<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1998
REGISTRATION NO. 333-51121
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
AMENDMENT NO. 3 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>
DELAWARE 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.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, PROSPECTUS DATED JUNE 11, 1998
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."
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, and (ii) 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").
Portions Copyright Netscape Communications Corporation, 1997. All Rights
Reserved. Netscape, Netscape Navigator and the Netscape N logo are registered
trademarks of Netscape in the United States and other countries.
<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-wrap 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>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------
PROFORMA
ACTUAL AS ADJUSTED(1)(2)
-------- -----------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,232 $41,401
Working capital............................................. 918 40,087
Total assets................................................ 8,388 47,557
Redeemable convertible preferred stock...................... 15,257 --
Stockholders' equity (net capital deficiency)............... (13,443) 40,983
</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)
3,729,055 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 $2.43
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) 1,180,945 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-wrap 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 from software retailers, dealers and third-party mail order
cataloguers in the United States were estimated to be approximately $14 billion
in 1997 and are expected to grow to approximately $24 billion in 2001,
representing a compound annual growth rate of approximately 14.7%. 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. 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." In June 1998, the Company reincorporated in the State of
Delaware. 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.
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock offered by this Prospectus. When used in this
Prospectus, the words "expects," "anticipates," "intends," "plans," "estimates"
and similar expressions are intended to identify forward looking statements.
Such statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below and elsewhere in
this Prospectus. Actual results could differ materially from those projected in
the forward looking statements as a result of the risk factors discussed below
and elsewhere in this Prospectus.
Limited Operating History; History of Net Operating Losses; Accumulated
Deficit. Since inception, the Company has incurred significant losses, and as
of March 31, 1998, the Company had an accumulated deficit of approximately $13.5
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."
Unpredictability of Future Operating Results. The Company expects to
experience significant fluctuations in its revenues due to a variety of factors,
many of which are outside the Company's
5
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control. Factors that could have a material adverse effect on the business,
financial condition and results of operations of the Company include: (i) the
Company's ability to retain existing customers, attract new customers at a
steady rate and maintain customer satisfaction; (ii) the announcement or
introduction of new sites, services and products by the Company and its
competitors; (iii) price competition; (iv) the level of use of the Internet and
online services and decreased consumer acceptance of the Internet and other
online services for the purchase of consumer products such as those offered by
the Company; (v) the Company's ability to upgrade and develop its systems and
infrastructure and attract new personnel in a timely and effective manner; (vi)
the level of traffic on the Company's Web site; (vii) the termination of any
strategic marketing alliances such as those with AOL, Excite or Netscape
pursuant to which the Company has exposure to traffic on third-party Web sites,
or the termination of contracts with major purchasers, particularly United
States government agencies (the "U.S. government"); (viii) technical
difficulties, system downtime or Internet brownouts; (ix) the failure of
Internet bandwidth to increase significantly over time and/or an increase in the
cost to consumers of obtaining or utilizing Internet bandwidth; (x) the amount
and timing of operating costs and capital expenditures relating to expansion of
the Company's business, operations and infrastructure; (xi) the number of
popular Software titles introduced during the period; (xii) certain government
regulations; and (xiii) general economic conditions and economic conditions
specific to the Internet, online commerce and the Software Industry.
The Company's future success, and in particular its revenues and operating
results, depends upon its ability to successfully execute several key aspects of
its business plan. The Company must increase the dollar volume of Software sales
through its online sites, either by generating significantly higher and
continuously increasing levels of traffic to its online sites or by increasing
the percentage of visitors to its online sites who purchase Software, or through
some combination thereof. The Company must also increase the number of repeat
purchasers of Software through its online sites. Although the Company has
implemented strategies, including its relationships with AOL, Excite and
Netscape, designed to accomplish these objectives, there can be no assurance
that the Company will be able to increase the dollar volume of Software sales
through its online sites, increase traffic to its online sites, increase the
percentage of visitors who purchase Software or increase the number of repeat
purchasers. The failure to do one or more of the foregoing would likely have a
material adverse effect on the Company's business, financial condition and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company may experience seasonality in its business, reflecting seasonal
fluctuations in the Software industry, Internet and commercial online service
usage and traditional retail, government and corporate seasonal spending
patterns and advertising expenditures. In particular, Internet and online
service usage and the rate of growth of such usage may decline in the summer.
Such seasonality may cause quarterly fluctuations in the Company's operating
results and could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's gross margins may be impacted by a number of factors,
including the mix of revenues from sales of shrink-wrap products and revenues
from ESD products, the mix of Software products sold, the mix of revenues among
sales to government, corporate and consumer purchasers, the mix of revenues
derived from its relationships with strategic partners such as AOL, Excite,
Netscape and the Company's Web site, and the amount of advertising or
promotional revenues received during a period. The Company realizes higher gross
margins from advertising and promotional revenues than it does from Software
product sales. The Company typically realizes higher gross margins on ESD
Software product sales than it does on sales of shrink-wrap Software products,
and also on sales of specialty Software products as compared to those on sales
of widely available commodity Software products. In addition, the Company
typically realizes
6
<PAGE> 8
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 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
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<PAGE> 9
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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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
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 or 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
any or all of the Company's agreements with AOL, Excite and Netscape would
likely have a material adverse effect on the Company's business, results of
operations and financial condition. See "Use of Proceeds,"
"Business -- Strategic Relationships" and Note 3 of Notes to Consolidated
Financial Statements.
Need for Additional Capital. The Company requires substantial working
capital to fund its business and expects to use a portion of the net proceeds of
this offering to fund its operating losses. Since inception, the Company has
experienced negative cash flow from operations and expects to continue to
experience significant negative cash flow from operations for the foreseeable
future. The Company currently anticipates that the net proceeds of this
offering, together with its existing capital resources, will be sufficient to
meet the Company's capital requirements through the next twelve months, although
there can be no assurance that the Company will not have additional capital
needs prior to the end of such period. Thereafter, the Company may be required
to raise additional funds, in part to fund its financial obligations to AOL and
Excite. There can be no assurance that such financing will be available when
required by the Company on terms acceptable to the Company, or at all. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Competition. The online commerce market is new, rapidly evolving and
intensely competitive, and the Company expects competition to intensify in the
future. Barriers to entry are minimal, and current and new competitors can
launch new Web sites at a relatively low cost. In addition, the Software
reselling industry is intensely competitive. The Company currently competes
primarily with traditional Software resellers, other online Software resellers
and other vendors. In the online market, the Company competes with online
Software resellers and vendors that maintain similar
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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
to establish new relationships with publishers and distributors. The Company
also relies on
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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 any 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 Corporation ("CyberSource") and, accordingly, plays a
limited role in the Company's management. The Company's new employees include a
number of key managerial, technical and operations personnel who have not yet
been fully integrated into the Company, and the Company expects to add
additional key personnel in the near future. To manage the expected growth of
its operations and personnel, the Company will be required to improve existing
and implement new transaction processing, operational and financial systems,
procedures and controls, and to expand, train and manage its growing employee
base, including its finance, administrative and operations staff. There can be
no assurance that the Company's current or planned personnel, systems,
procedures and controls will be adequate to support the Company's future
operations, that management will be able to hire, train, retain, motivate and
manage required personnel or that the Company's management will be able to
successfully identify, manage and exploit existing and potential market
opportunities. If the Company is unable to manage growth effectively, its
business, financial condition and results of operations would be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Employees," and "Management."
Dependence on Key Personnel; Need for Additional Personnel. The Company's
performance is substantially dependent on the continued services and on the
performance of its senior management and other key personnel, particularly
William S. McKiernan, Chairman of the Company's
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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 subject to certain limitations. Any discontinuation of such
services or termination of such license or
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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 and current 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."
Potential Conflicts of Interest with CyberSource. In connection with the
spin-off of the Company's internet commerce services business to CyberSource in
December 1997 (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 are not the
result of arm's length negotiations. Further, although the Company and
CyberSource are engaged in different businesses, the respective managements of
the Company and CyberSource currently have not adopted policies to govern the
pursuit or allocation of corporate opportunities between the Company and
CyberSource. In the event the overlapping board members of CyberSource and the
Company pursue the interests of CyberSource with respect to corporate
opportunities over those of the Company in the course of intercompany
transactions or where the same corporate opportunities are available to both
companies, the Company's business, financial condition and results of operation
could be materially adversely affected. See "Business -- Relationship with
CyberSource Corporation."
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
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distribution facility or arrangement or any Web site content localized for
foreign markets, and there can be no assurance that the Company will be able to
expand its global presence. In addition, there are certain risks inherent in
doing business on a global level, such as regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, difficulties in protecting intellectual property
rights, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates and potentially
adverse tax consequences, which could adversely impact the success of the
Company's global operations. In addition, the export of certain Software from
the United States is subject to export restrictions as a result of the
encryption technology in such Software and may give rise to liability to the
extent the Company violates such restrictions. There can be no assurance that
the Company will be able to successfully market, sell and distribute its
products in local markets or that one or more of such factors will not have a
material adverse effect on the Company's future global operations, and
consequently, on the Company's business, financial condition and results of
operations.
Uncertain Acceptance of the Company's Brand. The Company believes that
establishing, maintaining and enhancing the Company's brand is a critical aspect
of its efforts to attract and expand its online traffic. The growing number of
Internet sites that offer competing products and services, many of which already
have well-established brands in online services or the Software industry
generally, increase the importance of establishing and maintaining brand name
recognition. Promotion of the Company's brand will depend largely on the
Company's success in providing a high quality online experience supported by
dedicated customer service which cannot be assured. In addition, to attract and
retain online users and to promote and maintain the Company's brand in response
to competitive pressures, the Company may find it necessary to increase
substantially its financial commitment to creating and maintaining a strong
brand loyalty among customers. If the Company is unable to provide high quality
online services or customer support, or otherwise fails to 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
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normal business activities. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company utilizes third-party equipment and software that
may not be Year 2000 compliant. The Company is in the early stages of conducting
an audit of its third-party suppliers as to the Year 2000 compliance of their
systems. Failure of the Company's internal computer systems or of such
third-party equipment or software, or of systems maintained by the Company's
suppliers, to operate properly with regard to the Year 2000 and thereafter could
require the Company to incur unanticipated expenses to remedy any problems,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, the purchasing patterns of
customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase products from the Company, which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated with Acquisitions and Entry into New Business Areas. The
Company has experienced substantial changes in the expansion of its business and
operations since inception. The Company may choose to expand its operations by
developing new Web sites, promoting new or complementary products or sales
formats, expanding the breadth and depth of products and services offered or
expanding its market presence through relationships with third parties. In
addition, the Company may broaden the scope and content of its online store
through the acquisition of existing online services, or content and businesses
specializing in ESD and Software distribution. Although no such acquisitions are
currently being negotiated, any future acquisitions would expose the Company to
increased risks, including risks associated with the assimilation of new
operations, sites and personnel, the diversion of resources from the Company's
existing businesses, sites and technologies, the inability to generate revenues
from new sites or content 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
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secrets, copyrights, trademarks, trade dress and similar proprietary rights. In
addition, there can be no assurance that others will not independently develop
substantially equivalent intellectual property. A failure by the Company to
protect its intellectual property in a meaningful manner could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
management and technical resources, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, there can be no assurance that other parties will not assert
infringement claims against the Company. From time to time, the Company has
received, and may receive in the future, notice of claims of infringement of
other parties' proprietary rights. There can be no assurance that such claims
will not be asserted or prosecuted against the Company in the future or that any
past or future assertions or prosecutions will not materially adversely affect
the Company's business, financial condition and results of operations. The
defense of any such claims, whether such claims are with or without merit, could
be time-consuming, result in costly litigation and diversion of technical and
management personnel, cause product shipment delays or require the Company to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, or at all. In the event of a successful claim of
product infringement against the Company and the failure or inability of the
Company to develop non-infringing technology or license the infringed or similar
technology on a timely basis, the Company's business, financial condition and
results of operations could be materially adversely affected. See
"Business -- Legal Proceedings" and "-- Intellectual Property."
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
16
<PAGE> 18
corporation in a jurisdiction where it is required to do so could subject the
Company to taxes and penalties for the failure to qualify and could result in
the inability of the Company to enforce contracts in such jurisdictions. Any
such new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet and other
online services could have a material adverse effect on the Company's business,
financial condition and results of operations.
Liability for Internet Content. The Company believes that its future
success will depend in part upon its ability to deliver original and compelling
descriptive content about the Software products it sells on the Internet. As a
publisher of online content, the Company faces potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that the Company publishes
or distributes. Such claims have been brought, and sometimes successfully
litigated, against online services. In addition, in the event that the Company
implements a greater level of interconnectivity on its site, the Company will
not and cannot practically screen all of the content generated or accessed by
its users, and the Company could be exposed to liability with respect to such
content. Although the Company carries general liability insurance, the Company's
insurance may not cover claims of these types or may not be adequate to
indemnify the Company for all liability that may be imposed. Any imposition of
liability, particularly liability that is not covered by insurance or is in
excess of insurance coverage, could have a material adverse effect on the
Company's reputation and its business, financial condition and results of
operations.
Sales and Other Taxes. The Company does not currently collect sales or
other similar taxes in respect of shipments of goods or ESD sales into states
other than California and Virginia. However, one or more local, state or foreign
jurisdictions may seek to impose sales tax collection obligations on out of
state companies, such as the Company, which engage in online commerce. In
addition, any new operation in states outside California and Virginia could
subject shipments into such states 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
17
<PAGE> 19
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.
Benefits of the Offering to Current Stockholders. The existing stockholders
of the Company may benefit from this offering of Common Stock through the
creation of a public market for the Common Stock and through a potential
increase in the market value of their shares. Following the offering, shares are
expected to trade in a regular public trading market. Although the Common Stock
held by the existing stockholders of the Company is not being registered in
connection with this offering, the existing stockholders will be able to sell
their shares into the public market upon the expiration of certain lock-up
agreements entered into by such stockholders with Representatives of the
Underwriters if such shares are registered under the Act or if they qualify for
an exemption from such registration, subject to certain limitations. In
addition, the price at which the Company's Common Stock publicly trades after
this offering may result in an increase in the market value of the shares held
by existing stockholders. However, the trading price of the Common Stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to a number of factors. 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
at times that have often been unrelated or disproportionate to the operating
performance of such companies. The difference between the midpoint of the range
of the estimated initial public offering price set forth on the cover of this
Prospectus and the weighted average price per share to the existing stockholders
is $7.25 per share. There can be no assurance that the initial price of this
offering will be within such range. See "-- No Prior Market, Possible
Violatility of Stock Price," "Dilution," "Principal Stockholders," "Shares
Eligible for Future Sale" and "Underwriting."
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 21,576,321 shares of Common Stock held by existing
stockholders immediately prior to the closing of the offering will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act") (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 the officers, directors and stockholders of the Company,
approximately 4,687,202 shares will be eligible for sale without restriction
under Rule 144(k) and 15,448,114 shares will be eligible for sale subject to
compliance with the volume and other restrictions of Rule 144. The remaining
1,441,205 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 3,710,513 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
18
<PAGE> 20
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 and following the automatic conversion and cancellation of the
8,176,404 presently outstanding shares of Preferred Stock concurrent herewith in
accordance with the Company's Amended and Restated Certificate of Incorporation,
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 (assuming an initial public
offering price of $8.00 per share). Additional dilution will occur upon exercise
of outstanding options granted by the Company. See "Dilution."
Potential Conflict of Interest with C.E. Unterberg, Towbin. Affiliates of
C.E. Unterberg, Towbin, one of the representatives of the Underwriters, are
stockholders of the Company, and Steven P. Novak, a Director and a stockholder
of the Company, is a Managing Director of C.E. Unterberg, Towbin. After this
offering, affiliates of C.E. Unterberg, Towbin will hold in the aggregate more
than 10.0% of the outstanding capital stock of the Company, which could be
deemed to constitute a conflict of interest in accordance with Rule 2720 ("Rule
2720") of the National Association of Security Dealers, Inc. (the "NASD"). Rule
2720 provides that, among other things, when an NASD member firm participates in
the offering of equity securities of a company with who such member has a
"conflict of interest" (as defined in Rule 2720), the initial public offering
price can be no higher than that recommended by a "qualified independent
underwriter" (as defined in Rule 2720) (a "QIU"). Deutsche Morgan Grenfell
("DMG") plans to serve as the QIU in connection with this offering and will
recommend a price in compliance with the requirements of Rule 2720. DMG, in its
capacity as QIU, will receive no additional compensation as such in connection
with this offering.
19
<PAGE> 21
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."
In May 1998, the Company entered into a credit agreement (the "Credit
Agreement") with Deutsche Bank AG ("Deutsche Bank"). Deutsche Bank is the parent
corporation of Deutsche Morgan Grenfell Inc., one of the representatives of the
Underwriters. The Credit Agreement contains covenants that restrict and limit
the payment of dividends by the Company such that dividends may be issued solely
in the Common Stock of the Company. Pursuant to these restrictions the Company
is unable to issue cash dividends during the term of the Credit Agreement.
Although the Company intends to convert the amounts outstanding under the Credit
Agreement into a new credit facility, the Company expects that any new credit
facility will contain similar restrictive covenants; provided, however, there
can be no assurances that any such conversion will be on similar terms or
subject to similar restrictive covenants. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
20
<PAGE> 22
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 an assumed 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 16,023 54,473
Accumulated deficit............................... (13,490) (13,490) (13,490)
-------- -------- --------
Total stockholders' equity (net capital
deficiency).................................. (13,443) 2,533 40,983
-------- -------- --------
Total capitalization...................... $ 1,847 $ 2,566 $ 41,013
======== ======== ========
</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)
3,729,055 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 $2.43
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) 1,180,945 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.
21
<PAGE> 23
DILUTION
The proforma 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. Proforma net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the total proforma number of shares of Common
Stock outstanding, after giving effect to the automatic conversion of all
outstanding 8,176,404 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 an assumed 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 an assumed price of $7.44 per share,
the proforma 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>
Estimated initial public offering price per share........... $8.00
Proforma net tangible book value at March 31, 1998........ $0.06
Increase attributable to AOL.............................. .09
Increase attributable to new investors.................... 1.35
-----
Adjusted proforma 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 proforma 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 an assumed 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
---------- ------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)(2)... 21,288,962 80.2% $15,741 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% $57,741 100.0%
========== ===== ======= =====
</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) Excludes: (i) 3,729,055 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
$2.43 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) 1,180,945 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.
(3) Reflects 268,817 shares of Common Stock to be issued to AOL immediately
prior to the consummation of this offering at an assumed price of $7.44 per
share.
22
<PAGE> 24
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)
====== ====== ======= ======= ====== =======
Basic and diluted net loss per share from
continuing operations........................... $(0.03) $(0.07) $ (0.10) $ (0.21) $(0.02) $ (0.25)
Basic and diluted net loss per share from
discontinued operations......................... -- -- (0.08) (0.40) (0.07) --
------ ------ ------- ------- ------ -------
Basic and diluted net loss per share.............. $(0.03) $(0.07) $ (0.18) $ (0.61) $(0.09) $ (0.25)
====== ====== ======= ======= ====== =======
Share amounts used in the computation of net loss
per share....................................... 9,000 9,000 9,000 9,000 9,000 9,080
====== ====== ======= ======= ====== =======
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 proforma 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>
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and the other
information included elsewhere in this Prospectus. Certain statements in this
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" are forward looking statements. The forward looking statements
contained herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements. For a more detailed discussion of
these and other business risks, see "Risk Factors."
OVERVIEW
software.net is a leading online reseller of Software to the consumer,
small business and large enterprise markets. The Company operates its own Web
site and delivers Software to its customers over the Internet through electronic
software delivery ("ESD") and through physical delivery in shrink-wrap packages.
The Company launched its Web site in November 1994 and, in addition to selling
Software, the Company initially charged Software publishers a fee to list their
products on the Company's Web site. The Company ceased this practice in 1996. In
July of 1996, the Company expanded its business by entering into its first
contract with a U.S. government agency for the sale of Software products and
provision of related services. In July 1997, the Company expanded its third
party sales channel by entering into an agreement with Netscape pursuant to
which the Company created, manages and maintains the Netscape Software Depot Web
site.
In March 1998, the Company further expanded its third party sales channel
by entering into strategic relationships with AOL and Excite. The AOL agreement
(the "AOL Agreement") establishes the Company as the exclusive and
semi-exclusive reseller of Software on certain screens on the AOL 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. There can be no assurance that the Company
will achieve sufficient online traffic, or generate sufficient revenues 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. 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,
in December 1997, 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
24
<PAGE> 26
during 1996 and 1997 reflect a loss from discontinued operations in the amount
of $736,000 and $3.6 million, respectively. Under the terms of an Internet
commerce services agreement, the Company uses services supplied by CyberSource
on a non-exclusive basis for credit card processing, fraud screening, export
control, sales tax computation, electronic licensing, hosting of electronic
downloads and fulfillment notification. This Agreement expires on December 31,
1998 and automatically renews for an additional one year term, unless otherwise
terminated by either party. Pursuant to the terms of the services agreement, the
Company has agreed to indemnify CyberSource for an amount not to exceed $100,000
against any claim based upon an allegation that the Software distributed by the
Company infringes upon any third party's intellectual property rights.
CyberSource has agreed to indemnify the Company for an amount not to exceed
$100,000 against any claim based upon an allegation that the services, or the
use of any software provided by CyberSource in connection with the services,
provided by CyberSource to the Company infringes any third party's intellectual
property rights. 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."
Since inception the Company has experienced increasing net losses on an
annual basis. These annual net losses have increased from $511,000 in 1995 to
$5.4 million in 1997. The Company expects these annual net losses to continue to
increase as the Company expands its sales and marketing activities. For the
foreseeable future, the Company intends to expend significant financial and
management resources on brand development, marketing and promotion, site content
development, strategic relationships (such as those with AOL, Netscape and
Excite), 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 as marketing and
promotion costs increase, including new and increased expenses on greater staff
amounts and expenses on mass media advertising. 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 at a significant level primarily due to the
marketing agreements, and these levels are based on its operating plans and
estimates of future revenues which depend on anticipated sales resulting from
the marketing agreements and increased advertising and government sales. Sales
and operating results generally depend on the volume and timing of orders
received, which are difficult to forecast. Further, as noted above, the Company
expects these costs to increase above the fixed minimum. 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.
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.
25
<PAGE> 27
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. Although all such
contracts presently remain in full force and effect, such contracts are
terminable without cause or prior notice. Because the government contracts may
be terminated without cause or prior notice, there can be no assurance that the
Company will generate any 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>
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
26
<PAGE> 28
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 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.
27
<PAGE> 29
Income Taxes. The Company has recorded a net loss for the quarters ended
March 31, 1997 and March 31, 1998. As a result, no provision for income taxes
has been recorded in either of these quarters.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1996 AND 1997
Net Revenues. Net revenues increased from $5.9 million in 1996 to $16.8
million in 1997, primarily as a result of increased sales to consumer and
corporate customers and new U.S. government contracts.
Cost of Revenues. Cost of revenues increased from $5.1 million in 1996 to
$14.9 million in 1997, due to the execution of additional U.S. government
contracts and increased product sales to consumer and corporate customers.
Gross Margin. Gross margin decreased from 12.3% in 1996 to 11.5% in 1997.
This decrease was due primarily to a shift in the Company's revenue mix,
resulting from an increased level of lower margin U.S. government contract
revenues as a percentage of total net revenues. The decrease in overall gross
margin was partially offset by an increase in higher margin advertising and
promotional revenues received from Software publishers.
Research and Development Expenses. Research and development expenses
increased from $431,000 in 1996 to $1.1 million in 1997. Research and
development expenses as a percentage of net revenues decreased from 7.3% in 1996
to 6.3% in 1997. The absolute dollar increase in research and development
expenses from 1996 to 1997 was primarily attributable to an increase in
personnel-related costs. The decrease in research and development expenses as a
percentage of net revenues was primarily attributable to the substantial
increase in net revenues in 1997.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$704,000 in 1996 to $1.7 million in 1997. Sales and marketing expenses as a
percentage of net revenues were 12.0% in 1996 and 10.1% in 1997. The absolute
dollar increase in sales and marketing expenses from 1996 to 1997 primarily was
attributable to an increase in personnel and advertising expenditures, as well
as costs associated with a strategic marketing alliance. The decrease in sales
and marketing expenses as a percentage of net revenues primarily was
attributable to the substantial increase in net revenues in 1997.
General and Administrative Expenses. General and administrative expenses
increased from $450,000 in 1996 to $1.1 million in 1997. General and
administrative expenses as a percentage of net revenues were 7.7% in 1996 and
6.5% in 1997. The increase in general and administrative spending on an absolute
dollar basis in 1997 primarily was due to increased salaries and facilities-
related expenses associated with the hiring of additional personnel, increased
legal expenses associated with the settlement of certain litigation, and
increased bad debt reserves associated with the increase in net revenues. The
decrease in general and administrative expenses as a percentage of net revenues
primarily was attributable to the substantial increase in net revenues in 1997.
Interest Income, Net. Interest income, net, increased from $85,000 in 1996
to $167,000 in 1997 due to earnings on higher average cash and cash equivalents
balances in 1997.
Income Taxes. The Company had a net loss for both 1996 and 1997.
Accordingly, no provision for income taxes has been recorded in either of such
years. As of December 31, 1997, the Company 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
28
<PAGE> 30
Preferred Stock financings and this offering, utilization of the net operating
losses and tax credits may be subject to substantial annual limitations due to
the ownership change limitations provided by the Internal Revenue Code of 1986,
as amended and similar state provisions. The annual limitation may result in the
expiration of net operating losses and tax credits before utilization. See Note
10 of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995 AND 1996
Net Revenues. Net revenues increased from $1.0 million in 1995 to $5.9
million in 1996 due primarily to the growth of the Company's consumer and
corporate customer base.
Cost of Revenues. Cost of revenues increased from $623,000 in 1995 to $5.1
million in 1996, primarily reflecting an increase in product sales to consumer
and corporate customers.
Gross Margin. Gross margin decreased from 37.9% in 1995 to 12.3% in 1996.
This decrease was due primarily to a shift in the Company's business model.
During 1995, a number of Software publishers made certain payments to the
Company in exchange for the Company's inclusion of these publishers' products in
its online store. During 1996, the Company moved to its current Software
reseller model, resulting in the substantial reduction of such payments and the
associated decrease in gross margin.
Research and Development Expenses. Research and development expenses
increased from $388,000 in 1995 to $431,000 in 1996. Research and development
expenses as a percentage of net revenues decreased from 38.7% in 1995 to 7.3% in
1996. The absolute dollar increase in research and development expenses from
1995 to 1996 primarily was attributable to an increase in personnel-related
costs. The decrease in research and development expenses as a percentage of net
revenues primarily was attributable to the substantial increase in net revenues
in 1996.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$407,000 in 1995 to $704,000 in 1996. Sales and marketing expenses as a
percentage of net revenues were 40.6% in 1995 and 12.0% in 1996. The absolute
dollar increase in sales and marketing expenses from 1995 to 1996 was primarily
attributable to an increase in personnel-related costs. The decrease in sales
and marketing expenses as a percentage of net revenues was primarily
attributable to the substantial increase in net revenues in 1996.
General and Administrative Expenses. General and administrative expenses
increased from $103,000 in 1995 to $450,000 in 1996. General and administrative
expenses as a percentage of net revenues were 10.2% in 1995 and 7.7% in 1996.
The increase in general and administrative spending on an absolute dollar basis
in 1996 primarily was due to increased salaries and facilities-related expenses
associated with the hiring of additional personnel, increased professional fees,
and increased bad debt reserves associated with the increase in net revenues.
The decrease in general and administrative expenses as a percentage of net
revenues primarily was attributable to the substantial increase in net revenues
in 1996.
Interest Income, Net. Interest income, net, increased from $7,000 in 1995
to $85,000 in 1996 due to earnings on higher average cash and cash equivalents
balances in 1996.
Income Taxes. The Company has recorded a net loss for the years ended
December 31, 1995 and 1996. Accordingly, no provision for income taxes has been
recorded in either of such years.
29
<PAGE> 31
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>
<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. Gross margins
decreased in the third and fourth quarters of 1997 primarily due to an increased
level of lower margin U.S. government contract revenues as a percentage of the
Company's net revenues and a decrease in advertising and
30
<PAGE> 32
promotional revenues as a percentage of the Company's net revenues. Research and
development and general and administrative expenses increased in absolute
dollars in each quarter presented primarily due to personnel-related costs.
Sales and marketing expenses also increased on a quarterly basis in each quarter
presented due to increases in personnel-related costs and significantly
increased in the first quarter of 1998 due to expenditures associated with the
Company's strategic marketing alliances. Sales and marketing expenses and
general and administrative expenses each increased in absolute dollars in the
third quarter of 1997, but declined as a percentage of net revenues due to the
increase in the Company's net revenues during such period.
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company may be unable to
accurately forecast its revenues. The Company's current and future expense
levels are to a large extent fixed and are based on its operating plans and
estimates of future revenues. Sales and operating results generally depend on
the volume and timing of orders received, which are difficult to forecast. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues in relation to the Company's planned expenditures would have an
immediate adverse effect on the Company's business, financial condition and
results of operations. Further, as a strategic response to changes in the
competitive environment, the Company may from time to time make certain pricing,
service or marketing decisions that could have a material adverse effect on its
business, financial condition and results of operations. See "Risk
Factors -- Limited Operating History; History of Net Operating Losses;
Accumulated Deficit," "-- Unpredictability of Future Operating Results" and
"Business -- Competition."
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside of the Company's control. Factors that may adversely affect the
Company's quarterly operating results include (i) the Company's ability to
retain existing customers, attract new customers and maintain customer
satisfaction; (ii) the announcement or introduction of new sites, services and
products by the Company and its competitors: (iii) price competition; (iv) the
level of use of the Internet and online services and increasing consumer
acceptance of the Internet and other online services for the purchase of
consumer products such as those offered by the Company; (v) the Company's
ability to upgrade and develop its systems and infrastructure and attract new
personnel in a timely and effective manner; (vi) the level of traffic on the
Company's Web site; (vii) the termination of any strategic marketing alliances
such as those with AOL, Excite or Netscape pursuant to which the Company has
exposure to traffic on third party Web sites, or the termination of contracts
with major purchasers, particularly U.S. government agencies; (viii) technical
difficulties, system downtime or Internet brownouts; (ix) the failure of
Internet bandwidth to increase significantly over time and/or an increase in the
cost to consumers of exploiting Internet bandwidth; (x) the amount and timing of
operating costs and capital expenditures relating to expansion of the Company's
business, operations and infrastructure; (xi) the number of popular Software
titles introduced during the period; (xii) certain government regulations; and
(xiii) general economic conditions and economic conditions specific to the
Internet, online commerce and the Software industry. The Company expects that it
may experience seasonality in its business, reflecting a combination of seasonal
fluctuations in Internet usage and traditional retail, governmental and
corporate entity seasonal spending patterns. See "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
31
<PAGE> 33
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 accounts receivable and costs of deferred revenue, partially offset
by increases in accounts payable, deferred revenue, and the loss from
discontinued operations. Accounts receivable and accounts payable increased as a
result of significantly increased sales and purchasing activity during the
fourth quarter of 1997. In addition, cost of deferred revenue and deferred
revenue increased significantly due to new U.S. government contracts entered
into in 1997. 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. The decrease to both
deferred revenue and cost of deferred revenue was due to the recognition of
revenue and cost of revenue associated with U.S. government contracts. Net cash
used in investing activities of $4.9 million for the year ended December 31,
1997 was primarily attributable to cash used for discontinued operations. Net
cash used in investing activities for the first quarter of 1998 of $165,000 were
attributable to purchases of property and equipment.
Net cash provided by financing activities of $4.1 million and $2.6 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 entered into a credit agreement (the "Credit Agreement") with
Deutsche Bank AG ("Deutsche Bank") in May 1998. Deutsche Bank is the parent
corporation of Deutsche Morgan Grenfell Inc., one of the representatives of the
Underwriters. Pursuant to the Credit Agreement, in May 1998, Deutsche Bank
issued a standby letter of credit to the Company in the amount of approximately
$600,000 (the "Credit Facility") and loaned the Company approximately an
additional $4,200,000 (the "Loan"). To date the Company has used the funds made
available under these arrangements to: (i) make a down-payment on an office
lease entered into by the Company in May 1998; (ii) meet rental obligations
under that lease; and (iii)
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fulfill working capital needs and general corporate purposes of the Company. The
Loan bears interest at a rate equal to the higher of (i) the daily Federal Funds
Rate plus 0.5% per annum or (ii) Deutsche Bank's daily prime lending rate (the
"Base Rate"), plus 3.0% per annum (approximately 12% at May 31, 1998). Interest
is payable quarterly, in arrears, during the term of the Credit Agreement. The
Company is also required to pay a standby letter of credit fee equal to a
percentage of the face amount of the Credit Facility equal to the Base Rate plus
3.0% less the LIBOR rate for a three-month loan. In conjunction with the Credit
Agreement the Company is required to pay Deutsche Bank (i) an upfront fee of
$120,000 and (ii) a credit line fee equal to 7.50% of the amount by which the
Company's gross revenues during the term of the Credit Agreement exceed certain
agreed upon thresholds, subject to maximum payments of $337,500 in the
aggregate. The Company has $3.1 million in unused funds available under these
arrangements. All amounts borrowed under the Credit Agreement are due on
November 16, 1998. The Company is presently in full compliance with the terms of
the Credit Agreement and does not anticipate a change to such status with
respect to such terms. In connection with the Credit Agreement, Deutsche Bank
has received a first priority lien on all of the Company's assets, including
intellectual property. Pursuant to the terms of the Credit Agreement, the
Company is subject to certain financial and non-financial covenants; including
limitations on payments of dividends, additional borrowings, acquisitions and
disposition of assets and maintenance of maximum operating cash flow
deficiencies and minimum quick ratios. The Company intends, upon the expiration
of the Credit Agreement, to convert the amounts outstanding under the Credit
Facility and the Loan into a new credit facility in approximately the same or a
greater principal amount; however, there can be no assurances that the amounts
outstanding under the Credit Facility and the Loan will be converted into a new
credit facility on commercially acceptable terms, if at all. See "Underwriting."
The Company believes that the net proceeds from this offering, together
with its current cash and cash equivalents, and the funds borrowed under the
Credit Agreement in May 1998, 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 additional credit facilities,
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."
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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-wrap 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
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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 from software
retailers, dealers and third-party mail order cataloguers in the United States
were estimated to be approximately $14 billion in 1997 and are expected to grow
to approximately $24 billion in 2001, representing a compound annual growth rate
of approximately 14.7%. 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 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. For example, a ten-megabyte, such as Norton
Utilities for Windows NT, takes approximately one-hour to download via 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 and the speed by
which such products can be 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
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distributor supplied the Company with Software that accounted for a substantial
portion of the Company's total Software sales in 1997 and in the first quarter
of 1998. The Company has developed customized information systems and automated
ordering processes to enable it to offer an extensive selection 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 any 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
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Software sales to AOL members in excess of certain thresholds. The Company has
the right to sell advertising on its promotional screens in the AOL Online Area,
subject to the Company's obligation to pay a percentage of certain advertising
revenues above certain threshold amounts to AOL. 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 underwriting
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 underwriting 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 intranets, extranets 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
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likely have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, neither the AOL, Excite nor
Netscape agreements provides the Company with automatic renewal rights upon
expiration of their respective terms. There can be no assurance that such
agreements will be renewed on commercially acceptable terms, or at all.
Furthermore, the 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.
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Associates Program.
The Company recently established an Associates Program for the purpose of
extending the Company's market presence. This program enables "Associate" Web
sites to offer Software to their audiences for fulfillment by software.net. The
Associate embeds a hyperlink to software.net's site, together with Software
recommended for that Associate's targeted customer base. The Associate's
customers are automatically connected to the software.net store and may place
their orders. The Associate is able to offer enhanced services and
recommendations, avoiding the expenses associated with ordering and fulfillment
and receives a commission for certain orders.
Traditional Advertising
To date, the Company has engaged in limited advertising utilizing
traditional media. However, the Company believes there is an opportunity to
promote its online stores through a proactive advertising program which will
target customers through national media outlets such as magazines, newspapers,
and radio and television broadcasts.
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."
The Company maintains a structured return policy. Customers have the
ability to return product for replacement or credit upon authorization from the
Company. Shrink-wrapped product may be returned with a return material
authorization ("RMA") number. A corresponding credit is issued to the customer
when the Company receives a credit from the appropriate distributor indicating
receipt of the returned product. Electronically distributed product will be
credited only when a signed "letter of destruction" is received from the
customer via facsimile. Historically, the Company has not incurred outstanding
RMA exposure necessitating reserves. The Company's historical credit card
chargebacks occur at a rate representing less than 1% of total revenue.
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
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scaleable, flexible and seamless online reselling in a secure and easy to use
manner. By using a combination of proprietary solutions and commercially
available licensed technologies, the Company has deployed systems for online
content dissemination, online transaction processing, customer service, market
analysis and electronic data interchange. The Company has integrated these
proprietary and commercially available systems into a unified Software sales and
reporting system. Research and development expenses were $388,000, $431,000,
$1.1 million and $602,000 in 1995, 1996, 1997 and the first quarter of 1998,
respectively.
Scaleability and Flexibility. The architecture of the Company's hardware
and software is built upon a distributed transaction-processing model which
allows the processing load to be distributed among multiple parallel servers.
This architecture allows the Company to scale by either adding new servers or
increasing the capacity of existing servers. The Company's hardware and software
configuration is designed to scale to support growth while maintaining user
performance and minimizing the cost per transaction. In the rapidly changing
Internet environment, the ability to update this system in order to stay current
with new technologies is important. The system's template technology and modular
database design allow the addition or replacement of software components, page
layout templates and search and retrieval engines with minimal effort and
disruption. This architecture also enables low-cost, rapid deployment of
additional, co-branded Web sites that integrate with the software.net store.
Seamlessness. The Company's multiple hardware and software systems
integrate seamlessly to manage real time transactions with limited human
intervention. Orders for downloadable Software are automatically processed to
completion. Orders for products that must be shipped are automatically routed
electronically to one of the Company's distributors. The transaction is
completed and the customer's credit card charged after shipment of the product
has been confirmed. Orders 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
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ensure that the current release of Software is available to staff with minimal
management intervention. By providing a dedicated server with Enterprise
Download Manager to manage and receive the download, typical problems of failed
download and lost connections can be overcome. By using a local cache, the
Enterprise Download Manager satisfies the majority of requests for Software
updates internally with a resultant significant reduction in network traffic.
This technology is used to deliver products electronically together with
marketing and promotional information. Enterprise Download Manager tracks the
transmission of Software via ESD. If the transmission is interrupted for any
reason, Enterprise Download Manager re-initiates the transmission and completes
the interrupted download without the need to restart the entire download. See
"Business -- Relationship with CyberSource Corporation" and "Certain
Transactions."
Back Office Processing. The real time nature of fulfilling downloaded
Software orders adds significant complexity to the design of the Company's back
office system. Typical transaction processing systems assume that a physical
process must take place to deliver the product. The time required for physical
delivery obviates the need to process orders in real time (as well as the
customer's expectation of real time processing). In a Web-based sale of Software
to be delivered by ESD, the customer expects to be able to start downloading
within seconds of confirming the transaction. This need for almost instant
initiation of delivery impacts the design and operation of the Company's entire
back office system. Every element of a sale must be fully automated, as the time
needed for human intervention is not available.
The Company believes that its sophisticated back office transaction
processing system, which successfully processes, manages and fulfills Software
orders for ESD with limited human intervention in real time, is a significant
competitive advantage. The system incorporates commercially available database
components purchased from leading vendors, proprietary software products
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,
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proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards.
Substantially all of the Company's hardware associated with its development
and management system are located at a single facility leased by the Company in
San Jose, California. The Company contracts with a third party for facilities to
host the Company's production, computer and communications hardware systems and
for mission critical Internet connections, and these systems are located at a
single location in Santa Clara, California. The Company's systems and operations
are vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. The
Company currently does not have a formal disaster recovery plan and does not
carry sufficient business interruption insurance to compensate it for losses
that may occur. The occurrence of any of the foregoing could have a material
adverse effect on the Company's business financial conditions and results of
operations. See "Risk Factors -- Risks of System Failure, Single Site."
SECURITY
Customer Reassurance. A critical issue for the success of online retailing
is maintaining the integrity of information, particularly the security of
information such as credit card numbers. The Company believes that its existing
security systems are at least as secure as those used for traditional
transactions (i.e., in-store or mail order purchases) and that it has a
comprehensive security strategy. The Company's system automatically monitors
each purchase and confirms each order by email to the customer within minutes
after the order is placed and advises customers by email shortly after physical
orders are shipped.
Fault Tolerance and Scaleable Internet Access. The Company's systems are
designed for automatic transfer to "hot" spare systems in the event of failure
and are equipped with fully automated reporting tools. These tools provide
automated trouble notification and detailed event 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.
Year 2000 Concerns. 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
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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."
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 entered into in April 1998, and amended in May 1998, between the
Company and CyberSource (the "Cross License Agreement"), the Company granted to
CyberSource a non-exclusive, worldwide, perpetual, irrevocable royalty-free
license to internally use the Company's Cache Manager technology and to use and
sublicense the Company's customer database for certain limited purposes in
connection with fraud verification and detection. 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 the Company's Cache Manager (either alone or in combination with other
software) for subsequent sublicense, for use by enterprises and government
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 intellectual property 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 December 31, 1998 and automatically renews for an
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additional one year term, unless otherwise terminated by either party. Pursuant
to the terms of the Services Agreement, the Company has agreed to indemnify
CyberSource for an amount not to exceed $100,000 against any claim based upon an
allegation that the Software distributed by the Company infringes upon any third
party's intellectual property rights. CyberSource has agreed to indemnify the
Company for an amount not to exceed $100,000 against any claim based upon an
allegation that the services, or the use of any software provided by CyberSource
in connection with the services, provided by CyberSource to the Company
infringes any third party's intellectual property rights.
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 to other customers, including competitors of
the Company, the same services its provides to 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 prohibits CyberSource from competing
directly with the Company or acquiring or being acquired by a third party which
competes with the Company, any 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% per annum
compounded semi-annually. The terms of this loan arrangement were not 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 Software reselling industry
is intensely competitive. The Company currently competes primarily with
traditional Software resellers, other online Software resellers and other
vendors. In the online market, the Company competes with online Software sellers
and vendors that maintain 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,
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
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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 expansion of
existing technologies, such as price comparison programs that select specific
titles from a variety of Web sites, may direct customers to online Software
resellers that compete with the Company and may increase competitive pressures
on the Company. Increased competition may result in reduced operating margins,
as well as a loss of both market share and brand recognition. Further, as a
strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on its business,
financial condition and results of operations. In addition, companies that
control access to Internet transactions through network access or Web browsers
could promote the Company's competitors or charge the Company a substantial fee
for inclusion in their product or service offerings. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, and any inability to do so could have a material adverse effect on
the Company's business, operating results and financial condition. See "Risk
Factors -- Competition."
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. The Company presently is
not subject to any material legal proceedings.
INTELLECTUAL PROPERTY
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success, and
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks and service marks in the U.S., and has applied
for the registration of certain of its trademarks and service marks. The Company
applied for Federal registration of the service mark "SOFTWARE.NET" on August
24, 1994, and there can be no assurances that a Federal registration of the
service mark will issue in respect of SOFTWARE.NET. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which the Company's products and services are made available online.
The Company has licensed in the past, and expects that it may license in the
future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. While the Company attempts to ensure that the
quality of its brand is maintained by such licensees, there can be no assurance
that such licensees will not take actions that might materially adversely affect
the value of the Company's proprietary rights or reputation, which could have a
material adverse effect on the
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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 June 1, 1998, the Company employed 75 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
At present, the Company's principal administrative, engineering, marketing
and customer service facilities total approximately 13,500 square feet and are
located in San Jose, California under leases that expire in September 2002 and
August 1998. As soon as is practicable, the Company intends to sublet this
current facility to a third party for the remainder of the term of such lease.
There can be no assurance that the Company will be able to sublet this facility
on commercially acceptable terms or at all. The Company entered into a sublease
in May 1998 for approximately 75,197 square feet of office space located in
Sunnyvale, California (the "Sublease"). The Company intends that this location
will serve as the Company's principal administrative, engineering, marketing and
customer service facility. The Sublease term will commence as of July 1, 1998,
and will end sixty-two (62) months thereafter, unless sooner terminated. Under
the terms of the Sublease, the Company made a security deposit payment of
$297,000 cash, and issued an irrevocable letter of credit for $595,000 prior to
occupancy and commencement of the Sublease term. The Company is obligated to
make monthly payments of approximately $153,000 over the term of the Sublease.
The Company does not have an option to renew or extend the term of this
Sublease.
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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 June 1, 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, Finance & Administration
and Chief Financial Officer
Alan C. DeClerck......................... 43 Vice President, Sales
Brian J. Sroub........................... 39 Vice President, Marketing
Bert Kolde(1)(2)......................... 44 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 April 1995
to January 1997, 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 1990 to April 1995, 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> 52
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, Finance and
Administration and Chief Financial Officer in April 1998. From 1995 to February
1998, 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,
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, 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,
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
November 1993 to May 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.
BERT KOLDE, a director of the Company since July 1996, serves as a
director, Vice President, Treasurer and Secretary of Vulcan Ventures Inc., Vice
Chairman of the Portland Trail Blazers, Seattle Seahawks, Oregon Arena
Corporation and First and Goal Corporation, and as President of the Paul G.
Allen Virtual Education Foundation and the Paul G. Allen Forest Protection
Foundation. Mr. Kolde co-founded Asymetrix Learning Systems, Inc. in 1985, and
serves as Chairman of its Board of Directors. Mr. Kolde also serves as a
director of MetaCreations Corporation, Precision Systems, Inc. and CyberSource
Corporation. Mr. Kolde received his B.A. in Business Administration from
Washington State University and his M.B.A. from the University of Washington.
LINDA FAYNE LEVINSON, a director of the Company since September 1997, has
served as a principal of Global Retail Partners, L.P. since April 1997. From
1994 to 1997, she served as
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<PAGE> 53
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 recommends and establishes salaries, incentives
and other forms of compensation for officers and other employees of the Company
and administers the incentive compensation and benefit plans of the Company.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their
services as directors or members of committees of the Board of Directors, but
are reimbursed for their reasonable expenses incurred in attending meetings of
the Board of Directors. In April 1995, the Company
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<PAGE> 54
granted to 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. In March 1998, the Company granted Mr.
Breier an option to purchase 1,000,000 shares of Common Stock at an exercise
price of $2.60 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 options to purchase 10,000
shares of Common Stock annually on January 1 of each year; following April 4,
1998, the Company's 1998 Stock Option Plan provides for identical 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 may indemnify its directors and officers, employees and
agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross negligence
on the part of indemnified parties.
The Company has entered into agreements to indemnify its directors and
executive officers. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by such persons in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee (effective upon the
consummation of this offering) is an officer or employee of the Company with the
exception of Richard Scudellari who is the Secretary of the Company. Five of the
six members of the Company's Board of Directors also serve as members of the
Board of Directors of CyberSource. Vulcan Ventures Inc., a holder of Series B,
C, and D Preferred Stock, maintains a limited partner interest in Global Retail
Partners L.P., a holder of Series C and D Preferred Stock. Other than this
relationship and the CyberSource board memberships, no interlocking relationship
exists between the Company's
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<PAGE> 55
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 approximately $70,000
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.
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<PAGE> 56
STOCK OPTION PLANS
The Company's Board of Directors and stockholders adopted the 1995 Stock
Option Plan (the "1995 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, in April 1998 the Company's Board of Directors and stockholders
adopted the 1998 Stock Option Plan (the "1998 Plan" and collectively, with the
1995 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 each Plan 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 promote and 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 June 1, 1998, options to purchase 3,710,513 shares of Common Stock
were outstanding under the Plans with exercise prices ranging from $0.004 to
$7.00 per share. As of May 1, 1998, options to purchase 6,445 shares were
available for grant and options for 108,542 shares had been exercised under the
1995 Plan. As of June 1, under the 1998 Plan, options to purchase 1,174,500
shares were available for grant and no shares had been exercised. As of the date
of this Prospectus, options to purchase approximately 290,903 shares of Common
Stock were held by employees of CyberSource. See "Certain Transactions."
The Plans may be administered by the Company's Board of Directors or a
committee appointed by the Board (the "Administrator").
1998 Plan. The Administrator has the authority to select individuals who
are to receive options under the 1998 Plan and to specify the terms and
conditions of options granted (including whether or not such options are
incentive or nonstatutory stock options), the vesting provisions, the option
term and the exercise price. The 1998 Plan provides for the granting to
employees, including officers and employee directors of the Company, of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees and
consultants (including nonemployee directors) of nonstatutory stock options. In
addition, as described below, the 1998 Plan provides for automatic annual grants
of nonstatutory stock options to nonemployee directors.
The exercise price of incentive stock options granted under the 1998 Plan
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, outstanding capital 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 nonstatutory stock options shall be not less than
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 Administrator. No individual may be granted
options under the 1998 Plan in any one fiscal year which in the aggregate would
permit him or her to purchase more than 1,000,000 shares of Common Stock, except
that a newly-hired optionee may receive a one-time grant of an option to
purchase up to an additional 500,000 shares of Common Stock.
Generally, options granted under the 1998 Plan (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 Administrator, an option
granted under the 1998 Plan 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, one year after termination for death
or total and permanent disability and six months in the case of other types of
disability.
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<PAGE> 57
Options granted under the 1998 Plan 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.
In the event of (i) the merger or consolidation as a result of which the
holders of voting securities of the Company prior to the transaction hold shares
representing less than 51% of the voting securities of the Company after giving
effect to the transaction (other than a merger or consolidation with a
wholly-owned subsidiary or where there is no substantial change in the
stockholders of the Company and the options granted under the 1998 Plan are
assumed by the successor corporation), or (ii) the sale of all or substantially
all of the Company's assets, options outstanding under the 1998 Plan will be
assumed or substituted by the successor corporation or the successor corporation
shall provide substantially similar consideration to optionees as is provided to
the stockholders. In the event the successor corporation refuses to assume or
substitute outstanding options as provided above, or in the event of a
dissolution or liquidation of the Company, outstanding options shall expire on a
date specified in a written notice sent by the Compensation Committee to all
optionees (which date shall be at least 20 days after the date of such notice).
The 1998 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 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 Plan.
1995 Plan. The terms of options which may be issued under the 1995 Plan are
generally the same as those which may be issued under the 1998 Plan, except that
the 1995 Plan imposes a maximum number of shares which may be subject to options
issued to any individual of 1,000,000 shares. In addition, under the 1995 Plan,
in the event of a merger or consolidation of the Company in which the Company is
not a surviving corporation or a sale of all or substantially all of the
Company's assets, options outstanding under the 1995 Plan will be assumed or
substituted by the successor corporation or, in the event the successor
corporation refuses to assume or substitute the options or in the event of
dissolution or liquidation of the Company, outstanding options shall expire on a
date specified in a written notice sent by the Compensation Committee to all
optionees (which date shall be at least 20 days after the date of such notice).
Like the 1998 Plan, the 1995 Plan also provided for automatic annual grants
of nonstatutory stock options to nonemployee directors. As of the time the 1998
Plan was adopted, such grants ceased and were replaced by the automatic grants
provided for in the 1998 Plan.
Stock options previously granted under the 1995 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 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.
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<PAGE> 58
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 1,506,262 shares of Common
Stock upon consummation of this offering and such Preferred Stock then will be
cancelled and extinguished. 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 (the "Series B Director"). Bert 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 and such Preferred Stock then will
be cancelled and extinguished. 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 December 1997, the Company issued shares of Series C
Preferred Stock (the "Series C Financing") in private placements to certain
investors at a purchase price of $2.04 per share ($1.70 as adjusted for the
Spin-off), including issuances to the following entities in the number of shares
specified thereafter: (i) Global Retail Partners and its affiliates (1,470,588)
(each an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and collectively "GRP"); (ii) UT Capital Partners International, LDC
(formerly UH Capital Partners International, LDC) (59,914); UT Technology
Partners, LDC (formerly UH Technology Partners, LDC) (185,184); Unterberg Harris
Private Equity Partners, LP (201,961); Unterberg Harris Private Equity Partners,
CV (43,137) (collectively, the "Unterberg Affiliates"); and (iii) Vulcan
(716,666). In connection with the Series C Financing, the holders of Series C
Preferred Stock were given the right to designate one director of the Company
(the "Series C Director"). Linda Fayne Levinson, the Series C Director, is a
principal of Global Retail Partners, L.P., an affiliate of DLJ. Messrs. Novak
and Kolde and Ms. Levinson disclaim beneficial ownership of the shares of Series
C Preferred Stock issued to the Unterberg Affiliates, Vulcan and GRP,
respectively, except for any proportional interest held therein, if any. All of
the outstanding shares of Series C Preferred Stock will convert into an
aggregate of 3,000,000 shares of Common Stock upon consummation of this offering
and such Preferred Stock then will be cancelled and extinguished. The holders of
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<PAGE> 59
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 and such Preferred Stock then will be cancelled
and extinguished. 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 assumed 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 assumed 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."
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
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<PAGE> 60
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, the Company's Executive Vice President and
Chief Technology Officer, 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-qualified stock 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.
Under the terms of an oral agreement between the Company and William S.
McKiernan, the Chairman of the Company's Board of Directors, the Company repaid,
in two installments in December 1997 and January 1998, an aggregate of $105,000
for unpaid salary that had been accrued by the Company on Mr. McKiernan's behalf
for services provided by Mr. McKiernan to the Company from the date of the
Company's inception through December 1997.
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
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<PAGE> 61
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 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, Finance &
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, 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, 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, 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 to provide
Mr. Lussier with six months advance notice of termination, if such termination
occurs on or before April 27, 1999.
For additional information regarding options granted to the Company's
directors, see "Management -- Director Compensation."
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, capital stock of CyberSource was issued 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 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, respectively, at the time of the Spin-off. 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.
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<PAGE> 62
In connection with such transfer, the Company and CyberSource entered into
an Inter-Company Cross-License Agreement (the "Cross License Agreement") in
April 1998, which was amended in May 1998, 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 in
connection with fraud detection and verification. 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 the Company's Cache Manager technology (either alone or in combination with
other software) for subsequent sublicense, for 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 intellectual
property 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 December 31, 1998 and automatically renews for an
additional one year term, unless otherwise terminated by either party. Pursuant
to the terms of the Services Agreement, the Company has agreed to indemnify
CyberSource for an amount not to exceed $100,000 against any claim based upon an
allegation that the Software distributed by the Company infringes upon any third
party's intellectual property rights. CyberSource has agreed to indemnify the
Company for an amount not to exceed $100,000 against any claim based upon an
allegation that the services, or the use of any software provided by CyberSource
in connection with the services, provided by CyberSource to the Company
infringes any third party's intellectual property rights. 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. Interest accrues on the loan to Mr. McKiernan at
the rate of six and two hundredths percent (6.02%), compounded annually, and
shall be payable only at such time the principal is due and payable.
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 are not the result of arm's
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."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of June 1, 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 42.2% 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
Bert 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 63.1
</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) 21,307,504
shares outstanding as of June 1, 1998; (ii) 26,576,321 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 June 1, 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 June 1, 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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<PAGE> 64
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 Bert 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 I, L.P.); 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 June 1, 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 Bert
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 June 1, 1998 held by all directors and executive
officers of the Company.
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<PAGE> 65
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, $0.001 par value per share, of
which 6,823,596 shall be undesignated.
COMMON STOCK
As of June 1, 1998, there were 9,108,542 shares of Common Stock outstanding
held of record by 15 stockholders. There will be 26,576,321 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 and the sale of Common Stock to AOL
described below. 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 of the 8,176,404 outstanding shares
of Preferred Stock will be converted into 12,198,962 shares of Common Stock and
such Preferred Stock will be automatically retired in accordance with the
Company's Amended and Restated Certificate of Incorporation. 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 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 assumed 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
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<PAGE> 66
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 assumed offering price of $8.00 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 for 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
65
<PAGE> 67
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.
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.
66
<PAGE> 68
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
26,576,321 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.
The remaining 21,576,321 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 4,687,202 of the Restricted Shares will be
eligible for sale without restriction under Rule 144(k) and 15,448,114 of the
Restricted Shares will be eligible for sale subject to compliance with the
volume and other restrictions of Rule 144. The remaining 1,441,205 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
67
<PAGE> 69
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.
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."
68
<PAGE> 70
UNDERWRITING
The Underwriters named below, for whom Deutsche Morgan Grenfell Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated 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.
69
<PAGE> 71
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.
The Company entered into a credit agreement (the "Credit Agreement") with
Deutsche Bank AG ("Deutsche Bank") in May 1998. Deutsche Bank is the parent
corporation of DMG, one of the Representatives. Pursuant to the Credit
Agreement, in May 1998, Deutsche Bank issued a standby letter of credit for the
benefit of the Company in the amount of approximately $600,000 (the "Credit
Facility") and loaned the Company approximately an additional $4,200,000 (the
"Loan"). The Loan bears interest at a rate equal to the higher of (i) the daily
Federal Funds Rate plus 0.5% per annum or (ii) Deutsche Bank's daily prime
lending rate (the "Base Rate"), plus 3.0%. Interest is payable quarterly, in
arrears, during the term of the Credit Agreement. The Company is also required
to pay a standby letter of credit fee equal to a percentage of the face amount
of the Credit Facility equal to the Base Rate plus 3.0% less the LIBOR rate for
a three-month loan. In conjunction with the Credit Agreement the Company is
required to pay Deutsche Bank (i) an upfront fee of $120,000, and (ii) a credit
line fee equal to 7.50% of the amount by which the Company's gross revenues
during the term of the Credit Agreement exceed certain agreed upon thresholds,
subject to maximum payments of $337,500 in the aggregate. All amounts borrowed
under the Credit Agreement are due on November 16, 1998. In connection with the
Credit Agreement, Deutsche Bank has received a first priority lien on all of the
Company's assets, including intellectual property. Pursuant to the terms of the
Credit Agreement, the Company is subject to certain financial and non-
70
<PAGE> 72
financial covenants. The Company intends, upon expiration of the Credit
Agreement, to convert the amounts outstanding under the Credit Facility and the
Loan into a new credit facility in approximately the same or a greater principal
amount; however, there can be no assurances that the amounts outstanding under
the Credit Facility and the Loan will be able to be converted into a new credit
facility upon commercially acceptable terms, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."
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."
This offering is being conducted in accordance with Rule 2720 ("Rule 2720")
of the National Association of Security Dealers, Inc. (the "NASD") which
provides that, among other things, when an NASD member firm participates in the
offering of equity securities of a company with whom such member has a "conflict
of interest" (as defined in Rule 2720), the initial public offering price can be
no higher than that recommended by a "qualified independent underwriter" (as
defined in Rule 2720) (a "QIU"). Certain underwriters in this offering may be
deemed to have such a conflict of interest with the Company due to the fact that
certain entities and individuals affiliated with such underwriters own shares of
the Company's Common Stock as described above. Deutsche Morgan Grenfell plans to
serve as the QIU in the offering and will recommend a price in compliance with
the requirements of Rule 2720. DMG, in its capacity as QIU, will receive no
additional compensation as such in connection with this offering.
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 "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,
71
<PAGE> 73
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.
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.
72
<PAGE> 74
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> 75
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> 76
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> 77
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)
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..................... $ (812) $(1,616) $(5,460) $ (777) $(2,252)
====== ======= ======= ====== =======
Basic and diluted net loss per
share from continuing
operations....................... $(0.07) $ (0.10) $ (0.21) $(0.02) $ (0.25)
Basic and diluted net loss per
share from discontinued
operations....................... -- (0.08) (0.40) (0.07) --
------ ------- ------- ------ -------
Basic and diluted net loss per
share............................ $(0.07) $ (0.18) $ (0.61) $(0.09) $ (0.25)
====== ======= ======= ====== =======
Weighted average shares of common
stock outstanding used in
computing basic and diluted net
loss per share................... 9,000 9,000 9,000 9,000 9,080
====== ======= ======= ====== =======
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> 78
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> 79
<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
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> 80
<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> 81
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> 82
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 capital stock 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, at which time, collectibility is probable and
the Company has no remaining obligations. 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
relate 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
does not prepare detailed program designs as part of the development process.
Through
F-9
<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)
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> 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)
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.
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.
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
F-11
<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)
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.
Pro forma basic and diluted net loss per share is as follows (in thousands,
except per share amount):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1997 1998
------------------ ---------------
<S> <C> <C>
Net loss.................................................. $(5,359) $ (2,227)
======= ========
Shares used in computing basic and diluted net loss per
share................................................... 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>
Income Taxes
Income taxes are calculated under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS
109, the liability method is used in accounting for income taxes, which includes
the effects of temporary differences between financial and taxable amounts of
assets and liabilities.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company adopted FAS 130 in the three months ended March 31, 1998.
There was no impact to the Company as a result of the adoption of FAS 130, as
there is no 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.
F-12
<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)
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 transfer
of assets and liabilities to its wholly owned subsidiary, CyberSource, and the
distribution of CyberSource capital stock, (the "Spin-off"), in the form of a
dividend to the Company's 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>
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
F-13
<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)
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 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 periods of amortization are March 1998 to August 2001; April 1998 to March
2001; and August 1997 to July 1999 for AOL, Excite and Netscape, respectively.
The Company has expensed $104,000 and $563,000 related to these agreements in
1997 and the quarter ended March 31, 1998, respectively.
The Company also entered into a Common Stock and Warrants Subscription
Agreement which provides for the sale of $2,000,000 of common stock to AOL on or
immediately prior to the closing of an initial public offering ("IPO") at the
price paid by the Underwriters in the IPO. The agreement also provides for the
issuance of a warrant to purchase the Company's stock. This warrant will expire
upon the IPO. This warrant is for the purchase of 369,578 shares of Series D
preferred stock at an exercise price of $2.60 per share vesting in increments of
1/36 per month commencing March 1, 1998, provided, however that the warrant is
not exercisable until after August 31, 1999, if it does not expire prior to this
in connection with an IPO. In the event the Company initiates an IPO and as a
result the Series D warrant expires, the Company is obligated to deliver a new
warrant (the "IPO Warrant"). The Company is only required to issue this warrant,
however, if AOL purchases the $2,000,000 worth of common stock discussed above
at the time of the IPO.
The IPO Warrant will be for the purchase of 1.5 times the number of shares
of common stock purchased by AOL pursuant to the Stock Agreement at an exercise
price per share equal to the IPO 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.
F-14
<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)
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> 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)
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> 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)
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 or after 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> 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)
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 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 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 resulted
in nonstapled options to the employees of each entity and were accounted for and
in compliance with the guidelines in Emerging Issues Task Force Issue No. 90-9
and, therefore, no compensation expense has been recorded.
<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> 92
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> 93
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> 94
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> 95
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.
The Company entered into a credit agreement (the "Credit Agreement") with
Deutsche Bank AG ("Deutsch Bank")in May 1998. Pursuant to the Credit Agreement,
on May 21, 1998, Deutsche Bank issued a standby letter of credit to the Company
in the amount of approximately $600,000 (the "Credit Facility") and loaned the
Company approximately an additional $4,200,000 (the "Loan"). To date the Company
has used the funds made available under these arrangements to: (i) make a
down-payment on a lease entered into by the Company in May of 1998; (ii) meet
rental obligations under that lease; (iii) dispose of liabilities of the Company
accrued in the ordinary course of business; and (iv) support other working
capital needs of the Company. The Loan bears interest at a rate equal to the
higher of (i) the daily Federal Funds Rate plus 0.5% per annum or (ii) Deutsche
Bank daily prime lending rate ("Base Rate"), plus 3.0%, per annum (approximately
12% at May 31, 1998). Interest is payable quarterly, in arrears, during the term
of the Credit Agreement. The Company is also required to pay a standby letter of
credit fee equal to a percentage of the face amount of the Credit Facility equal
to the Base Rate plus 3% less the LIBOR rate for a three-month loan. In
conjunction with the Credit Agreement, the Company is required to pay to
Deutsche Bank (i) an upfront fee of $120,000 and (ii) a credit line fee equal to
7.50% of the amount by which the Company's gross revenues during the term of the
Credit Agreement exceed certain agreed upon thresholds, subject to maximum
payments of $337,500 in the aggregate. All amounts borrowed under the Credit
Agreement are due on November 16, 1998. The Company is presently in full
compliance with the terms of the Credit Agreement and does not anticipate a
change to such status with respect to such terms. In connection with the Credit
Agreement, Deutsche Bank will receive a first priority lien on all of the
Company's assets, including intellectual property. Pursuant to the terms of the
Credit Agreement, the Company is subject to certain financial and non-financial
covenants including limitations on payments of dividends, additional borrowings,
acquisitions and disposition of assets and maintenance of maximum operating cash
flow deficiencies and minimum quick ratios.
The Company entered into a sublease in May 1998 for approximately 75,197
square feet of office space located in Sunnyvale, California (the "Sublease").
The Company intends that this location will serve as the Company's principal
administrative, engineering, marketing and customer service facility. The
Sublease term will commence as of July 1, 1998, and will end sixty-two (62)
months thereafter, unless sooner terminated. Under the terms of the Sublease,
the Company made a security deposit payment of $297,000 cash and issued an
irrevocable letter of credit for $595,000 prior to occupancy and commencement of
the Sublease term. Under the terms of the sublease, the Company will be
obligated to make monthly payments of approximately $149,000 increasing to
$174,000 over the term of the Sublease. The Company will not have an option to
renew or extend the term of this Sublease.
F-22
<PAGE> 96
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> 97
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 34
Management............................ 50
Certain Transactions.................. 57
Principal Stockholders................ 62
Description of Capital Stock.......... 64
Shares Eligible for Future Sale....... 67
Underwriting.......................... 69
Legal Matters......................... 71
Experts............................... 71
Additional Information................ 71
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
, 1998
<PAGE> 98
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.
Article 6 of the registrant's Bylaws (Exhibit 3.2 hereto) permits
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 permit an unconditional right to indemnification for all
expense, liability and loss (including attorneys' fees, judgment, fines, ERISA
excise taxes or penalties and amounts paid in settlement) actually and
reasonably incurred or suffered by any person in connection with any actual or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative (including, to the extent permitted by law, any derivative
action) by reason of the fact that such person is or was serving as a director
or officer of the registrant or that, being or having been a director or officer
of the registrant, such person is or was serving at the request of the
registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan. The Bylaws also provide that the registrant
may, by action of its Board of Directors, provide indemnification to its
employees and agents with the same scope and effect as the foregoing
indemnification of directors and officers.
II-1
<PAGE> 99
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 IX 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 IX 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 10.1 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 1.1 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 937,500 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 19 investors for
a consideration of $2.04 per share of Series C Preferred Stock ($1.70 per share
as adjusted for the Spin-off), or an aggregate of approximately $6,120,000. The
purchasers consisted of eleven investors that are presently related to certain
directors who purchased 2,677,450 shares and eight unaffiliated investors who
purchased 322,550 shares.
II-2
<PAGE> 100
(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 June 1, 1998, the registrant
granted stock options to purchase 4,631,800 shares of Common Stock, with
exercise prices ranging from $0.0042 to $7.00 per share, to employees,
consultants, and directors pursuant to its 1995 and 1998 Stock Option Plans. Of
these options, options for 812,745 have been canceled without being exercised,
options for 108,542 shares have been exercised and options for 3,710,513 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> 101
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S> <C>
**1.1 -- Form of Underwriting Agreement.
2.1 -- Form of Agreement and Plan of Merger between the Registrant
and software.net Corporation, a California corporation.
**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,
1995, by and between the Registrant and Microsoft
Corporation.
**10.16 Offer letter to Mark Breier.
**10.17 Credit Agreement dated as of May 21, 1998 among the
Registrant, Deutsche Bank AG, New York Branch, as Agent and
the other financial institutions party hereto.
**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), as amended
on May 19, 1998.
**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>
II-4
<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, as amended on May 19, 1998.
**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.
10.28 -- Sublease dated as of May 27, 1998 by and between the
Registrant and First Data Merchant Services Corporation.
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> 103
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> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Second Amendment to Registration Statement to be signed on
its behalf by the undersigned, hereunto duly authorized in San Jose, California,
on June 11, 1998.
software.net Corporation
By: /s/ WILLIAM S. MCKIERNAN
------------------------------------
William S. McKiernan
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Second
Amendment to Registration Statement has been signed by the following persons in
the capacities indicated on the 11th day of June, 1998.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
Principal Executive Officer:
By: /s/ WILLIAM S. MCKIERNAN* Chairman of the Board June 11, 1998
-------------------------------------------------
William S. McKiernan
Principal Financial Officer and Principal Accounting Officer:
By: /s/ MICHAEL J. PRAISNER Vice President, Finance & June 11, 1998
------------------------------------------------- Administration and Chief
Michael J. Praisner Financial Officer
Additional Directors:
By: /s/ MARK L. BREIER* President, Chief Executive June 11, 1998
------------------------------------------------- Officer and Director
Mark L. Breier
By: /s/ LINDA FAYNE LEVINSON* Director June 11, 1998
-------------------------------------------------
Linda Fayne Levinson
By: /s/ HUBERT E. KOLDE* Director June 11, 1998
-------------------------------------------------
Hubert E. Kolde
By: /s/ STEVEN P. NOVAK* Director June 11, 1998
-------------------------------------------------
Steven P. Novak
By: /s/ RICHARD SCUDELLARI* Director June 11, 1998
-------------------------------------------------
Richard Scudellari
By: /s/ MICHAEL J. PRAISNER
-------------------------------------------------
Michael J. Praiser
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S> <C>
**1.1 -- Form of Underwriting Agreement.
2.1 -- Form of Agreement and Plan of Merger between the Registrant
and software.net Corporation, a California corporation.
**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,
1995, by and between the Registrant and Microsoft
Corporation.
**10.16 Offer letter to Mark Breier.
**10.17 Credit Agreement dated as of May 21, 1998 among the
Registrant, Deutsche Bank AG, New York Branch, as Agent and
the other financial institutions party hereto.
**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), as amended
on May 19, 1998.
**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> 106
<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, as amended on May 19, 1998.
**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.
10.28 -- Sublease dated as of May 27, 1998 by and between the
Registrant and First Data Merchant Services Corporation.
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 2.1
AGREEMENT AND PLAN OF MERGER
OF
SOFTWARE.NET CORPORATION, A CALIFORNIA CORPORATION
WITH AND INTO
SOFTWARE.NET CORPORATION, A DELAWARE CORPORATION
THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made this ____ day of
May, 1998, between software.net Corporation, a California corporation
("Company"), and software.net Corporation, a Delaware corporation ("Newco"). The
Company and Newco are referred to herein as the parties.
RECITALS
WHEREAS, the Company has an authorized capital stock consisting of (i)
30,000,000 shares of Common Stock, of which 9,090,000 shares have been duly
issued and are now outstanding, and (ii) 10,000,000 shares of Preferred Stock,
1,985,520 of which have been designated Series A Preferred Stock, all of which
have been duly issued and are now outstanding, 2,037,038 of which have been
designated Series B Preferred Stock, all of which have been duly issued and are
now outstanding, 3,000,000 of which have been designated Series C Preferred
Stock, all of which have been duly issued and are now outstanding and 1,523,424
of which have been designated Series D Preferred Stock, 1,153,846 of which have
been duly issued and are now outstanding; and
WHEREAS, the Board of Directors of the Company and Newco deem it advisable
and generally to the advantage and welfare of the corporate parties and their
respective stockholders or shareholders, as the case may be, that the Company
merge with and into Newco under and pursuant to the provisions of the California
Corporations Code and of the General Corporation Law of the State of Delaware:
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained and of the mutual benefits hereby provided, it is
agreed by and between the parties hereto as follows:
1. Merger.
1.1. Merger. In accordance with the provisions of this Agreement, the
Delaware General Corporation Law and the California General Corporation Law, the
Company shall be merged with and into Newco (the "Merger"), the separate
existence of the Company shall cease and Newco shall be, and is sometimes
referred to below as, the "Surviving Corporation," and the name of the Surviving
Corporation shall be software.net Corporation.
1.2. Filing and Effectiveness. The Merger shall become effective upon
completion of the following actions:
<PAGE> 2
(a) Adoption and approval of this Agreement and the Merger by the
stockholders of each Constituent Corporation in accordance with the applicable
requirements of the Delaware General Corporation Law and the California General
Corporation Law;
(b) The satisfaction or waiver of all of the conditions precedent
to the consummation of the Merger as specified in this Agreement;
(c) The filing with the Secretary of State of Delaware of an
executed Certificate of Merger or an executed counterpart of this Agreement
meeting the requirements of the Delaware General Corporation Law; and
(d) The filing with the Secretary of State of California of an
executed Certificate of Merger or an executed counterpart of this Agreement
meeting the requirements of the California General Corporation Law.
The date and time when the Merger becomes effective is referred to in this
Agreement as the "Effective Date of the Merger."
1.3. Effect of the Merger. Upon the Effective Date of the Merger, the
separate existence of the Company shall cease and Newco, as the Surviving
Corporation, (a) shall continue to possess all of its assets, rights, powers and
property as constituted immediately prior to the Effective Date of the Merger,
(b) shall be subject to all actions previously taken by its and the Company's
Board of Directors, (c) shall succeed, without other transfer, to all of the
assets, rights, powers and property of the Company in the manner more fully set
forth in Section 259 of the Delaware General Corporation Law, (d) shall continue
to be subject to all of the debts, liabilities and obligations of Newco as
constituted immediately prior to the Effective Date of the Merger, and (e) shall
succeed, without other transfer, to all of the debts, liabilities and
obligations of the Company in the same manner as if Newco had itself incurred
them, all as more fully provided under the applicable provisions of the Delaware
General Corporation Law and the California General Corporation Law.
2. Charter Documents, Directors and Officers.
2.1. Certificate of Incorporation. The Amended and Restated Certificate
of Incorporation (the "Restated Certificate") of Newco as in effect immediately
prior to the Effective Date of the Merger shall continue in full force and
effect as the Restated Certificate of the Surviving Corporation until duly
amended in accordance with the provisions thereof and applicable law.
2.2. Bylaws. The Bylaws of Newco as in effect immediately prior to the
Effective Date of the Merger shall continue in full force and effect as the
Bylaws of the Surviving Corporation until duly amended in accordance with the
provisions thereof and applicable law.
2.3. Directors and Officers. The directors and officers of the Company
immediately prior to the Effective Date of the Merger shall be the directors and
officers of the
- 2 -
<PAGE> 3
Surviving Corporation until their successors shall have been duly elected and
qualified or as otherwise provided by law, the Certificate of Incorporation of
the Surviving Corporation or the Bylaws of the Surviving Corporation.
3. Manner of Conversion of Stock.
3.1. Company Common Stock. Upon the Effective Date of the Merger, each
share of the Company's Common Stock issued and outstanding immediately prior
thereto shall, by virtue of the Merger and without any action by the parties,
the holder of such share or any other person, be converted into and exchanged
for one (1) fully paid and nonassessable share of Common Stock, $0.001 par
value, of the Surviving Corporation.
3.2. Company Preferred Stock. Upon the Effective Date of the Merger, each
share of the Company's Series A, Series B, Series C and Series D Preferred
Stock, issued and outstanding immediately prior thereto, which shares are
convertible into such number of shares of the Company's Common Stock as set
forth in the Company's Articles of Incorporation, as amended, shall, by virtue
of the Merger and without any action by the parties, the holder of such shares
or any other person, be converted into and exchanged for one (1) fully paid and
non-assessable share of Series A, Series B, Series C and Series D Preferred
Stock of the Surviving Corporation, $0.001 par value, respectively, having such
rights, preferences and privileges as set forth in the Restated Certificate of
the Surviving Corporation, which shares of Preferred Stock shall be convertible
into the same number of shares of the Surviving Corporation's Common Stock,
$0.001 par value as such share of the Company's Preferred Stock was convertible
into shares of the Company's Common Stock immediately prior to the Effective
Date of the Merger, subject to adjustment pursuant to the terms of the Restated
Certificate of the Surviving Corporation.
3.3. Company Options and Convertible Securities.
(a) Upon the Effective Date of the Merger, the Surviving
Corporation shall assume the obligations of the Company under the Company's 1995
Stock Option Plan, 1998 Stock Option Plan, 1998 Employee Stock Purchase Plan if
any, and all other employee benefit plans of the Company. Each outstanding and
unexercised option, warrant, other right to purchase, or security convertible
into, the Company's Common Stock or Preferred Stock (a "Right") shall become,
subject to the provisions in paragraph (c) hereof, an option, right to purchase,
or a security convertible into the Surviving Corporation's Common Stock or
Preferred Stock, respectively, on the basis of one share of the Surviving
Corporation's Common Stock or Preferred Stock, as the case may be, for each
share of the Company's Common Stock or Preferred Stock, issuable pursuant to any
such Right, on the same terms and conditions and at an exercise price equal to
the exercise price applicable to any such Company Right at the Effective Date of
the Merger. This paragraph 3.3(a) shall not apply to the Company's Common Stock
or Preferred Stock. Such Common Stock and Preferred Stock are subject to
paragraph 3.1 and 3.2 hereof, respectively.
(b) A number of shares of the Surviving Corporation's Common Stock
and Preferred Stock shall be reserved for issuance upon the exercise or
conversion of Rights
- 3 -
<PAGE> 4
equal to one share of Newco for each share of the Company's Common Stock and
Preferred Stock so reserved immediately prior to the Effective Date of the
Merger.
(c) The assumed Rights shall not entitle any holder thereof to a
fractional share upon exercise or conversion. In lieu thereof, any fractional
share interests to which a holder of an assumed Right (other than an option
issued pursuant to the Company's 1995 Stock Option Plan, 1998 Stock Option Plan
or 1998 Employee Stock Purchase Plan if any) would otherwise be entitled upon
exercise or conversion shall be aggregated (but only with other similar Rights
which have the same per share terms). To the extent that after such aggregation,
the holder would still be entitled to a fractional share with respect thereto
upon exercise or conversion, the holder shall be entitled upon the exercise or
conversion of all such assumed Rights pursuant to their terms (as modified
herein), to one full share of Common Stock or Preferred Stock in lieu of such
fractional share. With respect to each class of such similar Rights, no holder
will be entitled to more than one full share in lieu of a fractional share upon
exercise or conversion.
Notwithstanding the foregoing, with respect to options issued under the
Company's 1995 Stock Option Plan, 1998 Stock Option Plan or 1998 Employee Stock
Purchase Plan if any, that are assumed in the Merger, the number of shares of
Common Stock to which the holder would be otherwise entitled upon exercise of
each such assumed option following the Merger shall be rounded down to the
nearest whole number and the exercise price shall be rounded up to the nearest
whole cent. In addition, no "additional benefits" (within the meaning of Section
424(a)(2) of the Internal Revenue Code of 1986, as amended) shall be accorded to
the optionees pursuant to the assumption of their options.
3.4. Exchange of Certificates.
(a) After the Effective Date of the Merger, each holder of an
outstanding certificate representing shares of the Company's Common Stock or
Preferred Stock may be asked to surrender the same for cancellation to an
exchange agent, whose name will be delivered to holders prior to any requested
exchange (the "Exchange Agent"), and each such holder shall be entitled to
receive in exchange therefor a certificate or certificates representing the
number of shares of the appropriate class and series of the Surviving
Corporation's capital stock into which the surrendered shares were converted as
herein provided. Until so surrendered, each outstanding certificate theretofore
representing shares of the Company's capital stock shall be deemed for all
purposes to represent the number of whole shares of the appropriate class and
series of the Surviving Corporation's capital stock into which such shares of
the Company's capital stock were converted in the Merger.
(b) The registered owner on the books and records of the Surviving
Corporation or the Exchange Agent of any such outstanding certificate shall,
until such certificate shall have been surrendered for transfer or conversion or
otherwise accounted for to the Surviving Corporation or the Exchange Agent, have
and be entitled to exercise any voting and other rights with respect to and to
receive dividends and other distributions upon the shares
- 4 -
<PAGE> 5
of capital stock of the Surviving Corporation represented by such outstanding
certificate as provided above.
(c) Each certificate representing capital stock of the Surviving
Corporation so issued in the Merger shall bear the same legends, if any, with
respect to the restrictions on transferability as the certificates of the
Company so converted and given in exchange therefor, unless otherwise determined
by the Board of Directors of the Surviving Corporation in compliance with
applicable laws.
(d) If any certificate for shares of Surviving Corporation's stock
is to be issued in a name other than that in which the certificate surrendered
in exchange therefor is registered, it shall be a condition of issuance thereof
that the certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer, that such transfer otherwise be proper and comply with
applicable securities laws and that the person requesting such transfer pay to
the Exchange Agent any transfer or other taxes payable by reason of the issuance
of such new certificate in a name other than that of the registered holder of
the certificate surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not payable.
3.5. Fractional Shares. No fractional share interests of the Surviving
Corporation shall be issued. Any fractional share interests to which a holder
would otherwise be entitled shall be aggregated so that no the Company
shareholder shall receive cash in an amount greater than the value of one (1)
full share of Newco Common Stock.
4. General.
4.1. Covenants of Newco. Newco covenants and agrees that it will, on or
before the Effective Date of the Merger: (a) file any and all documents with the
California Franchise Tax Board necessary for the assumption by Newco of all of
the franchise tax liabilities of the Company; and (b) take such other actions as
may be required by the California General Corporation Law.
4.2. Further Assurances. From time to time, as and when required by Newco
or by its successors or assigns, there shall be executed and delivered on behalf
of the Company such deeds and other instruments, and there shall be taken or
caused to be taken by it such further and other actions, as shall be appropriate
or necessary in order to vest or perfect in or conform of record or otherwise by
Newco the title to and possession of all the property, interests, assets,
rights, privileges, immunities, powers, franchises and authority of the Company
and otherwise to carry out the purposes of this Agreement, and the officers and
directors of Newco are fully authorized in the name and on behalf of the Company
or otherwise to take any and all such action and to execute and deliver any and
all such deeds and other instruments.
4.3. Abandonment. At any time before the Effective Date of the Merger,
this Agreement may be terminated and the Merger may be abandoned for any reason
whatsoever by the Board of Directors of either the Company or Newco, or both,
notwithstanding the approval of
- 5 -
<PAGE> 6
this Agreement by the shareholders of the Company or by the sole stockholder of
Newco, or by both.
4.4. Amendment. The Boards of Directors of the parties may amend this
Agreement at any time prior to the filing of this Agreement (or certificate in
lieu thereof) with the Secretary of State of the State of Delaware, provided
that an amendment made subsequent to the adoption of this Agreement by the
stockholders of either party shall not: (a) alter or change the amount or kind
of shares, securities, cash, property and/or rights to be received in exchange
for or on conversion of all or any of the shares of any class or series thereof
of such party, (b) alter or change any term of the Restated Certificate of the
Surviving Corporation to be effected by the Merger, or (c) alter or change any
of the terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any class of shares or series of capital stock
of such party.
4.5. Tax Treatment. The parties intend that the Merger be treated as a
tax free reorganization under Section 368 of the Internal Revenue Code.
4.6. Registered Office. The registered office of the Surviving
Corporation in the State of Delaware is located at 1013 Centre Road, City of
Wilmington, County of New Castle. The Corporation Service Company is the
registered agent of the Surviving Corporation at such address.
4.7. Agreement. Executed copies of this Agreement will be on file at the
principal place of business of the Surviving Corporation at 3031 Tisch Way,
Suite 900, San Jose, California 95128 and copies thereof will be furnished to
any stockholder of either Constituent Corporation, upon request and without
cost.
4.8. Governing Law. This Agreement and all acts and transactions pursuant
hereto and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
5. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute one instrument.
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<PAGE> 7
IN WITNESS WHEREOF each of the corporate parties hereto, pursuant to
authority duly granted by the Board of Directors, has caused this Agreement and
Plan of Merger to be executed by an authorized officer.
<TABLE>
<S> <C>
"THE COMPANY" "NEWCO"
software.net Corporation, a California software.net Corporation, a Delaware
corporation corporation
By: /s/ Mark L. Breier By: /s/ Mark L. Breier
----------------------------------------- -----------------------------------------
Name: Mark L. Breier Name: Mark L. Breier
Title: President and Chief Executive Officer Title: President and Chief Executive Officer
By: /s/ Richard Scudellari By: /s/ Richard Scudellari
----------------------------------------- -----------------------------------------
Name: Richard Scudellari Name: Richard Scudellari
Title: Secretary Title: Secretary
</TABLE>
- 7 -
<PAGE> 8
CERTIFICATE OF OFFICER
OF
SOFTWARE.NET CORPORATION
The undersigned hereby certify that:
1. They are the duly elected and acting President and Secretary of
software.net Corporation., a California corporation (the "Company").
2. The Agreement and Plan of Merger (the "Agreement") of the Company
and software.net Corporation, a Delaware corporation ("Newco"), in the form
attached hereto, was duly approved by the Board of Directors and shareholders of
the Company as of May 20, 1998.
3. The number of outstanding shares of each class entitled to vote is
9,090,000 shares of Common Stock, 1,985,520 shares of Series A Preferred Stock,
2,037,038 shares of Series B Preferred Stock, 3,000,000 shares of Series C
Preferred Stock and 1,153,846 shares of Series D Preferred Stock.
4. The principal terms of the Agreement were approved by the Company by
the vote of a number of shares of each class which equaled or exceeded the vote
required.
5. The percentage vote required of each class is more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that we have read the foregoing certificate, and know the contents
thereof, and that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: June 10, 1998 By: /s/ Mark L. Breier
-----------------------------------------
Name: Mark L. Breier
Title: President and Chief Executive Officer
By: /s/ Richard Scudellari
-----------------------------------------
Name: Richard Scudellari
Title: Secretary
<PAGE> 9
CERTIFICATE OF OFFICER
OF
SOFTWARE.NET CORPORATION
The undersigned hereby certify that:
1. They are the duly elected and acting President and Secretary of
software.net Corporation, a Delaware corporation (the "Newco").
2. The Agreement of Merger (the "Agreement") of Newco and software.net
Corporation., a California corporation (the "Company"), in the form attached
hereto, was duly approved by the Board of Directors of Newco as of May 20,
1998.
3. There are no outstanding shares of capital stock of Newco.
We further declare under penalty of perjury under the laws of the State of
California that we have read the foregoing certificate, and know the contents
thereof, and that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: May June 10, 1998 By: /s/ Mark L. Breier
----------------------------------------
Name: Mark L. Breier
Title: President and Chief Executive Officer
By: /s/ Richard Scudellari
----------------------------------------
Name: Richard Scudellari
Title: Secretary
<PAGE> 1
EXHIBIT 5.1
June ___, 1998
software.net Corporation
3031 Tisch Way, Ste. 900
San Jose, California 95128
Re: Registration Statement on Form S-1
Dear Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you
with the Securities and Exchange Commission on April 27, 1998, as amended by
Amendments Nos. 1, 2 and 3 dated May 18, 1998, May 27, 1998 and June 11, 1998,
respectively (the "Registration Statement") in connection with the registration
under the Securities Act of 1933, as amended, of a total of 5,000,000 shares of
your Common Stock (the "Shares"), to be sold by the Company. The Shares include
an over-allotment option to purchase 750,000 shares granted to the underwriters
and are to be sold to the underwriters as described in the Registration
Statement for resale to the public. As your counsel in connection with this
transaction, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the sale and issuance
of the Shares.
It is our opinion that upon conclusion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares when issued and sold in the manner
described in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name wherever
appearing in the Registration Statement, including the Prospectus constituting a
part thereof, and in any amendment thereto.
Sincerely,
/s/ Jackson Tufts Cole & Black, LLP
---------------------------------------------
Jackson Tufts Cole & Black, LLP
<PAGE> 1
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is made as of May ___
1998, by and between software.net Corporation, a Delaware corporation (the
"Company"), and ____________ (the "Indemnitee").
RECITALS
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining liability insurance for directors, officers and key employees, the
significant increases in the cost of such insurance and the general reductions
in the coverage of such insurance.
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers and
key employees to expensive litigation risks at the same time as the availability
and coverage of liability insurance has been severely limited. Indemnitee does
not regard the current protection available as adequate under the present
circumstances, and Indemnitee and agents of the Company may not be willing to
continue to serve as agents of the Company without additional protection.
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, and to indemnify its
directors, officers and key employees so as to provide them with the maximum
protection permitted by law.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises made in this
Agreement, and for other good and valuable consideration, receipt of which is
hereby acknowledged, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
<PAGE> 2
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee reasonably believed to be
in or not opposed to the best interests of the Company, or, with respect to any
criminal action or proceeding, that Indemnitee had reasonable cause to believe
that Indemnitee's conduct was unlawful.
(b) Proceedings by or in the Right of the Company. The Company shall
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or in defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. No Employment Rights. Nothing contained in this Agreement is intended
to create in Indemnitee any right to continued employment with the Company.
3. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section l(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby undertakes
to repay such amounts advanced only if, and to the extent that, it
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<PAGE> 3
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby.
(b) Notice/Cooperation By Indemnitee. Indemnitee shall, as a
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company and shall be given in accordance with the provisions of
Section 12(d) below. In addition, Indemnitee shall give the Company such
information and cooperation as the Company may reasonably require and as shall
be within Indemnitee's power to provide.
(c) Procedure. Any indemnification and advances provided for in
Section 1 and this Section 3 shall be made no later than twenty (20) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within twenty (20) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the Company
contests Indemnitee's right to indemnification, the question of Indemnitee's
right to indemnification shall be for the court to decide, and neither the
failure of the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) to have made a determination that indemnification of Indemnitee is
proper in the circumstances because Indemnitee has met the applicable standard
of conduct required by applicable law, nor an actual determination by the
Company (including its Board of Directors, any committee or subgroup of the
Board of Directors, independent legal counsel, or its stockholders) that
Indemnitee has not met such applicable standard of conduct, shall create a
presumption that Indemnitee has or has not met the applicable standard of
conduct.
(d) Notice To Insurers. If, at the time of the receipt of a notice of
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
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<PAGE> 4
(e) Selection of Counsel. In the event the Company shall be obligated
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that: (i) Indemnitee shall have the
right to employ counsel in any such proceeding at Indemnitee's expense; and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. Notwithstanding any other provision of this Agreement, the
Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by
law, notwithstanding that such indemnification is not specifically authorized by
the other provisions of this Agreement, the Company's Certificate of
Incorporation, the Company's Bylaws or by statute. In the event of any change,
after the date of this Agreement, in any applicable law, statute, or rule which
expands the right of a Delaware corporation to indemnify a member of its board
of directors or an officer, such changes shall be deemed to be within the
purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he or she may have ceased
to serve in any such capacity at the time of any action, suit or other covered
proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the total
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<PAGE> 5
amount thereof, the Company shall nevertheless indemnify Indemnitee for the
portion of such expenses, judgments, fines or penalties to which Indemnitee is
entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
the position that indemnification is not permissible or liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the SEC to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
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<PAGE> 6
(a) Claims Initiated By Indemnitee. To indemnify or advance expenses
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have
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<PAGE> 7
acted in a manner "not opposed to the best interests of the Company" as referred
to in this Agreement.
11. Attorneys' Fees. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action was not made in good faith or was frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action was made in bad faith or was frivolous.
12. Miscellaneous.
(a) Governing Law. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Construction. This Agreement is the result of negotiations
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) Notices. Any notice, demand or request required or permitted to
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or forty-eight (48) hours after
being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party's address as
set forth below or as subsequently modified by written notice.
(e) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
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<PAGE> 8
(f) Successors and Assigns. This Agreement shall be binding upon the
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
to effectively bring suit to enforce such rights.
The parties hereto have executed this Agreement as of the day and year
set forth on the first page of this Agreement.
COMPANY INDEMNITEE
SOFTWARE.NET CORPORATION, a
Delaware corporation
By: By:
------------------------------- ----------------------------
Name: Name:
----------------------------- --------------------------
Title:
----------------------------
-8-
<PAGE> 1
EXHIBIT 10.28
SUBLEASE
BY AND BETWEEN
FIRST DATA MERCHANT SERVICES CORPORATION,
A SUBSIDIARY OF FIRST DATA CORPORATION
SUBLESSOR
AND
SOFTWARE.NET CORPORATION
SUBTENANT
<PAGE> 2
TABLE OF CONTENTS
Incorporation of Recitals................................................. 1
Demise and Term........................................................... 1
Subtenant Improvements Allowance.......................................... 2
Subtenant Alterations..................................................... 3
Use....................................................................... 3
Subordinate to Main Lease................................................. 4
Compliance with Main Lease................................................ 4
Performance by Sublessor.................................................. 5
No Breach of Main Lease................................................... 5
No Privity of Estate...................................................... 5
Indemnity................................................................. 5
Rent...................................................................... 6
Condition of Premises..................................................... 7
Consents and Approvals.................................................... 7
Notice.................................................................... 7
Termination of Main Lease................................................. 8
i
<PAGE> 3
Maintenance and Repair................................................... 8
Assignment and Sublettings............................................... 8
Insurance................................................................ 9
Right to Cure Subtenant's Defaults and Damages........................... 9
Remedies of Sublessor.................................................... 10
Brokerage................................................................ 11
Waiver of Jury Trial and Right to Counterclaim........................... 11
No Waiver................................................................ 11
Complete Agreement....................................................... 11
Successors and Assigns................................................... 11
Interpretation........................................................... 12
Consent of Landlord Under Main Lease..................................... 12
Holding Over............................................................. 12
Security Deposit......................................................... 12
Counterparts............................................................. 13
No Offer................................................................. 13
Hazardous Materials...................................................... 13
ii
<PAGE> 4
Signage................................................................... 13
Parking................................................................... 14
iii
<PAGE> 5
SUBLEASE
THIS SUBLEASE ("Sublease") is made and dated as of the ____ day of ____,
1998, by and between FIRST DATA MERCHANT SERVICES CORPORATION, a Florida
corporation, having an address of 5660 New Northside Drive, Suite 1400, Atlanta,
Georgia 30328 ("Sublessor") and SOFTWARE.NET CORPORATION, a California
corporation having an address of 1195 West Fremont Avenue, Sunnyvale, California
("Subtenant").
W I T N E S S E T H:
WHEREAS, Sublessor is tenant under that certain Build-To-Suit Lease
Agreement dated as of March 18, 1997 (the "Main Lease") with Sunnyvale Partners
Limited Partnership, an Illinois limited partnership ("Overlandlord") as
landlord, whereby Overlandlord leased to Sublessor land and improvements
consisting of a to-be constructed two-story office building containing
approximately 75,197 rentable square feet of office space located at 1195 West
Fremont Avenue, Sunnyvale, California (the "Building");
WHEREAS, the Building has since been constructed; and
WHEREAS, Sublessor desires to sublet a portion of the Building comprised
of approximately 52,185 rentable square feet located on the first and second
floors of the Building as more particularly shown and described on Exhibit B
attached hereto and incorporated herein by this reference (the "Premises") to
Subtenant, and Subtenant desires to sublet the Premises from Sublessor;
WHEREAS, the parties are agreeable to entering into a sublease of the
Premises on the terms and conditions set forth below; and
WHEREAS, unless otherwise defined in this Sublease, all capitalized terms
used herein have the meanings set out for them in the Main Lease.
AGREEMENT
NOW, THEREFORE, for and in consideration of the mutual promises set forth
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Sublessor and Subtenant hereby agree as
follows:
1. Incorporation of Recitals. The foregoing recitals are incorporated
into and made a part of this Sublease as if each were specifically recited
herein.
2. Demise and Term. Sublessor hereby subleases the Premises to
Subtenant, and Subtenant hereby hires and accepts the Premises from Sublessor.
The Premises shall include the non-exclusive appurtenant right to the use, in
common with others, of the lobbies, entrances, stairs, corridors, elevators and
other public portions of the Building. The term of this Sublease (the "Term")
shall be the period commencing July 1, 1998 (the "Commencement Date"), and
ending at 12:01 a.m. on the date which is sixty-two (62) months after the
Commencement Date (the "Expiration Date"), unless sooner terminated as herein
provided. Subtenant shall have no option to renew or extend the term of this
Sublease or to expand the Premises.
<PAGE> 6
3. Subtenant Improvements and Allowance. Sublessor agrees to contribute
a maximum amount of One Dollar and no/100 ($1.00) per square foot of rentable
area of the Premises for the completion of the Subtenant Improvements (as
hereinafter defined) ("Allowance") as more specifically set forth in this
Section 3.
a. Subtenant Improvements shall mean such items of general
applicability to office space that Subtenant desires to be installed in the
interior of the Premises. Subtenant shall deliver to Sublessor a space plan for
the Premises (the "Space Plan"), which Space Plan shall be subject to the
approval of Sublessor, which approval shall not be unreasonably withheld. Upon
Sublessor's approval of the Space Plan, Subtenant shall engage and pay for the
services of a licensed architect to prepare complete and detailed working
drawings and specifications for the construction of the Subtenant Improvements,
showing thereon all Subtenant Improvements (the "Drawings"). The Drawings shall
be subject to the approval of Sublessor, which approval shall not be
unreasonably withheld. If Sublessor should disapprove such Drawings, Sublessor
shall specify to Subtenant the reasons for its disapproval and Subtenant shall
cause the same to be revised to meet the Sublessor and Subtenant's mutual
reasonable satisfaction and Subtenant shall resubmit the same to Sublessor, as
so revised. It is understood by the parties that Subtenant has elected to
retain a general contractor and arrange for the construction and installation of
the Subtenant Improvements itself in a good and workmanlike manner [by labor
union contractors and subcontractors?] (the "Work"). Subtenant shall submit to
Sublessor the name of the general contractor and major subcontractors for
Sublessor's approval, which shall not be unreasonably withheld, or, at
Sublessor's option, Subtenant shall select its general contractor and major
subcontractors from a list pre-approved by Sublessor. If Sublessor shall reject
the general contractor or any major subcontractor, Sublessor shall advise
Subtenant of the reasons in writing and Subtenant shall choose another
contractor. Along with Subtenant's notice of its general contractor and major
subcontractors, Subtenant shall notify Sublessor of its estimate of the total
costs of the Work and, at Sublessor's option, Subtenant must provide to
Sublessor adequate assurance that Subtenant has the financial resources to pay
for such costs. Subtenant's contractors shall be duly licensed and shall obtain
and provide to Sublessor with certificates evidencing worker's compensation,
public liability and property damage insurance in amounts and forms and with
companies satisfactory to Sublessor. Subtenant's agreement with its contractors
shall require such contractors to provide daily cleanup of the work area to the
extent such clean up is necessitated by the Work, and to take reasonable steps
to minimize interference with other tenants' use and occupancy of the Building.
Subtenant and Subtenant's contractors shall comply with any other reasonable
rules, regulations or requirements that Sublessor or Overlandlord shall impose.
Subtenant may request reasonable changes in the Drawings provided that no change
shall be made to the Drawings without Sublessor's prior written approval, which
shall not be unreasonably withheld or delayed; (b) no such request shall effect
any structural change in the Building or otherwise render the Premises or
Building in violation of applicable laws; (c) Subtenant shall be responsible for
all costs of same; and (d) such requests shall constitute agreement by Subtenant
to any delay in completion caused by Sublessor's reviewing and processing such
change. Subtenant shall promptly pay any and all costs and expenses in
connection with or arising out of the performance of the Work and shall furnish
to Sublessor evidence of such payment upon request. Subtenant agrees not to
suffer or permit any mechanic, materialman, architect, broker or other lien to
be placed or filed against the Premises or the Building. In case any such lien
shall be filed, Subtenant shall immediately file and release such lien of
record. If Subtenant shall fail to have such lien immediately satisfied and
released, Sublessor may, on Subtenant's behalf, without being responsible for
any investigation as to the validity of such lien and without limiting any other
remedies Sublessor may have, pay the same and Subtenant shall upon demand pay
Sublessor the amount so paid.
2
<PAGE> 7
b. Upon completion of the Work, Subtenant may submit to Sublessor a
request in writing for the Allowance which request shall include: (i) as-built
drawings showing all of the Subtenant Improvements; (ii) a detailed breakdown
of final and total costs, together with receipted invoices showing payment
thereof; (iii) a certified written statement from the architect that the
Subtenant Improvements have been completed in compliance with the Drawings;
(iv) final lien waivers and releases from the architect, general contractor and
all subcontractors and suppliers; and (iv) a copy of a certificate of occupancy
for the Premises. Provided the request includes all of the foregoing, Sublessor
shall pay the Allowance to Subtenant within 30 days of Sublessor's receipt of
such request and all supporting documentation.
c. Subtenant hereby acknowledges and agrees that it is Subtenant's
sole and exclusive responsibility to cause the Premises and Drawings to comply
with all applicable laws, including the Americans with Disabilities Act and
other ordinances, orders, rules, regulations and requirements of all
governmental authorities having jurisdiction thereof. Notwithstanding anything
to the contrary contained in the Sublease or herein, Sublessor's participation
in the preparation of the Space Plan, the Drawings and/or the Subtenant
Improvements shall not constitute any representation or warranty, express or
implied, that the (i) Drawings are in conformity with applicable codes,
regulations or rules or (ii) the Subtenant Improvements, if built in accordance
with the Drawings will be suitable for Subtenant's intended purposes. Subtenant
acknowledges and agrees that the Subtenant Improvements are intended for use by
Subtenant and the requirements for such improvements are not within the special
knowledge of Sublessor.
d. Subtenant shall repair or replace (or at Sublessor's election,
reimburse Sublessor for the cost of repairing or replacing) any portion of the
Building or Premises or Sublessor's property damage, lost or destroyed in
connection with the Work and shall indemnify, defend and hold Sublessor
harmless from and against any and all losses, costs, damages, expenses and
liabilities, including without limitation reasonable attorneys fees, incurred
by Sublessor in connection with the Work, including but not limited claims
based on personal injury or property damage, contract claims and/or lien claims.
e. There shall be no delay in the Commencement Date or the payment of
rent due to any delay in the Work.
4. Subtenant Alterations. Subtenant shall not make any alterations,
additions, or improvements to the Sublet Premises without the prior consent of
Sublessor. Sublessor's approval of the Drawings in accordance with Section 3
hereof shall be considered "prior consent" to the Work for purposes of this
section. All alterations, installations, removals and restoration shall be
performed in a good and workmanlike manner so as not to damage or alter the
primary structure or structural qualities of the Building and other
improvements situated on the Sublet Premises or of which the Sublet Premises
area a part. All alterations, installations, removals and restoration shall in
addition be subject to the requirements of Section 3 hereof (with the exception
of the payment of the Allowance, which is a one-time Allowance payable only in
connection with the Work). All alterations, additions or improvements to the
Sublet Premises, including the Work, shall, at Sublessor's sole discretion,
either be removed by Subtenant prior to the end of the Term or earlier
termination thereof, or shall remain on the Premises at the end of the Term.
5. Use. Subtenant shall occupy and use the Premises only for research
and development and general office purposes and otherwise in strict compliance
with the allowable uses set forth in Section 5 of the Main Lease. Subtenant
shall not commit or suffer to be
3
<PAGE> 8
committed any annoyance, waste, nuisance or any act or thing which is against
public policy, or which may disturb the quiet enjoyment of Sublessor or any
other tenant or occupancy of the Building. Subtenant agrees not to deface or
damage the Building in any manner. Subtenant shall not use the Premises for any
unlawful purposes.
6. Subordinate to Main Lease. This Sublease is and shall be subject and
subordinate to the Main Lease. A copy of the Main Lease (from which certain
economic terms have been excised) is attached hereto as Exhibit A and made a
part hereof. Sublessor agrees that it will not voluntarily enter into any
agreement with Overlandlord which would result in the termination of the Main
Lease prior to the Expiration Date or which would negatively affect the rights
or obligations of Subtenant under this Sublease. Sublessor shall notify
Subtenant of any involuntary change.
7. Compliance with Main Lease. Except as set forth in the immediately
succeeding sentence, the terms, covenants and conditions of the Main Lease (the
"Incorporated Provisions") are incorporated herein by reference. Sections 1, 2,
3, 4, 6, 7(B), 8, 9, 15, 16(E), 17(E), 22, 23, 44 and 52 and Exhibits B, C, D,
E, F, G and I of the Main Lease are specifically excluded from the Incorporated
Provisions. Except to the extent that the Incorporated Provisions are
inapplicable or are modified by the provisions of this Sublease, the
Incorporated Provisions binding or inuring to the benefit of the landlord
thereunder shall, in respect of this Sublease, bind or inure to the benefit of
Sublessor, and the Incorporated Provisions, binding or inuring to the benefit
of the tenant thereunder shall, in respect of this Sublease, bind or inure to
the benefit of Subtenant with the same force and effect as if such Incorporated
Provisions were completely set forth in this Sublease, and as if the words
"Landlord" and "Tenant" or words of similar import, wherever the same appear in
the Incorporated Provisions, were construed to mean, respectively, "Sublessor"
and "Subtenant" in this Sublease, and as if the words "Premises," or words of
similar import, wherever the same appear in the Incorporated Provisions, were
construed to mean "Premises" in this Sublease, and as if the word "Lease," or
words of similar import, wherever the same appear in the Incorporated
Provisions, were construed to mean this "Sublease."
(a) The time limits contained in the Main Lease for the giving of
notices, making the demands or performing of any act, condition or covenant
on the part of the tenant thereunder, or for the exercise by the tenant
thereunder of any right, remedy or option, are changed for the purposes of
incorporation herein by reference by shortening the same in each instance
by 5 days, so that in each instance Subtenant shall have 5 days less time
to observe or perform hereunder than Sublessor has as the tenant under the
Main Lease, except that:
(i) any such time limits which are 7 days or less shall instead
by shortened in each instance by 3 business days, and
(ii) any such time limits which are 3 days or less shall instead
by shortened in each instance so that such time limits shall expire 1
business day prior to the expiration of such time limits under the
Main Lease.
(b) If any of the express provisions of this Sublease shall conflict
with any of the Incorporated Provisions, such conflict shall be resolved in
every instance in favor of the express provisions of this Sublease. If
Subtenant receives any notice or demand form Overlandlord under the Main
Lease, Subtenant shall deliver a copy thereof to Sublessor by overnight
courier the next business day or as soon thereafter as is reasonably
possible but in no event later than two business days after Subtenant's
receipt of such notice. If
4
<PAGE> 9
Sublessor receives any notice of default from Overlandlord under the Main
Lease, Sublessor shall deliver a copy thereof to Subtenant by overnight
courier the next business day or as soon thereafter as is reasonably
possible but in no event later than two business days after Sublessor's
receipt of such notice.
8. Performance by Sublessor. Sublessor shall not be required to furnish,
supply or install anything required under any article of the Main Lease.
Sublessor shall have no liability or responsibility whatsoever for
Overlandlord's failure or refusal to perform under the Incorporated Provisions.
Subtenant shall have the right to instruct Overlandlord with respect to the
performance by Overlandlord of Overlandlord's obligations as landlord under
their Main Lease. Upon Sublessor's receipt of a written notice from Subtenant
that Sublessor has filed to perform an obligation under the Incorporated
Provisions, (because of a failure of Overlandlord to perform its obligation
under the Main Lease) then Sublessor may, at its sole and exclusive option
either (a) use its reasonable efforts to cause Overlandlord to observe and
perform the same, provided, however, that Sublessor does not guarantee
Overlandlord's compliance with the Incorporated Provisions, or (b) direct
Subtenant to pursue its claim directly against Overlandlord which shall be done
at Subtenant's sole cost and expense. Subtenant shall not in any event have any
rights in respect of the Premises greater than Sublessor's rights under the Main
Lease. Notwithstanding any provision to the contrary contained herein, as to
Incorporated Provisions, Sublessor shall not be required to make any payment or
perform any obligation, and Sublessor shall have no liability to Subtenant for
any matter whatsoever, except for (i) Sublessor's obligation to pay the rent due
under the Main Lease, and (ii) Sublessor's obligation to use reasonable efforts,
upon the written request of Subtenant, to cause Overlandlord to observe and/or
perform its obligations under the Main Lease (or, in the alternative, to direct
Subtenant to pursue its claim against Overlandlord). Sublessor shall not be
responsible for any failure or interruption, for any reason whatsoever, of the
services or facilities that may be appurtenant to or supplied at the Building,
by Overlandlord or otherwise, including, without limitation, heat, air
conditioning, water elevator service and cleaning service, if any; and no
failure to furnish, or interruption of, any such services or facilities shall
give rise to any; (i) abatement, diminution or reduction of Subtenant's
obligations under this Sublease; (ii) constructive eviction, whether in whole or
in part; or (iii) liability on the part of Sublessor.
9. No Breach of Main Lease. Subtenant shall not do or permit to be done
any act or thing which may constitute a breach or violation of any term,
covenant or condition of the Main Lease.
10. No Privity of Estate. Nothing contained in this Sublease shall be
construed to create privity of estate or privity of contract between Subtenant
and Overlandlord.
11. Indemnity. Subtenant hereby does and shall indemnify, defend and hold
harmless Sublessor from and against all losses, costs, damages, expenses and
liabilities, including, without limitation, reasonable attorneys' fees, which
Sublessor may incur or pay by reason of: (i) Subtenant's use, occupancy or
management of the Premises; (ii) any accidents, damages or injuries to persons
or property occurring in, on or about the Premises; (iii) any breach or default
hereunder on Subtenant's part; (iv) any work done by or on behalf of Subtenant
in or to the Premises; (v) the breach or inaccuracy of any representation or
warranty made by Subtenant hereunder; or (vi) any act, omission or negligence
occurring in, on or about the Premises on the part of Subtenant and/or its
officers, employees, agents, customers, invitees or any person claiming through
or under Subtenant.
5
<PAGE> 10
12. Rent.
(a) Subtenant shall pay to Sublessor base rent (the "Base Rent") as
follows:
<TABLE>
<CAPTION>
PERIOD MONTHLY RENT PER SQUARE FOOT MONTHLY RENT ANNUAL RENT
------ ---------------------------- ------------ -----------
<S> <C> <C> <C>
July 1, 1998 - June 30, 1999 $ 2.85 $ 148,727.25 $ 1,784,727.00
July 1, 1999 - June 30, 2000 $ 2.96 $ 154,467.60 $ 1,853,611.20
July 1, 2000 - June 30, 2001 $ 3.08 $ 160,729.80 $ 1,928,757.60
July 1, 2001 - June 30, 2002 $ 3.20 $ 166,992.00 $ 2,003,904.00
July 1, 2002 - June 30, 2003 $ 3.33 $ 173,776.05 $ 2,085,312.60
</TABLE>
(b) Subtenant shall pay the Monthly Base Rent to Sublessor in advance of
the first day of each month during the Term at the offices of Sublessor
identified at the beginning of this Sublease or elsewhere as Sublessor shall
direct. Subtenant shall pay to Sublessor the first installment of Monthly
Base Rent upon Subtenant's execution of this Sublease. In addition to the
Monthly Base Rent, Subtenant shall also be responsible for and pay the
applicable material or service provider (including as the case may be, Sublessor
or Overlandlord) directly for any and all other amounts payable with respect to
providing: (i) gas, heat, air conditioning, electricity, telephone, water,
sewer, security services and janitorial services to the Premises; and (ii)
Subtenant's Proportionate Share (as defined in the following sentence) of all
costs with respect to the Building's common area and systems, and the Building
structure, including without limitation costs of maintenance, repair and
replacement of the Building structure, common area and systems, costs of
utilities and security for the common areas and a property management fee to the
property manager selected by Sublessor or Overlandlord; and (iii) Subtenant's
Proportionate Share of any other operating expenses to be paid by Sublessor
under the Main Lease, including without limitation, the Impositions and
insurance costs. Subtenant's Proportionate Share shall be Sixty-Five and
one-half percent (65.5%). All of the foregoing amounts shall be hereinafter
collectively referred to as the "Additional Charges".
(c) "Rent" (which term shall include the Base Rent and any Additional
Charges) shall be paid promptly when due, without notice or demand therefor and
without deduction, abatement, counterclaim or setoff of any amount for any
reason whatsoever. Base Rent and Additional Charges shall be paid to Sublessor
by good unendorsed check of Subtenant at the address of Sublessor set forth at
the beginning of this Sublease or to such other person and/or at such other
address as Sublessor may from time to time designate by notice to Subtenant. No
payment by Subtenant or receipt by Sublessor of any lesser amount than the
amount stipulated to be paid hereunder shall be deemed other than on account of
the earliest stipulated Base Rent or Additional Charges due under this
Sublease; nor shall any endorsement or statement on any check or letter be
deemed an accord and satisfaction, and Sublessor may accept any check or
payment without prejudice to Sublessor's right to recover the balance due or to
pursue any other remedy available to Sublessor.
6
<PAGE> 11
(d) Upon the execution of (i) this Sublease by both Sublessor and
Subtenant and (ii) consent to this Sublease by Overlandlord as provided
herein, Subtenant shall be authorized to take possession of the Premises
seven (7) days prior to the Commencement Date for the limited purpose of
installing its equipment. Subtenant hereby agrees that if Subtenant takes
possession of the Premises prior to the Commencement Date, then from and
after the date Subtenant takes possession of the Premises (the "Possession
Date"), all of Subtenant's obligations and duties under this Sublease shall
be effective. Notwithstanding anything in this Sublease to the contrary,
with the exception of the Allowance, Subtenant shall pay all charges
incurred by Subtenant (including but not limited to fees, if any, charged
by Overlandlord) in connection with Subtenant's relocation to the Premises,
the installation of all equipment and utility services for the Premises
which are required by Subtenant, including, but not limited to, telephones,
computers, and additional electric service.
13. Condition of Premises. Sublessor shall deliver the Premises to
Subtenant on the Commencement Date in "as is/where is" condition. Sublessor
shall have no obligations under this Sublease or otherwise to perform any work,
alterations, installations or to remove any asbestos or asbestos containing
material (collectively, "ACM"), if any, from the Premises or elsewhere.
Sublessor makes no representations or warranties whatsoever with respect to the
presence of ACM in the Premises. In making and executing this Sublease,
Subtenant has relied solely on such investigations, examinations and
inspections as Subtenant has chosen to make. Subtenant acknowledges that
Sublessor has afforded Subtenant the opportunity for full and complete
investigations, examinations, and inspections of the Premises.
14. Consents and Approvals. In any instance when Sublessor's consent or
approval is required under this Sublease, Sublessor's refusal to consent to or
approve any matter or thing shall be deemed reasonable and in good faith if
such consent or approval has not been obtained from Overlandlord; provided
however, Sublessor covenants to use reasonable efforts, at the sole cost and
expense of Subtenant (including, without limitation, reasonable attorneys' fees
and expenses), to obtain the consent or approval of Overlandlord and will
indicate to Overlandlord in those cases where its approval is conditioned upon
Overlandlord's approval that it has no objection thereto and agrees that if
such consent of Overlandlord shall not be required, Sublessor shall not
unreasonably withhold or delay its consent to such matter. In the event that
Subtenant shall seek the approval by or consent of Sublessor and Sublessor
shall fail or refuse to give such consent or approval, Subtenant shall not be
entitled to any damages from Sublessor for any withholding or delay of such
approval or consent by Sublessor.
15. Notice. All notices, consents, approvals, demands and requests which
are required or desired to be given by either party to the other hereunder
shall be in writing and shall be personally delivered, sent by telefax or by
reputable overnight courier delivery service or sent by United States
registered or certified mail and deposited in a United States post office,
return receipt requested and postage prepaid. Notices, consents, approvals,
demands and requests which are served upon Sublessor or Subtenant in the manner
provided herein shall be deemed to have been given or served for all purposes
hereunder on the day personally delivered or refused, the next business day
after sending by overnight courier as aforesaid, on the third business day
after mailing as aforesaid, or, if via telefax, on the date of transmission.
All notices, consents, approvals, demands, and requests given to Sublessor or
Subtenant shall be addressed to the address set forth at the beginning of this
Sublease with notices to Sublessor being addressed to the attention of the Vice
President - Real Estate with a copy at the same time and in the same manner to
Property Administration, First Data Card Services Group, 11204 Chicago Circle,
Omaha, NE 68154, Attention: Eileen Murdoch. Either party may from time to time
change the names and/or
7
<PAGE> 12
addresses to which notices, consents, approvals, demands and requests shall be
addressed by a notice given in accordance with the provisions of this Paragraph.
16. Termination of Main Lease. If for any reason the term of the Main
Lease shall terminate prior to the Expiration Date, this Sublease shall
thereupon be terminated and Sublessor shall not be liable to Subtenant by
reason thereof unless both (a) Subtenant shall not then be in default
hereunder, and (b) said termination shall have been effected because of the
breach or default of Sublessor as tenant under the Main Lease.
17. Maintenance and Repairs. Subtenant shall, at Subtenant's sole cost
and expense, keep and maintain the Premises in good condition and repair,
including without limitation, all necessary maintenance and repairs to all
portions of the Premises and all exterior entrances, all glass, window
casements, show window moldings, all partitions, doors, doorjambs, door closers
and hardware fixtures exclusive of normal maintenance services. All damage or
injury to the Building and/or common areas in which the same are located,
caused by the negligence of Subtenant, its employees, agents or visitors, shall
be repaired by Subtenant at Subtenant's sole cost and expense. Subtenant shall
promptly replace any portion of the Premises which cannot be fully repaired,
regardless of whether the benefit of such replacement extends, beyond the Term.
It is the intention of Sublessor and Subtenant that, at all times during the
Term, Subtenant shall, at its cost, maintain the Premises in compliance with
all applicable laws and in the same condition as existed upon the Commencement
Date of the Sublease, reasonable wear and tear excepted. Notwithstanding the
foregoing, Sublessor hereby agrees to perform the repair obligations for the
Building as described in Section 7(A) of the Main Lease and Subtenant agrees
to reimburse Sublessor for its Proportionate Share of such repair costs after
the opportunity to review Sublessor's receipts for such repair costs. The cost
of any repair which is capital in nature shall be amortized on a straight line
basis over its useful life ("Useful Life") at an interest rate not to exceed ten
percent (10%) and Subtenant shall reimburse Sublessor the amount equal to
Subtenant's Proportionate Share of the annualized amortization during the Term
of this Sublease. The Useful Life of a capital item shall be determined using
the United States Internal Revenue Service standard depreciation schedule in
effect on the date that the applicable capital expenditure is made. Subtenant
shall also reimburse Subtenant's Proportionate Share of the annualized
amortization of any improvement or replacement which is capital in nature,
provided that the item is intended to result in a cost savings, then only to the
extent of saving actually realized. Subtenant shall not be required to reimburse
Sublessor for any changes, alterations or improvements to any portion of the
Building first required by any law or regulation prior to the Term Commencement
Date, to the extent not attributable to Subtenant's use and occupancy of the
Premises.
18. Assignment and Subletting. Subtenant shall not, by operation of law,
merger, consolidation or otherwise, assign, sell, mortgage, pledge or in any
manner transfer this Sublease or any interest therein, or sublet the Premises
or any part or parts thereof, or grant any concession or license or otherwise
permit occupancy of all or any part of the Premises by any person, except with
the prior written consent of Sublessor. Sublessor shall not unreasonably
withhold its consent to an assignment of this Sublease by Subtenant (which
assignment may nevertheless require the consent of Overlandlord), provided that
the assignee proposed by Subtenant shall demonstrate to the reasonable
satisfaction of Sublessor that such proposed assignee has a net worth and
financial capacity equal to or greater than the net worth and financial capacity
of Subtenant. Neither the consent of Sublessor to an assignment, subletting,
concession or license, nor the references in this Sublease to assignees,
subtenants, concessionaires or licensees, shall in any way be construed to
relieve Subtenant of the requirement of obtaining the consent of
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<PAGE> 13
Sublessor to any further assignment, subletting, concession or license for all
or any part of the Premises. In the event Sublessor consents to any assignment
of this Sublease, the assignee shall execute and deliver to Sublessor an
agreement in form and substance satisfactory to Sublessor whereby the assignee
shall assume all of Subtenant's obligations under this Sublease from and after
the date of the assignment. Notwithstanding any assignment or subletting,
including, without limitation, any assignment or subletting permitted or
consented to, the original Subtenant named herein and any other person(s) who
at any time was or were Subtenant shall remain fully liable on this Sublease,
and if this Sublease shall be amended, modified, extended or renewed, the
original Subtenant named herein and any other person(s) who at any time was or
were Subtenant shall remain fully liable on this Sublease as so amended,
modified, extended or renewed. Any violation of any provision of this Sublease
by any assignee, subtenant or other occupant shall be deemed a violation by the
original Subtenant named herein, the then Subtenant and any other person(s) who
at any time was or were Subtenant, it being the intention and meaning that the
original Subtenant named herein, the then Subtenant and any other person(s) who
at any time was or were Subtenant shall all be liable to Sublessor for any and
all acts or omissions of any and all assignees, subtenants and other occupants
of the Premises claiming by, through or under Subtenant. If this Sublease shall
be assigned or if the Premises or any part thereof shall be sublet or occupied
by any person or persons other than the original Subtenant named herein,
sublessor may collect rent from any such assignee and/or any subtenants or
occupants, and apply the net amounts collected to the Base Rent and Additional
Charges, but no such assignment, subletting, occupancy or collection shall be
deemed a waiver of any of the provisions of this Paragraph, or the acceptance
of the assignee, subtenant or occupant as Subtenant, or a release of any person
from the further performance by such person of the obligations of Subtenant
under this Sublease.
19. Insurance. Subtenant shall provide and maintain throughout the term
of this Sublease a policy or policies of comprehensive public liability
insurance in standard form naming Sublessor and Overlandlord as additional
insureds and otherwise complying with Section 17 of the Main Lease with limits
of not less than $2,000,000.00 combined single limit for both bodily injury or
death and for property damage, including water damage. A policy, binder or
other reasonable satisfactory evidence of such insurance shall be delivered to
Sublessor by Subtenant no less than ten (10) days before the Possession Date.
Subtenant shall procure and pay for renewals or replacements of such insurance
from time to time before the expiration thereof, and Subtenant shall deliver to
Sublessor such renewal or replacement policy or binder or other reasonably
satisfactory evidence of such insurance at lease 30 days before the expiration
of any existing policy. All such policies shall be issued by companies licensed
to do business in the State of California and shall contain a provision whereby
the same cannot be cancelled or modified unless Sublessor is given at least 30
days' prior written notice by certified or registered mail of such cancellation
or modification.
20. Right to Cure Subtenant's Defaults and Damages. If Subtenant shall at
any time fail to make any payment or perform any other obligation of Subtenant
hereunder within the applicable cure period, if any, then Sublessor shall have
the right, but not the obligation, after five days' notice to Subtenant, or
without notice to Subtenant in the case of any emergency, and without waiving
or releasing Subtenant from any obligations of Subtenant hereunder, to make
such payment or perform such other obligation of Subtenant in such manner and
to such extent as Sublessor shall deem necessary, and in exercising any such
right, to pay any incidental costs and expenses, employ attorneys, and incur and
pay reasonable attorneys' fees. Subtenant shall pay to sublessor upon demand
all sums so paid by Sublessor and all incidental costs and expenses of
Sublessor in connection therewith, together with interest thereon at the rate
of 2% per calendar month or any part thereof or the then maximum rate of
interest which may lawfully
9
<PAGE> 14
be collected from Subtenant, whichever shall be less, from the date of the
making of such expenditures.
21. Remedies of Sublessor.
(a) "Default" shall mean a default by Subtenant under any provision
of this Sublease which default has not been cured within any applicable
grace or cure period.
(b) If a Default occurs, Sublessor shall have, in addition to all its
rights and remedies contained in the Incorporated Provisions pursuant to
Section 4 hereof, the following rights and remedies; all of Sublessor's
rights and remedies under this Sublease are distinct, separate and
cumulative, and none will exclude any other right or remedy allowed by law:
(i) Sublessor may, with or without notice of such election and
with or without entry or other action by Sublessor, immediately
terminate this Sublease, in which event the Term of this Sublease
shall end and all right, title, and interest of Subtenant hereunder
shall expire; or
(ii) Sublessor may enforce the provisions of this Sublease and
may enforce and protect the rights of the Sublessor hereunder by a
suit or suits in equity or at law for the specific performance of any
covenant or agreement herein or for the enforcement of any other
appropriate legal or equitable remedy, including the recovery of all
moneys due or to become due under any of the provisions of this
Sublease.
(c) If Sublessor elects to terminate Subtenant's right to possession
only without terminating this Sublease, Sublessor, at Sublessor's option,
may enter into the Premises, remove Subtenant's signs and other evidences
of tenancy, and take and hold possession thereof without such entry and
possession terminating this Sublease or releasing Subtenant, in whole or in
part, from Subtenant's obligation to pay Rent under this Sublease for the
full Term, and in the case Sublessor elects to terminate the Sublease or to
terminate possession only, Subtenant will immediately pay to Sublessor, if
Sublessor so elects, a sum equal to the then present value (as defined in
the following sentence) of the entire amount of the Rent specified in
Section 9 of this Sublease for the remainder of the Term, plus any other
sums then due under this Sublease, less the fair rental value of the
Premises for such period. In calculating this sum, present value shall be
computed on the basis of a discount rate of six percent per annum. In the
alternative, upon and after entry into possession without termination of
the Sublease, Sublessor will use its best efforts to relet all or any part
of the Premises for Subtenant's account for such rent and for such time and
upon such terms as Sublessor in Sublessor's sole discretion may determine.
Sublessor will not be required to observe any instruction given by
Subtenant about such reletting. Subtenant will, upon demand, pay the cost
of Sublessor's expenses of the reletting. If the consideration collected by
Sublessor upon any such reletting for Subtenant's account is not sufficient
to pay monthly the full amount of the Rent due under this Sublease,
together with the costs of Sublessor's expenses, Subtenant will pay to
Sublessor the amount of each monthly deficiency upon demand.
(d) Subtenant will pay upon demand all of Sublessor's costs,
charges, and expenses, including reasonable attorneys' fees, and fees and
expenses of agents and
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<PAGE> 15
others retained by Sublessor in any litigation, negotiation, or transaction
in which Sublessor seeks to enforce the terms or provisions of this
Sublease.
22. Brokerage. Sublessor and Subtenant each represents to the other that
except for the Staubach Company ("Sublessor's Broker") and Colliers Parrish
International, Inc. ("Subtenant's Broker") (collectively, the "Sublease
Brokers"), no broker or other person had any part, or was instrumental in any
way, in bringing about this Sublease. Sublessor agrees to pay the Sublessor's
Broker for services rendered in connection with this Sublease pursuant to the
Agreement (the "Broker Agreement") between Sublessor and the Sublessor's
Broker. By its execution hereof Sublessor's Broker agrees to pay Subtenant's
Broker one-half of Sublessor's Broker's commission. Sublessor and Subtenant
each agree to indemnify, defend and hold harmless the other from and against,
any claims made by any broker or any person, other than the Sublease Brokers,
for a brokerage commission, finder's fee, or similar compensation, by reason of
or in connection with this Sublease, and any loss, liability, damage, cost and
expense (including, without limitation, reasonable attorneys' fees) in
connection with such claims if such broker or other person had, or claimed to
have, dealings with such party in bringing about this Sublease. The provisions
of this Paragraph 22 shall survive the expiration or termination of this
Sublease.
23. Waiver of Jury Trial and Right to Counterclaim. Subtenant hereby
waives all right to trial by jury in any summary or other action, proceeding or
counterclaim arising out of or in any way connected with this Sublease. With
the exception of any compulsory counterclaims, Subtenant also hereby waives all
right to assert or interpose a counterclaim in any summary proceeding or other
action or proceeding to recover or obtain possession of the Premises unless
legally required to do so to preserve the claim.
24. No Waiver. The failure of Sublessor to insist in any one or more
cases upon the strict performance or observance of any obligation of Subtenant
hereunder or to exercise any right or option contained herein shall not be
construed as a waiver or relinquishment for the future of any such obligation
of Subtenant or any right or option of Sublessor. Sublessor's receipt and
acceptance of Base Rent or Additional Charges, or Sublessor's acceptance of
performance of any other obligation by Subtenant, with knowledge of Subtenant's
breach of any provision of this Sublease, shall not be deemed a waiver of such
breach. No waiver by Sublessor of any term, covenant or condition of this
Sublease shall be deemed to have been made unless expressed in writing and
signed by Sublessor.
25. Complete Agreement. There are no representations, agreements,
arrangements or understandings, oral or written, between the parties relating
to the subject matter of this Sublease which are not fully expressed in this
Sublease. This Sublease cannot be changed or terminated orally or in any other
manner other than by a written agreement executed by both parties.
26. Successors and Assigns. The provisions of this Sublease, except as
herein otherwise specifically provided, shall extend to, bind and inure to the
benefit of the parties hereto and their respective personal representatives,
heirs, successors and permitted assigns. In the event of any assignment or
transfer of the leasehold estate under the Main Lease, the transferor or
assignor, as the case may be, shall be and hereby is entirely relieved and
freed of all obligations under this Sublease arising after the date of any such
assignment or transfer, except that Sublessor shall not be relieved and freed
of its payment obligations to Overlandlord under the Main Lease which payment
obligations are greater than the payment obligations of Subtenant to Sublessor
hereunder unless Overlandlord and Sublessor otherwise agree.
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<PAGE> 16
27. INTERPRETATION. Irrespective of the place of execution or performance,
this Sublease shall be governed by and construed in accordance with the laws of
the state where the Premises is located. If any provision of this Sublease or
the application thereof to any person or circumstance shall, for any reason and
to any extent, be invalid or unenforceable, the remainder of this Sublease and
the application of that provision to other persons or circumstances shall not be
affected but rather shall be enforced to the extent permitted by law. The table
of contents, captions, headings and titles, if any, in this Sublease are solely
for convenience of reference and shall not affect its interpretation. This
Sublease shall be construed without regard to any presumption or other rule
requiring construction against the party causing this Sublease to be drafted.
Each covenant, agreement, obligation or other provision of this Sublease shall
be deemed and construed as a separate and independent covenant of the party
bound by, undertaking or making same, not dependent on any other provision of
this Sublease unless otherwise expressly provided. All pronouns and any
variations thereof shall be deemed to refer to the masculine, feminine or
neuter, singular or plural, as the identity of the parties may require. The
word "person" as used in this Sublease shall mean a natural person or persons, a
partnership, a corporation or any other form of business or legal association or
entity. This Sublease may be executed in counterparts or with counterpart
signature pages.
28. CONSENT OF LANDLORD UNDER MAIN LEASE. This Sublease shall not be
operative or effective for any purpose whatsoever unless and until Overlandlord
shall have given its written consent as provided hereto and any conditions
precedent with respect to such consent have been satisfied or waived.
Sublessor shall have no obligation to satisfy any such conditions precedent
provided, however, that Subtenant may, but shall not be obligated to, satisfy
any such conditions precedent and Sublessor shall reasonably cooperate with
Subtenant (at no cost or expense to Sublessor) in this regard.
29. HOLDING OVER. Subtenant shall pay Sublessor a sum for each day that
Subtenant retains possession of the Premises or any part thereof after
termination of this Sublease, by lapse of time or otherwise, equal to two (2)
times the Rent payable hereunder, and Subtenant shall also pay damages
consequential as well as direct, sustained by Sublessor by reason of such
retention. Nothing in this Section contained, however, shall be construed or
operate as a waiver of Sublessor's right of reentry or any other right of
Sublessor under this Sublease or of Overlandlord under the Main Lease.
30. SECURITY DEPOSIT. Subtenant agrees to deposit with Sublessor, upon
the execution of this Sublease, $297,454.50 in cash (the "Cash Security
Deposit") and $594,909.00 in the form of an irrevocable letter of credit issued
by a bank acceptable to Sublessor in form and substance satisfactory to
Sublessor (the "Letter of Credit")(the "Cash Security Deposit" and the "Letter
of Credit" are sometimes hereinafter collectively referred to as the "Security
Deposit"), which Security Deposit is security for the full and faithful
performance by Subtenant of every term, provision, covenant, and condition of
this Sublease. The Cash Security Deposit will be held by Sublessor, provided
however, that Sublessor will have no obligation to segregate the amount from
Sublessor's other funds. Upon the occurrence of a Default by Subtenant in
respect to any of the terms, provisions, covenants, or conditions of this
Sublease, including, but not limited to, payment of Rent, Sublessor may use,
apply, or retain the whole or any part of the Cash Security Deposit so
deposited for the payment of any such Rent in default, or for any other sum
which Sublessor may expend or be required to expend by reason of Subtenant's
Default, including, without limitation, any damage or deficiency in the
reletting of the Premises, whether such damage or deficiency accrued before or
after any reentry by Sublessor. If any of the Cash Security Deposit is so
used, Subtenant, on written demand by Sublessor, will promptly pay to Sublessor
such additional sum as may be necessary to restore the deposit to the original
amount
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<PAGE> 17
set forth in this Section 30. In addition, upon the occurrence of a Default by
Subtenant in respect to any of the terms, provisions, covenants or conditions of
this Sublease, including, but not limited to, payment of Rent, Sublessor may
also draw on the Letter of Credit and apply such amount to the payment of any
sum in default or any other sum which Sublessor may require or deem necessary to
spend or incur by reason of Subtenant's default. In such event, Subtenant shall,
upon demand, increase the Letter of Credit by the amount so applied to replenish
the Letter of Credit. Notwithstanding the foregoing, in the event of a
nonmonetary Default by Subtenant, Sublessor shall give Subtenant 48 hours
advance written notice prior to using any portion of the Security Deposit. The
Letter of Credit shall be payable to Sublessor or its successors and assigns and
have an expiration date no earlier than the one-year anniversary of the
Commencement Date and be automatically renewable for consecutive one year
periods through and including the Expiration Date. If not renewed at least
thirty (30) days prior to the end of each such one-year period, Sublessor shall
be permitted to draw the full amount of the Letter of Credit. The Letter of
Credit shall expressly provide, among other things, that Sublessor may draw
under it by presentation of a sight draft and a written certification by
Sublessor that Sublessor is then entitled to draw the amount of the draft.
Sublessor's right to draw upon the Cash Security Deposit and/or the Letter of
Credit shall be cumulative, and Sublessor shall be entitled to draw upon either
or both, and shall not be required to deplete either portion of the Security
Deposit before proceeding to draw on the other portion of the Security Deposit.
Provided Subtenant is not in material default of this Sublease, the principal
sum of the Letter of Credit shall be reduced by fifty (50%) on the first day of
the thirteenth (13th) month of the Sublease Term. If Subtenant fully and
faithfully complies with all of the terms, provisions, covenants, and conditions
of this Sublease, the Cash Security Deposit, or any balance thereof will be
returned to Subtenant after the last to occur of the following:
(a) the time fixed as the expiration of the Term of this Sublease;
(b) the surrender of the Premises by Subtenant to Sublessor in
accordance with this Sublease;
(c) the receipt of Sublessor of all sums due pursuant to the
Sublease.
Except as otherwise required by law, Subtenant will not be entitled to any
interest on such Cash Security Deposit.
31. Counterparts. This Sublease may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute but one and the same instrument.
32. No offer. The submission of this Sublease shall not be deemed to be
an offer, an acceptance, or a reservation of the Premises; and Sublessor shall
not be bound hereby until Sublessor has delivered to Subtenant a fully executed
copy of this Sublease, signed by both of the parties on the last page of this
Sublease in the spaces herein provided. Until such delivery, Sublessor reserves
the right to exhibit and lease the Premises to other prospective tenants.
33. Hazardous Materials. Subtenant shall comply with any and all EnvLaws.
Subtenant shall not: (a) cause, permit or allow the presence of any Hazardous
Substance on the Premises, or (b) conduct or authorize the use, generation,
release, transportation, storage, treatment or disposal of Hazardous Substances
at the Premises.
34. Signage. Subject to the prior consent of Sublessor and Overlandlord
and provided all such signage complies with all applicable governmental laws,
ordinances, rules or
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<PAGE> 18
regulations, does not cause any structural damage or other damage to the
Building, does not violate any existing restrictions affecting the Building, and
is compatible with the architecture of the Building and the landscaped are
adjacent thereto, Subtenant shall have the right to install, as Subtenant's sole
cost and expense: (a) door signage at the entrance to the Premises; and (b) a
monument sign and directional signage. Subtenant shall remove all signage from
the Premises at the end of the Term.
35. Parking. Subtenant shall have the non-exclusive right to the parking
spaces allocated to the Premises at a ratio of approximately 4 parking space
to 1,000 rentable square feet of Premises at no additional charge. Subtenant,
its agents, employees, invitees and contractors shall comply with Building
rules and regulations applicable to use of the parking areas.
36. [OMITTED]
37. Rules and Regulations; Common Areas. Subtenant shall comply with all
reasonable rules and regulations and all subsequent amendments and
modifications established by Sublessor or Overlandlord with respect to the
Building and common areas thereof, and shall cause its employees, customers,
contractors, agents and invitees to so comply. Without liability to Subtenent
and without effecting an eviction or disturbance of Subtenant's use or
possession or giving rise to any claim for set-offs or abatement of Rent, and
without imposing any obligation on Sublessor or Overlandlord to undertake any
of the same, Sublessor (or Overlandlord, as the case may be) shall have the
right to: (a) make changes, repairs, additions or alterations to the common
areas of the Building, including without limitation changes in the location,
size, shape and number of driveways, entrances, parking areas, loading areas,
ingress/egress, direction of traffic, landscaped areas and walkways and changes
in the arrangement or location of entrances or passageways, doors and doorways,
corridors, stairs, toilets or other public parts of the Building; (b) close any
of the common areas for maintenance purposes, including entrances, doors,
corridors or other facilities; (c) perform any acts related to the safety,
protection, preservation, reletting or improvement of the Building; (d) change
the name or street address of the Building or suite number of the Premises;
(e) to require all persons entering or leaving the Building to identify
themselves to security personnel by registration or otherwise; and (f) to close
the Building after-hours and on week-ends.
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<PAGE> 19
IN WITNESS WHEREOF, Sublessor and Subtenant have executed this Sublease as
of the day and year first above written.
SUBLESSOR: FIRST DATA MERCHANT SERVICES CORPORATION, a Florida
corporation
By: /s/ DAVID SCHLAPBACH
--------------------------------------------------------
Name: David Schlapbach
------------------------------------------------------
Title: Assistant Secretary
-----------------------------------------------------
SUBTENANT: SOFTWARE.NET CORPORATION, a California corporation
By: /s/ MICHAEL J. PRAISNER
--------------------------------------------------------
Name: Michael J. Praisner
------------------------------------------------------
Title: CFO
-----------------------------------------------------
The undersigned Sublease Brokers join in this Lease for purposes of agreeing to
be bound by the provisions of Paragraph 22 hereof.
THE STABAUCH COMPANY COLLIER'S PARISH INTERNATIONAL, INC.
By: /s/ ANTHONY LAUFMANN By: /s/ ROBERT SHEPHERD
---------------------------- ----------------------------
Name: Anthony Laufmann Name: Robert Shepherd
-------------------------- --------------------------
Title: President, NW Corp Svcs Title: Senior Vice President
------------------------- -------------------------
15
<PAGE> 20
ACKNOWLEDGED AND CONSENTED TO:
Sunnyvale Partners Limited Partnership, landlord under the Main Lease,
hereby consents to the sublease of the Premises described in the foregoing
Sublease and confirms that the consent given hereby satisfies the requirements
for landlord's consent of the subletting of the Premises set forth in the Main
Lease.
SUNNYVALE PARTNERS LIMITED PARTNERSHIP
By: /s/ JAMES MARTELL
----------------------------------------
Name: James Martell
--------------------------------------
Title: President, Ridge Sunnyvale, Inc.
-------------------------------------
16
<PAGE> 21
EXHIBIT A
THE MAIN LEASE
17
<PAGE> 22
BUILD-TO-SUIT LEASE AGREEMENT
Landlord: SUNNYVALE PARTNERS LIMITED PARTNERSHIP
Tenant: FIRST DATA MERCHANT SERVICES CORPORATION
March 18, 1997
<PAGE> 23
TABLE OF CONTENT
<TABLE>
<S> <C> <C>
1. Description......................................................................1
2. Term and Occupancy...............................................................1
3. Rent.............................................................................2
4. Construction.....................................................................3
5. Use..............................................................................7
6. Condition of Demised Premises....................................................8
7. Maintenance and Repairs..........................................................8
8. Alterations......................................................................9
9. Signs...........................................................................11
10. Services........................................................................11
11. Compliance with Law.............................................................12
12. Landlord's Title, Authority, and Quiet Enjoyment; Tenant's Authority............13
13. Subordination...................................................................13
14. Assignment and Sublease.........................................................14
15. Lease Extension.................................................................15
16. Impositions.....................................................................16
17. Insurance.......................................................................18
18. Destruction and Restoration.....................................................20
19. Condemnation....................................................................22
20. Default by Tenant...............................................................26
21. Landlord's Remedies.............................................................27
22. Default by Landlord.............................................................28
23. Tenant's Remedies...............................................................28
</TABLE>
i
<PAGE> 24
<TABLE>
<S> <C> <C>
24. Delivery of Executed Lease......................................................29
25. Termination.....................................................................29
26. Notices.........................................................................29
27. Brokerage.......................................................................30
28. Estoppel........................................................................30
29. Hazardous Substances............................................................30
30. Holdover........................................................................32
31. Surrender.......................................................................32
32. Liens...........................................................................33
33. Interest; Late Charges..........................................................34
34. Inspections.....................................................................34
35. Transfer of Landlord's Interest.................................................34
36. Indemnity.......................................................................35
37. Modification of Lease...........................................................35
38. Memorandum of Lease.............................................................36
39. Paragraph Captions..............................................................36
40. Entire Agreement................................................................36
41. Choice of Law and Interpretation................................................36
42. Prevailing Party................................................................36
43. Exhibits........................................................................36
44. Guarantee.......................................................................37
45. Independent Covenants...........................................................37
46. Entry by Landlord...............................................................37
47. [Deleted by intent of parties.].................................................37
48. Survival of Obligations.........................................................37
</TABLE>
ii
<PAGE> 25
<TABLE>
<S> <C> <C>
49. Lease Subject to Landlord's Acquisition of Demised Premises.....................38
50. Americans With Disabilities Act.................................................38
51. Reports by Tenant...............................................................39
52. Option to Purchase..............................................................39
53. No Third Party Beneficiaries....................................................41
54. Counterparts....................................................................41
55. Consents and Approvals..........................................................41
56. Limitation on Damages...........................................................41
57. Tenant's Property...............................................................41
</TABLE>
Exhibit A - Legal Description
Exhibit B - Site Plan
Exhibit C - Plans
Exhibit C-1 - Construction Schedule
Exhibit D - Schedule of Rents
Exhibit E - Lease Term Agreement
Exhibit F - Memorandum of Lease
Exhibit G - Landlord's Development Costs
Exhibit H - Permitted Exceptions
Exhibit I - Escrow Agreement
iii
<PAGE> 26
THIS BUILD-TO-SUIT LEASE AGREEMENT (this "Lease") is made as of the 18th
day of March, 1997 (the "date hereof") between SUNNYVALE PARTNERS LIMITED
PARTNERSHIP, an Illinois limited partnership, having its principal office at c/o
Ridge Sunnyvale, Inc, c/o Ridge Capital Corporation, 257 East Main Street,
Barrington, Illinois 60010 (hereinafter referred to as "Landlord"), and FIRST
DATA MERCHANT SERVICES CORPORATION, having its principal office at 5660 New
Northside Drive, Suite 1400, Atlanta, Georgia 30328 (hereinafter referred to as
"Tenant").
WITNESSETH:
Landlord, for and in consideration of the rents, covenants and agreements
hereafter set forth on the part of Tenant to be paid, kept, observed and
performed does hereby lease unto Tenant, and Tenant does hereby take subject
to the conditions herein expressed, all that parcel of land situated in the
City of Sunnyvale, County of Santa Clara, State of California and legally
described in Exhibit A attached hereto and made a part hereof (the "Land"),
together with all improvements located and to be constructed thereon by
Landlord, which are hereinafter called "Landlord's Improvements." Landlord's
Improvements and all improvements, machinery, building equipment, fixtures and
other property of Landlord, real, personal or mixed (except Tenant's trade
fixtures and any other property of Tenant), installed or located thereon,
together with all additions, alterations and replacements thereof are
collectively referred to herein as the "Improvements." The Land and the
Improvements are sometimes hereinafter collectively referred to as the "Demised
Premises." The structure located upon and being a part of the Demised Premises
which is constructed to be used as a two story office building containing
approximately 80,000 "useable square feet" (as defined in Paragraph 4 below) us
hereinafter referred to as the "Building".
1. Description. Landlord will cause Landlord's Improvements (including
the Building and other site improvements depicted on the Site Plan attached
hereto and made a part hereof as Exhibit B) to be constructed in substantial
accordance with the plans and specifications enumerate on Exhibit C (the
"Plans"). Landlord agrees that Landlord shall not make any modifications or
changes to the Plans without Tenant's prior written consent. Landlord further
agrees to make any changes to the Plans requested by Tenant in writing and if
the change requested by Tenant increases or decreases the cost of the Demised
Premises, the Base Rent provided for herein shall be adjusted in accordance
with the provisions of the formula provided on Exhibit D.
2. Term and Occupancy. A. The term of this Lease shall commence on the
Construction Completion Date, as provided in Paragraph 4 below (hereinafter
referred to as the "Commencement Date"), and shall end on the date which is the
last day of the month that includes the twelfth (12th) anniversary of the
Commencement Date (hereinafter referred to as the "Expiration Date"), unless
the term be extended or earlier terminated as provided herein.
Landlord shall notify Tenant of the anticipated Construction Completion
Date. Landlord agrees to notify Tenant promptly from time to time of any
changes in the anticipated Construction Completion Date. Tenant shall have the
right to enter the Demised Premises during the approximately ninety (90) day
period preceding the Construction Completion Date for the purpose of installing
its equipment and Tenant does hereby agree to assume all risk of loss or
<PAGE> 27
damage to such equipment, and to indemnify, defend and hold harmless Landlord
from and against any loss or damage to such equipment and all liability, loss or
damage arising from any injury to the property of Landlord, or its contractors,
subcontractors or materialmen, and any death or personal injury to any person or
persons arising out of such installation. Landlord agrees to cooperate with
Tenant so that Tenant's contractors and tradespeople will be permitted to
reasonably perform their work without material interference. Tenant agrees to
cooperate with Landlord so that Landlord's contractors and tradespeople will be
permitted to reasonably perform their work without material interference.
B. Notwithstanding anything else in this Lease to the contrary, Tenant
shall have the right to terminate this Lease as of the end of the eighth (8th)
Lease Year (the "Early Termination Date") provided that Tenant shall (a) notify
Landlord in writing of its election to terminate at least one (1) year prior to
the Early Termination Date, and (b) pay to the Landlord, concurrently with the
notification to Landlord hereunder, a termination fee by certified or cashier's
check or wire transfer of available funds ("Termination Amount") equal to the
discounted present value (using Landlord's financing interest rate) amount
needed to reduce the remaining unamortized principal balance due on the
indebtedness originally incurred by Landlord to finance the Landlord's
Development Costs (as defined in Paragraph 19F) to [omitted]. If Tenant gives
such notice as required hereunder and pays the Termination Amount concurrently
therewith, this Lease shall be deemed terminated as to all rights or obligations
hereunder (except such rights and obligations as Landlord and Tenant would
otherwise have upon normal expiration of the term of this Lease). Any such
notice hereunder, not accompanied by the Termination Amount as provided
hereinabove, shall be deemed invalid and of no force or effect. Upon Landlord's
closing on the permanent loan for the financing of the Landlord's Development
Costs, Landlord shall provide to Tenant a copy of the twenty (20) year permanent
loan amortization (the "Loan Amortization"), which shall include the principal
amount that will be due at the end of the eighth (8th) Lease Year.
Tenant shall have the right to pay the Termination Amount to any mortgagee
of the Demised Premises or other person with a lien on the Demised Premises or
the rents derived therefrom, but Tenant shall have no such obligation to do so
unless such obligation is specifically set forth in a non-disturbance or other
agreement between Tenant and such mortgagee or other lienholder. Notwithstanding
the foregoing, Tenant acknowledges and agrees that any payment to any such
mortgagee or other lienholder shall only be effectuated by a two-party or
two-payee certified or cashier's check, made payable to both Landlord and any
such mortgagee or other lienholder.
3. Rent. The annual base rental ("Base Rent") shall be calculated in
accordance with the provisions set forth on the Schedule of Rents attached
hereto and made a part hereof as Exhibit D. Base Rent shall be paid monthly, in
advance, in equal installments, without offset or deduction by wire transfer in
accordance with separate instruction given by Landlord to Tenant, on the
Commencement Date and on the first day of each month thereafter during the term
hereof; provided however, that if the term of this Lease shall commence on a
date other than the first day of a calendar month or end on a date other than
the last day of a calendar month (i) the first and last month's Base Rent shall
be prorated based upon the ratio that the number of days in the term within such
month bears to the total number of days in such month, and (ii) Base Rent
reserved for the calendar month of any scheduled rent escalation shall be
equitably adjusted upon due
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consideration of the number of days in such month falling within the preceding
Lease Year (as herein defined) and the number of days in such month falling
within the current Lease Year. For purposes of this Lease, the term "Lease Year"
shall mean the 12-month period commencing on the Commencement Date and each
12-month period thereafter during the term of this Lease (and any renewal or
extension thereof), provided that, if the Commencement Date is not the first day
of a calendar month, the first "Lease Year" shall be the period commencing on
the Commencement Date and ending on the last day of the twelfth (12th) full
calendar month following the Commencement Date and all Base Rent payable for the
month in which the Commencement Date occurs shall be paid on the first day of
the following calendar month. Notwithstanding the foregoing, on or prior to the
date of closing under the Sale Agreement (as defined herein), Tenant shall also
deposit into escrow with First American Title Guaranty Company the sum of Two
Million Dollars ($2,000,000.00) to cover a portion of the Landlord's Development
Costs which shall be disbursed in accordance with the Escrow Agreement attached
hereto as Exhibit I.
4. Construction.
A. Landlord agrees, at Landlord's sole cost and expense, to cause
construction of Landlord's Improvements in accordance with the following
schedule:
(a) Landlord shall use all reasonable efforts to commence the Site
Preparation Phase (as defined in that certain Real Estate Purchase and
Sale Agreement and Joint Escrow Instructions dated March 18, 1997 (the
"Sale Agreement") between Regis Homes of Northern California, Inc. and
Landlord) as soon as possible following the date Landlord acquires the
Land and in any event on or before the date four (4) business days
following the date Landlord acquires the Land (the "Estimated Construction
Commencement Date"), in accordance with the Plans and in accordance with
the construction schedule attached hereto as Exhibit C.1 (the
"Construction Schedule") and shall diligently pursue construction in an
effort to complete Landlord's Improvements on or before the Estimated
Construction Completion Date (as herein defined); provided, however, if
delay is caused or contributed to by act or neglect of Tenant, or those
acting for or under Tenant including, without limitation, changes ordered
by Tenant, or delays caused by labor disputes, casualties, acts of God or
the public enemy, governmental embargo restrictions, shortages of fuel,
labor, or building materials, action or non-action of public utilities, or
of local, State or Federal governments affecting the work, or other
similar causes beyond the Landlord's reasonable control, then the time of
commencement of said construction shall be extended for the additional
time caused by such delay (such delays are each hereinafter referred to as
an "excused delay"). The date on which Landlord actually commences
construction of Landlord's Improvements shall be referred to as the
"Construction Commencement Date."
(b) Landlord shall use all reasonable efforts to substantially
complete construction of Landlord's Improvements as soon as possible
following the Construction of Commencement Date in accordance with the
Construction Schedule attached hereto as Exhibit C.1, as may be extended
by excused delays (the
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Estimated Construction Completion Date"). The date on which Landlord
substantially completes construction of Landlord's Improvements (except for
work to be performed by Tenant) shall be referred to as the "Construction
Completion Date." Landlord acknowledges that Tenant will suffer significant
damages if Landlord fails to deliver the Demised Premises on or before the
Estimated Construction Completion Date and that time is of the essence with
respect to the Landlord's completion of the Landlord's Improvements as
required herein. If Landlord fails to cause the Landlord's Improvements to
be substantially completed on or before the Estimated Construction
Completion Date, as said date may be extended from time to time due to
excused delays, Landlord shall be obligated to pay to Tenant the following
sums for each day after the Estimated Construction Completion Date until
the Construction Completion Date up to the maximum of sixty-five (65) days
of delay and thereafter, Landlord shall be liable for Tenant's actual
damages for the delay (which shall include Tenant's actual cost incurred in
connection with holding over at its present location and/or renting
reasonably acceptable substitute space): (a) for the first thirty (30)
days of delay, the sum of One Thousand Dollars ($1,000.00) per day for each
calendar day of delay; (b) for the thirty-first (31st) day through the
sixtieth (60th) day of delay, the sum of Two Thousand Five Hundred Dollars
($2,500.00) per day for each calendar day of delay; and (c) for the
sixty-first (61st) day through the sixty-fifth (65th) day of delay, the sum
of Seven Thousand Five Hundred Dollars ($7,500.00) per day for each
calendar day of delay. Notwithstanding the foregoing, in no event shall
Landlord be liable to Tenant for any punitive, special, incidental,
indirect or consequential damages of any kind whatsoever, each of which is
hereby excluded by agreement of the parties regardless of whether or not
any party has been advised of the possibility of such damages. Landlord
shall pay the sums calculated above (other than actual damages accrued
after the 95th day of delay) within thirty (30) days after the Commencement
Date. In connection with the foregoing, Landlord agrees to deposit into
escrow for the benefit of Tenant all damages received from Regis
Contractors of Northern California, L.P. pursuant to Section 1.7 of that
certain Construction Management Agreement dated March 18, 1997. Tenant
agrees to deliver to Landlord an accounting of Tenant's actual damages upon
request.
B. Tenant or its architect will from time to time upon written request
of Landlord or Landlord's construction lender certify that the construction of
Landlord's Improvements has been completed to that point to the reasonable
satisfaction of Tenant. Notwithstanding the foregoing, nothing contained
herein shall be deemed to abrogate, waive or compromise any of Tenant's rights
hereunder with respect to the construction and completion of Landlord's
Improvements.
C. In the event this Lease has not been terminated pursuant to Paragraph
49 of the Lease, Landlord and Tenant promptly shall execute a document
substantially in the form attached hereto as Exhibit E and made a part hereof,
to establish the Commencement Date and the Expiration Date.
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D. The following phrases shall have the meaning set forth below:
(a) The phrase "commence[d][s] construction of Landlord's
Improvements" as used herein means issuance of all necessary permits
needed to commence construction, a building permit, execution of a
construction contract or contracts for the completion of Landlord's
Improvements in accordance with the Plans, execution of this Lease, and
excavation work has commenced.
(b) The phrase "substantial[ly] complete[ed][ion] [of] construction
of Landlord's Improvements as used in this Lease shall mean the
municipality having jurisdiction thereof issues a certificate of occupancy
permitting Tenant to occupy Landlord's Improvements or takes such other
action as may be customary to permit occupancy or use thereof for the
purposes provided herein and Landlord's Improvements are otherwise ready
for beneficial use and occupancy by Tenant subject to completion of any
punchlist items (as defined herein) by Landlord and Landlord's architect
certified to Tenant in writing that Landlord's Improvements have been
constructed and completed in a good and workmanlike manner in substantial
accordance with the Plans and that to the best of its knowledge the Plans
comply with applicable laws, including without limitation all building
codes, zoning ordinances and regulations and the Act (as defined herein)
and Landlord's Improvements are otherwise ready for beneficial use and
occupancy by Tenant subject to completion of any punchlist items by
Landlord; provided, however, the issuance of a certificate of occupancy or
such other action as may be customary to permit occupancy or use thereof
and the issuance of the architect's certificate shall not be a condition
to payment of rent or commencement of the term if failure to secure such
certificate of occupancy or action or architect's certificate is caused by
the act or neglect of Tenant or if matters required for issuance are the
responsibility of Tenant.
(c) The phrase "usable square feet" means the square feet contained
within the inside of the exterior walls of the Building.
E. Within fifteen (15) days after the Construction Completion Date,
Tenant, Landlord and Landlord's Architect shall prepare and execute a punchlist
(the "punchlist") of incomplete and incorrect items which shall include details
of construction and mechanical and electrical adjustments which are minor in
character and do not materially interfere with Tenant's use or enjoyment of the
Demised Premises in accordance with the provisions of this Lease, and may also
include landscaping and other items which do not materially affect Tenant's use
of the Demised Premises but which cannot be immediately completed because of
weather, or any items listed on the Plans or the Construction Schedule as items
to be completed after substantial completion of the Landlord's Improvements, if
any (such items are sometimes hereinafter referred to as "punchlist items").
Landlord shall use all reasonable efforts to complete the punchlist items as
soon as possible after its receipt of the punchlist, and to minimize disruption
of Tenant's business and other inconveniences to Tenant, subject to excused
delays. If Landlord fails to complete the punchlist items within ninety (90)
days after the receipt by Landlord of the completed punchlist by Tenant, subject
to excused delays, then Tenant shall have the right, but not the obligation, to
complete the punchlist items and Landlord shall reimburse Tenant for its
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reasonable out-of-pocket expenditures in connection therewith upon presentation
of invoices in sufficient detail and lien waivers covering performance of the
work. Nothing herein contained shall be deemed or construed to permit Tenant to
offset against Base Rent or other charges payable by Tenant hereunder. Landlord
shall deliver to Tenant "as built" working drawings of the Landlord's
Improvements within sixty (60) days after completion of the punchlist items.
Landlord shall maintain a retainage of a minimum or ten percent (10%) of
the cost of the so-called tenant improvement portion of the Landlord
Improvements (the "TI Work") or [omitted] based on an estimated approximate cost
of [omitted] for the TI Work. The aforementioned retainage shall not be released
until the punchlist items for TI Work have been completed to Tenant's reasonable
satisfaction.
F. Landlord shall at its own expense correct or repair any parts of
Landlord's Improvements that fail to conform with the requirements of the Plans
during the period of construction of Landlord's Improvements (unless Tenant is
willing to accept such non-conforming work and so notifies Landlord thereof in
writing). Landlord shall correct any defects in the construction of Landlord's
Improvements not caused by Tenant which appear within a period of one (1) year
from the Construction Completion Date, but not otherwise. Landlord shall obtain
for the joint benefit of Landlord and Tenant, a joint, non-exclusive assignment
of all contractor, subcontractor, equipment, material and manufacturers'
warranties relating to Landlord's Improvements which shall contain a minimum of
a one (1) year warranty period commencing with the contractors' or
subcontractors' completion of the work included in the Landlord's Improvements
(the "Warranties"). Furthermore, on the Construction Completion Date, Landlord
shall assign to Tenant the non-exclusive right to enforce any and all
Warranties and Landlord agrees to reasonably cooperate with Tenant's pursuit of
any and all claims under the Warranties.
G. Tenant shall have the right to request that changes be made to the
Plans. Within ten (10) days after Tenant's requests, Landlord shall provide an
estimate of the amount that the change will increase or decrease the cost of
completing the Landlord's Improvements and the time adjustment to the
Construction Schedule, if any. If Tenant approves the change following receipt
of the estimates, Landlord shall submit a change order to its contractors to
implement the change requested by Tenant. The estimated increase or decrease in
the time required to complete the Landlord's Improvements resulting from
Tenant's change shall be reflected as an adjustment to the Construction
Schedule and shall be deemed an "excused delay" and any net increase or
decrease in Landlord's construction costs due to Tenant's change order, shall
be borne by or credited to Tenant, as the case may be, by means of an
adjustment to the Schedule of Rents in accordance with the formula established
on Exhibit D.
H. If due to change orders initiated by Tenant, Landlord's Development
Costs exceed the amount of [omitted] then concurrent with any such change order,
Tenant Agrees to deposit into the escrow created by the Escrow Agreement (as
defined in Paragraph 3 hereof) the total amount of any such increase in
Landlord's Development Costs in excess of [omitted]. Notwithstanding the
foregoing, upon the closing of the permanent financing for the Demised Premises
occurring on or after the Commencement Date, Landlord shall reimburse Tenant for
all such increased costs and the Base Rent shall be adjusted in accordance with
the formula
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established on Exhibit D; provided, however, Base Rent shall not be adjusted
until such time as Tenant is reimbursed hereunder.
5. Use.
A. The Demised Premises shall be used and occupied for general office
purposes and for any other purpose which does not violate any applicable law,
rule, ordinance or regulation of any applicable governmental authority having
jurisdiction ("Tenant's Use"). Landlord represents that, to its actual
knowledge, the Demised Premises are currently zoned "O".
Administrative-Professional District and R1.7/PD, low medium density
residential district under the zoning ordinance of the City of Sunnyvale,
California, which zoning classification, to Landlord's actual knowledge, will
not restrict or limit Tenant's Use; provided, however, Landlord makes no
representation as to whether a special use permit, zoning variance or
comparable relief from the local zoning ordinance is required to conduct
Tenant's Use, and if such special use, variance or comparable relief is
required, Tenant shall obtain the same (at its sole cost and expense). Landlord
further represents, to its actual knowledge without independent investigation
or inquiry and subject to the foregoing proviso, that there are no other zoning
ordinances or any other prohibitions restricting or limiting Tenant's Use in
any material respect. In addition, Tenant may use all or any part of the
Demised Premises for any lawful purpose then permitted by local zoning
ordinances and the certificate of occupancy, if available; provided, however,
Tenant may not use or occupy the Demised Premises, or knowingly permit the
Demised Premises to be used or occupied (including without limitation
subleasing the Demised Premises or any part thereof or assigning this Lease to
any other party conducting a business other than Tenant's Use) or in such
a manner as to cause the value or usefulness of the Demised Premises, or any
part thereof, substantially to diminish (reasonable wear and tear excepted).
Tenant shall have the exclusive right to use of and shall have full access to
the Demised Premises twenty-four (24) hours per day, seven (7) days per week,
three hundred sixty-five (365) days per year during the term.
B. Tenant may, if Tenant so elects, and for Tenant's sole use, install
and operate within the Building microwave ovens and install and operate within
the Building vending machines to dispense hot and cold beverages, ice cream,
candy, food and cigarettes; such machines shall be maintained in a neat and
sanitary condition and shall comply with all applicable laws and ordinances.
Tenant shall also have the right to use, install and operate within the
Building, all telecommunication lines and other telecommunication and
electronic facilities relating to services to be provided to Tenant and its
subtenants and Landlord agrees to provide all necessary easements upon the
Demised Premises reasonably required by said service provider. Upon termination
of the Lease, and if so requested by Landlord, Tenant shall, at its sole cost
and expense, in a good and workmanlike manner and in as expeditious a manner as
possible, remove any or all of such items from the Demised Premises, to the
extent required by Landlord. Tenant further agrees to repair any damage to the
Demised Premises caused by the removal of such items. In conclusion with any
easements granted hereunder to service providers, Landlord reserves the right
to condition any such grant upon receipt of acknowledgement from the relevant
service provider(s) that such service provider agrees to vacate the easement,
and relinquish all of its rights in the Demised Premises, effective upon the
termination of the Lease. Notwithstanding anything contained herein to the
contrary, if the Lease is in full force and effect as of the thirteenth (13th)
anniversary of the Commencement Date and Tenant is not then in default
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hereunder, Landlord waives its rights hereunder to require Tenant to remove from
the Demised Premises any or all of the items referred to above, upon termination
of this Lease.
6. Condition of Demised Premises. Landlord shall construct and Tenant
shall reasonably accept Landlord's Improvements in accordance with the Plans.
As of the Commencement Date, Landlord's Improvements shall be in good working
order and condition, and subject to the items on or to be inserted on the
punchlist, constructed in substantial accordance with the Plans.
7. Maintenance and Repairs.
A. Except as otherwise provided herein, during the term of this Lease,
Tenant shall at Tenant's sole expense, keep the Demised Premises in good
working order, condition and repair and in compliance with all applicable laws
and shall perform all routine maintenance thereof and all necessary repairs
thereto, interior and exterior, structural and nonstructural ordinary and
extraordinary, foreseen or unforeseen, of every nature, kind and description.
When used in this Paragraph 7, "repairs" shall include all necessary
replacements, renewals, alterations, additions and betterments. If Tenant
cannot keep the Demised Premises or any portion thereof in good working order,
condition and repair, then Tenant shall replace the same in a first-class
manner. Tenant shall comply with manufacturers' recommended schedules for
warranty work. Tenant shall furnish all its own cleaning services. All
repairs and replacements made by Tenant shall be at least equal in quality to
the original work and shall be made by Tenant in accordance with all applicable
laws. The necessity for or adequacy of maintenance, repairs and replacements
shall be measured by the standards which are appropriate to improvements of
similar construction and class, provided that Tenant shall in any event make
all repairs and replacements necessary to avoid any structural damage or other
damage or injury to the Demised Premises.
B. Notwithstanding the provisions of Paragraph 7.A., and Tenant's
obligations to pay for all repairs, in the event that at any time during the
term of this Lease after the expiration of the twentieth (20th) Lease Year
(commencing with the Third Extension Term), Tenant reasonably determines that
capital expenditures are required to be expended by Tenant in connection with
maintaining, repairing or replacing the roof or structural components of the
Building, or replacing the parking areas, Building plumbing, electrical
heating, ventilation, or cooling equipment, sprinkler systems, or making any
other capital expenditure required by subsequent law (any such capital
expenditure being herein referred to as a "Specified Capital Item"), then the
Tenant shall submit to Landlord a proposed budget for such capital expenses for
the Specified Capital Items and obtain Landlord's prior written approval
thereof, which written approval shall not be unreasonably withheld or delayed.
Upon Tenant's obtaining Landlord's prior written approval of such Specified
Capital Items and Tenant completing such work in accordance with the
requirements set forth in this Lease, then and in that event, the Landlord
agrees that it shall reimburse Tenant for an amount ("Reimbursement Amount")
equal to the actual costs incurred in connection with the Specified Capital Item
previously approved by Landlord multiplied by a fraction, the numerator of which
is the portion of the useful life of such Specified Capital Items remaining
after the then existing term and the denominator of which is the useful life of
such Specified Capital Item (i.e., by way of example, in the event that the
approved cost for an approved Specified Capital Item was One Thousand Dollars
($1,000.00) and the useful life of such Specified Capital Item was eight (8)
years and such work was commenced at the end of the
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twentieth (20th) Lease Year, then in such event, Landlord would reimburse Tenant
for Five Hundred Dollars ($500) as the Reimbursement Amount). The "useful life"
of a Specified Capital Item shall be determined using the United States Internal
Revenue Service standard depreciation schedule in effect on the date that the
applicable capital expenditure is made. Notwithstanding anything contained
herein to the contrary, in the event that the Tenant exercises its option to
extend the term of the Lease, then simultaneous with the exercise of such
renewal option, the Tenant shall pay to Landlord an amount equal to the
difference between the Reimbursement Amount and the amount Landlord would have
paid as a Reimbursement Amount had the term been extended by the Extension Term
at the time such Specified Capital Item was commenced (i.e., by way of example,
in the event that the Specified Capital Item was One Thousand Dollars ($1,000)
and that the useful life of the Specified Capital Item was eight (8) years, with
such work having been commenced at the end of the twentieth (20th) Lease Year,
whereby Landlord reimbursed Tenant a Reimbursement Amount of Five Hundred
Dollars ($500), then simultaneous with the exercise of its option to extend the
Term for the Fourth Extension Term, the Tenant would pay to Landlord an amount
equal to Five Hundred Dollars ($500)). The allocation of the costs of Specified
Capital Items as set forth in this Paragraph 7.B. shall not relieve Tenant of
Tenant's maintenance and repair obligations under this Lease.
8. Alterations. Tenant may install tenant finishes in the Demised
Premises and make interior alterations, additional installations,
modifications, substitutions, improvements and decorations (collectively,
"Alterations") in and to the Demised Premises, subject only to the following
conditions:
(i) any Alterations shall be made at Tenant's sole cost and expense
so that the Demised Premises shall at all times be free of liens for
labor and materials supplied to the Demised Premises;
(ii) without the prior written approval of Landlord, Tenant shall
make no Alterations (x) which are structural in nature or adversely
affect in any way the structure of the Demised Premises; or (y) which
adversely affect or could render void or invalidate any Warranties under
this Lease. In addition, without the prior written approval of Landlord,
Tenant shall make no Alterations to any portion of the exterior or
elevation of the Building.
(iii) any Alterations shall be performed in a good and workmanlike
manner and in compliance with all applicable laws and requirements of
governmental authorities having jurisdiction and applicable insurance
requirements and shall not violate any term of any agreement or
restriction to which the Demised Premises are subject;
(iv) Tenant, at its sole cost and expense, shall cause its
contractors to maintain builder's risk insurance and such other insurance
(including, without limitation, workers compensation insurance) as is then
customarily maintained for such work, all with insurers licensed by the
State of California;
(v) At least fifteen (15) days prior to Tenant's commencement of any
Alterations costing in excess of One Million Dollars ($1,000,000.00), the
plans and specifications therefor shall be submitted to Landlord for
Landlord's review and
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approval, which approval shall not be unreasonably withheld or delayed
provided that the provisions of this subparagraph (v) shall not apply to
initial tenant improvements needed to locate a subtenant in the Demised
Premises; and
(vi) To the extent not inconsistent with the requirements set forth
above, Tenant shall not be required to obtain Landlord's consent to
Alterations which are a subtenant's initial tenant improvements.
Any Alteration shall, when completed, be of such character as not to
reduce the value or utility of the Demised Premises or the Building to which
such Alteration is made below its value or utility to Landlord immediately
before such Alteration, nor shall such Alternation after the exterior of the
Improvements or reduce the area or cubic content of the Building, nor change
the character of the Demised Premises or the Building as to use without
Landlord's express written consent.
No change, alteration, restoration or new construction shall be in or
connect the Improvements with any property, building or other improvement
located outside the boundaries of the Land, nor shall the same obstruct or
interfere with any existing easement.
Tenant shall notify Landlord in writing 30 days prior to commencing any
alterations, additions or improvements to the Demised Premises so that Landlord
shall have the right to record and post notices of nonresponsibility on the
Demised Premises. Within a reasonable time period prior to commencing the
alterations, additions or improvements, Tenant shall provide Landlord with
copies of all plans and specifications prepared in connection with any such
alteration, addition or improvement, as well as copies of each material
amendment and change thereto, if and when applicable.
All of Tenant's generators and uninterruptible power supply equipment (but
in no event including the primary HVAC system serving the Building), trade
fixtures, movable partitions, furniture, machinery and furnishings installed by
Tenant or assignees, subtenants or licensees of Tenant shall remain the
property of the owner thereof with the right of removal, whether or not affixed
and or attached to the real estate and the owner thereof shall be entitled to
remove the same or any part thereof during the term or at the end of the term
provided herein, provided that such owner shall repair any damage caused by
such removal. Except as otherwise provided herein, all Alterations made or
installed by Tenant shall remain the Property of Tenant and Tenant shall have
the right to remove the Alterations at any time during the term hereof provided
Tenant shall repair any damage resulting therefrom and leave the Demised
Premises in a commercially reasonable condition. Notwithstanding the foregoing,
any Alterations remaining on the Demised Premises at the end of the term shall
become the property of Landlord without payment therefor by Landlord, and shall
be surrendered to Landlord at the expiration of the term of this Lease;
provided however, if the Lease term ends prior to the thirteenth (13th)
anniversary of the Lease Commencement Date, if so requested by Landlord, Tenant
shall, at is sole cost and expense and in as expeditious a manner as possible
remove any or all of such Alterations from the Demised Premises, to the extent
required by Landlord. Tenant further agrees to repair any damage resulting
therefrom and leave the Demised Premises in a commercially reasonable condition.
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9. Signs.
A. Tenant may install, at its expense and pursuant to the Plans, a
monument identification sign containing Tenant's name at a location depicted on
Exhibit B unless such location would cause a violation of applicable laws in
which event said monument identification sign shall be moved to a location
mutually acceptable to the parties. Tenant shall also have the right to place
any additional signs at the Demised Premises without the prior consent of
Landlord, provided that such sign or signs (a) do not cause any structural
damage or other damage to the Building; (b) do not violate applicable
governmental laws, ordinances, rules or regulations; (c) do not violate any
existing restrictions affecting the Demised Premises; and (d) are compatible
with the architecture of the Building and the landscaped area adjacent thereto.
Tenant shall remove all signage from the Demised Premises at the end of the
term.
B. Landlord may place signs on the Demised Premises identifying Tenant
prior to the Construction Completion Date, provided Tenant has approved each
sign, such approval not to be unreasonably withheld.
10. Services.
A. Landlord shall provide all utility equipment, distribution systems,
fixtures and parts to the Demised Premises in accordance with the Plans, and
shall in all other respects prepare the Demised Premises to accept all
utilities to be used by Tenant during the term of the Lease as contemplated by
the Plans including all connection, tap-in and impact fees, any charges for
the underground installation of electric, gas or other utilities or services,
and other charges relating to the extension of or change in the facilities
necessary to provide the Demised Premises with adequate utilities services.
Tenant shall contract for and pay directly for the cost of usage of all
utilities including all charges for water, heat, gas, light, garbage,
electricity, telephone, sewage, steam, power or other public or private utility
services. If after Landlord's installation of the utility systems required to be
provided herein, any bond, charge or fee is required by the state in which the
Demised Premises are located, or any city or other agency, subdivision, or
instrumentality thereof, or by any utility company furnishing services or
utilities to the Demised Premises, as a condition precedent to continuing to
furnish utilities or services to the Demised Premises, such bond, charge or fee
shall be deemed to be a utility charge payable by Tenant. To the extent existing
utility easements on the Demised Premises are not sufficient to provide utility
and communication services to the Demised Premises for Tenant's Use, Landlord
agrees to grant additional easements to utility providers, including
telecommunication and electronic service providers, if reasonably required by
Tenant.
B. The Demised Premises shall include all of the improvements shown on
the Site Plan, including, without limitation, exclusive use of the paved
parking as set forth on the Site Plan.
C. Tenant acknowledges that any one or more of the services provided for
in Paragraph 10 hereof may be interrupted or suspended by reason of accident,
repair, alterations or improvements necessary to be made, strike, lockout,
misuse or neglect by Tenant and Tenant's agents, employees or invitees, or by
shortages of fuel or other energy supplies to be provided by public or private
utilities or supplies or by other matters, and Landlord shall not be liable to
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Tenant therefor, nor shall Tenant have any right to terminate the Lease or other
rights against Landlord in the event of a failure, interruption or suspension of
any of the aforesaid services.
11. Compliance with Law.
A. Landlord covenants that the Demised Premises (except trade fixtures,
equipment, machinery or any other item constructed or installed by Tenant) will
materially conform as of the Commencement Date to any applicable laws, orders,
statutes, ordinances, rules, regulations and requirements of federal, state and
municipal governments, including, without limitation, all applicable rules and
regulations of the Board of Fire Underwriters and any requirements of the
certificate of occupancy or any permit with respect to the Demised Premises and
the sidewalks, curbs, roadways, alleys, entrances or other facilities adjacent
or appurtenant thereto. Landlord shall be responsible for procuring building
and other permits and licenses necessary for construction of Landlord's
Improvements.
B. Tenant shall throughout the term of this Lease, at Tenant's sole
cost, materially comply with or remove or cure any violation of any applicable
laws, orders, statutes, ordinances, rules, regulations and requirements of
federal, state and municipal governments, including, without limitation, any
applicable laws, orders, statutes, ordinances, rules, regulations and
requirements of any federal, state or local government relating to occupational
safety and health (collectively, the "OSHA Regulations"), all applicable rules
and regulations of the Board of Fire Underwriters and any requirements of the
certificate of occupancy or any permit with respect to the Demised Premises and
the sidewalks, curbs, roadways, alleys, entrances or railroad track facilities
adjacent or appurtenant thereto, and whether the compliance, curing or removal
of any such violation and the costs and expenses necessitated thereby shall
have been foreseen or unforeseen, ordinary or extraordinary, and whether or not
the same shall be presently within the contemplation of Landlord or Tenant or
shall involve any change of governmental policy, or require structural or
extraordinary repairs, alterations or additions by Tenant and irrespective of
the costs thereof; provided, however, that Landlord shall be responsible, at
Landlord's sole cost, to make all repairs needed for the Demised Premises to
comply with all laws if said repair is required within one (1) years after the
Commencement Date and is necessary due to a defect in the construction of the
Landlord's Improvements including without limitation, a failure to construct
the Landlord's Improvements so that the Demised Premises are in compliance with
all laws as of the Commencement Date. Tenant, at its sole cost and expense,
shall comply with all agreements, contracts, easements, restrictions,
reservations or covenants, if any, affecting the Demised Premises or hereafter
created by Tenant and consented to, in writing, by Tenant or requested, in
writing, by Tenant. Tenant shall also comply with, observe and perform all
provisions and requirements of all policies of insurance at any time in force
with respect to the Demised Premises and shall comply with all development
permits issued by governmental authorities issued in connection with development
of the Demised Premises. Tenant shall procure and maintain all permits and
licenses required for the transaction of Tenant's business at the Demised
Premises, including with limitation, any special use permit, zoning variance or
comparable zoning relief necessary for Tenant's Use.
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12. Landlord's Title, Authority, and Quiet Enjoyment; Tenant's Authority.
A. Landlord represents that it will have, as of the Commencement Date,
marketable fee simple title to the Demised Premises, subject to the exceptions
to title currently encumbering the Demised Premises as described in Exhibit H,
and any additional exceptions to title created in connection with Landlord's
acquisition or development of the Demised Premises, or financing of such
acquisition or development (collectively referred to herein as the "Permitted
Exceptions"). Landlord represents that any such additional exceptions to title
created in connection with Landlord's acquisition or development of the Demised
Premises or financing of such acquisition or development shall not materially
interfere with Tenant's intended use of the Demised Premises. Any lien claims
properly bonded over or insured over by title insurance shall be deemed to be
Permitted Exceptions hereunder.
B. Landlord represents and warrants that it has full and complete
authority to enter into this Lease under all of the terms, conditions and
provisions set forth herein, and so long as Tenant keeps and substantially
performs each and every term, provision and condition herein contained on the
part of Tenant to be kept and performed, Tenant shall peacefully and quietly
enjoy the Demised Premises without hindrance or molestation by Landlord or by
any other person claiming by, through or under Landlord, subject to the terms
of the lease. Without limiting the foregoing, Landlord covenants to perform all
obligations to be performed by Landlord and to pay as and when due all amounts
to be paid by Landlord under any mortgage, deed of trust, ground lease or other
instrument encumbering the Demised Premises. Each individual executing this
Lease on behalf of Landlord represents and warrants to Tenant that he or she is
duly authorized to do so.
C. Tenant represents and warrants that it has full and complete
authority to enter into this Lease under all of the terms, conditions and
provisions set forth herein.
D. Tenant hereby approves the condition of Landlord's title to the
Demised Premises. This Lease shall be subject to the Permitted Exceptions and
Landlord shall not permit or cause any easements, covenants, restrictions,
conditions or other changes in Landlord's title which would materially and
adversely impact Tenant's Use. Landlord shall notify Tenant in writing prior to
permitting or causing any easements, covenants, restrictions, or conditions to
be placed of record.
13. Subordination. The priority of this Lease and the leasehold estate of
Tenant created hereunder are and shall be subject and subordinate to the lien of
any mortgage, deed of trust, sale-leaseback, ground lease or similar
encumbrance, whether such encumbrance is placed against the fee or leasehold
estate, affecting the Demised Premises and to all renewals, modifications,
consolidations, replacements and extensions thereof, and advances thereunder;
provided, however, with respect to any mortgage, deed of trust, sale-leaseback,
ground lease or similar encumbrance such subordination shall be subject to
receipt by Tenant of a nondisturbance agreement in form reasonably required by
any such lienholder or ground Lessor (collectively, a "Mortgagee") and
reasonably acceptable to Tenant. Tenant agrees at any time hereafter, upon
twenty (20) days prior written notice, to execute and deliver any instruments,
releases or other documents that may reasonably be required for the purpose of
subjecting and subordinating this Lease, as above provided, to the lien of any
such mortgage, deed of trust, ground lease, sale-
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leaseback or similar encumbrance in a form reasonably acceptable to Tenant and
the holder of such mortgage, provided said subordination provides that all
insurance proceeds and condemnation awards will be made available for the
restoration of the Demised Premises, as provided herein, and that Tenant's
rights hereunder will not be disturbed unless Tenant is in default beyond all
applicable cure periods. Any fee which Landlord's lender or ground lessor may
charge for such agreement shall be paid by Landlord.
In the event of any act or omission of Landlord constituting a default by
Landlord, Tenant shall not exercise any remedy until Tenant has given Landlord
and any mortgagee, ground lessor or sale-leaseback lessor of the Demised
Premises that has provided Tenant with written notice of its interest in the
Demised Premises and a notice address for each such party a prior thirty (30)
day written notice of such act or omission and until a reasonable period of
time to allow Landlord or the mortgagee, ground lessor or sale-leaseback lessor
to remedy such act or omission shall have elapsed following the giving of such
notice; provided, however, if such act or omission cannot, with due diligence
and in good faith, be remedied within such thirty (30) day period, then
Landlord or any such mortgagee, ground lessor or sale-leaseback lessor shall be
allowed such further period of time as may be reasonably necessary provided
that it commence remedying the same with due diligence and in good faith within
said thirty (30) day period.
If any Mortgagee shall succeed to the rights of Landlord under this Lease
or to ownership of the Demised Premises, whether through possession or
foreclosure or the delivery of a deed to the Demised Premises, then, upon
written request of such mortgagee so succeeding to Landlord's rights hereunder,
Tenant shall attorn to and recognize such mortgagee, ground lessor or
sale-leaseback lessor as Tenant's landlord under this Lease, and shall
promptly execute and deliver any instrument that such mortgagee may reasonably
request to evidence such attornment (whether before or after making of the
mortgage, ground lease or sale-leaseback lease). In the event of any other
transfer of Landlord's interest hereunder, upon the written request of the
transferee and Landlord, Tenant shall attorn to and recognize such transferee
as Tenant's landlord under this Lease and shall promptly execute and deliver
any instrument that such transferee and Landlord may reasonably request to
evidence such attornment.
14. Assignment and Sublease. Tenant, if there is no Material Breach (as
herein defined) by Tenant hereunder, shall have the right to assign this Lease
or to sublease all or any portion or the Demised Premises, without Landlord's
written consent in accordance with the terms of this Paragraph 14.
Tenant may assign this Lease or sublet the Demised Premises to an
affiliate or subsidiary more than fifty percent (50%) of the voting stock of
which is owned directly or indirectly by the direct or remote parent of Tenant
(without Landlord's consent, upon prior written notice to Landlord) and further
Tenant's interest in this Lease may be assigned to and assumed by a successor
to Tenant pursuant to a purchase of all or substantially all of the assets of
Tenant in connection with the sale of such assets or to any entity which
acquires all of Tenant's capital stock (without Landlord's consent upon prior
written notice to Landlord).
Any assignment or sublease shall require the assignee or subtenant to
comply with all terms of this Lease except for any sublease term, which shall
be at Tenant's discretion (but in no event extended beyond the term of this
Lease), and a copy of such sublease or assignment shall be
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delivered to Landlord at least ten (10) days prior to commencement of such
sublease or assignment.
Any assignee shall assume, by instrument in form and content satisfactory
to Landlord, the due performance of all of Tenant's obligations under this
Lease, including any accrued obligations at the time of the effective date of
the assignment, and such assumption agreement shall state that the same is made
by the assignee for the express benefit of Landlord as a third party
beneficiary thereof.
Each sublease permitted by this Paragraph 14 shall be subject and
subordinate to all of the terms, covenants and conditions of this Lease and to
all of the rights of Landlord hereunder; and in the event this Lease shall
terminate before the expiration of such sublease, the sublessee thereunder
will, at Landlord's option, attorn to Landlord and waive any rights the
sublessee may have to terminate the sublease or to surrender possession
thereunder, as a result of the termination of this Lease.
Tenant agrees to pay on behalf of Landlord any and all costs of Landlord
or otherwise occasioned by such assignment or subletting, including without
limitation, the cost of any alteration, addition, improvement or other
renovation or refurbishment to the Demised Premises made in connection with
such assignment or subletting and any cost imposed by any governmental
authority in connection with any of the foregoing.
Any assignment or subletting under this Paragraph 14 shall not relieve
Tenant (or any guarantor of Tenant's obligations under the Lease or any
assignee) of its obligations hereunder. Any assignment or subletting of this
Lease which is not in compliance with the provisions of this Paragraph 14 shall
be of no effect and void. Except as permitted in this Paragraph 14, Tenant
shall not transfer, sublet, assign or otherwise encumber its interest in the
Lease or the Demised Premises, unless consented to by Landlord.
No assignment or subleasing hereunder shall relieve Tenant from any of
Tenant's obligations in this Lease contained.
All profits from any such assignment or subletting shall be the property
of Tenant and not Landlord.
15. Lease Extension. If this Lease shall not have been terminated
pursuant to any provisions hereof and there is no Material Breach (as defined
herein) by Tenant hereunder at the time set for exercise of the Extension Terms
(as herein defined) and at the time set for commencement thereof, then Tenant
may, at Tenant's option, extend the term of this Lease for five (5) successive
additional terms of four (4) years each (each an "Extension Term," collectively
the "Extension Terms") commencing on the expiration of the original term, or
the immediately preceding Extension Term, as the case may be. Tenant may
exercise such option by giving Landlord written notice at least ten (10) months
prior to the expiration of the original or the immediately preceding Extension
Term, as the case may be. Upon the giving by Tenant to Landlord of such written
notice and the compliance by Tenant with the foregoing provisions of this
Paragraph 15, this Lease shall be deemed to be automatically extended upon all
the
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covenants, agreements, terms, provisions and conditions set forth in this Lease,
except that Base Rent for each such Extension Term shall be as provided on
Exhibit D.
If Tenant fails or omits to so give to Landlord the written notice
referred to above, Landlord shall provide Tenant with written notice of
Tenant's failure to exercise the Extension Term, and upon receipt of such
notice, Tenant shall be allowed fifteen (15) days to exercise the extension
option allowed for herein. If Landlord fails to provide such notice, Tenant's
renewal option shall expire upon the expiration of the then current term.
Failure to respond to Landlord's notice within such fifteen (15) days shall be
deemed to be a waiver by Tenant of its extension option hereunder.
16. Impositions.
A. Tenant covenants and agrees to pay during the term of this Lease, as
Additional Rent, before any fine, penalty, interest or cost may be added
thereto for the nonpayment thereof, all impositions described herein that
accrue on or after the Commencement Date, which include without limitation, all
real estate taxes, special assessments, water rates and charges, sewer rates and
charges, including any sum or sums payable for future sewer or water capacity
increases, charges for public utilities, street lighting, excise levies,
licenses, permits, inspection fees, other governmental charges, and all other
charges or burdens of whatsoever kind and nature (including costs, fees, and
expenses of complying with any restrictive covenants or similar agreements to
which the Demised Premises are subject), incurred in the use, occupancy,
ownership, operation, leasing or possession of the Demised Premises, without
particularizing by any known name or by whatever name hereafter called, and
whether any of the foregoing be general or special, ordinary or extraordinary,
foreseen or unforeseen (all of which are sometimes herein referred to as
"Impositions"), which at any time during the term may have been or may be
assessed, levied, confirmed, imposed upon, or become a lien on the Demised
Premises, or any portion thereof, or any appurtenance thereto, rents or income
therefrom, and such easements or rights as may now or hereafter be appurtenant
or appertain to the use of the Demised Premises.
B. If, at any time during the term of this Lease, any method of taxation
shall be such that there shall be levied, assessed or imposed on Landlord, or
on the Basic Rent or Additional Rent, or on the Demised Premises or on the
value of the Demised Premises, or any portion thereof, a capital levy, sales or
use tax, gross receipts tax or other tax on the rents received therefrom, or a
franchise tax, or an assessment, levy or charge measured by or based in whole
or in part upon such rents or value, Tenant covenants to pay and discharge the
same, it being the intention of the parties hereto that the rent to be paid
hereunder shall be paid to Landlord absolutely net without deduction or charge
of any nature whatsoever foreseeable or unforeseeable, ordinary or
extraordinary, or of any nature, kind or description, except as in this Lease
otherwise expressly provided. Nothing in this Lease contained shall require
Tenant to pay any municipal, state or federal net income or excess profits
taxes assessed against Landlord, or any municipal, state or federal capital
levy, estate succession, inheritance or transfer taxes of Landlord, or
corporation franchise taxes imposed upon any corporate owner of the fee of the
Demised Premises.
C. Tenant covenants to furnish Landlord, within 30 days after the date
upon which any Imposition or other tax, assessment, levy or charge is payable
by Tenant, official receipts of
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the appropriate taxing authority, or other appropriate proof satisfactory to
Landlord, evidencing the payment of the same. The certificate, advice or bill
of the appropriate official designated by law to make or issue the same or to
receive payment of any Imposition or other tax, assessment, levy or charge may
be relied upon by Landlord as sufficient evidence that such Imposition or other
tax, assessment, levy or charge is due and unpaid at the time of the making of
issuance of such certificate, advice or bill, unless Tenant provides Landlord
with evidence to the contrary.
D. At Landlord's written demand after any Event of Default (as defined
in Section 20 hereinafter) and for as long as such Event of Default is uncured,
or upon the request of any Mortgagee of the Demised Premises, (but only after
an Event of Default and for as long as such Event of Default is uncured) Tenant
shall pay to Landlord the known or estimated yearly real estate taxes and
assessments payable with respect to the Demised Premises in monthly payments
equal to one-twelfth of the known or estimated yearly real estate taxes and
assessments next payable with respect to the Demised Premises. From time to
time Landlord may re-estimate the amount of real estate taxes and assessments,
and in such event Landlord shall notify Tenant, in writing, of such re-estimate
and fix future monthly installments for the remaining period prior to the next
tax and assessment due date in an amount sufficient to pay the re-estimated
amount over the balance of such period after giving credit for payments made by
Tenant on the previous estimate. If the total monthly payments made by Tenant
pursuant to this Paragraph 16D shall exceed the amount of payments necessary for
said taxes and assessments, such excess shall be credited on subsequent monthly
payments of the same nature; but if the total of such monthly payments so made
under this paragraph shall be insufficient to pay such taxes and assessments
when due, then Tenant shall pay to Landlord such amount as may be necessary to
make up the deficiency.
E. Tenant shall have the right at its own expense to contest the amount
or validity, in whole or in part, of any Imposition by appropriate proceedings
diligently conducted in good faith, but only after Tenant provides Landlord or
the Mortgagee reasonable security, or Tenant makes payment of such Imposition,
unless such payment, or a payment thereof under protest, would operate as a bar
to such contest or interfere materially with the prosecution thereof, in which
event, notwithstanding the provisions of Paragraph 16A hereof Tenant may
postpone or defer payment of such Imposition if neither the Demised Premises nor
any portion thereof would, by reason of such postponement or deferment, be in
danger of being forfeited or lost, and (b) Tenant is not then in Material Breach
of this Lease. Upon the termination of any such proceedings, Tenant shall pay
the amount of such Imposition or part thereof, if any, as finally determined in
such proceedings, the payment of which may have been deferred during the
prosecution of such proceedings, together with any costs, fees, including
attorney's fees, interest, penalties, fines, and other liability in connection
therewith, and upon such payment Landlord shall return all amounts or
certificates deposited with it with respect to the contest of such Imposition,
as aforesaid, or, at the written direction of Tenant, Landlord shall make such
payment out of the funds on deposit with Landlord and the balance, if any, shall
be returned to Tenant. Tenant shall be entitled to the refund of any
Imposition, penalty, fine and interest thereon received by Landlord which have
been paid by Tenant or which have been paid by Landlord but for which Landlord
has been previously reimbursed in full by Tenant. Landlord shall not be
required to join in any proceedings referred to in this Paragraph 16E unless the
provisions of any law, rule or regulation at the time in effect shall require
that such proceedings be brought by or in the name of Landlord, in which event
Landlord shall join in such proceedings
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or permit the same to be brought in Landlord's name upon compliance with such
conditions as Landlord may reasonably require. Landlord shall not ultimately be
subject to any liability for the payment of any fees, including attorney's fees,
costs and expenses in connection with such proceedings. Tenant agrees to pay all
such fees (including reasonable attorney's fees), costs and expenses or, on
demand, to make reimbursement to Landlord for such payment. If Landlord is
provided a certificate of deposit or other interest bearing instrument as
security for the payment of the contested Imposition, during the time when any
such certificate of deposit or other interest bearing instrument is on deposit
with Landlord, and prior to the time when the same is returned to Tenant or
applied against the payment, removal or discharge of Impositions, as above
provided, Tenant shall be entitled to receive all interest paid thereon, if any.
Cash deposits shall not bear interest.
17. Insurance.
A. During the term of this Lease, during any extension thereof, and
during any holdover period, Tenant shall at its cost and expense procure and
keep in force a policy of comprehensive public liability insurance, with limits
of not less than $1,000,000 for injury to any one person, $2,000,000 as to any
one accident, and $100,000 as to property damage, all on a per occurrence basis
which policy shall name Landlord and its managing agent as additional insureds.
A certificate of such insurance shall be delivered to Landlord prior to the
Commencement Date and shall provide that same may not be cancelled or lowered in
amounts without prior written notice of not less than thirty (30) days to
Landlord and Landlord's mortgagee. Notwithstanding the foregoing, Tenant may
insure the foregoing risks under its blanket policy or elect to self-insure
such risks as provided in Paragraph 17E below. Any such liability insurance
shall contain a contractual liability endorsement covering Tenant's
indemnification obligations under this Lease.
B. During the term of this Lease and any extension thereof, Tenant, at
its sole cost and expense, shall obtain and continuously maintain in full force
and effect, policies of insurance covering the Improvements constructed,
installed or located on the Demised Premises naming the Landlord, as loss payee
as its interest may appear, against (a) loss or damage by fire; (b) loss or
damage from such other risks or hazards now or hereafter embraced by an
"Extended Coverage Endorsement," including, but not limited to, windstorm,
hail, explosion, vandalism, riot and civil commotion, damage from vehicles,
smoke damage, water damage and debris removal; (c) loss for flood if the
Demised Premises are in a designated flood or flood insurance area; (d) loss
for damage by earthquake if the Demised Premises are located in an
earthquake-prone area; (e) loss from so-called explosion, collapse and
underground hazards; and (f) loss or damage from such other risks or hazards of
a similar or dissimilar nature which are now or may hereafter be customarily
insured against with respect to improvements similar in construction, design,
general location, use and occupancy to the Improvements. At all times, such
insurance coverage shall be in an amount equal to 100% of the then "full
replacement cost" of the Improvements. "Full Replacement Cost" shall be
interpreted to mean the cost of replacing the improvements without deduction
for depreciation or wear and tear, and it shall include a reasonable sum for
architectural, engineering, legal, administrative and supervisory fees
connected with the restoration or replacement of the Improvements in the event
of damage thereto or destruction thereof. If a sprinkler system shall be
located in the Improvements, sprinkler leakage insurance shall be procured and
continuously maintained by Tenant at Tenant's
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sole cost and expense. Tenant shall cause to be inserted in the policy of
insurance required by this Paragraph 17B a so-called "waiver of subrogation"
clause as to Landlord and Landlord's insurer.
C. During the term of this Lease and any extension thereof, Tenant shall
maintain Workman's Compensation Insurance in accordance with the laws of the
State of California.
D. Tenant shall maintain insurance coverage (including loss of use and
business interruption coverage) upon Tenant's business and upon all personal
property of Tenant or the personal property of others kept, stored or
maintained on the Demised Premises against loss or damage by fire, windstorm or
other casualties or causes for such amount as Tenant may desire, and Tenant
agrees that such policies shall contain a waiver of subrogation clause as to
Landlord and Landlord's insurer.
E. Tenant's right to self-insure with respect to liability insurance is
conditioned upon Tenant or Tenant's guarantor maintaining a net worth of at
least $100,000,000.00. Tenant shall furnish Landlord with written confirmation
that Tenant has elected to self-insure with respect to liability insurance (if
that is the case), and if so, that Tenant's or Tenant's guarantor's net worth
is at least $100,000,000.00 as evidenced by audited financial statements of
Tenant or Tenant's guarantor or an affidavit from Tenant's or Tenant's
guarantor's chief financial officer. If Tenant self-insures with respect to
liability insurance, then Tenant agrees to indemnify, defend, and hold Landlord
harmless from and against any loss, damage, costs, fees (including attorneys'
fees), claims, demands, actions, cause of action, judgments, suits and
liability that was or would have been covered by the insurance policy or
policies replaced by self-insurance and such self-insurance shall not affect
the nonliability of Landlord under Paragraph 17F as to any loss or damage
caused by the perils described therein. The indemnification contained in this
Paragraph 17E is in addition to, and not in lieu of, any covenants or
obligations of Tenant contained in the other Paragraphs of this Lease. If
Tenant so elects to become a self-insurer with respect to liability insurance,
Tenant shall deliver to Landlord notice in writing of the required coverages
which it is self-insuring setting forth the amount, limits, and scope of the
self-insurance in respect to each type of coverage self-insured. Tenant, at
Landlord's request, shall provide to Landlord's mortgagee or assignee a
certificate satisfactory to such mortgagee or assignee setting forth the
self-insured coverages, if any, and stating that all losses shall be payable to
such mortgagee and/or assignee as its interests may appear.
Nothing in this Paragraph shall prevent Tenant from taking out insurance
of the kind and in the amount provided for under the preceding paragraphs of
this Paragraph under a blanket insurance policy or policies (certificates
thereof reasonably satisfactory to Landlord shall be delivered to Landlord)
which may cover other properties owned or operated by Tenant as well as the
Demised Premises; provided, however, that any such policy of blanket insurance
of the kind provided for shall specify therein the amounts thereof exclusively
allocated to the Demised Premises or Tenant shall furnish Landlord and the
holder of any fee mortgage with a written statement from the insurers under
such policies specifying the amounts of the total insurance exclusively
allocated to the Demised Premises; and provided, further, however, that such
policies of blanket insurance shall, as respects the Demised Premises, contain
the various provisions required of such an insurance policy by the foregoing
provisions of this Paragraph 17.
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F. Tenant hereby releases Landlord (and Landlord's assignees, employees,
agents and servants) and waives any claims it may have against Landlord from any
liability for damage to or destruction of Tenant's trade fixtures, personal
property (including also property under the care, custody, or control of
Tenant), machinery, equipment, furniture, fixtures and business interests on the
Demised Premises, except arising from Landlord's or Landlord's assignees',
employees', agents' or servants' negligence. This Paragraph shall apply
especially, but not exclusively, to damage or destruction caused by the flooding
of basements or other subsurface areas, or by refrigerators, sprinkling devices,
air conditioning apparatus, water, snow, frost, steam, excessive heat or cold,
falling plaster, broken glass, sewage, gas, odors or noise, or the bursting or
leaking of pipes or plumbing fixtures, and shall apply equally, whether any such
damage results from the act or omission of other tenants or occupants in the
Demised Premises or any other persons, and whether such damage be caused by or
result from any of the aforesaid, or shall be caused by or result from other,
circumstances of a similar or dissimilar nature.
G. Tenant shall require each of its contractors and tradespeople to
carry contractors liability/completed operations insurance, in the amounts
specified in Paragraph 17A above, from companies licensed to do business in the
State of California.
H. Upon expiration of the term of this Lease, the unearned premiums upon
any insurance policies or certificates thereof lodged with Landlord by Tenant
shall be payable to Tenant, provided that Tenant shall not then be in default
in keeping, observing or performing the terms and conditions of this Lease.
18. Destruction and Restoration.
A. Tenant covenants and agrees that in case of damage to or destruction
of the Improvements after the Commencement Date of the term of this Lease, by
fire or otherwise, Tenant, at its sole cost and expense, shall promptly restore,
repair, replace and rebuild the same as nearly as possible to the condition that
the same were in immediately prior to such damage or destruction with such
changes or alterations (made in conformity with Paragraph 8 hereof) as may be
reasonably acceptable to Landlord or required by law. Tenant shall forthwith
give Landlord written notice of such damage or destruction upon the occurrence
thereof and specify in such notice, in reasonable detail, the extent thereof.
Such restoration, repairs, replacements, rebuilding, changes and alterations,
including the cost of temporary repairs for the protection of the Demised
Premises, or any portion thereof, pending completion thereof are sometimes
hereinafter referred to as the "Restoration." The Restoration shall be carried
on and completed in accordance with the provisions and conditions of Paragraphs
8 and 18B hereof. If the net amount of the insurance proceeds (after deduction
of all costs, expenses and fees related to recovery of the insurance proceeds)
recovered by Landlord and held by Landlord and Tenant as co-trustee is
reasonably deemed insufficient by Landlord to complete the Restoration of such
improvements (exclusive of Tenant's personal property and trade fixtures which
shall be restored, repaired or rebuilt out of Tenant's separate funds), Tenant
shall, upon request of Landlord, deposit with Landlord and Tenant, as
co-trustees, a cash deposit equal to the reasonable estimate of the amount
necessary to complete the Restoration of such improvements less the amount of
such insurance proceeds available.
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B. All insurance moneys recovered by Landlord and held by Landlord and
Tenant as co-trustees on account of such damage or destruction, less Landlord's
reasonable out-of-pocket costs, if any, to Landlord of such recovery, shall be
applied to the payment of the costs of the Restoration and shall be paid out
from time to time as the Restoration progresses upon the written request of
Tenant, accompanied by a certificate of the architect or a qualified
professional engineer in charge of the Restoration stating that as of the date
of such certificate (a) the sum requested is justly due to the contractors,
subcontractors, materialmen, laborers, engineers, architects, or persons, firms
or corporations furnishing or supplying work, labor, services or materials for
such Restoration, or is justly required to reimburse Tenant for any expenditures
made by Tenant in connection with such Restoration, and when added to all sums
previously paid out by Landlord does not exceed the value of the Restoration
performed to the date of such certificate by all of said parties; (b) except for
the amount, if any, stated in such certificates to be due for work, labor,
services or materials there is not outstanding indebtedness known to the person
signing such certificate, after due inquiry, which is then due for work, labor,
services or materials in connection with such Restoration, which, if unpaid,
might become the basis of a mechanic's lien or similar lien with respect to the
Restoration or a lien upon the Demised Premises, or any portion thereof; and (c)
the costs, as estimated by the person signing such certificate, of the
completion of the Restoration required to be done subsequent to the date of such
certificate in order to complete the Restoration do not exceed the sum of the
remaining insurance moneys, plus the amount deposited by Tenant, if any,
remaining in the hands of Landlord after payment of the sum requested in such
certificate.
Tenant shall furnish Landlord within thirty (30) days after Tenant's
receipt of each progress payment with evidence reasonably satisfactory to
Landlord that Tenant has paid all bills in respect to any work, labor, services
or materials performed, furnished or supplied in connection with such
Restoration which was covered by the previous progress payment. Landlord shall
not be required to pay out or consent to any additional insurance moneys where
Tenant fails to supply satisfactory evidence of the payment of work, labor,
services or materials performed, furnished or supplied, as aforesaid. If the
insurance moneys in the hands of Landlord and Tenant as co-trustees, and such
other sums, if any, deposited with Landlord and Tenant as co-trustees pursuant
to this Paragraph 18, shall be insufficient to pay the entire cost of the
Restoration, Tenant agrees to pay any deficiency promptly upon demand so long
as Tenant has participated in the adjustment of the insurance proceeds;
provided, however, Landlord shall retain ultimate control over any final
adjustment with the property insurer, and provided further that notwithstanding
that the insurance moneys are insufficient to pay the cost of the Restoration,
Tenant shall continue to be liable for full payment of Base Rent, Additional
Rent and any other amounts due and payable hereunder. Upon completion of the
Restoration and payment in full thereof by Tenant, Landlord shall within a
reasonable period of time thereafter, turn over to Tenant all insurance moneys
or other moneys then remaining upon submission of proof reasonably satisfactory
to Landlord that the Restoration has been paid for in full and the damaged or
destroyed Building and other improvements repaired, restored or rebuilt as
nearly as possible to the condition they were in immediately prior to such
damage or destruction, or with such changes or alterations as may be made in
conformity with Paragraphs 8 and 18A hereof.
C. No destruction of or damage to the Demised Premises, or any portion
thereof, by fire, casualty or otherwise shall permit Tenant to surrender
this Lease or shall relieve Tenant from its liability to pay to Landlord the
Base Rent and Additional Rent payable under this Lease
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or from any of its other obligations under this Lease, and Tenant waives any
rights now or hereafter conferred upon Tenant by present or future law or
otherwise to quit or surrender this Lease or the Demised Premises, or any
portion thereof, to Landlord or to any suspension, diminution, abatement or
reduction of rent on account of any such damage or destruction.
D. Landlord agrees, subject to the provisions of Paragraphs 8 and 18
hereof, to in all instances turn over and make available to Tenant all
insurance moneys contemplated by Paragraph 18B hereof.
19. Condemnation
A. If, during the term of this Lease, the entire Demised Premises shall
be taken as the result of the exercise of the power of eminent domain
(hereinafter referred to as the "Proceedings"), this Lease and all right,
title and interest of Tenant hereunder shall cease and come to an end on the
date of vesting of title pursuant to such Proceedings and Landlord shall be
entitled to and shall receive the total award made in such Proceedings;
provided that Tenant shall have the right to state a claim separate from
Landlord's claim against the condemning authority for Tenant's moving costs and
the loss of the bargain of this Lease, to the extent that such a claim by
Tenant does not otherwise reduce Landlord's award.
In any taking of the Demised Premises, or any portion thereof, whether or
not this Lease is terminated as in this Paragraph provided, Tenant shall not be
entitled to any portion of the award for the taking of the Demised Premises or
damage to the Improvements, except as otherwise provided for in Paragraph 19C
with respect to the restoration of the Improvements, or for the estate or
interest of Tenant therein, all such award, damages, consequential damages and
compensation being hereby assigned to Landlord, and Tenant hereby waives any
right it now has or may have under present or future law to receive any
separate award of damages for its interest in the Demised Premises, or any
portion thereof, or its interest in this Lease, except that Tenant shall have,
nevertheless, the limited right to prove in the Proceedings and to receive any
award which may be made for damages to or condemnation of Tenant's movable trade
fixtures and equipment, and for Tenant's relocation costs in connection
therewith.
B. If, during the initial term of this Lease, or any extension or renewal
thereof, less than the entire Demised Premises, but more than 15% of the floor
area of the Building, or more than 25% of the land area of the Demised
Premises, or more than 20% of the parking spaces, shall be taken in any such
Proceedings, this Lease shall, upon vesting of title in the Proceedings,
terminate as to the portion of the Demised Premises so taken, and Tenant may,
at its option, terminate this Lease as to the remainder of the Demised
Premises. Tenant shall not have the right to terminate this Lease pursuant to
the preceding sentence unless (a) the business of Tenant conducted in the
portion of the Demised Premises taken cannot reasonably be carried on with
substantially the same utility and efficiency in the remainder of the Demised
Premises (or any substitute space securable by Tenant pursuant to clause (b)
hereof) and (b) Tenant cannot construct or secure or Landlord cannot provide
substantially similar space to the space so taken, on the remainder of the
Demised Premises, or Landlord cannot provide replacement parking spaces on
additional property located in close proximity to the Demised Premises that are
reasonably acceptable to Tenant. Such termination as to the remainder of the
Demised Premises shall be effected by notice in writing given not more than 60
days after the date of vesting of title
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in such Proceedings, and shall specify a date not more than 60 days after the
giving of such notice as the date of such termination. Upon the date specified
in such notice, the term of this Lease, and all right, title and interest of
Tenant hereunder, shall cease and come to an end. If this Lease is terminated as
in this Paragraph 19B provided, Landlord shall be entitled to and shall receive
the total award made in such Proceedings, Tenant hereby assigning any interest
in such award, damages, consequential damages and compensation to Landlord, and
Tenant hereby waiving any right Tenant has now or may have under present or
future law to receive any separate award of damages for its interest in the
Demised Premises, or any portion thereof, or its interest in this Lease except
as otherwise provided in Paragraph 19A. The right of Tenant to terminate this
Lease, as in this Paragraph 19B provided, shall be exercisable only upon
condition that Tenant is not then in default in the performance of any of the
terms, covenants or conditions of this Lease on its part to be performed, and
such termination upon Tenant's part shall become effective only upon compliance
by Tenant with all such terms, covenants and conditions to the date of such
termination. In the event that Tenant elects not to terminate this Lease as to
the remainder of the Demised Premises, the rights and obligations of Landlord
and Tenant shall be governed by the provisions of Paragraph 19C hereof.
C. If 15%, or less, of the floor area of the Building, or 25%, or less,
or the land area of the Demised Premises or 20% or less, of the parking spaces
shall be taken in such Proceedings, or if more than 15% of the floor area of the
Building or more than 25% of the land area of the Demised Premises or more than
20% of the parking spaces is taken (but less than the entire Demised Premises),
and this Lease is not terminated as in Paragraph 19B hereof provided, this Lease
shall, upon vesting of title in the Proceedings, terminate as to the parts so
taken, and Tenant shall have no claim or interest in the award, damages,
consequential damages and compensation, or any part thereof except as otherwise
provided in Paragraph 19A. Landlord shall be entitled to and shall receive the
total award made in such Proceedings, Tenant hereby assigning any interest in
such award, damages, consequential, damages and compensation to Landlord, and
Tenant hereby waiving any right Tenant, has now or may have under present or
future law to receive any separate award of damages for its interest in the
Demised Premises, or any portion thereof, or its interest in this Lease except
as otherwise provided in Paragraph 19A. The net amount of the award (after
deduction of all costs and expenses, including attorney's fees), shall be held
by Landlord as trustee and applied as hereinafter provided. Tenant, in such
case, covenants and agrees, at Tenant's sole cost and expense (subject to
reimbursement to the extent hereinafter provided), promptly to restore that
portion of the Improvements on the Demised Premises not so taken to a complete
architectural and mechanical unit for the use and occupancy of Tenant as in this
Lease provided. In the event that the net amount of the award (after deduction
of all costs and expenses, including attorney's fees) that may be received by
Landlord and held by Landlord as trustee in any such Proceedings as a result of
such taking is insufficient to pay all costs of such restoration work, Tenant
shall deposit with Landlord as trustee such additional sum as may be required
upon the written request of Landlord so long as Tenant has participated in the
Proceedings or otherwise provide reasonably adequate assurances to Landlord that
Tenant has the financial resources to fund such additional sum; provided,
however, Landlord shall retain ultimate control over any final settlement or
litigation with the condemning authority, and provided further that
notwithstanding that the net amount of the award may be insufficient to pay all
costs of the restoration work. Tenant shall continue to be liable for payment of
Base Rent. Additional Rent and any other amount due and payable hereunder, which
amounts shall not be abated except as provided in Paragraph 19E below. The
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provisions and conditions in Paragraph 8 applicable to changes and alterations
shall apply to Tenant's obligations to restore that portion of the Improvements
to a complete architectural and mechanical unit. Landlord agrees in connection
with such restoration work to apply so much of the net amount of any award
(after deduction of all costs and expenses, including attorney's fees) that may
be received by Landlord and held by Landlord as trustee in any such Proceedings
as a result of such taking to the costs of such restoration work thereof and the
said net award as a result of such taking shall be paid out from time to time to
Tenant, or on behalf of Tenant, as such restoration work progresses upon the
written request of Tenant, which shall be accompanied by a certificate of the
architect or the registered professional engineer in charge of the restoration
work stating that (a) the sum requested is justly due to the contractors,
subcontractors, materialmen, laborers, engineers, architects or other persons,
firms or corporations furnishing or supplying work, labor, services or materials
for such restoration work or as is justly required to reimburse Tenant for
expenditures made by Tenant in connection with such restoration work, and when
added to all sums previously paid out by Landlord as trustee does not exceed the
value of the restoration work performed to the date of such certificate; and (b)
the net amount of any such award as a result of such taking remaining in the
hands of Landlord, together with the sums, if any, deposited by Tenant with
Landlord as trustee pursuant to the provisions hereof, will be sufficient upon
the completion of such restoration work to pay for the same in full. If payment
of the award as a result of such taking, as aforesaid, shall not be received by
Landlord in time to permit payments as the restoration work progresses (except
in the event of an appeal of the award by Landlord), Tenant shall not be
required to proceed with any restoration work until payment of such award is
received by Landlord; provided, however, delay in payment of such amount shall
not release Tenant of its obligation to pay Base Rent, Additional Rent and other
amounts due and payable hereunder during any such delay and there shall be no
abatement of Base Rent, Additional Rent or any other amounts except as provided
in Paragraph 19E below. If Landlord appeals an award and payment of the award is
delayed pending appeal Tenant shall, nevertheless, perform and fully pay for
such work without delay, and payment of the amount to which Tenant would have
been entitled had Landlord not appealed the award (in an amount not to exceed
the net award prior to such appeal) shall be made by Landlord to Tenant as
restoration progresses pursuant to this Paragraph 19C, in which event Landlord
shall be entitled to retain an amount equal to the sum disbursed to Tenant
pursuant to the preceding sentence out of the net award as and when payment of
such award is received by Landlord. Tenant shall also furnish Landlord as
trustee with each certificate hereinabove referred to, together with evidence
reasonably satisfactory to Landlord that there are no unpaid bills in respect to
any work, labor, services or materials performed, furnished or supplied, or
claimed to have been performed, furnished or supplied, in connection with such
restoration work [relating to prior payments made by Landlord to Tenant], and
that no liens have been filed against the Demised Premises, or any portion
thereof. Landlord as trustee shall not be required to pay out any funds when
there are unpaid bills for work, labor, services or materials performed,
furnished or supplied in connection with such restoration work relating to prior
payments made by Landlord to Tenant, or where a lien for work, labor, services
or materials performed, furnished or supplied has been placed against the
Demised Premises, or any portion thereof. Upon completion of the restoration
work and payment in full therefor by Tenant, and upon submission of proof
reasonably satisfactory to Landlord that the restoration work has been paid for
in full and that the Improvements have been restored or rebuilt to a complete
architectural and mechanical unit for the use and occupancy of Tenant as
provided in this Lease, Landlord as trustee shall pay over to Tenant any portion
of the cash deposit furnished by Tenant then remaining; provided, however, any
other amounts awarded
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in such Proceedings (and made available for restoration) which remain following
restoration of the Demised Premises shall be the property of Tenant and Landlord
shall have no claim thereto.
D. In the event of any partial termination of this Lease as a result of
any such Proceedings, Tenant shall pay to Landlord all Base Rent and all
Additional Rent and other charges payable hereunder with respect to that
portion of the Demised Premises so taken in such Proceedings with respect to
which this Lease shall have terminated justly apportioned to the date of such
termination. From and after the date of vesting of title in such Proceedings,
Tenant shall continue to pay the Base Rent and Additional Rent and other
charges payable hereunder, as in this Lease provided, to be paid by Tenant,
subject to abatement, if any, as provided for in Paragraph 19E hereof.
E. In the event of a partial taking of the Demised Premises under
Paragraph 19C hereof, or a partial taking of the Demised Premises under
Paragraph 19B hereof, followed by Tenant's election not to terminate this
Lease, the fixed Base Rent payable hereunder during the period from and after
the date of vesting of title in such Proceedings to the termination of this
Lease shall not be reduced unless Tenant shall have completed the restoration
work with its own funds in accordance with the provisions of the Lease and
Landlord shall have applied the net amount of any award to reduce the
indebtedness secured by any financing encumbering the Demised Premises or
otherwise to reduce the amount for Landlord's Development Costs (as herein
defined), in which event fixed Base Rent payable hereunder shall be reduced to
a sum equal to the product of the Base Rent provided for herein multiplied by a
fraction, the numerator of which shall be Landlord's Development Costs less
any amounts so paid to and applied by Landlord less Tenant's $2,000,000
contribution, and the denominator of which shall be Landlord's Development
Costs less Tenant's $2,000,000 contribution without regard to any amounts so
paid and applied by Landlord.
F. Anything herein to the contrary notwithstanding, upon the occurrence
of any Proceedings which would otherwise result in a termination of this Lease,
Tenant shall, as a condition precedent to such termination so long as Tenant
has participated in such Proceedings, (provided, however, Landlord shall retain
ultimate control over any final settlement or litigation with the condemning
authority), pay to Landlord an amount, reasonably estimated by Landlord, equal
to the excess, if any, of the unamortized portion of Landlord's Development
Costs, less the $2,000,000 referred to below, over the net award to be received
by Landlord after deduction of all costs of the Proceedings. In making the
foregoing calculation, Landlord shall use an interest rate equal to the
interest rate associated with the project financing from time to time during
the term of this Lease. "Landlord's Development Costs" shall mean and include
any and all amounts incurred by Landlord in connection with the acquisition and
development of the Demised Premises, including, without limitation,
consideration paid for acquisition of the Demised Premises, costs for required
off-site improvements, including relocating electric lines underground, all
architectural, engineering, environmental, land planning and other consulting
fees, all title and survey expenses, any and all fees and expenses associated
with procuring construction and/or other financing for the project, any other
costs or expenses that would not have been incurred by Landlord had Landlord
not been involved in the acquisition of the Demised Premises, and all attorneys'
fees associated with any of the foregoing. A preliminary estimate of
Landlord's Development Costs (which includes Tenant's initial contribution of
$2,000,000 as deposited into escrow under Paragraph 3) is attached hereto and
made a part
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hereof as Exhibit G; provided, however, the parties agree and acknowledge that
the amounts and categories of costs and expenses set forth on Exhibit G
represent an estimate of such items only, and that Landlord anticipates changes
in, additions to and modifications of such items, including, without limitation,
changes, additions and modifications of such items as development of the project
and construction of the Demised Premises progresses including, without
limitation, changes, additions and modifications relating to actual design and
construction costs, and in securing construction and permanent financing for the
project from time to time. The parties agree to update the estimate provided for
in Exhibit G within sixty (60) days after the Commencement Date and attach the
updated Exhibit G initialled and dated by the parties in place of the Exhibit G
attached as of the date hereof.
20. Default by Tenant. The occurrence of any one or more of the following
events shall constitute an "Event of Default" by Tenant:
A. The failure by Tenant to make any payment of rental or any other
payment required to be made by Tenant hereunder, and any interest for late
payment thereof, as and when due, where such failure shall continue for a
period of five (5) days after receipt by Tenant of a written notice thereof
from Landlord.
B. The failure by Tenant to observe or perform any of the covenants,
conditions or provisions of this Lease (other than the failure by Tenant
described in subparagraph B below) where such failure shall continue for a
period of thirty (30) days after receipt by Tenant of written notice thereof
from Landlord; provided, however that if the nature of Tenant's default is such
that it cannot be cured solely by payment of money (and in the reasonable
judgment of Landlord said default is susceptible to cure) and that more than
thirty (30) days may be reasonably required for such cure, then Tenant shall not
be deemed to be in default if Tenant shall commence such cure within such
thirty (30) day period and shall thereafter diligently prosecute such cure to
completion.
C. (a) the making of any general arrangement or any assignment by Tenant
for the benefit of creditors;
(b) the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or a petition of reorganization or arrangement under
any law relating to bankruptcy (unless, in the case of a petition filed
against Tenant, the petition is dismissed within ninety (90) days of the
date filed);
(c) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets; and
(d) the attachment, execution or other judicial seizure of
substantially all of Tenant's assets.
D. An assignment or subletting by Tenant in violation of Paragraph 14
hereof.
E. The failure by Tenant in keeping, observing or performing any of the
terms contained in this Lease, other than those referred to in Subparagraphs 14
A,B,C and D above, and which exposes Landlord to criminal liability, and such
default shall continue after written
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notice thereof given by Landlord to Tenant, and Tenant fails to proceed timely
and promptly with all due diligence and in good faith to cure the same and
thereafter to prosecute the curing of such default with all due diligence, it
being intended that in connection with a default which exposes Landlord to
criminal liability that Tenant shall proceed immediately to cure or correct such
condition with continuity and with all due diligence and in good faith.
21. Landlord's Remedies. In the event of any Material Breach of this
Lease by Tenant, then Landlord, in addition to other rights or remedies it may
have, shall have the right to terminate this Lease, or without terminating this
Lease, terminate Tenant's right to possession of the Demised Premises, and in
either event Tenant shall immediately surrender possession of the Demised
Premises to Landlord and if Tenant fails to do so, Landlord may, without
prejudice to any other remedy it may have for possession or arrearage of
rentals, enter upon and take possession of the Demised Premises and expel or
remove Tenant and any other person who may be occupying the Demised Premises or
any part thereof, with or without legal proceedings, by force if necessary,
without being liable for prosecution or any claim or damage therefor. In such
event, Landlord shall be entitled to recover from Tenant all reasonable damages
incurred by Landlord by reason of Tenant's default, including without
limitation, the cost of recovering possession of the Demised Premises, expenses
of reletting including reasonable renovation and alteration of the Demised
Premises, reasonable attorneys' fees, real estate commissions, and any other
sum of money, late charges and damages caused by Tenant to Landlord. As used
herein, "Material Breach" shall mean any breach by Tenant in any of the terms
and conditions of this Lease which upon an Event of Default would have a
material and adverse impact of any kind upon Landlord and/or the Demised
Premises, as opposed to a technical breach by Tenant which is de minimis in
nature.
If Tenant's right to possession of the Demised Premises is terminated
without termination of the Lease, Landlord shall be entitled to enforce all of
Landlord's rights and remedies under the Lease, including the right to recover
the rent as it becomes due hereunder. Should Landlord elect to relet the
Demised Premises or any part thereof, Landlord may do so for such term or terms
and at such rental or rentals and upon such other terms and conditions as
Landlord may deem appropriate. Rental and other amounts received by Landlord in
connection with such reletting shall be applied against the amounts due from
Tenant hereunder after deducting any expenses incurred by Landlord with respect
to such reletting as provided above. Tenant shall pay any deficiency to
Landlord. Such deficiency shall be calculated on a cumulative basis with all
excess payments received by Landlord from such reletting to be applied against
future amounts due from Tenant and any deficiencies to be paid monthly. No such
reentry or taking possession of the Demised Premises by Landlord shall be
construed as an election on its part to terminate this Lease, unless a written
notice of such intention be given to Tenant, in which event Tenant's obligations
to Landlord shall forthwith cease, or unless the termination thereof be decreed
by a court of competent jurisdiction.
In the event Landlord terminates this Lease in accordance with this
Paragraph, then, Tenant shall be liable and shall pay to Landlord, the sum of
all rent and other payments owed to date to Landlord, all sums owed to date to
third parties (including without limitation, all Impositions) hereunder accrued
to the date of such termination, all reasonable amounts required to be spent by
Landlord to fulfill any of Tenant's obligations which Tenant did not fulfill
prior to termination by Landlord, plus, as damages, an amount equal to the
present value discounted at
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ten percent (10%) of (i) the total rental payments hereunder for the remaining
portion of the term of the Lease, calculated as if such term expires on the
date set forth in Paragraph 2, unless Tenant has extended this Lease, in which
case such calculation shall be as if the term expires on the final day of the
extension term then in effect, less (ii) the fair market rental value of the
Demised Premises for such remaining period. Nothing herein contained shall
limit or prejudice the right of Landlord to prove for and obtain, as damages by
reason of such expiration or termination, an amount equal to the maximum
allowed by any statute or rule of law in effect at the time when, and governing
the proceedings in which, such damages are to be proved, whether or not such
amount be greater, equal to or less than the amount of the difference referred
to above.
Landlord shall have the obligation to mitigate its damages to the extent
required by state law.
In addition to the aforesaid remedies, Landlord shall be entitled to
pursue any other remedy now or hereafter available to Landlord at equity or
under the laws or judicial decisions of the state where the Demised Premises is
located or by statute or otherwise. All rights and remedies of Landlord herein
enumerated shall be cumulative, and the exercise or the commencement of the
exercise by Landlord of any one or more of such rights or remedies should not
preclude the simultaneous or later exercise by Landlord of any or all other
rights or remedies. Tenant shall pay, upon demand, all of Landlord's costs,
including reasonable attorney's fees and court costs, incident to the
enforcement of Tenant's obligations hereunder. A receipt by Landlord of rent
with knowledge of the breach of any covenant hereof (other than breach of the
obligation to pay the portion of such rent paid) shall not be deemed a waiver
of such breach, and no waiver by Landlord of any provisions of this Lease shall
be deemed to have been made unless expressed in writing and signed by Landlord.
Without limiting the generality of the foregoing, no failure by Landlord to
insist upon the performance of any of the terms of this Lease or to exercise
any right or remedy consequent upon a breach thereof shall constitute a waiver
of such breach or any of the terms of this Lease, and no express waiver shall
affect any default other than the default specified in the express waiver and
that only for the time and to the extent therein stated. One or more waivers by
Landlord shall not be construed as a waiver of a subsequent breach of the same
covenant, term or condition. In addition to other remedies in this Lease
provided, Landlord shall be entitled to seek a restraint by injunction of the
violation or attempted or threatened violation of the covenants, conditions and
provisions of this Lease.
22. Default by Landlord. The following shall constitute a "Material
Breach" by Landlord:
The failure by Landlord to observe or perform any of the covenants,
conditions or provisions of this Lease where such failure shall continue for a
period of thirty (30) days after receipt by Landlord of written notice thereof
from Tenant; provided, however, that if the nature of Landlord's default is
such that it cannot be cured solely by payment of money and that more than
thirty (30) days may be reasonably required for such cure, then Landlord shall
not be deemed to be in default if Landlord shall commence such cure within such
thirty (30) day period and shall thereafter diligently prosecute such cure to
completion.
23. Tenant's Remedies. In the event of any Material Breach of this Lease
by Landlord, then Tenant in addition to other rights or remedies it may have at
law or in equity
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(subject to the terms of this Lease), at Tenant's sole option, may perform such
obligations of Landlord provided that Tenant has furnished to any party having a
recorded mortgage, deed of trust, ground lease or similar lien against the
Demised Premises (for which Tenant has received written notice) with written
notice of such default and such party has failed to cure the same within the
limits prescribed herein for Landlord to cure such default, and Tenant may
invoice Landlord for the costs and expenses thereof, which invoice Landlord
shall promptly pay. Notwithstanding the foregoing, despite such notice and
expiration of such cure period, no rent or other payments due from Tenant may
be offset by Tenant, and Tenant shall have no right to perform any obligation
of Landlord unless such performance by Tenant is necessary to prevent imminent
injury or damage to persons or Tenant's property.
24. Delivery of Executed Lease. Deleted by intent of parties.
25. Termination. Deleted by intent of parties
26. Notices. All notices shall be sent by registered mail, return receipt
requested, or by recognized overnight courier providing proof of delivery, to
the following addresses:
To Landlord: To Tenant:
Sunnyvale Limited Partnership First Data Merchant Service
Ridge Sunnyvale, Inc., Corporation
c/o Ridge Capital Corporation Attention: David L. Schlapbach,
Attention: James G. Martell Director of Real Estate
257 East Main Street and Counsel
Barrington, Illinois 60010 5660 New Northside Drive
Suite 1400
Atlanta, Georgia 30328
With a copy to: With a copy to:
Gardner, Carton & Douglas First Data Merchant Services
Attention: Glenn W. Reed Corporation
321 North Clark Street Attention: Roger L. Pierce, President
Suite 3400 700 Hansen Way
Chicago, Illinois 60610-4795 Palo Alto, CA 94303
Any notice shall be deemed to have been given three (3) days after the
date deposited in the United States mail, or on the first business day after
sending when delivery by recognized overnight courier providing proof of
delivery, in the manner aforesaid.
Either party, by written notice to the other, shall have the right to
change the addresses for notice(s) to be sent to such party, and to add or
substitute entities to which a copy of any notice shall be sent by the other
party.
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27. Brokerage. Landlord and Tenant acknowledge that no real estate broker
brought about this lease transaction. Landlord hereby indemnifies Tenant against
the claims of any party claiming by, through or under Landlord in connection
with this Lease transaction, and Tenant hereby indemnifies Landlord against the
claims of any party claiming by, through or under Tenant in connection with this
Lease transaction.
28. Estoppel. Landlord and Tenant shall, at any time upon not less than
twenty (20) days prior to written notice, execute and deliver to a prospective
new landlord, lender, or assignee or subtenant of Tenant, as the case may be, a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and
the date to which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to the party's knowledge, any uncured
defaults on the part of the other party hereunder, or so specifying such
defaults if any are claimed, and (iii) other reasonable requests that relate to
the Lease.
29. Hazardous Substances.
A. For purposes of this Paragraph 29, "Hazardous Substance" means:
(i) "Hazardous Substances" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), 42
U.S.C. Section 9601 et seq., as amended, and all regulations promulgated
thereunder, the Federal Clean Air Act, as amended (42 U.S.C. Section 7401
et seq.) and the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C.
Section 1317 et seq. as amended and all regulations promulgated thereunder;
(ii) "Hazardous Waste" as defined by the Resource Conservation
and Recovery Act ("RCRA"), 42 U.S.C. Section 6602 et seq. as amended and
all regulations promulgated thereunder;
(iii) Any pollutant or contaminant or hazardous, dangerous or
toxic chemicals, materials or substances within the meaning of any other
applicable federal, state or local law, regulation, ordinance or
requirement (including consent decrees and administrative orders) relating
to or imposing liability or standards of conduct concerning any hazardous,
toxic or dangerous waste, substance or material, all as amended or
hereafter amended;
(iv) More than 100 gallons of crude oil which is liquid at
standard conditions of temperature and pressure (80 degrees Fahrenheit and
14.7 pounds per square inch absolute);
(v) Any radioactive material, including any source, special
nuclear or by-product material as defined in 42 U.S.C. Section 2011 et seq.
as amended or hereafter amended, and all regulations promulgated
thereunder;
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(vi) Friable asbestos or any asbestos which becomes friable
during the term of this Lease; and
(vii) Anything defined as a hazardous, toxic or radioactive
material, waste or substance or the use, transportation or disposal of
which is regulated under applicable California laws or rules and
regulations issued pursuant thereof;
(all of the forgoing statutes, laws, ordinance, rules, regulations, and
common law theories being sometimes hereinafter collectively referred to as
"Envlaws").
B. Landlord and Tenant acknowledge the environmental condition of the
Land as described in that certain Site Management Plan prepared by Geomatrix
Consultants dated September 5, 1996, a copy of which Landlord has provided to
Tenant. Prior to the Construction Completion Date, Landlord shall cause to be
performed all asbestos and soil removal and disposal or other remediation
provided for under and in compliance with Section 4.4.7 of the Sale Agreement,
as well as all additional environmental clean-up of Hazardous Substances as
required by Section 4.4.7 of the Sale Agreement. Landlord shall indemnify,
defend and hold Tenant harmless from all damages, costs, losses, expenses
(including but not limited to reasonable attorneys' fees and engineering fees)
arising from any breach by Landlord of the preceding covenant; provided
however, the foregoing indemnification shall terminate upon the expiration of
one (1) year from the Construction Completion Date. Notwithstanding the
foregoing, in no event shall Tenant have the right to terminate this Lease or
have any right of set-off arising out of any breach or claimed breach by
Landlord in its obligations hereunder, it being expressly acknowledged and
agreed that the Base Rent and Additional Rent, and all other charges and sums
payable by Tenant hereunder, shall commence at the times provided herein and
shall continue to be payable as provided under this Lease.
C. Tenant shall not allow any Hazardous Substance to be brought on to
the Demised Premises and shall not conduct or authorize the generation,
transportation, storage, treatment or disposal at the Demised Premises, of any
Hazardous Substance other than in quantities incidental to the conduct of
Tenant's Use and in compliance with Envlaws; provided, however, nothing herein
contained shall permit Tenant to allow any so-called "acutely hazardous",
"ultra-hazardous", "imminently hazardous chemical substance or mixture" or
comparable Hazardous Substance to be located on or about the Demised Premises.
D. If the presence, release, threat of release, placement on or in the
Demised Premises, or the generation, transportation, storage, treatment, or
disposal at the Demised Premises of any hazardous substances as a result of
Tenant's operations at the Demised Premises: (i) gives rise to liability
(including, but not limited to, a responses action, remedial action, or removal
action) under Envlaws, (ii) causes a significant public health effect, or (iii)
pollutes or threatens to pollute the environment, Tenant shall promptly take
any and all remedial and removal action necessary to clean up the Demised
Premises and mitigate exposure to liability arising from the hazardous
substance, whether or not required by law.
E. Tenant shall indemnify, defend and hold Landlord harmless from all
damages, costs, losses, expenses (including, but not limited to, actual
attorneys' fees and engineering fees) arising from or attributable to the
existence of any hazardous substances at the Demised Premises
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as a result of Tenant's Operations at the Demised Premises, and (ii) any
breach by Tenant of any of its covenants in this Paragraph 29.
F. Upon request by Landlord during the term of this Lease, prior to the
exercise of any Extension Term, Tenant shall undertake and submit to Landlord
an environmental audit from an environmental consulting firm reasonably
acceptable to Landlord which audit shall evidence Tenant's compliance with this
Paragraph 29. Tenant shall bear the cost of such environmental audit unless
such audit discloses that Tenant has complied with the provisions of this
Paragraph 29 in which event Landlord shall pay for such audit.
G. Landlord or Tenant shall give the other prompt written notice upon
discovery of any Hazardous Substance at or adjacent to the Demised Premises.
Landlord and Tenant's obligations under this Paragraph 29 shall survive
termination of the Lease.
30. Holdover. Should Tenant continue to occupy the Demised Premises
after expiration of the term or any renewal thereof and provided Landlord has
notified Tenant thirty (30) days prior to the expiration of the term or any
renewal term that Landlord is negotiating or has executed a lease with a
third party for the Demised Premises or any portion thereof, Tenant shall be
deemed to be occupying the Demised Premises without claim or right and Tenant
shall pay Landlord all costs arising out of loss or liability resulting from
delay by Tenant in so surrendering the Demised Premises as above provided and
shall pay a charge for each day of occupancy an amount equal to 150% the Base
Rent (on a per diem basis) then reserved hereunder. In the event Landlord has
failed to notify Tenant in writing within thirty (30) days prior to the
expiration of the term or any renewal term that Landlord is negotiating or has
executed a lease with a third party for the Demised Premises or any portion
thereof, Tenant shall be entitled to occupy the Demised Premises for a period
of sixty (60) days following expiration of the term or any renewal term on the
same terms and conditions as such term or renewal term (including Base Rental
and additional rental). Should Tenant continue to occupy the Demised Premises
following such sixty (60) day period, Tenant shall be deemed to be occupying
the Demised Premises without claim or right and Tenant shall pay Landlord as a
full measure of all loss or liability resulting from delay by Tenant in so
surrendering the Demised Premises as above provided a charge for each day of
occupancy an amount equal to 200% of the Base Rent and Additional Rent (on a
per diem basis) then reserved hereunder.
31. Surrender.
A. Upon any termination or expiration of this Lease, Tenant shall
surrender the Demised Premises in the same condition as existed at the
Commencement Date, except for normal wear and tear and damage caused by the fire
or other casualty; provided, however, that nothing in this Paragraph 31 is
intended to change or diminish Tenant's obligations under any other part of this
Lease. Tenant shall remove the Alterations it is required to remove pursuant to
the terms of Paragraph 8 hereof. Any damage to the Demised Premises resulting
from the removal of such Alterations shall be repaired by Tenant at Tenant's
expense. If the Demised Premises be not surrendered as above set forth, Tenant
shall indemnify, defend and hold Landlord harmless against loss or liability
resulting from the delay by Tenant in so surrendering the Demised Premises,
including, without limitation any claim made by any succeeding occupant founded
on such delay.
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All property of Tenant not removed on or before the last day of the term
of this Lease (subject to Tenant's right to occupy the Demised Premises
following expiration of the term of this Lease as set forth in Paragraph 30
hereof) or within fifteen (15) days thereafter shall be deemed abandoned.
Tenant hereby appoints Landlord its agent to remove all property of Tenant from
the Demised Premises upon termination of this Lease and to cause its
transportation and storage for Tenant's benefit, all at the sole cost and risk
of Tenant and Landlord shall not be liable for damage, theft, misappropriation
or loss thereof and Landlord shall not be liable in any manner in respect
thereto. Tenant shall pay all costs and expenses of such removal,
transportation and storage. Tenant shall reimburse Landlord upon demand for any
expenses incurred by Landlord with respect to removal or storage of abandoned
property and with respect to restoring said Demised Premises to good order,
condition and repair.
32. Liens. Landlord shall deliver the Demised Premises to Tenant free of
all mechanic's and materialmen's liens or bond over all such mechanic's and
materialmen's liens. Tenant has no authority, express or implied, to create or
place any lien or encumbrance of any kind or nature whatsoever upon, or in any
manner to bind the interest of Landlord or Tenant in the Demised Premises, or
to charge the rentals payable hereunder for any claim in favor of any person
dealing with Tenant, including those who furnish materials or perform labor
for any construction or repairs, and Tenant covenants and agrees that it shall
not mortgage, encumber or pledge this Lease or any interest therein. The
preceding sentence shall not be construed as prohibiting Tenant from making
Alterations as provided in Paragraph 8 above or form permitting any other
mechanics or materialmen's lienable work to be performed as long as such work
is not prohibited by this Lease. Tenant agrees to indemnify and hold Landlord
harmless from any lien filed against the Demised Premises on account of work
performed by or on behalf of Tenant and from any and all losses, costs, damages,
expenses, liabilities, suits, penalties, claims and damages (including
reasonable attorney fees) arising from or relating to such lien. After Tenant's
receipt of notice or actual knowledge of the placing of any lien or encumbrance
against the Demised Premises, Tenant shall immediately give Landlord written
notice thereof. Tenant shall within ten (10) days therefrom remove such lien by
payment or bond.
If Tenant shall fail to discharge such mechanic's lien within such period,
then, in addition to any other right or remedy of Landlord, Landlord may, but
shall not be obligated to, discharge the same by paying to the claimant the
amount claimed to be due by procuring the discharge of such lien as to the
Demised Premises by deposit in the court having jurisdiction of such lien, a
cash sum sufficient to secure the discharge of the same, or by the deposit of a
bond or other security with such court sufficient in form, content and amount to
procure the discharge of such lien, or in such other manner as is now or may in
the future be provided by present or future law for the discharge of such lien
as a lien against the Demised Premises. Any amount paid by Landlord, or the
value of any deposit so made by Landlord, together with all costs, fees and
expenses in connection therewith (including reasonable attorneys' fees of
Landlord), together with interest thereon at the rate set forth in Paragraph 33
hereof, shall be repaid by Tenant to Landlord on demand by Landlord and if
unpaid may be treated as Additional Rent.
All materialmen, contractors, artisans, mechanics, laborers and any other
person now or hereafter furnishing any labor, services, materials, supplies or
equipment to Tenant with respect to the Demised Premises, or any portion
thereof, are hereby charged with notice that they must
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look exclusively to Tenant to obtain payment for the same. Notice is hereby
given that Landlord shall not be liable for any labor, services, materials,
supplies, skill, machinery, fixtures or equipment furnished or to be furnished
to Tenant upon credit, and that no mechanic's lien or other lien for any such
labor, services, materials, supplies, machinery, fixtures or equipment shall
attach to or affect the estate or interest of Landlord in and to the Demised
Premises, or any portion thereof.
33. Interest: Late Charge. Base Rent payable pursuant to Paragraph 3
hereof by Tenant to Landlord under this Lease, if not paid when due, and any
other charges payable by Tenant hereunder not paid when due, including any
charges, expenses, liabilities or fees in connection with a default by Tenant,
shall accrue interest at the rate of prime (as announced from time to time by
the First National Bank of Chicago) plus one percent (1%) per annum from the
due date until paid, said interest to be in addition to Base Rent and other
charges under this Lease and to be paid to Landlord by Tenant upon demand. In
addition, if any installment of Base Rent and other charges payable pursuant to
this Lease by Tenant to Landlord is not paid within five (5) days after receipt
by Tenant of a written notice thereof from Landlord, Tenant shall pay Landlord
a late charge in an amount equal to two percent (2%) of the amount then due to
defray the increased cost of collecting late payments.
34. Inspections. Landlord, its agents or employees may, after providing
Tenant with a least twenty-four (24) hours prior notice except in an emergency
situation, enter the Demised Premises during reasonable business hours when
accompanied by an authorized employee or agent of Tenant except in an emergency
situation, to (a) exhibit the Demised Premises to prospective purchasers or
lenders; (b) inspect the Demised Premises to see that Tenant is complying with
its obligations hereunder; and (c) exhibit the Demised Premises during the last
six (6) months of the term to prospective tenants; provided that Landlord shall
comply at all times with Tenant's reasonable security requirements.
35. Transfer of Landlord's Interest. Tenant acknowledges that Landlord
has the right to transfer its interest in the Demised Premises and in this Lease
at any time after the date which is eighteen (18) months after the Commencement
Date and subject to the provisions of Paragraph 52 hereof, and Tenant agrees
that in the event of any such transfer Landlord shall automatically be released
from all liability under this Lease except for any liabilities accruing prior to
the date of transfer for which Tenant has identified in an estoppel certificate
or by written notice to Landlord, and Tenant agrees to look solely to such
transferee for the performance of Landlord's obligations hereunder; provided,
however, any such transferee shall be deemed to have assumed the obligations of
Landlord hereunder subject to the conditions and limitations herein contained.
Tenant agrees to look solely to Landlord's interest in the Demised Premises for
the recovery of any judgment from Landlord, it being agreed that Landlord, or if
Landlord is a partnership, its partners whether general or limited, or if
Landlord is a corporation, its directors, officers or shareholders, or if
Landlord is a limited liability company, its members or managers, shall never be
personally liable for such judgment. Without limiting the generality of the
foregoing, Tenant agrees that Landlord may transfer its interest in this Lease
to any entity controlled by, controlling or under common control with Landlord,
that acquires the Demised Premises and from and after such transfer Landlord
shall be released from liability, as aforesaid.
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36. Indemnity. (a) To the fullest extent allowed by law, Tenant shall at
all times indemnify, defend and hold Landlord harmless against and from any and
all claims by or on behalf of any person or persons, firm or firms, corporation
or corporations, arising from the conduct or management, or from any work or
things whatsoever done in or about the Demised Premises, and will further
indemnify, defend and hold Landlord harmless against and from any and all claims
arising during the term of this Lease, or arising from any breach or default on
the part of Tenant in the performance of any covenant or agreement on the part
of Tenant to be performed, pursuant to the terms of this Lease, or arising from,
any act or negligence of Tenant, its agents, servants, employees or licensees,
or arising from any accident, injury or damage whatsoever caused to any person,
firm or corporation occurring during the term of this Lease, in or about the
Demised Premises or upon the sidewalk and the land adjacent thereto, and from
and against all costs, attorneys' fees, expenses and liabilities incurred in or
about any such claim or action or proceeding brought thereon; and in case any
action or proceeding be brought against Landlord by reason of any such claim,
Tenant, upon notice from Landlord, covenants to defend such action or proceeding
by counsel reasonably satisfactory to Landlord. Tenant's obligations under this
Paragraph 36 shall be insured by contractual liability endorsement on Tenant's
policies of insurance required under the provisions of Paragraph 17 hereof.
(b) Landlord shall protect, indemnify and hold Tenant harmless from
and against any and all loss, claims, liability or costs (including court
costs and attorneys' fees) incurred by reason of: (a) any damage to any
property or any injury (including but not limited to death) to any person
occurring in, or on or about the Demised Premises or the Building to the
extent that such injury or damage shall be proximately caused by the
Landlord's affirmative acts of negligence or willful misconduct of Landlord
or its agents, servants or employees; provided, however, that such
indemnification shall be limited to the extent of the sum of: (i) amounts
of insurance proceeds recovered by Landlord under insurance policies
carried by Landlord for such injury or damage, after deductibles, or
insurance proceeds that would have been received in the event Landlord had
not elected to self-insure, and (ii) the deductible amounts for such claims
under such insurance policies. The provisions of this Article shall
survive the termination of this Lease with respect to any claims or
liability occurring prior to such termination.
(c) Notwithstanding the foregoing indemnification obligations,
Landlord and Tenant both hereby release the other and the other's officers,
directors, partners, employees and agents from any claim which the
indemnified party might have to the extent that the cost of any such claim
is reimbursed by insurance proceeds recovered by the releasing party, and
both Landlord and Tenant shall confirm that their insurance providers shall
similarly waive all such claims.
37. Modification of Lease. The terms, covenants and conditions of this
Lease may not be changed orally but only by an instrument in writing signed by
the party against whom enforcement of the change is sought. The failure of
either party hereto to insist in any one or more cases upon the strict
performance of any term, covenant or condition of this Lease to be
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performed or observed by the other party hereto shall not constitute a waiver
of relinquishment for the future of any such term, covenant or condition.
38. Memorandum of Lease. Neither party shall record this Lease or any of
the exhibits and/or riders attached hereto, but shall enter into a "short form"
or Memorandum of Lease in recordable form attached hereto as Exhibit F and made
a part hereof, which shall set forth the parties, the legal description of the
land, a description of the Demised Premises, the Commencement Date and
Expiration Date of the term of the Lease, and any options to renew, options to
purchase or rights of first refusal granted hereunder.
39. Paragraph Captions. Paragraph captions herein are for Landlord's and
Tenant's convenience only, and neither limit nor amplify the provisions of this
Lease.
40. Entire Agreement. This Lease represents the entire agreement between
Landlord and Tenant and supersedes all prior agreements, both written and oral.
The terms, covenants and conditions of this Lease shall be binding upon and
shall inure to the benefit of Landlord and Tenant and their respective
executors, administrators, heirs, distributees, legal representatives,
successors and assigns.
41. Choice of Law and Interpretation. This Lease shall be governed by the
internal law of the State in which the Demised Premises is situated, without
considering such state's choice of law rules. Should any provision of this
Lease require judicial interpretation, it is agreed that the court interpreting
or construing the same shall not apply a presumption that the terms of any such
provision shall be more strictly construed against one party or the other by
reason of the rule of construction that a document is to be construed most
strictly against the party who itself or through its agent prepared the same, it
being agreed that the agents of all parties hereto have participated in the
preparation of this Lease.
42. Prevailing Party. If either party hereto files a lawsuit against the
other party relating to performance or non-performance under this Lease, and
the court has entered a judgment in favor of one party on one or more counts
and no judgment in favor of the other party on any counts, then the
non-prevailing party shall pay the prevailing party's reasonable attorneys'
fees and costs in connection with the lawsuit.
43. Exhibits. Attached hereto and made a part hereof are the following:
Exhibit A - Legal Description
Exhibit B - Site Plan
Exhibit C - Plans
Exhibit C-1 Construction Schedule
Exhibit D - Schedule of Rents
Exhibit E - Lease Term Agreement
Exhibit F - Memorandum of Lease
Exhibit G - Landlord's Development Costs
Exhibit H - Permitted Exceptions
Exhibit I - Escrow Agreement
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44. Guarantee. All obligations on the part of Tenant to be paid,
performed and complied with are unconditionally guaranteed by First Data
Corporation (the "Guarantor") according to the provisions of the Guarantee
executed by Guarantor in a form prepared by Landlord.
45. Independent Covenants. It is the express intent of Landlord and
Tenant that (a) the obligations of Landlord and Tenant hereunder shall be
separate and independent covenants and agreements and that the Base Rent and
Additional Rent, and all other charges and sums payable by Tenant hereunder,
shall commence at the times provided herein and shall continue to be payable in
all events; (b) all costs or expenses of whatsoever character or kind, general
or special, ordinary or extraordinary, foreseen or unforeseen, and of every
kind and nature whatsoever that may be necessary or required in and about the
Demised Premises, or any portion thereof, and Tenant's possession or authorized
use thereof during the term of this Lease, shall be paid by Tenant and all
provisions of this Lease are to be interpreted and construed in light of the
intention expressed in this Paragraph 45; (c) the Base Rent specified in
Paragraph 3 shall be absolutely net to Landlord so that this Lease shall yield
net to Landlord the Base Rent specified in Paragraph 3 in each year during the
term of this Lease (unless extended or renewed at a different Base Rent); (d)
all Impositions, insurance premiums, utility expenses, repair and maintenance
expenses, and all other costs, fees, interest, charges, expenses,
reimbursements and obligations of every kind and nature whatsoever relating to
the Demised Premises, or any portion thereof, which may arise or become due
during the term of this Lease, or any extension or renewal thereof, shall be
paid or discharged by Tenant as Additional Rent.
46. Entry by Landlord. Subject to the provisions of Section 34 hereof,
Tenant agrees to permit Landlord or Landlord's mortgagee and authorized
representatives of Landlord or Landlord's mortgagee to enter upon the Demised
Premises at all reasonable times during ordinary business hours for the purpose
of inspecting the same and making any necessary repairs to comply with any laws,
ordinances, rules, regulations or requirements of any public body, or the Board
of Fire Underwriters, or any similar body; provided that Landlord shall comply
at all times with Tenant's reasonable security requirements. Nothing herein
contained shall imply any duty upon the part of Landlord to do any such work
which, under any provision of this Lease, Tenant may be required to perform and
the performance thereof by Landlord shall not constitute a waiver of Tenant's
default in failing to perform the same. Landlord may, during the progress of any
work, keep and store upon the Demised Premises all necessary materials, tools
and equipment. Landlord shall not in any event be liable for inconvenience,
annoyance, disturbance, loss of business or other damage to Tenant by reason of
making repairs or the performance of any work in or about the Demised Premises,
or on account of bringing material, supplies and equipment into, upon or through
the Demised Premises during the course thereof, and the obligations of Tenant
under this Lease shall not be thereby affected in any manner whatsoever;
provided, however, Landlord shall use all reasonable efforts to conduct any
entry into the Demised Premises so as to interfere with the business of Tenant
as little as reasonably practical under the circumstances.
47. [Deleted by intent of parties.]
48. Survival of Obligations. Except as otherwise provided herein to the
contrary, all obligations of Tenant hereunder not fully performed as of the
expiration or earlier termination of
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the term of this Lease shall survive the expiration or earlier termination of
the term hereof for a period of one (1) year.
49. Lease Subject to Landlord's Acquisition of Demised Premises. Anything
herein to the contrary notwithstanding, it is agreed and acknowledged by the
parties hereto that as of the date hereof, Landlord does not own the Demised
Premises. Therefore, anything herein to the contrary notwithstanding, the
rights, duties and obligations of Landlord and Tenant hereunder are expressly
subject to and contingent upon acquisition by Landlord of the Demised Premises
by December 31, 1997 ("Contingency Date"), upon terms and conditions acceptable
to Landlord, in its sole and absolute discretion, including, without
limitation, procuring project financing on terms and conditions acceptable to
Landlord. In the event Landlord has not acquired the Demised Premises by the
Contingency Date on terms and conditions acceptable to Landlord, as aforesaid,
Landlord shall notify Tenant, and either party may terminate this Lease at
anytime thereafter (but prior to the date Landlord acquires the Demised
Premises) by delivering written notice of such termination to the other party,
whereupon the parties shall be released and discharged from any and all
obligations and liabilities not theretofore accrued under this Lease; provided,
however, in the event the Lease is so terminated, Tenant shall pay to Landlord,
within ten (10) days from the date Landlord has submitted a written statement
to Tenant requesting such payment, all amounts incurred by Landlord in
connection with the proposed acquisition and development of the Land,
including, without limitation, any earnest money deposit, any costs for required
off-site improvements, including sewer and road improvements, all
architectural, engineering, environmental, land planning and other consulting
fees, all title and survey expenses, all costs associated with the proposed
subdivision of the Land, any and all fees and expenses associated with
procuring construction and/or other financing for the project, any other costs
or expenses that would not have been incurred by Landlord had Landlord not been
involved in the acquisition and proposed development of the Land and all
attorneys' fees associated with any of the foregoing. Landlord agrees to use
all reasonable efforts to acquire the Demised Premises on terms and conditions
acceptable to Landlord, as aforesaid.
50. Americans With Disabilities Act.
A. In the event that any alteration or repair to the Demised Premises is
undertaken by Tenant with or without Landlord's consent, or is undertaken by
Landlord at Tenant's request during the term of this Lease (including any
renewal or extension thereof), such alteration or repair (i) shall be designed
and constructed in full compliance with the Americans With Disabilities Act, as
amended from time to time (the "Act") if such alteration or repair is
undertaken by Tenant, and (ii) shall be designed by Tenant in full compliance
with the Act if such alteration or repair is undertaken by Landlord at Tenant's
request, and the cost of any such design, alteration or repair to the Demised
Premises shall be borne by Tenant, including without limitation (a) the cost of
any such design, alteration or repair required as a result of (i) Tenant or an
assignee or subtenant being deemed a "Public Accommodation" or the Demised
Premises being deemed a "Place of Public Accommodation" or (ii) such alteration
or repair being deemed to affect an "Area of Primary Function" (as such terms
are defined in the Act); and (b) the cost of the installation or implementation
of any "Auxiliary Aid" required under the Act as a result of the operation of
any business within the Demised Premises. In addition, Tenant shall be
responsible for all costs and expenses incurred or to be incurred in order to
cause the Demised Premises and the operation of any business within the Demised
Premises to comply with the Act, and, if
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Tenant fails to keep and maintain the Demised Premises in compliance with the
Act, Landlord shall have the right but not the obligation, at Tenant's sole
cost and expense, to enter the Demised Premises and cause the Demised Premises
to be put into compliance with the Act; and Tenant shall indemnify, defend and
hold Landlord harmless from and against any and all costs, claims and
liabilities, including without limitation, attorneys' fees arising from or
related to Tenant's failure to maintain and keep the Demised Premises in
compliance with the Act.
B. In connection with its construction of the Landlord's Improvements
pursuant to Paragraph 4 hereof, Landlord represents and warrants that the
Landlord's Improvements to be constructed in accordance with the Plans will
comply in all material respects with all applicable laws, including without
limitation, the Act, and Landlord covenants that the Demised Premises delivered
to Tenant as of the Construction Completion Date shall comply in all material
respects with all applicable laws, including without limitation, the Act.
Landlord shall indemnify, defend and hold Tenant harmless from all damages,
costs, losses, expenses (including but not limited to reasonable attorneys'
fees) arising from any breach by Landlord of the preceding covenant; provided
however the foregoing indemnification shall terminate upon the expiration of
one (1) year from the Construction Completion Date. Notwithstanding the
foregoing, in no event shall Tenant have the right to terminate this Lease or
have any right of set-off arising out of any breach or claimed breach by
Landlord in its obligations hereunder; it being expressly acknowledged and
agreed that the Base Rent and Additional Rent, and all other charges and sums
payable by Tenant hereunder, shall commence at the times provided herein and
shall continue to be payable as provided herein.
51. Reports by Tenant. Upon request by Landlord at any time after 135
days after the end of the applicable fiscal year of Tenant, Tenant shall deliver
to Landlord (within 15 days after receipt of written request) a copy of the
audited financial statement of any guarantor of Tenant's obligations under this
Lease. If such audited statements are not available, Tenant may provide such
statements certified by such guarantor's chief financial officer as being true
and correct, in accordance with generally accepted principals of accounting
consistently applied over the applicable periods. Said financial statements
shall only be required in connection with a proposed sale or mortgaging of the
Demised Premises and shall be held in confidence by Landlord and any such
proposed purchaser or lender or their respective successors or assigns.
Notwithstanding the foregoing, Tenant shall cause First Data Corporation to
submit annual audited financial statements to Landlord and Landlord's mortgagee
in the manner set forth herein if First Data Corporation ceases to be a publicly
traded company.
52. Option to Purchase. Subject to the provisions hereinafter set forth,
and provided that Tenant is not then in default hereunder, Landlord hereby
grants to Tenant the option to purchase the Demised Premises upon the following
terms and conditions:
A. Landlord shall notify Tenant thirty (30) days prior to the date that
it intends to make the Demised Premises available to sale to third parties.
Included with such notice shall be the proposed purchase price for the Demised
Premises, as well as any other relevant economic terms being offered by
Landlord. In no event shall Landlord have the right to convey the Demised
Premises or otherwise make the Demised Premises available for sale to third
parties until eighteen (18) months after the Commencement Date.
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[ILLEGIBLE TEXT] enters into a serious negotiation with a prospective purchaser
to purchase the Demised Premises, then Landlord shall notify Tenant in writing
of (i) the fact of such negotiation, (ii) the purchase price agreed to between
Landlord and such prospective purchaser, and (iii) the other relevant
agreed-upon economic terms upon which such purchaser would acquire the Demised
Premises, and Tenant must within ten (10) business days thereafter, by written
notice to Landlord, elect to exercise the option to purchase the Demised
Premises upon all of the same terms and conditions as are contained in
Landlord's notice to Tenant in which event the parties shall enter into a
definitive agreement incorporating said terms and conditions. If Tenant does
not elect to purchase, Landlord shall have the right to sell to a third party
on the same terms and conditions provided to Tenant or shall submit any
modified terms to Tenant in accordance with the above. In no event shall Tenant
be afforded more than three (3) opportunities to exercise its option hereunder,
in connection with more than three (3) different offers from three (3)
different third parties.
C. If Tenant exercises its option to purchase hereunder, the closing of
such purchase shall occur on the date set forth in the definitive agreement
entered into between Landlord and Tenant. At the closing, Tenant shall pay the
purchase price via cash or wire transfer of immediately available funds to
Landlord, and Landlord shall deliver to Tenant a general warranty deed (or
equivalent) to the Demised Premises conveying good and marketable fee simple
title in Tenant to the Demised Premises, subject to no liens, encumbrances or
other exceptions to title other than the Permitted Exceptions and taxes for the
current year, and any exceptions to title that have been caused by Tenant or
that Tenant has accepted in writing (other than any mortgages or other liens,
which must be discharged by Landlord at or prior to such closing). On the
closing date, Landlord and Tenant shall also execute and deliver such other
documents and instruments as are customary in similar transactions and/or
reasonably necessary to implement the terms and conditions of this Lease, and
to allow Tenant to obtain an extended coverage ALTA owner's title policy
insuring Tenant's fee simple ownership of the Demised Premises in accordance
with the above.
D. Landlord covenants and agrees that if any exceptions to title other
than the Permitted Exceptions shall be revealed by the deed or title policy,
Landlord will at its sole cost and expense clear the title of such exceptions
as soon as reasonably practical but, in any event, within six (6) months after
the intended closing date (unless Tenant shall in writing extend such period),
and the actual closing (including the payment of the purchase price) of such
purchase of the Demised Premises shall be delayed until the title thereto has
been cleared. Until such time as Tenant's purchase of the Demised Premises is
closed as hereinabove provided, Tenant shall continue to occupy and possess the
Demised Premises under the terms and conditions of this Lease. If for any
reason such purchase is not closed, this Lease shall continue in full force and
effect as if Tenant had not exercised the aforesaid option to purchase, and
Tenant shall be entitled to retroactively exercise any option for any Extension
Term to the extent the normal option election date occurred after Tenant
exercised its option to purchase the Demised Premises.
E. Upon Tenant's notice to Landlord of the exercise of Tenant's option
to purchase, Landlord shall provide Tenant with copies of all surveys, title
insurance policies, title instruments and other such documents in Landlord's
possession pertaining to the Demised Premises. Tenant shall pay for the cost of
the title insurance policy, the cost to prepare any
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[ILLEGIBLE] escrow or closing services, and any cost or expense in connection
with any endorsements to the title policy requested by Tenant. Landlord shall be
responsible for the cost of compliance with any subdivision, lot split or
similar regulations which are applicable to or in connection with the conveyance
of the Demised Premises to Tenant. All rents shall be pro-rated between the
parties as of the date of closing. Tenant shall pay the cost of any documentary
stamp taxes required for recording the deed, as well as any transfer taxes. Any
other matters at closing not specifically provided for herein shall be handled
and the cost hereof charged to one or the other or both parties as shall be the
ordinary custom and practice for the handling of such matters or the
apportioning of the cost hereof then prevalent in the City of Sunnyvale, Santa
Clara County, California.
F. The option hereunder may only be exercised by Tenant or a subsidiary,
affiliate or related entity of Tenant. If neither Tenant or a subsidiary,
affiliate or related entity is then occupying all or a portion of the Demised
Premises, Tenant shall have no rights hereunder.
53. No Third Party Beneficiaries. The obligations of Tenant set forth
hereunder (including, without limitation, the obligations set forth in Sections
5A, 7A, 11B and 50), are covenants from Tenant to Landlord only and do not
create any third party beneficiaries of such obligations.
54. Counterparts. This lease may be executed in counterparts, each of
which shall be deemed an original but all of which together shall constitute but
one and the same instrument.
55. Consents and Approvals. Landlord and Tenant agree that any consents or
approvals to be provided by either party will not be unreasonably withheld or
delayed unless specifically provided otherwise herein.
56. Limitation on Damages. In no event shall Landlord or Tenant be liable
under any theory of tort, contract, strict liability or other legal or equitable
theory for any punitive, special, incidental, indirect or consequential
damages, each of which is hereby excluded by agreement of the parties regardless
of whether or not any party has been advised of the possibility of such damages.
57. Tenant's Property. All fixtures, equipment, improvements and
appurtenances attached to, or built into, the Demised Premises that are
installed by Tenant at Tenant's expense shall be Tenant's property until the
termination of this Lease. All of the foregoing items installed at Tenant's
expense as well as all paneling, partitions and business and trade fixtures and
communication and office equipment which are installed in the Demised Premises
by Tenant, and all furniture, furnishing and other articles of movable personal
property owned by Tenant and located in the Demised Premises or the Building
(all of which are hereinafter referred to as "Tenant's Property") shall belong
to Tenant, may be removed by Tenant at any time during the term hereof, and may
be removed by Tenant at the end of the term hereof or within fifteen (15) days
thereafter, whether as a result of the normal expiration of the term of this
Lease or of the early termination of this Lease pursuant to the terms hereof
(as a result of Tenant's default hereunder or otherwise). Tenant shall repair
any damage resulting from the removal of Tenant's Property and leave the Demised
Premises in a commercially reasonable condition. Any items of
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[illegible text]
pursuant to Paragraph 8 hereof, be deemed abandoned and retained by Landlord as
its property thereafter.
Landlord waives any landlord or other lien it may have on Tenant's
Property and shall not seek to enforce same, whether upon Tenant's default or
otherwise.
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IN WITNESS WHEREOF, Landlord and Tenant have duly executed its Lease as of the
day and year first above written.
LANDLORD:
SUNNYVALE PARTNERS LIMITED
PARTNERSHIP, an Illinois limited partnership
By: Ridge Sunnyvale, Inc.
Its: General Partner
By: /s/ JAMES G. MARTELL
-----------------------------
Its: President
-----------------------------
TENANT:
FIRST DATA MERCHANT SERVICES
CORPORATION, a Florida corporation
By: /s/ DAVID SCHLAPBACH
----------------------------------
Its: Assistant Secretary
---------------------------------
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EXHIBIT A
LEGAL DESCRIPTION
Real Property in the City of Sunnyvale, County of Santa Clara, State of
California described as follows:
Beginning at the Southeasterly corner of that certain 5.58 acre parcel of land
described in the Deed to Stauffer Chemical Company, a California Corporation
as said Deed is filed for record in Book 1331 Official Records, Page 256 in the
Office of the Recorder of said County said Point of Beginning being in the
centerline of Fremont Avenue;
Thence from said Point of Beginning, South 89 degrees 48' West along said
centerline of Fremont Avenue 409.86 feet to the Easterly line of the land
described in the Deed to said Stauffer Chemical Company, filed for record in
Book 2891 Official Records, Page 325 in the Office of the Recorder of Said
County;
Thence continuing South 89 degrees 48' West along said centerline 143.22 feet to
the centerline of Stevens Creek as shown on the Map of the I.J. Truman
Subdivision No. 2 filed for record October 3, 1904 in Vol. "F-3" of Maps, Page
99 in the Office of the Recorder of said County last said point being also the
Southwesterly corner of Lot 24 of said subdivision;
Thence leaving Fremont Avenue and running along the centerline of Stevens Creek
and the Westerly boundary of Lot 24 as shown on said Subdivision Map the
following courses;
North 50 degrees West 46.20 feet; thence North 15 degrees 45' West (North 16
degrees 45' West Truman Sub.) 118.80 feet; thence North 1 degree East 135.30
feet; thence North 37 degrees 30' East 264.00 feet; thence North 74 degrees
East 178.20 feet; thence North 35 degrees 15' East 126.72 feet; thence North 23
degrees 30' East 96.66 feet; thence North 61 degrees 45' East to the point of
intersection of said centerline of Stevens Creek with the Northerly
prolongation of the Easterly line of said 5.58 acre parcel; thence South 0
degrees 01' West leaving said boundary of Lot 24, along said prolongation and
Easterly line, 823.39 feet to the Point of Beginning.
Excepting therefrom the lands described in the Deed from said Stauffer Chemical
Company to the State of California recorded in Book 5541 Official Records, Page
263 in the Office of the Recorder of said County;
Commencing at the Southeasterly corner of that certain 5.58 acre parcel of land
conveyed to Stauffer Chemical Company, a Corporation, by Deed recorded February
16, 1946 in Book 1331 at Page 256, official Records of Santa Clara County;
Thence along the Easterly line of said parcel and the Northerly prolongation
thereof North 1 degree 00' 41" East 823.39 feet to the general Westerly line
of the parcel of land conveyed to Stauffer Chemical Company, a Corporation, by
Deed recorded June 10, 1954 in Book 2891 at Page 325, Official Records of Santa
Clara County; thence along last said line South 62 degrees 40' 37" West, 197.03
feet to a line parallel with and distant 48.00 feet Westerly, at right angles,
from
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The ME line of the Department or Public Works Survey for the State Freeway in
Santa Clara County, Road IV-SC1-114-A; thence along said parallel line South 16
degrees 01' 13" East, 479.62 feet; thence, South 9 degrees 06' 48" East, 167.07
feet; thence along a tangent curve to the right with a radius of 40.00 feet,
through an angle of 99 degrees 50' 37", an arc length of 69.70 feet to a line
parallel with and distant 60.00 feet, Northerly, at right angles, from the
centerline of Fremont Avenue (60.00 feet wide); thence along last said parallel
line, North 89 degrees 16' 11" West, 115.00 feet; thence South 76 degrees 50'
32" West, 124.99 feet; thence South 0 degrees 43' 49" West 30.00 feet to said
centerline; thence along last said line South 89 degrees 16' 11" East 278.80
feet to the point of commencement.
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EXHIBIT B
THE PREMISES
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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. 3 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
June 11, 1998
