<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CYBERSOURCE CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock (CyberSource Corporation)
Common Stock and Preferred Stock (PaylinX Corporation)
(2) Aggregate number of securities to which transaction applies:
8,450,792 (CyberSource Corporation)
7,042,331 (paylinX Corporation)
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$0.0033*
(4) Proposed maximum aggregate value of transaction:
$23,474.44
(5) Total fee paid:
$4.69
* Calculated in accordance with Exchange Act Rule 0-11(a)(4), based on one-
third of the par value of PaylinX's common stock (par value $0.01 per
share) and preferred stock (par value $0.01 per share), of which there were
an aggregate of 7,042,331 shares outstanding on July 31, 2000.
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
CYBERSOURCE CORPORATION
1295 Charleston Road
Mountain View, CA 94043
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FRIDAY, SEPTEMBER 15, 2000
TO OUR STOCKHOLDERS:
A special meeting of stockholders of CyberSource Corporation will be
held at our corporate headquarters at 1295 Charleston Road, Mountain View,
California, at 10:00 a.m. on Friday, September 15, 2000.
At our meeting, we will ask you to act on the following matters:
1. Approval of Issuance of Shares in Merger. We have entered into an
Agreement and Plan of Merger, dated as of July 9, 2000, providing for the
acquisition by merger of all the outstanding stock of PaylinX Corporation by us
in exchange for shares of our common stock. If the merger is completed,
approximately 8.45 million shares of our common stock (subject to adjustment for
changes in the outstanding capital stock of PaylinX) will be issued to the
stockholders of PaylinX in exchange for all of the shares of outstanding stock
of PaylinX. We will ask you to approve the issuance of the shares of our common
stock in the merger.
2. Approval of Amendment to Our Stock Option Plan. We will ask you to
ratify and approve amendments to our 1999 Stock Option Plan to increase the
number of shares reserved for issuance under the plan from 6,000,000 shares to
7,000,000 shares.
3. Other Business. If other business is properly raised at the
meeting, or if we need to adjourn the meeting, you will vote on these matters,
too.
If you were a stockholder as of the close of business on August 1,
2000, you are entitled to vote at this meeting.
We cordially invite all stockholders to attend the meeting in person.
To assure your representation at the meeting, however, you are urged to mark,
sign, date and return the enclosed proxy card as soon as possible in the
enclosed postage-prepaid envelope.
Whether or not you expect to attend the special meeting, please
complete, sign, date and promptly mail your proxy in the envelope provided. You
may revoke this proxy at any time prior to the special meeting and, if you
attend the special meeting, you may vote your shares in person.
BY ORDER OF THE BOARD OF DIRECTORS
----------------------
Richard Scudellari, Secretary
Dated: August 16, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SUMMARY OF THE ACQUISITION................................................................................ I
Information About the Companies.......................................................................... i
Summary of the Merger.................................................................................... ii
Federal Tax Treatment.................................................................................... iii
Accounting Treatment..................................................................................... iii
Conditions to the Merger................................................................................. iii
Possible Termination of Transaction...................................................................... iii
Completion of Merger..................................................................................... iv
A WARNING ABOUT FORWARD-LOOKING INFORMATION............................................................... v
PROXY STATEMENT........................................................................................... 1
GENERAL INFORMATION....................................................................................... 1
Why Did You Send Me This Proxy Statement?................................................................ 1
What Constitutes a Quorum?............................................................................... 1
What Vote Is Required for Each Proposal?................................................................. 1
What Are the Recommendations of the Board of Directors?.................................................. 2
How Many Votes Do I Have?................................................................................ 2
How Do I Vote by Proxy?.................................................................................. 2
Can I Change My Vote After I Return My Proxy Card?....................................................... 3
How Will CyberSource Executive Officers and Directors Vote?.............................................. 3
What Are the Costs of Solicitation of Proxies?........................................................... 3
Will There Be Any Other Matters Considered at the Special Meeting?....................................... 3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 4
Who Are the Largest Owners of CyberSource Common Stock?.................................................. 4
How Do We Compensate Directors?.......................................................................... 5
How Do We Compensate Executive Officers?................................................................. 5
Compensation Committee, Insider Participation and Interlocks............................................. 8
DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD OF DIRECTORS............................................. 9
PROPOSAL 1:............................................................................................... 9
APPROVAL OF THE ISSUANCE OF SHARES OF OUR COMMON STOCK IN THE MERGER WITH
PAYLINX CORPORATION....................................................................................... 9
General.................................................................................................. 9
Who are the Parties to the Merger?....................................................................... 9
MATERIAL TERMS OF THE MERGER.............................................................................. 10
What is the Structure of the Merger?..................................................................... 10
What Consideration Will We Pay to the PaylinX Stockholders, Option Holders and Warrant Holders........... 15
Are There Related Agreements?............................................................................ 16
What is the Background of this Transaction?.............................................................. 17
Has CyberSource Received an Opinion from a Financial Advisor that the Transaction is Fair from a
Financial Point of View?................................................................................ 18
What Vote is Required to Effect this Merger?............................................................. 24
Why is My Approval Necessary?............................................................................ 24
Do I Have any Rights if I do not Approve the Proposal?................................................... 24
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
Will My Rights as a CyberSource Stockholder Change Following the Merger?................................. 24
How Will the Merger be Treated for Accounting Purposes?.................................................. 25
How Will the Merger be Treated for Federal Income Tax Purposes?.......................................... 25
Who are the Largest Owners of PaylinX Common Stock?...................................................... 25
Will the Shares Issued to the PaylinX Stockholders be Registered with the Securities and Exchange
Commission............................................................................................... 26
Does the Merger Require the Notification or Approval of any Regulators?.................................. 26
Have CyberSource and PaylinX had any Significant Business Dealings with One Another in the Past?......... 27
INFORMATION ABOUT PAYLINX CORPORATION..................................................................... 27
SELECTED CONSOLIDATED FINANCIAL DATA FOR CYBERSOURCE...................................................... 29
HISTORICAL AND PRO FORMA PER SHARE DATA................................................................... 31
SELECTED FINANCIAL DATA FOR PAYLINX....................................................................... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR PAYLINX.................................................................................... 33
Results of Operations.................................................................................... 33
Liquidity and Capital Resources.......................................................................... 36
FINANCIAL STATEMENTS...................................................................................... F-1
PROPOSAL 2:............................................................................................... 39
RATIFICATION AND APPROVAL OF AMENDMENTS TO CYBERSOURCE'S 1999 STOCK OPTION
PLAN...................................................................................................... 39
Why Do You Need to Increase the Shares Reserved for Issuance?............................................ 39
The CyberSource Corporation 1999 Stock Option Plan....................................................... 39
OTHER BUSINESS............................................................................................ 43
INCORPORATION BY REFERENCE................................................................................ 43
</TABLE>
ANNEXES
-------
A. Agreement and Plan of Merger By and Among PaylinX Corporation, Sapphire
Merger, Inc. and CyberSource Corporation dated as of July 9, 2000
B. Opinion of J.P. Morgan Securities Inc.
C. CyberSource Corporation 1999 Stock Option Plan
ii
<PAGE>
SUMMARY OF THE ACQUISITION
This summary highlights selected information from this document
relating to the acquisition of all the outstanding stock of PaylinX Corporation
by us and may not contain all the information that is important to you. For a
more complete understanding of the acquisition and for a more complete
description of the legal terms of the acquisition, you should read this entire
document carefully, as well as any additional documents we refer you to,
including the Agreement and Plan of Merger that we have attached as Annex A.
Information About the Companies
CyberSource Corporation
1295 Charleston Road
Mountain View, CA 94043
(650) 965-6000
. We are a leading developer and provider of eCommerce transaction
services, and a pioneer in the area of Internet fraud detection. More
than 2,200 businesses in more than 26 countries have chosen to use the
CyberSource Internet Commerce Suite. The CyberSource Internet Commerce
Suite offers customer-controlled, real-time services including,
Payment Services, Tax Services, Risk Management Services, Distribution
Control Services, and Fulfillment Management Services. CyberSource
Global Professional Services develops comprehensive eCommerce
solutions that are built upon our mission-critical transaction
services and tailored to each customer environment to provide
security, reliability, and extensibility for rapid growth. Our
services enable online businesses to focus their resources on areas
where they can most effectively differentiate themselves, such as
marketing, Web site content, merchandising and customer support. By
outsourcing their eCommerce transaction processing needs to us, online
businesses can speed their time to market, reduce their overall
operating costs and process orders from around the world in local
currencies. Our services are comprehensive, scalable (adaptable to
meet increases in the number of transactions), highly reliable and
performed via a secure messaging protocol, or transmission format.
. You can find more information about CyberSource Corporation on page
9 of this document under the caption "Who are the Parties to the
Merger? - CyberSource Corporation and Sapphire Merger, Inc."
PaylinX Corporation
1767 Business Center Drive
Suite 100
Reston, VA 20190
(703) 438-7111
. PaylinX, a privately held company incorporated in 1996 with primary
operations in St. Louis, is a leader in multi-channel enterprise
payment solutions. The PaylinX payment server is a robust,
enterprise-wide transaction processing platform that manages the
authorization and settlement of credit card and other payment
transactions in real-time through built-in connections with
third-party processors and merchant-acquiring banks. The fully
scalable PaylinX payment solution enables businesses to accept and
process payment transactions through multiple enterprise sales
channels--Web storefronts, call centers, interactive voice response
(IVR) systems, in-store point-of-sale systems and kiosks--seamlessly
through a single uniform payment architecture.
. You can find more information about PaylinX on page 9 of this
document under the caption "Who are the Parties to the Merger? -
PaylinX Corporation."
i
<PAGE>
Summary of the Merger
The Agreement and Plan of Merger provides that our new subsidiary,
Sapphire Merger, Inc., will merge into PaylinX, with PaylinX surviving as a
wholly-owned subsidiary corporation of CyberSource. As a result of the merger,
each stockholder of PaylinX will receive one and two-tenths (1.2) shares of our
common stock for each share of PaylinX common stock or share of PaylinX
preferred stock held by that stockholder immediately prior to the merger. In the
merger, a total of approximately 8.45 million shares of our common stock
(subject to adjustment for changes in the outstanding capital stock of PaylinX)
will be issued to the PaylinX stockholders. In addition, upon consummation of
the merger, we will take on the obligation to issue approximately 2.91 million
shares of our common stock (subject to adjustment for changes in the outstanding
options) to holders of options to purchase PaylinX common stock. The options
will be converted into options to purchase shares of our common stock based on
the exchange ratio used in the merger for the issuance of our common stock for
PaylinX stock. Further, we will take on the obligation to issue approximately
17,000 shares of our common stock upon exercise of outstanding warrants to
purchase PaylinX stock. You should read the Agreement and Plan of Merger
carefully, which qualifies the summary below.
. We will exchange approximately 8.45 million shares of our common
stock for all of PaylinX's outstanding shares of stock, which
will then be cancelled. On July 9, 2000, PaylinX had 2,174,212
shares of common stock and 4,868,119 shares of preferred stock
outstanding. Any change in the number of shares of PaylinX stock
outstanding prior to the merger will result in an appropriate
adjustment in the number of shares of our common stock to be
issued in the merger. The procedure for the exchange of our stock
for PaylinX stock is explained in greater detail on page 15
under the caption "What Consideration Will We Pay to the PaylinX
Stockholders, Option Holders and Warrant Holders?"
. Options to purchase shares of PaylinX common stock that have been
issued to employees of PaylinX will be converted into options to
purchase shares of CyberSource common stock, using the same
exchange ratio as in the merger. On July 9, 2000 there were
outstanding options to purchase 2,430,128 shares of PaylinX
common stock. All of these options will be converted upon
completion of the merger into options to purchase, based on the
exchange ratio used in the merger for the issuance of our common
stock for PaylinX common stock, shares of our common stock,
subject to the terms of the PaylinX Corporation 2000 Stock Option
Plan. The procedure for the assumption of the options is more
fully explained on page 15 under the caption "What Consideration
will We Pay to the PaylinX Stockholders, Option Holders and
Warrant Holders?"
. We will issue approximately 17,000 shares of our common stock
upon exercise of outstanding warrants to purchase PaylinX stock.
For more information, please read the section entitled "What
Consideration Will We Pay to the PaylinX Stockholders, Option
Holders and Warrant Holders?" on page 15 of this document.
. Because we are issuing more than 20% of our currently outstanding
shares of common stock in the merger, under the listing rules of
The Nasdaq Stock Market, we are required to seek your approval
for the issuance of our common stock. Please read the section
entitled "Why is My Approval Necessary?" on page 24 of this
document.
ii
<PAGE>
. Under Delaware law, you do not have appraisal rights in
connection with this transaction, as explained more fully on page
24 under the caption "Do I Have any Rights if I do not Approve
the Proposal?"
. Your rights as a stockholder of CyberSource will not change
following the merger. In addition, PaylinX's stockholders, who
will become new stockholders of CyberSource, will have the same
rights as you do. Please refer to the section entitled "Will my
Rights as a CyberSource Stockholder Change Following the Merger?"
on page 24 of this document.
Federal Tax Treatment
. The merger and exchange of stock is intended to be a tax-free
reorganization for CyberSource, Sapphire Merger, Inc. and PaylinX
under the Internal Revenue Code, as explained more fully on page
25 under the caption "How Will the Merger be Treated for
Federal Income Tax Purposes?"
Accounting Treatment
. The merger will be accounted for by us as a purchase of a
business. This means that, for accounting and financial reporting
purposes, the assets and liabilities of PaylinX will be recorded
at their fair value, and any excess of CyberSource's purchase
price over the fair value of PaylinX's tangible net assets will
be recorded as intangible assets, including goodwill. For further
information, see "How Will the Merger be Treated for Accounting
Purposes?" on page 25.
Conditions to the Merger
The completion of the merger depends upon the satisfaction of a number
of conditions, including, but not limited to, the following:
. Approval by our stockholders of Proposal 1, authorizing the
issuance of our shares of common stock in the merger;
. Approval of the Agreement and Plan of Merger by the stockholders
of PaylinX;
. Absence of a determination by the Department of Justice and
Federal Trade Commission that the merger violates antitrust laws
or anti-competition regulations; and
. Receipt of a favorable determination by the Commission of the
California Department of Corporations that the terms and
conditions of the merger are fair or, alternatively, the filing
with and acceptance by the Securities and Exchange Commission of
a registration statement on Form S-4 to register the shares we
will issue in the merger.
For further information, see "What is the Structure of the Merger?--
Conditions to the Acquisition" on page 11.
Possible Termination of Transaction
Either we or PaylinX may call off the merger under certain
circumstances, including, but not limited to, if:
iii
<PAGE>
. We both consent;
. The other party breaches in a material manner any of the
representations and warranties or any covenant or agreement that
it has made under the Agreement and Plan of Merger;
. There is a valid injunction or prohibition against the merger
issued by a court or government agency;
. The merger is not completed on or before November 30, 2000;
. Our stockholders do not approve Proposal 1; or
. In connection with an alternative transaction for PaylinX, as
described in more detail below.
For further information, see "What is the Structure of the Merger?
--Termination of the Transaction" on page 13.
Completion of Merger
The merger will become effective when we file a Certificate of Merger
with the Delaware Secretary of State, which will occur as soon as practicable
following the satisfaction or waiver of all of the conditions to the merger.
iv
<PAGE>
A WARNING ABOUT FORWARD-LOOKING INFORMATION
We have made forward-looking statements in this document, and in
certain documents that we refer to in this document, that are subject to risks
and uncertainties. These statements are based on the beliefs and assumptions of
our management and on information currently available to our management.
Forward-looking statements include the information concerning possible or
assumed future results of operations of CyberSource set forth under "Proposal 1
-- What is the Background of this Transaction?" and "Unaudited Pro Forma
Condensed Combined Financial Statements," and statements preceded by, followed
by or that include the words "will," "believes," "expects," "anticipates,"
"intends," "plans," "estimates" or similar expressions. In particular, we have
made statements in this document regarding the anticipated effect of the
acquisition and our anticipated performance in future periods. Such statements
are subject to risks relating, among other things, to the following:
. Our revenues and earnings following the merger may be lower than
expected, or operating costs or customer or key employee losses
and business disruption following the acquisition may be greater
than expected;
. We may experience greater than expected costs or difficulties
relating to the integration of our business with that of PaylinX;
. We may encounter difficulties in managing our growth which could
adversely affect our results of operations;
. Increased competitive pressures, both domestically and
internationally, including pressures that result from the
issuance of patents or other intellectual property to our
competitors, may affect the sales of our services and impede our
ability to maintain our market share and pricing goals;
. Changes in United States, global or regional economic conditions
may affect the sale of our services and increase our costs
associated with providing such services;
. Changes in laws or regulations, including increased government
regulation of the Internet and privacy related issues, third
party relations and approvals, decisions of courts, regulators
and governmental bodies, may adversely affect our business or
ability to compete; and
. Other risks and uncertainties as may be detailed from time to
time in our public announcements and Securities and Exchange
Commission filings.
Our management believes that these forward-looking statements are
reasonable. You should not, however, place undue reliance on such forward-
looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Our future results and
stockholder values following completion of the acquisition may differ materially
from those expressed in these forward-looking statements. Many of the factors
that will determine these results and values are beyond our ability to control
or predict.
v
<PAGE>
CYBERSOURCE CORPORATION
1295 Charleston Road
Mountain View, CA 94043
PROXY STATEMENT
For the
Special Meeting of Stockholders
To be held on September 15, 2000
__________________________________________
GENERAL INFORMATION
This proxy statement contains information about our special meeting of
stockholders to be held on Friday, September 15, 2000 at our corporate
headquarters at 1295 Charleston Road Mountain View, California, at 10:00 a.m.
and any postponements or adjournments thereof.
Why Did You Send Me This Proxy Statement?
We sent you this proxy statement and the enclosed proxy card because
our board of directors is soliciting your votes for use at the Special Meeting
of Stockholders.
This proxy statement summarizes information that you need to know in
order to cast an informed vote at the meeting. However, you do not need to
attend the meeting to vote your shares. Instead, you may simply complete, sign
and return the enclosed proxy card.
We will begin sending this proxy statement, notice of special meeting
and the enclosed proxy card on or about August 16, 2000 to all stockholders
entitled to vote. Those entitled to vote are stockholders of record on August
1, 2000. On August 1, 2000, there were ________ shares of our common stock
outstanding.
What Constitutes a Quorum?
To establish a quorum at the special meeting, a majority of the shares
of our common stock outstanding on the record date must be present, either in
person or by proxy. We will count abstentions and broker non-votes for purposes
of establishing the presence of a quorum at the meeting.
What Vote Is Required for Each Proposal?
. Issuance of Shares in the Merger. The proposal to approve the
--------------------------------
issuance of shares in the merger must receive the affirmative
vote of a majority of our shares of common stock represented and
voting at the meeting. If you are present in person or
represented by proxy at the meeting and abstain from voting, it
has the same effect as if you voted against this proposal. In
addition, if you do not instruct your broker on how to vote on
this proposal, your broker will not be able to vote for you.
Those
1
<PAGE>
shares for which brokers are not able to vote will not be
considered voting at the special meeting and for purposes of
approving this proposal.
. Amendment of CyberSource's 1999 Stock Option Plan. The proposal
-------------------------------------------------
to amend our 1999 Stock Option Plan to increase the number of
shares of common stock reserved for issuance under the plan must
receive the affirmative vote of a majority of the shares of our
common stock represented and voting at the meeting. If you are
present in person or represented by proxy at the meeting and
abstain from voting, it has the same effect as if you voted
against this proposal. Broker non-votes will not be counted as
votes cast and will have no effect on the result of the vote.
What Are the Recommendations of the Board of Directors?
Our Board of Directors has unanimously approved the following items:
. issuance of our common stock in the merger; and
. the amendment of our 1999 Stock Option Plan to increase the
number of shares of common stock reserved thereunder for
future issuance.
We believe that the merger and the related transactions are fair to
and in the best interests of CyberSource and our stockholders. The Board of
Directors therefore unanimously recommends that you vote FOR approval of the
issuance of our common stock in the merger.
We believe that the amendment of our 1999 Stock Option Plan is in the
best interests of CyberSource and our stockholders. The Board of Directors
therefore unanimously recommends that you vote FOR the amendment of our 1999
Stock Option Plan.
How Many Votes Do I Have?
Each share of our common stock that you own entitles you to one vote
on each proposal. The proxy card indicates the number of shares that you own.
How Do I Vote by Proxy?
Whether you plan to attend the meeting or not, we urge you to
complete, sign and date the enclosed proxy card and return it promptly in the
envelope provided. Returning the proxy card will not affect your right to vote
in person at the meeting.
If you properly fill in your proxy card and send it to us in time to
vote, your "proxy" (one of the individuals named on your proxy card) will vote
your shares as you direct on each proposal. If you sign the proxy card but do
not make specific choices, your proxy will vote your shares as recommended by
the board of directors as follows:
. FOR the issuance of our common stock in the merger; and
. FOR the amendment of our 1999 Stock Option Plan.
2
<PAGE>
Can I Change My Vote After I Return My Proxy Card?
Yes. Even after you have submitted your proxy, you may change your
vote at any time before the proxy is exercised if:
. you file either a written revocation of your proxy, or a duly
executed proxy bearing a later date, with our Corporate Secretary
prior to the meeting; or
. you attend the meeting and vote in person. Presence at the
meeting will not revoke your proxy unless and until you vote in
person.
However, if your shares are held in the name of your broker, bank or
other nominee, and you wish to vote in person, you must bring an account
statement and a letter of authorization from your nominee so that you can vote
your shares.
How Will CyberSource Executive Officers and Directors Vote?
On the record date of August 1, 2000, our executive officers and
directors, including their affiliates, had voting power with respect to an
aggregate of ______________ shares of our common stock, or approximately ____%
of the shares of our common stock then-outstanding. We currently expect that
such directors and officers will vote all of their shares in favor of each of
the proposals.
What Are the Costs of Solicitation of Proxies?
We will bear the cost of solicitation of proxies from our stockholders
and the cost of printing and mailing this document. In addition to solicitation
by mail, our directors, officers and employees may solicit proxies from
stockholders by telephone, in person or through other means. These persons will
not receive additional compensation, but they will be reimbursed for the
reasonable out-of-pocket expenses they incur in connection with this
solicitation. We also will make arrangements with brokerage firms, fiduciaries
and other custodians who hold shares of record to forward solicitation materials
to the beneficial owner of these shares. We will reimburse these brokerage
firms, fiduciaries and other custodians for their reasonable out-of-pocket
expenses in connection with this solicitation.
Will There Be Any Other Matters Considered at the Special Meeting?
We are unaware of any matter to be presented at the special meeting
other than the proposals discussed in this proxy statement. If other matters
are properly presented at the special meeting, then the persons named in the
proxy will have authority to vote all properly executed proxies in accordance
with their judgment on any such matter, including any proposal to adjourn or
postpone the meeting. If you vote against any of the proposals, your proxy will
not vote in favor of any proposal to adjourn or postpone the meeting if the
postponement or adjournment is for the purpose of soliciting additional proxies
to approve the proposal that you voted against.
3
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Who Are the Largest Owners of CyberSource Common Stock?
The following table sets forth information known to us with respect to
the beneficial ownership of common stock as of August 1, 2000 as to (a) each
director and nominee, (b) each named executive officer, (c) all directors and
officers as a group, and (d) for each person known by us, as of August 1, 2000,
to beneficially own more than 5% of the outstanding shares of our common stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable, or exercisable within 60 days of August 1, 2000, are deemed
outstanding. Percentage of beneficial ownership is based upon _______ shares of
common stock outstanding as of August 1, 2000. To our knowledge, except as set
forth in the footnotes to this table and subject to applicable community
property laws, each person named in the table has sole voting and investment
power with respect to the shares set forth opposite that person's name. Except
as otherwise indicated, the address of each of the persons in this table is as
follows: c/o CyberSource Corporation, 1295 Charleston Road, Mountain View,
California, 94043.
<TABLE>
<CAPTION>
Name of Beneficial Owner Shares Beneficially Owned
------------------------ ----------------------------
Number Percentage
------------- ------------
<S> <C> <C>
William S. McKiernan(1)................................
AXA Financial, Inc.(2)
1290 Avenue of the Americas
New York, NY 10104...................................
Vulcan Ventures, Inc.
110 110th Avenue NE, Suite 550
Bellevue, WA 98004....................................
General Electric Capital Corporation
260 Longridge Road
Stamford, CT 06927....................................
Thomas A. Arnold(3).................................... *
William E. Donahoo(4).................................. *
Steven P. Novak........................................ *
Richard Scudellari(5).................................. *
Charles E. Noreen, Jr.(6).............................. *
L. Evan Ellis, Jr.(7).................................. *
Linda Fayne Levinson(8)................................ *
Michael N. Agostino (9)................................
All executive officers and directors as a group
(8 persons)(10)......................................
</TABLE>
* Less than 1% of the outstanding common stock.
(1) Includes shares of common stock held by Mr. McKiernan and shares of common
stock held by members of Mr. McKiernan's immediate family. Mr. McKiernan
disclaims beneficial ownership of the shares held by his immediate family.
4
<PAGE>
(2) Based on a Schedule 13G filed with the Securities and Exchange Commission
on February 14, 2000, filed on behalf of a group which includes AXA
Financial, Inc. Pursuant to the Schedule 13G, AXA Financial, Inc. has sole
voting power as to 20,800 and shares voting power as to 2,154,619 shares.
In addition, AXA Financial, Inc. has sole dispositive power as to 522,000
shares and shares dispositive power as to 1,653,419 shares.
(3) Includes options to purchase shares of common stock exercisable within 60
days of August 1, 2000.
(4) Includes options to purchase shares of common stock exercisable within 60
days of August 1, 2000.
(5) Includes options to purchase shares of common stock exercisable within 60
days of August 1, 2000.
(6) Includes options to purchase shares of common stock exercisable within 60
days of August 1, 2000.
(7) Includes options to purchase shares of common stock exercisable within 60
days of August 1, 2000.
(8) Includes options to purchase shares of common stock exercisable within 60
days of August 1, 2000.
(9) Includes options to purchase shares of common stock exercisable within 60
days of August 1, 2000.
(10) Includes options to purchase shares of common stock exercisable within 60
days of August 1, 2000.
How Do We Compensate Directors?
We do not pay directors cash compensation for their services as
directors or members of committees of the Board of Directors. We do reimburse
them for their reasonable expenses incurred in attending meetings of the Board
of Directors. In addition, each new non-employee director receives an option to
purchase 5,000 shares of our common stock upon joining the Board of Directors.
Each incumbent non-employee director is granted an option to purchase an
additional 5,000 shares of our common stock thereafter annually on January 1.
In addition, we granted options to purchase 10,000 shares of our common stock to
each of Messrs. Novak and Scudellari and Ms. Levinson on May 10, 1999, at an
exercise price of $9.00 per share. All options are immediately exercisable upon
grant and remain subject to a right of repurchase as determined under our 1999
Stock Option Plan.
How Do We Compensate Executive Officers?
The following table sets forth information concerning compensation of
our Chief Executive Officer and four other most highly compensated executive
officers whose aggregate cash compensation exceeded $100,000 during the year
ended December 31, 1999 (collectively, CyberSource's "Named Executive
Officers").
5
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation ------------------
-------------------- Securities
Name and Principal Position in 1999 Year Salary Bonus(2) Underlying Options
----------------------------------------------- ------------- -------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
William S. McKiernan 1999 $ 177,587 $20,833 --
Chief Executive Officer (1) 1998 144,375 (3) -- --
Charles E. Noreen, Jr. 1999 152,808 55,000 --
Vice President Finance and Administration 1998 42,115 -- 150,000
and Chief Financial Officer (4)
L. Evan Ellis, Jr. 1999 133,776 72,975 250,000
President and Chief Operating Officer (5) 1998 -- -- --
William E. Donahoo 1999 150,000 31,301 150,000
Vice President of Marketing (6) 1998 3,173 -- --
Thomas A. Arnold 1999 140,452 16,563 65,000
Chief Technical Officer (7) 1998 118,688 5,700 85,000
</TABLE>
-----------------
(1) Mr. McKiernan also held the position of President until August 1999.
(2) Includes bonus amounts earned in fiscal year 1999.
(3) Does not include $60,000 in deferred compensation earned by Mr. McKiernan in
1994 as President of Beyond.com Corporation, allocated to CyberSource in
connection with the spin off of CyberSource from Beyond.com and paid to Mr.
McKiernan in 1998.
(4) Mr. Noreen joined us in September 1998.
(5) Mr. Ellis joined us in April 1999.
(6) Mr. Donahoo joined us in December 1998.
(7) Until June 1999, Mr. Arnold held the position of Vice President of
Engineering and Chief Technology Officer.
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<PAGE>
Option Grants In Fiscal Year 1999
The following table sets forth information for each of our Named Executive
Officers concerning stock options granted to them during the fiscal year ended
December 31, 1999.
<TABLE>
<CAPTION>
Potential Realizable Value at
Number of Assumed Annual Rates of
Securities Percent of Stock Price Appreciation
Underlying Total Options Exercise for Option Term(4)
Options Granted to Price Per Expiration -------------------------------
Granted(1) Employees (2) Share Date(3) 5% 10%
---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William S. McKiernan ......... -- -- -- -- -- --
Charles E. Noreen, Jr. ....... -- -- -- -- -- --
L. Evan Ellis, Jr. ........... 150,000 5.61 $ 5.75 04/12/09 $ 542,422 $1,374,603
100,000 3.74 25.00 08/24/09 1,572,237 3,984,356
William E. Donahoo ........... 150,000 5.61 3.62 01/18/09 341,490 865,402
Thomas A. Arnold ............. 65,000 2.43 3.62 01/18/09 147,979 375,008
</TABLE>
(1) Each of the above options was granted pursuant to our option plans. 25% of
the options granted vest one year from the date of grant. Thereafter, the
remaining 75% of the options granted vest monthly over the next three years.
(2) In the last fiscal year, we granted options to employees to purchase an
aggregate of 2,884,400 shares.
(3) Options may terminate before their expiration dates if the optionee's status
as an employee or consultant is terminated or upon the optionee's death or
disability.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent our estimate or projection of our future common stock prices.
Aggregate Option Exercises In Last Fiscal Year and Year-End Option Values
The following table sets forth information concerning exercises of stock
options during the fiscal year ended December 31, 1999 by each of our Named
Executive Officers and the number and value of unexercised options held by each
of our Named Executive Officers on December 31, 1999.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised In-
Unexercised Options at the-Money Options at
December 31, 1999 December 31, 1999 (1)
Shares Acquired Value ----------------------------- ----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William S. McKiernan ............ -- -- -- -- -- --
Charles E. Noreen, Jr. .......... 20,000 $1,111,675 23,750 106,250 $1,216,238 $5,441,063
L. Evan Ellis, Jr. .............. -- -- -- 250,000 -- 9,579,500
William E. Donahoo .............. -- -- 37,500 112,500 1,804,875 5,414,625
Thomas A. Arnold ................ 14,062 50,694 16,251 77,500 838,777 3,771,856
</TABLE>
(1) The value of unexercised "in-the-money" options represents the difference
between the exercise price of stock options and $51.75, the closing sales
price of common stock on December 31, 1999.
7
<PAGE>
Compensation Committee, Insider Participation and Interlocks.
None of the members of our Compensation Committee is an executive
officer or employee of CyberSource. Two members of our Board of Directors also
serve as members of the Board of Directors of Beyond.com Corporation. Other than
with respect to Beyond.com Corporation, no interlocking relationship exists
between our Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other company, nor has an
interlocking relationship existed in the past.
8
<PAGE>
DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD OF DIRECTORS
PROPOSAL 1:
APPROVAL OF THE ISSUANCE OF SHARES OF OUR COMMON STOCK IN THE MERGER WITH
PAYLINX CORPORATION
General
We have approved an Agreement and Plan of Merger which provides that
our new subsidiary, Sapphire Merger, Inc., will merge with and into PaylinX
Corporation. PaylinX, as the surviving corporation in the merger, will become a
wholly-owned subsidiary of CyberSource. As a result of the merger, the
stockholders of PaylinX will receive approximately 8.45 million shares of our
common stock. We seek your approval to issue our shares of common stock in the
merger. The summary information provided below is provided to assist you in
making an informed voting decision and is qualified in its entirety by the
Agreement and Plan of Merger, which we have included as Annex A to this proxy
statement. We encourage you to carefully read the entire Agreement and Plan of
Merger.
Who are the Parties to the Merger?
CyberSource Corporation and Sapphire Merger, Inc.
We are a leading developer and provider of eCommerce transaction
services, and a pioneer in the area of Internet fraud detection. More than
2,200 businesses in more than 26 countries have chosen to use the CyberSource
Internet Commerce Suite. The CyberSource Internet Commerce Suite offers
customer-controlled, real-time services including, Payment Services, Tax
Services, Risk Management Services, Distribution Control Services, and
Fulfillment Management Services. CyberSource Global Professional Services
develops comprehensive eCommerce solutions that are built upon our mission-
critical transaction services and tailored to each customer environment to
provide security, reliability, and extensibility for rapid growth. Our services
enable online businesses to focus their resources on areas where they can most
effectively differentiate themselves, such as marketing, Web site content,
merchandising and customer support. By outsourcing their eCommerce transaction
processing needs to us, online businesses can speed their time to market, reduce
their overall operating costs and process orders from around the world in local
currencies. Our services are comprehensive, scalable (adaptable to meet
increases in the number of transactions), highly reliable and performed via a
secure messaging protocol, or transmission format.
As the Internet has become an important communications medium, online
businesses and consumers have embraced using the Internet to buy and sell goods
and services. To succeed online, an online business must attract customers to
its Web site and provide an appealing and easy-to-use environment that
encourages customers to place an order by clicking on the "buy" button. Once
the customer places an order, the online business must then process the order by
effectively and efficiently executing numerous transactions, such as credit card
authorization, calculation of sales tax and fulfillment of the order, often
while the customer is waiting.
While early adopters of eCommerce business models often developed
custom transaction processing systems, today many online businesses are seeking
to outsource their transaction processing requirements. Our services offer
online businesses a solution to the challenges of eCommerce transaction
processing. Key benefits of our services include:
9
<PAGE>
. Faster time-to-market,
. Access to a comprehensive suite of services,
. Enhanced customer flexibility and control,
. Global reach, and
. Reduced overall costs.
More than 2,200 customers have chosen to use our services. Our
customers and partners include leading Internet etailers, retailers,
manufacturers and businesses selling online including Amazon.com, Ashford.com,
BUY.COM (U.S. and U.K.), Compaq Computer, Mercata.com, MotherNature.com,
Nike.com, Priceline, Remedy and VerticalNet. CyberSource Corporation has its
headquarters in Mountain View, California, and offices in Japan and the United
Kingdom.
Our executive offices are located at 1295 Charleston Road, Mountain
View, California 94043, and our telephone number is (650) 965-6000.
Sapphire Merger, Inc. is a newly formed, wholly-owned subsidiary of
CyberSource. This subsidiary was formed for the sole purpose of merging into
PaylinX to effect a tax-free exchange of shares.
PaylinX Corporation
PaylinX, a privately held company incorporated in 1996 with primary
operations in St. Louis, is a leader in multi-channel enterprise payment
solutions. The PaylinX payment server is a robust, enterprise-wide transaction
processing platform that manages the authorization and settlement of credit card
and other payment transactions in real-time through built-in connections with
third-party processors and merchant-acquiring banks. The fully scalable PaylinX
payment solution enables businesses to accept and process payment transactions
through multiple enterprise sales channels--Web storefronts, call centers,
interactive voice response (IVR) systems, in-store point-of-sale systems and
kiosks--seamlessly through a single uniform payment architecture.
PaylinX's executive offices are located at 1767 Business Center Drive,
Suite 100, Reston, Virginia 20190, and its telephone number is (703) 438-7111.
MATERIAL TERMS OF THE MERGER
What is the Structure of the Merger?
General
The Agreement and Plan of Merger provides that, after approval by the
PaylinX stockholders and the satisfaction or waiver of the other conditions to
the transaction, Sapphire Merger, Inc. will merge with and into PaylinX. At the
time of the merger, the certificate of incorporation and bylaws of PaylinX will
be amended and restated to read as the certificate of incorporation and bylaws
of Sapphire Merger, Inc. As a result of the merger, PaylinX will become a
wholly-owned subsidiary of CyberSource. The directors and officers of PaylinX
will resign upon the merger becoming effective. The
10
<PAGE>
directors and officers of Sapphire Merger, Inc. immediately prior to the merger
becoming effective will become the directors and officers of PaylinX, and
continue in such capacities until they resign or until their respective
successors are duly elected and qualified.
Conditions to the Acquisition
The completion of the merger depends upon the satisfaction of a number
of conditions, as set forth below.
The obligation of CyberSource and PaylinX to consummate the merger is
subject to the satisfaction or waiver, on or before the intended closing date,
of many conditions, including the following:
. A permit to issue securities will have been issued by the State
of California after a fairness hearing held by the California
Department of Corporations or, alternatively, a registration
statement on Form S-4 will have been filed and declared effective
by the Securities and Exchange Commission covering the issuance
of CyberSource common stock in the merger;
. No order or other legal restraint or prohibition preventing the
consummation of the merger will be in effect;
. Each party, after executing the appropriate documentation, will
have received satisfactory tax opinions from its respective
outside counsel;
. The waiting period applicable under the Hart-Scott-Rodino
Antitrust Improvement Act, or any applicable foreign statute,
will have expired or been terminated;
. The transactions contemplated by the Agreement and Plan of Merger
will have been approved by the requisite vote of the stockholders
of PaylinX; and
. Your approval of Proposal 1 of this proxy statement.
Our obligation to consummate the merger is also subject to the
fulfillment of other conditions, including the following:
. We will have received, among others, the following documents: an
opinion letter from counsel to PaylinX on the legal ramifications
of various aspects of the merger; certification by PaylinX as to
the accuracy of representations and warranties, compliance with
covenants, performance of obligations and satisfaction of
conditions; copies of resolutions of the board of directors and
stockholders of PaylinX authorizing the transaction;
noncompetition agreements with some PaylinX employees; and a
comfort letter from PaylinX's independent accountants;
. No material adverse changes in PaylinX's business will have
occurred;
. PaylinX's net working capital will be equal to or greater than
agreed upon values set forth in the Agreement and Plan of Merger
and we will have received a certificate from PaylinX to that
effect;
11
<PAGE>
. The holders of no more than 1% of the outstanding shares of
PaylinX capital stock will have demanded, or will be eligible to
demand, appraisal rights;
. All material consents, waivers, approvals, authorizations, orders
and filings required to be obtained or made by PaylinX will have
been obtained or made and copies will have been delivered to us;
. If, prior to the closing of the merger, we have reasonably so
requested, PaylinX will have terminated its 401(k) plan and
provided us with satisfactory evidence of the termination;
. The representations and warranties made by PaylinX in the
Agreement and Plan of Merger must be true and accurate and all
covenants and obligations must be duly complied with or
performed;
. PaylinX will have executed and delivered the documents to which
it is a party and the escrow agent will have executed and
delivered the escrow agreement; and
. PaylinX will have obtained the requisite stockholder approval of
any payments or benefits to it Chairman and Chief Executive
Officer, John J. McDonnell, Jr., that could be considered "excess
parachute payments" under federal tax law.
The obligation of PaylinX to consummate the merger is also subject to
the fulfillment of certain other conditions, including the following:
. PaylinX will have received, among others, the following
documents: an opinion letter from counsel to us and Sapphire
Merger, Inc. on the legal ramifications of various aspects of the
merger; our certification as to the accuracy of representations
and warranties, compliance with covenants, performance of
obligations and satisfaction of conditions;
. We and Sapphire Merger, Inc. will have executed and delivered all
documents to which we are a party;
. All material consents, waivers, approvals, authorizations, orders
and filings required to be obtained or made, by us and Sapphire
Merger, Inc. will have been obtained or made by us and Sapphire
Merger, Inc.;
. John J. McDonnell, Jr. will have been appointed to our board of
directors;
. The representations and warranties made by us in the Agreement
and Plan of Merger must be true and accurate and all covenants
and obligations must be duly complied with or performed;
. No material adverse changes in our business will have occurred;
and
. The Nasdaq National Market will have accepted notification of the
listing of the shares of our common stock to be issued in the
merger, if and to the extent acceptance is required for the
effectiveness of the notification.
12
<PAGE>
Termination of the Transaction
Either we or PaylinX may call off the merger under certain
circumstances, including if:
. We both consent;
. The other party breaches in a material manner any of the
representations and warranties or any covenant or agreement that
it has made under the Agreement and Plan of Merger;
. There is a valid injunction or prohibition against the merger
issued by a court or government agency; or
. The acquisition is not completed on or before November 30, 2000.
We may call off the merger under certain circumstances, including if:
. Our stockholders fail to approve the issuance of shares in the
merger; or
. The PaylinX board of directors changes its unanimous
recommendation of the merger, recommends an alternative
transaction to the PaylinX stockholders, or recommends that the
PaylinX stockholders tender their shares pursuant to a tender
offer with respect to 15% or more of the outstanding PaylinX
capital stock.
PaylinX may call off the merger under certain circumstances, including
if, prior to the vote to approve the merger by the PaylinX stockholders, PaylinX
receives a superior proposal and has complied with certain requirements set
forth in the Agreement and Plan of Merger.
In the event the Agreement and Plan of Merger is terminated by mutual
consent of the parties, with some exceptions, each party will pay its own
expenses incurred in connection with the merger.
PaylinX will be obligated to pay us a fee of 2% of the aggregate value
of the merger in the event we terminate the Agreement and Plan of Merger for any
of the following reasons:
. We terminate the agreement as a result of PaylinX's breach of its
representations and warranties and the breach is not cured, or
the merger is not consummated on or before November 30, 2000, and
in either event an alternative transaction resulting in the
acquisition of PaylinX is consummated within 12 months of the
date of the Agreement and Plan of Merger;
. We terminate the agreement as a result of the PaylinX board of
directors changing its unanimous recommendation of the merger,
recommendation of an alternative transaction to the PaylinX
stockholders, or recommendation that the PaylinX stockholders
tender their shares pursuant to a tender offer with respect to
15% or more of the outstanding PaylinX capital stock; or
. PaylinX terminates the agreement as a result of its receipt of a
superior proposal prior to the vote to approve the merger by its
stockholders.
13
<PAGE>
Indemnification; Escrow
Pursuant to the Agreement and Plan of Merger, 10% of the shares of our
common stock to be issued in connection with the merger will be placed in escrow
for a period of one year. The shares will be contributed to the fund by the
PaylinX stockholders on a pro rata basis according to their ownership interests
in PaylinX immediately prior to the merger. The purpose of the escrow is to
provide the means for us to recover any amounts owed to us pursuant to PaylinX's
agreement to indemnify us. A separate escrow agreement among us, an independent
escrow agent and an agent appointed to represent the interests of the PaylinX
stockholders will provide the mechanism by which obligations owed as a result of
the indemnification will be recovered. The value of the shares held in the
escrow fund will be the average closing price of our common stock as reported on
the Nasdaq National Market on the 10 consecutive trading days ending on the day
before the merger closes. Any shares still held in the escrow fund at the end
of one year and not required to resolve any claims pending at that time will be
released to the PaylinX stockholders on the same pro rata basis as they were
contributed to the fund.
The PaylinX stockholders have agreed to indemnify and hold us harmless
against any damages that we incur by reason of the breach or alleged breach by
PaylinX of any representation, warranty, covenant or agreement of PaylinX
contained in the Agreement and Plan of Merger or in any document or certificate
delivered by PaylinX pursuant to the Agreement and Plan of Merger up to the
aggregate value of the escrow fund. This indemnification will be our sole and
exclusive remedy for any breach by PaylinX. We have also agreed to indemnify
and hold the PaylinX stockholders harmless against any damages that the PaylinX
stockholders have incurred by reason of the breach or alleged breach by us or
Sapphire Merger, Inc. of any representation, warranty, covenant or agreement of
us or Sapphire Merger, Inc. contained in the Agreement and Plan of Merger up to
the aggregate value of the escrow fund. This indemnification will be the
PaylinX stockholders' sole and exclusive remedy for any breach by us or Sapphire
Merger, Inc.
Covenants; Conduct of Business Prior to Completion of the Merger
During the period from the date of the Agreement and Plan of Merger
until the time the merger is consummated or the Agreement and Plan of Merger is
terminated, unless we agree otherwise, PaylinX will not take any action, except
in the ordinary course of business, and will use its best efforts to preserve
its business organization substantially intact, keep available the services of
its present officers, employees and consultants, preserve its present
relationships with customers, suppliers and other persons with which it has
significant business relations and will not, directly or indirectly, do, or
propose to do, any of the following without our prior written consent:
. amend or otherwise change its certificate of incorporation or
bylaws;
. issue shares of PaylinX capital stock, options, warrants,
convertible securities or other rights to acquire shares of
PaylinX capital stock, or of any subsidiary or any of its
affiliates (except with respect to the exercise of currently
outstanding options and warrants);
. sell or encumber any assets of PaylinX or of any subsidiary
except in the ordinary course of business, or take any action
that would result in any damage to any material asset of PaylinX;
14
<PAGE>
. accelerate, amend or change the period of exercisability of
options or restricted stock granted under the PaylinX stock
option plans, or authorize cash payments in exchange for any
options granted under any of the plans;
. make any material changes with respect to its capitalization as
of the date of the merger agreement;
. acquire any other business organization, incur any indebtedness
for borrowed money, provide funds to any entity, enter into or
amend any material agreement that provides for the sale, license,
or purchase by PaylinX or any of its subsidiaries of assets,
authorize any capital expenditures or purchase of fixed assets
which are individually in excess of $5,000 or, in the aggregate,
in excess of $100,000, or enter into or amend any contract;
. increase the compensation to its executive officers or, if not in
the ordinary course of business, to its other employees, grant
any severance or termination pay to any director or officer,
establish any collective bargaining or arrangement for the
benefit of any current or former directors, officers or
employees, except, in each case, as may be required by law or as
expressly contemplated by the Agreement and Plan of Merger;
. take any action to change its accounting policies or procedures;
. make any material tax election inconsistent with past practices,
settle or compromise any material tax liability, or agree to an
extension of a statute of limitations;
. pay, discharge or satisfy any claims, liabilities or obligations,
other than their payment, discharge or satisfaction in the
ordinary course of business;
. take or permit any action that could reasonably be expected to
delay the consummation of, or adversely affect, the merger;
. undertake any revaluation of PaylinX's or any of its subsidiary's
assets, other than in the ordinary course of business or in
accordance with generally accepted accounting principles;
. take, or omit to take, any action, which act or omission would
jeopardize qualification of the merger as a reorganization under
federal tax law; or
. take, or agree to take, any of the actions described above.
Amendment and Waiver of the Agreement and Plan of Merger
The Agreement and Plan of Merger may not be amended or modified, nor
may any conditions or obligations be waived, except in a written document signed
by each of the parties.
What Consideration Will We Pay to the PaylinX Stockholders, Option Holders and
Warrant Holders?
Each share of PaylinX common stock or preferred stock will be
converted into and exchanged for one and two-tenths (1.2) shares of our common
stock. On July 9, 2000, there were
15
<PAGE>
7,042,331 shares of PaylinX common stock and preferred stock outstanding.
Assuming this number does not change before we complete the merger, we will
issue a total of approximately 8.45 million shares of our common stock to the
stockholders of PaylinX.
In addition, we have agreed to assume all of PaylinX's stock options
that have been issued under PaylinX's 2000 Stock Option Plan. As of July 9,
2000, PaylinX had outstanding options to purchase 2,430,128 shares of common
stock. When we complete the merger, all of these options will be converted into
options to purchase shares of our common stock under the terms of the PaylinX
Corporation 2000 Stock Option Plan based on the exchange ratio used in the
merger for the issuance of our common stock for PaylinX stock.
We will also assume outstanding warrants to purchase 14,286 shares of
PaylinX common stock, which will be converted to warrants to purchase
approximately 17,000 shares of our common stock.
Are There Related Agreements?
PaylinX has entered into several agreements that include terms that
will be triggered by the merger. In addition, we and PaylinX have entered into
agreements with PaylinX employees and PaylinX investors in connection with
entering into the Agreement and Plan of Merger. These agreements are summarized
below. In connection with the merger, PaylinX's Chairman of the Board and Chief
Executive Officer, John ("Jack") J. McDonnell, Jr., agreed to amend the option
agreement he currently has with PaylinX, which called for full acceleration of
the vesting upon the signing of the Agreement and Plan of Merger, to limit the
acceleration to one half of the unvested shares upon the closing of the merger.
The remainder of Mr. McDonnell's options will vest pursuant to the terms of the
original option agreement. In return, the period over which Mr. McDonnell may
exercise his options was extended and we agreed to further provide that upon a
removal from our Board, other than for "cause," or upon a failure to re-elect
Mr. McDonnell to our Board during the one-year period following the date the
merger is consummated, the unvested portion of his option will accelerate fully.
Severance Agreements
Several of the PaylinX executives whose employment will be terminated
upon the closing of the merger are entitled to severance benefits under the
terms of their employment agreements with PaylinX. These benefits consist of
the executive's salary for the 180 day period following termination, any accrued
but unpaid bonus amounts, accrued but unpaid expenses and continuation of
medical plans and fringe benefits. We have agreed to assume the obligations
under these agreements following the merger.
Option Amendments
The PaylinX stock option plan provided that, upon the execution by
PaylinX of a definitive agreement to merge with another corporation, all
unvested options would accelerate and become fully vested. In connection with
entering into the Agreement and Plan of Merger, the employees who will continue
their employment after the merger agreed to amend the terms of their options to
delay the acceleration of vesting so that half of the unvested options would
vest at closing and the remaining unvested options would continue to vest in
accordance with the original vesting schedule. The amendment provides that if
the employee is terminated without "cause" within a year of the merger closing,
the option accelerates fully, but thereafter acceleration of the options is
governed by our 1999 Stock Option Plan and related form of agreement. As
consideration for the employees entering into these option amendments, we agreed
to grant the employees options to purchase our common stock.
PaylinX employees who hold options to purchase PaylinX stock, but who
were not requested to continue their employment after the merger, also agreed to
amend their option agreements.
16
<PAGE>
These employees agreed to defer acceleration of the vesting of their unvested
options until the merger closes.
Noncompetition Agreements
In connection with the merger, selected PaylinX employees that hold
PaylinX stock or options to purchase PaylinX stock signed noncompetition
agreements providing that from the date the merger closes until 24 months after
the employee's termination of employment with PaylinX or us, the employee may
not be involved in a competitive business within any state of the United States
where we conduct business. The employee is also prohibited from attempting to
induce our employees to leave their employment and from interfering with
customer relationships. As consideration for entering into the noncompetition
agreement, the employees' option agreement was amended to provide that the
period over which the employees options will be exercisable will be extended for
24 months from the date the merger closes.
Lock-up Agreements
In connection with the merger, PaylinX employees that hold PaylinX
capital stock or options to purchase PaylinX stock and PaylinX's investors
owning approximately 87% of the PaylinX capital stock signed lock-up agreements.
Under the lock-up agreements, for a period of 180 days after the closing of the
merger, the signatories may not, without our prior written consent, sell or
transfer any interest in stock acquired in the merger, stock options, the shares
subject to the stock options, or in any of our other securities subsequently
acquired.
Voting Agreements
In connection with the merger, we also entered into voting agreements
with PaylinX's significant stockholders. These voting agreements obligate the
stockholders to vote their shares of PaylinX stock in favor of the merger and
prohibit them from selling or transferring their PaylinX stock until the
earlier of the closing of the merger or the termination of the Agreement and
Plan of Merger. In addition, the voting agreements grant us an irrevocable
proxy to vote the shares held by the stockholders in favor of the merger
proposal and to sign documents indicating approval. Stockholders holding
sufficient voting power to approve the merger proposal have signed voting
agreements.
What is the Background of this Transaction?
During the week of February 24, 2000, David D. Daetz, our Vice
President of Corporate Business Development - Worldwide, contacted Jack
McDonnell, PaylinX's Chief Executive Officer, to explore his interest in some
form of business relationship between the two companies.
On March 2, 2000, Mr. Daetz, Jack McDonnell and John J. McDonnell III,
PaylinX's Senior Vice President of Corporate Development, held a teleconference
to explore a relationship between PaylinX and CyberSource. During this
teleconference, Mr. Daetz ascertained that Jack McDonnell was interested in
further discussing a possible business combination.
On March 20, 2000, William S. McKiernan, our Chief Executive Officer
and Chairman, L. Evan Ellis, our President and Chief Operating Officer, and Mr.
Daetz met Jack McDonnell in Phoenix,
17
<PAGE>
Arizona, where, after signing a mutual nondisclosure agreement, they provided a
business overview of each company and discussed a business combination.
On March 31, 2000, Messrs. McKiernan, Daetz and Thomas A. Arnold, our
Chief Technology Officer, met with Jack McDonnell, John McDonnell, Brian Bates,
PaylinX's President and Chief Operating Officer, Henry H. Graham, PaylinX's
Chief Financial Officer, Mark Belles, PaylinX's Vice President of Alliances, and
Ken Silver, PaylinX's Director of Business Development. During this meeting,
each company presented a corporate overview.
On April 4, 2000, Mr. Daetz sent John McDonnell a request to provide
due diligence information. On that same date, the parties signed a
confidentiality agreement with "no shop" and non-solicitation provisions.
During the month of April and the beginning of May, the parties
performed due diligence, including a meeting in St. Louis, Missouri on April 6,
2000 with additional personnel from both CyberSource and PaylinX. During this
same period, the parties entered into negotiations of a definitive agreement.
On May 10, 2000, the parties broke off discussions due to different views on
valuation of the proposed merger.
On June 1, 2000, the parties re-engaged in discussions, whereby
Messrs. McKiernan, Daetz and Charles E. Noreen, Jr., our Chief Financial
Officer, had a teleconference with Jack McDonnell to discuss PaylinX's May 2000
financials. On June 19, 2000, the parties further discussed valuation of the
proposed merger, and continued due diligence activities and negotiations of a
definitive agreement over the next several weeks. On June 26 and 27, 2000,
CyberSource executives met with PaylinX employees in St. Louis to provide an
overview of CyberSource and discuss proposed roles and compensation should the
business combination occur.
On June 29, 2000, the board of directors of PaylinX met via
teleconference, reviewed the proposed Agreement and Plan of Merger and related
transaction documents, discussed with its financial advisor, Chase H&Q, the
valuation of the proposed merger, reviewed its fiduciary obligations and voted
to approve the Agreement and Plan of Merger and the merger.
On July 9, 2000, our board of directors met via teleconference,
reviewed the proposed Agreement and Plan of Merger, discussed with our financial
advisor, J.P. Morgan Securities Inc., the valuation of the proposed merger, and
voted to approve the Agreement and Plan of Merger and the merger. CyberSource
and PaylinX then executed and exchanged the Agreement and Plan of Merger and
related transaction documents.
On July 10, 2000, we issued a press release announcing the signing of
a definitive agreement to acquire PaylinX.
Has CyberSource Received an Opinion From a Financial Advisor that the
Transaction is Fair from a Financial Point of View?
Pursuant to an engagement letter dated March 20, 2000, CyberSource
retained J.P. Morgan as its financial advisor in connection with the proposed
merger.
At the meeting of our board of directors on July 9, 2000, J.P. Morgan
gave its oral opinion, subsequently confirmed in writing, that, as of that date
and based upon and subject to various considerations set forth in the opinion,
the exchange ratio pursuant to the proposed merger was fair from a
18
<PAGE>
financial point of view to CyberSource. Our board of directors did not limit
J.P. Morgan in any way in the investigations it made or the procedures it
followed in giving its opinion.
We have attached as Annex B to this document the full text of J.P.
Morgan's written opinion. This opinion sets forth the assumptions made, matters
considered and limits on the review undertaken. We incorporate J.P. Morgan's
opinion into this document by reference and urge you to read the opinion in its
entirety. J.P. Morgan addressed its written opinion to our board of directors.
The opinion addresses only the exchange ratio pursuant to the merger and is not
a recommendation to any CyberSource stockholder as to how such stockholder
should vote at the special meeting. The summary of the opinion of J.P. Morgan
set forth in this proxy statement is qualified in its entirety by reference to
the full text of such opinion. You are urged to, and should, read the opinion
carefully and in its entirety.
In arriving at its opinion, J.P. Morgan reviewed:
(1) the merger agreement;
(2) the audited financial statements of CyberSource and PaylinX for
the fiscal year ended December 31, 1999, the unaudited financial
statements of CyberSource and PaylinX for the period ended March
31, 2000, and selected preliminary income statement information
for the period ended June 30, 2000;
(3) a number of financial forecasts and other data provided to J.P.
Morgan by us and PaylinX relating to our respective businesses;
(4) certain publicly available information, including financial
analysts' estimates (and the assumptions and bases therefor)
concerning our businesses and of certain companies engaged in
businesses comparable to those of PaylinX and the reported market
prices for certain other companies' securities deemed comparable;
(5) current and historical market prices of our common stock; and
(6) the terms of other business combinations that J.P. Morgan deemed
relevant.
J.P. Morgan also held discussions with several members of our and
PaylinX's management on various aspects of the merger, the past and current
business operations of CyberSource and PaylinX, the financial condition and
future prospects and operations of CyberSource and PaylinX, the effect of the
merger on the financial condition and future prospects and operations of
CyberSource and PaylinX and other matters that J.P. Morgan believed necessary or
appropriate to its inquiry. In addition, J.P. Morgan reviewed other financial
studies and analyses and considered other information that it deemed appropriate
for the purposes of its opinion.
J.P. Morgan relied upon and assumed, without independent verification,
the accuracy and completeness of all information that was publicly available or
otherwise reviewed by J.P. Morgan from third party sources. J.P. Morgan is not
responsible or liable for that information or its accuracy. J.P. Morgan did not
conduct any valuation or appraisal of any assets or liabilities, nor were any
valuations or appraisals provided to J.P. Morgan.
19
<PAGE>
In relying on other financial analyses provided to it, J.P. Morgan
assumed that they had been reasonably prepared based on assumptions reflecting
the best currently available estimates as to the financial condition of
CyberSource and PaylinX to which those analyses relate. J.P. Morgan also
assumed that the merger will have the tax consequences described in discussions
with, and materials furnished to, J.P. Morgan by our representatives, and that
the parties will complete the other transactions contemplated by the merger
agreement as described in the merger agreement. J.P. Morgan relied as to all
legal matters relevant to rendering its opinion upon the advice of counsel.
J.P. Morgan based its opinion on economic, market and other conditions
as in effect on, and the information made available to J.P. Morgan as of, the
date of the opinion. Subsequent developments may affect J.P. Morgan's opinion
and J.P. Morgan does not have any obligation to update, revise, or reaffirm its
opinion. J.P. Morgan expressed no opinion as to the price at which our common
stock will trade at any future time.
The terms of the proposed merger were determined through negotiations
between us and PaylinX and were approved by our board of directors. Although
J.P. Morgan provided advice to us during the course of these negotiations, the
decision to enter into the merger was solely that of our board of directors. As
described above, the opinion of J.P. Morgan and its presentation to our board of
directors were only one of a number of factors taken into consideration by our
board of directors in making its determination to approve the proposed merger.
J.P. Morgan employed generally accepted valuation methods in reaching
its opinion. The following is a summary of the material financial analyses that
J.P. Morgan utilized in providing its opinion. We have presented some of the
summaries of financial analyses in tabular format. In order to understand the
financial analyses used by J.P. Morgan more fully, you should read the tables
together with the text of each summary. The tables alone do not constitute a
complete description of J.P. Morgan's financial analyses.
PaylinX Analysis
i. Contribution Analysis
J.P. Morgan performed a contribution analysis using current and
historical financial data, and financial projections from management and equity
research analysts on a stand-alone basis, including deferred revenue as revenue.
These contributions were compared to the approximately 27% of continuing
ownership stake that PaylinX stockholders would have in the combined company
following the merger. The following table presents the contribution analysis of
PaylinX to the combined company:
<TABLE>
<CAPTION>
Contribution of PaylinX Contribution of PaylinX Contribution of PaylinX
to historical revenues to 2000 revenues to gross profit
---------------------- ---------------- ---------------
1999 1stQ2000 2ndQ2000 Low High 1999 1stQ2000
---- -------- -------- --- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
21% 30% 29% 29% 31% 57% 65%
</TABLE>
ii. Selected Public Trading Multiples
Using publicly available information, J.P. Morgan compared selected
financial data of PaylinX with similar data for selected publicly traded
companies engaged in businesses that J.P. Morgan judged to be reasonably
comparable to PaylinX. These companies were:
Ariba
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<PAGE>
Baltimore Technologies
BroadVision
Bottom Line
Checkfree
Clarus
Commerce One
CyberCash
CyberSource
Entrust Technologies
HNC Software
i2 Technologies
Intershop Communications
Open Market
Oracle
Purchase Pro
Trintech
Verisign
Vignette
WebMethods
J.P. Morgan selected these companies because they engage in businesses
reasonably comparable to those of PaylinX. J.P. Morgan used publicly available
financial projections by equity analysts covering each comparable company to
determine the ratio of market capitalization to projected revenues for 2000 and
2001 for each of these companies. The following table presents a comparison of
the median revenue multiples of the comparable companies and the implied merger
multiples for PaylinX based on a range of expected revenues for 2000 and 2001,
respectively:
<TABLE>
<CAPTION>
Revenue multiples
-----------------
2000 2001
---- ----
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C>
PaylinX implied merger multiple............... 10x 13x 4x 5x
Comparable company median..................... 29x 18x
</TABLE>
J.P. Morgan observed that the implied merger multiple was below the
median of the comparable company revenue multiples for each of 2000 and 2001.
It should be noted that no company utilized in the analysis above is
identical to PaylinX. In evaluating companies identified by J.P. Morgan as
comparable to PaylinX, J.P. Morgan made judgments and assumptions with regard to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of PaylinX,
such as the impact of competition on the business of PaylinX and the industry
generally, industry growth and the absence of any material change in the
financial condition and prospects of PaylinX or the industry or in the financial
markets in general. Mathematical analysis (such as determining the mean or the
median) is not in itself a meaningful method of using selected Internet company
data.
iii. Comparable Transaction Analysis
Using publicly available information, J.P. Morgan examined the
following transactions to determine the ratio of transaction size to projected
twelve month revenues:
21
<PAGE>
Computer Associates/Platinum Technology
PSINet/Transaction Network Services
Ceridian/ABR Information Services
WebMethods/Active Software
Digital Insight/nFront
Vignette/OnDisplay
Kana Communications/Silknet Software
SBC Communications/Sterling Commerce
J.P. Morgan analyzed the ratio of transaction size to projected twelve
month revenues for each of those transactions. All multiples for the selected
transactions were based on public information available at the time of public
announcement, and J.P. Morgan's analysis did not take into account different
market and other conditions during the period in which the selected transactions
occurred. The comparable transaction analysis yielded the following mean and
median for the multiple of projected twelve month revenues:
<TABLE>
<CAPTION>
Revenue multiples
-----------------
Mean Median
----- ------
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
PaylinX implied merger
multiple................................ 10x 13x 10x 13x
Comparable transaction median............ 26x 13x
</TABLE>
J.P. Morgan observed that the implied merger multiple was at or below
the mean and median of the comparable transaction revenue multiples.
It should be noted that no transaction utilized in the analysis above
is identical to the CyberSource-PaylinX merger. Mathematical analysis (such as
determining the mean or the median) is not in itself a meaningful method of
using selected Internet transaction data.
CyberSource Analysis
i. Selected Public Trading Multiples
Using publicly available information, J.P. Morgan compared our
selected financial data with similar data for selected publicly traded companies
engaged in businesses that J.P. Morgan judged to be reasonably comparable to our
business. These companies were:
Bottom Line
Checkfree
CyberCash
J.P. Morgan selected these companies because they engage in businesses
reasonably comparable to ours. J.P. Morgan used publicly available financial
projections by equity analysts covering each comparable company to determine the
ratio of market capitalization to projected revenues for 2000 and 2001 for each
of these companies. The following table presents a comparison of the median
revenue multiples of the comparable companies and CyberSource based on expected
revenues for 2000 and 2001, respectively:
<TABLE>
<CAPTION>
Revenue multiples
-----------------
2000 2001
---- ----
<S> <C> <C>
CyberSource multiples.......................... 10x 5x
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
Comparable company median...................... 6x 5x
</TABLE>
J.P. Morgan observed that our multiple was at or above the median of
the comparable company revenue multiples for each of 2000 and 2001.
It should be noted that no company utilized in the analysis above is
identical to us. In evaluating companies identified by J.P. Morgan as
comparable to us, J.P. Morgan made judgments and assumptions with regard to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond our control, such as the
impact of competition on our business and the industry generally, industry
growth and the absence of any material change in the financial condition and our
prospects or the industry or in the financial markets in general. Mathematical
analysis (such as determining the mean or the median) is not in itself a
meaningful method of using selected Internet company data.
ii. Trading Range
J.P. Morgan reviewed the range of closing prices of our common stock
prior to July 9, 2000. J.P. Morgan observed the following:
<TABLE>
<CAPTION>
Period Prior to July 9, 2000 Value Per Share
---------------------------- ---------------
<S> <C>
1 day $16.50
10 days $13.94
30 days $14.94
60 days $14.75
</TABLE>
This summary does not purport to be a complete description of the
analyses or data presented by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan believes that one must consider
its opinion, this summary and its analyses as a whole. Selecting portions of
this summary and these analyses, without considering the analyses as a whole,
could create an incomplete view of the processes underlying the analyses and
opinion. In arriving at its opinion, J.P. Morgan considered the results of all
of the analyses as a whole. No single factor or analysis was determinative of
J.P. Morgan's fairness determination. Rather, the totality of the factors
considered and analyses performed operated collectively to support its
determination. J.P. Morgan based the analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions that impact the companies' growth rates, labor costs and price
competition and industry-specific factors similar to those factors set forth
under the heading "Cautionary Statements" in our Annual Report on Form 10-K for
the year ended December 31, 1999 and under the heading "Factors That May Affect
Future Operating Results" in our Quarterly Reports on Form 10-Q for the quarters
ended March 30, 2000 and June 30, 2000. This summary sets forth, under the
description of each analysis, the other principal assumptions upon which J.P.
Morgan based that analysis. J.P. Morgan's analyses are not necessarily
indicative of actual values or actual future results that either company or the
combined company might achieve, which values may be higher or lower than those
indicated. Analyses based upon forecasts of future results are inherently
uncertain, as they are subject to numerous factors or events beyond the control
of the parties and their advisors. Accordingly, these forecasts and analyses
are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by those analyses.
Therefore, none of CyberSource, PaylinX, J.P. Morgan or any other person assumes
responsibility if future results are materially different from those forecasted.
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<PAGE>
As a part of its investment banking business, J.P. Morgan and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes.
For services rendered in connection with the merger, we have agreed to
pay J.P. Morgan a customary fee in connection with the financial advisory
services provided by J.P. Morgan and the delivery of the fairness opinion. In
addition, we have agreed to reimburse J.P. Morgan for its expenses incurred in
connection with its services, including the fees and disbursements of counsel,
and will indemnify J.P. Morgan against certain liabilities, including
liabilities arising under the Federal securities laws.
J.P. Morgan acted as co-manager in our initial public offering and in
our subsequent follow-on offering. J.P. Morgan and its affiliates maintain
banking and other business relationships with us and our affiliates, for which
they receive customary fees. J.P. Morgan has no financial advisory or other
relationship with PaylinX. In the ordinary course of their businesses, J.P.
Morgan and its affiliates may actively trade our equity securities for their own
accounts or for the accounts of customers and, accordingly, they may hold long
or short positions in those securities at any given time.
What Vote is Required to Effect this Merger?
Proposal 1, to approve the issuance of the shares of our common stock
in the merger, must receive the affirmative vote of a majority of the shares of
our common stock represented and voting at the meeting. The affirmative vote of
a majority of the shares of PaylinX common stock and preferred stock and two-
thirds of the shares of PaylinX preferred stock must approve the Agreement and
Plan of Merger and the merger. The holders of the shares of PaylinX capital
stock, representing such required majority, have agreed to approve the Agreement
and Plan of Merger and the merger. In addition, the approval of the merger by
the PaylinX stockholders is a condition under the Agreement and Plan of Merger
for us to complete the merger.
Why is My Approval Necessary?
We must seek stockholder approval of our proposed issuance of shares
of our common stock in the merger under the listing requirements of The Nasdaq
Stock Market because we are issuing greater than 20% of our currently
outstanding shares of common stock as consideration to PaylinX's stockholders.
If we did not seek stockholder approval, Nasdaq could delist our securities from
quotation on The Nasdaq National Market.
Do I Have any Rights if I do not Approve the Proposal?
No. If you choose to vote against the proposal to issue shares of our
common stock in the merger, Delaware General Corporation Law does not afford you
any appraisal rights, as defined under Delaware law, because your shares are
ineligible for such treatment pursuant to Section 262 of the Delaware General
Corporation Law.
Will My Rights as a CyberSource Stockholder Change Following the Merger?
No. When issued, the shares of our common stock that the PaylinX
stockholders will receive will have the same rights and privileges as the shares
of common stock currently authorized and outstanding. Holders of our common
stock have no preemptive rights, and therefore you do not have any
24
<PAGE>
preferential right to purchase any of the additional shares of our common stock
when such shares are issued. The issuance will result in each stockholder owning
a smaller percentage of outstanding shares of CyberSource common stock, but your
rights will remain the same. We believe, on balance, that the benefits that the
transaction will provide is important to our success and, accordingly, will
benefit CyberSource and our stockholders. We believe it is in the best interests
of our stockholders to approve Proposal 1.
How Will the Merger be Treated for Accounting Purposes?
This merger will be accounted for by us as a purchase of a business.
Under this method of accounting, the assets and liabilities of PaylinX will be
recorded at their fair value, and any excess of our purchase price over the fair
value of PaylinX's tangible net assets will be recorded as intangible assets,
including goodwill. The revenues and expenses of PaylinX will be included in
our consolidated financial statements from the date the merger is completed.
How Will the Merger be Treated for Federal Income Tax Purposes?
For federal income tax purposes, we and PaylinX intend that (i) the
merger will qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended; and (ii) none of CyberSource,
Sapphire Merger, Inc. or PaylinX will recognize any gain or loss for federal or
state income tax purposes as a result of the merger.
Who are the Largest Owners of PaylinX Common Stock?
The following table sets forth information known to us with respect to
the beneficial ownership of PaylinX capital stock as of August 1, 2000 by
individuals or entities owning greater than 5% of the outstanding PaylinX
capital stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For the purpose of this section, all
statements are based on information provided by the individuals or entities
named in the table. For each individual or entity, the table indicates the
number of shares beneficially owned and the percentage of all PaylinX
outstanding capital stock represented by that number. Percentage of beneficial
ownership is based upon ______ shares of common stock and convertible preferred
stock (on an as-converted basis) outstanding as of August 1, 2000. For each
person or entity, the number of shares, and therefore the percentages calculated
using the number of shares, includes additional shares of common stock not
currently outstanding but subject to options or warrants held by that person or
entity that are currently exercisable or that will become exercisable within 60
days of August 1, 2000. However, those additional shares are not included when
calculating the number and percentage of any other person or entity. Unless
indicated otherwise, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
Name of Beneficial Owner Shares Beneficially Owned
------------------------ ----------------------------
Number Percentage
------- ----------
<S> <C> <C>
John J. McDonnell, Jr. (1)............................. 1,184,199
Gateway Partners....................................... 637,438
Southeastern Technology Fund........................... 631,628
Bob Lozano............................................. 541,572
Account Management Corporation........................ 497,154
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
James E McKee III, Trustee; James & Christy
McKee Trust; Christy McKee, Trustee................ 482,664
BOME Investors, Inc.................................... 442,443
Dunluce Investors II, LLC.............................. 379,319
</TABLE>
_________________
(1) Includes (i) 379,320 shares owned by Dunluce Investors II, LLC; (ii)
274,358 shares owned by McDonnell & Associates, L.P.; and (iii) 383,521 shares
issuable upon exercise of stock options within 60 days from August 1, 2000. Mr.
McDonnell is the President of McDonnell Holdings, Inc., which serves as both the
general partner of McDonnell & Associates, L.P. and the manager of Dunluce
Investors II, LLC, respectively. Mr. McDonnell disclaims beneficial ownership of
the shares held by Dunluce Investors II, LLC and McDonnell & Associates, L.P.
Will the Shares Issued to the PaylinX Stockholders be Registered with the
Securities and Exchange Commission?
The shares of our common stock to be issued in the merger will not be
registered with the Securities and Exchange Commission in reliance upon the
exemption from registration contained in Section 3(a)(10) of the Securities Act
of 1933, as amended. The availability of the exemption is contingent upon the
issuance by the State of California of a permit qualifying the issuance of the
shares issued in the merger. For purpose of obtaining the permit and claiming
the exemption under Section 3(a)(10), we have requested that a public hearing be
conducted by the California Commissioner of Corporations on the fairness of the
terms and conditions set forth in the Agreement and Plan of Merger. If, based on
the facts presented, both in documents submitted in connection with the hearing
and in the process of hearing itself, the issuance of our common stock in
connection with the merger is deemed fair, a permit will be issued. Only in the
event the hearing is not held or the permit is not granted, we will file a
registration statement on Form S-4 to register the shares that we will issue in
the merger, and a registration statement on Form S-8 to register the shares to
be issued pursuant to the exercise of options to purchase PaylinX stock that we
will have assumed, if the merger is consummated.
Does the Merger Require the Notification or Approval of any Regulators?
Yes.
Department of Justice and the Federal Trade Commission
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, or HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission, or FTC, the merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice and the specified waiting period
requirements have been satisfied. We and PaylinX plan to file notification and
report forms under the HSR Act with the FTC and the Antitrust Division.
Accordingly, the waiting period under the HSR Act will expire at 11:59 p.m.,
Eastern Standard Time, thirty (30) days after the date of filing, unless we or
PaylinX receive a request for additional documents, or the Antitrust Division
and the FTC terminate the waiting period prior to that time. In practice,
complying with a request for additional information or material can take a
significant amount of time. In addition, if the Antitrust Division or the FTC
raise substantive issues in connection with the proposed transaction, the
parties may engage in negotiations with the relevant governmental agency
concerning possible means of addressing those issues and may agree to delay
consummation of the transaction while such negotiations continue.
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<PAGE>
We and PaylinX believe that the merger can be effected in compliance
with federal and state antitrust laws. However, there is no assurance that the
consummation of the merger will not be challenged on antitrust grounds or that,
if such a challenge were made, we and PaylinX would prevail or would not be
required to accept certain conditions, possibly including certain divestitures,
in order to consummate the merger.
Nasdaq Notification and Acceptance
Due to the size and nature of the acquisition of PaylinX, we need to
notify The Nasdaq Stock Market prior to the issuance of CyberSource stock to the
PaylinX stockholders in the merger. We will also obtain acceptance of the
notification, if and to the extent it is required.
We do not anticipate that any additional regulatory approvals will be
necessary. However, if we later determine that we must seek such additional
approvals, we will seek them as quickly as possible so that we may consummate
the merger. PaylinX has agreed to cooperate in all regulatory approval
processes.
Have CyberSource and PaylinX had any Significant Business Dealings with One
Another in the Past?
No.
INFORMATION ABOUT PAYLINX CORPORATION
Description of PaylinX's Business
Overview
PaylinX, a privately held company incorporated in 1996 with primary
operations in St. Louis, is a leader in multi-channel enterprise payment
solutions. The PaylinX payment server is a robust, enterprise-wide transaction
processing platform that manages the authorization and settlement of credit card
and other payment transactions in real-time through built-in connections with
third-party processors and merchant-acquiring banks. The fully scalable PaylinX
payment solution enables businesses to accept and process payment transactions
through multiple enterprise sales channels--Web storefronts, call centers,
interactive voice response (IVR) systems, in-store point-of-sale systems and
kiosks--seamlessly through a single uniform payment architecture.
Industry Background
In response to the growth of the Internet as a means of doing
business, many businesses have sought to develop an eCommerce capacity. To
date, these businesses have tended to focus on marketing and the appearance of
their web sites, rather than back-end payment and transaction processing
systems. Although many e-businesses have implemented a variety of solutions to
improve the online
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<PAGE>
customer shopping experience, these solutions generally do not provide good
payment processing, in many instances resulting in slow or incomplete
transactions.
Traditional electronic processing of transactions suffers from several
problems, including:
. Limited scalability. Traditional electronic payment processing
has different, uncoordinated processing systems for different
payment channels, resulting in added cost and inefficiency as the
business expands.
. Merchant Needs. Current payment processing systems are not
merchant-focused. This means, for example, that merchants are
typically limited to a single third-party processor for
authorization and settlement of transactions, and switching
between processors is difficult.
. Legacy and Internal Processes. Legacy payment processing systems
typically do not integrate with other internal processes, such as
accounting, inventory management or enterprise resource planning
systems.
Products and Technology
PaylinX has developed a software package to address the shortcomings
of traditional payment processing. Merchants are able to license the software,
install it quickly, and have all of their payment channels coordinated and
processed through a single, efficient system. The software has features that
address many of the needs discussed above, including:
. Scalable solution. The PaylinX software accepts and processes
payments from multiple payment channels. Furthermore, the PaylinX
software utilizes "multi-threaded" processing, meaning
transactions are processed independently, reducing congestion and
delay from high transaction volume. These features permit
merchants to easily add payment channels to those already
existing.
. Merchant-Centered Service. The PaylinX software communicates
with different third party processors, merchant banks and card
issuers. This permits the merchant to switch among processors
depending upon which offers the lowest transaction fees.
Merchants are also able to select among processors that accept
different forms of payment, such as credit cards, purchasing
cards and debit cards.
. Integration with other systems. The PaylinX software interfaces
with existing business applications such as inventory management,
accounting and enterprise resource planning. The PaylinX software
has a report generation module that consolidates reports across
these different systems.
In short, the PaylinX software provides an integrated solution, giving
merchants the ability to handle all types of payment channels while also
offering other distinct advantages of centralized payment processing.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA FOR CYBERSOURCE
The following selected financial data should be read in conjunction
with our Supplemental Consolidated Financial Statements and notes thereto. The
consolidated statement of operations data for the years ended December 31, 1999,
1998 and 1997 and the consolidated balance sheet data as of December 31, 1999
and 1998 are derived from our Supplemental Consolidated Financial Statements
which have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this proxy statement, and are qualified by reference to
such Supplemental Consolidated Financial Statements and the Notes thereto. The
consolidated statement of operations data for the period from March 20, 1996
(date of inception) to December 31, 1996 and the consolidated balance sheet data
as of December 31, 1997 and 1996 are derived from our Consolidated Financial
Statements not included herein which have been audited by Ernst & Young LLP,
independent auditors. The consolidated financial data as of June 30, 2000 and
for the six months ended June 30, 2000 and 1999 was derived from unaudited
financial statements incorporated by reference elsewhere in this proxy
statement. We have prepared this unaudited financial information on the same
basis as the audited supplemental consolidated financial statements and have
included all adjustments consisting only of normal recurring adjustments that we
consider necessary for a fair presentation of our financial position and
operating results for the periods presented. When you read this consolidated
financial data, you should also read the Supplemental Consolidated Financial
Statements and related notes included in this proxy statement. The historical
results are not necessarily indicative of future results. We have paid no cash
dividends on the common stock.
The unaudited selected consolidated pro forma financial data of
CyberSource and PaylinX is derived from the unaudited pro forma condensed
combined financial statements of CyberSource and PaylinX and should be read in
conjunction with such pro forma statements and notes thereto which are included
elsewhere in this proxy statement. For pro forma purposes, CyberSource's
historical supplemental consolidated statement of operations data for the year
ended December 31, 1999 have been combined with PaylinX's historical
consolidated statements of operations data for the year ended December 31, 1999
and CyberSource's historical consolidated statement of operations data for the
six months ended June 30, 2000 have been combined with PaylinX's historical
consolidated statement of operations data for the six months ended June 30,
2000, both giving effect to the PaylinX merger as if it had occurred at the
beginning of the period presented. The unaudited pro forma condensed combined
balance sheet data combines CyberSource's and PaylinX's historical
consolidated balance sheet data as of June 30, 2000, giving effect to the
PaylinX merger as if it had occurred as of June 30, 2000.
The consolidated pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the PaylinX merger had been in
effect during the periods presented, nor is it necessarily indicative of future
operating results or financial position. In particular, the actual adjustments
to the valuation of PaylinX's assets and liabilities in connection with the
acquisition may vary significantly from the preliminary estimates reflected in
the pro forma financial information.
29
<PAGE>
<TABLE>
<CAPTION>
Period From
March 20, 1996
Years Ended December 31, (Inception) to
---------------------------------------- December 31,
1999 1998 1997 1996
---------- --------- --------- --------------
(in thousands, except per share data)
CyberSource Consolidated Statements of Operations Data:
<S> <C> <C> <C> <C>
Revenues $ 12,931 $ 3,384 $ 968 $ 144
Cost of revenues........................................ 10,948 3,471 324 137
--------- --------- --------- --------
Gross profit (loss)..................................... 1,983 (87) 644 7
Operating expenses:
Product development................................... 7,807 3,831 2,300 338
Sales and marketing................................... 15,110 4,184 1,988 425
General and administrative............................ 6,023 2,079 681 387
Acquisition related costs............................. -- -- -- --
Deferred compensation amortization.................... 4716 18 -- --
--------- --------- --------- --------
Total operating expenses........................... 33,656 10,112 4,969 1,150
--------- --------- --------- --------
Loss from operations.................................... (31,673) (10,199) (4,325) (1,143)
Interest income (expense), net.......................... 1,828 (48) (13) --
--------- --------- --------- --------
Net loss $(29,845) $(10,247) $(4,338) $(1,143)
========= ========= ========= ========
Basic and diluted net loss per share(1)................. $ (1.95) $ (2.08)
========= =========
Shares used in computing basic and
diluted net loss per share(1)......................... 15,267 4,924
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
ProForma (2)
2000 1999 2000
------------ ---------- -----------
(in thousands, except per share data)
CyberSource Consolidated Statements of Operations Data:
<S> <C> <C> <C>
Revenues $ 13,838 $ 4,249 $ 19,690
Cost of revenues........................................ 10,747 3,750 11,399
--------- --------- ---------
Gross profit (loss)..................................... 3,091 499 8,291
Operating expenses:
Product development................................... 6,543 3,096 9,186
Sales and marketing................................... 12,616 6,424 17,539
General and administrative............................ 6,087 2,236 9,778
Acquisition related costs............................. 834 -- 834
Deferred compensation amortization................... 411 223 26,601
--------- --------- ---------
Total operating expenses........................... 26,491 11,979 63,938
--------- --------- ---------
Loss from operations.................................... (23,400) (11,480) (55,647)
Interest income (expense), net.......................... 3,793 (26) 3,536
--------- --------- ---------
Net loss $(19,607) $(11,506) $ (52,111)
========= ========= =========
Basic and diluted net loss per share(1)................ $ (0.76) $ (1.78) $ (1.52)
========= ========= =========
Shares used in computing basic and
diluted net loss per share(1)......................... 25,801 6,472 $ 34,252
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------- -------------------------
Pro Forma (2)
1999 1998 1997 1996 2000 2000
------- ------- ------- ------- ------- ---------------
(in thousands)
CyberSource Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments... $140,269 $11,422 $2,000 $ -- $116,096 $127,631
Working capital (deficit)........................... 137,951 7,814 2,016 (61) 113,244 120,033
Total assets........................................ 154,122 15,389 3,735 106 138,657 302,828
Long-term obligations, net of current portion...... 444 256 33 -- 204 1,040
Redeemable convertible preferred stock.............. -- 18,911 2,097 -- -- --
Total stockholders' equity (net capital deficiency) 146,559 (8,668) 1,037 421 129,685 285,235
</TABLE>
________
(1) See Note 1 of Notes to Supplemental Consolidated Financial Statements for an
explanation of the number of shares used in computing per share amounts.
Until December 31, 1997, CyberSource was operated as a division of
Beyond.com Corporation and had no outstanding common or preferred shares,
and, therefore, there are no loss per share amounts for the 1997 and 1996
periods.
(2) For an explanation of the calculation of pro forma amounts, see Notes to
Unaudited Pro Forma Condensed Combined Financial Statements.
30
<PAGE>
HISTORICAL AND PRO FORMA PER SHARE DATA
The table below presents historical per share financial information for
CyberSource and PaylinX. This information should be read in conjunction with
the audited supplemental consolidated financial statements and unaudited interim
consolidated financial statements and notes thereto of CyberSource, which are
included or incorporated by reference in this proxy statement and the audited
consolidated financial statements and unaudited interim consolidated financial
statements and notes thereto of PaylinX, which are included in this proxy
statement. In addition, it is important that you read the Unaudited Pro Forma
Condensed Combined Financial Information included in this proxy statement.
However, pro forma information is not necessarily indicative of what the actual
financial results would have been had the PaylinX merger taken place on June 30,
2000, or December 31, 1999, nor do they purport to indicate results of future
operations.
<TABLE>
<CAPTION>
Equivalent
Historical Pro Forma Pro Forma
------------------------- ----------- -----------
CyberSource PaylinX CyberSource PaylinX
----------- ------- ----------- -------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Book value per share:
June 30, 2000......................................... $ 5.73 $ (9.62) $ 8.28 $ 9.94
December 31, 1999..................................... 4.99 (8.19) -- --
Net income (loss) per share basic and diluted:
For the six months ended June 30, 2000................ (0.76) (2.90) (1.52) (1.82)
For the year ended December 31, 1999.................. (1.95) (8.82) (4.14) (4.97)
Dividends per share:
For the six months ended June 30, 2000................ - - - -
For the year ended December 31, 1999.................. - - - -
</TABLE>
31
<PAGE>
SELECTED FINANCIAL DATA FOR PAYLINX
The following selected financial data should be read in conjunction with the
PaylinX Financial Statements and Notes thereto. The statement of operations
data for the years ended December 31, 1999, 1998 and 1997 and the balance
sheet data as of December 31, 1999 and 1998 are derived from the PaylinX
Financial Statements which have been audited by Arthur Andersen LLP,
independent auditors, and are included elsewhere in this proxy statement, and
are qualified by reference to such Financial Statements and the notes
thereto. The statement of operations data for the year ended December 31,
1996 and the balance sheet data as of December 31, 1997 and 1996 are derived
from PaylinX Financial Statements not included herein which have been audited
by Arthur Andersen LLP, independent auditors. The financial data as of June
30, 2000 and for the six months ended June 30, 2000 and 1999 was derived from
unaudited financial statements included elsewhere in this proxy statement.
PaylinX has prepared this unaudited financial information on the same basis
as its audited financial statements and has included all adjustments,
consisting only of normal recurring adjustments, that it considers necessary
for a fair presentation of its financial position and operating results for
the periods presented. When you read this financial data, you should also
read the PaylinX Financial Statements and related notes included in this
proxy statement. The historical results are not necessarily indicative of
future results. PaylinX has paid no cash dividends on its common or preferred
stock.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------------------------- -------------------------
1999 1998 1997 1996 2000 1999
----------- ----------- ----------- ----------- ----------- -----------
(In thousands, except per share amounts)
PaylinX Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Net revenues...................... $ 3,160 $ 745 $ 437 $ 71 $ 5,146 $ 1,008
Operating income.................. (15,837) (602) (129) (188) (6,057) (2,543)
Net income........................ (16,045) (681) (148) (192) (6,314) (2,509)
Basic and diluted earnings per
common share...................... (8.82) (0.37) (0.08) (2.90) (1.34)
</TABLE>
<TABLE>
As of
As of December 31, June 30,
-------------------------------------------------------- -------------
1999 1998 1997 1996 2000
----------- ----------- ----------- ----------- -----------
(In thousands)
PaylinX Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets................ $ 6,419 $ 3,662 $ 253 $ 24 $ 18,931
Total long term
obligations................. 814 -- -- -- 836
Redeemable convertible
preferred stock............. 4,437 4,008 -- -- 36,067
Total stockholders equity (15,305) (527) (38) (184) (20,937)
(deficit)..................
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR PAYLINX
The following discussion of PaylinX's financial condition and results
of operations should be read in conjunction with PaylinX's financial
statements and related notes included elsewhere in this document. This
discussion does not take into account the impact of the contemplated merger
with CyberSource.
PaylinX Corporation is a leader in e-commerce payment solutions,
providing businesses with a single, enterprise-wide resource for processing all
electronic payments from customers. The PaylinX payment server allows a
merchant to accept payments through one channel - or through multiple channels
simultaneously, such as over the Internet, through a call center or through IVR
systems, through traditional physical point-of-sale sites or kiosks - creating a
high-quality, consistent consumer experience.
PaylinX simplifies and strengthens the payment chain for business-to-
consumer and business-to-business commerce at a time when merchant distribution
channels are undergoing rapid and forced diversification. The PaylinX platform
gives merchants the flexibility to easily add new delivery channels, including
Internet channels, which become integrated with the secure payment mechanism
from PaylinX. The PaylinX solution is offered as a comprehensive software suite
for merchants directly and for companies offering outsourced transaction
processing to merchants, as well as a payment gateway for network-based
solutions.
PaylinX's predecessor began system shipments in 1995, and PaylinX now
has more than 200 customer installations of the PaylinX payment server. This
platform has demonstrated proven, stable performance when loaded with high
transaction volumes and is broadly scalable to handle the growth and expansion
needs that merchants experience as their business models change over time. The
system is based on Windows NT.
In view of PaylinX's limited operating history, period-to-period
comparisons of PaylinX's revenues and operating results, including PaylinX's
operating expenses as a percentage of total revenues, may not be meaningful and
should not be relied upon as indications of future performance. Moreover,
PaylinX's historical growth rates should not be relied upon as indications of
future results.
Results of Operations
Six Months ended June 30, 2000 and 1999
Revenues. Revenues increased to $5.9 million for the six months ended
--------
June 30, 2000, an increase of approximately $4.9 million or 490.0% as compared
to $1.0 million for the six months ended June 30, 1999. This increase is
primarily due to the addition of customers for the PaylinX license
33
<PAGE>
software products and maintenance contracts. License software revenues were $5.1
million for the six months ended June 30, 2000, an increase of approximately
$4.2 million or 466.7% as compared to $0.9 million for the six months ended June
30, 1999. Maintenance and recurring revenues were approximately $0.8 million for
the six months ended June 30, 2000, an increase of approximately $0.7 million or
700.0% as compared to $0.1 million for the six months ended June 30, 1999.
Cost of Revenues. Cost of revenues consists primarily of costs
----------------
incurred in the packaging and shipping, costs of software installation, media
and manuals as well as personnel costs associated with customer support and
service operations. Cost of revenues increased to $0.7 million or 11.1% of
revenues for the six months ended June 30, 2000 from $0.2 million or 17.7 % of
revenues for the six months ended June 30, 1999. The increase in dollars is
primarily due to the addition of customer support personnel and related costs to
support the increase in customers' demand for PaylinX products.
Research and Development. Research and development expenses consist
------------------------
primarily of compensation and related costs of employees who are engaged in the
research, design of product enhancements and upgrades. Research and development
expenses increased to $2.6 million for the six months ended June 30, 2000 from
$1.1 million for the six months ended June 30, 1999. The increase is primarily
a result of the addition of personnel and the associated costs. PaylinX expects
research and development costs to increase in absolute dollars as it hires
additional personnel and continues to enhance product offerings.
Selling and Marketing. Selling and marketing expense consists
---------------------
primarily of compensation and travel expense of sales, alliance and marketing
personnel, market research and advertising costs. Sales and marketing expenses
increased to $4.9 million for the six months ended June 30, 2000 compared to
$1.0 million for the six months ended June 30, 1999. The increase is primarily
as result of higher personnel costs and related expenses, including commissions
associated with the increase in sales and the addition of personnel. PaylinX
expects sales and marketing expenses to increase in absolute dollars as it
increases sales and marketing personnel and associated expenses.
General and Administrative. General and administrative expenses
--------------------------
consist primarily of compensation of administrative personnel, fees for outside
professional services, facilities costs and related overhead. General and
administrative costs increased to $3.7 million for the six months ended June 30,
2000 compared to $1.3 million for the six months ended June 30, 1999. The
increase is primarily as a result of the addition of personnel and related
overhead. PaylinX expects general and administrative expenses to increase in
absolute dollars to support the expected growth of its business.
Interest Expense/(Income). Interest expense/(income) increased to
-------------------------
$0.3 million for the six months ended June 30, 2000 as compared to $0.0 million
for the six months ended June 30, 1999. The increase in expense was mainly due
to the issuance from June to September 1999 of $5.8 million in Convertible
Promissory Notes (Convertible Notes) and the issuance in November and December
of 1999 of $4.0 million in Short-Term Bridge Notes (Short-Term Notes). The
Convertible Notes were convertible into Series B Preferred Stock (Series B
Preferred) at 110% of the original note value upon completion of a subsequent
funding round of at least $10.0 million. The Convertible Notes had an interest
rate of 8% payable in either cash or additional Series B Preferred shares. The
Convertible Notes matured on the earliest of one year from the date of execution
of the Convertible Notes, issuance of the Series B Preferred shares or a merger
involving the Company. The Short-Term Notes had an interest rate of 9% and were
due within 90 days of issuance. In January 2000, PaylinX issued Series B
Preferred shares and all Convertible Notes, Short-Term Notes and associated
interest were converted into Series B Preferred shares. The interest expense
charge associated with the conversion of the Convertible Notes was partially
offset by interest income from PaylinX's investment activities.
34
<PAGE>
Income Taxes. No provision for federal and state income taxes was
------------
recorded as PaylinX has incurred net operating losses since inception.
Years Ended December 31, 1999 and 1998
Revenues. Revenues increased to $3.2 million in 1999, an increase of
--------
approximately $2.5 million or 357.1% as compared to $0.7 million in 1998. This
increase was due to the addition of customers for PaylinX's license software
products and maintenance contracts. License software revenues were $2.7 million
in 1999, an increase of approximately $2.1 million or 350.0% as compared to $0.6
million in 1998. Maintenance revenues were approximately $0.5 million in 1999,
an increase of approximately $0.3 million or 150.0% as compared to $0.2 million
in 1998.
Cost of Revenues. Cost of revenues increased to $0.6 million or 19.2%
----------------
of revenues in 1999 from $0.1 million or 10.7% in 1998. The increase in dollars
was primarily due to the addition of customer support personnel and related
costs to support the increase in customers' demand for PaylinX products.
Research and Development. Research and development expenses increased
------------------------
to $4.1 million in 1999 from $0.3 million in 1998. The increase was primarily a
result of the addition of personnel and the associated costs.
Selling and Marketing. Selling and marketing expenses increased to
---------------------
$4.1 million in 1999 compared to $0.3 million in 1998. The increase was
primarily as result of higher personnel cost and related expenses, including
commissions associated with the increase in sales and the addition of personnel.
General and Administrative. General and administrative costs
--------------------------
increased to $6.9 million in 1999 compared to $0.7 million in 1998. The increase
was primarily as a result of the addition of personnel and related overhead.
Loss on Disposal of Assets. In 1999 PaylinX recorded a loss on
--------------------------
disposal of assets of $0.4 million as result of the sale of excess office
equipment furniture.
Interest Expense. Interest expense increased to $0.3 million in 1999
----------------
as compared to $20 thousand in 1998. The increase was mainly due to the
issuance from June to September 1999 of $5.8 million in Convertible Notes and
the issuance in November and December of 1999 $4.0 million in Short-Term Notes.
In January 2000, PaylinX issued Series B Preferred shares and all Convertible
Notes, Short-Term Notes and associated interest were converted into Series B
Preferred shares.
Income Taxes. No provision for federal and state income taxes was
------------
recorded as PaylinX has incurred net operating losses since inception.
Years Ended December 31, 1998 and 1997
Revenues. Revenues increased to $0.7 million in 1998, an increase of
--------
approximately $0.3 million or 75.0% as compared to $0.4 million in 1997. This
increase was due to the addition of customers for PaylinX's license software
products and maintenance contracts. License software revenues were $0.6 million
in 1998, an increase of approximately $0.2 million or 50.0% as compared to $0.4
million in 1997. Maintenance revenues were approximately $0.2 million in 1998,
an increase of approximately $0.1 million or 100.0% as compared to $0.1 million
in 1997.
35
<PAGE>
Cost of Revenues. Cost of revenues increased to $0.1 million or 10.7%
----------------
of revenues in 1998 from $0.03 million or 6.9% in 1997. The increase in dollars
was primarily due to the addition of customer support personnel and related
costs to support the increase in customers' demand for PaylinX products.
Research and Development. Research and development expenses increased
------------------------
to $0.3 million in 1998 from $0.1 million in 1997. The increase was primarily a
result of the addition of personnel and the associated costs.
Selling and Marketing. Selling and marketing expenses increased to
---------------------
$0.3 million in 1998 compared to $0.1 million in 1997. The increase was
primarily as result of higher personnel cost and related expenses, including
commissions associated with the increase in sales and the addition of personnel.
General and Administrative. General and administrative costs
--------------------------
increased to $0.7 million in 1998 compared to $0.3 million in 1997. The
increase was primarily as a result of the addition of personnel and related
overhead.
Income Taxes. No provision for federal and state income taxes was
------------
recorded as PaylinX has incurred net operating losses since inception.
Liquidity and Capital Resources
Cash and cash equivalents increased by approximately $10.8 million to
$11.5 million as of June 30, 2000 compared to $0.75 million at December 31,
1999. In January 2000, PaylinX issued 3,836,472.15 shares of Series B Preferred
for $7.824538 per share, or $30.0 million proceeds in the aggregate. The $5.8
million of Convertible Notes (at 110% of the original note value), $4.0 million
of Short-Term Notes and the associated accrued interest on the Convertible Notes
and the Short-Term Notes were converted or exchanged for shares of the Series B
Preferred and are included in the total proceeds. The increase in cash as a
result of the issuance of the Series B Preferred was partially offset by
PaylinX's continued operating losses.
Under the terms of PaylinX's certificate of incorporation, each share
of Series A Preferred and Series B Preferred may be converted at any time into
one share of common stock, subject to certain conversion adjustments as defined
in the certificate of incorporation. The Series A Preferred and the Series B
Preferred will be converted automatically into common stock upon an initial
public offering valued at not less than $20 million.
The holders of the Series A Preferred and Series B Preferred may
require PaylinX to redeem half of the then outstanding shares of Series A
Preferred and Series B Preferred on the fifth anniversary of the original
issuance date, half of the then outstanding shares of Series A Preferred and
Series B Preferred on the sixth anniversary of the original issuance date and
the remaining outstanding shares of Series A Preferred and Series B Preferred on
the seventh anniversary of the original issuance date. The redemption price at
each of the redemption dates will be the greater of $5 and $7.824538 per share,
respectively, or fair market value, plus any declared and unpaid dividends for
the Series A Preferred and Series B Preferred. The fair market value of the
Series A Preferred and Series B Preferred is to be determined by independent
appraisers appointed by PaylinX and the Series A Preferred and Series B
Preferred stockholders.
36
<PAGE>
The Series A Preferred and Series B Preferred stockholders have
preemptive rights to purchase new issuances of securities.
PaylinX believes that its current cash and investment balances will
be sufficient to meet its working capital and capital requirements for at
least the next twelve months. PaylinX's future capital requirements will
depend on many factors including the level of investment it makes in new
products or new technologies. PaylinX's current cash balance may be
insufficient to meet its future funding requirements, and PaylinX may need to
obtain additional equity or debt financing. Additional funds may not be
available to PaylinX on a timely basis or on acceptable terms.
37
<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL
OF PROPOSAL 1.
38
<PAGE>
PROPOSAL 2:
RATIFICATION AND APPROVAL OF AMENDMENTS TO CYBERSOURCE'S
1999 STOCK OPTION PLAN
Why Do You Need to Increase the Shares Reserved for Issuance?
You are being asked to act upon a proposal to approve the action of
the Board of Directors amending our 1999 Stock Option Plan. The proposed
amendment to our option plan will increase the number of shares of common stock
reserved for issuance under the plan from 6,000,000 shares to 7,000,000 shares.
At the time of its adoption, our plan reserved 2,500,000 shares of common stock
for issuance thereunder. Subsequently, at the Annual Meeting of Stockholders
held on May 4, 2000, you ratified and approved amendments to the plan to
increase the number of shares reserved for issuance thereunder from 2,500,000 to
6,000,000 shares. We are now seeking to increase the number of shares of common
stock reserved under our option plan because we have agreed to issue
approximately 514,872 options to PaylinX employees under our option plan at the
time the merger becomes effective. In order to satisfy our obligations, we must
increase the number of shares of common stock we have reserved for issuance
under our plan.
As of August 1, 2000, of the _____________ shares initially reserved
for issuance, as may be adjusted, only [_______] remained available for future
grants under the plan.
In addition, the Board of Directors believes that the attraction and
retention of high quality personnel are essential to our continued growth and
success and that a stock option plan, such as our 1999 Stock Option Plan, is
necessary for us to remain competitive in our compensation practices. The
increase in the number of reserved shares is intended to support our
requirements for stock option grants to both current employees and future
employees.
The proposal to amend our 1999 Stock Option Plan to increase the
number of reserved shares must receive the affirmative vote of a majority of the
shares of our common stock represented and voting at the meeting. If you are
present in person or represented by proxy at the meeting and abstain from
voting, it has the same effect as if you voted against this proposal. Broker
non-votes will not be counted as votes cast and will have no effect on the
result of the vote.
THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE FOR RATIFICATION AND APPROVAL OF THE
AMENDMENT TO CYBERSOURCE'S 1999 STOCK OPTION PLAN
The CyberSource Corporation 1999 Stock Option Plan
A general description of the principal terms of our option plan is set
forth below. This description is qualified in its entirety by the terms of our
option plan, a copy of which is attached to this proxy statement as Annex C and
is incorporated by reference herein. In the following discussion of our option
plan, capitalized terms have the same meanings as defined in our option plan,
unless otherwise noted.
39
<PAGE>
General Description
The purposes of the option plan are to give our employees and others
who perform substantial services for us an incentive, through ownership of our
common stock, to continue to serve the company and to help us compete
effectively with other enterprises for the services of qualified individuals.
The option plan permits the grant of "incentive stock options" ("ISOs") within
the meaning of Section 422 of the Code only to employees, including officers and
employee directors, of CyberSource or any of our parent or subsidiary
corporation. Nonqualified stock options may be granted to employees, directors
and consultants. As of [_______], 2000, options to purchase [_______] shares had
been granted under the option plan, options to purchase [_______] shares had
been cancelled under the option plan and returned to the pool of shares
authorized and available for grant and options to purchase [_______] shares were
outstanding. As of [_______], 2000, the number of executive officers,
employees, consultants and directors of CyberSource and our subsidiaries that
were eligible to receive grants under our option plan was approximately [___]
persons.
Amendment to Increase Shares Reserved
The current number of shares reserved for issuance under our option
plan is 6,000,000. The proposed amendment to our option plan provides that the
number of shares reserved for issuance will be increased by 1,000,000 shares to
a total reserve of 7,000,000 shares.
Code Section 162(m) Limitations
On May 4, 2000, our option plan was amended to limit the maximum
number of options which may be awarded to an employee eligible to receive
options under the plan in any fiscal year to 1,000,000 shares. The purpose of
the amendment was to ensure that any options granted under the option plan after
May 2000 will qualify as "performance-based compensation" under Code Section
162(m).
Administration
Our option plan is administered, with respect to grants to directors,
officers, consultants, and employees, by a plan administrator (the
"Administrator"), which is defined as the Board of Directors or a committee
designated by the Board of Directors. The committee is constituted in such a
manner as to satisfy applicable laws, including Rule 16b-3 of the Securities
Exchange Act of 1934, as amended. With respect to options subject to Code
Section 162(m), the committee will be comprised solely of two or more "outside
directors," as defined under Code Section 162(m) and applicable tax regulations.
Amendment and Termination
The Board of Directors may at any time amend, suspend or terminate our
option plan. To the extent necessary to comply with applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to options granted to residents therein,
we will obtain stockholder approval of any amendment to our option plan in such
a manner and to such a degree as required. Our option plan will terminate in
January 2009 unless previously terminated by the Board of Directors.
Other Terms
The Administrator has the authority to select individuals who are to
receive options under our option plan and to specify the terms and conditions of
options granted (including whether or not the
40
<PAGE>
options are ISOs or nonqualified stock options), the vesting provisions, the
option term and the exercise price. The exercise price of ISOs granted under our
option plan will equal the fair market value of our common stock on the date of
grant (except in the case of grants to any person holding more than 10% of the
total combined voting power of all classes of CyberSource, or any of our
parent's or subsidiary's, stock in which case the exercise price will equal 110%
of the fair market value on the date of grant). The exercise price of
nonqualified stock options shall not be less than 85% of the fair market value
on the date of grant. The exercise price of options intended to qualify as
performance-based compensation for purposes of Code Section 162(m) will not be
less than 100% of the fair market value. Option holders may pay for an exercise
in cash or other consideration, including a promissory note, as approved by the
Administrator.
Generally, options granted under our option plan (other than those
granted to non-employee directors) vest at a rate of 25% of the shares
underlying the option after one year and the remaining shares vest in equal
portions over the following 36 months, so that all shares are vested after four
years. The form of stock option grant under our option plan used to grant
options to our employees provides for accelerated vesting of half of all
unvested shares upon involuntary termination of employment with CyberSource
without cause occurring within one year of a change in control of CyberSource.
Unless otherwise provided by the Administrator, an option granted under our
option plan generally expires 10 years from the date of grant (five years in the
case of an incentive stock option granted to any person holding more than 10% of
the total combined voting power of all classes of our stock, or the stock of our
parents or subsidiaries, or, if earlier, 30 days after the optionee's
termination of employment or service with the company or any of our affiliates
for any reason other than termination for death or disability, or one year after
termination for death or total and permanent disability and six months in the
case of other types of disability). Options granted under our option plan are
not generally transferable by the optionee except by will or the laws of descent
and distribution and generally are exercisable during the lifetime of the
optionee only by the optionee.
In the event of (i) a merger or consolidation as a result of which the
holders of our voting securities prior to the transaction hold shares
representing less than 51% of our voting securities after giving effect to the
transaction (other than a merger or consolidation with a wholly-owned subsidiary
or where there is no substantial change in our stockholders and the options
granted under our option plan are assumed by the successor corporation), or (ii)
the sale of all or substantially all of our assets, the successor corporation
will assume or substitute the options we have granted under our option plan or
will provide substantially similar consideration to optionees as is provided to
stockholders. In the event the successor corporation refuses to assume or
substitute outstanding options as provided above, or in the event of our
dissolution or liquidation, outstanding options will expire, notwithstanding any
contrary terms in the grant, on a date specified in a written notice sent to all
optionees (at least 20 days after the date of the notice).
Our option plan also provides for automatic grants to non-employee
directors. Each non-employee director, upon initial election or appointment to
the Board of Directors, is entitled to receive options to purchase 5,000 shares
of common stock, provided that the election or appointment does not occur within
the last quarter of a given year. Thereafter, each non-employee director is
entitled to receive options to purchase 5,000 shares of common stock annually on
January 1 of each year, provided he or she is a non-employee director on the
date of grant and has continuously been an active member of the Board of
Directors for the year prior to the grant date. Options granted to non-employee
directors pursuant to the automatic grant provisions of our option plan are
immediately exercisable, nonqualified stock options with an exercise price equal
to the fair market value of our common stock as of the date of grant and remain
subject to a right of repurchase as determined under the option plan. Grants to
non-employee directors are subject to the general requirements of our option
plan.
41
<PAGE>
Certain Federal Tax Consequences
The grant of a nonqualified stock option under our option plan will
not result in any federal income tax consequences to us or the optionee. Upon
exercise of a nonqualified stock option, the optionee is subject to income taxes
at the rate applicable to ordinary compensation income on the difference between
the option exercise price and the fair market value of the shares on the date of
exercise. This income is subject to withholding for federal income and
employment tax purposes. The company is entitled to an income tax deduction in
the amount of the income recognized by the optionee, subject to possible
limitations imposed by Section 162(m) of the Code. Any gain or loss on the
optionee's subsequent disposition of the shares of common stock will receive
long or short-term capital gain or loss treatment, depending on whether the
shares are held for more than one year following exercise. We do not receive a
tax deduction for any such gain.
The grant of an ISO under our option plan will not result in any
federal income tax consequences to us or the optionee. An optionee recognizes
no federal taxable income upon exercising an ISO (subject to the alternative
minimum tax rules discussed below), and we receive no deduction at the time of
exercise. In the event of a disposition of stock acquired upon exercise of an
ISO, the tax consequences depend upon how long the optionee has held the shares
of common stock. If the optionee does not dispose of the shares within two
years after the ISO was granted, nor within one year after the ISO was
exercised, the optionee will recognize a long-term capital gain (or loss) equal
to the difference between the sale price of the shares and the exercise price.
We are not entitled to any deduction under these circumstances.
If the optionee fails to satisfy either of the foregoing holding
periods, he or she must recognize ordinary income in the year of the disposition
(referred to as a "disqualifying disposition"). The amount of such ordinary
income generally is the lesser of (i) the difference between the amount realized
on the disposition and the exercise price, or (ii) the difference between the
fair market value of the stock on the exercise date and the exercise price. Any
gain in excess of the amount taxed as ordinary income will be treated as a long
or short-term capital gain, depending on whether the stock was held for more
than one year. In the year of the disqualifying disposition, we are entitled to
a deduction equal to the amount of ordinary income recognized by the optionee.
The "spread" under an ISO -- i.e., the difference between the fair
market value of the shares at exercise and the exercise price -- is classified
as an item of adjustment in the year of exercise for purposes of the alternative
minimum tax.
Shares of restricted stock may also be granted under our option plan.
The grant of restricted stock will subject the recipient to ordinary
compensation income on the difference between the amount paid for such stock and
the fair market value of the shares on the date that the restrictions lapse.
This income is subject to withholding for federal income and employment tax
purposes. We are entitled to an income tax deduction in the amount of the income
recognized by the recipient. Any gain or loss on the recipient's subsequent
disposition of the shares will receive long or short-term capital gain or loss
treatment depending on whether the shares are held for more than twelve months
and depending on how long the stock has been held since the restrictions lapsed.
We do not receive a tax deduction for any such gain. Recipients of restricted
stock may make an election under Section 83(b) of the Code to recognize as
ordinary compensation income in the year that such restricted stock is granted
the amount equal to the spread between the amount paid for such stock and the
fair market value on date of the issuance of the stock. If such an election is
made, the recipient recognizes no further amounts of compensation income upon
the lapse of any restrictions and any gain or loss on subsequent disposition
will be long or short-term capital gain. The Section 83(b) election must be made
within thirty days from the time the restricted stock is issued.
42
<PAGE>
The foregoing is only a summary of the current effect of federal
income taxation upon us and the grantee with respect to the shares purchased
under our option plan. Reference should be made to the applicable provisions of
the Code. In addition, the summary does not discuss the tax consequences of a
grantee's death or the income tax laws of any municipality, state or foreign
country to which the grantee may be subject.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
PROPOSAL 2.
OTHER BUSINESS
The board of directors does not intend to bring any other business
before the meeting and, to the knowledge of the board, no matters are to be
brought before the meeting except as specified in the notice of the meeting. If
any other business does properly come before the meeting, however, the proxies
will be voted in accordance with the judgment of the persons voting them.
INCORPORATION BY REFERENCE
We file annual, quarterly and current reports with the Securities and
Exchange Commission. You may read and copy such reports, statements and other
information that in the Securities and Exchange Commission's public reference
rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please
call the Securities and Exchange Commission at 1.800.SEC.0330 for further
information about their public reference rooms. Our public filings are also
available from commercial document retrieval services and via the Security and
Exchange Commission's Internet website, at http://www.sec.gov.
As allowed by the Securities and Exchange Commission rules, we can
"incorporate by reference" certain information into this document, which means
we can disclose important information to you by referring you to another
document filed separately with the Securities and Exchange Commission. The
information incorporated by reference is deemed to be a part of this document,
except for any information that contradicts information contained directly in
this document.
This proxy statement incorporates by reference the documents set forth
below that we have previously filed with the Securities and Exchange Commission.
These documents contain important information about us and our financial
condition that is not included or delivered with the proxy statement.
<TABLE>
<CAPTION>
CyberSource SEC Filings Period
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1999
Current Report on Form 8-K Filed on January 25, 2000
Current Report on Form 8-K/A Filed on March 27, 2000
Quarterly Report on Form 10-Q Quarter ended March 30, 2000
Quarterly Report on Form 10-Q Quarter ended June 30, 2000
</TABLE>
We incorporate by reference additional documents that we may file with
the Securities and Exchange Commission between the date of this document and the
date of the annual stockholder meeting. These include Current Reports on Form 8-
K. You may obtain documents incorporated be
43
<PAGE>
reference from the Securities and Exchange Commission's website described above
or, directly from us, without charge, by requesting them by e-mail, in writing
or by telephone at:
Investor Relations
CyberSource Corporation
1295 Charleston Road
Mountain View, CA 94043
(650) 965-6000
[email protected]
If you would like to request additional copies of this document or any
of the documents incorporated by reference, please do so at least five business
days before the date of the special meeting in order to receive timely delivery
of such documents.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the special meeting. We have
not authorized anyone to provide you with information that is different from
what is contained in this document. This document is dated August 16, 2000.
You should not assume that the information contained in this document is
accurate as of any date other than the date indicated, and neither the mailing
of this document creates any implication to the contrary.
By Order of the Board of Directors
_______________________________________
Richard Scudellari
Secretary
Dated: August 16, 2000
Mountain View, California
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended
December 31, 1999.................................................................. F-3
Unaudited Pro Forma Condensed Combined Statement of Operations for the Six Months
Ended June 30, 2000................................................................ F-4
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2000............ F-5
Notes to Unaudited Pro Forma Condensed Combined Financial Statements................ F-6
CYBERSOURCE - DECEMBER 31, 1999
Report of Ernst & Young LLP, Independent Auditors.................................. F-10
Supplemental Consolidated Balance Sheets........................................... F-11
Supplemental Consolidated Statements of Operations................................. F-12
Supplemental Consolidated Statement of Redeemable Convertible Preferred Stock,
Division Equity and Stockholders' Equity (Net Capital Deficiency)................. F-13
Supplemental Consolidated Statements of Cash Flows................................. F-14
Notes to Supplemental Consolidated Financial Statements............................ F-15
PAYLINX AUDITED FINANCIAL STATEMENTS
Report of Arthur Andersen LLP, Independent Auditors................................. F-28
Balance Sheets...................................................................... F-29
Statements of Operations............................................................ F-30
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit)................................................................... F-31
Statements of Cash Flows............................................................ F-32
Notes to Financial Statements....................................................... F-33
PAYLINX UNAUDITED FINANCIAL STATEMENTS
Unaudited Balance Sheets............................................................ F-43
Unaudited Statements of Operations.................................................. F-44
Unaudited Statements of Cash Flows.................................................. F-45
Notes to Unaudited Financial Statements............................................. F-46
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information for
CyberSource set forth below gives effect to the acquisition of PaylinX. The
historical financial information set forth below has been derived from, and is
qualified by reference to, the supplemental consolidated financial statements of
CyberSource and the consolidated financial statements of CyberSource and
PaylinX, and should be read in conjunction with those financial statements and
the notes thereto incorporated by reference or included elsewhere herein.
In July 2000, we initiated a transaction whereby a wholly-owned
subsidiary of CyberSource will be merged with and into PaylinX, and PaylinX will
become a wholly-owned subsidiary of CyberSource. In connection with the merger
we will issue approximately 8.45 million shares of our common stock to PaylinX
stockholders in exchange for PaylinX outstanding common and preferred stock, and
reserve for issuance upon exercise of options and warrants we assumed in
connection with the PaylinX merger approximately 2,916,000 and 17,000 shares of
our common stock, respectively. The unaudited pro forma condensed combined
statement of operations data for the year ended December 31, 1999 and the six
months ended June 30, 2000 set forth below give effect to the acquisition as if
it occurred on January 1, 1999. The unaudited pro forma condensed combined
balance sheet as of June 30, 2000 set forth below gives effect to the
acquisition of PaylinX as if it occurred on June 30, 2000.
The PaylinX acquisition will be accounted for using the purchase
method of accounting. The Pro Forma Financial Statements have been prepared on
the basis of assumptions described herein.
CyberSource expects to incur integration costs, the amount of which is
uncertain at this time, subsequent to the consummation of the acquisition. The
Pro Forma Condensed Combined Statements of Operations does not include the costs
of integration, as these costs will affect future operations and do not qualify
as liabilities in connection with a purchase business combination under EITF 95-
3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
The unaudited pro forma condensed combined balance sheet set forth
herein combines the balance sheets of CyberSource and PaylinX as of June 30,
2000. The unaudited pro forma condensed financial information set forth herein
combines the supplemental statement of operations of CyberSource for the year
ended December 31, 1999 and the PaylinX statement of operations for the year
ended December 31, 1999. The unaudited pro forma condensed financial information
set forth herein also combines the statement of operations of CyberSource for
the six months ended June 30, 2000 and the PaylinX statement of operations for
the six months ended June 30, 2000. This pro forma condensed financial
information reflects certain adjustments, including among others, adjustments to
reflect the amortization of intangible assets and goodwill acquired and deferred
compensation related to assumed options. The information set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes to
the financial statements of CyberSource and PaylinX which are incorporated by
reference or included elsewhere herein. The unaudited pro forma condensed
combined financial information set forth below does not purport to represent
what the consolidated results of operations or financial condition of
CyberSource would actually have been if the PaylinX acquisition and related
transaction had in fact occurred on such date or to project the future
consolidated results of operations or financial condition of CyberSource.
F-2
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1999
(In thousands, except per share amounts)
Total Pro Forma
CyberSource PaylinX Combined Adjustments Total
------------ --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues......................... $ 12,931 $ 3,160 $ 16,091 $ -- $ 16,091
Cost of revenues..................... 10,948 606 11,554 -- 11,554
-------- -------- -------- ----------- --------
Gross profit......................... 1,983 2,554 4,537 -- 4,537
Operating expenses
Product development................ 7,807 4,067 11,874 -- 11,874
Sales and marketing................ 15,110 6,986 22,096 -- 22,096
General and administrative......... 6,023 6,894 12,917 -- 12,917
Goodwill and deferred compensation
amortization................... 4,716 -- 4,716 37,713(7) 57,092
1,167(7)
2,500(7)
2,600(7)
3,533(8)
4,863(9)
-------- -------- -------- ---------- --------
Total operating expenses............. 33,656 17,947 51,603 52,376 103,979
Loss from operations................. (31,673) (15,393) (47,066) (52,376) (99,442)
Interest income...................... 2,123 -- 2,123 -- 2,123
Interest and other expense........... (295) (652) (947) -- (947)
-------- -------- -------- ---------- --------
Net loss............................. $(29,845) $(16,045) $(45,890) $ (52,376) $ (98,266)
======== ======== ======== ========== ========
Basic and diluted net loss per share. $ (1.95) $ (8.82) $ (4.14)
-------- -------- --------
Weighted average shares of common
stock............................... 15,267 1,867 23,718
======== ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma
Condensed Combined Financial Information
F-3
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2000
(In thousands, except per share amounts)
Total Pro Forma
CyberSource PaylinX Combined Adjustments Total
------------ -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues................................... $ 13,838 $ 5,852 $ 19,690 $ -- $ 19,690
Cost of revenues............................... 10,747 652 11,399 -- 11,399
-------- ------- -------- ----------- --------
Gross profit................................... 3,091 5,200 8,291 -- 8,291
Operating expenses
Product development.......................... 6,543 2,643 9,186 -- 9,186
Sales and marketing.......................... 12,616 4,923 17,539 -- 17,539
General and administrative................... 6,087 3,691 9,778 -- 9,778
Acquisition related costs.................... 834 -- 834 -- 834
Goodwill and deferred compensation
amortization............................. 411 -- 411 18,857(7) 26,601
584(7)
1,250(7)
1,300(7)
1,767(8)
2,432(9)
-------- ------- -------- ----------- --------
Total operating expenses....................... 26,491 11,257 37,748 26,190 63,938
Loss from operations........................... (23,400) (6,057) (29,457) (26,190) (55,647)
Loss on investment in joint venture............ (31) -- (31) -- (31)
Interest income................................ 3,879 -- 3,879 -- 3,879
Interest and other expense..................... (55) (257) (312) -- (312)
-------- ------- -------- ----------- --------
Net loss....................................... $(19,607) $(6,314) $(25,921) $ (26,190) $ (52,111)
======== ======= ======== =========== ========
Basic and diluted net loss per share........... $ (0.76) $ (2.90) $ (1.52)
======== ======= ========
Weighted average shares of common stock........ 25,801 2,174 34,252
======== ======= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma
Condensed Combined Financial Information
F-4
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
As of June 30, 2000
(In thousands)
Pro Forma
CyberSource PaylinX Total Adjustments Total
----------- ----------- -------- ------------- ---------
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................ $ 41,076 $ 11,535 $ 52,611 $ - $ 52,611
Short-term investments................... 75,020 - 75,020 - 75,020
Accounts receivable, net................. 4,583 2,815 7,398 - 7,398
Prepaid expenses and other current assets 1,333 224 1,557 - 1,557
-------- -------- -------- -------- --------
Total current assets.................. 122,012 14,574 136,586 - 136,586
-------- -------- -------- -------- --------
Property and equipment, net................ 15,420 3,953 19,373 - 19,373
Investment in joint venture................ 730 - 730 - 730
Other noncurrent assets.................... 495 404 899 - 899
Goodwill and other intangible assets....... - - - 145,240 (1) 145,240
-------- -------- -------- -------- --------
Total assets.......................... 138,657 18,931 157,588 145,240 302,828
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... 2,053 276 2,329 - 2,329
Other accrued liabilities................ 5,344 1,329 6,673 4,000 (1) 12,173
1,500 (3)
Deferred revenue......................... 793 1,360 2,153 (680)(2) 1,473
Current obligations under capital leases. 578 - 578 - 578
-------- -------- -------- -------- --------
Total current liabilities............. 8,768 2,965 11,733 4,820 16,553
Non-current obligation under capital leases 204 - 204 - 204
Other long-term obligations................ - 836 836 - 836
Redeemable Convertible preferred stock..... - 36,067 36,067 (36,067)(5) -
Stockholders' equity (net capital deficiency)
Common stock and paid-in capital........... 190,341 4,846 195,187 137,156 (5) 369,082
32,894 (5)
(4,846)(5)
8,691 (1)
Deferred compensation.................... (903) (1,796) (2,699) (8,691)(1) (9,594)
1,796 (4)
Accumulated other comprehensive loss..... (54) - (54) - (54)
Accumulated deficit...................... (59,699) (23,987) (83,686) 23,987 (6) (74,199)
(14,500)(6)
-------- -------- -------- -------- --------
Total stockholders' equity............ 129,685 (20,937) 108,748 176,487 285,235
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity
(net capital deficiency).............. $138,657 $ 18,931 $157,588 $145,240 $302,828
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma
Condensed Combined Financial Information
F-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
For purposes of the pro forma operating data, CyberSource's
consolidated financial statements as of June 30, 2000 and for the six months
ended June 30, 2000 have been combined with the PaylinX financial statements as
of June 30, 2000 and for the six months ended June 30, 2000. CyberSource's
supplemental consolidated statement of operations for the year ended December
31, 1999 has been combined with the PaylinX statement of operations for the year
ended December 31, 1999.
The companies have had no significant inter-company activity which
would require elimination in preparing the combined condensed financial
statements. In addition, the companies have no significantly different
accounting policies and procedures which would have required conforming
adjustments.
The accompanying pro forma information should be read in conjunction
with the historical financial statements and supplemental financial statements
and related notes for both CyberSource and PaylinX, which are either included or
incorporated by reference in this proxy statement.
The pro forma financial statements give effect to CyberSource's
acquisition of PaylinX through a merger and exchange of shares. The Unaudited
Pro Forma Combined Condensed Statements of Operations for the year ended
December 31, 1999 and the six months ended June 30, 2000 reflect this
transaction as if it had taken place at the beginning of the period presented.
The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to this
transaction as if it had taken place on June 30, 2000.
The merger is being accounted for using the purchase method of
accounting. The pro forma financial statements have been prepared on the basis
of assumptions described in the following notes and include assumptions relating
to the allocation of the consideration paid for the assets and liabilities of
PaylinX based on estimated fair value. CyberSource does not expect that the
final allocation of the purchase price will differ materially from the
preliminary allocations. In the opinion of CyberSource's management, all
adjustments necessary to present fairly such pro forma financial statements have
been made on the proposed terms and structure of the PaylinX merger.
In connection with the merger, CyberSource currently expects to incur
write-offs related to in-process research and development, of approximately
$14.5 million. The Unaudited Pro Forma Combined Condensed Statements of
Operations do not reflect these charges. The charge related to in-process
research and development will be reflected in CyberSource's consolidated
financial statements upon the effective time of the merger. The pro forma
financial statements do not include the costs of integration, the amount of
which is uncertain at this time as they will affect future operations.
The pro forma financial statements are not necessarily indicative of
what the actual financial results would have been had the transaction taken
place on January 1, 1999 or June 30, 2000 and do not purport to indicate the
results of future operations.
The pro forma financial statements give effect to the following pro
forma adjustments:
(1) In accordance with the merger agreement, PaylinX will become a wholly
owned subsidiary of CyberSource, and all outstanding shares of its
common and preferred stock will be converted into shares of
CyberSource common stock.
F-6
<PAGE>
The PaylinX merger is being accounted for using the purchase method of
accounting. The purchase price of $16.23 per share was based on the closing
price of CyberSource's stock on July 10, 2000 (the date of the announcement of
the merger) and the three days prior and subsequent to the announcement date.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
PaylinX CyberSource Fair Value
Shares Shares (in thousands)
------------------ ------------------ ------------------
<S> <C> <C> <C>
Shares.................................. 7,042,331 8,450,797 $137,156
Stock options assumed................... 2,430,128 2,916,153 41,585
------------------ ------------------ ------------------
Totals.................................. 9,472,459 11,366,950 $178,741
================== ================== ==================
</TABLE>
The PaylinX shares were first converted to CyberSource equivalent
shares by taking the number of PaylinX shares multiplied by the exchange ratio
of approximately 1.2 per share.
With respect to stock options assumed as part of the merger, all
PaylinX options will be exchanged for CyberSource options and are included as
part of the purchase price based on their fair value. Any unvested PaylinX
options issued in exchange for unvested CyberSource options are also included as
part of the purchase price based on their fair value, however, pursuant to
Financial Accounting Standards Board Interpretation Number 44, the portion of
the intrinsic value of unvested options that will be deemed to be earned over
the remaining vesting period of those options has been deducted from the fair
value of the unvested options and will be amortized as deferred compensation
over that remaining vesting period. The fair value of the options assumed is
based on the Black-Scholes model using the following assumptions:
. Fair market value of the underlying shares is based on the average
closing price of CyberSource's common stock on July 10, 2000 and
the three days prior and subsequent to such date.
. Expected life of 4.0 years
. Expected volatility of 1.13
. Risk free interest rate of 5.55%
. Expected dividend rate of 0%
Below is a table of the estimated acquisition cost, allocation of
excess purchase cost over the fair value of net assets acquired to goodwill and
other intangible assets acquired and annual amortization of the goodwill and
intangible assets acquired (in thousands, except for asset life);
F-7
<PAGE>
<TABLE>
<CAPTION>
Estimated Annual
Acquisition Asset Life Amortization
Cost (in years) of Intangibles
----------------- ------------------- ------------------
<S> <C> <C> <C>
Value of common stock and stock
options issued................. $ 178,741
Transaction costs................... 4,000
-----------------
Total estimated acquisition cost.... $ 182,741
=================
Historical value of net assets
acquired of PaylinX at June 30,
2000............................... $ 15,130 N/A
Adjustment to state net assets at
fair market value.................. (820) N/A
Assembled workforce................. 3,500 3 $ 1,167
Customer base....................... 13,000 5 $ 2,600
Developed technology................ 10,600 3 $ 3,533
In-process technology............... 14,500 N/A N/A
Covenants-not-to-compete............ 5,000 2 $ 2,500
Goodwill............................ 113,140 3 $37,713
Deferred compensation............... 8,691 3.5 $ 4,863
-----------------
Total............................... $ 182,741
=================
</TABLE>
Tangible assets of PaylinX acquired in the merger principally include
cash and cash equivalents, accounts receivables, and fixed assets. Liabilities
of PaylinX assumed in the merger principally include accounts payable, deferred
revenue and other liabilities.
To determine the value of the developed technology the expected future
cash flow attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of the technology,
existing and future markets, and assessments of the life cycle stage of the
technology. The analysis resulted in a valuation of approximately $10.6 million
for developed technology which has reached technological feasibility and
therefore was capitalizable. The developed technology is being amortized on a
straight line basis over a 3 year period.
The value of the assembled workforce was derived by estimating the
costs to replace the existing employees, including recruiting and hiring costs
and training costs for each category of employee. The analysis determined a
valuation of approximately $3.5 million for the assembled workforce, and is
being amortized on a straight line basis over a 3 year period.
The value of the customer base of approximately $13.0 million was
derived by considering, among other factors, the historical costs to develop
customer relationships, the expected income, and the associated risks.
Associated risks included the inherent difficulties and uncertainties in
transitioning business relationships. The value of the customer base is being
amortized over a 5 year period.
F-8
<PAGE>
The value of deferred compensation of approximately $8.7 million was
derived using the guidance of Financial Accounting Standards Board
Interpretation Number 44, the unvested options' intrinsic value, and a vesting
ratio of 38% for the remaining vesting period of unvested options. The
deferred compensation is being amortized on a graded basis over a 3.5 year
period.
The projects identified as in-process technology at PaylinX are those
that will be underway at the time of the PaylinX merger and would, after
consummation of the PaylinX merger, require additional effort to establish
technological feasibility. These projects have identifiable technological risk
factors which indicate that even though successful completion is expected, it is
not assured. If an identified project is not successfully completed, there is
no alternative future use for the project and the expected future income will
not be realized. The estimated amount of the in-process research and
development charge represents a preliminary estimate which could materially
differ from the actual results that will be experienced by CyberSource as
final values will not be established until after the closing of the PaylinX
merger.
The in-process technology acquired from PaylinX in the transaction
consists primarily of technology related to replacement and enhancement of
PaylinX's core technology, principally multi-channel enterprise payment
software.
(2) The pro forma adjustment to deferred revenue reflects the writedown of
deferred revenue to the estimated amount of the cost to provide
service under maintenance contracts as of June 30, 2000 plus a profit
margin related to such services.
(3) The pro forma adjustment to accrued liabilities reflects the
payments under severance agreements to executives of PaylinX who
will be terminated upon the closing of the merger.
(4) The pro forma adjustment to "deferred compensation" reflects the
elimination of PaylinX deferred compensation ($1.8 million).
(5) The pro forma adjustment to "common stock and additional paid in
capital" and "convertible preferred stock" reflects elimination of
PaylinX's common and preferred stock ($40.9 million) and the impact
of the issuance of CyberSource common stock ($178.7 million) in
connection with the merger.
(6) The pro forma adjustment to "Accumulated Deficit" reflects the
elimination of PaylinX's accumulated deficit ($24.0 million) and the
in-process technology charge ($14.5 million).
(7) The pro forma adjustment is for the amortization of goodwill,
assembled workforce, covenants-not-to-compete and customer base.
(8) The pro forma adjustment is for the amortization of developed
technology.
(9) The pro forma adjustment is for the amortization of deferred
compensation.
F-9
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CyberSource Corporation
We have audited the supplemental consolidated balance sheets of
CyberSource Corporation (formed as a result of the consolidation of CyberSource
Corporation and ExpressGold.com, Inc.) as of December 31, 1999 and 1998, and the
related supplemental consolidated statements of operations, redeemable
convertible preferred stock, division equity and stockholders' equity (net
capital deficiency), and cash flows of CyberSource Corporation and its
predecessor division of Beyond.com Corporation for each of the three years in
the period ended December 31, 1999. The supplemental consolidated financial
statements give retroactive effect to the merger of CyberSource Corporation and
ExpressGold.com, Inc. on January 10, 2000, which has been accounted for using
the pooling of interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental 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 supplemental financial statements referred to
above present fairly, in all material respects, the supplemental consolidated
financial position of CyberSource Corporation at December 31, 1999 and 1998, and
the supplemental consolidated results of operations and cash flows of
CyberSource Corporation and its predecessor division of Beyond.com Corporation
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 17, 2000
F-10
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
------
Current assets:...................................................................
Cash and cash equivalents....................................................... $ 71,673 $ 11,422
Short-term investments.......................................................... 68,596 --
Accounts receivable, net of allowances of $282 and $229 at December 31, 1999 3,212 863
and 1998.......................................................................
Prepaid expenses and other current assets....................................... 1,589 419
------------- -------------
Total current assets......................................................... 145,070 12,704
Property and equipment, net....................................................... 8,300 2,395
Other noncurrent assets........................................................... 752 290
------------- -------------
Total assets................................................................. $154,122 $ 15,389
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(NET CAPITAL DEFICIENCY)
------------------------
Current liabilities:
Accounts payable................................................................. $ 1,311 $ 575
Other accrued liabilities........................................................ 4,086 984
Deferred revenue................................................................. 461 120
Current obligations under capital leases......................................... 661 211
Notes payable to related parties................................................. 600 3,000
------------- -------------
Total current liabilities.................................................... 7,119 4,890
Noncurrent obligations under capital leases....................................... 444 256
Commitments and contingencies
Redeemable convertible preferred stock:
Designated shares--None in 1999 and 24,037,372 in 1998..........................
Issued and outstanding shares--None in 1999 and 16,957,061 in 1998............. -- 18,911
Stockholders' equity (net capital deficiency):
Convertible preferred stock, $0.001 par value:
Authorized shares--4,988,842 in 1999 and 25,000,000 in 1998................... -- --
Common stock, $0.001 par value:
Authorized shares--50,000,000 Issued and outstanding shares-- 25,594,709 in
1999 and 6,143,678 in 1998..................................................... 26 6
Additional paid-in capital........................................................ 187,828 1,715
Deferred compensation............................................................. (791) (142)
Accumulated other comprehensive loss.............................................. (412) --
Accumulated deficit............................................................... (40,092) (10,247)
------------- -------------
Total stockholders' equity (net capital deficiency).......................... 146,559 (8,668)
------------- -------------
Total liabilities and stockholders' equity (net capital deficiency)......... $154,122 $ 15,389
============= =============
</TABLE>
See accompanying notes.
F-11
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues........................................................... $ 12,931 $ 3,384 $ 968
Cost of revenues................................................... 10,948 3,471 324
-------------- -------------- --------------
Gross profit (loss)................................................ 1,983 (87) 644
Operating expenses:
Product development.............................................. 7,807 3,831 2,300
Sales and marketing.............................................. 15,110 4,184 1,988
General and administrative....................................... 6,023 2,079 681
Deferred compensation amortization............................... 4,716 18 --
-------------- -------------- --------------
Total operating expenses...................................... 33,656 10,112 4,969
-------------- -------------- --------------
Loss from operations............................................... (31,673) (10,199) (4,325)
Interest income.................................................... 108 --
2,123
Interest expense................................................... (295) (156) (13)
-------------- -------------- --------------
Net loss........................................................... $(29,845) $(10,247) $(4,338)
============== ============== ==============
Basic and diluted net loss per share............................... $(1.95) $(2.08)
============== ==============
Shares used in computing basic and diluted net loss per share..... 15,267 4,924
============== ==============
Pro forma basic and diluted net loss per share..................... $(1.46) $(0.87)
============== ==============
Shares used in computing pro forma basic and diluted net loss per
share............................................................. 20,411 11,746
============== ==============
</TABLE>
See accompanying notes.
F-12
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
SUPPLEMENTAL CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
DIVISION EQUITY AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Redeemable
Convertible
Preferred Stock Common Stock
-------------------- Divisional -------------------
Shares Amount Equity Shares Amount
--------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996.................... -- -- $ 421 -- $--
Funding provided by Beyond.com Corporation...... -- -- 7,051 -- --
Net loss and comprehensive net loss............. -- -- (4,338) -- --
Incorporation of CyberSource and issuance of
redeemable convertible preferred stock and
common stock in December 1997 upon capital
stock dividend from Beyond.com Corporation... 7,022,558 $2,097 (3,134) 4,535,000 5
---------- -------- ---------- ---------- --------
Balance at December 31, 1997.................... 7,022,558 2,097 -- 4,535,000 5
Issuance of common stock under stock option plan -- -- -- 871,536 --
Sale of common stock............................ -- -- -- 717,572 1
Common shares issued for services............... -- -- -- 19,570 --
Issuance of Series D redeemable convertible
preferred stock, [net of issuance costs of $20 1,851,850 1,980 -- -- --
Issuance of Series E redeemable convertible
preferred stock, net of issuance costs of $114 8,082,653 14,516 -- -- --
Issuance of warrants to Visa and GE Capital..... -- 318 -- -- --
Deferred compensation related to stock option grants -- -- -- -- --
Amortization of deferred compensation........... -- -- -- -- --
Net loss and comprehensive loss................. -- -- -- -- --
---------- -------- ---------- ---------- --------
Balance at December 31, 1998.................... 16,957,061 18,911 -- 6,143,678 6
Common shares issued for services............... -- -- -- 100,782 --
Issuance of common stock under stock option plan -- -- -- 321,405 1
Sale of common stock............................ -- -- -- 723,051 1
Compensation associated with common stock issued to
employee..................................... -- -- -- -- --
Deferred compensation related to stock option grants -- -- -- -- --
Conversion of note payable from Officer and
Stockholder into Series E preferred stock.... 1,657,458 3,000 -- -- --
Net exercise of warrants........................ 774,512 -- -- -- --
Conversion of preferred stock into common stock
upon Initial Public Offering................. (19,389,031) (21,911) -- 11,705,793 12
Issuance of common stock in Initial Public
Offering, net of issuance costs of $4,419.... -- -- -- 4,600,000 4
Issuance of common stock in Second Offering, net of
issuance costs of $6,193..................... -- -- -- 2,000,000 2
Amortization of deferred compensation........... -- -- -- -- --
Unrealized loss on short-term investments....... -- -- -- -- --
Net loss........................................ -- -- -- -- --
Comprehensive loss.............................. -- -- -- -- --
---------- -------- ---------- ---------- --------
Balance at December 31, 1999.................... -- $-- $-- 25,594,709 $ 26
========== ======== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Deferred Other Accumu-
Paid in Compen- Comprehensive lated
Capital sation Loss Deficit Total
------------ ---------- --------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996.................... $-- $-- $-- $-- $--
Funding provided by Beyond.com Corporation...... -- -- -- -- --
Net loss and comprehensive net loss............. -- -- -- -- --
Incorporation of CyberSource and issuance of
redeemable convertible preferred stock and
common stock in December 1997 upon capital
stock dividend from Beyond.com Corporation... 1,032 -- -- -- 1,037
------------ ---------- --------------- ---------- --------
Balance at December 31, 1997.................... 1,032 -- -- -- 1,037
Issuance of common stock under stock option plan 7 -- -- -- 7
Sale of common stock............................ 502 -- -- -- 503
Common shares issued for services............... 14 -- -- -- 14
Issuance of Series D redeemable convertible
preferred stock, [net of issuance costs of $20 -- -- -- -- --
Issuance of Series E redeemable convertible
preferred stock, net of issuance costs of $114 -- -- -- -- --
Issuance of warrants to Visa and GE Capital..... -- -- -- -- --
Deferred compensation related to stock option grants 160 (160) -- -- --
Amortization of deferred compensation........... -- 18 -- -- 18
Net loss and comprehensive loss................. -- -- -- (10,247) (10,247)
------------ ---------- --------------- ---------- --------
Balance at December 31, 1998.................... 1,715 (142) -- (10,247) (8,668)
Common shares issued for services............... 678 -- -- -- 678
Issuance of common stock under stock option plan 226 -- -- -- 227
Sale of common stock............................ 554 -- -- -- 555
Compensation associated with common stock issued to
employee..................................... 3,580 -- -- -- 3,580
Deferred compensation related to stock option grants 1,188 (1,188) -- -- --
Conversion of note payable from Officer and
Stockholder into Series E preferred stock.... -- -- -- -- --
Net exercise of warrants........................ -- -- -- -- --
Conversion of preferred stock into common stock
upon Initial Public Offering................. 21,899 -- -- -- 21,911
Issuance of common stock in Initial Public
Offering, net of issuance costs of $4,419.... 46,181 -- -- -- 46,185
Issuance of common stock in Second Offering,
net of issuance costs of $6,193.............. 111,807 -- -- -- 111,809
Amortization of deferred compensation........... -- 539 -- -- 539
Unrealized loss on short-term investments....... -- -- (412) -- (412)
Net loss........................................ -- -- -- (29,845) (29,845)
Comprehensive loss.............................. -- -- -- -- (30,257)
------------ ---------- --------------- ---------- --------
Balance at December 31, 1999.................... $187,828 $ (791) $ (412) $(40,092) $146,559
============ ========== =============== ========== ========
</TABLE>
See accompanying notes.
F-13
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
(In thousands)
Operating activities
Net loss............................................................ $(29,845) $(10,247) $(4,338)
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock issued for services rendered and as compensation............ 4,258 14 --
Depreciation and amortization..................................... 2,549 795 325
Amortization of deferred compensation............................. 539 18 --
Changes in assets and liabilities:
Accounts receivable............................................... (2,349) (397) (431)
Prepaid expenses and other current assets......................... (1,173) (302) (48)
Other noncurrent assets........................................... (458) -- --
Accounts payable.................................................. 737 306 147
Other accrued liabilities......................................... 3,101 857 109
Deferred revenue.................................................. 341 (30) 124
-------------- -------------- -------------
Net cash used in operating activities............................... (22,300) (8,986) (4,112)
Investing activities
Purchases of property and equipment................................. (7,301) (1,531) (927)
Purchases of short-term investments................................. (73,934) -- --
Sale of short-term investments...................................... 4,926 -- --
-------------- -------------- -------------
Net cash used in investing activities............................... (76,309) (1,531) (927)
Financing activities
Proceeds from issuances of notes payable to related parties........ 600 3,000 --
Principal payments on capital lease obligations..................... (516) (67) (12)
Financing provided by Beyond.com Corporation........................ -- -- 7,051
Loan to Beyond.com Corporation...................................... -- (400) --
Repayment of loan by Beyond.com Corporation......................... -- 400 --
Proceeds from issuance of stock, net................................ 555 17,006 --
Proceeds from Public Offerings...................................... 157,994 -- --
Proceeds from exercise of stock options............................. 227 7 --
-------------- -------------- -------------
Net cash provided by financing activities........................... 158,860 19,939 7,039
-------------- -------------- -------------
Net increase in cash and cash equivalents........................... 60,251 9,422 2,000
Cash and cash equivalents at beginning of period.................... 11,422 2,000 --
-------------- -------------- -------------
Cash and cash equivalents at end of period.......................... $ 71,673 $ 11,422 $ 2,000
============== ============== =============
Supplemental schedule of cash flow information
Interest paid....................................................... $ 295 $ 156 $ --
Supplemental schedule of noncash financing activities
Property and equipment acquired under capital leases............... $ 1,154 $ 480 $ 66
Issuance of warrants to Visa and GE Capital......................... $ -- $ 318 $ --
Deferred compensation related to stock option grants............... $ 1,188 $ 160 $ --
Conversion of note payable to an officer and stockholder into
redeemable convertible preferred stock............................ $ 3,000 $ -- $ --
Conversion of redeemable convertible preferred stock into common
stock.............................................................. $ 21,911 $ -- $ --
</TABLE>
See accompanying notes.
F-14
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
CyberSource Corporation (the Company) was incorporated in the state of
Delaware on December 30, 1997. Prior to its incorporation, the Company operated
as a division of Beyond.com Corporation (Beyond.com). The Company is a developer
and provider of real time eCommerce transaction services.
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 the predecessor division of Beyond.com. All intercompany
transactions and balances have been eliminated.
On December 31, 1997, Beyond.com transferred assets and liabilities to its
wholly owned subsidiary, CyberSource Corporation. Upon this transfer, Beyond.com
distributed capital stock in the form of a dividend to all existing stockholders
of Beyond.com on a pro rata basis such that the stockholders of the Company were
the same as the stockholders of Beyond.com at the time of the distribution (the
Spin-off). The accompanying statements of operations and stockholders' equity
for fiscal 1997 reflect the operations of the Company as a division of
Beyond.com through December 31, 1997.
The statements of operations for fiscal 1997 include all revenue and costs
directly attributable to the Company, including a corporate allocation of the
costs of facilities, salaries, and employee benefits. Additionally, incremental
corporate administration, finance, and management costs were allocated to the
Company. (See Note 8.)
All of the allocations reflected in the 1997 financial statements are based
on assumptions that management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs that would have resulted if the Company had been operated on a stand-alone
basis in fiscal 1997 nor are they necessarily indicative of future costs to
support the operations of the Company.
On January 10, 2000, the Company acquired ExpressGold.com, Inc., a
privately held South Dakota Corporation ("ExpressGold"). The transaction was
closed on January 10, 2000 and is being accounted for as a pooling of
interests. These supplemental consolidated financial statements have been
restated to reflect the acquisition of ExpressGold as a pooling of interests.
These supplemental consolidated financial statements will become the
historical financial statements upon issuance of financial statements for the
year ended December 31, 2000. (See Note 2)
Foreign Currency Translation
The financial statements of the Company's non-U.S. subsidiary are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation." Assets and
liabilities of the Company's subsidiary are translated at the rates of exchange
at the end of the 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.
F-15
<PAGE>
Use of Estimates
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
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 derives its revenues from eCommerce service monthly transaction
processing fees, support service fees, professional services, and digital
product rights management fees. Individual transactions, monthly transaction
revenues, and digital product rights management fees are recognized in the
period in which the transactions occur. Support service fees and professional
services are recognized when the services are provided and the related costs are
incurred. For the years ended December 31, 1999 and 1998, Beyond.com, a related
party, accounted for 13.1% and 23.7% of revenues, respectively. There were no
customers that accounted for greater than 10% of revenues in fiscal 1997.
Cash, Cash Equivalents and Short-Term Investments
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, 1999 and 1998, cash equivalents consist
primarily of investments in money market funds. To date, the Company has not
experienced losses on any of its investments.
Short-term investments are classified as available-for-sale and are carried
at fair market value. Short-term investments are comprised of commercial paper
with an original maturity greater than three months and less than one year.
Unrealized losses on short-term investments, which represents the difference
between the fair market value and the amortized cost, are approximately $412,000
as of December 31, 1999 and are included in accumulated other comprehensive
loss. There were no realized gains or losses from the sale of short-term
investments during fiscal 1999.
Accounts Receivable and Concentration of Credit Risk
At December 31, 1999 and 1998, 11% and 13%, respectively, of accounts
receivable are due from Beyond.com. At December 31, 1999 and 1998, accounts
receivable due from foreign customers are 11% and 6%, respectively. The Company
generally does not require collateral. The Company maintains allowances for
potential credit losses.
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 terms or the estimated useful lives.
F-16
<PAGE>
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Computer equipment and software................................................... $10,462 $2,963
Furniture and fixtures............................................................ 647 272
Office equipment.................................................................. 523 171
Leasehold improvements............................................................ 382 154
------------- -------------
12,014 3,560
Less accumulated depreciation and amortization.................................... 3,714 1,165
------------- -------------
$ 8,300 $2,395
============= =============
</TABLE>
Product Development
Product development expenditures are charged to operations as incurred.
Advertising Expense
The cost of advertising is recorded as an expense when incurred.
Advertising costs were approximately $3,601,000 and $32,000 during the years
ended December 31, 1999 and 1998, respectively.
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 the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
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.
Net Loss Per Share and Pro Forma Net Loss Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," basic and diluted net loss per share has been computed
using the weighted average number of shares of common stock outstanding during
the period. Potentially dilutive securities have been excluded from the
computation as their effect is antidilutive. Because the Company was a division
of Beyond.com through December 31, 1997 and had no outstanding common or
preferred stock, there is no earnings or loss per share presented for 1997.
Pro forma basic and diluted net loss per share is as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Net loss..................................................................... $(29,845) $(10,247)
================ ===============
Shares used in computing basic and diluted net loss per share................ 15,267 4,924
</TABLE>
F-17
<PAGE>
<TABLE>
<S> <C> <C>
Adjusted to reflect the effect of the assumed conversion of redeemable
convertible preferred stock from the date of issuance.................. 5,144 6,822
---------------- ---------------
Weighted average shares used in computing pro forma basic and diluted net
loss per share.......................................................... 20,411 11,746
---------------- ---------------
Pro forma basic and diluted net loss per share............................... $ (1.46) $ (0.87)
================ ===============
</TABLE>
If the Company had reported net income for the year ended December 31,
1999, diluted earnings per share would have included the shares used in the
computation of net loss per share as well as additional common equivalent shares
related to outstanding options to purchase approximately 3,308,405 shares of
common stock at December 31, 1999, shares issuable upon exercise of the
outstanding warrants prior to the exercise of these warrants in June 1999 and
shares issuable upon conversion of the outstanding convertible note payable
prior to the conversion of the note in June 1999. The common equivalent shares
from options and warrants would be determined on a weighted average basis using
the treasury stock method. The common equivalent shares related to the
convertible note payable would be determined on a weighted average basis using
the "as-if converted" method. If the Company had reported net income for the
year ended December 31, 1998, diluted earnings per share would have included
additional common equivalent shares related to approximately 1,007,224
outstanding options and 1,527,000 shares issuable on conversion of the
convertible note payable and exercise of the outstanding warrants at December
31, 1998.
Income Taxes
Income taxes are calculated under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
SFAS 109, the liability method is used in accounting for income taxes, which
includes the effects of temporary differences between financial and taxable
amounts of assets and liabilities.
Comprehensive Income
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 income. Comprehensive income consists of net income and other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.
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 standards 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.
F-18
<PAGE>
In December 1999, the Securities and Exchange Commission issued Statement
of Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). The Company does not believe that the adoption of SAB 101 will
materially change its financial position or results of operations.
2. Acquisition of ExpressGold
On January 10, 2000, the Company acquired ExpressGold, a developer of an
Internet Stored Value platform that allows merchants to offer gift certificates,
promotional certificates and corporate incentives to businesses and consumers.
Under the terms of the acquisition agreement, the Company issued 1,554,431
shares of CyberSource common stock in exchange for all of ExpressGold's common
stock. In addition, the Company issued 12,067 stock options in exchange for
ExpressGold's previously outstanding stock options. The number of shares of
CyberSource shares was calculated using an exchange ratio of approximately 1.3
shares of CyberSource for each share of ExpressGold common stock. The
transaction was accounted for as a pooling of interests and, accordingly, the
historical condensed consolidated financial statements of the Company have been
restated to include the financial position, results of operations and cash flows
of ExpressGold for all periods presented.
The following represents the results of operations for 1999 and 1998 for
the Company and ExpressGold prior to the restatement resulting from the
acquisition (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------ ------------------------------------------------
CyberSource ExpressGold CyberSource ExpressGold
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues $ 12,898 $ 33 $ 3,384 $ --
Net loss $(24,097) $(5,748) $(10,085) $(162)
</TABLE>
F-19
<PAGE>
3. Balance Sheet Detail
Other accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Employee benefits and related expenses............................................ $ 833 $ 310
Bonuses and commissions........................................................... 508 101
Marketing expenses................................................................ 369 --
Employee stock purchase plan contributions........................................ 313 --
Other liabilities................................................................. 2,063 573
------------- --------------
Total other accrued liabilities................................................. $4,086 $ 984
============= ==============
</TABLE>
4. Segment Information
Operating segments are identified as components of an enterprise about
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. Through December 31,
1999, the Company viewed its operations as principally two segments, eCommerce
transaction services (ECTS) and digital product sales and rights management
(DPR) for software and other digital products and manages the business based on
the revenues of these segments. Additionally, revenues from outside the United
States were 23% of revenues for the year ended December 31, 1999. In 1998 and
1997 the Company derived less than 10% of its revenues from outside the United
States.
The following tables presents revenues by the Company's two segments for
the years ended December 31, 1999, 1998 and 1997. There were no interbusiness
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 and reported to the Chief Executive Officer on a
consolidated basis. Revenues are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1999 1998 1997
------------- -------------- ---------------
<S> <C> <C> <C>
ETCS................................................................ $12,064 $2,708 $ 770
DPR................................................................. 867 676 198
------------- -------------- ---------------
Total............................................................. $12,931 $3,384 $ 968
============= ============== ===============
</TABLE>
5. Commitments
The Company leases its primary facility and equipment under noncancelable
operating leases. The lease agreement for the facility occupied by the Company
during 1999 expires periodically through 2001. In November 1999, the Company
entered into a lease agreement to occupy a new facility commencing January 2000
which expires in December 2006. The Company is planning to relocate to the new
facility in April 2000. Upon the completion of its relocation, the Company
intends to sublease its current facility through the expiration of its lease
agreement or terminate the lease with the lessor. Rental expense was
approximately $1,143,000, $467,000, and $144,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
The Company leases equipment under noncancelable lease agreements that are
accounted for as capital leases. Equipment under capital lease arrangements,
which is included in property and equipment,
F-20
<PAGE>
aggregated approximately $1,699,000 and $546,000 at December 31, 1999 and 1998,
respectively. Related accumulated amortization was approximately $524,000 and
$69,000 at December 31, 1999 and 1998, respectively. Amortization expense
related to assets under capital leases is included with depreciation expense.
Future minimum lease payments under noncancelable operating leases and
capital leases at December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------------- --------------
<S> <C> <C>
2000........................................................................... $ 3,586 $ 758
2001........................................................................... 2,496 406
2002........................................................................... 2,485 62
2003........................................................................... 2,535 --
2004 and thereafter............................................................ 8,252 --
------------ -------------
Total minimum payments....................................................... $19,354 $1,226
============
Less amount representing interest.............................................. 121
-------------
1,105
Less current portion........................................................... 661
-------------
$ 444
=============
</TABLE>
6. Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Designated Outstanding
Shares Shares
---------------- ------------------
<S> <C> <C>
Series A................................................................... 1,985,520 1,985,520
Series B................................................................... 2,500,000 2,037,038
Series C................................................................... 3,000,000 3,000,000
Series D................................................................... 1,851,852 1,851,850
Series E................................................................... 14,700,000 8,082,653
---------------- ------------------
Total.................................................................... 24,037,372 16,957,061
================ ==================
</TABLE>
In June 1999, the Company completed an initial public offering and all
outstanding shares of the Company's preferred stock, including preferred stock
issued in June 1999 upon conversion of a convertible note and exercise of
warrants, were converted into 11,705,793 shares of common stock.
During 1998, in connection with the issuance of Series E preferred stock
and certain strategic marketing agreements with Visa and GE Capital, the Company
issued warrants to purchase 552,486, 442,910, and 401,243 shares of the
Company's Series E preferred stock at exercise prices of $1.81, $3.00, and $4.00
per share, respectively. The warrants were fully exercisable upon the date of
issuance and expired three years from the original date of the marketing
services agreements. Preferred shares issued upon exercise of the warrants are
non-forfeitable.
The Company determined the fair value of the warrants at the time of
issuance to be $318,000 and recorded this amount as a cost of the strategic
marketing agreements. The determined value of the warrants was credited to
redeemable convertible preferred stock and is being amortized ratably over the
three year term of the strategic marketing agreements. The Company amortized
$79,000 and $28,000 of the value of the warrants to sales and marketing expense
in 1999 and 1998, respectively. In June 1999, all warrants were exercised
through a cashless net exercise into 774,512 shares of preferred stock.
F-21
<PAGE>
7. Stockholders' Equity
Common Shares
The Company is authorized to issue 50,000,000 shares of common stock. The
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, as may be
declared by the Board of Directors.
On April 30, 1999, the Company's Board of Directors approved a 1 for 2
reverse split of the Company's outstanding common stock, and on June 21, 1999,
the Company's stockholders approved the reverse split. The par value of the
common stock and the authorized shares of common stock were not adjusted as a
result of the reverse split. The conversion ratios of each series of preferred
stock were adjusted accordingly. The stock split is reflected in the
accompanying financial statements and footnotes on a retroactive basis for all
periods presented.
The Company completed its IPO on June 28, 1999. A total of 4,600,000
shares of common stock was sold by the Company at a price of $11.00 per share.
The net proceeds to the Company were approximately $46.2 million after deducting
the underwriters discount and offering expenses.
The Company completed a second offering on November 10, 1999. A total of
2,000,000 shares of common stock was sold by the Company at a price of $59.00
per share. The net proceeds to the Company were approximately $111.8 million
after deducting the underwriters discount and offering expenses.
In November 1999, a stockholder/employee of ExpressGold purchased 100,000
shares of common stock at $1.00 per share. In connection with the purchase, the
Company recorded compensation of $3,580,000 for the estimated difference between
the purchase price and the deemed fair value of the common stock for accounting
purposes.
The Company has reserved shares of common stock for future issuance at
December 31, 1999 as follows:
<TABLE>
<CAPTION>
1998 and 1999 Stock Option Plans:
<S> <C>
Options outstanding........................................................................ 3,308,405
Options available for future grants........................................................ 1,030,292
1999 Employee Stock Purchase Plan--shares available for future purchase..................... 500,000
-----------------
4,807,059
=================
</TABLE>
Stock Options
In conjunction with the Spin-off of the Company on December 31, 1997,
employees of the Company, immediately following the Spin-off, maintained their
outstanding exercisable stock options in Beyond.com and in March 1998 were
granted additional incentive stock options in the Company. Employees of
Beyond.com were granted additional stock options in the Company in March 1998
based on the extent that the employees' original Beyond.com options were
exercisable on the date of the Spin-off. The exercise prices of the original
Beyond.com option grants and the additional Company stock option grants were
adjusted to reflect the allocation of the fair market value per share price
between the Company's and Beyond.com's common stock at December 31, 1997. The
adjustments to these options resulted in nonstapled options to the employees of
each entity and were accounted for and in compliance
F-22
<PAGE>
with the guidelines in Emerging Issues Task Force Issue No. 90-9, and therefore,
no compensation expense has been recorded.
In March 1998, the Company adopted its 1998 Stock Option Plan (the 1998
Option Plan). There are 1,900,000 shares of common stock authorized for issuance
under the 1998 Option Plan. The 1998 Option Plan provides for the issuance of
common stock and the 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 1998 Option Plan generally
become exercisable over five years at the rate of 20% per year from the grant
date.
In January 1999, the Company adopted its 1999 Stock Option Plan (the 1999
Option Plan). The Company has reserved 2,500,000 shares of common stock for
issuance under the 1999 Option Plan. The provisions of the 1999 Plan are similar
to those of the 1998 Option Plan.
In October 1999, the Company adopted the 1999 Nonqualified Stock Option
Plan (the 1999 Nonqualified Option Plan). The Company has reserved 1,100,000
shares of common stock for issuance under the 1999 Nonqualified Option Plan. The
1999 Nonqualified Option Plan provides for the granting of non-qualified stock
options to employees, consultants and directors. The other provisions of the
1999 Nonqualified Option Plan are similar to those of the 1999 and 1998 Stock
Option Plans. In March 2000, the Company reserved an additional 637,500 shares
of common stock for issuance under the 1999 Nonqualified Option Plan.
On January 10, 2000, 9,250 outstanding ExpressGold stock options were
converted at the common stock exchange ratio in accordance with the ExpressGold
acquisition agreement, into 12,067 options to purchase the Company's common
stock at an average converted exercise price of $0.77. The options are
generally exercisable in four equal installments commencing one year from the
original grant date and expire ten years from the original grant date.
The following table summarizes information about the Company's stock option
activity under the 1998 Option Plan, the 1999 Option Plan and the 1999
Nonqualified Option Plan. Options granted prior to December 31, 1997 were
originated from options granted by Beyond.com and were granted by the Company
immediately following the adoption of the 1998 Option Plan.
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------
Weighted
Average
Shares Number Of Exercise
Available Shares Price
--------------- -------------- -------------
<S> <C> <C> <C>
Shares reserved.................................................... 1,900,000 -- $ --
Option granted based upon Beyond.com option grants prior to
Spin-off.......................................................... (1,227,183) 1,227,183 $ 0.16
Options granted.................................................... (679,575) 686,098 $ 0.47
Options exercised.................................................. -- (871,536) $ 0.01
Options canceled................................................... 34,521 (34,521) $ 0.38
--------------- -------------- -------------
Balance at December 31, 1998....................................... 27,763 1,007,224 $ 0.31
Additional shares reserved......................................... 3,600,000 -- $ --
Options granted.................................................... (2,884,400) 2,909,515 $12.92
Options exercised.................................................. -- (321,405) $ 0.70
Options canceled................................................... 286,929 (286,929) $ 5.22
--------------- -------------- -------------
Balance at December 31, 1999....................................... 1,030,292 3,308,405 $10.95
=============== ============== =============
</TABLE>
F-23
<PAGE>
In connection with certain stock options granted in 1999 and 1998, the
Company recorded deferred compensation for the estimated difference between the
exercise price of the options and the deemed fair value of $1,188,000, and
$160,000, respectively, which is being amortized on a graded method over the
four-year vesting period of the options. In fiscal 1999 and 1998, $539,000 and
$18,000 of this amount was amortized to compensation expense.
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Weighted Number of
Weighed Average Options Weighted
Number of Average Remaining Exercisable Average
Options Exercise Contractual Upon Exercise
Exercise Price Outstanding Price Life (Years) Issuance Price
---------------------- ----------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.007--$0.20 239,873 $ 0.08 8.21 86,563 $0.05
$ 0.54--$0.77 378,507 $ 0.56 8.68 81,460 $0.56
$ 3.62 1,208,975 $ 3.62 9.11 50,516 $3.62
$ 5.72--$7.20 193,750 $ 5.96 9.26 -- $ --
$ 9.00 743,000 $ 9.00 9.45 20,000 $ --
$22.44--$30.00 130,800 $25.60 9.59 -- $ --
$32.00--$66.25 413,500 $48.59 9.82 7,500 $ --
----------- -----------
3,308,405 $10.95 246,039 $1.07
=========== ===========
</TABLE>
At December 31, 1998 and 1997, 145,901 and 828,640 options were exercisable
at a weighted average exercise price of $0.09 and $0.004, respectively.
Employee Stock Purchase Plan
In June 1999, the Company's board of directors and stockholders adopted its
1999 Employee Stock Purchase Plan and reserved 2,500,000 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
deductions 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.
Stock-Based Compensation
Pro forma information regarding net loss is required by SFAS 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 SFAS 123.
The fair value for these options was estimated at the date of grant using the
black scholes method in 1999 and the minimum value method in 1998 and 1997 with
the following weighted average assumptions: a risk-free interest rate of 5.55%,
5.15% and 6.16% for 1999, 1998, and 1997, respectively; no dividend yield; a
volatility factor of the expected market price of the Company's common stock of
1.13 for 1999 and no volatility factor for 1998 or 1997; and a weighted average
expected life of the option of four years.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
F-24
<PAGE>
measure of the fair value of its employee stock options. Had compensation cost
been determined using the fair value at the grant date for options granted
calculated using the black scholes or the minimum value method of SFAS 123, the
Company's actual net loss would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma net loss (in thousands).................................. $(32,607) $(10,250) $(4,339)
Pro forma and diluted net loss per share........................... $ (2.14) $ (2.08)
</TABLE>
The weighted average fair value of options granted, which is the value
assigned to the options under SFAS 123, was $2.51, $0.08 and $0.02 per share for
options granted during 1999, 1998 and 1997, respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 1999, 1998 and 1997 is not representative of the effects on net
income (loss) for future years, as future years will include the effects of
options vesting as well as the impact of multiple years of stock option grants.
8. Related Party Transactions
Funding Prior to Spin-off
Through December 31, 1997, the Company utilized Beyond.com's centralized
cash management services and processes related to receivables, payables,
payroll, and other activities. Through December 31, 1997, the Company's net cash
requirements were funded by Beyond.com. Net financing provided by Beyond.com to
the Company in 1997 was approximately $7,051,000 including funding related to
expenditures for operations and investing activities and corporate services
provided, as described below. There were no intercompany transfers and no
amounts were paid to Beyond.com by the Company in repayment of the financing.
Through the date of the Spin-off, this amount was included in division equity.
The average balance financed by Beyond.com during fiscal 1997, which did not
bear interest, was approximately $6,000,000.
Corporate Services
In accordance with Staff Accounting Bulletin No. 55, additional allocations
have been reflected in these financial statements for 1997. These expenses have
included corporate communications, management, compensation and benefits
administration, payroll, accounts payable, income tax compliance, and other
administration and finance overhead. Allocations and charges were based on
either a direct cost pass-through for incremental corporate administration,
finance and management costs and a percentage allocation of costs for other
services provided based on factors such as net sales, headcount, and relative
expenditure levels. Such allocations and corporate charges totaled $688,500 for
the year ended December 31, 1997.
Management believes that the basis used for allocating corporate services
is reasonable. However, the terms of these transactions may differ from those
that would result from transactions among unrelated parties. The CEO of the
Company is Chairman of the Board of Beyond.com, and the companies also have one
other member of their Board of Directors in common. Pursuant to the terms of an
agreement entered into in connection with the Spin-off from Beyond.com, the
Company provides services to Beyond.com on a nonexclusive basis. During 1999 and
1998, the Company recorded approximately $1,687,000 and $801,000, respectively,
of revenues related to these services. As of December 31, 1999 and December 31,
1998, amounts receivable from Beyond.com were approximately $354,000 and
$147,000, respectively.
F-25
<PAGE>
In July 1999, the Company purchased a software license from Beyond.com for
$600,000 which is being amortized to cost of revenues over two years.
Note Receivable Issued to Beyond.com
On March 18, 1998, the Company loaned $400,000 to Beyond.com. The note was
repaid as of June 1998.
Convertible Note Payable to Officer and Stockholder
In August 1998, the Company issued an unsecured convertible one-year
promissory note to an officer and stockholder from whom it had borrowed an
aggregate of $3,000,000 in July 1998. The note, which was amended in October
1998, was payable in full on October 21, 1999 and bore interest at a rate of 10%
per annum. The note converted into 1,657,458 shares of Series E redeemable
convertible preferred stock in June 1999, prior to the completion of the
Company's initial public offering.
ExpressGold.com Shareholder Note Payable
ExpressGold had a note payable to its majority shareholder totaling
$600,000 at December 31, 1999. The note accrues interest at 11% and is
unsecured. In conjunction with the acquisition of ExpressGold by CyberSource,
the note was cancelled in exchange for 15,956 shares of CyberSource common
stock.
9. Litigation and Contingencies
A former Vice President of Product Management filed a lawsuit against the
Company in the Superior Court of California in Santa Clara County on April 8,
1999 seeking monetary and equitable relief. The plaintiff alleged several
causes of action, including wrongful termination, defamation, fraud, and unfair
business practices arising out of her three month employment with the Company.
On November 2, 1999, the lawsuit was settled for an immaterial amount.
In November 1999, a lawsuit was filed against the Company alleging that the
Company's payment services infringe upon two patents to certain automated
network payment, purchase and processing systems held by the plaintiff. While
there can be no assurances as to the outcome of this litigation, the Company has
obtained an opinion of patent counsel that the Company's payment services do not
infringe upon one of the plaintiff's patents and believes, based on consultation
with patent counsel, that its payment services do not infringe upon the other
patent. The Company intends to vigorously defend against the claims asserted.
On January 7, 2000, ExpressGold received a letter from a former employee
claiming that ExpressGold had wrongfully terminated the employee in order to
deny vesting of his option to purchase ExpressGold's common shares (19,750
shares of the Company common stock based on the exchange ratio), as well as
breach of contract, conversion, and fraud. No formal lawsuit has been filed at
this time and the Company believes that the claims are without merit, and
intends to vigorously defend itself against these allegations.
From time to time, the Company may be involved in other litigation relating
to claims arising out of its ordinary course of business. The Company believes
that there are no claims or actions pending or threatened against the Company,
the ultimate disposition of which would have a material impact on the Company's
financial position or results of operations.
10. Income Taxes
F-26
<PAGE>
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $26,500,000 and $27,200,000, respectively.
As of December 31, 1999, the Company also had federal and state research credit
carryforwards of approximately $460,000 and $240,000, respectively.
The net operating loss and credit carryforwards will expire at various
dates beginning in 2006 through 2019, if not utilized. The utilization of the
net operating losses and credits may be subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
The net deferred tax asset has been fully offset by a valuation allowance.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes at December 31, are as follows (in thousands):
Deferred tax assets:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
<S> <C> <C>
Net operating loss carryforwards $ 10,800,000 $ 3,400,000
Research credit carryforwards 700,000 200,000
Other, net 1,700,000 300,000
------------------------ ------------------------
Net deferred tax assets $ 13,200,000 $ 3,900,000
Valuation allowance $(13,200,000) $(3,900,000)
------------------------ ------------------------
Net deferred tax assets $ -- $ --
======================== ========================
</TABLE>
Under SFAS 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Based upon the weight of available
evidence, which includes the Company's historical operating performance, the
reported net losses in 1999 and 1998, and the uncertainties regarding future
results of operations of the Company, the Company has provided a full valuation
allowance against its net deferred tax assets as it is not more likely than not
that the deferred tax assets will be realized. The valuation allowance increased
by $9,300,000 during 1999 and increased by $3,900,000 during 1998.
11. Subsequent Events (Unaudited)
On March 1, 2000, the Company entered into a joint venture agreement with
Japanese partners Marubeni Corporation and Trans-Cosmos, Inc. to establish
CyberSource K.K. to provide eCommerce transaction services to the Japanese
market. The Company will maintain a majority controlling interest in CyberSource
K.K., subject to certain veto rights granted to the partners until CyberSource
K.K. achieves at least $2 million in quarterly revenue.
In July 2000, the Company signed a definitive agreement to acquire the
outstanding common shares of PaylinX Corporation, a developer of a payment
server platform for real-time credit card transactions. Under the terms of the
agreement, CyberSource will issue approximately 8.45 million shares of its
common stock for the outstanding shares of PaylinX Corporation. The
acquisition, will be accounted for as a purchase and is subject to stockholder
and regulatory approval.
F-27
<PAGE>
REPORT OF ARTHUR ANDERSEN LLP INDEPENDENT AUDITORS
To PaylinX Corporation:
We have audited the accompanying balance sheets of PaylinX Corporation (a
Missouri corporation) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity (deficit) 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 financial position of PaylinX Corporation as of
December 31, 1999 and 1998, and the 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/ Arthur Andersen LLP
St. Louis, Missouri,
February 4, 2000
F-28
<PAGE>
PAYLINX CORPORATION
BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------- ------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 745,769 $ 3,198,437
Accounts receivable 851,027 235,366
Other current assets 118,000 43,547
------------ -----------
Total current assets 1,714,796 3,477,350
PROPERTY AND EQUIPMENT 4,327,430 153,038
OTHER ASSETS 376,634 32,000
------------ -----------
Total assets $ 6,418,860 $ 3,662,388
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 5,660,126 $ 40,900
Accrued compensation and related expenses 158,299 17,714
Deferred revenue 787,846 122,885
Notes payable 4,000,000 -
Other current liabilities 79,535 -
------------- ------------
Total current liabilities 10,685,806 181,499
------------- ------------
OTHER LONG-TERM OBLIGATIONS 813,961 -
LONG-TERM DEBT 5,787,000 -
Series A convertible redeemable preferred stock ($.01 par value, 400,800
shares issued and outstanding, redemption value of $4,437,000) 4,437,100 4,008,100
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock ($.01 par value, 2,000,000 shares authorized, 1,868,908 and
933,100 shares issued and outstanding) 18,689 9,331
Additional paid-in capital 4,532,170 2,105,192
Deferred compensation (2,360,577) (1,620,600)
Retained deficit (17,495,289) (1,021,134)
------------- ------------
Total stockholders' equity (deficit) (15,305,007) (527,211)
------------- ------------
Total liabilities and stockholders' equity (deficit) $ 6,418,860 $ 3,662,388
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-29
<PAGE>
PAYLINX CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
REVENUE:
<S> <C> <C> <C>
License fees $ 2,693,753 $ 590,754 $ 374,737
Maintenance 466,095 154,247 62,010
------------ ---------- ----------
Total revenue 3,159,848 745,001 436,747
------------ ---------- ----------
OPERATING EXPENSES:
Cost of revenue 605,697 80,017 30,088
Research and development 4,067,124 262,445 120,354
Selling and marketing 6,985,615 340,035 124,730
General and administrative 6,894,161 664,301 290,220
Loss on disposal of assets 444,503 - -
------------ ---------- ----------
Total operating expenses 18,997,100 1,346,798 565,392
------------ ---------- ----------
Operating loss (15,837,252) (601,797) (128,645)
------------ ---------- ----------
OTHER (INCOME) EXPENSES:
Interest expense 280,149 21,480 19,053
Other (income) expense (72,246) 58,080 -
------------ ---------- ----------
Total other expenses 207,903 79,560 19,053
------------ ---------- ----------
Net loss $(16,045,155) $ (681,357) $ (147,698)
============ ========== ==========
Basic and diluted loss per share $ (8.82) $ (0.37) $ (0.08)
=============== ========== ==========
Weighted average shares used in basic and diluted per
share computation 1,867,103 1,855,366 1,799,250
=============== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
PAYLINX CORPORATION
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Series A
Convertible
Redeemable
Preferred Stock Common Stock
------------------------------------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 - $ - 850,000 $ 8,500
Issuance of common stock - - 51,800 518
Net loss - - - -
---------- -------------- ------------ -----------
BALANCE, DECEMBER 31, 1997 - - 901,800 9,018
Issuance of common stock - - 31,300 313
Compensation expense recorded on stock options - - - -
Issuance of preferred stock and warrants 400,800 4,008,100 - -
Net loss - - - -
---------- -------------- ------------ -----------
BALANCE, DECEMBER 31, 1998 400,800 4,008,100 933,100 9,331
Stock split - - 933,100 9,331
Issuance of common stock - - 2,708 27
Compensation expense recorded on stock options - - - -
Accretion related to Series A convertible redeemable
preferred stock - 429,000 - -
Net loss - - - -
---------- -------------- ------------ -----------
BALANCE, DECEMBER 31, 1999 400,800 $ 4,437,100 1,868,908 $ 18,689
========== ============== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Paid-In Deferred Retained Equity
Capital Compensation Deficit (Deficit)
-------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ - $ - $ (192,079) $ (183,579)
Issuance of common stock 292,707 - - 293,225
Net loss - - (147,698) (147,698)
-------------- -------------- ---------------- ----------------
BALANCE, DECEMBER 31, 1997 292,707 - (339,777) (38,052)
Issuance of common stock 114,885 - - 115,198
Compensation expense recorded on stock options 1,697,600 (1,620,600) - 77,000
Issuance of preferred stock and warrants - - - -
Net loss - - (681,357) (681,357)
-------------- -------------- ---------------- ----------------
BALANCE, DECEMBER 31, 1998 2,105,192 (1,620,600) (1,021,134) (527,211)
Stock split (9,331) - - -
Issuance of common stock 2,681 - - 2,708
Compensation expense recorded on stock options 2,433,628 (739,977) - 1,693,651
Accretion related to Series A convertible redeemable
preferred stock - - (429,000) (429,000)
Net loss - - (16,045,155) (16,045,155)
-------------- -------------- ---------------- ----------------
BALANCE, DECEMBER 31, 1999 $ 4,532,170 $(2,360,577) $(17,495,289) $(15,305,007)
============= ============= =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
PAYLINX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(16,045,155) $ (681,357) $(147,698)
Adjustments to reconcile net loss to cash used in operating
activities-
Depreciation and amortization 387,746 65,000 13,100
Loss on disposal of assets 444,503 - -
Other long-term obligations 813,961 - -
Compensation expense recorded on stock options 1,693,651 77,000 -
Other noncash charges - 198 225
Changes in assets and liabilities-
Accounts receivable (615,661) (175,901) (59,465)
Accounts payable and accrued expenses 5,619,226 (76,578) 23,038
Accrued compensation and related expenses 140,585 (100,355) 73,328
Deferred revenue 664,961 66,896 37,208
Other (339,552) (51,130) (23,565)
--------------- ------------- -----------
Total adjustments 8,809,420 (194,870) 63,869
--------------- ------------- -----------
Net cash used in operating activities (7,235,735) (876,227) (83,829)
--------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,101,641) (172,774) (44,824)
Sale of property 95,000 - -
--------------- ------------- -----------
Net cash used in investing activities (5,006,641) (172,774) (44,824)
--------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,708 115,000 293,000
Proceeds from issuance of preferred stock and warrants - 4,008,100 -
Proceeds from borrowings 9,787,000 - -
Payments on borrowings - - (50,000)
--------------- ------------- -----------
Net cash provided by financing activities 9,789,708 4,123,100 243,000
--------------- ------------- -----------
Net (decrease) increase in cash and cash equivalents (2,452,668) 3,074,099 114,347
CASH AND CASH EQUIVALENTS, beginning of year 3,198,437 124,338 9,991
--------------- ------------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 745,769 $3,198,437 $ 124,338
============== ============ ===========
CASH PAID FOR INTEREST $ 18,210 $ 21,480 $ 19,053
============== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
PAYLINX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY:
------------
PaylinX Corporation (the Company) designs, develops, markets, licenses and
supports point-of-sale software systems for the processing of electronic
payments, including those arising from internet e-commerce. The Company's
payment servers perform real-time authorization, settlement and management
functions for conventional and corporate purchasing card transactions in
consumer and business-to-business application environments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Use of Estimates
----------------
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist of cash on deposit with banks and money market
instruments with original maturities of 90 days or less.
Asset Impairment
----------------
The Company periodically assesses the carrying value of its long-lived assets
and recognizes impairment losses if it is determined the carrying values are not
recoverable.
Revenue Recognition
-------------------
Revenue is recognized when earned. The Company licenses software under
perpetual license agreements direct to customers and to resellers and provides
maintenance and support services. The Company's revenue recognition policies
are in compliance with American Institute of Certified Public Accountants
Statements of Position 97-2, 98-4 and 98-9, "Software Revenue Recognition."
License fee revenues are generally recognized when a license agreement has been
signed, the software product has been shipped, there are no uncertainties
surrounding product acceptance, the fees are fixed and determinable, and
collection is considered probable. For customer license agreements, which meet
these recognition criteria, the portion of the fees related to software licenses
will generally be recognized in the current period. The Company allocates a
portion of contractual license fees to postcontract support activities covered
under the contract including first year maintenance. Maintenance revenues are
recognized ratably over the maintenance period, which generally is one year.
F-33
<PAGE>
Research and Development
------------------------
Research and development costs are expensed as incurred. Costs required to be
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed," are not material.
F-34
<PAGE>
Income Taxes
------------
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes," which utilizes the liability method to calculate deferred income
taxes. Under this method, deferred taxes are determined based on the estimated
future tax effects of differences between financial statements and tax bases of
assets and liabilities given the provisions of enacted tax laws.
The significant deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- -------------
Deferred tax assets:
<S> <C> <C>
Start-up and organizational costs $ 8,649 $ 14,263
Stock options 672,847 29,260
Reserves and accruals 843,637 6,166
Deferred tax liabilities:
Depreciation and amortization (132,160) -
Net operating loss carryforward 5,092,215 333,582
Valuation allowance (6,485,188) (383,271)
-------------- ------------
Net deferred tax asset $ - $ -
=============== ============
</TABLE>
The Company has net operating loss carryforwards of approximately $13,401,000 at
December 31, 1999, which expire through 2019 if not utilized by the Company in
its tax return. As of December 31, 1999 and 1998, a valuation allowance has
been established to fully offset the net deferred tax asset.
Earnings Per Share
------------------
Basic earnings (loss) per share is computed by dividing net loss applicable to
common stockholders by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings (loss) per share is computed by
dividing the net loss applicable to common stockholders by the weighted average
number of common and common equivalent shares outstanding, unless the
calculation is antidilutive. For 1999, the net loss applicable to common
stockholders has been adjusted to reflect $429,000 of accretion related to the
Series A convertible redeemable preferred stock.
For all periods presented, the effect of dilutive securities is antidilutive.
As such, the denominator used in determining earnings per share is the same for
both basic and dilutive earnings per share.
3. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets ranging between three and seven years.
Leasehold improvements are amortized using the straight-line method over their
useful lives or lease terms, as appropriate.
F-35
<PAGE>
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
<S> <C> <C>
Computer equipment $1,844,909 $173,722
Purchased software 1,214,584 15,144
Furniture and fixtures 1,116,065 5,932
Leasehold improvements 607,895 37,700
---------- --------
4,783,453 232,498
Less- Accumulated depreciation and amortization (456,023) (79,460)
---------- --------
Property and equipment, net $4,327,430 $153,038
========== ========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, depreciation and
amortization expense was $387,746, $65,000 and $13,100, respectively.
4. DEBT:
-----
Convertible Debt
----------------
From June to September 1999, the Company issued $5,787,000 of Convertible
Promissory Notes (Convertible Notes). The Convertible Notes are convertible to
Series B Convertible Preferred Stock (Series B Preferred) at 110% of the
original note value only upon completion of a subsequent funding round of at
least $10,000,000. The Convertible Notes have an interest rate of 8% payable
either in cash or additional Series B Preferred shares. The Convertible Notes
expire either one year from the date of execution of the Convertible Notes, upon
issuance of the Series B Preferred shares or upon any merger involving the
Company. If the Convertible Notes become exercisable and are not exercised, the
terms of the Convertible Notes are extended for one year. In January 2000, the
Company issued Series B Preferred shares and all Convertible Notes and the
associated interest were converted into Series B Preferred shares. See Note 8
for more information.
Accounts Receivable Purchase Agreement
--------------------------------------
In October 1999, the Company executed an Accounts Receivable Purchase Agreement
(the Agreement) which allowed the Company to sell up to $2,000,000 in qualified
accounts receivable for a finance charge of 1.25% per month multiplied by the
average outstanding accounts receivable plus 1% of all accounts receivable sold
that month. The Company agreed to repurchase all accounts receivable over 90
days old, as well as any disputed accounts receivable. The Agreement gave the
issuer a lien on the cash, receivables, property and other assets of the
Company. The agreement expires in October 2000, but automatically renews
without cancellation by either the Company or the issuer. At December 31, 1999,
there were no accounts receivable sold under the Agreement.
In association with the Agreement, the Company issued warrants to purchase
14,285 Series A Preferred Stock (Series A) at an initial exercise price of
$10.50. These warrants expire October 13, 2004.
F-36
<PAGE>
Short-Term Bridge Notes
-----------------------
In November and December 1999, the Company issued $4,000,000 in Short-Term
Bridge Notes (Short-Term Notes). The Short-Term Notes pay interest of 9% and
are due within 90 days of issuance. In January 2000, the Company issued Series
B Preferred Shares and all Short-Term Notes and the associated interest were
converted into Series B Preferred Shares. See Note 8 for more information.
F-37
<PAGE>
Letter of Credit
----------------
In association with the Company's lease of office space, the Company was
required to establish a letter of credit. The maximum amount available under
the letter of credit was $325,000 and is payable to the lessor. The letter of
credit is secured by certificates of deposit totaling $325,000 which are
included in other assets in the accompanying balance sheet. The required letter
of credit decreases over the term of the lease.
5. RETIREMENT PLAN:
----------------
In February 1999, the Company established an employee benefit plan qualified
under Section 401(k) of the Internal Revenue Code through which eligible
employees may defer a portion of their salaries. The Company's contributions to
the plan are discretionary. The Company elected not to contribute to the Plan
in 1999.
6. STOCKHOLDERS' EQUITY (DEFICIT):
-------------------------------
Common Stock
------------
On July 1, 1999, the shareholders approved a two for one stock split. All per
share information has been retroactively adjusted to reflect this split for all
years presented.
Series A Convertible Redeemable Preferred Stock
-----------------------------------------------
During October and December 1998, the Company issued 400,800 shares of Series A
Convertible Redeemable Preferred Stock (Series A Preferred) along with warrants
to purchase up to 30,000 shares of common stock. Total proceeds from the
issuance were $4,008,100 with $10 per share allocated to the Series A Preferred
and $100 allocated to the warrants. Any excess of mandatory redemption value
over original recorded value is accreted to the earliest possible redemption
date. The periodic accretion is charged directly to retained earnings
(deficit). The Series A Preferred Shares were exchanged for new shares of
Series A preferred stock in conjunction with the subsequent event described in
Note 8.
The Series A Preferred stockholders have preemptive rights to purchase new
issuances of securities.
Each warrant issued allows the warrant holder to purchase one share of common
stock for $5 per share, subject to adjustment as defined in the certificate of
incorporation. The warrants expire in October 2003. The warrants vest and
become exercisable through December 31, 1999, contingent on the occurrence of
certain events as defined in the Preferred Stock Agreement.
Stock Options
-------------
In connection with the sale and issuance of preferred stock in October 1998, the
Company issued stock options primarily to the founders and certain employees.
Options continued to be granted to all new employees through December 31, 1999.
The options vest over a four-year period. There is no vesting for the first six
months, options are 6/48 vested at the end of the sixth month, then vesting is
straight-line through the 48th month. In accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," compensation
expense is recorded evenly over the period services are received (the vesting
period) and measured based on the intrinsic value of the options at the date of
grant. In 1999 and 1998, $1,693,651 and $77,000 was recorded as compensation
expense related to stock options, respectively.
F-38
<PAGE>
A summary of the status of the Company's stock options for 1999 and 1998
(restated for the 1999 stock split) is presented in the table below:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 424,400 $1.00 - $ -
Granted 896,350 2.06 424,400 1.00
Exercised (2,708) 1.00 - -
Canceled/forfeited (210,256) 1.47 - -
----------- ---------
Outstanding - end of year 1,107,786 $1.81 424,400 $1.00
=========== =========
Exercisable - end of year 356,008 $1.28 - $ -
Weighted average fair value for grants during year
$3.53 $4.17
</TABLE>
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1999 and 1998, respectively: risk-free interest rates ranging from
4.61% to 6.14% and 4.48% to 4.75%; expected dividend yield of 0.0%; and expected
lives of four years. The range of exercise prices for the options outstanding
at December 31, 1999, was $1.00 to $7.50. The exercise price for all options
outstanding at December 31, 1998, was $1.00. The weighted-average remaining
contractual life was 3.3 and 3.8 years for options outstanding at December 31,
1999 and 1998, respectively.
The Company's net loss and basic and diluted loss per share would not
significantly differ for 1999 and 1998 had compensation expense for the
Company's 1999 and 1998 grants of stock options been determined consistent with
SFAS No. 123, "Accounting for Stock-Based Compensation." The effects of the
application of SFAS 123 in this disclosure are not indicative of the pro forma
effect on net income (loss) in future years.
7. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company leases its St. Louis facility under an operating lease agreement
expiring in 2004 with renewal options.
In December 1999, the Company leased facilities in Reston, Virginia, and will
move the headquarters there. The Company will vacate certain leased space in
St. Louis, Missouri, and sublease the vacated space through March 31, 2001. A
reserve for the amount of the lease payments in excess of the sublease has been
established and constitutes the balance of other long-term obligations in the
accompanying balance sheets. The sublease renews automatically for a period
through October 31, 2004, unless canceled by either party. Additionally, the
Company has recognized a loss on disposal of assets of $444,503 due to
writing down leasehold improvements and furniture and fixtures to the net
realizable value as of December 31, 1999.
F-39
<PAGE>
As of December 31, 1999, minimum future lease payments under leases are as
follows:
<TABLE>
<CAPTION>
Less Net
For the Year Ending Lease Sublease Lease
December 31 Commitments Revenue Commitments
----------- ----------- ------- -----------
<S> <C> <C> <C>
2000 $931,808 $207,911 $723,897
2001 883,303 63,105 820,198
2002 907,697 - 907,697
2003 916,735 - 916,735
2004 652,338 - 652,338
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997, was $485,411,
$47,802 and $10,234, respectively.
The Company at times is a party to various claims and legal proceedings arising
in the ordinary course of business. Management does not believe that the
ultimate disposition of any or all such proceedings will have a material adverse
effect upon the financial condition or results of operations of the Company.
8. SUBSEQUENT EVENTS:
------------------
In January 2000, the shareholders of the Company voted to merge PaylinX
Corporation, a Missouri corporation, with PaylinX Corporation, a Delaware
corporation. The new company adopted a certificate of incorporation which
authorized 20,000,000 shares of common stock with a $0.01 per share par value.
The certificate of incorporation also authorized 5,000,000 shares of preferred
stock. In conjunction therewith, PaylinX Corporation, Delaware exchanges
801,600 shares of Series A Convertible Redeemable Preferred Stock (New Series A
Preferred) for the 400,800 shares of Series A Preferred from PaylinX
Corporation, Missouri.
Additionally, the Company issued 3,836,472.15 shares of Series B Convertible
Redeemable Preferred Stock (Series B Preferred) with a par value of $0.01 for
$7.824538 per share. The Convertible Notes (at 110% of the original note value)
and Short-Term Bridge Notes plus the associated accrued interest were converted
or exchanged for shares of the Series B Preferred.
Under the certificate of incorporation, each share of New Series A Preferred and
Series B Preferred may be voluntarily converted into one share of common stock,
subject to certain conversion adjustments as defined in the certificate of
incorporation at anytime. The New Series A Preferred and the Series B Preferred
will automatically be converted into common stock upon an initial public
offering valued at not less than $20 million.
The New Series A Preferred and Series B Preferred are mandatorily redeemable by
the Company as follows: half of the then outstanding shares of New Series A
Preferred and Series B Preferred on the fifth anniversary of the original
issuance date, half of the then outstanding shares of New Series A Preferred and
Series B Preferred on the sixth anniversary of the original issuance date and
the remaining outstanding shares of New Series A Preferred and Series B
F-40
<PAGE>
Preferred on the seventh anniversary of the original issuance date. The
redemption price at each of the redemption dates will be the greater of $5 and
$7.824538 per share or fair market value, plus any declared and unpaid dividends
for the New Series A Preferred and Series B Preferred, respectively. The fair
market value of the New Series A Preferred and Series B Preferred is to be
determined by independent appraisers appointed by the Company and the New Series
A Preferred and Series B Preferred stockholders.
The New Series A Preferred and Series B Preferred stockholders have preemptive
rights to purchase new issuances of securities.
F-41
<PAGE>
If this transaction had been completed at December 31, 1999, the effect of this
transaction on the December 31, 1999, balance sheet would have been as follows:
<TABLE>
<CAPTION>
Actual Pro Forma
1999 1999
---------------- ---------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 745,769 $ 19,619,974
Other current assets 969,027 969,027
------------ ------------
Total current assets 1,714,796 20,589,001
LONG-TERM ASSETS 4,704,064 4,704,064
------------ ------------
Total assets $ 6,418,860 $ 25,293,065
============ ============
CURRENT LIABILITIES:
Notes payable $ 4,000,000 $ -
Other current liabilities 6,685,806 6,423,867
------------ ------------
Total current liabilities 10,685,806 6,423,867
------------ ------------
OTHER LONG-TERM OBLIGATIONS 813,961 813,961
------------ ------------
LONG-TERM DEBT 5,787,000 -
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A redeemable, convertible preferred stock 4,437,000 4,437,000
Series B redeemable, convertible preferred stock - 29,501,844
Common stock 18,689 18,689
Additional paid-in capital 4,532,270 4,532,270
Deferred compensation (2,360,577) (2,360,577)
Retained deficit (17,495,289) (18,073,989)
------------ ------------
Total stockholders' equity (deficit) (10,867,907) 18,055,237
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 6,418,860 $ 25,293,065
============ ============
</TABLE>
F-42
<PAGE>
PAYLINX CORPORATION
UNAUDITED FINANCIAL STATEMENTS
Quarterly Report for the Period Ended June 30, 2000
<TABLE>
<CAPTION>
PAYLINX CORPORATION
BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
--------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,535,388 $ 745,769
Accounts receivable, net 2,814,576 851,027
Other current assets 224,525 118,000
--------------------- -------------------
Total current assets 14,574,489 1,714,796
Property and equipment, net 3,953,070 4,327,430
Other assets 403,578 376,634
--------------------- -------------------
Total assets $ 18,931,137 $ 6,418,860
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 789,175 $ 5,660,126
Accrued compensation and related expenses 816,099 158,299
Deferred revenue 1,360,560 787,846
Notes payable - 4,000,000
Other current liabilities - 79,535
--------------------- -------------------
Total current liabilities 2,965,834 10,685,806
Other long-term obligations 835,606 813,961
Long-term debt - 5,787,000
Series A convertible redeemable preferred stock ($.01 par value, 830,160 and
801,600 shares issued and outstanding, redemption value of $4,764,736) 4,764,836 4,437,100
Series B convertible, redeemable preferred stock ($.01 par value,4,066,518
and 0 shares issued and outstanding) 31,301,840 -
Stockholders' equity (deficit):
Common stock ($.01 par value, 20,000,000 shares authorized, 2,175,408 and
1,868,908 shares issued and outstanding) 21,754 18,689
Additional paid-in-capital 4,823,667 4,532,170
Deferred compensation (1,795,772) (2,360,577)
Retained deficit (23,986,628) (17,495,289)
--------------------- -------------------
Total stockholders' equity (deficit) (20,936,979) (15,305,007)
--------------------- -------------------
Total liabilities and stockholders' equity (deficit) $ 18,931,137 $ 6,418,860
===================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
<TABLE>
<CAPTION>
PAYLINX CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
-------------------------------------------------------------------------------
Revenue:
License fees $ 2,509,580 $ 416,198 $ 5,146,319 $ 862,858
Maintenance 416,960 67,265 705,491 145,067
-------------------- ---------------- --------------------------------------
Total revenue 2,926,540 483,463 5,851,810 1,007,925
Operating expenses:
Cost of revenue 297,668 56,908 652,413 178,383
Research and development 1,292,755 236,626 2,642,836 1,084,525
Selling and marketing 2,414,502 287,399 4,922,656 1,037,855
General and administrative 2,158,272 524,334 3,690,611 1,250,241
Total operating expenses 6,163,197 1,105,267 11,908,516 3,551,004
-------------------- ---------------- --------------------------------------
Operating loss (3,236,657) (621,804) (6,056,706) (2,543,079)
-------------------- ---------------- ---------------------- ---------------
Other (income) expenses:
Interest (income) expense (213,984) - 255,410 10,153
Other (income) expense - (31,279) 1,487 (44,519)
---------------------- ---------------
Total other (income) expenses (213,984) (31,279) 256,897 (34,366)
-------------------- ---------------- ---------------------- ---------------
Net loss $(3,022,673) $ (590,525) $(6,313,603) $(2,508,713)
==================== ================ ====================== ===============
Basic and diluted loss per share $ (1.39) $ (0.32) $ (2.90) $ (1.34)
==================== ================ ====================== ===============
Weighted average shares used in basic and
diluted per share computation 2,174,212 1,872,388 2,174,212 1,872,388
==================== ================ ====================== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
PAYLINX CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
<S> <C> <C>
2000 1999
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,313,603) $(2,508,713)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 524,169 66,391
Other long-term obligations 21,645 -
Compensation expense recorded on stock options 305,482 271,333
Changes in assets and liabilities:
Accounts receivable (1,963,549) (557,034)
Accounts payable and accrued expenses (4,870,951) 70,132
Accrued compensation and related expenses 657,800 7,802
Deferred revenue 572,714 129,358
Other (213,004) 18,537
-------------------- --------------------
Net cash used in operating activities (11,279,297) (2,502,194)
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (149,809) (1,293,749)
Net cash used in investing activities (149,809) (1,293,749)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 553,885 -
Proceeds from issuance of preferred stock, net 31,451,840 -
(Payments on)/proceeds from borrowings, net (9,787,000) 4,033,000
Net cash provided by financing activities 22,218,725 4,033,000
-------------------- --------------------
Net increase in cash and cash equivalents 10,789,619 237,057
Cash and cash equivalents, beginning of period 745,769 3,198,437
-------------------- --------------------
Cash and cash equivalents, end of period $ 11,535,388 $ 3,435,494
==================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
PAYLINX CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. The Company
PaylinX Corporation (the Company) designs, develops, markets, licenses and
supports point-of-sale software systems for the processing of electronic
payments, including those arising from internet e-commerce. The Company's
payment servers perform real-time authorization, settlement and management
functions for conventional and corporate purchasing card transactions in
consumer and business-to-business application environments.
2. Basis of Presentation
The accompanying unaudited, interim financial statements of PaylinX
Corporation omit or condense certain footnotes and other information
normally included in financial statements prepared in accordance with
generally accepted accounting principles. This report should be read in
conjunction with the audited financial statements and notes to the
financial statements as of and for the year ended December 31, 1999. In
the opinion of Management, all adjustments, consisting primarily of normal
recurring adjustments, necessary for a fair presentation of interim period
results have been made. The interim results reflected in the financial
statements are not necessarily indicative of results expected for the full
year, or future periods.
Use of Estimates
----------------
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
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those
estimates.
Revenue Recognition
-------------------
Revenue is recognized when earned. The Company licenses software under
perpetual license agreements direct to customers and to resellers and
provides maintenance and support services. The Company's revenue
recognition policies are in compliance with American Institute of Certified
Public Accountants Statements of Position 97-2, 98-4 and 98-9, "Software
Revenue Recognition." License fee revenues are generally recognized when a
license agreement has been signed, the software product has been shipped,
there are no uncertainties surrounding product acceptance, the fees are
fixed and determinable, and collection is considered probable. For
customer license agreements, which meet these recognition criteria, the
portion of the fees related to software licenses will generally be
recognized in the current period. The Company allocates a portion of
contractual license fees to postcontract support activities covered under
the contract including first year maintenance. Maintenance revenues are
recognized ratably over the maintenance period, which generally is one
year.
F-46
<PAGE>
Earnings Per Share
------------------
Basic earnings (loss) per share is computed by dividing net loss applicable
to common stockholders by the weighted average number of shares of common
stock outstanding during the year. Diluted earnings (loss) per share is
computed by dividing the net loss applicable to common stockholders by the
weighted average number of common and common equivalent shares outstanding,
unless the calculation is antidilutive. For all periods presented, the
effect of dilutive securities is antidilutive. As such, the denominator
used in determining earnings per share is the same for both basic and
dilutive earnings per share.
3. Debt
Convertible Debt
----------------
From June to September 1999, the Company issued $5,787,000 of Convertible
Promissory Notes (Convertible Notes). The Convertible Notes are
convertible to Series B Convertible Preferred Stock (Series B Preferred) at
110% of the original note value only upon completion of a subsequent
funding round of at least $10,000,000. The Convertible Notes have an
interest rate of 8% payable either in cash or additional Series B Preferred
shares. In January 2000, the Company issued Series B Preferred shares and
all Convertible Notes and the associated interest were converted into
Series B Preferred shares. See Note 4 for more information.
Short-Term Bridge Notes
-----------------------
In November and December 1999, the Company issued $4,000,000 in Short-Term
Bridge Notes (Short-Term Notes). In January 2000, the Company issued Series
B Preferred Shares and all Short-Term Notes and the associated interest
were converted into Series B Preferred Shares. See Note 4 for more
information.
4. Stockholders' Equity (Deficit)
Common Stock
------------
On July 1, 1999, the shareholders approved a two for one stock split. All
per share information has been retroactively adjusted to reflect this split
for all years presented.
Series A Convertible Redeemable Preferred Stock
-----------------------------------------------
During October and December 1998, the Company issued 400,800 shares of
Series A Convertible Redeemable Preferred Stock (Series A Preferred) along
with warrants to purchase up to 30,000 shares of common stock. Total
proceeds from the issuance were $4,008,100 with $10 per share allocated to
the Series A Preferred and $100 allocated to the warrants. Any excess of
mandatory redemption value over original recorded value is accreted to the
earliest possible redemption date. The periodic accretion is charged
directly to retained earnings (deficit). The Series A Preferred Shares
were exchanged for new shares of Series A preferred stock in conjunction
with the transaction described below.
Each warrant issued allows the warrant holder to purchase one share of
common stock for $5 per share, subject to adjustment as defined in the
certificate of incorporation. The warrants expire in October 2003. The
warrants vest and become exercisable through December 31, 1999, contingent
F-47
<PAGE>
on the occurrence of certain events as defined in the Preferred Stock
Agreement.
In January 2000, the shareholders of the Company voted to merge PaylinX
Corporation, a Missouri corporation, with PaylinX Corporation, a Delaware
corporation. The new company issued a certificate of incorporation which
authorized 20,000,000 shares of common stock with a $0.01 per share par
value. The certificate of incorporation also authorized 5,000,000 shares
of preferred stock. In conjunction therewith, PaylinX Corporation,
Delaware exchanged 801,600 shares of Series A Convertible Redeemable
Preferred Stock (New Series A Preferred) for the 400,800 shares of Series A
Preferred from PaylinX Corporation, Missouri.
Additionally, in February 2000, the Company issued 3,836,472.15 shares of
Series B Convertible Redeemable Preferred Stock (Series B Preferred) with a
par value of $0.01 for $7.824538 per share. The Convertible Notes (at 110%
of the original note value) and Short-Term Bridge Notes plus the associated
accrued interest were converted or exchanged for shares of the Series B
Preferred.
Under the certificate of incorporation, each share of New Series A
Preferred and Series B Preferred may be voluntarily converted into one
share of common stock, subject to certain conversion adjustments as defined
in the certificate of incorporation at anytime. The New Series A Preferred
and the Series B Preferred will automatically be converted into common
stock upon an initial public offering or sale valued at not less than $20
million.
The New Series A Preferred and Series B Preferred are mandatorily
redeemable by the Company as follows: half of the then outstanding shares
of New Series A Preferred and Series B Preferred on the fifth anniversary
of the original issuance date, half of the then outstanding shares of New
Series A Preferred and Series B Preferred on the sixth anniversary of the
original issuance date and the remaining outstanding shares of New Series A
Preferred and Series B Preferred on the seventh anniversary of the original
issuance date. The redemption price at each of the redemption dates will
be the greater of $5 and $7.824538 per share or fair market value, plus any
declared and unpaid dividends for the New Series A Preferred and Series B
Preferred, respectively.
The New Series A Preferred and Series B Preferred stockholders have
preemptive rights to purchase new issuances of securities.
F-48
<PAGE>
If this transaction had been completed at December 31, 1999, the effect of
this transaction on the December 31, 1999, balance sheet would have been as
follows:
<TABLE>
<CAPTION>
Actual Pro Forma
1999 1999
---------------- -----------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 745,769 $ 19,619,974
Other current assets 969,027 969,027
-------------- ---------------
Total current assets 1,714,796 20,589,001
LONG-TERM ASSETS 4,704,064 4,704,064
-------------- ---------------
Total assets $ 6,418,860 $ 25,293,065
============== ===============
CURRENT LIABILITIES:
Notes payable $ 4,000,000 $ -
Other current liabilities 6,685,806 6,423,867
-------------- ---------------
Total current liabilities 10,685,806 6,423,867
-------------- ---------------
OTHER LONG-TERM OBLIGATIONS 813,961 813,961
-------------- ---------------
LONG-TERM DEBT 5,787,000 -
-------------- ---------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A redeemable, convertible preferred stock 4,437,000 4,437,000
Series B redeemable, convertible preferred stock - 29,501,844
Common stock 18,689 18,689
Additional paid-in capital 4,532,270 4,532,270
Deferred compensation (2,360,577) (2,360,577)
Retained deficit (17,495,289) (18,073,989)
-------------- ---------------
Total stockholders' equity (deficit) (10,867,907) 18,055,237
-------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 6,418,860 $ 25,293,065
============== ===============
</TABLE>
F-49
<PAGE>
5. Commitments and Contingencies
The Company at times is a party to various claims and legal proceedings
arising in the ordinary course of business. Management does not believe
that the ultimate disposition of any or all such proceedings will have a
material adverse effect upon the financial condition or results of
operations of the Company.
6. Subsequent Event
On July 9, 2000, the Company signed an agreement and plan of merger with
Cybersource Corporation.
F-50
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PAYLINX CORPORATION,
SAPPHIRE MERGER, INC.
AND
CYBERSOURCE CORPORATION
July 9, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE 1 THE MERGER.................................................... 1
1.1 The Merger........................................................ 1
1.2 Effective Time of the Merger...................................... 1
ARTICLE 2 THE SURVIVING CORPORATION..................................... 1
2.1 Certificate of Incorporation...................................... 1
2.2 Bylaws............................................................ 1
2.3 Directors and Officers of Surviving Corporation................... 2
ARTICLE 3 CONVERSION OF SECURITIES...................................... 2
3.1 Conversion of Shares.............................................. 2
3.2 Options........................................................... 2
3.3 Exchange of Certificates.......................................... 3
3.4 Escrow............................................................ 3
3.5 Dividends; Transfer Taxes......................................... 3
3.6 No Fractional Shares.............................................. 4
3.7 Closing of Company Transfer Books................................. 4
3.8 Closing........................................................... 4
3.9 Supplementary Action.............................................. 4
3.10 Dissenting Shares................................................. 4
3.11 Lost, Stolen or Destroyed Certificate............................. 5
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY................. 5
Due Organization; Good Standing; Authority; Binding Nature of
4.1 Agreements........................................................ 5
4.2 Certificate of Incorporation and Bylaws; Records.................. 6
4.3 Capitalization; Ownership of Stock................................ 6
4.4 Financial Statements.............................................. 7
4.5 Absence of Changes................................................ 7
4.6 Title to Assets; Equipment; Real Property, Leases................. 9
4.7 Bank Accounts..................................................... 9
4.8 Receivables; Major Customers...................................... 10
4.9 Accounts Payable; Major Suppliers................................. 10
4.10 Proprietary Assets................................................ 10
4.11 Contracts......................................................... 11
4.12 Compliance With Legal Requirements................................ 13
4.13 Governmental Authorizations....................................... 14
4.14 Tax Matters....................................................... 14
4.15 Employee and Labor Matters........................................ 15
4.16 Benefit Plans; ERISA.............................................. 16
4.17 Environmental Matters............................................. 17
4.18 Sale of Products; Performance of Services......................... 18
4.19 Insurance......................................................... 18
4.20 Related Party Transactions........................................ 19
4.21 Proceedings; Orders............................................... 19
4.22 Non-Contravention; Consents....................................... 20
4.23 Brokers........................................................... 21
4.24 Year 2000 Compliance.............................................. 21
4.25 Tax Treatment..................................................... 21
4.26 Full Disclosure................................................... 21
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
4.27 Powers of Attorney........................................................................ 22
4.28 Voting Arrangements....................................................................... 22
4.29 Financial Projections..................................................................... 22
4.30 Opinion of Financial Advisor.............................................................. 22
4.31 Change in Control Payments................................................................ 22
4.32 Board Approval............................................................................ 22
4.33 Vote Required............................................................................. 22
4.34 Lock-Up Agreements........................................................................ 22
4.35 Expenses.................................................................................. 22
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB............................ 23
5.1 Due Organization; Good Standing; Authority; Binding Nature of Agreements.................. 23
5.2 Capitalization; Ownership of Stock........................................................ 23
5.3 Brokers................................................................................... 23
5.4 Non-Contravention; Consents............................................................... 23
5.5 Tax Treatment............................................................................. 24
5.6 SEC Filings; Financial Statements......................................................... 24
5.7 Opinion of Financial Advisor.............................................................. 24
5.8 Absence of Changes........................................................................ 24
5.9 Proceedings; Orders....................................................................... 24
5.10 Undisclosed Liabilities................................................................... 25
5.11 Full Disclosure........................................................................... 25
5.12 Vote Required............................................................................. 25
5.13 Acquiror Stock Listed on Nasdaq........................................................... 25
5.14 Board Approval............................................................................ 25
ARTICLE 6 ADDITIONAL AGREEMENTS................................................................ 26
6.1 Company Stock Options..................................................................... 26
6.2 Certain Employee Benefit Matters.......................................................... 26
6.3 Additional Agreements..................................................................... 26
6.4 Conduct of Business by the Company Pending the Merger..................................... 26
6.5 No Solicitation........................................................................... 27
6.6 Proxy Statement; Permit Application....................................................... 28
6.7 Stockholders' Meetings; Voting Agreements................................................. 29
6.8 Consents; Approvals....................................................................... 29
6.9 Agreements of Affiliates.................................................................. 30
6.10 Lock-Up Agreements........................................................................ 30
6.11 Acquiror Options.......................................................................... 30
6.12 Notification of Certain Matters........................................................... 30
6.13 Public Announcements...................................................................... 30
6.14 Conveyance Taxes.......................................................................... 30
6.15 Letters of Company Accountants............................................................ 31
6.16 Indemnification of the Company's Directors and Officers................................... 31
6.16 Executive Benefits Summaries.............................................................. 31
6.18 Nasdaq Notification....................................................................... 31
ARTICLE 7 CONDITIONS TO CONSUMMATION OF THE MERGER............................................. 31
7.1 Conditions to Obligations of Each Party to Effect the Merger.............................. 31
7.2 Additional Conditions to Acquiror's and Merger Sub's Obligation to Consummate the Merger.. 32
7.3 Additional Conditions to the Company's Obligation to Consummate the Merger................ 33
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE 8 ESCROW AND INDEMNIFICATION...................................... 34
8.1 Indemnification.................................................... 34
8.2 Escrow Fund........................................................ 34
8.3 Limitations on Indemnification..................................... 34
8.4 Escrow Periods..................................................... 35
8.5 Claims Upon Escrow Fund............................................ 35
8.6 Valuation.......................................................... 35
8.7 Objections to Claims to Escrow Fund................................ 35
8.8 Resolution of Conflicts............................................ 36
8.9 Stockholders' Agent................................................ 36
8.10 Actions of the Stockholders' Agent................................. 37
8.11 Claims............................................................. 37
ARTICLE 9 TERMINATION..................................................... 37
9.1 Termination........................................................ 37
9.2 Effect of Termination.............................................. 38
9.3 Fees and Expenses.................................................. 38
ARTICLE 10 MISCELLANEOUS PROVISIONS....................................... 39
10.1 Survival of Representations and Covenants.......................... 39
10.2 Transfer Taxes..................................................... 39
10.3 Notices............................................................ 39
10.4 Time of the Essence................................................ 40
10.5 Headings........................................................... 40
10.6 Counterparts....................................................... 40
10.7 Governing Law...................................................... 40
10.8 Waiver............................................................. 40
10.9 Amendments......................................................... 40
10.10 Severability....................................................... 40
10.11 Parties in Interest................................................ 40
10.12 Entire Agreement................................................... 40
10.13 Construction....................................................... 41
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of July 9, 2000 (the
"Agreement"), by and among CyberSource Corporation ("Acquiror"), a Delaware
corporation, Sapphire Merger, Inc. ("Merger Sub"), a Delaware corporation, and
PaylinX Corporation (the "Company"), a Delaware corporation. Certain
capitalized terms used in this Agreement are defined in Exhibit A.
WHEREAS, the Boards of Directors of Acquiror, Merger Sub and the Company
each have determined that the acquisition of the Company by Acquiror is in the
best interests of their respective companies and stockholders and presents an
opportunity for their respective companies to achieve long-term strategic and
financial benefits, and accordingly have agreed to effect the merger provided
for herein upon the terms and subject to the conditions set forth herein; and
WHEREAS, for federal income tax purposes, it is intended that the merger
contemplated herein shall qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time Merger Sub shall be merged with and into the Company, the
Company shall be the surviving corporation (the "Surviving Corporation") and
the separate existence of Merger Sub shall thereupon cease (the "Merger").
Without limiting the generality of the foregoing, at the Effective Time all
property, rights, powers, privileges and franchises of Merger Sub shall vest in
the Surviving Corporation, and all debts, liabilities and duties of Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
Immediately following the Effective Time, the Surviving Corporation shall be a
wholly-owned subsidiary of Acquiror.
1.2 Effective Time of the Merger. The Merger shall become effective when a
properly executed certificate of merger (the "Certificate of Merger"), in such
form as may be agreed by the parties hereto and as required by the relevant
provisions of the Delaware General Corporation Law (the "DGCL"), has been duly
filed with the Secretary of State of the State of Delaware, which filings shall
be made as part of the Closing upon satisfaction or waiver of the conditions
set forth in Article 7. When used in this Agreement, the term "Effective Time"
shall mean the date and time at which such Certificate of Merger has been
accepted for filing by the Secretary of State of the State of Delaware or at
such later time as is provided in the Certificate of Merger.
ARTICLE 2
THE SURVIVING CORPORATION
2.1 Certificate of Incorporation. At the Effective Time, the Certificate of
Incorporation of the Company, as amended and restated to read as the
Certificate of Incorporation of Merger Sub and as attached as Exhibit A to the
Certificate of Merger, shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter amended as provided by the DGCL and such
Certificate of Incorporation.
2.2 Bylaws. The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1
<PAGE>
2.3 Directors and Officers of Surviving Corporation. The directors of the
Company shall resign effective as of the Effective Time. The directors of
Merger Sub immediately prior to the Effective Time shall be the initial
directors of the Surviving Corporation, each to hold office in accordance with
the Certificate of Incorporation and Bylaws of the Surviving Corporation, and
the officers of Merger Sub immediately prior to the Effective Time shall be the
initial and only officers of the Surviving Corporation, in each case until
their respective successors are duly elected or appointed.
ARTICLE 3
CONVERSION OF SECURITIES
3.1 Conversion of Shares.
(a) At the Effective Time, by virtue of the Merger and without any action on
the part of the holders thereof, and subject to Section 3.10, each share of
common stock, $.01 par value per share, of the Company ("Company Common Stock")
and each share of the Company's preferred stock, $.01 par value per share
("Company Preferred Stock," and, together with the Company Common Stock, the
"Company Stock"), that is issued and outstanding immediately prior to the
Effective Time shall be converted into the right to receive, upon surrender of
the certificate formerly representing such share of Company Stock (the
"Certificate"), one and two-tenths (1.2) shares (the "Exchange Ratio") of
Common Stock of Acquiror, $0.001 par value per share ("Acquiror Stock");
provided, however, that each share of Company Stock that is held in the
treasury of the Company or by any subsidiary of the Company immediately prior
to the Effective Time shall not be so converted but shall be canceled and
retired, and no consideration shall be delivered in exchange therefor.
(b) In no event shall Acquiror be obligated to issue more than 8,450,797
shares of Acquiror Stock to holders of Company Stock as of the date of this
Agreement, plus shares of Acquiror Stock upon conversion of Company Stock
issued upon exercise of options to purchase up to 2,430,128 shares of Company
Common Stock and warrants to purchase 14,286 shares of Company Common Stock.
Notwithstanding anything to the contrary herein, no Stockholder shall have a
claim against Acquiror, Merger Sub or the Surviving Corporation if there is a
breach of Section 4.3 resulting in a Stockholder receiving a lesser number of
shares of Acquiror Stock.
(c) At the Effective Time, by virtue of the Merger and without any action on
the part of the holder thereof, each share of the common stock, no par value
per share, of Merger Sub that is issued and outstanding immediately prior to
the Effective Time shall be converted into and continue as one share of the
common stock of the Surviving Corporation.
3.2 Options.
(a) At the Effective Time, each outstanding option to purchase Company
Common Stock (a "Stock Option") subject to the Company's 2000 Stock Option Plan
(the "Company Stock Option Plan"), whether vested or unvested, shall by virtue
of the Merger be deemed assumed by Acquiror and will constitute an option to
acquire the number (rounded down to the nearest whole number) of shares of
Acquiror Stock as the holder of such Stock Option would have been entitled to
receive pursuant to the Merger had such holder exercised such option in full
immediately prior to the Effective Time (not taking into account whether or not
such option was in fact exercisable), at a price per share rounded up to the
nearest whole cent equal to (x) the aggregate exercise price for Company Common
Stock otherwise purchasable pursuant to such Stock Option divided by (y) the
Exchange Ratio. Such assumed options will be subject to the terms of the
Company Stock Option Plan and the stock option agreement between the Company
and each optionee, as amended.
(b) As soon as practicable after the Effective Time, Acquiror shall deliver
to each holder of an outstanding Stock Option an appropriate notice setting
forth such holder's rights pursuant thereto. Acquiror shall take all corporate
action necessary to reserve for issuance a sufficient number of Acquiror Stock
for delivery pursuant to the terms set forth in this Section 3.2.
2
<PAGE>
(c) At the Effective Time, each outstanding warrant to purchase Company
Stock shall by virtue of the Merger be deemed assumed by Acquiror and will
constitute the right to acquire the number (rounded down to the nearest whole
number) of shares of Acquiror Stock as the holder of such warrant would have
been entitled to receive pursuant to the Merger had such holder exercised such
warrant in full immediately prior to the Effective Time (not taking into
account whether or not such warrant was in fact exercisable), at a price per
share rounded up to the nearest whole cent equal to (x) the aggregate exercise
price for Company Common Stock otherwise purchasable pursuant to such warrant
divided by (y) the Exchange Ratio; provided that any such warrant will remain
subject to all other terms of the warrant agreement pursuant to which it was
granted.
3.3 Exchange of Certificates.
(a) Within twenty (20) business days after the Effective Time, Acquiror
shall make available, and each Stockholder will be entitled to receive upon
surrender of Certificates representing all shares of Company Stock held by such
Stockholder to American Stock Transfer and Trust Company, acting as exchange
agent (the "Exchange Agent"), certificates representing the number of whole
shares of Acquiror Stock into which such shares of Company Stock are converted
in the Merger (excluding the Escrow Shares), subject to this Section 3.3. The
shares of Acquiror Stock into which the shares of the Company Stock shall be
converted in the Merger shall be deemed to have been issued at the Effective
Time.
(b) As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each Stockholder (i) a letter of transmittal (which shall
specify that delivery shall be effected only upon delivery of the Certificates
to the Exchange Agent and shall be in such form and have such other provisions
as Acquiror may reasonably specify that are not inconsistent with the terms of
this Agreement) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Acquiror
Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor (y) a certificate
representing that number of whole shares of Acquiror Stock that the holder is
entitled to receive pursuant to this Section 3.3 and (z) a check representing
the amount of cash which such holder has the right to receive in respect of the
Certificate so surrendered pursuant to Section 3.6.
3.4 Escrow. As security for the Stockholders' indemnification obligations
set forth herein, Acquiror will deliver to the Escrow Agent under an Escrow
Agreement in substantially the form of Exhibit B attached hereto dated as of
the date hereof by and among Acquiror, the Stockholders' Agent and the Escrow
Agent (the "Escrow Agreement"), ten percent (10%) of the aggregate number of
shares of Acquiror Stock to be issued pursuant to Section 3.1 in respect of
Company Stock (the "Escrow Fund"). Such shares shall be held in escrow on
behalf of the Stockholders, on a pro rata basis, in accordance with each such
Stockholder's percentage ownership ("Pro Rata Portion") of Company Stock
immediately prior to the Merger. Such shares ("Escrow Shares") shall be held as
security for the Stockholders' indemnification obligations under Article 8.
3.5 Dividends; Transfer Taxes.
(a) No dividends that are declared on shares of Acquiror Stock after the
Effective Time (if any) will be paid to Persons entitled to receive
certificates representing shares of Acquiror Stock until such Persons surrender
their Certificates. Upon such surrender, there shall be paid to the Person in
whose name the certificates representing such shares of Acquiror Stock shall be
issued any dividends which shall have become payable with respect to such
shares of Acquiror Stock between the Effective Time and the time of such
surrender. In no event shall the Person entitled to receive such dividends be
entitled to receive interest on such dividends.
(b) If any certificates for any shares of Acquiror Stock are to be issued in
a name other than that in which the Certificate surrendered in exchange
therefor is registered, it shall be a condition of such exchange that the
Person requesting such exchange shall (i) pay to the Exchange Agent any
transfer or other taxes required by
3
<PAGE>
reason of the issuance of certificates for such shares of Acquiror Stock in a
name other than that of the registered holder of the Certificate surrendered or
(ii) establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable.
(c) Notwithstanding anything in this Agreement to the contrary, neither the
Exchange Agent nor any party hereto shall be liable to a Stockholder for any
shares of Acquiror Stock or dividends thereon or the cash payments otherwise
due hereunder delivered to a public official pursuant to applicable escheat
laws following the passage of time specified therein.
3.6 No Fractional Shares. Notwithstanding anything herein to the contrary,
no fractional shares of Acquiror Stock shall be issued pursuant to the Merger.
In lieu of the issuance of any such fractional share of Acquiror Stock, cash
adjustments will be paid in respect of any fractional share of Acquiror Stock
that would otherwise be issuable. The amount of such adjustment shall be the
product of (i) such fraction of a share of Acquiror Stock multiplied by (ii)
the Exchange Price.
3.7 Closing of Company Transfer Books. Upon the Closing, the stock transfer
books of the Company shall be closed and no transfer of shares of Company Stock
shall thereafter be made. If Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for certificates representing
shares of Acquiror Stock or cash in accordance with the terms hereof. The
holders of shares of Company Stock to be exchanged for shares of Acquiror Stock
pursuant to this Agreement shall cease to have any rights as stockholders of
the Company, except for the right to surrender such Certificates in exchange
for shares of Acquiror Stock as provided hereunder or such appraisal rights as
are provided under applicable law.
3.8 Closing. The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Morrison & Foerster LLP, 755
Page Mill Road, Palo Alto, California 94304, at 10:00 a.m. on the next business
day following satisfaction or waiver of all closing conditions set forth in
Article 7, or such later date or time as the parties hereto may agree in
writing.
3.9 Supplementary Action. If, at any time after the Effective Time, any
further assignments or assurances in law or any other things are necessary or
desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of the Company, or otherwise to
carry out the provisions of this Agreement, the officers and directors of the
Surviving Corporation are hereby authorized and empowered on behalf of the
Company in the name of and on behalf of the Company to execute and deliver any
and all things necessary or proper to vest or to perfect or confirm title to
such property or rights in the Surviving Corporation, and otherwise to carry
out the purposes and provisions of this Agreement.
3.10 Dissenting Shares.
(a) Notwithstanding any provisions of this Agreement to the contrary, any
shares of Company Stock held by a Stockholder who has exercised such holder's
appraisal rights in accordance with the DGCL and who, as of the Effective Time,
has not effectively withdrawn or lost such dissenter's rights ("Dissenting
Shares"), shall not be converted into or represent a right to receive the
consideration described in Section 3.1, but the holder of the Dissenting Shares
shall only be entitled to such rights as are granted by the DGCL.
(b) Notwithstanding the provisions of subsection (a) above, if any
Stockholder who demands appraisal rights with respect to such shares shall
effectively withdraw or lose (through the failure to perfect or otherwise) such
Stockholder's appraisal rights under the DGCL, then, as of the Effective Time
or the occurrence of such event, such Stockholder's shares shall automatically
be converted into and represent only the right to receive the consideration
described in Section 3.1, subject in any event to Section 3.5.
(c) The Company shall give Acquiror (i) prompt written notice of any written
demands for payment with respect to any shares of Company Stock pursuant to
appraisal rights, and any withdrawals of such demands or losses of such rights,
and any other instruments served pursuant to the DGCL, and (ii) the opportunity
to
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participate in all negotiations and proceedings with respect to demands for
appraisal rights. The Company shall not, except with the prior written consent
of Acquiror, voluntarily make any payment with respect to demands for appraisal
rights or offer to settle or settle any such demands.
3.11 Lost, Stolen or Destroyed Certificate. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such Acquiror Stock as may be
required pursuant to Section 3.1; provided, however, that Acquiror may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificates to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may be made
against Acquiror or the Exchange Agent with respect to the Certificates alleged
to have been lost, stolen or destroyed.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as specifically set forth in the disclosure schedule delivered by the
Company to Acquiror at or prior to the execution of this Agreement (the "Target
Disclosure Schedule"), the parts of which are numbered to correspond to the
Section numbers of this Agreement, the Company hereby represents and warrants
to Acquiror and Merger Sub as of the date hereof and as of the Effective Time
as follows:
4.1 Due Organization; Good Standing; Authority; Binding Nature of
Agreements.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has all necessary
corporate power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted and in the manner in which its
business is proposed to be conducted; (ii) to own and use its assets in the
manner in which its assets are currently owned and used and in the manner in
which its assets are proposed to be owned and used; (iii) to perform its
obligations under all Company Contracts; and (iv) to enter into and perform all
of its obligations under the Transactional Agreements to which it is a party.
(b) The Company has never conducted any business under or otherwise used,
for any purpose or in any jurisdiction, any fictitious name, assumed name,
trade name or name other than the name set forth in its certificate of
incorporation, as amended.
(c) The Company is duly qualified and in good standing as a foreign
corporation in each of the jurisdictions in which the nature of its business or
the ownership or leasing of its properties requires such qualification. Section
4.1(c) of the Target Disclosure Schedule sets forth a true and complete list of
each jurisdiction in which the Company has an officer or a paid representative
(employee or consultant) or owns or leases property and of each jurisdiction in
which the Company is qualified to do business.
(d) Section 4.1(d) of the Target Disclosure Schedule accurately sets forth
(i) the names of the members of the Company's board of directors, (ii) the
members of each committee of the Company's board of directors and (iii) the
names and titles of the Company's officers.
(e) Neither the Company nor any of the Stockholders has ever approved, or
commenced any proceeding or made any election contemplating, the dissolution or
liquidation of the Company or the winding up or cessation of the Company's
business or affairs.
(f) The Company has no subsidiaries, and the Company has never owned,
beneficially or otherwise, any shares or other securities of, or any direct or
indirect interest of any nature in, any Entity.
(g) The execution, delivery and performance of the Transactional Agreements
to which the Company is a party have been duly authorized by all necessary
action on the part of Company, its board of directors, and, as of the Effective
Time, the Stockholders.
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(h) Each of the Transactional Agreements to which the Company is a party
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms and conditions.
4.2 Certificate of Incorporation and Bylaws; Records.
(a) The Company has delivered to Acquiror accurate and complete copies of:
(i) the Company's certificate of incorporation and bylaws, including all
amendments thereto; (ii) the stock records of the Company; and (iii) the
minutes and other records of the meetings and other proceedings (including any
actions taken by written consent or otherwise without a meeting) of the
Stockholders, and any predecessor thereto, and the board of directors of the
Company, and any predecessor thereto. There have been no meetings or other
proceedings of the Stockholders, or any predecessor thereto, or the board of
directors of the Company, or any predecessor thereto, that are not reflected in
such minutes or other records.
(b) There has not been any violation of any of the provisions of the
Company's certificate of incorporation or bylaws or of any resolution adopted
by the Stockholders or the Company's board of directors, and to the Knowledge
of the Company no event has occurred, and no condition or circumstance exists,
that likely would (with or without notice or lapse of time) constitute or
result directly or indirectly in such a violation.
(c) The books of account, stock records, minute books and other records of
the Company are accurate, up to date and complete in all material respects, and
all of such books and records of the Company and any predecessor thereto are in
the actual possession and direct control of the Company.
4.3 Capitalization; Ownership of Stock. As of the date of this Agreement and
as of the Closing:
(a) The authorized capital stock of the Company consists of Thirty Million
(30,000,000) shares of Common Stock and Ten Million (10,000,000) shares of
Company Preferred Stock. As of the date of this Agreement, the outstanding
capital of the Company consists of (i) 2,174,212 shares of Common Stock,
(ii) options to purchase 2,430,128 shares of Common Stock, (iii) 4,868,119
shares of Company Preferred Stock and (iv) warrants to purchase 14,286 shares
of Common Stock. All of such Common Stock, warrants and options are owned of
record by the Stockholders, warrantholders and optionholders, respectively,
free and clear of any Encumbrances imposed by the Company. Section 4.3(a) of
the Target Disclosure Schedule includes (x) a list of all Company Stock Options
as of the date hereof, including the name of each holder of Company Stock
Options, the date of grant, the number of shares of Company Stock subject to
such options, the vesting commencement date and the vesting schedule, (y) a
list of all Stockholders and the number of shares of Company Common Stock held
thereby, in each case indicating which of such stock is restricted stock, if
any, and (z) a list of all holders of Company Preferred Stock of the number of
shares of Company Preferred Stock held thereby, in each case indicating which
of such stock is restricted stock, if any.
(b) All of the shares of Company Stock currently outstanding (i) have been
duly authorized and validly issued, (ii) are fully paid and nonassessable, and
(iii) have been issued in full compliance with all applicable securities laws
and other applicable Legal Requirements. The Company has delivered to Acquiror
accurate and complete copies of the stock certificates evidencing the currently
outstanding shares of Common Stock and Company Preferred Stock.
(c) There is no (i) outstanding preemptive right, subscription, option,
call, warrant or right (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of the Company from the
Company; (ii) outstanding security, instrument or obligation that is or may
become convertible into or exchangeable for any shares of the capital stock or
other securities of the Company issuable by the Company; (iii) Contract under
which the Company is or may become obligated to sell or otherwise issue any
shares of its capital stock or any other securities; or (iv) condition or
circumstance that likely would directly or indirectly give rise to or provide a
basis for the assertion of a claim by any Person to the effect that such Person
is entitled to acquire or receive any shares of capital stock or other
securities of the Company.
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(d) Since June 1, 1999, the Company has neither repurchased, redeemed or
otherwise reacquired, and has not agreed, committed or offered (in writing or
otherwise) to reacquire, any shares of capital stock or other securities. Any
securities reacquired by the Company were (or will have been) reacquired in
full compliance with the applicable provisions of all applicable Legal
Requirements.
4.4 Financial Statements.
(a) The Company has delivered to Acquiror the following financial statements
and notes (collectively, the "Financial Statements"), which are attached hereto
as Exhibit C:
(i) the audited balance sheet of the Company as of December 31, 1999,
and the related statements of operations, changes in stockholders' equity
and fund balance and cash flows of the Company for the one-year period
ending as of December 31, 1999, together with the notes thereto; and
(ii) the unaudited balance sheets of the Company as of March 31, 2000
(the "Unaudited Interim Balance Sheet") and related unaudited statements of
operations, for the three months then ended.
(b) All of the Financial Statements are accurate and complete in all
material respects. The Financial Statements are in accordance with the books
and records of the Company, present fairly the financial position of the
Company as of the respective dates thereof and the results of operations and,
with respect to the audited Financial Statements, changes in stockholders'
equity and fund balance and cash flows of the Company for the respective
periods covered thereby, and have been prepared in conformity with GAAP,
subject, in the case of the unaudited financial statements, to normal recurring
year-end adjustments, the effect of which will not be material and the absence
of notes and statements of cash flows and changes in stockholders' equity.
(c) At the date of the Unaudited Interim Balance Sheet, (i) the Company had
no Liabilities of any nature required by GAAP to be provided for in such
Unaudited Interim Balance Sheet which were not provided for, and (ii) all
reserves established by the Company and set forth in the Unaudited Interim
Balance Sheet were adequate in all material respects for the purposes for which
they were established.
(d) As of the date of this Agreement, the Company has no Liabilities in
excess of $300,000 individually or in the aggregate, except for (i) Liabilities
identified as such in the "liabilities" column of the Unaudited Interim Balance
Sheet; and (ii) accounts payable incurred and accrued by the Company in the
Ordinary Course of Business since the date of the Unaudited Interim Balance
Sheet.
4.5 Absence of Changes. Since March 31, 2000:
(a) there has not been any material adverse change in the Company's
business, condition, assets, liabilities, operations, financial performance,
results of operations or prospects, and no event has occurred that likely would
have a material adverse effect on the Company's business, condition, assets,
liabilities, operations, financial performance, results of operations or
prospects, except in each case any change, circumstances or effect relating to
(i) the economy or securities markets in general or (ii) the industries in
which the Company operates in general and not specifically relating to the
Company (a "Material Adverse Effect");
(b) there has not been any material loss, damage or destruction to, or any
material interruption in the use of, any of the Company's assets (whether or
not covered by insurance);
(c) the Company has not (i) declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock, or (ii) repurchased, redeemed or otherwise reacquired any shares of
capital stock or other securities;
(d) the Company has not sold or otherwise issued any shares of capital stock
or any other securities;
(e) the Company has not amended its certificate of incorporation or bylaws
and has not effected or been a party to any recapitalization, reclassification
of shares, stock split, reverse stock split or similar transaction;
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(f) the Company has not purchased or otherwise acquired any asset from any
other Person, except for assets acquired by the Company in the Ordinary Course
of Business;
(g) the Company has not leased or licensed any asset from any other Person
except for assets leased or licensed in the Ordinary Course of Business;
(h) the Company has not made any individual capital expenditure, measured
by invoice amount, in excess of $5,000;
(i) the Company has not sold or otherwise transferred, and has not leased
or licensed, any asset to any other Person except for software licenses
entered into by the Company in the Ordinary Course of Business;
(j) the Company has not written off as uncollectible, or established any
reserve with respect to, any account receivable or other indebtedness;
(k) the Company has not pledged or hypothecated any of its assets or
otherwise permitted any of its assets to become subject to any Encumbrance;
(l) the Company has not made any loan or advance to any other Person,
including without limitation, any Stockholder;
(m) the Company has not (i) established or adopted any Plan or (ii) paid
any bonus or made any profit sharing or similar payment to, or increased the
amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees other than salary increases for non-officer employees in the
Ordinary Course of Business and consistent with the Company's review and
compensation policies then in force;
(n) the Company has not entered into, and neither the Company nor any of
the assets owned or used by the Company has become bound by, any Contract,
except in the Ordinary Course of Business;
(o) no Contract by which the Company or any of the assets owned or used by
the Company is or was bound, or under which the Company has or had any rights
or interest, has been amended or terminated, except in the Ordinary Course of
Business;
(p) there has been no borrowing or agreement to borrow by the Company or
change in the contingent obligations of the Company by way of guaranty,
endorsement, indemnity, warranty or otherwise or grant of a mortgage or
security interest in any property of the Company (other than endorsements of
checks and indemnities and warranties entered into in the Ordinary Course of
Business), and the Company has not incurred, assumed or otherwise become
subject to any Liabilities, other than Liabilities incurred by the Company in
the Ordinary Course of Business;
(q) the Company has not discharged any Encumbrance or discharged or paid
any indebtedness or other Liability, except any that (i) are reflected as
current liabilities in the Unaudited Interim Balance Sheet or have been
incurred by the Company since the date thereof in the Ordinary Course of
Business, and (ii) have been discharged or paid in the Ordinary Course of
Business;
(r) the Company has not forgiven any debt or otherwise released or waived
any right or claim;
(s) the Company has not changed any of its methods of accounting or
accounting practices in any respect;
(t) the Company has not entered into any transaction or taken any other
action outside the Ordinary Course of Business; and
(u) the Company has not agreed or committed (in writing or otherwise) to
take any of the actions referred to in clauses (c) through (t) above.
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4.6 Title to Assets; Equipment; Real Property, Leases.
(a) The Company owns, and has good, valid and marketable title to, all
assets it purports to own, including (i) all assets reflected on the Unaudited
Interim Balance Sheet; (ii) all assets acquired by the Company since the date
of the Unaudited Interim Balance Sheet; (iii) all assets referred to in Section
4.6(b) of the Target Disclosure Schedule and all of the Company's rights under
Company Contracts; and (iv) all other assets reflected in the Company's books
and records as being owned by the Company. All of said assets are owned by the
Company free and clear of any Encumbrances, except liens for current taxes and
assessments not delinquent and such other liens that do not, singly or in the
aggregate, constitute a Material Adverse Effect.
(b) Section 4.6(b) of the Target Disclosure Schedule identifies all
equipment, furniture, fixtures, improvements and other tangible and intangible
assets owned by or leased to the Company, and sets forth the original cost and
book value of each of said assets.
(c) To the Knowledge of the Company, each asset identified in Section 4.6(b)
of the Target Disclosure Schedule (i) is free of defects and deficiencies and
in good condition and repair, consistent with its age and intended use
(ordinary wear and tear excepted); (ii) complies in all material respects, and
is being operated and otherwise used in material compliance, with all
applicable Legal Requirements; and (iii) is adequate in all material respects
for the uses to which it is being put.
(d) The Company does not own any real property or any interest in real
property, except for the leaseholds created under the real property leases
identified in Section 4.6(d) of the Target Disclosure Schedule (the "Leased
Premises"). Section 4.6(d) of the Target Disclosure Schedule provides an
accurate and complete description of the premises covered by said leases and
the facilities located on such premises. The Company enjoys peaceful and
undisturbed possession of such premises. The Company has delivered to Acquiror
complete copies of all such leases. Acquiror will obtain a valid leasehold
interest in such leases, in each case free and clear of all title defects,
Encumbrances and restrictions of any kind, except: (i) mechanics', carriers',
workers' and other similar liens arising in the Ordinary Course of Business
since the date of the Unaudited Interim Balance Sheet and (ii) liens for
current taxes not yet due and payable.
(e) Section 4.6(e) of the Target Disclosure Schedule identifies all personal
property assets that are being leased or licensed to the Company.
(f) All material leases pursuant to which the Company leases real or
personal property are valid and effective in accordance with their respective
terms and, to the Company's Knowledge, there exists no default thereunder or
occurrence or condition which could result in a default thereunder or
termination thereof.
(g) The Company's Leased Premises are in a condition adequate for the
conduct of the business in the Ordinary Course of Business, and the Company
owns, or has a valid leasehold interest in or license to, all assets necessary
for the conduct of its business as presently conducted except for those that
would not have a Material Adverse Effect.
4.7 Bank Accounts. Section 4.7 of the Target Disclosure Schedule accurately
sets forth, with respect to each account maintained by or for the benefit of
the Company at any bank or other financial institution:
(a) the name and location of the institution at which such account is
maintained;
(b) the name in which such account is maintained and the account number of
such account;
(c) a description of such account and the purpose for which such account is
used;
(d) the balance in such account as of May 31, 2000;
(e) the rate of interest as of May 31, 2000 being earned on the funds in
such account; and
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(f) the names of all individuals authorized to draw on or make withdrawals
from such account.
There are no safe deposit boxes or similar arrangements maintained by or for
the benefit of the Company.
4.8 Receivables; Major Customers.
(a) Section 4.8(a) of the Target Disclosure Schedule provides an accurate
and complete breakdown and aging of all accounts and notes receivable and a
list of all other receivables of the Company as of May 31, 2000.
(b) All existing accounts receivable of the Company (including those
accounts receivable reflected on the Unaudited Interim Balance Sheet that have
not yet been collected and those accounts receivable that have arisen since
such date and have not yet been collected) (i) represent valid obligations of
customers of the Company arising from bona fide transactions entered into in
the Ordinary Course of Business; and (ii) are current and in the aggregate,
will be collected in full (without any counterclaim or setoff), net of
reserves, on or before the later of 120 days from the date of invoice or 120
days from the date hereof.
(c) Since June 1, 1999, the Company has not received any notice or other
communication (in writing or otherwise), or received any other information,
indicating that any customer or other Person may cease dealing with the Company
or demand a refund of any fees previously paid.
(d) The Company has provided to Acquiror a copy of the Company's standard
form of customer contract for each product or service it offers to customers.
The Company has no oral contracts or agreements to deliver products or provide
services.
4.9 Accounts Payable; Major Suppliers.
(a) Section 4.9(a) of the Target Disclosure Schedule (i) provides an
accurate and complete breakdown and aging of the Company's accounts payable as
of May 31, 2000; (ii) provides an accurate and complete breakdown of all
customer deposits and other deposits held by the Company as of March 31, 2000;
and (iii) provides an accurate and complete breakdown of the Company's long
term debt as of the date of this Agreement.
(b) Section 4.9(b) of the Target Disclosure Schedule accurately identifies,
and provides an accurate and complete breakdown of, the amounts paid to each
supplier or other Person, that received more than $5,000 from the Company
during the five month period ended May 31, 2000, other than amounts paid to
employees or consultants and described in Section 4.15(a) or (b) of the Target
Disclosure Schedule. Each such supplier or other Person has executed and
delivered to the Company a valid and binding invoice or other agreement with
the Company relating to the services or supplies to which such amounts relate.
4.10 Proprietary Assets.
(a) Section 4.10(a) of the Target Disclosure Schedule sets forth each of the
following Proprietary Assets owned by or licensed to the Company or otherwise
used in connection with the Company's business: all United States and foreign
(i) patent and patent applications; (ii) registered trademarks and trademark
applications; (iii) registered copyrights and applications for copyright
registration; (iv) mask work registrations and applications to register mask
works; and (v) any other such Proprietary Asset that is the subject of an
application to, or certificate or registration issued by, any state, government
or other public legal authority.
(b) All material designs, drawings, specifications, schematics, source code,
object code, scripts, documentation, flow charts, diagrams, data lists,
databases, compilations and information incorporating, embodying or reflecting
any of the Proprietary Assets of the Company at any stage of their development
were written, developed and created solely and exclusively by employees of the
Company without the assistance of any third party or entity or were created by
third parties who assigned ownership of their rights to the Company
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by means of valid and enforceable consultant confidentiality and invention
assignment agreements, true and complete copies of which have been delivered to
Acquiror. The Company has taken reasonable measures and precautions necessary
to protect the confidentiality and value of each Proprietary Asset that is
owned by or licensed to the Company or that is otherwise used in connection
with the Company's business.
(c) The Company has not granted any third party any right to manufacture,
reproduce, license, use, distribute, market or exploit any of its Proprietary
Assets or any adaptations, translations, or derivative works based on the
Proprietary Assets or any portion thereof. No Company Proprietary Asset is a
"derivative work" of any original work currently owned by a third party as the
term "derivative work" is defined in the United States Copyright Act, Title 17,
U.S.C. Section 101.
(d) All current and former employees of the Company have executed a
Proprietary Information and Inventions Agreement substantially in the form
attached as Exhibit D. Such agreements constitute valid and binding obligations
of the Company and such person, enforceable in accordance with their respective
terms. To the Knowledge of the Company, no such employee is in violation
thereof. The Company does not believe it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any Company employees
made prior to their employment by the Company, except for inventions, trade
secrets or proprietary information identified in Section 4.10(d) of the Target
Disclosure Schedule, which have been assigned to the Company.
(e) None of the Proprietary Assets owned or used by the Company violate or
infringe or, if used in the Company's business as currently proposed to be
conducted, would violate or infringe, any license, patent, copyright, service
mark, trademark, trade name, trade secret or other intellectual property right
of others. The Company is not infringing and has not at any time infringed or
received any notice or other communication (in writing or otherwise) of any
actual, alleged, possible or potential infringement of any Proprietary Asset
owned or used by any other Person. To the Company's Knowledge, no Person is
infringing, and no Proprietary Asset owned or used by any other Person
infringes or conflicts with, any Proprietary Asset owned or used by Company.
Except for agreements entered into in the Ordinary Course of Business, the
Company has not entered into any agreement to indemnify any other Person
against any charge of infringement, misappropriation or other conflict with
respect to any Proprietary Asset.
(f) There are no royalties, honoraria, fees or other payments payable by the
Company to any Person by reason of the ownership, use, license, sale or
disposition of any Proprietary Asset of the Company.
(g) The Proprietary Assets owned by or licensed to the Company include all
Proprietary Assets necessary to conduct the Company's business to the same
extent and in the same manner as currently conducted and currently anticipated
by the Company to be conducted. Such ownership or, to the Company's knowledge,
right to use, and to license others to use, are free and clear of, and without
liability under, all claims and right of third parties (other than the
licensor).
(h) All proprietary software developed by the Company and currently sold,
licensed or otherwise used by the Company in its business is free from
significant programming errors, operates in substantial conformity with its
user documentation and other descriptions and standards applicable thereto
provided by the Company, and does not contain any virus, timer, clock, counter,
or other limiting design, instruction or routine, that would, without the
user's knowledge and consent, erase data or programming code or cause such
software to become inoperable or otherwise incapable of being used in the full
manner for which it was designed and created.
4.11 Contracts.
(a) Except as provided in Section 4.15 of the Target Disclosure Schedule,
Section 4.11(a) of the Target Disclosure Schedule lists each of the following
Company Contracts:
(i) any Company Contract or series of related Company Contracts
requiring in the aggregate payments after the date hereof by or to the
Company of more than $5,000;
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(ii) any Company Contract with or for the benefit of any current or
former officer, director, stockholder, employee or consultant of the
Company or relative of any of the foregoing;
(iii) any Company Contract with any labor union or association
representing any employee of the Company;
(iv) any Company Contract for the purchase or sale of materials,
supplies, equipment, merchandise or services that contain an escalation,
renegotiation or redetermination clause or that obligate the Company to
purchase all or substantially all of its requirements of a particular
product from a supplier, or for periodic minimum purchases of a particular
product from a supplier;
(v) any Company Contract for sale of any of the assets or properties of
the Company other than in the Ordinary Course of Business or for the grant
to any Person of any options, rights of first refusal, or preferential or
similar rights to purchase any such assets or properties;
(vi) any agreement of surety, guarantee or indemnification, other than
agreements in the Ordinary Course of Business with respect to obligations
in an aggregate amount not in excess of $50,000;
(vii) any Company Contract containing covenants of the Company not to
compete in any line of business, in any geographic area or with any Person
or covenants of any other Person not to compete with the Company or in any
line of business of the Company;
(viii) any Company Contract granting or restricting the right of the
Company to use any Proprietary Assets;
(ix) any Company Contract with customers or suppliers for the sharing of
fees, the rebating of charges or other similar arrangements;
(x) any Company Contract with any holder of securities of the Company as
such (including, without limitation, any Company Contract containing an
obligation to register any of such securities under any federal or state
securities laws);
(xi) any Company Contract obligating the Company to deliver services or
product enhancements or containing a "most favored nation" pricing clause;
(xii) any Company Contract relating to the acquisition by the Company of
any operating business or the capital stock of any other person;
(xiii) any Company Contract requiring the payment to any Person of a
brokerage or sales commission or a finder's or referral fee (other than
arrangements to pay commission or fees to employees in the Ordinary Course
of Business);
(xiv) any Company Contract or note relating to or evidencing outstanding
indebtedness for borrowed money;
(xv) any lease, sublease or other Company Contract under which the
Company is lessor or lessee of any real property or equipment or other
tangible property with respect to obligations in excess of $50,000; and
(xvi) any other material Company Contract whether or not made in the
Ordinary Course of Business.
(b) Each Company Contract is valid and in full force and effect, and is
enforceable by the Company in accordance with its material terms, except as
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity.
(c) Neither the Company nor, to the Company's Knowledge, any other party to
a Company Contract is in default under any Company Contract. No event has
occurred, and no circumstance or condition exists, that likely would (with or
without notice or lapse of time) (i) result in a violation or breach of any of
the provisions of any Company Contract, (ii) give any Person the right to
declare a default or exercise any remedy or hinder
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any Company Contract, (iii) give any Person the right to accelerate the
maturity or performance of any Company Contract, or (iv) give any Person the
right to cancel, terminate or modify any Company Contract except for such
cancellation, termination or modification that, singly or in the aggregate,
would not have a Material Adverse Effect. The Company has not waived any of its
rights under any Company Contract, except in the Ordinary Course of Business.
(d) To the Company's actual knowledge, each Person against which the Company
has or may acquire any rights under any Company Contract is solvent and is able
to satisfy all of such Person's current and future monetary obligations and
other obligations and Liabilities to the Company.
(e) (i) The Company is not a guarantor of and has not otherwise agreed to
cause, insure or become liable for, and has not pledged any of its assets to
secure, the performance or payment of any obligation or other Liability of any
other Person except in the Ordinary Course of Business; and (ii) the Company
has never been a party to or bound by (A) any joint venture agreement,
partnership agreement, profit sharing agreement, cost sharing agreement, loss
sharing agreement or similar Contract, or (B) any Contract that creates or
grants to any Person, or provides for the creation or grant of, any stock
appreciation right, phantom stock right or similar right or interest.
(f) To the Knowledge of the Company, the performance of the Company
Contracts will not result in any violation of or failure to comply with any
Legal Requirement.
(g) No Person is renegotiating, nor has the contractual right to
renegotiate, any amount paid or payable to the Company under any Company
Contract or any other material term or provision of any Company Contract which
would have a Material Adverse Effect.
(h) Section 4.11(h) of the Target Disclosure Schedule identifies and
provides an accurate and brief description of each proposed Contract as to
which any bid, offer, written proposal, term sheet or similar document has been
submitted or received by the Company that would commit the Company to deliver
goods or provide services with a value in excess of $5,000 and is outstanding.
(i) No party to any Company Contract has notified the Company or made a
claim to the effect that the Company has failed to perform an obligation
thereunder. In addition, to the Knowledge of the Company, there is no plan,
intention or indication of any contracting party to any Company Contract to
cause the termination, cancellation or modification of such Contract or to
reduce or otherwise change its activity thereunder so as to materially
adversely affect the benefits derived or expected to be derived therefrom by
the Company.
(j) The Contracts identified in Section 4.11(a) of the Target Disclosure
Schedule collectively constitute all of the Contracts necessary to enable the
Company to conduct its business in the manner in which its business is
currently being conducted and in the manner in which its business is proposed
to be conducted.
4.12 Compliance With Legal Requirements.
(a) The Company is in compliance with each Legal Requirement that is
applicable to it or to the conduct of its business or the ownership or use of
any of its assets, except with respect to non-compliance that would not have a
Material Adverse Effect.
(b) To the Knowledge of the Company, no event has occurred, and no condition
or circumstance exists, that likely would (with or without notice or lapse of
time) constitute or result directly or indirectly in a violation by the Company
of, or a failure on the part of the Company to comply with, any Legal
Requirement, except such failures as would not have a Material Adverse Effect.
(c) The Company has not received at any time any notice or other
communication (in writing or otherwise) from any Governmental Body, or any
other Person, regarding (i) any actual, alleged, possible or potential
violation of, or failure to comply with, any Legal Requirement or (ii) any
actual, alleged, possible or
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potential obligation on the part of the Company to undertake, or to bear all or
any portion of the cost of, any cleanup or any remedial, corrective or response
action of any nature.
(d) To the Knowledge of the Company, no Governmental Body has proposed or is
considering any Legal Requirement (other than any Legal Requirement that would
be applicable generally to the online payment industry) that, if adopted or
otherwise put into effect, would specifically affect the Company and (i) may
have an adverse effect on the Company's business, condition, assets,
liabilities, operations, financial performance, results of operations or
prospects or on the ability of the Company to comply with or perform any
covenant or obligation under this Agreement or any of the other Transactional
Agreements, or (ii) may have the effect of preventing, delaying, making illegal
or otherwise interfering with any of the Transactions.
4.13 Governmental Authorizations.
(a) Section 4.13 of the Target Disclosure Schedule identifies (i) each
Governmental Authorization that is held by the Company; and (ii) each other
Governmental Authorization that, to the Knowledge of the Company, is held by
any of the Company's employees and is used in connection with the Company's
business. The Company has delivered to Acquiror accurate and complete copies of
all of the Governmental Authorizations identified in Section 4.13 of the Target
Disclosure Schedule, including all renewals thereof and all amendments thereto.
Each Governmental Authorization identified or required to be identified in
Section 4.13 of the Target Disclosure Schedule is valid and in full force and
effect.
(b) The Governmental Authorizations identified in Section 4.13 of the Target
Disclosure Schedule constitute all of the Governmental Authorizations necessary
(i) to enable the Company to conduct its business in the manner in which its
business is currently being conducted and intended to be conducted and (ii) to
permit the Company to own and use its assets in the manner in which they are
currently owned and used.
4.14 Tax Matters.
(a) Each Tax required to have been paid, or claimed by any Governmental Body
to be payable, by the Company (whether pursuant to any Tax Return or otherwise)
has been duly paid in full on a timely basis. Any Tax required to have been
withheld or collected by the Company has been duly withheld and collected, and
(to the extent required) each such Tax has been paid to the appropriate
Governmental Body.
(b) Section 4.14(b) of the Target Disclosure Schedule accurately identifies
all Tax Returns required to be filed by or on behalf of the Company with any
Governmental Body with respect to any taxable period ending on or before the
date hereof ("Company Returns"). All Company Returns (i) have been or will be
filed when due, and (ii) have been, or will be when filed, accurately and
completely prepared in material compliance with all applicable Legal
Requirements. All amounts shown on the Company Returns to be due on or before
the date hereof, and all amounts otherwise payable in connection with the
Company Returns on or before the date hereof, have been paid. The Company has
delivered to Acquiror accurate and complete copies of Company Returns filed by
the Company.
(c) The Company's liability for unpaid Taxes for all periods ending on or
before the date of the Financial Statements does not, in the aggregate, exceed
the amount of the current liability accruals for Taxes (excluding reserves for
deferred taxes) reported in the Financial Statements. The Company has
established in the Ordinary Course of Business reserves for the payment of all
Taxes for the period from the date of the Financial Statements through the date
hereof and has disclosed the dollar amount of such reserves to the Acquiror.
(d) Section 4.14(d) of the Target Disclosure Schedule accurately identifies
each examination or audit of any Company Return that has been conducted by any
Governmental Body. The Company has delivered to Acquiror accurate and complete
copies of all audit reports and similar documents relating to Company Returns.
No extension or waiver of the limitation period applicable to any of the
Company Returns has been granted (by the Company or any other Person), and no
such extension or waiver has been requested from the Company.
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(e) No claim or other Proceeding is pending or to the Company's Knowledge
has been threatened against or with respect to Company in respect of any Tax.
There are no unsatisfied Liabilities for Taxes with respect to any notice of
deficiency or similar document received by the Company. The Company has not
entered into or become bound by any agreement or consent pursuant to Section
341(f) of the Code. The Company has not been, and will not be, required to
include any adjustment in taxable income for any tax period (or portion
thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions or events
occurring, or accounting methods employed, prior to the Closing. The Company is
in compliance with the terms and conditions of any applicable Tax exemptions,
Tax agreements or Tax orders of any Governmental Body to which it may be
subject or which it may have claimed, and the transactions contemplated by this
Agreement will not have any adverse effect on such compliance.
(f) There is no agreement, plan, arrangement or other Contract covering any
employee or independent contractor or former employee or independent contractor
of the Company that, individually or collectively, could give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant
to Section 280G or Section 162 of the Code.
(g) All stock options that the Company has treated as incentive stock
options under Section 421 of the Code meet the requirements of Section 422 of
the Code.
(h) Company has no net operating losses or other tax attributes presently
subject to limitation under Code Sections 382, 383, or 384.
(i) The Company is not liable for Taxes incurred by any individual, trust,
corporation, partnership or other entity other than Company, either as a
transferee or pursuant to Treasury Regulations Section 1.1502-6, or pursuant to
any other provision of federal, state or local law or regulation. The Company
is not, and has never been, a party to or bound by any tax indemnity agreement,
tax sharing agreement, tax allocation agreement or similar Contract.
(j) The Company is not a party to any joint venture, partnership or other
arrangement or contract which could be treated as a partnership for United
States federal income tax purposes.
(k) The Company is not a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code and has not been a United
States real property holding corporation within the applicable period specified
in Section 897(c)(1)(A)(ii) of the Code.
4.15 Employee and Labor Matters.
(a) Section 4.15(a) of the Target Disclosure Schedule accurately sets forth,
with respect to each employee of the Company (including any employee of the
Company who is on a leave of absence or on layoff status) (i) the name of such
employee and the date as of which such employee was originally hired by the
Company; (ii) such employee's title; (iii) such employee's annualized
compensation as of the date of this Agreement; (iv) each Plan in which such
employee participates or is eligible to participate; and (v) any Governmental
Authorization that is held by such employee and that is used in connection with
the Company's business.
(b) Section 4.15(b) of the Target Disclosure Schedule contains a list of
individuals who are currently performing services for the Company and are
classified as "consultants" or "independent contractors," and the respective
compensation of each such "consultant" or "independent contractor."
(c) There is no former employee of the Company who is receiving or is
scheduled to receive (or whose spouse or other dependent is receiving or is
scheduled to receive) any benefits (whether from the Company or otherwise)
relating to such former employee's employment with the Company.
(d) The Company is not a party to or bound by any employment agreement or
any union contract, collective bargaining agreement or similar Contract.
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(e) The employment of each of the Company's employees is terminable by the
Company at will. The Company has delivered to Acquiror accurate and complete
copies of all employee manuals and handbooks, disclosure materials, policy
statements, employment agreements and other materials relating to the
employment of the current employees of the Company.
(f) To the Knowledge of the Company (i) no employee of the Company intends
to terminate his or her employment with the Company and the Company does not
have a present intention to terminate the employment of any employee; (ii) no
employee of the Company has received since June 30, 1999, nor is currently
considering, an offer to join a business that likely would be competitive with
the Company's business; and (iii) no employee of the Company is a party to or
is bound by any confidentiality agreement, noncompetition agreement or other
Contract (with any Person) that likely would have an adverse effect on (A) the
performance by such employee of any of his or her duties or responsibilities as
an employee of the Company, or (B) the Company's business or operations.
(g) The Company is not engaged, and has never been engaged, in any unfair
labor practice of any nature. There has never been any slowdown, work stoppage,
labor dispute or union organizing activity, or any similar activity or dispute,
affecting the Company or any of its employees. There is not now pending, and to
the Knowledge of the Company no Person has threatened to commence, any such
slowdown, work stoppage, labor dispute or union organizing activity or any
similar activity or dispute, nor has any event occurred, nor does any condition
or circumstance exist, that likely would directly or indirectly give rise to or
provide a basis for the commencement of any such slowdown, work stoppage, labor
dispute or union organizing activity or any similar activity or dispute.
(h) To the Company's Knowledge, each employee of the Company is in
compliance with all applicable visa and work permit requirements. To the
Company's Knowledge, no visa or work permit held by an employee of the Company
will expire during the six month period beginning at the date of this
Agreement.
4.16 Benefit Plans; ERISA.
(a) Section 4.16 of the Target Disclosure Schedule lists (i) all Employee
Benefit Plans, (ii) all employment agreements, including, but not limited to,
any individual benefit arrangement, policy or practice with respect to any
current or former employee or director of the Company or any ERISA Affiliate,
and (iii) all other employee benefit, bonus or other incentive compensation,
stock option, stock purchase, stock appreciation, severance pay, lay-off or
reduction in force, change in control, sick pay, vacation pay, salary
continuation, retainer, leave of absence, educational assistance, service
award, employee discount, fringe benefit plans, arrangements, policies or
practices, whether legally binding or not, which the Company or any ERISA
Affiliate maintains, contributes to or has any obligation to or liability for
(collectively, the "Plans").
(b) None of the Plans is a Defined Benefit Plan, and neither the Company nor
any ERISA Affiliate has ever sponsored, maintained or contributed to, or ever
been obligated to contribute to, a Defined Benefit Plan.
(c) None of the Plans is a Multiemployer Plan, and neither the Company nor
any ERISA Affiliate has ever contributed to, or ever been obligated to
contribute to, a Multiemployer Plan.
(d) The Company does not maintain or contribute to any welfare benefit plan
that provides health benefits to an employee after the employee's termination
of employment or retirement except as required under Section 4980B of the Code
and Sections 601 through 608 of ERISA.
(e) Each Plan that is an Employee Benefit Plan complies by its terms and in
operation with the requirements provided by any and all statutes, orders or
governmental rules or regulations currently in effect and applicable to the
Plan, including but not limited to ERISA and the Code.
(f) All reports, forms and other documents required to be filed with any
Governmental Body with respect to any Plan (including without limitation,
summary plan descriptions, Forms 5500 and summary annual reports) have been
timely filed and are accurate.
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(g) Each Plan intended to qualify under Section 401(a) of the Code is the
subject of a favorable determination letter issued by the Internal Revenue
Service that provides that it so qualifies through the last day of the "TRA 86
Remedial Amendment Period," as such term is defined in Section 3.02 of Revenue
Procedure 96-55 issued by the Internal Revenue Service and that its related
trust is exempt from taxation under Section 501 of the Code. Nothing has
occurred since the date of the Internal Revenue Service's favorable
determination letter that could adversely affect the qualification of such Plan
or the tax exempt status of its related trust.
(h) All contributions for all periods ending prior to the Closing (including
periods from the first day of the current plan year to the Closing) have been
made prior to the Closing by the Company or the applicable ERISA Affiliate.
(i) All insurance premiums have been paid in full, subject only to normal
retrospective adjustments in the ordinary course, with regard to the Plans for
plan years ending on or before the Closing.
(j) With respect to each Plan:
(i) no prohibited transactions (as defined in Section 406 or 407 of
ERISA or Section 4975 of the Code) have occurred for which a statutory
exemption is not available;
(ii) no action or claims (other than routine claims for benefits made in
the ordinary course of Plan administration for which Plan administrative
review procedures have not been exhausted) are pending, threatened or
imminent against or with respect to the Plan, any employer who is
participating (or who has participated) in any Plan or any fiduciary (as
defined in Section 3(21) of ERISA) of the Plan;
(iii) neither the Company nor any fiduciary has any Knowledge of any
facts which could give rise to any such action or claim; and
(iv) it provides that it may be amended or terminated at any time and,
except for benefits protected under Section 411(d) of the Code, all
benefits payable to current, terminated employees or any beneficiary may be
amended or terminated by the Company at any time without liability.
(k) Neither the Company nor any ERISA Affiliate has any liability or is
threatened with any liability (whether joint or several) (i) for any excise tax
imposed by Sections 4971, 4975, 4976, 4977 or 4979 of the Code, or (ii) to a
fine under Section 502 of ERISA.
(l) All of the Plans listed in the Target Disclosure Schedule, to the extent
applicable, are in compliance with the continuation of group health coverage
provisions contained in Section 4980B of the Code and Sections 601 through 608
of ERISA.
(m) True, correct and complete copies of all documents creating or
evidencing any Plan listed in the Target Disclosure Schedule have been made
available to Acquiror, and true, correct and complete copies of all reports,
forms and other documents required to be filed with any Governmental Body
(including, without limitation, summary plan descriptions, Forms 5500 and
summary annual reports for all plans subject to ERISA) have been made available
to Acquiror. There are no negotiations, demands or proposals which are pending
or have been made which concern matters now covered, or that would be covered,
by the type of agreements listed in the Target Disclosure Schedule.
(n) All expenses and liabilities relating to all of the Plans described in
the Target Disclosure Schedule have been, and will on the Closing be fully and
properly accrued on the Company's books and records and disclosed in accordance
with generally accepted accounting principles and in Plan financial statements.
4.17 Environmental Matters. The Company is and has been at all times in
compliance in all material respects with all Environmental Laws. The Company
has now and at all times has had all the necessary permits required under
Environmental Laws for the operation of its business, and is not and has not
been in violation of
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any of the terms and conditions of any of its permits. The Company has not
received any notice or other communication (in writing or otherwise) that
alleges that the Company is not in compliance with any Environmental Law. The
Company has not generated, manufactured, produced, transported, imported,
used, treated, refined, processed, handled, stored, discharged, released, or
disposed of any Hazardous Materials (whether lawfully or unlawfully) at any of
the Leased Premises occupied or controlled by the Company on or at any time
prior to the date hereof other than common household and office products in de
minimis quantities. There are not and have not been any releases or threatened
releases of any Hazardous Materials in any quantity (other than common
household and office products in de minimis quantities) at, on, or from the
Leased Premises during the Company's occupancy, and to the Knowledge of the
Company (a) there are no circumstances that may prevent or interfere with the
Company's compliance with any Environmental Law and (b) no former owner or
user of the Leased Premises engaged in any type of manufacturing or commercial
activity which might be reasonably expected to generate, manufacture, produce,
transport, import, use, treat, refine, process, handle, store, discharge,
release, or dispose of any Hazardous Materials (whether lawfully or
unlawfully) on the Leased Premises.
4.18 Sale of Products; Performance of Services.
(a) The Company has not made any express warranties or guarantees relating
to its products or services that are in effect as of the date hereof. No
customer or other Person has ever asserted or threatened to assert any
material claim against the Company (i) under or based upon any warranty
provided by or on behalf of the Company, or (ii) under or based upon any other
warranty relating to any product sold by the Company or any services performed
by the Company. To the Knowledge of the Company, no event has occurred, and no
condition or circumstance exists, that likely would (with or without notice or
lapse of time) directly or indirectly give rise to or serve as a basis for the
assertion of any such claim. The Company has received no customer complaints
pursuant to which the Company gave a credit or accepted a product return for a
refund in either case in excess of $5,000.
(b) The Company has in place and at all times has had in place an adequate
and appropriate quality control program.
4.19 Insurance.
(a) Section 4.19 of the Target Disclosure Schedule accurately sets forth,
with respect to each insurance policy maintained by or at the expense of, or
for the direct or indirect benefit of, the Company:
(i) the name of the insurance carrier that issued such policy and the
policy number of such policy;
(ii) whether such policy is a "claims made" or an "occurrences" policy;
(iii) a description of the coverage provided by such policy and the
material terms and provisions of such policy (including all applicable
coverage limits, deductible amounts and co-insurance arrangements);
(iv) the annual premium payable with respect to such policy, and the
cash value (if any) of such policy; and
(v) a description of any claims pending, and any claims that have been
asserted in the past, with respect to such policy.
Section 4.19 also identifies (1) each pending application for insurance that
has been submitted by or on behalf of the Company and (2) each self-insurance
or risk-sharing arrangement affecting the Company or any of its assets. The
Company has delivered to Acquiror accurate and complete copies of all of the
insurance policies identified in Section 4.19 of the Target Disclosure
Schedule (including all renewals thereof and endorsements thereto) and binders
relating thereto indicating that such policies are in full force and effect as
of the date hereof, and all of the pending applications identified in Section
4.19 of the Target Disclosure Schedule.
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(b) Each of the policies identified in Section 4.19 of the Target Disclosure
Schedule is valid, enforceable and in full force and effect, and has been
issued by an insurance carrier that, to the Knowledge of the Company, is
solvent, financially sound and reputable. All of the information contained in
the applications submitted in connection with said policies was (at the times
said applications were submitted) accurate and complete in all material
respects, and all premiums and other amounts owing with respect to said
policies have been paid in full on a timely basis. The nature, scope and dollar
amounts of the insurance coverage provided by said policies are substantially
similar to those customarily carried by reasonable persons conducting business
similar to that, or owning assets similar to those, of the Company.
(c) There is no pending claim under or based upon any of the policies
identified in Section 4.19 of the Target Disclosure Schedule, and to the
Company's Knowledge, no event has occurred, and no condition or circumstance
exists, that likely would (with or without notice or lapse of time) directly or
indirectly give rise to or serve as a basis for any such claim.
(d) The Company has not received:
(i) any notice or other communication (in writing or otherwise)
regarding the actual or possible cancellation or invalidation of any of the
policies identified in Section 4.19 of the Target Disclosure Schedule or
regarding any actual or possible adjustment in the amount of the premiums
payable with respect to any of said policies;
(ii) any notice or other communication (in writing or otherwise)
regarding any actual or possible refusal of coverage under, or any actual
or possible rejection of any claim under, any of the policies identified in
Section 4.19 of the Target Disclosure Schedule; or
(iii) any indication that the issuer of any of the policies identified
in Section 4.19 of the Target Disclosure Schedule may be unwilling or
unable to perform any of its obligations thereunder.
4.20 Related Party Transactions.
(a) No Related Party has, and no Related Party has at any time since January
1, 1999, had, any direct or indirect interest of any nature in any asset used
in or otherwise relating to the business of the Company;
(b) No Related Party is, or has been, indebted to the Company;
(c) No Related Party has entered into, or has had any direct or indirect
financial interest in, any Contract, transaction or business dealing of any
nature involving the Company and no such Contract, transaction or business
dealing of any nature is necessary to operate the business of the Company as it
is currently conducted;
(d) No Related Party is competing, or has at any time competed, directly or
indirectly, with the Company in any market served by the Company;
(e) No Related Party has any claim or right against the Company; and
(f) No event has occurred, and no condition or circumstance exists, that
likely would (with or without notice or lapse of time) directly or indirectly
give rise to or serve as a basis for any claim or right in favor of any Related
Party against the Company.
4.21 Proceedings; Orders.
(a) There is no pending Proceeding, and to the Knowledge of the Company, no
Person has threatened to commence any Proceeding (i) that involves the Company
or that otherwise relates to or likely would affect the Company's business or
any of the assets owned or used by the Company (whether or not the Company is
named as a party thereto); or (ii) that challenges, or that may have the effect
of preventing, delaying, making
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illegal or otherwise interfering with, any of the Transactions. To the
Knowledge of the Company, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that likely would directly or indirectly give
rise to or serve as a basis for the commencement of any such Proceeding.
(b) To the Company's Knowledge, no Proceeding has ever been commenced by or
against the Company, and no Proceeding otherwise involving or relating to the
Company has been pending or threatened in writing at any time.
(c) The Company has delivered to Acquiror accurate and complete copies of
all pleadings, correspondence and other written materials to which the Company
has access that relate to the Proceedings identified in Section 4.21(b) of the
Target Disclosure Schedule.
(d) There is no Order to which the Company, or any of the assets owned or
used by the Company, is subject.
(e) To the Knowledge of the Company, no officer or employee of the Company
is subject to any Order that prohibits such officer or employee from engaging
in or continuing any conduct, activity or practice relating to the Company's
business.
(f) There is no Order that, or to the Knowledge of the Company, proposed
Order (other than any proposed Order that would be applicable generally to the
online payment industry) that, if issued or otherwise put into effect, (i)
likely would have a Material Adverse Effect on the ability of the Company to
comply with or perform any covenant or obligation under this Agreement or any
of the other Transactional Agreements or (ii) may have the effect of
preventing, delaying, making legal or otherwise interfering with any of the
Transactions.
4.22 Non-Contravention; Consents. Neither the execution and delivery of this
Agreement or the other Transactional Agreements, nor the consummation or
performance of any of the Transactions, will directly or indirectly (with or
without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the Company's certificate of incorporation or bylaws, or (ii) any
resolution adopted by the Stockholders, the Company's board of directors or any
committee of the Company's board of directors, if any;
(b) to the Knowledge of the Company, contravene, conflict with or result in
a violation of, or give any Governmental Body or other Person the right to
challenge any of the Transactions or to exercise any remedy or obtain any
relief under, any Legal Requirement or any Order to which the Company, or any
of the assets owned or used by the Company, is subject;
(c) cause the Company to become subject to, or to become liable for the
payment of, any Tax;
(d) cause any of the assets owned or used by the Company to be reassessed or
revalued by any taxing authority or other Governmental Body;
(e) contravene, conflict with or result in a violation of any of the terms
or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental Authorization
that is held by the Company or any of its employees or that otherwise relates
to the Company's business or to any of the assets owned or used by the Company;
(f) contravene, conflict with or result in a violation or breach of, or
result in a default under, any provision of any of the Company Contracts;
(g) give any Person the right to (i) declare a default or exercise any
remedy under any Company Contract, (ii) accelerate the maturity or performance
of any Company Contract, or (iii) cancel, terminate or modify any Company
Contract;
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(h) give any Person the right to any payment by the Company or give rise to
any acceleration or change in the award, grant, vesting or determination of
options, warrants, rights, severance payments or other contingent obligations
of any nature whatsoever of the Company in favor of any Person, in any such
case as a result of the change in control of the Company or otherwise resulting
from the Transactions; or
(i) result in the imposition or creation of any Encumbrance upon or with
respect to any asset owned or used by the Company.
Except as set forth in Section 4.22 of the Target Disclosure Schedule, the
Company will not be required to make any filing with or give any notice to, or
obtain any Consent from, any Person in connection with the execution and
delivery of this Agreement and the other Transactional Agreements or the
consummation or performance of any of the Transactions. As of the date hereof,
all such filings, notices and Consents have been duly made, given or obtained
and are in full force and effect, other than those which by their nature are
required to be made, given or obtained after the execution of this Agreement,
all of which shall be made, given or obtained within the time required
therefor.
4.23 Brokers. Except for a fee payable to Chase H&Q, the Company has not
agreed or become obligated to pay, or taken any action that likely would result
in any Person claiming to be entitled to receive, any brokerage commission,
finder's fee or similar commission or fee in connection with any of the
Transactions.
4.24 Year 2000 Compliance. All of the Company's products (including products
currently under development) record, store, process and calculate and present
calendar dates falling on and after January 1, 2000, calculate any information
dependent on or relating to such dates in the same manner and with the same
functionality, data integrity and performance as the products record, store,
process, calculate and present calendar dates on or before December 31, 1999,
or calculate any information dependent on or relating to such dates
(collectively "Year 2000 Compliant"). All of the Company's material products
lose no functionality with respect to the introduction of records containing
dates falling on or after January 1, 2000. All of the Company's internal
computer systems, including without limitation, its accounting systems, are
Year 2000 Compliant.
4.25 Tax Treatment. Neither the Company nor any of its Affiliates has taken
any action and to the Company's Knowledge no fact, agreement, plan or other
circumstance exists that could pose a material risk to the status of the Merger
as a reorganization under the provisions of Section 368(a) of the Code.
4.26 Full Disclosure.
(a) Neither this Agreement (including all Schedules and Exhibits hereto) nor
any of the Transactional Agreements, when taken together, contains any untrue
statement of material fact or omits to state any fact necessary to make any of
the representations, warranties or statements contained therein on behalf of
the Company not misleading. To the extent any representation or warranty
permits omission of items otherwise required to be discussed because they are
not material or do not or would not have a Material Adverse Effect, such
omissions in the aggregate will not and do not have a Material Adverse Effect.
(b) As of the date of this Agreement, the Company has provided Acquiror and
Acquiror's Representatives with full and complete access to all of the
Company's records and other documents and data requested by them.
(c) There is no fact within the Knowledge of Company (other than publicly
known facts relating exclusively to political or economic matters of general
applicability) that (i) may have a Material Adverse Effect on the ability of
the Company to comply with or perform any covenant or obligation under this
Agreement or any of the other Transactional Agreements, or (ii) may have the
effect of preventing, delaying, making illegal or otherwise interfering with
any of the Transactions.
(d) All of the information set forth in the Target Disclosure Schedule is
accurate and complete in all material respects. None of the other information
regarding the Company and its business, condition, assets,
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liabilities, operation, financial performance, net income and prospects that
has been furnished to Acquiror or any of its Representatives by or on behalf of
Company or any of the Company's Representatives, when taken together, contains
any untrue statement of material fact or omits to state any fact necessary to
make such information not misleading.
4.27 Powers of Attorney. The Company has not given a power of attorney to
any Person.
4.28 Voting Arrangements. There are no outstanding stockholder agreements,
voting trusts, proxies or other arrangements or understandings relating to the
voting of any shares of the capital stock of the Company (other than the Voting
Agreement (as defined below)).
4.29 Financial Projections. The Company's business plan dated June 16, 2000
as heretofore provided to Acquiror has been prepared by the Company based on
the Company's good faith estimates (based on reasonable investigation) of the
projected financial performance of the Company without taking into effect the
Transactions and based on certain assumptions set forth therein, which
assumptions the Company believes are reasonable. The Company has concluded
after reasonable investigation that the assumptions and conclusions of the
Company's business plan constitute reasonable estimates of the Company's actual
performance, but such estimates are no guarantee of actual performance.
4.30 Opinion of Financial Advisor. The Company has been advised by its
financial advisor, Chase H&Q, that, in its opinion, as of the date of this
Agreement, the Exchange Ratio is fair from a financial point of view to the
Company's stockholders and has delivered a written copy of such opinion dated
the date hereof to Acquiror.
4.31 Change in Control Payments. Except as set forth in Section 4.31 of the
Company Target Disclosure Schedule, the Company does not have any plans,
programs or agreements to which it is a party, or to which it is subject,
pursuant to which payments (whether in cash or property or the vesting of
property) may be required upon, or may become payable directly or indirectly as
a result of, a change of control of the Company.
4.32 Board Approval. The board of directors of the Company has, as of the
date of this Agreement, unanimously (i) approved, subject to Stockholder
approval, this Agreement and the transactions contemplated hereby, (ii)
determined that the Merger is in the best interests of the Stockholders and is
on terms that are fair to such Stockholders and (iii) recommended that the
Stockholders approve this Agreement and the Merger.
4.33 Vote Required. The affirmative vote of the holders of a majority of the
outstanding Company Stock entitled to vote with respect to the Merger and the
affirmative vote of the holders of two-thirds of the Company Preferred Stock
are the only votes of the holders of any class or series of Company's capital
stock necessary to approve this Agreement and the transactions contemplated
hereby.
4.34 Lock-Up Agreements. Concurrently herewith each of the persons listed in
Section 4.34 of the Target Disclosure Schedule has entered into a Lock-Up
Agreement (as defined below) and the Company shall in no way challenge the
validity, or enforceability of any of the Lock-Up Agreements.
4.35 Expenses. The fees, costs and expenses incurred by the Company in
connection with the Transactional Agreements and the Transactions shall not
exceed $300,000 if the Transactions are completed in the manner contemplated by
this Agreement (including the successful completion of the Permit Application
process set forth in Section 6.6(a) below), and shall in no event exceed
$500,000. For the purposes of this Section, the Company's fees, costs and
expenses shall not include (i) any fees, costs or expenses incurred by the
Company pursuant to the letter agreement dated April 6, 2000 between the
Company and Chase H&Q, (ii) any compensation payable by the Company to its
employees pursuant to existing arrangements (including any severance payments
payable under existing employment agreements or the Executive Benefits
Summaries referred to in Section 6.17) or (iii) any ordinary and necessary
overhead expenses incurred by the Company.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
The Acquiror and Merger Sub hereby represent and warrant to Company as of
the date hereof and as of the Effective Time as follows:
5.1 Due Organization; Good Standing; Authority; Binding Nature of
Agreements.
(a) Acquiror is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has all necessary
corporate power and authority to enter into and perform its obligations under
the Transactional Agreements to which it is a party. Merger Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, and has all necessary corporate power and
authority to enter into and perform its obligations under the Transactional
Agreements to which it is a party.
(b) Merger Sub has been recently formed for the purpose of effecting the
Merger and has not conducted any business except in connection with preparation
for the Merger. Acquiror owns all of the issued and outstanding capital stock
of Merger Sub.
(c) The execution, delivery and performance of each of the Transactional
Agreements to which it is a party have been duly authorized by all necessary
action on the part of each of Acquiror and Merger Sub, their respective boards
of directors, the sole stockholder of Merger Sub, and as of the Effective Time,
the Acquiror's stockholders.
(d) Each of the Transactional Agreements to which it is a party constitutes
the legal, valid and binding obligation of Acquiror and Merger Sub, enforceable
against Acquiror and Merger Sub in accordance with its terms and conditions.
5.2 Capitalization; Ownership of Stock. As of the date of this Agreement:
(a) The authorized capital stock of the Acquiror consists of Fifty Million
(50,000,000) shares of Common Stock, $.001 par value per share, and Four
Million Nine Hundred Eighty-Eight Thousand Eight Hundred Fourty-Two (4,988,842)
shares of Preferred Stock, $.001 par value per share. The outstanding capital
of the Acquiror as of May 31, 2000 consisted of (i) 25,969,587 shares of Common
Stock and (ii) options to purchase 4,862,346 shares of Common Stock. No
warrants to purchase shares of Common Stock were outstanding as of May 31,
2000.
5.3 Brokers. Other than a fee payable to J.P. Morgan & Co., the Acquiror has
not agreed or become obligated to pay, or taken any action that likely would
result in any Person claiming to be entitled to receive, any brokerage
commission, finder's fee or similar commission or fee in connection with any of
the Transactions.
5.4 Non-Contravention; Consents. Neither the execution and delivery of this
Agreement or the Transactional Agreements to which Acquiror or Merger Sub, as
the case may be, is a party, nor the consummation or performance of any of the
Transactions, will directly or indirectly (with or without notice or lapse of
time) contravene, conflict with or result in a violation of (i) any of the
provisions of Acquiror's or Merger Sub's respective certificate of
incorporation or bylaws, or (ii) any resolution adopted by Acquiror's or Merger
Sub's stockholders, Acquiror's or Merger Sub's board of directors or any
committee of Acquiror's or Merger Sub's board of directors. With the exception
of the filing of the Certificate of Merger in the State of Delaware and any
necessary filings pursuant to federal and state securities laws or the rules of
other Governmental Bodies, Acquiror and Merger Sub will not be required to make
any filing with or give any notice to, or to obtain any Consent from, any
Person in connection with the execution and delivery of this Agreement or the
consummation or performance of any of the Transactions.
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5.5 Tax Treatment. Neither Acquiror nor any of its affiliates has taken any
action or knows of any fact, agreement, plan or other circumstance that could
pose a material risk to the status of the Merger as a reorganization under the
provisions of Section 368(a) of the Code.
5.6 SEC Filings; Financial Statements.
(a) Acquiror has filed all forms, reports, exhibits and other documents
required to be filed with the Securities and Exchange Commission (the "SEC")
between June 24, 1999 and the date of this Agreement and has made available to
the Company (i) its Annual Report on Form 10-K for the year ended December 31,
1999 (the "1999 10-K"), (ii) all proxy statements relating to the Company's
meetings of stockholders (whether annual or special) held between June 24,
1999, and the date of this Agreement, (iii) all other reports or registration
statements (other than reports on Forms 3, 4 or 5 filed on behalf of affiliates
of the Company) filed by the Company with the SEC between June 24, 1999, and
the date hereof, and (iv) all amendments and supplements to all such reports
and registration statements filed by the Company with the SEC (collectively,
the "Acquiror SEC Reports"). The Acquiror SEC Reports (i) were prepared in
accordance with applicable requirements of the Securities Act of 1933, as
amended (the "Securities Act") or the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and the SEC's rules and regulations thereunder
(collectively, the "Federal Securities Laws"), as the case may be, and (ii) did
not at the time they were filed (or if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. No
subsidiary is required to file any forms, reports or other documents with the
SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Acquiror SEC Reports was prepared
in accordance with GAAP (except as may be indicated in the notes thereto) and
each fairly presented the consolidated financial position of the Acquiror and
its subsidiaries as of the respective dates thereof and the consolidated
results of its operations and cash flows and stockholder equity for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount.
(c) The Acquiror has heretofore furnished to the Company a complete and
correct copy of any amendments or modifications, which have not yet been filed
with the SEC but which are required to be filed, to agreements, documents or
other instruments which previously had been filed by the Acquiror with the SEC
pursuant to the Securities Act or the Exchange Act.
5.7 Opinion of Financial Advisor. Acquiror has been advised by its financial
advisor, J.P. Morgan & Co., that, in its opinion, as of the date of this
Agreement, the Exchange Ratio is fair from a financial point of view to
Acquiror's stockholders and has delivered a written copy of such opinion dated
the date hereof to the Company.
5.8 Absence of Changes. Since the date of the Agreement, there has not been
any material adverse change in the Acquiror's or Merger Sub's respective
business, condition, assets, liabilities, operations, results of operations or
prospects, and no event has occurred that likely would have a material adverse
effect on the Acquiror's or Merger Sub's respective business, condition,
assets, liabilities, operations, financial performance, results of operations
or prospects, other than any change, circumstances or effect relating to (i)
the economy or securities markets in general, (ii) the market price of shares
of Acquiror Stock or (iii) the industries in which the Acquiror operates in
general and not specifically relating to the Acquiror ("Acquiror Material
Adverse Effect").
5.9 Proceedings; Orders.
(a) Except as disclosed in Acquiror's public filings with the SEC, there is
no pending Proceeding, and to the Knowledge of the Acquiror or Merger Sub, no
Person has threatened to commence any Proceeding, that
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challenges, or that may have the effect of preventing, delaying, making illegal
or otherwise interfering with, any of the Transactions. To the Knowledge of the
Acquiror or Merger Sub, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that likely would directly or indirectly give
rise to or serve as a basis for the commencement of any such Proceeding.
(b) There is no Order that, or to the Knowledge of the Acquiror or Merger
Sub, proposed Order (other than any proposed Order that would be applicable
generally to the online payment industry) that, if issued or otherwise put into
effect, (i) likely would have an Acquiror Material Adverse Effect on the
ability of the Acquiror or Merger Sub to comply with or perform any covenant or
obligation under this Agreement or any of the other Transactional Agreements or
(ii) may have the effect of preventing, delaying, making legal or otherwise
interfering with any of the Transactions.
5.10 Undisclosed Liabilities. Except as disclosed in the 1999 10-K (or in
any subsequently filed Acquiror SEC Reports), as of the date hereof, neither
the Acquiror nor any of its subsidiaries or Affiliates has any liabilities or
any obligations of any nature whether or not accrued, contingent or otherwise,
except for liabilities or obligations incurred in the Ordinary Course of
Business since December 31, 1999 or which individually or in the aggregate are
not material in nature or amount.
5.11 Full Disclosure.
(a) Neither this Agreement (including all Exhibits hereto) nor any of the
Transactional Agreements, when taken together, contains any untrue statement of
material fact or omits to state any fact necessary to make any of the
representations, warranties or statements contained therein on behalf of the
Acquiror or Merger Sub not misleading. To the extent any representation or
warranty permits omission of items otherwise required to be discussed because
they are not material or do not or would not have an Acquiror Material Adverse
Effect, such omissions in the aggregate will not and do not have an Acquiror
Material Adverse Effect.
(b) There is no fact within the Knowledge of Acquiror or Merger Sub (other
than publicly known facts relating exclusively to political or economic matters
of general applicability) that (i) may have an Acquiror Material Adverse Effect
on the ability of the Acquiror or Merger Sub to comply with or perform any
covenant or obligation under this Agreement or any of the other Transactional
Agreements, or (ii) may have the effect of preventing, delaying, making illegal
or otherwise interfering with any of the Transactions.
5.12 Vote Required. The affirmative vote of a majority of the shares of each
class of stock held by the stockholders and that are entitled to vote with
respect to the Merger are the only votes of the holders of any class or series
of the Acquiror's capital stock necessary to approve this Agreement and the
transactions contemplated hereby.
5.13 Acquiror Stock Listed on Nasdaq. The Acquiror Stock has been approved
for quotation on the Nasdaq National Market.
5.14 Board Approval. The board of directors of Acquiror has, as of the date
of this Agreement, (i) approved, subject to approval by Acquiror's
stockholders, this Agreement and the transactions contemplated hereby, (ii)
determined that the Merger is in the best interests of Acquiror's stockholders
and is on terms that are fair to such stockholders and (iii) recommended that
Acquiror's stockholders approve this Agreement and the Merger.
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ARTICLE 6
ADDITIONAL AGREEMENTS
6.1 Company Stock Options. Acquiror agrees to file, if available for use by
Acquiror, a registration statement on Form S-8 for the shares of Acquiror Stock
issuable with respect to assumed Company Stock Options within ninety (90) days
following the Effective Time and intends to maintain the effectiveness of such
registration statement thereafter for so long as any of such options or other
rights remain outstanding.
6.2 Certain Employee Benefit Matters. Each employee of the Company at the
Effective Time will be provided with employee benefits (other than benefits
under stock options plans) by the Surviving Corporation or Acquiror which in
the aggregate are no less favorable to such employee than those provided from
time to time by Acquiror to similarly situated employees.
6.3 Additional Agreements. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of Acquiror and the Company (or of
the Surviving Corporation on behalf of the Company) shall take all such
necessary action.
6.4 Conduct of Business by the Company Pending the Merger. During the period
from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, the Company covenants and
agrees that, unless Acquiror shall otherwise agree in writing or as required or
permitted under this Agreement, the Company shall conduct its business only in,
and the Company shall not take any action except in the Ordinary Course of
Business; and the Company shall use its best efforts to preserve substantially
intact the business organization of the Company, to keep available the services
of the present officers, employees and consultants of the Company and its
subsidiaries and to preserve the present relationships of the Company with
customers, suppliers and other persons with which the Company has significant
business relations. By way of amplification and not limitation, except as
contemplated by this Agreement the Company shall not, during the period from
the date of this Agreement and continuing until the earlier of the termination
of this Agreement or the Effective Time, directly or indirectly do, or propose
to do, any of the following without the prior written consent of Acquiror:
(a) amend or otherwise change the Company's certificate or articles of
incorporation or bylaws;
(b) issue, sell, pledge, dispose of or encumber, or authorize the issuance,
sale, pledge, disposition or encumbrance of, any shares of Company capital
stock of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of Company capital stock, or any other
ownership interest (including, without limitation, any phantom interest) of the
Company, any subsidiary or any of its Affiliates (except the exercise of
currently outstanding options and warrants in accordance with their terms);
(c) sell, pledge, dispose of or encumber any assets or inventory of the
Company or of any subsidiary (except for (i) sales of assets or inventory in
the Ordinary Course of Business, (ii) dispositions of obsolete or worn out
assets, and (iii) pledges of assets pursuant to existing agreements, or take
any action that would reasonably be expected to result in any damage to,
destruction or loss of any material asset of the Company (whether or not
covered by insurance);
(d) except as is contemplated by this Agreement, or the applicable award
agreement or Employee Plan, accelerate, amend or change the period (or permit
any acceleration, amendment or change) of exercisability of options or
restricted stock granted under the Plans (including the Company Stock Option
Plan) or authorize cash payments in exchange for any options granted under any
of such plans;
(e) (i) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
any of its common stock, (ii) split, combine or reclassify any of its common
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its common stock, (iii)
amend the terms of, repurchase, redeem or otherwise
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acquire, or permit any subsidiary to repurchase, redeem or otherwise acquire,
any of its securities or any securities of a subsidiary, except in accordance
with preexisting commitments as of the date hereof, or propose to do any of the
foregoing;
(f) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any company, corporation, partnership or other business organization or
division thereof, or enter into or amend any contract, agreement, commitment or
arrangement to effect any such acquisition, (ii) incur any indebtedness for
borrowed money or issue any debt securities or assume, guarantee or endorse
(other than checks in the Ordinary Course of Business) or otherwise as an
accommodation become responsible for, the obligations of any person, or make
any loans or advances; (iii) to provide funds to or make any investment (in the
form of a loan, capital contribution or otherwise) in any Entity; (iv) except
in the Ordinary Course of Business or otherwise provided or permitted by this
Agreement, to enter into or amend any material agreement or contract which
provides for the sale, license, or purchase by the Company or any of its
subsidiaries of assets; (v) authorize any capital expenditures or purchase of
fixed assets which are individually in excess of $5,000 or, in the aggregate,
in excess of $100,000; or (vi) enter into or amend any contract, agreement,
commitment or arrangement to effect any of the matters prohibited by this
Section 6.4(f);
(g) increase the compensation payable or to become payable to its officers
or employees, except for increases in salary or wages of employees of the
Company who are not executive officers of the Company in the Ordinary Course of
Business, or grant any severance or termination pay to, or enter into any
employment or severance agreement with any director, officer, or, establish,
adopt, enter into or amend any collective bargaining, bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any current or
former directors, officers or employees, except, in each case, as may be
required by law or as expressly contemplated by this Agreement;
(h) take any action to change accounting policies or procedures (including,
without limitation, procedures with respect to revenue recognition, payments of
accounts payable and collection of accounts receivable);
(i) make any material Tax election inconsistent with past practices or
settle or compromise any material federal, state, local or foreign Tax
liability or agree to an extension of a statute of limitations;
(j) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the Ordinary Course of Business;
(k) engage in any action or enter into any transaction or permit any action
to be taken or transaction to be entered into that could reasonably be expected
to delay the consummation of, or otherwise adversely affect, any of the
Transactions;
(l) undertake any revaluation of any of the Company's or any subsidiary's
assets, including, without limitation, writing down the value of inventory or
writing off notes or accounts receivable other than in the Ordinary Course of
Business or in accordance with GAAP;
(m) take, or allow to be taken or fail to take any action which act or
omission would jeopardize qualification of the Merger as a reorganization
within the meaning of Section 368(a) of the Code;
(n) take, or agree in writing or otherwise to take, any of the actions
described in Sections 6.4(a) through (m).
6.5 No Solicitation.
(a) The Company shall not, and shall not permit or authorize its officers,
directors, employees, affiliates, agents or other representatives (including
without limitation any investment banker, financial advisor, attorney or
accountant retained by it) to initiate, solicit or encourage (including by way
of furnishing information or
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assistance) or take any other action to facilitate, any inquiries or the making
of any proposal relating to, or that may reasonably be expected to lead to, any
Alternative Transaction (as defined in Section 9.3(c)), or enter into
discussions (except as to the existence of these provisions) or negotiate with
any person or entity in furtherance of such inquiries or to obtain an
Alternative Transaction, or agree to, or endorse, any Alternative Transaction,
or authorize or permit any of the officers, directors, employees or agents of
the Company or any investment banker, financial advisor, attorney, accountant
or other representative retained by the Company to take any such action and the
Company shall promptly notify Acquiror of all relevant terms of any such
inquiries or proposals received by the Company or by any such officer,
director, employee, agent, investment banker, financial advisor, attorney,
accountant or other representative relating to any of such matters and if such
inquiry or proposal is in writing, the Company shall promptly deliver or cause
to be delivered to Acquiror a copy of such inquiry or proposal and promptly
update Acquiror as to any material changes with respect to such inquiry or
proposal; provided, however, that nothing contained in this subsection (a)
shall prohibit the board of directors of the Company and its officers,
directors, employees, affiliates, agents or other representatives (including
without limitation any investment banker, financial advisor, attorney or
accountant retained by it) from (i) furnishing information to, entering into a
confidentiality agreement with, or entering into discussions or negotiations
with, any persons or entity in connection with an unsolicited bona fide
proposal in writing by such person or entity relating to an Alternative
Transaction if, and only to the extent that (A) the board of directors of the
Company determines in good faith, after receiving a written legal opinion from
its outside legal counsel, that such action is necessary to comply with its
fiduciary duties under Delaware law, (B) such action is in response to an
unsolicited bona fide written proposal made by a third party relating to an
Alternative Transaction on terms which the Company's board of directors in good
faith believes to be more favorable to the Stockholders than the Merger and for
which financing is committed (a "Superior Proposal"), and (C) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity the Company provides written notice to Acquiror to
the effect that it is furnishing information to, or entering into discussions
or negotiations with, such person or entity; (ii) complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Alternative Transaction;
or (iii) in the event of a Superior Proposal, to enter an agreement or
understanding with respect to the Superior Proposal.
(b) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Acquiror and
Merger Sub) conducted heretofore with respect to any of the foregoing. The
Company agrees not to release any third party from any confidentiality or
standstill agreement to which the Company is a party.
(c) The Company shall inform its officers, directors and employees of the
Company and any investment banker or other advisor or representative retained
by the Company who are aware of, and require such person to agree to abide by,
the restrictions described in this Section 6.5.
6.6 Proxy Statements; Permit Application.
(a) In connection with the meeting of the Acquiror's stockholders to approve
this Agreement and the Transactions (the "Acquiror's Stockholders' Meeting"),
as soon as practicable after the date hereof the Acquiror will, with the
assistance of the Company, prepare and file with the SEC a proxy statement (the
"Acquiror Proxy Statement"), conforming to the requirements of the applicable
provisions of the Exchange Act, soliciting the Acquiror stockholders' approval
of this Agreement and the Transactions at the Acquiror Stockholders' Meeting.
The issuance of the Acquiror Stock in the Merger shall be exempt from
registration pursuant to Section 3(a)(10) of the Securities Act. In order to
qualify for such exemption, as soon as practicable after the date hereof, the
Company shall prepare an information statement (the "Information Statement") to
be sent to its shareholders summarizing reasons for, and the terms and
conditions of, the Merger. Acquiror shall prepare an application for a permit
to issue securities (the "Permit Application") pursuant to Section 25121 of the
California Corporate Securities Law of 1968, as amended (the "CCSL"). Acquiror
shall also prepare a notice of hearing (the "Notice"), notifying the
Stockholders of a hearing to be held on the fairness of the securities issuance
pursuant to Section 25142 of the CCSL. Acquiror shall then cause the
Information Statement, Permit Application and Notice to be filed with the
California Department of Corporations (the
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"Department") for review prior to the Department's setting of a hearing date.
Each party shall cooperate, and shall use best efforts to cause its outside
counsel, accountants and other advisors to cooperate, (including providing such
information as shall be reasonably necessary) with the other in preparing the
above documents and in connection with the Permit Application process generally
and shall provide the documents it has prepared to the other party and its
counsel for review and comment (and shall make such changes thereto as are
reasonably requested by the other party and its counsel) prior to filing such
documents with the Commissioner. Acquiror and the Company will respond to any
comments from the California Department of Corporations and use their
reasonable efforts to have the 3(a)(10) permit (the "Permit") granted as soon
as practicable after such filing. As promptly as practicable after the date of
this Agreement, Acquiror shall prepare and make such filings as are required
under applicable state securities laws relating to the transactions
contemplated by this Agreement. The Company shall cooperate with Acquiror, and
provide information to Acquiror, in connection with filings made by Acquiror
under such applicable state securities laws.
(b) Notwithstanding anything to the contrary contained herein, in the event
that it is established to the reasonable satisfaction of Acquiror and the
Company that a Permit will not be obtainable with respect to the Merger, or
that the shares of Acquiror Stock issuable in connection with the Merger may
not otherwise be issued in reliance on an exemption from registration under the
Securities Act, Acquiror shall use reasonable efforts to prepare and file as
promptly as possible with the SEC a registration statement on Form S-4 or any
other applicable form (the "Registration Statement") covering the issuance of
the Acquiror Shares in connection with the Merger. In such event, Acquiror will
use reasonable efforts to cause such Registration Statement to become effective
as promptly as possible following filing. Company shall cooperate with
Acquiror, and shall use best efforts to cause its outside counsel, accountants
and other advisors to cooperate, in preparing and filing the Registration
Statement and will provide such information as Acquiror reasonably requests in
connection therewith.
(c) In connection with the meeting of the Stockholders to approve this
Agreement and the Transactions (the "Company Stockholders' Meeting"), as soon
as practicable after the date hereof the Company will promptly prepare a proxy
statement (the "Company Proxy Statement"), conforming to the requirements of
applicable law and the DGCL, soliciting the Stockholders' approval of this
Agreement and the transactions contemplated herein at the Stockholders'
Meeting. Such Company Proxy Statement shall include the unanimous
recommendation of the Company's board of directors that the Stockholders
approve this Agreement and the Transactions. The Company Proxy Statement and
all other proxy materials shall be subject to the review and reasonable
approval of Acquiror.
6.7 Stockholders' Meeting; Voting Agreements. Each of the Company and
Acquiror shall call and use commercially reasonable efforts to hold the Company
Stockholders' Meeting and the Acquiror Stockholders' Meeting, respectively, as
promptly as practicable after the date on which the Permit is issued or the
Registration Statement becomes effective, as applicable, for the purpose of
voting upon the approval of the Merger. The Company and Acquiror shall each use
commercially reasonable efforts to solicit from their respective stockholders
proxies in favor of the approval of the Merger, and shall use commercially
reasonable efforts to take all other action necessary or advisable to secure
the vote or consent of stockholders required by the DGCL and the certificate of
incorporation and bylaws of the Company and the Acquiror, as applicable, to
obtain such approvals. Concurrently herewith each of the persons listed on
Schedule 6.7 has entered into a Voting Agreement with Acquiror in substantially
the form of Exhibit E hereto (the "Voting Agreement") and the Company shall in
no way challenge the validity, or enforceability of any of the Voting
Agreements or any proxy entered into in connection therewith.
6.8 Consents; Approvals. The Company and Acquiror shall coordinate and
cooperate with one another and shall each use their reasonable best efforts to
obtain (and shall each refrain from taking any willful action that would impede
obtaining) all consents, waivers, approvals, authorizations or orders
(including, without limitation, all rulings, decisions or approvals by any
Governmental Body), and the Company and Acquiror shall make all filings
(including, without limitation, the pre-merger notification filings required
under the HSR Act and all other filings with Governmental Bodies) required in
connection with the authorization, execution and
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delivery of this Agreement by the Company and Acquiror and the consummation by
them of the Transactions, excepting only those merger notification filings with
foreign jurisdictions for which the failure to file would not have a Material
Adverse Effect on the Company or the transactions contemplated hereby. The
Company and Acquiror shall furnish all information required to be included in
any application or other filing to be made pursuant to the rules and
regulations of any Governmental Body in connection with the Transactions.
Except where prohibited by applicable statutes and regulations, and subject to
the Confidentiality Agreement, each party shall coordinate with one another in
preparing and exchanging such information, and shall promptly provide the other
(or its counsel) with copies of all filings, presentations or submissions made
by such party with any Governmental Body in connection with this Agreement or
the Transactions.
6.9 Agreements of Affiliates. In the event a Registration Statement is filed
as set forth in Section 6.6(b), the Company shall deliver to Acquiror, prior to
the date the Registration Statement becomes effective under the Securities Act,
a letter (the "Affiliate Letter") identifying all persons who are, or may be
deemed to be, at the time of the Company Stockholders' Meeting, "affiliates" of
the Company for purposes of Rule 145 under the Securities Act. The Company will
cause each person who is identified as an "affiliate" in the Affiliate Letter
to deliver to Acquiror, prior to the Effective Time, a written agreement (an
"Affiliate Agreement") in a form mutually agreeable to the Company and
Acquiror.
6.10 Lock-Up Agreements. The Company shall use its best efforts to obtain
from each of the persons listed on Schedule 6.10 at the Effective Time a Lock-
Up Agreement with Acquiror substantially in the form of Exhibit F (each, a
"Lock-Up Agreement").
6.11 Acquiror Options. In its sole discretion, Acquiror may grant options to
purchase Acquiror Stock to employees of the Company who, subsequent to the
Effective Time, will be employees of the Surviving Corporation.
6.12 Notification of Certain Matters. The Company shall give prompt notice
to Acquiror, and Acquiror shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty contained in this
Agreement to be materially untrue or inaccurate such that the conditions to
closing set forth in Section 7.2(a) and 7.3(a), as the case may be, shall not
be met and (ii) any failure of the Company, Acquiror or Merger Sub, as the case
may be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder such that the conditions to closing
set forth in Section 7.2(a) and 7.3(a), as the case may be, shall not be met;
provided, however, that the delivery of any notice pursuant to this Section
6.12 shall not limit or otherwise affect the remedies available hereunder to
the party receiving such notice and further provided that failure to give such
notice shall not be treated as a breach of covenant for the purposes of
Section 7.2(a) or 7.3(a) unless the failure to give such notice results in
material prejudice to the other party.
6.13 Public Announcements. Acquiror and the Company shall consult with each
other before issuing any press release with respect to the Merger or this
Agreement and shall not issue any such press release or make any such public
statement without the prior consent of the other party, which shall not be
unreasonably withheld; provided, however, that Acquiror may, without the prior
consent of the Company, issue such press release or make such public statement
as may upon the advice of counsel be required by law or the Nasdaq National
Market if it has used all reasonable efforts to consult with the Company. Each
of Acquiror and Company shall make all necessary filings with Governmental
Bodies and shall promptly provide the other party with copies of filings made
by such party between the date hereof and the Effective Time.
6.14 Conveyance Taxes. Acquiror and the Company shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications,
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees, and any similar taxes which become payable in
connection with the transactions contemplated hereby that are required or
permitted to be filed on or before the Effective Time.
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6.15 Letters of Company Accountants. The Company shall request that letters
from the Company's independent accountants, addressed to Acquiror, in form and
substance reasonably satisfactory to Acquiror and customary in scope and
substance for comfort letters delivered by independent accountants be delivered
to Acquiror on Acquiror's reasonable request. The Company shall provide
reasonable cooperation to such independent accountants to enable them to issue
such letters and shall use best efforts to cause them to do so.
6.16 Indemnification of the Company's Directors and Officers. Acquiror
agrees that all rights to indemnification existing as of the date of this
Agreement in favor of any director, officer, employee or agent of the Company
and its subsidiary (the "Indemnified Parties") as provided in their respective
Certificate of Incorporation, By-laws or comparable organizational documents,
shall survive the Merger and shall continue in full force and effect for a
period of not less than six years from the Effective Time, provided that, in
the event any claim or claims are asserted or made within such six-year period,
all rights to indemnification in respect of any such claim or claims shall
continue until final disposition of any and all such claims.
6.17 Executive Benefits Summaries. Acquiror agrees that upon the Effective
Time the Acquiror shall irrevocably assume the Company's obligations under the
Executive Benefit Summaries listed on Schedule 6.17 and shall deliver to the
parties to such Executive Benefits Summaries a written assumption agreement to
such effect.
6.18 Nasdaq Notification. Acquiror shall notify the Nasdaq National Market
of the proposed issuance of Acquiror Stock to the Stockholders no later than
fifteen (15) days prior to the Closing.
ARTICLE 7
CONDITIONS TO CONSUMMATION OF THE MERGER
7.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) Fairness Hearing; Permit. The Company and Acquiror shall be satisfied
that the fairness hearing shall have been held by the Commissioner and a Permit
shall have been issued by the State of California. If a Registration Statement
is filed as set forth in Section 6.6(b), the Registration Statement shall have
been declared effective by the SEC under the Securities Act. No stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC. No proceedings for that purpose and no similar proceeding in
respect of the Acquiror Proxy Statement shall have been initiated or threatened
by the SEC;
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; and there shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger, which makes the consummation of
the Merger illegal;
(c) Tax Opinions. Acquiror and the Company shall have received opinions of
Morrison & Foerster LLP and Arent Fox Kintner Plotkin & Kahn, PLLC,
respectively, in form and substance reasonably satisfactory to Acquiror and the
Company, respectively, on the basis of certain facts, representations and
assumptions set forth in such opinions, dated the Effective Time, to the effect
that the Merger will be treated for federal income tax purposes as a
reorganization qualifying under the provisions of Section 368(a) of the Code
and that each of Acquiror, Merger Sub and the Company will be a party to the
reorganization within the meaning of Section 368(b) of the Code; provided,
however, that if the counsel to either Acquiror or the Company does not render
such opinion this condition shall nonetheless be deemed to be satisfied with
respect to such party if counsel to the other party renders such opinion to
such party. Each of the Company, Acquiror and Merger Sub agrees to deliver
customary representation certificates as requested by such counsel for the
purpose of rendering such opinions;
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(d) HSR Act. The waiting period (and any extension thereof) applicable to
the consummation of the Merger under the HSR Act shall have expired or been
terminated and any other applicable waiting period under any other premerger
notification statute of a foreign jurisdiction, to the extent material, has
either expired or been terminated; and
(e) Stockholder Approval. This Agreement and the transactions contemplated
hereby shall have been approved and adopted by the requisite vote of the
Stockholders and the stockholders of Acquiror as required by the DGCL.
7.2 Additional Conditions to Acquiror's and Merger Sub's Obligation to
Consummate the Merger. Acquiror's and Merger Sub's obligations to consummate
the Merger and to take the other actions required to be taken by Acquiror and
Merger Sub at the Closing is subject to the satisfaction of each of the
following conditions (any of which may be waived by Acquiror, in whole or in
part):
(a) Acquiror shall have received the following documents:
(i) the opinion letter from Arent Fox Kintner Plotkin & Kahn, PLLC,
counsel to the Company, dated the date hereof, in the form attached as
Exhibit G;
(ii) a certificate, duly executed by the Company, certifying that (A)
each of the representations and warranties made by the Company in this
Agreement and in the other Transactional Agreements is accurate in all
material respects as of the date of Closing, (B) each of the covenants and
obligations that the Company is required to have complied with or performed
pursuant to this Agreement or any of the other Transactional Agreements at
or prior to the Closing has been duly complied with and performed in all
material respects, and (C) each of the conditions set forth in Section 7.2
has been satisfied in all material respects;
(iii) copies of resolutions of the Company, certified by the Secretary
of the Company, authorizing the execution, delivery and performance of the
Transactional Agreements to which the Company is a party and the
Transactions, and copies of resolutions of the meeting of stockholders of
the Company (or written consent in lieu thereof), certified by the
Secretary of the Company, authorizing the Transactions;
(iv) if required as set forth in Section 6.9. Acquiror shall have
received from each person who is identified in the Affiliate Letter as an
"affiliate" of the Company, an Affiliate Agreement, and such Affiliate
Agreement shall be in full force and effect;
(v) Noncompetition Agreements between each of the Company employees
listed on Schedule 6.7 and Acquiror substantially in the form of Exhibit H
hereto (each, a "Noncompetition Agreement");
(vi) the letter from the Company's independent accountants discussed in
Section 6.15; and
(vii) such other documents as Acquiror may reasonably request in good
faith for the purpose of (i) evidencing the accuracy of any representation
or warranty made by the Company, (ii) evidencing the compliance by the
Company, or the performance by the Company of, any covenant or obligation
set forth in this Agreement, (iii) evidencing the satisfaction of any
condition set forth in Section 7.1 or this Section 7.2, or (iv) otherwise
facilitating the consummation or performance of any of the Transactions.
(b) Since the date of this Agreement, there shall not have occurred a
Material Adverse Effect.
(c) The Company's net working capital (current assets minus current
liabilities) on the date of the Closing shall be not less than (i) $10 million
if the Closing occurs on or before August 31, 2000, (ii) $9.25 million if the
Closing occurs between September 1 and September 30, 2000, (iii) $8.5 million
if the Closing occurs between October 1 and October 31, 2000, and (iv) $7.75
million if the Closing occurs between November 1 and November 30, 2000.
Acquiror and Merger Sub shall have received a certificate to such effect signed
by the President and Chief Financial Officer of the Company.
(d) The holders of no more than one percent (1%) of the outstanding shares
of Company Stock shall have demanded and not lost or withdrawn, or shall be
eligible to demand, appraisal rights.
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(e) All material consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made ("Material
Consents"), by the Company for the authorization, execution and delivery of
this Agreement and the consummation by it of the transactions contemplated
hereby shall have been obtained and made by the Company and copies thereof
shall have been delivered to Acquiror.
(f) If, prior to the Closing, Acquiror shall have so reasonably requested,
Company shall have terminated its 401(k) Plan, and evidence thereof
satisfactory to Acquiror shall have been furnished to Acquiror.
(g) Each of the representations and warranties made by the Company in the
Agreement are true and accurate in all material respects as of the Closing and
all covenants and obligations that the Company is required to have complied
with or performed pursuant to this Agreement or any of the Transaction
Documents at or prior to Closing have been duly complied with or performed in
all material respects.
(h) The Company shall have executed and delivered all Transactional
Agreements to which the Company it is a party. The Escrow Agent shall have
executed and delivered the Escrow Agreement.
(i) The Company shall have obtained the requisite stockholder approval under
Section 280G(b)(5) of the Code of any payments or benefits that could be
considered "excess parachute payments" within the meaning of Section 280G of
the Code to John McDonnell, Jr. and shall require John McDonnell, Jr. to
subject his existing benefits and payments to the stockholder approval
requirements of Section 280G(b)(5) of the Code, as contemplated in the Proposed
Treasury Regulations promulgated thereunder.
7.3 Additional Conditions to the Company's Obligation to Consummate the
Merger. The Company's obligation to consummate the Merger and to take the other
actions required to be taken by the Company at the Closing shall be subject to
the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by the Company, in whole or in part):
(a) The Company shall have received the following documents:
(i) the opinion letter from Morrison & Foerster LLP, counsel to Acquiror
and Merger Sub, dated the date hereof, in the form attached as Exhibit I;
(ii) a certificate, duly executed by Acquiror, certifying that (A) each
of the representations and warranties made by Acquiror in this Agreement
and in the other Transactional Agreements is accurate in all material
respects as of the date of the Closing, (B) each of the covenants and
obligations that Acquiror is required to have complied with or performed
pursuant to this Agreement or any of the other Transactional Agreements at
or prior to the Closing has been duly complied with and performed in all
material respects, and (C) each of the conditions set forth in Section 7.3
has been satisfied in all material respects; and
(iii) such other documents as the Company may request in good faith for
the purpose of (A) evidencing the accuracy of any representation or
warranty made by Acquiror and Merger Sub, (B) evidencing the compliance by
Acquiror and Merger Sub with, or the performance by Acquiror and Merger Sub
of, any covenant or obligation set forth in this Agreement or any of the
other Transactional Agreements, (C) evidencing the satisfaction of any
condition set forth in Section 7.1 or this Section 7.3, or (D) otherwise
facilitating the consummation or performance of any of the Transactions.
(b) Each of Acquiror and Merger Sub shall have executed and delivered all
Transactional Agreements to which it is a party.
(c) All material consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by the Acquiror
and Merger Sub for the authorization, execution and delivery of this Agreement
and the consummation by each of them respectively of the transactions
contemplated hereby shall have been obtained and made by the Acquiror and
Merger Sub.
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(d) John J. McDonnell, Jr. shall have been appointed to the Board of
Directors of Acquiror.
(e) Each of the representations and warranties made by the Acquiror in the
Agreement are true and accurate in all material respects as of the Closing and
all covenants and obligations that the Acquiror is required to have complied
with or performed pursuant to this Agreement or any of the Transaction
Documents at or prior to Closing have been duly complied with or performed in
all material respects.
(f) Since the date of the Agreement, there shall not have occurred any event
that would constitute an Acquiror Material Adverse Effect.
(g) The Nasdaq National Market shall have accepted the notification filed in
accordance with Section 6.18, if and to the extent such acceptance is required
for the effectiveness of the notification.
ARTICLE 8
ESCROW AND INDEMNIFICATION
8.1 Indemnification.
(a) By the Stockholders. From and after the Effective Time and subject to
the limitations contained in Sections 8.2 and 8.3, the Stockholders will,
severally and pro rata, up to their respective Pro Rata Portion of the Escrow
Fund, indemnify and hold Acquiror harmless against any loss, expense, liability
or other damage, including reasonable attorneys' fees, to the extent of the
amount of such loss, expense, liability or other damage (collectively,
"Damages") that Acquiror has incurred by reason of the breach or alleged breach
by the Company of any representation, warranty, covenant or agreement of the
Company contained in this Agreement or in any document or certificate delivered
by the Company pursuant hereto. Such indemnification shall be Acquiror's sole
and exclusive remedy for any such breach by the Company.
(b) By Acquiror. From and after the Effective Time and subject to the
limitations contained in Section 8.3, Acquiror will indemnify and hold the
Stockholders harmless against any Damage that the Stockholders have incurred by
reason of the breach or alleged breach by Acquiror or Merger Sub of any
representation, warranty, covenant or agreement of Acquiror or Merger Sub
contained in this Agreement, up to the monetary value of the Escrow Fund
(determined by multiplying the number of Escrow Shares by the average closing
price of Acquiror's stock over the ten trading day period ending on the day
immediately prior to the Closing). Such indemnification shall be the
Stockholders' sole and exclusive remedy for any such breach by Acquiror or
Merger Sub.
8.2 Escrow Fund. As security for the indemnities in Section 8.1, the Escrow
Shares shall be deposited with the Escrow Agent within ten (10) days of the
Closing, such deposit to be governed by the terms set forth in this Article 8
and in the Escrow Agreement.
8.3 Limitations on Indemnification.
(a) Acquiror's Damages. Notwithstanding the foregoing, no indemnification
shall be payable pursuant to Section 8.1(a) unless and until an Officer's
Certificate or Certificates for an aggregate amount of Damages in excess of
$500,000 has been delivered to the Stockholders' Agent and to the Escrow Agent;
provided, however, that after an Officer's Certificate or Certificates for an
aggregate of $500,000 in Damages has been delivered, Acquiror shall be entitled
to indemnification for the full amount of Damages identified in such Officer's
Certificate or Certificates.
(b) Stockholders' Damages. Notwithstanding the foregoing, Acquiror shall
have no liability under Section 8.1(b) unless and until a Stockholders' Agent
Certificate or Certificates for an aggregate amount of Damages in excess of
$500,000 has been delivered to the Acquiror and to the Escrow Agent; provided,
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however, that after a Stockholders' Agent Certificate or Certificates for an
aggregate of $500,000 in Damages has been delivered, the Stockholders shall be
entitled to indemnification for the full amount of Damages identified in such
Stockholders' Agent Certificate or Certificates.
(c) No indemnification shall be payable pursuant to Section 8.1(a) or (b)
after the first anniversary of the Effective Date (the "Expiration Date"),
except with respect to claims made prior to the Expiration Date, but not
resolved by the Expiration Date.
(d) The limitations of Section 8.1 and this Section 8.3 shall not apply in
the case of a fraudulent or intentional misrepresentation by any party, but no
Person shall be liable for any such misrepresentation or breach by any other
Person (except to the extent of its share of the consideration received
pursuant to Section 3.1 above if such misrepresentation or breach is by the
Company).
8.4 Escrow Periods. The Escrow Fund shall commence on the date hereof and
terminate on the first anniversary of the Closing (the "Escrow Period"),
provided, however, that the number of Escrow Shares, which, in the reasonable
judgment of Acquiror, subject to the objection of the Stockholders' Agent and
the subsequent resolution of the matter in the manner provided in Section 8.8,
are necessary to satisfy any unsatisfied claims specified in any Officer's
Certificate theretofore delivered to the Escrow Agent and the Stockholders'
Agent prior to termination of the Escrow Period with respect to Damages
incurred or litigation pending prior to expiration of the Escrow Period, shall
remain in the Escrow Fund until such claims have been finally resolved, or, if
earlier, until released in accordance with Section 8.1 above and 8.5 below.
8.5 Claims Upon Escrow Fund. Upon receipt by the Escrow Agent on or before
the last day of the Escrow Period of a certificate signed by any appropriately
authorized officer of Acquiror (an "Officer's Certificate"):
(i) Stating the aggregate amount of Acquiror's Damages or an estimate
thereof, in each case to the extent known or determinable at such time, and
(ii) Specifying in reasonable detail the individual items of such
Damages included in the amount so stated, the date each such item was paid
or properly accrued or arose, and the nature of the misrepresentation,
breach or claim to which such item is related, then the Escrow Agent shall,
subject to the provisions of Sections 8.3, 8.7 and 8.8 hereof, deliver to
Acquiror out of the Escrow Fund, as promptly as practicable, Escrow Shares
having a value equal to such Damages all in accordance with the Escrow
Agreement and Section 8.6 below. Amounts paid or distributed from the
Escrow Fund shall be paid or distributed pro rata among the Holders (as
defined in the Escrow Agreement) based upon their respective percentage
interests therein at the time.
8.6 Valuation. For the purpose of compensating Acquiror or the Stockholders
for their respective Damages pursuant to this Agreement, the value per share of
the Escrow Shares and the total consideration received pursuant to Section 3.1
above shall be determined by reference to the Exchange Price. In determining
the amount of any indemnity, there shall be taken into account any tax benefit,
insurance proceeds or other similar recovery or offset realized, directly or
indirectly.
8.7 Objections to Claims to Escrow Fund. At the time of delivery of any
Officer's Certificate to the Escrow Agent, a duplicate copy of such Officer's
Certificate shall be delivered to the Stockholders' Agent and for a period of
thirty (30) days after such delivery, the Escrow Agent shall make no delivery
of Escrow Shares pursuant to Section 8.5 unless the Escrow Agent shall have
received written authorization from the Stockholders' Agent to make such
delivery. After the expiration of such thirty (30) day period, the Escrow Agent
shall make delivery of the Escrow Shares in the Escrow Fund in accordance with
Section 8.5, provided that no such delivery may be made if the Stockholders'
Agent shall object in a written statement to the claim made in the Officer's
Certificate, and such statement shall have been delivered to the Escrow Agent
and to Acquiror prior to the expiration of such thirty (30) day period.
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8.8 Resolution of Conflicts.
(a) In case the Stockholders' Agent or Acquiror, as applicable shall object
in writing to any claim or claims made in any Acquiror's Officer's Certificate
or Stockholders' Agent Certificate, the non-objecting party shall have thirty
(30) days to respond in a written statement to the objection. If after such
thirty (30) day period there remains a dispute as to any claims, the
Stockholders' Agent and Acquiror shall attempt in good faith for thirty (30)
days to agree upon the rights of the respective parties with respect to each of
such claims. If the Stockholders' Agent and Acquiror should so agree, a
memorandum setting forth such agreement shall be prepared and signed by both
parties and, if Acquiror has requested delivery of Escrow Shares, shall be
furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on
any such memorandum and shall distribute the Escrow Shares from the Escrow Fund
in accordance with the terms of the memorandum.
(b) If no such agreement can be reached after good faith negotiation, either
Acquiror or the Stockholders' Agent may, by written notice to the other, demand
arbitration of the matter, unless the amount of the damage or loss is at issue
in pending litigation with a third party, in which event arbitration shall not
be commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter shall be settled by
arbitration conducted by three (3) arbitrators. Within fifteen (15) days after
such written notice is sent, Acquiror (on the one hand) and the Stockholders'
Agent (on the other hand) shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator. The decision of the
arbitrators as to the validity and amount of any claim in such Officer's
Certificate or Stockholders' Agent Certificate shall be binding and conclusive
upon the parties to this Agreement, and notwithstanding anything in Sections
8.1 through 8.5, the Escrow Agent shall be entitled to act in accordance with
such decision and make or withhold payments out of the Escrow Fund in
accordance with such decision.
(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be conducted under
the commercial rules then in effect of the American Arbitration Association.
Any arbitration shall be held in Santa Clara, California if the arbitration is
commenced by the Company, or in Reston, Virginia if the arbitration is
commenced by the Acquiror. The non-prevailing party to an arbitration shall pay
its own expenses, the fees of each arbitrator, the administrative fee of the
American Arbitration Association, and the expenses, including, without
limitation, the reasonable attorneys' fees and costs, incurred by the
prevailing party to the arbitration.
8.9 Stockholders' Agent.
(a) John J. McDonnell, Jr. is constituted and appointed as agent (the
"Stockholders' Agent") for and on behalf of the Stockholders to give and
receive notices and communications, to authorize delivery to Acquiror of the
Escrow Shares or other property from the Escrow Fund in satisfaction of claims
by Acquiror, to object to such deliveries, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders
of courts and awards of arbitrators with respect to such claims, and to take
all actions necessary or appropriate in the judgment of the Stockholders' Agent
for the accomplishment of the foregoing. Such agency may be changed by the
holders of a majority in interest of the Escrow Shares from time to time upon
not less than ten (10) days' prior written notice to Acquiror. No bond shall be
required of the Stockholders' Agent, and the Stockholders' Agent shall receive
no compensation for services. Notices or communications to or from the
Stockholders' Agent shall constitute notice to or from each of the
Stockholders.
(b) The Stockholders' Agent shall not be liable for any act done or omitted
hereunder as Stockholders' Agent while acting in good faith, and any act done
or omitted pursuant to the advice of counsel shall be conclusive evidence of
such good faith. The Stockholders shall jointly and severally indemnify the
Stockholders' Agent and hold him harmless against any loss, liability or
expense incurred without gross negligence or bad faith on the part of the
Stockholders' Agent and arising out of or in connection with the acceptance or
administration of his duties under this Agreement or the Escrow Agreement,
provided, that the Stockholders' Agent shall be reimbursed for counsel fees and
other out-of-pocket expenses incurred by such Stockholder Agent in connection
with the administration of his duties under this Agreement or the Escrow
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Agreement or the Escrow Agreement from the proceeds of the sale of Escrow
Shares by the Stockholder Agent. For such purpose, the Stockholder Agent shall
be authorized to direct the Escrow Agent to deliver or cause to be delivered
to the Stockholder Agent such number of Escrow Shares the sale of which by the
Stockholder Agent in ordinary open-market brokers transactions is sufficient
to cover such out-of-pocket costs.
(c) The Stockholders' Agent shall have reasonable access to information
about Company and Acquiror and the reasonable assistance of Company's and
Acquiror's officers and employees for purposes of performing its duties and
exercising its rights under this Article 8, provided that the Stockholders'
Agent shall treat confidentially and not disclose any nonpublic information
from or about Company or Acquiror to anyone (except on a need to know basis to
individuals who agree to treat such information confidentially).
8.10 Actions of the Stockholders' Agent. A decision, act, consent or
instruction of the Stockholders' Agent shall constitute a decision of all of
the Stockholders and shall be final, binding and conclusive upon each such
Stockholder, and the Escrow Agent and Acquiror may rely upon any decision,
act, consent or instruction of the Stockholders' Agent as being the decision,
act, consent or instruction of each and every such Stockholder. The Escrow
Agent and Acquiror are hereby relieved from any liability to any person for
any acts done by them in accordance with such decision, act, consent or
instruction of the Stockholders' Agent.
8.11 Claims. In the event Acquiror becomes aware of a third-party claim
which Acquiror believes may result in a demand against the Stockholders,
Acquiror shall notify the Stockholders' Agent of such claim, and the
Stockholders' Agent and the Stockholders shall be entitled, at their expense,
to participate in any defense of such claim. Acquiror shall have the right in
its sole discretion to settle any such claim; provided, however, that Acquiror
may not effect the settlement of any such claim without the consent of the
Stockholders' Agent, which consent shall not be unreasonably withheld. In the
event that the Stockholders' Agent has consented to any such settlement, the
Stockholders' Agent shall have no power or authority to object to the amount
of any claim by Acquiror against the Stockholders for indemnity with respect
to such settlement, unless such claim is in an amount in excess of any amount
consented to by the Stockholders' Agent.
ARTICLE 9
TERMINATION
9.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, notwithstanding approval thereof by the Stockholders or the
stockholders of Acquiror:
(a) by mutual written consent duly authorized by the boards of directors of
Acquiror and the Company;
(b) by either Acquiror or the Company if the Merger shall not have been
consummated by November 30, 2000 (the "Final Date") (provided that the right
to terminate this Agreement under this Section 9.1(b) shall not be available
to any party whose failure to fulfill any obligation under this Agreement has
been a principal cause of or resulted in the failure of the Merger to occur on
or before such date and such action or failure to act constitutes a material
breach of this Agreement);
(c) by either Acquiror or the Company if a court of competent jurisdiction
or governmental, regulatory or administrative agency or commission shall have
issued a non-appealable final order, decree or ruling or taken any other
action, in each case having the effect of permanently restraining, enjoining
or otherwise prohibiting the Merger, except if the party relying on such
order, decree or ruling or other action has not complied with its obligations
under Section 6.8;
(d) by Acquiror if, at the Acquiror Stockholders' Meeting (including any
adjournment or postponement thereof), the requisite vote of Acquiror's
stockholders, as required by the DGCL (the "Requisite Vote") shall not have
been obtained;
(e) by Acquiror, if (i) the board of directors of the Company shall
withdraw, modify or change its unanimous recommendation of this Agreement or
the Merger in a manner adverse to Acquiror or shall have
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resolved to do any of the foregoing; (ii) the board of directors of the Company
shall have recommended to the stockholders of the Company an Alternative
Transaction (as defined in Section 9.3(d)); or (iii) a tender offer or exchange
offer for 15% or more of the outstanding shares of Company Common Stock is
commenced (other than by Acquiror or an affiliate of Acquiror), and the board
of directors of the Company recommends that the stockholders of the Company
tender their shares in such tender or exchange offer;
(f) by the Company, prior to the receipt of the Requisite Vote, if the
Company receives, without violating its obligations under Section 6.5, a
Superior Proposal; provided that in order for the termination of this Agreement
to be deemed effective pursuant to this paragraph (f), the Company shall have
complied with all its obligations under Section 6.5 and with applicable
requirements of Section 9.3, including payment of the Fee Payable By Company
(as defined in Section 9.3(b)) pursuant to Section 9.3(b); or
(g) by Acquiror or the Company, upon a breach of any representation,
warranty, covenant or agreement on the part of the Company or Acquiror,
respectively, set forth in this Agreement such that the conditions set forth in
Section 7.2(a) or Section 7.3(a) would not be satisfied, provided, that if such
breach is curable through the exercise of commercially reasonable efforts, then
the other party may not terminate pursuant to this Section 9.1(g) in respect of
such breach if such breach is curable and shall have been cured within 30 days
following notice by the other party of such breach, provided the breaching
party continues to use commercially reasonable efforts to cure such breach
during the 30 day period (it being understood that (i) the other party may not
terminate this Agreement pursuant to this Section 9.1(g) after notice of such
breach if such breach shall have been cured within 30 days or the party seeking
to terminate shall then be in material breach of this Agreement and (ii) no
cure period shall be required for a breach which by its nature cannot be
cured).
9.2 Effect of Termination. In the event of the termination of this Agreement
pursuant to Section 9.1, this Agreement shall forthwith become void and there
shall be no liability on the part of any party hereto or any of its affiliates,
directors, officers or stockholders except (i) as set forth in Section 9.3, and
(ii) nothing herein shall relieve any party from liability for any willful
breach hereof or willful or intentional misrepresentations.
9.3 Fees and Expenses.
(a) Except as set forth in this Section 9.3, (i) all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, if the Merger is not
consummated, or (ii) if the Merger is consummated, then all costs and expenses
incurred in connection with the Transactional Agreements and the transactions
contemplated hereby and thereby shall be paid by the party incurring such
expenses.
(b) The Company shall pay Acquiror a fee equal to two percent (2%) of the
monetary value of the Acquiror Stock to be issued pursuant to Section 3.1
determined by multiplying the number of shares of Acquiror Stock to be issued
pursuant hereto by the average closing price of Acquiror's stock over the ten
trading day period immediately prior to the termination date in cash (the "Fee
Payable By Company"), upon the earliest to occur of the following events:
(i) the termination of this Agreement by Acquiror pursuant to Sections
9.1(b) or 9.1(g) if an Alternative Transaction with any Third Party is
consummated, announced or a letter of intent is entered into by the Company
and such Third Party with respect to an Alternate Transaction within twelve
(12) months of the date of such termination; or
(ii) the termination of this Agreement by Acquiror pursuant to Section
9.1(e); or
(iii) the termination of this Agreement by Company pursuant to Section
9.1(f).
(c) As used herein, "Alternative Transaction" means any of the following:
(i) a transaction pursuant to which any person (or group of persons) other than
Acquiror or its affiliates (a "Third Party") seeks to acquire, directly or
indirectly, more than five percent (5%) of the outstanding shares of capital
stock of the Company,
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whether from the Company or pursuant to a tender offer or exchange offer or
otherwise, (ii) a merger or other business combination involving the Company
pursuant to which any Third Party acquires more than five percent (5%) of the
outstanding equity securities of the Company or the entity surviving such
merger or business combination, (iii) any other transaction pursuant to which
any Third Party acquires control of all or substantially all of the assets of
the Company (including for this purpose the outstanding equity securities of
the Company's subsidiaries), (iv) the adoption by the Company of a plan of
liquidation, the declaration or payment by the Company of an extraordinary
dividend on any of its shares of capital stock or the effectuation by the
Company of a recapitalization or other type of transaction that would involve
either a change in the Company's outstanding capital stock or a distribution of
assets of any kind to the holders of such capital stock, (v) the issuance by
the Company of shares of capital stock to the public or (vi) the repurchase by
the Company or any of its subsidiaries of shares of the Company's capital stock
representing at least five percent (5%) or more of the aggregate voting power
of all voting securities of the Company.
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Survival of Representations and Covenants. All representations,
warranties, covenants and agreements of the Company contained in this Agreement
shall survive the Closing and any investigation at any time made by or on
behalf of Acquiror until the Expiration Date. All representations, warranties,
covenants and agreements of Acquiror contained in this Agreement shall survive
the Closing and any investigation at any time made by or on behalf of the
Company until the Expiration Date.
10.2 Transfer Taxes. Each Stockholder shall be individually responsible for
his, her or its respective sales, use and transfer taxes, including but not
limited to any value added, stock transfer, gross receipts, stamp duty and
real, personal or intangible property transfer taxes, due by reason of the
consummation of the Transactions, including but not limited to any interest or
penalties in respect thereof.
10.3 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by telecopier) to
the address or telecopier number set forth beneath the name of such party below
(or to such other address or telecopier number as such party shall have
specified in a written notice given to the other parties hereto):
if to the Company:
PaylinX Corporation
1762 Business Center Drive, Suite 100
Reston, VA 20190
Attention: President
Telefax: (703) 438-7113
with a copy to:
Arent Fox Kintner Plotkin & Kahn, PLLC
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attention: Jeffrey E. Jordan
Telefax: (202) 857-6395
if to Acquiror or Merger Sub:
CyberSource Corporation
1295 Charleston Road
Mountain View, CA 94043
Attention: Chief Financial Officer
Telefax: (650) 625-9147
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with a copy to:
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, California 94304
Attention: Richard Scudellari
Telefax: 650-494-0792
10.4 Time of the Essence. Time is of the essence in the performance of each
of the terms hereof with respect to the obligations and rights of each party
hereto.
10.5 Headings. The headings contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of
this Agreement.
10.6 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
10.7 Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the internal laws of the State of Delaware
(without giving effect to principles of conflicts of laws).
10.8 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise or waiver of any such power, right, privilege
or remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy is expressly
set forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except
in the specific instance in which it is given.
10.9 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Acquiror, Merger Sub and the Company.
10.10 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
10.11 Parties in Interest. Except for the provisions of Article 8 hereof
applicable to the Stockholders, none of the provisions of this Agreement is
intended to provide any rights or remedies to any Person other than the parties
hereto and their respective successors and assigns (if any).
10.12 Entire Agreement. The Transactional Agreements (including Schedules
and Exhibits thereto) set forth the entire understanding of the parties
relating to the subject matter thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter thereof.
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10.13 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections," "Exhibits" and "Schedules" are intended to refer to Sections of
this Agreement and Exhibits and Schedules to this Agreement.
[Signature page follows]
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IN WITNESS WHEREOF, each of Acquiror, Merger Sub, and the Company has caused
this Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the date first above written.
CYBERSOURCE CORPORATION
/s/ William S. McKiernan
By: _________________________________
Name: William S. McKiernan
Title: Chief Executive Officer
SAPPHIRE MERGER, INC.
/s/ William S. McKiernan
By: _________________________________
Name: William S. McKiernan
Title: President
PAYLINX CORPORATION
/s/ John McDonnell, Jr.
By: _________________________________
Name: John McDonnell, Jr.
Title: Chief Executive Officer
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INDEX OF SCHEDULES AND EXHIBITS
<TABLE>
<C> <S> <C>
A. Certain Definitions.................................................. 44
B. Escrow Agreement.....................................................
C. Company Financial Statements.........................................
D. Proprietary Information and Inventions Agreement.....................
E. Form of Voting Agreement.............................................
F. Form of Lock-Up Agreement............................................
G. Opinion from Company Counsel.........................................
H. Form of Noncompetition Agreement.....................................
I. Opinion from Acquiror's Counsel......................................
Schedule 6.7 Signatories to Voting Agreement...............................
Schedule 6.10 Signatories to Lock-Up Agreement.............................
Schedule 6.17 Parties to Executive Benefit Summaries.......................
</TABLE>
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquiror. "Acquiror" shall have the meaning specified in the first
paragraph of the Agreement.
Acquiror Material Adverse Effect. "Acquiror Material Adverse Effect" shall
have the meaning specified in Section 5.8 of the Agreement.
Acquiror Proxy Statement. "Acquiror Proxy Statement shall have the meaning
specified in Section 6.6 of the Agreement.
Acquiror Stock. "Acquiror Stock" shall have the meaning specified in
Section 3.1(a) of the Agreement.
Acquiror's Stockholders' Meeting. "Acquiror's Stockholders' Meeting shall
have the meaning specified in Section 6.6 of the Agreement.
Acquiror Stock Option Plan. "Acquiror Stock Option Plan" shall have the
meaning specified in Section 3.2(a) of the Agreement.
Affiliate. "Affiliate" shall have the meaning specified in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended.
Affiliates Agreement. "Affiliates Agreement" shall have the meaning
specified in Section 6.9 of the Agreement.
Agreement. "Agreement" shall mean the Agreement and Plan of Merger to which
this Exhibit A is attached (including the Target Disclosure Schedule and all
Exhibits), as it may be amended from time to time.
Best Efforts. "Best Efforts" shall mean the efforts that a prudent Person
desiring to achieve a particular result would use in order to seek to ensure
that such result is achieved as expeditiously as possible. An obligation to
use "Best Efforts" under this Agreement does not require the Person subject to
that obligation to take actions that would result in a materially adverse
change in the benefits to such Person of this Agreement, the other
Transactional Agreements and the Transactions.
Certificate. "Certificate" shall have the meaning specified in Section
3.1(a) of the Agreement.
Certificate of Merger. "Certificate of Merger" shall have the meaning
specified in Section 1.2 of the Agreement.
Closing. "Closing" shall have the meaning specified in Section 3.8 of the
Agreement.
Code. "Code" shall have the meaning specified in the Recitals of the
Agreement.
Company. The "Company" shall have the meaning specified in the first
paragraph of the Agreement.
Company Contract. "Company Contract" shall mean any Contract:
(a) to which Company is a party;
(b) by which the Company or any of its assets is or may become bound or
under which the Company has, or may become subject to, any obligation; or
(c) under which the Company has or may acquire any right or interest.
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Company Preferred Stock. "Company Preferred Stock" shall have the meaning
specified in Section 3.1(a) of the Agreement.
Company Proxy Statement. "Company Information Statement" shall have the
meaning specified in Section 6.6(c) of the Agreement.
Company Returns. "Company Returns" shall have the meaning specified in
Section 4.14(b) of the Agreement.
Company Stock. "Company Stock" shall have the meaning specified in Section
3.1(a) of the Agreement.
Company Stockholders' Meeting. "Company Stockholders' Meeting shall have
the meaning specified in Section 6.6(c) of the Agreement.
Company Stock Option Plan. "Company Stock Option Plan" shall have the
meaning specified in Section 3.2(a) of the Agreement.
Confidentiality Agreement. "Confidentiality Agreement" means the agreement
between Acquiror and the Company dated as of April 4, 2000.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental
Authorization).
Contract. "Contract" shall mean, with respect to any Person, any legally
binding written, oral, implied or other agreement, contract, understanding,
arrangement, instrument, note, guaranty, indemnity, representation, warranty,
deed, assignment, power of attorney, certificate, purchase order, work order,
insurance policy, benefit plan, commitment, covenant, assurance, obligation,
promise or undertaking of any nature to which such Person is a party or by
which its properties or assets maybe bound or affected or under which it or
its business, properties or assets receive benefits.
Damages. "Damages" shall have the meaning specified in Section 8.1.
Defined Benefit Plan. "Defined Benefit Plan" shall mean either a plan
described in Section 3(35) of ERISA or a plan subject to the minimum funding
standards set forth in Section 302 of ERISA and Section 412 of the Code.
DGCL. "DGCL" shall have the meaning specified in Section 1.2 of the
Agreement.
Dissenting Shares. "Dissenting Shares" shall have the meaning specified in
Section 3.10(a) of the Agreement.
Effective Time. "Effective Time" shall have the meaning specified in
Section 1.2 of the Agreement.
Employee Benefit Plan. "Employee Benefit Plan" shall have the meaning
specified in Section 3(3) of ERISA.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, equity, trust, equitable
interest, claim, preference, right of possession, lease, tenancy, licensee,
encroachment, covenant, infringement, interference, Order, proxy, option,
right of first refusal, preemptive right, community property interest, legend,
defect, impediment, exception, reservation, limitation, impairment,
imperfection of title, condition or restriction of any nature (including any
restriction on the voting of any security, any restriction on the transfer of
any security or other asset, any restriction on the receipt of any income
derived from any asset, any restriction on the use of any asset and any
restriction on the possession, exercise or transfer of any other attribute of
ownership of any asset.
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Entity. "Entity" shall mean any corporation (including any non profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, cooperative, foundation, society,
political party, union, company (including any limited liability company or
joint stock company), firm or other enterprise, association, organization or
entity.
Environmental Law. "Environmental Law" shall mean any federal, state, local
or foreign Legal Requirement relating to pollution or protection of human
health or the environment.
ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of
1974.
ERISA Affiliate. "ERISA Affiliate" shall mean any Person that is, was or
would be treated as a single employer with the Company under Section 4001 of
ERISA or Section 414(b), (c), (m) or (o) of the Code.
Exchange Agent. "Exchange Agent" shall have the meaning specified in
Section 3.3(a) of the Agreement.
Escrow Agreement. "Escrow Agreement" shall have the meaning specified in
Section 3.4 of the Agreement.
Escrow Fund. "Escrow Fund" shall have the meaning specified in Section 3.4
of the Agreement.
Escrow Period. "Escrow Period" shall have the meaning specified in Section
8.4 of the Agreement.
Exchange Price. "Exchange Price" shall mean the average closing price of
Acquiror Stock as reported on the NASDAQ National Market on the ten (10)
consecutive trading days ending on the day immediately preceding the date of
Closing.
Exchange Ratio. "Exchange Ratio" shall have the meaning specified in
Section 3.1(a) of the Agreement.
Escrow Shares. "Escrow Shares" shall have the meaning specified in Section
3.4 of the Agreement.
Financial Statements. "Financial Statements" shall have the meaning
specified in Section 4.4 of the Agreement.
GAAP. "GAAP" shall mean United States Generally Accepted Accounting
Principles, applied on a consistent basis across all periods presented.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, concession, approval, consent,
ratification, permission, clearance, confirmation, endorsement, waiver,
certification, designation, rating, registration, qualification or
authorization that is issued, granted, given or otherwise made available by or
under the authority of any Governmental Body or pursuant to any Legal
Requirement; or
(b) right under any Contract with any Governmental Body.
Governmental Body. "Governmental Body" shall mean any:
(a) nation, principality, state, commonwealth, province, territory, county,
municipality, district or other jurisdiction of any nature;
(b) federal, state, local, municipal, foreign or other government;
(c) governmental or quasi governmental authority of any nature (including
any governmental division, subdivision, department, agency, bureau, branch,
office, commission, council, board, instrumentality, officer, official,
representative, organization, unit, body or Entity and any court or other
tribunal);
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(d) multinational organization or body; or
(e) individual, Entity or body exercising, or entitled to exercise, any
executive, legislative, Judicial, administrative, regulatory, police, military
or taxing authority or power of any nature.
Hazardous Material. "Hazardous Material" shall mean any substance,
chemical, waste or other material which is listed, defined or otherwise
identified as hazardous, toxic or dangerous under any applicable law; as well
as any petroleum, petroleum product or by-product, crude oil, natural gas,
natural gas liquids, liquefied natural gas, or synthetic gas useable for fuel,
and "source," "special nuclear," and "by-product" material as defined in the
Atomic Energy Act of 1954, 42 U.S.C. (S)(S) 2011 et seq.
HSR Act. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
Knowledge. An individual shall be deemed to have "Knowledge" of a
particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter; or
(b) a prudent individual would discover or otherwise become aware of such
fact or other matter in the course of conducting a reasonable investigation
concerning the existence of such fact or other matter.
A corporation shall be deemed to have "Knowledge" of a particular fact or
matter only if a director or officer of such corporation has or had Knowledge,
or should have had such Knowledge following investigation as set forth in
subsection (b) above, of such fact or matter.
Leased Premises. "Leased Premises" shall have the meaning specified in
Section 4.6(d) of the Agreement.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, legislation, constitution,
principle of common law, resolution, ordinance, code, edict, decree,
proclamation, treaty, convention, rule, regulation, ruling, directive,
pronouncement, requirement, specification, determination, decision, opinion or
interpretation that is or has been issued, enacted, adopted, passed, approved,
promulgated, made, implemented or otherwise put into effect by or under the
authority of any Governmental Body.
Liability. "Liability" shall mean any debt, obligation, duty or liability
of any nature including any unknown, undisclosed, unmatured, unaccrued,
unasserted, contingent, indirect, conditional, implied, vicarious, derivative,
joint, several or secondary liability, regardless of whether such debt,
obligation, duty or liability would be required to be disclosed on a balance
sheet prepared in accordance with generally accepted accounting principles and
regardless of whether such debt, obligation, duty or liability is immediately
due and payable.
Lock-Up Agreement. "Lock-Up Agreement" shall have the meaning specified in
Section 6.10 of the Agreement.
Material Adverse Effect. "Material Adverse Effect" shall have the meaning
specified in Section 4.5(a) of the Agreement.
Merger. "Merger" shall have the meaning specified in Section 1.1 of the
Agreement.
Merger Sub. "Merger Sub" shall have the meaning specified in the first
paragraph of the Agreement.
Multiemployer Plan. "Multiemployer Plan" shall mean a plan described in
Section 3(37) of ERISA.
Noncompetition Agreement. "Noncompetition Agreement" shall have the meaning
specified in Section 7.2(a)(viii) of the Agreement.
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Officer's Certificate. "Officer's Certificate" shall have the meaning
specified in Section 8.5 of the Agreement.
Order. "Order" shall mean any:
(a) order, judgment, injunction, edict, decree, ruling, pronouncement,
determination, decision, opinion, verdict, sentence, subpoena, writ or award
that is issued, made, entered, rendered or otherwise put into effect by or
under the authority of any court, administrative agency or other Governmental
Body or any arbitrator or arbitration panel; or
(b) Contract with any Governmental Body that is entered into in connection
with any Proceeding.
Ordinary Course of Business. An action taken by or on behalf of the Company
shall not be deemed to have been taken in the "Ordinary Course of Business"
unless:
(a) such type of action is recurring in nature, consistent with the
Company's past practices and taken in the ordinary course of the Company's
normal day to day operations;
(b) such action is not required to be authorized by the Company's
stockholders, the Company's board of directors or any committee of the
Company's board of directors and does not require any other separate or
special authorization of any nature; and
(c) such action is similar in nature and magnitude to actions customarily
taken, without any special or separate authorization, in the ordinary course
of the normal day to day operations of other Entities that are employed in
businesses similar to Company's business.
Permit. "Permit" shall have the meaning specified in Section 6.6(a) of the
Agreement.
Person. "Person" shall mean any individual, Entity or Governmental Body.
Plans. "Plans" shall have the meaning specified in Section 4.16(a) of the
Agreement.
Proceeding. "Proceeding" shall mean any action, suit, litigation,
arbitration, proceeding (including any civil, criminal, administrative,
investigative or appellate proceeding and any informal proceeding),
prosecution, contest, hearing, inquiry, inquest, audit, examination or
investigation, commenced, brought, conducted or heard by or before, or
otherwise has involved, any Governmental Body or any arbitrator or arbitration
panel.
Proprietary Asset. "Proprietary Asset" shall mean any patent, patent
application, trademark (whether registered or unregistered and whether or not
relating to a published work), trademark application, trade name, fictitious
business name, service mark (whether registered or unregistered), service mark
application, copyright (whether registered or unregistered), copyright
application, maskwork, maskwork application, trade secret, know how,
franchise, system, computer software, invention, design, blueprint,
proprietary product, technology, proprietary right or other intellectual
property right.
Proprietary Information and Inventions Agreement. "Proprietary Information
and Inventions Agreement" shall mean an agreement between the Company and its
employees and consultants, substantially in the form of Exhibit D.
Pro Rata Portion. "Pro Rata Portion" shall have the meaning specified in
Section 3.4 of the Agreement.
Registration Statement. "Registration Statement" shall have the meaning
specified in Section 6.6 of the Agreement.
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Related Party. Each of the following shall be deemed to be a "Related
Party":
(a) each individual who is, or who has at any time been, an officer of the
Company or a predecessor thereto;
(b) each child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law,
son-in law, daughter-in-law, brother-in-law, or sister-in-law of each of the
individuals referred to in clause "(a)" above, including adoptive
relationships;
(c) any Entity (other than the Company) in which any one of the Persons
referred to in clauses "(a)" or "(b)" above holds (or in which more than one of
such individuals collectively hold), beneficially or otherwise, a material
voting, proprietary or equity interest.
Representatives. "Representatives" of a specified party shall mean officers,
directors, employees, attorneys, accountants, advisors and representatives of
such party, including, without limitation, in the case of Company, all
subsidiaries of Company and all such Persons with respect to such subsidiaries.
The Related Parties shall be deemed to be "Representatives" of Company.
SEC. "SEC" shall mean the Securities and Exchange Commission.
Stockholder. "Stockholder" shall mean a stockholder of the Company
immediately prior to the Effective Time.
Stockholders' Agent. "Stockholders' Agent" shall have the meaning specified
in Section 8.9 of the Agreement.
Stockholders' Agent Certificate. "Stockholders' Agent Certificate" shall
have the meaning specified in Section 8.5 of the Agreement.
Stock Option. "Stock Option" shall have the meaning specified in Section 3.2
of the Agreement.
Superior Proposal. "Superior Proposal shall have the meaning specified in
Section 6.5 of the Agreement.
Surviving Corporation. "Surviving Corporation" shall have the meaning
specified in Section 1.1 of the Agreement.
Target Disclosure Schedule. "Target Disclosure Schedule" shall have the
meaning specified in Article 4 of the Agreement.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, estimated tax, gross receipts tax, value added tax, surtax,
excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax,
property tax, business tax, occupation tax, inventory tax, occupancy tax,
withholding tax or payroll tax), levy, assessment, tariff, impost, imposition,
toll, duty (including any customs duty), deficiency or fee, and any related
charge or amount (including any fine, penalty or interest), (a) imposed,
assessed or collected by or under the authority of any Governmental Body, or
(b) payable pursuant to any tax sharing agreement or similar Contract.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information that
is, has been or may in the future be filed with or submitted to, or required to
be filed with or submitted to, any Governmental Body in connection with the
determination, assessment, collection or payment of any Tax or in connection
with the administration, implementation or enforcement of or compliance with
any Legal Requirement relating to any Tax.
Third Party. "Third Party" shall have the meaning specified in Section
9.3(c) of the Agreement.
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Transactional Agreements. "Transactional Agreements" shall mean:
(a) the Agreement;
(b) the Escrow Agreement;
(c) the Affiliates Agreement;
(d) the Noncompetition Agreements;
(e) the Lock-Up Agreements;
(f) the Voting Agreements; and
(g) the Certificate of Merger.
Transactions. "Transactions" shall mean (a) the execution and delivery of
the respective Transactional Agreements, and (b) all of the transactions
contemplated by the respective Transactional Agreements, including, without
limitation, the Merger, and the performance by Company, Acquiror, the
Stockholders, and the other parties to the Transactional Agreements of their
respective obligations under the Transactional Agreements.
Unaudited Interim Balance Sheet. "Unaudited Interim Balance Sheet" shall
have the meaning specified in Section 4.4(a)(ii) of the Agreement.
Voting Agreement. "Voting Agreement" shall have the meaning specified in
Section 6.7 of the Agreement.
Year 2000 Compliant. "Year 2000 Compliant" shall have the meaning specified
in Section 4.24 of the Agreement.
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<PAGE>
ANNEX B
July 10, 2000
The Board of Directors
CyberSource Corporation
1295 Charleston Road
Mountain View, CA 94043
Attention: William S. McKiernan
Chief Executive Officer
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to CyberSource Corporation (the "Company") of the consideration proposed
to be paid by the Company in connection with the proposed merger (the "Merger")
of the Company with PaylinX Corporation (the "Seller"). Pursuant to the
Agreement, dated as of July 10, 2000 (the "Agreement"), among the Company, the
Seller and Sapphire Acquisition Corporation ("the Merger Subsidiary"), the
Seller will be merged with the Merger Subsidiary and become a wholly-owned
subsidiary of the Company, and the Company will pay for each share of Common
Stock, par value $0.01 per share, Series A Convertible Preferred Stock, par
value $0.01 per share, and Series B Convertible Redeemable Preferred Stock, par
value $0.01 per share, of the Seller, a consideration equal to 1.20 shares of
the Common Stock of the Company (the "Exchange Ratio").
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) certain
information concerning the business of the Seller and of certain other companies
engaged in businesses comparable to those of the Seller, and the reported market
prices for certain other companies' securities deemed comparable; (iii) current
and historical market prices of the common stock of the Company; (iv) the
audited financial statements of the Company and the Seller for the fiscal year
ended December 31, 1999, and the unaudited financial statements of the Company
and the Seller for the period ended March 31, 2000; (v) certain internal
financial analyses and forecasts prepared by the Company and the Seller and
their respective managements; and (vi) the terms of other business combinations
that we deemed relevant.
In addition, we have held discussions with certain members of the management of
the Company and the Seller with respect to certain aspects of the Merger, and
the past and current business operations of the Company and the Seller, the
financial condition and future prospects and operations of the Company and the
Seller, the effects of the Merger on the financial condition and future
prospects of the Company and the Seller, and certain other matters we believed
necessary or appropriate to our inquiry. We have reviewed such other financial
studies and analyses and considered such other information as we deemed
appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company and the Seller or otherwise
reviewed by us, and we have not assumed any responsibility or liability
therefor. We have not conducted any valuation or appraisal of any assets or
liabilities, nor have any such valuations or appraisals been provided to us. In
relying on financial analyses and forecasts provided to us, we have assumed that
they have been reasonably prepared based on assumptions reflecting the best
currently available estimates and judgments by management as to the expected
future results of operations and financial condition of the Company and the
Seller to which
<PAGE>
- 2 -
such analyses or forecasts relate. We have also assumed that the Merger will
have the tax consequences described in discussions with, and materials furnished
to us by, representatives of the Company, and that the other transactions
contemplated by the Agreement will be consummated as described in the Agreement.
We have relied as to all legal matters relevant to rendering our opinion upon
the advice of counsel.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We are expressing no opinion herein as to the price at which the Company's stock
will trade at any future time.
We have acted as financial advisor to the Company with respect to the proposed
Merger and will receive a fee from the Company for our services if the proposed
Merger is consummated. In the ordinary course of their businesses, J.P. Morgan
and its affiliates may actively trade the equity securities of the Company for
their own account or for the accounts of customers and, accordingly, they may at
any time hold long or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the Exchange Ratio in the proposed Merger is fair, from a financial
point of view, to the Company.
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion does
not constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote with respect to the Merger. This opinion may not be
disclosed, referred to, or communicated (in whole or in part) to any third party
for any purpose whatsoever except with our prior written consent in each
instance. This opinion may be reproduced in full in any proxy or information
statement mailed to stockholders of the Company but may not otherwise be
disclosed publicly in any manner without our prior written approval and must be
treated as confidential.
Very truly yours,
/s/ J.P. Morgan Securities Inc.
<PAGE>
ANNEX C
CYBERSOURCE CORPORATION
1999 STOCK OPTION PLAN
(amended and restated April, 2000)
(amended July, 2000)
1. Purpose. This 1999 Stock Option Plan/1/ ("Plan") is established as a
compensatory plan to attract, retain and provide equity incentives to selected
persons to promote the financial success of CyberSource Corporation, a Delaware
corporation (the "Company"). Capitalized terms not previously defined herein
are defined in Section 18 of this Plan.
2. Types of Options and Shares. Options granted under this Plan (the
"Options") may be either (a) incentive stock options ("ISOs") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or (b) nonqualified stock options (also known as "nonstatutory stock
options") ("NQSOs"), as designated at the time of grant. The shares of stock
that may be purchased upon exercise of Options granted under this Plan (the
"Shares") are shares of Common Stock of the Company ("Common Stock").
3. Number of Shares. The aggregate number of Shares that may be issued
pursuant to Options granted under this Plan is 7,000,000 Shares, subject to
adjustment as provided in this Plan. If any Option expires or is terminated
without being exercised in whole or in part, the unexercised or released Shares
from such Option shall be available for future grant and purchase under this
Plan. Shares that actually have been issued under the Plan shall not be
returned to the Plan and shall not become available for future issuance under
the Plan, except that if unvested Shares are forfeited, or repurchased by the
Company at their original purchase price, such Shares shall become available
for future grant under the Plan. At all times during the term of this Plan, the
Company shall reserve and keep available such number of Shares as shall be
required to satisfy the requirements of outstanding Options under this Plan.
4. Eligibility.
(a) General Rules of Eligibility. Options may be granted to employees,
officers, directors, consultants, independent contractors and advisors
(provided such consultants, contractors and advisors render bona fide services
not in connection with the offer and sale of securities in a capital-raising
transaction) of the Company or any Parent, Subsidiary or Affiliate of the
Company. ISOs may be granted only to employees (including officers and
directors who are also employees) of the Company or a Parent or Subsidiary of
the Company. The Committee (as defined in Section 15) in its sole discretion
shall select the recipients of Options ("Optionees"). An Optionee may be
granted more than one Option under this Plan.
(b) Company Assumption of Options. The Company may also, from time to time,
assume outstanding options granted by another company, whether in connection
with an acquisition of such other company or otherwise, by either (i) granting
an Option under this Plan in replacement of the Option assumed by the Company,
or (ii) treating the assumed option as if it had been granted under this Plan
if the terms of such assumed option could be applied to an Option granted under
this Plan. Such assumption shall be permissible if the holder of the assumed
option would have been eligible to be granted an Option hereunder if the other
company had applied the rules of this Plan to such grant.
--------
(/1/Approved)by the Company's Board of Directors and stockholders in January,
1999.
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5. Terms and Conditions of Options. The Committee shall determine whether
each Option is to be an ISO or an NQSO, the number of Shares subject to the
Option, the exercise price of the Option, the period during which the Option
may be exercised, and all other terms and conditions of the Option, subject to
the following:
(a) Form of Option Grant. Each Option granted under this Plan shall be
evidenced by a written Stock Option Grant (the "Grant") in substantially the
form attached hereto as Exhibit A and Exhibit A-1 (with respect to grants made
to Non-Employee Directors pursuant to Section 6 hereof) or such other form as
shall be approved by the Committee.
(b) Date of Grant. The date of grant of an Option shall be the date on which
the Committee makes the determination to grant such Option unless otherwise
specified by the Committee and subject to applicable provisions of the Code.
The Grant representing the Option will be delivered to the Optionee with a copy
of this Plan within a reasonable time after the date of grant; provided,
however, that if, for any reason, including a unilateral decision by the
Committee not to execute an agreement evidencing such Option, a written Grant
is not executed within sixty (60) days after the date of grant, such Option
shall be deemed null and void (at the discretion of the Committee). No Option
shall be exercisable until such Grant is executed by the Company and the
Optionee.
(c) Exercise Price. The exercise price of an NQSO shall be not less than
eighty-five percent (85%) of the Fair Market Value of the Shares on the date
the Option is granted. The exercise price of an ISO shall be not less than one
hundred percent (100%) of the Fair Market Value of the Shares on the date the
Option is granted. The exercise price of any Option granted to a person owning
more than ten percent (10%) of the total combined voting power of all classes
of stock of the Company or any Parent or Subsidiary of the Company ("Ten
Percent Shareholders") shall not be less than one hundred ten percent (110%) of
the Fair Market Value of the Shares on the date the Option is granted. In the
case of Options intended to qualify as Performance-Based Compensation, the
exercise price shall be not less than one hundred percent (100%) of the Fair
Market Value of the Shares on the date of grant.
(d) Exercise Period. Options shall be exercisable within the times or upon
the events determined by the Committee as set forth in the Grant; provided,
however, that, so long as required by Applicable Laws, each Option must become
exercisable at a rate of at least twenty percent (20%) per year over five (5)
years from the date the Option is granted; provided further, that no Option
shall be exercisable after the expiration of ten (10) years from the date the
Option is granted; and provided further, that no ISO granted to a Ten Percent
Shareholder shall be exercisable after the expiration of five (5) years from
the date the Option is granted. The Committee may grant an Option whereby the
Optionee may elect to exercise any or all of the Option prior to full vesting.
Any unvested Shares received pursuant to such exercise may be subject to a
repurchase right in favor of the Company or to any other restriction the
Committee determines to be appropriate.
(e) Limitations on Options. The aggregate Fair Market Value (determined as
of the time an Option is granted) of stock with respect to which ISOs are
exercisable for the first time by an Optionee during any calendar year (under
this Plan or under any other incentive stock option plan of the Company or any
Parent or Subsidiary of the Company) shall not exceed one hundred thousand
dollars ($100,000). To the extent that the Fair Market Value of stock with
respect to which ISOs are exercisable for the first time by an Optionee during
any calendar year exceeds $100,000, the Options for the amount in excess of
$100,000 shall be treated as not being ISOs and shall be treated as NQSOs. The
foregoing shall be applied by taking Options into account in the order in which
they were granted. In the event that the Code or the regulations promulgated
thereunder are amended after the effective date of this Plan to provide for a
different limit on the Fair Market Value of Shares permitted to be subject to
ISOs, such different limit shall be incorporated herein and shall apply to any
Options granted after the effective date of such amendment.
(f) Individual Option Limit. The maximum number of Shares with respect to
which Options may be granted to any Optionee in any fiscal year of the Company
shall be one million (1,000,000) Shares. The foregoing limitation shall be
adjusted proportionately in connection with any change in the Company's
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<PAGE>
capitalization pursuant to Section 12, below. To the extent required by Section
162(m) of the Code or the regulations thereunder, in applying the foregoing
limitation with respect to an Optionee, if any Option is canceled, the canceled
Option shall continue to count against the maximum number of Shares with
respect to which Options may be granted to the Optionee. For this purpose, the
repricing of an Option shall be treated as the cancellation of the existing
Option and the grant of a new Option.
(g) Options Non-Transferable. To the extent provided in an individual Grant,
NQSOs shall be transferable by gift to members of the Optionee's Immediate
Family, by instrument to an inter vivos or testamentary trust under which the
NQSOs are to be passed to beneficiaries upon the death of the Optionee as
settlor of the trust, by will, and by the laws of descent and distribution.
ISOs granted under this Plan, and any interest therein, shall not be
transferable or assignable by the Optionee, and may not be made subject to
execution, attachment or similar process, otherwise than by will or by the laws
of descent and distribution and shall be exercisable during the lifetime of the
Optionee only by the Optionee or any permitted transferee.
(h) Assumed Options. In the event the Company assumes an option granted by
another company in accordance with Section 4(b) above, the terms and conditions
of such option shall remain unchanged (except the exercise price and the number
and nature of shares issuable upon exercise, which will be adjusted
appropriately pursuant to Section 424 of the Code and the Treasury Regulations
applicable thereto). In the event the Company elects to grant a new Option
rather than assuming an existing option (as specified in Section 4), such new
Option need not be granted at Fair Market Value on the date of grant and may
instead be granted with a similarly adjusted exercise price.
(i) Termination of Options. Except as otherwise provided in an Optionee's
Grant, Options granted under the Plan shall terminate and may not be exercised
if the Optionee ceases to be employed by, or provide services to, the Company
or any Parent or Subsidiary of the Company (or, in the case of a NQSO, by or to
any Affiliate of the Company). An Optionee shall be considered to be employed
by the Company for all purposes under this Section 5(i) if the Optionee is an
officer, director or full-time employee of the Company or any Parent,
Subsidiary or Affiliate of the Company or if the Committee determines that the
Optionee is rendering substantial services as a part-time employee, consultant,
contractor or advisor to the Company or any Parent, Subsidiary or Affiliate of
the Company. The Committee shall have discretion to determine whether an
Optionee has ceased to be employed by the Company or any Parent, Subsidiary or
Affiliate of the Company and the effective date on which such employment
terminated (the "Termination Date").
(j) Termination Generally. If an Optionee ceases to be employed by the
Company and all Parents, Subsidiaries or Affiliates of the Company for any
reason except death or disability, the Options which are then exercisable (and
only to the extent exercisable)(the "Vested Options") by the Optionee on the
Termination Date, may be exercised by the Optionee, but only within three
months after the Termination Date or such shorter period of time as provided in
the Grant, but in no event less than thirty (30) days; provided that Options
may not be exercised in any event after the Expiration Date.
(k) Death or Disability. If an Optionee's employment with the Company and
all Parents, Subsidiaries and Affiliates of the Company is terminated because
of the death of the Optionee or the permanent and total disability of the
Optionee within the meaning of Section 22(e)(3) of the Code, the Vested
Options, as determined on the Termination Date, may be exercised by the
Optionee (or the Optionee's legal representative), but only within twelve (12)
months after the Termination Date; and provided further that Options may not be
exercised in any event later than the Expiration Date. If an Optionee's
employment with the Company and all Parents, Subsidiaries and Affiliates of the
Company is terminated because of a disability of the Optionee which is not
permanent and total within the meaning of Section 22(e)(3) of the Code, the
Vested Options, as determined on the Termination Date, may be exercised by the
Optionee or the Optionee's legal representative, but only within six (6) months
after the Termination Date; and provided further that Options may not be
exercised in any event later than the Expiration Date.
3
<PAGE>
6. Director Formula Option Grants. In addition to discretionary grants of
Options granted pursuant to other terms of this Plan, Non-Employee Directors
of the Company shall receive Options in accordance with the following terms:
(a) Formula Grant. Upon initial election or appointment to the Company's
Board of Directors, provided that such election or appointment is not during
the Company's last quarter of a year, the elected or appointed Non-Employee
Director shall receive a NQSO for 5,000 shares on the first business day
following the election or appointment of such Non-Employee Director.
Thereafter, annually on January 1, each Non-Employee Director shall receive a
NQSO for 5,000 shares.
(b) Terms of Grant. Options granted pursuant to this Section 6 shall be
subject to the following terms:
(i) Exercise Price and Payment Terms. The exercise price for the Options
granted pursuant to this Section 6 shall be equal to one hundred per cent
(100%) of the Fair Market Value of the Shares on the date of the grant,
(excepting Ten Percent Shareholders in respect of whom the exercise price
for the Options granted pursuant to this Section 6 shall be equal to one
hundred ten percent (110%)) payable in cash or otherwise in accordance with
the alternatives specified in clauses (i), (ii), (iv), (v) and (vi) of
Section 7(b) of this Plan.
(ii) Term. The term of the Options shall be ten (10) years from the date
the Option is granted (excepting Ten Percent Shareholders in respect of
whom the term of the Options shall be five (5) years).
(iii) Vesting and Repurchase Period. All Options granted pursuant to the
terms of this Section 6 shall be exercisable at anytime on or after the
date of grant pursuant to the terms of the form of Grant set forth as
Exhibit A-1 hereto. The Company shall have the right to repurchase any
unvested Shares at the exercise price paid for such Shares pursuant to the
terms of the form of Grant set forth as Exhibit A-1 hereto. With respect to
Shares issued pursuant to Options granted on the date of adoption of the
Plan, the Company's repurchase rights as to unvested Shares shall lapse on
the earlier of (i) June 30, 1999 or (ii) the consummation of the Company's
initial public offering of common stock. With respect to Shares issued
pursuant to all other Options granted pursuant to the terms of this Section
6, the Company's repurchase rights as to unvested Shares shall lapse nine
(9) months after the date of the grant.
(iv) Other Terms. In order to be eligible for the annual automatic
option grants, the Non-Employee Director shall be on the date of grant, and
shall have maintained for the prior year, continuous status as an active
member of the Board of Directors for the entire year or from the date the
Non-Employee Director joined the Board of Directors. If, for any reason, a
Non-Employee Director ceases to be a member of the Board, such director
shall be ineligible for that year's grant.
7. Exercise of Options.
(a) Notices. Options may be exercised only by delivery to the Company of a
written exercise agreement in a form approved by the Committee (which need not
be the same for each Optionee), stating the number of Shares being purchased,
the restrictions imposed on the Shares, if any, and such representations and
agreements regarding the Optionee's investment intent and access to
information, if any, as may be required by the Company to comply with
applicable securities laws, together with payment in full of the exercise
price for the number of Shares being purchased.
(b) Payment. Payment for the Shares may be made in cash (by check) or,
where permitted by law any of the following methods approved by the Committee,
or any combination thereof, provided that the portion of the consideration
equal to the par value of the Shares must be paid in cash or other legal
consideration permitted by the Delaware General Corporation Law: (i) by
cancellation of indebtedness of the Company to the Optionee; (ii) by surrender
of shares of Common Stock of the Company already owned by the Optionee, having
a Fair Market Value equal to the exercise price of the Option (but only to the
extent that such exercise would not result in an accounting compensation
charge with respect to the Shares used to pay the exercise price unless
otherwise determined by the Committee); (iii) by waiver of compensation due or
accrued to Optionee for
4
<PAGE>
services rendered; (iv) through delivery of a promissory note for the full
exercise price bearing interest at such rate with the note due at such time, on
a secured or unsecured basis, as determined by the Committee; (v) provided that
a public market for the Company's stock exists, through a "same day sale"
commitment from the Optionee and a broker-dealer that is a member of the
National Association of Securities Dealers, Inc. (an "NASD Dealer") whereby the
Optionee irrevocably elects to exercise the Option and to sell a portion of the
Shares so purchased to pay for the exercise price and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to forward the exercise price
directly to the Company; and/or (vi) provided that a public market for the
Company's stock exists, through a "margin" commitment from the Optionee and an
NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and
to pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the exercise price directly to the Company.
(c) Withholding Taxes. Prior to issuance of the Shares upon exercise of an
Option, the Optionee shall pay or make adequate provision for any federal or
state withholding obligations of the Company, if applicable. Where approved by
the Committee in its sole discretion, the Optionee may provide for payment of
withholding taxes upon exercise of the Option by requesting that the Company
retain Shares with a Fair Market Value equal to the minimum amount of taxes
required to be withheld. In such case, the Company shall issue the net number
of Shares to the Optionee by deducting the Shares retained from the Shares
exercised. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined in accordance with Section 83 of the Code (the "Tax Date"). All
elections by Optionees to have Shares withheld for this purpose shall be made
in writing in a form acceptable to the Committee and shall be subject to the
following restrictions:
(i) the election must be made on or prior to the applicable Tax Date;
(ii) once made, the election shall be irrevocable as to the particular
Shares as to which the election is made;
(iii) all elections shall be subject to the consent or disapproval of
the Committee; and
(iv) if the Optionee is an officer or director of the Company or other
person (in each case, an "Insider") whose transactions in the Company's
Common Stock are subject to Section 16(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and if the Company is subject to
Section 16(b) of the Exchange Act, the election must comply with Rule 16b-3
as promulgated by the Securities and Exchange Commission ("Rule 16b-3").
(d) Limitations on Exercise. Notwithstanding anything else to the contrary
in the Plan or any Grant, no Option may be exercisable later than the
expiration date of the Option.
8. Restrictions on Shares. At the discretion of the Committee, the Company
may reserve to itself and/or its assignee(s) in the Grant (a) a right of first
refusal to purchase all Shares that an Optionee (or a subsequent transferee)
may propose to transfer to a third party, and/or (b) a right to repurchase a
portion of or all Shares held by an Optionee upon the Optionee's termination of
employment or service with the Company or its Parent, Subsidiary or Affiliate
of the Company for any reason within a specified time (but not to exceed ninety
(90) days of the later of termination or exercise of the Option, if required by
Applicable Laws), as determined by the Committee at the time of grant at the
higher of (i) the Optionee's original purchase price or, (ii) the Fair Market
Value of such Shares. Shares may be repurchased at Optionee's original purchase
price provided that, so long as required by Applicable Laws, such right to
repurchase as to employees lapses at the rate of at least twenty percent (20%)
of the Shares subject to the Option per year over five (5) years from the date
the Option is granted (without respect to the date the Option was exercised or
became exercisable).
9. Modification, Extension and Renewal of Options. The Committee shall have
the power to modify, extend or renew outstanding Options and to authorize the
grant of new Options in substitution therefor, provided that any such action
may not, without the written consent of the Optionee, impair any rights under
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<PAGE>
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered shall be treated in accordance with Section 424(h)
of the Code. The Committee shall have the power to reduce the exercise price of
outstanding options; provided, however, that the exercise price per share may
not be reduced below the minimum exercise price that would be permitted under
Section 5(c) of this Plan for options granted on the date the action is taken
to reduce the exercise price.
10. Privileges of Stock Ownership. No Optionee shall have any of the rights
of a shareholder with respect to any Shares subject to an Option until such
Option is properly exercised. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to such date,
except as provided in this Plan. The Company shall provide to each Optionee,
regardless of the reports provided to shareholders in general, a copy of the
annual financial statements of the Company within a reasonable time frame
following the end of the fiscal year of the Company.
11. No Obligation to Employ; No Right to Future Grants. Nothing in this Plan
or any Option granted under this Plan shall confer on any Optionee any right
(a) to continue in the employ of, or other relationship with, the Company or
any Parent or Subsidiary of the Company or limit in any way the right of the
Company or any Parent, Subsidiary or Affiliate of the Company to terminate the
Optionee's employment or other relationship at any time, with or without cause,
or (b) to have any Option(s) granted to such Optionee under this Plan, or any
other plan, or to acquire any other securities of the Company, in the future.
12. Adjustment of Option Shares. In the event that the number of outstanding
shares of Common Stock of the Company is changed by a stock dividend, stock
split, reverse stock split, combination, reclassification or similar change in
the capital structure of the Company without consideration, or if a substantial
portion of the assets of the Company are distributed, without consideration in
a spin-off or similar transaction, to the shareholders of the Company, the
number of Shares available under this Plan, the maximum number of Shares with
respect to which Options may be granted to any Optionee and the number of
Shares subject to outstanding Options and the exercise price per share of such
Options shall be proportionately adjusted, subject to any required action by
the Board or shareholders of the Company and compliance with applicable
securities laws; provided, however, that a fractional share shall not be issued
upon exercise of any Option and any fractions of a Share that would have
resulted shall either be cashed out at Fair Market Value or the number of
Shares issuable under the Option shall be rounded down to the nearest whole
number, as determined by the Committee; and provided further that the exercise
price may not be decreased to below the par value, if any, for the Shares.
13. Assumption of Options by Successors.
(a) In the event of (i) a merger or consolidation as a result of which the
holders of voting securities of the Company prior to the transaction hold
shares representing less than 51% of the voting securities of the Company after
giving effect to the transaction (other than a merger or consolidation with a
wholly-owned subsidiary or where there is no substantial change in the
shareholders of the corporation and the Options granted under this Plan are
assumed by the successor corporation), or (ii) the sale of all or substantially
all of the assets of the Company, any or all outstanding Options shall be
assumed by the successor corporation, which assumption shall be binding on all
Optionees, an equivalent option shall be substituted by such successor
corporation or the successor corporation shall provide substantially similar
consideration to Optionees as was provided to shareholders (after taking into
account the existing provisions of the Optionees' options such as the exercise
price and the vesting schedule), and, in the case of outstanding shares subject
to a repurchase option, issue substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Optionee.
(b) In the event such successor corporation, if any, refuses to assume or
substitute, as provided above, pursuant to an event described in subsection (a)
above, or in the event of a dissolution or liquidation of the Company, the
Options shall, notwithstanding any contrary terms in the Grant, expire on a
date specified in a written notice given by the Committee to the Optionees
specifying the terms and conditions of such termination (which date shall be at
least twenty (20) days after the date the Committee gives the written notice).
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14. Adoption and Shareholder Approval. The Plan became effective when
adopted by the Board of Directors (the "Board") in January 1999. In April,
2000, the Board adopted and approved an amendment and restatement of the Plan
(a) to increase the number of Shares available for issuance under the Plan and
(b) to adopt a limit on the maximum number of Shares with respect to which
Options may be granted to any Optionee in any fiscal year of the Company and
certain other administrative provisions to comply with the performance-based
compensation exception to the deduction limit of Section 162(m) of the Code,
which amendments are subject to approval by the shareholders of the Company.
15. Administration.
(a) This Plan may be administered by the Board or a Committee appointed by
the Board (the "Committee"). At all times during which the Company is
registered under the Exchange Act, with respect to grants of awards to
directors or employees who are also officers or directors of the Company, the
Plan shall be administered by (A) the Board, or (B) a Committee designated by
the Board, which Committee shall be constituted in such a manner as to satisfy
the Applicable Laws and to permit such grants and related transactions under
the Plan to be exempt from Section 16(b) of the Exchange Act in accordance
with Rule 16b-3. Once appointed, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. As used in this
Plan, references to the "Committee" shall mean either such Committee or the
Board if no committee has been established. The interpretation by the
Committee of any of the provisions of this Plan, any related agreements, or
any Option granted under this Plan shall be final and binding upon the Company
and all persons having an interest in any Option or any Shares purchased
pursuant to an Option.
(b) Notwithstanding the foregoing, grants of an Option to any Covered
Employee intended to qualify as Performance-Based Compensation shall be made
only by a Committee (or subcommittee of a Committee) which is comprised solely
of two or more members of Board of Directors eligible to serve on a committee
granting Options qualifying as Performance-Based Compensation. In the case of
such Options granted to Covered Employees, references to a "Committee" shall
be deemed to be references to such Committee or subcommittee.
16. Term of Plan. Options may be granted pursuant to this Plan from time to
time on or prior to December 31, 2008, a date which is less than ten years
after the earlier of the date of approval of this Plan by the Board or the
shareholders of the Company pursuant to Section 14 of this Plan.
17. Amendment or Termination of Plan. The Board or Committee may, at any
time, amend, alter, suspend or discontinue the Plan, but no amendment,
alteration, suspension or discontinuation shall be made which would impair the
rights of any Optionee under any Option theretofore granted, without his or
her consent. To the extent necessary to comply with Applicable Laws, the
Company shall obtain approval of the stockholders of the Company of any plan
amendment in such a manner and to such a degree as required. Without limiting
the foregoing, the Board or Committee may at any time or from time to time
authorize the Company, with the consent of the respective Optionees, to issue
new Options in exchange for the surrender and cancellation of any or all
outstanding Options.
18. Certain Definitions. As used in this Plan, the following terms shall
have the following meanings:
(a) "Affiliate" means any corporation that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is under common
control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct
or indirect, of the power to cause the direction of the management and
policies of the corporation, whether through the ownership of voting
securities, by contract or otherwise.
(b) "Applicable Laws" means the legal requirements relating to the
administration of stock incentive plans, if any, under applicable provisions
of federal and state securities laws, the corporate laws of California and, to
the extent other than California, the corporate law of the state of the
Company's incorporation, the
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Code, the rules of any applicable stock exchange or national market system, and
the rules of any foreign jurisdiction applicable to awards granted to residents
therein.
(c) "Covered Employee" means an Optionee who is a "covered employee" under
Section 162(m)(3) of the Code.
(d) "Fair Market Value" shall mean the fair market value of the Shares as
determined by the Committee from time to time in good faith, and if required by
Applicable Laws, in a manner consistent with Section 260.140.50 of Title 10 of
the California Code of Regulations. If a public market exists for the Shares,
the Fair Market Value shall be the average of the last reported bid and asked
prices for Common Stock of the Company on the last trading day prior to the
date of determination or, in the event the Common Stock of the Company is
listed on a stock exchange or is a Nasdaq National Market security, the Fair
Market Value shall be the closing price on such exchange or quotation system on
the last trading day prior to the date of determination.
(e) "Non-Employee Directors" shall have the meaning set forth in Rule 16b-
3(b)(3) as promulgated by the Securities and Exchange Commission under Section
16(b) of the Exchange Act, as such rule is amended from time to time and as
interpreted by the Securities and Exchange Commission.
(f) "Immediate Family" means an individual who is a member of the Optionee's
"immediate family" as that term is defined under Rule 16a-1(e) of the Exchange
Act.
(g) "Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if, at the time of the granting
of the Option, each of the corporations other than the Company owns stock
possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
(h) "Performance-Based Compensation" means compensation qualifying as
"performance-based compensation" under Section 162(m) of the Code.
(i) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of
the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
19. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more options outstanding,
copies of financial statements at least annually.
20. Applicable Law and Regulations. The obligations of the Company under
this Plan are subject to the approval of state and federal authorities or
agencies with jurisdiction over the subject matter hereof. The Company shall
not be obligated to issue or deliver shares under this Plan if such issuance or
delivery would violate applicable state or federal securities laws.
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FRONT
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CYBERSOURCE CORPORATION
1295 Charleston Road
Mountain View, CA 94043
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints L. Evan Ellis, Jr. and Charles E. Noreen, Jr. as
proxies, each with full power of substitution, to represent and vote as
designated on the reverse side all the shares of common stock of CyberSource
Corporation (the "Company") held of record by the undersigned on August 1, 2000,
at the Special Meeting of Stockholders to be held at the Company's headquarters
located at 1295 Charleston Road, Mountain View, California, on September 15,
2000, and any adjournment or postponement thereof.
(Continued and to be signed on the reverse side)
BACK
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Please date, sign and mail your proxy card back as soon as possible!
Special Meeting of Stockholders
CYBERSOURCE CORPORATION
SEPTEMBER 15, 2000
(1) To ratify and approve the issuance of shares of the Company in exchange for
all outstanding stock of PaylinX Corporation.
(2) To ratify and approve an amendment to the Company's 1999 Stock Option Plan
described in the accompanying proxy statement.
(3) In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is given, this proxy will be
voted for Proposals 1,2 and 3.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. IF YOUR ADDRESS IS INCORRECTLY SHOWN, PLEASE PRINT CHANGES.
