<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1999.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ___________ to ___________.
Commission File Number: 000-26477
CYBERSOURCE CORPORATION
(Exact name of Registrant as specified in its charter)
77-0472961
Delaware ---------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
550 S. WINCHESTER BOULEVARD, SUITE 301
SAN JOSE, CALIFORNIA 95128
--------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (408) 556-9100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
As of July 31, 1999 there were 21,978,570 shares of common stock, par value
$0.001 per share, outstanding.
This Report on Form 10-Q includes 23 pages with the Index to Exhibits located on
page 22.
<PAGE>
CYBERSOURCE CORPORATION
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Page
------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31,
1998........................................................................ 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 1998........................................ 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998...................................................... 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition And Results of
Operations.................................................................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities....................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......................... 21
Item 6. Exhibits and Reports on Form 8-K............................................ 22
Signature ............................................................................ 23
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
1999 1998 (1)
--------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,990 $ 11,111
Accounts receivable, net of allowances of $216 and $229 at June 30, 1999 1,194 863
and December 31, 1998, respectively
Prepaid expenses and other current assets 844 411
-------- --------
Total current assets 45,028 12,385
Property and equipment, net 4,037 2,300
Other noncurrent assets 237 290
-------- --------
Total assets $ 49,302 $ 14,975
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 2,267 $ 531
Other accrued liabilities 3,203 969
Deferred revenues 307 120
Current obligations under capital leases 613 211
Convertible note payable to an officer and stockholder - 3,000
-------- --------
Total current liabilities 6,390 4,831
Noncurrent obligations under capital leases 701 256
Redeemable convertible preferred stock - 18,911
Stockholders' equity (net capital deficiency):
Common stock 21 5
Additional paid-in capital 64,278 1,199
Deferred compensation (955) (142)
Accumulated deficit (21,133) (10,085)
-------- --------
Total stockholders' equity (net capital deficiency) 42,211 (9,023)
-------- --------
Total liabilities and stockholders' equity (net capital deficiency) $ 49,302 $ 14,975
======== ========
- -----------------------
</TABLE>
(1) The balance sheet at December 31, 1998 has been derived from the audited
financial statements as of that date.
See notes to condensed consolidated financial statements.
3
<PAGE>
CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 2,536 $ 699 $ 4,249 $ 1,338
Cost of revenues 2,236 655 3,741 1,302
------- ------- -------- -------
Gross profit 300 44 508 36
Operating expenses:
Product development 1,652 808 2,974 1,479
Sales and marketing 4,207 849 6,286 1,671
General and administrative 1,105 413 2,043 743
Deferred compensation amortization 156 - 223 -
------- ------- -------- -------
Total operating expenses 7,120 2,070 11,526 3,893
------- ------- -------- -------
Loss from operations (6,820) (2,026) (11,018) (3,857)
Interest income (expense), net (38) 11 (30) 18
------- ------- -------- -------
Net loss and comprehensive loss $(6,858) $(2,015) $(11,048) $(3,839)
======= ======= ======== =======
Basic and diluted net loss per share $ (1.15) $ (0.44) $ (1.93) $ (0.85)
======= ======= ======== =======
Shares used in computing basic and diluted net loss per 5,954 4,546 5,715 4,540
share ======= ======= ======== =======
Proforma basic and diluted net loss per share $ (0.42) $ (0.18) $ (0.69) $ (0.36)
======= ======= ======== =======
Shares used in computing proforma basic and diluted net loss
per share 16,213 10,994 16,089 10,767
======= ======= ======== =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss and comprehensive loss $(11,048) $(3,839)
Adjustments to reconcile net loss to net cash used in operating activities:
Common stock issued to consultants for services 81 -
Depreciation 770 324
Amortization of deferred compensation 223 -
Changes in operating assets and liabilities:
Accounts receivable (331) (443)
Prepaid expenses and other current assets (433) (69)
Other noncurrent assets 53 -
Accounts payable 1,736 430
Other accrued liabilities 2,234 290
Deferred revenues 187 (17)
-------- -------
Net cash used in operating activities (6,528) (3,324)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,462) (483)
------ ----
Net cash used in investing activities (1,462) (483)
CASH FLOWS FROM FINANCING ACTIVITES:
Principal payments on capital lease obligations (198) (21)
Proceeds from issuance of common stock in initial public offering, net of offering expenses 39,990 -
Proceeds from exercise of stock options 77 -
Proceeds from issuance of redeemable convertible preferred stock, net - 1,980
------- -------
Net cash provided by financing activities 39,869 1,959
------- -------
Increase (decrease) in cash and cash equivalents 31,879 (1,848)
Cash and cash equivalents at beginning of period 11,111 2,000
------- -------
Cash and cash equivalents at end of period $42,990 $ 152
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ 1,045 -
Deferred compensation related to stock option grants $ 1,036 -
Conversion of note payable to an officer and stockholder into redeemable preferred stock $ 3,000 -
Conversion of redeemable convertible preferred stock into common stock $21,911 -
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
CYBERSOURCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
CyberSource Corporation and its wholly-owned subsidiary ("CyberSource" or the
"Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
as well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. In the opinion of
management, all adjustments (consisting primarily of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six-month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
prospectus dated June 23, 1999 comprising part of the Company's Registration
Statement on Form S-1, as amended, filed with the Securities and Exchange
Commission, SEC File No. 333-77545.
The Company completed an initial public offering of its common stock on June
28, 1999 (the "IPO"). A total of 4,000,000 shares of common stock was sold
by the Company to the public at a price of $11.00 per share. The net
proceeds to the Company were approximately $40.0 million after deducting the
underwriters discount and offering expenses. Subsequent to June 30, 1999, an
additional 600,000 shares of common stock were sold by the Company to the
public at a price of $11.00 per share from the exercise of the underwriter's
overallotment option generating additional net proceeds to the Company of
approximately $6.1 million.
2. NET LOSS PER SHARE
Net loss per share is presented in accordance with the requirements of
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(FAS 128). Pro forma net loss per share has been computed under FAS 128 and
also gives effect to the conversion of redeemable convertible preferred stock
not included in the net loss per share that converted upon completion of the
IPO.
If the Company had reported net income, diluted earnings per share would have
included the shares used in the computation of basic and diluted earnings per
share and pro forma basic and diluted earnings per share as well as
additional common equivalent shares related to the outstanding options and
warrants (determined using the treasury stock method) for the three and six
months ended June 30, 1998 and 1999 and additional common equivalent shares
related to the convertible note payable (using the if-converted method).
3. LEGAL MATTER
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 alleges several
causes of action, including wrongful termination, defamation, fraud, and
unfair business practices arising out of her three month employment with the
Company. While there can be no assurances as to the outcome of this
litigation, the Company believes the lawsuit is without merit, and intends to
vigorously defend against the claims asserted.
6
<PAGE>
CYBERSOURCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" in the
fiscal year ended December 31, 1998, which establishes standards for
reporting information regarding operating segments.
To date, the Company has viewed its operations as principally two segments,
e-commerce transaction services (ECTS) and digital product rights management
(DPR) for software and other digital products and manages the business based
on the revenues of these segments.
The following table presents revenues by the Company's two business units for
the three and six months ended June 30, 1999 and 1998. 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>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
ETCS................................................... $2,369 $ 505 $3,881 $ 900
DPR.................................................... 167 194 368 438
------ ------ ------ ------
Total.................................................. $2,536 $ 699 $4,249 $1,338
</TABLE>
7
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, including
statements regarding our expectations, hopes, intentions, beliefs or strategies
regarding the future. Such forward-looking statements include, but are not
limited to, our anticipated expense levels for research and development,
selling, general and administrative operations; the amount of and specific uses
of anticipated capital expenditures; expectations regarding liquidity, adequacy
of cash resources; and adequacy of current facilities. Actual results could
differ materially from those projected in any forward-looking statements for the
reasons detailed below under the sub-heading "Factors That May Affect Future
Operating Results" and in other sections of this Report on Form 10-Q. All
forward-looking statements included in this Form 10-Q are based on information
available to us on the date of this Report on Form 10-Q, and we assume no
obligation to update the forward-looking statements, or to update the reasons
why actual results could differ from those projected in the forward-looking
statements. See "Factors That May Affect Future Operating Results" below, as
well as such other risks and uncertainties as are detailed in our Securities and
Exchange Commission reports and filings for a discussion of the factors that
could cause actual results to differ materially from the forward-looking
statements.
The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Registration Statement on Form S-1, as amended, filed
with the Securities and Exchange Commission, SEC File No. 333-77545.
The Company completed an initial public offering of its common stock on June 28,
1999 (the "IPO"). A total of 4,000,000 shares of common stock was sold by the
Company to the public at a price of $11.00 per share. The net proceeds to the
Company were approximately $40.0 million after deducting the underwriters
discount and offering expenses. Subsequent to June 30, 1999, an additional
600,000 shares of common stock were sold by the Company to the public at a price
of $11.00 per share from the exercise of the underwriter's overallotment option
generating additional net proceeds to the Company of approximately $6.1 million.
OVERVIEW
We commenced operations in March 1996 as a division of Beyond.com. From our
inception to March 1997, our operating activities related primarily to planning
and developing proprietary e-commerce transaction systems, recruiting personnel,
raising capital and purchasing operating assets. On December 31, 1997,
Beyond.com transferred assets and liabilities related to its e-commerce
transaction processing services division to CyberSource. We have incurred
significant losses since our inception and through June 30, 1999 had incurred
cumulative losses of approximately $26.6 million. We expect to continue to
incur substantial operating losses for the foreseeable future.
We derive substantially all of our revenues from e-commerce monthly transaction
processing fees, and, to a lesser extent, support services and digital product
rights management fees. Transaction revenues and digital product rights
management fees are recognized in the period in which the transactions occur.
Our e-commerce transaction processing service revenues are derived from
contractual relationships providing revenues on a per transaction basis,
generally subject to a monthly minimum or maintenance fee. In general, these
contractual relationships provide for a one-year term with automatic renewal and
can be canceled by either party at any time with sixty days prior notice.
Support service fees are recognized as the related services are provided and
costs are incurred. As our revenues grow, we expect e-commerce transaction
processing revenues to become an increasingly larger percentage of our total
revenues.
In view of the rapidly evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our revenues and
operating results, including our gross margin and operating expenses as a
percentage of total revenues, are not meaningful and should not be relied upon
as indications of future performance. Moreover, we do not believe that our
historical growth rates are indicative of future results. Even if our revenues
and number of transactions did continue to expand at a steady pace in absolute
numbers, our growth rate would decrease.
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues. Revenues increased from $0.7 million for the three months ended
June 30, 1998 to $2.5 million for the three months ended June 30, 1999, an
increase of approximately $1.8 million or 262.8%. This increase is due to the
addition of merchants as well as transaction volume increases from existing
merchants resulting from the increased market acceptance of e-commerce. Our
transactions increased from approximately 1.2 million processed during the three
months ended June 30, 1998 to approximately 8.0 million processed during the
three months ended June 30, 1999.
Cost of Revenues. Cost of revenues consists primarily of costs incurred
in the delivery of e-commerce transaction services, including personnel costs in
our operations, professional services and merchant support functions,
depreciation of capital equipment used in our network infrastructure and costs
related to the hosting of our servers at third-party hosting centers in the
United States and the United Kingdom. Cost of revenues increased from $0.7
million or 93.7% of revenues for the three months ended June 30, 1998 to $2.2
million or 88.2% of revenues for the three months ended June 30, 1999. The
increase is due to higher personnel related costs resulting from an increase in
personnel and an increase in depreciation expense on capital equipment. In
addition, international cost of revenues increased due to costs associated with
a third party payment processing gateway in the U.K. due to increased
international transaction volumes.
Product Development. Product development expenses consist primarily of
compensation and related costs of employees engaged in the research, design and
development of new services, and to a lesser extent, facility costs and related
overhead. Product development expenses increased from $0.8 million for the
three months ended June 30, 1998 to $1.7 million for the three months ended June
30, 1999. The increase is due to higher personnel related costs resulting from
an increase in personnel and increased allocated facilities and infrastructure
related costs. We expect product development expenses to increase in absolute
dollars as we hire additional personnel and develop new services.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation of sales and marketing personnel, market research and advertising
costs, and, to a lesser extent, facility costs and related overhead. Sales and
marketing expenses increased from $0.8 million for the three months ended June
30, 1998 to $4.2 million for the three months ended June 30, 1999. The increase
is primarily due to increased advertising expenses resulting from marketing and
promotional programs and, to a lesser extent, additional personnel related costs
resulting from an increase in personnel. We expect our sales and marketing
expenses to increase in absolute dollars as we continue to hire personnel to
support our increasing sales volume.
General and Administrative. General and administrative expenses consist
primarily of compensation for administrative personnel, fees for outside
professional services and, to a lesser extent, facility costs and related
overhead. General and administrative expenses increased from $0.4 million for
the three months ended June 30, 1998 to $1.1 million for the three months ended
June 30, 1999. The increase is primarily due to higher personnel related costs
resulting from an increase in personnel. We expect general and administrative
expenses to increase in absolute dollars to support the expected growth in our
business.
Deferred Compensation Amortization. During the three months ended June
30, 1999, we recorded an additional $0.4 million of unearned compensation in
connection with the grant of stock options with exercise prices less than the
deemed fair market value on the respective date of grant. Deferred compensation
amortization related to 1998 and 1999 stock option grants will be approximately
$0.5 million, $0.4 million and $0.2 million in 1999, 2000 and 2001,
respectively. Amortization expense related to deferred compensation was $0.2
million for the three months ended June 30, 1999.
9
<PAGE>
Interest Income (Expense), Net. Interest income consists of interest
earnings on cash and cash equivalents and increased from $15,000 for the three
months ended June 30, 1998 to $0.1 million for the three months ended June 30,
1999. The increase is primarily due to an increase in cash and cash equivalents
as a result of equity financings in late 1998. Interest expense increased from
$4,000 for the three months ended June 30, 1998 to $0.1 million in the three
months ended June 30, 1999. The increase represents interest on capital leases
and a $3.0 million unsecured convertible note issued in August 1998 which was
converted into Series E preferred stock in June 1999 and subsequently converted
into common stock upon the completion of the initial public offering.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
Revenues. Revenues increased from $1.3 million for the six months ended
June 30, 1998 to $4.2 million for the six months ended June 30, 1999, an
increase of approximately $2.9 million or 217.6%. The increase is a result of
the addition of merchants and increased transaction volumes from existing
merchants resulting from the increased acceptance of e-commerce. Our
transactions increased from approximately 2.1 million processed during the six
months ended June 30, 1998 to approximately 13.8 million processed during the
six months ended June 30, 1999.
Cost of Revenues. Cost of revenues increased from $1.3 million or 97.3%
of revenues for the six months ended June 30, 1998 to $3.7 million or 88.0% of
revenues for the six months ended June 30, 1999. The increase for the six
months ended June 30, 1999 as compared to the six months ended June 30, 1998 in
dollars is due to an increase in operations, professional services and merchant
support personnel and related costs and an increase in depreciation expense on
capital equipment. In addition, international cost of revenues increased due to
costs associated with a third party payment processing gateway in the U.K. due
to increased international transaction volumes.
Product Development. Product development expenses increased from $1.5
million for the six months ended June 30, 1998 to $3.0 million for the six
months ended June 30, 1999. The addition of product development personnel as
well as increased allocated facilities and infrastructure related costs
accounted for the increase.
Sales and Marketing. Sales and marketing expenses increased from $1.7
million for the six months ended June 30, 1998 to $6.3 million for the six
months ended June 30, 1999. The increase is primarily due to increased
advertising expenses resulting from marketing and promotional programs, and to a
lesser extent, additional personnel related costs resulting from an increase in
sales and marketing personnel.
General and Administrative. General and administrative expenses increased
from $0.7 million for the six months ended June 30, 1998 to $2.0 million for the
six months ended June 30, 1999. The increase is primarily due to higher
personnel related costs resulting from the hiring of additional personnel. We
expect general and administrative expenses to increase in absolute dollars to
support the expected growth in our business.
Deferred Compensation. During the six months ended June 30, 1999, we
recorded an additional $1.0 million of unearned compensation in connection with
the grant of stock options with exercise prices less than the deemed fair market
value on the respective date of grant. Amortization expense related to deferred
compensation was $0.2 million for the six months ended June 30, 1999.
Interest Income (Expense), Net. Interest income increased from $26,000
for the six months ended June 30, 1998 to $0.2 million for the six months ended
June 30, 1999. Interest expense of $0.2 million for the six months ended June
30, 1999 represents interest on capital leases and a $3.0 million unsecured
convertible note issued in August 1998 which was converted into Series E
preferred stock in June 1999 and subsequently converted into common stock upon
the completion of the initial public offering.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased by $31.9 million from approximately
$11.1 million at December 31, 1998 to $43.0 million at June 30, 1999. This
increase resulted from the receipt of net proceeds of $40.0 million in June 1999
from our initial public offering. This was offset by net losses incurred during
the six months ended June 30, 1999 as well as capital expenditures.
Net cash used in our operating activities was approximately $6.5 million
for the six months ended June 30, 1999 as compared to $3.3 million for the six
months ended June 30, 1998. The increase in cash used in operating activities
is primarily a result of the increase in our net losses and increases in current
assets, offset partially by increases in depreciation and amortization of
deferred compensation and accounts payable and other accrued liabilities. The
increase in accounts payable and other accrued liabilities is primarily due to
an increase in advertising expenses resulting from marketing and promotional
programs as well as accrued offering expenses relating to our initial public
offering.
Net cash used in investing activities was approximately $1.5 million during
the six months ended June 30, 1999 as compared to $0.5 million for the six
months ended June 30, 1998 and was comprised primarily of purchases of furniture
and equipment for new employees, and leasehold improvements related to office
expansion. Our planned capital expenditures for the remainder of 1999 are
approximately $4 million, primarily for capital equipment used in our network
infrastructure.
Net cash provided by financing activities increased from $2.0 million for
the six months ended June 30, 1998 to $39.9 million for the six months ended
June 30, 1999. This increase resulted from the receipt of proceeds in June 1999
from our initial public offering in which we issued 4,000,000 shares of common
stock to the public at a price of $11.00 per share.
We believe that our current cash balance will be sufficient to meet our
working capital and capital requirements for at least the next twelve months.
We expect that we will continue to expand our research and development, sales
and marketing and general and administrative activities. In addition, our
future capital requirements will depend on many factors including the level of
investment we make in new businesses, new products or new technologies. To the
extent that our current cash balance is insufficient to fund our future
activities, we may need to obtain additional equity or debt financing.
Additional funds may not be available or, if available, we may not be able to
obtain them on terms favorable to our stockholders and us.
YEAR 2000 READINESS DISCLOSURE
State of Readiness. We utilize a number of computer software programs and
operating systems across our entire organization, including applications used in
financial business systems and various administrative functions. To the extent
that our software applications contain source code that is unable to
appropriately interpret the upcoming Year 2000 and beyond, some level of
modification or replacement of applications will be necessary. We believe that
our internal Year 2000 issues are limited to information technology, or IT,
systems such as software programs and computer operating systems, and we are
working closely with the suppliers of these systems to ensure that all systems
are Year 2000 compliant. Employing a team made up of internal personnel, we
have completed our identification of IT systems that are not yet Year 2000
compliant and have commenced modification or replacement of non-compliant
systems as necessary. We anticipate that modification or replacement and
testing of these systems will be completed by September 1999.
We rely on two Internet service providers for our Internet access. Both
companies have represented in their public filings with the Securities and
Exchange Commission that their systems are fully Year 2000 compliant or that
they have processes in place to achieve full compliance before the Year 2000.
We are relying on these Internet service providers to accomplish these tasks,
but have obtained no contractual commitments from them regarding Year 2000
issues.
11
<PAGE>
We are highly dependent on a few personal computer manufacturing companies for
our supply of desktop hardware and peripherals. To the extent that Year 2000
issues affect these suppliers' ability to deliver on schedule, we have reviewed
our primary suppliers' plans for the Year 2000 compliance to the extent that
Year 2000 issues affect these suppliers' ability to deliver on schedule. Based
on our review, we believe that they have made the necessary modifications to or
replacement of their affected systems. We have no contractual commitment from
our suppliers regarding Year 2000 issues.
In addition, we have not assessed the Year 2000 readiness of our merchants.
Merchants who are not Year 2000 compliant may be unable to utilize our services
resulting in a reduction in our revenues. Furthermore, the Internet as a whole,
and business conducted on the Internet, may be adversely affected by Year 2000
issues. We have no means of assessing such risk.
Costs of Addressing Year 2000 Issues. Given the information known at this time
about our noncompliant systems, coupled with ongoing, normal course-of-business
efforts to upgrade or replace critical systems, as necessary, we do not expect
Year 2000 compliance costs to have any material adverse impact on our business.
We estimate that total costs for the Year 2000 compliance assessment and
remediation will not exceed $100,000. The costs of this assessment and
remediation will be paid out of general and administrative expenses.
Risks of Year 2000 Issues. In light of our assessment and remediation efforts
to date, and the planned, normal course-of-business upgrades, we believe that
any residual Year 2000 risk, other than Year 2000 risks affecting the Internet
as a whole, is limited to non-critical business applications and support
hardware. No assurance can be given, however, that all our systems will be Year
2000 compliant or that compliance will not have a material adverse effect on our
business. We also do not have any assurance that the manufacturers who supply
desktop hardware or software for us will be Year 2000 compliant with their
internal systems; a reduction in the supply of desktop hardware or software from
these suppliers could have a material adverse effect on our business. In this
case, we will find alternate suppliers of desktop hardware and software.
Contingency Plans. We believe that, if our suppliers are not Year 2000
compliant, the reasonably likely worst case would be that we would be unable to
receive desktop hardware and software from them on a timely basis which would
disrupt employee productivity and could materially adversely affect our
business. We plan to develop a contingency plan for all operations to address
the most reasonably likely worst case scenarios regarding Year 2000 compliance.
We expect this contingency plan to be completed by September 1999.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q contains forward-looking statements which
involve risks and uncertainties. This Company's actual results could differ
materially from those anticipated by such forward-looking statements as a result
of certain factors including those set forth below.
We Have a Limited Operating History and Are Subject to the Risks Encountered by
Early-Stage Companies
We commenced operations in March 1996. From March 1996 until December 1997, we
operated as a division of Beyond.com. In December 1997, we were incorporated as
a separate legal entity and our company was spun off from Beyond.com.
Accordingly, we have a very limited operating history, and our business and
prospects must be considered in light of the risks and uncertainties to which
early-stage companies in rapidly evolving markets such as e-commerce are
particularly exposed. These risks include:
. risks that the intense competition and rapid technological change in
our industry could adversely affect market acceptance of all of our
services;
. risks that we may not be able to expand our systems to handle increased
traffic, resulting in slower response times and other difficulties in
providing services to our merchant customers;
12
<PAGE>
. risks that we may not be able to fully utilize relationships with our
strategic partners and indirect sales channels; and
. risks that any fluctuations in our quarterly operating results will be
significant relative to our revenues.
These risks are discussed in more detail below. We cannot assure you that our
business strategy will be successful or that we will successfully address these
risks and the risks detailed below.
We Have a History of Losses, Expect Future Losses and Cannot Assure You that We
Will Achieve Profitability
Although our revenues have increased on a quarterly basis since 1997, we
have not achieved profitability and cannot be certain that we will realize
sufficient revenues to achieve profitability. We have incurred significant net
losses since our inception. We incurred net losses of $4.3 million in 1997,
$10.1 million in 1998 and $11.0 million in the six months ended June 30, 1999.
As of June 30, 1999, we had incurred cumulative losses of $26.6 million. You
should not consider recent quarterly revenue growth as indicative of our future
performance. We do not expect to sustain similar levels of growth in future
periods. We anticipate that we will increase our sales and marketing, network
infrastructure, product development and general and administrative expenses in
1999 and, as a result, we will need to generate significantly higher revenues in
order to achieve profitability. If we do achieve profitability, we may not be
able to sustain it.
The Expected Fluctuations of Our Quarterly Results Could Cause Our Stock Price
to Fluctuate or Decline
We expect that our quarterly operating results will fluctuate
significantly in the future based upon a number of factors, many of which are
not within our control. We plan to further increase our operating expenses in
order to expand our sales and marketing activities, build our network
infrastructure and broaden our service capabilities. We base our operating
expenses on anticipated market growth and our operating expenses are relatively
fixed in the short term. As a result, if our revenues are lower than we expect,
our quarterly operating results may not meet the expectations of public market
analysts or investors, which could cause the market price of our common stock to
decline.
Our quarterly results may fluctuate in the future as a result of many
factors, including the following,
. changes in the number of transactions effected by our merchants,
especially as a result of seasonality or general economic conditions;
. our ability to attract new merchants and to retain our existing
merchants;
. merchant acceptance of our pricing model; and
. our success in expanding our sales and marketing programs.
Other factors that may affect our quarterly results are set forth
elsewhere in this section. As a result of these factors, our revenues are not
predictable with any significant degree of certainty.
Due to the uncertainty surrounding our revenues and expenses, we believe
that quarter-to-quarter comparisons of our historical operating results should
not be relied upon as an indicator of our future performance.
13
<PAGE>
We Could Lose a Significant Portion of Our Business Because We Do Not Have a
Long-Term Contract with Our Largest Customer, Beyond.com
Revenues from services provided to Beyond.com accounted for 23.7% of our
revenues in 1998, 21.9% of our revenues in the first quarter of 1999 and 14.2%
for the second quarter of 1999. No other customer accounted for more than 10%
of our revenues in 1998 or the first six months of 1999. Any significant
decrease in revenues from Beyond.com could materially adversely affect our
operating results. We have no long-term contract with Beyond.com that requires
it to continue to use any of our services. Accordingly, Beyond.com could cease
using all or part of our services on short notice without penalty.
The Demand for Our Services Could Be Negatively Affected by a Reduced Growth of
E-commerce or Delays in the Development of the Internet Infrastructure
Sales of goods and services over the Internet do not currently represent a
significant portion of overall sales of goods and services. We depend on the
growing use and acceptance of the Internet as an effective medium of commerce by
merchants and customers in the United States and internationally. Rapid growth
in the use of and interest in the Internet is a relatively recent development.
In particular, sales of goods and services over the Internet have developed more
slowly outside of the United States. We cannot be certain that acceptance and
use of the Internet will continue to develop or that a sufficiently broad base
of merchants and consumers will adopt, and continue to use, the Internet as a
medium of commerce.
The emergence of the Internet as a commercial marketplace may occur more
slowly than anticipated for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. If the number
of Internet users or their use of Internet resources continues to grow, it may
overwhelm the existing Internet infrastructure. Delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity could also have a detrimental effect. These factors could
result in slower response times or adversely affect usage of the Internet,
resulting in lower numbers of e-commerce transactions and lower demand for our
services.
Potential System Failures and Lack of Capacity Issues Could Negatively Affect
Demand for Our Services
Our ability to deliver services to our merchants depends on the
uninterrupted operation of our e-commerce transaction processing systems. Our
systems and operations are vulnerable to damage or interruption from:
. earthquake, fire, flood and other natural disasters;
. power loss, telecommunications or data network failure, operator
negligence, improper operation by employees, physical and electronic
break-ins and similar events; and
. computer viruses.
Despite the fact that we have implemented redundant servers in a third-
party hosting center, we may still experience service interruptions for the
reasons listed above and a variety of other reasons. If our redundant servers
are not available, our business may not have sufficient business interruption
insurance to compensate us for resulting losses. We have experienced periodic
interruptions, affecting all or a portion of our systems, which we believe will
continue to occur from time to time. In addition, any interruption in our
systems that impairs our ability to provide services could damage our reputation
and reduce demand for our services.
Our success also depends on our ability to grow, or scale, our e-commerce
transaction systems to accommodate increases in the volume of traffic on our
system, especially during peak periods of demand. We may not be able to
anticipate increases in the use of our systems and successfully expand the
capacity of our network infrastructure. Our inability to expand our systems to
handle increased traffic could result in system disruptions, slower response
times and other difficulties in providing services to our merchant customers,
which could materially harm our business.
14
<PAGE>
A Breach of Our E-commerce Security Measures Could Reduce Demand for Our
Services
A requirement of the continued growth of e-commerce is the secure
transmission of confidential information over public networks. We rely on public
key cryptography, an encryption method that utilizes two keys, a public and a
private key, for encoding and decoding data, and digital certificate technology,
or identity verification, to provide the security and authentication necessary
for secure transmission of confidential information. Regulatory and export
restrictions may prohibit us from using the strongest and most secure
cryptographic protection available and thereby expose us to a risk of data
interception. A party who is able to circumvent our security measures could
misappropriate proprietary information or interrupt our operations. Any
compromise or elimination of our security could reduce demand for our services.
We may be required to expend significant capital and other resources to
protect against security breaches or to address any problems they may cause.
Concerns over the security of the Internet and other online transactions and the
privacy of users may also inhibit the growth of the Internet and other online
services generally, and the Web in particular, especially as a means of
conducting commercial transactions. Because our activities involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent security breaches may disrupt our
operations.
The Intense Competition in Our Industry Could Reduce or Eliminate the Demand for
Our Services
The market for our services is intensely competitive and subject to rapid
technological change. We expect competition to intensify in the future. Our
primary source of competition comes from online merchants who develop custom
systems. These online merchants who have made large initial investments to
develop custom systems may be less likely to adopt an outsourced transaction
processing strategy. We also face competition from developers of other systems
for e-commerce transaction processing such as Clear Commerce, CyberCash, Digital
River, HNC Software, Open Market and Hewlett-Packard (VeriFone). In addition,
other companies may enter the market for our services. In the future, we may
also compete with large Internet-centric companies that derive a significant
portion of their revenues from e-commerce and may offer, or provide a means for
others to offer, e-commerce transaction services.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements.
Competition could seriously impede our ability to sell additional services on
terms favorable to us. Our current and potential competitors may develop and
market new technologies that render our existing or future services obsolete,
unmarketable or less competitive. Our current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with other solution providers, thereby increasing the ability of their
services to address the needs of our prospective customers. Our current and
potential competitors may establish or strengthen cooperative relationships with
our current or future channel partners, thereby limiting our ability to sell
services through these channels. We expect that competitive pressures will
require the reduction of the prices of our services and reduce our market share,
either of which could materially and adversely affect our business, results of
operations or financial condition.
If We Lose Key Personnel or Are Unable to Attract and Retain Additional
Qualified Personnel We May Not be Able to Successfully Manage Our Business and
Achieve Our Objectives
We believe our future success will depend upon our ability to retain our
key management personnel, including William S. McKiernan, our President and
Chief Executive Officer, and other key members of management because of their
experience and knowledge regarding the development, special opportunities and
challenges of our business. None of our key employees is subject to an
employment contract. We may not be successful in attracting and retaining key
employees in the future.
15
<PAGE>
Our future success and our ability to expand our operations will also
depend in large part on our ability to attract and retain additional qualified
marketing, sales and technical personnel. Competition for these types of
employees is intense due to the limited number of qualified professionals. We
have in the past experienced difficulty in recruiting qualified marketing,
sales, engineering and support personnel. Failure to attract and retain
personnel, particularly marketing, sales and technical personnel could make it
difficult for us to manage our business and meet our objectives.
Difficulties We May Encounter Managing Our Growth Could Adversely Affect Our
Results of Operations
We have experienced a period of rapid and substantial growth that has
placed and, if such growth continues, will continue to place a strain on our
administrative infrastructure. We have increased the number of our employees
from 45 employees at December 31, 1997 to 127 employees at December 31, 1998 and
196 employees at June 30, 1999. This expansion is placing a significant strain
on our managerial and financial resources.
During 1998, we expended significant time and resources in developing our
management information and control systems and our business plan which was
completed towards the end of 1998. In the future, we may not be able to enhance
our management information and control systems in an efficient and timely
manner, and our current or planned personnel, systems, procedures and controls
may not be adequate to support our future operations. In addition, we may not be
able to hire, train, retain, motivate and manage required personnel or to
successfully identify, manage and exploit existing and potential market
opportunities. If we are unable to manage growth effectively, our business,
results of operations and financial condition would be materially adversely
affected.
If We Are Not Able to Fully Utilize Relationships With Our Indirect Sales
Channel Partners, We May Experience Lower Revenue Growth and Higher Operating
Costs
Our future growth will depend in part on the success of our relationships
with existing and future indirect sales channel partners that will market our
services to their merchant accounts. If these relationships are not successful
or do not develop as quickly as we anticipate, our revenue growth may be
adversely affected. Accordingly, we may have to increase our sales and marketing
expenses in an attempt to secure additional merchant accounts.
Our Management Team Must Work Together Effectively in Order to Expand Our
Business, Increase Our Revenues and Improve Our Operating Results
Several members of our existing senior management personnel joined us
recently. As a result, there is an increased risk that management will not be
able to work together effectively as a team, especially in the short term, to
address the challenges to our business. In addition, our new employees include a
number of key managerial, technical and operations personnel who have been with
us for a limited period of time. We expect to add additional key personnel in
the near future that will also need to be integrated into our management team.
Our Market is Subject to Rapid Technological Change and to Compete, We Must
Continually Enhance Our Systems to Comply with Evolving Standards
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. The Internet and the e-commerce industry are
characterized by rapid technological change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render our technology and systems obsolete. Our success will depend, in
part, on our ability to both internally develop and license leading technologies
to enhance our existing services and develop new services. We must continue to
address the increasingly sophisticated and varied needs of our merchants, and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of proprietary technology
involves significant technical and business risks. We may fail to develop new
technologies effectively or to adapt our proprietary technology and systems to
merchant requirements or emerging industry standards. If we are unable to adapt
to changing market conditions, merchant requirements or emerging industry
standards, our business would be materially harmed.
16
<PAGE>
Our Current and Prior Overlapping Board Members with Beyond.com May Create
Conflicts of Interests and Result in Actions Inconsistent with Stockholder
Interests
In connection with our spin off from Beyond.com in December 1997, we
entered into agreements with Beyond.com to define the ongoing relationship
between the two companies. At the time these agreements were negotiated, all of
our directors were also directors of Beyond.com and other members of our
management team were also executive officers of Beyond.com. As a result, these
agreements were not the result of arms' length negotiations between CyberSource
and Beyond.com. Further, although we and Beyond.com are engaged in different
businesses, the two companies currently have no policies to govern the pursuit
or allocation of corporate opportunities, in the event they arise. Our business
could be adversely affected if the overlapping board members of the two
companies, of which there are currently two, William S. McKiernan and Bert
Kolde, pursue Beyond.com's interests over ours either in the course of
transactions between the companies or where the same corporate opportunities are
available to both companies.
We May Not Be Able to Adequately Protect Our Proprietary Technology and May Be
Infringing Upon Third-Party Intellectual Property Rights
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights.
As part of our confidentiality procedures, we enter into non-disclosure
agreements with our employees. Despite these precautions, third parties could
copy or otherwise obtain and use our technology without authorization, or
develop similar technology independently. Effective protection of intellectual
property rights may be unavailable or limited in foreign countries. We cannot
assure you that the protection of our proprietary rights will be adequate or
that our competitors will not independently develop similar technology,
duplicate our services or design around any patents or other intellectual
property rights we hold.
We also cannot assure you that third parties will not claim our current or
future services infringe upon their rights. We have not conducted any search to
determine whether any of our services or technologies may be infringing upon
patent rights of third parties. As the number of services in our market
increases and functionalities increasingly overlap, companies such as ours may
become increasingly subject to infringement claims. In addition, these claims
also might require us to enter into royalty or license agreements. Any
infringement claims, with or without merit, could cause costly litigation that
could absorb significant management time. If required to do so, we may not be
able to obtain royalty or license agreements, or obtain them on terms acceptable
to us.
We May Not Be Able to Secure Funding in the Future Necessary to Operate Our
Business as Planned
We require substantial working capital to fund our business. We have had
significant operating losses and negative cash flow from operations since
inception and expect this to continue for the foreseeable future. We expect to
use our current cash and cash equivalents primarily to continue investments in
service development, to expand sales and marketing activities, to fund product
development, to fund continued operations and potentially to make future
acquisitions. We believe our existing capital resources, will be sufficient to
meet our capital requirements for at least the next twelve months. However, our
capital requirements depend on several factors, including the rate of market
acceptance of our services, the ability to expand our merchant base, the growth
of sales and marketing and other factors. If capital requirements vary
materially from those currently planned, we may require additional financing
sooner than anticipated. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our stockholders will be reduced,
and these equity securities may have rights, preferences or privileges senior to
those of the holders of our common stock. Additional financing may not be
available when needed on terms favorable to us or at all. If adequate funds are
not available or are not available on acceptable terms, we may be unable to
develop or enhance our services, take advantage of future opportunities or
respond to competitive pressures.
17
<PAGE>
We May Become Subject to Government Regulation and Legal Uncertainties That
Would Adversely Affect Our Financial Results
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, export control laws and laws or regulations directly applicable to e-
commerce. However, due to the increasing usage of the Internet, it is possible
that a number of laws and regulations may be applicable or may be adopted in the
future with respect to conducting business over the Internet covering issues
such as:
. taxes;
. user privacy;
. pricing;
. content;
. right to access personal data;
. copyrights;
. distribution; and
. characteristics and quality of services.
For example, we believe that some of our services may require us to comply
with the Fair Credit Reporting Act. As a precaution, we are implementing changes
to our systems and processes so that we will be in compliance with the act.
Complying with this act requires us to provide information about personal data
stored by us or our merchants. Failure to comply with this act could result in
claims being made against us.
Furthermore, the growth and development of the market for e-commerce may
prompt more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. The adoption of
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for our services and
increase our cost of doing business.
The applicability of existing laws governing issues such as property
ownership, copyrights, encryption and other intellectual property issues,
taxation, libel, export or import matters and personal privacy to the Internet
is uncertain. The vast majority of laws were adopted prior to the broad
commercial use of the Internet and related technologies. As a result, they do
not contemplate or address the unique issues of the Internet and related
technologies. Changes to these laws intended to address these issues, including
some recently proposed changes in the United States regarding taxation and
encryption and in the European Union regarding contract formation and privacy,
could create uncertainty in the Internet marketplace and impose additional costs
and other burdens. This uncertainty, costs and burden could reduce demand for
our services or increase the cost of doing business due to increased costs of
litigation or increased service delivery costs.
18
<PAGE>
Our International Business Exposes Us to Additional Foreign Risks
Services provided to merchants outside the United States accounted for 9%
of our revenues in 1998, 17% of our revenues in the first quarter of 1999 and
30% of our revenues in the second quarter of 1999. We intend to expand our
international presence in the future. Conducting business outside of the United
States is subject to additional risks that may affect our ability to sell our
services and result in reduced revenues, including:
. changes in regulatory requirements;
. reduced protection of intellectual property rights;
. evolving privacy laws in Europe;
. the burden of complying with a variety of foreign laws; and
. political or economic instability or constraints on international
trade.
In addition, some software exports from the United States are subject to
export restrictions as a result of the encryption technology in that software
and we may become liable to the extent we violate these restrictions. We might
not successfully market, sell and distribute our services in local markets and
we cannot be certain that one or more of these factors will not materially
adversely affect our future international operations, and consequently, our
business, financial condition and operating results.
Computer Systems and Software Are Critical to Our Operations and any Significant
Disruption Due to Year 2000 Non-Compliance Would Adversely Affect Our Business
Many currently installed computer systems are not capable of
distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, computer systems and software used by many
companies and organizations in a wide variety of industries, including
technology, transportation, utilities, finance and telecommunications, will
produce erroneous results or fail unless they have been modified or upgraded to
process date information correctly. Year 2000 compliance efforts may involve
significant time and expense, and uncorrected problems could materially
adversely affect our business, financial condition or operating results.
We have completed audits of our internal systems and are working closely
with suppliers of these systems to ensure that all systems are Year 2000
compliant. We have commenced modification or replacement of non-compliant
systems as necessary. In addition, we are highly dependent on a few personal
computer manufacturing companies for our supply of desktop hardware and
peripherals. These suppliers may not be able to deliver on schedule due to Year
2000 issues, which could result in serious disruptions of employee productivity
and materially adversely affect our business.
Existing Stockholders May Exert Control Over CyberSource to the Detriment of
Minority Stockholders
Our officers, directors and principal stockholders (i.e., greater than 5%
stockholders) together control approximately 51.8% of our outstanding common
stock. As a result, these stockholders, if they act together, will be able to
control the management and affairs of CyberSource and all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control of CyberSource and might
affect the market price of our common stock.
19
<PAGE>
Our Stock Price May Fluctuate Substantially
The market price for the common stock will be affected by a number of
factors, including the following:
. the announcement of new services or service enhancements by us or our
competitors;
. quarterly variations in our or our competitors' results of operations;
. changes in earnings estimates or recommendations by securities
analysts;
. developments in our industry; and
. general market conditions and other factors, including factors
unrelated to our operating performance or the operating performance of
our competitors.
In addition, stock prices for many companies in the technology and
emerging growth sectors have experienced wide fluctuations that have often been
unrelated to the operating performance. These factors and fluctuations, as well
as general economic, political and market conditions may materially adversely
affect the market price of our common stock.
The Anti-Takeover Provisions in Our Certificate of Incorporation Could Adversely
Affect the Rights of the Holders of Our Common Stock
Anti-takeover provisions of Delaware law and our Certificate of
Incorporation may make a change in control of CyberSource more difficult, even
if a change in control would be beneficial to the stockholders. These provisions
may allow the Board of Directors to prevent changes in the management and
control of CyberSource. Under Delaware law, our Board of Directors may adopt
additional anti-takeover measures in the future.
One anti-takeover provision that we have is the ability of our Board of
Directors to determine the terms of preferred stock and issue preferred stock
without the approval of the holders of the common stock. Our Certificate of
Incorporation allows the issuance of up to 5,610,969 shares of preferred stock.
As of June 30, 1999, there are no shares of preferred stock outstanding.
However, because the rights and preferences of any series of preferred stock may
be set by the Board of Directors in its sole discretion without approval of the
holders of the common stock, the rights and preferences of this preferred stock
may be superior to those of the common stock. Accordingly, the rights of the
holders of common stock may be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We provide our services to customers primarily in the United States and, to a
lesser extent, in Europe and elsewhere throughout the world. As a result, our
financial results could be affected by factors, such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. All
sales are currently made in U.S. dollars or pound sterling. A strengthening of
the dollar or the pound sterling could make our products less competitive in
foreign markets. Our interest income is sensitive to changes in the general
level of U.S. interest rates. Due to the nature of our short-term investments,
which are primarily money market funds, we have concluded that there is no
material market risk exposure.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 alleges several
causes of action, including wrongful termination, defamation, fraud, and unfair
business practices arising out of her three month employment with the Company.
While there can be no assurances as to the outcome of this litigation, the
Company believes the lawsuit is without merit, and intends to vigorously defend
against the claims asserted.
ITEM 2. CHANGES IN SECURITIES.
Upon the closing of our initial public offering in June 1999, all
outstanding shares of CyberSource's Preferred Stock were automatically converted
into 10,489,792 shares of Common Stock. Following such closing, CyberSource
filed an amendment to its Restated Certificate of Incorporation with the
Delaware Secretary of State which authorized 5,610,969 shares of undesignated
Preferred Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In June 1999, prior to its initial public offering, CyberSource submitted
the following matters to a vote of its security holders through an Action by
Written Consent. Each of the matters were approved by holders of the required
majority of CyberSource's outstanding Common Stock and Preferred Stock.
1. To approve and adopt a 1999 Employee Stock Purchase Plan and
to reserve a total of 500,000 shares of Common Stock
thereunder for issuance to employees.
2. To approve an amendment to CyberSource's Restated Certificate
of Incorporation to effect a one-for-two stock split of all
the outstanding shares of Common Stock.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
--------
Exhibit
Number Description
------- -------------------------------------------------------------------------------
<S> <C>
3.1* Certificate of Incorporation of CyberSource Corporation, as amended.
3.2* CyberSource Corporation's Bylaws.
3.3* Bylaw Amendment.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
10.1* Form of Indemnification Agreement between CyberSource Corporation and each of
its officers and directors.
10.2* 1998 Stock Option Plan.
10.3* 1999 Stock Option Plan.
10.4* Standard Office Lease dated August 20, 1996 by and between California State
Automobile Association Inter-Insurance Bureau as Landlord and CyberSource
Corporation as Tenant.
10.5* First Amendment to Lease dated October 20, 1997 by and between California
State Association Inter-Insurance Bureau as Landlord and CyberSource
Corporation as Tenant.
10.6* Assignment of Standard Office Lease dated December 31, 1997 by and between
CyberSource Corporation as Assignor and Internet Commerce Services Corporation
as Assignee.
10.7* Sublease dated July 1, 1998 by and between MultiGen Inc. of California as
Sublessor and CyberSource of California as Sublessee.
10.8* Second Amendment to Lease dated October 30, 1998 by and between California
State Automobile Association Inter-Insurance Bureau as Landlord and
CyberSource Corporation as Tenant.
10.9+* Conveyance Agreement dated December 31, 1997 by and between CyberSource
Corporation and Internet Commerce Services Corporation.
10.10+* Amended and Restated Inter-Company Cross License Agreement dated May 19, 1998
by and between Internet Commerce Services Corporation and software.net
Corporation.
10.11+* Internet Commerce Services Agreement dated April 23, 1998 by and between
Internet Commerce Services Corporation and software.net Corporation.
10.12* Amended and Restated Investors' Rights Agreement dated October 21, 1998.
10.14* 1999 Employee Stock Purchase Plan.
27.1 Financial Data Schedule.
</TABLE>
-------------------------
* Incorporated by reference to the same numbered exhibit previously
filed with the Company's Registration Statement on Form S-1
(Registration No. 333-77545).
+ Confidential treatment granted as to portions of this exhibit.
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
-------------------
during the quarter ended June 30, 1999.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERSOURCE CORPORATION
-----------------------
(Registrant)
Date: August 13, 1999 By /s/ Charles E. Noreen, Jr.
--------------------------------------
Charles E. Noreen, Jr.
Vice President of Finance and
Administration and Chief Financial Officer
(Authorized Officer and Principal Financial
Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999 CYBERSOURCE CORPORATION FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 42,990
<SECURITIES> 0
<RECEIVABLES> 1,410
<ALLOWANCES> (216)
<INVENTORY> 0
<CURRENT-ASSETS> 844
<PP&E> 5,955
<DEPRECIATION> (1,918)
<TOTAL-ASSETS> 49,302
<CURRENT-LIABILITIES> 6,390
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 42,190
<TOTAL-LIABILITY-AND-EQUITY> 49,302
<SALES> 0
<TOTAL-REVENUES> 4,249
<CGS> 3,741
<TOTAL-COSTS> 11,526
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> (11,048)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,048)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,048)
<EPS-BASIC> (1.93)
<EPS-DILUTED> 0
</TABLE>
