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FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 2000
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BEYOND.COM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7375 94-3212136
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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3200 PATRICK HENRY DRIVE
SANTA CLARA, CALIFORNIA
(408) 855-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RONALD S. SMITH
CHIEF EXECUTIVE OFFICER
BEYOND.COM CORPORATION
3200 PATRICK HENRY DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 855-3000
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
SERVICE, SHOULD BE SENT TO:
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JUSTIN L. BASTIAN, ESQ. ABIGAIL ARMS, ESQ.
MORRISON & FOERSTER LLP SHEARMAN & STERLING
755 PAGE MILL ROAD 801 PENNSYLVANIA AVENUE, N
PALO ALTO, CALIFORNIA 94304 WASHINGTON, D.C. 20004
(650) 813-5600 (202) 508-8000
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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: [X]
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: [ ]
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CALCULATION OF REGISTRATION FEE
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MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING
SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE
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10 7/8% Convertible Subordinated Notes Due December 1,
2003..................................................... $42,166,667 39% $16,445,000(1)
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Common Stock, par value $0.001 per share................... 9,876,730 shares(3) $1.625 $16,049,687(4)
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Total.............................................
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TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
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10 7/8% Convertible Subordinated Notes Due December 1,
2003..................................................... $4,342(2)
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Common Stock, par value $0.001 per share................... $4,238
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Total............................................. $8,580
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(1) Pursuant to Rule 457(f)(1) under the Securities Act of 1933, this amount is
the market value as of June 30, 2000 of the maximum amount of 7 1/4%
Convertible Subordinate Notes due December 1, 2003 (the "existing notes")
that may be received by the Registrant from tendering holders in the
exchange offer.
(2) The registration fee has been calculated pursuant to Rule 457(f) under the
Securities Act of 1933.
(3) The 9,876,730 shares of common stock are being registered to the extent the
Registrant elects to pay in common stock instead of cash under the terms of
the exchange notes or the exchange offer. Also includes such indeterminate
number of shares of Common Stock as shall be issuable upon conversion of the
exchange notes being registered hereunder. No additional consideration shall
be received for the Common Stock issuable upon conversion of the exchange
notes and therefore no registration fee is required pursuant to Rule 457
under the Securities Act.
(4) Estimated in accordance with Rule 457(c) and Rule 457(d) solely for the
purpose of calculating the amount of the registration fee based on the
average of the high and low price of the Registrant's common stock as
reported on The Nasdaq National Market on June 30, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY
THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 3, 2000
PROSPECTUS
[LOGO OF BEYOND.COM CORPORATION]
------------------------
EXCHANGE OFFER FOR
10 7/8% CONVERTIBLE SUBORDINATED NOTES DUE DECEMBER 1, 2003 FOR ITS
7 1/4% CONVERTIBLE SUBORDINATED NOTES DUE DECEMBER 1, 2003
------------------------
If you elect to participate in the exchange offer, you will receive from us
$2,000 principal amount of the 10 7/8% Convertible Subordinated Notes due
December 1, 2003 for each $3,000 principal amount of the 7 1/4% Convertible
Subordinated Notes due December 1, 2003.
This exchange offer will expire at 5:00 p.m., Eastern Daylight Time, on --
2000, unless we extend the offer.
Our common stock is traded on the Nasdaq National Market under the symbol
"BYND." On June 29, 2000, the last reported sale price from our common stock on
the Nasdaq National Market was $1.625 per share.
We mailed this prospectus and the letter of transmittal on July , 2000.
------------------------
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF FACTORS
THAT YOU SHOULD CONSIDER BEFORE YOU DECIDE TO PARTICIPATE IN THIS EXCHANGE OFFER
OR PURCHASE ADDITIONAL EXCHANGE NOTES.
------------------------
We have retained Georgeson Shareholder Communications, Inc. as our
information agent to assist you in connection with the exchange offer. You may
call Georgeson Shareholder Communications, Inc., at (800) 223-2064, toll free,
to receive additional documents and to ask questions.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DEALER MANAGER FOR THE EXCHANGE OFFER:
ROBERTSON STEPHENS
This prospectus is dated July , 2000
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date of this prospectus.
------------------------
TABLE OF CONTENTS
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PAGE
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Summary..................................................... 1
Risk Factors................................................ 7
Special Note Regarding Forward Looking Statements...........
Use of Proceeds............................................. 21
Price Range of Common Stock................................. 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 33
Management.................................................. 41
Certain Relationships and Related Transactions.............. 45
The Exchange Offer.......................................... 47
Description of Exchange Notes............................... 55
Description of Existing Notes............................... 69
Description of Capital Stock................................ 84
Book-Entry System -- The Depository Trust Company........... 85
Legal Matters............................................... 87
Experts..................................................... 87
Consolidated Financial Statements........................... 88
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SUMMARY
This summary does not contain all the information you should consider
before exchanging your existing notes for the exchange notes. You should read
this entire prospectus carefully. Unless otherwise indicated, "we," "us," "our"
and similar terms refer to Beyond.com Corporation.
OUR COMPANY
We are an e-commerce services provider that builds and manages websites for
businesses and sells software and computer related products to the government,
corporate and consumer markets. Additionally, we operate our own online store,
where customers can find an extensive selection of software and computer related
products and services.
ESTORE GROUP
Our eStore Group offers software developers, hardware manufacturers and
systems OEMs full-service Web stores that can be rapidly implemented more
economically than if they had developed a similar website internally. Businesses
can choose from an array of services, including website design and construction,
transaction processing, physical and electronic order fulfillment, customer
support, marketing, and merchandising support. Our current eStore customers
include CADopia, Compaq Computer, Executive Software, HP Shopping Village (a
subsidiary of Hewlett Packard), IntelliGolf, McAfee, Palm Computing, Symantec,
Systran Software, Telex and Trend Micro.
GOVERNMENT SYSTEMS GROUP
Our Government Systems Group provides digitally downloadable software and
related services to a growing list of United States Government agencies
including the Internal Revenue Service (IRS), Office of the Comptroller of the
Currency (OCC), Bureau of Engraving and Printing (BEP), Office of Thrift
Supervision (OTS), Defense Logistics Agency (DLA), National Imagery and Mapping
Agency (NIMA), Patent and Trademark Office (PTO) and the Department of Defense
(DoD).
WEBSITE
Our online store (www.beyond.com), offers customers a comprehensive
selection of software and computer related products, customer reviews, customer
service, and competitive prices. We deliver software to customers by physically
delivering the shrink-wrap software package or over the Internet via digital
download. We carry approximately 177,000 software stock keeping units;
approximately 13,000 of these stock keeping units can be delivered to customers
via digital download.
STRATEGIC REFOCUS
At the end of the third quarter of 1999, we made a strategic decision to
refocus our business from a consumer retail focused company to a
business-to-business e-commerce services company. Under this new direction, we
plan to focus our resources and expertise in two areas with substantial revenue
growth and profit potential: our eStore and Government Systems Groups.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
We have summarized the terms of the exchange offer in this section. Before
you decide whether to tender your existing notes in this offer, you should read
the detailed description of the offer under "The Exchange Offer" and of the
exchange notes under "Description of Exchange Notes" for further information.
Terms of the exchange......... We are offering up to $42.17 million aggregate
principal amount of new 10 7/8% Convertible
Subordinated Notes due December 1, 2003 for up
to $63.25 million aggregate principal amount of
7 1/4% Convertible Subordinated Notes due
December 1, 2003. We are offering to exchange
$2,000 principal amount of exchange notes for
each $3,000 principal amount of existing notes.
You may tender all, some or none of your
existing notes. We may pay interest on the
exchange notes with shares of our common stock,
par value $0.001 per share, or in cash, solely
at our option.
Conversion Price.............. The exchange notes will be convertible at any
time prior to maturity at a conversion price of
$4.00 per share, subject to adjustment under
certain conditions.
Expiration date; extension;
termination................. The exchange offer and withdrawal rights will
expire at 5:00 p.m., Eastern Daylight Time, on
--, 2000, or any subsequent date to which we
extend it. We may extend the expiration date
for any reason. In the case of any extension,
we will issue a press release or other public
announcement no later than 9:00 a.m., Eastern
Daylight Time, on the next business day after
the previously scheduled expiration date. You
must tender your existing notes prior to this
date if you wish to participate in the offer.
We have the right to:
- extend the expiration date of the
exchange offer and retain all tendered
existing notes, subject to your right to
withdraw your tendered notes, or
- waive any condition or otherwise amend
the terms of the exchange offer in any
respect, other than the condition that
the registration statement be declared
effective.
Conditions to the exchange
offer......................... The exchange offer is subject to the
registration statement and any post-effective
amendment to the registration statement
covering the exchange notes being effective
under the Securities Act. The offer also is
subject to customary conditions, which we may
waive. Please read "The Exchange
Offer -- Conditions for completion of the
exchange offer" for more information.
Withdrawal Rights............. You may withdraw a tender of your existing
notes at any time before the exchange offer
expires by delivering a written notice of
withdrawal to LaSalle National Bank, the
exchange agent, before the expiration date. If
you change your mind, you may retender your
existing notes by again following the exchange
offer procedures before the exchange offer
expires.
Procedures for tendering
existing notes.............. If you hold existing notes through a broker,
dealer, commercial bank, trust company or other
nominee, you should contact that
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person promptly if you wish to tender your
existing notes. Tenders of your existing notes
will be effected by book-entry transfers
through The Depository Trust Company.
If you hold your existing notes through a
broker, dealer, commercial bank, trust company
or other nominee, you also may comply with the
procedures for guaranteed delivery.
Please do not send letters of transmittal to
us. You should send those letters to LaSalle
National Bank, the exchange agent. The exchange
agent can answer your questions regarding how
to tender your existing notes.
Interest...................... Interest on the exchange notes will be payable
in cash or, at our option, in common stock at a
rate of 10 7/8% per year, payable on June 1 and
December 1 of each year. If we elect to pay
interest in common stock, the shares of common
stock will be valued at 90% of the average of
the closing prices for the five trading days
immediately preceding the second trading day
prior to the interest payment date. The
exchange notes will bear interest from the
issue date. Existing notes accepted for
exchange will cease to accrue interest from and
after the date of consummation of the exchange
offer.
Exchange Agent................ LaSalle National Bank
Information Agent............. Georgeson Shareholder Communications, Inc. For
information regarding the exchange offer,
please call (toll free (800) 223-2064; collect
(212) 440-9800).
Dealer Manager................ Robertson Stephens
Risk Factors.................. You should consider carefully the matters
described under "Risk Factors," as well as
other information set forth in this prospectus
and in the letter of transmittal.
Deciding whether to
participate
in the exchange offer....... Neither we nor our officers or directors make
any recommendation as to whether you should
tender or refrain from tendering all or any
portion of your existing notes in the exchange
offer. Further, we have not authorized anyone
to make any such recommendation. You must make
your own decision whether to tender your
existing notes in the exchange offer and, if
so, the aggregate amount of existing notes to
tender after reading this prospectus and the
letter of transmittal and consulting with your
advisers, if any, based on your own financial
position and requirements.
Consequences of not exchanging
existing notes.............. If you do not exchange your existing notes in
the exchange offer, your existing notes will be
subordinate to the exchange notes. Further, the
liquidity and trading market for existing notes
not tendered in the exchange could be adversely
affected to the extent existing notes are
tendered and accepted in the exchange offer.
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COMPARISON OF EXCHANGE NOTES AND EXISTING NOTES
The following is a brief summary of the terms of the exchange notes and the
existing notes. For a more complete description of the exchange notes, see
"Description of Exchange Notes."
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EXCHANGE NOTES EXISTING NOTES
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Securities..................... $42.17 million aggregate $63.25 million aggregate
principal amount of 10 7/8% principal amount of 7 1/4%
Convertible Subordinated Notes Convertible Subordinated Notes
due December 1, 2003. The due December 1, 2003.
exchange notes will be issued
in principal amount of $1,000
and integral multiples of
$1,000.
Issuer......................... Beyond.com Corporation Beyond.com Corporation
Maturity....................... December 1, 2003 December 1, 2003
Interest....................... Interest on the exchange notes Interest on the existing notes
will be payable in cash or, at is payable in cash at a rate of
our option, in common stock at 7 1/4% per year, payable on
a rate of 10 7/8% per year, June 1 and December 1 of each
payable on June 1 and December year.
1 of each year. If we elect to
pay interest in common stock,
the shares of common stock will
be valued at 90% of the average
of the closing prices for the
five trading days immediately
preceding the second trading
day prior to the interest
payment date. The exchange
notes will bear interest from
the issue date. Existing notes
accepted for exchange will
cease to accrue interest from
and after the date of
consummation of the exchange
offer.
Conversion -- General.......... The exchange notes will be The existing notes are
convertible at any time prior convertible at any time prior
to the maturity at a conversion to maturity at a conversion
price of $4.00 per share, price of $18.34 per share,
subject to adjustment under subject to adjustment under
certain conditions. However, certain conditions. However,
the right to convert an the right to convert an
existing note called for existing note called for
redemption terminates on the redemption terminates on the
business day immediately business day immediately
preceding the redemption date preceding the redemption date
or such earlier date as the or such earlier date as the
holder presents any existing holder presents any existing
note for redemption. note for redemption.
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EXCHANGE NOTES EXISTING NOTES
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Auto-Conversion................ We may elect to automatically None.
convert all or part of the
exchange notes on or prior to
maturity if our common stock
price has exceeded 150% of the
conversion price for at least
20 trading days during a 30-day
trading period ending five
trading days prior to the
notice of automatic conversion.
If an automatic conversion
occurs on or prior to December
6, 2001, we will pay additional
interest in cash or, at our
option, in common stock equal
to three interest payments on
the converted exchange notes,
less any interest actually paid
prior to automatic conversion.
If we elect to pay the
additional interest in common
stock, the shares of common
stock will be valued at 90% of
the average of the closing
prices for the five trading
days immediately preceding the
second trading day prior to the
conversion date.
Ranking........................ The exchange notes will be The existing notes are
subordinated to all of our subordinated to all of our
senior debt and will be senior senior debt and will be
in right of payment to our subordinated to the exchange
existing notes. As of March 31, notes. As of March 31, 2000, we
2000, we had no outstanding had no outstanding senior debt.
senior debt. The exchange notes The existing notes also are
also are effectively effectively subordinated to all
subordinated to all indebtedness and other
indebtedness and other liabilities of our
liabilities of our subsidiaries, including trade
subsidiaries, including trade payables but excluding
payables but excluding intercompany liabilities.
intercompany liabilities.
Optional Redemption............ We may redeem the exchange We may redeem the existing
notes on or after December 6, notes on or after December 6,
2001, in whole or in part, on 2000, in whole or in part, on
not less than 30 but no more not less than 30 but no more
than 60 days' notice, at the than 60 days' notice, at the
redemption prices set forth in redemption prices set forth in
this prospectus, plus accrued this prospectus, plus accrued
and unpaid interest, if any, to and unpaid interest, if any, to
the redemption date. the redemption date.
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EXCHANGE NOTES EXISTING NOTES
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Repurchase at option of You may require us to You may require us to
holders...................... repurchase all or part of your repurchase all or part of your
exchange notes upon a change in existing notes upon a change in
control at a repurchase price control at a repurchase price
equal to 100% of the equal to 100% of the
outstanding principal amount of outstanding principal amount of
the existing notes being the existing notes being
redeemed, plus any accrued and redeemed, plus any accrued and
unpaid interest. unpaid interest.
Listing........................ The exchange notes are expected The existing notes trade in the
to trade in the over-the-counter market.
over-the-counter market.
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RISK FACTORS
You should carefully consider the risks described below before you decide
to exchange your existing notes for exchange notes. The risks and uncertainties
described below are not the only ones facing our company. Additional risks and
uncertainties that we do not presently know or that we currently deem immaterial
may also impair our business operations.
If any of the following risks actually occur, they could materially
adversely affect our business, financial condition or operating results. In that
case, the trading price of our common stock and the existing notes could
decline.
OUR LIMITED EXPERIENCE MAKES IT DIFFICULT TO ASSESS WHETHER THE IMPLEMENTATION
OF OUR NEW BUSINESS MODEL WILL BE SUCCESSFUL
Historically, our business has been focused primarily on the online resale
of commercial off-the-shelf computer software to consumers, small businesses and
large enterprises. We have recently refocused our business from this consumer
oriented business model to an e-commerce services provider model that we refer
to as our eStore Group. We must launch and operate our eStore business model
successfully and generate adequate revenue and gross margin to replace an
expected decrease in revenue we may incur in the consumer market as we scale
back on our consumer branding efforts. We have limited experience in operating
our eStore business and cannot give any assurances that we will be able to fully
build this business.
WE HAVE A LIMITED OPERATING HISTORY, HAVE INCURRED NET LOSSES SINCE INCEPTION
AND EXPECT TO INCUR NET LOSSES FOR THE FORESEEABLE FUTURE
We began selling software on our website in November 1994. As a result, we
have only a limited operating history upon which you may evaluate our business
and prospects. Additionally, because we have refocused our business model to an
e-commerce services provider model from a consumer oriented business model, our
prior operating history does not provide meaningful information upon which you
may evaluate our business and prospects. We incurred net losses of approximately
$209.2 million from inception of our business through March 31, 2000. As of
March 31, 2000, we had an accumulated deficit of approximately $212.9 million.
We expect to continue to incur significant net operating losses for the
foreseeable future.
WE ANTICIPATE SIGNIFICANT OPERATING LOSSES AND NEGATIVE CASH FLOW WHICH MAY
ADVERSELY AFFECT OUR BUSINESS IN THE FUTURE
We expect significant operating losses and negative cash flow to continue
for the foreseeable future. Because we have planned expenses and relatively low
gross margins, our ability to become profitable depends on our ability to
generate and sustain higher net revenues. If we do achieve profitability, we
cannot be certain that we can sustain or increase profitability on a quarterly
or annual basis in the future.
We base our current and future expense levels, which are largely fixed, on
our operating plans and estimates of future revenues. We find sales and
operating results difficult to forecast, because they generally depend on the
volume and timing of the orders we receive. As a result, we may be unable to
adjust our spending in a timely manner to compensate for any unexpected revenue
shortfall. A shortfall in revenues will significantly harm our business and
operating results. In view of the rapidly evolving nature of our business,
proposed and possible future acquisitions and our limited operating history of
selling software online, we have little experience forecasting our revenues.
Therefore, we believe that period-to-period comparisons of our financial results
are not necessarily meaningful and you should not rely upon them as an
indication of our future performance. If we cannot achieve and sustain operating
profitability or positive cash flow from operations, we may be unable to meet
our debt service obligations or working capital requirements, which would
adversely affect our business.
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WE MAY NOT ACCURATELY FORECAST OUR SALES AND REVENUES DUE TO A VARIETY OF
FACTORS, WHICH WILL CAUSE QUARTERLY FLUCTUATIONS IN OUR OPERATING RESULTS AND
MAY RESULT IN VOLATILITY IN OUR STOCK PRICE
Our revenues and operating results may fluctuate significantly from quarter
to quarter due to a number of factors, not all of which are in our control.
These factors include:
- our ability to attract and retain new customers and maintain customer
satisfaction;
- new websites, services and products introduced by us or by our
competitors;
- price competition;
- decreases in the level of growth, use of or consumer acceptance of the
Internet and online services for the purchase of consumer products;
- the termination of contracts with major purchasers, particularly U.S.
Government agencies;
- technical difficulties or system downtime affecting the Internet or
online services, generally, and eStore websites for customers or the
operation of our website;
- the failure of Internet bandwidth to increase significantly over time
and/or an increase in the cost to consumers of obtaining or using
Internet bandwidth;
- the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and infrastructure;
- government regulations related to use of the Internet for commerce or
sales and distribution of software; and
- general economic conditions and economic conditions specific to the
Internet, online commerce and the software industry.
We must successfully execute our new eStore strategy. This includes adding
significant new eStore clients in the software and computer peripherals markets
while adding additional high margin services that are valued by our customers.
We must also increase the number of repeat purchasers of software through our
online sites and increase revenues from purchasers of digitally downloadable
software products. In addition, we must successfully maintain the Beyond.com
brand. We cannot be certain that we can accomplish these objectives or that our
business strategy will be successful.
Seasonal fluctuations in the software industry, Internet and commercial
online service usage, and traditional retail, government and corporate seasonal
spending patterns and advertising expenditures may affect our business. In
particular, Internet and online service usage and its rate of growth may decline
in the summer. These seasonal patterns may cause quarterly fluctuations in our
operating results and could adversely and materially affect our financial
performance. Our gross margins are likely to fluctuate over time. A number of
factors may impact our gross margins, including:
- the mix of revenues between our eStores Group, Government Systems Group
and our website;
- the mix of transaction versus reseller revenue in our eStore business;
- the mix of revenues from sales of shrink-wrap products and products
delivered through digital download;
- the mix of revenues from sales of software products and computer
peripheral products (such as joysticks, personal organizers and related
products);
- the amount of advertising or promotional revenues we receive; and
- our ability to rapidly grow value added services for our eStore business.
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<PAGE> 12
We realize higher gross margins from:
- advertising and promotional revenues than from software products sales;
- product sales through digital download than from sales of shrink-wrap
software products;
- sales of specialty software products than from sales of widely available
commodity software products; and
- consulting and marketing services for eStores, than from transaction
fees.
We believe that the size of new software products will continue to increase
and that they will be suitable for digital download only if network bandwidth
increases significantly. This trend may limit our ability to distribute such
software products via digital download and may limit our ability to realize the
higher gross margins associated with digital download software product sales for
our eStore customers. Any change in one or more of these factors could adversely
and materially affect our gross margins and operating results in future periods.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indicator of our future
performance. It is likely that in some future quarter our operating results may
fall below the expectations of securities analysts and investors. In this event,
the trading price of our common stock may fall significantly.
IF WE DO NOT SECURE ADDITIONAL CAPITAL TO FUND OUR BUSINESS WE WILL BE UNABLE TO
SUSTAIN GROWTH
We require substantial working capital to fund our business in the longer
term. We expect operating losses and negative cash flow to continue for the
foreseeable future. We will likely have to raise additional funds to fund our
operations and to make interest payments to holders of our existing and exchange
notes. We may elect to seek additional funds at any time. The actual amount and
timing of our longer-term future capital requirements may differ materially from
our estimates. In particular, our estimates may be inaccurate as a result of
changes and fluctuations in our revenues, operating costs and development
expenses.
Our revenues and costs also depend upon factors that we cannot control.
These factors include changes in technology and regulations, increased
competition and factors such as Web integrity, seasonality, and performance by
third parties in connection with our operations. Because of these factors, our
actual revenues and costs are uncertain and may vary considerably. These
variations may significantly affect our future need for capital. We may be
unable to raise financing sufficient for our needs, either on suitable terms or
at all. This will hinder our ability to satisfy our obligations to holders of
our existing and exchange notes. This result would substantially harm the
trading price of our common stock and materially harm our business.
IF WE DO NOT OBTAIN SUBSTANTIAL AMOUNTS OF CAPITAL FOR DEBT SERVICE, WE MAY NOT
BE ABLE TO REPAY THE EXISTING NOTES AND THE EXCHANGE NOTES IN 2003
By selling the existing notes in November and December 1998, we incurred
$63,250,000 principal amount of indebtedness. Unless we have a high percentage
of participation in the exchange offer, we will not have sufficient cash to fund
scheduled payments of principal and interest on our existing notes. Likewise, we
will likely require substantial amounts of cash to fund scheduled payments of
the principal and interest on the exchange notes. We will not be able to meet
these cash requirements out of cash flow from operations. We also may be unable
to obtain alternative financing. A lack of adequate financing may adversely
affect our ability to:
- respond to changing business and economic conditions;
- make future acquisitions;
- absorb negative operating results; or
- fund capital expenditures or increased working capital requirements.
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We could attempt to refinance our outstanding existing or exchange notes if
our cash flow from operations is insufficient to repay them at maturity.
However, a refinancing might not be available on terms acceptable to us, or at
all. If we fail to make necessary payments on the existing or exchange notes, we
will be in default under the terms of the existing or exchange notes, as
applicable, and may also be in default under agreements controlling our other
indebtedness, if any. Any default by us under the existing or exchange notes or
on other indebtedness could adversely affect our financial condition and
operating results.
POTENTIAL DELISTING OF OUR COMMON STOCK BY NASDAQ
Our common stock trades on the Nasdaq National Market which has alternative
compliance requirements for continued listing of common stock of either (i) a
minimum closing bid price of at least $5.00 per share, or (ii) net tangible
assets of at least $4,000,000. At June 14, 2000, our common stock had traded
below $5.00 for more than 20 consecutive trading days. Similarly, at June 14,
2000, our net tangible assets were less than $4,000,000. On June 14, 2000, we
received a letter from Nasdaq indicating that unless the minimum bid price for
our common stock returned to at least $5.00 per share for at least 10
consecutive trading days prior to September 12, 2000, our shares would be
delisted from the Nasdaq National Market on September 14, 2000. Thus, if we
cannot meet the preceding test, or if we cannot raise our net tangible assets to
at least $4,000,000 by September 12, 2000, our shares will be delisted from
Nasdaq National Market on September 14, 2000. The result of delisting from the
Nasdaq National Market could be a reduction in the liquidity of any investment
in our common stock, the existing notes, or the exchange notes. Delisting could
also reduce the ability of holders of our common stock to purchase or sell
shares as quickly and as inexpensively as they have done historically. This lack
of liquidity also makes it more difficult for us to raise capital in the future.
WE MAY NOT BE ABLE TO COMPETE WITH MORE ESTABLISHED OR MORE SPECIALIZED
COMPANIES
We face competition primarily on three fronts: e-commerce service vendors
of various types, government resellers and systems integrators, and online
resellers of software and computer peripherals.
E-COMMERCE SERVICE VENDORS
The e-commerce business-to-business outsourcing marketplace for building
and managing Web stores is new, rapidly evolving and intensely competitive. We
expect competition to intensify in the future as current and new competitors
potentially launch new e-commerce services that offer a variety of outsourcing
options to businesses. eStore competitors include, but are not limited to,
Digital River, ReleaseNow, NetSales and ShopNow. These companies provide similar
solutions to our eStore Group offering. Like us, they target the software and
hardware industry and similar customers ranging from small to large businesses.
Other competitors include Escalate, BuyNow and Sykes Enterprises. Escalate and
BuyNow are still new to the market but could pose a competitive threat once
established. Sykes Enterprises has a solid clientele in the software and
hardware industry and could be a competitive threat if they become an end-to-end
or full-service provider.
Competitive pressures created by any one of these current or future
competitors, or by our competitors collectively, could negatively impact our
business.
We believe that the principal competitive factors in our market are:
- skill in building and managing Web stores that offer a wide array of
services, including advertising, merchandising, marketing campaigns,
banner campaigns, market research and strategic planning. Marketing
services include direct emails with personalized messages, e-packaging
solutions that allow customers to rent, demo and download software,
update services that inform clients of new upgrades to their software,
and e-business centers that target business-to-business clients;
- expertise in Web user interface design;
- proprietary technology and operational experience in digital download;
- rapid website building time;
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- operational and service performance excellence in the areas of customer
support and site uptime;
- offering additional services, including fraud elimination services;
- providing a one-stop solution through key partnerships with companies
such as CyberCash, Preview Systems and Ingram Micro that allow companies
to outsource some of their services and alleviate internal resources; and
- expertise in integrating with a client's infrastructure.
Competitors such as Digital River have longer operating histories and
larger customer bases than we do. In addition, some of our current or potential
competitors have greater financial, marketing and other resources than we do.
In addition, as more businesses turn to e-commerce outsourcers to market
and sell their products online, well established and well financed entities may:
- acquire online competitors;
- invest in online competitors; or
- form joint ventures with online competitors.
Certain of our actual or potential competitors, such as Digital River,
ReleaseNow, NetSales, ShopNow and BuyNow, may be able to:
- secure key partnerships with vendors that allow them to outsource their
services at a better price than we can;
- secure key partnerships that enable them greater access to potential
customers;
- devote greater resources to marketing and promotional campaigns;
- adopt more aggressive pricing or services models to build market share;
or
- devote substantially more resources to grow and improve their e-commerce
outsourcing offerings than we can.
GOVERNMENT RESELLERS AND SYSTEMS INTEGRATORS
In the government services marketplace, our competitors including, but not
limited to, SoftwareSpectrum, GTSI, ASAP, CDW-G, SoftMart, GMR, MA Federal,
SHI.com, and CorporateSoftware & Technology have greater experience in selling
software to the large enterprise market than we do. Further, they have more
sophisticated infrastructure and larger sales teams than we do.
For website competition, we expect challenges from current online
resellers, such as, Amazon.com, Buy.com, CompUSA, Cyberian Outpost, and Egghead,
which may have longer operating histories, larger customer bases and greater
financial, marketing and other resources than we do. In addition, new
technologies and expansion of existing technologies, such as price comparison
programs that select specific titles from a variety of websites, may direct
customers to online software resellers that compete with us and may increase our
competition.
In summary, increased competition may cause us to reduce pricing or
increase service and marketing expenses that could reduce operating margins and
funds available to improve our technology and promote our business. We cannot
assure that we can compete successfully against current and future competitors.
Failure to compete successfully against our current and future competitors could
materially hurt our business.
OUR FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO MAINTAIN
OUR CURRENT RELATIONSHIPS WITH SOFTWARE DEVELOPERS AND DISTRIBUTORS
We are entirely dependent upon the software developers and distributors
that supply us with software and computer products for resale, and the
availability of these software and computer products is unpredictable. In
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1999 and 1998, sales of software provided by Microsoft and by a major software
distributor accounted for a substantial portion of our revenues. As is common in
the industry, we have no long term or exclusive arrangements with any software
developers or distributors that guarantee the availability of software for
resale. For example, our agreement with Microsoft automatically renews for
successive one-year periods but is terminable for any reason by 30 days written
notice prior to the expiration of the given term. If this relationship
terminates then the publishers or distributors that currently supply us with
software might cease to continue to supply us, and we might be unable to
establish new relationships with other software developers and distributors.
We also rely on software distributors to ship shrink-wrap software to
customers that do not use digital download. We have limited control over the
shipping procedures of our distributors and shipments by these distributors have
in the past been, and may in the future be, subject to delays. Although most
software we sell carries a warranty from its publisher, publishers or
distributors occasionally fail to reimburse us for returns from customers.
Furthermore, our contract with Microsoft allows Microsoft to review and approve
our creditworthiness. If Microsoft determines that we are not creditworthy or
not in compliance with payment or reporting terms, it may require us to post
security acceptable to them which could negatively impact our financial
condition.
OUR FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SECURE AND
MAINTAIN FUTURE CONTRACTS WITH U.S. GOVERNMENT AGENCIES
We have several contracts with U.S. Government agencies, which accounted
for approximately 14% of our net revenues in 1999 and 17% of our net revenues in
the three months ended March 31, 2000. Each of these contracts is subject to
annual review and renewal by the government, and may be terminated at any time.
Each government contract, option and extension is only valid if the government
appropriates enough funds for expenditure on such contracts, options or
extensions. Accordingly, we might fail to derive any revenue from sales of
software to the U.S. Government in any given future period. If the U.S.
government fails to renew or terminates any of these contracts it would
adversely affect our business and results of operations.
OUR COMMON STOCK PRICE IS VOLATILE
The market price for our common stock is volatile and has fluctuated
significantly to date. The trading price of our common stock is likely to
continue to be highly volatile and subject to wide fluctuations in response to
factors including the following:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations, new sales formats or new
products or services by us or our 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 us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel; and
- sales of common stock.
In addition, the securities market has experienced extreme price and volume
fluctuations, and the market prices of the securities of Internet-related and
technology companies have been especially volatile. These broad market and
industry factors may adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of stock, many
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companies have been the object of securities class action litigation. If we were
to be sued in a securities class action, it could result in substantial costs
and a diversion of management's attention and resources.
OUR SUCCESS IS SUBJECT TO RISKS ASSOCIATED WITH DEPENDENCE ON THE INTERNET AND
INTERNET INFRASTRUCTURE
DEVELOPMENT
Our success will depend in large part on continued growth in, and the use
of, the Internet. There are critical issues concerning the commercial use of the
Internet, which remain unresolved. The issues concerning the commercial use of
the Internet, which we expect will affect the development of the market for our
services include:
- security;
- reliability;
- cost;
- ease of access;
- quality of service; and
- necessary increases in bandwidth availability.
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 that these enterprises accept a new medium for conducting
business and exchanging information. These entities likely will accept this new
medium only if the Internet provides them 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 fails to develop or develops more slowly than we expect as a commercial
or business medium, it will adversely affect our business.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY AND CREDIT CARD
FRAUD
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. To securely
transmit confidential information, such as customer credit card numbers, we rely
on encryption and authentication technology that we license from third parties.
To the extent that our activities or those of third party contractors
involve the storage and transmission of proprietary information (such as credit
card numbers), security breaches could damage our reputation and expose us to a
risk of loss or litigation and possible liability. Our business may be adversely
affected if our security measures do not prevent security breaches, and we
cannot assure that we can prevent all security breaches. In addition, we have
suffered losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the orders.
Under current credit card practices, a merchant is liable for fraudulent credit
card transactions where, as is the case with the transactions we process, that
merchant does not obtain a cardholder's signature. Fraudulent use of credit card
data in the future could adversely affect our business.
OUR SUCCESS IS SUBJECT TO RISKS ASSOCIATED WITH DIGITAL DOWNLOAD
Our success will depend in part on our customers accepting digital download
as a method of buying software. We typically derive higher gross margins from
software sales to consumers via digital download than we do on shrink-wrap
software sales. Digital download is a relatively new method of selling software
products and its growth and market acceptance is highly uncertain and subject to
a number of factors, including:
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- 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 titles that are available for purchase through
digital download as compared to those available through traditional
methods;
- the level of consumer comfort with the process of downloading software;
and
- the relative ease of this process and transaction security concerns.
We believe there is a maximum size of a software product that most
consumers are willing to purchase via digital download. We also believe that the
size of new software products will continue to increase and that these software
products will be unsuitable for digital download without significant increases
in network bandwidth. It will adversely affect our business if digital download
fails to achieve widespread market acceptance. Even if digital download achieves
widespread acceptance, we might not overcome the substantial existing and future
technical challenges associated with electronically delivering software reliably
and consistently on a long-term basis. Our business environment is characterized
by rapid technological change, frequent new product enhancements and uncertain
product life cycles. If we are unable to enhance our digital download technology
in a timely and cost-effective manner, we may lose customers to our competitors.
This would also adversely affect our business.
WE DEPEND ON THE CONTINUED SERVICE OF KEY PERSONNEL WHOSE EXPERTISE WOULD BE
DIFFICULT TO REPLACE AND WE MAY BE UNABLE TO RETAIN QUALIFIED PERSONNEL IN THE
FUTURE
Our future success depends on the continued service and performance of our
senior management and other key personnel, particularly William S. McKiernan,
Chairman of our Board of Directors and Ronald S. Smith, our Chief Executive
Officer. Competition for qualified management personnel is intense, particularly
in the Silicon Valley area, and we may be unable to successfully attract,
assimilate, or retain sufficiently qualified personnel in the future.
WE ARE SUBJECT TO CAPACITY CONSTRAINT RISKS, RELIANCE ON INTERNALLY DEVELOPED
SYSTEMS AND SYSTEM DEVELOPMENT RISKS
An element of our strategy is to generate a high volume of traffic on, and
use of, our website. Our revenues depend in part, on the number of customers who
use our website to purchase software. Accordingly, our website, transaction
processing systems and network infrastructure performance, reliability and
availability are critical to our operating results. These factors are also
critical to our reputation and our ability to attract and retain customers and
maintain adequate customer service levels. The volume of goods we sell and the
attractiveness of our product and service offerings will decrease if there are
any systems interruptions that affect the availability of our website or our
ability to fulfill orders. We have experienced periodic systems interruptions,
which we believe may continue to occur. We are continually enhancing and
expanding our technology and transaction processing systems, and network
infrastructure and other technologies, to accommodate a substantial increase in
the volume of traffic on our website. We may be unsuccessful in these efforts or
we may be unable to accurately project the rate or timing of increases in the
use of our website. We may also fail to timely expand and upgrade our systems
and infrastructure to accommodate these increases. In addition, we cannot
predict whether additional network capacity will be available from third party
suppliers as we need it. Also, our network or our suppliers' network might be
unable to timely achieve or maintain a sufficiently high capacity of data
transmission to timely process orders or effectively conduct digital download,
especially if our website traffic increases. Our failure to achieve or maintain
high capacity data transmission could significantly reduce consumer demand for
our services.
WE HAVE OVERLAPPING MANAGEMENT WITH CYBERSOURCE WHICH MAY LEAD TO POTENTIAL
CONFLICTS OF INTERESTS
In connection with the spin off of our Internet commerce services business
to CyberSource in December 1997, we entered into agreements with CyberSource to
define the ongoing relationship between the two companies. At the time these
agreements were negotiated, all of our directors were also directors of
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CyberSource and other members of our management team joined CyberSource as
executive officers. As a result, these and subsequent agreements may not be
deemed the result of arm's length negotiations. Further, although we and
CyberSource are engaged in different businesses, the two companies currently
have no policies to govern the pursuit or allocation of corporate opportunities
between CyberSource and us in the event they arise. Our business could be
adversely affected if the overlapping board members of the two companies pursue
CyberSource's interests over ours either in the course of intercompany
transactions or where the same corporate opportunities are available to both
companies.
OUR SYSTEMS ARE LOCATED IN SINGLE FACILITY WHICH SUBJECTS US TO THE RISK OF
SYSTEM FAILURE
Our success, in particular our ability to successfully receive and fulfill
orders and provide high quality customer service, largely depends on the
efficient and uninterrupted operation of our computer and communications
systems. Substantially all of our development and management systems are in a
single facility we lease in Santa Clara, California.
Our systems and operations are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. We have no formal disaster recovery plan and carry insufficient
business interruption insurance to compensate us for losses that may occur.
Furthermore, our security mechanisms or those of our suppliers may not prevent
security breaches or service breakdowns. Despite our implementation of security
measures, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. These events could cause
interruptions or delays in our business, loss of data or render us unable to
accept and fulfill customer orders.
IF WE ARE UNABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE IN A TIMELY MANNER, WE
MAY LOSE CUSTOMERS TO OUR COMPETITORS
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online store. The Internet and
the online commerce industry are characterized by rapid technological change,
changes in user and customer requirements and preferences and frequent new
product and service introductions. If competitors introduce products and
services embodying new technologies or if new industry standards and practices
emerge, then our existing Website, proprietary technology and systems may become
obsolete. Our future success will depend on our ability to do the following:
- both license and internally develop leading technologies useful in our
business;
- enhance our existing services;
- develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective customers; and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
To develop our website and other proprietary technology entails significant
technical and business risks. We may use new technologies ineffectively, or we
may fail to adapt our website, proprietary technology and transaction processing
systems to customer requirements or emerging industry standards. If we face
material delays in introducing new services, products and enhancements then our
customers may forego the use of our services and use those of our competitors.
IN ORDER TO ENSURE THE QUALITY OF OUR BRAND, WE MUST SUCCESSFULLY PROTECT OUR
PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success. To protect
our proprietary rights, we rely on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers, partners and others. We pursue the registration of our trademarks and
service marks in the U.S., and have applied for the registration of our
trademarks and service marks. We applied for Federal registration of the service
marks "BEYOND.COM" on July 10, 1998, and "BEYOND DOT COM" on July 14, 1998,
although we cannot be
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certain that federal registration of these service marks or any other service
mark will issue. In addition, effective trademark, service mark, copyright and
trade secret protection may be unavailable in every country in which our
products and services are available online.
We have licensed in the past, and expect to license in the future, certain
of our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that these licensees maintain the quality of
our brand, the licensees could take actions that materially harm the value of
our proprietary rights or reputation. Furthermore, the steps we take to protect
our proprietary rights may be inadequate or third parties might infringe or
misappropriate our trade secrets, copyrights, trademarks, trade dress and
similar proprietary rights. In addition, others could independently develop
substantially equivalent intellectual property. We may have to litigate in the
future to enforce our intellectual property rights, to protect our trade secrets
or to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and the diversion of our management
and technical resources which could harm our business.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS
Other parties may assert infringement or unfair competition claims against
us. In the past, other parties have sent us notice of claims of infringement of
proprietary rights, and we expect to receive other notices in the future. We
cannot predict whether others will assert claims of infringement against us, or
whether any past or future assertions or prosecutions will adversely affect our
business. If we are forced to defend against any such claims, whether they are
with or without merit or are determined in our favor, then we may face wasted
time, costly litigation, diversion of technical and management personnel, or
product shipment delays. As a result of such a dispute, we may have to develop
non-infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may be unavailable on terms
acceptable to us, or at all. If there is a successful claim of product
infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, it could
adversely affect our business.
WE MAY BECOME SUBJECT TO ADDITIONAL GOVERNMENT REGULATION WHICH MAY AFFECT THE
MANNER IN WHICH WE
CONDUCT OUR BUSINESS
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the U.S.
Congress resulted in Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European Union
recently enacted its own privacy regulations. The law of the Internet, however,
remains largely unsettled, even in areas where there has been some legislative
action. It may take years to determine whether and how existing laws such as
those governing intellectual property, privacy, libel, contracts and taxation
apply to the Internet. In addition, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws,
both in the U.S. and abroad that may impose additional burdens on companies
conducting business online. The adoption or modification of laws or regulations
relating to the Internet could adversely affect our business.
WE MAY FACE CLAIMS BASED ON OUR INTERNET CONTENT FOR WHICH WE ARE NOT COMPLETELY
COVERED BY INSURANCE
We believe that our future success will depend in part upon our ability to
deliver original and compelling descriptive content about the software products
we sell, or our customers sell, on the Internet. As a publisher of online
content, we face potential liability for defamation, negligence, copyright,
patent or trademark infringement, or other claims based on the nature and
content of materials that we publish or distribute. In the past, plaintiffs have
brought such claims and sometimes successfully litigated them against online
services. In addition, in the event that we implement a greater level of
interconnectivity on our website, we will not and cannot practically screen all
of the content our users generate or access, which could expose us to liability
with respect to such content. Although we carry general liability insurance, our
insurance may not cover claims of these types or may be inadequate to indemnify
us for all liability that may be imposed on us. If we face liability,
particularly liability that is not covered by our insurance or is in excess of
our insurance coverage, then our reputation and our business may suffer.
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WE MAY BE SUBJECT TO SALES AND OTHER TAXES WHICH WOULD RESULT IN A DECLINE IN
OUR PROFITS
We do not currently collect sales or other similar taxes for physical
shipments of goods into states other than California, Virginia and the District
of Columbia. We do not currently collect sales or other similar taxes for
digital download of goods into states other than the District of Columbia.
However, one or more local, state or foreign jurisdictions may seek to impose
sales tax collection obligations on us and other out of state companies which
engage in online commerce. In addition, any new operations in states outside
California and the District of Columbia, including operations assumed in
connection with the proposed BuyDirect.com merger, could subject our shipments
into such states to state sales taxes under current or future laws. If one or
more states or any foreign country successfully asserts that we should collect
sales or other taxes on the sale of our merchandise, it could adversely affect
our business.
MANAGEMENT AND CERTAIN STOCKHOLDERS CAN EXERCISE SIGNIFICANT INFLUENCE OVER US
WHICH MAY NOT BE IN THE BEST INTEREST OF OTHER STOCKHOLDERS
As of May 31, 2000, William S. McKiernan, the Chairman of our Board of
Directors, and his respective affiliates beneficially own in the aggregate
approximately 20.2% of our outstanding common stock. Therefore, if William S.
McKiernan and his respective affiliates act together, they 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 may also have the effect of
delaying, preventing or deterring a change in our control which could adversely
affect the market price of our common stock.
OUR SUCCESS IS SUBJECT TO RISKS ASSOCIATED WITH GLOBAL EXPANSION
Although we sell software to customers outside the U.S., we have no
overseas electronic fulfillment or distribution facility or arrangement. We also
have no website content localized for foreign markets. Therefore, we may be
unable to expand our global presence effectively. In addition, international
operations are subject to inherent risks, including:
- regulatory requirements;
- export restrictions;
- tariffs and other trade barriers;
- difficulties in protecting intellectual property rights;
- longer payment cycles;
- problems in collecting accounts receivable;
- political instability; and
- fluctuations in currency exchange rates.
In addition, the United States imposes export restrictions on certain
software because of its encryption technology and we may face liability if we
violate these restrictions.
IF OUR SOFTWARE SYSTEMS ARE NOT YEAR 2000 READY, OUR BUSINESS WILL BE ADVERSELY
AFFECTED
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
recent change in the century. If not corrected, many computer software
applications could fail or create erroneous results beyond the Year 2000. We
assessed our proprietary software and our internally developed systems, which
permit the sale, order, processing and delivery of off-the-shelf software to our
customers to determine Year 2000 compliance. We searched through software code
for each of these applications and identified all instances where date specific
information is required. We further investigated whether these date fields
contain two or four digits. We believe our other proprietary software and
internally developed systems are Year 2000 compliant.
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In addition to our proprietary software and internally developed systems,
we utilize software, computer technology and other services internally developed
and provided by third-party vendors that may fail due to the Year 2000
phenomenon. For example, we are dependent on the institutions involved in
processing our members' credit card payments for Internet services. We are also
dependent on telecommunications vendors and leased point-of-purchase vendors to
maintain network reliability.
Our software applications run on several hardware platforms and associated
operating systems. In addition, our software operates in accordance with several
external Internet protocols, such as HTTP and NNTP. Our software is therefore
dependent upon the correct processing of dates by these systems and protocols.
We reviewed information made publicly available by our hardware platform
providers regarding Year 2000 compliance and researched the date handling
capabilities of applicable Internet protocols. We do not believe that the
underlying systems and protocols that operate in conjunction with our software
applications contain material Year 2000 deficiencies.
We use multiple software systems for our internal business purposes,
including accounting, email, development, human resources, customer service and
support, and sales tracking systems. We have made inquiries of vendors of the
systems that we believe are mission critical to our business regarding their
Year 2000 readiness. Each of these vendors has indicated to us that it believes
its applications are Year 2000 compliant, although we have not received
affirmative documentation in this regard from any of these vendors. To date, we
have not experienced any material Year 2000 problems with regards to our
proprietary software, internally developed systems, and hardware or software
platforms developed by external vendors.
THE INTRODUCTION OF THE EURO CURRENCY CREATES A SIGNIFICANT AMOUNT OF
UNCERTAINTY
In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union ("EMU"). During 2002, all
EMU countries are expected to completely replace their national currencies with
the Euro. A significant amount of uncertainty exists as to the effect the Euro
will have on the marketplace generally and, additionally, all of the final rules
and regulations have not yet been defined and finalized by the European
Commission with regard to the Euro currency. We list the prices for our
products, accounts, and invoices for sales and collect payments in U.S. dollars,
even for sales outside the U.S. We currently utilize third-party vendor
equipment and software products that may or may not be EMU compliant. Although
we are currently taking steps to address the impact, if any, of EMU compliance
for such third-party products, the failure of any critical component to operate
properly during and after the Euro conversion process may have an adverse effect
on our business or results of operations or require us to incur expenses to
remedy such problems.
OUR CHARTER DOCUMENTS AND OTHER AGREEMENTS CONTAIN PROVISIONS WHICH MAY
ADVERSELY AFFECT A POTENTIAL TAKEOVER
Provisions of our Amended and Restated Certificate of Incorporation,
Bylaws, option agreements and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. See "Description of Capital Stock".
THE EXCHANGE NOTES ARE SUBORDINATED TO OUR SENIOR DEBT, BUT SENIOR IN PAYMENT TO
THE EXISTING NOTES
The exchange notes will be unsecured and subordinated in right of payment
to senior debt. The exchange notes are also senior to the existing notes. As a
result of such subordination, in the event of our liquidation or insolvency, a
payment default with respect to senior debt, a covenant default with respect to
designated senior debt or upon acceleration of the exchange notes due to an
event of default, our assets will be available to pay obligations on the
exchange notes only after all senior debt has been paid in full, and there may
not be sufficient assets remaining to pay amounts due on any or all of the
exchange notes then outstanding. Neither we nor our subsidiaries are prohibited
under the exchange note indenture from incurring debt.
As of March 31, 2000, we had no outstanding senior debt. The existing notes
are also effectively subordinated to all indebtedness and other liabilities of
our subsidiaries, including trade payables but excluding intercompany
liabilities.
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<PAGE> 22
WE MAY NOT HAVE THE FINANCIAL RESOURCES TO REPURCHASE THE EXCHANGE NOTES IN THE
EVENT OF A CHANGE IN CONTROL
We may be unable to repurchase the exchange notes in the event of a change
in control. Upon a change in control, you may require us to repurchase all or a
portion of your exchange notes. If a change in control were to occur, we may not
have enough funds to pay the repurchase price for all tendered exchange notes.
The terms of our existing bank facility prohibit the repurchase of the exchange
notes in cash. Any future credit agreements or other debt agreements may contain
similar provisions, or expressly prohibit the repurchase of the exchange notes
upon a change in control or may provide that a change in control constitutes an
event of default under that agreement. If a change in control occurs at a time
when we are prohibited from repurchasing the exchange notes, we could seek the
consent of our lenders to repurchase the exchange notes or could attempt to
refinance the debt agreements. If we do not obtain consent, we could not
repurchase the exchange notes. Our failure to repurchase the exchange notes
would constitute an event of default under the exchange note indenture, which
might constitute an event of default under the terms of our other debt. Our
obligation to offer to repurchase the exchange notes upon a change in control
would not necessarily afford you protection in the event of a highly leveraged
transaction, reorganization, merger or similar transaction.
IF AN ACTIVE MARKET FOR THE EXCHANGE NOTES FAILS TO DEVELOP, THE TRADING PRICE
AND LIQUIDITY OF THE EXCHANGE NOTES COULD BE MATERIALLY ADVERSELY AFFECTED
Prior to the offering there has been no trading market for the exchange
notes. The dealer manager has advised us that it currently intends to make a
market in the exchange notes. The liquidity of the trading market for the
exchange notes will depend in part on the level of participation of the holders
of existing notes in the exchange offer. The greater the participation in the
exchange offer, the greater the liquidity of the trading market for the exchange
notes and the lesser the liquidity of the trading market for the existing notes
not tendered in the exchange offer. However, Robertson Stephens is not obligated
to make a market and may discontinue this market making activity at any time
without notice. In addition, market making activity by Robertson Stephens will
be subject to the limits imposed by the Securities Act and the Exchange Act. As
a result, we cannot assure you that any market for the exchange notes will
develop or, if one does develop, that it will be maintained. If an active market
for the exchange notes fails to develop or be sustained, the trading price and
liquidity of the exchange notes could be materially adversely affected.
WE EXPECT THE TRADING PRICE OF THE EXCHANGE NOTES AND THE UNDERLYING COMMON
STOCK TO BE HIGHLY VOLATILE, WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF
OUR EXCHANGE NOTES AND UNDERLYING COMMON STOCK
The trading price of the exchange notes and the underlying common stock
will fluctuate in response to variations in:
- operating results;
- announcements by us or our competitors of technological innovations or
new products;
- qualifications of volume shipment programs from major customers;
- general conditions in the disk drive and computer industries; and
- general economic and market conditions.
In addition, stock markets have experienced extreme price volatility in
recent years, particularly for high technology companies. In the past, our
common stock has experienced volatility not necessarily related to announcements
of our financial performance. Broad market fluctuations may also adversely
affect the market price of our exchange notes and underlying common stock.
In the event of a change in control after the expiration date, holders of
the exchange notes will receive substantially less than holders of existing
notes to the extent that a holder elects to exercise his or her repurchase
right.
In the event that there is a change in control prior to the expiration date
of the exchange offer, holders of existing notes would have the right to
receive, to the extent they elected to exercise their repurchase right,
$63,250,000 in aggregate principal amount as a result of the change in control.
In the event that there is a
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<PAGE> 23
change in control after the expiration date of the exchange offer and 100% of
the holders of the existing notes tendered in the exchange, holders of the
exchange notes would have the right to receive, to the extent they elected to
exercise their repurchase right, $42,166,666 as a result of the change in
control.
IF WE AUTOMATICALLY CONVERT THE EXCHANGE NOTES, YOU SHOULD BE AWARE THAT THERE
IS A SUBSTANTIAL RISK THAT THE PRICE OF OUR COMMON STOCK COULD FLUCTUATE FROM
THE DATE WE ELECT TO AUTOMATICALLY CONVERT TO THE CONVERSION DATE
We may elect to automatically convert the exchange notes on or prior to
maturity if our common stock price has exceeded 150% of the conversion price for
at least 20 trading days during a 30-day trading period ending five trading days
prior to the notice of automatic conversion. You should be aware that there is a
substantial risk that the price of our common stock could fluctuate between the
time when we may first elect to automatically convert the exchange notes and the
automatic conversion date. This time period may extend from 15 to 30 calendar
days from the time we elect to automatically convert the exchange notes until
the conversion date.
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify such
forward-looking statements. This prospectus also contains forward-looking
statements attributed to certain third parties relating to their estimates
regarding the growth of certain electronic-commerce, electronic software
delivery, software and related service markets and spending. You should not
place undue reliance on these forward-looking statements, which apply only as of
the date of this prospectus. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described above and elsewhere in this
prospectus.
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<PAGE> 24
USE OF PROCEEDS
We will not receive any proceeds from the exchange of the existing notes
for the exchange notes pursuant to the exchange offer.
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low closing sales prices of a
share of the common stock reported on The Nasdaq National Market during the
indicated periods.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1998
Second Quarter (from June 17, 1998)......................... $19.94 $13.19
Third Quarter............................................... $19.94 $ 8.38
Fourth Quarter.............................................. $29.06 $ 6.31
FISCAL YEAR 1999
First Quarter............................................... $38.50 $21.80
Second Quarter.............................................. $35.50 $17.44
Third Quarter............................................... $30.00 $12.25
Fourth Quarter.............................................. $15.25 $ 7.50
FISCAL YEAR 2000
First Quarter............................................... $ 8.09 $ 4.28
Second Quarter (through June 30, 2000)...................... $ 3.88 $ 1.34
</TABLE>
On June 30, 2000, the last reported sales price of our common stock on The
Nasdaq National Market was $1.344 per share.
DIVIDEND POLICY
We do not pay any dividends on our common stock. We currently intend to
retain earnings, if any, for use in our business and do not anticipate paying
cash dividends to holders of our common stock. Our existing credit facility
currently restricts the payment of dividends.
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<PAGE> 25
CAPITALIZATION
The following table sets forth our consolidated capitalization:
- at March 31, 2000:
- as adjusted to give effect to the issuance of the exchange notes in the
exchange offer on the assumption that $63.25 million of the outstanding
existing notes were validly tendered and accepted for exchange; and
- as adjusted to reflect an extraordinary gain of $37,950,000 million on
the assumed early extinguishment of all outstanding existing notes. The
extraordinary gain was calculated using an estimated fair value of the
exchange notes of $25,300,000. The actual fair value of the exchange
notes will be determined on the date of the exchange. The amount of the
actual extraordinary gain to be recorded will be based on the actual fair
value of the exchange notes.
To the extent that existing notes are not validly tendered or accepted in
the exchange offer, the amount attributed to the exchange notes would decrease,
the amount attributed to the existing notes would increase and the extraordinary
gain would be reduced. The financial data at March 31, 2000 in the following
table are derived from our unaudited financial statements for the quarter ended
March 31, 2000.
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Long-term debt
10 7/8% Convertible Subordinated Notes due 2003
(exchange-notes)....................................... $ -- $ 25,300
7 1/4% Convertible Subordinated Notes due 2003
(existing-notes)....................................... 63,250 --
Stockholders' equity:
Common stock, no par value:
Authorized 70,000,000 in 1999 and 50,000,000 in 1998
Issued and outstanding shares 37,834,055(1)............ 296,924 296,924
Deferred compensation..................................... (622) (622)
Accumulated deficit....................................... (212,910) (174,960)
-------- --------
Total stockholders' equity................................ 83,392 121,342
-------- --------
Total capitalization.............................. $146,642 $146,642
======== ========
</TABLE>
---------------
(1) Outstanding shares exclude the shares reserved for issuance upon conversion
of the exchange notes, the shares issuable upon exercise of outstanding
warrants, the shares issuable under our employee stock purchase plan, the
shares issuable upon exercise of options outstanding and available under our
stock option plans, and the shares issuable upon exercise of options outside
our stock option plans.
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<PAGE> 26
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, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 are derived
from our Consolidated Financial Statements which have been audited by Ernst &
Young LLP, independent auditors, and are included in this prospectus, and are
qualified by reference to such Consolidated Financial Statements and the related
Notes. The consolidated statement of operations data for the three months ended
March 31, 1999 and 2000 and the consolidated balance sheet data as of March 31,
2000 are derived from the unaudited financial statements included in this
prospectus. The consolidated statement of operations data for the years ended
December 31, 1995 and 1996, and the balance sheet data as of December 31, 1995,
1996 and 1997 are derived from audited consolidated financial statements not
included in this prospectus. The historical results are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- -------------------
1995 1996 1997 1998 1999(2) 1999(2) 2000
------ ------- ------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Net revenues..................................... $1,003 $ 5,858 $16,806 $ 36,650 $ 117,282 $ 19,102 $ 31,339
Cost of revenues................................. 623 5,137 14,873 31,074 101,290 16,204 27,162
------ ------- ------- -------- --------- -------- --------
Gross profit..................................... 380 721 1,933 5,576 15,992 2,898 4,177
Operating expenses:
Research and development....................... 388 431 1,060 4,140 10,385 1,731 3,680
Sales and marketing............................ 407 704 1,696 27,206 81,349 16,563 16,992
General and administrative..................... 103 450 1,087 3,801 12,319 2,258 3,700
Goodwill and deferred compensation
amortization................................. -- -- -- 1,565 36,745 732 11,486
Restructuring.................................. -- -- -- -- -- -- 13,707
------ ------- ------- -------- --------- -------- --------
Total operating expenses................ 898 1,585 3,843 36,712 140,798 21,284 49,565
------ ------- ------- -------- --------- -------- --------
Loss from operations............................. (518) (864) (1,910) (31,136) (124,806) (18,386) (45,388)
Interest and other income, net................... 7 85 167 63 41 (410) (395)
------ ------- ------- -------- --------- -------- --------
Loss from continuing operations.................. (511) (779) (1,743) (31,073) (124,765) (18,796) (45,783)
Loss from discontinued operations................ -- (736) (3,616) -- -- -- --
------ ------- ------- -------- --------- -------- --------
Net loss......................................... $ (511) $(1,515) $(5,359) $(31,073) $(124,765) $(18,796) $(45,783)
====== ======= ======= ======== ========= ======== ========
Basic and diluted net loss per share from
continuing operations(1)....................... $(0.07) $ (0.10) $ (0.21) $ (1.65) $ (3.67) $ (0.66) $ (1.23)
====== ======= ======= ======== ========= ======== ========
Basic and diluted net loss per share from
discontinued operations(1)..................... -- (0.08) (0.40) -- -- -- --
------ ------- ------- -------- --------- -------- --------
Basic and diluted net loss per share(1).......... $(0.07) $ (0.18) $ (0.61) $ (1.65) $ (3.67) $ (0.66) $ (1.23)
====== ======= ======= ======== ========= ======== ========
Number of shares used in computing basic and
diluted net loss per share(1).................. 9,000 9,000 9,000 18,900 34,039 28,364 37,114
====== ======= ======= ======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
------ ------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents, and short-term
investments................................... $ 255 $ 3,737 $ 2,571 $ 81,548 $ 66,313 $ 50,145
Working capital (deficiency).................... (106) 3,543 1,093 80,128 68,093 37,448
Total assets.................................... 579 5,691 9,586 109,904 220,376 173,704
Long-term obligations, net of current
portion....................................... 105 105 99 63,250 63,260 63,250
Redeemable convertible preferred stock.......... 651 6,395 12,565 -- -- --
Stockholders' equity (net capital deficiency)... $ (793) $(2,409) $(11,191) $ 24,723 $ 127,512 $ 83,392
OTHER FINANCIAL DATA
Ratio of Earnings to Fixed Charges(3)........... N/A N/A N/A N/A N/A N/A
Deficiency of Earnings Available to Cover Fixed
Charges(3).................................... $ (511) $(1,515) $ (5,359) $(31,073) $(124,765) $(45,783)
</TABLE>
---------------
(1) For explanation of the calculation of per share amounts, see Note 1 of Notes
to Consolidated Financial Statements.
(2) The results of operations for fiscal 1999 and the three months ended March
31, 1999 and 2000 include the results of operations of BuyDirect.com from
its date of acquisition, March 30, 1999.
(3) For purposes of this computation, the ratio of earnings to fixed charges has
been calculated by dividing fixed charges into loss from continuing
operations before income taxes plus fixed charges. Fixed charges consist of
interest expense and a portion of base rental charges considered to
represent interest cost.
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<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
At the end of the third quarter of 1999, we made a strategic decision to
refocus the our business from a consumer retail focused company to a
business-to-business e-commerce services company. With this new direction, we
plan to focus our resources and expertise in two areas that we believe have
substantial revenue growth and profit potential: our eStore and Government
Systems Groups. While we will still sell software and computer related products
via our website, we do not intend to spend significant advertising dollars to
attract new customers to the website as we have done in the past.
Notwithstanding our recent shift in focus, we intend to continue to reassess our
business and it is possible that, under certain circumstances, portions of our
business maybe sold to enable us to more narrowly focus on our eStore Group. As
part of this refocus, we reduced our workforce by approximately 75 employees in
January 2000, or approximately 20% of our total workforce, and consolidated
facilities and disposed of excess capital assets. Additionally, we terminated
our existing marketing agreements focused on generating consumer sales with AOL,
CNET, Excite, Yahoo! and ZDNet during February and March 2000 at a cost of
approximately $10.1 million in termination fees and associated prepaid and
intangible assets write-offs. We recorded a restructuring charge of $13.7
million in the first quarter of 2000. Management expects the workforce
reduction, facilities consolidation, and termination of marketing agreements
will lower future operating expenses and reduce cash obligations for the
remainder of fiscal 2000.
eSTORE GROUP
Our eStore Group allows software developers, hardware manufacturers and
systems OEMs to launch a full-service Web store at a substantially lower total
cost than they would incur if they had developed a similar system internally.
Businesses can choose from an array of services, including website design and
construction, transaction processing, physical and electronic order fulfillment,
customer support, marketing, merchandising support, fraud management, tax
payment, currency conversion and reporting. Our current eStore customers include
CADopia, Compaq Computer, Executive Software, HP Shopping Village (a subsidiary
of Hewlett Packard), McAfee.com, Microsoft, Palm Computing, Symantec, Systran
Software, Telex and Trend Micro.
We derive revenue for our eStore Group from two different business models.
One model, where we earn revenues by reselling the products of our eStore
customers, is a traditional reseller model that is characterized by higher per
transaction revenue but lower margins. The second model, where we are paid fees
based on the transactions we complete and the services we render, is a
transaction and services model which typically has lower revenue per transaction
but higher potential gross margins. In the near term, we expect our gross
margins will fluctuate around our current levels, depending on the mix of these
two models in any given quarter. We believe in the long term, as we migrate to a
higher percentage of customers under the transaction model and leverage our
merchandising expertise and digital service capabilities, our gross margins will
be higher than current levels.
GOVERNMENT SYSTEMS GROUP
Our Government Systems Group provides digitally downloadable software and
related services to a growing list of U.S. Government agencies including the
Internal Revenue Service (IRS), Office of the Comptroller of the Currency (OCC),
Bureau of Engraving and Printing (BEP), Office of Thrift Supervision (OTS),
Defense Logistics Agency (DLA), National Imagery and Mapping Agency (NIMA),
Patent and Trademark Office (PTO), and the Department of Defense (DoD).
WEBSITE
Our online store (www.beyond.com), offers customers a comprehensive
selection of software and computer related products, customer reviews, customer
service, and competitive prices. We deliver software to customers by physically
delivering the shrink-wrap software package, or over the Internet via digital
download. We carry approximately 177,000 software stock keeping units and
approximately 13,000 of these stock keeping units can be delivered to customers
via digital download.
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<PAGE> 28
Each year since inception, we have incurred significant net losses. These
annual net losses have increased from $5.5 million in 1997, to $31.1 million in
1998, to $124.8 million in 1999. For the three months ended March 31, 2000 our
net loss was $45.8 million. We anticipate our operating expenses, net of
goodwill and deferred compensation amortization, will decrease from 1999 levels
in the remainder of fiscal 2000 as a result of our restructuring activities in
the first quarter of 2000, lower headcount, reduced advertising and business
model transition. However, our de-emphasis on advertising to promote our brand
and our reallocation of resources to the eStore Group could result in
dramatically reduced revenues and increased losses, if the market does not
accept our eStore product or if sale of our eStore product grow at a slower pace
than we expect.
In addition, as a result of the BuyDirect.com merger, we recorded a
significant amount of goodwill, the amortization of which will adversely affect
our earnings and profitability for the foreseeable future. We recorded goodwill
and other intangible assets of approximately $136.5 million, to be amortized
through 2002. We believe it is likely that we will not generate additional
earnings sufficient to recover the amount of goodwill and other intangible
assets recorded during the period in which they are amortized.
As we currently have relatively low gross margins, our ability to become
profitable given our planned expenses depends on our ability to generate and
sustain higher net revenues. If we do achieve profitability, we cannot be
certain that we can sustain or increase profitability on a quarterly or annual
basis in the future. We do not expect to achieve operating "break even" until at
least the fourth quarter of 2002. We have little experience forecasting our
revenues. We base our current and future expense levels, which are largely
fixed, on our operating plans and estimates of future revenues. In view of the
rapidly evolving nature of our business and our limited operating history, we
have little experience forecasting our revenues. Therefore, we believe that
period-to-period comparisons of our financial results are not necessarily
meaningful and you should not rely upon them as an indication of our future
performance. If we cannot achieve and sustain operating profitability or
positive cash flows from operations, we may be unable to meet our debt service
obligations or working capital requirements, which would adversely affect our
business.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET REVENUES. Our revenues are primarily derived from two sources: the
operation of eStores and resale of computer software. Our revenues include sales
of software to customers using credit cards, to corporate customers that are
invoiced directly under credit terms, to U.S. Government agencies pursuant to
contractual arrangements and, to a lesser extent, amounts received from software
developers for advertising and promotion. Revenue from the sale of software, net
of estimated returns, is recognized when persuasive evidence of an arrangement
exists, either shipment of the physical product or delivery of the electronic
product has occurred, fees are fixed and determinable, and collectibility is
considered probable. Sales of software under contracts with the U.S. Government
require continuing service, support and performance by the Company. Accordingly,
the related revenues and costs are deferred and recognized over the period the
service, support and performance are provided. Revenues derived from software
developers for advertising and promotion are recognized as the services are
provided. Costs of deferred revenue relate to software licenses purchased from
software developers for sales to U.S. Government agencies. As our business model
shifts away from aggressive advertising promotion of our consumer business, we
may not be able to develop the eStore service to replace potential lost consumer
revenues. This could have a materially adverse affect on our business, and could
adversely impact our ability to meet our debt service obligations.
Our revenues can be categorized into the following three segments:
- eStore revenue was $9.2 million in the quarter ended March 31, 2000,
compared to $3.4 million in the quarter ended March 31, 1999. The
increase was primarily the result of the addition of a number of new
eStore customers, including Compaq Computer, HP Shopping Village, My
Software and Symantec. eStore revenue represented 29.3% of total revenue
in the first quarter 2000 compared to 18.0% of total revenue in the first
quarter 1999.
- Government Systems revenue was $10.2 million in the first quarter 2000
compared to $3.1 million in the first quarter 1999. The increase in 2000
was primarily the result of the addition of a number of new contracts
with U.S. Government agencies including, the Bureau of Engraving and
Printing (BEP),
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<PAGE> 29
Department of Defense (DoD), Internal Revenue Service (IRS), and Patent
and Trademark Office (PTO) as well as the expansion of existing
contracts. Government Systems revenue represented 32.5% of total revenue
in the quarter ended March 31, 2000 compared to 16.0% of total revenue in
the quarter ended March 31, 1999.
- Website revenue was $12.0 million in the first quarter 2000 compared to
$12.6 million in the first quarter 1999. The decrease in 2000 was
primarily the result of the change in our business focus. Website revenue
represented 38.2% of total revenue in 2000 compared to 65.9% of total
revenue in 1999.
COST OF REVENUES. Our cost of revenues consists primarily of the costs of
software and software licenses sold to consumer and corporate customers, related
credit card processing fees, and the costs of software licenses and software
updates provided to U.S. Government agencies.
Our cost of revenues can be categorized into the following three segments:
- eStore's cost of revenues was $7.8 million in the first quarter 2000
compared to $2.7 million in the first quarter 1999. The increase in 2000
was primarily the result of the addition of new eStore customers,
including Compaq Computer, HP Shopping Village, My Software and Symantec.
- Government Systems cost of revenues was $9.4 million in the first quarter
2000 compared to $2.8 million in the first quarter 1999. The increase in
2000 was primarily the result of the addition of new contracts with U.S.
Government agencies, including, the BEP, DoD, IRS, and PTO as well as the
expansion of existing contracts.
- Website cost of revenues was $9.9 million in the first quarter 2000
compared to $10.7 million in the first quarter 1999. The decrease in 2000
was primarily the result of the change in our business focus.
GROSS MARGIN. Our gross margin (gross profit as a percentage of net
revenues) decreased from 15.2% in the first quarter 1999 to 13.3% in the first
quarter 2000. This decrease primarily resulted from a higher percentage of lower
margin government business in the first quarter of 2000 as compared to the first
quarter of 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
primarily consist of personnel and other expenses associated with developing and
enhancing our websites as well as associated facilities related expenses. Our
research and development expenses increased from $1.7 million in the first
quarter 1999 to $3.7 million in the first quarter 2000, primarily as a result of
an increase in personnel related costs. These expenses increased as a percentage
of net revenues from 9.1% in the quarter ended March 31, 1999 to 11.7% in the
quarter ended March 31, 2000.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses consist
primarily of costs associated with promoting our websites, including personnel
and related expenses. Our sales and marketing expenses increased from $16.6
million in the quarter ended March 31, 1999 to $17.0 million in the quarter
ended March 31, 2000. These expenses decreased as a percentage of net revenues
from 86.7% in the quarter ended March 31, 1999 to 54.2% in the quarter ended
March 31, 2000.
During the first quarter of 2000, we terminated our existing marketing
agreements with AOL, CNET, Excite, Yahoo!, and ZDNet for a cost of approximately
$10.1 million in termination fees and write-offs associated with prepaid and
intangible assets. As a result, we are no longer obligated to make payments
under these agreements in any future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses consist primarily of personnel expenses, legal and accounting
expenses,and corporate facility-related expenses. Our general and administrative
expenses increased from $2.3 million in the quarter ended March 31, 1999 to $3.7
million in the quarter ended March 31, 2000. These expenses were constant as a
percentage of net revenues of 11.8% in the quarters ended March 31, 1999 and
2000.
AMORTIZATION OF GOODWILL AND DEFERRED COMPENSATION. Expenses associated
with the amortization of goodwill and deferred compensation related to the
acquisition of BuyDirect.com in March 1999 and the grant of stock options,
increased from $732,000 in the quarter ended March 31, 1999, to $11.5 million in
the quarter ended March 31, 2000. This increase was primarily the result of a
full quarter of amortization of goodwill
26
<PAGE> 30
related to the acquisition of BuyDirect.com during the first quarter of 2000. We
believe it is unlikely that we will generate additional earnings sufficient to
recover the amount of goodwill and other intangible assets recorded during the
period in which they are amortized.
RESTRUCTURING. The $13.7 million of restructuring charges recorded in the
quarter ended March 31, 2000 were primarily comprised of approximately $10.1
million in termination fees and associated prepaid and intangible assets
write-offs related to certain marketing agreements, $2.0 million in employee
termination costs, $700,000 for the write-off of excess equipment and facilities
consolidation, and $900,000 of other expenses related to the write-off of
prepaid royalties and consultation expenses related to our change in business
focus. No restructuring charges were recorded in the quarter ended March 31,
1999.
OTHER EXPENSE, NET. Other expense, net, primarily consists of earnings on
our cash and short-term investments, net of interest costs related to our
financing obligations. Other expense, net, decreased from $410,000 for the
quarter ended March 31, 1999 to $395,000 in the quarter ended March 31, 2000. In
the first quarter 2000, interest expense totaling approximately $1,271,000
primarily arose from our 7 1/4% Convertible Subordinated Notes. Interest expense
in the first quarter 2000 was offset primarily by interest income totaling
approximately $867,000 earned on our cash and short-term investment balances. In
the first quarter 1999, interest expense totaling approximately $1,268,000 arose
from our 7 1/4% Convertible Subordinated Notes, offset by interest income
totaling approximately $858,000 from our cash balances.
INCOME TAXES. No provision for income taxes has been recorded due to
operating losses with no current tax benefit. Results of Operations for the
years ended December 31, 1998 and 1999
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
Net Revenues
- eStore revenue was $25.0 million in 1999 compared to $1.7 million in
1998. The increase in 1999 was primarily the result of the addition of a
number of new eStore customers, including Compaq Computer, HP Shopping
Village, My Software and Symantec; and the fact that our eStore service
was relatively new in 1998 with revenue only in the fourth quarter of
1998. eStore revenue represented 21.4% of total revenue in 1999 compared
to 4.7% of total revenue in 1998.
- Government Systems revenue was $29.7 million in 1999 compared to $10.5
million in 1998. The increase in 1999 was primarily the result of the
addition of a number of new contracts with U.S. Government agencies
including, the BEC, DoD, IRS, and PTO as well as the expansion of
existing contracts. Government systems revenue represented 25.3% of total
revenue in 1999 compared to 28.7% of total revenue in 1998.
- Website revenue was $62.5 million in 1999 compared to $24.4 million in
1998. The increase in 1999 was primarily the result of the acquisition of
BuyDirect and our aggressive marketing and advertising campaign. Website
revenue represented 53.3% of total revenue in 1999 compared to 66.6% of
total revenue in 1998.
Cost of Revenues
- eStore's cost of revenues was $20.9 million in 1999 compared to $1.4
million in 1998. The increase in 1999 was primarily the result of the
addition of a number of new eStore customers, including Compaq Computer,
HP Shopping Village, My Software and Symantec; and the fact that our
eStore service was relatively new in 1998 with cost of revenues only in
the fourth quarter of 1998.
- Government Systems cost of revenues was $27.0 million in 1999 compared to
$9.6 million in 1998. The increase in 1999 was primarily the result of
the addition of a number of new contracts with U.S. Government agencies,
including, the BEC, DoD, IRS, and PTO as well as the expansion of
existing contracts.
- Website cost of revenues was $53.4 million in 1999 compared to $20.0
million in 1998. The increase in 1999 was primarily the result of
increases in revenues resulting from the acquisition of BuyDirect and an
aggressive marketing and advertising campaign.
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GROSS MARGIN. Our gross margin (gross profit as a percentage of net
revenues) decreased from 15.2% in 1998 to 13.6% in 1999. This decrease primarily
resulted from an increase in consumer rebate programs along with an increase in
lower margin government business during 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
primarily consist of personnel and other expenses associated with developing and
enhancing our websites as well as associated facilities related expenses. Our
research and development expenses increased from $4.1 million in 1998 to $10.4
million in 1999, primarily as a result of an increase in personnel related costs
of $7.0 million. These expenses decreased as a percentage of net revenues from
11.2% in 1998 to 8.9% 1999. The increase in absolute spending was the result of
increases in our personnel and depreciation on computer equipment. The decrease
in spending as a percentage of revenue was due to faster growth in revenues
versus expenses. We anticipate that research and development expenses will
decrease in absolute dollar terms in fiscal 2000.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses consist
primarily of advertising expenditures and costs associated with promoting our
websites, including personnel and related expenses. In addition, expenditures
associated with our strategic marketing alliances are included in sales and
marketing expenses. Our sales and marketing expenses increased significantly
from $27.2 million in 1998 to $81.3 million in 1999. These expenses decreased as
a percentage of net revenues from 74.1% in 1998 to 69.4% in 1999. The absolute
dollar spending for these expenses increased as the result of increased costs
associated with strategic marketing alliances of $21.9 million, branding and
marketing campaigns of $19.9 million, and an increase in personnel to support
increased sales and marketing activity of $17.4 million.
During the first quarter of 2000 we terminated our existing marketing
agreements with AOL, CNET, Excite, Yahoo!, and ZDNet for approximately $10.1
million in termination fees and write-offs associated with prepaid and
intangible assets. As a result, we are no longer obligated to make payments
under these agreements in any future periods. These agreements represented 27%
of the sales and marketing expenses in 1999. Based on our termination of these
agreements and future reductions in advertising expenditures, we anticipate that
sales and marketing expenses will decrease in absolute dollar terms in fiscal
2000.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses consist primarily of personnel expenses, legal and accounting expenses,
and corporate facility-related expenses. Our general and administrative expenses
increased from $3.8 million in 1998 to $12.3 million in 1999. These expenses
decreased as a percentage of net revenues from 10.4% in 1998 to 10.5% in 1999.
The increase in absolute dollars was primarily the result of increased
personnel-related costs of $7.4 million and facilities-related expenses of $1.3
million associated with the hiring of additional personnel, as well as legal and
accounting fees of $2.1 million associated with strategic initiatives conducted
during the year. We anticipate that general and administrative expenses will
decrease in absolute dollar terms in fiscal year 2000.
GOODWILL AND DEFERRED COMPENSATION AMORTIZATION. As a result of the
BuyDirect.com merger on March 30, 1999, we recorded $136.5 million of goodwill.
In 1999 we amortized $34.1 million dollars of this goodwill balance and will
amortize an additional $39.1 million dollars in fiscal year 2000. The goodwill
associated with the BuyDirect acquisition will be fully amortized in fiscal
2002. There may be additional goodwill amortization charges if additional
mergers are completed. We recorded deferred compensation during 1999 of $4.6
million dollars in conjunction with our BuyDirect merger and deferred
compensation in 1998 of $3.8 million in connection with certain stock options
granted prior to our initial public offering. During 1999, we amortized $2.5
million of deferred compensation to expense and recorded a further reduction in
deferred compensation of $2.8 million as a result of employee terminations.
INTEREST INCOME, NET. Interest income, net, consists of earnings on our
cash and short-term investments, net of interest costs related to our financing
obligations. Interest income, net, decreased from $63,000 in 1998 to $41,000 in
1999. In 1999, interest expense totaling approximately $5.1 million primarily
arose from our 7 1/4% Convertible Subordinated Notes. Interest expense in 1999
was offset primarily by interest income totaling approximately $5.0 million
earned on our cash and short-term investment balances. In 1998, interest expense
totaling approximately $1.3 million arose from our 7 1/4% Convertible
Subordinated Notes, offset by interest income totaling approximately $1.4
million from our cash balances.
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INCOME TAXES. We incurred a net operating loss for 1998 and for 1999, with
no current tax benefit. As a result, in these periods no provision for income
taxes has been recorded. As of December 31, 1999, for federal income tax
purposes we had approximately $135,000,000 of net operating loss carryforwards,
which expire between 2002 and 2019. Based on application of criteria outlined in
Statement of Financial Accounting Standards No. 109 (FAS 109) to our limited
operating history, losses incurred to date, and the difficulty in accurately
predicting our future operating results, we have recorded a full valuation
allowance against our deferred income tax assets for 1998 and 1999.
Additionally, any attempt by us to utilize such net operating loss carryforwards
and any tax credit carryforwards may be subject to a substantial annual
limitation imposed by ownership change provisions of the Internal Revenue Code
of 1986, as amended, and by similar state provisions. Such annual limitation may
result in the expiration of net operating loss carryforwards and tax credits
before utilization. (See Note 12 of Notes to Consolidated Financial Statements).
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Revenues
- eStore revenue was $1.7 million, or 4.7% of total revenue, in 1998 with
revenue only in the fourth quarter. There were no eStore revenues in
1997.
- Government Systems revenue was $10.5 million in 1998 compared to $5.6
million in 1997. The increase in 1998 was primarily the result of the
expansion of existing contracts with U.S. Government agencies. Government
Systems revenue represents 28.7% of total revenue in 1998 compared to
33.2% of total revenue in 1997.
- Website revenue was $24.4 million in 1998 compared to $11.2 million in
1997. The increase in 1998 was primarily the result of an aggressive
marketing and advertising campaign. Website revenue represents 66.6% of
total revenue in 1998 compared to 66.8% of total revenue in 1997.
Cost of Revenues
- eStore's cost of revenues was $1.4 million in 1998 with cost of revenues
only in the fourth quarter. There were no eStore cost of revenues in
1997.
- Government Systems cost of revenues was $9.6 million in 1998 compared to
$5.1 million in 1997. The increase in 1998 was primarily the result of
the expansion of existing contracts with U.S. Government agencies.
- Website cost of revenues was $20.0 million in 1998 compared to $9.8
million in 1997. The increase in 1998 was primarily the result of an
aggressive marketing and advertising campaign.
Gross Margin. Our gross margin increased from 11.5% in 1997 to 15.2% in
1998. This increase primarily resulted from a shift in our revenue mix as we
received an increased percentage of higher margin consumer business, an
increased percentage of higher margin digital download revenues, and an
increased percentage of higher margin advertising and promotional revenues from
software publishers.
Research and Development Expenses. Our research and development expenses
consist primarily of personnel and other expenses associated with developing and
enhancing our websites as well as associated facilities related expenses. Our
research and development expenses increased from $1.1 million in 1997 to $4.1
million in 1998, primarily as a result of an increase in personnel related costs
of $1.5 million and depreciation on computer equipment of $225,000. These
expenses also increased as a percentage of net revenues from 6.3% in 1997 to
11.3% 1998.
Sales and Marketing Expenses. Our sales and marketing expenses consist
primarily of promotional expenditures and costs associated with operating our
websites, including personnel and related expenses. In addition, we included the
expenditures associated with our strategic marketing alliances under sales and
marketing expenses. Our sales and marketing expenses increased significantly
from $1.7 million in 1997 to $27.2 million in 1998. These expenses also
increased significantly as a percentage of net revenues from 10.1%
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in 1997 to 74.2% in 1998. This increase both in absolute dollars and as a
percentage of net revenues was primarily the result of costs of:
- $7.2 million for developing and maintaining our strategic marketing
alliances;
- $11.3 million for our branding and marketing campaign (including expenses
associated with our re-branding efforts); and
- $3.7 million for an increase in personnel to support increased sales and
marketing and advertising.
General and Administrative Expenses. Our general and administrative
expenses consist primarily of personnel expenses, legal and accounting expenses,
and corporate facility-related expenses. Our general and administrative expenses
increased from $1.1 million in 1997 to $3.8 million in 1998. These expenses also
increased, as a percentage of net revenues, from 6.5% in 1997 to 10.4% in 1998.
This increase in both absolute dollars and as a percentage of net revenues was
primarily the result of increased personnel-related costs and facilities-related
expenses associated with the hiring of additional personnel of $2.3 million.
Interest Income, Net. Interest income, net, consists of earnings on our
cash investments, net of interest costs related to our financing obligations.
Interest income, net, decreased from $167,000 in 1997 to $63,000 in 1998. This
decrease was primarily a result of increased interest expenses totaling
approximately $1.3 million associated with our credit facility and our 7 1/4%
Convertible Subordinated Notes offset by interest income totaling approximately
$1.4 million from higher average cash balances.
Income Taxes. We incurred a net operating loss for 1997 and 1998, with no
current tax benefit. As a result, in these periods no provision for income taxes
was recorded.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 2000, we financed our operations primarily
through private sales of preferred stock, our initial public offering in June
1998 of 5,750,000 shares of our common stock, our second public offering in
April 1999 of 3,000,000 shares of our common stock, and the sale of convertible
notes in November and December 1998. We raised cumulative net cash proceeds
totaling $14.8 million through private sales of preferred stock. In June 1998,
we received net proceeds of $46.8 million from our initial public offering. We
raised an additional $2.0 million at the closing of our initial public offering
through the sale of common stock to America Online pursuant to a Common Stock
and Warrant Subscription Agreement entered into in March 1998. In November and
December 1998, we raised net cash proceeds totaling approximately $63.3 million
through the sale of our 7 1/4% Convertible Subordinated Notes. In April 1999 we
received net proceeds of $98.5 million from our second public offering.
As of March 31, 2000, we had approximately $50.1 million of cash compared
with $66.3 million at December 31, 1999. We believe that our cash, cash
equivalents, and short-term investments at March 31, 2000 will be sufficient to
meet our anticipated needs for working capital and capital expenditures for at
least the next 12 months. Thereafter, we expect that the cash we generate from
operations likely will not be sufficient to satisfy our longer term cash needs.
We will need significant amounts of cash to make a variety of payments, in the
longer term including:
- payment of the principal and interest on 7 1/4% Convertible Subordinated
Notes when due;
- continued investment in technical infrastructure; and
- payment of ongoing operating expenses.
We may need to sell additional equity or debt securities to raise cash to
meet these obligations. Such sales likely would result in additional dilution to
our stockholders. In addition, we cannot assure that financing will be available
in amounts or on terms acceptable to us, if at all.
We used net cash of $16.8 million in operating activities in the three
months ended March 31, 2000. Our cash used in operating activities in the three
months ended March 31, 2000 was primarily comprised of the net effect of:
- a net loss of $45.8 million offset by non-cash charges for depreciation
and amortization, including amortization of goodwill and deferred
compensation of $12.9 million;
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- a decrease in accounts receivable totaling $7.3 million primarily related
to the collection of U.S. Government agency receivables;
- a decrease in prepaid partnership agreements of approximately $4.1
million associated primarily with write-offs related to the
restructuring;
- a decrease in accounts payable totaling $4.4 million; and
- an increase in accrued liabilities associated with the restructuring.
We received net cash of $22.8 million from investing activities primarily
related to sales of short-term investments for the three months ended March 31,
2000.
We received net cash of $1.0 million in the three months ended March 31,
2000 from financing activities primarily related to proceeds from stock option
exercises and employee purchases of our stock.
To the extent that the existing notes are tendered in the exchange offer
contemplated in this prospectus, the book value of the existing notes tendered
would be reduced to the fair value of the exchange notes issued. At the time of
the exchange, we will record an extraordinary gain for the difference between
the book value of the existing notes tendered and the fair value of the exchange
notes issued. In addition, we will incur additional interest expense over the
term of the exchange notes to accrete the exchange notes from the fair value
recorded to the principal amount of the exchange notes calculated using the
interest method.
YEAR 2000 RISK MAY ADVERSELY AFFECT OUR COMPANY
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
recent change in the century. If not corrected, many computer software
applications could fail or create erroneous results beyond the Year 2000. We
assessed our proprietary software and our internally developed systems, which
permit the sale, order, processing and delivery of off-the-shelf software to our
customers to determine Year 2000 compliance. We searched through software code
for each of these applications and identified all instances where date specific
information is required. We further investigated whether these date fields
contain two or four digits. We believe our other proprietary software and
internally developed systems are Year 2000 compliant.
In addition to our proprietary software and internally developed systems,
we utilize software, computer technology and other services internally developed
and provided by third-party vendors that may fail due to the Year 2000
phenomenon. For example, we are dependent on the institutions involved in
processing our members' credit card payments for Internet services. We are also
dependent on telecommunications vendors and leased point-of-purchase vendors to
maintain network reliability.
Our software applications run on several hardware platforms and associated
operating systems. In addition, our software operates in accordance with several
external Internet protocols, such as HTTP and NNTP. Our software is therefore
dependent upon the correct processing of dates by these systems and protocols.
We reviewed information made publicly available by our hardware platform
providers regarding Year 2000 compliance and researched the date handling
capabilities of applicable Internet protocols. We do not believe that the
underlying systems and protocols that operate in conjunction with our software
applications contain material Year 2000 deficiencies.
We use multiple software systems for our internal business purposes,
including accounting, email, development, human resources, customer service and
support, and sales tracking systems. We have made inquiries of vendors of the
systems that we believe are mission critical to our business regarding their
Year 2000 readiness. Each of these vendors has indicated to us that it believes
its applications are Year 2000 compliant, although we have not received
affirmative documentation in this regard from any of these vendors. To date, we
have not experienced any material Year 2000 problems with regards to our
proprietary software, internally developed systems, and hardware or software
platforms developed by external vendors.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations, and change in the market values of our investments.
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INTEREST RATE RISK. Our exposure to market rate risk for changes in
interest rates relate primarily to our investment portfolio. We have not used
derivative financial instruments in our investment portfolio. We invest our
excess cash in debt instruments of the U.S. Government and its agencies, and in
high-quality corporate issuers and, by policy, limit the amount of credit
exposure to any one issuer. We protect and preserve our invested funds by
limiting default, marketand reinvestment risk. Investments in both fixed rate
and floating rate interest earning instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
due to a rise in interest rates, while floating rate securities may produce less
income than expected if interest rates fall. Due in part to these factors, our
future investment income may fall short of expectations due to changes in
interest rates. We may suffer losses in principal if forced to sell securities
that have declined in market value due to changes in interest rates. We have no
cash flow exposure due to rate changes for our $63.3 million Convertible
Subordinated Notes.
FOREIGN CURRENCY RISK. To date we have not experienced material risks
associated with foreign currencies as a result of our operations. However, with
our expansion internationally, we will be exposed to risks associated with
fluctuations in foreign currencies during fiscal 2000.
INVESTMENT RISK. To date, we have not invested in equity instruments of
companies.
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BUSINESS
We are an e-commerce services provider that builds and manages websites for
businesses and sells software and computer related products to the government,
corporate and consumer markets. Additionally, we operate our own online store,
where customers can find an extensive selection of software and computer related
products and services.
ESTORE GROUP
Our eStore Group offers software developers, hardware manufacturers and
systems OEMs full-service Web stores that can be rapidly implemented more
economically than if they had developed a similar website internally. Businesses
can choose from an array of services, including website design and construction,
transaction processing, physical and electronic order fulfillment, customer
support, marketing, and merchandising support. Our current eStore customers
include CADopia, Compaq Computer, Executive Software, HP Shopping Village (a
subsidiary of Hewlett Packard), IntelliGolf, McAfee, Palm Computing, Symantec,
Systran Software, Telex and Trend Micro.
GOVERNMENT SYSTEMS GROUP
Our Government Systems Group provides digitally downloadable software and
related services to a growing list of United States Government agencies
including the Internal Revenue Service (IRS), Office of the Comptroller of the
Currency (OCC), Bureau of Engraving and Printing (BEP), Office of Thrift
Supervision (OTS), Defense Logistics Agency (DLA), National Imagery and Mapping
Agency (NIMA), Patent and Trademark Office (PTO), and the Department of Defense
(DoD).
WEBSITE
Our online store (www.beyond.com), offers customers a comprehensive
selection of software and computer related products, customer reviews, customer
service, and competitive prices. We deliver software to customers by physically
delivering the shrink-wrap software package or over the Internet via digital
download. We carry approximately 177,000 software stock keeping units;
approximately 13,000 of these stock keeping units can be delivered to customers
via digital download.
STRATEGIC REFOCUS
At the end of the third quarter of 1999, we made a strategic decision to
refocus our business from a consumer retail focused company to a
business-to-business e-commerce services company. Under this new direction, we
plan to focus our resources and expertise in two areas with substantial revenue
growth and profit potential: our eStore and Government Systems Groups.
PRODUCTS, SERVICES AND SOLUTIONS
E-commerce Outsourcing Solutions and eStore Service
We are a leading e-commerce services provider that builds and manages Web
stores for numerous businesses, including, CADopia, Compaq Computer, Executive
Software Inc., HP Shopping Village (a subsidiary of Hewlett Packard),
IntelliGolf, McAfee, Palm Computing, Symantec, Systran Software Inc., Telex and
Trend Micro. Revenues from our eStore Group grew from $1.7 million in 1998 to
$25.0 million in 1999, and were $9.2 million for the three months ended March
31, 2000. We believe our eStore Group provides a superior economic model that
enables software developers, OEM's and other businesses to sell directly on the
Web. Our eStore group offers cost-effective solutions that address the
inefficiencies inherent in traditional marketing models. Key components of our
solution include:
WEB STORE DEVELOPMENT AND DESIGN. Our Web store solution can be
customized to meet the characteristics of the customer's product or
industry. We leverage the extensive experience we have gained by running
our own website as well as numerous eStores since 1998.
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MERCHANDISING AND MARKETING SOLUTIONS. By operating our own online
software store, which has consistently been cited by Media Metrix as a top
Internet shopping site, we have gained significant experience selling and
merchandising products over the Web. We have successfully transferred our
expertise in the North American market to other global markets including
Europe, Asia and Australia. This global merchandising and marketing
experience is important to companies wanting to engage in e-commerce, as
well as companies currently engaged in e-commerce that need help maximizing
their sales on the Internet. Our marketing and merchandising solutions
include affiliate programs, rebate and gift certificate programs, direct
marketing and sales support expertise.
ORDER MANAGEMENT AND FULFILLMENT. We have established a number of
order fulfillment partnerships that provide cost effective order
fulfillment services for our eStore customers as well as our own website.
These solutions include reseller models, consignment models, and electronic
data interface to our eStore customers or their third-party order
fulfillment partners. These solutions ensure that the retail customer has a
highly reliable and seamless procurement experience.
CUSTOMER SUPPORT. In conjunction with the operation of our eStores,
we have developed customer service capabilities in North America, Europe,
Asia and Australia. We utilize both internal and outsourced customer
service solutions, and tailor our customer service solution to specific
customer's needs at cost effective prices.
Software and Computer Peripheral Reseller Solutions
Our website is a leading online reseller of packaged and digitally
downloadable computer software and computer related products and services to
U.S. Government agencies and consumers. We provide customers with superior value
by offering one of the largest selections of brand name high quality software
available online as well as the convenience of shopping from the home or office,
24-hours-a-day, seven-days-a-week. Since we launched our retail software website
in November 1994, net revenues from our Government Systems Group and website
increased from approximately $5.9 million in 1996, to approximately $16.8
million in 1997, to approximately $34.9 million in 1998, to approximately $92.2
million in 1999. During the three months ended March 31, 2000 net revenues from
our Government Systems Group was approximately $10.2 million. Since our launch,
we have delivered software products to more than two million cumulative
customers. In 1998 and 1999, we fulfilled 43% and 59%, respectively, of our
deliveries to customers through digital download. In both 1998 and 1999, we
fulfilled all of our deliveries related to our U.S. Government contracts through
digital download.
The key benefits of our reseller solutions for the software supply chain
include:
ENTERPRISE BENEFITS. We provide our government and corporate
customers with significant savings in the purchase, delivery, installation
and maintenance of their software assets. Using digital download, our
enterprise customers are ableto deploy their software purchases rapidly,
efficiently and securely. Additionally, they are able to track and update
their software assets more effectively to ensure consistent use of
compatible software across the enterprise.
SOFTWARE DEVELOPER BENEFITS. As an online reseller of software
products, we are not constrained by the inherent limitations of a physical
store. Our digital download capability reduces software developers' risk of
customer demand forecasting. Our e-commerce solution reduces administrative
costs and mitigates potential revenue recognition and restatement concerns
associated with demand forecasting. Finally, software developers can work
with us to obtain demographic and behavioral data about their end users,
expanding their opportunities for marketing and targeted services.
CONSUMERS AND SMALL BUSINESSES. Software publishers primarily sell to
consumer and small business purchasers through a network of distributors
and resellers. We believe our website provides an inherent cost advantage
in this market space over the traditional software resellers.
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STRATEGY
LEVERAGE ECONOMIC MODEL; FOCUS ON E-COMMERCE OPPORTUNITIES. We believe our
e-commerce solutions provide our customers with inherent economic advantages
relative to traditional commercial practices. We have invested significant time
and money developing e-commerce expertise associated with our website and eStore
Group. We intend to aggressively apply this experience to additional software
and technology reseller opportunities and to opportunities that present
themselves in other industries as well. With the forecasted growth of
e-commerce, we believe our acquired expertise in this field will provide
significant value for prospective customers who want to establish an e-commerce
presence.
DEVELOP AND PROMOTE OUR E-COMMERCE VALUE ADD SERVICES. The array of value
add customer services that accompany our eStores present our customers with cost
effective solutions for running their Internet based commerce solution. These
value add services should provide us with an additional revenue source, while
leveraging our existing strengths in marketing, payment processing and order
fulfillment.
UTILIZE OUR INTERNATIONAL E-COMMERCE EXPERIENCE ON BEHALF OF OUR
CUSTOMERS. We conduct e-commerce in more than 20 countries around the world. We
believe this provides our current and prospective customers with experience in
markets where they may not have relevant experience. We believe this breadth of
international coverage provides us with a competitive advantage over other
prospective e-commerce providers that lack our international expertise.
PROMOTE DIGITAL DOWNLOAD. We are a leader in digital downloading of
software with approximately 13,000 software stock keeping units available for
delivery to the end user's personal computer. Digital download offers
convenience to customers and an economic advantage to us and to software
publishers over traditional methods of software delivery.
MAINTAIN TECHNOLOGY FOCUS AND EXPERTISE. We intend to leverage our
scalable, state-of-the-art, interactive commerce platform to enhance the
services we offer and expand the benefits of online software reselling. We also
intend to use our technology platform to further enhance our customer
interaction and support systems to provide us with a competitive advantage. Our
internal development group will continue to develop, purchase, license and make
technological advancements to our website and our transaction processing systems
to enhance our availability, reliability and site uptime.
LEVERAGE OUR DIRECT MARKETING EXPERTISE. We will continue to utilize many
online sales and marketing techniques to increase brand recognition and drive
traffic to our online stores. We have established direct links with certain
software developers' websites. These links allow a potential customer visiting
that developer's website to automatically link to our order form and purchase
software. We also have established customer specific email campaigns that notify
customers about new products and promotions they may find of interest.
LEVERAGE OUR AFFILIATES PROGRAM. Our Affiliates Program increases our
market presence by allowing affiliate websites to offer software to their
audience for which we provide fulfillment. The affiliate embeds a hyperlink to
our site, together with software recommended for that affiliate's targeted
customer base. This hyperlink automatically connects the customer to our online
store where the affiliate's customer may place an order. The affiliate can offer
enhanced services and recommendations, while avoiding ordering and fulfillment
costs. Under these arrangements, we pay the affiliate a small percentage
commission based on the sales generated through the affiliate. As of March 31,
2000, we have approximately [54,000] affiliates, a [265%] increase from December
31, 1998.
TECHNOLOGY
We use complex proprietary and commercially licensed technology to simplify
and enhance the customer experience by developing ways to simplify the use of
digital download, by reducing the number of customer actions required to
complete a transaction and by clearly displaying the location of digitally
downloaded software on the consumer's desktop. We are also using our technology
to make management reporting processes as seamless and simple as possible. By
using a combination of proprietary solutions and commercially available licensed
technologies, we have developed systems for online content dissemination, online
transaction processing, customer service, market analysis and electronic data
interchange. We have integrated
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these proprietary and commercially available systems into a unified software
sales and reporting system. During the three months ended March 31, 2000,
research and development costs were $3.7 million. Research and development costs
in 1999, 1998, and 1997 were $10.4 million, $4.2 million, and $1.1 million
respectively.
SCALABILITY AND FLEXIBILITY. We built our hardware and software
architecture on a transaction processing model that allows us to distribute the
processing load among multiple parallel servers. This architecture allows us to
scale by either adding new servers or increasing the capacity of existing
servers. We designed our hardware and software configuration to scale to support
growth while maintaining user performance and minimizing the cost per
transaction. In the rapidly changing Internet environment, it is important that
we are able to update our system to stay current with new technologies. Our
system's template technology and modular database design allow us to easily add
or replace software components, page layout templates, and search and retrieval
engines with minimal effort and disruption. We designed our hardware and
software architecture to allow us to inexpensively and rapidly add co-branded
websites that integrate with our online store.
SEAMLESSNESS. Our multiple hardware and software systems are designed to
integrate seamlessly to manage real time transactions with limited human
intervention including the ability to automatically process orders for
downloadable software to completion, electronically route orders for physical
products to one of our distributors, as well as charge the customer's credit
card after confirmation of shipment, and automatically route orders requiring
human intervention to our customer service representatives.
COMPONENTS OF OUR TECHNOLOGY. We use commercially available and internally
developed software. Our policy is to limit the number of hardware and software
vendors whose products are used in our production systems. This policy
facilitates integration, maintenance, performance and upgrades.
STORE ENGINE ARCHITECTURE. We base our hardware and software systems on a
distributed transaction processing model. This model allows us to distribute
applications and data among multiple parallel servers. We developed many of the
software components and pages of our website in a manner that lets us separate
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 website changes, and minimizes the
engineering required to maintain a growing amount of items and content. We use
proprietary technology that allows websites with different formats to integrate
our online store elements, such as search, vendor and product pages. This
technology allows us to maintain several Web storefronts over a single order
processing and customer service system.
ENTERPRISE DOWNLOAD MANAGER. For the large enterprise environment, we have
developed technology to aid in the distribution of large software products and
large numbers of software products. This technology includes server software,
which maintains a cache of software downloaded to key locations behind a
customer's firewall, and an enhanced version of the Sm@rtCert(TM) technology
licensed on a non-exclusive basis from CyberSource, which we offer as an
integrated service. We call this integrated service the "Enterprise Download
Manager." By distributing caches of software (many of which may be too large to
download) to key locations within an enterprise, a large enterprise can ensure
that the current release of software is available to its staff with minimal
supervision. We can overcome problems of failed download and lost connections by
providing a dedicated server to manage and receive the download. By using a
local cache, the Enterprise Download Manager satisfies most requests for
software updates internally, significantly reducing the amount of network
traffic. We use this technology to deliver products electronically along with
marketing and promotional information. In addition, our Enterprise Download
Manager service tracks the transmission of software via digital download. If
there is a disruption of the transmission, the Enterprise Download Manager
restarts the transmission and completes the interrupted download without
restarting the entire download.
BACK OFFICE PROCESSING. The real time nature of fulfilling downloaded
software orders adds significant complexity to the design of our 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
eliminates the need to process orders in real time (as well as the customer's
expectation of real time processing). When a customer wants to download the
software they purchase via digital download, the customer expects to be able to
start downloading within seconds of confirming the transaction. This need for
almost instant initiation of
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<PAGE> 40
delivery impacts the design and operation of our entire back office system. We
must automate every element of a sale because we do not have the time needed for
human intervention.
Our transaction processing system incorporates commercially available
database components purchased from leading vendors, proprietary software
products developed internally and Internet commerce services supplied by
CyberSource. This system accepts orders captured by the store engine and
processes them according to pre-coded rules, validates each order, screens the
order for possible fraud, authorizes the payment method and transmits an
electronic message to our distributors for physical delivery or allows the
customer to digitally download the product following approval of an order. Our
customer service representatives can access the entire history of any order or
customer online through a Web-based interface. Representatives also can manage
an order entirely from within this interface. Our system logs all actions by a
customer service representative including the identity of the representative,
the actions taken and a time stamp of the action.
DATA WAREHOUSE. We use a database management system to index, retrieve and
manipulate product information, content, product catalogs, orders, transactions,
and customer information, and perform rapid searching, sorting, viewing and
distribution of a large volume of content. The data warehouse allows us to
access detailed transaction and customer interaction data and perform
proprietary market analysis. Our data warehouse incorporates commercially
available hardware and software combined with our proprietary software in an
internally developed configuration. This data warehouse provides a unified
platform for our store engine and back office systems. Any reduction in
performance, disruption in Internet access or discontinuation of services
provided to us by CyberSource could materially adversely affect our business. We
cannot assure that we will:
- accommodate increases in network traffic in the future;
- accurately project the rate or timing of such increases;
- upgrade our systems and infrastructure to accommodate future traffic
levels on our online sites;
- effectively upgrade and expand our transaction processing systems;
- successfully integrate any newly developed or purchased modules with our
existing systems;
- successfully use new technologies; or
- successfully adapt our online sites, proprietary technology and
transaction processing systems to meet customer requirements or emerging
industry standards.
SECURITY
CUSTOMER REASSURANCE. To be successful, we must maintain the integrity and
security of information such as credit card numbers. We believe that our
existing security systems are at least as secure as those used for traditional
transactions (i.e., in-store or mail order purchases). We also believe we have a
comprehensive security strategy. Our system automatically monitors each
purchase, confirms each order by email to the customer within minutes of order
placement and advises customers by email shortly after our distributors ship
physical orders.
FAULT TOLERANCE AND SCALABLE INTERNET ACCESS. We have designed our systems
for automatic transfer to back-up systems in the event of a failure. We have
also equipped our systems with fully automated reporting tools. These tools
provide automated trouble notification and detailed event logging. We maintain a
minimum of two of each critical production system. For distributed systems such
as Web servers, as many as 30 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 redistributes traffic among the remaining
machines with no loss of user functionality. Standby systems that monitor the
health of the live machine automatically take over in the event of a failure of
our firewall and load distribution system. After correcting the problem, these
automated systems then notify technical staff by pager so our staff can replace
or repair the failed system.
We contract with a hosting provider that specializes in providing scalable
business solutions to high volume Internet sites for mission critical Internet
connectivity. We contract with the hosting provider to
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<PAGE> 41
deliver a secure platform for server hosting with non-interruptible power supply
and back up generators, fire suppression, raised floors, heating ventilation and
air-conditioning, separate cooling zones, seismically braced racks,
24-hours-a-day, seven-days-a-week operations and high levels of physical
security. We connect our systems to a high speed Internet connection with
multiple, redundant interconnects to key backbone locations.
Notwithstanding these precautions, we cannot assure that the security
mechanisms used by us, our suppliers or our Internet provider will prevent
security breaches or service breakdowns. Despite the network security measures
we have implemented, our servers may be vulnerable to computer viruses, physical
or electronic break-ins and similar disruptions. Such a disruption could lead to
interruptions or delays in service, loss of data, or inability to accept and
fulfill customer orders. Any of these events may materially affect our business,
results of operations and financial condition.
COMPETITION
We face competition primarily on three fronts: e-commerce service vendors
of various types, government resellers and systems integrators, and online
resellers of software and computer peripherals.
E-Commerce Service Vendors
The e-commerce business-to-business outsourcing marketplace for building
and managing web stores is new, rapidly evolving and intensely competitive. We
expect competition to intensify in the future as current and new competitors
potentially launch new e-commerce services that offer a variety of outsourcing
options to businesses. eStore competitors include Digital River, ReleaseNow,
NetSales and ShopNow. These companies provide similar solutions to our eStore
Group offering. Like us, they target the software and hardware industry and
similar customers ranging from small to large businesses. Other competitors
include Escalate, BuyNow and Sykes Enterprises. Escalate and BuyNow are still
new to the market but could pose a competitive threat once established. Sykes
Enterprises has a solid clientele in the software and hardware industry and
could be a competitive threat if they become an end-to-end or full-service
provider.
Competitive pressures created by any one of these current or future
competitors, or by our competitors collectively, could negatively impact our
business.
We believe that the principal competitive factors in our market are:
- skill in building and managing Web stores that offer a wide array of
services, including advertising, merchandising, marketing campaigns,
banner campaigns, market research and strategic planning. Marketing
services include direct emails with personalized messages, e-packaging
solutions that allow customers to rent, demo and download software,
update services that inform clients of new upgrades to their software,
and e-business centers that target business-to-business clients;
- expertise in Web user interface design;
- proprietary technology and operational experience in digital download;
- rapid website building time;
- operational and service performance excellence in the areas of customer
support and site uptime;
- offering additional services, including fraud elimination services;
- providing a one-stop solution through key partnerships with companies
such as CyberCash, Preview Systems and Ingram Micro that allow companies
to outsource some of their services and alleviate internal resources; and
- expertise in integrating with a client's infrastructure.
Competitors such as Digital River have longer operating histories and
larger customer bases than we do. In addition, some of our current or potential
competitors have greater financial, marketing and other resources than we do.
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<PAGE> 42
In addition, as more businesses turn to e-commerce outsourcers to market
and sell their products online, other entities may:
- acquire online competitors;
- invest in online competitors; or
- form joint ventures with online competitors.
Certain of our actual or potential competitors, such as Digital River,
ReleaseNow, NetSales, ShopNow and BuyNow, may be able to:
- secure key partnerships with vendors that allow them to outsource their
services at a better price we can;
- secure key partnerships that enable them greater access to potential
customers;
- devote greater resources to marketing and promotional campaigns;
- adopt more aggressive pricing or services models to build market share;
or
- devote substantially more resources to grow and improve their e-commerce
outsourcing offerings than we can.
Government Resellers and Systems Integrators
In the government systems marketplace, competitors such as Software
Spectrum, GTSI, ASAP, CDW-G, SoftMart, GMR, MA Federal, SHI.com, and Corporate
Software & Technology have greater experience in selling software to the large
enterprise market than we do. Further, they have more sophisticated
infrastructure and larger sales teams than we do.
Online Resellers of Software and Computer Peripherals
For website competition, we expect challenges from current online
resellers, such as, Amazon.com, Buy.com, CompUSA, Cyberian Outpost, and Egghead,
which may have longer operating histories, larger customer bases, and greater
financial, marketing, and other resources than we do. In addition, new
technologies or the expansion of existing technologies, such as price comparison
programs that select specific titles from a variety of websites, may direct
customers to online software resellers that compete with us.
In summary, increased competition may cause us to reduce pricing or
increase service and marketing expenses that could reduce operating margins and
funds available to improve our technology and promote our businesses. We cannot
assure that we can compete successfully against current and future competitors.
Failure to compete successfully against our current and future competitors could
materially hurt our business.
PROPRIETARY RIGHTS
We rely on a combination of copyright, trademark, patent and trade secret
laws and contractual restrictions to establish and protect our technology and
proprietary rights and information. We require employees and consultants to sign
confidentiality agreements. However, we cannot assure you that our processes
will be sufficient to prevent misappropriation of our technology and proprietary
rights and information, or that our competitors will not independently develop
technologies that are substantially equivalent or superior to ours.
EMPLOYEES
As of December 31, 2000, we employed approximately 389 employees. However,
in early 2000, we terminated approximately 20% of our workforce. We also employ
independent contractors and other temporary employees. Labor unions do not
represent any of our employees. We consider our employee relations to be good.
Competition for qualified personnel in our industry is intense, particularly for
software
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<PAGE> 43
development and other technical staff. We believe that we need to continue to
attract, hire and retain qualified personnel to be successful in the future.
PROPERTIES
Facilities
Beyond's executive office is a subleased property located in Santa Clara,
California. We also lease or sublease additional office space facilities in
certain locations in the United States. The following is a summary of the office
space square footage that we are leasing by location:
<TABLE>
<CAPTION>
SQUARE
LOCATION BUSINESS USE FOOTAGE
-------- ------------ -------
<S> <C> <C>
Santa Clara, California.............. Company Headquarters and Primary 104,540
Administrative, Engineering and Marketing
Facility
Reston, Virginia..................... Government Sales Office 6,414
Portland, Oregon..................... Customer Service Center 3,233
</TABLE>
LEGAL PROCEEDINGS
From time to time we may be involved in litigation relating to claims
arising from the normal course of our business. The Company is not currently
subject to any material legal proceedings.
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<PAGE> 44
MANAGEMENT
The following table sets forth certain information about our executive
officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
William S. McKiernan................. 43 Chairman of the Board of Directors
Ronald S. Smith...................... 59 Chief Executive Officer
C. Richard Neely, Jr................. 45 Senior Vice President of Finance and Administration
and Chief Financial Officer
John D. Vigouroux.................... 40 Senior Vice President, Sales and Marketing
Montgomery B. Mars................... 36 Vice President, Business and Corporate Development
Brian C. Mellea...................... 46 Vice President, Marketing
Eric A. Chatham...................... 37 Vice President, Infrastructure Engineering
Mark. W. Bailey...................... 41 Director
Ronald S. Posner..................... 57 Director
Richard Scudellari................... 43 Director
</TABLE>
William S. McKiernan is our co-founder and has served as our Chairman of
the Board of Directors since March 1998. From our inception in 1994 to March
1998, Mr. McKiernan served as our President and Chief Executive Officer. Mr.
McKiernan also currently serves as Chairman of the Board of Directors 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 holds a Master's degree in Business Administration
from the Harvard Business School.
Ronald S. Smith serves as our President, Chief Executive Officer and a
member of our Board of Directors. Prior to joining us, Mr. Smith was President
of Merisel, North American Distribution and President of Merisel Canada. Prior
to joining Merisel, Mr. Smith was Chief Executive Officer of Cygnet Storage
Systems. From 1994 through 1997 Mr. Smith was President and Chief Executive
Officer of NCR Canada, Ltd., the Canadian affiliate of NCR Corporation. Mr.
Smith holds a Bachelor of Science degree in math and physics from Dalhousie
University and a Bachelor of Mechanical Engineering degree from The Technical
University of Nova Scotia.
C. Richard "Rick" Neely, Jr. serves as our Senior Vice President of Finance
and Administration and Chief Financial Officer. Mr. Neely joined us in December
1999 as Chief Financial Officer and was named Interim Chief Executive Officer in
January 2000, and served in that capacity until June 2000. From 1998 until
joining us, Mr. Neely was Vice President of Finance and Operations Controller
for Synopsys Inc., the leading provider of EDA software tools to the global
electronics market. From 1996 to 1998, Mr. Neely was Vice President of Finance
and Corporate Controller at Heartport Inc., a medical device manufacturing
company. Prior to Heartport Inc., Mr. Neely was Group Controller and Director of
Finance at Advanced Micro Devices Inc. Mr. Neely holds a Master's degree in
Business Administration in Finance and Marketing from the University of Chicago
and a Bachelor of Arts in Economics from Whitman College, where he graduated
summa cum laude.
John D. Vigouroux became our Senior Vice President, Sales and Marketing in
January 2000. Mr. Vigouroux's previous role with us was Vice President of
Business and Corporate Development. Prior to joining us, Mr. Vigouroux was Vice
President of Business development at NetObjects from June 1997 to October 1998.
From August 1996 to June 1997, Mr. Vigouroux was the Director of Business
Development of Cisco Systems Inc. Prior to that, Mr. Vigouroux served as Manager
of Strategic Opportunities of Adobe Systems Inc. from August 1993 to August
1996. Mr. Vigouroux holds a Masters degree in Business Administration from New
Hampshire College and a Bachelor of Arts degree in Organizational Behavior and
Development from Averett College in Danville, VA.
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<PAGE> 45
Montgomery B. Mars was appointed as our Vice President of Business and
Corporate Development in October 1999. Previously, Mr. Mars was Director of
Business Development for us. Prior to joining us, Mr. Mars ran his own
management consulting business for early stage technology companies and held
Vice President and Director level positions at Mercator Genetics and Ixsys Inc.
Mr. Mars was also a Corporate Attorney at Latham & Watkins. Mr. Mars holds a
Bachelor of Science degree in Biochemistry from UC Davis, a Juris Doctorate
degree from the University of Southern California and a Masters degree in
Business Administration from the Wharton School at the University of
Pennsylvania.
Brian C. Mellea became our Vice President of Marketing in April 1999. Prior
to joining us, Mr. Mellea was Director of Marketing at Inpart from 1998 until
1999. Prior to joining Inpart, Mr. Mellea served as Senior Marketing Manager for
Apple Computer. Mr. Mellea holds a Bachelor of Science in Civil Engineering from
Worcester Polytechnic Institute, a Master of Science in Engineering from MIT,
and a Masters degree in Business Administration from Harvard Business School.
Eric A. Chatham became our Vice President of Infrastructure Engineering in
October 1999. Prior to joining us, Mr. Chatham was the Director of Operations
and Crisis Management for eBay. Prior to joining eBay, Mr. Chatham served as
Director of Operations and Corporate Integration for Informix from December 1998
until February 1999. Prior to joining Informix, Mr. Chatham served as Director
of MIS and Operations from December 1997 until December 1998 and Manager of
Desktop and Server Support from April 1996 until December 1997 for Red Brick
Systems. Mr. Chatham holds a Bachelor of Science degree, with a concentration in
computer sciences, from Humboldt State University.
Mark W. Bailey joined our Board of Directors in April 2000. Mr. Bailey has
been Chief Executive Officer of WebPartner since November 1999 and Chairman of
WebPartner since 1997. Prior to becoming WebPartner's Chief Executive Officer,
Mr. Bailey was Vice President of Business Development at Healtheon Corporation
from July 1998 to October 1999. For six months prior to joining Healtheon, Mr.
Bailey served as general partner of Venrock Associates, the venture capital arm
of the Rockefeller family. From 1989 to 1997, Mr. Bailey was Senior Vice
President of Business Development at Symantec Corporation.
Ronald S. Posner joined our Board of Directors in March 1999, and serves as
Chairman of NetCatalyst.com, an internet accelerator firm based in Los Angeles.
Prior to NetCatalyst.com, Mr. Posner was Chairman of PS Capital, a venture
capital firm. Mr. Posner has held or currently holds key advisory roles within a
number of startups and public companies. In addition, he is a board member of
Click2learn.com Inc. and Smallworld.
Richard Scudellari was a member of our Board of Directors since our
inception through March 1998. Mr. Scudellari rejoined the Board in April 2000.
Mr. Scudellari has been a partner at Morrison & Foerster LLP, a law firm, since
February 1999. From 1990 to January 1999, Mr. Scudellari was a partner at
Jackson Tufts Cole & Black, LLP, a law firm. Mr. Scudellari is also a member of
the board of CyberSource Corporation. Mr. Scudellari holds a Bachelor of Science
degree and Juris Doctorate degree from Boston College.
EXECUTIVE COMPENSATION.
Directors
We pay non-employee directors an annual director's fee in the amount of
$10,000, in quarterly installments.
In January 1999, we granted Mr. Kolde (who resigned from our Board in April
2000) an option to purchase 10,000 shares of common stock at an exercise price
of $20.75 per share.
The 1999 Stock Incentive Plan provides for initial grants of 20,000 shares
upon appointment to the Board of Directors and subsequent grants of 5,000 shares
following the conclusion of each Annual Meeting of Stockholders commencing with
the 2000 Annual Meeting of Stockholders. These options would vest over four
years.
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<PAGE> 46
In March 1999, we granted each of Messrs. Carlston, Chen and Posner
(Messrs. Carlston and Chen each resigned from our Board in April 2000) options
to purchase 20,000 shares of common stock at an exercise price of $23.75 per
share under the 1998 Stock Option Plan. These options vest over four years with
25% of the total shares granted vesting in March 2000 and the remaining shares
vesting monthly thereafter through March 2003, contingent upon continuous
service as a Director. Each of Messrs. Carlston, Chen and Posner waived his
rights to the initial automatic option grants under our 1998 Stock Option Plan.
Executive Officers
The following table sets forth certain information concerning compensation
of and stock options granted to each of the persons serving as our Chief
Executive Officer and each of our four other most highly compensated executive
officers for the fiscal year ended December 31, 1999. We refer to these officers
as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION SECURITIES
------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
--------------------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Mark L. Breier(1)................... 1999 $290,000 $34,000 250,000 --
Chief and Executive Officer 1998 150,000 37,500 1,000,000 --
Gordon F. Jones(3).................. 1999 145,000 78,000 140,000 $65,000(2)
Senior Vice President and Chief
Information Officer
Mala Anand(4)....................... 1999 205,000 -- 45,000 --
Vice President, Engineering 1998 92,000 15,000 180,000 --
Kendall M. Fargo.................... 1999 124,000 91,000 60,000 --
Vice President, Corporate
Operations 1998 70,000 134,000 40,000 --
1997 45,000 50,000 50,000 --
John D. Vigouroux(5)................ 1999 189,000 13,000 36,250 --
Senior Vice President, Sales 1998 22,000 -- 145,000 --
and Marketing
</TABLE>
---------------
(1) Mr. Breier was hired in March 1998 and resigned in January 1999.
(2) Represents a relocation allowance.
(3) Mr. Jones was hired in May 1999.
(4) Ms. Anand was hired in June 1998 and resigned in March 2000.
(5) Mr. Vigouroux was hired in October 1998.
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<PAGE> 47
Option grants in last fiscal year
The following table sets forth certain information with respect to stock
options granted in fiscal 1999 to the Named Executives Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
---------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES OPTION TERM(4)
OPTIONS IN FISCAL EXERCISE PRICE EXPIRATION ------------------------
NAME GRANTED (#) YEAR(2) ($/SHARE)(3) DATE 5% ($) 10% ($)
---- ----------- ---------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Breier....... 250,000 7.09% $32.1250 4/22/2009 13,082,060 $20,830,994
Gordon F. Jones...... 140,000 3.97% 24.0625 5/07/2009 5,487,339 8,737,670
Mala Anand........... 45,000 1.28% 20.75 6/15/2009 1,520,980 2,421,907
Kendall M. Fargo..... 5,000 0.14% 22.75 4/01/2009 185,287 295,038
55,000 1.56% 7.75 10/27/2009 694,316 1,105,583
John D. Vigouroux.... 36,250 1.03% 7.75 10/27/2009 457,618 728,680
</TABLE>
---------------
(1) Each of these options vests over four years at a rate of 25% of the shares
subject to the option after one year and the remaining shares subject to the
option at the rate of 1/48th per month thereafter. Each of these options has
a ten-year term.
(2) Based on an aggregate of 3,528,457 options granted by us during the fiscal
year ended 1999 to employees of and consultants to us, including the Named
Executives.
(3) The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by our Board of
Directors.
(4) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the common stock on the date of grant appreciates at the
indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price.
Aggregate option exercises in last fiscal year and fiscal year-end option
values
The following table sets forth certain information regarding stock options
held as of December 31, 1999 by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AS OF IN-THE-MONEY OPTIONS AS OF
SHARES DECEMBER 31, 1999 (#) DECEMBER 31, 1999 ($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Breier............. 25,274 $427,131 412,226 812,500 $2,148,728 $2,932,031
Gordon F. Jones............ -- -- -- 140,000 -- --
Mala Anand................. -- -- 67,500 157,500 -- --
Kendall M. Fargo........... 10,000 269,833 58,458 111,042 388,078 217,544
John D. Vigouroux.......... -- 42,292 138,958 5,287 15,104
</TABLE>
---------------
(1) The value of unexercised "in-the-money" options represents the difference
between the exercise price of stock options and $7.8125, the closing sales
price of the common stock on December 31, 1999.
EMPLOYMENT AGREEMENTS
We and Mark L. Breier (who was our President and Chief Executive Officer
through January 2000) were parties to an employment agreement dated March 23,
1998 (the "Breier Agreement"). Mr. Breier's annual base salary under the Breier
Agreement was $200,000, subject to good faith adjustment by our Board of
Directors. In addition, Mr. Breier was eligible to participate in the our
executive benefit plans and to earn an
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<PAGE> 48
annual bonus in the amount of $50,000, payable quarterly, based on achievement
of objectives mutually determined by Mr. Breier and our Board of Directors at
the beginning of each year of employment. According to the Breier Agreement,
$25,000 of Mr. Breier's potential bonus for 1998 was guaranteed and paid to Mr.
Brier in quarterly installments.
Pursuant to the Breier Agreement, we granted an option to purchase
1,000,000 shares of common stock to Mr. Breier on March 30, 1998, 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 including acceleration of the vesting in connection with a
change of control (as defined in the Breier Agreement).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OPTION GRANTS AND AGREEMENTS WITH EXECUTIVE OFFICERS AND DIRECTORS
In April 1999, we loaned Gordon F. Jones, our Senior Vice President, Chief
Information Officer, $117,000 to assist Mr. Jones' transition to working for us.
This loan is memorialized in a promissory note issued by Mr. Jones to us, which
provides for repayment by October 1999, and bears interest at a rate of 6.5%
compounded annually. In July 1999, Mr. Jones had fully repaid the principal plus
all interest incurred.
In January 2000, our Board of Directors adopted the Chairman Grant Program
and reserved 1,000,000 shares of common stock for issuance to selected full-time
employees under this plan. William S. McKiernan, our Chairman of the Board,
agreed to contribute 1,000,000 shares of our common stock owned by him to the
Plan over the one year term of the Plan. Shares will be issued on a quarterly
basis, in the total amount of 250,000 shares per quarter. The shares shall be
awarded to selected full time employees who have gone beyond normal expectations
in their contributions to our success as a whole.
In January 2000, Mark L. Breier resigned as President and Chief Executive
Officer. Per the terms of his employment agreement, we will continue to pay Mr.
Breier his base salary from the date of his resignation until the lesser of
twelve months or that number of months before which he obtains a position with
another firm.
In March 2000, James R. Lussier resigned as our Vice President, Business
Operations and Corporate Strategy. Per the terms of his separation agreement, we
will continue to pay Mr. Lussier his base salary for four months after the date
of separation agreement.
RELATIONSHIP WITH CYBERSOURCE CORPORATION
Pursuant to the terms of an agreement entered into in connection with the
spin-off of CyberSource Corporation ("CyberSource"), we use services supplied 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
us to replace such services, could be disruptive to our business. We also
received a non-exclusive license to certain CyberSource technology. Under the
services agreement, we are obligated to compensate CyberSource on a basis of
services used per order or transaction. At the time these agreements were
negotiated, all of our directors were also directors of CyberSource and other
members of our management team joined CyberSource as executive officers. As a
result, these and subsequent agreements may not be deemed the result of arm's
length negotiations. Further, although we and CyberSource are engaged in
different businesses, the two companies currently have no policies to govern the
pursuit or allocation of corporate opportunities between CyberSource and us in
the event they arise. Our business could be adversely affected if the
overlapping board members of the two companies pursue CyberSource's interests
over ours either in the course of intercompany transactions or where the same
corporate opportunities are available to both companies.
In connection with the CyberSource spin-off, we approved loans in amounts
equal to the adverse incremental income tax any stockholder incurred as a result
of the spin-off and the transactions contemplated
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<PAGE> 49
thereby. In April 1998, we 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 was due and payable no
later than December 17, 1999. Interest accrued on the loan to Mr. McKiernan at
the rate of six and two hundredths percent (6.02%), compounded annually. In May
1999, Mr. McKiernan had fully repaid the principal plus all interest incurred.
We entered into a Software License Agreement with CyberSource in June 1999,
pursuant to which CyberSource purchased a perpetual, transferable, worldwide
license to copy, modify, market and otherwise use technology related to
transaction processing services. Pursuant to the terms of the agreement, we will
not license or otherwise distribute the software to any of CyberSource's
competitors through June 2001, and CyberSource will own all modifications or
derivative works of the software. We will indemnify CyberSource against any
legal cause of action brought against CyberSource to the extent that the cause
of action is based on a claim that the software infringes any intellectual
property rights of a third party, and CyberSource will indemnify us against any
legal cause of action brought against us to the extent that the cause of action
is based on a claim that any modification or derivative of the software
infringes any intellectual property rights of a third party. The purchase price
of the license was $600,000.
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<PAGE> 50
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING EXISTING NOTES
We are offering to exchange $2,000 principal amount of exchange notes for
each $3,000 principal amount of existing notes that are validly tendered on the
terms and subject to the conditions set forth in this prospectus and in the
accompanying letter of transmittal.
Holders must tender existing notes in a principal amount of $3,000 and any
integral multiple of $3,000.
You may tender all, some or none of your existing notes.
The exchange offer is not being made to, and we will not accept tenders for
exchange from, holders of existing notes in any jurisdiction in which the
exchange offer or the acceptance of the offer would not be in compliance with
the securities or blue sky laws of that jurisdiction.
Our board of directors and officers do not make any recommendation to the
holders of existing notes as to whether or not to tender all or any portion of
their existing notes. In addition, we have not authorized anyone to make any
recommendation. You must make your own decision whether to tender your existing
notes and, if so, the amount of existing notes to tender.
EXPIRATION DATE
The expiration date for the offer is 5:00 p.m., Eastern Daylight Time, on[
--, 2000], unless we extend the offer. We may extend this expiration date for
any reason. The last date on which tenders will be accepted, whether on[ --,
2000] or any later date to which the exchange offer may be extended, is referred
to as the expiration date.
EXTENSIONS; AMENDMENTS
We expressly reserve the right, in our discretion, for any reason to:
- delay the acceptance of existing notes for exchange,
- extend the time period during which the exchange offer is open, by giving
oral or written notice of an extension to the holders of existing notes
in the manner described below. During any extension, all existing notes
previously tendered and not withdrawn will remain subject to the exchange
offer, and
- amend the terms of the exchange offer other than the condition that the
registration statement become effective under the Securities Act.
If we consider an amendment to the exchange offer to be material, or if we
waive a material condition of the exchange offer, we will promptly disclose the
amendment in a prospectus supplement, and if required by law, we will extend the
exchange offer for a period of five to ten business days.
We will give oral or written notice of any (1) extension, (2) amendment,
(3) non-acceptance or (4) termination to the holders of the existing notes as
promptly as practicable. In the case of any extension, we will issue a press
release or other public announcement no later than 9:00 a.m., Eastern Daylight
Time, on the next business day after the previously scheduled expiration date.
PROCEDURES FOR TENDERING EXISTING NOTES
Your tender to us of existing notes and our acceptance of your tender will
constitute a binding agreement between you and us upon the terms and subject to
the conditions set forth in this prospectus and in the accompanying letter of
transmittal.
TENDER OF EXISTING NOTES HELD THROUGH A CUSTODIAN. If you are a beneficial
holder of the existing notes, that are held of record by a custodian bank,
depository institution, broker, dealer, trust company or other nominee, you must
instruct the custodian to tender the existing notes on your behalf. Your
custodian will provide you with their instruction letter which you must use to
give these instructions. Any beneficial owner of
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<PAGE> 51
existing notes held of record by The Depository Trust Company or its nominee,
through authority granted by The Depository Trust Company, may direct The
Depository Trust Company participant through which the beneficial owner's
existing notes are held in The Depository Trust Company to tender on the
beneficial owner's behalf.
TENDER OF EXISTING NOTES HELD THROUGH THE DEPOSITORY TRUST COMPANY. To
effectively tender existing notes that are held through The Depository Trust
Company, Depository Trust Company participants should transmit their acceptance
through the Automated Tender Offer Program ("ATOP"), for which the transaction
will be eligible, and The Depository Trust Company will then edit and verify the
acceptance and send an agent's message to the exchange agent for its acceptance.
Delivery of tendered existing notes must be made to the exchange agent pursuant
to the book-entry delivery procedures set forth below or the tendering
Depository Trust Company participant must comply with the guaranteed delivery
procedures set forth below. No letters of transmittal will be required to tender
existing notes through ATOP.
In addition, the exchange agent must receive:
- a completed and signed letter of transmittal or an electronic
confirmation pursuant to The Depository Trust Company's ATOP system
indicating the principal amount of existing notes to be tendered and any
other documents, if any, required by the letter of transmittal, and
- prior to the expiration date, a confirmation of book-entry transfer of
such existing notes, into the exchange agent's account at The Depository
Trust Company, in accordance with the procedure for book-entry transfer
described below, or
- the holder must comply with the guaranteed delivery procedures described
below.
Your existing notes must be tendered by book-entry transfer. The exchange
agent will establish an account with respect to the existing notes at The
Depository Trust Company for purposes of the exchange offer within two business
days after the date of this prospectus. Any financial institution that is a
participant in The Depository Trust Company must make book-entry delivery of
existing notes by having The Depository Trust Company transfer such existing
notes into the exchange agent's account at The Depository Trust Company in
accordance with The Depository Trust Company's procedures for transfer. Although
your existing notes will be tendered through The Depository Trust Company
facility, the letter of transmittal, or facsimile, or an electronic confirmation
pursuant to The Depository Trust Company's ATOP system, with any required
signature guarantees and any other required documents, if any, must be
transmitted to and received or confirmed by the exchange agent at its address
set forth below under "Exchange agent," prior to 5:00 p.m. Eastern Daylight Time
on the expiration date. You or your broker must ensure that the exchange agent
receives an agent's message from The Depository Trust Company confirming the
book-entry transfer of your existing notes. An agent's message is a message
transmitted by The Depository Trust Company and received by the exchange agent
that forms a part of the book-entry confirmation which states that The
Depository Trust Company has received an express acknowledgement from the
participant in The Depository Trust Company tendering the shares that such
participant agrees to be bound by the terms of the letter of transmittal.
Delivery of documents to The Depository Trust Company in accordance with its
procedures does not constitute delivery to the exchange agent.
If you are an institution which is a participant in The Depository Trust
Company's book-entry transfer facility, you should follow the same procedures
that are applicable to persons holding existing notes through a financial
institution.
Do not send letters of transmittal or other exchange offer documents to us,
Robertson Stephens or the information agent.
It is your responsibility that all necessary materials get to the exchange
agent before the expiration date. If the exchange agent does not receive all of
the required materials before the expiration date, your existing notes will not
be validly tendered.
Any existing notes not accepted for exchange for any reason will be
returned without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
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<PAGE> 52
We will have accepted the validity of tendered existing notes if and when
we give oral or written notice to LaSalle National Bank, the exchange agent. The
exchange agent will act as the tendering holders' agent for purposes of
receiving the exchange notes from us. If we do not accept any tendered existing
notes for exchange because of an invalid tender or the occurrence of any other
event, LaSalle National Bank will return those existing notes to you, without
expense, promptly after the expiration date via book-entry transfer through The
Depository Trust Company.
OUR INTERPRETATIONS ARE BINDING
We will determine in our sole discretion, all questions as to the validity,
form, eligibility and acceptance of existing notes tendered for exchange. Our
determination will be final and binding. We reserve the absolute right to reject
any and all tenders of any particular existing notes not properly tendered or to
not accept any particular existing note which acceptance might, in our judgment
or our counsel's judgment, be unlawful. We also reserve the absolute right to
waive any defects or irregularities or conditions of the exchange offer as to
any particular existing notes either before or after the expiration date,
including the right to waive the ineligibility of any holder who seeks to tender
existing notes in the exchange offer. Our interpretation of the terms and
conditions of the exchange offer as to any particular existing note either
before or after the expiration date, including the letter of transmittal and the
instructions to such letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of existing notes for exchange must be cured within such reasonable period of
time as we shall determine. Neither we, the exchange agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of existing notes for exchange, nor shall any of them
incur any liability for failure to give such notification.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Once all of the conditions to the exchange offer are satisfied or waived,
we will accept, promptly after the expiration date, all existing notes properly
tendered, and will issue the exchange notes promptly after acceptance of the
existing notes. The discussion under the heading "Conditions for completion of
the exchange offer" provides further information regarding the conditions to the
exchange offer. For purposes of the exchange offer, we shall be deemed to have
accepted properly tendered existing notes for exchange when, as and if we have
given oral or written notice to the exchange agent, with written confirmation of
any oral notice to be given promptly after giving such notice.
For each $3,000 principal amount of existing notes accepted for exchange,
the holder of such existing note will receive exchange notes having a principal
amount of $2,000. The exchange notes will bear interest from the issue date.
Existing notes accepted for exchange will cease to accrue interest from and
after the date of consummation of the exchange offer.
In all cases, issuance of exchange notes for existing notes that are
accepted for exchange in the offer will be made only after timely receipt by the
exchange agent of:
- a timely book-entry confirmation of such existing notes into the exchange
agent's account at the book-entry transfer facility,
- a properly completed and duly executed letter of transmittal or an
electronic confirmation of the submitting holder's acceptance through The
Depository Trust Company's ATOP system, and
- all other required documents, if any.
If we do not accept any tendered existing notes for any reason set forth in
the terms and conditions of the exchange offer, or if existing notes are
submitted for a greater principal amount than the holder desires to exchange,
the unaccepted or non-exchanged existing notes tendered by book-entry transfer
into the exchange agent's account at the book-entry transfer facility will be
returned in accordance with the book-entry procedures described above, and the
existing notes that are not exchange notes will be credited to an account
maintained with The Depository Trust Company, as promptly as practicable after
the expiration or termination of the exchange offer.
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GUARANTEED DELIVERY PROCEDURES
If you desire to tender your existing notes and you cannot complete the
procedures for book-entry transfer set forth above on a timely basis, you may
still tender your existing notes if:
- your tender is made through an eligible institution,
- prior to the expiration date, the exchange agent received from the
eligible institution a properly completed and duly executed letter of
transmittal, or a facsimile of such letter of transmittal or an
electronic confirmation pursuant to the Depository Trust Company's ATOP
system, and notice of guaranteed delivery, substantially in the form
provided by us, by facsimile transmission, mail or hand delivery, that:
(a) sets forth the name and address of the holder of existing notes and
the amount of existing notes tendered,
(b) states that the tender is being made thereby, and
(c) guarantees that within three New York Stock Exchange trading days
after the expiration date a book-entry confirmation and any other
documents required by the letter of transmittal, if any, will be
deposited by the eligible institution with the exchange agent; and
- book-entry confirmation and all other documents, if any, required by the
letter of transmittal are received by the exchange agent within three New
York Stock Exchange trading days after the expiration date.
WITHDRAWAL RIGHTS
You may withdraw your tender of existing notes at any time prior to 5:00
p.m., Eastern Daylight Time, on the expiration date. For a withdrawal to be
effective, the exchange agent must receive a written notice of withdrawal at the
address or, in the case of eligible institutions, at the facsimile number, set
forth below under the heading "Exchange agent" prior to 5:00 p.m., Eastern
Daylight Time, on the expiration date. Any notice of withdrawal must:
- specify the name of the person who tendered the existing notes to be
withdrawn;
- contain a statement that you are withdrawing your election to have your
existing notes exchanged;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the existing notes were tendered,
including any required signature guarantees; and
- if you have tendered your existing notes in accordance with the procedure
for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at The Depository Trust
Company to be credited with the withdrawn existing notes and otherwise
comply with the procedures of such facility.
Any existing notes that have been tendered for exchange, but which are not
exchanged for any reason, will be credited to an account maintained with the
book-entry transfer facility for the existing notes, as soon as practicable
after withdrawal, rejection of tender or termination of the exchange offer.
Properly withdrawn existing notes may be retendered by following the
procedures described under the heading "Procedures for tendering existing notes"
above at any time on or prior to 5:00 p.m., Eastern Daylight Time, on the
expiration date.
CONDITIONS FOR COMPLETION OF THE EXCHANGE OFFER
We will not accept existing notes for exchange notes and may terminate or
not complete the exchange offer if the registration statement covering the
exchange offer is not effective under the Securities Act.
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We may not accept existing notes for exchange and may terminate or not
complete the exchange offer if:
- any action, proceeding or litigation seeking to enjoin, make illegal or
delay completion of the exchange offer or otherwise relating in any
manner to the exchange offer is instituted or threatened;
- any order, stay, judgment or decree is issued by any court, government,
governmental authority or other regulatory or administrative authority
and is in effect, or any statute, rule, regulation, governmental order or
injunction shall have been proposed, enacted, enforced or deemed
applicable to the exchange offer, any of which would or might restrain,
prohibit or delay completion of the exchange offer or impair the
contemplated benefits of the exchange offer to us;
- any of the following occurs and the adverse effect of such occurrence
shall, in our reasonable judgment, be continuing:
-- any general suspension of trading in, or limitation on prices for,
securities on any national securities exchange or in the
over-the-counter market in the United States;
-- any extraordinary or material adverse change in U.S. financial
markets generally, including, without limitation, a decline of at
least twenty percent in either the Dow Jones Average of industrial
stocks or the Standard & Poor's 500 Index from January, 2000;
-- a declaration of a banking moratorium or any suspension of payments
in respect of banks in the United States;
-- any limitation, whether or not mandatory, by any governmental entity
on, or any other event that would reasonably be expected to
materially adversely affect, the extension of credit by banks or
other lending institutions;
-- a commencement of a war or other national or international calamity
directly or indirectly involving the United States, which would
reasonably be expected to affect materially and adversely, or to
delay materially, the completion of the exchange offer;
-- if any of the situations described above existed at the time of
commencement of the exchange offer and that situation deteriorates
materially after commencement of the exchange offer;
- any tender or exchange offer, other than this exchange offer by us, with
respect to some or all of our outstanding common stock or any merger,
acquisition or other business combination proposal involving us shall
have been proposed, announced or made by any person or entity;
- any event or events occur that have resulted or may result, in our
judgment, in an actual or threatened change in our business condition,
income, operations, stock ownership or prospects and our subsidiaries,
taken as a whole;
- as the term "group" is used in Section 13(d)(3) of the Securities
Exchange Act,
-- any person, entity or group acquires more than five percent of our
outstanding shares of common stock, other than a person, entity or
group which had publicly disclosed such ownership with the SEC prior
to --, 2000;
-- any such person, entity or group which had publicly disclosed such
ownership prior to such date shall acquire additional common stock
constituting more than two percent of our outstanding shares; or
-- any new group shall have been formed that beneficially owns more than
five percent of our outstanding shares of common stock which in our
judgment in any such case, and regardless of the circumstances, makes
it inadvisable to proceed with the exchange offer or with such
acceptance for exchange of shares.
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If any of the above events occur, we may:
- terminate the exchange offer and as promptly as practicable return all
tendered existing notes to tendering note holders;
- extend the exchange offer and, subject to the withdrawal rights described
in "The Exchange Offer" on page 50, retain all tendered existing notes
until the extended exchange offer expires;
- amend the terms of the exchange offer; or
- waive the unsatisfied condition and, subject to any requirement to extend
the period of time during which the exchange offer is open, complete the
exchange offer.
The conditions are for our sole benefit. We may assert these conditions
with respect to all or any portion of the exchange offer regardless of the
circumstances giving rise to them. We may waive any condition in whole or in
part at any time in our discretion. Our failure to exercise our rights under any
of the above conditions does not represent a waiver of these rights. Each right
is an ongoing right which may be asserted at any time. Any determination by us
concerning the conditions described above will be final and binding upon all
parties.
If a stop order issued by the SEC is in effect with respect to the
registration statement of which this document is a part, we will not accept any
existing notes tendered and we will not exchange for any exchange notes.
FEES AND EXPENSES
Robertson Stephens is acting as the dealer manager in connection with the
exchange offer. Robertson Stephens will receive a fee in the manner described
below for its services as dealer manager, in addition to being reimbursed for
its out-of-pocket expenses, including the reasonable Attorneys' fees and
disbursements of counsel, in connection with the exchange offer.
The fees will be paid for each $3,000 principal amount of existing notes
tendered, based on a sliding scale, with higher fees per existing note paid on
the incremental principal amount of existing notes tendered above specified
thresholds. The fee scale ranges from $60.00 per $3,000 principal amount up to a
maximum of $165 per $3,000 principal amount if more than 70% of the aggregate
principal amount of the existing notes are tendered. Based on the foregoing fee
structure, if all the outstanding existing notes are tendered in the exchange
offer, Robertson Stephens will receive an aggregate fee of approximately
$1,550,000 or 2.45%, of the principal amount of existing notes currently
outstanding. Regardless of the amount of existing notes tendered Robertson
Stephens will receive a minimum fee of $500,000.
We have agreed to indemnify Robertson Stephens against specified
liabilities relating to or arising out of the offer, including civil liabilities
under the federal securities laws, and to contribute to payments which Robertson
Stephens may be required to make in respect thereof. However, in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. Robertson Stephens may from
time to time hold existing notes, exchange notes and our common stock in its
proprietary accounts, and to the extent it owns existing notes in these accounts
at the time of the exchange offer, Robertson Stephens may tender these existing
notes.
We have retained Georgeson Shareholder Communications, Inc. to act as the
information agent and LaSalle National Bank to act as the exchange agent in
connection with the exchange offer. The information agent may contact holders of
existing notes by mail, telephone, facsimile transmission and personal
interviews and may request brokers, dealers and other nominee stockholders to
forward materials relating to the exchange offer to beneficial owners. The
information agent and the exchange agent each will receive reasonable
compensation for their respective services, will be reimbursed for reasonable
out-of-pocket expenses and will be indemnified against liabilities in connection
with their services, including liabilities under the federal securities laws.
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Neither the information agent nor the exchange agent has been retained to
make solicitations or recommendations. The fees they receive will not be based
on the principal amount of existing notes tendered under the exchange offer.
We will not pay any fees or commissions to any broker or dealer or any
other person, other than Robertson Stephens, for soliciting tenders of existing
notes under the exchange offer. Brokers, dealers, commercial banks and trust
companies will, upon request, be reimbursed by us for reasonable and necessary
costs and expenses incurred by them in forwarding materials to their customers.
LEGAL LIMITATION
The above conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition, or may be
waived by us in whole or in part at any time prior to the expiration date of the
exchange offer in our sole discretion. Our failure at any time to exercise any
of the foregoing rights shall not be deemed a waiver of any such right and each
such right shall be deemed an ongoing right which may be asserted at any time
prior to the expiration date of the exchange offer.
In addition, we will not accept for exchange any existing notes tendered,
and no exchange notes will be issued in exchange for any such existing notes, if
at such time any stop order shall be threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act of 1939.
LaSalle National Bank has been appointed as the exchange agent for the
exchange offer. All executed letters of transmittal should be directed to the
exchange agent at the address set forth below. Questions, requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent addressed as follows:
LaSalle National Bank
<TABLE>
<S> <C>
By Registered & Certified Mail: By Regular Mail or Overnight Courier:
135 South LaSalle St. Suite 1960 135 South LaSalle St. Suite 1960
Chicago, IL 60603 Chicago, IL 60603
</TABLE>
In Person by Hand Only:
135 South LaSalle St. Suite 1960
Chicago, IL 60603
For Information Call:
(312) 904-5619
By Facsimile Transmission (for Eligible Institutions only):
Attention: Corporate Trust Operations
Confirm by Telephone
(312) 904-5619
If you deliver the letter of transmittal to an address other than as set
forth above or transmission of instructions via facsimile other than as set
forth above, then such delivery or transmission does not constitute a valid
delivery of such letter of transmittal.
FEES AND EXPENSES
We will not make any payment to brokers, dealers, or others soliciting
acceptances of the exchange offer. The estimated cash expenses to be incurred in
connection with the exchange offer will be paid by us. We estimate these
expenses in the aggregate to be approximately $400,000.
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CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE EXISTING NOTES
Holders who tender their existing notes for exchange will not be obligated
to pay any related transfer taxes. The existing notes that are not exchanged for
exchange notes pursuant to the exchange offer will be subordinate in payment to
the exchange notes.
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DESCRIPTION OF EXCHANGE NOTES
We will issue the exchange notes under an indenture, dated as of ,
2000, between us and LaSalle National Bank, as trustee. The following
description is a summary of the material provisions of the exchange notes and
the exchange notes indenture (the "Indenture"). This summary is subject to and
is qualified by reference to all the provisions of the exchange notes indenture.
As used in this "Description of Exchange Notes" section, references to
"we," "our" or "us" refer solely to Beyond.com Corporation and not its
subsidiaries.
GENERAL
Our 10 7/8% Convertible Subordinated Notes:
- will be general unsecured obligations of ours;
- will mature on December 1, 2003;
- will bear interest at a rate of 10 7/8% per year. The exchange notes will
bear interest from the issue date. Existing notes accepted for exchange
will cease to accrue interest from and after the date of consummation of
the exchange offer.
- Interest will be in cash or, at our option, in common stock at rate of
10 7/8% per year, payable on June 1 and December 1 of each year. If we
elect to pay interest in common stock, the shares of common stock will be
valued at 90% of the average of the closing prices for the five trading
days immediately preceding the second trading day prior to the interest
payment date.
- will subordinate to senior to all our existing notes and all existing and
future senior indebtedness (as defined below) and any of our subsidiaries
in right of payment;
- will be issuable in denominations of $1,000 principal amount and integral
multiples thereof; and
- will be issued only in fully registered book entry form, without coupons,
and will be represented by one or more permanent Global Notes (referred
to in this Section as "Global Notes").
A holder of our 10 7/8% Convertible Subordinated Notes may serve notices
and demands to or upon us in respect of our 10 7/8% Convertible Subordinated
Notes and our Indenture with LaSalle National Bank at our office or agency
maintained for that purpose in Chicago, Illinois. In the event that The
Depository Trust Company issues physical or "definitive" notes (referred to in
this Section as "Definitive Notes"), holders of our 10 7/8% Convertible
Subordinated Notes may surrender their 10 7/8% Convertible Subordinated Notes
for payment, conversion, registration of transfer or exchange at our office or
agency maintained for that purpose in Chicago, Illinois. In addition, in our
Indenture with LaSalle National Bank we have agreed, if Definitive Notes are
issued, maintain an office or agency for the foregoing purposes in the Borough
of Manhattan, The City of New York. In our Indenture with LaSalle National Bank,
we agreed at all times to maintain a paying agent, Conversion Agent and
Registrar for our 10 7/8% Convertible Subordinated Notes in Chicago, Illinois,
and, if Definitive Notes are issued under the limited circumstances described
below, in the Borough of Manhattan, The City of New York. The Trustee will
initially act as paying agent, Conversion Agent (as defined below) and Registrar
(as defined below) in Chicago, Illinois.
INTEREST
$42,166,667 principal amount of our 10 7/8% Convertible Subordinated Notes
bear interest from July , 2000 at 10 7/8% per year. Interest will be in cash
or, at our option, in common stock at rate of 10 7/8% per year, payable on June
1 and December 1 of each year. If we elect to pay interest in common stock, the
shares of common stock will be valued at 90% of the average of the closing
prices for the five trading days immediately preceding the second trading day
prior to the interest payment date. We will pay interest semi-annually on
December 1 and June 1 of each year, commencing December 1, 2000. We will make
interest payments to holders of record at the close of business on November 15
or May 15 preceding each interest payment date. We will compute the interest on
the basis of a 360 day year composed of twelve 30 day months. We will pay
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principal of and interest on our 10 7/8% Convertible Subordinated Notes at the
office of the paying agent. The Trustee will initially act as the paying agent.
At our option, we may pay interest either by check mailed to the address of the
person entitled thereto as it appears in the Note register or by transfer to an
account located in the United States such person maintains. However, we will
make any payments to LaSalle National Bank, Chicago, Illinois by wire transfer
of immediately available funds to the account of The Depository Trust Company or
its nominee. For purposes of this discussion, we refer to The Depository Trust
Company as "DTC" and LaSalle National Bank as "Trustee."
FORM, DENOMINATION AND REGISTRATION
Except under the limited circumstances described below, the Trustee will
issue our 10 7/8% Convertible Subordinated Notes only in fully registered book
entry form which will be represented by one or more permanent Global Notes
without coupons deposited with a custodian for and registered in the name of a
nominee of DTC. Our 10 7/8% Convertible Subordinated Notes will be issuable in
denominations of $1,000 principal amount and integral multiples thereof. The
records of DTC will reflect holdings of beneficial interests in any Global Note.
DTC will effectuate any transfer of a beneficial interest through its records,
or through records of DTC's direct and indirect participants. Beneficial
interests may not be exchanged for Definitive Notes except under the limited
circumstances described below. Except as described below, the record ownership
of Global Notes may be transferred, in whole or in part, only to DTC, another
nominee of DTC, or to a successor of DTC or its nominee.
We will not charge for any registration of transfer or exchange of our
10 7/8% Convertible Subordinated Notes but we may require you to pay an amount
sufficient to cover any applicable tax or other governmental charge.
In case any of our 10 7/8% Convertible Subordinated Notes you own become
mutilated or defaced, we will execute and, on our request, the Trustee will
authenticate and deliver a new substantially identical 10 7/8% Convertible
Subordinated Note, dated the date of its authentication in exchange and
substitution for your canceled original 10 7/8% Convertible Subordinated Note.
In case any of our 10 7/8% Convertible Subordinated Notes you own become
destroyed, lost or stolen:
- you must give us and the Trustee such security or indemnity as we may
require to hold us both harmless; and
- you must furnish to us satisfactory evidence of the destruction, loss or
theft of such 10 7/8% Convertible Subordinated Note and your ownership
thereof.
When we issue any substituted 10 7/8% Convertible Subordinated Note, we may
require you to pay us an amount sufficient to cover applicable fees and
expenses.
BOOK ENTRY NOTES
If and when DTC issues Global Notes, DTC will credit, on its internal
system, the respective principal amounts of the individual beneficial interests
represented by such Global Notes to the accounts of persons who have accounts
with DTC. Only the following persons may own beneficial interests in a Global
Note:
- persons who have accounts with DTC;
- persons who hold beneficial interests through participants; or
- certain banks, brokers, dealers, trust companies and other parties that
clear their transactions through or maintain a custodial relationship
with a participant, either directly or indirectly, and have indirect
access to the DTC system.
Ownership of beneficial interests in the Global Notes will be shown on, and
the transfer of these ownership interests will be effected through, records DTC
maintains (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
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So long as DTC or its nominee is the registered owner or holder, as defined
on our Indenture with LaSalle National Bank, of a Global Note, DTC or the
nominee will be considered the sole owner or holder of our 10 7/8% Convertible
Subordinated Notes represented by the Global Note for all purposes under our
Indenture with LaSalle National Bank and our 10 7/8% Convertible Subordinated
Notes. With limited exceptions, if you own beneficial interests in the Global
Notes, then you:
- will not be entitled to have certificates registered in your name;
- will not receive or be entitled to receive physical delivery of
certificates in definitive form; and
- will not be considered the owner or holder of our 10 7/8% Convertible
Subordinated Notes represented by such Global Notes.
If you are the beneficial owner of an interest in a Global Note, you will
not be able to transfer that interest except in accordance with DTC's applicable
procedures (in addition to those under our Indenture with LaSalle National
Bank).
DTC may discontinue providing its services as depository with respect to
our 10 7/8% Convertible Subordinated Notes at any time. As an owner of
beneficial interests in the Global Note, you will be entitled to receive
physical delivery of Definitive Notes in certificated form under the following
limited circumstances:
- DTC or any successor depository notifies us that it is unwilling or
unable to continue as depository for a Global Note;
- DTC ceases to be a "clearing agency" registered under the Exchange Act
and we do not appoint a successor depository within 90 days; or
- an Event of Default, as defined in our Indenture with LaSalle National
Bank, has occurred and is continuing
If DTC issues Definitive Notes in certificated form under such
circumstances, then the certificates shall be registered in the names DTC shall
direct. We expect that such instructions will be based upon directions received
by DTC from its participants.
We will make payments on Global Notes to DTC or its nominee as the
registered owner thereof. Neither we, the Trustee nor any paying agent will have
any responsibility or liability for:
- any aspect of the records relating to beneficial ownership interest in
the Global Notes;
- payments made on account of beneficial ownership interests in the Global
Notes; or
- maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment regarding a
Global Note held by it or its nominee, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Note as shown on the records of DTC or its
nominee. We also expect that payments by participants to indirect participants
and by participants and indirect participants to owners of beneficial interests
in such Global Note will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
registered in the names of nominees. Such payments, however, will be the
responsibility of the applicable participants and indirect participants.
To convert your beneficial ownership of interests in Global Notes into
common stock, you should contact your broker or other participant or indirect
participant through whom you hold beneficial interests. Your broker, participant
or indirect participant, as the case may be, shall provide you with information
on procedures, including proper forms and cut off times, for submitting requests
for conversion.
DTC will effect transfers between participants in accordance with DTC rules
and will settle these transfers in same day funds. However, the laws of some
states may require that certain persons take physical delivery of securities in
definitive form. Such laws may impair your ability to transfer or pledge your
beneficial interests in the Global Notes.
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DTC will take any action a holder of our 10 7/8% Convertible Subordinated
Notes is permitted to take (including the presentation of our 10 7/8%
Convertible Subordinated Notes for conversion) only at the direction of one or
more participants to whose account DTC has credited the interests in the Global
Notes. DTC will only take such action in respect of that portion of principal
amount of our 10 7/8% Convertible Subordinated Notes as to which the
participant, or participants, has given direction.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and to facilitate the clearance and settlement of securities
transactions between participants through electronic book entry changes to
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants in DTC include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations such as the initial purchasers of our 10 7/8% Convertible
Subordinated Notes. Some participants (or their representatives), together with
other entities, own DTC. Other entities such as banks, brokers, dealers and
trust companies that clear through, or maintain a custodial relationship with, a
participant, either directly or indirectly have indirect access to the DTC
system.
Conveyance of notices and other communications by DTC to participants, by
participants to indirect participants and indirect participants to beneficial
owners will be governed by arrangements among them, subject to any statutory or
regulatory requirements that may be in effect from time to time. If we intend to
redeem our 10 7/8% Convertible Subordinated Notes, we will send redemption
notices with respect to Global Notes to DTC or its nominee. If we intend to
redeem less than all of our 10 7/8% Convertible Subordinated Notes evidenced by
a Global Note, DTC will reduce the amount of the interest of each participant in
such 10 7/8% Convertible Subordinated Notes in accordance with its procedures.
Although voting with respect to our 10 7/8% Convertible Subordinated Notes
is limited, in those cases that require a vote, neither DTC nor its nominee will
itself consent or vote with respect to Global Notes. Under its usual procedures,
DTC would mail an omnibus proxy to us as soon as possible after the record date.
The omnibus proxy assigns DTC or its nominee consenting or voting rights to
those participants to whose accounts our 10 7/8% Convertible Subordinated Notes
are credited on the record date listed in the omnibus proxy. We believe that the
arrangements among DTC, its participants and indirect participants, and
beneficial owners will enable the beneficial owners to exercise rights
equivalent in substance to the rights that can be directly exercised by a holder
of our 10 7/8% Convertible Subordinated Notes.
We obtained the information in this section concerning DTC and DTC's book
entry system from sources we believe to be reliable, but we take no
responsibility for the accuracy of this information.
CONVERSION RIGHTS
You may, at any time prior to the close of business on December 1, 2003,
convert the principal amount of any of our 10 7/8% Convertible Subordinated
Notes (or any portion thereof equal to $1,000 or any integral multiple thereof)
into shares of our common stock at the conversion price of $4.00 per share,
subject to adjustment as described below. However, your right to convert a
10 7/8% Convertible Subordinated Note previously called for redemption will
terminate at the close of business on the business day immediately preceding the
redemption date for the 10 7/8% Convertible Subordinated Notes. Your right to
convert a 10 7/8% Convertible Subordinated Note also will terminate on any
earlier date on which you present the 10 7/8% Convertible Subordinated Note for
redemption (unless we have defaulted in making the redemption payment when due,
in which case your conversion right shall terminate at the close of business on
the date the default is cured and the 10 7/8% Convertible Subordinated Note is
redeemed).
If you exercise your option to require us to purchase any of our 10 7/8%
Convertible Subordinated Notes and you deliver a "change in control purchase
notice," you may convert your 10 7/8% Convertible Subordinated Note only if you
withdraw your notice by a "written notice of withdrawal" delivered to a paying
agent prior to the close of business on the business day prior to the change in
control purchase date in accordance with our Indenture with LaSalle National
Bank.
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We will make no payment or adjustment for dividends or distributions with
respect to shares of our common stock issued upon conversion of a 10 7/8%
Convertible Subordinated Note. Except as otherwise provided in our Indenture
with LaSalle National Bank, we will not pay interest accrued on converted
10 7/8% Convertible Subordinated Notes. However, we will pay interest accrued to
but excluding December 6, 2001, on any of our 10 7/8% Convertible Subordinated
Notes called for redemption and converted on or before the close of business on
the business day immediately preceding December 6, 2001. If you surrender any of
our 10 7/8% Convertible Subordinated Notes for conversion between the record
date for the payment of an installment of interest and the related interest
payment date, then notwithstanding such conversion, we will pay the person in
whose name such 10 7/8 Convertible Subordinated Note was registered at the close
of business on the record date. In such event, unless your Note has been called
for redemption, when you surrender your 10 7/8 Convertible Subordinated Note for
conversion you must also pay us an amount equal to the interest payable on such
interest payment date on the principal amount of your converted 10 7/8%
Convertible Subordinated Note. We will not issue fractional shares upon
conversion, but we will pay cash for any fractional interest based upon the
closing price (as defined in our Indenture with LaSalle National Bank) of the
common stock on the trading day immediately prior to the date of conversion.
We will adjust the conversion price of our 10 7/8% Convertible Subordinated
Notes if certain events occur. These events include:
- our issuance of shares of common stock as a dividend or distribution on
our common stock;
- our subdivision or combination of our outstanding common stock;
- our issuance to all or substantially all holders of our common stock of
rights or warrants entitling them to subscribe for or purchase our common
stock at a price per share less than the then current market price per
share (as defined in our Indenture with LaSalle National Bank);
- our distribution to all or substantially all of our common stockholders
of shares of our capital stock (other than common stock), evidence of
indebtedness, or other non cash assets;
- our distribution to all or substantially all of our common stockholders
of rights or warrants to subscribe for our securities (other than those
rights and warrants referred to above and other limited rights);
- our distribution to all or substantially all of our common stockholders
of cash in an aggregate amount that exceeds an amount equal to 12.5% of
our market capitalization (determined as provided in our Indenture with
LaSalle National Bank); and
- our purchase of common stock pursuant to a tender offer made by us, or
any of our Subsidiaries, to the extent that the tender offer involves
aggregate consideration that exceeds an amount equal to 12.5% of our
market capitalization (determined as provided in our Indenture with
LaSalle National Bank) on the expiration date of the tender offer.
Notwithstanding the foregoing, we will not adjust the conversion price for
a transaction of the nature described above if all holders of our 10 7/8%
Convertible Subordinated Notes are entitled to participate in the transaction on
a basis and with notice that the Board of Directors determines to be fair and
appropriate in light of the basis and notice on which common stockholders
participate in the transaction.
We need not adjust the conversion price for any issuance of common stock
pursuant to a plan for reinvestment of dividends or interest or for a change in
the par value of common stock. To the extent that our 10 7/8% Convertible
Subordinated Notes become convertible into the right to receive cash, we need
not adjust the conversion price thereafter as to the cash, and interest will not
accrue on the cash. From time to time we may reduce the conversion price by any
amount for any period of time if the period is at least 20 days or such longer
period as may be required by law and if the reduction is irrevocable during the
period.
However, in no event may we reduce the conversion price to less than the
par value of a share of common stock. We need not adjust the conversion price
until the cumulative adjustments require an increase or decrease of at least 1%
in the conversion price as last adjusted.
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We or our successor, purchaser or transferee corporation must execute a
supplemental indenture if we experience any of the following:
- a reclassification or change of shares of common stock (other than a
change in par value, or as a result of a subdivision or combination, or
any other change for which a conversion price adjustment is provided in
our Indenture with LaSalle National Bank);
- a consolidation or merger to which we are a party other than a merger in
which we are the continuing corporation and which does not result in any
reclassification of, or change (other than a change in name or par value,
or as a result of a subdivision or combination) in, outstanding shares of
common stock; or
- a sale or conveyance of all or substantially all of our property and
assets to any person.
This supplemental indenture must provide that the holders of our 10 7/8%
Convertible Subordinated Notes shall have the right to convert such 10 7/8
Convertible Subordinated Note into the kind and amount of shares of stock and
other securities and property (including cash) receivable upon such transaction
by a holder of the number of shares of common stock deliverable upon conversion
of such 10 7/8 Convertible Subordinated Note immediately prior to such
transaction. This provision is subject to any applicable right of the holders
upon a Change in Control (as defined below). Such supplemental indenture shall
provide for adjustments to the conversion price which shall be as nearly
equivalent as may be practicable to the adjustments of the conversion price
provided by our Indenture with LaSalle National Bank.
The term "all or substantially all" as used in the previous two paragraphs
will likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances, and there may be a degree of uncertainty in
interpreting such phrase. As a consequence, in the event the holders of our
10 7/8% Convertible Subordinated Notes were to assert that an adjustment to the
conversion price, or the conversion privilege of our 10 7/8% Convertible
Subordinated Notes or the execution of a supplemental indenture was required
under our Indenture with LaSalle National Bank, and we were to contest such
assertion, then we cannot assure you as to how a court would interpret the
phrase. This uncertainty may prevent the Trustee or the holders of our 10 7/8%
Convertible Subordinated Notes from successfully asserting that the conversion
price or the conversion privilege is subject to adjustment, or our 10 7/8%
Convertible Subordinated Notes are convertible into other shares of stock and
other securities and property that the holders would have owned immediately
after the transaction if the holders had converted our 10 7/8% Convertible
Subordinated Notes immediately before the effective date of the transaction.
If we issue certain rights, warrant, evidences of indebtedness, securities
or other property (including cash) to holders of the common stock and we make a
corresponding adjustment to the conversion price, then you may face a
constructive distribution taxable as a dividend.
AUTO-CONVERSION
We may elect to automatically convert the exchange notes on or prior to
maturity if our common stock price has exceeded 150% of the conversion price for
at least 20 trading days during a 30-day trading period ending five trading days
prior to the notice of automatic conversion. If an automatic conversion occurs
on or prior to December 6, 2001, we will pay additional interest in cash or, at
our option, in common stock equal to three interest payments on the converted
exchange notes, less any interest actually paid prior to automatic conversion.
If we elect to pay the additional interest in common stock, the shares of common
stock will be valued at 90% of the average of the closing prices for the five
trading days immediately preceding the second trading day prior to the
conversion date.
OPTIONAL REDEMPTION
We may redeem our 10 7/8% Convertible Subordinated Notes at our option on
or after December 6, 2001, in whole or, from time to time, in part, upon not
less than 30 nor more than 60 days' notice by mail.
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PERIOD REDEMPTION PRICE
The redemption prices (expressed as a percentage of principal amount) are
as follows for our 10 7/8% Convertible Subordinated Notes we redeem during the
periods set forth below:
<TABLE>
<S> <C>
December 6, 2001 through November 30, 2002.................. 106.215%
December 1, 2002 and thereafter............................. 103.108%
</TABLE>
and 100% at December 1, 2003, in each case together with accrued interest to,
but excluding, the redemption date.
In each case these redemption amounts include accrued interest up to but
not including the redemption date. However, we will pay installments of interest
which are due and payable on interest payment dates falling on or before the
relevant redemption date to holders in whose names such 10 7/8% Convertible
Subordinated Notes are registered at the close of business on the relevant
record dates.
If we redeem less than all of our outstanding 10 7/8% Convertible
Subordinated Notes, the Trustee shall select our 10 7/8% Convertible
Subordinated Notes to be redeemed in principal amounts of $1,000 or multiples
thereof by lot, pro rata or by another method the Trustee considers fair and
appropriate. If a portion of a holder's 10 7/8% Convertible Subordinated Notes
is selected for partial redemption and such holder converts a portion of our
10 7/8% Convertible Subordinated Notes, the converted portion shall be deemed to
be of the portion selected for redemption.
All of our 10 7/8% Convertible Subordinated Notes which we or any of our
Subsidiaries redeem or otherwise acquire prior to maturity will be immediately
canceled and may not be held, reissued or resold.
PURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE IN CONTROL
In the event of a Change in Control, each holder will have the option,
subject to the terms and conditions of our Indenture with LaSalle National Bank,
to require us to purchase all or any part of such holder's 10 7/8% Convertible
Subordinated Notes. However, the principal amount of our 10 7/8% Convertible
Subordinated Notes we repurchase must be $1,000 or an integral multiple thereof.
We must then purchase the holder's 10 7/8% Convertible Subordinated Notes as of
the date that is 30 business days after the occurrence of such Change in Control
(referred to in this Section as the "Change in Control Purchase Date"). The
purchase price we pay must be equal to 100% of the principal amount thereof,
plus accrued interest up to but not including the Change in Control Purchase
Date. We have the option to pay the repurchase price in cash, common stock or a
combination of cash and common stock.
Within 10 business days after the occurrence of a Change in Control, we
shall mail to the Trustee and to each holder and cause to be published a written
notice of the Change in Control, setting forth, among other things, the terms
and conditions, and the procedures required for exercise of, such holder's right
to require the purchase of such holder's 10 7/8% Convertible Subordinated Notes.
To exercise the purchase right upon a Change in Control, a holder must
deliver written notice of such exercise to a paying agent at any time prior to
the close of business on the business day prior to the Change in Control
Purchase Date, specifying our 10 7/8% Convertible Subordinated Notes with
respect to which the purchase right is being exercised. The holder may withdraw
such notice of exercise by a written notice of withdrawal delivered to a paying
agent at any time prior to the close of business on the business day prior to
the Change in Control Purchase Date.
A Change in Control shall be deemed to have occurred if any of the
following occurs after the initial sale of our 10 7/8% Convertible Subordinated
Notes:
- any "person" or "group" is or becomes the "beneficial owner" (as such
terms are defined below), directly or indirectly, of shares of our Voting
Stock representing 50% or more of the total voting power of all
outstanding classes of our Voting Stock (as defined below) or has the
power, directly or indirectly, to elect a majority of the members of the
Board of Directors, or
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- we consolidate with, or merge with or into, another person or we sell,
assign, convey, transfer, lease or otherwise dispose of all or
substantially all of our assets, or any person consolidates with, or
merges with or into us, in any such event other than pursuant to a
transaction in which the persons that "beneficially owned" directly or
indirectly, shares of our Voting Stock immediately prior to such
transaction "beneficially own," directly or indirectly, shares of our
Voting Stock representing at least a majority of the total voting power
of all outstanding classes of Voting Stock of the surviving or transferee
person; or
- we liquidate or dissolve.
For purposes of this definition:
(1) "person" and "group" have the meanings given such terms under Sections
13(d) and 14(d) of the Exchange Act, and the term "group" includes any group
acting for the purpose of acquiring, holding or disposing of securities within
the meaning of Rule 13d 5-(b)(I) under the Exchange Act;
(2) a "beneficial owner" shall be determined in accordance with Rule 13d-3
under the Exchange Act, except that the number of shares of our Voting Stock
shall be deemed to include, in addition to all outstanding shares of our Voting
Stock and unissued shares deemed to be held by the "person" or "group" (as such
terms are defined above) or other person with respect to which the Change in
Control determination is being made, all unissued shares deemed to be held by
all other persons;
(3) the term "beneficially owned" shall have a meaning correlative to that
of beneficial owner; and
(4) "unissued shares" means shares of Voting Stock not outstanding that are
subject to options, warrants, rights to purchase or conversion privileges
exercisable within 60 days of the date of determination of a Change in Control.
Notwithstanding the foregoing, we will deem a Change in Control not to have
occurred if:
- the closing price (as defined in our Indenture with LaSalle National
Bank) of our common stock for any five trading days during the ten
trading days immediately preceding the Change in Control is at least
equal to 105% of the conversion price in effect immediately preceding the
Change in Control;
- at least 90% of the consideration (excluding cash payments for fractional
shares or cash payments for appraisal rights) in the transaction or
transactions constituting the Change in Control consists of shares of
common stock or securities convertible into shares of common stock that
are, or upon issuance will be, traded on a national securities exchange
in the United States of America or through the Nasdaq National Market.
We believe the term "all or substantially all" as used in the definition of
Change in Control will likely be interpreted under applicable state law and its
meaning will be dependent upon particular facts and circumstances. We believe
there may be a degree of uncertainty in interpreting such phrase. As a
consequence, in the event that holders of our 10 7/8% Convertible Subordinated
Notes elect to exercise their rights under our Indenture with LaSalle National
Bank following the occurrence of a transaction which they believe constitutes a
transfer of "all or substantially all of the assets" within the meaning above
and we elect to contest such attempted exercise, there can be no assurance as to
how a court would interpret the phrase. This uncertainty may prevent the Trustee
or the holders of our 10 7/8% Convertible Subordinated Notes from successfully
asserting that a Change in Control has occurred.
We will comply with the provisions of Rule 13e-4 and Rule 14e-1, if
applicable, under the Exchange Act, will file Schedule 13E-4 or any successor or
similar schedule if required thereunder, and will otherwise comply with all
federal and state securities laws in connection with any offer we make to
purchase Notes at the option of the holders upon a Change in Control.
The Change in Control purchase feature of our 10 7/8% Convertible
Subordinated Notes may in certain circumstances make more difficult or
discourage a takeover of our company and the removal of incumbent management. We
are not aware of any specific effort to accumulate shares of common stock or to
obtain control of our company by means of a merger, tender offer, solicitation
or otherwise, nor is the Change in Control purchase feature part of a plan by
management to adopt a series of anti-takeover provisions. Instead,
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the Change in Control purchase feature is a result of negotiations between us
and the initial purchasers of our 10 7/8% Convertible Subordinated Notes.
Subject to the limitation on mergers and consolidations discussed below, we
could, in the future, enter into transactions, including recapitalizations, that
would not constitute a Change in Control under our Indenture with LaSalle
National Bank, but that would increase the amount of indebtedness (including
Senior Indebtedness) outstanding or otherwise adversely affect the holders of
our 10 7/8% Convertible Subordinated Notes. The Indenture does not restrict our
ability, or that of our subsidiaries, to create additional indebtedness
(including Senior Indebtedness). If we take on significant amounts of additional
indebtedness, it could have an adverse effect on our ability to repay the
principal and interest on our indebtedness, including our 10 7/8% Convertible
Subordinated Notes.
If a Change in Control were to occur, we cannot assure that we would have
sufficient funds to pay the Change in Control Purchase Price for the tendered
10 7/8% Convertible Subordinated Notes. In addition, other indebtedness which we
may incur in the future may have similar change of control provisions permitting
the holders thereof to accelerate or require us to repurchase such indebtedness
upon the occurrence of events similar to a Change in Control. If we fail to
repurchase our 10 7/8% Convertible Subordinated Notes when required following a
Change in Control, it will result in an Event of Default under our Indenture
with LaSalle National Bank whether or not such repurchase is permitted by the
subordination provisions thereof.
Other than granting holders the option to require us to purchase all or
part of their 10 7/8% Convertible Subordinated Notes upon the occurrence of a
Change in Control as described above, our Indenture with LaSalle National Bank
does not contain any covenants or other provisions designed to afford holders
protection in the event of takeovers, recapitalizations, highly leveraged
transactions or similar restructurings we may undertake.
In the event that DTC issues Definitive Notes under the limited
circumstances herein, holders electing to exercise the option to have their
Notes repurchased following a Change in Control must surrender such Definitive
Notes, together with such additional documents as are required by our Indenture
with LaSalle National Bank, at the office of a paying agent. Where not all of
our 10 7/8% Convertible Subordinated Notes represented by a Definitive Note are
submitted for purchase, a new Definitive Note in respect of the principal amount
of our 10 7/8% Convertible Subordinated Notes that have not been so submitted
for purchase will be issued to the holder.
SUBORDINATION OF NOTES
As set forth in our Indenture with LaSalle National Bank, our 10 7/8%
Convertible Subordinated Notes are senior in right of payment to the 7 1/4%
Convertible Subordinated Notes subordinated in right of payment to the prior
payment in full of all of our Senior Indebtedness, whether outstanding on the
date of our Indenture with LaSalle National Bank or thereafter created, assumed
or guaranteed. If we pay or distribute any assets in any dissolution, winding
up, liquidation or reorganization (whether in insolvency or bankruptcy
proceedings or otherwise), we must repay all Senior Indebtedness, which does not
include the 7 1/4% Convertible Subordinated Notes, in full before we make any
payment in respect of our 10 7/8% Convertible Subordinated Notes. In the event
we default in payment (whether at maturity or at a date fixed for prepayment or
by acceleration or otherwise) of principal, premium, if any, or interest on
Senior Indebtedness, we cannot make any payment in respect of our 10 7/8%
Convertible Subordinated Notes until we have paid in full the Senior
Indebtedness then due or the cure, waiver or cessation of the default. Unless
and until such default has been cured, waived or has ceased to exist, we may not
make any payment on our 10 7/8% Convertible Subordinated Notes if an event of
default occurs with respect to any Senior Indebtedness (other than a default in
the payment of principal, premium, if any, or interest on Senior Indebtedness)
which permits a holder thereof to accelerate its maturity, and the holder
delivers written notice of such default to the Trustee and to us. However,
nothing in the sentence will prevent us from making previous payment (which is
not otherwise prohibited) on our 10 7/8% Convertible Subordinated Notes for a
period of more than 180 days after the date such written notice of default is
given unless the maturity of such Senior Indebtedness has been accelerated. If
the holder accelerates the Senior Indebtedness, we cannot make any payment on
our 10 7/8% Convertible Subordinated Notes until
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such acceleration has been waived, rescinded or annulled or such Senior
Indebtedness has been paid in full. Notwithstanding the provisions described in
the preceding sentences, not more than one written notice of default shall be
given with respect to the same issue of Senior Indebtedness within a period of
360 consecutive days, and no event of default which existed on the date of any
written notice of default and was known to the holders of any issue of Senior
Indebtedness shall be made the basis for the giving of a subsequent written
notice of default by the holders of such issue of Senior Indebtedness.
We may not make any payment or distribution of assets of any kind to the
Trustee, any paying agent or any holder of our 10 7/8% Convertible Subordinated
Notes in violation of any of the subordination provisions of our Indenture with
LaSalle National Bank, whether in cash, property or securities, in respect of
our 10 7/8% Convertible Subordinated Notes before we have repaid all Senior
Indebtedness in full. If we do so, then such payment or distribution will be
held by the recipient in trust for the benefit of holders of Senior Indebtedness
or their representatives to the extent necessary to make payment in full of all
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution to or for the holders of Senior Indebtedness.
Because of the subordination provisions described above, in the event of
our bankruptcy, dissolution or reorganization, holders of Senior Indebtedness
may receive more ratably, and holders of our 10 7/8% Convertible Subordinated
Notes may receive less ratably, than our other creditors (excluding holders of
our 7 1/4% Convertible Subordinated Notes. Such subordination will not prevent
the occurrence of any Event of Default under our Indenture with LaSalle National
Bank.
The Indenture does not limit the amount of indebtedness, including Senior
Indebtedness, that we, or any subsidiary, can create, incur, assume or
guarantee. As of March 31, 2000, we had no Senior Indebtedness outstanding.
CERTAIN DEFINITIONS
For purposes of this description, the following terms have the meanings set
forth below.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP, and the amount of such obligation at any date shall be
the capitalized amount thereof at such date, determined in accordance with GAAP.
"Conversion Agent" means an office or agency that we maintain where
securities may be presented for conversion.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect us
against fluctuations in currency values.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable from time to
time and are consistently applied.
"Indebtedness" means, with respect to any person, without duplication, (a)
all liabilities of such person for borrowed money or for the deferred purchase
price of property or services, excluding any trade accounts payable and other
current liabilities incurred in the ordinary course of business; (b) all
obligations of such person evidenced by bonds, notes, debentures, or other
similar instruments; (c) all Capitalized Lease Obligations of such person; (d)
all guarantees of Indebtedness referred to in this definition by such person;
(e) all obligations of such person under or in respect of Currency Agreements
and Interest Rate Protection Obligations of such person; and (f) any amendment,
supplement, modification, deferral, renewal, extension or refunding of any
liability of the types referred to in clauses (a) through (e) above.
"Interest Rate Protection Agreement" means any arrangement between us and
any other person whereby, directly or indirectly, such person is entitled to
receive from time to time periodic payments
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calculated by applying either a floating or a fixed rate of interest on a stated
notional amount in exchange for periodic payments made by such person calculated
by applying a fixed or a floating rate of interest on the same notional amount
and shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Interest Rate Protection Obligations" means the obligations we have
pursuant to an Interest Rate Protection Agreement.
"Paying Agent" means an office or agency that we maintain where securities
may be presented for payment.
"Registrar" means an office or agency that we maintain where securities may
be presented for registration of transfer or for exchange.
"Senior Indebtedness" means the principal of and premium, if any, interest
and other amounts payable on or in respect of any of our Indebtedness, whether
outstanding on the date of our Indenture with LaSalle National Bank or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to, or shall be junior in right of payment to,
or shall be pari passu in right of payment with, our 10 7/8% Convertible
Subordinated Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall
not include (a) Indebtedness evidenced by our 10 7/8% Convertible Subordinated
Notes, (b) Indebtedness evidenced by our 7 1/4 Convertible Subordinated Notes,
(c) Indebtedness which, when incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code (or any successor provision
thereto), is without recourse to us, (d) trade accounts payable or other current
liabilities incurred in the ordinary course of business, (e) Indebtedness of or
amounts we owe for compensation to employees or for services rendered to us, (f)
any liability for federal, state, local or other taxes owed or owing by us, (g)
our Indebtedness to a Subsidiary of ours and (h) amounts owing under leases
(other than Capitalized Lease Obligations).
"Significant Subsidiary" means any Subsidiary of ours which is a
"significant subsidiary" within the meaning of Rule 1-02 under Regulation SX
promulgated by the Commission, as such Rule is in effect on the date of our
Indenture with LaSalle National Bank, but substituting 50% for 10% in each
instance that 10% appears in such Rule.
"Subsidiary" means, with respect to any person, a corporation a majority of
whose outstanding Voting Stock is at the time of determination thereof, directly
or indirectly, owned by such person, by one or more Subsidiaries of such person
or by such person and one or more of its Subsidiaries, and any other person
(other than a corporation), including, without limitation, a joint venture, in
which such person, one or more Subsidiaries of such person or such person and
one or more of its Subsidiaries, directly or indirectly, at the date of
determination thereof, owns at least a majority of the ownership interests
entitled to vote in the election of directors, managers or trustees thereof (or
other persons performing similar functions). For purposes of this definition,
any directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a
Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof under ordinary circumstances have the power to vote in
the election of the board of directors, managers or trustees of any person (or
other persons performing similar functions), irrespective of whether or not, at
the time, Capital Stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency.
EVENTS OF DEFAULT; NOTICE AND WAIVER
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization with respect to us or any Significant
Subsidiary) occurs and is continuing, the Trustee may, by notice to us, declare
all unpaid principal of and accrued interest to the date of acceleration on our
10 7/8% Convertible Subordinated Notes then outstanding to be due and payable
immediately. Also, in such event, the holders of at least 25% in principal
amount of our 10 7/8% Convertible Subordinated Notes then outstanding
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may, by notice to us and the Trustee, declare all unpaid principal of and
accrued interest to the date of acceleration on our 10 7/8% Convertible
Subordinated Notes then outstanding to be due and payable immediately. If an
Event of Default resulting from certain events of bankruptcy, insolvency or
reorganization with respect to us or any Significant Subsidiary occurs, all
unpaid principal of and accrued interest on our 10 7/8% Convertible Subordinated
Notes then outstanding shall become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any holder.
Our Indenture with LaSalle National Bank provides that the holders of a
majority in principal amount of our outstanding 10 7/8% Convertible Subordinated
Notes may on behalf of all holders waive any existing default or Event of
Default and its consequences except a default or Event of Default in the payment
of principal of or accrued interest on our 10 7/8% Convertible Subordinated
Notes or any default in respect of any provision of our Indenture with LaSalle
National Bank that cannot be modified or amended without the consent of the
holder of each Note affected.
The following will be "Events of Default" under our Indenture with LaSalle
National Bank:
- our failure to pay any interest on our 10 7/8% Convertible Subordinated
Notes for 30 days after the same is due or our failure to pay any
principal of or premium, if any, on our 10 7/8% Convertible Subordinated
Notes when due;
- our failure to comply with any of our other agreements contained in our
10 7/8% Convertible Subordinated Notes or our Indenture with LaSalle
National Bank for 60 days after receipt of notice of such failure from
the Trustee or the holders of not less than 25% in aggregate principal
amount of our 10 7/8% Convertible Subordinated Notes then outstanding;
- our default under any bond, debenture, note or other evidence of
indebtedness for money borrowed or that of any Significant Subsidiary
having an aggregate outstanding principal amount in excess of $10
million, which default shall have resulted in such indebtedness being
accelerated, without such indebtedness being discharged, or such
acceleration having been rescinded or annulled, within ten days from the
date of such acceleration; and
- certain events of bankruptcy, insolvency or reorganization with respect
to us or any Significant Subsidiary.
The Trustee shall, within 90 days after the occurrence of any default known
to it, give to the holders notice of such default; provided that, except in the
case of a default in the payment of principal of or interest on any of our
10 7/8% Convertible Subordinated Notes, the Trustee may withhold such notice if
it in good faith determines that the withholding of such notice is in the
interests of the holders.
No holder may pursue any remedy under our Indenture with LaSalle National
Bank or our 10 7/8% Convertible Subordinated Notes against us (except actions
for payment of overdue principal or interest or for the conversion of our
10 7/8% Convertible Subordinated Notes), unless:
- the holder gives to the Trustee written notice of a continuing Event of
Default;
- the holders of at least 25% in principal amount of the outstanding Notes
make a written request to the Trustee to pursue the remedy;
- such holder or holders offer satisfactory indemnity to the Trustee
against any loss, liability or expense;
- the Trustee does not comply with the request within 60 days after receipt
of the request and the offer of indemnity; and
- the Trustee shall not have received during such 60 day period a contrary
direction from the holders of at least a majority in principal amount of
the outstanding Notes.
We must deliver an Officers' Certificate to the Trustee within 90 days
after the end of each fiscal year as to the signers' knowledge of our compliance
with all conditions and covenants contained in our Indenture with LaSalle
National Bank, and stating whether or not the signers know of any default or
Event of Default. If any
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such signer knows of such a default or Event of Default, the Officers'
Certificate shall describe the default or Event of Default and the efforts to
remedy the same.
AMENDMENT
We, together with the Trustee, may amend or supplement our Indenture with
LaSalle National Bank or our 10 7/8% Convertible Subordinated Notes with the
written consent of the holders of at least a majority in principal amount of the
outstanding Notes. The holders of a majority in principal amount of the
outstanding Notes may waive our compliance in a particular instance with any
provision of our Indenture with LaSalle National Bank or our 10 7/8% Convertible
Subordinated Notes without notice to any holder. However, without the consent of
the holder of each Note affected thereby, an amendment, supplement or waiver may
not:
- reduce the percentage of the principal amount of outstanding Notes whose
holders must consent to an amendment, supplement or waiver;
- reduce the rate of or change the time for payment of interest on any
Note;
- reduce the principal of or premium on or change the fixed maturity of any
of our 10 7/8% Convertible Subordinated Notes, or change the definition
of "Change in Control" or "Change in Control Purchase Date" applicable to
any of our 10 7/8% Convertible Subordinated Notes or the amount payable
by us to the holder of any Note upon a Change in Control, or alter any of
the other Change in Control provisions or any of the redemption
provisions in a manner adverse to the holder of any of our 10 7/8%
Convertible Subordinated Notes;
- alter the conversion provisions with respect to any of our 10 7/8%
Convertible Subordinated Notes in a manner adverse to the holder thereof;
- waive a default in the payment (whether at maturity, upon redemption, on
an interest payment date, on a Change in Control Purchase Date or
otherwise) of the principal of or premium or interest on any Note;
- reduce the percentage of our 10 7/8% Convertible Subordinated Notes
necessary to waive defaults or Events of Default;
- modify any of the subordination provisions in our Indenture with LaSalle
National Bank in a manner adverse to the holders of our 10 7/8%
Convertible Subordinated Notes; or
- make any of our 10 7/8% Convertible Subordinated Notes payable in money
other then that stated in our 10 7/8% Convertible Subordinated Notes.
We, together with the Trustee, may amend or supplement our Indenture with
LaSalle National Bank or our 10 7/8% Convertible Subordinated Notes without
notice to or consent of any holder in certain events, such as to comply with the
conversion, adjustment, liquidation and merger provisions described in our
Indenture with LaSalle National Bank, to cure any ambiguity, defect or
inconsistency or to make any other change that does not adversely affect the
rights of the holders, to comply with the provisions of the Trust Indenture Act
or to appoint a successor Trustee.
No amendment may be made that adversely affects the rights under the
provisions described under "Subordination of Notes" above of a holder of an
issue of our Senior Indebtedness unless the holders of that issue, pursuant to
its terms, consent to such amendment.
SATISFACTION AND DISCHARGE
If all of our 10 7/8% Convertible Subordinated Notes have been delivered to
the Trustee for cancellation (subject to certain limited exceptions) or if all
of our 10 7/8% Convertible Subordinated Notes not theretofore delivered to the
Trustee for cancellation have become due and payable or will become due and
payable within one year at their stated maturity or upon redemption, then we may
terminate all of our obligations under our Indenture with LaSalle National Bank,
other than our obligation to pay the principal of and interest on our 10 7/8%
Convertible Subordinated Notes and certain other obligations (including our
obligation to deliver
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shares of common stock upon conversion of our 10 7/8% Convertible Subordinated
Notes and our obligation to purchase our 10 7/8% Convertible Subordinated Notes
following a Change in Control), at any time, by depositing with the Trustee or a
paying agent other than us, money sufficient to pay the principal of and
interest on our 10 7/8% Convertible Subordinated Notes then outstanding to
maturity or redemption.
MERGERS AND CONSOLIDATIONS
Subject to the right of the holders to require us to purchase our 10 7/8%
Convertible Subordinated Notes in the event of a Change in Control, we may
consolidate or merge with or into any other corporation, and we may sell, lease,
convey, assign or otherwise transfer all or substantially all our property and
assets to any other corporation, provided:
- either we are the resulting or surviving corporation, or the successor
corporation is organized and existing under the laws of the United States
of America, any state thereof or the District of Columbia which expressly
assumes, by supplemental indenture executed and delivered to the Trustee,
payment of the principal of and interest on our 10 7/8% Convertible
Subordinated Notes and performance and observance of every covenant of
ours in our Indenture with LaSalle National Bank and our 10 7/8%
Convertible Subordinated Notes (including, without limitation, the
agreement to deliver shares of common stock upon conversion of our
10 7/8% Convertible Subordinated Notes);
- immediately after giving effect to such transaction, no default or Event
of Default shall have occurred and be continuing; and
- certain other conditions are met.
Thereafter, in any such transaction (other than a lease) in which we are
not the surviving or resulting corporation, we shall be released from all of our
obligations under our Indenture with LaSalle National Bank and our 10 7/8%
Convertible Subordinated Notes.
CONCERNING THE TRUSTEE
LaSalle National Bank has agreed to serve as the Trustee under our
Indenture with LaSalle National Bank. The Trustee will be permitted to deal with
us and any of our Affiliates with the same rights as if it were not Trustee;
provided, however, that under the Trust Indenture Act, if the Trustee acquires
any conflicting interest (as defined in the Trust Indenture Act) and there
exists a default with respect to our 10 7/8% Convertible Subordinated Notes, it
must eliminate such conflict or resign.
The holders of a majority in principal amount of all outstanding of our
10 7/8% Convertible Subordinated Notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy or power
available to the Trustee, provided that such direction does not conflict with
any law or our Indenture with LaSalle National Bank, is not unduly prejudicial
to the rights of another holder or the Trustee and does not involve the Trustee
in personal liability.
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DESCRIPTION OF EXISTING NOTES
We issued the existing notes under an indenture, dated as of November 23,
1998, between us and LaSalle National Bank, as trustee. The following
description is a summary of the material provisions of the existing notes and
the indenture. This summary is subject to and is qualified by reference to all
the provisions of the existing notes indenture.
As used in this "Description of Existing Notes" section, references to
"we," "our" or "us" refer solely to Beyond.com Corporation and not its
subsidiaries.
GENERAL
Our 7 1/4% Convertible Subordinated Notes:
- are general unsecured obligations of ours;
- mature on December 1, 2003;
- bear interest at a rate of 7 1/4% per year from November 23, 1998;
- rank behind all of our existing and future senior indebtedness (as
defined below) and any of our subsidiaries in right of payment;
- will be issuable in denominations of $1,000 principal amount and integral
multiples thereof; and
- have been issued only in fully registered book entry form, without
coupons, and will be represented by one or more permanent Global Notes
(referred to in this Section as "Global Notes").
A holder of our 7 1/4% Convertible Subordinated Notes may serve notices and
demands to or upon us in respect of our 7 1/4% Convertible Subordinated Notes
and our Indenture with LaSalle National Bank at our office or agency maintained
for that purpose in Chicago, Illinois. In the event that Depository Trust
Company issues physical or "definitive" notes (referred to in this Section as
"Definitive Notes"), holders of our 7 1/4% Convertible Subordinated Notes may
surrender their 7 1/4% Convertible Subordinated Notes for payment, conversion,
registration of transfer or exchange at our office or agency maintained for that
purpose in Chicago, Illinois. In addition, in our Indenture with LaSalle
National Bank we have agreed to, if Definitive Notes are issued, maintain an
office or agency for the foregoing purposes in the Borough of Manhattan, The
City of New York. In our Indenture with LaSalle National Bank, we agreed to at
all times maintain a paying agent, Conversion Agent and Registrar for our 7 1/4%
Convertible Subordinated Notes in Chicago, Illinois, and, if Definitive Notes
are issued under the limited circumstances described below, in the Borough of
Manhattan, The City of New York. The Trustee will initially act as paying agent,
Conversion Agent (as defined below) and Registrar (as defined below) in Chicago,
Illinois.
INTEREST
$63,250,000 principal amount of our 7 1/4% Convertible Subordinated Notes
bear interest from November 23, 1998 at 7 1/4% per year. We will pay interest
semi-annually on December 1 and June 1 of each year, commencing June 1, 1999. We
will make interest payments to holders of record at the close of business on
November 15 or May 15 preceding each interest payment date. We will compute the
interest on the basis of a 360 day year composed of twelve 30 day months. We
will pay principal of and interest on our 7 1/4% Convertible Subordinated Notes
at the office of the paying agent. The Trustee will initially act as the paying
agent. At our option, we may pay interest either by check mailed to the address
of the person entitled thereto as it appears in the Note register or by transfer
to an account located in the United States such person maintains. However, we
will make any payments to The Depository Trust Company, New York, New York by
wire transfer of immediately available funds to the account of the Depository
Trust Company or its nominee. For purposes of this discussion, we refer to the
Depository Trust Company as "DTC" and LaSalle National Bank as "Trustee."
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FORM, DENOMINATION AND REGISTRATION
Except under the limited circumstances described below, the Trustee will
issue our 7 1/4% Convertible Subordinated Notes only in fully registered book
entry form which will be represented by one or more permanent Global Notes
without coupons deposited with a custodian for and registered in the name of a
nominee of DTC. Our 7 1/4% Convertible Subordinated Notes will be issuable in
denominations of $1,000 principal amount and integral multiples thereof. The
records of DTC will reflect holdings of beneficial interests in any Global Note.
DTC will effectuate any transfer of a beneficial interest through its records,
or through records of DTC's direct and indirect participants. Beneficial
interests may not be exchanged for Definitive Notes except under the limited
circumstances described below. Except as described below, the record ownership
of Global Notes may be transferred, in whole or in part, only to DTC, another
nominee of DTC, or to a successor of DTC or its nominee.
We will not charge for any registration of transfer or exchange of our
7 1/4% Convertible Subordinated Notes but we may require you to pay an amount
sufficient to cover any applicable tax or other governmental charge.
In case any of our 7 1/4% Convertible Subordinated Notes you own becomes
mutilated or defaced, we will execute and, on our request, the Trustee will
authenticate and deliver a new substantially identical 7 1/4% Convertible
Subordinated Note, dated the date of its authentication in exchange and
substitution for your canceled original 7 1/4% Convertible Subordinated Note. In
case any of our 7 1/4% Convertible Subordinated Notes you own becomes destroyed,
lost or stolen:
- you must give us and the Trustee such security or indemnity as we may
require to hold us both harmless; and
- you must furnish to us satisfactory evidence of the destruction, loss or
theft of such 7 1/4% Convertible Subordinated Note and your ownership
thereof.
When we issue any substituted 7 1/4% Convertible Subordinated Note, we may
require you to pay us an amount sufficient to cover applicable fees and
expenses.
BOOK ENTRY NOTES
If and when DTC issues Global Notes, DTC will credit, on its internal
system, the respective principal amounts of the individual beneficial interests
represented by such Global Notes to the accounts of persons who have accounts
with DTC. Only the following persons may own beneficial interests in a Global
Note:
- persons who have accounts with DTC;
- persons who hold beneficial interests through participants; or
- certain banks, brokers, dealers, trust companies and other parties that
clear their transactions through or maintain a custodial relationship
with a participant, either directly or indirectly, and have indirect
access to the DTC system.
Ownership of beneficial interests in the Global Notes will be shown on, and
the transfer of these ownership interests will be effected through, records DTC
maintains (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder, as defined
on our Indenture with LaSalle National Bank, of a Global Note, DTC or the
nominee will be considered the sole owner or holder of our 7 1/4% Convertible
Subordinated Notes represented by the Global Note for all purposes under our
Indenture with LaSalle National Bank and our 7 1/4% Convertible Subordinated
Notes. With limited exceptions, if you own beneficial interests in the Global
Notes, then you:
- will not be entitled to have certificates registered in your name;
- will not receive or be entitled to receive physical delivery of
certificates in definitive form; and
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- will not be considered the owner or holder of our 7 1/4% Convertible
Subordinated Notes represented by such Global Notes.
If you are the beneficial owner of an interest in a Global Note, you will
not be able to transfer that interest except in accordance with DTC's applicable
procedures (in addition to those under our Indenture with LaSalle National
Bank).
DTC may discontinue providing its services as depository with respect to
our 7 1/4% Convertible Subordinated Notes at any time. As an owner of beneficial
interests in the Global Note, you will be entitled to receive physical delivery
of Definitive Notes in certificated form under the following limited
circumstances:
- DTC or any successor depository notifies us that it is unwilling or
unable to continue as depository for a Global Note;
- DTC ceases to be a "clearing agency" registered under the Exchange Act
and we do not appoint a successor depository within 90 days; or
- an Event of Default, as defined on our Indenture with LaSalle National
Bank, has occurred and is continuing
If DTC issues Definitive Notes in certificated form under such
circumstances, then the certificates shall be registered in the names DTC shall
direct. We expect that such instructions will be based upon directions received
by DTC from its participants.
We will make payments on Global Notes to DTC or its nominee as the
registered owner thereof. Neither we, the Trustee nor any paying agent will have
any responsibility or liability for:
- any aspect of the records relating to beneficial ownership interest in
the Global Notes;
- payments made on account of beneficial ownership interests in the Global
Notes; or
- maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment regarding a
Global Note held by it or its nominee, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Note as shown on the records of DTC or its
nominee. We also expect that payments by participants to indirect participants
and by participants and indirect participants to owners of beneficial interests
in such Global Note will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
registered in the names of nominees. Such payments, however, will be the
responsibility of the applicable participants and indirect participants.
To convert your beneficial ownership of interests in Global Notes into
common stock, you should contact your broker or other participant or indirect
participant through whom you hold beneficial interests. Your broker, participant
or indirect participant, as the case may be, shall provide you with information
on procedures, including proper forms and cut off times, for submitting requests
for conversion.
DTC will effect transfers between participants in accordance with DTC rules
and will settle these transfers in same day funds. However, the laws of some
states may require that certain persons take physical delivery of securities in
definitive form. Such laws may impair your ability to transfer or pledge your
beneficial interests in the Global Notes.
DTC will take any action a holder of our 7 1/4% Convertible Subordinated
Notes is permitted to take (including the presentation of our 7 1/4% Convertible
Subordinated Notes for conversion) only at the direction of one or more
participants to whose account DTC has credited the interests in the Global
Notes. DTC will only take such action in respect of that portion of principal
amount of our 7 1/4% Convertible Subordinated Notes as to which the participant,
or participants, has given direction.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of
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the Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book entry
changes to accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants in DTC include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations such as the initial purchasers of our 7 1/4%
Convertible Subordinated Notes. Some participants (or their representatives),
together with other entities, own DTC. Other entities such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with, a participant, either directly or indirectly have indirect
access to the DTC system.
Conveyance of notices and other communications by DTC to participants, by
participants to indirect participants and indirect participants to beneficial
owners will be governed by arrangements among them, subject to any statutory or
regulatory requirements that may be in effect from time to time. If we intend to
redeem our 7 1/4% Convertible Subordinated Notes, we will send redemption
notices with respect to Global Notes to DTC or its nominee. If we intend to
redeem less than all of our 7 1/4% Convertible Subordinated Notes evidenced by a
Global Note, DTC will reduce the amount of the interest of each participant in
such 7 1/4% Convertible Subordinated Notes in accordance with its procedures.
Although voting with respect to our 7 1/4% Convertible Subordinated Notes
is limited, in those cases that require a vote, neither DTC nor its nominee will
itself consent or vote with respect to Global Notes. Under its usual procedures,
DTC would mail an omnibus proxy to us as soon as possible after the record date.
The omnibus proxy assigns DTC or its nominee consenting or voting rights to
those participants to whose accounts our 7 1/4% Convertible Subordinated Notes
are credited on the record date listed in the omnibus proxy. We believe that the
arrangements among DTC, its participants and indirect participants, and
beneficial owners will enable the beneficial owners to exercise rights
equivalent in substance to the rights that can be directly exercised by a holder
of our 7 1/4% Convertible Subordinated Notes.
We obtained the information in this section concerning DTC and DTC's book
entry system from sources we believe to be reliable, but we take no
responsibility for the accuracy of this information.
CONVERSION RIGHTS
You may, at any time prior to the close of business on December 1, 2003,
convert the principal amount of any of our 7 1/4% Convertible Subordinated Notes
(or any portion thereof equal to $1,000 or any integral multiple thereof) into
shares of our common stock at the conversion price of $18.34 per share, subject
to adjustment as described below. However, your right to convert a 7 1/4%
Convertible Subordinated Note previously called for redemption will terminate at
the close of business on the business day immediately preceding the redemption
date for the 7 1/4% Convertible Subordinated Notes. Your right to convert a
7 1/4% Convertible Subordinated Note also will terminate on any earlier date on
which you present the 7 1/4% Convertible Subordinated Note for redemption
(unless we have defaulted in making the redemption payment when due, in which
case your conversion right shall terminate at the close of business on the date
the default is cured and the 7 1/4% Convertible Subordinated Note is redeemed).
If you exercise your option to require us to purchase any of our 7 1/4%
Convertible Subordinated Notes and you deliver a "change in control purchase
notice," you may convert your 7 1/4% Convertible Subordinated Note only if you
withdraw your notice by a "written notice of withdrawal" delivered to a paying
agent prior to the close of business on the business day prior to the change in
control purchase date in accordance with our Indenture with LaSalle National
Bank.
We will make no payment or adjustment for dividends or distributions with
respect to shares of our common stock issued upon conversion of a 7 1/4%
Convertible Subordinated Note. Except as otherwise provided in our Indenture
with LaSalle National Bank, we will not pay interest accrued on converted 7 1/4%
Convertible Subordinated Notes. However, we will pay interest accrued to but
excluding December 6, 2001, on any of our 7 1/4% Convertible Subordinated Notes
called for redemption and converted on or before the close of business on the
business day immediately preceding December 6, 2001. If you surrender any of our
7 1/4% Convertible Subordinated Notes for conversion between the record date for
the payment of an installment of
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interest and the related interest payment date, then notwithstanding such
conversion, we will pay the person in whose name such 7 1/4 Convertible
Subordinated Note was registered at the close of business on the record date. In
such event, unless your Note has been called for redemption, when you surrender
your 7 1/4 Convertible Subordinated Note for conversion you must also pay us an
amount equal to the interest payable on such interest payment date on the
principal amount of your converted 7 1/4% Convertible Subordinated Note. We will
not issue fractional shares upon conversion, but we will pay cash for any
fractional interest based upon the closing price (as defined in our Indenture
with LaSalle National Bank) of the common stock on the trading day immediately
prior to the date of conversion.
We will adjust the conversion price our 7 1/4% Convertible Subordinated
Notes if certain events occur. These events include:
- our issuance of shares of common stock as a dividend or distribution on
our common stock;
- our subdivision or combination of our outstanding common stock;
- our issuance to all or substantially all holders of our common stock of
rights or warrants entitling them to subscribe for or purchase our common
stock at a price per share less than the then current market price per
share (as defined in our Indenture with LaSalle National Bank);
- our distribution to all or substantially all of our common stockholders
of shares of our capital stock (other than common stock), evidence of
indebtedness, or other non cash assets;
- our distribution to all or substantially all of our common stockholders
of rights or warrants to subscribe for our securities (other than those
rights and warrants referred to above and other limited rights);
- our distribution to all or substantially all of our common stockholders
of cash in an aggregate amount that exceeds an amount equal to 12.5% of
our market capitalization (determined as provided in our Indenture with
LaSalle National Bank); and
- our purchase of common stock pursuant to a tender offer made by us, or
any of our Subsidiaries, to the extent that the tender offer involves
aggregate consideration that exceeds an amount equal to 12.5% of our
market capitalization (determined as provided in our Indenture with
LaSalle National Bank) on the expiration date of the tender offer.
Notwithstanding the foregoing, we will not adjust the conversion price for
a transaction of the nature described above if all holders of our 7 1/4%
Convertible Subordinated Notes are entitled to participate in the transaction on
a basis and with notice that the Board of Directors determines to be fair and
appropriate in light of the basis and notice on which common stockholders
participate in the transaction.
We need not adjust the conversion price for any issuance of common stock
pursuant to a plan for reinvestment of dividends or interest or for a change in
the par value of common stock. To the extent that our 7 1/4% Convertible
Subordinated Notes become convertible into the right to receive cash, we need
not adjust the conversion price thereafter as to the cash, and interest will not
accrue on the cash. From time to time we may reduce the conversion price by any
amount for any period of time if the period is at least 20 days or such longer
period as may be required by law and if the reduction is irrevocable during the
period.
However, in no event may we reduce the conversion price to less than the
par value of a share of common stock. We need not adjust the conversion price
until the cumulative adjustments require an increase or decrease of at least 1%
in the conversion price as last adjusted.
We or our successor, purchaser or transferee corporation must execute a
supplemental indenture if we experience any of the following:
- a reclassification or change of shares of common stock (other than a
change in par value, or as a result of a subdivision or combination, or
any other change for which a conversion price adjustment is provided in
our Indenture with LaSalle National Bank);
- a consolidation or merger to which we are a party other than a merger in
which we are the continuing corporation and which does not result in any
reclassification of, or change (other than a change in
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name or par value, or as a result of a subdivision or combination) in,
outstanding shares of common stock; or
- a sale or conveyance of all or substantially all of our property and
assets to any person.
This supplemental indenture must provide that the holders of our 7 1/4%
Convertible Subordinated Notes shall have the right to convert such 7 1/4
Convertible Subordinated Note into the kind and amount of shares of stock and
other securities and property (including cash) receivable upon such transaction
by a holder of the number of shares of common stock deliverable upon conversion
of such 7 1/4 Convertible Subordinated Note immediately prior to such
transaction. This provision is subject to any applicable right of the holders
upon a Change in Control (as defined below). Such supplemental indenture shall
provide for adjustments to the conversion price which shall be as nearly
equivalent as may be practicable to the adjustments of the conversion price
provided by our Indenture with LaSalle National Bank.
The term "all or substantially all" as used in the previous two paragraphs
will likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances, and there may be a degree of uncertainty in
interpreting such phrase. As a consequence, in the event the holders of our
7 1/4% Convertible Subordinated Notes were to assert that an adjustment to the
conversion price, or the conversion privilege of our 7 1/4% Convertible
Subordinated Notes or the execution of a supplemental indenture was required
under our Indenture with LaSalle National Bank, and we were to contest such
assertion, then we cannot assure you as to how a court would interpret the
phrase. This uncertainty may prevent the Trustee or the holders of our 7 1/4%
Convertible Subordinated Notes from successfully asserting that the conversion
price or the conversion privilege is subject to adjustment, or our 7 1/4%
Convertible Subordinated Notes are convertible into other shares of stock and
other securities and property that the holders would have owned immediately
after the transaction if the holders had converted our 7 1/4% Convertible
Subordinated Notes immediately before the effective date of the transaction.
If we issue certain rights, warrant, evidences of indebtedness, securities
or other property (including cash) to holders of the common stock and we make a
corresponding adjustment to the conversion price, then you may face a
constructive distribution taxable as a dividend.
OPTIONAL REDEMPTION
We may redeem our 7 1/4% Convertible Subordinated Notes at our option on or
after December 6, 2001, in whole or, from time to time, in part, upon not less
than 30 nor more than 60 days' notice by mail.
PERIOD REDEMPTION PRICE
The redemption prices (expressed as a percentage of principal amount) are
as follows for our 7 1/4% Convertible Subordinated Notes we redeem during the
periods set forth below:
<TABLE>
<S> <C>
December 6, 2001 through November 30, 2002.................. 101.813%
December 1, 2002 and thereafter............................. 100.000%
</TABLE>
In each case these redemption amounts include accrued interest up to but
not including the redemption date. However, we will pay installments of interest
which are due and payable on interest payment dates falling on or before the
relevant redemption date to holders in whose names such 7 1/4% Convertible
Subordinated Notes are registered at the close of business on the relevant
record dates.
If we redeem less than all of our outstanding 7 1/4% Convertible
Subordinated Notes, the Trustee shall select our 7 1/4% Convertible Subordinated
Notes to be redeemed in principal amounts of $1,000 or multiples thereof by lot,
pro rata or by another method the Trustee considers fair and appropriate. If a
portion of a holder's 7 1/4% Convertible Subordinated Notes is selected for
partial redemption and such holder converts a portion of our 7 1/4% Convertible
Subordinated Notes, the converted portion shall be deemed to be of the portion
selected for redemption.
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All of our 7 1/4% Convertible Subordinated Notes which we or any of our
Subsidiaries redeem or otherwise acquire prior to maturity will be immediately
canceled and may not be held, reissued or resold.
PURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE IN CONTROL
In the event of a Change in Control, each holder will have the option,
subject to the terms and conditions of our Indenture with LaSalle National Bank,
to require us to purchase all or any part of such holder's 7 1/4% Convertible
Subordinated Notes. However, the principal amount of our 7 1/4% Convertible
Subordinated Notes we repurchase must be $1,000 or an integral multiple thereof.
We must then purchase the holder's 7 1/4% Convertible Subordinated Notes as of
the date that is 30 business days after the occurrence of such Change in Control
(referred to in this Section as the "Change in Control Purchase Date"). The
purchase price we pay must be equal to 100% of the principal amount thereof,
plus accrued interest up to but not including the Change in Control Purchase
Date.
Within 10 business days after the occurrence of a Change in Control, we
shall mail to the Trustee and to each holder and cause to be published a written
notice of the Change in Control, setting forth, among other things, the terms
and conditions, and the procedures required for exercise of, such holder's right
to require the purchase of such holder's 7 1/4% Convertible Subordinated Notes.
To exercise the purchase right upon a Change in Control, a holder must
deliver written notice of such exercise to a paying agent at any time prior to
the close of business on the business day prior to the Change in Control
Purchase Date, specifying our 7 1/4% Convertible Subordinated Notes with respect
to which the purchase right is being exercised. The holder may withdraw such
notice of exercise by a written notice of withdrawal delivered to a paying agent
at any time prior to the close of business on the business day prior to the
Change in Control Purchase Date.
A Change in Control shall be deemed to have occurred if any of the
following occurs after the initial sale of our 7 1/4% Convertible Subordinated
Notes:
- any "person" or "group" is or becomes the "beneficial owner" (as such
terms are defined below), directly or indirectly, of shares of our Voting
Stock representing 50% or more of the total voting power of all
outstanding classes of our Voting Stock (as defined below) or has the
power, directly or indirectly, to elect a majority of the members of the
Board of Directors, or
- we consolidate with, or merge with or into, another person or we sell,
assign, convey, transfer, lease or otherwise dispose of all or
substantially all of our assets, or any person consolidates with, or
merges with or into us, in any such event other than pursuant to a
transaction in which the persons that "beneficially owned" directly or
indirectly, shares of our Voting Stock immediately prior to such
transaction "beneficially own," directly or indirectly, shares of our
Voting Stock representing at least a majority of the total voting power
of all outstanding classes of Voting Stock of the surviving or transferee
person; or
- we liquidate or dissolve.
For purposes of this definition:
(1) "person" and "group" have the meanings given such terms under Sections
13(d) and 14(d) of the Exchange Act, and the term "group" includes any group
acting for the purpose of acquiring, holding or disposing of securities within
the meaning of Rule 13d 5-(b)(I) under the Exchange Act;
(2) a "beneficial owner" shall be determined in accordance with Rule 13d-3
under the Exchange Act, except that the number of shares of our Voting Stock
shall be deemed to include, in addition to all outstanding shares of our Voting
Stock and unissued shares deemed to be held by the "person" or "group" (as such
terms are defined above) or other person with respect to which the Change in
Control determination is being made, all unissued shares deemed to be held by
all other persons;
(3) the term "beneficially owned" shall have a meaning correlative to that
of beneficial owner; and
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(4) "unissued shares" means shares of Voting Stock not outstanding that are
subject to options, warrants, rights to purchase or conversion privileges
exercisable within 60 days of the date of determination of a Change in Control.
Notwithstanding the foregoing, we will deem a Change in Control not to have
occurred if:
- the closing price (as defined in our Indenture with LaSalle National
Bank) of our common stock for any five trading days during the ten
trading days immediately preceding the Change in Control is at least
equal to 105% of the conversion price in effect immediately preceding the
Change in Control;
- at least 90% of the consideration (excluding cash payments for fractional
shares or cash payments for appraisal rights) in the transaction or
transactions constituting the Change in Control consists of shares of
common stock or securities convertible into shares of common stock that
are, or upon issuance will be, traded on a national securities exchange
in the United States of America or through the Nasdaq National Market.
We believe the term "all or substantially all" as used in the definition of
Change in Control will likely be interpreted under applicable state law and its
meaning will be dependent upon particular facts and circumstances. We believe
there may be a degree of uncertainty in interpreting such phrase. As a
consequence, in the event that holders of our 7 1/4% Convertible Subordinated
Notes elect to exercise their rights under our Indenture with LaSalle National
Bank following the occurrence of a transaction which they believe constitutes a
transfer of "all or substantially all of the assets" within the meaning above
and we elect to contest such attempted exercise, there can be no assurance as to
how a court would interpret the phrase. This uncertainty may prevent the Trustee
or the holders of our 7 1/4% Convertible Subordinated Notes from successfully
asserting that a Change in Control has occurred.
We will comply with the provisions of Rule 13e-4 and Rule 14e-1, if
applicable, under the Exchange Act, will file Schedule 13E-4 or any successor or
similar schedule if required thereunder, and will otherwise comply with all
federal and state securities laws in connection with any offer we make to
purchase Notes at the option of the holders upon a Change in Control.
The Change in Control purchase feature of our 7 1/4% Convertible
Subordinated Notes may in certain circumstances make more difficult or
discourage a takeover of our company and the removal of incumbent management. We
are not aware of any specific effort to accumulate shares of common stock or to
obtain control of our company by means of a merger, tender offer, solicitation
or otherwise, nor is the Change in Control purchase feature part of a plan by
management to adopt a series of anti-takeover provisions. Instead, the Change in
Control purchase feature is a result of negotiations between us and the initial
purchasers of our 7 1/4% Convertible Subordinated Notes.
Subject to the limitation on mergers and consolidations discussed below, we
could, in the future, enter into transactions, including recapitalizations, that
would not constitute a Change in Control under our Indenture with LaSalle
National Bank, but that would increase the amount of indebtedness (including
Senior Indebtedness) outstanding or otherwise adversely affect the holders of
our 7 1/4% Convertible Subordinated Notes. The Indenture does not restrict our
ability, or that of our subsidiaries, to create additional indebtedness
(including Senior Indebtedness). If we take on significant amounts of additional
indebtedness, it could have an adverse effect on our ability to repay the
principal and interest on our indebtedness, including our 7 1/4% Convertible
Subordinated Notes.
If a Change in Control were to occur, we cannot assure that we would have
sufficient funds to pay the Change in Control Purchase Price for the tendered
7 1/4% Convertible Subordinated Notes. In addition, other indebtedness which we
may incur in the future may have similar change of control provisions permitting
the holders thereof to accelerate or require us to repurchase such indebtedness
upon the occurrence of events similar to a Change in Control. If we fail to
repurchase our 7 1/4% Convertible Subordinated Notes when required following a
Change in Control, it will result in an Event of Default under our Indenture
with LaSalle National Bank whether or not such repurchase is permitted by the
subordination provisions thereof.
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Other than granting holders the option to require us to purchase all or
part of their 7 1/4% Convertible Subordinated Notes upon the occurrence of a
Change in Control as described above, our Indenture with LaSalle National Bank
does not contain any covenants or other provisions designed to afford holders
protection in the event of takeovers, recapitalizations, highly leveraged
transactions or similar restructurings we may undertake.
In the event that DTC issues Definitive Notes under the limited
circumstances herein, holders electing to exercise the option to have their
Notes repurchased following a Change in Control must surrender such Definitive
Notes, together with such additional documents as are required by our Indenture
with LaSalle National Bank, at the office of a paying agent. Where not all of
our 7 1/4% Convertible Subordinated Notes represented by a Definitive Note are
submitted for purchase, a new Definitive Note in respect of the principal amount
of our 7 1/4% Convertible Subordinated Notes that have not been so submitted for
purchase will be issued to the holder.
SUBORDINATION OF NOTES
As set forth in our Indenture with LaSalle National Bank, our 7 1/4%
Convertible Subordinated Notes are subordinated in right of payment to the prior
payment in full of all of our Senior Indebtedness, whether outstanding on the
date of our Indenture with LaSalle National Bank or thereafter created, assumed
or guaranteed. If we pay or distribute any assets in any dissolution, winding
up, liquidation or reorganization (whether in insolvency or bankruptcy
proceedings or otherwise), we must repay all Senior Indebtedness in full before
we make any payment in respect of our 7 1/4% Convertible Subordinated Notes. In
the event we default in payment (whether at maturity or at a date fixed for
prepayment or by acceleration or otherwise) of principal, premium, if any, or
interest on Senior Indebtedness, we cannot make any payment in respect of our
7 1/4% Convertible Subordinated Notes until we have paid in full the Senior
Indebtedness then due or the cure, waiver or cessation of the default. Unless
and until such default has been cured, waived or has ceased to exist, we may not
make any payment on our 7 1/4% Convertible Subordinated Notes if an event of
default occurs with respect to any Senior Indebtedness (other than a default in
the payment of principal, premium, if any, or interest on Senior Indebtedness)
which permits a holder thereof to accelerate its maturity, and the holder
delivers written notice of such default to the Trustee and to us. However,
nothing in the sentence will prevent us from making previous payment (which is
not otherwise prohibited) on our 7 1/4% Convertible Subordinated Notes for a
period of more than 180 days after the date such written notice of default is
given unless the maturity of such Senior Indebtedness has been accelerated. If
the holder accelerates the Senior Indebtedness, we cannot make any payment on
our 7 1/4% Convertible Subordinated Notes until such acceleration has been
waived, rescinded or annulled or such Senior Indebtedness has been paid in full.
Notwithstanding the provisions described in the preceding sentences, not more
than one written notice of default shall be given with respect to the same issue
of Senior Indebtedness within a period of 360 consecutive days, and no event of
default which existed on the date of any written notice of default and was known
to the holders of any issue of Senior Indebtedness shall be made the basis for
the giving of a subsequent written notice of default by the holders of such
issue of Senior Indebtedness.
We may not make any payment or distribution of assets of any kind to the
Trustee, any paying agent or any holder of our 7 1/4% Convertible Subordinated
Notes in violation of any of the subordination provisions of our Indenture with
LaSalle National Bank, whether in cash, property or securities, in respect of
our 7 1/4% Convertible Subordinated Notes before we have repaid all Senior
Indebtedness in full. If we do so, then such payment or distribution will be
held by the recipient in trust for the benefit of holders of Senior Indebtedness
or their representatives to the extent necessary to make payment in full of all
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution to or for the holders of Senior Indebtedness.
Because of the subordination provisions described above, in the event of
our bankruptcy, dissolution or reorganization, holders of Senior Indebtedness
may receive more ratably, and holders of our 7 1/4% Convertible Subordinated
Notes may receive less ratably, than our other creditors. Such subordination
will not prevent the occurrence of any Event of Default under our Indenture with
La Salle National Bank.
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The Indenture does not limit the amount of indebtedness, including Senior
Indebtedness, that we, or any subsidiary, can create, incur, assume or
guarantee. As of December 31, 1998, we had no Senior Indebtedness outstanding.
CERTAIN DEFINITIONS
For purposes of this description, the following terms have the meanings set
forth below.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP, and the amount of such obligation at any date shall be
the capitalized amount thereof at such date, determined in accordance with GAAP.
"Conversion Agent" means an office or agency that we maintain where
securities may be presented for conversion.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect us
against fluctuations in currency values.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable from time to
time and are consistently applied.
"Indebtedness" means, with respect to any person, without duplication, (a)
all liabilities of such person for borrowed money or for the deferred purchase
price of property or services, excluding any trade accounts payable and other
current liabilities incurred in the ordinary course of business; (b) all
obligations of such person evidenced by bonds, notes, debentures, or other
similar instruments; (c) all Capitalized Lease Obligations of such person; (d)
all guarantees of Indebtedness referred to in this definition by such person;
(e) all obligations of such person under or in respect of Currency Agreements
and Interest Rate Protection Obligations of such person; and (f) any amendment,
supplement, modification, deferral, renewal, extension or refunding of any
liability of the types referred to in clauses (a) through (e) above.
"Interest Rate Protection Agreement" means any arrangement between us and
any other person whereby, directly or indirectly, such person is entitled to
receive from time to time periodic payments calculated by applying either a
floating or a fixed rate of interest on a stated notional amount in exchange for
periodic payments made by such person calculated by applying a fixed or a
floating rate of interest on the same notional amount and shall include, without
limitation, interest rate swaps, caps, floors, collars and similar agreements.
"Interest Rate Protection Obligations" means the obligations we have
pursuant to an Interest Rate Protection Agreement.
"paying agent" means an office or agency that we maintain where securities
may be presented for payment.
"Registrar" means an office or agency that we maintain where securities may
be presented for registration of transfer or for exchange.
"Senior Indebtedness" means the principal of and premium, if any, interest
and other amounts payable on or in respect of any of our Indebtedness, whether
outstanding on the date of our Indenture with LaSalle National Bank or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to, or shall be junior in right of payment to,
or shall be pari passu in right of payment with, our 7 1/4% Convertible
Subordinated Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall
not include (a) Indebtedness evidenced by our 7 1/4% Convertible Subordinated
Notes, (b) Indebtedness which, when incurred and without respect to any
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election under Section 1111(b) of Title 11, United States Code (or any successor
provision thereto), is without recourse to us, (c) trade accounts payable or
other current liabilities incurred in the ordinary course of business, (d)
Indebtedness of or amounts we owe for compensation to employees or for services
rendered to us, (e) any liability for federal, state, local or other taxes owed
or owing by us, (f) our Indebtedness to a Subsidiary of ours and (g) amounts
owing under leases (other than Capitalized Lease Obligations).
"Significant Subsidiary" means any Subsidiary of Beyond.com which is a
"significant subsidiary" within the meaning of Rule 1-02 under Regulation SX
promulgated by the Commission, as such Rule is in effect on the date of our
Indenture with LaSalle National Bank, but substituting 50% for 10% in each
instance that 10% appears in such Rule.
"Subsidiary" means, with respect to any person, a corporation a majority of
whose outstanding Voting Stock is at the time of determination thereof, directly
or indirectly, owned by such person, by one or more Subsidiaries of such person
or by such person and one or more of its Subsidiaries, and any other person
(other than a corporation), including, without limitation, a joint venture, in
which such person, one or more Subsidiaries of such person or such person and
one or more of its Subsidiaries, directly or indirectly, at the date of
determination thereof, owns at least a majority of the ownership interests
entitled to vote in the election of directors, managers or trustees thereof (or
other persons performing similar functions). For purposes of this definition,
any directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a
Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof under ordinary circumstances have the power to vote in
the election of the board of directors, managers or trustees of any person (or
other persons performing similar functions), irrespective of whether or not, at
the time, Capital Stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency.
EVENTS OF DEFAULT; NOTICE AND WAIVER
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization with respect to us or any Significant
Subsidiary) occurs and is continuing, the Trustee may, by notice to us, declare
all unpaid principal of and accrued interest to the date of acceleration on our
7 1/4% Convertible Subordinated Notes then outstanding to be due and payable
immediately. Also, in such event, the holders of at least 25% in principal
amount of our 7 1/4% Convertible Subordinated Notes then outstanding may, by
notice to us and the Trustee, declare all unpaid principal of and accrued
interest to the date of acceleration on our 7 1/4% Convertible Subordinated
Notes then outstanding to be due and payable immediately. If an Event of Default
resulting from certain events of bankruptcy, insolvency or reorganization with
respect to us or any Significant Subsidiary occurs, all unpaid principal of and
accrued interest on our 7 1/4% Convertible Subordinated Notes then outstanding
shall become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any holder.
Our Indenture with LaSalle National Bank provides that the holders of a
majority in principal amount of our outstanding 7 1/4% Convertible Subordinated
Notes may on behalf of all holders waive any existing default or Event of
Default and its consequences except a default or Event of Default in the payment
of principal of or accrued interest on our 7 1/4% Convertible Subordinated Notes
or any default in respect of any provision of our Indenture with LaSalle
National Bank that cannot be modified or amended without the consent of the
holder of each Note affected.
The following will be "Events of Default" under our Indenture with LaSalle
National Bank:
- our failure to pay any interest on our 7 1/4% Convertible Subordinated
Notes for 30 days after the same is due or our failure to pay any
principal of or premium, if any, on our 7 1/4% Convertible Subordinated
Notes when due;
- our failure to comply with any of our other agreements contained in our
7 1/4% Convertible Subordinated Notes or our Indenture with LaSalle
National Bank for 60 days after receipt of notice of such failure
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from the Trustee or the holders of not less than 25% in aggregate
principal amount of our 7 1/4% Convertible Subordinated Notes then
outstanding;
- our default under any bond, debenture, note or other evidence of
indebtedness for money borrowed or that of any Significant Subsidiary
having an aggregate outstanding principal amount in excess of $10
million, which default shall have resulted in such indebtedness being
accelerated, without such indebtedness being discharged, or such
acceleration having been rescinded or annulled, within ten days from the
date of such acceleration; and
- certain events of bankruptcy, insolvency or reorganization with respect
to us or any Significant Subsidiary.
The Trustee shall, within 90 days after the occurrence of any default known
to it, give to the holders notice of such default; provided that, except in the
case of a default in the payment of principal of or interest on any of our
7 1/4% Convertible Subordinated Notes, the Trustee may withhold such notice if
it in good faith determines that the withholding of such notice is in the
interests of the holders.
No holder may pursue any remedy under our Indenture with LaSalle National
Bank or our 7 1/4% Convertible Subordinated Notes against us (except actions for
payment of overdue principal or interest or for the conversion of our 7 1/4%
Convertible Subordinated Notes), unless:
- the holder gives to the Trustee written notice of a continuing Event of
Default;
- the holders of at least 25% in principal amount of the outstanding Notes
make a written request to the Trustee to pursue the remedy;
- such holder or holders offer satisfactory indemnity to the Trustee
against any loss, liability or expense;
- the Trustee does not comply with the request within 60 days after receipt
of the request and the offer of indemnity; and
- the Trustee shall not have received during such 60 day period a contrary
direction from the holders of at least a majority in principal amount of
the outstanding Notes.
We must deliver an Officers' Certificate to the Trustee within 90 days
after the end of each fiscal year as to the signers' knowledge of our compliance
with all conditions and covenants contained in our Indenture with LaSalle
National Bank, and stating whether or not the signers know of any default or
Event of Default. If any such signer knows of such a default or Event of
Default, the Officers' Certificate shall describe the default or Event of
Default and the efforts to remedy the same.
AMENDMENT
We, together with the Trustee, may amend or supplement our Indenture with
LaSalle National Bank or our 7 1/4% Convertible Subordinated Notes with the
written consent of the holders of at least a majority in principal amount of the
outstanding Notes. The holders of a majority in principal amount of the
outstanding Notes may waive our compliance in a particular instance with any
provision of our Indenture with LaSalle National Bank or our 7 1/4% Convertible
Subordinated Notes without notice to any holder. However, without the consent of
the holder of each Note affected thereby, an amendment, supplement or waiver may
not:
- reduce the percentage of the principal amount of outstanding Notes whose
holders must consent to an amendment, supplement or waiver;
- reduce the rate of or change the time for payment of interest on any
Note;
- reduce the principal of or premium on or change the fixed maturity of any
of our 7 1/4% Convertible Subordinated Notes, or change the definition of
"Change in Control" or "Change in Control Purchase Date" applicable to
any of our 7 1/4% Convertible Subordinated Notes or the amount payable by
us to the holder of any Note upon a Change in Control, or alter any of
the other Change in Control provisions or any of the redemption
provisions in a manner adverse to the holder of any of our 7 1/4%
Convertible Subordinated Notes;
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<PAGE> 84
- alter the conversion provisions with respect to any of our 7 1/4%
Convertible Subordinated Notes in a manner adverse to the holder thereof;
- waive a default in the payment (whether at maturity, upon redemption, on
an interest payment date, on a Change in Control Purchase Date or
otherwise) of the principal of or premium or interest on any Note;
- reduce the percentage of our 7 1/4% Convertible Subordinated Notes
necessary to waive defaults or Events of Default;
- modify any of the subordination provisions in our Indenture with LaSalle
National Bank in a manner adverse to the holders of our 7 1/4%
Convertible Subordinated Notes; or
- make any of our 7 1/4% Convertible Subordinated Notes payable in money
other then that stated in our 7 1/4% Convertible Subordinated Notes.
We, together with the Trustee, may amend or supplement our Indenture with
LaSalle National Bank or our 7 1/4% Convertible Subordinated Notes without
notice to or consent of any holder in certain events, such as to comply with the
conversion, adjustment, liquidation and merger provisions described in our
Indenture with LaSalle National Bank, to cure any ambiguity, defect or
inconsistency or to make any other change that does not adversely affect the
rights of the holders, to comply with the provisions of the Trust Indenture Act
or to appoint a successor Trustee.
No amendment may be made that adversely affects the rights under the
provisions described under "Subordination of Notes" above of a holder of an
issue of our Senior Indebtedness unless the holders of that issue, pursuant to
its terms, consent to such amendment.
REGISTRATION RIGHTS
On the initial sale of our 7 1/4% Convertible Subordinated Notes, we
entered into a registration rights agreement with the initial purchasers of our
7 1/4% Convertible Subordinated Notes. Under this agreement, we must register
for resale under the Securities Act our 7 1/4% Convertible Subordinated Notes
and the shares of common stock into which our 7 1/4% Convertible Subordinated
Notes are convertible within 60 days of the latest date of original issuance of
the Notes. This registration statement was declared effective by the staff of
the Commission on March 23, 1999. We will use our reasonable efforts to keep it
effective until the earliest of:
- two years after the filing date;
- the date when all the applicable securities have been registered under
the Securities Act and disposed of; and
- the date on which all the applicable securities have been sold to the
public pursuant to Rule 144 under the Securities Act.
If you hold securities and sell them under this registration statement, you
will be required to provide certain information with respect to yourself and the
specifics of the sale. You will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and be bound
by the provisions of the registration rights agreement which are applicable to
you (including certain indemnification obligations). At least five business days
prior to any intended resale you must notify us of such intention and provide us
with such information with respect to such holder and the intended distribution
as may be reasonably required to amend the shelf registration statement or
supplement the prospectus.
We may suspend the use of this prospectus which is a part of the
registration statement for limited periods under certain circumstances relating
to pending corporate developments, public filings with the Commission and
similar events. Subject to certain limitations, we have agreed to pay liquidated
damages to all holders of our 7 1/4% Convertible Subordinated Notes or common
stock into which our 7 1/4% Convertible Subordinated Notes may convert that have
requested to sell pursuant to this registration statement if the registration
statement is not timely filed or declared effective, or if a stop order
suspending this registration statement or proceedings therefor have been
initiated under the Securities Act, or if the related prospectus is
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<PAGE> 85
unavailable for periods in excess of those set forth in the registration rights
agreement. We have further agreed, if such failure to file or unavailability
continues for an additional 30 day period, to pay liquidated damages to all such
holders, whether or not such holder has requested to sell pursuant to this
registration statement. Liquidated damages will accrue until such time as there
are no triggering events which have occurred and are continuing at a rate equal
to one half of one percent (0.50%) per annum of the principal amount of our
7 1/4% Convertible Subordinated Notes and will be payable on the interest
payment dates for our 7 1/4% Convertible Subordinated Notes to the persons in
whose names the relevant securities were registered at the close of business on
the immediately preceding regular record dates for our 7 1/4% Convertible
Subordinated Notes.
With respect to each holder, our obligations to pay liquidated damages
remains in effect only so long as our 7 1/4% Convertible Subordinated Notes and
the common stock issuable upon the conversion of our 7 1/4% Convertible
Subordinated Notes held by such holder are "Registrable Securities" within the
meaning of the registration rights agreement. We will pay all expenses of this
registration statement and provide each holder that is selling hereunder copies
of this prospectus and take certain other actions as are required to permit,
subject to the foregoing, unrestricted resales of the applicable securities.
This summary of certain provisions of the registration rights agreement is
not complete, and we qualify it in its entirety by reference to all the
provisions of the registration rights agreement, a copy of which is available
upon request.
SATISFACTION AND DISCHARGE
If all of our 7 1/4% Convertible Subordinated Notes have been delivered to
the Trustee for cancellation (subject to certain limited exceptions) or if all
of our 7 1/4% Convertible Subordinated Notes not theretofore delivered to the
Trustee for cancellation have become due and payable or will become due and
payable within one year at their stated maturity or upon redemption, then we may
terminate all of our obligations under our Indenture with LaSalle National Bank,
other than our obligation to pay the principal of and interest on our 7 1/4%
Convertible Subordinated Notes and certain other obligations (including our
obligation to deliver shares of common stock upon conversion of our 7 1/4%
Convertible Subordinated Notes and our obligation to purchase our 7 1/4%
Convertible Subordinated Notes following a Change in Control), at any time, by
depositing with the Trustee or a paying agent other than us, money sufficient to
pay the principal of and interest on our 7 1/4% Convertible Subordinated Notes
then outstanding to maturity or redemption.
MERGERS AND CONSOLIDATIONS
Subject to the right of the holders to require us to purchase our 7 1/4%
Convertible Subordinated Notes in the event of a Change in Control, we may
consolidate or merge with or into any other corporation, and we may sell, lease,
convey, assign or otherwise transfer all or substantially all our property and
assets to any other corporation, provided:
- either we are the resulting or surviving corporation, or the successor
corporation is organized and existing under the laws of the United States
of America, any state thereof or the District of Columbia which expressly
assumes, by supplemental indenture executed and delivered to the Trustee,
payment of the principal of and interest on our 7 1/4% Convertible
Subordinated Notes and performance and observance of every covenant of
ours in our Indenture with LaSalle National Bank and our 7 1/4%
Convertible Subordinated Notes (including, without limitation, the
agreement to deliver shares of common stock upon conversion of our 7 1/4%
Convertible Subordinated Notes);
- immediately after giving effect to such transaction, no default or Event
of Default shall have occurred and be continuing; and
- certain other conditions are met.
Thereafter, in any such transaction (other than a lease) in which we are
not the surviving or resulting corporation, we shall be released from all of our
obligations under our Indenture with LaSalle National Bank and our 7 1/4%
Convertible Subordinated Notes.
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<PAGE> 86
CONCERNING THE TRUSTEE
LaSalle National Bank has agreed to serve as the Trustee under our
Indenture with LaSalle National Bank. The Trustee will be permitted to deal with
us and any of our Affiliates with the same rights as if it were not Trustee;
provided, however, that under the Trust Indenture Act, if the Trustee acquires
any conflicting interest (as defined in the Trust Indenture Act) and there
exists a default with respect to our 7 1/4% Convertible Subordinated Notes, it
must eliminate such conflict or resign.
The holders of a majority in principal amount of all outstanding of our
7 1/4% Convertible Subordinated Notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy or power
available to the Trustee, provided that such direction does not conflict with
any law or our Indenture with LaSalle National Bank, is not unduly prejudicial
to the rights of another holder or the Trustee and does not involve the Trustee
in personal liability.
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<PAGE> 87
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
We are authorized to issue up to 70,000,000 shares of common stock and
15,000,000 shares of preferred stock. The following description of our capital
stock is not complete and is qualified in its entirety by our certificate of
incorporation and bylaws, both of which are included as exhibits to the
registration statement of which this prospectus forms a part, and by applicable
Delaware laws.
COMMON STOCK
As of May 31, 2000, there were 35,907,657 shares of common stock
outstanding held of record by approximately 107 stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
our board of directors may declare a dividend out of funds legally available and
the holders of common stock are entitled to receive ratably any such dividends.
In the event of our liquidation, dissolution or winding up, holders of our
common stock are entitled to share ratably in all of our assets remaining after
we pay our liabilities and liquidation preferences of any outstanding shares of
preferred stock. Holders of our common stock have no preemptive rights or other
subscription rights to convert their shares 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 conversion of our 10 7/8% Convertible Subordinated Notes will be fully paid
and nonassessable.
PREFERRED STOCK
Our board of directors has the authority, without further action by our
stockholders, to issue up to 15,000,000 shares of preferred stock in one or more
series and to fix the privileges and rights of each series. These privileges and
rights may be greater than those of the common stock. Our board of directors,
without further 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. This type of "blank check preferred
stock" makes it possible for us to issue preferred stock quickly with terms
calculated to delay or prevent a change in our control or make removal of our
management more difficult. Additionally, if we issue this preferred stock, then
the market price of common stock may decrease, and voting and other rights may
decrease. We currently have no plans to issue any of this preferred stock.
WARRANTS
Concurrent with the purchase of 238,949 shares of our common stock at a
price per share equal to our initial public offering price (less underwriters'
discounts) by America Online in June 1998, we issued to America Online a
non-forfeitable warrant for 358,423 shares of common stock at a per share
exercise price of $8.37, which vests in increments of 1/36 per month commencing
March 1, 1998.
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<PAGE> 88
BOOK-ENTRY SYSTEM -- THE DEPOSITORY TRUST COMPANY
The exchange notes will be evidenced by a global security initially
deposited with The Depository Trust Company, and registered in the name of Cede
& Co., as The Depository Trust Company's nominee. Except as set forth below, the
global security may be transferred only to another nominee of The Depository
Trust Company or to a successor of The Depository Trust Company or its nominee.
Holders of exchange notes may hold their interests in the global security
directly through The Depository Trust Company or indirectly through
organizations which are participants in The Depository Trust Company (called
"participants"). Transfers between participants will be affected in the ordinary
way in accordance with The Depository Trust Company rules and will be settled in
clearinghouse funds. The laws of some states require that some persons take
physical delivery of securities in definitive form. As a result, holders may be
unable to transfer beneficial interests in the global security to those persons.
Holders that are not participants may beneficially own interests in the
global security held by The Depository Trust Company only through participants
or indirect participants, including banks, brokers, dealers, trust companies and
other parties that clear through or maintain a custodial relationship with a
participant. So long as Cede & Co., as the nominee of The Depository Trust
Company, is the registered owner of the global security, Cede & Co. will be
considered the sole holder of the global security for all purposes. Except as
provided below, owners of beneficial interests in the global security will not:
- be entitled to have certificates registered in their names.
- be entitled to receive physical delivery of certificates in definitive
form, and
- be considered registered holders.
We will make payments of interest on and principal of and the redemption or
repurchase price of the global security to Cede & Co., the nominee for The
Depository Trust Company, as the registered holder of the global security. We
will make these payments by wire transfer of immediately available funds.
Neither we, the trustee nor any paying agent will have any responsibility or
liability for:
- records or payments on beneficial ownership interests in the global
security; or
- maintaining, supervising or reviewing any records relating to those
beneficial ownership interests.
We have been informed that The Depository Trust Company's practice is to
credit participants' accounts on the payment date. These payments will be made
in amounts proportionate to participants' beneficial interests in the exchange
notes. Payments by participants to owners of beneficial interests in the
exchange notes represented by the global security held through participants will
be the responsibility of those participants.
We will send any redemption notices to Cede & Co. We understand that if
less than all of the exchange notes are being redeemed, The Depository Trust
Company's practice is to determine by lot the amount of the holdings of each
participant to be redeemed. We also understand that neither The Depository Trust
Company nor Cede & Co. will consent or vote with respect to the exchange notes.
We have been advised that under its usual procedures, The Depository Trust
Company will mail an "omnibus proxy" to us as soon as possible after the record
date. The omnibus proxy assigns Cede & Co.'s consenting or voting rights to
those participants to whose accounts the exchange notes are credited on the
record date identified in a listing attached to the omnibus proxy.
A person having a beneficial interest in existing notes represented by the
global security may be unable to pledge that interest to persons or entities
that do not participate in The Depository Trust Company system, or to take other
actions in respect of that interest, because that interest is not represented by
a physical certificate.
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<PAGE> 89
The Depository Trust Company has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the Uniform Commercial
Code, and
- a "clearing agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
The Depository Trust Company was created to hold securities for its
participants and to facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes to
accounts of its participants. Some of the participants, together with other
entities, own The Depository Trust Company. Indirect access to The Depository
Trust Company system is available to others such as banks, brokers, dealers and
trust companies that clear through, or maintain a custodial relationship with a
participant, either directly or indirectly.
The Depository Trust Company is under no obligation to perform or continue
to perform the above procedures. The Depository Trust Company may discontinue
these at any time. If The Depository Trust Company is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
us within 90 days, we will cause existing notes to be issued in definitive form
in exchange for the global security.
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<PAGE> 90
LEGAL MATTERS
The validity of the exchange notes will be passed upon for us by Morrison &
Foerster LLP, Palo Alto, California. As of the date of this prospectus, Richard
Scudellari, a partner in that firm, owns 40,000 shares of our common stock.
Customary legal matters will be passed upon for the dealer manager by Shearman &
Sterling, Washington, D.C.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule as of December 31, 1998 and 1999 and for the
three years ended December 31, 1999, as set forth in their report. We have
included our consolidated financial statements and schedule in this prospectus
and elsewhere in the registration statement in reliance upon Ernst & Young LLP's
report, given upon their authority as experts in accounting and auditing.
The exchange agent:
LaSalle National Bank
<TABLE>
<S> <C>
By Registered & Certified Mail: By Regular Mail or Overnight Courier:
135 South LaSalle St. Suite 1960 135 South LaSalle St. Suite 1960
Chicago, IL 60603 Chicago, IL 60603
</TABLE>
In Person by Hand Only:
135 South LaSalle St. Suite 1960
Chicago, IL 60603
For Information Call:
(312) 904-5619
By Facsimile Transmission (for Eligible Institutions only):
Attention: Corporate Trust Operations
Confirm by Telephone
(312) 904-5619
The Information Agent:
Georgeson Shareholder Communications, Inc.
17 State Street, 10th Floor
New York, New York 10004
Banks and Brokers Call Collect: (212) 440-9800
Call Toll Free: (800) 223-2064
------------------------
Any questions or requests for assistance or additional copies of this
prospectus and the letter of transmittal may be directed to the information
agent at its telephone number and location set forth above. You may also contact
your broker, dealer, commercial bank or trust company or other nominee for
assistance concerning the exchange offer.
The dealer manager for the exchange offer:
ROBERTSON STEPHENS
555 California Street, Suite 2600
San Francisco, CA 94104
(415) 781-9700
Call Toll Free: (800) 234-2663
Attention: Mark McGlade, Convertible Securities Desk
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
BEYOND.COM CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 89
Consolidated Balance Sheets................................. 90
Consolidated Statements of Operations....................... 91
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)............................................... 92
Consolidated Statements of Cash Flows....................... 93
Notes to Consolidated Financial Statements.................. 94
</TABLE>
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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, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Beyond.com
Corporation at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
San Jose, California
January 14, 2000, except for
Note 6, as to which the
date is March 27, 2000.
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BEYOND.COM CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1998 1999 2000
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 81,548 $ 11,539 $ 18,460
Short-term investments................................. -- 54,774 31,685
Accounts receivable, net of allowances of $878, $992
and $976 at December 31, 1998 and 1999 and March 31,
2000, respectively.................................. 8,785 13,843 6,530
Note receivable from a director........................ 270 -- --
Prepaid partnership agreements......................... 4,091 5,151 1,003
Prepaid expenses and other current assets.............. 2,110 3,002 2,191
Cost of deferred revenue............................... 5,255 9,388 4,641
-------- --------- ---------
Total current assets........................... 102,059 97,697 64,510
Property and equipment, net.............................. 3,150 13,077 12,724
Goodwill and other intangible assets..................... -- 102,229 89,647
Other noncurrent assets.................................. 4,695 7,373 6,823
-------- --------- ---------
Total assets................................... $109,904 $ 220,376 $ 173,704
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 14,443 $ 12,579 $ 8,181
Accrued employee expenses.............................. 575 2,046 3,581
Other accrued liabilities.............................. 1,169 5,468 11,173
Current obligations under capital leases............... -- 118 78
Deferred revenue....................................... 5,744 9,393 4,049
-------- --------- ---------
Total current liabilities...................... 21,931 29,604 27,062
Noncurrent obligations under capital leases.............. -- 10 --
Convertible notes payable................................ 63,250 63,250 63,250
Commitments and contingencies
Stockholders' equity:
Common stock, no par value:
Authorized shares -- 50,000,000 in 1998 and
70,000,000 in 1999 and 2000.......................
Issued and outstanding shares -- 27,424,763 in 1998,
36,490,133 in 1999 and 37,834,055 in 2000......... 69,311 295,814 296,924
Deferred compensation.................................. (2,226) (1,444) (622)
Accumulated other comprehensive income................. -- 269 --
Accumulated deficit.................................... (42,362) (167,127) (212,910)
-------- --------- ---------
Total stockholders' equity..................... 24,723 127,512 83,392
-------- --------- ---------
Total liabilities and stockholders' equity..... $109,904 $ 220,376 $ 173,704
======== ========= =========
</TABLE>
See accompanying notes.
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BEYOND.COM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1997 1998 1999 1999 2000
------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $16,806 $ 36,650 $ 117,282 $ 19,102 $ 31,339
Cost of revenues......................... 14,873 31,074 101,290 16,204 27,162
------- -------- --------- -------- --------
Gross profit............................. 1,933 5,576 15,992 2,898 4,177
Operating expenses:
Research and development............... 1,060 4,140 10,385 1,731 3,680
Sales and marketing.................... 1,696 27,206 81,349 16,563 16,992
General and administrative............. 1,087 3,801 12,319 2,258 3,700
Goodwill and deferred compensation
amortization........................ -- 1,565 36,745 732 11,486
Restructuring.......................... -- -- -- -- 13,707
------- -------- --------- -------- --------
Total operating expenses....... 3,843 36,712 140,798 21,284 49,565
------- -------- --------- -------- --------
Loss from operations..................... (1,910) (31,136) (124,806) (18,386) (45,388)
Interest and other income................ 173 1,356 5,131 858 876
Interest expense......................... (6) (1,293) (5,090) (1,268) (1,271)
------- -------- --------- -------- --------
Loss from continuing operations.......... (1,743) (31,073) (124,765) (18,796) (45,783)
Loss from discontinued operations........ (3,616) -- -- -- --
------- -------- --------- -------- --------
Net loss................................. (5,359) (31,073) (124,765) (18,796) (45,783)
Accretion of premium on redemption of
redeemable convertible preferred stock
in excess of purchase price............ (101) (51) -- -- --
------- -------- --------- -------- --------
Net loss applicable to common
stockholders........................... $(5,460) $(31,124) $(124,765) $(18,796) $(45,783)
======= ======== ========= ======== ========
Basic and diluted net loss per share from
continuing operations.................. $ (0.21) $ (1.65) $ (3.67) $ (0.66) $ (1.23)
Basic and diluted net loss per share from
discontinued operations................ (0.40) -- -- -- --
------- -------- --------- -------- --------
Basic and diluted net loss per share..... $ (0.61) $ (1.65) $ (3.67) $ (0.66) $ (1.23)
======= ======== ========= ======== ========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share............. 9,000 18,900 34,039 28,364 37,114
======= ======== ========= ======== ========
</TABLE>
See accompanying notes.
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BEYOND.COM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS
COMMON STOCK OTHER EQUITY
--------------------- DEFERRED COMPREHENSIVE ACCUMULATED (NET CAPITAL
SHARES AMOUNT COMPENSATION INCOME DEFICIT DEFICIENCY)
---------- -------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.............. 9,000,000 $ 45 $ -- $ -- $ (2,454) $ (2,409)
Issuance of common stock upon exercise of
options under employee stock option
plans................................... 70,000 2 -- -- -- 2
Spin-off of CyberSource to stockholders on
December 31, 1997....................... -- -- -- -- (3,324) (3,324)
Net loss and comprehensive loss........... -- -- -- -- (5,359) (5,359)
---------- -------- ------- ----- --------- ---------
Balance at December 31, 1997.............. 9,070,000 47 -- -- (11,238) (11,191)
Issuance of common stock upon exercise of
options under employee stock option
plans................................... 166,852 28 -- -- -- 28
Conversion of redeemable convertible
preferred stock to common stock upon the
initial public offering................. 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 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 loss........... -- -- -- -- (31,073) (31,073)
---------- -------- ------- ----- --------- ---------
Balance at December 31, 1998.............. 27,424,763 69,311 (2,226) -- (42,362) 24,723
Issuance of common stock upon exercise of
options under employee stock option
plans................................... 1,087,175 2,360 -- -- -- 2,360
Common shares issued in second public
offering, net........................... 3,000,000 98,499 -- -- -- 98,499
Shares issued upon merger with
BuyDirect.com, net...................... 4,930,123 123,267 -- -- -- 123,267
Deferred compensation resulting from the
assumption of BuyDirect.com options..... -- 4,590 (4,590) -- -- --
Write-off of deferred compensation for
terminated employees.................... -- (2,826) 2,826 -- -- --
Shares issued upon purchase of
SoftGallery, net........................ 48,072 613 -- -- -- 613
Amortization of deferred compensation..... -- -- 2,546 -- -- 2,546
Unrealized gain on short-term
investments............................. -- -- -- 269 -- 269
Net loss.................................. -- -- -- -- (124,765) (124,765)
---------- -------- ------- ----- --------- ---------
Comprehensive loss........................ -- -- -- -- -- (124,496)
---------- -------- ------- ----- --------- ---------
Balance at December 31, 1999.............. 36,490,133 $295,814 $(1,444) $ 269 $(167,127) $ 127,512
Issuance of common stock upon exercise of
options under employee stock option
plans (unaudited)....................... 1,290,684 723 -- -- -- 723
Issuance of common stock under employee
stock purchase plan (unaudited)......... 53,238 283 -- -- -- 283
Receipt of common stock contributed by
Chairman for Chairman Grant Plan
(unaudited)............................. (122,750) -- -- -- -- --
Issuance of common stock under Chairman
Grant Plan (unaudited).................. 122,750 637 -- -- -- 637
Write-off of deferred compensation for
terminated employees (unaudited)........ -- (533) 533 -- -- --
Amortization of deferred compensation
(unaudited)............................. -- -- 289 -- -- 289
Unrealized loss on short-term investments
(unaudited)............................. -- -- -- (269) -- (269)
Net loss (unaudited)...................... -- -- -- -- (45,783) (45,783)
---------- -------- ------- ----- --------- ---------
Comprehensive loss (unaudited)............ -- -- -- -- -- (46,052)
---------- -------- ------- ----- --------- ---------
Balance of March 31, 2000 (unaudited)..... 37,834,055 $296,924 $ (622) $ -- $(212,910) $ 83,392
========== ======== ======= ===== ========= =========
</TABLE>
See accompanying notes.
92
<PAGE> 96
BEYOND.COM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1997 1998 1999 1999 2000
------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(5,359) $(31,073) $(124,765) $(18,796) $(45,783)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 79 510 2,825 337 418
Common shares issued for employee services.............. -- -- -- -- 637
Amortization of goodwill and deferred compensation...... -- 1,565 36,745 755 12,871
Amortization of debt issuance costs..................... -- 113 803 127 145
Net loss of discontinued operations..................... 3,616 -- -- -- --
Changes in assets and liabilities:
Accounts receivable..................................... (750) (7,604) (4,888) 5,091 7,313
Prepaid partnership agreements.......................... (396) (3,695) 579 (5,779) 4,148
Prepaid expenses and other current assets............... (44) (1,990) (177) (982) 811
Cost of deferred revenue................................ (4,120) (317) (4,133) 778 4,747
Other noncurrent assets................................. -- (770) (3,462) 90 405
Accounts payable........................................ 1,720 12,187 (3,042) (9,310) (4,398)
Accrued employee expenses............................... 20 525 1,361 289 1,535
Other accrued liabilities............................... 152 949 (4,489) 4,415 5,705
Deferred revenue........................................ 4,602 175 3,646 (1,228) (5,344)
Cash provided by discontinued operations................ 181 -- -- -- --
------- -------- --------- -------- --------
Net cash used in operating activities..................... (299) (29,425) (98,997) (24,213) (16,790)
INVESTING ACTIVITIES
Purchases of property and equipment....................... (333) (3,280) (11,657) (1,101) (65)
Purchases of short-term investments....................... -- -- (57,659) -- (54,038)
Sale of short-term investments............................ -- -- 3,154 -- 76,858
Issuance of note receivable to director................... -- (270) -- -- --
Costs associated with the acquisition of BuyDirect.com.... -- -- (5,839) (5,839) --
Repayment of note receivable to director.................. -- -- 270 -- --
Cash used for discontinued operations..................... (4,611) -- -- -- --
------- -------- --------- -------- --------
Net cash used in investing activities..................... (4,944) (3,550) (71,731) (6,940) 22,755
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 lease obligations.................... (3) (57) (140) -- (50)
Proceeds from sale of redeemable convertible preferred
stock, net.............................................. 6,069 2,924 -- -- --
Proceeds from sale of common stock, net................... -- 48,830 98,499 -- --
Proceeds from exercise of stock options................... 2 28 2,360 55 723
Proceeds from sale of common stock to employees........... -- -- -- -- 283
Cash used for discontinued operations..................... (1,946) -- -- -- --
------- -------- --------- -------- --------
Net cash provided by financing activities................. 4,077 111,952 100,719 55 956
------- -------- --------- -------- --------
Net increase (decrease) in cash and cash equivalents...... (1,166) 78,977 (70,009) (31,098) 6,921
Cash and cash equivalents at beginning of period.......... 3,737 2,571 81,548 81,548 11,539
------- -------- --------- -------- --------
Cash and cash equivalents at end of period................ $ 2,571 $ 81,548 $ 11,539 $ 50,450 $ 18,460
======= ======== ========= ======== ========
SUPPLEMENTAL SCHEDULES OF CASH FLOW INFORMATION
Interest paid............................................. $ 6 $ -- $ 4,693 $ 3 $ --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Issuance of Warrant to AOL................................ $ -- $ 1,075 $ -- $ -- $ --
Deferred compensation related to stock options............ $ -- $ 3,791 $ 4,590 $ -- $ --
Issuance of common stock upon conversion of preferred
stock................................................... $ -- $ 15,540 $ -- $ -- $ --
Issuance of common stock in conjunction with
acquisitions............................................ $ -- $ -- $ 123,880 $120,542 $ --
</TABLE>
See accompanying notes.
93
<PAGE> 97
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Beyond.com Corporation ("Beyond.com" or the "Company") was incorporated in
the state of California as CyberSource Corporation on August 12, 1994. In 1998,
the Company reincorporated in Delaware as software.net Corporation. In December
1998, the Company changed its name to Beyond.com. 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
reflect CyberSource as a discontinued operation (see Note 4).
Basis of Presentation
The accompanying consolidated financial statements reflect the financial
position and results of operations of the Company and its wholly owned
subsidiaries and include the results of operations of BuyDirect.com and
SoftGallery from the date of acquisition (see Note 3). All intercompany
transactions and balances have been eliminated.
Interim Financial Statements
In the opinion of management, the unaudited interim consolidated financial
statements at March 31, 2000 and for the three months ended March 31, 1999 and
2000 include all adjustments necessary to present fairly the Company's financial
position at March 31, 2000, and results of operations and cash flows for the
three months ended March 31, 1999 and 2000. Results for the three months ended
March 31, 2000 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 two sources: the
operation of eStores and resale of computer software. The Company's revenues
include sales of software to customers using credit cards, to corporate
customers that are invoiced directly under credit terms, to U.S. Government
agencies pursuant to contractual arrangements and, to a lesser extent, amounts
received from software developers for advertising and promotion. Revenue from
the sale of software, net of estimated returns, is recognized when persuasive
evidence of an arrangement exists, either shipment of the physical product or
delivery of the electronic product has occurred, fees are fixed and determinable
and collectibility is considered probable. Sales of software under contracts
with U.S. Government agencies require continuing service, support and
performance by the Company. Accordingly, the related revenues and costs are
deferred and recognized over the period the service, support and performance are
provided. Revenues derived from software developers for advertising and
promotion are recognized as the services are provided. Costs of deferred revenue
relate to software licenses purchased from software developers for sales to U.S.
Government agencies.
The American Institute of Certified Public Accountants Statement of
Position, "Software Revenue Recognition" (SOP 97-2) provides revised and
expanded guidance on software revenue recognition and
94
<PAGE> 98
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
applies to all entities that earn revenue from licensing, selling, or otherwise
marketing computer software. The application of SOP 97-2 has not had a material
impact on the Company's results of operations.
Foreign Currency Translation
The financial statements of the Company's subsidiaries are translated into
U.S. dollars in accordance with the Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation." Assets and liabilities of the Company's
subsidiaries are translated using exchange rates on the last day of the
reporting period. Revenues and expenses are translated using the average
exchange rates in effect during the period. Gains and losses from foreign
currency translation were not material through December 31, 1999.
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, 1999 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, 1997, 1998, and 1999 were approximately $178,000, $8,500,000, and
$19,956,000, respectively. Amounts capitalized for future advertising were
$515,000 at December 31, 1998. There were no amounts capitalized for future
advertising at December 31, 1999.
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, 1998 and 1999 and March 31, 2000, cash
equivalents consist primarily of investments in money market accounts for which
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.
Short-Term Investments
Short-term investments are classified as available-for-sale and are carried
at fair market value. Short-term investments are comprised primarily of
commercial paper and corporate notes with an original maturity greater than
three months and less than one year. Unrealized gains and losses on short-term
investments, which represent the difference between the fair market value and
the amortized or original cost, are approximately $269,000 as of December 31,
1999 and are included in accumulated other comprehensive income. There were no
realized gains or losses from the sale of short-term investments during fiscal
1999.
95
<PAGE> 99
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
The following is a summary of available for sale securities at December 31,
1999:
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED FAIR
COST GAINS/(LOSSES) VALUE
----------- -------------- -----------
<S> <C> <C> <C>
Obligations of government agencies......... $11,498,000 $(18,000) $11,480,000
Corporate obligations, principally
commercial paper and corporate notes..... 43,007,000 287,000 43,294,000
----------- -------- -----------
Total................................. $54,505,000 $269,000 $54,774,000
=========== ======== ===========
</TABLE>
The Company held no short-term investments at December 31, 1998.
Concentration of Credit Risk and Other Risks
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, and accounts receivable. The Company operates in three business
segments 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 management's expectations. For each of the years ended
December 31, 1997, 1998 and 1999 and the three months ended March 31, 2000, U.S.
Government agencies accounted for 33%, 29%, 25% and 33% of revenues,
respectively. No customer accounted for greater than 10% of the receivable
balance at December 31, 1998. As of December 31, 1999, the Company had three
U.S. Government agency customers that accounted for 65% of gross accounts
receivable.
The Company's contracts with U.S. Government agencies 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,
-----------------
1998 1999
------ -------
<S> <C> <C>
Computer equipment and software............................. $2,450 $12,779
Furniture and fixtures...................................... 1,010 2,146
Office equipment............................................ 77 401
Leasehold improvements...................................... 221 1,169
------ -------
3,758 16,495
Less accumulated depreciation and amortization.............. (608) (3,418)
------ -------
$3,150 $13,077
====== =======
</TABLE>
96
<PAGE> 100
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
Long-Lived Assets
The Company reviews its long-lived assets, including its goodwill and other
intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
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 9, 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 10.
Net Loss Per Share
Net loss per share is presented under Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128). Basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period and excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is computed using the
weighted average number of common and dilutive common shares outstanding during
the period. Due to the Company's net loss for the fiscal years ended December
31, 1997, 1998, and 1999 and the three months ended March 31, 1999 and 2000,
potentially dilutive securities have been excluded from the computation as their
effect is antidilutive.
If the Company had reported net income, diluted net income per share would
have included the shares used in the computation of net loss per share as well
as the effect of approximately 7,120,000, 4,853,000, 1,016,000, 6,374,000, and
6,313,000 shares purchasable under outstanding options and warrants not included
above for the years ended December 31, 1999, 1998, and 1997 and for the three
months ended March 31, 2000 and 1999, respectively. The number of common
equivalent shares from options and warrants would be determined on a weighted
average basis using the treasury stock method. The convertible notes outstanding
in 1998, 1999, and 2000 were also excluded from the common equivalent share
calculation, as it would have been antidilutive.
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.
Internally Used Software
In fiscal 1999, the Company adopted 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 to all non-governmental entities for software which
is internally developed, acquired, or modified solely to meet the entity's
internal needs. SOP 98-1 did not have a material effect on the Company's
financial statements or results of operations.
97
<PAGE> 101
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
Comprehensive Loss
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities, which were previously
reported separately in stockholders' equity, to be included in other
comprehensive loss. Comprehensive loss consists of the Company's net loss and
other comprehensive income.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," (SFAS 133). SFAS 133 establishes accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 133 requires all
companies to recognize derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after July 1, 2000. The Company is currently assessing the potential impact SFAS
133 will have on the Company's statement of financial position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). The Company is required
to adopt SAB 101 no later than its quarter ended December 31, 2000. The Company
does not believe that the adoption of SAB 101 will have a material effect on its
financial position or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform with current
year's presentation.
2. RESTRUCTURING COSTS
During the quarter ended March 31, 2000, Beyond.com Corporation (the
"Company" or "Beyond.com") recorded a restructuring charge of $13.7 million.
This was a result of a plan to refocus the Company's business from a consumer
retail focused company to a business-to-business e-commerce services company. As
part of this refocus, the Company reduced its workforce by approximately 75
employees in January 2000, or approximately 20% of its total workforce,
consolidated facilities and disposed of excess capital assets. Additionally, the
Company terminated its existing marketing agreements focused on generating
consumer sales with AOL, CNET, Excite, Network Associates, Yahoo! and ZDNet
during February and March 2000. The restructuring charges were comprised of
approximately $10.1 million in termination fees and associated prepaid and
intangible assets write-offs related to certain marketing agreements, $2.0
million in employee termination costs, $700,000 for the write-off of excess
equipment and facilities consolidation, and $900,000 for the write-off of
prepaid royalties and consultation expenses related to the Company's change in
business focus. The remaining restructuring reserve, included in other accrued
liabilities, as of March 31, 2000 of approximately $3.5 million will be drawn
down over the next nine months with cash payments related to the termination of
marketing agreements and employee severance and benefit costs.
98
<PAGE> 102
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
The following table summarizes the Company's restructuring activities for
the three months ended March 31, 2000:
<TABLE>
<CAPTION>
EXCESS
MARKETING SEVERANCE EQUIPMENT AND
AGREEMENTS AND BENEFITS FACILITIES OTHER TOTAL
---------- ------------ ------------- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Restructuring reserve recorded in quarter
ended March 31, 2000..................... $10,123 $ 2,002 $ 693 $ 889 $13,707
Cash charges............................... (3,181) (1,330) -- (348) (4,859)
Non-cash charges........................... (4,100) -- (693) (541) (5,334)
------- ------- ----- ----- -------
Reserve balance as of March 31, 2000....... $ 2,842 $ 672 $ -- $ -- $ 3,514
======= ======= ===== ===== =======
</TABLE>
3. ACQUISITIONS
BuyDirect.com
On March 30, 1999, a wholly owned subsidiary of Beyond.com merged with and
into BuyDirect.com, an online software retailer for consumers and business
customers. BuyDirect.com was originally launched as a service of CNET and became
a wholly owned subsidiary of Beyond.com in March 1998. Upon the closing of this
merger, Beyond.com issued 4,930,123 shares of its common stock to
BuyDirect.com's stockholders in exchange for their outstanding shares of
BuyDirect.com common and preferred stock. Beyond.com assumed options to purchase
281,757 shares of its common stock in connection with the merger. The common
stock issued was valued at $120.5 million based on the average closing price of
the common stock for the five trading days immediately preceding and the five
trading days following the announcement of the acquisition. The Company
accounted for the merger using the purchase method of accounting. The purchase
consideration of approximately $138.9 million included the fair market value of
the common stock of $120.5 million, the fair value of the fully vested options
assumed of $2.7 million, liabilities assumed of $13.0 million and the
acquisition costs of $5.8 million incurred in connection with the merger. The
fair value of the unvested options assumed of $4.6 million has been recorded as
deferred compensation.
The Company has allocated the purchase price to assets and liabilities
based on management's best estimates of the respective fair values with the
excess cost over the net assets acquired allocated to goodwill as follows
(amounts in millions):
<TABLE>
<S> <C>
Current assets.............................................. $ 1.6
Property and equipment...................................... 1.1
Marketing agreements........................................ 2.0
Customer base............................................... 2.0
Assembled workforce......................................... 1.1
Technology.................................................. 1.6
Covenants not to compete.................................... 6.5
Goodwill.................................................... 123.0
------
Total purchase price................................... $138.9
======
</TABLE>
The intangible assets are being amortized to expense over the estimated
useful lives of one to three and one half years. Fifteen percent of the shares
issued to the BuyDirect.com stockholders are being held in escrow for a period
not to exceed fifteen months after the date of the closing of the merger to
secure indemnification
99
<PAGE> 103
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
obligations of the BuyDirect.com stockholders. At December 31, 1999 the balance
of intangible assets and goodwill was $102.2 million, net of accumulated
amortization of $34.1 million.
The unaudited pro forma consolidated statement of operations data for the
years ended December 31, 1998 and 1999 set forth below gives effect to the
acquisition of BuyDirect.com as if it occurred on January 1, 1998. The unaudited
pro forma results for 1998 and 1999 include an adjustment to reflect a full year
of amortization of goodwill, intangible assets and deferred compensation
recorded in conjunction with the acquisition. The basic and diluted net loss per
share amounts are computed using the weighted average number of shares of common
stock outstanding after the issuance of the Company's common stock to acquire
the outstanding shares of BuyDirect.com.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1998 1999
---------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $ 41,297 $ 119,731
Net loss.................................................... $(86,059) $(176,030)
Basic and diluted net loss per share........................ $ (3.61) $ (3.88)
</TABLE>
SoftGallery SARL
On October 20, 1999, Beyond.com acquired SoftGallery SARL, a Paris, France
based, online software reseller of digitally downloadable software products.
Under the terms of the acquisition, Beyond.com issued approximately 48,000
shares of its common stock to SoftGallery stockholders, paid cash of $500,000
and assumed liabilities of $167,000. In addition, Beyond.com is obligated to
issue an additional 192,000 shares to SoftGallery stockholders, subject to
SoftGallery meeting specific European revenue targets and employment
contingencies. The European revenue contingencies are only applicable if
Beyond.com meets certain marketing and business development commitments in
Europe. These shares will be held in escrow and will be delivered in various
intervals through October 2003 as SoftGallery meets the revenue targets and
employment contingencies (See Note 14).
The common stock issued on the date of the acquisition that was not subject
to the revenue targets or employment contingencies was valued at approximately
$600,000, based on the closing price on the date of the acquisition. The
acquisition was accounted for using the purchase method of accounting. The total
purchase price was approximately $1.4 million and included the fair value of the
common shares issued of approximately $600,000, a cash payment of $500,000,
liabilities assumed of $167,000 and acquisition costs of approximately $100,000.
The purchase price was allocated to intangible assets and is being amortized
over the estimated useful life of four years. On the date of the acquisition,
Beyond.com did not record the value of the contingent consideration to be issued
because these amounts were not earned and were subject to the revenue targets
and employment contingencies. The value of the remaining shares subject to the
revenue targets and employment contingencies will be recorded as compensation
expense as the shares are earned pursuant to the terms of the agreement. As of
December 31, 1999, no contingent shares had been earned. Pro forma information
for the SoftGallery acquisition has not been presented because the effect of the
acquisition was not considered material to the Company's consolidated financial
position, results of operations, or cash flows.
4. 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-
100
<PAGE> 104
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
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 $1,128,000 for the year ended December 31, 1997. The results of
operation of the discontinued business have been presented as a loss from
discontinued operations.
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>
5. SEGMENT INFORMATION
Under Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" (FAS 131), operating
segments are identified as components of an enterprise for which separate
discrete financial information is available that is evaluated by the chief
operating decision maker or decision making group to make decisions about how to
allocate resources and assess performance. The Company's chief operating
decision maker is the Chief Executive Officer. At December 31, 1999, the Company
reported its operations as three segments: eStores, Government Systems and
website groups.
The following table presents net revenues and cost of revenues of the
Company's three segments for the three years ended December 31, 1999 and the
three months ended March 31, 1999 and 2000. There were no inter-business unit
sales or transfers. The Company does not report operating expenses, depreciation
and amortization, interest income (expense), income taxes, capital expenditures,
or identifiable assets by its industry segments to the Chief Executive Officer.
The Company's Chief Executive Officer reviews the revenues from each of the
Company's reportable segments, and all of the Company's expenses are managed by
101
<PAGE> 105
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
and reported to the Chief Executive Officer on a consolidated basis. Net
revenues and cost of revenues are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------ ------------------
1997 1998 1999 1999 2000
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
NET REVENUES
eStores......................... $ -- $ 1,734 $ 25,041 $ 3,444 $ 9,177
Government Systems.............. 5,573 10,503 29,718 3,064 10,192
Website......................... 11,233 24,413 62,523 12,594 11,970
------- ------- -------- ------- -------
Total...................... $16,806 $36,650 $117,282 $19,102 $31,339
======= ======= ======== ======= =======
COST OF REVENUES
eStores......................... $ -- $ 1,400 $ 20,873 $ 2,711 $ 7,844
Government Systems.............. 5,053 9,631 27,006 2,808 9,428
Website......................... 9,820 20,043 53,411 10,685 9,890
------- ------- -------- ------- -------
Total...................... $14,873 $31,074 $101,290 $16,204 $27,162
======= ======= ======== ======= =======
</TABLE>
6. MARKETING AGREEMENTS
During 1997, 1998 and 1999, the Company entered into marketing agreements
with America Online Inc. ("AOL"), Excite Inc. ("Excite"), Netscape
Communications Corporation ("Netscape"), Network Associates Inc. ("Network
Associates") and Yahoo! Inc. ("Yahoo!"). In the first quarter of 2000, the
Company terminated its agreements with AOL, Excite, Network Associates, and
Yahoo! (See Note 2).
The AOL agreement was for a term of 42 months beginning March 1998, unless
earlier terminated, and provided for a marketing relationship between AOL and
the Company. Pursuant to this agreement, the Company was 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 Website from various AOL
Web pages. During the term, AOL was 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 did not provide certain
cumulative targeted Impressions, AOL would 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).
The Excite agreement was for a term of 36 months beginning April 1998
pursuant to which the Company was the exclusive Software reseller on certain
screens within certain channels of Excite's website.
The Netscape agreement was for a term of 24 months beginning August 1997,
pursuant to which the Company created and managed an online software store
accessible through Netscape's Internet site. In compensation for sales of
product offered by the Company on this online software store, the Company paid a
commission to Netscape. These commissions were charged to sales and marketing
expense. Under the agreement, the Company also paid Netscape a fee to license
its trademarks for use on the Company's co-branded site.
The Company 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
102
<PAGE> 106
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
Associates and whereby the Company agreed to operate and manage certain aspects
of Network Associates' website. Pursuant to these agreements, the Company and
Network Associates developed an interdependent relationship whereby the Company
resells Network Associates' products. Furthermore, the Company had significant
fixed financial obligations to Network Associates under the Co-Hosting Agreement
based on certain exclusivity rights.
In February 1999, the Company entered into an agreement with Yahoo!, a
global Internet media company that offers a branded network of comprehensive
information, communication and shopping services. Under this agreement, Yahoo!
promoted and advertised Beyond.com as a premier software merchant by delivering
page views across Yahoo!'s branded network of sites, including the Yahoo! home
page, My Yahoo!, Yahoo! Shopping, Yahoo! Games, and relevant categories and
search result pages in the Yahoo! directory. Over the 18 month term of the
agreement, the Company was required to make fixed payments, augmented by certain
performance-based payments.
Under these agreements, once the Company had generated a certain cumulative
net gross margin from software sales, the Company was required to 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, 1999, none of these net gross margin targets were achieved.
The amounts paid under the AOL, Netscape and Network Associates agreements
were 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 were March 1998 to March 2000, August 1997 to July 1999,
and September 1998 to March 2000 for AOL, Netscape and Network Associates,
respectively. The amounts paid under the Excite and Yahoo! agreements were
expensed to sales and marketing expenses as the payments became due over the
contract term beginning from the launch date of the services. The period of
amortization for these agreements was April 1998 to March 2000 and February 1999
to March 2000 for Excite and Yahoo!, respectively. The Company expensed
$14,818,000 and $6,700,000 related to these agreements in 1999 and 1998,
respectively. Total amounts capitalized under these agreements at December 31,
1999 and 1998 were $3,990,000 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 358,423 shares of common stock at an exercise price per share of $8.37 and
such shares are non-forfeitable.
The Company determined the fair value of the IPO Warrant using the
Black-Scholes model with the following assumptions: risk-free interest rate of
6.00%, no dividend yield, a volatility factor of 0.25, and an expected life of
eight years based on the term of the warrant. The fair value of the IPO Warrant
was determined at the time of issuance to be approximately $1,075,000 and was
recorded 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
$656,000 of the IPO Warrant value to sales and marketing expense through 1999.
As a result of the BuyDirect.com merger, the Company assumed marketing
agreements with @Home Corporation (@Home), CNET Networks Inc. (CNET), ZD Inc.
(ZDNet) and other partners In the first quarter of 2000, the Company terminated
its agreements with CNET and ZDNet (See Note 2).
103
<PAGE> 107
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
The @Home agreement is for a term of 36 months beginning in November 1998
and provides for the Company to become the exclusive software store promoted on
the @Home Network. The amounts paid under this agreement are being amortized to
sales and marketing expenses on a straight-line basis over the period from the
launch date to the termination of the services. Additionally, under the terms of
the @Home agreement, the minimum payments made by the Company may be reduced
pursuant to an adjustment factor based on the average annual number of @Home
subscribers and may be increased if gross profits earned by the Company on sales
to @Home subscribers exceed certain levels.
The CNET agreement was for a term of 24 months beginning in October 1998.
Under the CNET agreement, Beyond.com received Internet and television promotions
and exclusivity from CNET. The amounts paid under this agreement were amortized
to sales and marketing expenses on a straight-line basis over the period from
the launch date to the termination of the services. Additionally, the Company
was required to pay certain actual click fees owed for customers delivered to
the Company's sites directly from the CNET sites in the period incurred.
The ZDNet agreement was for a term 36 months beginning in February 1999 and
provided for certain promotion and advertising and on-line software content for
use on the Company's website. The amounts paid under this agreement were
amortized to sales and marketing expenses on a straight-line basis over the
period from the launch date to the termination of the services.
The Company expensed $6,674,000 related to the agreements assumed as a
result of the BuyDirect.com merger in 1999. Total amounts capitalized under
these agreements assumed as a result of the BuyDirect.com merger at December 31,
1999 were $1,161,000.
7. 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, 1999, the fair value of the convertible notes based on quotes from
a major brokerage firm was $37,065,000. 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.
8. OPERATING LEASE COMMITMENTS
The Company leases or subleases facilities and certain equipment under
noncancelable operating leases expiring at various dates through 2004. In
October 1999, the Company entered into a new facility lease agreement for
approximately 105,000 square feet of office space in Santa Clara, California.
The new lease expires in 2004. In addition to the base rent, the lease agreement
requires the Company to pay taxes, insurance and maintenance expenses.
Occupation of the new facility commenced in November 1999. Rental expense was
approximately $3,353,000, $1,228,000, and $266,000 for the years ended December
31, 1999, 1998, and 1997, respectively.
104
<PAGE> 108
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
In September 1999, the Company issued a $1.0 million letter of credit in
connection with the Company's new facility lease. The letter of credit
designates the landlord as beneficiary and provide that the landlord may draw
down the letter of credit in the amount equal to any default under the lease. As
of December 31, 1999, no amounts have been advanced to the lessor from the
letter of credit.
The annual future minimum lease payments under all noncancelable operating
leases at December 31, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 3,385
2001........................................................ 2,960
2002........................................................ 2,981
2003........................................................ 2,803
2004........................................................ 2,433
-------
Total minimum lease payments........................... $14,562
=======
</TABLE>
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In March and April 1998, the Company sold a total of 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. Upon the
Company's initial public offering, all outstanding shares of preferred stock
converted into 12,198,962 shares of common stock.
10. STOCKHOLDERS' EQUITY
Common Shares
The Company is authorized to issue 70,000,000 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 at
December 31, 1999 as follows:
<TABLE>
<S> <C>
1995, 1998, and 1999 Stock Option Plans (the Plans)
Options outstanding....................................... 5,987,994
Options available for future grant........................ 946,008
Options granted outside of the Plans........................ 773,728
Shares reserved for Employee Stock Purchase Plan............ 1,000,000
Outstanding warrants........................................ 358,423
Shares reserved for conversion of convertible notes
payable................................................... 3,448,745
----------
12,514,898
==========
</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. On
March 17, 1999, the
105
<PAGE> 109
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
Company's Board of Directors and stockholders adopted the 1999 Non-Qualified
Stock Option Plan and reserved an aggregate of 750,000 shares of common stock
for grants of stock options under such plan. On March 17, 1999, the Company's
Board of Directors and stockholders adopted the 1999 Incentive Stock Option Plan
and reserved an aggregate of 2,000,000 shares of common stock for grants of
stock options under such plan. 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.
Some of the options granted under the Plans vest over one year at the rate of
50% 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, 1997, 1998, and
1999, as 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
106
<PAGE> 110
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
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 was recorded.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
AVERAGE
SHARES NUMBER EXERCISE PRICE
AVAILABLE OF SHARES PER SHARE
---------- ---------- --------------
<S> <C> <C> <C>
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................................... -- (166,852) $ 0.168
Options canceled.................................... 224,250 (224,250) $ 5.775
---------- ----------
Balance at December 31, 1998.......................... 268,849 4,494,299 $ 4.163
Additional Shares Reserved.......................... 3,031,757 -- --
Options granted..................................... (3,528,457) 3,528,457 $19.391
Options exercised................................... -- (860,903) $ 2.768
Options canceled.................................... 1,455,616 (1,455,616) $12.983
Options assumed as a result of the BuyDirect.com
Merger........................................... (281,757) 281,757 $ 1.328
---------- ----------
Balance at December 31, 1999.......................... 946,008 5,987,994 $11.113
========== ==========
</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, 1999:
<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 1999 PRICE LIFE (YEARS) 1999 PRICE
---------------- ----------------- -------- ------------ ----------------- --------
<S> <C> <C> <C> <C> <C>
$0.0042 - $ 7.69 2,654,512 $ 2.79 7.90 1,329,078 $ 1.45
$ 7.75 - $13.50 1,458,021 $ 9.92 9.51 156,254 $ 9.36
$ 13.75 - $26.00 1,377,286 $21.51 9.38 94,600 $22.37
$ 25.13 - $37.00 498,175 $29.67 9.31 11,350 $28.16
--------- ---------
$0.0042 - $37.00 5,987,994 $11.11 8.67 1,591,282 $ 4.17
========= =========
</TABLE>
As of December 31, 1998 and 1997, 647,341 and 666,448 options were
exercisable at a weighted average price of $0.09 and $0.03, respectively.
107
<PAGE> 111
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
Options Granted Outside of the Stock Options 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. A total of 226,272 option
shares have been exercised as of December 31, 1999. As of December 31, 1999, the
remaining life of the options is approximately two years, and all options are
exercisable.
Employee Stock Purchase Plan
In April 1999, the Company's Board of Directors and stockholders adopted
its 1999 Employee Stock Purchase Plan and reserved 1,000,000 shares of common
stock for issuance under this plan. In accordance with Section 423 of the
Internal Revenue Code, this plan permits eligible employees to authorize payroll
deduction of up to 10% of their base compensation to purchase shares of the
Company's common stock at the lower of 85% of the fair market value of the
common stock on the first day of the offering period or the purchase date. No
shares have been issued under this plan as of December 31, 1999. The first seven
month offering period ended on January 31, 2000.
Chairman Grant Program
In January 2000, the Company's Board of Directors adopted the Chairman
Grant Program and reserved 1,000,000 shares of common stock for issuance to
selected full-time employees under this plan. William S. McKiernan, the
Company's Chairman of the Board, agreed to contribute 1,000,000 shares of the
Company's common stock owned by him to the Plan over the one year term of the
Plan. Shares will be issued on a quarterly basis, in the total amount of 250,000
shares per quarter. The shares shall be awarded to selected full time employees
who have gone beyond normal expectations in their contributions to the Company's
success as a whole. During the first quarter of 2000, the Company issued
approximately 123,000 shares at a cost of approximately $637,000 and accrued
approximately $1.6 million for an additional 377,000 shares to be issued related
to employees service in the first quarter of 2000.
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 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 6.1%, 5.2%, and 5.6% for 1997, 1998, and 1999, respectively, no
dividend yield, no volatility factor for 1997; a volatility factor of 1.35 for
1998; and a volatility factor of 1.23 for 1999, of the expected market price of
the Company's common stock, and a weighted average expected life of the option
of 4.0 years for 1997, 5.43 years for 1998 and 5.34 years for 1999.
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
108
<PAGE> 112
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
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,
--------------------------------
1997 1998 1999
------- -------- ---------
<S> <C> <C> <C>
Pro forma net loss (in thousands).................. $(5,364) $(32,924) $(142,559)
Pro forma basic and diluted net loss per share..... $ (0.30) $ (1.36) $ (4.19)
</TABLE>
The weighted average fair value of options granted, which is the value
assigned to the options under FAS 123, was $0.04, $6.48, and $17.05 for options
granted during 1997, 1998 and 1999, respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 1997, 1998, and 1999 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 2000.
11. 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, could 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 $747,000 and $1.1 million related
to such services in 1998 and 1999, respectively. As of December 31, 1998 and
1999, amounts owed to CyberSource were approximately $100,000 and $151,000,
respectively. In June 1999, the Company granted a two-year exclusive license of
proprietary risk management system software to Cybersource for a non-refundable
license fee of $600,000.
During the years ended December 31, 1997, 1998, and 1999, legal fees
incurred were approximately, $304,000, $1,300,000, and $988,000, respectively,
relating to a law firm in which the current secretary of the board of directors
of the Company is a partner. As of December 31, 1998 and 1999, amounts owed to
the law firm were approximately $147,000, and $69,000, respectively.
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 accrued on the
outstanding principal at a rate of 6.02% per annum. The note and related accrued
interest was paid in full during 1999.
12. 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.
13. INCOME TAXES
No provision for income taxes has been recorded due to operating losses
with no current tax benefit.
109
<PAGE> 113
BEYOND.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITIED)
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $135,000,000 and $38,000,000, respectively.
The Company also had federal and state research credit carryforwards of
approximately $374,000 and $435,000, respectively. The net operating loss
carryforwards and tax credit carryforwards will expire at various dates
beginning in 2002 through 2019, if not utilized.
Utilization of the net operating losses and tax 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
tax 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
our deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards........................ $ 14,507,000 $ 48,875,000
Research credit carryforwards........................... 491,000 809,000
Reversals and accruals.................................. 807,000 1,048,000
------------ ------------
Total deferred tax assets.......................... 15,805,000 50,732,000
Valuation allowance..................................... (15,805,000) (50,732,000)
------------ ------------
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 the laws that will be in effect when the
differences are expected to reverse. In light of FAS 109 and based upon the
weight of available evidence, which includes our historical operating
performance, the reported net operating losses in the period 1997, 1998, and
1999, and the uncertainties regarding the future results of our operations, we
have provided a full valuation allowance against our net deferred tax assets, as
it is not more likely than not that such deferred tax assets will be realized.
The valuation allowance increased by $12,659,000 during 1998 and increased by
$34,927,000 during 1999.
14. EVENTS SUBSEQUENT TO THE DATE OF AUDITOR'S REPORT (UNAUDITED)
SoftGallery
On April 25, 2000, the Company entered into an agreement to return 80.01%
of Beyond.com's ownership of SoftGallery to the previous SoftGallery
stockholders. Under the terms of this agreement, Beyond.com issued approximately
177,000 shares of its common stock and paid cash of $125,000 to SoftGallery
shareholders in order to replace and supercede obligations associated with the
original acquisition. Beyond.com's cost basis for its remaining 19.99%
investment in SoftGallery is $2.0 million which includes the cost of the initial
purchase of approximately $1.4 million and the additional divestiture cost of
approximately $600,000. Beyond.com retained no significant influence over the
day-to-day operations of SoftGallery under terms of this agreement. The Company
has accounted for its remaining 19.99% investment in SoftGallery under the cost
method.
110
<PAGE> 114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond the indemnification specifically provided by the current
law.
Article IX of our Certificate of Incorporation, as amended, provides for
the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI of our Bylaws provides for the indemnification of officers,
directors and third parties acting on our behalf if such person acted in good
faith and in a manner reasonably believed to be in, and not opposed to, our best
interest and, with respect to any criminal action or proceeding, the indemnified
party had no reason to believe his or her conduct was unlawful.
We have entered into indemnification agreements with our directors and
executive officers, in addition to providing indemnification in our Bylaws, and
intend to enter into indemnification agreements with any new directors and
executive officers in the future.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits: The Exhibit Index attached hereto is hereby incorporated to
this item by reference thereto.
(b) FINANCIAL STATEMENT SCHEDULES
BEYOND.COM 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, 1997
Accounts receivable allowances........................ $ 65 $240 $ (30) $275
Allowance for sales returns........................... -- -- -- --
Period ended December 31, 1998
Accounts receivable allowances........................ 275 332 (31) 576
Allowance for sales returns........................... -- 462 (160) 302
Period ended December 31, 1999
Accounts receivable allowances........................ 576 634 (809) 401
Allowance for sales returns........................... 302 310 (21) 591
</TABLE>
All other schedules are omitted because they are inapplicable or the
requested information is shown in the financial statements of the registrant or
related notes thereto.
ITEM 22. UNDERTAKINGS
(a) The Undersigned hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first-class mail or equally
prompt means. This includes information contained in documents filed subsequent
to the effective date of the registration statement throughout the date
responding to the request.
II-1
<PAGE> 115
(b) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(c) The Undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of our annual report pursuant to
Section 13(a) or 15(d) of the existing notes Exchange Act of 1934 (and, where
applicable, each filing of any employee benefit plan's annual report pursuant to
Section 15(d) of the existing notes Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time hall be deemed to be the initial bona
fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrants pursuant to the provisions described under Item 20 above, or
otherwise, the registrants have each 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 registrants of expenses incurred or paid by a director, officer
or controlling person of the registrants in the successful defense of
controlling person in connection with the securities being registered, the
registrants will, unless in the opinion of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by them is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(e) The undersigned registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and
deviation from low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
II-2
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California on June 30, 1999.
Beyond.com Corporation
By: /s/ RONALD S. SMITH
------------------------------------
Ronald S. Smith
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints William S. McKiernan and C.
Richard Neely, Jr. as his true and lawful attorneys-in-fact and agents, jointly
and severally, with full power of substitution and resubstitution, for and in
his stead, in any and all capacities, to sign on his behalf the Registration
Statement on Form S-4 in connection with the sale by the selling stockholders of
offered securities, and to execute any amendments thereto (including
post-effective amendments) or certificates that may be required in connection
with this Registration Statement, and to file the same, with all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission and granting unto said attorney in-fact and gents,
jointly and severally, the full power and authority to do and perform each and
every act and thing necessary or advisable to all intents and purposes as he/she
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, jointly and severally, or his/her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement on Form S-4 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By: /s/ RONALD S. SMITH June 30, 2000
---------------------------------------------- President, Chief Executive
Ronald S. Smith Officer and Director
By: /s/ WILLIAM S. MCKIERNAN June 30, 2000
---------------------------------------------- Chairman of the Board of
William S. McKiernan Directors
By: /s/ MARK W. BAILEY June 30, 2000
----------------------------------------------
Mark W. Bailey Director
By: /s/ RONALD S. POSNER June 30, 2000
----------------------------------------------
Ronald S. Posner Director
By: /s/ RICHARD SCUDELLARI June 30, 2000
----------------------------------------------
Richard Scudellari Director
</TABLE>
II-3
<PAGE> 117
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1* Form of Dealer Manager Agreement.
3.1 Certificate of Incorporation, as amended (Incorporated by
reference from Beyond.com's Current Report on Form 8-K filed
with the Commission on December 31, 1998, as amended.)
3.2 Bylaws of the Registrant (Incorporated by reference from
Beyond.com's Registration Statement on Form S-1 (Reg. No.
333-51121), as amended, filed with the Commission on June
17, 1998.)
4.1 Form of exchange note indenture between the Registrant and
LaSalle National Bank as exchange note trustee.
4.3 Form of existing note indenture dated as of November 23,
1998, by and between the Registrant and LaSalle National
Bank Association (Incorporated by reference from
Beyond.com's Registration Statement on Form S-1 (Reg. No.
333-74545) filed with the Commission on March 23, 1999.)
4.6 Form of Exchange Note (included in Exhibit 4.1)
5.1* Opinion of Morrison & Foerster LLP
12.1 Statement regarding computation of ratios of earnings to
fixed charges
23.1 Consent of Ernst & Young LLP, independent auditors
23.2* Consent of Morrison & Foerster LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
25.1* Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of LaSalle National Bank
Association
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and other Nominees
99.4 Form of Letter to clients
</TABLE>
------------------------
* To be filed by amendment.
