<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998
REGISTRATION NO. 333-51121
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
AMENDMENT NO. 1 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SOFTWARE.NET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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>
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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:
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<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: [ ]
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.
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<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 MAY 18, 1998
[SOFTWARE.NET CORPORATION LOGO]
- --------------------------------------------------------------------------------
5,000,000 SHARES
COMMON STOCK
- --------------------------------------------------------------------------------
All of the 5,000,000 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 $7.00 and $9.00 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 "SWNT."
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.
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<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 $750,000, payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
750,000 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 MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. SUCH STABILIZING ACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON NASDAQ IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS ANNUAL REPORTS CONTAINING
AUDITED FINANCIAL STATEMENTS EXAMINED BY INDEPENDENT AUDITORS AND MAKE AVAILABLE
TO ITS STOCKHOLDERS UNAUDITED QUARTERLY INFORMATION FOR THE FIRST THREE QUARTERS
OF EACH FISCAL YEAR.
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 and (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").
<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........................ 5,000,000 shares
Common Stock to be outstanding after the
offering.................................... 26,557,779 shares(1)
Use of Proceeds............................. Working capital, payment of
obligations and general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol...... "SWNT"
CONSOLIDATED SUMMARY FINANCIAL DATA
(In thousands)
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<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 1,933 375 938
Total operating expenses.................................... 898 1,585 3,843 584 3,190
Loss from continuing operations............................. (511) (779) (1,743) (169) (2,227)
Net loss.................................................... (511) (1,515) (5,359) (752) (2,227)
</TABLE>
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<CAPTION>
MARCH 31, 1998
----------------------------
PROFORMA
ACTUAL AS ADJUSTED(1)(2)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,232 $41,400
Working capital............................................. 918 40,086
Total assets................................................ 8,388 47,556
Redeemable convertible preferred stock...................... 15,257 0
Stockholders' equity (net capital deficiency)............... (13,443) 40,982
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1998. Includes: (i) the
conversion into Common Stock of 276,466 shares of Series D Preferred Stock
issued in April 1998; and (ii) 268,817 shares of Common Stock to be issued
to AOL immediately prior to the consummation of this offering assuming an
initial public offering price of $8.00 per share and an underwriting
discount of $0.56 per share. Excludes as of the date of this Prospectus: (i)
3,731,055 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) 1,178,945 shares of Common Stock
reserved for future issuance under the Plans; and (iv) 403,226 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 $7.44 per share
(assuming an initial public offering price of $8.00 per share and an
underwriting discount of $0.56 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 $8.00
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
within the meaning of Section 27A of the Securities Act of 1933, as amended.
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 $13.5
million. The Company incurred net losses of $511,000, $1.5 million, $5.4 million
and $2.2 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."
5
<PAGE> 7
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 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
6
<PAGE> 8
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 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
7
<PAGE> 9
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 reputation 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 service 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.
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<PAGE> 10
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 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
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<PAGE> 11
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 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
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<PAGE> 12
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 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 manage-
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<PAGE> 13
ment 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 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
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<PAGE> 14
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 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 prohibits 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.
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<PAGE> 15
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 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."
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<PAGE> 16
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 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
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<PAGE> 17
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."
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
16
<PAGE> 18
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 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 61.3% of the outstanding Common
Stock. In particular, William S. McKiernan, the Chairman of the Company's Board
of Directors, will hold approximately 33.9% 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 21,557,779 shares of Common Stock held by existing
stockholders immediately prior to the closing of the offering will be
"restricted securities"
17
<PAGE> 19
as that term is defined in Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act") (which amount includes 268,817 shares of Common Stock to
be issued to AOL immediately prior to the consummation of this offering assuming
an initial public offering price of $8.00 per share and an underwriting discount
of $0.56 per share and which amount further assumes that no options are
exercised in the interim). Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 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 1,422,663 shares will
become eligible for sale at various times within 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 3,731,055 shares of Common Stock which will be eligible 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 (b) 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 6,823,596 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 $6.50 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 5,000,000 shares of
Common Stock offered hereby, assuming an initial public offering price of $8.00
per share, are estimated to be approximately $36.4 million (approximately $42.0
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
5,000,000 shares of Common Stock offered hereby at the initial public offering
price of $8.00 per share, after deducting estimated underwriting discounts and
offering expenses and the sale of 268,817 shares of Common Stock at $7.44 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;
15,000,000 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;
40,000,000 shares authorized, 21,288,962 shares
issued and outstanding proforma; 26,557,779
shares issued and outstanding proforma as
adjusted(1).................................... 47 16,022 54,472
Accumulated deficit............................... (13,490) (13,490) (13,490)
-------- -------- --------
Total stockholders' equity (net capital
deficiency).................................. (13,443) 2,532 40,982
-------- -------- --------
Total capitalization...................... $ 1,847 $ 2,565 $ 41,015
======== ======== ========
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1998. Includes: (i) the
conversion into Common Stock of 276,466 shares of Series D Preferred Stock
issued in April 1998, and (ii) 268,817 shares of Common Stock to be issued
to AOL immediately prior to the consummation of this offering assuming an
initial public offering price of $8.00 per share and an underwriting
discount of $0.56 per share. Excludes as of the date of this Prospectus: (i)
3,731,055 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) 1,178,945 shares of Common Stock
reserved for future issuance under the Plans, and (iv) 403,226 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 $7.44 per share
(assuming an initial public offering price of $8.00 per share and an
underwriting discount of $0.56 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 pro forma net tangible book value of the Company as of March 31, 1998
was approximately $1.3 million, or $0.06 per share of Common Stock. Pro forma
net tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the total pro forma number of shares of
Common Stock outstanding, after giving effect to the automatic conversion of all
outstanding shares of Preferred Stock (including 276,466 shares of Series D
Preferred Stock issued in April 1998) into an aggregate of 12,198,962 shares of
Common Stock. After giving effect to the sale of the 5,000,000 shares of Common
Stock offered by the Company hereby at the initial public offering price of
$8.00 per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, and the sale of 268,817
shares of Common Stock to AOL at $7.44 per share, the pro forma net tangible
book value of the Company, as adjusted, at March 31, 1998 would have been $39.8
million or $1.50 per share of Common Stock. This amount represents an immediate
increase in such net tangible book value of $1.44 per share to existing
shareholders and an immediate dilution of $6.50 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $8.00
Pro forma net tangible book value at March 31, 1998....... $0.06
Increase attributable to AOL.............................. .09
Increase attributable to new investors.................... 1.35
-----
Adjusted pro forma net tangible book value after this
offering and the sale of shares to AOL.................... 1.50
-----
Dilution per share to new investors......................... $6.50
=====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average price per share paid by
existing shareholders and to be paid by AOL and purchasers of the shares offered
by the Company hereby (at the initial public offering price of $8.00 per share
before deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- -------- -------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)(3)... 21,288,962 80.2% $15,740 27.3% $0.74
AOL(2)(3)..................... 268,817 1.0 2,000 3.5 7.44
New Investors................. 5,000,000 18.8 40,000 69.2 8.00
---------- ----- ------- ----- -----
Total(1)(2)(3)...... 26,557,779 100.0% $57,740 100.0% 2.17
========== ===== ======= ===== =====
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1998, including conversion into
Common Stock of 276,466 shares of Series D Preferred Stock issued in April
1998.
(2) Reflects 268,817 shares of Common Stock to be issued to AOL immediately
prior to the consummation of this offering at a price of $7.44 per share.
(3) Excludes as of the date of this Prospectus: (i) 3,731,055 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) 1,178,945 shares of Common Stock reserved for future issuance under
the Plans; and (iv) 403,225 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 $7.44 per share (assuming an initial public offering price
of $8.00 per share and an underwriting discount of $0.56 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 5,254
----- ------ ------- ------- ------ -------
Gross profit..................... 37 380 721 1,933 375 938
Operating expenses
Research and development....... 164 388 431 1,060 155 602
Sales and marketing............ 57 407 704 1,696 265 1,953
General and administrative..... 43 103 450 1,087 164 635
----- ------ ------- ------- ------ -------
Total operating expenses..... 264 898 1,585 3,843 584 3,190
----- ------ ------- ------- ------ -------
Loss from operations............. (227) (518) (864) (1,910) (209) (2,252)
Interest income, net............. -- 7 85 167 40 25
----- ------ ------- ------- ------ -------
Loss from continuing operations.. (227) (511) (779) (1,743) (169) (2,227)
Loss from discontinued
operations..................... -- -- (736) (3,616) (583) --
----- ------ ------- ------- ------ -------
Net loss......................... $(227) $ (511) $(1,515) $(5,359) $ (752) $(2,227)
===== ====== ======= ======= ====== =======
Proforma basic and diluted net
loss per share from continuing
operations..................... $ (0.10) $ (0.11)
Proforma basic and diluted net
loss per share from
discontinued operations........ (0.20) --
------- -------
Proforma basic and diluted net
loss per share................. $ (0.30) $ (0.11)
======= =======
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 1,093 918
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) $(13,443)
</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 within the meaning of Section 27A of
the Securities Act of 1933, as amended. 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 service 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
23
<PAGE> 25
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 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
YEAR 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 84.9
------ ------ ------ ------ ------
Gross profit.......................... 37.9 12.3 11.5 11.9 15.1
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 31.5
General and administrative.......... 10.2 7.7 6.5 5.2 10.3
------ ------ ------ ------ ------
Total operating expenses............ 89.5 27.0 22.9 18.5 51.5
------ ------ ------ ------ ------
Loss from operations.................. (51.6) (14.7) (11.4) (6.6) (36.4)
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) (36.0)
Loss from discontinued operations..... 0.0 (12.6) (21.5) (18.5) --
------ ------ ------ ------ ------
Net loss.............................. (50.9)% (25.9)% (31.9)% (23.8)% (36.0)%
====== ====== ====== ====== ======
</TABLE>
24
<PAGE> 26
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.
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 $5.3 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 15.1% 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 $2.0 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 31.5% 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 $635,000 in the
25
<PAGE> 27
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
10.3% 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 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
26
<PAGE> 28
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 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
27
<PAGE> 29
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.
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
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<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 5,254
------ ------ ------- ------- -------
Gross profit........................ 375 542 530 486 938
Operating expenses:
Research and development.......... 155 184 302 419 602
Sales and marketing............... 265 332 442 657 1,953
General and administrative........ 164 247 265 411 635
------ ------ ------- ------- -------
Total operating expense... 584 763 1,009 1,487 3,190
------ ------ ------- ------- -------
Loss from operations................ (209) (221) (479) (1,001) (2,252)
Interest income, net................ 40 32 24 71 25
------ ------ ------- ------- -------
Loss from continuing operations..... (169) (189) (455) (930) (2,227)
Loss from discontinued operations... (583) (455) (1,036) (1,542) --
------ ------ ------- ------- -------
Net loss............................ $ (752) $ (644) $(1,491) $(2,472) $(2,227)
====== ====== ======= ======= =======
</TABLE>
28
<PAGE> 30
<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 84.9
------ ------- ------- ------- -------
Gross profit....................... 11.9 15.8 11.0 9.0 15.1
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 31.5
General and administrative....... 5.2 7.2 5.4 7.6 10.3
------ ------- ------- ------- -------
Total operating expense.......... 18.5 22.3 20.9 27.6 51.5
------ ------- ------- ------- -------
Loss from operations............... (6.6) (6.5) (9.9) (18.6) (36.4)
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) (36.0)
Loss from discontinued
operations....................... (18.5) (13.2) (21.5) (28.6) --
------ ------- ------- ------- -------
Net loss........................... (23.8)% (18.8)% (30.9)% (45.9)% (36.0)%
====== ======= ======= ======= =======
</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 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
29
<PAGE> 31
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 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 $2.7 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 $2.2 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.
30
<PAGE> 32
Net cash provided by financing activities of $4.1 million and $2.6 million
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 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 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
32
<PAGE> 34
26% in December 1997 to 40% in December 2002. The Internet also has emerged as
an attractive medium for the purchase and 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.
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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.
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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
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periodically offers previews of 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 product for physical delivery from traditional
distributors and sources the substantial majority of its ESD SKUs 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
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developed customized information systems and automated ordering processes to
enable it to offer an extensive selection 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 service 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 and the Games Channel areas, among others, of the AOL Online
Area. 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 by AOL
through "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
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to pay a percentage of certain advertising revenues above certain threshold
amounts to AOL. In addition, AOL has the right, in its sole discretion, to
reduce or cease placements of the promotions granted under this agreement, or
restrict access from the AOL service to the Company's Web site, in certain
circumstances, including, if the functional integrity of the AOL service is
compromised or the ability of AOL to provide service to 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 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
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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 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 direct 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
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advertising program which will target customers through national media outlets
such as magazines, newspapers, and radio and television broadcasts.
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
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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 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.
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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
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 combined 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 to either effectively upgrade and expand its transaction-processing
systems or to successfully integrate any newly developed or purchased modules
with its existing systems in a timely manner. 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
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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 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 between the Company and
CyberSource 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
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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 Cross License Agreement further provides that the parties shall have joint
ownership of certain utility tools and allocates between the Company and
CyberSource ownership of certain inventions made by each party on or before June
30, 1998 and the ownership of certain improvements, enhancements and
modifications by the parties to the Sm@rtCert and Cache Manager technologies
made through 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."
On March 18, 1998, the Company borrowed $400,000 from CyberSource to assist
with short term liquidity needs. This loan is memorialized in a promissory note
issued by the Company to CyberSource, which provides for repayment in a lump sum
on or before September 18, 1998 and bears interest at a rate of 5.32% compounded
semi-annually. The terms of this loan arrangement may not be the result of arm's
length negotiation between the Company and CyberSource.
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
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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 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
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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 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 May 15, 1998, the Company employed 78 employees. 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.
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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
James R. Lussier......................... 41 Vice President, Business Operations
Michael J. Praisner...................... 51 Vice President of Finance &
Administration and Chief Financial
Officer
Alan C. DeClerck......................... 43 Vice President of Sales
Brian J. Sroub........................... 39 Vice President, Marketing
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
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<PAGE> 49
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.
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.
JAMES R. LUSSIER joined the Company in April 1998 as Vice President of
Business Operations. From September 1992 to April 1998, Mr. Lussier served as an
Associate Partner of Andersen Consulting where Mr. Lussier was responsible for
the Electronics and High Technology Strategy Practice Group and was a member of
the Commerce Core Team. Mr. Lussier received a B.S. in Finance from the Wharton
School, University of Pennsylvania, an M.A. in Sociology, with an emphasis in
Statistics, from the University of California at Berkeley and an M.B.A. from the
Stanford University Graduate School of Business.
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.
BRIAN J. SROUB joined the Company in April 1998 as Vice President of
Marketing. From June 1995 to April 1998, Mr. Sroub served as the Vice President,
Marketing of Hearst New Media & Technology, a worldwide media company. From
October 1993 to June 1995, Mr. Sroub served as the Vice President, Sales &
Marketing of Sony Electronics. Prior to October 1993, Mr. Sroub co-founded Home
Environmental Products, a start-up horticultural corporation, and was a Brand
Manager at Procter & Gamble Company. Mr. Sroub received a B.A. in Economics &
Communications from Boston College, an M.A. in Economics from Boston College and
an M.B.A. from the 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.
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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 advised major corporations
and start-up entrepreneurial ventures. In 1993, Ms. Levinson was an executive
with Creative Artists Agency, Inc. From 1989 to 1992, Ms. Levinson was a partner
of Wings Partners, Inc., a merchant banking firm and was actively involved in
taking Northwest Airlines private. From 1984 to 1987, Ms. Levinson was a Senior
Vice President of American Express Travel Related Services, Inc. Prior to that,
Ms. Levinson was a partner at McKinsey & Co. Ms. Levinson presently serves as a
Director of Administaff, Inc., Genentech, Inc., Jacobs Engineering Group, Inc.
and NCR Corporation 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.
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. Each director is
elected for a period of one year and serves until his or her successor is duly
elected and qualified. 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.
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<PAGE> 51
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, 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
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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 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.
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 received an option to acquire 1,000,000 shares 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.
52
<PAGE> 53
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 "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 May 15, 1998, options to purchase 3,731,055 shares of Common Stock
were outstanding under the Plans with exercise prices ranging from $0.004 to
$5.50 per share. As of May 15, 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 May 15, under the 1998 Stock Option Plan, options to purchase
1,172,500 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
53
<PAGE> 54
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 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.
54
<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
55
<PAGE> 56
Stock will convert into an aggregate of 3,000,000 shares of Common Stock upon
consummation of this offering. The holders 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 $8.00 per share and
assuming an underwriting discount of $0.56 per share, AOL will purchase 268,817
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
underwriting discount) which will vest in increments of 1/36th per month
commencing March 1, 1998. Based on an offering price of $8.00 per share, the AOL
Warrant will enable AOL to purchase 403,225 shares of Common Stock at an
exercise price of $7.44 per share (assuming an underwriting discount of $0.56
per share). 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."
56
<PAGE> 57
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 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 $0.50 per share.
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
57
<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.
In April 1998, the Company granted Brian J. Sroub, the Company's Vice
President of Marketing, an option to purchase 180,000 shares of Common Stock at
an exercise price of $5.44 per share.
In April 1998, the Company granted James R. Lussier, the Company's Vice
President of Business Operations, an option to purchase 180,000 shares of Common
Stock at an exercise price of $5.50 per share. The Company has agreed Mr.
Lussier with six months advance notice of termination, if such termination
occurs on or before April 27, 1999.
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.
58
<PAGE> 59
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, 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.
On March 18, 1998, the Company borrowed $400,000 from CyberSource to assist
with short term liquidity needs. This loan is memorialized in a promissory note
issued by the Company to CyberSource, which provides for repayment in a lump sum
on or before September 18, 1998 and bears interest at a rate of 5.32% compounded
semi-annually. The terms of this loan arrangement may not be the result of arms'
length negotiation between the Company and CyberSource.
The Company has entered into indemnification agreements with each of its
executive officers and directors. See "Management -- Limitation of Liability and
Indemnification Matters."
59
<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of May 15, 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% 33.9%
John P. Pettitt(3)................................ 1,250,000 5.5 4.5
Vulcan Ventures Inc.(4)........................... 3,036,624 14.3 11.4
110 110th Avenue NE,
Suite 550
Bellevue, Washington 98004
Entities affiliated with C. E. Unterberg,
Towbin(5)....................................... 2,275,510 10.7 8.6
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 7.3
2121 Avenue of the Stars
Los Angeles, California 90067
Hubert E. Kolde(7)................................ 3,036,624 14.3 11.4
Linda Fayne Levinson(8)........................... 1,928,694 9.1 7.3
Steven P. Novak(9)................................ 2,275,510 10.7 8.6
Richard Scudellari(10)............................ 70,000 * *
WA&H Investments.................................. 1,153,321 5.4 4.3
First Bank Place
601 Second Ave. South,
31st Floor
Minneapolis, MN 55402
All Directors and Executive Officers as a Group
(11 Persons)(11):................................. 17,556,982 77.8 63.0
</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 May 15, 1998; (ii) 26,557,779 shares outstanding
after this offering which assumes no exercise of the Underwriters' over-
allotment option and includes 268,817 shares of Common Stock to be issued
to AOL immediately prior to the consummation of this offering (assuming an
initial public offering price of $8.00 per share and an underwriting
discount of $0.56 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 May 15, 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, Brian J. Sroub and James R.
Lussier, holders of options to purchase 1,000,000, 200,000, 180,000,
180,000 and 180,000 shares of Common Stock, respectively, none of which
are exercisable within 60 days of May 15, 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.
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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.
(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 May 15, 1998 held by all directors and executive
officers of the Company.
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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 15,000,000 shares of Preferred Stock, 6,823,596 shall be
undesignated, $0.001 par value per share.
COMMON STOCK
As of May 15, 1998, there were 9,090,000 shares of Common Stock outstanding
held of record by 15 stockholders. There will be 26,557,779 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 6,823,596 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 $8.00 per share less the underwriting discount of $0.56 per share, AOL
will purchase 268,817 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 on an offering price of $8.00
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per share, immediately prior to the consummation of the offering, the Company
will issue to AOL a warrant for 403,225 shares of Common Stock at an exercise
price of $7.44 per share (assuming an underwriting discount of $0.56 per share).
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.
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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
26,557,779 shares of Common Stock. All of the 5,000,000 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 purchased by "Affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act.
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<PAGE> 65
The remaining 21,557,779 shares of Common Stock outstanding upon completion
of this offering will be "restricted securities," as that term is defined in
Rule 144 ("Restricted Shares") (which amount includes 268,817 shares of Common
Stock to be issued to AOL immediately prior to the consummation of this offering
assuming an initial public offering price of $8.00 per share and an underwriting
discount of $0.56 per share). 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," AOL as well as 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 become eligible for sale at various times within 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 265,578 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 3,731,055 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.
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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 the option grant outside the plans, 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 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 9,268,817 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."
In addition to the 5,000,000 shares of Common Stock offered hereby, 268,817
shares (assuming an initial public offering price of $8.00 per share and an
underwriting discount of $0.56 per share) will be sold 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 403,225
additional shares of Common Stock at an exercise price of $7.44 per share
(assuming an initial public offering price of $8.00 per share and an
underwriting discount of $0.56 per share). See "Description of Capital
Stock -- Warrants."
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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............................................ 5,000,000
</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 750,000 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.
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<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
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<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.
69
<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-8
Notes to Consolidated Financial Statements.................. F-9
</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:
Note payable to related party............... $ -- $ -- $ 400
Accounts payable............................ 536 2,256 2,092
Other accrued liabilities................... 97 270 818
Current obligations under capital leases.... -- 18 17
Deferred revenue............................ 967 5,569 3,214
------- -------- --------
Total current liabilities........... 1,600 8,113 6,541
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) (13,490) (13,490)
------- -------- -------- --------
Total stockholders' equity (net
capital deficiency)............... (2,409) (11,191) (13,443) $ 1,814
------- -------- -------- ========
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 5,254
------ ------- ------- ------ -------
Gross profit....................... 380 721 1,933 375 938
Operating expenses:
Research and development......... 388 431 1,060 155 602
Sales and marketing.............. 407 704 1,696 265 1,953
General and administrative....... 103 450 1,087 164 635
------ ------- ------- ------ -------
Total operating
expenses............... 898 1,585 3,843 584 3,190
------ ------- ------- ------ -------
Loss from operations............... (518) (864) (1,910) (209) (2,252)
Interest income.................... 7 96 173 40 27
Interest expense................... -- (11) (6) -- (2)
------ ------- ------- ------ -------
Loss from continuing operations.... (511) (779) (1,743) (169) (2,227)
Loss from discontinued operations.. -- (736) (3,616) (583) --
------ ------- ------- ------ -------
Net loss........................... $ (511) $(1,515) $(5,359) $ (752) $(2,227)
====== ======= ======= ====== =======
Pro forma basic and diluted net
loss per share from continuing
operations....................... $ (0.10) $ (0.11)
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) $ (0.11)
======= =======
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 -- -- -- --
</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>
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)
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 -- -- -- --
</TABLE>
F-6
<PAGE> 76
<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>
Accretion of premium on
redemption of
redeemable convertible
preferred stock in
excess of purchase
price (unaudited)...... -- 25 -- -- (25) (25)
Net loss (unaudited)..... -- -- (2,227) (2,227)
--------- ------- --------- --- -------- --------
Balance at March 31, 1998
(unaudited).............. 7,899,938 $15,257 9,090,000 $47 $(13,490) $(13,443)
========= ======= ========= === ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 77
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) $(2,227)
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 (164)
Other accrued liabilities......................... 54 (28) 172 (57) 548
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) (2,738)
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 -- -- -- 400
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 -- 2,564
----- ------- ------- ------- -------
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-8
<PAGE> 78
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-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)
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-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)
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.
Proforma Net Loss Per Share and Unaudited Proforma Stockholders' Equity
Proforma 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-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)
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) $ (2,227)
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) $ (2,252)
====== ======= ======= ====== ========
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) $ (0.25)
====== ======= ======= ====== ========
Proforma:
Net loss.......................................... $ (511) $(1,515) $(5,359) $ (752) $ (2,227)
====== ======= ======= ====== ========
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) $ (0.11)
======= ========
</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.
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)
There was no impact to the Company as a result of the adoption of FAS 130, as
there is no 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-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)
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.
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)
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 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-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)
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
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)
offering 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-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)
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-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)
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-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)
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 $170,000 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 $133,333, 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 $133,333, respectively.
On March 18, 1998, the Company borrowed $400,000 from CyberSource. This
loan is memorialized in a promissory note issued by the Company to CyberSource,
which provides for repayment in a lump sum on or before September 18, 1998 and
bears interest at a rate of 5.32% compounded semi-annually.
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.
F-20
<PAGE> 90
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)
10. INCOME TAXES
No provision for income taxes has been recorded due to operating losses
with no current tax benefit.
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.
F-21
<PAGE> 91
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)
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-22
<PAGE> 92
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> 93
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....................... 24
Business.............................. 33
Management............................ 48
Certain Transactions.................. 55
Principal Stockholders................ 60
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 64
Underwriting.......................... 67
Legal Matters......................... 68
Experts............................... 69
Additional Information................ 69
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]
5,000,000 SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
C.E. UNTERBERG, TOWBIN
PROSPECTUS
MAY , 1998
<PAGE> 94
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
Transfer Agent and Registrar fees........................... 25,000
Miscellaneous............................................... 98,160
--------
Total............................................. $750,000
========
</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
II-1
<PAGE> 95
its Board of 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
II-2
<PAGE> 96
approximately $6,120,000. The purchasers consisted of eleven investors that are
presently related to certain 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 $8.00 per share, AOL
will purchase 268,817 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 $8.00 per share and an underwriting discount of $0.56 per share, the
Company will issue to AOL a Warrant for 403,225 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 3,906,055 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 3,731,055 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> 97
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S> <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 -- Government Integrator Agreement (#3622) dated as of May 5,
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 dated as of April
29, 1996, 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.
</TABLE>
II-4
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S> <C>
*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.
*10.26 Agreement dated as of December 19, 1995, by and between the
Registrant and the United States Department of Defense, DFAS
(#N00140-96-G-D115).
*10.27 Call Center Agreement dated as of October 17, 1997, by and
between the Registrant and LOGISTIX.
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.
** Previously filed.
+ Confidential Treatment Requested.
(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
</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.
II-5
<PAGE> 99
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 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> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this First Amendment to Registration Statement to be signed on
its behalf by the undersigned, hereunto duly authorized in San Jose, California,
on May 18, 1998.
software.net Corporation
By: /s/ WILLIAM S. MCKIERNAN
------------------------------------
William S. McKiernan
Chairman of the Board
POWER OF ATTORNEY
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 18th day of May, 1998.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
Principal Executive Officer:
By: /s/ WILLIAM S. MCKIERNAN* Chairman of the Board May 18, 1998
-------------------------------------------------
William S. McKiernan
Principal Financial Officer and Principal Accounting Officer:
By: /s/ MICHAEL J. PRAISNER Vice President for Finance & May 18, 1998
------------------------------------------------- Administration and Chief
Michael J. Praisner Financial Officer
Additional Directors:
By: /s/ MARK L. BREIER* President, Chief Executive May 18, 1998
------------------------------------------------- Officer and Director
Mark L. Breier
By: /s/ LINDA FAYNE LEVINSON* Director May 18, 1998
-------------------------------------------------
Linda Fayne Levinson
By: /s/ HUBERT E. KOLDE* Director May 18, 1998
-------------------------------------------------
Hubert E. Kolde
By: /s/ STEVEN P. NOVAK* Director May 18, 1998
-------------------------------------------------
Steven P. Novak
By: /s/ RICHARD SCUDELLARI* Director May 18, 1998
-------------------------------------------------
Richard Scudellari
By: /s/ MICHAEL J. PRAISNER
-------------------------------------------------
Michael J. Praiser
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S> <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 -- Government Integrator Agreement (#3622) dated as of May 5,
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 dated as of April
29, 1996, by and between the Registrant and Exodus
Communications, Inc.
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S> <C>
*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.
*10.26 Agreement dated as of December 19, 1995, by and between the
Registrant and the United States Department of Defense, DFAS
(#N00140-96-G-D115).
*10.27 Call Center Agreement dated as of October 17, 1997, by and
between the Registrant and LOGISTIX.
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.
** Previously filed.
+ Confidential Treatment Requested.
<PAGE> 1
EXHIBIT 10.12
SPONSORSHIP AGREEMENT
This agreement ("Agreement") is entered into as of the 30 day of March, 1998
("Effective Date"), by and between Excite, Inc., a California corporation,
located at 555 Broadway, Redwood City, California 94063 ("Excite"), and
CyberSource Corporation, a California corporation, located at 3031 Tisch Way,
Suite 900, San Jose, California 95128, (also known as "software.net" and
referred to herein as "Client").
RECITALS
A. Excite maintains a site on the internet at http://www.excite.com (the
"Excite Site") and owns, manages or is authorized to place advertising on
affiliated Web sites worldwide (collectively, the "Excite Network") which,
among other things, allow its users to search for and access content and
other sites on the Internet.
B. Within the Excite Site, Excite currently organizes certain content into
topical channels (the "Channels").
C. Excite also makes available to its users a number of community and
communications services, including chat and email.
D. Client is engaged in the business of the retail sale of computer software
at its Web site located at http://www.software.net (the "Client Site").
E. Client wishes to promote its business to Excite's users through promotions
and advertising in various portions of the Excite Site as set forth herein.
Therefore, the parties agree as follows:
1. SPONSORSHIP OF THE EXCITE COMPUTERS & INTERNET CHANNEL AND THE EXCITE
SHOPPING CHANNEL
a) A link to the Client Site (consistent with the format used on similar
links on the same page and as mutually determined by Client and
Excite) will be displayed on the home page of the Excite Computers &
Internet Channel in the "Today in the Computers & Internet Channel"
promotional area being developed by Excite (or in an equivalent
promotional area mutually determined by Client and Excite) when
launched, guaranteed to be displayed in at least [*] during each year
of the term of the Agreement, as mutually scheduled by the parties in
Exhibit A. Excite guarantees the display of [*] of this link in the
first year of the term of the Agreement. Excite estimates, but does
not guarantee, the display of [*] of this link in the
1
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 2
CONFIDENTIAL
second year of the term of the Agreement and [*] of this link in the third
year of the term of the Agreement. For the purposes of this Agreement, an
"Impression" is any text and/or graphic link to the Client Site, any banner
advertisement linked to the Client Site, any other promotional placement
linked to the Client Site or any other hypertext link to the Client Site
served by Excite on the Excite Site, subject to the following: while the
parties acknowledge that Excite may serve multiple Impressions on a single
page, no more than three (3) different Impressions on a single page in the
areas specified by the terms of this Agreement may be counted toward
Excite's satisfaction of its Impression guarantees hereunder,
notwithstanding the total number of links, banner advertisements,
promotional placements or hypertext links that are located on such page.
b) Links to the Client Site (consistent with the format used on similar links
on the same page and as mutually determined by Client and Excite) will be
displayed on the home page of the Software department of the Excite
Computers & Internet Channel in the "Top 10 Downloads" promotional area
being developed by Excite (or in an equivalent promotional area mutually
determined by Client and Excite) when launched and for the duration of the
term of the Agreement. Excite estimates, but does not guarantee, the
display of [*] of this link in the first year of the term of the Agreement,
[*] of this link in the second year of the term of the Agreement and [*] of
this link in the third year of the term of the Agreement.
c) Links to the Client Site (consistent with the format used on similar links
on the same page and as mutually determined by Client and Excite) will be
displayed in the "Product Zone" and "Reviews" sections of the Software
department of the Excite Computers & Internet Channel in a location such
as the gray bar that appears above the fold but below the top advertising
banner (or in an equivalent promotional area mutually determined by Client
and Excite) for the duration of the term of the Agreement. A link to the
Client Site (in either a text or graphic format to be mutually determined
by Client and Excite following testing for the maximum effectiveness of
the link) will be displayed in the "Product Zone" and "Reviews" sections
of the Software department of the Excite Computers & Internet Channel in
the left-hand side of each such page for the duration of the term of the
Agreement. Excite estimates, but does not guarantee, the display of [*] of
this link in the first year of the term of the Agreement, [*] Impressions
of this link in the second year of the term of the Agreement and
2
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 3
CONFIDENTIAL
[*] of this link in the third year of the term of the Agreement.
d) A link to the Client Site (consistent with the format used on similar links
on the same page and as mutually determined by Client and Excite) will be
displayed in the Software department of the Excite Computers & Internet
Channel in a "Shareware" page or promotional area being developed by Excite
(or in an equivalent promotional area mutually determined by Client and
Excite) when launched and for the duration of the term of the Agreement.
Excite estimates, but does not guarantee, the display of [*] of this link
in the first year of the term of the Agreement, [*] of this link in the
second year of the term of the Agreement and [*] Impressions of this link
in the third year of the term of the Agreement.
e) Excite will display a text and/or graphic link to the Client Site on the
"Sponsorship Strip" (consistent with the format used on similar links on
the same strip and as mutually determined by Client and Excite) in all
pages in the Software department of the Excite Computers & Internet Channel
in which the Sponsorship Strip is displayed for the term of the Agreement.
Excite may display a text and/or graphic link to the Client Site on the
Sponsorship Strip (consistent with the format used on similar links on the
same strip and as mutually determined by Client and Excite) in other pages
in the Excite Computers & Internet Channel in which the Sponsorship Strip
is displayed for the term of the Agreement as mutually determined by Client
and Excite. Excite estimates, but does not guarantee, the display of [*] of
this link in the first year of the term of the Agreement, [*] of this link
in the second year of the term of the Agreement and [*] Impressions of this
link in the third year of the term of the Agreement.
f) Links to the Client Site (consistent with the format used on similar links
on the same page and as mutually determined by Client and Excite) will be
displayed in all Software "Web Directory" pages in the Excite Computers &
Internet Channel in a promotional area in the left sidebar of these pages
being developed by Excite (or in an equivalent promotional area mutually
determined by Client and Excite) when launched and for the duration of the
term of the Agreement. Excite estimates, but does not guarantee, the
display of [*]
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[*] Impressions of this link in the third year of the term of the
Agreement.
g) Links to the Client Site (consistent with the format used on similar
links on the same page and as mutually determined by Client and Excite)
will be displayed in the Excite Computers & Internet Channel, in the
Software area of the Shopping department of the Excite Computers &
Internet Channel and in the Computers & Software department of the
Excite Shopping Channel in a promotional/content module being developed
by Excite (or in an equivalent promotional area mutually determined by
Client and Excite) when launched and for the duration of the term of the
Agreement. Excite estimates, but does not guarantee, the display of [*]
Impressions of this link in the first year of the term of the Agreement,
[*] Impressions of this link in the second year of the term of the
Agreement and [*] Impressions of this link in the third year of the term
of the Agreement.
h) In the event that Excite develops product search categories for the
"Excite Shopping Search powered by Jango" service displayed on the
Excite Site ("Jango") which correspond to products available through the
Client Site, Excite will make reasonable commercial efforts to program
Jango to display links to the Client Site in response to user searches
for the products available through the Client Site. The development,
maintenance, modification and/or deletion of Jango product search
categories is within Excite's sole discretion. Client will reasonably
cooperate with Excite in providing information and access to the Client
Site in order to allow Excite to complete any necessary Jango
programming.
i) Set forth on Exhibit B hereto are copies of screenshots which are
illustrative of the placement of the links in the areas contemplated by
Sections 1(a) - (g). For the term of the Agreement, Excite will make
reasonable commercial efforts to maintain the aggregate prominence and
exposure of each of Client's links, advertising banners and promotional
placements as separately described in Sections 1(a) - (g) on a placement
by placement basis at a level equal to or better than the examples
displayed in Exhibit B.
2. SPONSORSHIP OF THE EXCITE SMALL BUSINESS AREA
a) The parties recognize that Excite is currently in the process of
developing a Small Business Area and that although related sponsorship,
promotional and advertising opportunities may vary over time, Client
shall be provided with the links, promotions, Impressions and other
benefits as set forth in this Section 2.
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b) Links to the Client Site (consistent with the format used on similar
links on the same page and as mutually determined by Client and Excite)
will be displayed in the Software department of the Excite Small
Business Area in a promotional/content module being developed by Excite,
in the Sponsorship Strip, in text links and/or equivalent promotional
areas (mutually determined by Client and Excite) when launched and for
the duration of the term of the Agreement. Excite estimates, but does
not guarantee, the display of [*] of these links in the first year of
the term of the Agreement, [*] of these links in the second year of the
term of the Agreement and [*] Impressions of these links in the third
year of the term of the Agreement.
3. ADVERTISING ON THE EXCITE SITE
a) Excite will display Client's banner advertising (which will link to the
Client Site) in general rotation on the Excite Computer & Internet
Channel for the duration of the Agreement. Excite guarantees the display
of [*] of these banners in the first year of the term of the Agreement,
[*] Impressions of these banners in the second year of the term of the
Agreement.
b) Excite will display Client's banner advertising (which will link to the
Client Site) on Excite Search results pages in response to the following
keyword packages and keywords: General Computer Package, Computer
Hardware Package, Computer Software Package and the keyword "antivirus".
When keyphrase advertising becomes available on the Excite Site, Excite
will display Client's banner advertising on Excite Search results pages
in response to the mutually determined keyphrases, subject to
availability. Excite guarantees the display of [*] Impressions under the
General Computer Package, [*] Impressions under the Computer Hardware
Package, [*] redact under the Computer Software Package, [*] under
the Connectivity Package, [*] under the keyword "antivirus" and [*]
Impressions of these banners in the first year of the term of the
Agreement. Excite guarantees the display of [*] Impressions of these
banners in the second year of the term of the Agreement, with the
allocation of Impressions between the keyword packages and keywords to
be determined in good faith by the parties prior to start of the second
year. Excite guarantees the display of
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[*] Impressions of these banners in the third year of the term of the
Agreement, with the allocation of Impressions between the keyword
packages and keywords to be determined in good faith by the parties
prior to start of the third year.
c) Excite will display Client's banner advertising (which will link to
the Client Site) in general rotation on the MailExcite service. Excite
guarantees the display of [*] Impressions of these banners in the
first year of the term of the Agreement, [*] Impressions of these
banners in the second year of the term of the Agreement and [*]
Impressions of these banners in the third year of the term of the
Agreement.
4. EMAIL CAMPAIGNS
a) Excite and Client will cooperate in developing customized email
campaigns for Client featuring Client's merchandise during the term of
the Agreement. All email marketing campaigns will comply with Excite's
then-current user data and privacy policies.
b) Excite guarantees that it will deliver [*] Impressions of the email
messages described in this Section 4 during the term of the Agreement.
For the purposes of this Section 4 only, each email message will count
as one (1) Impression.
5. IMPRESSION GUARANTEES
a) Excite guarantees the display of [*] Impressions of the links,
promotional placements, advertising banners and emails described in
Sections 1 - 4 in the first year of the term of the Agreement
pursuant to the schedule stated in Exhibit C. Excite guarantees that,
out of these [*] guaranteed Impressions in the first year of the term
of the Agreement, a total of [*] Impressions will consist of the
Impressions on the home page of the Software department of the Excite
Computers & Internet Channel described in Section 1(b), the "Product
Zone" and "Reviews" pages of the Computers & Internet Channel
described in Section 1(c), the "Shareware" page of the Software
department of the Excite Computers & Internet Channel described in
Section 1(f), the Software area of the Shopping department of the
Excite Computers & Internet Channel and in the Computers & Software
department of the Excite Shopping Channel described in Section 1(g)
and the keyword banners described in Section 3(b).
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b) Excite guarantees the display of [*] Impressions of the links,
promotional placements, advertising banners and emails described in
Sections 1 - 4 in the second year of the term of the Agreement
pursuant to the schedule stated in Exhibit C.
c) Excite guarantees the display of [*] Impressions of the links,
promotional placements, advertising banners and emails described in
Sections 1 - 4 in the third year of the term of the Agreement pursuant
to the schedule stated in Exhibit C.
6. EXCLUSIVITY
a) [*]
b) [*]
c) [*]
d) Notwithstanding the foregoing, Excite may display banner advertising
for Client's Competitors on the Excite Site in areas other than those
areas
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described in Section 6(b) and may display links to Client's Competitors
in Excite Search results pages in response to user queries, in Excite's
general directory of Web sites and in search results displayed in the
"Excite Shopping Service powered by Jango".
e) In the event the Excite creates any new Channels or other areas which
reasonably relate to the sale of software, Client, at its option, may
request inclusion in such Channels or other areas. In such event, the
parties shall negotiate in good faith a modification to this Agreement
whereby Client relinquishes certain of the links and promotions set
forth herein in exchange for inclusion of comparable value in such new
Channels or other areas.
7. LAUNCH DATE, RESPONSIBILITY FOR EXCITE NETWORK AND REPORTING
a) Client and Excite will use reasonable efforts to implement and put in
operation the display of the links, promotional placements and
advertising described in the Agreement by April 15, 1998 (the actual
date of such implementation to be referred to herein as the "Launch
Date"), except to the extent that different launch dates are described
in Sections 1-4.
b) The parties recognize that the scheduled Launch Date can be met only if
Client provides final versions of all graphics, text, keywords, banner
advertising, promotional placements, other promotional media and valid
URL links necessary to implement the promotional placements and
advertising described in the Agreement (collectively, "Impression
Material") to Excite fourteen (14) days prior to scheduled Launch Date.
c) [*]
d) Excite will have sole responsibility for providing, hosting and
maintaining, at its expense, the Excite Network. Except as limited by
the terms of this Agreement, Excite will have sole control over of the
"look and feel" of the Excite Network including, but not limited to,
the display, and placement of the parties' respective names and/or
brands and the promotional links, but excluding the content and
appearance of all advertising banners of Client appearing on the Excite
Site, which shall be controlled by Client, and excluding the content of
all links and promotional placements of Client
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appearing on the Excite Site, which shall be created by Client but
subject to Excite's generally-applicable advertising and promotion
standards.
e) Excite will maintain accurate records with respect to the number of
Impressions of Client's links, advertising banners and promotional
placements displayed on the Excite Site and will provide Client with
monthly reports substantiating the number of such Impressions. Client
has the right to audit such records once every twelve months during
the term of this Agreement. The terms and conditions of Section 8(h)
shall apply to such audit rights mutatis mutandis.
8. SPONSORSHIP, ADVERTISING AND TRANSACTION FEES
a) Client will pay Excite sponsorship and advertising fees of [*] for the
first year of the term of the Agreement. These fees will be paid in
equal monthly installments of [*]. The first monthly payment will be
due only after 80% or more of the Impressions contemplated by Section
1 hereof are in place and operating and the advertising contemplated
by Section 3 hereof has substantially commenced ("First Payment
Date"). Subsequent installments will be due on a monthly basis
thereafter.
b) Client will pay Excite sponsorship and advertising fees of [*] for the
second year of the term of the Agreement. These fees will be paid in
equal monthly installments of [*]. The first monthly payment will be
due upon the first anniversary of the First Payment Date. Subsequent
installments will be due on a monthly basis thereafter.
c) Client will pay Excite sponsorship and advertising fees of [*] for the
third year of the term of the Agreement. These fees will be paid in
equal monthly installments of [*]. The first monthly payment will be
due upon the second anniversary of First Payment Date. Subsequent
installments will be due on a monthly basis thereafter.
d) [*]
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[*]
e) [*]
f) Client will pay Excite its share of Net Margins within thirty (30) days
after the close of the financial quarter in which Client recognizes the
revenue derived from these transactions.
g) The sponsorship fees and transaction payments are net of any agency
commissions to be paid by Client.
h) Client will maintain accurate records with respect to the calculation of
all transaction payments due under this Agreement. Once per year, the
parties will review these records to verify the accuracy and appropriate
accounting of all payments made pursuant to the Agreement. In addition,
Excite may, upon no less than thirty (30) days prior written notice to
Client (and no more than once per year), cause an independent Certified
Public Accountant to inspect the records of Client reasonably related to
the calculation of such payments during Client's normal business hours.
such Certified Public Accountant shall only be provided access to such
records after it has executed a nondisclosure agreement in a form
acceptable to Client. The fees charged by such Certified Public Accountant
in connection with the inspection will be paid by Excite unless the
payments made to Excite are determined to have been less than [*] of the
payments actually owed to Excite, in which case Client will be responsible
for the payment of the reasonable fees for such inspection.
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i) Excite shall be obligated to deliver the Impressions referred to in
Section 10(a) at the times and in the manner as set forth on Exhibit C
hereto. In the event that Excite shall fail to timely deliver all of
the Impressions required during any six month period, Excite shall
have thirty (30) days to deliver the shortfall of such Impressions. In
the event such shortfall is not delivered within such thirty (30) day
period, Client shall cease making any of the monthly payments
contemplated by Sections 8(a), (b) or (c) until such shortfall is
delivered. Until such shortfall is delivered, no Impressions will be
deemed delivered for the next six month period.
9. PUBLICITY
Unless required by law, neither party will make any public statement,
press release or other announcement relating to the terms of or
existence of this Agreement without the prior written approval of the
other. Notwithstanding the foregoing, the parties agree to issue an
initial press release regarding the relationship between Excite and
Client, the timing and wording of which will be mutually agreed upon.
10. TERM AND TERMINATION
a) Except as otherwise set forth herein, the term of this Agreement will
begin on the Launch Date and will not end until Excite displays of a
total of [*] of Client's advertising banners and promotional
placements on the Excite Site. Except as otherwise set forth herein,
regardless of Excite's actual delivery of Impressions, the term of
this Agreement will not be shorter than three (3) years after the
Launch Date.
b) Either party may terminate this Agreement if the other party
materially breaches its obligations hereunder and such breach remains
uncured for thirty (30) days following the notice to the breaching
party of the breach.
c) All undisputed payments that have accrued prior to the termination or
expiration of this Agreement will be payable in full within thirty
(30) days thereof.
d) The provisions of Section 11(a), (b) and (c) (Trademark Ownership and
License), Section 12 (Content Ownership), Section 13 (Confidentiality
and User Data), Section 14 (Indemnity), Section 15 (Limitation of
Liability) and Section 16 (Dispute Resolution) will survive any
termination or expiration of this Agreement.
11. TRADEMARK OWNERSHIP AND LICENSE
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a) Client will retain all right, title and interest in and to its
trademarks, service marks and trade names worldwide, subject to the
limited license granted to Excite hereunder.
b) Excite will retain all right, title and interest in and to its
trademarks, service marks and trade names worldwide, subject to the
limited license granted to Client hereunder.
c) Each party hereby grants to the other a non-exclusive, limited
license to use its trademarks, service marks or trade names only as
specifically described in this Agreement. All such use shall be in
accordance with each party's reasonable policies regarding
advertising and trademark usage as established from time to time.
d) Upon the expiration or termination of this Agreement, each part will
cease using the trademarks, service marks and/or trade names of the
other except;
i) As the parties may agree in writing; or
ii) To the extent permitted by applicable law.
12. CONTENT OF OWNERSHIP
a) Client will retain all right, title and interest in and to the Client
Site worldwide including, but not limited to, ownership of all
copyrights and other intellectual property rights therein.
b) Excite will retain all right, title, and interest in and to the
Excite Network worldwide including, but no limited to, ownership of
all copyrights, look and feel and other intellectual property rights
therein.
13. CONFIDENTIALITY AND USER DATA
a) For the purposes of this Agreement, "Confidential Information" means
information about the disclosing party's (or its suppliers") business
or activities that is proprietary and confidential, which shall
include all business, financial, technical and other information of a
party marked or designated by such party as "confidential" or
"proprietary" or information which, by the nature of the
circumstances surrounding the disclosure, ought in good faith to be
treated as confidential.
b) Confidential Information will not include information that (i) is in
or enters the public domain without breach of this Agreement, (ii)
the receiving party lawfully receives from a third party without
restriction on disclosure and without breach of a nondisclosure
obligation, (iii) the receiving party knew
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prior to receiving such information from the disclosing party or (iv)
the receiving party develops independent of any information originating
from the disclosing party.
c) Each party agrees (i) that it will not disclose to any third party or
use any Confidential Information disclosed to it by the other except as
expressly permitted in this Agreement and (ii) that it will take all
reasonable measures to maintain the confidentiality of all Confidential
Information of the other party in its possession or control, which will
in no event be less than the measures it uses to maintain the
confidentiality of its own information of similar importance.
d) The usage reports provided by Excite to Client hereunder will be deemed
to be the Confidential Information of Excite.
e) The terms and conditions of this Agreement will be deemed to be
Confidential Information and will not be disclosed without the written
consent of the other party.
f) For the purposes of this Agreement, "User Data" means all information
submitted by users referred to the Client Site from the Excite Site
during the term of the Agreement. The parties acknowledge that any
individual user of the Internet could be a user of Excite and/or Client
through activities unrelated to this Agreement and that user data
gathered independent of this Agreement, even from individuals who are
users of both parties' services, will not be deemed to be "User Data"
for the purposes of this Agreement.
g) Both parties will retain all rights to make use of any User Data
obtained through this Agreement, subject to the limitations and other
terms of this Agreement.
h) Client will provide to Excite all User Data collected by Client within
thirty (30) days following the end of each calendar month during the
term of this Agreement in a mutually-determined electronic format.
i) Excite will not use User Data collected by Client and delivered to
Excite to directly or indirectly solicit any such users either
individually or in the aggregate during the term of this Agreement and
at any time following the expiration or termination of this Agreement.
j) Client will not use User Data collected by Client to directly or
indirectly solicit Excite users on behalf of any of Excite's direct
competitors either individually or in the aggregate during the term of
this Agreement (except as provided for elsewhere in the Agreement) and
at any time following the expiration or termination of this Agreement.
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k) Neither party will sell, disclose, transfer or rent any User Data which
could reasonably be used to identify a specific named individual
("Individual Data") to any third party nor will either party use
Individual Data on behalf of any third party without the express
permission of the individual user. Where user permission for
dissemination of Individual Data to third parties has been obtained,
each party will use commercially reasonable efforts to require the third
party recipients of Individual Data to provide an "unsubscribe" feature
in any email communications generated by, or on behalf of, the third
party recipients of Individual Data.
l) Notwithstanding the foregoing, each party may disclose Confidential
Information or User Data (i) to the extent required by a court of
competent jurisdiction or other governmental authority or otherwise as
required by law or (ii) on a "need-to-know" basis under an obligation of
confidentiality to its legal counsel, accountants, banks and other
financing sources and their advisors.
14. INDEMNITY
a) Client will indemnify, defend and hold harmless Excite, its affiliates,
officers, directors, employees, consultants and agents from any and all
third party claims, liability, damages and/or costs (including, but not
limited to, attorneys fees) arising from:
i) The breach of any representation or covenant in this Agreement;
or
ii) Any claim that Client's advertising banners infringe or violate
any third party's copyright, patent, trade secret, trademark,
right of publicity or right of privacy or contain any defamatory
content; or
iii) Any claim arising from content displayed on the Client Site.
Excite will promptly notify Client of any and all such claims and will
reasonably cooperate with Client with the defense and/or settlement
thereof; provided that, if any settlement requires an affirmative
obligation of, results in any ongoing liability to or prejudices or
detrimentally impacts Excite in any way and such obligation, liability,
prejudice or impact can reasonably be expected to be material, then such
settlement shall require Excite's written consent (not to be
unreasonably withheld or delayed) and Excite may have its own counsel in
attendance at all proceedings and substantive negotiations relating to
such claim.
b) Excite will indemnify, defend and hold harmless Client, its affiliates,
officers, directors, employees, consultants and agents from any and all
third party claims, liability, damages and/or costs (including, but not
limited to, attorneys fees) arising from:
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i) The breach of any representation or covenant in this
Agrement; or
ii) Any claim arising from the Excite Network other than
content or services provided by Client.
Client will promptly notify Excite of any and all such claims and
will reasonably cooperate with Excite with the defense and/or
settlement thereof; provided that, if any settlement requires an
affirmative obligation of, results in any ongoing liability to or
prejudices or detrimentally impacts Client in any way and such
obligation, liability, prejudice or impact can reasonably be expected
to be material, then such settlement shall require Client's written
consent (not to be unreasonably withheld or delayed) and Client may
have its own counsel in attendance at all proceedings and
substantive negotiations relating to such claim.
c) EXCEPT AS SPECIFIED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY
WARRANTY IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT
AND HEREBY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES, INCLUDING ALL
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE REGARDING SUCH SUBJECT MATTER.
15. LIMITATION OF LIABILITY
EXCEPT UNDER SECTIONS 14(a) AND 14(b), IN NO EVENT WILL EITHER PARTY
BE LIABLE TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING
NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THAT PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF EITHER PARTY FOR
DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR
ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, [*]
16. DISPUTE RESOLUTION
a) The parties agree that any breach of either of the parties'
obligations regarding trademarks, service marks or trade names,
confidentiality and/or User Data would result in irreparable injury
for which there is no adequate remedy at law. Therefore, in the event
of any breach of threatened breach of a party's obligations,
regarding trademarks, service marks or trade names or
confidentiality, the aggrieved party will be entitled to seek
equitable relief in
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addition to its other available legal remedies in a court of competent
jurisdiction.
b) In the event of disputes between the parties arising from or
concerning in any manner the subject matter of this Agreement, other
than disputes arising from or concerning trademarks, service marks or
trade names, confidentiality and/or User Data, the parties will first
attempt to resolve the dispute(s) through good faith negotiation. In
the event that the dispute(s) cannot be resolved through good faith
negotiation within thirty days of notice by one party to the other of
its desire to seek the resolution of such a dispute, the parties will
refer the dispute(s) to a mutually acceptable mediator.
c) In the event that disputes between the parties arising from or
concerning in any manner the subject matter of this Agreement, other
than disputes arising from or concerning trademarks, service marks or
trade names, confidentiality and/or User Data, cannot be resolved
through good faith negotiation and mediation within thirty (30) days
of the engagement of a mutually acceptable mediator, the parties will
refer the dispute(s) to the American Arbitration Association for
resolution through binding arbitration by a single arbitrator pursuant
to the American Arbitration Association's rules applicable to
commercial disputes; provided, however, that the Federal Rules of
Evidence shall apply in toto to any such dispute, and, subject to the
arbitrator's discretion to limit the item and scope of discovery, the
Federal Rules of Civil Procedure shall apply with respect to
discovery.
17. GENERAL
a) Assignment. Neither party may assign this Agreement, in whole or in
part, without the other party's written consent (which will not be
unreasonably withheld), except that no such consent will be required
in connection with (i) a merger, reorganization or sale of all, or
substantially all, of such party's assets or (ii) either party's
assignment and/or delegation of its rights and responsibilities
hereunder to a wholly-owned subsidiary or joint venture in which the
assigning party holds an interest. Any attempt to assign this
agreement other than as permitted above will be null and void.
b) Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of California, notwithstanding
the actual state or country of residence or incorporation of Excite or
Client.
c) Notice. Any notice under this Agreement will be in writing and
delivered by personal delivery, express courier, confirmed facsimile,
confirmed email or certified or registered mail, return receipt
requested, and will be deemed given upon personal delivery, one (1)
day after deposit with express courier, upon confirmation of receipt
of facsimile or email or five (5) days after deposit
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in the mail. Notices will be sent to a party at its address set forth
in this Agreement or such other address as that party may specify in
writing pursuant to this Section.
d) No Agency. The parties are independent contractors and will have no
power or authority to assume or create any obligation or
responsibility on behalf of each other. This Agreement will not be
construed to create or imply any partnership, agency or joint venture.
e) Force Majeure. Any delay in or failure of performance by either party
under this Agreement will not be considered a breach of this Agreement
and will be excused to the extent caused by any occurrence beyond the
reasonable control of such party including, but not limited to, acts
of God, power outages and governmental restrictions.
f) Severability. In the event that any of the provisions of this
Agreement are held to be unenforceable by a court or arbitrator, the
remaining portions of the Agreement will remain in full force and
effect.
g) Entire Agreement. This Agreement and the Exhibits hereto are the
complete and exclusive agreement between the parties with respect to
the subject matter hereof, superseding any prior agreements and
communications (both written and oral) regarding such subject matter.
This Agreement may only be modified, or any rights under it waived, by
a written document executed by both parties.
h) Counterparts. This Agreement may be executed in counterparts, each of
which will serve to evidence the parties' binding agreement.
CyberSource Corporation Excite, Inc.
By: /s/ JOHN PETTITT By: /s/ ROBERT C. HOOD
Name: John Pettitt Name: Robert C. Hood
Title: EVP Title: EVP-CFO
Date: 3/30/98 Date: 3-31-98
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555 Broadway
Redwood City, California 94063
650.568.6000 (voice)
650.568.6030 (fax)
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EXHIBIT A
"TODAY IN THE COMPUTERS & INTERNET CHANNEL"
ROTATION SCHEDULE
Week 1 Week 2 Week 3 Week 4 Notes
April
May
June Quarter end &
July Win 98
August
September [*] Quarter end
October [*]
November
December Quarter end &
January Christmas
February
March Tax season &
April Quarter end
- -------------------------------------------------------------
TOTALS [*]
- -------------------------------------------------------------
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EXHIBIT B
ILLUSTRATIVE SCREEN SHOTS
20
<PAGE> 21
MOCKUP OF C&I HOME PAGE FOR SOFTWARE NET (PLACEMENT 1a)
C&I Home Page
o 26 weeks - rotating according to schedule
o program out one line during rotation
<PAGE> 22
EXCITE COMPUTERS & INTERNET
C&I Software Home Page
o "Top 10 Ticket" is permanent
o Placement will rotate between "561-Tech Headlines" and "Get Free Software"
50/50 or 256 weeks each
<PAGE> 23
PRODUCT ZONE PAGE MOCKUP FOR SOFTWARE.NET (PLACEMENT 1c)
Product Zone and Product Review Page
o Permanent Link with 30-35 Characters avail. for programming, similar to "get
the best deal on software"
o Permanent text or graphic
<PAGE> 24
MOCKUP OF SHARWARE PAGE (PLACEMENT 1d)
Shareware Page
o Permanent Placement
<PAGE> 25
MOCKUP OF "SPONSORSHIP STRIP" (PLACEMENT 1e)
<PAGE> 26
MOCKUP OF SOFTWARE WEB DIRECTORY PAGE (PLACEMENT 1f)
WEB DIRECTORY
- PERMANENT LINK WITH
30-35 CHARACTERS AVAIL.
FOR PROGRAMMING SIMILAR
TO "DOWNLOAD SHAREWARE"
- PERMANENT PROMO BOX
BELOW THE SEARCH BOX
<PAGE> 27
SHOPPING/SOFTWARE
SMALL BUSINESS/SHOP/SOFTWARE
C&I/SHOP/SOFTWARE
o Permanent placement in "Hot Product" module -- specific deal offering
o Permanent placement in "Shop There First" but rotation within 3 spots
<PAGE> 28
SHOPPING HOME PAGE
o Permanent link under Computer Software Department link
<PAGE> 29
CONFIDENTIAL
EXHIBIT C
IMPRESSION DELIVERY SCHEDULE
YEAR 1 IMPRESSIONS
[*] [*]
YEAR 2
[*] [*]
YEAR 3
[*] [*]
Contract Total [*]
21
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<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 Amendment No. 1 to the Registration Statement (Form S-1 No.
333-51121) and related Prospectus of software.net Corporation for the
registration of 5,000,000 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
May 18, 1998
