<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 September 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 October 31, 2000, there were 34,964,849 shares of common stock, par value
$0.001 per share, outstanding.
This Report on Form 10-Q includes 24 pages with the Index to Exhibits located on
page 23.
<PAGE>
CYBERSOURCE CORPORATION
INDEX TO REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999....................................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2000 and 1999....................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 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.............................................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 22
Item 2. Changes in Securities and Use of Proceeds................................................. 22
Item 4. Submission of Matters to a Vote of Securities Holders..................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................................................... 23
Signature .......................................................................................... 24
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999 (1)
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45,024 $ 71,673
Short-term investments 65,526 68,596
Accounts receivable, net of allowances of $1,265 and $282
at September 30, 2000 and December 31, 1999, respectively 7,350 3,212
Prepaid expenses and other current assets 1,249 1,589
-------- --------
Total current assets 119,149 145,070
Intangible assets 148,889 -
Property and equipment, net 20,372 8,300
Investment in joint venture 662 -
Other noncurrent assets 706 752
-------- --------
Total assets $289,778 $154,122
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,148 $ 1,311
Accrued payroll related expenses 4,792 1,341
Other accrued liabilities 5,563 3,345
Deferred revenue 2,231 461
Current obligations under capital leases 475 661
-------- --------
Total current liabilities 15,209 7,119
Noncurrent obligations under capital leases 124 444
Stockholders' equity:
Common stock 34 26
Additional paid-in capital 370,382 187,828
Deferred compensation (9,244) (791)
Accumulated other comprehensive loss (19) (412)
Accumulated deficit (86,708) (40,092)
-------- --------
Total stockholders' equity 274,445 146,559
-------- --------
Total liabilities and stockholders' equity $289,778 $154,122
======== ========
</TABLE>
(1) Restated for the acquisition of ExpressGold.com, Inc.
See notes to condensed consolidated financial statements.
3
<PAGE>
CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 (1) 2000 1999 (1)
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Transaction and support $ 5,019 $ 3,311 $ 14,331 $ 7,337
Professional services 2,645 333 7,171 556
Enterprise software 96 - 96 -
-------- ------- -------- --------
Total revenues 7,760 3,644 21,598 7,893
Cost of revenues:
Transaction and support 3,970 2,830 11,587 6,330
Professional services 1,603 294 4,733 544
Enterprise software 60 - 60 -
Amortization of developed technology 118 - 118 -
-------- ------- -------- --------
Cost of sales 5,751 3,124 16,498 6,874
Gross profit 2,009 520 5,100 1,019
Operating expenses:
Product development 4,152 2,309 10,695 5,405
Sales and marketing 7,631 4,081 20,247 10,505
General and administrative 2,650 1,572 8,737 3,808
In-process research and development 14,500 - 14,500 -
Amortization of goodwill and
other intangible assets 1,525 - 1,525 -
Acquisition related costs - - 834 -
Deferred compensation amortization 307 156 718 379
-------- ------- -------- --------
Total operating expenses 30,765 8,118 57,256 20,097
-------- ------- -------- --------
Loss from operations (28,756) (7,598) (52,156) (19,078)
Loss on investment in joint venture (68) - (99) -
Interest income (expense), net 1,815 590 5,639 564
-------- ------- -------- --------
Net loss $(27,009) $(7,008) $(46,616) $(18,514)
======== ======= ======== ========
Basic and diluted net loss per share $(0.99) $(0.30) $(1.77) $(1.52)
======== ======= ======== ========
Shares used in computing basic and
diluted net loss per share 27,306 23,253 26,275 12,195
======== ======= ======== ========
Proforma basic and diluted net loss per share $(0.97)
========
Shares used in computing proforma basic and
diluted net loss per share 19,073
========
</TABLE>
(1) Restated for the acquisition of ExpressGold.com, Inc.
See notes to condensed consolidated financial statements.
4
<PAGE>
CYBERSOURCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999 (1)
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(46,616) $(18,514)
Adjustments to reconcile net loss to net cash used
in operating activities:
In-process research and development 14,500 -
Common stock issued to consultants for services - 81
Depreciation 3,404 1,563
Amortization of goodwill and other intangible assets 1,643 -
Amortization of deferred compensation 718 379
Loss on investment in joint venture 99 -
Changes in operating assets and liabilities:
Accounts receivable (2,972) (1,226)
Prepaid expenses and other current assets 446 (685)
Other noncurrent assets 348 79
Accounts payable 769 1,012
Other accrued liabilities (1,518) 2,249
Deferred revenue 779 335
-------- --------
Net cash used in operating activities (28,400) (14,727)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (13,282) (5,024)
Purchases of short-term investments (86,999) (14,790)
Sales of short-term investments 90,481 -
Cash acquired from PaylinX acquisition 10,985 -
Investment in joint venture (761) -
-------- --------
Net cash provided by (used in) investing activities 424 (19,814)
CASH FLOWS FROM FINANCING ACTIVITES:
Principal payments on capital lease obligations (506) (341)
Proceeds from issuance of shareholder note payable - 100
Proceeds from issuance of common stock, net of offering expenses - 46,684
Proceeds from exercise of stock options 1,048 176
Proceeds from employee stock purchase plan 804 -
-------- --------
Net cash provided by financing activities 1,346 46,619
Effect of exchange rates on cash (19) -
-------- --------
Increase (decrease) in cash and cash equivalents (26,649) 12,078
Cash and cash equivalents at beginning of period 71,673 11,422
-------- --------
Cash and cash equivalents at end of period $ 45,024 $ 23,500
======== ========
Supplemental schedule of noncash financing activities:
Property and equipment acquired under capital lease $ - $ 1,061
Deferred compensation related to stock option grants $ 522 $ 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
Common stock issued in acquisition of PaylinX $160,300 $ -
Deferred compensation related to the acquisition of PaylinX $ 8,649 $ -
</TABLE>
(1) Restated for the acquisition of ExpressGold.com, Inc.
See notes to condensed consolidated financial statements.
5
<PAGE>
CYBERSOURCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
CyberSource Corporation and its wholly-owned 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 nine
month periods ended September 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.com (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 nine months
ended September 30, 1999 for the Company and ExpressGold prior to the
restatement resulting from the acquisition (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
---------------------------- ---------------------------
CyberSource ExpressGold CyberSource ExpressGold
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues....................... $ 3,634 $ 10 $ 7,883 $ 10
Net loss....................... $(6,715) $(293) $(17,763) $(751)
</TABLE>
6
<PAGE>
3. ACQUISITION OF PAYLINX CORPORATION
On September 18, 2000, the Company acquired all of the outstanding common shares
of PaylinX Corporation ("PaylinX"), a developer of a payment server platform
for real-time credit card transactions. Upon the closing of the acquisition,
the Company issued 8,807,788 million shares of its common stock to PaylinX
stockholders. In addition, the Company issued 2,609,370 stock options in
exchange for PaylinX's previously outstanding stock options. The purchase price
consists of approximately $143.0 million of common stock issued to PaylinX
stockholders, $27.8 million of stock options assumed, $8.6 million of deferred
compensation and $4.0 million of costs incurred related to the acquisition.
The acquisition has been accounted for using the purchase method of accounting.
The Company has allocated the purchase price to assets and liabilities based on
management's best estimates of the respective fair values with the excess cost
over the net assets acquired allocated to goodwill as follows (in thousands):
Historical value of net assets acquired $ 13,700
Assembled workforce 3,500
Customer base 13,000
Developed technology 10,600
In-process technology 14,500
Covenants-not-to-compete 5,000
Goodwill 114,500
Deferred compensation 8,600
--------
Total: $183,400
========
The balance sheet as of September 30, 2000 includes the net assets of PaylinX
and the statement of operations includes the revenues and expenses of PaylinX
for the period from September 18, 2000, the date of the acquisition, to
September 30, 2000. The $14.5 million allocated to in-process research and
development was included in the Company's operating expenses during the three
months ended September 30, 2000. The intangible assets are being amortized over
the estimated useful lives of three to five years. Tangible assets of PaylinX
acquired in the acquisition principally include cash and cash equivalents,
accounts receivable and fixed assets. Liabilities of PaylinX assumed in the
acquisition principally include accounts payable, deferred revenue and other
liabilities.
The unaudited pro forma consolidated statement of operations data for the nine
months ended September 30, 2000 and 1999 set forth below gives effect to the
acquisition of PaylinX as if it occurred on January 1, 1999. The unaudited pro
forma results include an adjustment to reflect amortization of goodwill,
intangible assets and deferred compensation recorded in conjunction with the
acquisition. The basic and diluted net loss per share amounts are computed
using the weighted average number of shares of common stock outstanding after
the issuance of the Company's common stock to acquire the outstanding shares of
PaylinX.
Nine Months Ended
(Unaudited) September 30,
---------------------
(In thousands, except per share amounts) 2000 1999
---------------------------------------- --------- ---------
Revenues $ 28,570 $ 6,135
Net loss $(91,922) $(49,182)
Basic and diluted net loss per share $ (2.65) $ (1.83)
7
<PAGE>
4. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net loss.................................................... $(27,009) $(7,008) $(46,616) $(18,514)
Change in unrealized loss on short-term investments......... 40 - 412 -
Change in cumulative translation adjustment................. (5) - (19) -
-------- ------- -------- --------
Comprehensive loss.......................................... $(26,974) $(7,008) $(46,223) $(18,514)
======== ======= ======== ========
</TABLE>
5. NET LOSS PER SHARE
Net loss per share is presented in accordance with the requirements of Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). Pro
forma net loss per share has been computed under FAS 128 and also gives effect
to the conversion of redeemable convertible preferred stock not included in the
net loss per share that converted upon completion of the Company's initial
public offering in June 1999.
If the Company had reported net income for the nine months ended September 30,
1999, diluted earnings per share would have included the shares used in the
computation of net loss per share as well as shares issuable upon the conversion
of the redeemable preferred stock for the entire period, additional common
equivalent shares related to outstanding options to purchase approximately
3,137,000 shares of common stock at September 30, 1999, shares issuable upon
exercise of the outstanding warrants prior to the exercise of these warrants in
June 1999 and shares issuable upon conversion of the outstanding convertible
note payable prior to the conversion of the note in June 1999. The common
equivalent shares from options and warrants would be determined on a weighted
average basis using the treasury stock method. The common equivalent shares
related to the convertible note payable would be determined on a weighted
average basis using the "as-if converted" method. If the Company had reported
net income for the nine months ended September 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 9,622,640 shares of common stock at September
30, 2000. The common equivalent shares from options would be determined on a
weighted average basis using the treasury stock method.
6. 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.
On September 1, 2000, Sharon Maerten-Moore and Daragh Crowley filed an action on
behalf of themselves and purportedly, a class of all other similarly situated
persons against the Company and two other companies as co-defendants, Civil
Action No. C-00-3180 (WHO), in the United States District Court for the Northern
District of California. The action purports to be a class action on behalf of
"all persons whose personal and private information was secretly transmitted,
used and/or disclosed" by defendants allegedly without those persons'
authorization or consent. Plaintiffs allege violations of federal statutes
prohibiting the interception and disclosure of electronic communications and the
accessing of stored electronic communications, common law violations of unjust
enrichment, invasion of privacy, negligence, misrepresentation, breach of
contract, and violation of California Business and Professions Code (S)17200
which prohibits unfair business practices. Plaintiffs seek statutory and other
unspecified damages and seek to enjoin the allegedly unlawful practices.
Plaintiffs have extended the Company's time to respond to the complaint.
Discovery has not yet begun, and no trial date has been set. Management believes
that the claims alleged are without merit and plans to vigorously defend the
action.
8
<PAGE>
7. 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.
Due to the acquisition of PaylinX as described in Note 3, the Company currently
views its operations as principally three segments, e-commerce transaction
services and support, professional services and enterprise software and manages
the business based on the revenues of these segments. The following table
presents revenues and cost of revenues by the Company's three business units for
the three and nine month periods ended September 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 Nine Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
------ ------ ------- ------
<S> <C> <C> <C> <C>
Revenues:
E-commerce transaction services and support............ $5,019 $3,311 $14,331 $7,337
Professional services.................................. 2,645 333 7,171 556
Enterprise software.................................... 96 - 96 -
------ ------ ------- ------
Total revenues........................................ $7,760 $3,644 $21,598 $7,893
====== ====== ======= ======
Cost of revenues:
E-commerce transaction services and support............ $3,970 $2,830 $11,587 $6,330
Professional services.................................. 1,603 294 4,733 544
Enterprise software.................................... 178 - 178 -
------ ------ ------- ------
Total cost of revenues................................ $5,751 $3,124 $16,498 $6,874
====== ====== ======= ======
</TABLE>
Additionally, revenues from outside the United States were 25% of revenues for
the nine months ended September 30, 1999. During the three months ended
September 30, 2000, two customers accounted for 16.7% and 10.1% of our revenues,
respectively. During the nine months ended September 30, 2000, one customer
accounted for 18.5% of our revenues.
8. 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 and
results of operations.
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 does not believe that SAB 101
will have a material impact on the Company's statement of financial position and
results of operations.
9
<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, the sale of enterprise software licenses and related maintenance as well
as 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. Enterprise software
license and maintenance revenue is deferred and recognized over the maintenance
contract period, generally twelve months, as the Company does not have vendor
specific objective evidence supporting the recognition of the license in the
period in which the sale occurred. We have incurred significant losses since our
inception, and through September 30, 2000 had incurred cumulative losses of
approximately $92.1 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.
We have experienced a period of rapid and substantial growth. 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 445 at
September 30, 2000 which include 92 employees who joined CyberSource as a result
of the PaylinX acquisition.
The following discussion compares the results of operations for the three and
nine months ended September 30, 2000 and 1999 after restatement to reflect the
acquisition of ExpressGold, which was accounted for as a pooling of interests.
In addition, we completed our acquisition of PaylinX on September 18, 2000.
Therefore, the balance sheet as of September 30, 2000 includes the net assets of
PaylinX and the statement of operations includes the revenues and expenses of
PaylinX for the period from September 18, 2000 to September 30, 2000.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues. Revenues were $7.8 million for the three months ended September 30,
2000 as compared to $3.6 million for the three months ended September 30, 1999,
an increase of approximately $4.1 million or 113.0%. Transaction and support
revenues were $5.0 million for the three months ended September 30, 2000 as
compared to $3.3 million for the three months ended September 30, 1999, an
increase of approximately $1.7 million or 51.6%. 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 44.9 million during the three months
ended September 30, 2000 as compared to approximately 11.8 million processed
during the three months ended September 30, 1999. Professional services revenues
were $2.6 million for the three months ended September 30, 2000 as compared to
$0.3 million for the three months ended September 30, 1999 due to an increase in
professional services projects that occurred during the three months ended
September 30, 2000. Enterprise software license and maintenance revenue was
$96,000 during the three months ended September 30, 2000. This revenue was
generated following our acquisition of PaylinX on September 18, 2000. During the
three months ended September 30, 2000, two customers accounted for 16.7% and
10.1% of our revenues, respectively.
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 $4.0 million
or 79.1% of transaction and support revenues for the three months ended
September 30, 2000 as compared to $2.8 million or 85.5% of transaction and
support revenues for the three months ended September 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 60.6% of professional services revenues for the
three months ended September 30, 2000 as compared to $0.3 million or 88.3% of
professional services revenues for the three months ended September 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. Enterprise software cost of sales
are comprised of customer support personnel costs and fulfillment costs.
Enterprise software cost of sales was $60,000 or 62.5% of enterprise software
revenues for the three months ended September 30, 2000. Included in cost of
revenues during the three months ended September 30, 2000 is $118,000 of
amortization of developed technology resulting from the acquisition of PaylinX.
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 $4.2 million for the three months
ended September 30, 2000 as compared to $2.3 million for the three months ended
September 30, 1999. The increase is due to the addition of product development
personnel, their related direct costs as well as allocated indirect costs
including facilities and infrastructure costs. We expect product development
expenses to increase in absolute dollars due to the addition of personnel
resulting from the acquisition of PaylinX and as we hire additional personnel
that will 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 $7.6 million for the three months ended September 30,
2000 as compared to $4.1 million for the three months ended September 30, 1999.
The increase is due to the addition of sales and marketing personnel, their
related direct costs as well as allocated indirect costs. We expect our sales
and marketing expenses to increase in absolute dollars due to the addition of
personnel resulting from the acquisition of PaylinX and 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 bad debt expense. General and administrative expenses were $2.7 million for
the three months ended September 30, 2000 as compared to $1.6 million for the
three months ended September 30, 1999. The increase is due to the addition of
administrative personnel, their related direct costs as well as allocated
indirect costs. We expect general and administrative expenses to increase in
absolute dollars from the addition of personnel resulting from the acquisition
of PaylinX and to support the expected growth in our business.
In-process Research and Development. During the three months ended September
30, 2000, we recorded $14.5 million in a one-time write-off of in-process
research and development costs as a result of our acquisition of PaylinX.
11
<PAGE>
Amortization of Goodwill and Other Intangible Assets. During the three months
ended September 30, 2000, we recorded $1.5 million of amortization of intangible
assets resulting from our acquisition of PaylinX.
Deferred Compensation Amortization. During the three months ended September 30,
2000, we recorded aggregate unearned compensation in the amount of $8.6 million
in connection with our acquisition of PaylinX. Amortization expense related to
deferred compensation was $0.3 million for the three months ended September 30,
2000 as compared to $0.2 million for the three months ended September 30, 1999.
Interest Income (Expense), Net. Interest income consists of interest earnings on
cash, cash equivalents and short-term investments and was $1.8 million for the
three months ended September 30, 2000 as compared to $0.6 million for the three
months ended September 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 and, to a lesser extent, slightly higher investment yields.
Interest expense was $22,000 for the three months ended September 30, 2000 as
compared to $53,000 in the three months ended September 30, 1999.
Loss on Investment in Joint Venture. On March 1, 2000, the Company entered into
a joint venture agreement with Japanese partners Marubeni Corporation and Trans-
Cosmos, Inc. to establish CyberSource K.K. to provide e-commerce transaction
services to the Japanese market. During the three months ended September 30,
2000, we recorded a loss of approximately $68,000 which represents our share of
the joint venture's loss for the period.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues. Revenues were $21.6 million for the nine months ended September 30,
2000 as compared to $7.9 million for the nine months ended September 30, 1999,
an increase of approximately $13.7 million or 173.6%. Transaction and support
revenues were $14.3 million for the nine months ended September 30, 2000 as
compared to $7.3 million for the nine months ended September 30, 1999, an
increase of approximately $7.0 million or 95.3%. 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 103.8 million during the nine months
ended September 30, 2000 as compared to approximately 25.5 million processed
during the nine months ended September 30, 1999. Professional services revenues
were $7.2 million for the nine months ended September 30, 2000 as compared to
$0.6 million for the nine months ended September 30, 1999 due to an increase in
demand for our professional services that occurred during the nine months ended
September 30, 2000. Enterprise software license and maintenance revenue was
$96,000 during the nine months ended September 30, 2000 as a result of our
acquisition of PaylinX on September 18, 2000. During the nine months ended
September 30, 2000, one customer accounted for 18.5% of our revenues.
Cost of Revenues. Transaction and support cost of revenues were $11.6 million or
80.9% of transaction and support revenues for the nine months ended September
30, 2000 as compared to $6.3 million or 86.3% of transaction and support
revenues for the nine months ended September 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 $4.7 million or 66.0% of
professional services revenues for the nine months ended September 30, 2000 as
compared to $0.5 million or 97.8% of professional services revenues for the nine
months ended September 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. Enterprise
software cost of sales was $60,000 or 62.5% of enterprise software revenues for
the three months ended September 30, 2000. Included in cost of revenues during
the nine months ended September 30, 2000 is $118,000 of amortization of
developed technology resulting from our acquisition of PaylinX.
Product Development. Product development expenses were $10.7 million for the
nine months ended September 30, 2000 as compared to $5.4 million for the nine
months ended September 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 $20.2 million for the
nine months ended September 30, 2000 as compared to $10.5 million for the nine
months ended September 30, 1999. The increase is due to the addition of sales
and marketing personnel, their related direct costs as well as allocated
indirect costs. Sales and marketing expenses for the nine months ended
September 30, 2000 also include $0.8 million of one-time signing bonuses for
certain professional services employees.
12
<PAGE>
General and Administrative. General and administrative expenses were $8.7
million for the nine months ended September 30, 2000 as compared to $3.8 million
for the nine months ended September 30, 1999. The increase is due to the
addition of administrative personnel, their related direct costs as well as
allocated indirect costs. In addition, general and administrative expenses
include approximately $0.9 million of costs that were incurred during the nine
months ended September 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 $0.5 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 and enterprise
software businesses.
Deferred Compensation Amortization. During the nine months ended September 30,
2000, we recorded an aggregate unearned compensation in the amount of $9.1
million resulting from our acquisition of PaylinX, and to a lesser extent, 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 $0.7 million for the nine months
ended September 30, 2000 which includes a one-time compensation charge of $0.1
million relating to our acquisition of ExpressGold.com in January 2000.
Interest Income (Expense), Net. Interest income consists of interest earnings on
cash, cash equivalents and short-term investments and was $5.7 million for the
nine months ended September 30, 2000 as compared to $0.8 million for the nine
months ended September 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 $0.1 million for the nine months ended
September 30, 2000 as compared to $0.2 million in the nine months ended
September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments decreased by $29.7 million
from approximately $140.3 million at December 31, 1999 to $110.6 million at
September 30, 2000. This decrease consists of approximately $28.4 million used
in funding our operations during the nine months ended September 30, 2000 as
well as capital expenditures of approximately $13.3 million primarily relating
to our new office facility which we occupied in April 2000, offset by
approximately $11.0 million in cash acquired from PaylinX and approximately $3.5
million in net proceeds from the sale of short-term investments.
Net cash used in our operating activities was approximately $28.4 million for
the nine months ended September 30, 2000 as compared to $14.7 million for the
nine months ended September 30, 1999. The increase in cash used in operating
activities is primarily due to the increase in our net losses, offset by a one-
time in-process technology write-off and increases in depreciation and
amortization of intangible assets and deferred compensation.
Net cash provided by investing activities was approximately $0.4 million during
the nine months ended September 30, 2000 as compared to net cash used in
investing activities of $19.8 million for the nine months ended September 30,
1999. Net cash provided by investing activities was comprised primarily of $11.0
million of cash received as a result of the acquisition of PaylinX and $3.5
million in net proceeds from the sale of short-term investments, offset by $13.2
million of purchases of property and equipment, primarily leasehold improvements
related to our new office facility. Our planned capital expenditures for the
remainder of 2000 are approximately $3.1 million, primarily for capital
equipment used in our network infrastructure.
Net cash provided by financing activities was approximately $1.3 million during
the nine months ended September 30, 2000 as compared to $46.6 million for the
nine months ended September 30, 1999. During June 1999, we completed our
initial public offering and raised approximately $40.0 million.
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.
13
<PAGE>
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,
including PaylinX which was acquired on September 18, 2000.
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 $46.6 million in the nine months ended
September 30, 2000. As of September 30, 2000, we had incurred cumulative losses
of $92.1 million, which includes cumulative losses of ExpressGold. You should
not consider recent quarterly revenue growth as indicative of our future
performance. We may not 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 as we integrate
PaylinX and 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.
14
<PAGE>
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, including PaylinX which was acquired
on September 18, 2000;
. an interruption with one or more of our gateway processors and channel
partners;
. seasonality of the retail sector;
. general economic conditions, which may affect our customers and prospects'
capital investment levels, leading to reduced sales and longer sales cycles.
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 Nine Months Ended September
30, 2000 May be Non-Recurring
In the three and nine months ended September 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 $3.7 million
for the nine months ended September 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 September 30, 2000, one customer
for which we performed a non-recurring professional services engagement
accounted for 16.6% 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.
15
<PAGE>
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 September 2000 we
completed our acquisition of 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 into CyberSource. From
time to time, we have engaged in discussions with third parties concerning
potential acquisitions of product lines, technologies and businesses. If we do
not successfully integrate PaylinX, or if the benefits of the PaylinX
transaction do not meet the expectation of financial or industry analysts, the
market price of our common stock may decline. 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 PaylinX or another 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
such as the enterprise software market; and
. the potential loss of key employees of PaylinX or another 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.
16
<PAGE>
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, our
professional services business and our enterprise software 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.
17
<PAGE>
Our future success and our ability to expand our operations will also depend in
large part on our ability to attract and retain additional qualified marketing,
sales and technical personnel. Competition for these types of employees is
intense due to the limited number of qualified professionals. We have in the
past experienced difficulty in recruiting qualified marketing, sales,
engineering and support personnel. Failure to attract and retain personnel,
particularly marketing, sales and technical personnel could make it difficult
for us to manage our business and meet our objectives.
Difficulties We May Encounter Managing Our Growth Could Adversely Affect Our
Results of Operations
We have experienced a period of rapid and substantial growth that has placed
and, if such growth continues, will continue to place a strain on our
administrative infrastructure. We have increased the number of our employees
from 45 employees at December 31, 1997, 127 employees at December 31, 1998 and
228 employees at December 31, 1999 to 445 at September 30, 2000 which include 92
employees who joined CyberSource as a result of the PaylinX acquisition. This
expansion is placing a significant strain on our managerial and financial
resources.
During August 2000, we implemented an enterprise resource planning (ERP) system
and a customer relationship management (CRM) system. 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 and Software Products 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, as well as our software products. 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 as well as our software products. 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.
18
<PAGE>
Our Current and Prior Overlapping Board Members with Beyond.com May Create
Conflicts of Interests and Result in Actions Inconsistent with Stockholder
Interests
In connection with our spin off from Beyond.com in December 1997, we entered
into agreements with Beyond.com to define the ongoing relationship between the
two companies. At the time these agreements were negotiated, all of our
directors were also directors of Beyond.com and other members of our management
team were also executive officers of Beyond.com. As a result, these agreements
were not the result of arms' length negotiations between CyberSource and
Beyond.com. Further, although we and Beyond.com are engaged in different
businesses, the two companies currently have no policies to govern the pursuit
or allocation of corporate opportunities, in the event they arise. Our business
could be adversely affected if the overlapping board members of the two
companies, of which there are currently two, William S. McKiernan and 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.
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 and software 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 and
software, 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.
19
<PAGE>
We May Become Subject to Government Regulation and Legal Uncertainties That
Would Adversely Affect Our Financial Results
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
export control laws and laws or regulations directly applicable to e- commerce.
However, due to the increasing usage of the Internet, it is possible that a
number of laws and regulations may be applicable or may be adopted in the future
with respect to conducting business over the Internet covering issues such as:
. taxes;
. user privacy;
. pricing;
. content;
. right to access personal data;
. copyrights;
. distribution; and
. characteristics and quality of services.
For example, we believe that some of our services may require us to comply with
the Fair Credit Reporting Act. As a precaution, we are implementing changes to
our systems and processes so that we will be in compliance with the act.
Complying with this act requires us to provide information about personal data
stored by us or our merchants. Failure to comply with this act could result in
claims being made against us.
Furthermore, the growth and development of the market for e-commerce may prompt
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business online. The adoption of additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for our services and increase our cost
of doing business.
The applicability of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
export or import matters and personal privacy to the Internet is uncertain. The
vast majority of laws were adopted prior to the broad commercial use of the
Internet and related technologies. As a result, they do not contemplate or
address the unique issues of the Internet and related technologies. Changes to
these laws intended to address these issues, including some 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 3.7% of our revenues in 1998, 1999 and the nine months ended September
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.
20
<PAGE>
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 September 30, 2000, our officers, directors and principal stockholders (i.e.,
greater than 5% stockholders) together control approximately 24.8% 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 September 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.
21
<PAGE>
Due to the nature of our short-term investments, which are primarily money
market funds, we have concluded that there is no material market risk exposure.
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.
On September 1, 2000, Sharon Maerten-Moore and Daragh Crowley filed an action on
behalf of themselves and purportedly, a class of all other similarly situated
persons against the Company and two other companies as co-defendants, Civil
Action No. C-00-3180 (WHO), in the United States District Court for the Northern
District of California. The action purports to be a class action on behalf of
"all persons whose personal and private information was secretly transmitted,
used and/or disclosed" by defendants allegedly without those persons'
authorization or consent. Plaintiffs allege violations of federal statutes
prohibiting the interception and disclosure of electronic communications and the
accessing of stored electronic communications, common law violations of unjust
enrichment, invasion of privacy, negligence, misrepresentation, breach of
contract, and violation of California Business and Professions Code (S)17200
which prohibits unfair business practices. Plaintiffs seek statutory and other
unspecified damages and seek to enjoin the allegedly unlawful practices.
Plaintiffs have extended the Company's time to respond to the complaint.
Discovery has not yet begun, and no trial date has been set. Management believes
that the claims alleged are without merit and plans to vigorously defend the
action.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Of the remaining $85.7 million of net proceeds as of September 30, 2000 from the
second offering in November 1999, the Company used $12.7 million to fund
operations and acquired $4.3 million of property and equipment. The remaining
68.7 million of net proceeds was held in various short-term investment and cash
and cash equivalent accounts as of September 30, 2000.
On September 18, 2000, pursuant to an Agreement and Plan of Merger, dated as of
July 9, 2000 ("Agreement"), the Company completed the acquisition of PaylinX, a
privately held Delaware corporation pursuant to a merger transaction. As
consideration for the transaction, the Company issued an aggregate of 8,807,788
shares of the Company's common stock, $0.001 par value, in exchange for all of
the outstanding shares of capital stock of PaylinX, subject to the withholding
of 10% of such shares in escrow in accordance with the terms of the Agreement.
At the effective time of the acquisition, all outstanding options and warrants
to purchase shares of PaylinX common stock were automatically converted into
options and warrants to purchase 2,609,370 shares of the Company's common stock
based upon the conversion factor set forth in the Agreement with corresponding
adjustments to their respective exercise prices. The Company applied for and
received from the California Department of Corporations a fairness determination
with respect to the transaction under all provisions of Section 25121 and 25142
of the California Corporate Securities Law of 1968. Accordingly, the issuance of
Company securities in the transaction were exempt from registration under
Section 5 of the Securities Act of 1933, as amended, pursuant to Section
3(a)(10) of such Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Meeting of Stockholders on September 15, 2000. The
stockholders voted on proposals to:
1. Approve the issuance of shares in merger with PaylinX. Approve the issuance
of approximately 8.46 million shares of the Company's common stock (subject
to adjustment for changes in the outstanding capital of PaylinX) to
stockholders of PaylinX in exchange for all of the shares of outstanding
stock of PaylinX.
2. Approve an amendment to the Company's 1999 Stock Option Plan to increase the
number of shares reserved thereunder from 6,000,000 shares to 7,000,000
shares.
The proposals were approved by the following votes:
1. Approve the issuance of shares in merger with PaylinX. Approve the issuance
of approximately 8.46 million shares of the Company's common stock (subject
to adjustment for changes in the outstanding capital of PaylinX) to
stockholders of PaylinX in exchange for all of the shares of outstanding
stock of PaylinX.
For Against Abstained
16,797,673 154,056 26,325
2. Approve an amendment to the Company's 1999 Stock Option Plan to increase the
number of shares reserved thereunder from 6,000,000 shares to 7,000,000
shares.
For Against Abstained
12,756,042 4,082,302 139,710
22
<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.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERSOURCE CORPORATION
-----------------------
(Registrant)
Date: November 13, 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)
24
