<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number: 000-26477
CYBERSOURCE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0472961
---------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1295 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
--------------------------
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (650) 965-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of July 21, 2000, there were 26,003,987 shares of common stock, par value
$0.001 per share, outstanding.
This Report on Form 10-Q includes 23 pages with the Index to Exhibits located on
page 22.
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CYBERSOURCE CORPORATION
INDEX TO REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999........................................................ 3
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2000 and 1999.............................................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999................................................... 5
Notes to Condensed Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 21
Item 2. Changes in Securities and Use of Proceeds.................................... 21
Item 4. Submission of Matters to a Vote of Securities Holders........................ 21
Item 6. Exhibits and Reports on Form 8-K............................................. 22
Signature............................................................................. 23
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 (1)
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,076 $ 71,673
Short-term investments 75,020 68,596
Accounts receivable, net of allowances of $1,157 and $282
at June 30, 2000 and December 31, 1999, respectively 4,583 3,212
Prepaid expenses and other current assets 1,333 1,589
-------- --------
Total current assets 122,012 145,070
Property and equipment, net 15,420 8,300
Investment in joint venture 730 -
Other noncurrent assets 495 752
-------- --------
Total assets $138,657 $154,122
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,053 $ 1,311
Other accrued liabilities 5,344 4,686
Deferred revenue 793 461
Current obligations under capital leases 578 661
-------- --------
Total current liabilities 8,768 7,119
Noncurrent obligations under capital leases 204 444
Stockholders' equity:
Common stock 26 26
Additional paid-in capital 190,315 187,828
Deferred compensation (903) (791)
Accumulated other comprehensive loss (54) (412)
Accumulated deficit (59,699) (40,092)
-------- --------
Total stockholders' equity 129,685 146,559
-------- --------
Total liabilities and stockholders' equity $138,657 $154,122
======== ========
</TABLE>
(1) Restated for the acquisition of ExpressGold.com, Inc.
See notes to condensed consolidated financial statements.
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CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
----------- -----------
2000 1999 (1) 2000 1999 (1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Transaction and support $ 4,916 $ 2,399 $ 9,312 $ 4,026
Professional services 2,172 137 4,526 223
-------- -------- -------- --------
Total revenues 7,088 2,536 13,838 4,249
Cost of revenues:
Transaction and support 3,833 2,115 7,617 3,500
Professional services 1,572 130 3,130 250
-------- -------- -------- --------
Cost of sales 5,405 2,245 10,747 3,750
Gross profit 1,683 291 3,091 499
Operating expenses:
Product development 3,591 1,720 6,543 3,096
Sales and marketing 7,159 4,294 12,616 6,424
General and administrative 3,124 1,217 6,087 2,236
Acquisition related costs - - 834 -
Deferred compensation amortization 149 156 411 223
-------- -------- -------- --------
Total operating expenses 14,023 7,387 26,491 11,979
-------- -------- -------- --------
Loss from operations (12,340) (7,096) (23,400) (11,480)
Loss on investment in joint venture (31) - (31) -
Interest income (expense), net 1,904 (37) 3,824 (26)
-------- -------- -------- --------
Net loss $(10,467) $ (7,133) $(19,607) $(11,506)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.40) $ (1.06) $ (0.76) $ (1.78)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share 25,928 6,721 25,801 6,472
======== ======== ======== ========
Proforma basic and diluted net loss per share $ (0.42) $ (0.68)
======== ========
Shares used in computing proforma basic and
diluted net loss per share 16,980 16,846
======== ========
</TABLE>
(1) Restated for the acquisition of ExpressGold.com, Inc.
See notes to condensed consolidated financial statements.
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CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
--------------------
2000 1999 (1)
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $(19,607) $(11,506)
Adjustments to reconcile net loss to net cash used
in operating activities:
Common stock issued to consultants for services - 81
Depreciation and amortization 1,827 791
Amortization of deferred compensation 411 223
Loss on investment in joint venture 31 -
Changes in operating assets and liabilities:
Accounts receivable (1,371) (333)
Prepaid expenses and other current assets 256 (373)
Other noncurrent assets 257 -
Accounts payable 742 1,740
Other accrued liabilities 1,390 2,240
Deferred revenues 332 187
-------- --------
Net cash used in operating activities (15,732) (6,950)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,947) (1,569)
Purchases of short-term investments (76,052) -
Sales of short-term investments 70,000 -
Investment in joint venture (761) -
-------- --------
Net cash used in investing activities (15,760) (1,569)
CASH FLOWS FROM FINANCING ACTIVITES:
Principal payments on capital lease obligations (323) (198)
Proceeds from issuance of shareholder note payable - 400
Proceeds from issuance of common stock in initial
public offering,
net of offering expenses - 39,990
Proceeds from issuance of common stock - 30
Proceeds from exercise of stock options 846 77
Proceeds from employee stock purchase plan 386 -
-------- --------
Net cash provided by financing activities 909 40,299
Effect of exchange rates on cash (14) -
-------- --------
Increase (decrease) in cash and cash equivalents (30,597) 31,780
Cash and cash equivalents at beginning of period 71,673 11,422
-------- --------
Cash and cash equivalents at end of period $ 41,076 $ 43,202
======== ========
Supplemental schedule of noncash financing activities
Property and equipment acquired under capital lease $ - $ 1,045
Deferred compensation related to stock option grants $ 524 $ 1,036
Conversion of note payable to an officer and stockholder
into redeemable preferred stock $ - $ 3,000
Conversion of note payable and related accrued interest
into common stock $ 731 $ -
Conversion of redeemable convertible preferred stock into
common stock $ - $ 21,911
(1) Restated for the acquisition of ExpressGold.com, Inc.
See notes to condensed consolidated financial statements.
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CYBERSOURCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
CyberSource Corporation and its wholly-owned subsidiaries (collectively,
"CyberSource" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. In the opinion of management, all adjustments
(consisting primarily of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six
month periods ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report filed on Form 10-K with the
Securities and Exchange Commission on March 30, 2000, SEC File No. 000-26477.
The condensed consolidated balance sheets, condensed consolidated statements of
operations and the condensed consolidated statements of cash flows have been
restated to include the results of operations of ExpressGold (see Note 2,
"Acquisition of ExpressGold.com, Inc.") which was acquired in January 2000.
2. ACQUISITION OF EXPRESSGOLD.COM, INC.
On January 10, 2000, the Company acquired ExpressGold.com, Inc. ("ExpressGold"),
a developer of an Internet Stored Value platform that allows merchants to offer
gift certificates, promotional certificates and corporate incentives to
businesses and consumers. Under the terms of the acquisition agreement, the
Company issued 1,554,431 shares of CyberSource common stock in exchange for all
of ExpressGold's common stock. In addition, the Company issued 12,067 stock
options in exchange for ExpressGold's previously outstanding stock options. The
number of shares of CyberSource shares was calculated using an exchange ratio of
approximately 1.3 shares of CyberSource for each share of ExpressGold common
stock. The transaction was accounted for as a pooling of interests and,
accordingly, the historical condensed consolidated financial statements of the
Company have been restated to include the financial position, results of
operations and cash flows of ExpressGold for all periods presented.
The following represents the results of operations for the three and six months
ended June 30, 1999 for the Company and ExpressGold prior to the restatement
resulting from the acquisition (in thousands):
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------------- -------------------------
CyberSource ExpressGold CyberSource ExpressGold
------------ ----------- ----------- -----------
Revenues............. $ 2,536 $ - $ 4,249 $ -
Net loss............. $(6,858) $(275) $(11,048) $(458)
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3. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net loss............................................. $ (10,467) $ (7,133) $ (19,607) $ (11,506)
Change in unrealized loss on short-term investments.. 63 - 372 -
Cumulative translation adjustment.................... (14) - (14) -
--------- -------- --------- ---------
Comprehensive loss................................... $ (10,418) $ (7,133) $ (19,249) $ (11,506)
========= ======== ========= =========
4. NET LOSS PER SHARE
</TABLE>
Net loss per share is presented in accordance with the requirements of Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). Pro
forma net loss per share has been computed under FAS 128 and also gives effect
to the conversion of redeemable convertible preferred stock not included in the
net loss per share that converted upon completion of the initial public offering
in June 1999.
If the Company had reported net income for the six months ended June 30, 1999,
diluted earnings per share would have included additional common equivalent
shares related to approximately 2,902,174 outstanding options at June 30, 1999.
If the Company had reported net income for the six months ended June 30, 2000,
diluted earnings per share would have included the shares used in the
computation of net loss per share as well as additional common equivalent shares
related to outstanding options to purchase approximately 4,989,102 shares of
common stock at June 30, 2000. The common equivalent shares from options would
be determined on a weighted average basis using the treasury stock method.
5. LEGAL MATTER
In November 1999, a lawsuit was filed against the Company alleging that the
Company's payment services infringe upon two patents to certain automated
network payment, purchase and processing systems held by the plaintiff. While
there can be no assurances as to the outcome of this litigation, the Company has
obtained opinions of patent counsel that the Company's payment services do not
infringe upon either of the plaintiff's patents. The Company intends to
vigorously defend against the claims asserted.
6. SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which establishes standards for
reporting information regarding operating segments.
The Company views its operations as principally two segments, e-commerce
transaction services and support as well as professional services and manages
the business based on the revenues of these segments. The following table
presents revenues and cost of revenues by the Company's two business units for
the three and six month periods ended June 30, 2000 and 1999. The Company's
Chief Executive Officer reviews the revenues from each of the Company's
reportable segments. All of the Company's expenses, with the exception of cost
of revenues, are managed by and reported to the Chief Executive Officer on a
consolidated basis. Revenues and cost of revenues are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
E-commerce transaction services and support.. $ 4,916 $ 2,399 $ 9,312 $ 4,026
Professional services........................ 2,172 137 4,526 223
------- ------- -------- -------
Total revenues.......................... $ 7,088 $ 2,536 $ 13,838 $ 4,249
======= ======= ======== =======
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Cost of revenues:
E-commerce transaction services and support.. $ 3,833 $ 2,115 $ 7,617 $ 3,500
Professional services........................ 1,572 130 3,130 250
------- ------- --------- -------
Total cost of revenues.................. $ 5,405 $ 2,245 10,747 3,750
======= ======= ========= =======
</TABLE>
Additionally, revenues from outside the United States were 6.8% and 30.1% of
revenues for the six months ended June 30, 2000 and 1999, respectively. During
the three months ended June 30, 2000, one customer accounted for 23.2% of our
revenues. During the three months ended June 30, 1999, one other customer
accounted for 14.2% of our revenues. As of June 30, 2000, approximately 25.1%
of our accounts receivable balance was due from one customer.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," (SFAS 133). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 133
requires all companies to recognize derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after July 1, 2000. The Company is currently assessing the potential
impact SFAS 133 will have on the Company's statement of financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and is effective in the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company is currently assessing the
potential impact SAB 101 will have on the Company's statement of financial
position.
8. SUBSEQUENT EVENT
In July 2000, the Company signed a definitive agreement to acquire the
outstanding common shares of PaylinX Corporation, a developer of a payment
server platform for real-time credit card transactions. Under the terms of the
agreement, CyberSource has agreed to issue approximately 8.4 million shares of
its common stock for the outstanding shares of PaylinX. The acquisition will
be accounted for as a purchase and is subject to stockholder and regulatory
approval.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, including
statements regarding our expectations, hopes, intentions, beliefs or strategies
regarding the future. Such forward-looking statements include, but are not
limited to, our anticipated expense levels for research and development,
selling, general and administrative operations; the amount of and specific uses
of anticipated capital expenditures; and expectations regarding liquidity and
adequacy of cash resources. Actual results could differ materially from those
projected in any forward-looking statements for the reasons detailed below under
the sub-heading "Factors That May Affect Future Operating Results" and in other
sections of this Report on Form 10-Q. All forward-looking statements included in
this Form 10-Q are based on information available to us on the date of this
Report on Form 10-Q, and we assume no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ from those
projected in the forward-looking statements. See "Factors That May Affect Future
Operating Results" below, as well as such other risks and uncertainties as are
detailed in our Securities and Exchange Commission reports and filings for a
discussion of the factors that could cause actual results to differ materially
from the forward-looking statements.
The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in our Form 10-K, filed with the Securities and Exchange Commission on
March 30, 2000, SEC File No. 000-26477.
OVERVIEW
We derive substantially all of our revenues from e-commerce monthly transaction
processing fees, professional services, support services and, to a lesser
extent, digital product rights management fees. Transaction revenues and digital
product rights management fees are recognized in the period in which the
transactions occur. Our e-commerce transaction processing service revenues are
derived from contractual relationships providing revenues on a per transaction
basis, generally subject to a monthly minimum or maintenance fee. In general,
these contractual relationships provide for a one-year term with automatic
renewal and can be canceled by either party at any time with sixty days prior
notice. Professional services revenue and support service fees are recognized as
the related services are provided and costs are incurred. We have incurred
significant losses since our inception, and through June 30, 2000 had incurred
cumulative losses of approximately $65.1 million, which includes the cumulative
losses of ExpressGold. We expect to continue to incur substantial operating
losses for the foreseeable future.
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.
The following discussion compares the results of operations for the three and
six months ended June 30, 2000 and 1999 after restatement to reflect the
acquisition of ExpressGold, which was accounted for as a pooling of interests.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues. Revenues were $7.1 million for the three months ended June 30, 2000 as
compared to $2.5 million for the three months ended June 30, 1999, an increase
of approximately $4.6 million or 179.4%. Transaction and support revenues were
$4.9 million for the three months ended June 30, 2000 as compared to $2.4
million for the three months ended June 30, 1999, an increase of approximately
$2.5 million or 104.9%. This increase is due to the addition of customers as
well as transaction volume increases from existing customers resulting from the
increased market acceptance of e-commerce. Our transactions processed were
approximately 34.7 million during the three months ended June 30, 2000 as
compared to approximately 8.0 million processed during the three months ended
June 30, 1999. Professional services revenues were $2.2 million for the three
months ended June 30, 2000 as compared to $0.1 million for the three months
ended June 30, 1999 due to an increase in demand for our professional services
that occurred during the six months ended June 30, 2000. During the three
months ended June 30, 2000, one customer for which we performed a non-recurring
professional services engagement accounted for 23.2% of our revenues.
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Cost of Revenues. Transaction and support cost of revenues consists primarily of
costs incurred in the delivery of e-commerce transaction services, including
personnel costs in our operations and merchant support functions, depreciation
of capital equipment used in our network infrastructure and costs related to the
hosting of our servers at third-party hosting centers in the United States and
the United Kingdom. Transaction and support cost of revenues were $3.8 million
or 78.0% of transaction and support revenues for the three months ended June 30,
2000 as compared to $2.1 million or 88.2% of transaction and support revenues
for the three months ended June 30, 1999. The increase in absolute dollars is
due to higher personnel related costs resulting from an increase in personnel
and an increase in depreciation expense on capital equipment. Professional
services cost of revenues consist principally of personnel related costs and
expenses and a portion of allocated overhead costs related to providing
professional services. Professional services cost of revenues were $1.6 million
or 72.4% of professional services revenues for the three months ended June 30,
2000 as compared to $0.1 million or 94.9% of professional services revenues for
the three months ended June 30, 1999. The increase in absolute dollars is due to
higher personnel and contractor related costs resulting from an increase in
personnel and contractor usage necessary to support our increase in professional
services projects. The decrease in professional services cost of revenues as a
percentage of professional services revenues is due to economies of scale
resulting from the increase in professional services projects.
Product Development. Product development expenses consist primarily of
compensation and related costs of employees engaged in the research, design and
development of new services, and to a lesser extent, facility costs and related
overhead. Product development expenses were $3.6 million for the three months
ended June 30, 2000 as compared to $1.7 million for the three months ended June
30, 1999. The increase is due to higher personnel related costs resulting from
an increase in personnel and increased facilities and infrastructure related
costs. We expect product development expenses to increase in absolute dollars as
we hire additional personnel and endeavor to develop new services.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation of sales and marketing personnel, market research and advertising
costs, and, to a lesser extent, facility costs and related overhead. Sales and
marketing expenses were $7.2 million for the three months ended June 30, 2000 as
compared to $4.3 million for the three months ended June 30, 1999. The increase
is primarily due to additional personnel related costs resulting from an
increase in personnel. Sales and marketing expenses for the three months ended
June 30, 2000 include $0.8 million of one-time signing bonuses for certain
professional services employees. We expect our sales and marketing expenses to
increase in absolute dollars as we continue to hire personnel to expand our
sales and marketing effort.
General and Administrative. General and administrative expenses consist
primarily of compensation for administrative personnel, fees for outside
professional services, to a lesser extent, facility costs and related overhead
and, for the three and six months ended June 30, 2000, bad debt expense. General
and administrative expenses were $3.1 million for the three months ended June
30, 2000 as compared to $1.2 million for the three months ended June 30, 1999.
The increase is primarily due to higher personnel related costs resulting from
an increase in personnel. General and administrative expenses for the three
months ended June 30, 2000 include approximately $0.6 million of bad debt
expense, approximately $0.3 million in legal expense and $0.2 million of costs
relating to our facility relocation. The increase in bad debt expense is due to
the current capital market conditions impacting our Internet based customers as
well as the increased customer receivable balances inherent in the professional
services business. We expect general and administrative expenses to increase in
absolute dollars to support the expected growth in our business.
Deferred Compensation Amortization. During the three months ended June 30, 2000,
we recorded aggregate unearned compensation in the amount of $0.5 million in
connection with the grant of stock options during the quarter with exercise
prices less than the fair value on the respective dates of grant. Amortization
expense related to deferred compensation was $0.2 million for the three months
ended June 30, 2000 and 1999.
Interest Income (Expense), Net. Interest income consists of interest earnings on
cash, cash equivalents and short-term investments and was $1.9 million for the
three months ended June 30, 2000 as compared to $0.1 million for the three
months ended June 30, 1999. The increase is primarily due to increased cash,
cash equivalents and short-term investment balances as a result of our
financings in 1999. Interest expense was $24,000 for the three months ended June
30, 2000 as compared to $0.1 million in the three months ended June 30, 1999.
Loss on Investment in Joint Venture. During the three months ended June 30,
2000, we recorded a loss of approximately $31,000 which represents our share of
the joint venture's loss for the period.
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<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues. Revenues were $13.8 million for the six months ended June 30, 2000 as
compared to $4.2 million for the six months ended June 30, 1999, an increase of
approximately $9.6 million or 225.7%. Transaction and support revenues were $9.3
million for the six months ended June 30, 2000 as compared to $4.0 million for
the six months ended June 30, 1999, an increase of approximately $5.3 million or
131.3%. This increase is due to the addition of customers as well as transaction
volume increases from existing customers resulting from the increased market
acceptance of e-commerce. Our transactions processed were approximately 58.9
million during the six months ended June 30, 2000 as compared to approximately
13.8 million processed during the six months ended June 30, 1999. Professional
services revenues were $4.5 million for the six months ended June 30, 2000 as
compared to $223,000 for the six months ended June 30, 1999 due to an increase
in demand for our professional services that occurred during the six months
ended June 30, 2000.
Cost of Revenues. Transaction and support cost of revenues were $7.6 million or
81.8% of transaction and support revenues for the six months ended June 30, 2000
as compared to $3.5 million or 86.9% of transaction and support revenues for the
six months ended June 30, 1999. The increase in absolute dollars is due to an
increase in operations and merchant support personnel and related costs and an
increase in depreciation expense on capital equipment. Professional services
cost of revenues were $3.1 million or 69.2% of professional services revenues
for the six months ended June 30, 2000 as compared to $250,000 or 112.1% of
professional services revenues for the six months ended June 30, 1999. The
increase in absolute dollars is due to higher personnel and contractor related
costs resulting from an increase in personnel and contractor usage necessary to
support our increase in professional services projects. The decrease in
professional services cost of revenues as a percentage of professional services
revenues is due to economies of scale resulting from the increase in
professional services projects.
Product Development. Product development expenses were $6.5 million for the six
months ended June 30, 2000 as compared to $3.1 million for the six months ended
June 30, 1999. The addition of product development personnel, as well as
increased allocated facilities and infrastructure related costs, accounted for
the increase.
Sales and Marketing. Sales and marketing expenses were $12.6 million for the six
months ended June 30, 2000 as compared to $6.4 million for the six months ended
June 30, 1999. The increase is primarily due to additional personnel related
costs resulting from an increase in personnel. Sales and marketing expenses for
the six months ended June 30, 2000 also include $0.8 million of one-time signing
bonuses for certain professional services employees.
General and Administrative. General and administrative expenses were $6.1
million for the six months ended June 30, 2000 as compared to $2.2 million for
the six months ended June 30, 1999. The increase is primarily due to higher
personnel related costs resulting from an increase in personnel. In addition,
general and administrative expenses include approximately $0.9 million of costs
that were incurred during the six months ended June 30, 2000 relating to our
facility relocation and rent on an unoccupied facility as it was prepared for
occupancy, approximately $0.7 million of bad debt expense and approximately $0.4
of legal expense. The increase in bad debt expense is due to the current capital
market conditions impacting our Internet based customers as well as the
increased customer receivable balances inherent in the professional services
business.
Acquisition Related Costs. Acquisition related costs in the amount of $0.8
million consist of costs incurred related to our acquisition of ExpressGold in
January 2000.
Deferred Compensation Amortization. During the six months ended June 30, 2000,
we recorded an aggregate unearned compensation in the amount of $0.5 million in
connection with the grant of stock options during the period with exercise
prices less than the fair value on the respective dates of grant. Amortization
expense related to deferred compensation was $0.4 million for the six months
ended June 30, 2000 which includes a one-time compensation charge of $0.1
million relating to our acquisition of ExpressGold.
Interest Income (Expense), Net. Interest income consists of interest earnings on
cash, cash equivalents and short-term investments and was $3.9 million for the
six months ended June 30, 2000 as compared to $79,000 for the six months ended
June 30, 1999. The increase is primarily due to increased cash, cash equivalents
and short-term investment balances as a result of our financings in 1999.
Interest expense was $55,000 for the six months ended June 30, 2000 as compared
to $105,000 in the six months ended June 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments decreased by $24.2 million
from approximately $140.3 million at December 31, 1999 to $116.1 million at June
30, 2000. This decrease is primarily due to our net loss of $19.6 million
incurred during the six months ended June 30, 2000 as well as capital
expenditures of $8.9 million primarily relating to our new office facility which
we occupied in April 2000.
Net cash used in our operating activities was approximately $15.7 million for
the six months ended June 30, 2000 as compared to $7.0 million for the six
months ended June 30, 1999. The increase in cash used in operating activities is
primarily due to the increase in our net losses and overall increases in current
assets, offset partially by increases in depreciation and amortization of
deferred compensation and other current liabilities. The increase in other
current liabilities is primarily due to the expansion of our operations and the
related costs and increases in accrued personnel related to headcount growth.
Net cash used in investing activities was approximately $15.8 million during the
six months ended June 30, 2000 as compared to $1.6 million for the six months
ended June 30, 1999. Net cash provided by investing activities was comprised
primarily of the purchase of leasehold improvements related to our new office
facility, the purchase and maturity of short-term investments and our
investment in a Japanese joint venture. Our planned capital expenditures for the
remainder of 2000 are approximately $7.4 million, primarily for capital
equipment used in our network infrastructure and software and related
implementation costs for an enterprise resource planning (ERP) system and a
customer relationship management (CRM) system.
Net cash provided by financing activities was approximately $0.9 million during
the six months ended June 30, 2000 as compared to $40.3 million for the six
months ended June 30, 1999. During June 1999, we completed our initial public
offering and raised approximately $40.0 million.
Of the remaining $110.4 million of net proceeds as of March 31, 2000 from the
second offering in November 1999, we used $15.8 million to fund operations and
acquired $8.9 million of property and equipment. The remaining $85.7 million of
net proceeds was held in various short-term investment and cash and cash
equivalent accounts as of June 30, 2000.
We believe that our current cash and investment balances will be sufficient to
meet our working capital and capital requirements for at least the next twelve
months. We expect that we will continue to expand our research and development,
sales and marketing and general and administrative activities. In addition, our
future capital requirements will depend on many factors including the level of
investment we make in new businesses, new products or new technologies. To the
extent that our current cash balance and expected 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.
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q contains forward-looking statements which
involve risks and uncertainties. Our actual results could differ materially
from those anticipated by such forward-looking statements as a result of certain
factors including those set forth below.
We Have a Limited Operating History and Are Subject to the Risks Encountered by
Early-Stage Companies
We commenced operations in March 1996. From March 1996 until December 1997, we
operated as a division of Beyond.com. In December 1997, we were incorporated as
a separate legal entity and our company was spun off from Beyond.com.
Accordingly, we have a 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 continue to expand our professional
services business;
. risks that we may not be able to fully utilize relationships with our
strategic partners and indirect sales channels;
. risks that any fluctuations in our quarterly operating results will be
significant relative to our revenues; and
. risks that we may not be able to adequately integrate acquired businesses.
These risks are discussed in more detail below. We cannot assure you that our
business strategy will be successful or that we will successfully address these
risks and the risks detailed below.
We Have a History of Losses, Expect Future Losses and Cannot Assure You that We
Will Achieve Profitability
Although our revenues have increased on a quarterly basis since 1997, we have
not achieved profitability and cannot be certain that we will realize sufficient
revenues to achieve profitability. We have incurred significant net losses since
our inception. We incurred net losses of $4.3 million in 1997, $10.2 million in
1998, $29.8 million in the 1999 and $19.6 million in the six months ended June
30, 2000. As of June 30, 2000, we had incurred cumulative losses of $65.1
million, which includes cumulative losses of ExpressGold. You should not
consider recent quarterly revenue growth as indicative of our future
performance. We do not expect to sustain similar levels of growth in future
periods. We have continued to increase our sales and marketing, network
infrastructure, product development and general and administrative expenses and
plan to continue to do so during the remainder of 2000. As a result, we will
need to generate significantly higher revenues in order to achieve
profitability. If we do achieve profitability, we may not be able to sustain it.
The Expected Fluctuations of Our Quarterly Results Could Cause Our Stock Price
to Fluctuate or Decline
We expect that our quarterly operating results will fluctuate significantly in
the future based upon a number of factors, many of which are not within our
control. We plan to further increase our operating expenses in order to expand
our sales and marketing activities, build our network infrastructure and broaden
our service capabilities. We base our operating expenses on anticipated market
growth and our operating expenses are relatively fixed in the short term. As a
result, if our revenues are lower than we expect, our quarterly operating
results may not meet the expectations of public market analysts or investors,
which could cause the market price of our common stock to decline.
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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 customers, especially
as a result of seasonality, success of each customer's business, general
economic conditions or regulatory requirements restricting our customers;
. our ability to attract new customers and to retain our existing customers;
. customer acceptance of our pricing model;
. our success in expanding our sales and marketing programs;
. our success in growing our professional services business;
. our success in integrating acquisitions;
. an interruption with one or more of our gateway processors and channel
partners;
. seasonality of the retail sector.
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.
Revenues from Professional Services in the Three and Six Months Ended June 30,
2000 May be Non-Recurring
In the three and six months ended June 30, 2000, we experienced strong growth in
the demand for our professional services and were engaged to complete a large
project with related revenue in the amount of approximately $2.1 million for the
three months ended March 31, 2000 and $1.6 for the three months ended June 30,
2000. In order to satisfy this demand, we committed internal resources, hired a
significant number of additional professional services personnel and hired
independent contractors. We may not be engaged for additional projects of
similar or larger size and the demand for professional services may decrease.
For instance, our professional services revenues decreased from approximately
$2.4 million for the three months ended March 31, 2000 to approximately $2.2
million for the three months ended June 30, 2000. In addition, if we are
engaged for additional projects of similar or larger size, we may not be able to
hire the resources necessary to meet future demand. As a result, our revenues
from professional services could decrease significantly. During the three
months ended June 30, 2000, one customer for which we performed a non-recurring
professional services engagement accounted for 23.7% of our revenues.
We May Have an Accounts Receivable Concentration Risk At Times
Our professional services business has become a larger percentage of our total
revenue in 2000 compared to 1999. Some of our professional services engagements
are large projects and result in higher concentration of our accounts receivable
balance at times. For example, as of June 30, 2000, approximately 25.1% of our
accounts receivable balance was due from one professional services customer. We
expect to continue to experience this concentration risk resulting from our
professional services business.
Some of Our Larger Customers Have Internet Centric Businesses and May Not Be
Able to Obtain Necessary Funding
A significant number of our customers have Internet based business models. Some
of these customers are among our largest customers. Many of these customers may
require substantial working capital to fund their businesses, may not have
adequate funds available and may be dependent upon the capital markets for
funding. Our customers may not be able to raise the additional capital required
to fund their businesses and, as a result, we may experience a decrease in our
customer base, a reduction in recurring revenue and an increase in our bad debt
expense.
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We Intend to Pursue Strategic Acquisitions and Our Business Could Be Materially
Adversely Affected if We Fail to Adequately Integrate Acquired Businesses
As part of our overall business strategy, we intend to pursue strategic
acquisitions of complementary businesses or technologies that would provide
additional service offerings, additional industry expertise, a broader client
base or an expanded geographic presence. For instance, in July 2000 we signed a
definitive agreement to acquire PaylinX, a developer of a payment server
platform for real-time credit card transactions. We have no experience in
integrating or operating a payment server business and cannot give assurance
that we will be successful in integrating and operating this business should we
consummate the PaylinX acquisition. From time to time, we have engaged in
discussions with third parties concerning potential acquisitions of product
lines, technologies and businesses. Any future acquisition could result in the
use of significant amounts of cash, dilutive issuances of equity securities, or
the incurrence of debt or amortization expenses related to goodwill and other
intangible assets, any of which could materially adversely affect our business,
operating results and financial condition. In addition, acquisitions involve
numerous risks, including:
. difficulties in the assimilation of the operations, technologies, products
and personnel of the acquired company;
. the diversion of management's attention from other business concerns;
. risks of entering markets in which we have no or limited prior experiences;
and
. the potential loss of key employees of the acquired company.
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 reduced demand for our services.
Potential System Failures and Lack of Capacity Issues Could Negatively Affect
Demand for Our Services
Our ability to deliver services to our merchants depends on the uninterrupted
operation of our e-commerce transaction processing systems. Our systems and
operations are vulnerable to damage or interruption from:
. earthquake, fire, flood and other natural disasters;
. power loss, telecommunications or data network failure, operator negligence,
improper operation by employees, physical and electronic break-ins and
similar events; and
. computer viruses.
Despite the fact that we have implemented redundant servers in third-party
hosting centers, two of which are currently located in Santa Clara, California,
we may still experience service interruptions for the reasons listed above and a
variety of other reasons. If our redundant servers are not available, our
business may not have sufficient business interruption insurance to compensate
us for resulting losses. We have experienced periodic interruptions, affecting
all or a portion of our systems, which we believe will continue to occur from
time to time. For example, on November 12, 1999, our services were unavailable
for approximately ten hours due to an internal system problem we encountered. In
addition, any interruption in our systems that impairs our ability to provide
services could damage our reputation and reduce demand for our services.
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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
systems, 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 with
respect to our e-commerce transaction services and support business. Currently
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, First Data Corporation, Hewlett-Packard (VeriFone), HNC Software, Open
Market, ShopNow.com and Signio (a subsidiary of VeriSign). In addition, other
companies, including financial services and credit companies such as AT&T and GE
Capital, may enter the market for our services. In the future, we may also
compete with large Internet-centric companies that derive a significant portion
of their revenues from e-commerce and may offer, or provide a means for others
to offer, e-commerce transaction services. With respect to our professional
services business, our primary competitors include Internet service firms, such
as Agency.com, iXL, Proxicom and Razorfish, and technology integrators, such as
Andersen Consulting, Sapient, Scient and Viant.
Many of our competitors have longer operating histories, substantially greater
financial, technical, marketing or other resources, or greater name recognition
than we do. Our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. Competition
could seriously impede our ability to sell additional services on terms
favorable to us. Our current and potential competitors may develop and market
new technologies that render our existing or future services obsolete,
unmarketable or less competitive. For example, Microsoft and CyberCash have each
introduced electronic-wallet solutions, that if widely adopted by consumers, may
result in reduced demand by our merchants for our fraud screening services. Our
current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with other solution providers,
thereby increasing the ability of their services to address the needs of our
prospective customers. Our current and potential competitors may establish or
strengthen cooperative relationships with our current or future channel
partners, thereby limiting our ability to sell services through these channels.
We expect that competitive pressures will require the reduction of the prices of
our services and reduce our market share, either of which could materially and
adversely affect our business, results of operations or financial condition.
If We Lose Key Personnel or Are Unable to Attract and Retain Additional
Qualified Personnel We May Not be Able to Successfully Manage Our Business and
Achieve Our Objectives
We believe our future success will depend upon our ability to retain our key
management personnel, including William S. McKiernan, our Chief Executive
Officer, and other key members of management because of their experience and
knowledge regarding the development, special opportunities and challenges of our
business. None of our key employees is subject to an employment contract. We may
not be successful in attracting and retaining key employees in the future.
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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, 127 employees at December 31, 1998 and
228 employees at December 31, 1999 to 331 at June 30, 2000. This expansion is
placing a significant strain on our managerial and financial resources.
During 2000, we plan to implement an enterprise resource planning (ERP) system
and a customer relationship management (CRM) system. Such implementations are
complex projects and demand management resources. 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 within the
last year. As a result, there is a risk that management will not be able to work
together effectively as a team to address the challenges to our business. In
addition, our new employees include a number of key managerial, technical and
operations personnel who have been with us for a limited period of time. We
expect to add additional key personnel in the near future that will also need to
be integrated into our management team.
Our Market is Subject to Rapid Technological Change and to Compete, We Must
Continually Enhance Our Systems to Comply with Evolving Standards
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. The Internet and the e-commerce industry are
characterized by rapid technological change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render our technology and systems obsolete. Our success will depend, in
part, on our ability to both internally develop and license leading technologies
to enhance our existing services and develop new services. We must continue to
address the increasingly sophisticated and varied needs of our merchants, and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of proprietary technology
involves significant technical and business risks. We may fail to develop new
technologies effectively or to adapt our proprietary technology and systems to
merchant requirements or emerging industry standards. If we are unable to adapt
to changing market conditions, merchant requirements or emerging industry
standards, our business would be materially harmed.
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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 Richard
Scudellari, pursue Beyond.com's interests over ours either in the course of
transactions between the companies or where the same corporate opportunities are
available to both companies.
We May Not Be Able to Adequately Protect Our Proprietary Technology and May Be
Infringing Upon Third-Party Intellectual Property Rights
Our success depends upon our proprietary technology. We rely on a combination of
patent, copyright, trademark and trade secret rights, confidentiality procedures
and licensing arrangements to establish and protect our proprietary rights.
As part of our confidentiality procedures, we enter into non-disclosure
agreements with our employees. Despite these precautions, third parties could
copy or otherwise obtain and use our technology without authorization, or
develop similar technology independently. Effective protection of intellectual
property rights may be unavailable or limited in foreign countries. We cannot
assure you that the protection of our proprietary rights will be adequate or
that our competitors will not independently develop similar technology,
duplicate our services or design around any patents or other intellectual
property rights we hold.
We also cannot assure you that third parties will not claim our current or
future services infringe upon their rights. We have not conducted any search to
determine whether any of our services or technologies may be infringing upon
patent rights of third parties. As the number of services in our market
increases and functionalities increasingly overlap, companies such as ours may
become increasingly subject to infringement claims. In addition, these claims
also might require us to enter into royalty or license agreements. Any
infringement claims, with or without merit, could cause costly litigation that
could absorb significant management time. If required to do so, we may not be
able to obtain royalty or license agreements, or obtain them on terms acceptable
to us. A lawsuit was filed against the Company in November 1999 alleging that
the Company's payment services infringe upon two patents to certain automated
network payment, purchase and processing systems held by the plaintiff. The
Company has obtained opinions of patent counsel that the Company's payment
services do not infringe upon either of the plaintiff's patents other than
searches for prior art conducted in the ordinary course of applying for patents.
We May Not Be Able to Secure Funding in the Future Necessary to Operate Our
Business as Planned
We require substantial working capital to fund our business. We have had
significant operating losses and negative cash flow from operations since
inception and expect this to continue for the foreseeable future. We expect to
use our current cash and cash equivalents and short-term investments primarily
to continue investing in service development, to expand sales and marketing
activities, to fund product development, to fund continued operations and
potentially to make future acquisitions, such as our acquisition of PaylinX and
our investment in our joint venture in Japan. We believe our existing capital
resources will be sufficient to meet our capital requirements for at least the
next twelve months. However, our capital requirements depend on several
factors, including the rate of market acceptance of our services, the ability to
expand our merchant base, the growth of sales and marketing and other factors.
If capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
our stockholders will be reduced, and these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
Additional financing may not be available when needed on terms favorable to us
or at all. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures.
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We May Become Subject to Government Regulation and Legal Uncertainties That
Would Adversely Affect Our Financial Results
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
export control laws and laws or regulations directly applicable to e- commerce.
However, due to the increasing usage of the Internet, it is possible that a
number of laws and regulations may be applicable or may be adopted in the future
with respect to conducting business over the Internet covering issues such as:
. taxes;
. user privacy;
. pricing;
. content;
. right to access personal data;
. copyrights;
. distribution; and
. characteristics and quality of services.
For example, we believe that some of our services may require us to comply with
the Fair Credit Reporting Act. As a precaution, we are implementing changes to
our systems and processes so that we will be in compliance with the act.
Complying with this act requires us to provide information about personal data
stored by us or our merchants. Failure to comply with this act could result in
claims being made against us.
Furthermore, the growth and development of the market for e-commerce may prompt
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business online. The adoption of additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for our services and increase our cost
of doing business.
The applicability of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
export or import matters and personal privacy to the Internet is uncertain. The
vast majority of laws were adopted prior to the broad commercial use of the
Internet and related technologies. As a result, they do not contemplate or
address the unique issues of the Internet and related technologies. Changes to
these laws intended to address these issues, including some proposed changes in
the United States regarding taxation and encryption and in the European Union
regarding contract formation and privacy, could create uncertainty in the
Internet marketplace and impose additional costs and other burdens. This
uncertainty, costs and burden could reduce demand for our services or increase
the cost of doing business due to increased costs of litigation or increased
service delivery costs.
Our International Business Exposes Us to Additional Foreign Risks
Services provided to merchants outside the United States accounted for 9.0%,
23.1% and 6.8% of our revenues in 1998, 1999 and the six months ended June 30,
2000, respectively. In March 2000, we entered into a joint venture agreement
with Japanese partners Marubeni Corporation and Trans-Cosmos, Inc. and
established CyberSource K.K. to provide e-commerce transaction services to the
Japanese market. 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.
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In addition, some software exports from the United States are subject to export
restrictions as a result of the encryption technology in that software, and we
may become liable to the extent we violate these restrictions. We might not
successfully market, sell and distribute our services in local markets, and we
cannot be certain that one or more of these factors will not materially
adversely affect our future international operations, and consequently, our
business, financial condition and operating results.
Also, sales of our services conducted through our subsidiary in the United
Kingdom are denominated in Pounds Sterling. We may experience fluctuations in
revenues or operating expenses due to fluctuations in the value of the Pound
Sterling relative to the U.S. Dollar. We do not currently hedge with respect to
currency exchange fluctuations.
Existing Stockholders May Exert Control Over CyberSource to the Detriment of
Minority Stockholders
At June 30, 2000, our officers, directors and principal stockholders (i.e.,
greater than 5% stockholders) together control approximately 44.7% of our
outstanding common stock. As a result, these stockholders, if they act together,
may be able to control our management and affairs and matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control of CyberSource and might
affect the market price of our common stock.
Our Stock Price May Fluctuate Substantially
The market price for the common stock will be affected by a number of factors,
including the following:
. the announcement of new services or service enhancements by us or our
competitors;
. quarterly variations in our or our competitors' results of operations;
. changes in earnings estimates or recommendations by securities analysts;
. developments in our industry; and
. general market conditions and other factors, including factors unrelated to
our operating performance or the operating performance of our competitors.
In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been unrelated
to the operating performance. These factors and fluctuations, as well as general
economic, political and market conditions may materially adversely affect the
market price of our common stock.
The Anti-Takeover Provisions in Our Certificate of Incorporation Could Adversely
Affect the Rights of the Holders of Our Common Stock
Anti-takeover provisions of Delaware law and our Certificate of Incorporation
may make a change in control of CyberSource more difficult, even if a change in
control would be beneficial to the stockholders. These provisions may allow the
Board of Directors to prevent changes in the management and control of
CyberSource. Under Delaware law, our Board of Directors may adopt additional
anti-takeover measures in the future.
One anti-takeover provision that we have is the ability of our Board of
Directors to determine the terms of preferred stock and issue preferred stock
without the approval of the holders of the common stock. Our Certificate of
Incorporation allows the issuance of up to 4,988,842 shares of preferred stock.
As of June 30, 2000, there are no shares of preferred stock outstanding.
However, because the rights and preferences of any series of preferred stock may
be set by the Board of Directors in its sole discretion without approval of the
holders of the common stock, the rights and preferences of this preferred stock
may be superior to those of the common stock. Accordingly, the rights of the
holders of common stock may be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We provide our services to customers primarily in the United States and, to a
lesser extent, in Europe and elsewhere throughout the world. As a result, our
financial results could be affected by factors, such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. All
sales are currently made in U.S. dollars or pound sterling. A strengthening of
the dollar or the pound sterling could make our products less competitive in
foreign markets. Our interest income is sensitive to changes in the general
level of U.S. interest rates.
Due to the nature of our short-term investments, which are primarily money
market funds, we have concluded that there is no material market risk exposure.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1999, Net MoneyIN filed an action against the Company in the U.S.
District Court in the District of Arizona claiming that the Company has
infringed, induced others to infringe, and contributed to the infringement by
others of claims of U.S. Patent No. 5,822,737 and U.S. Patent No. 5,963,917. Net
MoneyIN's complaint seeks injunctive relief and unspecified damages. The
Company has received opinions of patent counsel that the claims of the Net
MoneyIN 737 and the Net MoneyIN 917 patents are not infringed by the Company's
services. However, there can be no assurances that the Company's payment
services will not ultimately be determined to infringe upon the Net MoneyIN
patents, and the Company anticipates that Net MoneyIN will continue to pursue
litigation with respect to these claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Of the remaining $110.4 million of net proceeds as of March 31, 2000 from the
second offering in November 1999, the Company used $15.8 million to fund
operations and acquired $8.9 million of property and equipment. The remaining
$85.7 million of net proceeds was held in various short-term investment and cash
and cash equivalent accounts as of June 30, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 4, 2000. The
stockholders voted on proposals to:
1. Elect five Directors of the Company.
2. To ratify and approve amendments to the Company's 1999 Stock Option Plan to
(i) increase the number of shares reserved thereunder from 2,500,000 shares to
6,000,000, and (ii) limit the maximum number of options and stock appreciation
rights that may be awarded to an employee in any one fiscal year of the Company
in order to ensure compliance with the requirements of Section 162(m) of the
Internal Revenue Code of 1986, as amended.
3. Ratify the appointment of Ernst & Young, LLP as the Company's auditors for
2000.
The proposals were approved by the following votes:
1. Election of Directors
Nominee For Withheld
William S. McKiernan 22,513,561 25,268
Bert Kolde 22,513,561 25,268
Linda Fayne Levinson 22,495,201 43,628
Steven P. Novak 22,513,561 25,268
Richard Scudellari 22,513,561 25,268
2. To ratify and approve amendments to the Company's 1999 Stock Option Plan to
(i) increase the number of shares reserved thereunder from 2,500,000 shares to
6,000,000, and (ii) limit the maximum number of options and stock appreciation
rights that may be awarded to an employee in any one fiscal year of the Company
in order to ensure compliance with the requirements of Section 162(m) of the
Internal Revenue Code of 1986, as amended.
For Against Abstained Broker Non-Votes
14,223,131 4,020,519 23,012 4,272,167
3. Ratify appointment of Ernst & Young, LLP
For Against Abstained Broker Non-Votes
22,353,468 166,473 2,700 2,700
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ --------------------------------------------------------------
3.1* Certificate of Incorporation of CyberSource Corporation, as amended.
3.2* CyberSource Corporation's Bylaws.
3.3* Bylaw Amendment.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
10.1* Form of Indemnification Agreement between CyberSource Corporation and
each of its officers and directors.
10.2* 1998 Stock Option Plan.
10.3* 1999 Stock Option Plan.
10.4* Standard Office Lease dated August 20, 1996 by and between California
State Automobile Association Inter-Insurance Bureau as Landlord and CyberSource
Corporation as Tenant.
10.5* First Amendment to Lease dated October 20, 1997 by and between
California State Association Inter-Insurance Bureau as Landlord and CyberSource
Corporation as Tenant.
10.6* Assignment of Standard Office Lease dated December 31, 1997 by and
between CyberSource Corporation as Assignor and Internet Commerce Services
Corporation as Assignee.
10.7* Sublease dated July 1, 1998 by and between MultiGen Inc. of California
as Sublessor and CyberSource of California as Sublessee.
10.8* Second Amendment to Lease dated October 30, 1998 by and between
California State Automobile Association Inter-Insurance Bureau as Landlord and
CyberSource Corporation as Tenant.
10.9+* Conveyance Agreement dated December 31, 1997 by and between
CyberSource Corporation and Internet Commerce Services Corporation.
10.10+* Amended and Restated Inter-Company Cross License Agreement dated May
19, 1998 by and between Internet Commerce Services Corporation and software.net
Corporation.
10.11+* Internet Commerce Services Agreement dated April 23, 1998 by and
between Internet Commerce Services Corporation and software.net Corporation.
10.12* Amended and Restated Investors' Rights Agreement dated October 21,
1998.
10.14* 1999 Employee Stock Purchase Plan.
10.15+** Development and Marketing Agreement dated July 26, 1999 by and between
CyberSource Corporation and VISA U.S.A., Inc.
10.16+** CyberSource Internet Commerce Services Agreement dated May 1, 1999 by
and between CyberSource Corporation and Beyond.com Corporation.
10.17** 1999 Nonqualified Stock Option Plan.
10.18+** Software License Agreement dated June 30, 1999 by and between
CyberSource Corporation and Beyond.com Corporation.
10.19*** Lease Agreement dated November 3, 1999 by and between Shoreline
Investments V and CyberSource Corporation.
27.1 Financial Data Schedule.
---------------------
* Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form S-1 (Registration No. 333-77545).
** Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form S-1 (Registration No. 333-89337).
***Incorporated by reference to the same numbered exhibit previously filed with
the Company's Annual Report on Form 10-K filed on March 30, 2000 (SEC File No.
000-26477)
+ Confidential treatment granted as to portions of this exhibit.
(b) Reports on Form 8-K.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERSOURCE CORPORATION
-----------------------
(Registrant)
Date: July 28, 2000 By /s/ Charles E. Noreen, Jr.
------------------------------------
Charles E. Noreen, Jr.
Vice President of Finance and Administration
and Chief Financial Officer
(Authorized Officer and Principal Financial
Officer)
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