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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 September 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)
Delaware 77-0472961
---------------------
(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 [X] No [ ]
As of October 31, 1999, there were 21,991,530 shares of common stock, par value
$0.001 per share, outstanding.
This Report on Form 10-Q includes 25 pages with the Index to Exhibits located on
page 24.
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CYBERSOURCE CORPORATION
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998........................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 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.................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 23
Item 2. Changes in Securities and Use of Proceeds..................................... 23
Item 6. Exhibits and Reports on Form 8-K.............................................. 24
Signature .............................................................................. 25
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 (1)
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,461 $ 11,111
Short-term investments 14,790 -
Accounts receivable, net of allowances of $504 and $229 at September 30,
1999 and December 31, 1998, respectively 2,079 863
Prepaid expenses and other current assets 1,101 411
------------ -----------
Total current assets 41,431 12,385
Property and equipment, net 6,733 2,300
Other noncurrent assets 211 290
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Total assets $ 48,375 $ 14,975
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 1,577 $ 531
Other accrued liabilities 3,210 969
Deferred revenues 455 120
Current obligations under capital leases 642 211
Convertible note payable to an officer and stockholder - 3,000
------------ -----------
Total current liabilities 5,884 4,831
Noncurrent obligations under capital leases 545 256
Redeemable convertible preferred stock - 18,911
Stockholders' equity (net capital deficiency):
Common stock 22 5
Additional paid-in capital 70,571 1,199
Deferred compensation (799) (142)
Accumulated deficit (27,848) (10,085)
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Total stockholders' equity (net capital deficiency) 41,946 (9,023)
------------ -----------
Total liabilities and stockholders' equity (net capital deficiency) $ 48,375 $ 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.
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CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- -----------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 3,634 $ 943 $ 7,883 $ 2,281
Cost of revenues 3,094 895 6,835 2,197
--------- -------- --------- --------
Gross profit 540 48 1,048 84
Operating expenses:
Product development 2,233 1,055 5,207 2,534
Sales and marketing 3,970 1,118 10,256 2,789
General and administrative 1,485 571 3,528 1,314
Deferred compensation amortization 156 - 379 -
--------- -------- --------- --------
Total operating expenses 7,844 2,744 19,370 6,637
--------- -------- --------- --------
Loss from operations (7,304) (2,696) (18,322) (6,553)
Interest income (expense), net 589 (39) 559 (21)
--------- -------- --------- --------
Net loss $ (6,715) $ (2,735) $ (17,763) $ (6,574)
========= ======== ========= ========
Basic and diluted net loss per share $ (0.31) $ (0.53) $ (1.58) $ (1.38)
========= ======== ========= ========
Shares used in computing basic and diluted net loss per
share 21,927 5,209 11,246 4,763
========= ======== ========= ========
Proforma basic and diluted net loss per share $ (0.31) $ (0.98)
========= =========
Shares used in computing proforma basic and diluted net loss
per share 21,927 18,124
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $ (17,763) $ (6,574)
Adjustments to reconcile net loss to net cash used in operating activities:
Common stock issued to consultants for services 81 -
Depreciation 1,527 500
Amortization of deferred compensation 379 -
Changes in operating assets and liabilities:
Accounts receivable (1,216) (330)
Prepaid expenses and other current assets (611) (151)
Accounts payable 1,046 683
Other accrued liabilities 2,241 497
Deferred revenues 335 (38)
----------- ----------
Net cash used in operating activities (13,981) (5,413)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,899) (800)
Purchases of short-term investments (14,790) -
----------- ----------
Net cash used in investing activities (19,689) (800)
CASH FLOWS FROM FINANCING ACTIVITES:
Proceeds from issuance of convertible note payable to an officer and stockholder - 3,000
Principal payments on capital lease obligations (341) (21)
Loan to Beyond.com Corporation - (400)
Repayment of loan by Beyond.com Corporation - 400
Proceeds from issuance of common stock in initial public offering, net of offering expenses 46,185 -
Proceeds from exercise of stock options 176 -
Proceeds from issuance of redeemable convertible preferred stock, net - 1,980
----------- -----------
Net cash provided by financing activities 46,020 4,959
----------- -----------
Increase (decrease) in cash and cash equivalents 12,350 (1,254)
Cash and cash equivalents at beginning of period 11,111 2,000
----------- -----------
Cash and cash equivalents at end of period $ 23,461 $ 746
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 250 $ 61
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ 1,061 -
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
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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 (collectively,
"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 nine-
month periods ended September 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 November 4, 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-
89337.
The Company completed the initial public offering of its common stock in June
1999 (the "IPO"). A total of 4,000,000 shares of common stock were 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. In July 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.
The Company completed a secondary offering of its common stock in November
1999. A total of 2,000,000 shares of common stock were sold by the Company to
the public at a price of $59.00 per share. In addition, 1,800,000 shares were
sold by selling shareholders. The net proceeds to the Company were
approximately $111 million after deducting the underwriters discount and
offering expenses.
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.
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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 1,001,000 outstanding options and 1,527,000
shares issuable on conversion of the convertible note payable and exercise of
outstanding warrants at December 31, 1998. If the Company had reported net
income for the nine months ended September 30, 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 3,137,000 shares of common stock at
September 30, 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.
3. COMPREHENSIVE LOSS
The Company has no material components of other comprehensive loss and, as a
result, the comprehensive loss is the same as the net loss for all periods
presented.
4. 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. In November 1999, the Company and the plaintiff agreed to a
settlement which is immaterial to the financial statements.
5. 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 nine months ended September 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 Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1999 1998 1999 1998
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
ETCS................................................... $ 3,386 $ 842 $ 7,267 $ 1,742
DPR.................................................... 248 101 616 539
----------- -------- ---------- ---------
Total.................................................. $ 3,634 $ 943 $ 7,883 $ 2,281
=========== ======== ========== =========
</TABLE>
Additionally, in 1998 the Company derived less than 10% of its revenues from
outside the United States. Revenues from outside the United States were 25% of
revenues for the nine months ended September 30, 1999.
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6. RELATED PARTY TRANSACTIONS
In July 1999, the Company purchased a software license from Beyond.com for
$600,000 which is being amortized over two years.
7. SUBSEQUENT EVENTS
Stock Option Plan
In October 1999, the Company adopted the 1999 Nonqualified Stock Option Plan
(the 1999 Nonqualified Plan). The Company has reserved 1,100,000 shares of
common stock for issuance under the 1999 Nonqualified Plan. The 1999
Nonqualified Plan provides for the granting of non-qualified stock options
to employees, consultants and directors. The other provisions of the 1999
Nonqualified Plan are similar to those of the 1999 Stock Option Plan and the
1998 Stock Option Plan.
Litigation and Contingencies
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.
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. 333-89337.
The Company completed the initial public offering of its common stock in June
1999. A total of 4,000,000 shares of common stock were 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. In July 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.
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The Company completed a secondary offering of its common stock in November 1999.
A total of 2,000,000 shares of common stock were sold by the Company to the
public at a price of $59.00 per share. The net proceeds to the Company were
approximately $111 million after deducting the underwriters discount and
offering expenses. In addition, 1,800,000 shares of common stock were sold to
the public by selling stockholders.
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 September 30, 1999 had
incurred cumulative losses of approximately $33.3 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Revenues were $3.6 million for the three months ended September
30, 1999 as compared to $0.9 million for the three months ended September 30,
1998, an increase of approximately $2.7 million or 285.4%. 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 2.5 million processed during the
three months ended September 30, 1998 to approximately 11.8 million processed
during the three months ended September 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 were $3.1 million or
85.1% of revenues for the three months ended September 30, 1999 as compared to
$0.9 million or 94.9% of revenues for the three months ended September 30, 1998.
The increase in dollars 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 were $2.2 million for the three months
ended September 30, 1999 as compared to $1.1 million for the three months ended
September 30, 1998. The increase is due to higher personnel
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related costs resulting from an increase in personnel and increased 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 were $4.0 million for the three months ended September 30,
1999 as compared to $1.1 million for the three months ended September 30, 1998.
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 were $1.5 million for the three
months ended September 30, 1999 as compared to $0.6 million for the three months
ended September 30, 1998. 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. Amortization expense related to
deferred compensation was $0.2 million for the three months ended September 30,
1999. Deferred compensation amortization related to 1998 and 1999 stock option
grants will be approximately $0.6 million, $0.4 million and $0.2 million in
1999, 2000 and 2001, respectively.
Interest Income (Expense), Net. Interest income consists of interest
earnings on cash, cash equivalents and short-term investments and was $0.6
million for the nine months ended September 30, 1999 as compared to $15,000 for
the nine months ended September 30, 1998. The increase is primarily due to an
increase in cash, cash equivalents and short-term investments as a result of our
initial public offering in June 1999. Interest expense was $53,000 for the three
months ended September 30, 1999 as compared to $54,000 in the three months ended
September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Revenues were $7.9 million for the nine months ended September
30, 1999 as compared to $2.3 million for the nine months ended September 30,
1998, an increase of approximately $5.6 million or 245.6%. The increase is due
to the addition of merchants and transaction volume increases from existing
merchants resulting from the increased market acceptance of e-commerce. Our
transactions processed increased from approximately 4.5 million during the nine
months ended September 30, 1998 to approximately 25.5 million during the nine
months ended September 30, 1999.
Cost of Revenues. Cost of revenues were $6.8 million or 86.7% of revenues
for the nine months ended September 30, 1999 as compared to $2.2 million or
96.3% of revenues for the nine months ended September 30, 1998. The increase is
due primarily to additional operations and merchant support personnel related
costs and costs associated with our use of a second third-party hosting center
in the United States which commenced operations during the quarter ended
September 30, 1999. 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 were $5.2 million for
the nine months ended September 30, 1999 as compared to $2.5 million for the
nine months ended September 30, 1998. The increase is primarily due to higher
personnel related costs resulting from an increase in personnel.
Sales and Marketing. Sales and marketing expenses were $10.3 million for
the nine months ended September 30, 1999 as compared to $2.8 million for the
nine months ended September 30, 1998. The increase is primarily due to an
increase in marketing and promotional programs, higher personnel related costs
resulting from an increase in personnel and higher sales commissions resulting
from an increase in sales.
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General and Administrative. General and administrative expenses were $3.5
million for the nine months ended September 30, 1999 as compared to $1.3 million
for the nine months ended September 30, 1998. 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 including our expected relocation to
a new facility in early 2000.
Deferred Compensation. During the nine months ended September 30, 1999, we
recorded an aggregate unearned compensation in the amount of $1.0 million in
connection with the grant of stock options with exercise prices less than the
deemed fair market value on the respective date of grant and amortized $0.4
million of deferred compensation during that period. Deferred compensation
amortization related to these stock option grants, as well as 1998 stock option
grants, will be approximately $0.6 million, $0.4 million and $0.2 million for
the years 1999, 2000 and 2001 and thereafter.
Interest Income (Expense), Net. Interest income was $0.8 million for the
nine months ended September 30, 1999 as compared to $41,000 for the nine months
ended September 30, 1998. The increase is primarily due to an increase in cash,
cash equivalents and short-term investments as a result of equity financings
completed during 1999, including our initial public offering in June 1999.
Interest expense was $0.3 million for the nine months ended September 30, 1999
as compared to $62,000 for the nine months ended September 30, 1998. The
increase represents interest on an unsecured convertible note issued in August
1998 and interest on capital leases. The convertible note was converted into
equity in June 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments increased by $27.2
million from approximately $11.1 million at December 31, 1998 to $38.3 million
at September 30, 1999. This increase resulted from the receipt of net proceeds
of $46.2 million in June and July 1999 from our initial public offering. This
was offset by net losses incurred during the nine months ended June 30, 1999 as
well as capital expenditures.
Net cash used in our operating activities was approximately $14.0 million
for the nine months ended September 30, 1999 as compared to $5.4 million for the
nine months ended September 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 the expansion of our operations and the related costs and
increases in accrued personnel related to headcount growth.
Net cash used in investing activities was approximately $19.7 million
during the nine months ended September 30, 1999 as compared to $0.8 million for
the nine months ended September 30, 1998 and was comprised primarily of
purchases of short-term investments, capital equipment used in our network
infrastructure, furniture and equipment for new employees and leasehold
improvements related to office expansion. Our planned capital expenditures for
the remainder of 1999 are approximately $1.5 million, primarily for capital
equipment used in our network infrastructure.
Net cash provided by financing activities increased from $5.0 million for
the nine months ended September 30, 1998 to $46.0 million for the nine months
ended September 30, 1999. This increase resulted from the receipt of proceeds in
June and July 1999 from our initial public offering in which we issued a total
of 4,600,000 shares of common stock to the public at a price of $11.00 per
share.
With the $46.2 million of net proceeds from the initial public offering in
June and July 1999, the Company purchased $14.8 million of short-term
investments, acquired $3.4 million of property and equipment and used $7.5
million to fund operations during the three months ended September 30, 1999. The
remaining $18.9 million of net proceeds was held in various cash and cash
equivalent accounts as of September 30, 1999.
We believe that our current cash and investment balances, together with the
net cash proceeds of approximately $111 million received from our secondary
offering in November 1999, 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
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future capital requirements will depend on many factors including the level of
investment we make in new businesses, new products or new technologies. A
portion of the net proceeds may be used to invest or acquire complementary
businesses or technologies. To the extent that our current cash balance,
together with the cash proceeds received from our secondary offering in November
1999 and expected future earnings, 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. We have compiled certifications and representations of
Year 2000 compliance from publishers of all operating systems and software
utilized by our employees in the normal course of business. Employing a team
made up of internal personnel, we are currently testing the IT systems to
determine if any additional modifications or replacements are necessary. To
date, we do not believe that such additional modifications or replacements are
necessary. We anticipate that the final round of testing of these systems will
be completed by the end of November 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.
We developed proprietary software to perform the Internet commerce services. We
have completed all code reviews and modifications we believe are necessary to
make our services Year 2000 compliant. We are currently in the process of
conducting the final round of testing to determine if any additional
modifications are necessary. To date, we do not believe that additional
modifications are necessary. We anticipate that the final round of testing of
these systems will be completed by November 1999.
We are highly dependent on a few personal computer manufacturing companies for
our supply of desktop hardware and peripherals. 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 non-compliance will not have a material
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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 have alternate suppliers in place in the event that our current
suppliers are not able to provide the necessary hardware and software. With
regard to our systems in separately located data center facilities, we expect to
complete building and testing of the redundant systems by November 1999.
Additionally, our IT, engineering, operations and merchants services departments
will be fully staffed 24 hours a day from December 30, 1999 through January 4,
2000 to address issues arising from non-compliance of our services or of our
merchants, if any.
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;
. 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 $17.8 million in the nine months ended September 30, 1999. As of
September 30, 1999, we had incurred cumulative losses of $33.3 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 have continued to increase our sales and marketing, network
infrastructure, product development and general and administrative expenses in
1999 and plan to continue to do so in 2000. 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.
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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, success of each merchant's
business, general economic conditions or regulatory requirements
restricting our merchants;
. our ability to attract new merchants and to retain our existing
merchants;
. merchant acceptance of our pricing model;
. our success in expanding our sales and marketing programs; and
. an interruption with one or more of our gateway processors and channel
partners.
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.
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 and 15.3% of our revenues in the nine months ended September
30, 1999. No other customer accounted for more than 10% of our revenues in 1998
or the first nine 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
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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 third-party
hosting centers, two of which are currently located in Santa Clara, California,
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.
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
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systems for e-commerce transaction processing such as Clear Commerce, CyberCash,
Digital River, Hewlett-Packard (VeriFone), HNC Software, Open Market, PaylinX,
ShopNow.com and Signio. In addition, other companies, including financial
services and credit companies such as First Data Corporation, AT&T and GE
Capital, 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. For example, Microsoft and CyberCash have each
introduced electronic-wallet solutions, that if widely adopted by consumers, may
result in reduced demand by our merchants for our fraud screening services. 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.
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
209 employees at September 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
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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
within the last year. As a result, there is a risk that management will not be
able to work together effectively as a team 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.
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.
Intellectual Property and Patent Infringement Claim
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
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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. In November 1999, Net MoneyIN filed an action against us in the U.S.
District Court in the District of Arizona claiming that we have infringed,
induced others to infringe, and contributed to the infringement by others of
claims of U.S. Patent No. 5,822,737 and U.S. Patent No. 5,963,917. Net
MoneyIN's complaint seeks injunctive relief and unspecified damages. We have
received an opinion of our patent counsel that the claims of the Net MoneyIN 737
patent are not infringed by our services. In addition, we believe, based upon
consultation with our patent counsel, that the claims of the Net MoneyIN 917
patent are not infringed by our services. However, there can be no assurances
that our payment services will not ultimately be determined to infringe upon the
Net MoneyIN patents, and we anticipate that Net MoneyIN will continue to pursue
litigation with respect to these claims.
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.
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;
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. 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.
Our International Business Exposes Us to Additional Foreign Risks
Services provided to merchants outside the United States accounted for 9.0%
of our revenues in 1998 and 24.9% of our revenues for the nine months ended
September 30, 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.
We rely on different gateway processors to provide credit card processing
services for our international transactions than for our domestic transactions.
Our international revenue depends on our international merchants' ability to
process transactions with these gateway processors. We are currently
renegotiating our relationship with one of our international gateway processors.
Although we expect a favorable outcome to these negotiations, we can offer no
assurance that we will agree upon mutually acceptable terms. If we do not agree
upon mutually acceptable terms, this international gateway processor could
interrupt or terminate the services provided by it to some of our international
merchants. Although we have another international gateway processor in place
and are developing relationships with other international gateway processors, an
interruption or termination of services provided by this international gateway
processor could materially adversely affect our international revenues.
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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.
Also, sales of our services conducted through our subsidiary in the United
Kingdom are denominated in Pounds Sterling. We may experience fluctuations in
revenues or operating expenses due to fluctuations in the value of the Pound
Sterling relative to the U.S. Dollar. We do not currently hedge with respect to
currency exchange fluctuations.
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.
We Intend to Pursue Strategic Acquisitions and Our Business Could Be Materially
Adversely Affected if We Fail to Adequately Integrate Acquired Businesses
As part of our overall business strategy, we intend to pursue strategic
acquisitions of complementary businesses or technologies that would provide
additional service offerings, additional industry expertise, a broader client
base or an expanded geographic presence. From time to time, we have engaged in
discussions with third parties concerning potential acquisitions of product
lines, technologies and businesses. Any future acquisition could result in the
use of significant amounts of cash, potentially dilutive issuances of equity
securities, or the incurrence of debt or amortization expenses related to
goodwill and other intangible assets, any of which could materially adversely
affect our business, operating results and financial condition. In addition,
acquisitions involve numerous risks, including:
. difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
. the diversion of management's attention from other business concerns;
. risks of entering markets in which we have no or limited prior
experiences; and
. the potential loss of key employees of the acquired company.
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 47.4% of our outstanding common
stock. As a result, these stockholders, if they act together, may be able to
control our management and affairs and matters requiring stockholder approval,
including the election of
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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.
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.
Sales of Shares Eligible For Future Sale Could Cause Our Stock Price to Decline
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding stock options and warrants) in
the public market, the market price of our common stock could fall. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
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 4,988,842 shares of preferred stock.
As of September 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.
21
<PAGE>
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.
22
<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.
In November 1999, Net MoneyIN filed an action against the Company in the
U.S. District Court in the District of Arizona claiming that the Company has
infringed, induced others to infringe, and contributed to the infringement by
others of claims of U.S. Patent No. 5,822,737 and U.S. Patent No. 5,963,917.
Net MoneyIN's complaint seeks injunctive relief and unspecified damages. The
Company has received an opinion of its patent counsel that the claims of the Net
MoneyIN 737 patent are not infringed by the Company's services. In addition,
the Company believes, based upon consultation with its patent counsel, that the
claims of the Net MoneyIN 917 patent are not infringed by the Company's
services. However, there can be no assurances that the Company's payment
services will not ultimately be determined to infringe upon the Net MoneyIN
patents, and the Company anticipates that Net MoneyIN will continue to pursue
litigation with respect to these claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended September 30, 1999, the Company issued 18,992
shares of common stock pursuant to stock option exercises with aggregate
proceeds of $6,699.
With the $46.1 million of net proceeds from the initial public offering of
its common stock in June and July 1999, the Company purchased $14.8 million of
short-term investments, acquired $3.4 million of property and equipment and used
$7.5 million to fund operations during the three months ended September 30,
1999. The remaining $18.9 million of net proceeds was held in various cash and
cash equivalent accounts as of September 30, 1999.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit
Number Description
------ --------------------------------------------------------------
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.
10.15+** Development and Marketing Agreement dated July 26, 1999 by and
between CyberSource Corporation and VISA U.S.A., Inc.
10.16+** CyberSource Internet Commerce Services Agreement dated May 1,
1999 by and between CyberSource Corporation and Beyond.com
Corporation.
10.17** 1999 Nonqualified Stock Option Plan.
10.18+** Software License Agreement dated June 30, 1999 by and between
CyberSource Corporation and Beyond.com Corporation.
27.1 Financial Data Schedule.
---------------------
* Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 (Registration No.
333-77545).
** Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 (Registration No.
333-89337).
+ 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 September 30, 1999.
24
<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: November 12, 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)
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23,461
<SECURITIES> 14,790
<RECEIVABLES> 2,583
<ALLOWANCES> (504)
<INVENTORY> 0
<CURRENT-ASSETS> 1,101
<PP&E> 9,408
<DEPRECIATION> (2,675)
<TOTAL-ASSETS> 48,375
<CURRENT-LIABILITIES> 5,884
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 41,924
<TOTAL-LIABILITY-AND-EQUITY> 48,375
<SALES> 0
<TOTAL-REVENUES> 7,883
<CGS> 6,835
<TOTAL-COSTS> 19,370
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (559)
<INCOME-PRETAX> (17,763)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,763)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,763)
<EPS-BASIC> (1.58)
<EPS-DILUTED> 0
</TABLE>
