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Filed pursuant to Rule 424(b)(4)
Registration No. 333-77545
PROSPECTUS
4,000,000 Shares
[CYBERSOURCE LOGO APPEARS HERE]
Common Stock
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This is CyberSource Corporation's initial public offering of common
stock.
Prior to this offering, no public market existed for the shares. The
common stock has been approved for listing on the Nasdaq National Market under
the symbol "CYBS."
Investing in the common stock involves risks which are described in the
"Risk Factors" section beginning on page 4 of this prospectus.
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Per Share Total
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Public offering price............................ $11.00 $44,000,000
Underwriting discount............................... $.77 $3,080,000
Proceeds, before expenses, to CyberSource
Corporation........................................ $10.23 $40,920,000
</TABLE>
The underwriters may also purchase up to an additional 600,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
----------------
Merrill Lynch & Co.
J.P. Morgan & Co.
PaineWebber Incorporated
C.E. Unterberg, Towbin
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The date of this prospectus is June 23, 1999.
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The graphic depicts the CyberSource logo with the words "the power behind the
buy button" to the left of a screenshot of the Beyond.com web site. Below the
screenshot are four colored lines representing data streams. The colored lines
extend from the Beyond.com screenshot to a large box containing five gears with
the title "Internet Commerce Suite." The colored lines proceed and pass between
the five gears inside the large box. The upper left gear is titled
"Distribution Control" and contains a picture of an airplane as a graphical
fill. The upper right gear is titled "Tax Services" and contains financial data
as a graphical fill. The lower left gear is titled "Fulfillment Management" and
contains a picture of a warehouse as a graphical fill. The lower middle gear is
title "Payment Services" and contains a picture of currency and a credit card as
a graphical fill. The lower right gear is titled "Risk Management" and contains
a picture of a credit card swipe as a graphical fill. Three of the colored lines
extend to three boxes aligned below the graphic. The box on the left contains a
picture of three individuals unloading boxes from a delivery truck. The middle
box contains financial data, the term "Bank" and the phrase "order status
cleared." The box on the right contains graphs that represent "Merchant Data
Analysis Results for Risk Management." Below this box is the disclaimer
"Artist's depiction. Not actual data".
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TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Forward-Looking Statements............................................... 13
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 23
Management............................................................... 37
Principal Stockholders................................................... 46
Transactions between CyberSource and its Officers, Directors and
Significant Stockholders................................................ 48
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 54
Legal Matters............................................................ 57
Experts.................................................................. 57
Where You Can Find More Information...................................... 57
Index to Consolidated Financial Statements............................... F-1
</TABLE>
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Unless otherwise indicated, the information in this prospectus
. reflects the conversion of all outstanding shares of preferred
stock into 10,489,792 shares of common stock effective
automatically upon the closing of this offering;
. reflects a one-for-two reverse split of our outstanding common
stock;
. assumes the issuance of an aggregate of 1,527,048 shares of common
stock pursuant to the exercise of warrants and the conversion of a
convertible promissory note which was converted on June 7, 1999;
and
. assumes no exercise of the underwriters' over-allotment option.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to
provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition,
results of operations and prospects may have changed since that date.
CyberSource(R) is a registered trademark of CyberSource Corporation.
This prospectus contains product names and trade names and trademarks of
CyberSource and of other organizations.
<PAGE>
PROSPECTUS SUMMARY
This summary is not complete and does not contain all of the information
that may be important to you. You should read the entire prospectus carefully,
including the financial data and related notes, before making an investment
decision.
CyberSource Corporation
We are a leading developer and provider of real-time, or on-demand, e-
commerce transaction services. Through our Internet Commerce Suite, we offer
services to online merchants for global payment processing, fraud prevention,
tax calculation, export compliance, territory management, delivery address
verification and fulfillment management. Our services enable online merchants
to focus their resources on areas where they can most effectively differentiate
themselves, such as marketing, Web site content, merchandising and customer
support. By outsourcing their e-commerce transaction processing needs to us,
online merchants can speed their time to market, reduce their overall operating
costs and process orders from around the world in local currencies. Our
services are comprehensive, scalable (adaptable to meet increases in the number
of transactions), highly reliable and performed via a secure messaging
protocol, or transmission format. Our merchants have used our services to
process more than 14 million transactions since January 1998, of which
approximately 5.8 million were processed in the first quarter of 1999.
As the Internet has become an increasingly important communications
medium, merchants and consumers have embraced using the Internet to buy and
sell goods and services. International Data Corporation, or IDC, forecasts that
the actual number of Web buyers worldwide will expand from 28 million in 1998
to approximately 128 million in 2002 and that the amount of commerce conducted
over the Web will increase from approximately $50 billion in 1998 to
approximately $734 billion in 2002 worldwide. To succeed online, a merchant
must attract customers to its Web site and provide an appealing and easy-to-use
environment that encourages customers to place an order by clicking on the
"buy" button. Once the customer places an order, the merchant must then process
the order by executing numerous transactions, such as credit card
authorization, calculation of sales tax and fulfillment of the order, often
while the customer is waiting.
While early adopters of e-commerce business models often developed custom
transaction processing systems, today many online merchants are seeking to
outsource their transaction processing requirements. Our services offer online
merchants a solution to the challenges of e-commerce transaction processing.
Key benefits of our services include:
. Faster time-to-market,
. Access to a comprehensive suite of services,
. Enhanced merchant flexibility and control,
. Global reach, and
. Reduced overall costs.
More than 400 customers have chosen to use our services. Our merchants
include Beyond.com, BUY.COM, Compaq Computer, Egghead.com, Fawcette
Publications, Remedy and Shopping.com. We target merchants worldwide through a
direct sales force as well as through an indirect sales channel. Our indirect
sales channel partners include payment service providers, systems integrators,
developers of software for Internet commerce servers and merchant aggregators
(Internet companies that host groups of merchants). We have also entered into
strategic relationships with General Electric Capital Corp., or GE Capital, and
Visa International to penetrate new e-commerce markets.
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CyberSource Corporation was incorporated by Beyond.com in Delaware in
December 1997 under the name Internet Commerce Services Corporation.
Beyond.com, whose original name was CyberSource Corporation, contributed all
the assets and liabilities comprising its Internet commerce services business
to Internet Commerce Services Corporation and spun off Internet Commerce
Services Corporation to Beyond.com's stockholders in December 1997. In October
1998 we changed our name to CyberSource Corporation. Our headquarters are
located at 550 S. Winchester Blvd., Suite 301, San Jose, California 95128, and
our telephone number is (408) 556-9100. Information contained on our Web site
at www.cybersource.com does not constitute part of this prospectus.
The Offering
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Common stock offered.... 4,000,000 shares
Common stock to be
outstanding after this
offering............... 21,548,816 shares(1)
Use of proceeds......... For general corporate purposes, including sales and marketing,
product development and other corporate expenses.
Nasdaq National Market
symbol................. CYBS
</TABLE>
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(1) Excludes 2,035,575 shares of common stock issuable upon exercise of options
outstanding and 1,389,949 shares available for grant as of March 31, 1999
(of which options to purchase 311,000 shares were granted in April 1999 and
options to purchase 736,250 shares were granted in June 1999) under our
1998 Stock Option Plan and our 1999 Stock Option Plan. Also excludes an
additional 500,000 shares reserved for issuance under our 1999 Employee
Stock Purchase Plan. See "Description of Capital Stock--Authorized and
Outstanding Capital Stock" and Notes 5 and 9 of Notes to Consolidated
Financial Statements.
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Summary Consolidated Financial Data
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Period From
March 20, 1996 Years Ended Three Months
(Inception) to December 31, Ended March 31,
December 31, ----------------- ----------------
1996 1997 1998 1998 1999
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(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues................... $ 144 $ 968 $ 3,384 $ 639 $ 1,713
Gross profit (loss)........ 7 644 (87) (8) 208
Total operating expenses... 1,150 4,969 9,950 1,823 4,406
Loss from operations....... (1,143) (4,325) (10,037) (1,831) (4,198)
Net loss................... $(1,143) $(4,338) $(10,085) $(1,824) $(4,190)
Basic and diluted net loss
per share................. $ (2.05) $ (0.40) $ (0.77)
Shares used in computing
basic and diluted net loss
per share................. 4,918 4,535 5,465
Pro forma basic and diluted
net loss per share........ $ (0.86) $ (0.26)
Shares used in computing
pro forma basic and
diluted net loss per
share(1).................. 11,740 15,955
Selected Non-Financial
Operating Data:
Number of transactions
processed................. 8,560 870 5,800
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March 31, 1999
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Pro As
Actual Forma(1) Adjusted(2)
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Consolidated Balance Sheet Data:
Cash and cash equivalents...................... $ 7,423 $11,357 $51,457
Working capital................................ 3,222 10,156 50,256
Total assets................................... 12,150 16,084 56,184
Redeemable convertible preferred stock......... 18,911 -- --
Total stockholders' equity (net capital
deficiency)................................... (13,056) 12,789 52,889
</TABLE>
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(1) Adjusted to reflect the conversion of all shares of preferred stock into
10,489,792 common stock and the issuance of 1,527,048 shares of common
stock pursuant to the exercise of warrants and the conversion of a
convertible promissory note.
(2) Adjusted to reflect the sale of 4,000,000 shares in this offering hereby,
based on the initial public offering price of $11.00 per share.
3
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RISK FACTORS
You should carefully consider the following factors as well as other
information contained in this prospectus before deciding to invest in shares
of our common stock.
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 revenue 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 $4.2 million in the first quarter of 1999. As of
March 31, 1999, we had incurred cumulative losses of $19.8 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 significantly 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;
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. 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.
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 21.9% of our revenues in the first quarter of 1999. No
other customer accounted for more than 10% of our revenues in 1998 or the first
quarter 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
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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 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
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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. For example, our operating and financial
performance was negatively affected during the first half of 1998 because of
the frequent absence of Mr. McKiernan due to unrelated external business
engagements. This was a temporary situation that did not continue beyond the
first half of 1998. 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 146 employees at March 31, 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, including our Vice President of Engineering, who joined us in June
1999, our Vice President of North American Sales, who joined us in April 1999,
our Vice President of Operations, who joined us in March 1999, and our Vice
President of Marketing, who joined us in December 1998. In addition, through
June 1998, Mr. McKiernan was spending
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almost all of his time as Chief Executive Officer or Chairman of the Board of
Beyond.com. Because these members of our management team are new, 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.
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
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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. See "Business--Intellectual Property" for more information
relating to protecting our intellectual property rights and risks relating to
claims of infringement upon the intellectual property rights of others.
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 the net proceeds of this offering 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 that these proceeds, together with our existing
capital resources, will be sufficient to meet our capital requirements for 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;
. copyrights;
. distribution; and
. characteristics and quality of services.
For example, we believe that some of our services may require us to
comply with the Federal Credit Reporting Act. As a precaution, we are
implementing changes to our systems 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.
9
<PAGE>
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%
of our revenues in 1998 and 17% of our revenues in the first 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Readiness
Disclosure."
10
<PAGE>
Existing Stockholders May Exert Control Over CyberSource to the Detriment of
Minority Stockholders
After this offering, our officers, directors and principal stockholders
(i.e., greater than 5% stockholders) will together control approximately 56.4%
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.
Our Stock Price May Fluctuate Substantially and You May Not Be Able to Resell
Your Shares Above the Offering Price
Prior to this offering, there has been no public market for shares of our
common stock. The initial public offering price of the shares of common stock
has been determined by negotiation between representatives of the underwriters
and us. This price does not necessarily reflect the market price of the common
stock following this offering and you may not be able to resell your shares at
or above the initial public offering price.
The market price for the common stock following this offering 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 After This Offering 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 options and warrants)
in the public market following this offering, 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. Upon completion of this offering, we will have outstanding
21,548,816 shares of common stock (based upon shares outstanding as of March
31, 1999), assuming the issuance of an aggregate of 1,527,048 shares of common
stock pursuant to the exercise of warrants and the conversion of a convertible
note, no exercise of the underwriters' over-allotment option and no exercise of
outstanding options after March 31, 1999. Of these shares, the 4,000,000 shares
sold in this offering will be freely tradable. The remaining shares of common
stock outstanding after this offering will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
October 21, 1999 (120 days after the date of this prospectus)...... 312,430
December 20, 1999 (180 days after the date of this prospectus)..... 15,686,838
Periodically thereafter upon the expiration of one-year holding
periods........................................................... 1,549,547
</TABLE>
11
<PAGE>
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
after this offering. At the time of the offering, 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.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties, and assumptions about CyberSource, including, among other
things:
. risks and uncertainties encountered by early-stage companies;
. continued growth in e-commerce and Internet infrastructure
development;
. our ability to retain our existing merchants and attract new
merchants;
. technical difficulties and unanticipated system downtime; and
. our relationship with Beyond.com.
We undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties, and assumptions, the
forward-looking events discussed in this prospectus might not occur.
USE OF PROCEEDS
Net proceeds from the sale of our shares of common stock at the initial
offering price of $11.00 per share are estimated to be approximately $40.1
million. If the underwriters' over-allotment option is exercised in full, our
net proceeds will be approximately $46.2 million.
The principal purposes of this offering are to obtain additional working
capital, to create a public market for our common stock and to facilitate
future access by CyberSource to public equity markets. We expect to use the net
proceeds for general corporate purposes, including sales and marketing, product
development and other corporate expenses. Pending these uses, the net proceeds
of this offering will be invested in short-term, investment grade, interest-
bearing instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain earnings, if any, to support the development of
our business and do not anticipate paying cash dividends for the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
Board of Directors after taking into account factors, such as our financial
condition, operating results and current and anticipated cash needs.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of CyberSource as of
March 31, 1999:
. on an actual basis;
. on a pro forma basis to give effect to the conversion into
10,489,792 shares of common stock of all outstanding shares of
preferred stock; the issuance of 1,527,048 shares of common stock
pursuant to the exercise of warrants and the conversion of a
convertible promissory note; and
. as further adjusted to give effect to the sale by CyberSource of
4,000,000 shares of common stock offered by CyberSource hereby at
the initial public offering price of $11.00 per share and the
receipt of estimated net proceeds.
This table should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Long term debt, including current portion...... $ 3,744 $ 744 $ 744
======== ======== ========
Redeemable convertible preferred stock,
24,037,372 shares designated, 16,957,061
shares issued and outstanding actual, none pro
forma or pro forma as adjusted................ 18,911 -- --
Stockholders' equity:
Preferred stock, $.001 par value; 25,000,000
shares authorized, no shares issued and
outstanding -- actual, pro forma and
pro forma as adjusted........................ -- -- --
Common stock, $.001 par value; 50,000,000
shares authorized, 5,531,976 shares issued
and outstanding, -- actual; 17,548,816 shares
issued and outstanding -- pro forma;
21,548,816 shares issued and outstanding --
pro forma as adjusted(1).................... 6 18 22
Additional paid in capital.................... 1,884 27,717 67,813
Deferred compensation related to stock
options...................................... (671) (671) (671)
Accumulated deficit........................... (14,275) (14,275) (14,275)
-------- -------- --------
Total stockholders' equity (net capital
deficiency)................................. (13,056) 12,789 52,889
-------- -------- --------
Total capitalization....................... $ 9,599 $ 13,533 $ 53,633
======== ======== ========
</TABLE>
- --------
(1) Excludes 2,035,575 shares of common stock issuable upon exercise of options
outstanding and 1,389,949 shares available for grant as of March 31, 1999
(of which options to purchase 311,000 shares were granted in April 1999 and
options to purchase 736,250 shares were granted in June 1999) under our
1998 Stock Option Plan and our 1999 Stock Option Plan. Also excludes an
additional 500,000 shares reserved for issuance under our 1999 Employee
Stock Purchase Plan. See "Management -- Stock Plans" and "Executive
Compensation" and Notes 5 and 9 of Notes to Consolidated Financial
Statements.
14
<PAGE>
DILUTION
At March 31, 1999, our pro forma net tangible book value was $12.5
million or approximately $0.71 per share. Pro forma net tangible book value per
share represents the amount of our stockholders' equity, less intangible
assets, divided by 17,548,816 shares of common stock (on a pro forma basis to
give effect to the conversion upon completion of this offering of all shares of
preferred stock into 10,489,792 shares of common stock and the issuance of
1,527,048 shares of common stock pursuant to the exercise of warrants and a
conversion of the convertible promissory note). After giving effect to the sale
by us of 4,000,000 shares of our common stock hereby at the initial public
offering price of $11.00 per share, and the application of the estimated net
proceeds therefrom, our pro forma net tangible book value as of March 31, 1999
would have been $52.6 million or $2.44 per share. This represents an immediate
increase in pro forma net tangible book value of $1.73 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$8.56 per share to the purchasers of common stock in this offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $11.00
Pro forma net tangible book value per share as of March 31,
1999........................................................... $0.71
Increase attributable to new investors.......................... 1.73
-----
Pro forma net tangible book value per share after this offering... 2.44
------
Dilution per share to new investors............................... $ 8.56
======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31,
1999, the differences between the existing stockholders (on a pro forma basis
to give effect to the conversion upon completion of this offering of all shares
of preferred stock into 10,489,792 shares of common stock and the issuance of
1,527,048 shares of common stock pursuant to the exercise of warrants and the
conversion of the convertible promissory note) and the purchasers of shares in
this offering (at the initial public offering price of $11.00 per share) with
respect to the number of shares purchased from us, the total consideration paid
and the average price per share paid:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 17,548,816 81.4% $19,780,000 31.0% $ 1.13
New investors.......... 4,000,000 18.6 44,000,000 69.0 11.00
---------- ----- ----------- -----
Total................ 21,548,816 100.0% $63,780,000 100.0%
========== ===== =========== =====
</TABLE>
The above computations assume no exercise of options after March 31,
1999. As of March 31, 1999, there were options outstanding under our 1998 Stock
Option Plan and 1999 Stock Option Plan to purchase a total of 2,035,575 shares
of common stock at a weighted average exercise price of $2.02 per share. In
addition, 1,389,949 shares under our 1998 Stock Option Plan and 1999 Stock
Option Plan were reserved for future grants at March 31, 1999 (of which options
to purchase 311,000 shares were granted in April 1999 at a weighted average
exercise price of $5.10 per share and options to purchase 736,250 shares were
granted in June 1999 at an exercise price of $9.00 per share). In June 1999,
500,000 shares were reserved for future issuance under our 1999 Employee Stock
Purchase Plan. To the extent that outstanding options are exercised, or any of
the reserved shares are issued, there will be further dilution to new
investors. See "Capitalization," "Management--Stock Plans," "--Executive
Compensation" and Notes 5 and 9 of Notes to Consolidated Financial Statements.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statements of operations data for the
period from March 20, 1996 (inception) through December 31, 1996, and for the
years ended December 31, 1997 and 1998 and the selected balance sheet data as
of December 31, 1997 and 1998 are derived from our audited consolidated
financial statements appearing elsewhere in this prospectus. The selected
balance sheet data as of December 31, 1996 is derived from our audited
consolidated financial statements not included in this prospectus. The
consolidated financial data as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 was derived from unaudited financial statements
included elsewhere in this prospectus. We have prepared this unaudited
information on the same basis as the audited consolidated financial statements
and have included all adjustments, consisting only of normal recurring
adjustments that we consider necessary for a fair presentation of our financial
position and operating results for these periods. When you read this
consolidated financial data, you should also read the consolidated financial
statements and related notes included in this prospectus. The historical
results are not necessarily indicative of future results. The pro forma
consolidated balance sheet data as of March 31, 1999 is unaudited and reflects
the assumed conversion of all outstanding shares of preferred stock into common
stock upon the consummation of this offering.
<TABLE>
<CAPTION>
Period from Three Months
March 20 Year Ended Ended
(Inception) to December 31, March 31,
December 31, ----------------- ----------------
1996 1997 1998 1998 1999
-------------- ------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues.................. $ 144 $ 968 $ 3,384 $ 639 $ 1,713
Cost of revenues.......... 137 324 3,471 647 1,505
------- ------- -------- ------- -------
Gross profit (loss)....... 7 644 (87) (8) 208
Operating expenses:
Product development...... 338 2,300 3,802 671 1,322
Sales and marketing...... 425 1,988 4,184 822 2,079
General and
administrative.......... 387 681 1,946 330 938
Deferred compensation
amortization............ -- -- 18 -- 67
------- ------- -------- ------- -------
Total operating
expense................ 1,150 4,969 9,950 1,823 4,406
------- ------- -------- ------- -------
Loss from operations...... (1,143) (4,325) (10,037) (1,831) (4,198)
Interest income (expense),
net...................... -- (13) (48) 7 8
------- ------- -------- ------- -------
Net loss.................. $(1,143) $(4,338) $(10,085) $(1,824) $(4,190)
======= ======= ======== ======= =======
Net loss per share(1)..... $ (2.05) $ (0.40) $ (0.77)
Shares used in computing
basic and diluted net
loss per share(1)........ 4,918 4,535 5,465
Pro forma basic and
diluted net loss per
share(1)................. $ (0.86) $ (0.26)
Shares used in computing
pro forma basic and
diluted net loss per
share(1)................. 11,740 15,955
Selected Non-Financial
Operating Data:
Number of transactions
processed................ 8,560 870 5,800
</TABLE>
<TABLE>
<CAPTION>
Pro forma
December 31, as of
------------------------ March 31, March 31,
1996 1997 1998 1999 1999
------- ------- ------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........ $ -- $ 2,000 $11,111 $ 7,423 $ 7,423
Working capital (deficit)........ (61) 2,016 7,554 3,222 3,222
Total assets..................... 106 3,735 14,975 12,150 12,150
Noncurrent obligations under
capital leases.................. -- 33 256 426 426
Redeemable convertible preferred
stock........................... -- 2,097 18,911 18,911 --
Total stockholders' equity (net
capital deficiency) / divisional
equity (1996)................... 421 1,037 (9,023) (13,056) 5,855
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share
amounts. Until December 31, 1997, the Company was operated as a division of
Beyond.com Corporation and had no outstanding common or preferred shares,
and, therefore, there are no loss per share amounts for the 1996 and 1997
periods.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus.
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. Our financial
statements for 1996 and 1997 reflect our operations as a division of Beyond.com
through December 31, 1997. Our balance sheet as of December 31, 1997 has been
prepared using the historical basis of accounting and includes all the assets
and liabilities specifically identifiable to us. Our statements of operations
for 1996 and 1997 include all revenues and costs directly attributable to us,
including a corporate allocation of the costs of facilities, salaries and
employee benefits. Additionally, incremental corporate administration, finance
and management costs are allocated to us. We have incurred significant losses
since our inception, and through March 31, 1999 had incurred cumulative losses
of approximately $19.8 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 cancelled 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
The following discussion does not contain data from the inception period
of March 20, 1996 through December 31, 1996, because we believe that amounts
from this inception period are not comparable to those for the years ended
December 31, 1997 and 1998 due to the different duration of the periods, and
due to the limited size of our operations as a division of Beyond.com in that
period.
Three Months Ended March 31, 1998 and 1999
Revenues. Revenues increased from $0.6 million for the three months ended
March 31, 1998 to $1.7 million for the three months ended March 31, 1999, an
increase of approximately $1.1 million or 168.1%. This 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
increased from approximately 870,000 processed during the three months ended
March 31, 1998 to approximately 5,800,000 during the three months
17
<PAGE>
ended March 31, 1999. A press article attributes to William S. McKiernan, our
President and Chief Executive Officer, a statement that 50 million transactions
is a realistic target for 1999. Mr. McKiernan cannot recall making such a
statement and believes that it is an interpretation made by the author of the
article. Therefore, the statement should not be taken as a forecast. There can
be no assurance that we will process 50 million transactions in 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 United Kingdom. Cost of revenues increased from $0.6 million
for the three months ended March 31, 1998 to $1.5 million for the three months
ended March 31, 1999. The increase is due primarily to additional operations
and merchant support personnel and related costs.
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 $0.7 million for the
quarter ended March 31, 1998 to $1.3 million for the quarter ended March 31,
1999. The increase is primarily due to higher personnel related costs resulting
from an increase in personnel. 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 March
31, 1998 to $2.1 million for the three months ended March 31, 1999. The
increase is primarily due to $0.7 million of additional personnel related costs
resulting from an increase in personnel and $0.1 million of additional sales
commissions. We expect sales and marketing expenses to increase in absolute
dollars as we substantially increase our marketing and promotional programs.
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 $0.3 million for
the three months ended March 31, 1998 to $0.9 million for the three months
ended March 31, 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 of our business.
Deferred Compensation Amortization. During the three months ended March
31, 1999 and in April 1999, we recorded aggregate unearned compensation in the
amount of $0.6 million and $0.4 million in connection with the grant of stock
options with exercise prices less than the deemed fair value on the respective
dates of grant. Deferred compensation amortization, related to these stock
option grants, as well as 1998 stock option grants for years 1999, 2000 and
2001 and thereafter will be approximately $0.6 million, $0.4 million and $0.2
million, respectively.
Interest Income (Expense), Net. Interest income consists of interest
earnings on cash and cash equivalents and increased from $11,000 for the three
months ended March 31, 1998 to $0.1 million for the three months ended March
31, 1999. The increase is primarily due to an increase in cash and cash
equivalents as a result of equity financings completed during 1998. Interest
expense increased from $4,000 for the three months ended March 31, 1998 to $0.1
million for the three months ended March 31, 1999. The increase represents
interest on an unsecured convertible note issued in August 1998 and interest on
capital leases.
Years Ended December 31, 1997 and 1998
Revenues. Revenues increased from $1.0 million in 1997 to $3.4 million in
1998, an increase of approximately $2.4 million or 249.6%. The increase is a
result of the addition of merchants and increased
18
<PAGE>
transaction volumes from existing customers resulting from the increased market
acceptance of e-commerce. Since we were a division of Beyond.com, no revenues
were recorded from Beyond.com transactions processed during 1997. During 1998,
Beyond.com accounted for approximately 23.7% of our revenues. Given the
continued increase in our customer base, we expect Beyond.com's percentage of
total revenues to decrease in future periods as new customers increase our
transaction volumes and revenues.
Cost of Revenues. Cost of revenues increased from $0.3 million or 33.5%
of revenues in 1997 to $3.5 million or 102.6% of revenues in 1998. The increase
in 1998 in dollars and as a percent of revenues is due to an increase of $1.5
million in operations, professional services and merchant support personnel and
related costs, an increase of $0.2 million in depreciation expense on capital
equipment as well as an increase of $0.3 million in costs related to the
hosting of our servers at third party hosting centers in the United States and
United Kingdom which include costs for additional space, installation of
equipment and additonal phone line requirements.
Product Development. Product development expenses increased from $2.3
million in 1997 to $3.8 million in 1998. The addition of product development
personnel during 1998 primarily accounted for the increase.
Sales and Marketing. Sales and marketing expenses increased from $2.0
million in 1997 to $4.2 million in 1998. The increase is primarily due to
higher personnel related costs and increased sales commissions.
General and Administrative. General and administrative expenses increased
from $0.7 million in 1997 to $1.9 million in 1998. The increase is primarily
due to higher personnel related costs resulting from the hiring of additional
personnel and, to a lesser extent, from salary increases.
Deferred Compensation Amortization. During the year ended December 31,
1998, we recorded aggregate unearned compensation in the amount of $0.2 million
in connection with the grant of stock options during 1998 with exercise prices
less than the deemed fair value on the respective dates of grant.
Interest Income (Expense), Net. Interest income was approximately $0.1
million in 1998. Interest expense of $0.2 million in 1998 represents interest
on an unsecured convertible note and interest on capital leases.
Income Taxes. No provision for federal and state income taxes was
recorded as we incurred net operating losses since inception. As of December
31, 1998, we had federal and state net operating loss carryforwards of
approximately $8.6 million. If we are not able to use them, the federal and
state net operating loss carryforwards will expire in 2006 through 2018. The
Tax Reform Act of 1986 imposes substantial restrictions on the utilization of
net operating losses and tax credits in the event of a corporation's ownership
change, as defined in the Internal Revenue Code. Our ability to utilize net
operating loss carryforwards may be limited as a result of such an ownership
change. We do not anticipate that a material limitation on our ability to use
our carryforwards and credits will result from this offering.
We have provided a full valuation allowance on our deferred tax assets
because of the uncertainty regarding their realization. Our accounting for
deferred taxes under Statement of Financial Accounting Standards No. 109
involves the evaluation of a number of factors concerning the realizability of
our deferred tax assets. In concluding that a full valuation allowance was
required, we considered such factors as our history of operating losses and
expected future losses and the nature of our deferred tax assets.
19
<PAGE>
Quarterly Results of Operations
The following table presents our unaudited quarterly consolidated
statements of operations data and non-financial operating data for the five
quarters ended March 31, 1999. In management's opinion, the consolidated
statements of operations data has been prepared substantially on the same basis
as the audited consolidated financial statements appearing elsewhere in this
prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below in order to present
fairly the unaudited quarterly results. The quarterly data should be read in
conjunction with our audited consolidated financial statements and the related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------
Mar 31, June 30, Sept 30, Dec 31, Mar 31,
1998 1998 1998 1998 1999
------- -------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues....................... $ 639 $ 699 $ 943 $ 1,103 $ 1,713
Cost of revenues............... 647 655 895 1,274 1,505
------- ------- ------- ------- -------
Gross profit (loss)............ (8) 44 48 (171) 208
Operating expenses:
Product development........... 671 808 1,055 1,268 1,322
Sales and marketing........... 822 849 1,118 1,395 2,079
General and administrative.... 330 413 571 632 938
Deferred compensation
amortization................. -- -- -- 18 67
------- ------- ------- ------- -------
Total operating expenses..... 1,823 2,070 2,744 3,313 4,406
------- ------- ------- ------- -------
Loss from operations........... (1,831) (2,026) (2,696) (3,484) (4,198)
Interest income (expense),
net........................... 7 11 (39) (27) 8
------- ------- ------- ------- -------
Net loss....................... $(1,824) $(2,015) $(2,735) $(3,511) $(4,190)
======= ======= ======= ======= =======
Non-Financial Operating Data:
Number of transactions
processed..................... 870 1,193 2,473 4,024 5,800
</TABLE>
Revenues increased during each quarter of 1998 and the first quarter of
1999 due to increases in transaction volumes and, to a lesser extent, increases
in merchant support services. The increase in cost of revenues during each
quarter of 1998 and the first quarter of 1999 is due to an increase in cost
related to operations, infrastructure and the hosting of our servers at third-
party hosting centers in the United States and United Kingdom, and to a lesser
extent, increases in merchant support personnel throughout the period. The
gross loss in the quarter ended March 31, 1998 is a result of continued
investment in network infrastructure and costs related to the hosting of our
servers. The gross loss in the quarter ended December 31, 1998 is a result of
an increase of $0.2 million in operations, professional services and merchant
support personnel related costs to support anticipated future revenue growth.
Product development expense increased during each quarter of 1998 and the first
quarter of 1999 principally due to an increase in product development
personnel. Sales and marketing expense increased in the three months ended
December 31, 1998 and March 31, 1999 due to an increase in sales and marketing
personnel costs of $0.4 million. The increase in general and administrative
expense in the three months ended March 31, 1999 is due to increased recruiting
expenses of $0.1 million, accounting and outside service expenses of $0.1
million and additional headcount. The deferred compensation amortization
represents the amortization of unearned compensation in connection with the
grant of stock options during 1998 and 1999 at exercise prices less than the
deemed fair value on the respective dates of grant.
Liquidity and Capital Resources
Our cash and cash equivalents increased by approximately $5.4 million
from December 31, 1997 to March 31, 1999. This increase resulted from our
receipt of approximately $16.5 million in proceeds from the
20
<PAGE>
sale of equity securities and issuance of an unsecured convertible note payable
for $3.0 million to William McKiernan, our Chief Executive Officer, an officer
and stockholder, which was partially offset by our net losses during 1998 and
the three months ended March 31, 1999. The convertible note payable for $3.0
million was issued to fund our on-going operations. Without this loan, we would
have been unable to meet our payroll obligations. Our investment in property
and equipment was approximately $2.0 million, excluding approximately $0.8
million of property and equipment financed under capital leases, during the
period from December 31, 1997 to March 31, 1999. See "Certain Transactions--
Option Grants and Agreements with Executive Officers and Directors."
Net cash used in our operating activities was approximately $8.9 million
in 1998 and approximately $3.1 million for the three months ended March 31,
1999. Cash used in operations in 1998 and the three months ended March 31, 1999
was primarily due to our net losses and increases in current assets, offset by
depreciation and amortization and increases in accounts payable and accrued
liabilities. Accounts payable and accrued liabilities increased in those
periods primarily due to the expansion of our operations and the related costs
and increases in accrued personnel costs related to headcount growth. Lack of
resources to manage the collection of accounts receivable significantly
impacted our cash flows during the second and third quarters of 1998. Additions
to headcount and improved processes during the fourth quarter of 1998
contributed to an improvement in collections.
Net cash used in investing activities was approximately $1.4 million
during 1998 and approximately $0.5 million during the three months ended
March 31, 1999 and was comprised primarily of purchases of furniture and
equipment for new employees, and leasehold improvements related to office
expansions in both periods. Our planned capital expenditures for the remainder
of 1999 are approximately $4.5 million, primarily for capital equipment used in
our network infrastructure.
Net cash provided by financing activities was approximately $19.4 million
in 1998 and approximately $0.1 million was used in financing activities for the
three months ended March 31, 1999. Net cash provided by financing activities in
1998 was due primarily to proceeds from our issuance of a convertible note
payable of $3.0 million and proceeds from the issuance of preferred stock of
$16.5 million.
In accordance with the terms of the convertible note payable, the
principal balance of $3,000,000 was converted into 1,657,458 shares of Series E
preferred stock on June 7, 1999 at a price of $1.81 per share. Upon completion
of the offering, these shares will convert into 828,729 shares of common stock.
Interest accrued on the note at a rate of ten percent (10.0%) per annum, and
was payable in quarterly installments. As of May 31, 1999, $225,000 of interest
had been paid and $50,000 had been recorded as accrued interest. See "Certain
Transactions--Option Grants and Agreements with Executive Officers and
Directors."
We believe that the net proceeds from this offering, together with our
current cash balances, will be sufficient to meet our working capital and
capital requirements for at least the twelve months immediately following the
offering. We expect that we will continue to use our cash to fund operations
during that period as we hire additional personnel and 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 the funds generated by this
offering, together with existing resources and future earnings, are
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
21
<PAGE>
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.
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 must review the suppliers' plans for Year 2000 compliance and satisfy
ourselves that they have made the necessary modifications to or replacement of
their affected systems. We have requested these plans and will evaluate them as
they are received. We anticipate that this evaluation will be completed by May
1999. We will rely primarily on the suppliers' commitments to accomplish this
task but have no contractual commitment from the 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 non-compliant 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 of 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. See "Risk Factors--We Face Year 2000 Risks."
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 July 1999.
Qualitative and Quantitative 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.
22
<PAGE>
BUSINESS
Overview
We are a leading developer and provider of real-time e-commerce
transaction services. Through our CyberSource Internet Commerce Suite, we offer
services to online merchants for global payment processing, fraud prevention,
tax calculation, export compliance, territory management, delivery address
verification and fulfillment management.
Industry Background
The Rapid Growth of Internet Commerce
As the Internet has become an increasingly important communications
medium, merchants and consumers have begun using the Internet to buy and sell
goods and services. According to International Data Corporation, or IDC, the
number of Internet users worldwide will grow from an estimated 97 million at
the end of 1998 to an estimated 320 million by 2002. Increasingly, these
Internet users are becoming online consumers. IDC forecasts that the actual
number of Web buyers worldwide will expand from 28 million in 1998 to
approximately 128 million in 2002 and that the amount of worldwide commerce
conducted over the Web will increase from $50 billion in 1998 to approximately
$734 billion in 2002.
E-commerce offers both merchants and consumers numerous benefits:
. Merchants and consumers can interact 24 hours a day, 7 days a
week, regardless of their respective locations.
. Merchants can customize Web site content to match the needs and
preferences of individual users by transparently personalizing
content for each user.
. The online store enables merchants to readily increase the number
of products and services offered, thereby enhancing the product
selection available to customers.
. Online merchants can avoid investments in physical retail
locations.
. Much of the interaction between merchants and consumers can be
automated, resulting in reduced selling costs.
These benefits allow merchants to focus on growing their customer bases and to
market and sell their products around the world in a cost-effective and
efficient manner.
The early adopters of e-commerce were often Internet-centric companies,
such as Amazon.com and Beyond.com, which were founded specifically to transact
business on the Internet. Today, many businesses consider it essential to offer
their goods and services online, and traditional retailers such as department
stores, car dealers, and toy stores have opened online stores to supplement
their traditional retail models. An increasingly broad selection of products is
now being sold online, ranging from the initial online product offerings of
books, music, computers and software to more traditional consumer goods such as
automobiles, clothes, movie tickets, vitamins and even such personal products
as prescription drugs. Accordingly, the need for online transaction processing
is affecting virtually all industries.
Transaction Processing Demands
To succeed online, a merchant must attract customers to its Web site and
provide an appealing and easy-to-use environment that encourages customers to
place an order by clicking on the "buy" button. Once the customer places an
order, the merchant must process the order by effectively and efficiently
executing numerous transactions. With the rapid increase in the number of
online merchants and the vast array of products and services becoming available
online, competition among online merchants is increasingly intense. Due to
these competitive pressures, merchants must focus their resources on attracting
customers to their Web
23
<PAGE>
sites and providing compelling content to keep customers in their online
stores. However, as a merchant succeeds in these efforts, the increased number
of resulting orders creates another set of complex challenges. These challenges
include:
. Payment processing. The vast majority of online consumer purchases
are conducted using credit cards. These credit card transactions
should be processed in real-time to confirm an order while the
customer is online. Increasingly, merchants are also seeking to
process transactions in local currencies around the world.
. Fraud prevention. Because of the anonymity offered by the Internet
and the speed with which one can make purchases, the opportunity
for fraud is significant. In e-commerce transactions, because the
credit card is not present, a merchant is generally held liable by
its bank for the full value of the transaction in the event of
credit card fraud even if a pre-authorization had been obtained.
Online merchants must find ways to combat this fraud to avoid
losing both the product being sold and the related revenue.
. Sales Tax/VAT. An online merchant must comply with many different
national, state and local sales tax/value added tax (VAT)
regulations that vary depending on merchant and customer locations
or product type.
. Export compliance. Online merchants must ensure that a proposed
transaction complies with complex, rapidly changing export
regulations that restrict the export of some goods to prohibited
countries, persons and entities.
. Territory management. A transaction may be subject to policies and
restrictions imposed by manufacturers that may prohibit the
merchant from selling products due to a customer's geographic
location.
. Fulfillment management. Online orders for physical goods must be
transmitted to fulfillment centers, distributors or merchant-owned
distribution centers for shipment of the goods.
The online merchant must often address these demands while the customer
is waiting online. Information that a traditional retailer can collect during a
period of hours, such as fraud screen or export restrictions, often must be
available to the online merchant immediately. In addition, the merchant must
have an e-commerce system that scales as the business grows, provides a high
level of reliability and handles peak loads. The merchant's e-commerce system
should also integrate smoothly into its existing business and technology and
must support secure, authenticated messaging.
Evolution of E-commerce Transaction Processing Systems
Early adopters of e-commerce business models typically developed custom
transaction processing systems. Merchants that built these systems often faced
long development cycles, which delayed their time-to-market. These custom
systems often had limited functionality and scalability and high ongoing
maintenance costs.
More recently, online merchants have attempted to address their
transaction processing needs by either purchasing or outsourcing discrete
systems. Merchants that turn to discrete systems like payment processing are
still faced with the need to address other potentially costly and time-
consuming transaction processing issues like fraud screening or export control.
In addition, merchants that purchase discrete systems often discover that these
systems cannot scale as their business grows.
As the Internet becomes an essential marketplace, merchants seek e-
commerce service providers with the expertise to deliver a comprehensive system
that shortens time-to-market and maximizes the value of their investment. This
transaction processing solution should be available at a low initial and
overall cost and, at the same time, be scalable to support the growth of the
online business. A solution should also allow the merchant to maintain control
over its online content and customer relationships and to integrate new
services easily.
24
<PAGE>
The CyberSource Solution
We are a leading developer and provider of real-time e-commerce
transaction services. Through our CyberSource Internet Commerce Suite, we offer
online merchants a solution to the challenges of e-commerce transaction
processing. Key benefits of our solution include:
. Faster Time-To-Market. Our services and technical support enable
online merchants to begin processing transactions without lengthy
or costly integration efforts. Our services are invoked by a
single common interface installed on a merchant's commerce server.
This interface may be easily installed with a "plug-in," software
that resides on the merchant's commerce server and enables them to
easily activate our services. "Plug-ins" integrate with many
popular commerce servers such as those offered by BroadVision, IBM
and Microsoft. In addition, we have developed our software
libraries to run on most operating systems including Microsoft NT,
UNIX (Sun Solaris, HP UX, IBM AIX, and others) and Linux.
. Access to Comprehensive Suite of Services. We provide merchants
with on-demand, online access to services that address a broad
spectrum of e-commerce transaction processing issues related to
global payment processing, fraud prevention, tax calculation,
export compliance, territory management, delivery address
verification and fulfillment management.
. Enhanced Merchant Flexibility and Control. Our comprehensive
transaction processing solution enables the merchant to choose
transaction services a la carte on a per order basis. The merchant
has the flexibility to purchase any or all of our offered services
for each order as needed. In addition, because our services are
provided transparently to the customer, merchants retain complete
control over their customers' buying experiences.
. Global Reach. Our services are used by merchants in many countries
throughout the world. We have established a network of virtual
network access points in 18 countries on 5 continents. In
addition, our payment gateways currently support over 100
currencies and provide sales tax/VAT calculations for all Canadian
provinces and all countries in the European Union in addition to
all United States jurisdictions.
. Reduced Overall Costs. Our services enable merchants to
effectively process online transactions without the cost of
developing and maintaining their own complex transaction
processing systems and infrastructure. Furthermore, our services
lower transaction costs by reducing fraud and avoiding the
shipment of goods to undeliverable physical addresses in the
United States and Canada.
The technology underlying our e-commerce transaction services provides
the following benefits:
. Scalability. Our services allow merchants to deliver consistent
quality of service as transaction volumes grow, and to handle
daily and seasonal peak periods. As a result, merchants do not
have to expand these areas of their transaction processing
infrastructure as their businesses grow.
. High Reliability. Our systems are engineered to provide high
reliability, and we provide transaction processing 24 hours a day,
7 days a week. In addition, we offer our merchants support 24
hours a day, 7 days a week.
. Secure Messaging. All communications between the merchant's Web
server and our system are facilitated by our Simple Commerce
Messaging Protocol, or SCMP. This encrypted protocol allows for
digital signature processing, message integrity, and identity
verification of all communications between the merchant and us.
. Real-Time Responses. Because our services enable online merchants
to process e-commerce transactions in real-time, merchants can
improve their level of customer satisfaction and reduce their
support costs by avoiding delayed responses and minimizing the
need for follow-up communications.
25
<PAGE>
Strategy
Our objective is to be the leading worldwide provider of real-time e-
commerce transaction services. Key elements of our strategy include the
following:
Enhance and Extend Our Suite of E-commerce Services. We intend to build
upon our scalable, state-of-the-art transaction processing systems to enhance
the services we currently offer. By continuing to invest resources in our core
transaction processing engine, CyberSource Internet Commerce Engine, we intend
to further improve availability, reliability and scalability. Based on input
from our merchants, we plan to introduce new services to solve e-commerce
problems as they emerge. For example, in response to merchant demand, in March
1999, we introduced as part of our service suite delivery address verification,
which uses database and artificial intelligence technologies to determine
whether the merchant's customer has supplied a deliverable street address in
the United States or Canada. To supplement our internal development efforts, we
will also consider acquisitions of complementary technologies and companies.
Expand Merchant Customer Base through Improved Brand Recognition and
Increased Marketing. To date, we have made limited investments in marketing and
branding. We intend to substantially increase our marketing and promotional
programs, including brand recognition, advertising and public relations
efforts, to capitalize upon our advantage as an early leader in the e-commerce
transaction services market. We also intend to increase the size of our direct
sales force and enter into additional collaborative relationships to generate
new merchant customers as well as to increase the number of transaction
services used by our existing merchants.
Utilize Partnerships to Drive Transactions. We intend to utilize or
leverage our relationships with our channel partners including First Data
Corp., Microsoft, Paymentech and Vital Processing Services and our strategic
relationships with GE Capital's Equity Capital Group and Visa International to
increase our transaction volume and create new markets. We intend to enter into
additional relationships with other companies that offer similar benefits.
Increase International Presence and Operations. We intend to expand the
availability and brand recognition of our services throughout the world. For
example, we plan to offer payment processing services in all major currencies
and sales tax/VAT services in all major nations. In addition, we expect to
expand our e-commerce infrastructure through new relationships outside the
United States and to increase our international direct sales force.
Build Organization Around the Merchant. We will continue to focus on the
needs of our merchants and build our services and organization accordingly. For
example, we have established a merchant advisory board which provides us with
valuable feedback on how to improve existing services and identifies potential
new services. In addition, we conduct market research utilizing focus groups
and customer surveys to learn more about our market and business opportunities.
Our merchant customers benefit from the collective experience of over 400
merchants as we improve existing services and develop new services.
CyberSource Services
CyberSource provides a suite of e-commerce transaction services designed
to simplify merchants' operations and allow them to focus on marketing and
merchandising tasks required for their online businesses. Our services are
transparent to the merchant's customers. We also offer digital product rights
management and professional services.
CyberSource Internet Commerce Suite
The CyberSource Internet Commerce Suite is offered to online merchants
worldwide on a remotely accessed, pay-per-transaction basis. All of our
services are accessible through a common software interface
26
<PAGE>
residing on the merchant's Web server. The diagram below illustrates the
logical flow of an order being processed by our Internet Commerce Suite.
[The graphics depicts a replica of the on screen button with the word "BUY" on
the button. Next to the button are six connected circles labeled from left to
right "Calculate Tax", "Authorize Payment", "Screen For Fraud", "Verify
Delivery Address", "Check Export Compliance" and "Check Distribution Policies".
An arrow points to a box labeled "Fulfill Order or Provide Access" which has a
line connecting it to two options (1) on top "Physical Product Shipment" which
has two connected circles, the first one labeled "Message Fulfillment Center"
and the second labeled "Settle Payment" between the two circles the line is
labeled "Product Shipment"; (2) on bottom "Digital Products and Services" which
has two connected circles, the first one labeled "Issue Rights Deliver Product"
and the second labeled "Settle Payment". Below this group connected by a dotted
line is a box entitled "Digital Property Preparation, Warehousing, Rights
Management".]
The CyberSource Internet Commerce Suite currently consists of:
Tax Services Our tax service calculates sales and use taxes
for over 7,000 taxing jurisdiction in the
United States and Canada. The service also
supports VAT calculation for all countries in
the European Union and many others outside the
European Union, enabling businesses to comply
with most international VAT regulations.
Payment Services We provide secure, real-time credit card
processing services for all major card brands
through major processing gateways in the United
States and Europe. We support transactions in
over 100 currencies, including the Euro.
Risk Management Services Our Internet fraud screening system uses
artificial intelligence, in conjunction with an
extensive transaction history database, to
allow Internet merchants to predict and control
fraud. The service, which typically returns a
predictive score in fewer than ten seconds,
significantly reduces our merchants' risk of
fraud losses.
Distribution Control We provide a range of distribution control
Services services to help ensure merchants comply with
corporate, partner, and government policies for
product and service sales. They include:
. Export control. Through this service, we
help to ensure that online merchants comply
with United States Government export
regulations, monitoring order acceptance
against a rapidly changing list of denied
countries, persons or entities and
electronically verifying the customer's
location using our geolocation technology.
27
<PAGE>
. Policy control. We offer this distribution
control service to assist merchants in
complying with internal corporate policies
and partner marketing and distribution
agreements for product sales. Specifically,
this service allows merchants to limit
product or service distribution to specific
territories requested by the business,
thereby ensuring compliance with marketing
policies or distribution agreements.
Fulfillment Management We support a number of services to help online
Services merchants manage physical and digital product
delivery in a secure, efficient fashion. These
include:
. Fulfillment messaging. We provide secure
fulfillment messaging to simplify the
transmission of online orders to fulfillment
centers, distributors, and merchant-owned
distribution centers. The service handles
all message routing and supports secure-
mail, file transfer protocol and electronic
data interchange formats. In addition, this
service works in conjunction with our
payment services to comply with card
association rules regarding settlement upon
product shipment.
. Delivery address verification. This service
is designed to prevent merchants from
shipping goods to incorrect physical
addresses in the United States and Canada.
This service identifies undeliverable
addresses while the customer is still online
so that discrepancies can be resolved
immediately. This service utilizes database
and artificial intelligence technologies to
confirm in real-time that city/state/zip
combinations are correct and that streets
and street addresses are valid.
. Secure digital delivery. We use patented
technology and digital certificates to
provide simple, secure, electronic delivery
of digital content, such as software, music,
images and documents. Globally distributed
servers provide geographic distribution
efficiency.
Digital Products Rights Management
We provide online digital product registration services which allow
digital property owners to specify licensing and distribution conditions.
Digital property owners may designate agents authorized to sell or distribute
their property, and assign distribution controls by product or geographic
location.
We maintain secure digital warehouses for property owned by, or
authorized to be sold by, the transacting merchant. Digital products may be
archived in the digital warehouses indefinitely to support returns and
replacement.
Professional Services
Our professional services organization provides business application
expertise, technical know-how, and product knowledge to complement our products
and assist our merchants in achieving faster time-to-market. Our professional
services include planning, implementation, and training. Our planning services
include system and resource evaluation, back-office commerce system design,
order fulfillment strategies and commerce applications assessment and
recommendations. Our implementation services include project
28
<PAGE>
management, merchant bank account acquisition, commerce application
configuration and activation and commerce application testing and validation.
Our training services include digital product preparation, customer service and
support training and ongoing site maintenance.
For the year ended December 31, 1998, revenues derived from transaction
processing, support services and digital product rights were approximately 55%,
24% and 21% of total revenues, respectively, compared to 65%, 21% and 14% of
total revenues, respectively, for the three months ended March 31, 1999. These
percentages exclude U.K. revenues as we did not segregate U.K. revenues in 1998
as they represented less than 10% of total revenues. The increase in
transaction processing revenues as a percentage of total revenues in the three
months ended March 31, 1999 was due to the increase in transaction volumes
during the period.
Merchants and Markets
We have a broad customer base from a variety of industry groups.
Beyond.com accounted for 23.7% of our revenues in 1998 and 21.8% during the
three months ended March 31, 1999. No other customer accounted for 10% or more
of our revenues during 1997, 1998 or the three months ended March 31, 1999. The
following is a representative list of customers that have chosen to use our
services:
<TABLE>
<S> <C> <C>
Hardware/Electronics Media/Books Pharmaceutical
- ---------------------------- ---------------------------- ----------------------------
Compaq Computer Definitive Stock Green Tree Nutrition
Computerstore.com Fawcette Publications HealthShop.com
Cybershop Electronics.net Liquid Audio mybasics.com
Western Digital VarsityBooks.com
</TABLE>
<TABLE>
<S> <C>
Retail Merchandise Software
-------------------------------- --------------------------------
BUY.COM Adobe Systems
BuySafe International Beyond.com
CyberShop eGift.com Egghead.com
K-Tel IBM Software Group (Lotus)
Shopping.com Remedy
</TABLE>
The following examples illustrate how customers are using our real-time
e-commerce transaction services.
BUY.COM
BUY.COM, one of the Internet's fastest-growing superstores, uses our
Internet Commerce Suite for payment, risk management and fulfillment management
services. These services have allowed BUY.COM to keep pace with their sales
growth, cut costs, speed time-to-market and mitigate fraud. At the same time,
BUY.COM is maintaining its flexibility to integrate its transaction processing
systems with its business processes. By using our services, BUY.COM was able to
replace its existing e-commerce transaction processing system that had limited
payment handling capabilities, did not integrate well with their back-office
processes and was costly to maintain.
Compaq Computer
Compaq Computer, one of the world's largest personal computer
manufacturers, sought to implement a Web-based commerce system that could meet
their rigorous demands for secure, reliable, high-volume, highly scalable
processing services. Compaq Computer had been working on increasing its
visibility and revenue generating capability of its factory outlets operation.
This operation had been selling direct via retail and telesales for four years.
In 1998, Compaq Computer decided to commerce-enable the factory outlet Web
site. Compaq Computer chose to use the CyberSource Internet Commerce Suite. In
particular, they sought to leverage our tax and risk management services. As a
result, the factory outlet Web site was able to benefit
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from our scalable on-demand processing power that handled their unpredictable
transaction volumes and reduced overhead and fraud.
Sales and Marketing
Target customers for our e-commerce transaction services include
Internet-centric merchants, including those who have developed custom
transaction processing systems, established retailers that have opened online
stores to supplement their traditional retail models and merchant aggregators
that host Web sites for other merchants. We reach these merchants worldwide
through a direct sales force as well as through an indirect sales channel that
leverages existing sales and marketing infrastructures developed by our
partners. In addition to our direct and indirect sales efforts, we work with
several strategic partners to promote our e-commerce transaction services. As
of March 31, 1999, we had a total of 49 persons in sales and marketing.
Direct Sales. Our direct sales force is comprised of dedicated sales
professionals that target medium to large Internet commerce merchants that
focus primarily on business-to-consumer sales and typically process over 2,500
customer orders per month. In addition, these merchants typically maintain
their own online stores. Our direct sales organization consists of account
managers and territory managers. Our account managers focus on maintaining high
merchant satisfaction and selling additional services to existing merchants,
and our territory managers are responsible for attracting new merchants to our
services.
Indirect Sales Channel. Our indirect sales channel is divided into sales
channel partners and merchant aggregators. Our sales channel partners, who
according to contractual relationships with us receive commissions based on
account set-up and transaction fees paid by merchants they refer to us, include
payment service providers, system integrators and commerce server providers.
. Our payment service providers, who process credit card
transactions for a significant majority of domestic banks issuing
credit card accounts, include First Data Corp., Paymentech and
Vital Processing Services.
. Our systems integrators, who assist merchants in the design,
development and implementation of online stores, include iXL,
Fort Point Partners, USWeb/CKS and other leading systems
integrators.
. Our commerce server providers, who design, develop and distribute
software that facilitates the deployment of commerce-enabled Web
sites allowing for seamless integration of our e-commerce
transaction services, include BroadVision, IBM, Intershop,
Interworld, Mercantec and Microsoft.
Our merchant aggregators, who according to contractual relationships with
us resell our services, provide hosted online store systems to their customers.
They include TicketMaster Online-CitySearch and Verio. Both channels refer and
facilitate the sale of our e-commerce transaction services to their customer
base.
Strategic Partners. Our strategic partners include GE Capital and Visa
International. We work together with our strategic partners to enhance our
existing suite of products, develop new services, and drive the adoption of
industry standards while further increasing the visibility of our e-commerce
services. We currently have contractual relationships with our strategic
partners under which we pay commissions to our strategic partners who refer
internet merchants to us and with whom we enter into a contractual
relationship.
Marketing. We use a variety of marketing activities to increase market
awareness of our services and educate our target audience. In addition to
building awareness of our brand, our marketing activities focus on generating
leads for our sales efforts. To build awareness and attract new merchants we
conduct marketing and partnership programs including, advertising, public
relations activities, referral programs, co-branded initiatives, virtual
seminars and trade shows.
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Merchant Support
We provide a range of merchant support services to ensure a high level of
performance and reliability and to enable merchants to get to market more
quickly. We offer three levels of support services including account
activation, standard support and premier support. All of these services include
transaction reporting, fraud list updating and notification of scheduled and
unscheduled system downtime and self-help merchant support tools on our Web
site.
Account Activation. Our account activation level service is intended for
use by merchants that receive technical support from a technically qualified
third party or organization that resells the CyberSource Internet Commerce
Suite. Account activation provides the ability to get merchants connected to
the CyberSource Internet Commerce Suite, configuration of all merchant IDs and
account information, full test services, secure access to our online merchant
support center and limited e-mail support.
Standard Support. Our standard support level is designed to provide
support during regular standard business hours. Standard support provides all
of the services of account activation as well as toll free technical support
from 7 a.m. to 7 p.m., Pacific Time, Monday through Friday, from our merchant
support group with a guaranteed four hour response. The standard support also
includes email support with a guaranteed two hour response and an initial one
hour project orientation conference call with our support professionals.
Premier Support. Our premier support level provides the benefits of the
standard support level with the addition of a dedicated merchant support
engineer available 24 hours a day, 7 days a week, via toll-free telephone
access or email with a two hour guaranteed response. Also included are a
dedicated business account manager and a review to optimize fraud scoring and
other Internet commerce services.
Through toll-free numbers, our merchants can reach our support desk
professionals around the clock. As of March 31, 1999, 19 of our employees were
dedicated to merchant support.
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Technology
Our proprietary transaction processing system employs a modular
architecture that was designed to scale rapidly and handle the transaction
processing demands of our merchants across the Internet. This system is
composed of multiple groups of servers and routers acting as a single point of
contact for our merchants' transaction processing requirements. The primary
software components of our system are the E-Transaction Databases, the Internet
Commerce Engine, or ICE, the Internet Commerce Services Applications, the
Simple Commerce Messaging Protocol, or SCMP, and the SCMP client. This system
utilizes industry standards to maximize our compatibility with our merchants'
e-commerce systems. In addition, we have implemented a global network of data
centers and access points that are designed to minimize transaction processing
time and system failures.
[The graphic depicts a main box with the words "CyberSource Data Center" above
it. Inside the main box top center are the words "Internet Commerce
Applications." Below is a row of seven boxes labeled from left to right "Tax
Calculation," Global Payment Procedures," "Fraud Prevention," "Delivery Address
Verification," "Territory Management," "Export Compliance," and "Fulfillment
Management." Below is a box labeled "Internet Commerce Engine" and below that
is a graphical representation of a disk labeled "eTransaction Databases." One
zigzag line connects the main box with a box on the left. The line is labeled
"Secure Commerce Messaging Protocol," the box is labeled "Merchant Commerce
Server (SCMP Client)." To the right of the main box are four zigzag lines
labeled from to bottom "Paymentech," "First Data Corp.," "NatWest," and "Other
External Resources."]
E-Transaction Database Architecture
Three primary databases form the core of our transaction processing
system: the transaction process database which maintains information necessary
to process each individual transaction; the decision support database, which
processes reports and provides detailed information about merchants'
transactions and the digital products rights management database, which manages
and reports on the digital property rights that customers have purchased. Our
transaction services rely on these databases to store the information necessary
to process transactions. For example, our fraud prevention service relies upon
a proprietary database of millions of transactions to assess the risk of fraud.
Internet Commerce Engine
Our ICE manages work flow functions and the required communications
between CyberSource commerce servers, our database and any external resources
including First Data Corp., National Westminster Bank, Paymentech and Vital
Processing Services. Our Internet Commerce Engine is designed to meet the
transaction processing demands of our merchants in a secure, fast, efficient,
reliable, scalable and interoperable manner. Our ICE was designed to scale
rapidly to handle peak transaction processing loads. Separate ICE servers share
the transaction load from our merchants and provide for immediate backup
services should any ICE server fail. Additional ICE servers can be readily
added to our data centers to accommodate increased merchant demand.
Internet Commerce Services Applications
We have developed a set of software applications that perform the
services in our Internet Commerce Suite. These services include global payment
processing, fraud prevention, tax calculation, export compliance, territory
management, delivery address verification and fulfillment management. These
applications contain the rules and logic necessary to provide our transaction
services to merchants. The applications share resources with the ICE and
databases which allow us to efficiently add new application services to meet
our customers needs.
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Simple Commerce Messaging Protocol
We have developed the Simple Commerce Messaging Protocol, or SCMP, to
enable efficient and secure connections between our ICE and our merchants. In
order to ensure secure messaging, SCMP utilizes industry standards for secure
communications including the Data Encryption Standard, RSA/public key
cryptography and digital certificates. SCMP enables our merchants to securely
access our suite of commerce services. Most importantly, SCMP can be integrated
into any software product that might require our application services.
SCMP Client
Our services are invoked by a common programming interface, residing on
our merchants' commerce servers. This client may be easily installed with a
"plug-in" that is available for most popular commerce servers including those
offered by BroadVision, IBM and Microsoft. In addition, we have developed
software libraries which act as a client and run on most operating systems
including Microsoft NT, UNIX (Sun Solaris, HP UX, Linux, IBM AIX). A merchant
can access our commerce services using either the plug-in or the software
libraries that we have developed.
Industry Standards
The implementation of our architecture is based on and complies with
widely accepted industry standards. For example, the ICE utilizes industry
standard components from industry leaders such as Cisco, Harbinger, Microsoft,
Retail Logic, RSA Data Security, Sun Microsystems and Sybase. Adherence to
industry standards provides compatibility with existing applications, enables
ease of modification and reduces the need for software modules to be rewritten
over time, thus protecting our merchants' investments.
Data Centers and Network Access
Our data centers are located at leased facilities in San Jose, California
and London, England. A data center is a facility containing servers, modem
banks, network circuits and other physical equipment necessary to connect users
to the Internet. These data centers have multiple levels of redundant
connectivity to the Internet, back-up power, fire suppression, seismic
reinforcement and security surveillance 24 hours a day, 7 days a week. In
addition, we have access to 18 "points of presence" located on 5 continents.
That acess is provided by an Internet service provider and allows us to serve
merchants globally. A "point of presence," or POP, is a point along an Internet
service provider's network that enables users to connect to the Internet more
directly and therefore more quickly. These points of presence provide rapid
access to our suite of services and significantly reduce the number of Internet
connections a transaction must pass through to reach us.
Product Development
Our product development team is responsible for the design, development
and release of our core infrastructure and services. We have a well-defined
software development methodology that we believe enables us to deliver services
that satisfy real business needs for the global market while meeting commercial
quality expectations. We emphasize quality assurance throughout our software
development lifecycle. We believe that a strong emphasis placed on analysis,
design and rapid prototyping early in the project lifecycle reduces the number
and costs of defects that may be found in later stages. Our development
methodology focuses on delivery of product to a global market, enabling
localization into multiple languages, multi-currency payment processing, global
fraud detection, and local regulatory compliance from a single code base. As of
March 31, 1999, we employed 38 persons in our product development organization.
When appropriate, we utilize third parties to expand the capacity and
technical expertise of our internal product development organization. On
occasion, we have licensed third-party technology that we feel provides the
strongest technical alternative. We believe this approach shortens time-to-
market without compromising our competitive position or product quality.
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Intellectual Property
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.
We have been issued one patent and have five applications pending. The
issued patent, for a method and system for controlling distribution of software
in a multitiered distribution chain, expires in April 2016. We have pending
patent applications covering our Internet fraud screen system, digital
delivery, delivery address verification and other technologies for services not
yet offered for sale to the public. We investigate, define and prepare
applications for new patents as a part of the standard product development
cycle. Our engineering management team meets on a routine basis to harvest new
invention disclosures from the engineering and architecture groups. We cannot
assure you that any patent application that we file will issue as a patent, and
we cannot assure you that any patent issued to us will not be held invalid or
unenforceable based on prior art or for any other reason.
We believe that numerous patent applications relating to the Internet
commerce field have been filed or have issued as patents. From time to time, in
the ordinary course of business, we become aware of one or more patents of
third parties that we choose to evaluate for a variety of purposes. These
purposes may include determining the general contents of patents, reviewing the
technological developments of their assignees, and determining whether our
technology may overlap. We have not conducted any search to determine whether
any of our services or technology could be alleged to infringe upon any patent
rights of any third party. We cannot assure you that none of our products,
services, and technology infringes any patent of any third party.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors, and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
reverse engineer, copy or otherwise obtain our technology without
authorization, or develop similar technology independently. While we police the
use of our services and technology through online monitoring and functions
designed into SCMP and our ICE, an unauthorized third-party may nevertheless
gain unauthorized access to our services or pirate our software. We are unable
to determine the extent to which piracy of our intellectual property or
software exists. Software piracy is a prevalent problem in our industry.
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 intellectual property rights we hold.
From time to time we may receive notice of claims of infringement of
other parties' intellectual property rights. As the number of services in our
market increases and functionalities overlap, companies such as ours may become
increasingly subject to infringement claims. Any infringement claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel or require us to develop non-
infringing technology or enter into licensing agreements. Such licensing
agreements, if required, may not be available on acceptable terms, if at all.
In the event of a successful claim of infringement and our failure or inability
to develop non-infringing technology or license the proprietary rights on a
timely basis, our business, operating results and financial condition could be
materially adversely affected.
Competition
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
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companies may enter the market for our services. In the future, we may 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 e-commerce transaction service
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. Competitive pressures could reduce our market share or require the
reduction of the prices of our services, either of which could materially and
adversely affect our business, results of operations or financial condition.
We compete on the basis of certain factors, including:
. system reliability;
. product performance;
. breadth of service offering;
. ease of implementation;
. time to market;
. customer support; and
. price.
We believe that we presently compete favorably with respect to each of
these factors. However, the market for our services is still rapidly evolving,
and we may not be able to compete successfully against current and potential
competitors.
Facilities
Our primary offices are located in approximately 27,782 square feet of
space in San Jose, California under a lease expiring in January 2001. We also
lease space for our sales and support offices in Weybridge, United Kingdom.
Employees
As of March 31, 1999, we had a total of 146 employees, including 38
persons in Product Development, 49 persons in sales and marketing, 38 persons
in consulting, customer support and training, and 21 persons in general and
administrative services. None of our employees is represented by a labor union,
and we consider employee relations to be good.
Legal Proceedings
A former Vice President of Product Management filed a lawsuit against us
in the Superior Court of California in Santa Clara County on April 8, 1999
seeking unspecified monetary damages 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 us. While we cannot assure you as to the outcome of this litigation, we
believe the lawsuit is without merit, and we intend to vigorously defend
against the claims asserted.
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Regulations
The following regulations can impact our business now or in the future.
Fair Credit Reporting Act. Because our Internet fraud screening system
assesses the probability of fraud in an Internet credit card transaction, we
may be deemed a consumer reporting agency under 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. Failure to comply with
this act could result in claims being made against us by individual consumers
and the Federal Trade Commission.
Export Control Regulations. Current export control regulations prohibit
the export of strong encryption technology without a license, thereby
preventing us from using stronger encryption technology to protect the security
of data being transmitted to and from Internet merchants outside of the United
States. We have applied for a license to use higher levels of encryption with
our international merchants but cannot be sure that the license will be issued.
If our application is denied, we will be unable to use stronger encryption
technology with our international merchants.
Internet Tax Freedom Act. Enacted in October 1998 and effective through
October 2001, the act bars state or local governments from imposing taxes that
would subject buyers and sellers of electronic commerce to taxation in multiple
states. The act also bars state and local governments from imposing taxes on
Internet access through October 2001. When the act expires or if the act is
repealed, Internet access and sales across the Internet may be subject to
additional taxation by state and local governments, thereby discouraging
purchases over the Internet and adversely affecting our business.
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MANAGEMENT
Officers, Directors and Key Employees
Our officers, key employees and directors, their ages and their positions
as of April 15, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<C> <C> <S>
Executive Officers
William S. McKiernan.......... 42 Chairman of the Board of Directors,
President and Chief Executive Officer
Anthony V. Bates.............. 48 Executive Vice President of International
Charles E. Noreen, Jr. ....... 38 Vice President of Finance and
Administration and Chief Financial
Officer
William E. Donahoo............ 37 Vice President of Marketing
Thomas A. Arnold.............. 44 Chief Technical Officer
Robert J. Ford................ 49 Vice President of Engineering
Eric M. Wun................... 40 Vice President of Operations
L. Evan Ellis, Jr. ........... 44 Vice President of North American Sales
Key Employees
Steven W. Klebe............... 43 Vice President of Payment Industry
Alliances
Anthony F. Quilici............ 29 Vice President of Merchant Support
Tracy Wilk.................... 40 Vice President of Product Marketing
Directors
Bert Kolde(1)(2).............. 44 Director
Linda Fayne Levinson(1)(2).... 57 Director
Steven P. Novak(1)(2)......... 51 Director
Richard Scudellari(1)(2)...... 42 Director and Secretary
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
William S. McKiernan founded CyberSource and has been our President and
Chief Executive Officer since our inception in December of 1997. In 1994, Mr.
McKiernan co-founded Beyond.com, an on-line reseller of computer software, and
was its Chief Executive Officer from its inception until 1998. He currently
serves as Chairman of the Board of Directors of Beyond.com. From 1992 to 1994,
Mr. McKiernan was employed by McAfee Associates, Inc. (now known as Network
Associates), a developer of computer security software, where he served as
President and Chief Operations Officer during its initial public offering in
October 1992. Prior to joining McAfee Associates in 1992, Mr. McKiernan was
Vice President of Princeton Venture Research, Inc., an investment banking and
venture consulting firm from 1990 to 1992. Mr. McKiernan has also held
management positions with IBM/ROLM, a telecommunications company, and Price
Waterhouse. Mr. McKiernan holds a B.S. from Boston College and an M.B.A. from
the Harvard Business School.
Anthony V. Bates has served as our Executive Vice President of
International since joining us in February 1997. From 1996 to 1997, Mr. Bates
was Vice President of Worldwide Sales and Marketing for Serena Software
International, a software developer. From 1990 to 1996, Mr. Bates was President
and Chief Executive Officer of Specialix, Inc., a leading international
supplier of data communications products. Mr. Bates received an Honors Degree
in Electronics and Electrical Engineering from Newcastle upon Tyne Polytechnic
in the United Kingdom.
Charles E. Noreen, Jr. has served as our Vice President of Finance and
Administration and Chief Financial Officer since joining us in September 1998.
Mr. Noreen was employed by RockShox, Inc., a bicycle
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component manufacturer, first as its Vice President and Chief Financial Officer
from May 1996 to July 1998, then as its Vice President of Business Development
from July 1998 to September 1998. Mr. Noreen was a partner at Coopers & Lybrand
L.L.P. from 1994 to 1996 where he served as an accountant from 1983 to 1996.
Mr. Noreen is a certified public accountant and received a B.S. in Business
Administration from the University of Southern California.
William E. Donahoo has served as our Vice President of Marketing since
joining us in December 1998. From July 1998 to November 1998, Mr. Donahoo was
Vice President of Marketing & Business Development for DigiCash, Inc., a
developer of electronic currency, DigiCash filed for Chapter 11 bankruptcy
protection in November 1998. From March 1997 to March 1998, Mr. Donahoo was
Vice President of Marketing for Novonyx, a network software developer, which he
co-founded. From October 1990 to March 1997, Mr. Donahoo was employed by
Novell, Inc., a network software developer, first as a product-line manager
from October 1990 to October 1996, then as its Vice President of Marketing for
the Netware Product Group until March 1997. Mr. Donahoo received a B.S. in
Computer Science and an M.B.A. from Brigham Young University.
Thomas A. Arnold joined us in March 1996 and is currently serving as our
Chief Technical Officer. From October 1989 to March 1996, Mr. Arnold managed
applications development at Silicon Graphics, Inc., a developer and
manufacturer of high performance computer workstations. Mr. Arnold received a
B.S. in Public Administration at San Jose State University and an M.B.A. with
an emphasis in Information Technology Management from Golden Gate University.
Robert J. Ford has served as our Vice President of Engineering since
joining us in June 1999. From 1997 to 1999, Mr. Ford was Vice President of
Engineering for Extensity, Inc., a vendor of web-based e-business applications.
From 1995 to 1997, Mr. Ford served as Vice President of Engineering for
Intrinsa Corporation, a developer of defect detection software. From 1992 to
1995, Mr. Ford was Vice President of Engineering for Objectivity, Inc., a
developer of database management systems. Also, Mr. Ford was employed by Boole
& Babbage, Inc., a vendor of systems management software, from 1980 to 1992,
where he was Vice President of Systems from 1989 to 1992. Mr. Ford received a
B.S. from Witwatersrand College for Advanced Technical Education.
Eric M. Wun has served as our Vice President of Operations since joining
us in March 1999. From August 1998 to February 1999, Mr. Wun was Vice President
of Operations for Corio, Inc., a computer application service provider. From
December 1996 to August 1998, Mr. Wun was Vice President of Operations for Zip2
Corp., a developer of personalized Web sites. Mr. Wun was Vice President and
Data Center Manager for Visa International from February 1992 to October 1996.
Mr. Wun received a B.S. in Economics from the University of San Francisco.
L. Evan Ellis, Jr. has served as our Vice President of North American
Sales since joining us in April 1999. From 1990 to 1999, Mr. Ellis was with
Silicon Graphics, Inc. where he was Senior Vice President of Field Operations
for the Americas from October 1997 to April 1999, Senior Vice President of
Marketing from May 1997 to October 1997, Vice President of Western U.S. from
October 1995 to May 1997 and Vice President of Field Marketing and Distribution
from October 1991 to October 1995. From 1978 to 1990, Mr. Ellis was employed by
International Business Machines in various sales and sales management roles.
Mr. Ellis received a B.S. in Economics from the University of California, Los
Angeles.
Steven W. Klebe has served as Vice President of Payment Industry
Alliances for CyberSource since January 1999. Prior to that, from December 1998
to January 1999, Mr. Klebe was Vice President of Business Development and, from
April 1997 to December 1998, was Vice President of Sales and Marketing. From
1994 to 1997, Mr. Klebe was Vice President of Sales for CyberCash, a provider
of Internet payment services. From 1985 to 1994, Mr. Klebe was employed by
VeriFone. Mr. Klebe received a B.S. in Marketing from Northeastern University.
Anthony F. Quilici has served as our Vice President of Merchant Support
since February 1999. From February 1998 to February 1999, Mr. Quilici served as
Vice President of Operations, and from our inception in
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December 1997 until February 1998, he served as our Director of Operations.
Prior to joining us, Mr. Quilici worked at Silicon Graphics, Inc. as a systems
analyst from June 1995 to December 1997 and as a data analyst from July 1992 to
June 1995. Mr. Quilici received a B.S. in Management Information Systems from
California State University, Chico.
Tracy Wilk has served as our Vice President of Product Marketing since
joining us in April 1999. From 1992 to 1999, Mr. Wilk was Vice President of
Strategic Alliances and Investments at Visa International. Mr. Wilk received a
B.A. in Economics and an M.B.A. from the University of California, Berkeley.
Bert Kolde has been a director of CyberSource since our inception in
December 1997. Mr. Kole serves as a director, Vice President, Treasurer and
Secretary of Vulcan Ventures Inc., an investment organization, Vice Chairman of
the Portland Trail Blazers, Seattle Seahawks, Oregon Arena Corporation, and
First and Goal Corporation. In addition, Mr. Kolde serves as President of the
Paul G. Allen Virtual Education Foundation, a fund promoting Internet-based
learning and the Paul G. Allen Forest Protection Foundation, a trust for public
land. Mr. Kolde co-founded Asymetrix Learning Systems, Inc., a provider of
online learning services in 1985, and serves as Chairman of its Board of
Directors. Mr. Kolde also serves as a director of MetaCreations Corporation, a
developer of visual computing software tools, Precision Systems, Inc., a
developer of computer products and Beyond.com. Mr. Kolde holds a B.A. in
Business Administration from Washington State University and an M.B.A. from the
University of Washington.
Linda Fayne Levinson has been a director of CyberSource since our
inception in December 1997. Ms. Levinson has served as a principal of Global
Retail Partners, L.P. since April 1997. From 1994 to 1997, she served as
President of Fayne Levinson Associates, an independent general management
consulting firm that advised major corporations and start-up entrepreneurial
ventures. In 1993, Ms. Levinson was a financial adviser with Creative Artists
Agency, Inc. From 1989 to 1992, Ms. Levinson was a partner of Wings Partners,
Inc., a merchant banking firm and was actively involved in taking Northwest
Airlines private. From 1984 to 1987, Ms. Levinson was a Senior Vice President
of American Express Travel Related Services, Inc., a payment card company.
Prior to that, Ms. Levinson was a partner at McKinsey & Co. Ms. Levinson
presently serves as a director of Administaff, Inc., a professional employer
organization, Genentech, Inc., a biotechnology company, Jacobs Engineering
Group, Inc., a provider of engineering, design and consulting services, NCR
Corporation, a developer of information technology products, GoTo.com, Inc., a
developer of search engine technologies, as well as several privately-held
companies. Ms. Levinson received her A.B. from Barnard College in Russian
Studies, her M.A. from Harvard University in Russian Literature and her M.B.A.
from New York University.
Steven P. Novak has been a director of CyberSource since our inception in
December 1997. Mr. Novak is the Managing Director heading C.E. Unterberg,
Towbin's Internet Practice. From February 1993 to January 1998, Mr. Novak
served as co-founder, President, and Chief Investment Officer of C.E.
Unterberg, Towbin Advisors, a registered investment advisor. Mr. Novak also
serves as a director of several privately held companies. Mr. Novak's prior
affiliations include, among others, Forstmann Leff Associates, a fund manager,
Sanford C. Bernstein & Company, Inc, an independent investment counselor, and
Harris Bankcorp, a multibank holding company. Mr. Novak holds a B.S. from
Purdue University and an M.B.A. from the Harvard Business School.
Richard Scudellari has been a director of CyberSource since our inception
in December 1997. Mr. Scudellari has been a partner at Morrison & Foerster LLP,
a law firm, since February 1999. From 1990 to January 1999 Mr. Scudellari was a
partner at Jackson Tufts Cole & Black, LLP., a law firm. Mr. Scudellari holds a
B.S. and J.D. from Boston College.
We currently have authorized five directors. Our executive officers are
appointed by, and serve at the discretion of, our Board of Directors. Each of
our officers and directors, excluding non-employee directors, devotes
substantially full time to our affairs. Our non-employee directors devote such
time to our affairs as is necessary to discharge their duties. There are no
family relationships among any of our directors, officers or key employees. Two
of the five members of our Board of Directors also serve as directors of
Beyond.com.
39
<PAGE>
Board Committees
Our Audit Committee reviews, acts on and reports to our Board of
Directors with respect to auditing and accounting matters, including the
selection of our independent accountants, the scope of our annual audits, fees
to be paid to the independent accountants, the performance of our independent
accountants and our accounting practices. Ms. Levinson and Messrs. Kolde,
Novak, and Scudellari are the members of our Audit Committee.
Our Compensation Committee establishes salaries, incentives and other
forms of compensation for officers and other employees. This Committee also
administers our incentive compensation and benefit plans. Ms. Levinson and
Messrs. Kolde, Novak, and Scudellari are the members of the Compensation
Committee.
Compensation Committee, Insider Participation and Interlocks
None of the members of our Compensation Committee is an officer or
employee of CyberSource. Two members of our Board of Directors also serve as
members of the board of directors of Beyond.com. Other than with respect to
Beyond.com, no interlocking relationship exists between our Board of Directors
or Compensation Committee and the board of directors or compensation committee
of any other company, nor has an interlocking relationship existed in the past.
Director Compensation
We do not pay directors cash compensation for their services as directors
or members of committees of the Board of Directors. We do reimburse them for
their reasonable expenses incurred in attending meetings of the Board of
Directors. In addition, each new non-employee director receives an option to
purchase 5,000 shares of our common stock upon joining the Board of Directors.
Each incumbent non-employee director is granted an option to purchase an
additional 5,000 shares of our common stock thereafter annually on January 1.
All options are immediately exercisable upon grant and remain subject of a
right of repurchase as determined under the 1999 Option Plan. See "Stock
Plans -- 1999 Option Plan."
40
<PAGE>
Executive Compensation
The following table sets forth information concerning compensation of our
Chief Executive Officer and our other most highly compensated executive
officers whose aggregate cash compensation exceeded $100,000 during the year
ended December 31, 1998 (collectively, our "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Other Securities
Annual Underlying
Name and Principal Position Salary Bonus(1) Compensation Options
- --------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
William S. McKiernan
President and Chief Executive
Officer........................ $144,375(2) -- -- --
Anthony V. Bates
Executive Vice President of
International.................. 137,500 $36,500 -- 77,500
Thomas A. Arnold
Vice President of Engineering
and Chief Technology Officer... 118,688 5,700 -- 85,000
Gregory Quinn(3)
Vice President Sales........... 118,693 53,400 -- 65,000
</TABLE>
- --------
(1) Includes bonus amounts earned in 1998 and paid in 1999.
(2) Does not include $60,000 in deferred compensation earned by Mr. McKiernan
in 1994 as President of Beyond.com, allocated to us in connection with the
spin off and paid to Mr. McKiernan in 1998.
(3) Mr. Quinn's employment with us terminated in March 1999.
41
<PAGE>
Option Grants In Fiscal Year 1998
The following table sets forth information for each of our Named
Executive Officers concerning stock options granted to them during the fiscal
year ended December 31, 1998.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Price Appreciation
Underlying Options Exercise for Option Term(5)
Options Granted to Price Expiration ----------------------
Granted(1) Employees(2) Per Share(3) Date(4) 5% 10%
---------- ------------ ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
William S. McKiernan.... -- -- -- -- -- --
Anthony V. Bates........ 50,000 4.27% $0.045 3/18/08 $ 13,789 $ 23,437
12,500 1.07 0.2000 3/18/08 1,572 3,984
15,000 1.28 0.5400 7/30/08 5,094 12,909
Thomas A. Arnold........ 75,000 6.40 0.015 3/18/08 22,933 37,406
10,000 0.85 0.5400 7/30/08 3,396 8,606
Gregory Quinn........... 50,000 4.27 0.2000 3/18/08 6,289 15,937
15,000 1.28 0.5400 7/30/08 5,094 12,909
</TABLE>
- --------
(1) Each of the above options was granted pursuant to our 1998 Stock Option
Plan. 25% of the options granted vest one year from the date of grant.
Thereafter the remaining 75% of the options granted vest monthly over the
next three years.
(2) In the last fiscal year, we granted options to employees to purchase an
aggregate of 1,170,998 shares.
(3) In determining the fair market value of our common stock, our board of
directors considered factors, such as our financial condition and business
prospects, our operating results, the absence of a market for our common
stock and the risks normally associated with high technology companies. The
exercise price may be paid in cash, check, promissory note, shares of our
common stock, through a cashless exercise procedure involving same-day sale
of the purchased shares or any combination of these methods.
(4) Options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated or upon the optionee's
death or disability.
(5) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent our estimate or projection of our future common stock prices.
Aggregate Option Exercises In Last Fiscal Year and Year-End Option Values
The following table sets forth information concerning exercises of stock
options during the fiscal year ended December 31, 1998 by each of our Named
Executive Officers and the number and value of unexercised options held by each
of our Named Executive Officers on December 31, 1998.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares December 31, 1998 December 31, 1998(1)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William S. McKiernan.... -- -- -- -- -- --
Anthony V. Bates........ 17,187 $ 8,422 3,125 57,188 $ 5,500 $ 91,426
Thomas A. Arnold........ 42,188 21,938 7,813 35,000 13,984 57,450
Gregory Quinn........... -- -- -- 65,000 -- 217,200
</TABLE>
- --------
(1) The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options and the fair market value for
our common stock of $3.62 per share as of December 31, 1998, as determined
by our Board of Directors.
42
<PAGE>
Stock Plans
In March 1998, we adopted our 1998 Stock Option Plan. We reserved
1,900,000 shares of common stock for stock option grants under the 1998 Option
Plan. Additionally, in January 1999, we adopted our 1999 Stock Option Plan. We
reserved 2,500,000 shares of common stock for stock option grants under the
1999 Option Plan. The purpose of each plan is to enhance our long-term
stockholder value by offering our employees, directors, officers, consultants,
agents, advisors and independent contractors the opportunity to promote and
participate in our growth and success, and to encourage these people to remain
in our service and acquire and maintain stock ownership in us.
As of March 31, 1999, options to purchase 2,035,575 shares of common
stock were outstanding under the 1998 Plan and the 1999 Option Plan with
exercise prices ranging from $0.0066 to $3.62 per share. As of March 31, 1999,
options to purchase 1,389,949 shares were available for grant under the 1998
Option Plan and 1999 Option Plan (of which options to purchase 311,000 shares
were granted in April 1999 with exercise prices ranging from $3.62 to $7.20 and
options to purchase 736,250 shares were granted in June 1999 at an exercise
price of $9.00 per share) and options for 974,476 shares had been exercised.
Our Board of Directors or a committee appointed by the Board may
administer the plans.
1999 Stock Option Plan
The administrator has the authority to select individuals who are to
receive options under the 1999 Option Plan and to specify the terms and
conditions of options granted (including whether or not the options are
incentive or nonstatutory stock options), the vesting provisions, the option
term and the exercise price. The 1999 Option Plan provides that we may grant
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986 to employees, including our officers and employee
directors, and we may grant nonstatutory stock options to employees and
consultants, including non-employee directors.
The exercise price of incentive stock options granted under the 1999
Option Plan shall equal the fair market value of our common stock on the date
of grant (except in the case of grants to any person holding more than 10% of
the total combined voting power of all classes of our, or any of our parent's
or subsidiary's, stock in which case the exercise price shall equal 110% of the
fair market value on the date of grant). The exercise price of nonqualified
stock options shall not be less than 85% of the fair market value on the date
of grant. Option holders may pay for an exercise in cash or other
consideration, including a promissory note, as approved by the administrator.
Generally, options granted under the 1999 Option Plan (other than those
granted to non-employee directors) vest at a rate of 25% of the shares
underlying the option after one year and the remaining shares vest in equal
portions over the following 36 months, so that all shares are vested after four
years. The form of stock option grant under the 1999 Option Plan used to grant
options to our employees provides for accelerated vesting of half of all
unvested shares upon involuntary termination of employment with us without
cause occurring within one year of a change in control of CyberSource. Unless
otherwise provided by the administrator, an option granted under the 1999
Option Plan generally expires 10 years from the date of grant (five years in
the case of an incentive stock option granted to any person holding more than
10% of the total combined voting power of all classes of our, or any of our
parent's or subsidiary's, stock or, if earlier, 30 days after the optionee's
termination of employment or service with us or any of our affiliates for any
reason other than termination for death or disability, or one year after
termination for death or total and permanent disability and six months in the
case of other types of disability). Options granted under our 1999 Option Plan
are not generally transferable by the optionee except by will or the laws of
descent and distribution and generally are exercisable during the lifetime of
the optionee only by the optionee.
In the event of (i) a merger or consolidation as a result of which the
holders of our voting securities prior to the transaction hold shares
representing less than 51% of our voting securities after giving effect to the
transaction (other than a merger or consolidation with a wholly-owned
subsidiary or where there is no
43
<PAGE>
substantial change in our stockholders and the options granted under the 1999
Option Plan are assumed by the successor corporation), or (ii) the sale of all
or substantially all of our assets the successor corporation will assume or
substitute the options we have granted under the 1999 Option Plan or shall
provide substantially similar consideration to optionees as is provided to the
stockholders. In the event the successor corporation refuses to assume or
substitute outstanding options as provided above, or in the event of our
dissolution or liquidation, outstanding options shall expire, notwithstanding
any contrary terms in the grant, on a date specified in a written notice sent
to all optionees (which date shall be at least 20 days after the date of the
notice).
The 1999 Option Plan also provides for automatic grants to non-employee
directors. Each non-employee director, upon initial election or appointment to
the Board of Directors, is entitled to receive options to purchase 5,000 shares
of common stock, provided that the election or appointment does not occur
within the last quarter of a given year. Thereafter, each non-employee director
is entitled to receive options to purchase 5,000 shares of common stock
annually on January 1 of each year, provided he or she is a non-employee
director on the date of grant and has continuously been an active member of the
Board of Directors for the year prior to the grant date. Options granted to
non-employee directors pursuant to the automatic grant provisions of the 1999
Option Plan are immediately exercisable, nonqualified stock options with an
exercise price equal to the fair market value of our common stock as of the
date of grant and remain subject to a right of repurchase that lapses on June
30, 1999. Grants to non-employee directors are subject to the general
requirements of the 1999 Option Plan.
1998 Stock Option Plan
The terms of options which we may grant under the 1998 Option Plan are
generally the same as those we may grant under the 1999 Option Plan. However,
under the 1998 Option Plan, the administrator may not grant options to an
individual in any one fiscal year which would permit that individual to
purchase more than 250,000 shares of common stock. The administrator may,
however, grant a newly-hired optionee a one-time grant of an option to purchase
up to an additional 250,000 shares of common stock. Also, the form of stock
option grant used to grant options to our employees under the 1998 Option Plan
does not provide for accelerated vesting as is provided in the form of stock
option grant used to grant options to our employees under the 1999 Option Plan.
Stock options previously granted under the plans to the executives and
directors are described above under "Executive Compensation." At this time we
cannot determine the number of shares of common stock that may be subject to
options we grant in the future to our executive officers and other officers,
key employees and directors.
1999 Employee Stock Purchase Plan
Our 1999 Stock Purchase Plan was approved in June 1999 by the Board and
by our stockholders. The effective date of the 1999 Purchase Plan will be the
first calendar day of the first full month 60 days following the effective date
of the Registration Statement. The 1999 Purchase Plan is intended to qualify as
an "employee stock purchase plan" under Section 423 of the Code in order to
provide our employees with an opportunity to purchase common stock through
payroll deductions. An aggregate of 500,000 shares of common stock has been
reserved for issuance under the 1999 Purchase Plan and made available for
purchase thereunder, subject to adjustment in the event of a stock split, stock
dividend or other similar change in the common stock or our capital structure.
All of our employees (and employees of our "subsidiary corporations" and
"parent corporations" (as defined by the Internal Revenue Code) designated by
the administrator of the 1999 Purchase Plan) whose customary employment is for
more than five months in any calendar year and more than 20 hours per week are
eligible to participate in the 1999 Purchase Plan. In addition, except
employees who are employees on the effective date of the 1999 Purchase Plan,
employees must have been employed for twelve months or more to participate in
the 1999 Purchase Plan. Non-employee directors, consultants, and employees
subject to the rules or laws of a foreign jurisdiction that prohibit or make
impractical the participation of such employees in the 1999 Purchase Plan are
not eligible to participate in the 1999 Purchase Plan.
44
<PAGE>
The 1999 Purchase Plan designates offer periods, purchase periods and
exercise dates. The Code allows for offer periods of up to 27 months and
purchase periods of any length within an offer period. Initially, the purchase
periods under the 1999 Purchase Plan will coincide with the offer periods such
that the purchase periods will be of six months' duration commencing each
February 1 and August 1 following the effective date of the 1999 Purchase Plan
(except that the initial purchase period will commence on the effective date of
the 1999 Purchase Plan and will end on January 31, 2000). Exercise dates are
the last date of each purchase period, that is July 31 and January 31 under the
1999 Purchase Plan. In the event we merge with or into another corporation or
sell all or substantially all of our assets, or in the event certain other
transactions in which our stockholders before the transaction own less than 50%
of the total combined voting power of our outstanding securities following the
transaction, the administrator of the 1999 Purchase Plan may elect to shorten
the offer period then in progress.
On the first day of each offer period, a participating employee is
granted a purchase right, which is a form of option to be automatically
exercised on the next exercise date. Deductions are to be made from the salary
of participants (in accordance with their authorizations) and credited to their
accounts under the 1999 Purchase Plan. When the purchase right is exercised,
the participant's withheld salary is used to purchase shares of common stock.
The price per share at which shares of common stock are to be purchased under
the 1999 Purchase Plan for any six month period is the lesser of (A) 85% of the
fair market value of the common stock on the date of the grant of the option
(the commencement of the offer period) or (B) 85% of the fair market value of
the common stock of the exercise date (the last day of the offer period).
Payroll deductions may range from 1% to 10% (in whole -percentage
increments) of a participant's regular base pay, exclusive of bonuses,
overtime, shift-premiums, commissions, reimbursements or other expense
allowances. Participants may not make direct cash payments to their accounts.
For any six-month period the employee may purchase the lesser of $5,000 worth
of stock (calculated at the discounted rate) and 500 shares. The Code imposes
certain additional limitations on the amount of common stock that may be
purchased during any calendar year.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of March 31, 1999 as adjusted to
reflect the sale of shares offered hereby, by:
. each person known by us to own beneficially more than 5% of the
outstanding shares of common stock,
. each of our directors,
. each Named Executive Officer (see "Management--Executive
Compensation"), and
. all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of March 31, 1999 are
deemed outstanding. Percentage of beneficial ownership is based upon 17,548,816
shares of common stock outstanding prior to this offering and 21,548,816 shares
of common stock outstanding after this offering. To our knowledge, except as
set forth in the footnotes to this table and subject to applicable community
property laws, each person named in the table has sole voting and investment
power with respect to the shares set forth opposite the person's name. Except
as otherwise indicated, the address of each of the persons in this table is as
follows: c/o CyberSource Corporation, 550 S. Winchester Blvd., Suite 301, San
Jose, California 95128.
<TABLE>
<CAPTION>
Percent
Beneficially
Owned
-----------------
5% Beneficial Owners, Directors, Named Executive Number of Before After
Officers Shares Offering Offering
- ------------------------------------------------ ---------- -------- --------
<S> <C> <C> <C>
William S. McKiernan(1).......................... 5,328,724 30.4% 24.7%
Bert Kolde(2).................................... 2,490,603 14.2 11.6
Vulcan Ventures, Inc.
110 110th Avenue NE, Suite 550
Bellevue, WA 98004.............................. 2,480,603 14.1 11.5
Linda Fayne Levinson(3).......................... 1,936,634 11.0 9.0
Global Retail Partners, L.P. and its
affiliates(4)
2121 Avenue of the Stars, Suite 1630
Los Angeles, CA 90067........................... 1,931,634 11.0 9.0
General Electric Capital Corporation(5)
260 Long Ridge Road
Stamford, CT 06927.............................. 1,665,171 9.3 7.6
Steven P. Novak(6)............................... 1,565,624 8.9 7.3
Entities affiliated with C.E. Unterberg,
Towbin(7)
Swiss Bank Tower
10 East 50th Street, 22nd Floor
New York, NY 10002.............................. 1,535,624 8.8 7.1
Thomas A. Arnold(8).............................. 60,313 *
Richard Scudellari(9)............................ 45,000 *
Anthony V. Bates(10)............................. 33,177 *
Gregory Quinn(11)................................ 19,375 *
All executive officers and directors as a group
(11 persons)(12)................................ 11,460,074 65.1% 53.1%
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
46
<PAGE>
(1) Includes 4,200,275 shares of common stock held by Mr. McKiernan, 299,720
shares of common stock held by members of Mr. McKiernan's immediate family
and 828,729 shares of common stock issuable pursuant to a convertible
promissory note. Mr. McKiernan disclaims beneficial ownership of the
shares held by his immediate family.
(2) Includes 2,480,603 shares held by Vulcan Ventures, Inc. Mr. Kolde is a
director, the Vice President, Secretary and Treasurer of Vulcan Ventures,
Inc. Mr. Kolde disclaims beneficial ownership of the shares owned by
Vulcan, except for his proportional interest therein, if any.
(3) Includes options to purchase 5,000 shares of common stock that vest within
60 days of March 31, 1999, held by Ms. Levinson. Also includes 1,931,634
shares held by Global Retail Partners, L.P. and its affiliates. Ms.
Levinson is a principal of Global Retail Partners, L.P. Ms. Levinson
disclaims beneficial ownership of these shares, except for her
proportional interest therein, if any.
(4) Includes 1,238,464 shares of common stock held by Global Retail Partners,
L.P., 85,265 shares held by Global Retail Partners Funding, Inc., 80,508
shares held by GRP Partners, L.P., 369,036 shares held by DLJ Diversified
Partners, L.P., 137,047 shares held by DLJ Diversified Partners-A, L.P.,
13,200 shares held by DLJ ESC II, L.P., 8,114 shares held by DLJ ESC
L.L.C. (collectively, the "Global Affiliates").
(5) Includes warrants to purchase 283,955 shares of common stock that vest
within 60 days of March 31, 1999, held by General Electric Capital
Corporation.
(6) Includes 1,535,624 shares of Common Stock held by the Unterberg Affiliates
(as defined below). Mr. Novak disclaims beneficial ownership of these
shares, except for his proportional interest therein, if any.
(7) Includes 57,581 shares of Common Stock held by UT Capital Partners
International, LDC (formerly UH Capital Partners International, LDC),
377,759 shares held by UT Technology Partners, LDC (formerly UH Technology
Partners, LDC); 841,529 shares held by C. E. Unterberg Towbin Capital
Partners I, L.P. (formerly Unterberg Harris Capital Partners I, L.P.);
176,796 shares held by Unterberg Harris Private Equity Partners, L.P.;
37,761 shares held by Unterberg Harris Private Equity Partners, CV and
44,198 shares held by C.E. Unterberg Towbin LLC (collectively, the
"Unterberg Affiliates").
(8) Includes options to purchase 18,125 shares of common stock that vest
within 60 days of March 31, 1999, held by Mr. Arnold.
(9) Includes options to purchase 5,000 shares of common stock that vest within
60 days of March 31, 1999, held by Mr. Scudellari.
(10) Includes options to purchase 15,990 shares of common stock that vest
within 60 days of March 31, 1999, held by Mr. Bates.
(11) Includes options to purchase 19,375 shares of common stock that vest
within 60 days of March 31, 1999, held by Mr. Quinn.
(12) Includes (i) options to purchase 44,115 shares of common stock that vest
within 60 days of March 31, 1999, held by all directors and executive
officers of CyberSource and (ii) 828,729 shares issuable pursuant to Mr.
McKiernan's convertible promissory note.
47
<PAGE>
TRANSACTIONS BETWEEN CYBERSOURCE AND
ITS OFFICERS, DIRECTORS AND SIGNIFICANT STOCKHOLDERS
Relationship with Beyond.com
In December 1997, we were spun-off from Beyond.com into a new Delaware
corporation, now called CyberSource Corporation. In connection with the spin-
off, Beyond.com issued our capital stock to their stockholders such that,
following consummation of the spin-off, each of Beyond.com's stockholders held
shares of common stock, Series A preferred stock, Series B preferred stock, and
Series C preferred stock of CyberSource in equal number and ownership
proportion and with the same rights as the stockholder had as a Beyond.com
stockholder. On the date of the spin-off, Beyond.com employees were granted
stock options in CyberSource based on the extent to which the employees'
original options in Beyond.com were vested. Immediately following the spin-off,
our employees maintained their outstanding vested stock options in Beyond.com
and were granted additional stock options in CyberSource to the extent of their
original options. The exercise prices of the original and additional option
grants were adjusted to reflect the allocation of the fair market per share
price between Beyond.com and our common stock, respectively, at the time of the
spin-off.
We have entered into agreements with Beyond.com for the purpose of
defining the ongoing relationship between the two companies. Because four out
of five of our directors were also directors of Beyond.com at the time these
agreements were negotiated and members of our management team were formerly a
part of the management team of Beyond.com, these agreements are not the result
of arm's length negotiations. However, we believe the terms of these agreements
are no less favorable to us than could have been negotiated with a non-
affiliated party. We qualify the following description of these agreements in
their entirety by reference to the agreements, which have been filed as
exhibits to the registration statement of which this prospectus is a part.
Under our Conveyance Agreement dated December 31, 1997, we received from
Beyond.com:
. technology (including rights to all patent applications,
trademarks and other of our intellectual property rights);
. contracts and licenses with third parties; and
. tangible assets in connection with credit card processing, fraud
screening, export control, territory management and electronic
fulfillment services.
In addition, we received employees engaged in the Internet commerce services
business from Beyond.com. We believe that we obtained all property from
Beyond.com necessary to operate our business. We do not share any property with
Beyond.com except for utility tools and improvements to the licensed technology
as described below.
In connection with this transfer, we entered into an InterCompany Cross-
License Agreement with Beyond.com in April 1998, which was amended in May 1998,
pursuant to which Beyond.com granted us a non-exclusive, worldwide, perpetual,
irrevocable, royalty-free license to (1) internally use technology related to
electronic software distribution, and (2) use and sublicense its then existing
customer database in connection with fraud detection and verification. Under
this agreement, we granted Beyond.com a worldwide, perpetual, irrevocable,
royalty-free license to internally use our Sm@rtCert technology and
improvements thereto. We also granted Beyond.com the right to modify this
technology for purposes of merging the technology into its Cache Manager
technology (either alone or in combination with other software) for subsequent
sublicense to enterprises and governmental agencies. However, the Cross-License
Agreement limits the ability of Beyond.com to use our technology to compete
with us. The Cross-License Agreement further provides that the parties shall
have joint ownership of utility tools developed jointly prior to the date of
the Cross-License Agreement, and any improvements to the licensed technology to
the extent jointly developed after the date of the Cross-License Agreement. The
Cross-License Agreement also allocates between us and Beyond.com the ownership
of the other inventions each party made on or before June 30, 1998. Each party
has agreed to indemnify the other against any third party claims regarding the
licensee's use of licensed technology that results in a claim against the
licensor, except to the extent that the claim is based upon a claim that the
licensed technology infringes upon any third party's intellectual property
rights.
48
<PAGE>
We also entered into an Internet Commerce Services Agreement with
Beyond.com, pursuant to which we agreed to provide services including credit
card processing, fraud screening, export control, territory management and
electronic fulfillment. This agreement expires on April 23, 2000, and
automatically renews for an additional one-year term, unless otherwise
terminated by either party. Pursuant to the terms of this agreement, Beyond.com
agreed to indemnify us for an amount not to exceed $100,000 against any claim
based upon an allegation that the software we distributed infringes upon any
third party's intellectual property rights. We agreed to indemnify Beyond.com
for an amount not to exceed $100,000 against any claim based upon an allegation
that our services, or the use of any software we provided in connection with
our services, infringes any third party's intellectual property rights. During
1998 and the three months ended March 31, 1999, we recorded approximately
$801,000 and $375,000, respectively, of revenues related to these services.
In March 1998, we made a bridge loan in the principal amount of $400,000
to Beyond.com to fund Beyond.com's operations until its financing was complete.
The loan accrued interest at 3.5% per annum and was repaid in full with
interest in June 1998.
Stock and Warrant Issuances
Since our inception in December 1997, we have issued shares of common
stock and shares of preferred stock in private placement transactions each as
set forth below.
In March and April 1998, we issued shares of Series D preferred stock in
private placements to investors at a purchase price of $1.08 per share. In
October and December 1998, we issued shares of Series E preferred stock in
private placements to investors at a purchase price of $1.81 per share. Upon
the closing of this offering, each two shares of Series D and Series E
Preferred Stock convert into one share of common stock.
The following table shows the number of shares of Series D and Series E
preferred stock purchased by the investors who beneficially own more than five
percent of our preferred stock:
<TABLE>
<CAPTION>
Number of Shares Number of Shares
of Series D of Series E
Preferred Stock Preferred Stock
Purchaser(1) Purchased Purchased
- ------------ ---------------- ----------------
<S> <C> <C>
Vulcan Ventures Incorporated................ 735,231 1,657,459
UT Technology Partners, LDC................. 276,243
UT Capital Partners International, LDC...... 55,249
UH Technology Partners, LDC................. 294,092
C.E. Unterberg, Towbin Capital Partners I,
L.P ....................................... 176,796
C.E. Unterberg, Towbin LLC.................. 88,397
Unterberg Harris Private Equity Partners,
L.P........................................ 60,583 91,050
Unterberg Harris Private Equity Partners,
C.V. ...................................... 12,940 19,448
DLJ Diversified Partners, L.P. ............. 140,465 316,655
DLJ Diversified Partners-A, L.P............. 52,164 117,596
DLJ ESC II, L.P............................. 8,113 18,289
GRP Partners, L.P........................... 30,643 69,082
Global Retail Partners Funding, Inc......... 32,456 73,162
Global Retail Partners, L.P. ............... 471,390 1,062,674
General Electric Capital Corporation........ 2,762,431
</TABLE>
- --------
(1) Each listed purchaser is affiliated with a director of our company. For a
description of these affiliations and disclaimers of beneficial ownership,
see "Principal Stockholders."
49
<PAGE>
Concurrent with the issuance of Series E preferred stock to General
Electric Capital Corporation, which beneficially owns more than five percent
of our preferred stock, we issued General Electric Capital Corporation
warrants to buy 567,910 shares of Series E preferred stock with a weighted
average exercise price of $2.64. These shares are convertible into 283,955
shares of our common stock.
Option Grants and Agreements with Executive Officers and Directors
We granted options to the following directors to purchase shares of
common stock on the date, for the number of shares, with an exercise price as
indicated opposite each person's name:
<TABLE>
<CAPTION>
Securities
Underlying Option
Name Grant Date(1) Options Price
---- ------------- ---------- ------
<S> <C> <C> <C>
Bert Kolde................................... 3/18/98 5,000 $0.045
3/18/98 5,000 0.200
1/1/99 5,000 3.620
Linda Fayne Levinson......................... 3/18/98 5,000 0.200
1/1/99 5,000 3.620
5/10/99 10,000 9.000
Steven P. Novak.............................. 3/18/98 10,000 0.003
3/18/98 10,000 0.013
3/18/98 5,000 0.045
3/18/98 5,000 0.200
1/1/99 5,000 3.620
5/10/99 10,000 9.000
Richard Scudellari........................... 3/18/98 5,000 0.200
1/1/99 5,000 3.620
5/10/99 10,000 9.000
</TABLE>
- --------
(1) Options with a grant date in 1998 are subject to the terms of the 1998
Option Plan. Options with a grant date in 1999 are subject to the terms of
the 1999 Option Plan.
Under the terms of an oral agreement between us and William S.
McKiernan, our President, Chief Executive Officer and Chairman of our Board of
Directors, we repaid a balance of $60,000 in January 1998 for unpaid salary
that we had accrued on Mr. McKiernan's behalf for services Mr. McKiernan
provided to our predecessor, from whom we were spun-off, from the date of its
inception through December 31, 1994.
In July 1998, Mr. McKiernan loaned us $3,000,000 pursuant to a
convertible promissory note dated August 7, 1998 that was amended and restated
on October 21, 1998. In accordance with the terms of the convertible
promissory note, the principal balance of $3,000,000 was converted into
1,657,458 shares of our Series E preferred stock in June 1999 at a price of
$1.81 per share. Interest accrued on the note at a rate of ten percent (10.0%)
per annum, and was payable to Mr. McKiernan in quarterly installments. As of
May 31, 1999, $225,000 of interest had been paid and $50,000 had been recorded
as accrued interest.
We have entered into indemnification agreements with each of our
executive officers and directors.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
As of the consummation of this offering, we are authorized to issue up to
50,000,000 shares of common stock and 4,988,842 shares of preferred stock. The
following description of our capital stock is not complete and is qualified in
its entirety by our Certificate of Incorporation and Bylaws, both of which were
included as exhibits to the registration statement of which this prospectus
forms a part.
Common Stock
As of March 31, 1999, there were 17,548,816 shares of common stock
outstanding held of record by approximately 95 stockholders, including
10,489,792 shares that will be issued upon the automatic conversion of the
outstanding shares of our preferred stock into common stock upon the closing of
the offering and 1,527,048 shares issuable upon the exercise of warrants and
the conversion of a convertible promissory note. Holders of our common stock
shall be entitled to one vote for each share in all matters required or
permitted to be voted on by our stockholders. The Board of Directors may
declare a dividend out of funds legally available and the holders of common
stock are entitled to receive ratably any such dividends. In the event of our
liquidation, dissolution or winding up, holders of our common stock are
entitled to share ratably in all of our assets. Holders of our common stock
have no preemptive rights or other subscription rights to convert their shares
into any other securities. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable.
Preferred Stock
As of March 31, 1999, there were 25,000,000 shares of preferred stock
authorized and 16,957,061 shares of preferred stock outstanding. In addition,
1,396,639 shares of preferred stock were reserved for issuance upon the
exercise of warrants and 1,657,458 shares of preferred stock were reserved for
issuance upon the conversion of a convertible promissory note. All shares of
preferred stock outstanding at the time of consummation of this offering
convert automatically into common stock at such time and cannot be reissued.
Thereafter, there are no shares of preferred stock outstanding.
After the consummation of the offering, the Board of Directors has the
authority, without further action by the stockholders, to issue up to 4,988,842
shares of preferred stock in one or more series and to fix the privileges and
rights of each series. These privileges and rights may be greater than those of
the common stock. The Board of Directors, without stockholder approval, can
issue preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of common
stock. Therefore, we could issue preferred stock quickly with terms calculated
to delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, if we issue preferred stock, then the
market price of common stock may decrease, and voting and other rights may be
adversely affected. We have no plans to issue any preferred stock.
Warrants
As of March 31, 1999, we had outstanding warrants to purchase an
aggregate amount of 1,396,639 shares of Series E preferred stock. Those shares
if purchased will convert into 698,319 shares of common stock upon the closing
of this offering. The right to purchase shares subject to these warrants
terminates upon the consummation of this offering, unless the initial public
offering price is less than $8.00 per share.
Charter and Bylaw Provisions
We are subject to Section 203 of the Delaware General Corporation Law
which prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The term "business combination" includes mergers and stock
and asset sales. An "interested stockholder" is a person who, together with
affiliates and
51
<PAGE>
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The effect of this statute could, among other
things, make it more difficult for a third party to gain control of us,
discourage bids for the common stock at a premium or otherwise adversely affect
the market price of the common stock.
Limitation of Directors' and Officers' Liability; Indemnification
Our Certificate of Incorporation includes provisions that limit the
personal liability of our officers and directors for monetary damages for
breach of their fiduciary duties as directors, except for liability that cannot
be eliminated under the Delaware General Corporation Law. The Delaware General
Corporation Law does not permit a provision in a corporation's certificate of
incorporation that would eliminate this liability (i) for any breach of their
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) for any unlawful payment of a dividend or unlawful
stock repurchase or redemption, as provided in Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate this
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of a corporation only if he or she is a director of the corporation and
is acting in his or her capacity as director, and do not apply to the officers
of the corporation who are not directors.
Our Bylaws provide that, to the fullest extent permitted by the Delaware
General Corporation Law, we shall indemnify our directors and officers. In
addition, we anticipate that each director will enter into an indemnification
agreement pursuant to which we will indemnify the director to the fullest
extent permitted by the Delaware General Corporation Law. At present, there is
no pending litigation or proceeding involving any of our directors or officers
in which indemnification is required or permitted, and we are not aware of any
threatened litigation or proceeding that may result in a claim for
indemnification.
Registration Rights
After the SEC declares this registration statement effective, and
assuming we comply with other requirements, the holders of approximately
16,516,856 shares of common stock will hold registration rights. These rights
are held under the terms of several agreements between us and the holders of
these shares of common stock. Under the terms of these agreements, if we
propose to register any of our securities under the Securities Act, either for
our own account or for other security holders, we must give the holders of
registration rights notice of registration and include a portion of their
shares of common stock in the registration at our expense. In addition, holders
of registration rights may require us to file a registration statement under
the Securities Act at our expense with respect to their shares of common stock.
We are required to use our commercially reasonable efforts to effect this
registration. All of these registration rights are subject to conditions and
limitations, among them the right of the underwriters of any offering to limit
the number of shares included in such registration and our right not to effect
a registration in certain specific situations. Under these agreements, we have
agreed to bear all registration expenses (other than underwriting discounts and
commissions and fees, and fees and disbursements of counsel of the holders of
registration rights subject to limitations). We have agreed to indemnify the
holders of registration rights against liabilities under the Securities Act. We
are bearing all costs related to the registration statement of which this
prospectus is a part.
Listing
Application has been made for quotation of our common stock on the Nasdaq
National Market under the symbol "CYBS."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company. Its address is 40 Wall Street, New York, NY 10005,
and its telephone number is 212-936-5100.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 21,548,816 shares of
common stock outstanding based on shares outstanding as of March 31, 1999. Of
these shares, the 4,000,000 shares sold in this offering will be freely
transferable without restriction under the Securities Act, unless held by
"affiliates" of CyberSource as that term is used under the Securities Act and
the Regulations promulgated thereunder.
The remaining 17,548,816 outstanding shares were sold by us in reliance
on exemptions from the registration requirements of the Securities Act and are
restricted securities within the meaning of Rule 144 under the Securities Act.
Upon the expiration of agreements not to sell entered into with us, 120 days
after the effective date approximately 312,430 shares will become eligible for
sale subject to compliance with Rule 144. Beginning 180 days after the date of
this prospectus, approximately 15,686,838 shares will become eligible for sale
subject the provisions of Rule 144, Rule 144(k) or Rule 701 upon the expiration
of agreements not to sell such shares entered into between the underwriters and
such stockholders of CyberSource. Beginning 180 days after the date of this
prospectus, approximately 327,677 additional shares will become eligible for
sale subject to vested options as of the Effective Date in compliance with Rule
701 and upon the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders. Any shares subject to lock-up
agreements may be released at any time without notice by the underwriters.
<TABLE>
<CAPTION>
Shares
First
Days After Date of This Eligible
Prospectus for Sale Comment
----------------------- ---------- -------
<C> <C> <S>
Upon Effectiveness........ 4,000,000 Freely tradeable shares sold in offering.
120 days.................. 312,430 CyberSource lockup released; shares saleable under Rules 144 and 701.
180 days.................. 15,686,838 Underwriter lockup released; shares saleable under Rules 144 and 701.
</TABLE>
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned restricted shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the Effective Date, a number of
shares that does not exceed the greater of (i) 1% of the then outstanding
shares of common stock (approximately 215,488 shares immediately after this
offering based on shares outstanding as of March 31, 1999) or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale, subject to the filing of a Form 144 with respect to such
sale and other limitations and restrictions. In addition, a person who is not
deemed to have been an affiliate of CyberSource at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years, would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above.
Any employee, officer or director of or consultant to CyberSource who
purchased his or her shares prior to the Effective Date or who holds vested
options as of that date pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits non-
affiliates to sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding-period restrictions, in each case commencing 90
days after the Effective Date. However, we and our officers, directors and our
other stockholders have agreed not to sell or otherwise dispose of any shares
of our common stock for the 180-day period after the date of this prospectus
without the prior written consent of the underwriters. See "Underwriting."
As soon as practicable after the Effective Date, we intend to file a
registration statement on Form S-8 under the Securities Act to register shares
of common stock reserved for issuance under the 1998 Option Plan and the 1999
Option Plan, thus permitting the resale of such shares by non-affiliates in the
public market without restriction under the Securities Act. Such registration
statements will become effective immediately upon filing.
Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered in this offering.
53
<PAGE>
UNDERWRITING
General
We intend to offer our common stock through a number of underwriters.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan & Co.,
PaineWebber Incorporated and C.E. Unterberg, Towbin are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in a purchase agreement between us and the
underwriters, we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us, the
number of shares of our common stock set forth opposite its name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ................................................. 1,625,000
J.P. Morgan Securities Inc. ....................................... 650,000
PaineWebber Incorporated .......................................... 650,000
C.E. Unterberg, Towbin ............................................ 325,000
BancBoston Robertson Stephens Inc. ................................ 100,000
Goldman, Sachs & Co. .............................................. 100,000
Hambrecht & Quist LLC ............................................. 100,000
Prudential Securities Incorporated ................................ 100,000
Wasserstein Perella Securities, Inc. .............................. 100,000
Burnham Securities Inc. ........................................... 50,000
First Union Capital Markets Corp. ................................. 50,000
Legg Mason Wood Walker, Incorporated .............................. 50,000
Moors & Cabot, Inc. ............................................... 50,000
SoundView Technology Group, Inc. .................................. 50,000
---------
Total ........................................................ 4,000,000
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth in that agreement, to purchase all of the
shares of our common stock being sold under the terms of the agreement if any
of the shares of common stock are purchased. Under the purchase agreement, the
commitments of non-defaulting underwriters may be increased.
We have agreed to indemnify the underwriters against liabilities under
the Securities Act, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.
The expenses of this offering, exclusive of the underwriting discount,
are estimated at $820,000 and are payable by us.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
The shares of common stock will be ready for delivery in New York, New
York on or about June 29, 1999.
Commissions and Discounts
The representatives have advised us that the underwriters propose
initially to offer the shares of our common stock to the public at the initial
public offering price set forth on the cover page of this prospectus,
54
<PAGE>
and to dealers at such price less a concession not in excess of $.46 per share
of common stock. The underwriters may allow, and such dealers may allow, a
discount not in excess of $.10 per share of common stock to other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Per Without With
Share Option Option
----- ------- ------
<S> <C> <C> <C>
Public offering price........................... $11.00 $44,000,000 $50,600,000
Underwriting discount........................... $.77 $3,080,000 $3,542,000
Proceeds, before expenses, to CyberSource....... $10.23 $40,920,000 $47,058,000
</TABLE>
Over-Allotment Option
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of an
additional 600,000 shares of our common stock at the initial public offering
price set forth on the cover of this prospectus, less the underwriting
discount. The underwriters may exercise this option solely to cover over-
allotments, if any, made on the sale of our common stock offered hereby. To the
extent that the underwriters exercise this option, each underwriter will be
obligated to purchase a number of additional shares of our common stock
proportionate to such underwriter's initial amount reflected in the foregoing
table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 8% of the shares offered hereby to be sold to some
of our employees, directors and other persons with relationships with us. The
number of shares of our common stock available for sale to the general public
will be reduced to the extent that those persons purchase the reserved shares.
Any reserved shares which are not orally confirmed for purchase within one day
of the pricing of the offering will be offered by the underwriters to the
general public on the same terms as the other shares offered by this
prospectus.
No Sales of Similar Securities
We and our executive officers and directors have agreed not to directly
or indirectly
. offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, lend or otherwise
dispose of or transfer any shares of our common stock or
securities convertible into or exchangeable or exercisable for or
repayable with our common stock, whether now owned or later
acquired by the person executing the agreement or with respect to
which the person executing the agreement later acquires the power
of disposition, or file any registration statement under the
Securities Act relating to any shares of our common stock or
. enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of
ownership of our common stock whether any such swap or transaction
is to be settled by delivery of our common stock or other
securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a
period of 180 days after the date of the prospectus. See "Shares
Eligible for Future Sale."
55
<PAGE>
Nasdaq National Market Listing
Before this offering, there has been no market for our common stock. The
initial public offering price has been determined through negotiations between
us and the representatives of the underwriters. The factors considered in
determining the initial public offering price, in addition to prevailing market
conditions, include the valuation multiples of publicly traded companies that
the representatives believe to be comparable to us, some of our financial
information, the history of, and the prospects for, us and the industry in
which we compete, and an assessment of our management, its past and present
operations, the prospects for, and timing of, future revenues of CyberSource,
the present state of our development, the percentage interest of CyberSource
being sold as compared to the valuation for CyberSource and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to ours. There can be no assurance that an active
trading market will develop for our common stock or that our common stock will
trade in the public market subsequent to the offering at or above the initial
public offering price.
Our common stock has been approved for listing on the Nasdaq National
Market under the symbol "CYBS."
The underwriters do not expect sales of our common stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered under the prospectus.
Price Stabilization and Short Positions
Until the distribution of our common stock is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase our common stock. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price
of our common stock. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the underwriters
may reduce that short position by purchasing our common stock in the open
market. The underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
Penalty Bids
The underwriters may also impose a penalty bid on other underwriters and
selling group members. This means that if the underwriters purchase shares of
our common stock in the open market to reduce their short position or to
stabilize the price of our common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of our common stock to the extent
that it discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
56
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Morrison & Foerster LLP, Palo Alto, California. A partner of Morrison &
Foerster LLP owns 45,000 shares of our common stock and holds an option to
purchase an additional 10,000 shares of our common stock. Legal matters in
connection with this offering will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule and the financial statements and schedule of
our predecessor division of Beyond.com corporation at December 31, 1997 and
1998 and for the period from March 20, 1996 (inception) to December 31, 1996
and for the years ended December 31, 1997 and 1998, as set forth in their
report. We have included our consolidated financial statements and schedule in
this prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's reports, given on their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a Registration Statement on Form S-1 under the Securities Act of
1933, as amended, with respect to the Common Stock offered hereby. This
prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Items are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to CyberSource and our common stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part thereof. Statements contained in this prospectus as
to the contents of any contract or any other document referred to are not
necessarily complete, and, in each instance, if such contract or document is
filed as an exhibit, reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at the North Western Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center,
13th Floor, New York, NY 10048, and copies of all or any part thereof may be
obtained from such office after payment of fees prescribed by the Commission.
The Commission maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
57
<PAGE>
CYBERSOURCE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1998
and for the period from March 20, 1996 (inception)
to December 31, 1996
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP Independent Auditors........................... F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statement of Redeemable Convertible Preferred Stock, Division
Equity and Stockholders' Equity (Net Capital Deficiency).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CyberSource Corporation
We have audited the accompanying consolidated balance sheets of
CyberSource Corporation as of December 31, 1997 and 1998, and the related
consolidated statements of operations, redeemable convertible preferred stock,
division equity and stockholders' equity (net capital deficiency), and cash
flows of CyberSource Corporation and its predecessor division of Beyond.com
Corporation for the period from March 20, 1996 (inception) to December 31, 1996
and for the years ended December 31, 1997 and 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CyberSource Corporation at December 31, 1997 and 1998, and the consolidated
results of operations and cash flows of CyberSource Corporation and its
predecessor division of Beyond.com Corporation for the period from March 20,
1996 (inception) to December 31, 1996 and for the years ended December 31, 1997
and 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
February 18, 1999, except
as to the first paragraph
of Note 9, as to which
the date is June 21, 1999
F-2
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
--------------- March 31, March 31,
1997 1998 1999 1999
------ -------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents......... $2,000 $ 11,111 $ 7,423
Accounts receivable, net of
allowances of $332, $229, and
$163 at December 31, 1997 and
1998, and March 31, 1999......... 466 863 1,022
Prepaid expenses and other current
assets........................... 118 411 646
------ -------- --------
Total current assets............ 2,584 12,385 9,091
Property and equipment, net......... 1,151 2,300 2,795
Other noncurrent assets............. -- 290 264
------ -------- --------
Total assets.................... $3,735 $ 14,975 $ 12,150
====== ======== ========
Liabilities and stockholders' equity
(net capital deficiency)
Current liabilities:
Accounts payable.................. $ 269 $ 531 $ 972
Other accrued liabilities......... 128 969 1,348
Deferred revenue.................. 150 120 231
Current obligations under capital
leases........................... 21 211 318
Convertible note payable to an
officer and stockholder.......... -- 3,000 3,000
------ -------- --------
Total current liabilities....... 568 4,831 5,869
Noncurrent obligations under capital
leases............................. 33 256 426
Commitments
Redeemable convertible preferred
stock:
Designated shares--24,037,372
Issued and outstanding shares--
7,022,558 in 1997, 16,957,061 in
1998 and 1999, and none pro forma
(liquidation preference of
$18,616 at December 31, 1998 and
March 31, 1999, respectively).... 2,097 18,911 18,911 $ --
Stockholders' equity (net capital
deficiency):
Convertible preferred stock,
$0.001 par value:
Authorized shares--25,000,000
Issuable in series; see above as
to series designated as
redeemable and shares issued
Common stock, $0.001 par value:
Authorized shares--50,000,000
Issued and outstanding shares--
4,535,000 in 1997, 5,406,536 in
1998, 5,531,976 in 1999, and
16,021,800 pro forma........... 5 5 6 16
Additional paid-in capital........ 1,032 1,199 1,884 20,785
Deferred compensation............. -- (142) (671) (671)
Accumulated deficit............... -- (10,085) (14,275) (14,275)
------ -------- -------- --------
Total stockholders' equity (net
capital deficiency)............ 1,037 (9,023) (13,056) $ 5,855
------ -------- -------- ========
Total liabilities and
stockholders' equity (net
capital deficiency)............ $3,735 $ 14,975 $ 12,150
====== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Period From
March 20,
1996 Three Months Ended
(Inception) to Years Ended December 31, March 31,
December 31, ------------------------ --------------------
1996 1997 1998 1998 1999
-------------- ------------ ------------ --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 144 $ 968 $ 3,384 $ 639 $ 1,713
Cost of revenues........ 137 324 3,471 647 1,505
------- ----------- ------------ --------- ---------
Gross profit (loss)..... 7 644 (87) (8) 208
Operating expenses:
Product development... 338 2,300 3,802 671 1,322
Sales and marketing... 425 1,988 4,184 822 2,079
General and
administrative....... 387 681 1,946 330 938
Deferred compensation
amortization......... -- -- 18 -- 67
------- ----------- ------------ --------- ---------
Total operating
expenses............... 1,150 4,969 9,950 1,823 4,406
------- ----------- ------------ --------- ---------
Loss from operations.... (1,143) (4,325) (10,037) (1,831) (4,198)
Interest income......... -- -- 108 11 103
Interest expense........ -- (13) (156) (4) (95)
------- ----------- ------------ --------- ---------
Net loss................ $(1,143) $ (4,338) $ (10,085) $ (1,824) $ (4,190)
======= =========== ============ ========= =========
Basic and diluted net
loss per share......... $ (2.05) $ (0.40) $ (0.77)
============ ========= =========
Shares used in computing
basic and diluted net
loss per share......... 4,918 4,535 5,465
============ ========= =========
Pro forma basic and
diluted net loss per
share.................. $ (0.86) $ (0.26)
============ =========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 11,740 15,955
============ =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
DIVISION EQUITY AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(In thousands, except share and per share amounts)
Period from March 20, 1996 (inception) to March 31, 1999
<TABLE>
<CAPTION>
Redeemable
Convertible Division
Preferred Stock Equity
------------------ --------
Shares Amount Amount
---------- ------- --------
<S> <C> <C> <C>
Funding provided by Beyond.com
Corporation.................. -- $ -- $ 1,564
Net loss and comprehensive
loss......................... -- -- (1,143)
---------- ------- -------
Balance at December 31, 1996.. -- -- 421
Funding provided by Beyond.com
Corporation.................. -- -- 7,051
Net loss and comprehensive
loss......................... -- -- (4,338)
Incorporation of CyberSource
and issuance of redeemable
convertible preferred stock
and common stock in December
1997 upon capital stock
dividend from Beyond.com
Corporation.................. 7,022,558 2,097 (3,134)
---------- ------- -------
Balance at December 31, 1997.. 7,022,558 2,097 --
Issuance of common stock under
stock option plan............ -- -- --
Issuance of Series D
redeemable convertible
preferred stock, net of
issuance costs of $20........ 1,851,850 1,980 --
Issuance of Series E
redeemable convertible
preferred stock, net of
issuance costs of $114....... 8,082,653 14,516 --
Issuance of warrants to Visa
and GE Capital............... -- 318 --
Deferred compensation related
to stock option grants....... -- -- --
Amortization of
deferred compensation........ -- -- --
Net loss and comprehensive
loss......................... -- -- --
---------- ------- -------
Balance at December 31, 1998.. 16,957,061 18,911 --
Common shares issued for
services (unaudited)......... -- -- --
Issuance of common stock under
stock option plan
(unaudited).................. -- -- --
Deferred compensation related
to stock option grants
(unaudited).................. -- -- --
Amortization of deferred
compensation (unaudited)..... -- -- --
Net loss and comprehensive
loss (unaudited)............. -- -- --
---------- ------- -------
Balance at March 31, 1999
(unaudited).................. 16,957,061 $18,911 $ --
========== ======= =======
<CAPTION>
Stockholders' Equity
------------------------------------------------------------
Total
Stockholders'
Common Stock Deferred Additional Accumu- Equity
---------------- Compen- Paid-In lated (Net Capital
Shares Amount sation Capital Deficit Deficiency)
--------- ------ -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Funding provided by Beyond.com
Corporation.................. -- $ -- $ -- $ -- $ -- $ --
Net loss and comprehensive
loss......................... -- -- -- -- -- --
--------- ------ -------- ---------- --------- -------------
Balance at December 31, 1996.. -- -- -- -- -- --
Funding provided by Beyond.com
Corporation.................. -- -- -- -- -- --
Net loss and comprehensive
loss......................... -- -- -- -- -- --
Incorporation of CyberSource
and issuance of redeemable
convertible preferred stock
and common stock in December
1997 upon capital stock
dividend from Beyond.com
Corporation.................. 4,535,000 5 -- 1,032 -- 1,037
--------- ------ -------- ---------- --------- -------------
Balance at December 31, 1997.. 4,535,000 5 -- 1,032 -- 1,037
Issuance of common stock under
stock option plan............ 871,536 -- -- 7 -- 7
Issuance of Series D
redeemable convertible
preferred stock, net of
issuance costs of $20........ -- -- -- -- -- --
Issuance of Series E
redeemable convertible
preferred stock, net of
issuance costs of $114....... -- -- -- -- -- --
Issuance of warrants to Visa
and GE Capital............... -- -- -- -- -- --
Deferred compensation related
to stock option grants....... -- -- (160) 160 -- --
Amortization of
deferred compensation........ -- -- 18 -- -- 18
Net loss and comprehensive
loss......................... -- -- -- -- (10,085) (10,085)
--------- ------ -------- ---------- --------- -------------
Balance at December 31, 1998.. 5,406,536 5 (142) 1,199 (10,085) (9,023)
Common shares issued for
services (unaudited)......... 22,500 -- -- 81 -- 81
Issuance of common stock under
stock option plan
(unaudited).................. 102,940 1 -- 8 -- 9
Deferred compensation related
to stock option grants
(unaudited).................. -- -- (596) 596 -- --
Amortization of deferred
compensation (unaudited)..... -- -- 67 -- -- 67
Net loss and comprehensive
loss (unaudited)............. -- -- -- -- (4,190) (4,190)
--------- ------ -------- ---------- --------- -------------
Balance at March 31, 1999
(unaudited).................. 5,531,976 $ 6 $(671) $1,884 $(14,275) $(13,056)
========= ====== ======== ========== ========= =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From Three Months
March 20, 1996 Years Ended Ended
(Inception) to December 31, March 31,
December 31, ----------------- ----------------
1996 1997 1998 1998 1999
-------------- ------- -------- ------- -------
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................... $(1,143) $(4,338) $(10,085) $(1,824) $(4,190)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Common stock issued to
employers for services.. -- -- -- -- 81
Depreciation and
amortization............ 73 325 778 150 351
Amortization of deferred
compensation............ -- -- 18 -- 67
Changes in assets and
liabilities:
Accounts receivable..... (35) (431) (397) (171) (159)
Prepaid expenses and
other current assets... (70) (48) (293) (120) (174)
Accounts payable........ 122 147 262 144 441
Other accrued
liabilities............ 19 109 841 227 379
Deferred revenue........ 26 124 (30) 2 111
------- ------- -------- ------- -------
Net cash used in operating
activities................ (1,008) (4,112) (8,906) (1,592) (3,093)
Investing activities
Purchases of property and
equipment................. (556) (927) (1,419) (270) (542)
------- ------- -------- ------- -------
Net cash used in investing
activities................ (556) (927) (1,419) (270) (542)
Financing activities
Proceeds from issuance of
convertible note payable
to an officer and
stockholder............... -- -- 3,000 -- --
Principal payments on
capital lease
obligations............... -- (12) (67) (21) (62)
Financing provided by
Beyond.com Corporation.... 1,564 7,051 -- -- --
Loan to Beyond.com
Corporation............... -- -- (400) (400) --
Repayment of loan by
Beyond.com Corporation.... -- -- 400 275 --
Proceeds from issuance of
redeemable convertible
preferred stock, net...... -- -- 16,496 1,521 --
Proceeds from exercise of
stock options............. -- -- 7 -- 9
------- ------- -------- ------- -------
Net cash provided by (used
in) financing activities.. 1,564 7,039 19,436 1,375 (53)
------- ------- -------- ------- -------
Net increase (decrease) in
cash and cash
equivalents............... -- 2,000 9,111 (487) (3,688)
Cash and cash equivalents
at beginning of period.... -- -- 2,000 2,000 11,111
------- ------- -------- ------- -------
Cash and cash equivalents
at end of period.......... $ -- $ 2,000 $ 11,111 $ 1,513 $ 7,423
======= ======= ======== ======= =======
Supplemental schedule of
cash flow information
Interest paid.............. $ -- $ -- $ 156 $ 4 $ 96
Supplemental schedule of
noncash financing
activities
Property and equipment
acquired under capital
leases.................... $ -- $ 66 $ 480 $ -- $ 339
Issuance of warrants to
Visa and GE Capital....... $ -- $ -- $ 318 $ -- $ --
Deferred compensation
related to stock option
grants.................... $ -- $ -- $ 160 $ -- $ 596
</TABLE>
See accompanying notes.
F-6
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
The Company
CyberSource Corporation (the Company) was incorporated in the state of
Delaware on December 30, 1997. Prior to its incorporation, the Company operated
as a division of Beyond.com Corporation (Beyond.com). The Company is a
developer and provider of real time e-commerce transaction services.
Basis of Presentation
The accompanying consolidated financial statements reflect the financial
position and results of operations of the Company and its wholly owned
subsidiary and the predecessor division of Beyond.com. All intercompany
transactions and balances have been eliminated.
On December 31, 1997, Beyond.com transferred assets and liabilities to
its wholly owned subsidiary, CyberSource Corporation. Upon this transfer,
Beyond.com distributed capital stock in the form of a dividend to all existing
stockholders of Beyond.com on a pro rata basis such that the stockholders of
the Company were the same as the stockholders of Beyond.com at the time of the
distribution (the Spin-off). The accompanying financial statements for fiscal
1996 and 1997 reflect the operations of the Company as a division of Beyond.com
through December 31, 1997. The balance sheet as of December 31, 1997 has been
prepared using the historical basis of accounting and include all of the assets
and liabilities specifically identifiable to the Company. Beyond.com's
corporate accounting systems were not designed to track cash receipts and
payments and liabilities on a business-specific basis.
The statements of operations for fiscal 1996 and 1997 include all revenue
and costs directly attributable to the Company, including a corporate
allocation of the costs of facilities, salaries, and employee benefits.
Additionally, incremental corporate administration, finance, and management
costs are allocated to the Company. See Note 6.
All of the allocations reflected in 1996 and 1997 in the financial
statements are based on assumptions that management believes are reasonable
under the circumstances. However, these allocations and estimates are not
necessarily indicative of the costs that would have resulted if the Company had
been operated on a stand-alone basis in fiscal 1996 and 1997 nor are they
necessarily indicative of future costs to support the operations of the
Company.
Interim Financial Statements
In the opinion of management, the unaudited interim consolidated
financial statements at March 31, 1999 and for the three months ended March 31,
1998 and 1999 include all adjustments, consisting only of normal recurring
accruals, necessary to present fairly the Company's financial position at March
31, 1999, and results of operations and cash flows for the three months ended
March 31, 1998 and 1999. Results for the three months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the entire year.
Foreign Currency Translation
The financial statements of the Company's non-U.S. subsidiary are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation." Assets
F-7
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
and liabilities of this subsidiary are translated at the rates of exchange at
the end of the period. Revenues and expenses are translated using the average
exchange rates in effect during the period. Gains and losses from foreign
currency translation were not material through March 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues primarily from e-commerce service
monthly transaction processing fees, and, to a lesser extent, support service
fees and digital product rights management fees. Individual transactions,
monthly transaction revenues, and digital product rights management fees are
recognized in the period in which the transactions occur. Support service fees
are recognized when the services are provided and the related costs are
incurred. In fiscal 1998, Beyond.com, a related party, accounted for 24% of
revenues. In fiscal 1996, a different customer accounted for 26% of revenues.
There were no customers which accounted for greater than 10% of revenues in
fiscal 1997. In the three months ended March 31, 1999, one customer accounted
for 22% of revenues.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity from the date of purchase of three months or less to be cash
equivalents. As of December 31, 1997 and 1998 and March 31, 1999, cash
equivalents consist primarily of investments in money market funds. To date,
the Company has not experienced losses on any of its investments.
Accounts Receivable and Concentration of Credit Risk
At December 31, 1997, 10% of accounts receivable was due from one
customer. At December 31, 1998 and March 31, 1999, 13% and 16%, respectively,
of accounts receivable were due from Beyond.com. The Company generally does not
require collateral. The Company maintains allowances for potential credit
losses.
Property and Equipment
Property and equipment are stated at cost and are depreciated on a
straight-line basis over estimated useful lives of three years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease terms or the estimated useful lives.
F-8
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ ---------
<S> <C> <C> <C>
Computer equipment and software..................... $1,230 $2,916 $3,545
Furniture and fixtures.............................. 169 272 380
Office equipment.................................... 78 116 133
Leasehold improvements.............................. 72 144 210
------ ------ ------
1,549 3,448 4,268
Less accumulated depreciation and amortization...... 398 1,148 1,473
------ ------ ------
$1,151 $2,300 $2,795
====== ====== ======
</TABLE>
Product Development
Product development expenditures are charged to operations as incurred.
Advertising Expense
The cost of advertising is recorded as an expense when incurred.
Advertising costs were not significant during any of the periods presented.
Accounting Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and
related interpretations in accounting for its employee stock options because
the alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," basic and diluted net loss per share has been computed
using the weighted average number of shares of common stock outstanding during
the period. Potentially dilutive securities have been excluded from the
computation as their effect is antidilutive. Because the Company was a division
of Beyond.com through December 31, 1997 and had no outstanding common or
preferred stock, there is no earnings or loss per share presented.
Pro forma net loss per share has been computed as described above and
also gives effect, under Securities and Exchange Commission guidance, to the
conversion of redeemable convertible preferred shares and convertible notes
payable not included above that will automatically convert upon completion of
the Company's initial offering (using the if-converted method). If the offering
contemplated by this prospectus is consummated, all of the redeemable
convertible preferred stock outstanding as of March 31, 1999 will
F-9
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
automatically be converted into an aggregate of 10,489,792 shares of common
stock, based on the shares of redeemable convertible preferred stock
outstanding at March 31, 1999. Unaudited pro forma stockholders' equity at
March 31, 1999, as adjusted for the conversion of redeemable convertible
preferred stock, is disclosed on the balance sheet.
Pro forma basic and diluted net loss per share is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1998 1999
------------ ------------
<S> <C> <C>
Net loss............................................. $(10,085) $(4,190)
======== =======
Weighted average shares used in computing basic and
diluted net loss per common share................... 4,918 5,465
======== =======
Pro forma:
Shares used in computing basic and diluted net loss
per share used above.............................. 4,918 5,465
Adjusted to reflect the effect of the assumed
conversion of redeemable convertible preferred
stock from the date of issuance................... 6,822 10,490
-------- -------
Weighted average shares used in computing pro forma
basic and diluted net loss per share................ 11,740 15,955
======== =======
Pro forma basic and diluted net loss per share....... $ (0.86) $ (0.26)
======== =======
</TABLE>
If the Company had reported net income, diluted earnings per share would
have included the shares used in the computation of pro forma net loss per
share as well as an additional approximately 2,528,000 and 3,564,000 common
equivalent shares related to the outstanding options, warrants, and convertible
notes payable not included above for the year ended December 31, 1998 and for
the three months ended March 31, 1999, respectively. 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.
Income Taxes
Income taxes are calculated under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under
FAS 109, the liability method is used in accounting for income taxes, which
includes the effects of temporary differences between financial and taxable
amounts of assets and liabilities.
New Accounting Pronouncements
In January 1999, the Company adopted American Institute of Certified
Public Accountants Statement of Position, "Accounting for Computer Software
Developed For or Obtained For Internal Use" (SOP 98-1). SOP 98-1 applies to all
nongovernmental entities and provides revised guidance for the accounting
treatment for software which is internally developed, acquired, or modified
solely to meet the entity's internal needs. SOP 98-1 did not have a material
effect on the Company's financial statements or results of operations for the
three months ended March 31, 1999.
F-10
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
2. Segment Information
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information" (FAS
131) in the fiscal year ended December 31, 1998. FAS 131 supersedes Statement
of Financial Accounting Standards No. 14, "Financial Reporting for Segments of
a Business Enterprise" (FAS 14). FAS 131 changes current practice under FAS 14
by establishing a new framework for reporting information regarding operating
segments in annual financial statements and requires selected information for
these segments in interim financial statements. FAS 131 also establishes
standards for related disclosures about products and services and geographic
areas.
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available that is evaluated by
the chief operating decision maker or decision making group to make decisions
about how to allocate resources and assess performance. The Company's chief
operating decision maker is the Chief Executive Officer. 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. Additionally, in 1996, 1997 and 1998 the Company derived less than
10% of its revenues from outside the United States. Revenues from outside the
United States were 17% of revenues in the three months ended March 31, 1999.
The following table presents revenues and operating loss by the Company's
two business units for the period from March 20, 1996 (inception) to December
31, 1996, for the year ended 1997 and 1998, and for the three months ended
March 31, 1999. There were no interbusiness unit sales or transfers. The
Company does not report operating expenses, depreciation and amortization,
interest income (expense), income taxes, capital expenditures, or identifiable
assets by industry segment to the Chief Executive Officer. The Company's Chief
Executive Officer reviews the revenues from each of the Company's reportable
segments, and all of the Company's expenses are managed by and reported to the
Chief Executive Officer on a consolidated basis. Revenues are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended
December 31, Three months
---------------- ended March 31,
1996 1997 1998 1999
---- ---- ------ ---------------
<S> <C> <C> <C> <C>
ETCS........................................... $131 $770 $2,708 $1,512
DPR............................................ 13 198 676 201
---- ---- ------ ------
Total.......................................... $144 $968 $3,384 $1,713
==== ==== ====== ======
</TABLE>
3. Commitments
The Company leases its primary facility and equipment under noncancelable
operating leases expiring periodically through 2001. Rental expense was
approximately $43,000, $144,000, $459,000, and $201,000 for the period from
March 20, 1996 (inception) to December 31, 1996 and for 1997 and 1998, and for
the three months ended March 31, 1999, respectively. The Company has the option
to extend the lease term for an additional three years.
Beginning in 1997, the Company leased equipment under noncancelable lease
agreements that are accounted for as capital leases. Equipment under capital
lease arrangements, which is included in property and
F-11
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
equipment, aggregated approximately $546,000 and $885,000 at December 31, 1998
and March 31, 1999, respectively. Related accumulated amortization was
approximately $69,000 and $126,000 at December 31, 1998 and March 31, 1999,
respectively. Amortization expense related to assets under capital leases is
included with depreciation expense.
Future minimum lease payments under noncancelable operating leases and
capital leases at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
1999....................................................... $1,048 $227
2000....................................................... 947 197
2001....................................................... 73 81
------ ----
Total minimum payments..................................... $2,068 505
======
Less amount representing interest.......................... 38
----
467
Less current portion....................................... 211
----
$256
====
</TABLE>
4. Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock at December 31, 1998 and March 31,
1999 is as follows:
<TABLE>
<CAPTION>
Issued and
Designated Outstanding
Shares Shares
---------- -----------
<S> <C> <C>
Series A.............................................. 1,985,520 1,985,520
Series B.............................................. 2,500,000 2,037,038
Series C.............................................. 3,000,000 3,000,000
Series D.............................................. 1,851,852 1,851,850
Series E.............................................. 14,700,000 8,082,653
---------- ----------
Total............................................... 24,037,372 16,957,061
========== ==========
</TABLE>
The holders of Series A, B, C, D, and E redeemable convertible preferred
stock are entitled to receive annual noncumulative dividends at the rate of
$0.0064, $0.0432, $0.03264, $0.108, and $0.181 per share, respectively, plus,
with respect to the Series B, C, D, and E preferred stock, cumulative dividends
at a rate of $0.00252, $0.001904, $0.0063, and $0.0106 per share, per month,
subsequent to the respective original issuance date, respectively, when and if
declared by the Board of Directors, payable in preference to common stock
dividends. There were no dividends declared or payable by the Company at
December 31, 1998.
Each share of preferred stock is convertible at any time at the option of
the holder into shares of common stock at the then effective conversion price.
Each outstanding share of Series A and B, preferred stock is convertible into
1.00 share of common stock, and each two shares C, D, and E preferred stock are
convertible into 1 share of common stock subject to adjustment as specified in
the Certificate of Incorporation.
F-12
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
Each series of preferred stock will automatically convert into common stock
immediately prior to the consummation of a firm commitment underwritten public
offering under the Securities Act of 1933 (IPO) in which the sale price to the
public is not less than $7.00 per share, and the aggregate offering price to
the public is not less than $15,000,000, or at such time as the Company
receives the consent of not less than two-thirds of the holders of each series
of the preferred stock.
Each preferred share has voting rights equal to the number of common
shares into which it is convertible. Upon liquidation, the holders of the
Series A preferred stock are entitled to receive $0.064 per share, plus any
declared but unpaid dividends, before any distribution may be made to the
holders of the Series B, C, D, and E preferred or common shares. After the
payment to the holders of the Series A preferred stock, the holders of the
Series B, C, D, and E preferred stock are entitled to receive $0.432, $0.3264,
$1.08, and $1.81 per share, respectively, plus any declared but unpaid
dividends, before any distribution may be made to the holders of common shares.
At any time after January 5, 2000, the holders of a majority of the then
outstanding shares of Series A preferred stock may request the redemption of
all of the outstanding shares of Series A redeemable convertible preferred
stock. The Company shall redeem such shares at a price per share of $0.12, plus
accrued dividends, if any, for Series A preferred stock. At any time after July
12, 2002, the majority of the then outstanding shares of Series B preferred
stock may request the redemption of all of the outstanding shares of Series B
preferred stock at the original issuance price per share of $0.432 plus accrued
dividends, if any. At any time after July 12, 2002, the respective holders of
at least two-thirds of the then outstanding shares of Series C, D, and E
preferred stock separately may request the redemption of all of the outstanding
shares of Series C, D, and E preferred stock, respectively. The Company shall
redeem such shares at the original issuance price per share of $0.3264, $1.08,
and $1.81, respectively, plus accrued dividends, if any. All of the outstanding
preferred stock is recorded at its redemption amount.
During 1998, in connection with the issuance of Series E preferred stock
and certain strategic marketing agreements with Visa and GE Capital, the
Company issued warrants to purchase 552,486, 442,910, and 401,243 shares of the
Company's Series E preferred stock at exercise prices of $1.81, $3.00, and
$4.00 per share, respectively. The warrants are fully exercisable upon the date
of issuance and expire three years from the original date of the marketing
services agreements. Preferred shares issued upon exercise of the warrants are
non-forfeitable.
The Company has determined the fair value of the warrants at the time of
issuance to be $318,000 and has recorded this amount as a cost of the strategic
marketing agreements. The determined value of the warrants was credited to
redeemable convertible preferred stock and is being amortized ratably over the
three year term of the strategic marketing agreements. The Company amortized
$28,000 and $26,000 of the value of the warrants to sales and marketing expense
in 1998 and for the three months ended March 31, 1999, respectively.
5. Stockholders' Equity
Common Shares
The Company is authorized to issue 50,000,000 shares of common stock. The
holders of common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders of the Company. Subject to the preferences that
may be applicable to any outstanding shares of preferred stock, the holders of
F-13
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors.
The Company has reserved shares of common stock for future issuance at
December 31, 1998 as follows:
<TABLE>
<S> <C>
1998 Stock Option Plan:
Options outstanding............................................. 1,000,701
Options available for future grants............................. 27,763
Convertible note payable.......................................... 828,729
Redeemable convertible preferred stock............................ 10,489,792
Outstanding warrants.............................................. 698,319
----------
13,045,304
==========
</TABLE>
Stock Options
In conjunction with the Spin-off of the Company on December 31, 1997,
employees of the Company, immediately following the Spin-off, maintained their
outstanding exercisable stock options in Beyond.com and in March 1998 were
granted additional incentive stock options in the Company. Employees of
Beyond.com were granted additional stock options in the Company in March 1998
based on the extent that the employees' original Beyond.com options were
exercisable on the date of the Spin-off. The exercise prices of the original
Beyond.com option grants and the additional Company stock option grants were
adjusted to reflect the allocation of the fair market value per share price
between the Company's and Beyond.com's common stock at December 31, 1997. The
adjustments to these options resulted in nonstapled options to the employees of
each entity and were accounted for and in compliance with the guidelines in
Emerging Issues Task Force Issue No. 90-9, and therefore, no compensation
expense has been recorded.
In March 1998, the Company adopted its 1998 Stock Option Plan (the 1998
Option Plan). There are 1,900,000 shares of common stock authorized for
issuance under the 1998 Option Plan. The 1998 Option Plan provides for the
issuance of common stock and the granting of options to employees, officers,
directors, consultants, independent contractors, and advisors of the Company.
The exercise price of a nonqualifying stock option and an incentive stock
option shall not be less than 85% and 100%, respectively, of the fair value of
the underlying shares on the date of grant. Options granted under the 1998
Option Plan generally become exercisable over five years at the rate of 20% per
year from the grant date.
In January 1999, the Company adopted its 1999 Stock Option Plan (the 1999
Option Plan). The Company has reserved 2,500,000 shares of common stock for
issuance under the 1999 Option Plan. The provisions of the 1999 Plan and
similar to those of the 1998 Option Plan.
F-14
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
The following table summarizes information about the Company's stock
option activity under the 1998 Option Plan and the 1999 Option Plan. Options
granted prior to December 31, 1997 were originated from options granted by
Beyond.com and were granted by the Company immediately following the adoption
of the 1998 Option Plan.
<TABLE>
<CAPTION>
Options Outstanding
---------------------------
Number Weighted
Shares of Average Adjusted
Available Shares Exercise Price
---------- --------- ----------------
<S> <C> <C> <C>
Shares reserved....................... 1,900,000 -- $ --
Options granted based upon Beyond.com
option grants prior to Spin-off...... (1,227,183) 1,227,183 $0.160
Options granted....................... (679,575) 679,575 $0.474
Options exercised..................... -- (871,536) $0.008
Options canceled...................... 34,521 (34,521) $0.378
---------- ---------
Balance at December 31, 1998.......... 27,763 1,000,701 $0.310
Additional shares reserved
(unaudited).......................... 2,500,000 -- $ --
Options granted (unaudited)........... (1,233,350) 1,233,350 $3.620
Options exercised (unaudited)......... -- (102,940) $0.064
Options canceled (unaudited).......... 95,536 (95,536) $2.504
---------- ---------
Balance at March 31, 1999
(unaudited).......................... 1,389,949 2,035,575 $2.024
========== =========
</TABLE>
In connection with certain stock options granted in 1998, the three months
ended March 31, 1999 and April 1999, the Company recorded deferred compensation
for the estimated difference between the exercise price of the options and the
deemed fair value of $160,000, $596,000 and $424,000, respectively, which is
being amortized on a graded method over the four-year vesting period of the
options.
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted Number of Weighted
Weighted Average Options Average
Number of Average Remaining Exercisable Adjusted
Options Adjusted Contractual Upon Exercise
Exercise Price Outstanding Exercise Price Life (Years) Issuance Price
--------------- ----------- -------------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
$0.006 -- $0.04 312,384 $0.04 7.76 109,510 $0.03
$0.06 34,417 $0.06 8.84 8,868 $0.06
$0.20 163,150 $0.20 9.20 21,000 $0.20
$0.54 490,750 $0.54 9.71 -- $ --
--------- -------
1,000,701 $0.31 139,378 $0.06
========= =======
</TABLE>
At December 31, 1997, 828,640 options were exercisable at a weighted
average exercise price of $0.004.
Stock-Based Compensation
Pro forma information regarding net loss is required by FAS 123, which
also requires that the information be determined as if the Company has
accounted for its employee stock options granted under the
F-15
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
fair value method of FAS 123. The fair value for these options was estimated at
the date of grant using the minimum value method with the following weighted
average assumptions: a risk-free interest rate of 5.51%, 6.16%, and 5.15% for
1996, 1997, and 1998, respectively; no dividend yield or volatility factors of
the expected market price of the Company's common stock; and a weighted average
expected life of the option of four years.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost been determined using the fair value at the grant
date for options granted calculated using the minimum value method of FAS 123,
the Company's actual net loss would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Pro forma net loss (in thousands).............. $(1,143) $(4,339) $(10,088)
Pro forma basic and diluted net loss per
share......................................... $ (2.05)
</TABLE>
The weighted average fair value of options granted, which is the value
assigned to the options under FAS 123, was $0.002, $0.02, and $0.08 per share
for options granted during 1996, 1997, and 1998, respectively.
The pro forma impact of options on the net loss for the period from March
20, 1996 (inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998 is not representative of the effects on net income (loss) for
future years, as future years will include the effects of options vesting as
well as the impact of multiple years of stock option grants.
6. Related Party Transactions
Funding Prior to Spin-off
Through December 31, 1997, the Company utilized Beyond.com's centralized
cash management services and processes related to receivables, payables,
payroll, and other activities. Through December 31, 1997, the Company's net
cash requirements were funded by Beyond.com. Net financing provided by
Beyond.com to the Company in 1996 and 1997 was approximately $1,564,000 and
$7,051,000, respectively, including funding related to expenditures for
operations and investing activities, corporate services provided, as described
below, and a $2,000,000 cash contribution by Beyond.com upon the Spin-off.
There were no intercompany transfers and no amounts were paid to Beyond.com by
the Company in repayment of the financing during these periods, and through the
date of the Spin-off, these amounts were included in division equity. The
average balances financed by Beyond.com during fiscal 1996 and 1997, which did
not bear interest, were approximately $800,000 and approximately $6,000,000,
respectively.
F-16
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
Corporate Services
In accordance with Staff Accounting Bulletin No. 55, additional
allocations have been reflected in these financial statements for 1996 and
1997. These expenses have included corporate communications, management,
compensation and benefits administration, payroll, accounts payable, income
tax compliance, and other administration and finance overhead. Allocations and
charges were based on either a direct cost pass-through for incremental
corporate administration, finance and management costs and a percentage
allocation of costs for other services provided based on factors such as net
sales, headcount, and relative expenditure levels. Such allocations and
corporate charges totaled $519,000 and $688,500 for the period from March 20,
1996 (inception) to December 31, 1996 and for the year ended December 31,
1997, respectively.
Management believes that the basis used for allocating corporate services
is reasonable. However, the terms of these transactions may differ from those
that would result from transactions among unrelated parties.
The CEO of the Company is Chairman of the Board of Beyond.com and the
companies also have one other member of their Board of Directors in common.
Pursuant to the terms of an agreement entered into in connection with the
Spin-off from Beyond.com, the Company provides services to Beyond.com on a
nonexclusive basis. During 1998 and the three months ended March 31, 1999, the
Company recorded approximately $801,000 and $375,000, respectively, of
revenues related to these services. As of December 31, 1998 and March 31,
1999, amounts receivable from Beyond.com were approximately $147,000 and
$179,000, respectively.
Note Receivable Issued to Beyond.com
On March 18, 1998, the Company loaned $400,000 to Beyond.com. The note
was repaid as of June 1998.
Convertible Note Payable to Officer and Stockholder
In August 1998, the Company issued an unsecured convertible one-year
promissory note to an officer and stockholder from whom it had borrowed an
aggregate of $3,000,000 in July 1998. The note, which was amended in October
1998, is payable in full on October 21, 1999 and bears interest at a rate of
10% per annum. Interest is payable in quarterly installments. The note is
convertible into 1,657,458 shares of Series E redeemable convertible preferred
stock at the option of the note holder. See Note 9.
7. Litigation and Contingencies
From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. See Note 9. The Company
believes that there are no claims or actions pending or threatened against the
Company, the ultimate disposition of which would have a material impact on the
Company's financial position or results of operations.
8. Income Taxes
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $8,600,000. As of December 31, 1998, the
Company also had federal and state research credit
F-17
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
carryforwards of approximately $130,000 and $70,000, respectively. The net
operating loss and credit carryforwards will expire at various dates beginning
in 2006 through 2018, if not utilized.
The utilization of the net operating losses and credits may be subject to
a substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes at December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.................................. $ 3,400
Research credit carryforwards..................................... 200
Other, net........................................................ 300
-------
Net deferred tax assets............................................. 3,900
Valuation allowance................................................. (3,900)
-------
Net deferred tax assets............................................. $ --
=======
</TABLE>
9. Subsequent Events
Reverse Stock Split
On April 30, 1999, the Company's Board of Directors approved a 1 for 2
reverse split of the Company's outstanding common stock, and on June 21, 1999,
the Company's stockholders approved the reverse split. The par value of the
common stock and the authorized shares of common stock were not adjusted as a
result of the reverse split. The conversion ratios of each series of preferred
stock were adjusted accordingly. The stock split is reflected in the
accompanying financial statements and footnotes on a retroactive basis in all
periods presented.
Legal Matter (unaudited)
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.
Stock Options (unaudited)
In April 1999, the Company granted options to purchase 311,000 shares of
common stock at a weighted average price of $5.10 per share and recorded
deferred compensation of $424,000 related to these grants. In June 1999, the
Company granted options to purchase 736,250 shares of common stock at an
exercise price of $9.00 per share.
F-18
<PAGE>
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
Employee Stock Purchase Plan (unaudited)
In June 1999, the Company's board of directors and stockholders adopted
its 1999 Employee Stock Purchase Plan and reserved 500,000 shares of common
stock for issuance under this plan.
Convertible Note Payable to Officer and Stockholder (unaudited)
In June 1999, the outstanding unsecured convertible one-year promissory
note to an officer and stockholder was converted to 1,657,458 shares of Series
E redeemable convertible preferred stock.
F-19
<PAGE>
The graphic depicts the words CyberSource with "the power behind the buy button"
underneath it.
<PAGE>
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Through and including July 18, 1999, (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
4,000,000 Shares
[CYBERSOURCE LOGO APPEARS HERE]
Common Stock
-----------------
P R O S P E C T U S
-----------------
Merrill Lynch & Co.
J.P. Morgan & Co.
PaineWebber Incorporated
C.E. Unterberg, Towbin
June 23, 1999
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