGE> 44
EXHIBIT C TO COMMON STOCK AND
WARRANTS SUBSCRIPTION AGREEMENT
REGISTRATION RIGHTS AGREEMENT
March ___, 1998
Ladies and Gentlemen:
CyberSource Corporation, a/k/a "software.net," a California corporation
(the "Company"), proposes to issue and sell to America Online, Inc., a Delaware
corporation ("AOL"), upon the terms set forth in that certain Common Stock and
Warrants Subscription Agreement of even date herewith (the "Subscription
Agreement"), shares of the Company's common stock, no par value (the "Purchase
Shares"). Simultaneously with the execution and delivery of the Subscription
Agreement, the Company will issue to AOL the Private Placement Warrant
Certificate (as defined in the Subscription Agreement) for the future purchase
of shares of the Company's Series D Preferred Stock (the "Preferred Shares") as
set forth in the Private Placement Warrant Certificate and simultaneously with
the issuance and sale of the Purchase Shares, the Company will issue to AOL the
IPO Warrant Certificate for the future purchase of additional shares of the
Company's common stock as set forth in the IPO Warrant Certificate (together
with the Preferred Shares and the Shares of Common Stock issuable upon
conversion of the Preferrred Shares, the "Warrant Shares"). As an inducement to
AOL to purchase the Purchase Shares, the Company agrees with AOL as follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following respective meanings:
1.1. "Commission" shall mean the Securities and Exchange
Commission, or any other Federal agency at the time administering the Securities
Act.
1.2. "Person" shall mean and include an individual, a
corporation, a partnership, a trust, an unincorporated organization and a
government or any department, agency or political subdivision thereof.
1.3. "Restricted Shares" shall mean the Purchase Shares, the
Warrant Shares and any shares of capital stock received in respect thereof,
evidenced by certificates bearing a restrictive legend substantially in the form
set forth in Section VI.A of the Subscription Agreement.
1.4. "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
<PAGE> 45
1.5. "Transfer" shall include any disposition of any shares of
Restricted Shares or of any interest therein which would constitute a sale
thereof within the meaning of the Securities Act.
1.6. Capitalized terms used herein without definition shall have
the meanings ascribed to such terms in the Subscription Agreement.
2. Registration Rights
2.1. Incidental Registration. If the Company proposes for any
reason to register, including pursuant to Section 2.2 hereof, any of its
securities under the Securities Act (other than pursuant to the initial public
offering of the Company's securities on Form S-1 or pursuant to a registration
statement on Forms S-8 or S-4 or similar or successor forms), it shall each such
time promptly give written notice to AOL of its intention to do so, and, upon
the written request, given within 30 days after receipt of any such notice of
AOL to register any Restricted Shares (which request shall specify the
Restricted Shares intended to be sold or disposed of by AOL), the Company shall
use its best efforts to cause all such Restricted Shares to be included in such
registration under the Securities Act, all to the extent requisite to permit the
sale or other disposition (in accordance with the Company's intended methods
thereof, as aforesaid) by AOL of the Restricted Shares so registered. In the
event that the proposed registration by the Company is, in whole or in part, an
underwritten public offering of securities by the Company, if the managing
underwriter determines and advises in writing that the inclusion of all
Restricted Shares proposed to be included in the underwritten public offering
and other issued and outstanding shares of Common Stock proposed to be included
therein by persons other than AOL (the "Other Shares") would interfere with the
successful marketing of such securities by the Company, then (i) the number of
Restricted Shares and Other Shares shall be reduced, pro rata among the holders
of Other Shares and AOL (based upon the number of shares of Common Stock
requested by the holders thereof to be registered in such underwritten public
offering), but such other shares shall only be reduced to the extent permitted
by any existing agreements with respect to registration rights to which the
Company is a party, and (ii) in each case those shares of Common Stock which are
excluded from the underwritten public offering shall be withheld from the market
by the holders thereof for a period, not to exceed 90 days, which the managing
underwriter reasonably determines as necessary in order to effect the
underwritten public offering.
2.2. Registrations on Form S-2 or S-3. At such time as the
Company shall have qualified for the use of Form S-2 or S-3 (or any similar form
or forms promulgated by the Commission), provided that AOL is at such time
unable to sell all of the Restricted Shares (other than Warrant Shares in
respect of which the Warrants are not then executable) in one transaction
pursuant to Rule 144 under the Securities Act, AOL shall have the right to
request one registration on Form S-2 and two registrations on Form S-3 (which
request shall be in writing, shall specify the Restricted Shares intended to be
sold or disposed of by AOL, shall state the intended method of disposition of
such Restricted Shares by AOL and shall relate to Restricted Shares having a
proposed aggregate gross offering price (before deduction of underwriting
discounts and expenses of sale) of at least $2,000,000 for a registration on
Form S-2 and $1,000,000 for a registration on Form S-3), and the Company shall
be obligated to effect such registration or registrations on Form S-2 or Form
S-3 (as the case may be); provided, however,
-2-
<PAGE> 46
that the Company shall in no event be obligated to cause the effectiveness of
more than one such registration statement in any calendar year. The Company
shall not register securities for sale for its own account in any registration
requested pursuant to this Section 2.2 unless requested to do so by the holders
of Restricted Shares who hold at least 51% of the stock as to which registration
has been requested. At any time prior to the time that the Company shall have
qualified for the use of Form S-2 or S-3 (or any similar form or forms
promulgated by the Commission) AOL shall have the one time right to request the
Company to file a registration statement on any form which the Company is then
entitled to use. Such request shall be in writing, shall specify the shares of
Common Stock intended to be sold or disposed of by AOL, shall state the intended
method of disposition by AOL and shall relate to Common Stock having a proposed
aggregate gross offering price (before deduction of underwriting discounts and
expenses of sale) of at least $2,000,000, and the Company shall be obligated to
effect such registration as promptly as practical, subject in any event to all
applicable securities laws; provided, however, that the Company shall not be
required to file such registration statement prior to the expiration of 180 days
from the effective date of the Company's registration statement covering its
initial public offering. Notwithstanding the foregoing, if the Company shall
furnish to AOL within fifteen (15) days of receipt of such request a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors of the Company (as evidenced by a board resolution)
(A) the Company is in possession of material, non-public information concerning
an acquisition, merger, recapitalization, consolidation, reorganization or other
material transaction by or of the Company or concerning pending or threatened
litigation and (B) disclosure of such information would seriously jeopardize any
such transaction or litigation or otherwise materially harm the Company and it
is therefore essential to defer the filing of such registration statement, the
Company shall have the right to defer such filing to a date not later than sixty
(60) days after receipt of such request, provided that the Company will not
exercise this right more than once in any twelve-month period.
2.3. Designation of Underwriter.
2.3.1. In the case of any registration effected pursuant to
Sections 2.2, AOL shall have the right to designate the managing
underwriter (if any) in any such underwritten offering, provided
that it is reasonably acceptable to the Company.
2.3.2. In the case of any registration initiated by the
Company, the Company shall have the right to designate the managing
underwriter in any underwritten offering.
2.4. Preparation and Filing. If and whenever the Company is under
an obligation pursuant to the provisions of Section 2.2 to effect the
registration of any Restricted Shares, the Company shall, as expeditiously as
practicable:
2.4.1. prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective;
-3-
<PAGE> 47
2.4.2. prepare and file with the Commission such amendments
and supplements to such registration statements and the prospectus
used in connection therewith as may be necessary to keep such
registration statement effective and current for at least ninety
(90) day and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all Restricted
Shares covered by such registration statement;
2.4.3. furnish to AOL such number of copies of a summary
prospectus or other prospectus, including a preliminary prospectus,
in conformity with the requirements of the Securities Act, and such
other documents as AOL may reasonably request in order to facilitate
the public sale or other disposition of such Restricted Shares;
2.4.4. use its best efforts to register or qualify the
Restricted Shares covered by such registration statement under the
securities or blue sky laws of such jurisdictions as AOL shall
reasonably request (provided, however, the Company shall not be
required to consent to general service of process for all purposes
in any jurisdiction where it is not then qualified) and do any and
all other acts or things which may be necessary or advisable to
enable AOL to consummate the public sale or other disposition in
such jurisdictions of such securities;
2.4.5. notify AOL, at any time when a prospectus relating
thereto covered by such registration statement is required to be
delivered under the Securities Act within the appropriate period
mentioned in Section 2.4.2 above, of the happening of any event as a
result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing and at the
request of AOL, prepare and furnish to AOL a reasonable number of
copies of a supplement to or an amendment of such prospectus as may
be necessary so that, as thereafter delivered to the purchasers of
such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing;
2.4.6. furnish, upon request, to AOL a signed counterpart,
addressed to AOL, of (i) an opinion of counsel for the Company,
dated the effective date of the registration statement, and (ii) a
"comfort" letter signed by the independent public accountants who
have certified the Company's financial statements included in the
registration statement, covering substantially the same matters with
respect to the registration statement (and the prospectus included
therein) and (in the case of the "comfort" letter) with respect to
events subsequent to the date of the financial statements, as are
customarily covered (at the time of such registration ) in opinions
of issuer's counsel and in "comfort" letters delivered to the
underwriters in underwritten public offerings of securities; and
2.4.7. shall register or qualify or cooperate with AOL and
its counsel in connection with the registration or qualification of
the Restricted Shares for offer and sale
-4-
<PAGE> 48
under the securities or "blue sky" laws of such states of the
United States as AOL reasonably requests in writing and do any and
all other acts or things necessary or advisable to enable the offer
and sale in such jurisdiction of the Restricted Shares covered in
the registration statement; provided that the Company shall not be
required to (i) qualify generally to do business in any jurisdiction
where it is not then so qualified or (ii) take any action which
would subject it to general service of process or to taxation in any
jurisdiction where it is not then so subject; and
2.4.8. make reasonably available for inspection by AOL, any
underwriter participating in any disposition pursuant to the
registration statement and any attorney, accountant or other agent
retained by AOL or any such underwriter all relevant financial and
other records, pertinent corporate documents and properties of the
Company and cause the Company's officers, directors, employees,
accountants and auditors to supply all relevant information
reasonably requested by AOL or any such underwriter, attorney,
accountant or agent in connection with the registration statement,
in each case, as shall be reasonably necessary to enable such
persons to conduct a reasonable investigation within the meaning of
Section 11 of the Securities Act.
2.5. The Company shall maintain the effectiveness of any
registration statement filed pursuant to Section 2.2 until the sooner to occur
of (i) such time that all Restricted Shares included therein are sold or no
longer constitute Restricted Shares as defined in Section 1.3 hereof or (ii) 90
days following the effective date of such registration statement.
3. Registration Expenses. All expenses incurred by the Company in
complying with its obligations under Section 2 hereof shall be paid by the
Company, including, without limitation, all registration and filing fees,
printing expenses, blue sky filing fees, fees and disbursements of counsel for
the Company, and expenses of any required audits; provided, however, that (i)
all underwriting discounts and selling commissions and other similar fees and
costs applicable to the Restricted Shares covered by registrations effected
hereunder, as well as the fees and disbursements of counsel designated for AOL
shall be borne by AOL in proportion to the number of Restricted Shares sold by
AOL and (ii) all other expenses incurred by the Company in excess of $75,000
shall be borne by AOL pro rata (i) with other selling shareholders of the
Company and (ii) with the Company in connection with the sale of shares other
than shares of the Company issue and outstanding immediately prior to the date
of the registration statement, each selling pursuant to a registration statement
filed under Section 2 hereof.
4. Indemnification.
4.1. In the event of any registration of any Restricted Shares
under the Securities Act pursuant to this Agreement or registration or
qualification of any Restricted Shares under state securities or blue sky laws,
the Company shall indemnify and hold harmless AOL, its directors, officers and
underwriters or any other person acting on behalf of AOL and each other person,
if any, who controls any of the foregoing persons, within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, or any action in respect thereof (including but not limited to, any
losses, claims, damages, liabilities or actions relating to the purchase and
sale of Restricted Shares) to which any of the foregoing persons may become
-5-
<PAGE> 49
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any registration statement under which such Restricted Shares were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, or any
document prepared and/or furnished by the Company (incident to the registration
or qualification of any Restricted Shares under state securities or blue sky
laws, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading or, with respect to any prospectus,
necessary to make the statements therein in light of the circumstances under
which they were made, not misleading, or any violation by the Company of the
Securities Act or state securities or blue sky laws applicable to the Company
and relating to action or inaction required of the Company in connection with
such registration or qualification under such state securities or blue sky laws,
and shall reimburse as incurred AOL, its directors, officers and underwriters,
or any other person acting on behalf of AOL and any person controlling AOL for
any legal or any other expenses reasonably incurred by any of them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company shall not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in said registration statement, said preliminary
prospectus or said prospectus or said amendment or supplement or any document
incident to the registration or qualification of any Restricted Shares under
state securities or blue sky laws, in reliance upon and in conformity with
written information pertaining to AOL furnished to the Company by AOL or AOL's
agent or representative specifically for use in the preparation thereof,
provided further, that this indemnity agreement will be in addition to any
liability which the Company may otherwise have to AOL, its directors, officers
and control persons.
4.2. AOL shall indemnify and hold harmless (in the same manner
and to the same extent as set forth in the preceding paragraph or, if different,
in the manner and to the extent as is in accordance with standard industry
practice at the time of the proposed sale) the Company, each director of the
Company, each officer of the Company who shall sign such registration statement,
and any person who controls the Company within the meaning of the Securities
Act, with respect to any untrue statement or omission from such registration
statement, any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereto, if such untrue statement or omission was
made in reliance upon and in conformity with written information pertaining to
AOL furnished to the Company by AOL or AOL's agent or representative
specifically for use in the preparation of such registration statement,
preliminary prospectus, final prospectus or amendment or supplement; provided,
however, that the amount of AOL's indemnification obligation shall be limited to
the net proceeds received by AOL from the sale of AOL's Restricted Shares
pursuant to the registration statement.
4.3. Promptly after receipt by an indemnified party of notice of
the commencement of any action involving a claim referred to in the preceding
paragraphs of this Section 4, such indemnified party will, if a claim in respect
thereof is made against an indemnifying party, give written notice to the latter
of the commencement of such action. In case any such action is brought against
an indemnified party, the indemnifying party will be entitled to participate in
and to assume the defense thereof, jointly with any other indemnifying party
-6-
<PAGE> 50
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party (who shall not, except with the consent
of the indemnified party, be counsel to the indemnifying party), and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be responsible
for any legal or other expenses subsequently incurred by the indemnified party
in connection with the defense thereof; provided, however, that if any
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to such indemnified party which are different from or
additional to those available to the indemnifying party, or that such claim or
litigation involves or could have an effect upon matters beyond the scope of the
indemnity agreement provided in this Section 4, the indemnifying party shall not
have the right to assume the defense of such action on behalf of such
indemnified party and such indemnifying party shall reimburse such indemnified
party and any person controlling such indemnified party for that portion of the
fees and expenses of any counsel retained by the indemnified party which are
reasonably related to the matters covered by the indemnity agreement provided in
this Section 4.
4.4. The indemnifying party shall not make any settlement of any
claims indemnified against hereunder without the written consent of the
indemnified party or parties, which consent shall not be unreasonably withheld.
4.5. In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 4 is due
in accordance with its terms but is for any reason held by a court to be
unavailable from the Company or AOL on grounds of public policy or otherwise,
the Company and AOL shall contribute to the aggregate losses, claims, damages
and liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending the same) to which the Company and
AOL or an underwriter (and any person who controls any of the foregoing persons,
and any person acting on behalf of any of the foregoing persons in connection
with such registration), including, without limitation, any officer, director,
broker, employee, agent, attorney and accountant, and in the case of a
partnership, each of its partners) is subject, as the case may be, in such
proportion as is appropriate to reflect the relative fault of the Company and
AOL or such underwriter (and any person who controls any of the foregoing
persons, and any person acting on behalf of any of the foregoing in connection
with such registration, including, without limitation, any officer, director,
broker, employee, agent, attorney or accountant, and in the case of a
partnership, each of its partners), as the case may be, in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as all other relevant equitable considerations; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation;
provided, further, that in the case of AOL, the maximum amount of such
contribution shall be limited to an amount equal to the net proceeds actually
received by AOL from the sale of Restricted Shares effected pursuant to such
registration. Any party entitled to contribution under this paragraph shall,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this paragraph, notify such other
party or parties from whom contribution may be sought, but the omission to so
notify such other party or parties shall not relieve the party or parties from
whom contribution may be sought from any other contribution obligation it or
they may have under this paragraph or otherwise.
-7-
<PAGE> 51
4.6. The agreement contained in this Section 4 shall survive the
sale of the Restricted Shares pursuant to Section 2 hereof and shall remain in
full force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of any indemnified party.
5. Rule 144. The Company shall use its best efforts to file the reports
required to be filed by it under the Securities Act and the Exchange Act in a
timely manner and, if at any time the Company is not required to file such
reports, it will, upon the request of AOL, make publicly available other
information so long as necessary to permit sales of the Restricted Shares
pursuant to Rule 144. The Company covenants that it will take such further
action as AOL may reasonably request, all to the extent required from time to
time to enable AOL to sell the Restricted Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144.
Upon the request of AOL, the Company shall deliver to AOL a written statement as
to whether it has complied with such requirements. The Company shall furnish to
AOL upon request its most recent annual or quarterly report of the Company and
other reports or documents so filed by the Company.
6. Underwritten Registrations. If any of the Restricted Shares are to be
sold in an underwritten offering pursuant to Section 2.2, the investment banker
or investment bankers and manager or managers that will administer the offering
will be selected by AOL, provided that it or they are reasonably acceptable to
the Company. If the Shares are sold in an underwritten offering, AOL agrees to
(i) sell the Shares on the basis reasonably provided in any underwriting
arrangements approved by AOL, (ii) complete and execute all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements and (iii)
provide such information to the Company as is necessary to include AOL as a
selling stockholder.
7. Granting of Registration Rights.
7.1. Nothing in this Registration Rights Agreement shall restrict
any rights to any person(s) pursuant to registration rights previously granted
by the Company to register any shares of capital stock or other securities of
the Company regardless of whether such rights would be superior to the rights of
AOL granted pursuant to this Agreement.
7.2. The Company shall not grant any rights to any person(s) to
register any shares of capital stock or other securities of the Company if such
rights would conflict with or impair AOL's rights under this Agreement.
8. "Market Stand-Off" Agreement. AOL hereby agrees that it shall not, to
the extent requested by the Company and an underwriter of Common Stock (or other
securities) of the Company, sell or otherwise transfer or dispose of any
securities of the Company (other than securities registered in the offering)
whether or not acquired by AOL under the subscription Agreement for a period of
one hundred eighty (180) days, following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however,
that:
-8-
<PAGE> 52
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers shares (or
securities) to be sold on its behalf to the public in an
underwritten offering; and
(b) all officers and directors of the Company, holders of 5%
or more of the Company's issued and outstanding capital stock and
all other persons with registration rights (whether or not pursuant
to this Agreement) similarly agree not to sell or transfer.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Restricted Shares (and the shares
or securities of every other person subject to the foregoing restriction) until
the end of such reasonable and customary period.
9. Miscellaneous.
9.1. Registration Review. AOL shall have the right to review any
references to AOL that appear in any registration statements contemplated hereby
filed with the Securities and Exchange Commission by the Company, provided, that
AOL shall not unreasonably object to such references and, provided further, that
this review right shall not impede the Company in meeting its disclosure
obligations under applicable securities laws, as reasonably interpreted by its
counsel, or unreasonably delay the filing of any such registration statements.
9.2. Amendments and Waivers. The provisions of this Agreement may
not be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, except with the written consent of
the Company and AOL.
9.3. Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand delivery, first-class
mail, facsimile transmission, or air courier which guarantees overnight
delivery:
(1) if to AOL. at its address as follows: America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Fax No.: (703) 265-1202
Attention: David Colburn and
General Counsel
with a copy to Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
New York, NY 10103
Fax No.: (212) 506-5151
Attention: Martin H. Levenglick
-9-
<PAGE> 53
(2) if to the Company, at its address
as follows: CyberSource Corporation
a/k/a "software.net"
3031 Tisch Way, Suite 900
San Jose, CA 95128
Fax No.: (408) 241-8258
Attention: President
with a copy to: Jackson Tufts Cole & Black, LLP
60 South Market Street, 10th Floor
San Jose, CA 95113
Fax No.: (408) 998-4889
Attn: Richard Scudellari, Esq.
All such notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered; five business days after
being deposited in the mail, postage prepaid, if mailed; when receipt is
acknowledged by recipient's facsimile machine operator, if sent by facsimile
transmission; and on the day delivered, if sent by overnight air courier
guaranteeing next day delivery.
9.4. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of AOL and the Company and their respective successors
and assigns. The registration rights of AOL under Sections 2.1 and 2.2 hereof
(and, except as provided in the next sentence, all other rights and benefits
under this Agreement) may be transferred to a transferee that acquires at least
50% of the Purchase Shares originally issued to AOL. The registration rights of
AOL under Sections 2 and 3 hereof (and all other rights and benefits under this
Agreement) may also be transferred to a transferee that is a current or future
affiliate of AOL or to another party reasonably acceptable to the Company
without restriction as to minimum transfer amount and is not a competitor of the
Company. The Company shall be given written notice by the holder at the time of
such transfer stating the name and address of the transferee and identifying the
securities with respect to which the registration rights are being assigned
pursuant to this Section 8.4.. The registration rights of AOL under this
Agreement shall not be otherwise transferable without the consent of the
Company.
9.5. Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Signatures may be provided
by facsimile, provided that actual execution copies are sent by an overnight
delivery service on the same date as the facsimile transmission.
9.6. Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
-10-
<PAGE> 54
9.7. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
-11-
<PAGE> 55
9.8. Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be affected. If the foregoing is in accordance with your
understanding of our agreement, please sign and return to the Company a
counterpart hereof, whereupon this instrument, along with all counterparts, will
become a binding agreement between us in accordance with its terms.
Very truly yours,
CYBERSOURCE CORPORATION,
a California corporation
By [SIG]
--------------------------------
Name:
Title:
The foregoing Registration Rights Agreement is hereby confirmed and
accepted as of the date first above written.
AMERICA ONLINE, INC..
a Delaware corporation
By________________________________
Name:
Title:
- 12 -
<PAGE> 1
EXHIBIT 10.10
CONVEYANCE AGREEMENT
THIS CONVEYANCE AGREEMENT ("Agreement"), dated this 31st day of
December, 1997, is made and entered into by and between CyberSource Corporation,
a California Corporation ("CyberSource"), and Internet Commerce Services
Corporation, a Delaware corporation ("ICS").
ARTICLE 1.
DEFINITIONS
The following definitions shall for all purposes, unless otherwise
clearly indicated to the contrary, apply to the terms used in this Agreement:
1.1. "Assets" means all of CyberSource's right, title and interest,
legal or equitable, in and to the assets, properties, rights, contract rights,
licenses, interests, claims, demands, causes of action, utility (and similar)
deposits, business, and goodwill used or acquired by CyberSource in connection
with its internet commerce services business (hereinafter referred to as the
"Commerce Services Business"), including the assets listed as Exhibit A attached
hereto, and the contents of such business throughout the United States and the
rest of the world including, but not limited to, all of the furniture, fixtures,
equipment and other items of personal property reflected on the balance sheet of
CyberSource relating to the Commerce Services Business and the contracts of the
Commerce Services Business. "Assets" specifically excludes the assets,
properties, rights, contract rights, licenses, interests, claims, demands,
causes of action, utility (and similar) deposits, business, and goodwill used or
acquired by CyberSource in connection with its Software.net business.
1.2. "Liabilities" means, with respect to the Assets being transferred
pursuant to this Agreement, all of CyberSource's liabilities, duties and
obligations of every kind reflected on the balance sheet of CyberSource,
including the liabilities set forth on Exhibit C hereof, acquired by CyberSource
in connection with the Commerce Services Business, or associated with a contract
being transferred to ICS hereunder.
ARTICLE 2.
CONVEYANCES
CyberSource hereby grants, bargains, sells, conveys, assigns, transfers
and delivers all of the Assets to ICS and ICS hereby accepts such Assets, at and
as of the Effective Time hereinafter provided.
TO HAVE AND TO HOLD all and singular the said Assets hereby granted,
bargained, sold, conveyed, assigned, transferred and delivered or intended so to
be unto ICS, its successors and assigns, to and for its and their own use
forever, together with all and singular the properties, assets, members and
appurtenances thereunder belonging or in anyway incident or appertaining
thereto.
<PAGE> 2
If the conveyance and assignment attempted to be made hereunder of any
agreement, lease, permit, license, right, claim or other Asset would be
ineffective as between CyberSource and ICS without the consent of any third
person, or would serve as a cause for terminating or invalidating any such
agreement, lease, permit, license, right, claim or other Asset or would cause or
serve as a cause for the loss of ownership thereof, then such Asset is
temporarily excluded from the aforesaid conveyance and assignment to the extent
agreed by CyberSource and ICS. However, under such circumstances CyberSource
shall, to the greatest extent permitted, hold such Asset for the exclusive use
and benefit of ICS until such consent has been obtained. Upon the obtaining of
such consent no further conveyance or assignment shall be required, but full and
complete title to such Asset shall automatically become vested in ICS by virtue
of this Agreement.
ARTICLE 3.
ASSUMPTION OF LIABILITIES
In connection with the grant, bargain, sale, conveyance, assignment,
transfer and delivery made under Article 2 and for any conveyances, assignments,
transfers and deliveries to be made by CyberSource to ICS pursuant to Article 7,
ICS hereby assumes and agrees to perform and fully discharge all of the
Liabilities at and as of the Effective Time. ICS hereby agrees to indemnify,
defend and hold harmless CyberSource, its successors and assigns, of and from
any and all costs, liabilities and expense, including court costs and reasonable
attorneys' fees, arising from or connected with the Liabilities hereby assumed
to the extent of the assumption hereunder.
ARTICLE 4.
CONSIDERATION
In consideration of the transfer of the Assets to ICS hereunder, ICS
hereby agrees to issue, and shall be issuing at and as of the Effective Time
upon the written instruction of CyberSource to (i) the holders of the Series A
Preferred Stock of CyberSource 1,985,520 shares of the Series A Preferred Stock
of ICS ("ICS Series A"), (ii) the holders of the Series B Preferred Stock of
CyberSource 2,037,038 shares of Series B Preferred Stock of ICS ("ICS Series
B"), (iii) the holders of the Series C Preferred Stock of CyberSource 3,000,000
Series C Preferred Stock of ICS ("ICS Series C"), and to the holders of the
Company Common Stock 9,070,000 shares of the common stock of ICS ("ICS Common"),
each such issuance to be on a same percentage basis with respect to each
shareholder's shareholdings in CyberSource with the same preferential
characteristics (adjusted for the value of the distribution) for the Company's
preferred shareholders and with the same percentage ownership for each
shareholder as those which currently exist (the "ICS Stock Issuance"), and the
agreement by ICS to assume, perform and fully discharge all of the Liabilities.
CyberSource and ICS hereby agree that for tax purposes the capital stock issued
by ICS shall be deemed to have been issued to CyberSource and distributed by
CyberSource to its shareholders.
-2-
<PAGE> 3
ARTICLE 5.
WARRANTIES
EXCEPT AS SET FORTH IN ARTICLE 11 TO THE CONTRARY, ALL SALES,
CONVEYANCES, ASSIGNMENTS, TRANSFERS AND DELIVERIES TO BE MADE HEREUNDER WILL BE
MADE WITHOUT REPRESENTATION OR WARRANTY OF ANY KIND (INCLUDING, WITHOUT
LIMITATION, ANY REPRESENTATION OR WARRANTY OF TITLE). ALL ASSETS, RIGHTS AND
BUSINESSES TO BE SOLD, CONVEYED, ASSIGNED, TRANSFERRED AND DELIVERED HEREUNDER
WILL BE SOLD, CONVEYED, ASSIGNED, TRANSFERRED AND DELIVERED "AS IS". CYBERSOURCE
EXPRESSLY DISCLAIMS ANY WARRANTIES OF CONDITION, MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE. This Agreement is made, however, with full rights of
substitution and subrogation of ICS in and to all covenants, warranties and
other rights of indemnification by others heretofore given or made with respect
to any of the Assets.
ARTICLE 6.
SALES TAXES AND RECORDING FEES
The parties agree that ICS shall pay all sales, use and similar taxes
arising out of the sales, conveyances, assignments, transfers and deliveries to
be made hereunder, and shall pay all documentary, filing and recording fees
required in connection therewith.
ARTICLE 7.
FURTHER ASSURANCES
From time to time after the date hereof, and without any further
consideration, CyberSource will execute and deliver such instruments of
conveyance, assignment, transfer and delivery, and take such other action, as
ICS may reasonably request in order more effectively to vest in ICS beneficial
and record title to the Assets to be conveyed and assigned hereunder or intended
so to be and to put ICS in actual possession and operating control of such
Assets. After the date hereof, CyberSource agrees to use its best efforts to
obtain, without additional cost to ICS any and all consents and approvals that
may be necessary to vest or confirm title to all the Assets in ICS.
ARTICLE 8.
POWER OF ATTORNEY
CyberSource does hereby constitute and appoint ICS, its successors and
assigns, the true and lawful attorney of CyberSource with full power of
substitution for it and in its name, place and stead or otherwise on behalf of
CyberSource, its successors and assigns, and for the benefit of ICS, its
successors and assigns, to demand and receive from time to time any and all
property and assets, real, personal, and mixed, tangible and intangible, hereby
conveyed and assigned or intended so to be and to execute in the name of
CyberSource, its successors and assigns, deeds, assignments and other
instruments of further assurance and to give receipts and releases in respect of
the same, and from time to time to institute and prosecute in the name of ICS or
-3-
<PAGE> 4
CyberSource for the benefit of ICS as may be appropriate, any and all
proceedings at law, in equity or otherwise which ICS, its successors and
assigns, may deem proper in order to collect, assert or enforce any claims,
rights or title of any kind in and to the Assets hereby conveyed and assigned or
intended so to be, and to defend and compromise any and all actions, suits or
proceedings in respect of any of said Assets and to do any and all such acts and
things in furtherance of this Agreement as ICS, its successors or assigns, shall
deem advisable. CyberSource hereby declares that the appointment hereby made and
the powers hereby granted are coupled with an interest and are and shall be
irrevocable and perpetual and shall not be terminated by any act of CyberSource
or its successors or assigns or by operation of law.
ARTICLE 9.
SECURITIES LAW REPRESENTATIONS
CyberSource acknowledges that the capital stock to be issued pursuant to
the ICS Stock Issuance are being issued to it pursuant to a private offering
exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act"), and, as a result thereof, the shares of ICS capital stock are
"restricted securities" for purposes of Rule 144 as promulgated under the
Securities Act. CyberSource represents and warrants that it and each of its
shareholders is an "accredited investor" as such term is defined in Regulation D
as promulgated under the Securities Act.
ARTICLE 10.
GENERAL
10.1. Registration Rights. The holders of ICS Series A, ICS Series B,
and ICS Series C are hereby granted by the Company the information rights and
registration rights with respect to their Preferred Stock holdings in ICS as
such holders have with respect to the shares of Preferred Stock of CyberSource.
10.2. McKiernan Transfers. William S. McKiernan ("McKiernan") hereby
agrees that the holders of ICS Series A Interests, ICS Series B and ICS Series C
shall have co-sale and rights of first offer on proposed transfers of shares of
ICS capital stock by McKiernan to the same extent such holders have with respect
to the shares of Preferred Stock of CyberSource.
10.3. Effective Time. Regardless of when executed, this Conveyance
Agreement shall be effective as of 3:30 p.m., Pacific Standard Time (the
"Effective Time"), on December 31, 1997.
10.4. Headings. All article or section headings in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any of the provisions hereof.
10.5. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.
-4-
<PAGE> 5
10.6. Integration. This Agreement constitutes the entire agreement
between the parties pertaining to the subject matter hereof and supersedes all
prior agreements and understandings pertaining thereto.
10.7. Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one agreement binding on
the parties hereto.
10.8. Applicable Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of California.
ARTICLE 11.
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PARTIES
11.1 Representations and Warranties of CyberSource. CyberSource hereby
represents and warrants to ICS the following:
(a) Neither the execution of this Agreement by CyberSource nor
the consummation of the transactions contemplated hereby which are to be
performed by CyberSource violates the provisions of Section 500 the California
General Corporation Law (the "GCL") as applicable to CyberSource.
(b) All consents and approvals necessary or appropriate for
CyberSource to execute this Agreement and to consummate the transactions
contemplated hereby which are to be performed by CyberSource have been obtained,
except for such consents and approvals the failure of which to obtain would not
result in any material adverse effect on CyberSource or its shareholders; it
being specifically understood that the effect of Sections 502, 503 and 506 of
the GCL are expressly excluded from this representation.
(c) To the best knowledge of CyberSource , the transfer by
CyberSource of its internet commerce services business to ICS as provided in
this Agreement in exchange for stock of ICS qualifies as a Section 351
transaction under the Internal Revenue Code.
11.2 Representations and Warranties of ICS. ICS hereby represents and
warrants to CyberSource the following:
(a) ICS is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to own and hold its properties, carry on its
business as now conducted and as proposed to be conducted. ICS has the corporate
power and authority to enter into this Agreement and to carry out the
transactions contemplated by this Agreement.
(b) The total number of shares of capital stock which ICS is
authorized to issue is forty million (40,000,000), divided into two classes as
follows: thirty million (30,000,000) shares of common stock, $.001 par value per
share (the "Common Stock") and ten million shares of preferred stock. $.001 par
value per share (the "Preferred Stock"). 1,985,520 shares of Preferred Stock
have been designated Series A Preferred Stock (the "Series A Stock"),
-5-
<PAGE> 6
2,500,000 shares of Preferred Stock have been designated Series B Preferred
Stock (the "Series B Stock") and 3,000,000 shares of Preferred Stock have been
designated Series C Preferred Stock (the "Series C Stock"). No such shares will
have been issued by ICS prior to the ICS Stock Issuance. The rights, preferences
and privileges of the Series A Stock, Series B Stock and the Series C Stock will
be as stated in the Certificate of Incorporation of ICS. Except as set forth in
this Agreement, ICS has no obligations as of the date of this Agreement to issue
any shares of its capital stock.
(c) All corporate action on the part of ICS, its officers,
directors and stockholders necessary for the authorization, execution and
delivery of this Agreement, the performance of all obligations of ICS hereunder
and for the authorization, issuance and delivery of the shares of capital stock
to be issued in the ICS Stock Issuance has been taken and this Agreement
constitutes a valid and legally binding agreement of ICS enforceable against ICS
in accordance with its terms, except as limited by (i) bankruptcy or insolvency
laws or (ii) equitable principles or public policy.
(d) The shares to be issued in the ICS Stock Issuance, when
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable. The Board of Directors of ICS has adopted resolutions reserving
the shares of Common Stock to be issued upon conversion of the Series A Stock,
Series B Stock and Series C Stock and when the shares of Common Stock are issued
upon such conversion in accordance with the Certificate of Incorporation of ICS,
such shares will be duly and validly issued, fully paid and nonassessable.
(e) ICS has no assets or liabilities other than those conveyed
pursuant to this Agreement.
11.3 Covenants of ICS. ICS hereby covenants that it will take all
actions reasonably necessary or appropriate to grant and preserve the rights of
the ICS stockholders set forth in Sections 10.1 and 10.2 of this Agreement and
any other rights or duties such stockholders have in their capacity as
CyberSource shareholders, such that the CyberSource shareholders will have
equivalent rights and duties in their capacity as ICS stockholders.
11.4 Beneficiaries of Representations and Warranties. The
representations and warranties of CyberSource and ICS set forth in this Article
11 are expressly made for the benefit of, in addition to the party specified
above, the shareholders and stockholders, as the case may be, of the relevant
entity. CyberSource expressly acknowledges that its shareholders are relying on
these representations and warranties in connection with their approval of this
Agreement and the transactions contemplated hereby. The representations and
warranties set forth in this Article 11 shall expire and be of no further force
and effect as of the close of business on January 30, 1998.
-6-
<PAGE> 7
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first above written.
INTERNET COMMERCE SERVICES
CORPORATION
By:____________________________________
___________________________________
William McKiernan Name:__________________________________
Title:_________________________________
CYBERSOURCE CORPORATION
By:____________________________________
Name: William McKiernan
Title: President and Chief Executive
Officer
-7-
<PAGE> 8
EXHIBIT A
LIST OF INCLUDED ASSETS
1. All contract, technology license and other rights between
CyberSource and third parties for the operation of the Commerce Services
Business, and other directly related services, including CyberSource's customer
contracts and employment agreements with Commerce Services Business employees,
including specifically those assets and liabilities set forth on the balance
sheet attached hereto as Exhibit B and the schedule of employees and other
assets contained in Appendix I hereto.
2. All technology currently used in the Commerce Services
Business;
3. The portion of the leases for the space occupied by the
Commerce Services Business and the Employees thereof; and
4. All of the employees of CyberSource who are singularly engaged
in the Commerce Services Business.
Exhibit - Page 1
<PAGE> 1
EXHIBIT 10.14
NETSCAPE
TRADEMARK LICENSE AGREEMENT
This Trademark License Agreement ("Agreement") is effective as of the 23rd day
of June 1997 ("Effective Date") and is entered into by and between Netscape
Communications Corporation ("Netscape"), a Delaware corporation located at 501
East Middlefield Road, Mountain View California 94043, and CyberSource
Corporation ("Licensee"), a California corporation with its principal place of
business at 550 South Winchester Boulevard, Suite 301, San Jose, California
95128.
RECITALS
A. Netscape owns and uses the name and/or trademark NETSCAPE and NETSCAPE
SOFTWARE DEPOT and the registered trademarks therefor as listed on
Exhibit A (collectively referred to as the "Marks") in connection with
its Internet-related software products, services and technology;
B. Licensee is in the business of secure, electronic distribution of
software and digital products over the Internet;
C. Licensee desires to use the trademark NETSCAPE solely in the titles set
forth in Exhibit B in connection with Internet online software virtual
storefront operations in the languages and geographic territories set
forth opposite such titles in Exhibit B; and
D. Netscape is willing to permit such use of the Marks under the terms and
conditions, set forth in this Agreement
NOW THEREFORE, the parties agree as follows:
1. Grant of License
1.1 Grant of License. Netscape hereby grants to Licensee a
non-exclusive, nontransferable license to use the Marks in the titles set forth
in Exhibit B solely in conjunction with Internet online software virtual
storefront operations in the languages and geographic territories set forth in
Exhibit B opposite such titles (the "Storefront Services") which shall in part,
promote Netscape's products and services and products that support Netscape
products, will be jointly developed by Netscape and Licensee, and which services
shall reside on Licensee's web site located at [_____________] deploying
Licensee's servers and be located one click away from Netscape's web site.
Licensee may only use the Marks as a collective whole and shall not separately
use any element or elements of the Marks.
1.2 Reservation of Rights. Netscape hereby reserves any and all
rights not expressly and explicitly granted in this Agreement, including
Netscape's right to authorize or license use of the Marks or any other
trademarks or names containing NETSCAPE, to any third party for use in
connection with any goods and services, including but not limited to, Internet
online software virtual storefront operations. Without limiting the rights
reserved in the preceding sentence, Netscape hereby reserves any and all rights
to use, authorize use or license use of the Marks or any other trademarks or
names containing NETSCAPE in any geographic territory listed in Exhibit B in a
language or language(s) different from the language listed next to such
geographic territory in Exhibit B. No right is provided to use any other
Netscape trademark, including without limitation, the Netscape Horizon Logo.
2. License Fee. For the rights granted to Licensee herein, Licensee shall
pay Netscape a one-time non-refundable license fee of Five Hundred Thousand
Dollars ($500,000), One Hundred Thousand
1
<PAGE> 2
Dollars ($100,000) of which shall be due and paid at the time of the execution
of this Agreement and Four Hundred Thousand Dollars ($400,000) of which shall be
due on June 30, 1997 and paid no later than September 30, 1997. The license fee
due hereunder is exclusive of any applicable taxes. Licensee shall be
responsible for all applicable national, state and local taxes, value added or
sales taxes, exchange, interest banking, collection and other charges and levies
and assessments pertaining to payments other than U.S. taxes based on Netscape's
net income. If Licensee is required by law to make any deduction or to withhold
from any sum payable to Netscape by Licensee hereunder, (i) Licensee shall
effect such deduction or withholding remit such amounts to the appropriate
taxing authorities and promptly furnish Netscape with tax receipts evidencing
the payments of such amounts, and (ii) the sum payable by Licensee upon which
the deduction or withholding is based shall be increased to the extent necessary
to ensure that, after such deduction or withholding Netscape receives and
retains, free from liability for such deduction or withholding a net amount
equal to the amount Netscape would have received and retained in the absence of
such required deduction or withholding.
3. Ownership of Marks. Licensee hereby acknowledges that Netscape is the
owner of the Marks, and any trademark applications and/or registrations thereto,
agrees that it will do nothing inconsistent with such ownership and agrees that
all use of the Marks by Licensee shall inure to the benefit of Netscape.
Licensee agrees that nothing in this Agreement shall give Licensee any right,
title or interest in the Marks other than the right to use the Marks in
accordance with this Agreement, Licensee agrees not to register or attempt to
register the Marks as a trademark, service mark, Internet domain name, trade
name, or any similar trademarks or name, with any domestic or foreign
governmental or quasigovernmental authority. Licensee may not register or use
the Marks or an abbreviation of the Marks as part of an Internet domain name.
The provisions of this paragraph shall survive the expiration or termination of
this Agreement.
4. Use of the Marks; Protection of the Marks.
4.1 Proper Use. Licensee agrees that all use of the Marks shall only
occur in connection with the Storefront Services and shall be in strict
compliance with the terms of this Agreement. Licensee may use the Marks as set
forth in Section 1.1 as well as in connection with the promotion of the
Storefront Services excluding the merchandising of non-Netscape products. Use of
the Marks for promotional purposes shall be submitted to Netscape for Netscape's
approval at least twenty (20) business days prior to the promotional use of the
Mark. The Marks shall always be used in the English language, and no
modifications to the Marks shall be used. Licensee shall use the Marks in
conformance with Netscape's trademark guidelines ("Trademark Guidelines"), set
forth in Exhibit C which Trademark Guidelines may be revised by Netscape from
time to time. Licensee agrees not to use any other trademark or service mark in
combination with the Marks other than as described in Section 1.1. Licensee has
no right to sublicense, transfer, translate or assign the use of the Marks or
use the Marks for any other purpose other than the purpose described herein.
Licensee may not use the Mark in connection with, or for the benefit of, any
third party's products or services. Licensee further agrees not to use the Marks
on or in connection with any products or services that are or could be deemed by
Netscape, in its reasonable judgment, to be obscene, pornographic, disparaging
of Netscape or its products or products, or otherwise in poor taste, or that are
themselves unlawful or whose purpose is to encourage unlawful activities by
others.
4.2 Quality Standards. Licensee agrees to maintain a consistent
level of quality of the Storefront Services performed in connection with the
Marks equal to that found in Licensee's existing Web site services. Licensee
further agrees to maintain a level of quality in connection with its use of the
Marks that is consistent with general industry standards.
4.3 Monitoring by Netscape. Licensee acknowledges that Netscape has
no further obligations under this Agreement other than the right to periodically
monitor Licensee's use of the Marks in conjunction with the Storefront Services.
Upon request by Netscape, Licensee shall provide Netscape with representative
samples of each such use prior to the time the Marks are published on the
Internet or in press materials or marketing or advertising materials. If
Netscape determines that Licensee is using the
2
<PAGE> 3
Marks improperly, and/or in connection with Storefront Services which do not
meet the standards set forth in Section 4.1 or Section 4.2, Netscape shall
notify Licensee, and Licensee shall remedy the improper use within two (2)
business days following receipt of such notice from Netscape. Use of the Marks
in connection with goods or services other than the Storefront Services or the
promotion of the Storefront Services, or in a manner inconsistent with the
Trademark Guidelines, shall constitute material breach of this Agreement. If
such material breach has not been cured within two (2) business days following
receipt of notice from Netscape, Netscape may immediately terminate the license
grant described in Section 1.1.
4.4 Legend; Disclaimer. Licensee shall include with any online
publication or publication in print containing the Marks a trademark legend
indicating that "Netscape is a trademark of Netscape Communications Corporation
registered in the U.S. and other jurisdictions" and that the Marks are used
under license, and a disclaimer that Licensee and not Netscape has produced the
Storefront Services and is responsible for the content thereof.
4.5 Storefront Services. If Netscape reasonably determines that the
Storefront Services contain or present any material that constitutes an
infringement of Netscape's trademark, patents, copyrights or trade secrets,
Licensee's right to use the Marks pursuant to the grant described in Section 1.1
shall, upon written notice from Netscape of such determination, be suspended
until Licensee has revised, removed or removed links to such material to
Netscape's reasonable satisfaction. If such revision or removal of, or removal
of links to, such material to Netscape's reasonable satisfaction has not
occurred within thirty (30) days of the notice from Netscape described in the
preceding sentence, Netscape may immediately terminate the license grant
described in Section 1.1. If Netscape reasonably determines that the Storefront
Services contains or presents any material that could reasonably constitute an
infringement of a third party's copyright, trademark, patents or trade secrets,
Netscape may immediately terminate this Agreement if Licensee has not revised to
Netscape's reasonable satisfaction that material or presentation within one (1)
business day of written notice from Netscape.
4.6 Licensee Web Sites. If Netscape, in its sole discretion, at any
time determines that Licensee's web sites or sites operated by Licensee on
behalf of other parties contain any material or present any material in a manner
that Netscape reasonably deems inaccurate or an improper tarnishment of
Netscape, the Netscape products or the Marks, or an infringement of Netscape's
or a third party's rights, including but not limited to rights under trademark,
patent, trade secret or copyright laws, or unlawful in any country or territory,
Netscape may immediately terminate this Agreement if Licensee has not revised to
Netscape's reasonable satisfaction that material or presentation within three
(3) business days of written notice from Netscape.
5. Confidential Information and Disclosure. Unless required by law, and
except to assert its rights hereunder or for disclosures to its own employees on
a "need to know" basis, Licensee agrees not to disclose the terms of this
Agreement or matters relating thereto without the prior written consent of
Netscape, which consent shall not be unreasonably withheld.
6. Indemnification by Licensee. Licensee agrees to indemnify Netscape and
to hold Netscape harmless from any and all liability, loss, damages, claims or
causes of action, including reasonable legal fees and expenses that may be
incurred by Netscape, arising out of performance of this Agreement, operation of
the Storefront Services, or Licensee's use of the marks and content on
Licensee's web sites linked to or presented in conjunction with the Marks,
except for liability, loss, damages, claims or causes of action arising out of
third party claims (i) that Licensee's use of the Marks infringe that third
party's valid and subsisting U.S. trademark registration in the Marks or (ii) in
respect of any act or omission of Netscape giving rise to liability. Netscape
shall provide Licensee with prompt written notice of any claim for which
indemnification is sought and cooperating fully with and allowing Licensee to
control the defense and settlement of such claim. Netscape may not settle any
such claim without Licensee's prior written consent, which consent shall not be
unreasonably withheld. Netscape shall have the right, at its own expense, to
participate in the defense of any such claim.
3
<PAGE> 4
7. Termination
7.1 Term and Termination. This Agreement and the term of the license
granted herein shall be perpetual unless terminated as provided in Section 4.3,
Section 4.5 or this Section 7.1. Netscape shall have the right to terminate this
Agreement upon the occurrence of one or more of the following: (a) any material
breach by Licensee of its obligations under this Agreement which remains uncured
for thirty (30) days or more following written notice of such breach from
Netscape, (b) use of the Marks by Licensee in a manner which is disparaging of
Netscape or its products and services and which remains uncured for two (2) days
following notice from Netscape, (c) Licensee and Netscape decide not to jointly
develop and launch the Storefront Services, or (d) the Storefront Services are
discontinued.
7.2 Effect of Termination. Upon termination of the Agreement,
Licensee agrees it shall immediately cease any and all use of the Marks.
8. General
8.1 Governing Law. This Agreement shall be subject to and governed
in all respects by the statutes and laws of the State of California without
regard to the conflicts of laws principles thereof. The Superior Court of Santa
Clara County and/or the United States District Court for the Northern District
of California shall have exclusive jurisdiction and venue over all controversies
in connection herewith, and each party hereby consents to such exclusive and
personal jurisdiction and venue.
8.2 Entire Agreement. This Agreement, including Exhibit A, Exhibit B
and Exhibit C attached hereto, constitutes the entire Agreement and
understanding between the parties and integrates all prior discussions between
them related to its subject matter. No modification of any of the terms of this
Agreement shall be valid unless in writing and signed by an authorized
representative of each party.
8.3 Assignment. Licensee may not assign any of its rights or
delegate any of its duties under this Agreement, or otherwise transfer this
Agreement (by merger, operation of law or otherwise) without the prior written
consent of Netscape. Any attempted assignment, delegation or transfer in
derogation hereof shall be null and void.
8.4 Notices. All notices required or permitted hereunder shall be
given in writing addressed to the respective parties as set forth below and
shall either be (a) personally delivered or (b) transmitted by
nationally-recognized private express courier, and shall be deemed to have been
given on the date of receipt if delivered personally, or two (2) days after
deposit with such express courier. Either party may change its address for
purposes hereof by written notice to the other in accordance with the provisions
of this Subsection. The addresses for the parties are as follows:
Licensee: Netscape:
CyberSource Corporation Netscape Communications Corporation
550 South Winchester Blvd., Suite 301 501 East Middlefield Road, MV-002
San Jose, California 95128-2545 Mountain View, CA 94043
Fax: (415) 528-4123
Fax: [(408) 241-8258] Attn: General Counsel
Attn: [__________________________]
8.5 Force Majeure. Neither party will be responsible for any failure
to perform its obligations under this Agreement due to causes beyond its
reasonable control, including but not limited to acts of God, war, riot,
embargoes, acts of civil or military authorities, fire, floods or accidents.
8.6 Waiver. Any waiver, either expressed or implied, by either party
of any default by the other in the observance and performance of any of the
conditions, covenants of duties set forth herein shall not constitute or be
construed as a waiver of any subsequent or other default.
8.7 Headings. The headings to the Sections and Subsections of this
Agreement are included merely for convenience of reference and shall not affect
the meaning of the language included therein.
4
<PAGE> 5
8.8 Independent Contractors. The parties acknowledge and agree that
they are dealing with each other hereunder as independent contractors. Nothing
contained in the Agreement shall be interpreted as constituting either party the
joint venture or partner of the other party or as conferring upon either party
the power of authority to bind the other party in any transaction with third
parties.
8.9 Survival. The provisions of Section 1.2 (Reservation of Rights),
3 (Ownership of Marks), 4.4 (Legend; Disclaimer), 5 (Confidential Information
and Disclosure), 6 (Indemnification by Licensee), 7.2 (Effect of Termination)
and 8 (General) will survive any termination of this Agreement
8.10 Equitable Relief. Licensee recognizes and acknowledges that a
breach by Licensee of this Agreement will cause Netscape irreparable damage
which cannot be readily remedied in monetary damages in an action at law, and
may, in addition thereto, constitute an infringement of the Marks. In the event
of any default or breach by Licensee that could result in irreparable harm to
Netscape or cause some loss or dilution of Netscape's goodwill, reputation, or
rights in the Marks, Netscape shall be entitled to immediate injunctive relief
to prevent such irreparable harm, loss, or dilution in addition to any other
remedies available.
8.11 Severability. Except as otherwise set forth in this Agreement,
the provisions of this Agreement are severable, and if any one or more such
provisions shall be determined to be invalid, illegal or unenforceable, in whole
or in part, the validity, legality and enforceability of any of the remaining
provisions or portions thereof shall not in any way be affected thereby and
shall nevertheless be binding between the parties hereto. Any such invalid,
illegal or unenforceable provision or portion thereof shall be changed and
interpreted so as to best accomplish the objectives of such provision or portion
thereof within the limits of applicable law.
8.12 Attorney's Fees. In the event of any action, suit, or proceeding
brought by either party to enforce the terms of this Agreement, the prevailing
party shall be entitled to receive its costs, expert witness fees, and
reasonable attorneys fees and expenses, including costs and fees on appeal.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date.
"LICENSEE" "NETSCAPE"
CYBERSOURCE CORPORATION NETSCAPE COMMUNICATIONS
CORPORATION
By: /s/ JOHN PETTITT By: /s/ MIKE HOMER
------------------------------- ----------------------------------
Name: John Pettitt Name: Mike Homer
----------------------------- --------------------------------
Title: Exec VP Title: Senior VP Marketing
---------------------------- -------------------------------
Date: 23 June 1997 Date: June 23
----------------------------- --------------------------------
Exhibit A: Licensed Netscape Trademarks
Exhibit B: Titles; Target Language and Geographic Combinations
Exhibit C: Trademark Guidelines
5
<PAGE> 6
EXHIBIT A
MARKS
NETSCAPE U.S. Federal Trademark Registration No. 2,027,552
NETSCAPE SOFTWARE DEPOT
1
<PAGE> 7
EXHIBIT B
TITLE; TARGET LANGUAGE AND GEOGRAPHIC COMBINATIONS
Title Target Language Geographic Territory
- ----- --------------- --------------------
Netscape Software Depot by English United States and Canada
software.net
1
<PAGE> 8
EXHIBIT C
TRADEMARK GUIDELINES
Netscape's Trademark Guidelines are published at the following URL:
http://home.netscape.com/misc/trademarks.html#trademarks
1
<PAGE> 1
EXHIBIT 10.18
<TABLE>
<S><C>
- ------------------------------------------------------------------------------------------------------------------------------------
SOLICITATION/CONTRACT ORDER FOR COMMERCIAL ITEMS 1. Requisition Number Page 1 of
Offeror to Complete Blocks 12, 17, 23, 24, & 30 ATMIPR96300015 13
- ------------------------------------------------------------------------------------------------------------------------------------
2. Contract No. 3. Award/Effective Date 4. Order Number 5. Solicitation Number 6. Solicitation Issue Date
N00140-96-C-2410 03 JUL 1996 N00140-96-R-2410 6/17/96
- ------------------------------------------------------------------------------------------------------------------------------------
7. FOR SOLICITATION A. Name B. Telephone (No Collect Calls) 8. Offer Due Date/Local Time
INFORMATION CALL Sharon M. Phillips (215)697-9687 COB 7/1/96
- ------------------------------------------------------------------------------------------------------------------------------------
9. Issued By N00140 10. This Acquisition Is 11. Deliver For FOB Destination Unless Box Is 12. Discount
------ SIC Marked [ ] Schedule Terms
[X] Unrestricted
FISC Norfolk Detachment Philadelphia Percent Set Aside -------------------------------------------------------------
700 Robbins Avenue, Building 2 B [ ] Set Aside [ ] 13a. This contract is a rated order under DPAS
Philadelphia, PA 19111-5083 [ ] Small Business Size (13 CFR 700)
[ ] Small Disadvantaged -------------------------------------------------------------
Business 13b. Rating
[ ] 8(a)
-------------------------------------------------------------
14. Method of Solicitation
[ ] RFQ [ ] IFB [X] RFP
- ------------------------------------------------------------------------------------------------------------------------------------
15. Deliver To: Code 16. Administered By: Code
S0507A
Electronic deliveries to DMA & designated ---------- DCMAO San Francisco -----------
field activities at Defense Mapping Agency, 1265 Borregas Avenue
4600 Sagamore Road, Bethesda, MD 20816-5003 Sunnyvale, CA 94089
(408)541-7099
- ------------------------------------------------------------------------------------------------------------------------------------
17a. Contractor/Offeror Code 04AE6 Facility 18a. Payment Will Be Made By: Code SC1004
----- --------- -----------
CyberSource Corporation DFAS-Columbus Center
1050 Chestnut Street, Ste 201 DFAS-CO-JWV-Van Nuys Division
Menlo Park, CA 94025 (800)617-7638 X50 P.O. Box 182157
Columbus, OH 43218-2157 (800)553-2839
Telephone:
- ------------------------------------------------------------------------------------------------------------------------------------
[ ] 17b. Check if remittance is different and put [ ] See Addendum
such address in offer 18b. Submit Invoices To Address Shown in Block 18a. Unless Block
Below Is Checked.
- ------------------------------------------------------------------------------------------------------------------------------------
19. Item No. 20. Schedule of Supplies/Services 21. Quantity 22. Unit 23. Unit Price 24. Amount
- ------------------------------------------------------------------------------------------------------------------------------------
SEE PAGE 2
- ------------------------------------------------------------------------------------------------------------------------------------
25. Accounting & Appropriation Data 26. Total Award Amount
AA: 9760300.4802 8C6 8500AP AT0000140DD 663200 $1,289,760.00 $1,289,760.00
- ------------------------------------------------------------------------------------------------------------------------------------
[ ] 27a. Solicitations Incorporate By Reference FAR 52.212-1, 52.212-4. FAR 523.212.3 And 52.212.5 Are Attached.
Adden [ ] Are [ ] Are Not Attached
[X] 27b. Contracts/Purchase Orders Incorporated By Reference FAR 52.212-4. FAR 52.212-6 Is Attached.
Adden [ ] Are [ ] Are Not Attached
- ------------------------------------------------------------------------------------------------------------------------------------
28. CONTRACTOR IS REQUIRED TO SIGN THIS DOCUMENT AND 29. AWARD OF CONTRACT: REFERENCE CyberSource OFFER DATED 6/25/96
[ ] RETURN TWO COPIES TO ISSUING OFFICE. CONTRACTOR AGREES [X] YOUR OFFER ON SOLICITATION (BLOCK 5), INCLUDING ANY ADDITIONS OR
TO FURNISH AND DELIVER ALL ITEMS SET FORTH OR OTHER- CHANGES WHICH ARE SET FORTH HEREIN, IS ACCEPTED AS TO ITEMS:
WISE IDENTIFIED ABOVE AND ON ANY ADDITIONAL SHEETS ALL
SUBJECT TO THE TERMS AND CONDITIONS SPECIFIED HEREIN.
- ------------------------------------------------------------------------------------------------------------------------------------
30A. Signature of Offeror/Contractor 31a. UNITED STATES OF AMERICA (Signature of Contracting Officer)
/s/ J. J. SWIZEWSKI
- ------------------------------------------------------------------------------------------------------------------------------------
30b. Name & Title of Signer (Type or Print) 30c. Date Signed 31b. Name of Contracting Officer 31c. Date Signed
J. J. SWIZEWSKI 7/3/96
- ------------------------------------------------------------------------------------------------------------------------------------
32a. Quantity in Column 20 Has Been 33, Ship Number 34. DO Voucher Number 35. Amount Verified
Accepted and Conforms Correct For
[ ] Received [ ] Inspected [ ] to the Contract, ----------------
Except As Noted [ ] Partial [ ] Full
- ------------------------------------------------------------------------------------------------------------------------------------
32b. Signature of Authorized Govt. 32c. Date Signed 36. Payment 37. Check Number
Representative [ ] Complete [ ] Partial [ ] Final
---------------------------------------------------------------------
38. S/R Account Number 39. S/R Voucher Number 40. Paid By
- ------------------------------------------------------------------------------------------------------------------
41a. I CERTIFY THIS ACCOUNT IS CORRECT AND PROPER FOR PAYMENT 42a. Received By (Print)
41b. Signature and Title of Certifying 41c. Date Signed 42b. Received At (Location
Officer
42c. Data Rec'd (YY/MM/DD) 42d. Received By (Print)
- ------------------------------------------------------------------------------------------------------------------------------------
STANDARD FORM 1449 (10/95)
FISC NORFOLK DET PHIL ELECTRONIC
VERSION
</TABLE>
<PAGE> 2
N00140-96-C-2410
Page 2
Schedule of Supplies/Services (cont.)
<TABLE>
<CAPTION>
Item No. Description Qty Unit Unit Price Amount
- -------- ----------------------------- ------ ---- ---------- -----------
<S> <C> <C> <C> <C> <C>
0001 Microsoft Office Standard
License maintenance 2 yrs.
P/N 021-050-MNT 3,000 EA $168.00 $504,000.00
0002 Microsoft Office Professional
License maintenance 2 yrs.
P/N 269-050-MNT 1,000 EA $201.00 $201,000.00
0003 Microsoft Windows 32-bit OS
License maintenance 2 yrs.
P/N 236-075-MNT 2,000 EA $105.00 $210,000.00
0004 Microsoft Project
License maintenance 2 yrs.
P/N 076-050-MNT 300 EA $120.00 $ 36,000.00
0005 Claris Filemaker for MAC
License maintenance 2 yrs.
P/N 816150U 1,000 EA $108.00 $108,000.00
0006 Claris Filemaker for WIN
License maintenance 2 yrs.
P/N 921150U 500 EA $108.00 $ 54,000.00
0007 Claris Draw for MAC
License maintenance 2 yrs.
P/N 864050U 1,000 EA $104.00 $104,000.00
0008 Claris Draw for WIN
License maintenance 2 yrs.
P/N 926050U 100 EA $104.00 $ 10,400.00
0009 Symantic Anti-virus License 4,000 EA $ 10.97 $ 43,880.00
0010 Symantic Anti-virus
License maintenance 2 yrs. 4,000 EA $ 4.62 $ 18,480.00
</TABLE>
<PAGE> 3
CYBERSOURCE CORPORATION'S BID FOR ELECTRONIC DELIVERY OF SOFTWARE LICENSE
MAINTENANCE SOLICITATION N00140-96-R-2410
(7) PRICE
<TABLE>
<CAPTION>
ITEM
NUMBER COMPANY PRODUCT NAME TYPE PART NUMBER QUANTITY UNIT PRICE EXTENDED PRICE
- ------ --------- ------------ ---- ------------ -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
0001 Microsoft Office for Windows(R) Maintenance 2yr.-- MNT 021-050-MNT 3000 $168.00 $ 504,000.00
English
0002 Microsoft Office Professional for Windows(R) with MNT 269-050-MNT 1000 $201.00 $ 201,000.00
Access Maintenance 2yr.--English
0003 Microsoft Windows(R) 32-Bit Family Maintenance MNT 236-075-MNT 2000 $105.00 $ 210,000.00
2yr.--English
0004 Microsoft Project for Windows(R) Maintenance MNT 076-050-MNT 300 $120.00 $ 36,000.00
2yr.--English
0005 Claris ClarisFilemaker Pro VLA Maintenance MNT 816150U 1000 $108.00 $ 108,000.00
for Mac 2yr.
0006 Claris ClarisFilemaker Pro VLA Maintenance MNT 921150U 500 $108.00 $ 54,000.00
for Win 2yr.
0007 Claris ClarisDraw VLA Maintenance MNT 926050U 1000 $104.00 $ 104,000.00
for Mac 2yr.
0008 Claris ClarisDraw VLA Maintenance MNT 864050U 100 $104.00 $ 10,400.00
for Win 2yr.
0009 Symantec Antivirus for Mac and Windows Lics 07-92-00471 4000 $ 10.97 $ 43,880.00
0010 Symantec Antivirus Maintenance 2 yr. for MNT 07-27-00471 4000 $ 4.62 $ 18,480.00
Mac and Windows (Upgrade Insurance)
TOTAL $1,289,760.00
All products will be delivered via encrypted electronic delivery over the
Internet. FOB destination.
There are no prompt payment terms available.
</TABLE>
<PAGE> 4
N00140-96-C-2410
Page 5
2 > RECORD NUMBER; 1617PRD0001
CBD ISSUE DATE: 06/17/96 SECTION: Procurements FSC CODE: D
KEYWORDS: FISC NORFOLK DETACHMENT PHILADELPHIA
TITLE: SOFTWARE LICENSE MAINTENANCE
SOL N00140-96-R-2410 DUE: N/A
POC Sharon Phillips, Contract Negotiator, (215)697-9687. This is a combined
synopsis/solicitation for commercial items prepared in accordance with the
format in Subpart 12.6, as supplemented with additional information included in
this notice. This announcement constitutes the only solicitation, proposals are
being requested and a written solicitation will not be issued. Solicitation
number N00140-96-R-2410 is issued as a Request for Proposal. This acquisition
is restricted to the software manufacturers or an authorized dealer of the
software products since they are the only sources who can provide the required
software licenses and maintenance. The software license maintenance is required
for two (2) years. All software updates, upgrades and new versions shall be
provided electronically. The electronic delivery of the software products under
maintenance is required via downloading from the Internet. All updates,
upgrades and new versions of the software products under maintenance shall be
available on the Internet on the same day they are received from the
publisher/manufacturer. Notification on the availability of updates, upgrades
and new versions shall be sent to the designated end-user. The contractor shall
also provide the government with a local or toll free phone number for
questions or service calls. Item number 0001 is for software license
maintenance for Microsoft Office Standard, Part Number 021-050-MNT, Quantity
3,000. Item number 0002 is for software license maintenance for Microsoft
Office Professional, Part Number 269-050-MNT, Quantity 1,000. Item number 0003
is for software license maintenance for Microsoft Windows 32-bit Operating
System (OS), Part Number 236-075-MNT, Quantity 2,000. Item number 0004 is for
software license maintenance for Microsoft Project, Part Number 076-050-MNT,
Quantity 300. Item number 0005 is for software license maintenance for Claris
Filemaker for Macintosh, Part Number 816150U, Quantity 1,000. Item number 0006
is for software license maintenance for Claris Filemaker for Windows, Part
Number 921150U, Quantity 500. Item number 0007 is for software license
maintenance for Claris Draw for Macintosh, Part Number 864050U, Quantity 1,000.
Item number 0008 is for software license maintenance for Claris Draw for
Windows, Part Number 926050U, Quantity 100. Item number 0009 is for initial
license Symantec Anti-virus software, Quantity 4,000. Item number 0010 is for
software license maintenance for Symantec Anti-virus software, Quantity 4,000.
Electronic deliveries shall be made to the Defense Mapping Agency (DMA), 4600
Sagamore Rd., Bethesda, MD 20816-5003 and their designated field activities
during the two-year term of this maintenance contract. All proposals received
shall specify FOB Destination. This solicitation and incorporated provisions
and clauses are those in effect through FAC 90-37. The following FAR provisions
and clauses apply to this solicitation and are incorporated by reference: FAR
52.212-1 Instructions to Offerors-Commercial Items. 52.212-2
Evaluation-Commercial Items. The government will award a contract resulting
from this solicitation to the responsible offeror whose offer conforms to the
minimum technical requirements and submits the lowest overall price. The
following factors shall be used to evaluate offers: price and past performance,
FAR 52.212-3 Offeror Representations and
<PAGE> 5
N00140-96-C-2410
Page 6
Certifications-Commercial Items, FAR 52.212-4 Contract Terms and
Conditions-Commercial Items, and FAR 52.212-5 Contract Terms and Conditions
Required to Implement Statutes or Executive Orders-Commercial Items. The
solicitation & incorporated provisions and clauses are those in effect through
FAC 90-37. The following DFAR provisions and clauses apply to this solicitation
and are incorporated by reference: DFAR 252.212-7000 Offeror Representations
and Certifications-Commercial Items, and DFAR 252.212-7001 Contract Terms and
Conditions Required to Implement Statutes Applicable to Defense Acquisitions of
Commercial Items. The Government will evaluate the quality of the offeror's
past performance. This evaluation is separate and distinct from the Contracting
Officer's responsibility determination. The assessment of the offeror's past
performance will be used as a means of evaluating the relative capability of
the offeror and other competitors to successfully meet the requirements of the
solicitation. The offeror shall describe its past performance on directly
related or similar contracts it has held within the last five (5) years which
are of similar scope, magnitude and complexity to that which is detailed in the
solicitation. Offerors which describe similar contracts shall provide a
detailed explanation demonstrating the similarity of the contracts to the
requirements of the solicitation. The Government will consider Termination for
Default, delinquencies, failure to comply with specifications and/or SOW
requirements, cost overruns, amount of rework and any other information which
reflects the overall quality of the offeror's past performance. The offeror
shall provide the following information regarding its past performance:
Contract Number(s), Name and reference point of contact at the federal, state,
local government or commercial entity for which the contract was performed,
Dollar value of the contract, Detailed description of the work performed, Names
of subcontractor(s) used, if any, and a description of the extent of work
performed by the subcontractor(s), and The number, type and severity of any
quality, delivery or cost problems in performing the contract, the corrective
action taken and the effectiveness of the corrective action. The Government
reserves the right to obtain information for use in the evaluation of past
performance from any and all sources including sources outside of the
Government. Offerors lacking relevant past performance history will receive a
neutral rating for past performance. However, the proposal of an offeror with
no relevant past performance history, while rated neutral for past performance,
may not represent the most advantageous proposal to the Government and thus,
may be an unsuccessful proposal when compared to the proposals of other
offerors. The offeror must provide the information requested above for the past
performance evaluation or affirmatively state that it possesses no relevant
directly related or similar past performance. An offeror failing to provide the
past performance information or to assert that is has no relevant directly
related or similar past performance will be considered ineligible for award.
Award will be made to the eligible, responsible offeror whose offer, conforming
to the solicitation, is determined most advantageous to the Government price
and past performance considered. The evaluation will consider past performance
equal in important to price. The Government reserves the right to award the
contract to other than the lowest priced offeror. Vendors wishing to respond to
this solicitation should provide this office with the following as a minimum: a
price proposal on company letterhead or SF 1449 for the requested items showing
unit price, extended price, technical information, past performance
information, prompt payment
<PAGE> 6
N00140-96-C-2410
Page 7
terms, remittance address and a copies of FAR 52.212-13 and DFAR
252.212-7000, to be provided to an offeror upon request. Responses to this
solicitation are due Close of Business (COB) 01 July 1996. All offers shall be
sent to FISC Philadelphia, attention Ms. Sharon Phillips, Code 0221F and should
reference solicitation N00140-96-R-2410, SYN 307.
[FISC NORFOLK DETACHMENT PHILADELPHIA], 700 Robbins Ave., Bldg. 2B.,
Philadelphia, PA 19111-5084
(0165)
******
<PAGE> 7
N00140-96-C-2410
Page 8
ADDENDA
CONTRACT TERMS AND CONDITIONS - COMMERCIAL ITEMS (FAR 52.212-4)(OCT 1995)
(a) Inspection/Acceptance. The Contractor shall only tender for acceptance those
items that conform to the requirements of this contract. The Government reserves
the right to inspect or test any supplies or services that have been tendered
for acceptance. The Government may require repair or replacement of
nonconforming supplies or reperformance of nonconforming services at no increase
in contract price. The Government must exercise its postacceptance rights (1)
within a reasonable time after the defect was discovered or should have been
discovered; and (2) before any substantial change occurs in the condition of the
item, unless the change is due to the defect in the item.
(b) Assignment. The Contractor or its assignee's rights to be paid amounts due
as a result of performance of this contract, may be assigned to a bank, trust
company, or other financing institution, including any Federal lending agency in
accordance with the Assignment of Claims Act (31 U.S.C. 3727).
(c) Changes. Changes in the terms and conditions of this contract may be made
only by written agreement of the parties.
(d) Disputes. This contract is subject to the Contract Disputes Act of 1978, as
amended (41 U.S.C. 601-613). Failure of the parties to this contract to reach
agreement on any request for equitable adjustment, claim, appeal or action
arising under or relating to this contract shall be a dispute to be resolved in
accordance with the clause at FAR 52.233-1, Disputes, which is incorporated
herein by reference. The Contractor shall proceed diligently with performance of
this contract, pending final resolution of any dispute arising under the
contract.
(e) Definitions. The clause at FAR 52.202-1, Definitions, is incorporated herein
by reference.
(f) Excusable delays. The Contractor shall be liable for default unless
nonperformance is caused by an occurrence beyond the reasonable control of the
Contractor and without its fault or negligence such as, acts of God or the
public enemy, acts of the Government in either its sovereign or contractual
capacity, fires, floods, epidemics, quarantine restrictions, strikes, unusually
severe weather, and delays of common carriers. The Contractor shall notify the
Contracting Officer in writing as soon as it is reasonably possible after the
commencement of any excusable delay, setting forth the full particulars in
connection therewith, shall remedy such occurrence with all reasonable dispatch,
and shall promptly give written notice to the Contracting Officer of the
cessation of such occurrence.
(g) Invoice. The Contractor shall submit an original invoice and three copies
(or electronic invoice, if authorized,) to the address designated in the
contract to receive invoices. An invoice must include -
(1) Name and address of the Contractor;
(2) Invoice date;
(3) Contract number, contract line item number and, if applicable, the
order number;
(4) Description, quantity, unit of measure, unit price and extended price
of the items delivered;
(5) Shipping number and date of shipment including the bill of lading
number and weight of shipment if shipped on Government bill of lading;
(6) Terms of any prompt payment discount offered;
<PAGE> 8
N00140-96-C-2410
Page 9
(7) Name and address of official to whom payment is to be sent; and
(8) Name, title, and phone number of person to be notified in event of
defective invoice.
Invoices will be handled in accordance with the Prompt Payment Act (31
U.S.C. 3903) and Office of Management and Budget (OMB) Circular A-125, Prompt
Payment.
(h) Patent indemnity. The contractor shall indemnify the Government and its
officers, employees and agents against liability, including costs, for actual
or alleged direct or contributory infringement of, or inducement to infringe,
any United States or foreign patent, trademark or copyright, arising out of the
performance of this contract, provided the Contractor is reasonably notified of
such claims and proceedings.
(i) Payment. Payment shall be made for items accepted by the Government that
have been delivered to the delivery destinations set forth in this contract.
The Government will make payment in accordance with the Prompt Payment Act (31
U.S.C. 3903) and Office of Management and Budget (OMB) Circular A-125, Prompt
Payment. Payments under this contract may be made by the Government either by
check, electronic funds transfer, or the Automated Clearing House, at the option
of the Government.
In connection with any discount offered for early payment, time shall be
computed from the date of the invoice. For the purpose of computing the
discount earned, payment shall be considered to have been made on the date
which appears on the payment check or the date on which an electronic funds
transfer was made.
(j) Risk of loss. Unless the contract specifically provides otherwise, risk of
loss or damage to the supplies provided under this contract shall remain with
the Contractor until, and shall pass to the Government upon:
(1) Delivery of the supplies to a carrier, if transportation is f.o.b.
origin; or
(2) Delivery of the supplies to the Government at the destination
specified in the contract, if transportation is f.o.b. destination.
(k) Taxes. The contract price includes all applicable Federal, State, and local
taxes and duties.
(l) Termination for the Government's convenience. The Government reserves the
right to terminate this contract, or any part hereof, for its sole convenience.
In the event of such termination, the Contractor shall immediately stop all
work hereunder and shall immediately cause any and all of its suppliers and
subcontractors to cease work. Subject to the terms of this contract, the
Contractor shall be paid a percentage of the contract price reflecting the
percentage of the work performed prior to the notice of termination, plus
reasonable charges the Contractor can demonstrate to the satisfaction of the
Government using its standard record keeping system, have resulted from the
termination. The Contractor shall not be required to comply with the cost
accounting standards or contract cost principles for this purpose. This
paragraph does not give the Government any right to audit the Contractor's
records. The Contractor shall not be paid for any work performed or costs
incurred which reasonably could have been avoided.
(m) Termination for cause. The Government may terminate this contract, or any
part hereof, for cause in the event of any default by the Contractor, or if the
Contractor fails to comply with any contract terms and conditions, or fails to
provide the Government, upon request, with adequate assurances of future
performance. In the event of termination for cause, the Government shall not be
liable to the Contractor for any amount for supplies or services not accepted,
and the Contractor shall be liable to the Government for any and all rights and
remedies provided by law. If it is determined that the Government improperly
terminated this contract for default, such termination shall be deemed a
termination for convenience.
<PAGE> 9
N00140-96-C-2410
Page 10
(n) Title. Unless specified elsewhere in this contract, title to items
furnished under this contract shall pass to the Government upon acceptance,
regardless of when or where the Government takes physical possession.
(o) Warranty. The Contractor warrants and implies that the items delivered
hereunder are merchantable and fit for use for the particular purpose described
in this contract.
(p) Limitation of liability. Except as otherwise provided by an express or
implied warranty, the Contractor will not be liable to the Government for
consequential damages resulting from any defect or deficiencies in accepted
items.
(q) Other compliances. The Contractor shall comply with all applicable Federal,
State and local laws, executive orders, rules and regulations applicable to its
performance under this contract.
(r) Compliance with laws unique to Government contracts. The Contractor agrees
to comply with 31 U.S.C. 1352 relating to limitations on the use of appropriated
funds to influence certain Federal contracts; 18 U.S.C. 431 relating to
officials not to benefit; 40 U.S.C. 327, et seq., Contract Work Hours and
Safety Standards Act, 41 U.S.C. 51-58, Anti-Kickback Act of 1986;
41 U.S.C. 251 related to whistle blower protections; and 49 U.S.C. 40118, Fly
American.
(s) Order of precedence. Any inconsistencies in this solicitation or contract
shall be resolved by giving preference in the following order: (1) the schedule
of supplies/services; (2) the Assignments, Disputes, Payments, Invoice, Other
Compliances, and Compliance with Laws Unique to Government Contracts paragraphs
of this clause; (3) the clause at 52.212-5; (4) addenda to this solicitation or
contract, including any license agreements for computer software; (5)
solicitation provisions if this is a solicitation; (6) other paragraphs of this
clause: (7) the Standard Form 1449; (8) other documents, exhibits, and
attachments; and (9) the specification.
CONTRACT TERMS AND CONDITIONS REQUIRED TO IMPLEMENT STATUTES OR EXECUTIVE
ORDERS - COMMERCIAL ITEMS (FAR 52.212-5)(JAN 1996)
(a) The Contractor agrees to comply with the following FAR clauses, which are
incorporated in this contract by reference, to implement provisions of law or
Executive orders applicable to acquisitions of commercial items:
(1) 52.222-3, Convict Labor (E.O. I1755); and
(2) 52.233-3, Protest After Award (31 U.S.C. 3553 and 40 U.S.C. 759).
(b) The contractor agrees to comply with the FAR and FIRMR clauses in this
paragraph (b) which the contracting officer has indicated as being incorporated
in this contract by reference to implement provisions of law or executive
orders applicable to acquisitions of commercial items or components:
_X_(1) 52.203-6, Restrictions on Subcontractor Sales to the Government,
with Alternate I (41 U.S.C. 253g and 10 U.S.C. 2402).
_X_(2) 52.203-10, Price or Fee Adjustment for Illegal or Improper Activity
(41 U.S.C. 423).
_X_(3) 52.219-8, Utilization of Small Business Concerns and Small
Disadvantaged Business Concerns (15 U.S.C. 637(d)(2) and (3));
_X_(4) 52.219-9, Small, Small Disadvantaged and Women-Owned Small Business
Subcontracting Plan (15 U.S.C. 637(d)(4));
<PAGE> 10
N00140-96-C-2410
Page 11
___(5) 52.219-14, Limitation on Subcontracting (15 U.S.C. 637(a)(14)).
_X_(6) 52.222-26, Equal Opportunity (E.O. 11246).
_X_(7) 52.222-35, Affirmative Action for Special Disabled and Vietnam Era
Veterans (38 U.S.C. 4212).
_X_(8) 52.222-36, Affirmative Action for Handicapped Workers (29 U.S.C.
793).
_X_(9) 52.222-37, Employment Reports on Special Disabled Veterans and
Veterans of the Vietnam Era (38 U.S.C. 4212).
___(10) 52.225-3, Buy American Act-Supplies (41 U.S.C. 10).
___(11) 52.225-9, Buy American Act-Trade Agreements Act-Balance of
Payments Program (41 U.S.C. 10, 19 U.S.C. 2501-2582).
___(12) Reserved.
___(13) 52.225-18, European Union Sanctions for End Products (E.O. 12849).
___(14) 52.225-19, European Union Sanctions for Services (E.O. 12849).
___(15) 52.225-21, Buy American Act-North American Free Trade Agreement
Implementation Act-Balance of Payments Program (41 U.S.C. 10, Pub. L. 103-187).
___(16) 52.247-64, Preference for Privately Owned U.S.-Flag Commercial
Vessels (46 U.S.C. 1241).
___(17) 201-39.5202-3, Procurement Authority (FIRMR).
(This acquisition is being conducted under _regulatory_delegation of GSA's
exclusive procurement authority for FIP resources. The specific GSA DPA case
number is _N/A_).
(c) The Contractor agrees to comply with the FAR clauses in this paragraph (c),
applicable to commercial services, which the Contracting Officer has indicated
as being incorporated in this contract by reference to implement provisions of
law or executive orders applicable to acquisitions of commercial items or
components:
NONE APPLICABLE.
___(1) 52.222-41, Service Contract Act of 1965, As amended (41 U.S.C. 351,
et seq.).
___(2) 52.222-42, Statement of Equivalent Rates for Federal Hires (29
U.S.C. 206 and 41 U.S.C. 351, et seq.).
___(3) 52.222-43, Fair Labor Standards Act and Service Contract Act-Price
Adjustment (Multiple Year and Option Contracts)(29 U.S.C. 206, and 41 U.S.C.
351, et seq.).
___(4) 52.222-44, Fair Labor Standards Act and Service Contract Act-Price
Adjustment (29 U.S.C. 206 and 41 U.S.C. 351, et seq.).
___(5) 52.222-47, SCA Minimum Wages and Fringe Benefits Applicable to
Successor Contract Pursuant to Predecessor Contractor Collective Bargaining
Agreement (CBA)(41 U.S.C. 351, et seq.).
<PAGE> 11
N00140-96-C-2410
Page 12
(d) Comptroller General Examination of Record. The Contractor agrees to comply
with the provisions of this paragraph (d) if this contract was awarded using
other than sealed bid, is in excess of the simplified acquisition threshold,
and does not contain the clause at 52.215-2, Audit and Records-Negotiation.
(1) The Comptroller General of the United States, or an authorized
representative of the Comptroller General, shall have access to and rights to
examine any of the Contractor's directly pertinent records involving
transactions related to this contract.
(2) The Contractor shall make available at its offices at all reasonable
times the records, materials, and other evidence for examination, audit, or
reproduction, until 3 years after final payment under this contract or for any
shorter period specified in FAR Subpart 4.7, Contractor Records Retention, of
the other clauses of this contract. If this contract is completely or partially
terminated, the records relating to the work terminated shall be made available
for 3 years after any resulting final termination settlement. Records relating
to appeals under the disputes clause or to litigation or the settlement of
claims arising under or relating to this contract shall be made available until
such appeals, litigation, or claims are finally resolved.
(3) As used in this clause, records include books, documents, accounting
procedures and practices, and other data, regardless of type and regardless of
form. This does not require the Contractor to create or maintain any record
that the Contractor does not maintain in the ordinary course of business or
provision of law.
(e) Notwithstanding the requirements of the clauses in paragraphs (a), (b),
(c) or (d) of this clause, the Contractor is not required to include any FAR
clause, other than those listed below (and as may be required by an addenda to
this paragraph to establish the reasonableness of prices under Part 15), in a
subcontract for commercial items or commercial components:
(1) 52.222-26, Equal Opportunity (E.O. 11246);
(2) 52.222-35, Affirmative Action for Special Disabled and Vietnam Era
Veterans (38 U.S.C. 2012(a)); and
(3) 52.222-36, Affirmative Action for Handicapped workers (29 U.S.C. 793).
(4) 52.247-64, Preference for Privately Owned U.S.-Flagged Commercial
Vessels (46 U.S.C. 1241) (flow down not required for subcontracts awarded
beginning May 1, 1996).
CONTRACT TERMS AND CONDITIONS REQUIRED TO IMPLEMENT STATUTES OR EXECUTIVE
ORDERS APPLICABLE TO DEFENSE ACQUISITIONS OF COMMERCIAL ITEMS (DFARS
252.212-7001)(NOV 1995)
(a) The Contractor agrees to comply with the Defense Federal Acquisition
Regulation Supplement (DFARS) clause 252.247-7023, Transportation of Supplies
by Sea, which is included in this contract by reference to implement 10 U.S.C.
2631.
(b) The Contractor agrees to comply with any clause that is checked on the
following list of DFARS clauses which, if checked, is included in this contract
by reference to implement provisions of law or Executive Orders applicable to
acquisitions of commercial items or components.
X 252.205-7000 Provision of Information to Cooperative Agreement Holders
- --- (10 U.S.C. 2416).
252.206-7000 Domestic Source Restriction (10 U.S.C. 2304).
- ---
<PAGE> 12
N00140-96-C-2410
Page 13
252.219-7001 Notice of Partial Small Business Set-Aside With Preferential
- ----- Consideration for Small Disadvantages Business Concerns (__ Alternate
I)(Section 9004, Pub. L. 101-165(10 U.S.C. 2301 (repealed) note)).
252.219-7002 Notice of Small Disadvantages Business Set-Aside (__ Alternate
- ----- I)(15 U.S.C. 644).
252.219-7003 Small Business and Small Disadvantages Business Subcontracting
- ----- Plan (DoD Contracts)(15 U.S.C. 637)
252.219-7005 Incentive for Subcontracting with Small Businesses, Small
- ----- Disadvantaged Businesses, Historically Black Colleges and Universities
and Minority Institutions (__ Alternate I)(Section 9004, Pub. L.
101-165 (10 U.S.C. 2301 (repealed)(note)).
252.219-7006 Notice of Evaluation Preference for Small Disadvantages
- ----- Business Concerns (__ Alternate I)(15 U.S.C. 644).
X 252.225-7001 Buy American Act and Balance of Payments Program (41 U.S.C.
- ----- 10, E.O. 10582).
X 252.225-7007 Trade Agreements (10 U.S.C. 2501-2582).
- -----
252.225-7012 Preference for Certain Domestic Commodities.
- -----
252.225-7014 Preference for Domestic Specialty Metals (10 U.S.C. 2241
- ----- note).
252.225-7015 Preference for Domestic Hand or Measuring Tools (10 U.S.C.
- ----- 2241 note).
252.225-7017 Preference for United States and Canadian Valves and Machine
- ----- Tools (10 U.S.C. 25534(c)(2)).
252.225-7027 Limitation on Sales Commissions and Fees (12 U.S.C. 2779).
- -----
252.225-7028 Exclusionary Policies and Practices of Foreign Governments (22
- ----- U.S.C. 2755).
252.225-7029 Restriction on Acquisition of Air Circuit Breakers (10 U.S.C.
- ----- 2534(a)(3)).
252.225-7036 North American Free Trade Agreement Implementation Act.
- -----
X 252.227-7015 Technical Data-Commercial Items (10 U.S.C. 2320)
- -----
X 252.227-7037 Validation of Restrictive Markings on Technical Data (10
- ----- U.S.C. 2321).
X 252.233-7000 Certification of Claims and Requests for Adjustment or Relief
- ----- (10 U.S.C. 2410).
252.242-7002 Submission of Commercial Freight Bills for Audit (31 U.S.C.
- ----- 3726).
X 252.247-7024 Notification of Transportation of Supplies by Sea (10 U.S.C.
- ----- 2631).
252.249-7001 Notification of Substantial Impact on Employment (10 U.S.C.
- ----- 2501 note).
<PAGE> 1
EXHIBIT 10.19
<TABLE>
<S><C>
- ------------------------------------------------------------------------------------------------------------------------------------
SOLICITATION/CONTRACT 1. THIS CONTRACT IS A RATED ORDER UNDER RATING PAGE 1 OF
BIDDER/OFFEROR TO COMPLETE BLOCKS 11, 13, 15, 21, 22, & 27. DPAS (15 CFR 350)
- ------------------------------------------------------------------------------------------------------------------------------------
2. CONTRACT NO. 3. AWARD/EFFECTIVE DATE 4. SOLICITATION NUMBER 5. SOLICITATION TYPE 6. SOLICITATION ISSUE DATE
[ ] SEALED [X] NEGOTIATED
N00140-97-D-1756 12 JUN 97 N00140-97-Q-1756 BIDS
- ------------------------------------------------------------------------------------------------------------------------------------
7. Issued By CODE N00140 10. THIS ACQUISITION IS
------
FISC DETACHMENT PHILADELPHIA [ ] UNRESTRICTED [ ] LABOR SURPLUS AREA CONCERNING
700 ROBBINS AVENUE, BLDG 2B [ ] SET ASIDE % FOR [ ] COMBINED SMALL BUSINESS &
PHILADELPHIA, PA 19111-5083 [ ] SMALL BUSINESS LABOR AREA CONCERNS
SIC: [X] OTHER
Ms. Eileen Flanigan code 02P22B 215-697-9636 SIZE STANDARD:
- ------------------------------------------------------------------------------------------------------------------------------------
9. SOLICITATION: BIDDERS/OFFERORS SHALL INSURE THAT SEALED BIDS/PROPOSALS (AN ORIGINAL AND ONE COPY) SHALL BE RECEIVED IN THE BID
ROOM, OR IN THE DEPOSITORY LOCATED IN THE BID ROOM at FISC NORFOLK DETACHMENT PHILADELPHIA, BUILDING 2B, 700 ROBBINS AVENUE,
PHILADELPHIA, PA 19111-5083 NO LATER THAN 4:00 p.m. (LOCAL TIME, PHILADELPHIA, PA) ON
LATE OFFERS ARE SUBJECT TO THE LATE BID OR PROPOSAL PROVISIONS INCORPORATED HEREIN. ALL OFFERS ARE SUBJECT TO SUCH PROVISIONS,
REPRESENTATIONS, CERTIFICATIONS, AND SPECIFICATIONS AS ARE ATTACHED OR INCORPORATED HEREIN BY REFERENCE.
- ------------------------------------------------------------------------------------------------------------------------------------
10. ITEMS TO BE PURCHASED (BRIEF DESCRIPTION)
[ ] SUPPLIES [X] SERVICES Software Services
- ------------------------------------------------------------------------------------------------------------------------------------
11. IF OFFER IS ACCEPTED BY THE GOVERNMENT WITHIN 12. ADMINISTERED BY: CODE
180 CALENDAR DAYS (UNLESS OFFEROR INSERTS A DIFFERENT S0507A
PERIOD) FROM THE DATE SET FORTH IN BLOCK 9 ABOVE THE DCMAO San Francisco -----------
CONTRACTOR AGREES TO HOLD ITS OFFERED PRICES FIRM FOR 1265 Borregas Avenue
THE ITEMS SOLICITED HEREIN AND TO ACCEPT ANY RESULTING Sunnyvale, CA 94089
CONTRACT SUBJECT TO THE TERMS AND CONDITIONS 408-541-7099
STATED HEREIN.
- ------------------------------------------------------------------------------------------------------------------------------------
13. CONTRACTOR/ CODE FACILITY CODE 14. PAYMENT WILL BE MADE BY: CODE SC1004
OFFEROR ----- --------- -----------
DFAS-Columbus Center
Cybersource Corporation DFAS-CO-JWV-Van Nuys Division
550 S. Winchester Blvd. P.O. Box 182157
Ste. 301 Columbus, OH 43218-2157 800-553-2839
San Jose, CA 95128
TELEPHONE NO. DUNS NO.
[ ] CHECK IF REMITTANCE IS DIFFERENT AND PUT SUCH ADDRESS
IN OFFER.
- ------------------------------------------------------------------------------------------------------------------------------------
15. PROMPT PAY DISCOUNT 16. AUTHORITY FOR USING OTHER THAN FULL
AND OPEN COMPETITION
[ ] 10 USC 2304 [ ] 41 USC 253(C) ( )
(C)
- ------------------------------------------------------------------------------------------------------------------------------------
17. 18. 19. 20. 21. 22.
ITEM NO. SCHEDULE OF SUPPLIES/SERVICES QUANTITY UNIT UNIT PRICE AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
SEE PAGE 2
MAIL INVOICES TO:
DEFENSE LOGISTICS AGENCY
ATT: AOAC
8725 JOHN J KINGMAN ROAD
STE. 2533/ROOM 3631
FT. BELVOIR, VA 22060-6221
THIS CONTRACT CREATES UNILATERAL OPTIONS, WHICH IF EXERCISED WILL RESULT IN A TOTAL CONTRACT VALUE OF $49,459,907.25
- ------------------------------------------------------------------------------------------------------------------------------------
23. ACCOUNTING & APPROPRIATION DATA 26. TOTAL AWARD AMOUNT (FOR
GOVT USE ONLY)
FUNDING TO BE PROVIDED ON DELIVERY ORDER 0001 ISSUED CONCURRENTLY WITH THIS CONTRACT Est. $49,459,907.25
- ------------------------------------------------------------------------------------------------------------------------------------
[X] 25. CONTRACTOR IS REQUIRED TO SIGN THIS DOCUMENT AND [ ] 26. AWARD OF CONTRACT. YOUR OFFER ON SOLICITATION NUMBER SHOWN
RETURN TWO COPIES TO ISSUING OFFICE. CONTRACTOR AGREES IN BLOCK 4 INCLUDING ANY ADDITIONS OR CHANGES WHICH ARE SET
TO FURNISH AND DELIVER ALL ITEMS SET FORTH HEREIN OR FORTH HEREIN IS ACCEPTED AS TO ITEMS:
OTHERWISE IDENTIFIED ABOVE AND ON ANY CONTINUATION
SHEETS SUBJECT TO THE TERMS AND CONDITIONS SPECIFIED
HEREIN.
- ------------------------------------------------------------------------------------------------------------------------------------
27. SIGNATURE OF OFFEROR/CONTRACTOR 28. UNITED STATES OF AMERICA (SIGNATURE OF CONTRACTING OFFICER)
/s/ W. S. MCKIERNAN /s/ J. J. SWIZEWSKI
- ------------------------------------------------------------------------------------------------------------------------------------
NAME & TITLE OF SIGNER (TYPE OR PRINT) DATE SIGNED NAME OF CONTRACTING OFFICER DATE SIGNED
William S. McKiernan 6/6/97 J. J. SWIZEWSKI/CONTRACTING OFFICER 6/12/97
CEO
- ------------------------------------------------------------------------------------------------------------------------------------
STANDARD FORM 1447
</TABLE>
<PAGE> 2
[SOFTWARE.NET LETTERHEAD]
June 25, 1996
Ms. Sharon Phillips
FISC Norfolk Detachment Philadelphia
700 Robbins Ave., Bldg. 2B.
Philadelphia, PA 19111-5084
Dear Ms. Phillips:
Enclosed is our bid for Software License Maintenance Solicitation
N00140-96-R-2410. We would welcome the opportunity to serve the Defense Mapping
Agency for the next two years with their electronically delivered maintenance
agreement. CyberSource is confident that our electronic distribution technology
will simplify the DMA's upkeep of their software inventory. As pioneers in
electronic software distribution we have many accomplishments including:
- - We have successfully completed over 200,000 encrypted electronic software
deliveries over the Internet.
- - We currently electronically distribute over 3,300 software products over the
Internet.
- - We have developed the leading electronic package available for electronic
software distribution that eliminates the possibility of virus installation
or product corruption during the electronic transmission over the Internet.
- - The only company approved to electronically deliver software from Microsoft,
Symantec, Claris, IBM, FTP, Qualcomm, Intergraph, Farallon and Wall Data.
- - The first company to have its electronic encryption technology approved by
Microsoft Corporation.
Although the use of electronic distribution for maintenance of software is new
for the government, the technology that we will utilize has been put to use
successfully over 200,000 times to fulfill orders from corporations, government
agencies and Universities. If this contract is awarded to CyberSource, we will
have the system in place for the Defense Mapping Agency within 10 days of
notification.
Thank you for the opportunity to bid on this solicitation and please do not
hesitate to contact me with any questions that you may have.
Sincerely,
/s/ [SIG]
- ----------------------------------------
Kendall M. Fargo
CyberSource Government Sales Manager
<PAGE> 3
N00140-97-D-1756
PAGE 2
SECTION B SCHEDULE OF SUPPLIES AND SERVICES
<TABLE>
<CAPTION>
EST
CLIN DESCRIPTION QTY U/I U/P AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0001 SOFTWARE SERVICES 43887 EA $156.45 $ 6,866,121.15
IN SUPPORT OF THE
PRODUCTS LISTED IN
SECTION C FOR THE PERIOD
FROM DATE OF AWARD
THROUGH 12 MONTHS.
0002 MICROSOFT PROJECT 10000 EA $213.30 $ 2,133,000.00
OPTION I
0003 SOFTWARE SERVICES 57408 EA $156.45 $ 8,981,481.60
IN SUPPORT OF THE
PRODUCTS LISTED IN
SECTON C FOR THE
PERIOD 13 MONTHS
THROUGH 24 MONTHS.
OPTION II
0004 SOFTWARE SERVICES 63102 EA $156.45 $ 9,872,307.90
IN SUPPORT OF THE
PRODUCTS LISTED IN
SECTION C FOR THE
PERIOD 25 MONTHS
THROUGH 36 MONTHS.
OPTION III
0005 SOFTWARE SERVICES 70332 EA $156.45 $11,003,441.40
IN SUPPORT OF THE
PRODUCTS LISTS IN
SECTION C FOR THE
PERIOD 37 MONTHS
THROUGH 48 MONTHS.
OPTION IV
0006 SOFTWARE SERVICES 67776 EA $156.45 $10,603,555.20
IN SUPPORT OF THE
PRODUCTS LISTS
IN SECTION C FOR THE
PERIOD 49 MONTHS.
</TABLE>
<PAGE> 4
N00140-97-D-1756
PAGE 3
THROUGH 60 MONTHS.
NOTE: THE UNIT OF ISSUE "EACH" LISTED ABOVE IS DEFINED AS A "SEAT" WHICH
EQUALS A COMPUTER SYSTEM USING THE SOFTWARE PRODUCTS LISTED IN SECTION C.
SECTION C DESCRIPTION/SPECIFICATION
The software services available under this contract support the Defense
Logistics Agency (DLA) and Department of Defense Procurement Offices.
Each seat may be supported by the following server products:
Microsoft BackOffice Client
Microsoft BackOffice Server including Exchange Connectors - The DLA and
DoD Procurement may install and maintain up to 1088 Back Office Servers
under this contract.
Microsoft Site Server - The DLA and DoD Procurement may install and
maintain up to 125 Site Servers under this contract.
Each seat shall have the ability to utilize at the desktop the following
products:
Microsoft Win 95
Microsoft Windows NT Workstations
Microsoft Office Professional
Microsoft Project
Microsoft Visual Basic Enterprise Edition
Microsoft Publisher
CyberMedia First Aid Deluxe 95
Intessera Technology Vue Finder V4.2
Attachment I is a listing of the component of each product listed above which
is included under this contract. Software services include Office Professional,
Back Office Server, Back Office Client Access Licenses competitive upgrades and
maintenance. No new licenses for Office Professional, Project other than CLIN
0002, NT Workstation and Windows 95 are included.
Maintenance includes "versions upgrades" and "successor or upgrade products"
meaning any "major product upgrade" (e.g. version 1.0 to 2.0), "minor product
upgrade" (e.g., version 2.0 to 2.1) and "maintenance upgrade" (e.g., version
2.01 to 2.01a) for such Products, which have been made generally available
prior to expiration of the contract. Windows 95 is considered a successor
product to Windows 3.1 and Windows 3.11. Successor or upgrade products do not
include any existing or future product which are not a direct successor to the
Products such as extensions, add-on's and accessory
<PAGE> 5
N00140-97-D-1756
PAGE 4
products marketed separately from the Product. For example, Microsoft Word for
Windows & Bookshelf is not a direct successor of Windows NT. Further, Windows
NT is a successor to earlier versions of Windows NT, but Windows NT 3.5 is NOT
a successor to Windows 3.1 or Windows 95. Competitive upgrades from
non-Microsoft products, except as noted in Section C, and pre-released or "beta"
version software products are also not included. If an upgrade product is
jointly packaged with one or more additional products, such upgrade will only
be included if the product upgrade is not separately available.
Upon expiration of the contract, the DLA and DoD Procurement offices shall
retain license to use the Desktop Software ordered during the ordering period
and installed Back Office Server and Site Server Products.
Software shall be provided via Electronic Distribution Technology (EDT)
downloading from the Internet using encryption approved by the respective
software publishers. Fourteen (14) hard copies of media and documentation shall
be required for each software product initially and as products are revised or
updated.
Microsoft Project purchased under CLIN 0002 shall be the latest version of the
commercial product available at time of delivery.
Microsoft Consulting Services. Microsoft Corporation, through its Microsoft
Consulting Services division (MSC) shall provide services to assist with the
planning and deployment of Microsoft products. The focus of the services shall
be to provide knowledge transfer, guidance and assistance with Microsoft
products, tools and technologies. 1000 hours of technical services shall be
provided only during the first 12 months of performance.
Product Support. This contract does not include end-user support from
Microsoft. However, technical support shall be provided for DLA through
Microsoft Premier Support. Support is included for the base year and each
option of the contract. The following support items are included for the base
year and each option:
A designated Technical Account Manager
24X7 technical support
Premier Service Desk
600 technical support incidents per year
Technical Issue Escalation
One on-site Orientation & Planning Service
One Supportability Review per year (3-day on-site)
One scheduled on-site TAM visit per quarter and
One subscription of TechNet and One MSDN Library
All products shall be used in accordance with Microsoft's commercial License
Agreement which
<PAGE> 6
N00140-97-D-1756
PAGE 5
will be displayed before download.
All server products are provided in "per seat" mode meaning, that each user
must have a client access license as further defined in the License Agreement.
SECTION D MARKING AND PACKING
PREPARATION FOR DELIVERY (COMMERCIALLY PACKAGED ITEMS) (FISC DET PHILA)(OCT
1992)
Preservation, packaging and packing shall be in accordance with ASTM D-3951-90,
"Commercial Packaging of Supplies and Equipment."
SECTION E INSPECTION AND ACCEPTANCE
The following clauses are hereby incorporated into section E by reference:
52.246-4 Inspection of Services - Fixed Price (AUG 1996)
INSPECTION AND ACCEPTANCE (SERVICES) (FISC DET PHILA)(OCT 1992)
Inspection and acceptance of services to be furnished hereunder shall be made,
upon completion of the services, by Defense Logistics Agency, Mr. John
Karpovich, 8725 John J. Kingman Road Ste. 2533/Room 3631, Ft. Belvoir, VA
22060-6221.
SECTION F DELIVERIES OR PERFORMANCE
The following clauses are hereby incorporated into section F by reference:
Clause No. Title
52.242-15 Stop-Work Order (AUG 1989)
52.242-17 Government Delay of Work (APR 1984)
52.247-34 F.O.B. Destination (NOV 1991)
DURATION OF CONTRACT PERIOD (FISC DET PHILA)(OCT 1992)
(a) This contract shall become effective on DATE OF AWARD or date of award,
whichever is later, and the ordering period shall continue in effect during the
period ending 12 months after date of contract unless terminated in accordance
with other provisions herein. The performance period shall continue in effect
during the period ending 12 months after date of contract.
(b) Notwithstanding the provisions of Clause entitled "Indefinite Quantity" and
"Ordering", the Contracting Officer may at his election, issue Delivery Orders
beyond the ordering period and require the Contractor to continue to perform
work beyond the performance period set forth above until the total estimated
maximum cost of the contract shall have been expended, not to exceed 60 months.
<PAGE> 7
N00140-97-D-1756
PAGE 6
TRANSPORTATION OF SUPPLIES BY SEA (DFARS 252.247-7023)(NOV 1995)
(a) Definitions. As used in this clause--
(1) Components means articles, materials, and supplies incorporated
directly into end products at any level of manufacture, fabrication, or
assembly by the Contractor or any subcontractor.
(2) Department of Defense (DoD) means the Army, Navy, Air Force, Marine
Corps, and defense agencies.
(3) Foreign flag vessel means any vessel that is not a U.S.-flag vessel.
(4) Ocean transportation means any transportation aboard a ship, vessel,
boat, barge, or ferry through international waters.
(5) Subcontractor means a supplier, materialman, distributor, or vendor at
any level below the prime contractor whose contractual obligation to perform
results from, or is conditioned upon, award of the prime contract and who is
performing any part of the work or other requirement of the price contract.
However, effective May 1, 1996, the term does not include a supplier,
materialman, distributor, or vendor of commercial items or commercial
components.
(6) Supplies means all property, except land and interests in land, that
is clearly identificable for eventual use by or owned by the DoD at the time of
transportation by sea.
(i) An item is clearly identifiable for eventual use by the DoD if, for
example, the contract documentation contains a reference to a DoD contract
number or a military destination.
(ii) Supplies includes (but is not limited to) public works; buildings and
facilities; ships; floating equipment and vessels of every character, type, and
description, with parts, subassemblies, accessories, and equipment; machine
tools; material; equipment; stores of all kinds; end items; construction
materials; and components of the foregoing.
(7) U.S.-flag vessel means a vessel of the United States or belonging to
the United States, including any vessel registered or having national status
under the laws of the United States.
(b) The Contractor shall employ U.S.-flag vessels in the transportation by sea
of any supplies to be furnished in the performance of this contract. The
Contractor and its subcontractors may request that the Contracting Officer
authorize in foreign-flag vessels, or designate available U.S.-flag vessels, if
the Contractor or a subcontractor believes that-
(1) U.S.-flag vessels are not available for timely shipment;
(2) The Freight charges are inordinately excessive or unreasonable; or
(3) Freight charges are higher than charges to private persons for
transportation of like goods.
(c) The Contractor must submit any request for use of other than U.S.-flag
vessels in writing to the Contracting Officer at least 45 days prior to the
sailing date necessary to meet its delivery schedules. The Contracting Officer
will process requests submitted after such date(s) as expeditiously as
possible, but the Contracting Officer's failure to grant approvals to meet the
<PAGE> 8
N00140-97-D-1756
PAGE 7
shipper's sailing date will not of itself constitute a compensable delay under
this or any other clause of this contract. Requests shall contain at a minimum--
(1) Type, weight, and cube of cargo;
(2) Required shipping date;
(3) Special handling and discharge requirements;
(4) Loading and discharge points;
(5) Name of shipper and consignee;
(6) Prime contract number; and
(7) A documented description of efforts made to secure U.S.-flag vessels,
including points of contact (with names and telephone numbers) with at least
two U.S.-flag carriers contacted. Copies of telephone notes, telegraphic and
facsimile message or letters will be sufficient for this purpose.
(d) The Contractor shall, within 30 days after each shipment covered by this
clause, provide the Contracting Officer and the Division of National Cargo,
Office of Market Development, Maritime Administration, U.S. Department of
Transportation, Washington, DC 20590, one copy of the rated on board vessel
operating carrier's ocean bill of lading, which shall contain the following
information--
(1) Prime contract number;
(2) Name of vessel;
(3) Vessel flag of registry;
(4) Date of loading;
(5) Port of loading;
(6) Port of final discharge;
(7) Description of commodity;
(8) Gross weight in pounds and cubic feet if available;
(9) Total ocean freight in U.S. dollars; and
(10) Name of the steamship company.
(e) The Contractor agrees to provide with its final invoice under this contract
a representation that to the best of its knowledge and belief-
(1) No ocean transportation was used in the performance of this contract;
(2) Ocean transportation was used and only U.S.-flag vessels were used for
all ocean shipments under the contract;
(3) Ocean transportation was used, and the Contractor had the written
consent of the Contracting Officer for all non-U.S.-flag ocean transportation;
or
(4) Ocean transportation was used and some or all of the shipments were
made on non-U.S.-flag vessels without the written consent of the Contracting
Officer. The Contractor shall describe these shipments in the following format:
Item Contract
Description Line Items Quantity
<PAGE> 9
N00140-97-D-1756
Page 8
Total
(f) If the final invoice does not include the required representation, the
Government will reject and return it to the Contractor as an improper invoice
for the purposes of the Prompt Payment clause of this contract. In the event
there has been unauthorized use of non-U.S.-flag vessels in the performance of
this contract, the Contracting officer is entitled to equitably adjust the
contract, based on the unauthorized use.
(g) The Contractor shall include this clause, including this paragraph (g) in
all subcontracts under this contract, which exceed the simplified acquisition
threshold in Part 13 of the Federal Acquisition Regulation.
PLACE OF DELIVERY: DESTINATION (FISC DET PHILA)(OCT 1992)
(a) The articles to be furnished hereunder shall be delivered all transportation
charges paid by the contractor to:
FOURTEEN (14) HARD COPIES OF MEDIA AND DOCUMENTATION
DEFENSE LOGISTICS AGENCY
ATTN: AQAC, JOHN KARRPOVICH
8725 JOHN J KINGMAN ROAD
STE. 2533/ROOM 3631
FT. BELVOIR,VA 22060-6221
(b) Bids submitted on a basis other than F.O.B. destination will be rejected as
nonresponsive and offers may be deemed unacceptable.
SECTION G C0NTRACT ADMINISTRATION
SUBMISSION OF INVOICES - FIXED PRICE (NAPS 5252.232-9000) (JUL 1992)
(a) "Invoice" as used in this clause does not include contractor's requests for
progress payments.
(b) The contractor shall submit original invoices with 4 copies to the address
identified in the solicitation/contract award form (SF 26-Block 10; SF 33-Block
23; SF 1447-Block 14), unless delivery orders are acceptable, in which case
invoices will be segregated by individual order and submitted to the address
specified in the order (DD 1155-Block 13 or SF 26-Block 10).
(c) The use of copies of the Material Inspection and Receiving Report (MIRR),
DD Form 250, as an invoice is encouraged. DFARS Appendix F-306 provides
instructions for such use. Copies of the MIRR used as an invoice are in
addition to the standard distribution stated in DFARS F-401.
(d) In addition to the requirement of the Prompt Payment clause of this
contract, the contractor shall cite on each invoice the contract line item
number (CLIN); the contract subline item number (SLIN), if applicable; the
accounting classification reference number (ACRN) as identified on the
financial accounting data sheets, and the payment terms.
<PAGE> 10
N00140-97-D-1756
PAGE 9
(e) The contractor shall prepare a consolidated invoice covering all shipments
delivered under an individual order.
(f) If acceptance is at origin, the contractor shall submit the MIRR or other
acceptance verification directly to the designated payment office. If
acceptance is at designation, the consignee will forward acceptance
verification to the designated payment office.
SUBCONTRACTING PLAN - WAIVED (FISC DET PHILA)(OCT 1992)
The contracting officer has determined that there are no subcontracting
possibilities and therefore, no Small Business and Small Disadvantaged Business
Subcontracting Plan is required.
SECTION H SPECIAL CONTRACT REQUIREMENTS
ORDERING (INDEFINITE DELIVERY TIME AND MATERIAL/LABOR HOUR AND COST
REIMBURSEMENT CONTRACTS)
(a) Ordering: Supplies or services to be furnished under this contract shall be
furnished at such times as ordered by the issuance of Delivery Orders on DD
Form 1155 by the Fleet and Industrial Supply Center Norfolk Detachment
Philadelphia. All orders issued hereunder are subject to the terms and
conditions of this contract. This contract shall control in the event of
conflict with any Order. When mailed, a Delivery Order shall be "issued" for
purpose of this contract at the time the Government deposits the order in the
mail, or, if transmitted by other means, when physically delivered to the
contractor.
(b) Ordering Procedures:
(1) Delivery Orders issued shall include, but not be limited to the
following information:
(a) date of order
(b) contract and order number
(c) appropriation and accounting data
(d) description of the services to be performed
(e) description of end item(s) to be delivered
(h) exact place of pickup and delivery
(i) the inspecting and accepting codes (as applicable)
(j) period of time in which the services are to be performed
Oral orders may be placed hereunder only in emergency circumstances.
Information described above shall be furnished to the contractor at the time of
placing an oral order and shall be confirmed by issuance of a written Delivery
Order on DD Form 1155 within ten (10) working days.
(c) Modifications of Delivery Orders: Delivery Orders may be modified by the
Ordering Officer. Modifications to Delivery Orders shall include the
information set forth in paragraph b, above, as applicable. Delivery Orders may
be modified orally by the Ordering Officers in emergency circumstances. Oral
modifications shall be confirmed by issuance of a written modification within
two working days from the time of the oral communication modifying the order.
(d) The Fixed Price or Ceiling Amount: for each Delivery Order will be the
ceiling price stated
<PAGE> 11
N00140-97-D-1756
PAGE 10
therein and may not be exceeded except when authorized by a modifiction to the
Delivery Order.
MINIMUM AND MAXIMUM QUANTITIES (FISC DET PHILA)(OCT 1992)
As referred to in paragraph (b) of the "Indefinite Quantities" clause of this
contract, the contract minimum quantity is a total of 50% of CLIN 0001; if
Option I is exercised 50% of CLIN 0003, if Option II is exercised 50% of CLIN
0004; if Option III is exercised 50% of CLIN 0005; if Option IV is exercised
50% of CLIN 0006. The contract maximum quantity is a total value of the
contract.
LIABILITY, AUTOMOBILE AND WORKMAN'S COMPENSATION INSURANCE (FISC DET PHILA)(OCT
1992)
The following types of insurance are required in accordance with the clause
entitled "INSURANCE-WORK ON A GOVERNMENT INSTALLATION" (FAR 52.228-5) and shall
be maintained in the minimum amounts shown:
1. Comprehensive General Liability: $200,000 per person and $500,000 per
accident for bodily injury.
2. Automobile Insurance: $200,000 per person and $500,000 per accident for
bodily injury and $20,000 per accident for property damage.
3. Standard Workmen's compensation and Employer's Liability Insurance (or,
where maritime employment is involved, Longshoremen's and Harbor Worker's
Compensation Insurance) in the minimum amount of $100,000.
SECTION I CLAUSE AND PROVISIONS
CLAUSES - FIXED PRICE SERVICE
THE FOLLOWING CONTRACT CLAUSES ARE HEREBY INCORPORATED BY REFERENCE:
CLAUSE NO TITLE
52.232-1 Payments (APR 1984)
52.233-3 Protest After Award (AUG 1996)
252.225-7031 Secondary Arab Boycott of Israel (JUN 1992)
252.231-7000 Supplemental Cost Principles (DEC 1991)
252.232-7006 Reduction or Suspension of Contract Payments
Upon Finding of Fraud (AUG 1992)
52.202-1 Definitions (OCT 1995)
52.203-3 Gratuities (APR 1984)
52-203-5 Covenant Against Contingent Fees (JUL 1996)
52-203-6 Restrictions on Subcontractor Sales to the Government (JUL
1995)
52.203-7 Anti-Kickback Procedures (JUL 1995)
52.203-8 Cancellation, Rescission, and Recovery of Funds for Illegal
or Improper Activity (JAN 1997)
52.203-10 Price or Fee Adjustment for Illegal or Improper Activity
(JAN 1997)
<PAGE> 12
N00140-97-D-1756
PAGE 11
<TABLE>
<S> <C>
52.203-12 Limitation on Payments to Influence Certain Federal Transactions
(JAN 1990)
52.204-4 Printing/Copying Double-Sided on Recycled Paper (JUN 1996)
52.209-6 Protecting the Government's Interest when Subcontracting with
Contractors Debarred, Suspended, or Proposed for Debarment
(JUL 1995)
52.215-2 Audit and Records - Negotiation (AUG 1996)
52.215-26 Integrity of Unit Prices (FEB 1997)
52.215-26 ALTERNATE I (APR 1991)
52.215-33 Order of Precedence (JAN 1986)
52.217-8 Option to Extend Services (AUG 1989)
52.219-8 Utilization of Small, Small Disadvantaged and Women-Owned
Small Business Concerns (OCT 1995)
52.219-14 Limitation on Subcontracting (DEC 1996)
52.222-3 Convict Labor (AUG 1996)
52.222-26 Equal Opportunity (APR 1984)
52.222-28 Equal Opportunity Preaward Clearance of Subcontracts (APR 1984)
52.222-29 Notification of Visa Denial (APR 1984)
52.222-35 Affirmative Action for Special Disabled and Vietnam Era Veterans
(APR 1984)
52.222-36 Affirmative Action for Handicapped Workers (APR 1984)
52.222-37 Employment Reports on Special Disabled Veterans and Veterans of
the Vietnam Era (JAN 1988)
52.223-2 Clean Air and Water (APR 1984)
52.223-6 Drug-Free Workplace (JAN 1997)
52.225-11 Restrictions on Certain Foreign Purchases (OCT 1996)
52.226-1 Utilization of Indian Organizations and Indian-Owned Economic
Enterprises (SEP 1996)
52.228-5 Insurance - Work on a Government Installation (JAN 1997)
52.229-4 Federal, State, and Local Taxes (Noncompetitive Contract)
(JAN 1991)
52.232-8 Discounts for Prompt Payment (APR 1989)
52.232-11 Extras (APR 1984)
52.232-17 Interest (JUN 1996)
52.232-23 Assignment of Claims (JAN 1986)
52.232-25 Prompt Payment (MAR 1994)
(a)(6)(i)_30__________
(b)(2)___N/A____________
52.232-34 Optional Information for Electronic Funds Transfer Payment
(AUG 1996)
52.233-1 Disputes (OCT 1995)
52.233-1 ALTERNATE I (DEC 1991)
52.237-2 Protection of Government Buildings, Equipment, and Vegetation
(APR 1984)
52.237-3 Continuity of Services (JAN 1991)
52.239-1 Privacy or Security Safeguards (AUG 1996)
52.242-12 Report of Shipment (REPSHIP) (JUL 1995)
52.242-13 Bankruptcy (JUL 1995)
</TABLE>
<PAGE> 13
N00140-97-D-1756
PAGE 13
contract expires. The preliminary notice does not commit the Government to an
extension.
(b) If the Government exercises this option, the extended contract shall be
considered to include this option provision.
(c) The total duration of this contract, including the exercise of any options
under this clause, shall not exceed 60 months.
AVAILABILITY OF FUNDS (FAR 52.232-18)(APR 1984)
Funds are not presently available for this contract. The Government's obligation
under this contract is contingent upon the availability of appropriated funds
from which payment for contract purposes can be made. No legal liability on the
part of the Government for any payment may arise until funds are made available
to the Contracting Officer for this contract and until the Contractor receives
notice of such availability, to be confirmed in writing by the Contracting
Officer.
SECTION J LIST OF EXHIBITS, ATTACHMENT AND OTHER DOCUMENTS
ATTACHMENT I -- COMPONENT OF EACH PRODUCT
<PAGE> 14
Attachment I - Product Component
<TABLE>
- --------------------------------------------------------------------------------------------------------
<CAPTION>
CATEGORY PRODUCT/UPGRADES INCLUDES
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
[ILLEGIBLE] Windows 95 Upgrade Internet Explorer
Windows NT Workstation Clients: Windows 95, Windows NT,
Plus! for Windows 95 Windows 3.1, Macintosh, UNIX
- --------------------------------------------------------------------------------------------------------
[ILLEGIBLE] Office Professional Word
Excel
PowerPoint
Access, FoxPro
Schedule+
Bookshelf
Outlook
Project
Front Page (included with NT Server)
Publisher
Visual Basic Enterprise Edition
- --------------------------------------------------------------------------------------------------------
[ILLEGIBLE] BackOffice NT Server with Internet Information Server,
Index Server, and Front Page
SQL Server
Exchange Enterprise (includes connectors)
Systems Management Server
SNA Server
Proxy Server
BackOffice Client Access License NT Server Client Access
SQL Server Client Access
Exchange Client Access
Systems Management Server Client Access
SNA Server Client Access
- --------------------------------------------------------------------------------------------------------
[ILLEGIBLE] Internet Explorer (included with Windows 95)
NetMeeting
News and Mail Client
[ILLEGIBLE] Internet Information Server (included with NT Server)
Index Server (included with NT Server)
Proxy Server (included with BackOffice Server)
[ILLEGIBLE] Personalization System
Content Replication System
Commerce Server
Usage Analyst Enterprise Edition
Site Analyst
Visual InterDev (promotional
- --------------------------------------------------------------------------------------------------------
offering)
[ILLEGIBLE] FrontPage (included with NT Server)
ActiveX Control Pad
Internet Assistants for MS Office
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.21
PROMISSORY NOTE
$270,000.00 April 15, 1998
San Jose, California
FOR VALUE received, William S. McKiernan, ("Maker") whose address is 14800
Butano Terrace, Saratoga, CA 95070, promises to pay to the order of CyberSource
Corporation (a/k/a "software.net Corporation"), a California corporation whose
address is 3031 Tisch Way, Suite 900, San Jose, CA 95128, and any of its
successors (all of whom shall hereinafter be referred to collectively as
"Holder") the principal sum of Two Hundred Seventy Thousand Dollars and 00/100
($270,000.00) in lawful money of the United States of America together with
interest upon the unpaid principal as set forth below.
1. Interest shall accrue on the outstanding principal at the rate of
six and two hundredths percent (6.02%). Interest shall be compounded annually
and shall be payable only at such time the principal is due and payable. The
rate of interest calculated in accordance with this paragraph in effect at any
given time shall be referred to as the "Interest Rate."
2. The loan shall be paid in full as follows unless sooner accelerated:
any outstanding and unpaid principal and interest shall be due and payable on
April 15, 2003, which shall be five years from the date herein, provided,
however that any outstanding and unpaid principal and interest shall become due
and payable no later than eighteen (18) months after an initial public offering
of the Holder's common stock.
3. This Promissory Note ("Note") may be prepaid at any time and from
time to time in whole or in part without penalty. Any payment or prepayment
received hereunder shall, at the option of Holder, be applied first to costs and
expenses relating to enforcing its rights hereunder, then to interest then due,
and thereafter to principal.
4. If the Interest Rate hereunder exceeds the maximum amount allowed by
law, the interest collected hereunder shall be the maximum allowed by law and
that portion, if any, of interest payment representing an amount in excess of
the then legal maximum rate shall be deemed a payment of principal and shall be
applied against the principal then owing under this Note.
5. Holder may, without notice or demand, declare the entire principal
sum then unpaid, together with all accrued interest, immediately due and payable
upon (i) a material breach of the Pledge Agreement (as defined below) which is
not cured within thirty (30) days of written notice thereof, or (ii) nonpayment
of any amount owed under this Note when due, each of which shall be an event of
default hereunder.
<PAGE> 2
6. Maker and any endorsers hereby authorize Holder to take the
following actions:
(i) to accept additional or substitute co-makers;
(ii) to release co-makers;
(iii) to change or extend dates of payment;
(iv) to grant indulgences, all without notice and without
affecting the obligations of the undersigned; and
(v) to renew or extend or replace this Note.
7. To the extent permitted by law, Maker and any endorsers hereby waive
presentment, demand, protest, notice of protest, notice of dishonor, notice of
nonpayment, and all other notices, except where notices are expressly provided
for in this Note.
8. This Note has been made and delivered in the State of California and
shall be construed and enforced in accordance with the laws of the State of
California. In any action brought under or in connection with this Note, Maker,
including its successors or assigns, hereby consents to the jurisdiction of any
competent state or federal court within the State of California and consents to
service of process by any means authorized by law.
9. Maker agrees to pay for all fees and expenses, including attorneys'
fees and related costs, incurred by Holder in enforcing its rights under this
Note, whether or not legal proceedings are commenced.
10. This Note may not be assigned, in whole or in part, by Holder or
Maker.
11. Holder shall not by any act of omission or commission be deemed to
have waived any rights or remedies hereunder unless such waiver is in writing
and signed by the Holder and then only to the extent specifically set forth
therein; a waiver of one event shall not be construed as a bar to or waiver of
such right or remedy on the occurrence of a subsequent event. In this regard,
the acceptance of a late payment or the acceptance of a payment for less than
the full amount owing shall not be deemed to waive the late payment fee nor to
release the balance of the amount owing unless expressly agreed to by Holder in
writing.
12. This Note is secured by that certain Pledge Agreement ("Pledge
Agreement") executed concurrently herewith between Maker and Holder.
- 2 -
<PAGE> 3
13. Not withstanding anything else to the contrary set forth herein,
Holder acknowledges and agrees that the indebtedness evidenced by this Note
shall be recourse only to the Collateral (defined in the Pledge Agreement) as
set forth in the Pledge Agreement, and further agrees that in any action or
proceeding brought on this Note, no deficiency judgment shall be sought,
obtained or enforced against Maker.
MAKER HOLDER
CyberSource Corporation (aka "software.net
Corporation"), a California corporation
By: ____________________________ By: _________________________________________
William S. McKiernan Name: Mark L. Breier
Title: President and Chief Executive Officer
- 3 -
<PAGE> 1
EXHIBIT 10.22
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT ("Agreement") is made as of April 15, 1998, by and
between William S. McKiernan ("Debtor"), and CyberSource Corporation (a/k/a
"software.net Corporation"), a California corporation (the "Company"). Terms
used without other definition herein that are defined in Division 8 or Division
9 of the California Uniform Commercial Code shall have the respective meanings
assigned to such terms therein.
RECITALS
A. Debtor and the Company are parties to that certain Promissory Note
(the "Note") dated concurrently herewith pursuant to which Debtor borrowed
$270,000.00 from the Company subject to the terms and conditions set forth
therein, which terms and conditions are hereby incorporated by reference.
B. As security for the payment and performance of the obligations of
Debtor to the Company under the Note, as hereinafter defined, and in order to
induce the Company to extend credit pursuant to the Note, Debtor is entering
into this Agreement.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Debtor and the Company hereby agree
as follows:
Section 1. Security Interest.
1.1. Grant of Interest. Debtor hereby grants the Company a first
priority, perfected security interest in the Collateral, as hereinafter defined,
to secure the Indebtedness, as hereinafter defined, owed to the Company. Prior
to, or contemporaneous with, the execution and delivery of this Agreement,
Debtor has delivered or shall deliver to the Company each of the items of
Collateral as set forth below.
1.2. Collateral. The term "Collateral" means, collectively 129,808 shares
of common stock of the Company owned by Debtor (the "Stock") and all
substitutions therefor and liquidating dividends, stock dividends, cash
dividends, new securities and other property to which Debtor is or may hereafter
become entitled to receive on account of the Stock.
1.3. Indebtedness. "Indebtedness" means all debts, obligations, and
liabilities of Debtor to the Company arising out of the Note or under this
Agreement.
1.4. Collateral Delivery.
a. Concurrent with the execution and delivery of this Agreement
or prior thereto, Debtor is delivering to the Company the Collateral, which
shall be duly endorsed in blank without restriction (or with a duly executed
Assignment Separate From Certificate (stock power) duly endorsed in blank
without restriction).
1
<PAGE> 2
b. Voting, etc. So long as no Event of Default (as defined
herein) has occurred and is continuing, Debtor shall have the right to vote the
Stock and exercise the consensual rights and powers relating to such Stock;
provided, however, that Debtor shall not be permitted to trade or sell the Stock
without the consent of the Company until all amounts owed to the Company under
the Note are paid in full.
Section 2. Covenants, Representations and Warranties.
2.1. Debtor's Covenants. Debtor hereby covenants and agrees that:
a. Debtor will at all times keep the Collateral free of all
liens, encumbrances and claims of any kind or nature other than the security
interest of the Company.
b. Debtor will not sell, transfer, lease or otherwise dispose of
any of the Collateral or any interest therein to any individual or entity until
all amounts owed to the Company under the Note are paid in full.
c. Debtor will pay when due and prior to delinquency all taxes,
levies, assessments or other claims which are or may become liens against the
Collateral.
d. Debtor will deliver to the Company promptly or ensure that the
Company promptly receives (i) all Collateral, (ii) all initial transaction
statements and all other writings necessary or desirable to evidence the
transfer and pledge of the Collateral to the Company as provided above, (iii)
such specific acknowledgments, assignments, stock or bond powers, or other
agreements or writings as the Company may request relating to the Collateral,
and (iv) copies of records and other reports relating to the Collateral in such
form and detail and at such times as the Company may from time to time require.
e. Debtor will from time to time as required by the Company: (i)
execute and deliver to the Company, and file or record at Debtor's expense, all
notices and other documents the Company deems necessary in order for it to
maintain a first perfected security interest in the Collateral; and (ii) perform
such other acts, and execute and deliver to the Company such additional
assignments, agreements and instruments, as the Company may request in
connection with the administration and enforcement of this Agreement and/or the
Company's rights, powers and remedies hereunder.
2.2. Debtor's Representations. Debtor hereby represents and warrants to
the Company that Debtor has full and complete marketable title to the Collateral
free and clear of all liens, encumbrances and security interests (except for
those in favor of the Company and those expressly permitted in writing by the
Company).
Section 3. Default.
3.1. Events of Default. The occurrence of any of the following shall
constitute an Event of Default under this Agreement at the option of the
Company:
2
<PAGE> 3
a. Debtor fails to perform any obligation under the Note.
b. Debtor breaches any provision of this Agreement and fails to
cure such breach within thirty (30) days after the receipt of written notice
from the Company specifying such breach.
3.2. Rights on Default. Upon the occurrence of an Event of Default:
a. All Indebtedness shall, at the option of the Company, without
demand or notice, become immediately due and payable.
b. The Company shall have all other rights and remedies available
under contract or applicable law, which include those of a secured party under
the California Uniform Commercial Code, at law or in equity, and the right to
take possession of the Collateral (if not then in the Company's possession), and
sell and dispose of the same, or any part thereof, at public or private sale or
at any broker's board or on any securities exchange, for cash, upon credit or
for future delivery, and at such price or prices as the Company may deem
satisfactory all in accordance with applicable law.
c. In taking action as is specified above, the Company shall be
permitted to use the services of a broker.
d. The Company, instead of exercising the power of sale herein
conferred upon it, may proceed by a suit or suits at law or in equity to
foreclose the security interests herein granted and sell the Collateral, or any
portion thereof, under a judgment or decree of a court or courts of competent
jurisdiction. Debtor hereby agrees that any disposition of Collateral by way of
a private placement or other method which, in the opinion of the Company, is
required or advisable under federal and state securities laws is commercially
reasonable.
3.3. Application of Proceeds. The proceeds of any sale foreclosure or
disposition shall be applied first to the reasonable expenses of retaking,
holding, preparing for sale, discharging all liens, selling and the like, then
to the reasonable attorneys' fees and legal expenses incurred by the Company,
and then to the Indebtedness pursuant to the terms of the Note. Should the net
proceeds resulting from any such sale or disposition exceed the amount owing to
the Company, the Company shall pay such surplus to the Debtor or other person(s)
legally entitled thereto.
3.4. Powers. Upon the occurrence and during the continuance of an Event
of Default, Debtor's right to exercise the voting or consensual rights and
powers with respect to the Collateral shall cease, and all such rights and
authority to exercise such voting or consensual rights and powers shall inure to
the Company.
3
<PAGE> 4
Section 4. Power of Attorney. Debtor hereby irrevocably appoints the Company, or
any officer thereof, as Debtor's true and lawful attorney-in-fact coupled with
an interest, with full power of substitution, after an Event of Default to sign
or endorse any instrument, document, or other writing necessary or desirable to
transfer title or other rights to or in any of the Collateral; and, after an
Event of Default, to do all acts necessary or incidental to assert, protect and
enforce the Company's rights in the Collateral and under this Agreement. Debtor
agrees to reimburse the Company promptly upon demand for any expenses the
Company may incur while acting as Debtor's attorney-in-fact, which expenses
shall constitute indebtedness under the Note.
Section 5. Waivers of Debtor.
5.1. Presentment. Debtor hereby waives presentment, demand, protest,
notice of protest, notice of dishonor, notice of payment and nonpayment, notice
of any default, or notice of nonpayment at maturity.
5.2. Enforcement. Debtor hereby waives any right to require the Company
(i) to proceed against any person, (ii) to pursue any remedy in the Company's
power in any order or whatsoever. The Company shall not be required to take any
action to preserve rights against prior parties with respect to any of the
Collateral.
5.3. Release of Third Parties. Debtor hereby waives any right or defense
it may now or hereafter have based upon (i) the Company's release of any party
who may be obligated to the Company; (ii) the Company's release or impairment of
any collateral for the Indebtedness; and (iii) the modification or extension of
the Indebtedness.
5.4. Suretyship Defenses. Debtor hereby waives any and all suretyship
defenses now or hereafter available to it under the California Civil Code or the
California Uniform Commercial Code.
5.5. General Waivers. Without limiting the generality of any other waiver
or other provision of this Agreement, Debtor hereby waives, to the maximum
extent such waiver is permitted by law, any and all benefits or defenses arising
directly or indirectly under any one or more of: (i) California Civil Code
Sections 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845,
2846, 2847, 2848, 2849, 2850, 2899, and 3433; (ii) Chapter 2 of Title 14 of the
California Civil Code; (iii) California Code of Civil Procedure Sections 580a,
580b, 580c, 580d, and 726; or (iv) California Uniform Commercial Code Section
3605.
Section 6. Non-Waiver. Subject to Section 8.3, the Company may, in the exercise
of its sole discretion, waive an Event of Default, or cure an Event of Default,
at Debtor's expense.
Section 7. The Company's Duties.
a. The Company's sole duty with respect to the Collateral in its
possession shall be to use reasonable care in the custody and preservation
thereof. The Company shall be deemed to have exercised reasonable care in the
custody and preservation of such Collateral if such Collateral is accorded
treatment substantially equal to that which the Company accords its
4
<PAGE> 5
own property, it being understood that the Company shall not have any
responsibility for (i) ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, declining value, tender or other matters
relative to any Collateral, regardless of whether the Company have or are deemed
to have knowledge of such matters or (ii) taking any steps to preserve any
rights against any person with respect to any Collateral. Under no circumstances
shall the Company be responsible for an injury or loss to the Collateral, or any
part thereof, arising from any cause beyond the reasonable control of the
Company. b. The Company may at any time deliver the Collateral or any part
thereof to Debtor or arrange for the delivery thereof and Debtor's receipt shall
be a complete and full acquittance for the Collateral so delivered, and the
Company shall thereafter be discharged from any liability or responsibility
therefor.
Section 8. General Provisions.
8.1. Notices. Any notice given by any party under this Agreement or the
Note shall be in writing and personally delivered, deposited in the United
States mail, postage prepaid, or sent by telex or other authenticated message,
charges prepaid, and addressed as follows:
To Debtor: To the Company:
---------- ---------------
William S. McKiernan CyberSource Corporation
14800 Butano Terrace a/k/a "software.net Corporation"
Saratoga, CA 95070 3031 Tisch Way, Suite 900
San Jose, CA 95128
Attn: President
with a copy to:
Jackson Tufts Cole & Black, LLP
60 South Market Street, Suite 1000
San Jose, CA 95113
Attn: Richard Scudellari, Esq.
Each party may change the address to which notices, requests and other
communications are to be sent by giving written notice of such change to each
other party.
8.2. Binding Effect. This Agreement shall be binding upon Debtor, its
permitted successors, representatives and assigns, and shall inure to the
benefit of the Company and its successors, representatives and assigns;
provided, however, that neither Debtor nor the Company may assign or transfer
Debtor's obligations under this Agreement without each other's prior written
consent.
8.3. No Waiver. Any waiver, consent or approval by the Company of any
Event of Default or breach of any provision, condition or covenant of this
Agreement or the Note must be in writing and shall be effective only to the
extent set forth in writing. No waiver of any breach
5
<PAGE> 6
or default shall be deemed a waiver of any later breach or default of this
Agreement or the Note. No failure or delay on the part of the Company in
exercising any power, right or privilege under this Agreement or the Note shall
operate as a waiver thereof, and no single or partial exercise of any such
power, right or privilege shall preclude any further power, right or privilege.
8.4. Rights Cumulative. All rights and remedies existing under this
Agreement are cumulative to, and not exclusive of, any other rights or remedies
available under contract or applicable law. The obligations of Debtor under this
Agreement shall continue to be effective or be reinstated, as the case may be,
if at any time any payment of any Indebtedness is rescinded or must otherwise be
returned by the Company upon, on account of, or in connection with, the
insolvency, bankruptcy or reorganization of Debtor or otherwise, all as though
such payment had not been made.
8.5. Unenforceable Provisions. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall be so only as to such
jurisdiction and only to the extent of such prohibition or unenforceability, but
all the remaining provisions of this Agreement shall remain valid and
enforceable.
8.6. Governing Law. Except as may be otherwise provided by the California
Uniform Commercial Code or in any addendum hereto, this Agreement shall be
governed by and construed in accordance with the laws of the State of
California.
8.7. Entire Agreement. This Agreement and the Note are intended by Debtor
and the Company as the final expression of Debtor's obligations to the Company
in connection with the Collateral and supersedes all prior understandings or
agreements concerning the subject matter hereof. This Agreement may be amended
only by a writing signed by Debtor and accepted by the Company in writing.
8.8. Legal Matters.
a. Choice of Law. The validity, terms, performance and
enforcement of this Agreement shall be governed by those laws of the State of
California which are applicable to agreements which are negotiated,
executed/delivered and performed solely in the State of California.
b. Jurisdiction; Venue. The state and federal District Courts
located in San Jose, California shall have exclusive jurisdiction and venue over
any action or proceeding arising out of or related to the negotiation,
execution, delivery, performance, breach or enforcement of this Agreement.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
COMPANY DEBTOR
CyberSource Corporation (a/k/a
"software.net Corporation"), a
California corporation
By: _________________________________ _____________________________________
Name: Mark L. Breier William S. McKiernan
Title: President and Chief Executive
Officer
7
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
March 25, 1998 in the Registration Statement (Form S-1) and related Prospectus
of software.net Corporation for the registration of shares of its common stock.
Our audits also included the financial statement schedule of software.net
Corporation listed in Item 16(b). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
April 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 2,571 2,232
<SECURITIES> 0 0
<RECEIVABLES> 1,456 2,185
<ALLOWANCES> 275 400
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,206 7,459
<PP&E> 478 643
<DEPRECIATION> (98) (139)
<TOTAL-ASSETS> 9,586 8,388
<CURRENT-LIABILITIES> 8,113 6,163
<BONDS> 0 0
12,565 15,257
0 0
<COMMON> 47 47
<OTHER-SE> (11,238) (13,112)
<TOTAL-LIABILITY-AND-EQUITY> 9,586 8,388
<SALES> 16,806 6,192
<TOTAL-REVENUES> 16,806 6,192
<CGS> 14,873 5,189
<TOTAL-COSTS> 14,873 5,189
<OTHER-EXPENSES> 3,843 2,877
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (6) (2)
<INCOME-PRETAX> (1,743) (1,849)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,743) (1,849)
<DISCONTINUED> (3,616) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,359) (1,849)
<EPS-PRIMARY> (.30) (.09)
<EPS-DILUTED> (.30) (.09)
</TABLE>
