<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): January 12, 1999
------------------------------
BEYOND.COM CORPORATION
(Exact Name of Registrant as Specified in Charter)
DELAWARE 000-24457 94-3212136
- --------------------------------------------------------------------------------
(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION)
1195 West Fremont Avenue, Sunnyvale, California 94087
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (408) 616-4200
--------------
N/A
- --------------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT
ITEM 5. OTHER EVENTS
On January 12, 1999, Beyond.com Corporation, a Delaware corporation
(the "Registrant"), announced the financial results for its fourth quarter and
fiscal year ended December 31, 1998. Attached hereto as Exhibit 99.1 is the
Registrant's press release dated January 12, 1999. Attached hereto as Exhibit
99.2 are the Registrant's Financial Statements for the year ended December 31,
1998, and the Financial Data Schedule is attached hereto as Exhibit 27.1.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
-1-
<PAGE> 2
(c) Exhibits
27.1 Financial Data Schedule
99.1 Press Release dated January 12, 1999
99.2 Financial Statements for the year ended December 31, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
BEYOND.COM CORPORATION
(Registrant)
Dated: January 21, 1999 By: /s/ MICHAEL J. PRAISNER
----------------------------------------
Name: Michael J. Praisner
Title: Vice President, Finance & Administration
and Chief Financial Officer
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule
99.1 Press Release dated January 12, 1999
99.2 Financial Statements for the year ended
December 31, 1998
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 81,548
<SECURITIES> 0
<RECEIVABLES> 8,785
<ALLOWANCES> 878
<INVENTORY> 0
<CURRENT-ASSETS> 102,059
<PP&E> 3,150
<DEPRECIATION> 608
<TOTAL-ASSETS> 109,904
<CURRENT-LIABILITIES> 21,931
<BONDS> 63,250
0
0
<COMMON> 69,311
<OTHER-SE> (44,588)
<TOTAL-LIABILITY-AND-EQUITY> 109,904
<SALES> 36,650
<TOTAL-REVENUES> 36,650
<CGS> 31,074
<TOTAL-COSTS> 31,074
<OTHER-EXPENSES> 36,712
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (31,073)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,073)
<DISCONTINUED> 0
<EXTRAORDINARY> 51
<CHANGES> 0
<NET-INCOME> (31,124)
<EPS-PRIMARY> (1.65)<F1>
<EPS-DILUTED> (1.28)<F2>
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic & Diluted.
<F2>For Purposes of This Exhibit, Diluted means Pro-forma.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CONTACTS:
<TABLE>
<S> <C>
Michael Praisner Laura Dayton
Chief Financial Officer Director of Investor Relations
BEYOND.COM BEYOND.COM
408.616.4200 408.616.4328
</TABLE>
BEYOND.COM(TM) ANNOUNCES RECORD FOURTH QUARTER AND 1998 FINANCIAL RESULTS
DECEMBER 1998 CONSUMER REVENUES INCREASED 727%
COMPARED WITH SAME PERIOD A YEAR AGO
SUNNYVALE, Calif. -- Jan. 12, 1999 -- Online software superstore Beyond.com
(Nasdaq: "BYND") today announced its fourth quarter and 1998 financial results.
Strong holiday sales resulted in record fourth quarter revenues in 1998 of $13.1
million, a 35 percent increase compared with revenues of $9.7 million in the
third quarter of 1998 and a 143 percent increase compared with revenues of $5.4
million reported in the fourth quarter a year ago. The net loss for the fourth
quarter of 1998 was $14.4 million. This compares with a net loss of $8.9 million
in the third quarter of 1998 and a net loss of $2.5 million in the fourth
quarter a year ago. The basic and diluted net loss per share for the fourth
quarter of 1998 was ($0.53) per share. This compares with a net loss of ($0.33)
per share in the third quarter of 1998 and a pro forma net loss of ($0.12) per
share in the fourth quarter of 1997.
Net revenues for fiscal 1998 were $36.7 million, a 118 percent increase over net
revenues of $16.8 million reported for fiscal 1997. Net loss for fiscal 1998 was
$31.1 million, or a pro forma net loss of ($1.28) per share, compared with a net
loss in fiscal 1997 of $5.5 million, or a pro forma net loss of ($0.30) per
share.
"The 1998 holiday season along with our first-ever television advertisements
drove record numbers of software buyers to our site, http://www.beyond.com,"
said Mark Breier, Beyond.com president and chief executive officer. "In
December alone, consumer revenues increased 727 percent compared with the same
period last year and doubled from Q3 to Q4."
Overall cumulative customer accounts, which include consumer, government
desktops and corporate buyers, grew to more than 634,000 in the fourth quarter,
an increase of 47 percent from the third quarter of 1998. Consumers represented
the vast majority of customer accounts. There were 568,969 cumulative consumer
accounts in the fourth quarter, an increase of 55 percent from 367,079 consumer
accounts through the third quarter of 1998.
-more-
<PAGE> 2
Beyond.com Announces Fourth Quarter and 1998 Financial Results
Jan. 12, 1999
Page 2
According to Media Metrix, Beyond.com's reach on the Internet grew 267 percent
to 2.2 percent in November from 0.6 percent in August. Media Metrix also found
the Beyond.com was the 17th most-visited shopping site on the Internet during
the month of November. No other hardware or software reseller was ranked among
the top 25 shopping sites on the Internet.
"We are pleased to report that our operations kept pace with the surge in
holiday purchases, at times sustaining a 20-fold increase in orders while
maintaining better than 99.9 percent system up time. We proved that our
operational capability scaled quickly and effectively to meet customer demand,"
Breier explained.
The company's Affiliates Program, which enables qualified commercial web sites
to market and sell Beyond.com's software SKUs, increased to 14,800 affiliates
in the fourth quarter of 1998, a 196 percent increase from 5,000 affiliates at
the end of the third quarter of 1998.
"In just the four short months since we changed our name to Beyond.com, we have
dramatically improved our Web site with reviews, recommendations and Gold Star
customer ratings, effectively utilized our TV and radio advertising dollars to
propel us to the 17th most visited shopping site on the Internet, and expanded
our enterprise capabilities to better serve our corporate and government
customers," Breier said.
"We also grew our catalog of digitally downloadable titles 70 percent from
3,300 to 5,600 titles and expanded our physical stock keeping units 30 percent
from 30,000 to 39,000."
"Our government business continued to expand in the fourth quarter when we were
chosen by GTSI, the largest dedicated Federal government provider of computer
products, to digitally download software and software upgrades to the U.S. Army
over five years. The contract, which is reviewed and renewed annually, calls
for Beyond.com to provide software for up to 200,000 desktops. This is a key
deal because it demonstrates the government's and GTSI's growing confidence in
Beyond.com to provide digital distribution of software throughout numerous
agencies."
"New partnerships were formed with Palm computing, EarthWeb and most recently,
Novadigm. Under the Novadigm agreement, Beyond.com will license Novadigm's
Radio(TM) technology to build an Internet-based software update service for
small to medium-sized businesses, said Breier. "The agreement complements our
core strengths in digital distribution and will enable us to offer additional
software management services to our corporate and government customers."
-more-
<PAGE> 3
Beyond.com Announces Fourth Quarter and 1998 Financial Results
Jan. 12, 1999
Page 3
"Today, our primary strengths include an experienced, deep management team
focused on the following: Rapid customer satisfaction through expert digital
downloading capabilities and technical customer support, strong partnerships
with key portal sites, strategic relationships with top software publishers, a
Web site characterized by helpfulness with software reviews and
recommendations, and a three-pronged sales approach that targets consumers,
corporations and government enterprises."
"Going forward, we intend to continue our aggressive marketing campaign to
strengthen our brand identity and gain new customer accounts in a worldwide
software market that researchers estimate was $44 billion in 1997 and is
expected to grow to $96 billion in 2002. Our goal is to be first in customers'
minds as the place to go buy software."
ABOUT BEYOND.COM
Beyond.com sells commercial, off-the-shelf software to the government
enterprise, corporate and consumer markets, offering its customers a better
place to buy software. Visitors to the company's online store
http://www.beyond.com enjoy a comprehensive selection of software backed by
customer service and competitive pricing. Approximately 39,000 software
stock-keeping units (SKUs) are available for online purchase with 5,600 SKUs
available for immediate, electronic delivery, including software from such major
publishers as Adobe, Lotus, Microsoft, Sun Microsystems and Symantec. The
company has established strategic marketing alliances with America Online,
Inc., Excite, Inc., Netscape Communications Corporation and Network Associates.
Additionally, Beyond.com offers publishers transaction processing, physical and
electronic order fulfillment, customer support, site design consultation,
marketing support and reporting.
The company has applied for federal registration of the marks BEYOND.COM and
BEYOND DOT COM. Beyond.com Corporation trades on the Nasdaq National Market
under the symbol ("BYND"). More information on the company can be found in the
company's prospectus dated June 17, 1998, filed under its original name,
software.net Corporation, as filed with the Securities and Exchange Commission
("SEC").
To the extent that this news release discusses expectations about Beyond.com's
revenues and earnings projections, expectations about the company's business in
the first quarter of 1999 and beyond, or plans to grow the company's customer
base though its Web site, agreements with EarthWeb or PalmComputing, its TV
advertising campaign, portal or publishers agreements, or its recent agreement
with Novadigm, these statements are forward-looking within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to substantial
risks and uncertainties. Actual results for the first quarter of 1999 and
subsequent quarters could differ materially from any future performance
suggested above. Among the factors that could affect subsequent periods
include: Reductions in or cancellations of customer orders, changes in
relationships with software suppliers, changes in relationships with strategic
partners, changes in the product mix sold by the company, competition from other
online software resellers or publishers; inability to raise sufficient capital
on satisfactory terms, or at all, and other factors described in the company's
prospectus dated June 17, 1998, as filed with the SEC. Beyond.com news and
product/service information is available at the company's World Wide Web site
located at http://www.beyond.com.
-Financial Tables to Follow-
<PAGE> 4
Beyond.com Announces Fourth Quarter and 1998 Financial Results
Jan. 12, 1999
Page 4
BEYOND.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $ 13,139 $ 5,389 $ 36,650 $16,806
Cost of Revenues $ 11,131 $ 4,903 $ 31,074 $14,873
-------- ------- -------- -------
Gross Profit $ 2,008 $ 486 $ 5,576 $ 1,933
Operating Expenses:
Research and Development $ 1,192 $ 419 $ 4,201 $ 1,060
Sales and Marketing $ 13,299 $ 657 $ 27,568 $ 1,696
General and Administrative $ 1,723 $ 411 $ 4,943 $ 1,087
-------- ------- -------- -------
Total Operating Expenses $ 16,214 $ 1,487 $ 36,712 $ 3,843
-------- ------- -------- -------
Loss From Operations $(14,206) $(1,001) $(31,136) $(1,910)
Interest Income $ (178) $ 71 $ 49 $ 167
Gain on Sale of Assets -- $ 14 --
-------- ------- -------- -------
Loss From Continuing Operations $(14,384) $ (930) $(31,073) $(1,743)
Loss From Discontinued Operations $ 0 $(1,542) -- $(3,616)
-------- ------- -------- -------
Net Loss $(14,384) $(2,472) $(31,073) $(5,359)
-------- ------- -------- -------
Accretion of Premium on Preferred Stock -- $ (25) $ (51) $ (101)
Net Loss Applicable to Common Stockholders $(14,384) $(2,497) $(31,124) $(5,460)
Basic and diluted net loss per share from continuing operations $ (0.53) $ (0.11) $ (1.65) $ (0.21)
Basic and diluted net loss per share from discontinued
operations -- $ (0.17) -- $ (0.40)
-------- ------- -------- -------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.53) $ (0.28) $ (1.65) $ (0.61)
======== ======= ======== =======
Shares used in computing net loss per share 27,355 9,000 18,900 9,000
Pro forma basic and diluted net loss per share from
continuing operations $ (0.53) $ (0.05) $ (1.28) $ (0.10)
Pro forma basic and diluted net loss per share from
discontinued operations -- $ (0.07) -- $ (0.20)
-------- ------- -------- -------
Pro Forma Basic and Diluted Net Loss per Share $ (0.53) $ (0.12) $ (1.28) $ (0.30)
======== ======= ======== =======
Shares used in computing pro forma net loss per share 27,355 20,045 24,276 17,828
</TABLE>
-more-
<PAGE> 5
Beyond.com Announces Fourth Quarter and 1998 Financial Results
Jan. 12, 1999
Page 5
BEYOND.COM
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
(AUDITED) (AUDITED)
------------ ------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 81,548 $ 2,571
Accounts Receivable, net $ 8,785 $ 1,181
Prepaid Partnership Agreements $ 4,091 $ 396
Other Prepaid Expenses and Current Assets $ 1,610 $ 120
Cost of Deferred Revenue $ 5,755 $ 4,938
-------- --------
Total Current Assets $101,789 $ 9,206
Non-Current Assets
Property and equipment, net $ 3,150 $ 380
Deposits and Other Long Term Assets $ 4,965 --
Intangible Assets --
-------- --------
Total Non-Current Assets $ 8,115 $ 380
-------- --------
TOTAL ASSETS $109,904 $ 9,586
======== ========
Current Liabilities:
Accounts Payable $ 14,443 $ 2,256
Other Accrued Liabilities $ 1,261 $ 270
Accrued Interest Expense $ 483 --
Current Obligation Under Capital Leases -- $ 18
Deferred Revenue $ 5,744 $ 5,569
-------- --------
Total Current Liabilities $ 21,931 $ 8,113
Note Payable to a Shareholder and Director -- $ 60
Noncurrent Obligations under capital leases -- $ 39
Noncurrent Debt $ 63,250 --
Commitments:
Redeemable Convertible Preferred Stock -- $ 12,565
Stockholder's Equity: (Net Capital Deficiency)
Common Stock $ 69,311 $ 47
Deferred Compensation $ (2,226) --
Accumulated Deficit $(42,362) $(11,238)
-------- --------
Total Stockholder's Equity (Net Capital Deficiency) $ 24,723 $(11,191)
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
-------- --------
(NET CAPITAL DEFICIENCY) $109,904 $ 9,586
-------- --------
</TABLE>
<PAGE> 1
EXHIBIT 99.2
BEYOND.COM CORPORATION
FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 1998
<PAGE> 2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Beyond.com Corporation
We have audited the accompanying consolidated balance sheets of Beyond.com
Corporation as of December 31, 1997 and 1998, 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, 1998. 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 Beyond.com
Corporation at December 31, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
January 11, 1999
F-2
<PAGE> 3
BEYOND.COM CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 2,571 $ 81,548
Accounts receivable, net of allowances of $275 and $878
at December 31, 1997 and 1998....................... 1,181 8,785
Note receivable from a director........................ -- 270
Prepaid expenses and other current assets.............. 516 6,201
Cost of deferred revenue............................... 4,938 5,255
-------- --------
Total current assets........................... 9,206 102,059
Property and equipment, net.............................. 380 3,150
Other noncurrent assets.................................. -- 4,695
-------- --------
Total assets................................... $ 9,586 $109,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable....................................... $ 2,256 $ 14,443
Other accrued liabilities.............................. 270 1,744
Current obligations under capital leases............... 18 --
Deferred revenue....................................... 5,569 5,744
-------- --------
Total current liabilities...................... 8,113 21,931
Note payable to a shareholder and director............... 60 --
Noncurrent obligations under capital leases.............. 39 --
Convertible notes payable................................ -- 63,250
Commitments and contingencies
Redeemable convertible preferred stock, no par value,
issuable in series:
Authorized shares -- 10,000,000 in 1997
Issued and outstanding shares -- 7,022,558 in 1997..... 12,565 --
Stockholders' equity (net capital deficiency)
Preferred stock, no par value:
Authorized shares -- 15,000,000 in 1998................ -- --
Common stock, no par value:
Authorized shares -- 30,000,000 in 1997 and 50,000,000
in 1998
Issued and outstanding shares -- 9,070,000 in 1997 and
27,423,763 in 1998.................................. 47 69,311
Deferred compensation.................................. -- (2,226)
Accumulated deficit.................................... (11,238) (42,362)
-------- --------
Total stockholders' equity (net capital
deficiency)................................. (11,191) 24,723
-------- --------
Total liabilities and stockholders' equity (net
capital deficiency)......................... $ 9,586 $109,904
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 4
BEYOND.COM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Net revenues.................................... $ 5,858 $16,806 $ 36,650
Cost of revenues................................ 5,137 14,873 31,074
------- ------- --------
Gross profit.................................... 721 1,933 5,576
Operating expenses:
Research and development...................... 431 1,060 4,201
Sales and marketing........................... 704 1,696 27,568
General and administrative.................... 450 1,087 4,943
------- ------- --------
Total operating expenses.............. 1,585 3,843 36,712
------- ------- --------
Loss from operations............................ (864) (1,910) (31,136)
Interest and other income....................... 96 173 1,356
Interest expense................................ (11) (6) (1,293)
------- ------- --------
Loss from continuing operations................. (779) (1,743) (31,073)
Loss from discontinued operations............... (736) (3,616) --
------- ------- --------
Net loss and comprehensive net loss............. (1,515) (5,359) (31,073)
Accretion of premium on redemption of redeemable
convertible preferred stock in excess of
purchase price................................ (101) (101) (51)
------- ------- --------
Net loss applicable to common stockholders...... $(1,616) $(5,460) $(31,124)
======= ======= ========
Basic and diluted net loss per share from
continuing operations......................... $ (0.10) $ (0.21) $ (1.65)
Basic and diluted net loss per share from
discontinued operations....................... (0.08) (0.40) --
------- ------- --------
Basic and diluted net loss per share............ $ (0.18) $ (0.61) $ (1.65)
======= ======= ========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share.................... 9,000 9,000 18,900
======= ======= ========
Pro forma basic and diluted net loss per share
from continuing operations.................... $ (0.10) $ (1.28)
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) $ (1.28)
======= ========
Shares used in computing pro forma basic and
diluted net loss per share.................... 17,828 24,276
======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 5
BEYOND.COM 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 EQUITY (NET
--------------------- COMMON STOCK DEFERRED ACCUMULATED CAPITAL
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT DEFICIENCY)
---------- -------- ---------- ------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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.................................. 2,037,038 5,144 -- -- -- -- --
Accretion of premium on redemption of
redeemable convertible preferred
stock in excess of purchase price.... -- 101 -- -- -- (101) (101)
Net loss............................... -- -- -- -- -- (1,515) (1,515)
----------------------------------------------------------------------------------------
Balance at December 31, 1996........... 4,022,558 6,395 9,000,000 45 (2,454) (2,409)
Issuance of Series C redeemable
convertible
preferred stock at $2.04 per share,
net.................................. 3,000,000 6,069 -- -- -- -- --
Issuance of common stock upon exercise
of options under employee stock
option plan.......................... -- -- 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 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.......................... -- -- 165,852 28 -- -- 28
Issuance of Series D redeemable
convertible
preferred stock at $2.60 per share,
net.................................. 1,153,846 2,924 -- -- -- -- --
Accretion of premium on redemption of
redeemable convertible preferred
stock in excess of purchase price.... -- 51 -- -- -- (51) (51)
Conversion of redeemable convertible
preferred stock to common stock upon
the initial public offering.......... (8,176,404) (15,540) 12,198,962 15,540 -- -- 15,540
Issuance of warrant to AOL............. -- -- -- 1,075 -- -- 1,075
Shares issued upon the initial public
offering, net........................ -- -- 5,750,000 46,830 -- -- 46,830
Shares issued in a private placement... -- -- 238,949 2,000 -- 2,000
Deferred compensation resulting from
the grant of options................. -- -- -- 3,791 (3,791) -- --
Amortization of deferred
compensation......................... -- -- -- -- 1,565 -- 1,565
Net loss and comprehensive net loss.... -- -- -- -- -- (31,073) (31,073)
----------------------------------------------------------------------------------------
Balance at December 31, 1998........... -- $ -- 27,423,763 $69,311 $(2,226) $(42,362) $ 24,723
========== ======== ========== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 6
BEYOND.COM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ $(1,515) $(5,359) $(31,073)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 19 79 6,613
Amortization of deferred compensation and other... 49 -- 1,565
Amortization of debt issuance costs............... -- -- 113
Net loss of discontinued operations............... 736 3,616 --
Changes in assets and liabilities:
Accounts receivable............................... (202) (750) (7,604)
Prepaid expenses and other current assets......... (50) (440) (11,490)
Cost of deferred revenue.......................... (819) (4,120) (317)
Other noncurrent assets........................... -- -- (1,068)
Accounts payable.................................. 345 1,720 12,187
Other accrued liabilities......................... (28) 172 1,474
Deferred revenue.................................. 967 4,602 175
Cash provided by (used for) discontinued
operations..................................... (6) 181 --
------- ------- --------
Net cash used in operating activities............... (504) (299) (29,425)
INVESTING ACTIVITIES
Purchases of property and equipment................. (16) (333) (3,280)
Issuance of note receivable to director............. -- -- (270)
Cash used for discontinued operations............... (1,292) (4,611) --
------- ------- --------
Net cash used in investing activities............... (1,308) (4,944) (3,550)
FINANCING ACTIVITIES
Proceeds from issuance of convertible notes
payable........................................... -- -- 63,250
Payments for debt issuance costs.................... -- -- (2,963)
Repayment of note payable to related party.......... -- (45) (60)
Repayment of capital leases obligations............. -- (3) (57)
Proceeds from sale of redeemable convertible
preferred stock, net.............................. 5,294 6,069 2,924
Proceeds from sale of common stock, net............. -- -- 48,830
Proceeds from exercise of stock options............. -- 2 28
Cash used for discontinued operations............... -- (1,946) --
------- ------- --------
Net cash provided by financing activities........... 5,294 4,077 111,952
------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 3,482 (1,166) 78,977
Cash and cash equivalents at beginning of period.... 255 3,737 2,571
------- ------- --------
Cash and cash equivalents at end of period.......... $ 3,737 $ 2,571 $ 81,548
======= ======= ========
SUPPLEMENTAL SCHEDULES OF CASH FLOW INFORMATION
Interest paid....................................... $ -- $ 6 $
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES
Issuance of Series A redeemable convertible
preferred stock upon conversion of notes
payable........................................... $ 300 $ -- $ --
Issuance of Warrant to AOL.......................... $ -- $ -- $ 1,075
Deferred compensation related to stock option
grants............................................ $ -- $ -- $ 3,791
Issuance of common stock upon conversion of
preferred stock................................... $ -- $ -- $ 15,540
</TABLE>
See accompanying notes.
F-6
<PAGE> 7
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Beyond.com Corporation (the "Company") was incorporated in the state of
California as CyberSource Corporation on August 12, 1994. In April 1998, the
Company changed its name to software.net Corporation. In June 1998, the Company
reincorporated in Delaware as software.net Corporation. In December 1998, the
Company changed its name to Beyond.com. 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).
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 sales to U.S.
government agencies.
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 the
Company's results of operations.
F-7
<PAGE> 8
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During fiscal 1998, the Financial Accounting Standard Board approved the
American Institute of Certified Public Accountants Statements of Position,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" (SOP 98-4)_ and "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions" (SOP 98-9) which provide
revised and expanded guidance with respect to vendor specific objective evidence
as defined by SOP 97-2. SOP 98-4 and SOP 98-9 are effective for transactions
entered into after March 31, 1998 and fiscal years beginning after March 15,
1999, respectively. The application of SOP 98-4 and SOP 98-9 has not had a
material impact on the Company's results of operations.
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 December 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 costs of advertising are recorded as an expense when incurred or upon
the first showing of the advertisement. Advertising costs for the years ended
December 31, 1996, 1997, and 1998 were approximately $98,000, $178,000, and
$8,500,000, respectively. Amounts capitalized for future advertising were none
and $515,000, at December 31, 1997 and 1998, 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, 1997 and 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 primarily in the United States 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 customer returns, and such losses have been within
F-8
<PAGE> 9
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
management's expectations. For each of the years ended December 31, 1997 and
1998, U.S. government agencies, principally the Defense Logistics Agency,
accounted for 33% and 29% of revenues, respectively. There were no government
customers accounting for greater than 10% of revenues in 1996. As of December
31, 1998, 65% and 12% of accounts receivable was comprised of sales to U.S.
government agencies and one corporate customer, respectively.
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 digital downloading as a
method of selling Software over the Internet. If digital downloading 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 digital downloading 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. Property and equipment consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
---- ------
<S> <C> <C>
Computer equipment and software........................ $257 $2,450
Furniture and fixtures................................. 122 1,010
Office equipment....................................... 70 77
Leasehold improvements................................. 29 221
---- ------
478 3,758
Less accumulated depreciation and amortization......... (98) (608)
---- ------
$380 $3,150
==== ======
</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 8, 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 pro forma disclosures of applying FAS 123 included in
Note 8.
F-9
<PAGE> 10
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Loss Per Share and Pro forma Net Loss Per Share
Net loss per share is presented under Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128). FAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Earnings per share amounts for all
periods have been presented to conform to FAS 128 requirements. Potentially
dilutive securities have been excluded from the computation as their effect is
antidilutive.
Pro forma net loss per share 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
automatically converted upon completion of the Company's initial offering (using
the if-converted method).
Pro forma basic and diluted net loss per share is as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------
1997 1998
------- --------
<S> <C> <C>
Net loss.................................................. $(5,539) $(31,073)
======= ========
Shares used in computing basic and diluted net loss per
share................................................... 9,000 18,900
Adjustments to reflect the effect of the assumed
conversion of redeemable convertible preferred stock
from the date of issuance through the date of the
initial public offering in 1998......................... 8,828 5,376
------- --------
Weighted average shares used in computing pro forma basic
and diluted net loss per share.......................... 17,828 24,276
======= ========
Pro forma basic and diluted net loss per share............ $ (0.30) $ (1.28)
======= ========
</TABLE>
If the Company had reported net income, diluted earnings per share would
have included the shares used in the computation of pro forma net loss per share
as well as an additional approximately 1,577,000, 1,879,000, and 2,965,000
common equivalent shares related to the outstanding options and warrants
(determined using the treasury stock method) for the years ended December 31,
1996, 1997 and 1998, respectively, and an additional 3,449,000 shares in 1998
related to the convertible notes payable not included above (using the "if
converted" method).
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.
F-10
<PAGE> 11
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS 131)
in the fiscal year ended December 31, 1998. FAS 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. FAS 131 also establishes
standards for related disclosures about products and services, and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
maker, as defined under FAS 131, is the Chief Executive Officer. To date, the
Company has viewed the Company's operations as principally one segment, Software
sales. Additionally, the Company derives an immaterial amount of revenue from
non-domestic sources. As a result, the financial information disclosed herein,
materially represents all of the financial information related to the Company's
principal operating segment.
Internally Used Software
In March 1998, the Financial Accounting Standards Board approved American
Institute of Certified Public Accountants Statement of Position, "Accounting for
Computer Software Developed For or Obtained For Internal-Use" (SOP 98-1). SOP
98-1 provides revised guidance for the accounting treatment for software which
is internally developed, acquired, or modified solely to meet the entity's
internal needs. SOP 98-1 applies to all non-governmental entities and is
effective for all activities in fiscal years beginning after December 15, 1998.
The Company does not expect SOP 98-1 to have a material effect on its financial
statements or 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 $170,000 and
$1,128,000 for the years ended December 31, 1996 and 1997, respectively. The
results of operation of the discontinued business have been presented as a loss
from discontinued operations.
F-11
<PAGE> 12
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of net assets at the time of the Spin-off on December 31,
1997 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Assets:
Cash and cash equivalents................................ $2,000
Accounts receivable...................................... 606
Prepaid expenses and other assets........................ 118
Property and equipment................................... 1,152
Less liabilities:
Accounts payable and accrued liabilities................. 397
Deferred revenue and other............................... 155
------
Net assets................................................. $3,324
======
</TABLE>
3. MARKETING AGREEMENTS
During 1997 and 1998, the Company entered into marketing agreements with
America Online, Inc. ("AOL"), Excite, Inc. ("Excite"), Netscape Communications
Corporation ("Netscape") and Network Associates, Inc. ("Network Associates").
The AOL Agreement is for a term of 42 months beginning March 1998, 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 certain screens on the AOL
Service and aol.com to AOL customers through links to the Company's Web site
from various AOL Web pages. During the term, AOL is obligated to deliver a
cumulative number of Impressions (as defined in the agreement), with various
cumulative targets throughout the duration of the agreement term. If AOL does
not provide certain cumulative targeted Impressions, AOL will be required to
refund a portion of the fees paid by the Company under this agreement (or under
some circumstances, as outlined in this agreement, AOL will have the option to
extend the term and deliver the Impressions by the end of that extended term).
Upon conclusion of the initial 42 month term, AOL will have the right to renew
the agreement for two successive one-year terms.
The Excite agreement is for a term of 36 months beginning April 1998
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 beginning August 1997,
pursuant to which the Company created and manages an online Software store
accessible through Netscape's Internet site.
The Company has entered into various contracts with Network Associates in
1997 and 1998. In September 1997, the Company and Network Associates entered
into an agreement whereby the Company agreed to electronically distribute
Network Associates products. In September 1998, the Company and Network
Associates entered into agreements whereby the Company agreed to co-host certain
websites with Network Associates and whereby the Company agreed to operate and
manage certain aspects of Network Associates' website. Pursuant to these
agreements, the Company and Network
F-12
<PAGE> 13
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Associates have developed an interdependent relationship whereby the Company
resells Network Associates' products. Furthermore, the Company has significant
fixed financial obligations to Network Associates under the Co-Hosting Agreement
based on certain exclusivity rights.
These marketing agreements provide for payments totaling $8,963,000 in
1999, $10,213,000 in 2000 and $1,163,000 in 2001. During 1998, the Company made
payments totalling $10,613,000 under these agreements.
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. As of December 31, 1998, none
of these net gross margin targets have been achieved.
The amounts paid under the AOL, Netscape and Network Associates agreements
are being amortized to sales and marketing expenses on a straight-line basis
over the period from the launch dates to the termination dates of the services.
The periods of amortization are March 1998 to August 2001; August 1997 to July
1999; and September 1998 to August 2001 for AOL, Netscape and Network
Associates, respectively. The amounts paid under the Excite agreement are being
expensed to sales and marketing expenses as the payments become due over the
contract term beginning from the launch date of the services. The period of
amortization for this agreement is April 1998 to March 2001. The Company has
expensed $104,000 and $6,700,000 related to these agreements in 1997 and 1998,
respectively. Total amounts capitalized under these agreements at December 31,
1997 and 1998 were none and $4,100,000, respectively.
The Company also entered into a Common Stock and Warrants Subscription
Agreement which provided for the sale of $2,000,000 of common stock to AOL
immediately prior to the closing of an initial public offering ("IPO") at the
price paid by the Underwriters in the IPO. At the completion of the IPO and the
purchase by AOL of the $2,000,000 of common stock, the Company issued a common
stock warrant (the "IPO Warrant"). The IPO Warrant vests in increments of 1/36
per month commencing March 1, 1998. The IPO Warrant was issued for the purchase
of 358,422 shares of common stock at an exercise price per share of $8.37 and
such shares are non-forfeitable.
The Company has determined the fair value of the IPO Warrant at the time of
issuance to be approximately $1,075,000 in total and 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. The Company amortized $298,000 of
the IPO Warrant value to sales and marketing expense in 1998.
4. BORROWINGS
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.
F-13
<PAGE> 14
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company entered into a credit agreement (the "Credit Agreement") with
Deutsche Bank AG ("Deutsche 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"). The Loan
bore 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. The Company was 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 also paid Deutsche
Bank an upfront fee of $120,000 and credit line fees equal to 7.5% totaling
$18,000. All amounts borrowed under this agreement were paid by the Company on
November 16, 1998.
5 . CONVERTIBLE NOTES PAYABLE
In November and December 1998, the Company issued unsecured convertible
subordinated notes payable with an aggregate principal amount of $63,250,000.
The notes bear an annual interest rate of 7.25% and mature on December 1, 2003.
Interest on the notes is payable semi-annually commencing on June 1, 1999. The
notes are convertible into common stock at the option of the holder at any time
prior to December 2, 2003 at the conversion price of $18.34 per share. As of
December 31, 1998, the difference between the carrying value and the fair value
of the notes payable was immaterial based upon the minimal change in interest
rates from the dates of issuance to fiscal year end. There are no financial
covenants associated with the notes payable.
At any time on or after December 6, 2001 the notes will be redeemable at
the option of the Company at the specified redemption price equal to a
percentage of the principal amount, plus accrued interest. The Company shall
redeem such notes at a price equal to 101.813% of the principal on or before
November 30, 2002. Subsequent to this date the notes shall be redeemed at a
price equal to 100% of the principal amount of the notes.
6. OPERATING LEASE COMMITMENTS
The Company leases or subleases facilities and certain equipment under
noncancelable operating leases expiring at various dates through 2003. The
Company does not have an option to renew or extend the term of the sublease
related to the Company's principal administrative, engineering, marketing and
customer service facility which expires in 2003. Rental expense was
approximately $101,000, $266,000, and $1,228,000 for the years ended December
31, 1996, 1997, and 1998, respectively.
F-14
<PAGE> 15
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows as of December 31, 1998 (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 2,461
2000........................................................ 2,484
2001........................................................ 2,277
2002........................................................ 2,285
2003........................................................ 1,043
-------
Total minimum lease payments...................... $10,550
=======
</TABLE>
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock at December 31, 1997 is as follows
by series:
<TABLE>
<CAPTION>
DESIGNATED SHARES ISSUED AND
SHARES OUTSTANDING
---------- --------------------
<S> <C> <C>
A......................................... 1,985,520 1,985,520
B......................................... 2,500,000 2,037,038
C......................................... 3,000,000 3,000,000
D......................................... 1,523,424 --
--------- ---------
Total preferred stock........... 9,008,944 7,022,558
========= =========
</TABLE>
In March and April 1998, the Company sold 1,153,846 shares of Series D
redeemable convertible preferred stock at $2.60 per share.
Each share of preferred stock was 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 was convertible into 2.00, 2.00, 1.00, and 1.00 shares of common stock,
respectively, and was subject to adjustment as specified in the Articles of
Incorporation. Upon the Company's initial public offering, all outstanding
shares of preferred stock converted into 12,198,962 shares of common stock.
There have been no dividends declared or payable by the Company.
8. STOCKHOLDERS' EQUITY
Common Shares
The Company is authorized to issue 50,000,000 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.
F-15
<PAGE> 16
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has reserved shares of common stock for future issuance at
December 31, 1998 as follows:
<TABLE>
<S> <C>
1995 and 1998 Stock Option Plans:
Options outstanding....................................... 4,495,299
Options available for future grant........................ 268,849
Options granted outside of the Plan......................... 1,000,000
Outstanding warrants........................................ 358,422
---------
6,122,570
=========
</TABLE>
Stock Option Plans
The Company's 1995 Stock Option Plan was adopted by the Company on January
5, 1995. There are 3,000,000 shares of common stock authorized for issuance
under such plan. 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.
These plans (collectively "the Plans") provide 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 Plans generally vest over four years at
the rate of 25% one year from the grant date and ratably every month thereafter.
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 years ended December 31, 1996 and 1997, and
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
F-16
<PAGE> 17
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Issues Task Force Issue No. 90-9 and, therefore, no compensation expense has
been recorded.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
NUMBER AVERAGE EXERCISE
SHARES AVAILABLE OF SHARES PRICE PER SHARE
---------------- --------- ----------------
<S> <C> <C> <C>
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............ 3,000,000 -- --
Options granted....................... (3,868,946) 3,868,946 $5.162
Options exercised..................... -- (165,852) $0.168
Options canceled...................... 224,250 (224,250) $5.775
---------- ---------
Balance at December 31, 1998............ 268,849 4,495,299 $4.163
========== =========
</TABLE>
In connection with certain stock options granted in March and April 1998,
the Company recorded deferred compensation for the estimated difference between
the exercise price of the options and the deemed fair value of approximately
$3,800,000 which is being amortized over the four year vesting period of the
options.
The following table summarizes information about options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED NUMBER OF
OPTIONS WEIGHTED AVERAGE OPTIONS WEIGHTED
OUTSTANDING AS OF AVERAGE REMAINING EXERCISABLE AS OF AVERAGE
DECEMBER 31, EXERCISE CONTRACTUAL DECEMBER 31, EXERCISE
EXERCISE PRICE 1998 PRICE LIFE (YEARS) 1998 PRICE
-------------- ----------------- -------- ------------ ----------------- --------
<S> <C> <C> <C> <C> <C>
$0.004 - $ 1.90.. 1,285,499 $ 0.46 8.05 642,341 $0.04
$2.60 - $ 4.00.. 1,241,600 $ 2.61 9.24 5,000 $4.00
$4.36 - $ 8.63.. 1,246,800 $ 5.52 9.38 -- $ --
$9.00 - $29.06.. 721,400 $11.09 9.56 1,000 $9.00
--------- -------
$0.0042 - $29.06.. 4,495,299 $4.163 648,341 $0.09
========= =======
</TABLE>
As of December 31, 1996, and 1997, 573,498 and 666,448 options were
exercisable at a weighted average exercise price of $0.03 and $0.03,
respectively.
F-17
<PAGE> 18
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options Granted Outside of the Stock Option Plans
On January 5, 1995, the Company granted options outside of the Plans 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 December 31, 1998. As of December 31, 1998, the remaining life
of the options is approximately three years, and all options are 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, 1997, and 1998 under the fair value method of FAS 123. The
fair value for options granted prior to the IPO were estimated at the date of
grant using the minimum value method. Options granted subsequent to the IPO were
valued using the Black-Scholes model based on the actual stock closing price on
the day previous to the date of grant. The following weighted average
assumptions were used to calculate the value of the options granted: risk-free
interest rate of 5.6%, 6.1% and 5.2% for 1996, 1997, and 1998, respectively, no
dividend yield, no volatility factor for 1996 and 1997 and a volatility factor
of 1.35 for 1998, of the expected market price of the Company's common stock,
and a weighted average expected life of the option of four years for 1996 and
1997 and 5.43 years for 1998.
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 value method and the Black-Scholes model described
above, 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>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Pro forma net loss (in thousands)............... $(1,515) $(5,364) $(32,924)
Pro forma basic and diluted net loss per
share......................................... $ (0.30) $ (1.36)
</TABLE>
The weighted average fair value of options granted, which is the value
assigned to the options under FAS 123, was $0.04, $0.04 and $6.48 for options
granted during 1996, 1997, and 1998 respectively.
F-18
<PAGE> 19
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma impact of options on the net loss for the years ended
December 31, 1996, 1997, and 1998 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 1999.
9. 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 $746,500 related to such services
in 1998. As of December 31, 1998, amounts owed to CyberSource were approximately
$100,000.
During the years ended December 31, 1996, 1997, and 1998, legal fees
incurred were approximately, $112,000, $304,000, and $1,300,000, respectively,
relating to a law firm in which a current director of the Company is a partner.
As of December 31, 1997 and 1998, amounts owed to the law firm were
approximately $89,000, and $147,000, respectively.
On March 18, 1998, the Company borrowed $400,000 from CyberSource. The note
was repaid in June 1998.
On April 15, 1998, the Company issued a promissory note to a director and
stockholder to whom it loaned an aggregate of $270,000. Interest shall accrue on
the outstanding principal at a rate of 6.02% per annum. The note and related
accrued interest are due December 17, 1999. This note remains outstanding as of
December 31, 1998.
10. LITIGATION AND CONTINGENCIES
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.
In November 1998, a third party that appears to hold a registered United
States trademark for "A Better Way to Buy Software" sent the Company a letter
asserting that use of that phrase up to such time infringed its trademark
rights. The Company disputes the validity of this assertion. However, this third
party might file a lawsuit against the Company, which could subject the Company
to injunctive relief or money damages, or both. In November 1998, another third
party, based in Australia, sent the Company a letter asserting that the
Company's use of the name "Beyond.com" infringes the trademark and domain name
rights of this third party. The Company disputes the validity of this
F-19
<PAGE> 20
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assertion. However, if the asserting party were to be successful with certain of
its claims the Company's ability to use the "Beyond.com" mark, name or domain
name could be materially and adversely affected.
11. INCOME TAXES
No provision for income taxes has been recorded due to operating losses
with no current tax benefit.
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $37,000,000 and $31,000,000, respectively.
The Company also had federal and state research credit carryforwards of
approximately $314,000 and $268,000, respectively. The net operating losses and
credit carryforwards will expire at various dates beginning in 2002 through
2013, 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,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......... $ 2,952,000 $ 14,507,000
Research credit carryforwards............ 43,000 491,000
Reserves and accruals.................... 151,000 807,000
----------- ------------
Total deferred tax assets........ 3,146,000 15,805,000
Valuation allowance........................ (3,146,000) (15,805,000)
----------- ------------
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 1996, 1997, and 1998, 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 not more likely than not that the
deferred tax assets will be realized. The valuation allowance increased by
$2,204,000 during 1997 and increased by $12,659,000 during 1998.
F-20
