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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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CYBERSOURCE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 7374 77-0472961
(State or Other Jurisdiction
of Incorporation or
Organization)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer
Identification Number)
550 S. Winchester Blvd., Suite 301
San Jose, California 95128
(408) 556-9100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $.001 Par Value per Share
Securities Registered Pursuant to Section 12(g) of the Act:
None
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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 and 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. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of March 17, 2000 was approximately
$1,068,291,797 (based on a closing sale price of $41.50 per share as reported
for the NASDAQ Exchange).
The number of shares of the registrant's Common Stock, $.001 par value per
share, outstanding as of March 17, 2000 was 25,741,971.
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PART I
ITEM 1: BUSINESS
Overview
CyberSource Corporation is a leading developer and provider of real-time e-
commerce transaction services. Through our CyberSource Internet Commerce Suite,
we offer services to online merchants for global payment processing, fraud
prevention, tax calculation, export compliance, territory management, delivery
address verification, fulfillment management and stored value.
Industry Background
The Rapid Growth of Internet Commerce
As the Internet has become an increasingly important communications medium,
businesses and their customers have begun using the Internet to buy and sell
goods and services. E-commerce offers both online businesses and consumers
numerous benefits:
. Online businesses and consumers can interact 24 hours a day, 7 days a
week, regardless of their respective locations.
. Online businesses can customize Web site content to match the needs and
preferences of individual users by transparently personalizing content
for each user.
. The online commerce site enables businesses to readily increase the
number of products and services offered, thereby enhancing the product
selection available to customers.
. Online businesses can avoid investments in physical retail locations.
. Much of the interaction between online businesses and consumers can be
automated, resulting in reduced selling costs.
These benefits allow online businesses to focus on growing their customer
bases and to market and sell their products around the world in a cost-
effective and efficient manner.
The early adopters of e-commerce were often Internet-centric companies, such
as Amazon.com and Buy.com, which were founded specifically to transact business
on the Internet. Today, many businesses consider it essential to offer their
goods and services online, and traditional retailers such as department stores,
car dealers, and toy stores have opened online stores to supplement their
traditional retail models. An increasingly broad selection of products is now
being sold online, ranging from the initial online product offerings of books,
music, computers and software to more traditional consumer goods such as
automobiles, clothes, movie tickets, vitamins and even such personal products
as prescription drugs. Accordingly, the need for online transaction processing
is affecting virtually all industries.
Transaction Processing Demands
To succeed online, a business must attract customers to its Web site and
provide an appealing and easy-to-use environment that encourages customers to
place an order by clicking on the "buy" button. Once the customer places an
order, the online business must process the order by effectively and
efficiently executing numerous transactions. With the rapid increase in the
number of businesses selling online and the vast array of products and services
becoming available online, competition among online businesses is increasingly
intense. Due to these competitive pressures, online businesses must focus their
resources on attracting customers to their Web sites and providing compelling
content to keep customers in their online stores. However, as an online
business succeeds in these efforts, the increased number of resulting orders
creates another set of complex challenges.
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These challenges include:
. Payment processing. The vast majority of online consumer purchases are
conducted using credit cards. These credit card transactions should be
processed in real-time to confirm an order while the customer is online.
Increasingly, merchants are also seeking to process transactions in local
currencies around the world.
To reduce transaction fees and offer customers an alternative to credit
card payment, an increasing number of businesses and institutions are
expressing interest in taking payment via electronic checks. Banks
generally process checks on a flat-fee per transaction basis rather than a
percentage of sales as is common with credit cards. Therefore the cost to
process a check electronically is generally lower than processing the
transaction via credit card.
. Fraud prevention. Because of the anonymity offered by the Internet and
the speed with which one can make purchases, the opportunity for fraud is
significant. In e-commerce transactions, because the credit card is not
present, an online business is generally held liable by its bank for the
full value of the transaction in the event of credit card fraud even if a
pre-authorization had been obtained. Online businesses must find ways to
combat this fraud to avoid losing both the product being sold and the
related revenue.
. Sales tax/VAT. An online business must comply with many different
national, state and local sales tax/value added tax (VAT) regulations
that vary depending on business and customer locations or product type.
. Export compliance. Online businesses must ensure that a proposed
transaction complies with complex, rapidly changing export regulations
that restrict the export of some goods to prohibited countries, persons
and entities.
. Territory management. A transaction may be subject to policies and
restrictions imposed by manufacturers that may prohibit the online
business from selling products due to a customer's geographic location.
. Fulfillment management. Online orders for physical goods must be
transmitted to fulfillment centers, distributors or merchant-owned
distribution centers for shipment of the goods.
. Stored value. To generate new revenue streams, improve customer service
and loyalty, and improve return on investment from promotional and online
initiatives, leading online businesses are integrating Internet stored
value technology such as Internet gift or promotional certificates into
existing e-commerce, marketing and customer service applications.
The online business must often address these demands while the customer is
waiting online. Information that a traditional retailer can collect during a
period of hours, such as fraud screen or export restrictions, often must be
available to the online business immediately. In addition, the business must
have an e-commerce system that scales as the business grows, provides a high
level of reliability and handles peak loads. The e-commerce system of the
online business should also integrate smoothly into the existing business and
technology and must support secure, authenticated messaging.
Evolution of E-commerce Transaction Processing Systems
Early adopters of e-commerce business models typically developed custom
transaction processing systems. The online businesses that built these systems
often faced long development cycles, which delayed their time-to-market. These
custom systems often had limited functionality and scalability and high ongoing
maintenance costs.
More recently, online businesses have attempted to address their transaction
processing needs by either purchasing or outsourcing discrete systems. Online
businesses that turn to discrete systems like payment
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processing are still faced with the need to address other potentially costly
and time-consuming transaction processing issues like fraud screening or export
control. In addition, online businesses that purchase discrete systems often
discover that these systems cannot scale as their business grows.
As the Internet has become an essential marketplace, online businesses are
increasingly turning to e-commerce service providers with the expertise to
deliver a comprehensive solution that shortens time-to-market and maximizes the
value of their investment. These transaction processing solutions should be
available at a low initial and overall cost and, at the same time, be scalable
to support the growth of the online business. A solution should also allow the
business to maintain control over its online content and customer relationships
and to integrate new services easily.
The CyberSource Solution
We are a leading developer and provider of real-time e-commerce transaction
services. Through our CyberSource Internet Commerce Suite, we offer online
businesses a solution to the challenges of e-commerce transaction processing.
Key benefits of our solution include:
. Faster time-to-market. Our services and technical support enable online
businesses to begin processing transactions without lengthy or costly
integration efforts. Our services are invoked by a single common
interface, the CyberSource Commerce Component, installed on a merchant's
commerce server. This interface is available as a pre-installed part of
the commerce server application or as a "plug-in,"--a software module
that is pre-configured for use with the businesses commerce server,
making it easy to install and utilize our services. Currently, the
CyberSource Commerce Component is integrated or available as a plug-in
for popular commerce servers such as those offered by ATG, BroadVision,
IBM, and Microsoft. In addition, we offer development kits that support
installation of this interface in most operating system environments
including Microsoft NT, UNIX (Sun Solaris, HP UX, IBM AIX, SCO and
others) and Linux.
. Access to a comprehensive suite of services. We provide online businesses
with on-demand, online access to services that address a broad spectrum
of e-commerce transaction processing issues related to global payment
processing, fraud prevention, tax calculation, export compliance,
territory management, delivery address verification, fulfillment
management and stored value.
. Enhanced customer flexibility and control. Our comprehensive transaction
processing solution enables the online business to choose transaction
services a la carte on a per order basis. The online business has the
flexibility to purchase any or all of our offered services for each order
as needed. In addition, because our services are provided transparently
to the customer, online businesses retain complete control over their
customers' buying experiences.
. Global reach. Our services are used by online businesses in many
countries throughout the world. We have established a network of virtual
network access points in 18 countries on 5 continents. Inaddition, our
payment gateways currently support over 150 currencies and provide sales
tax/VAT calculations for all Canadian provinces and all countries in the
European Union in addition to all United States jurisdictions.
. Reduced overall costs. Our services enable online businesses to
effectively process online transactions without the cost of developing
and maintaining their own complex transaction processing systems and
infrastructure. Furthermore, our services lower transaction costs by
reducing fraud and avoiding the shipment of goods to undeliverable
physical addresses in the United States and Canada.
The technology underlying our e-commerce transaction services provides the
following benefits:
. Scalability. Our services allow online businesses to deliver consistent
quality of service as their transaction volumes grow, and to handle daily
and seasonal peak periods. As a result, online businesses do not have to
expand these areas of their transaction processing infrastructure as
their businesses grow.
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. High reliability. Our systems are engineered to provide high reliability,
and we provide transaction processing 24 hours a day, 7 days a week. In
addition, we offer our customers support 24 hours a day, 7 days a week.
. Secure messaging. All communications between the customer's Web server
and our system are facilitated by our Simple Commerce Messaging Protocol,
or SCMP. This encrypted protocol allows for digital signature processing,
message integrity, and identity verification of all communications
between the customer and us.
. Real-time responses. Because our services enable online businesses to
process e-commerce transactions in real-time, they can improve their
level of customer satisfaction and reduce their support costs by avoiding
delayed responses and minimizing the need for follow-up communications.
Strategy
Our objective is to be the leading worldwide provider of real-time e-
commerce transaction services. Key elements of our strategy include the
following:
Enhance and Extend Our Suite of E-commerce Services. We intend to build
upon our scalable, state-of-the-art transaction processing systems to
enhance and extend the suite of services we currently offer. By continuing
to invest resources in our core transaction processing engine, the
CyberSource Internet Commerce Engine, we intend to further improve
availability, reliability and scalability. Based on input from our
customers, we plan to introduce new services to solve e-commerce problems
as they emerge. For example, in September 1999, we announced an agreement
to collaborate with Visa U.S.A. in expanding the capabilities of our
Internet Fraud Screen, leveraging Visa's fraud modeling expertise and our
Internet fraud reduction experience and historical transaction database. In
February 2000, we announced the integration of a new, more powerful fraud
detection model that uses neural network and rules-based modeling
technology to refine our Internet Fraud Screen enhanced by Visa. In January
2000, we announced support for an alternative payment method with the
addition of electronic check processing service. This new service expands
our payment services offering and enables online businesses and billers to
extend their reach to a broader customer base. We also completed an
acquisition in January 2000 with the purchase of ExpressGold, Inc., a
developer and provider of Internet stored value and a leader in stored
value services, such as private-label, Internet-based gift certificates for
online businesses. To supplement our internal development efforts, we will
continue to consider strategic acquisitions of complementary technologies
and companies.
Expand Merchant Customer Base through Improved Brand Recognition and
Increased Marketing. To date, we have made significant investments in
marketing and branding. We are continuing to increase our sales and
marketing expenses in 2000 from 1999 levels and plan to continue to do so
into the future. We have also increased the size of our direct sales force
and entered into additional collaborative relationships to generate new
merchant customers as well as to increase the number of transaction
services used by our existing merchants.
Utilize Partnerships to Drive Transactions. We intend to utilize or
leverage our relationships with our channel partners including reselling
partners such as Bank of America, First Data Corp., Paymentech, and Vital
Processing Services; solutions resellers (who offer hosted storefront
services) such as Corio, Escalate, Ingram Micro, TicketMaster Online-
CitySearch and U.S. Internetworking; and our strategic relationships with
GE Capital's Equity Capital Group and Visa to increase our transaction
volume and create new markets. We intend to enter into additional
relationships with other companies that offer similar benefits.
Increase International Presence and Operations. We intend to expand the
availability and brand recognition of our services throughout the world.
For example, we maintain our European headquarters in the United Kingdom
and have a sales presence in Germany and Australia. In addition, we have
established a payment processing relationship with National Westminster
Bank, or NatWest, to expand support for
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multi-currency payment processing for European and other merchants wishing
to support payment and settlement in local European currencies. In March
2000, we entered into a joint venture agreement in Japan with Marubeni
Corporation and Trans-Cosmos, Inc. to establish CyberSource Kabushiki
Kaisha, which will provide online businesses in the Japanese market with
eCommerce transaction services. We plan to enhance these and similar
relationships that will allow us to offer payment processing services in
all major currencies and sales tax/VAT services in all major nations. We
intend to continue buildi.ng our sales, marketing and operational presence
outside of the United States to serve merchants worldwide.
Build Organization Around the Merchant. We will continue to focus on the
needs of our customers and build our services and organization accordingly.
For example, we have established a customer advisory board which provides
us with valuable feedback on how to improve existing services and
identifies potential new services. In addition, we conduct market research
utilizing focus groups and customer surveys to learn more about our market
and business opportunities. Our online business customers benefit from the
collective experience of over 1,200 merchants as we improve existing
services and develop new services.
CyberSource Services
We provide a suite of e-commerce transaction services designed to simplify
online operations and allow our customers to focus on marketing and
merchandising tasks required for their online businesses. Our services are
transparent to the online businesses customers. We also offer digital product
rights management and distribution services as well as professional services.
CyberSource Internet Commerce Suite
The CyberSource Internet Commerce Suite is offered to online businesses
worldwide on a remotely accessed, pay-per-transaction basis. All of our
transaction services are accessible through a common software interface
residing on the customer's Web server.
The CyberSource Internet Commerce Suite currently consists of:
Tax Services: Our tax service calculates sales and use taxes for
over 7,000 taxing jurisdictions in the United
States and Canada. The service also supports VAT
calculation for all countries in the European Union
and many others outside the European Union,
enabling businesses to comply with most
international VAT regulations.
Payment Services: We provide a range of mission-critical payment
processing services designed for web merchants, as
well as e-commerce-enabled businesses and
government institutions. CyberSource credit card
services enables rapid, real-time authorization and
settlement of major credit cards, worldwide, in
multiple currencies including the Euro. We also
support acceptance of personal or business checks
online, in real-time, as payment for goods and
services.
Risk Management Services: Our Internet fraud screening system uses artificial
intelligence, in conjunction with an extensive
transaction history database, to allow online
businesses to predict and control fraud. The
service, which typically returns a predictive score
in fewer than ten seconds, significantly reduces
our customers' risk of fraud losses.
In July 1999, we entered into an agreement with
Visa U.S.A. pursuant to which Visa agreed to verify
our fraud screening results for transactions
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paid for by a Visa credit card, enabling us to
continually improve the accuracy and predictability
of our Internet Fraud Screen service. This service,
called CyberSource Internet Fraud Screen enhanced
by Visa was launched in September 1999 and enhanced
in February 2000. The new model, built using a
combination of neural networks and rules-based
modeling technology we believe is the first to use
card association reported fraud information to
accurately predict Internet fraud. Improved
accuracy translates into lower operational costs
for online businesses, because they can rely more
heavily on automated methods of order screening
with lower risk of rejecting valid sales or
accepting fraudulent purchases.
Distribution Control We provide a range of distribution control services
Services: to help ensure online businesses comply with
corporate, partner, and government policies for
product and service sales. They include:
. Export control. Through this service we help to
ensure that online businesses comply with United
States Government export regulations, monitoring
order acceptance against a rapidly changing list
of denied countries, persons or entities and
electronically verifying the customer's location
using our geolocation technology.
. Policy control. We offer this distribution
control service to assist online businesses in
complying with internal corporate policies and
partner marketing and distribution agreements for
product sales. Specifically, this service allows
online businesses to limit product or service
distribution to specific territories requested by
the business, thereby ensuring compliance with
marketing policies or distribution agreements.
Fulfillment Management We support a number of services to help online
Services: businesses manage physical and digital product
delivery in a secure, efficient fashion. These
include:
. Fulfillment messaging. We provide secure
fulfillment messaging to simplify the
transmission of online orders to fulfillment
centers, distributors, and merchant-owned
distribution centers. The service handles all
message routing and supports secure-mail, file
transfer protocol and electronic data interchange
formats. In addition, this service works in
conjunction with our payment services to comply
with card association rules regarding settlement
upon product shipment.
. Delivery address verification. This service is
designed to prevent online businesses from
shipping goods to incorrect physical addresses in
the United States and Canada. This service
identifies undeliverable addresses while the
customer is still online so that discrepancies
can be resolved immediately. This service
utilizes database and artificial intelligence
technologies to confirm in real-time that
city/state/zip combinations are correct and that
streets and street addresses are valid.
. Secure digital delivery. We use patented
technology and digital certificates to provide
simple, secure, electronic delivery of digital
content, such as software, music, images and
documents. Globally distributed servers provide
geographic distribution efficiency.
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. Digital warehousing. We maintain secure digital
warehouses for property owned by, or authorized
to be sold by, the transacting merchant. Digital
products may be archived in the digital
warehouses indefinitely to support returns and
replacement.
Stored Value: Through the acquisition of ExpressGold.com, Inc. in
January 2000 we added an Internet stored value
platform to the CyberSource Internet Commerce
Suite. This allows us to offer our online business
customers a variety of new services, beginning with
gift certificates, corporate incentive certificates
and promotional certificates. Whether a merchant is
web-centered or traditional with a growing web
presence, they can now issue their own private-
label gift certificates. The merchant holds the
funds and benefits from the increased sales from
gift giving, site promotions, and corporate
incentive sales. In the future, we plan to offer a
variety of other pre-paid payment services and
point programs.
Professional Services
Our professional services organization provides business application
expertise, technical know-how, and product knowledge to complement our products
and assist our customers in achieving faster time-to-market. Our professional
services include planning, implementation, and training. Our planning services
include system and resource evaluation, back-office commerce system design,
order fulfillment strategies and commerce applications assessment and
recommendations. Our implementation services include project management,
merchant bank account acquisition, commerce application configuration and
activation and commerce application testing and validation. Our training
services include digital product preparation, customer service and support
training and ongoing site maintenance.
For the year ended December 31, 1999, revenues derived from transaction
processing, support services, professional services and digital product rights
were approximately 58%, 26%, 9% and 7% of total revenues, respectively,
compared to 58%, 19%, 4% and 19% of total revenues, respectively, for the year
ended December 31, 1998.
Merchants and Markets
We have a broad customer base from a variety of industry groups. Beyond.com
accounted for 13.1% of our revenues in 1999 and 23.7% in 1998. No other
customer accounted for 10% or more of our revenues during 1999, 1998 or 1997.
Revenues from outside the United States were 23% of revenues for the year ended
December 31, 1999. In 1998, the Company derived less than 10% of its revenues
from outside the United States.
Sales and Marketing
Target customers for our e-commerce transaction services include
manufacturers wishing to sell directly online, Internet-centric merchants,
including those who have developed custom transaction processing systems and
established retailers that have opened online stores to supplement their
traditional retail models. We reach these online businesses worldwide through a
direct sales force as well as through an indirect sales channel that leverages
existing sales and marketing infrastructures developed by our partners. In
addition to our direct and indirect sales efforts, we work with several
strategic partners to promote our e-commerce transaction services. As of
December 31, 1999, we had a total of 63 persons in sales and marketing
worldwide.
Direct Sales. Our direct sales force is comprised of dedicated sales
professionals that target medium-to-large online businesses that focus
primarily on business-to-consumer sales and typically process over 2,500
customer orders per month. In addition, these merchants typically maintain
their own online stores. Our direct sales organization consists of account
managers and territory managers. Our account managers focus on maintaining high
customer satisfaction and selling additional services to existing customers,
and our territory managers are responsible for attracting new customers to our
services.
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Indirect Sales. Our indirect sales channel is divided into "resellers,"
"solutions resellers," "web/systems integrators," and "commerce server
vendors." These partners have contractual relationships that vary from co-
marketing relationships to authorized resale of transaction services.
. Resellers. Our resellers provide our services as a part of their larger
services portfolio, and facilitate the sale and billing of our services.
Resellers are authorized to sell our transaction services, as well as our
support services. Our resellers include banks and payment services
providers such as Bank of America, National Westminster Bank, Paymentech,
and Wells Fargo Bank.
. Solutions resellers. Solutions resellers provide total storefront
solutions, typically hosting customized and turnkey storefronts for
online businesses which include our eCommerce transaction services. Our
solutions resellers manage the entire customer relationship including
operations support and transaction services billing, and include ISPs,
Portals, or specialized systems integrators such as Corio, Escalate,
Ingram Micro, TicketMaster Online-CitySearch, and U.S. Internetworking.
. Web/systems integrators. These partners assist businesses in the design,
development and implementation of online stores, and include Agency.com,
iXL, Fort Point Partners and USWeb/CKS.
. Commerce server vendors. Our commerce server vendors design, develop and
distribute software that facilitates the deployment of commerce-enabled
Web sites, allowing for seamless integration of our eCommerce transaction
services and include Allaire, ATG, Blue Martini, BroadVision, emercis,
Evergreen, IBM, Intershop, InterWorld, Microsoft, Oracle, PeopleSoft and
Vignette.
Strategic Partners. Our strategic partners include GE Capital and Visa. We
work together with our strategic partners to enhance our existing suite of
products, develop new services, and drive the adoption of industry standards
while further increasing the visibility of our e-commerce services. We
currently have contractual relationships with our strategic partners under
which we pay commissions to our strategic partners who refer Internet
businesses to us and with whom we enter into a contractual relationship.
In July 1999, we entered into an agreement with Visa U.S.A. to jointly
develop and promote the CyberSource Internet Fraud Screen enhanced by Visa for
use in the United States. The agreement has an initial term until August 2001
and will be automatically extended thereafter until terminated by either party.
Visa has agreed to promote and market the new product to its member financial
institutions and Internet merchants. During the term of the agreement, we
cannot enter into any development or consultation agreements with certain
competitors of Visa in the area of Internet fraud detection.
Marketing. We use a variety of marketing activities to increase market
awareness of our services and educate our target audience. In addition to
building awareness of our brand, our marketing activities focus on generating
leads for our sales efforts. To build awareness and attract new customers and
partners we conduct marketing and partnership programs including advertising,
public relations activities, referral programs, co-branded initiatives, virtual
seminars and trade shows.
Customer Support
We provide a range of customer activation and sustaining support services to
ensure a high level of performance and reliability and to enable online
businesses to get to market more quickly. We offer two levels of rapid start
implementation and two levels of sustaining support services in addition to
basic account activation: standard support and premier support. All of these
services include transaction reporting, fraud list updating and notification of
scheduled and unscheduled system downtime and self-help customer support tools
on our Web site. Customers may select any combination of implementation and/or
sustaining support packages, according to their needs.
Account Activation. Our account activation level service is intended for use
by customers that receive technical support from a technically qualified third
party, an organization that resells the CyberSource Internet Commerce Suite, or
by those customers with sufficient in-house technical expertise. Account
activation allows
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customers to connect to the CyberSource Internet Commerce Suite, configure all
merchant IDs and account information, access test services, gain secure access
to our online merchant support center and next business day e-mail support.
Rapid Start Implementation and Standard Sustaining Support. This level of
service is designed to provide support to customers during regular business
hours. It provides all of the services of account activation as well as toll
free telephone support from 7 a.m. to 7 p.m., Pacific Time, Monday through
Friday, from our merchant support group with a guaranteed four hour response
time. E-mail support with a guaranteed four hour response time and an initial
one hour project orientation conference call with our support professionals is
also included.
Rapid Start Premier Implementation and Premier Sustaining Support. Our
premier support level provides the implementation and sustaining support
benefits of the standard level with the addition of a dedicated merchant
support center engineer available during project implementation, and support
available 24 hours a day, 7 days a week, via toll-free telephone access or
email with a one hour guaranteed response. Also included are a dedicated
business account manager and a review to optimize fraud scoring and other
Internet commerce services.
Through toll-free telephone numbers, our customers can reach our support
desk professionals around the clock. As of December 31, 1999, 29 of our
employees were dedicated to customer support.
Technology
Our proprietary transaction processing system employs a modular architecture
that was designed to scale rapidly and handle the transaction processing
demands of our customers across the Internet. This system is composed of
multiple groups of servers and routers acting as a single point of contact for
our customers' transaction processing requirements. The primary software
components of our system are the E-Transaction Databases, the Internet Commerce
Engine, or ICE, the Internet Commerce Services Applications, the Simple
Commerce Messaging Protocol, or SCMP, and the SCMP client. This system utilizes
industry standards to maximize our compatibility with our customers' e-commerce
systems. In addition, we have implemented a global network of data centers and
access points that are designed to minimize transaction processing time and
system failures.
E-Transaction Database Architecture
Three primary databases form the core of our transaction processing system:
the transaction process database which maintains information necessary to
process each individual transaction; the decision support database, which
processes reports and provides detailed information about customers'
transactions and the digital products rights management database, which manages
and reports on the digital property rights that customers have purchased. Our
transaction services rely on these databases to store the information necessary
to process transactions. For example, our fraud prevention service relies upon
a proprietary database of millions of transactions to assess the risk of fraud.
Internet Commerce Engine
Our ICE manages work flow functions and the required communications between
our commerce servers, our database and any external resources including First
Data Corp., National Westminster Bank, Paymentech and Vital Processing
Services. Our Internet Commerce Engine is designed to meet the transaction
processing demands of our customers in a secure, fast, efficient, reliable,
scalable and interoperable manner. Our ICE was designed to scale rapidly to
handle peak transaction processing loads. Separate ICE servers share the
transaction load from our customers and provide for immediate backup services
should any ICE server fail. Additional ICE servers can be readily added to our
data centers to accommodate increased merchant demand.
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Internet Commerce Services Applications
We have developed a set of software applications that perform the services
in our Internet Commerce Suite. These services include global payment
processing, fraud prevention, tax calculation, export compliance, territory
management, delivery address verification, fulfillment management, and stored
value. We are currently in the process of integrating Internet Stored Value
Services, that we recently acquired through the ExpressGold acquisition, into
the Internet Commerce Engine. We expect to complete this integration during
2000. These applications contain the rules and logic necessary to provide our
transaction services to customers. The applications share resources with the
ICE and databases which allow us to efficiently add new application services to
meet our customers' needs.
Simple Commerce Messaging Protocol
We have developed the Simple Commerce Messaging Protocol, or SCMP, to enable
efficient and secure connections between our ICE and our customers. In order to
ensure secure messaging, SCMP utilizes industry standards for secure
communications including the Data Encryption Standard, RSA/public key
cryptography and digital certificates. SCMP enables our customers to securely
access our suite of commerce services. Most importantly, SCMP can be integrated
into any software product that might require our application services.
SCMP Client
Our services are invoked by a common programming interface, residing on our
customers' commerce servers. This client may be easily installed with a "plug-
in" that is available for most popular commerce servers including those offered
by BroadVision, IBM and Microsoft. In addition, we have developed software
libraries which act as a client and run on most operating systems including
Microsoft NT, UNIX (Sun Solaris, HP UX, IBM AIX, SCO and others) and Linux. A
customer can access our commerce services using either the plug-in or the
software libraries that we have developed.
Industry Standards
The implementation of our architecture is based on and complies with widely
accepted industry standards. For example, the ICE utilizes industry standard
components from industry leaders such as Cisco, Harbinger, Microsoft, Retail
Logic, RSA Data Security, Sun Microsystems and Sybase. Adherence to industry
standards provides compatibility with existing applications, enables ease of
modification and reduces the need for software modules to be rewritten over
time, thus protecting our customers' investments.
Data Centers and Network Access
Our data centers are located at leased facilities in Santa Clara, California
and London, England. A data center is a facility containing servers, modem
banks, network circuits and other physical equipment necessary to connect users
to the Internet. These data centers have multiple levels of redundant
connectivity to the Internet, back-up power, fire suppression, seismic
reinforcement and security surveillance 24 hours a day, 7 days a week. In
addition, we have access to 18 "points of presence" located on 5 continents.
That access is provided by an Internet service provider and allows us to serve
merchants globally. A "point of presence," or POP, is a point along an Internet
service provider's network that enables users to connect to the Internet more
directly and therefore more quickly. These points of presence provide rapid
access to our suite of services and significantly reduce the number of Internet
connections a transaction must pass through to reach us.
Product Development
Our product development team is responsible for the design, development and
release of our core infrastructure and services. We have a well-defined
software development methodology that we believe enables us to deliver services
that satisfy real business needs for the global market while meeting commercial
quality
10
expectations. We emphasize quality assurance throughout our software
development lifecycle. We believe that a strong emphasis placed on analysis,
design and rapid prototyping early in the project lifecycle reduces the number
and costs of defects that may be found in later stages. Our development
methodology focuses on delivery of product to a global market, enabling
localization into multiple languages, multi-currency payment processing, global
fraud detection, and local regulatory compliance from a single code base. As of
December 31, 1999, we employed 56 persons in our product development
organization.
When appropriate, we utilize third parties to expand the capacity and
technical expertise of our internal product development organization. On
occasion, we have licensed third-party technology that we feel provides the
strongest technical alternative. We believe this approach shortens time-to-
market without compromising our competitive position or product quality.
Intellectual Property
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights.
We have been issued two patents and have six patent applications pending.
The first issued patent, for a method and system for controlling distribution
of software in a multitiered distribution chain, expires in April 2016. The
second issued patent, for a method and system for detecting fraud in a credit
card transaction over the Internet, expires in July 2017. We have pending
patent applications covering enhancements to our Internet fraud screen system,
digital delivery, delivery address verification, stored value electronic
certificate processing and other technologies for services not yet offered for
sale to the public. We investigate, define and prepare applications for new
patents as a part of the standard product development cycle. Our engineering
management team meets on a routine basis to harvest new invention disclosures
from the engineering and architecture groups. We cannot assure you that any
patent application that we file will issue as a patent, and we cannot assure
you that any patent issued to us will not be held invalid or unenforceable
based on prior art or for any other reason.
We believe that numerous patent applications relating to the Internet
commerce field have been filed or have issued as patents. From time to time, in
the ordinary course of business, we become aware of one or more patents of
third parties that we choose to evaluate for a variety of purposes. These
purposes may include determining the general contents of patents, reviewing the
technological developments of their assignees, and determining whether our
technology may overlap. We have not conducted any search to determine whether
any of our services or technology could be alleged to infringe upon any patent
rights of any third party. We cannot assure you that none of our products,
services, and technology infringes any patent of any third party.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors, and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
reverse engineer, copy or otherwise obtain our technology without
authorization, or develop similar technology independently. While we police the
use of our services and technology through online monitoring and functions
designed into SCMP and our ICE, an unauthorized third-party may nevertheless
gain unauthorized access to our services or pirate our software. We are unable
to determine the extent to which piracy of our intellectual property or
software exists. Software piracy is a prevalent problem in our industry.
Effective protection of intellectual property rights may be unavailable or
limited in foreign countries. We cannot assure you that the protection of our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology, duplicate our services or design
around any intellectual property rights we hold.
From time to time we may receive notice of claims of infringement of other
parties' intellectual property rights. As the number of services in our market
increases and functionalities overlap, companies such as ours may become
increasingly subject to infringement claims. Any infringement claims, with or
without merit, could
11
be time-consuming, result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology or
enter into licensing agreements. Such licensing agreements, if required, may
not be available on acceptable terms, if at all. In the event of a successful
claim of infringement and our failure or inability to develop non-infringing
technology or license the proprietary rights on a timely basis, our business,
operating results and financial condition could be materially adversely
affected.
Competition
The market for our services is intensely competitive and subject to rapid
technological change. We expect competition to intensify in the future. Our
primary source of competition comes from online businesses who develop custom
systems. These online businesses 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, Hewlett-Packard (VeriFone), HNC Software, Open Market, PaylinX,
ShopNow.com and Signio (a subsidiary of VeriSign). In addition, companies,
including financial services and credit companies such as First Data
Corporation, AT&T and GE Capital, may enter the market for our services. In the
future, we also may compete with large Internet-centric companies that derive a
significant portion of their revenues from e-commerce and may offer, or provide
a means for others to offer, e-commerce transaction services.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. Competition could seriously impede our ability to sell additional
services on terms favorable to us. Our current and potential competitors may
develop and market new technologies that render our existing or future services
obsolete, unmarketable or less competitive. Our current and potential
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with other e-commerce transaction service
providers, thereby increasing the ability of their services to address the
needs of our prospective customers. Our current and potential competitors may
establish or strengthen cooperative relationships with our current or future
channel partners, thereby limiting our ability to sell services through these
channels. Competitive pressures could reduce our market share or require the
reduction of the prices of our services, either of which could materially and
adversely affect our business, results of operations or financial condition.
We compete on the basis of certain factors, including:
.system reliability;
.product performance;
.breadth of service offering;
.ease of implementation;
.time to market;
.customer support; and
.price.
We believe that we presently compete favorably with respect to each of these
factors. However, the market for our services is still rapidly evolving, and we
may not be able to compete successfully against current and potential future
competitors.
Employees
As of December 31, 1999, we had a total of 228 employees, including 56
persons in product development, 63 persons in sales and marketing, 71 persons
in professional services, operations and customer support, 38 persons in
general and administrative services. None of our employees is represented by a
labor union, and we consider employee relations to be good.
12
Proprietary Rights
We rely on a combination of copyright, trademark, patent and trade secret
laws and contractual restrictions to establish and protect our technology and
proprietary rights and information. We require employees and consultants to
sign confidentiality agreements. However, we cannot assure you that our steps
will be sufficient to prevent misappropriation of our technology and
proprietary rights and information or that our competitors will not
independently develop technologies that are substantially equivalent or
superior to ours.
Regulations
The following regulations can impact our business now or in the future:
Fair Credit Reporting Act. Because our Internet fraud screening system
assesses the probability of fraud in an Internet credit card transaction,
we may be deemed a consumer reporting agency under the Fair Credit
Reporting Act. As a precaution, we are implementing changes to our systems
and processes so that we will be in compliance with the act. Complying with
this act requires us to provide information about personal data stored by
us. Failure to comply with this act could result in claims being made
against us by individual consumers and the Federal Trade Commission.
Export Control Regulations. Current export control regulations prohibit
the export of strong encryption technology without a license, thereby
preventing us from using stronger encryption technology to protect the
security of data being transmitted to and from Internet merchants outside
of the United States. We have obtained a license to use 168-bit encryption
technology with our international merchants, and have applied for a license
to use higher levels of encryption technology. We cannot be sure that the
license to use stronger encryption technology will be issued. If our
application is denied, we will be unable to use stronger than 168-bit
encryption technology with our international merchants.
Internet Tax Freedom Act. Enacted in October 1998 and effective through
October 2001, the act bars state or local governments from imposing taxes
that would subject buyers and sellers of electronic commerce to taxation in
multiple states. The act also bars state and local governments from
imposing taxes on Internet access through October 2001. When the act
expires or if the act is repealed, Internet access and sales across the
Internet may be subject to additional taxation by state and local
governments, thereby discouraging purchases over the Internet and adversely
affecting our business.
ITEM 2: PROPERTIES
Facilities
Our primary offices are located in approximately 32,528 square feet of space
in San Jose, California under leases expiring in September 2000 (5,277 square
feet) and in January 2001 (27,251 square feet). We also lease space for field
sales offices in Jersey City, New Jersey and Los Angeles, California. In
addition, we maintain sales and support offices in leased space in Weybridge,
United Kingdom.
In November 1999, we entered into a lease agreement to occupy approximately
72,000 square feet of space in a new facility commencing January 2000 which
expires in December 2006. We are planning to relocate to the new facility in
April 2000 and, upon the completion of our relocation, we intend to either
sublease or terminate the lease for our current facility.
ITEM 3: LEGAL PROCEEDINGS
In November 1999, Net MoneyIN filed an action against us in the U.S.
District Court in the District of Arizona claiming that we have infringed,
induced others to infringe, and contributed to the infringement by others of
claims of U.S. Patent No. 5,822,737 and U.S. Patent No. 5,963,917. Net
MoneyIN's complaint seeks injunctive relief and unspecified damages. We have
received an opinion of our patent counsel that the claims of
13
the Net MoneyIN 737 patent are not infringed by our services. In addition, we
believe, based upon consultation with our patent counsel, that the claims of
the Net MoneyIN 917 patent are not infringed by our services. However there can
be no assurance that our payment services will not ultimately be determined to
infringe the Net MoneyIN patents, and we anticipate that Net MoneyIN will
continue to pursue litigation with respect to these claims.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since our initial public offering on June 23, 1999, our common stock has
traded on the Nasdaq National Market under the symbol "CYBS." The following
table sets forth the range of high and low closing sales prices of our common
stock for the periods indicated:
Year ended December 31, 1999 High Low
---------------------------- ------- ----
Second Quarter (from June 23, 1999)......................... $14 3/4 $ 12
Third Quarter............................................... $55 3/8 $15 1/4
Fourth Quarter.............................................. $70 1/2 $40 1/8
The Company had approximately 360 shareholders of record as of December 31,
1999. The Company has not declared or paid any cash dividends on its Common
Stock and presently intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
With the remaining $18.9 million of net proceeds from the initial public
offering in June 1999 and the $111.8 million of net proceeds from the secondary
public offering in November 1999, the Company purchased $59.3 million of short-
term investments, acquired $2.1 million of property and equipment and used $6.3
million to fund operations during the three months ended December 31, 1999. The
remaining $63.0 million of net proceeds was held in various cash and cash
equivalent accounts as of December 31, 1999.
14
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The historical results are not
necessarily indicative of future results.
SELECTED CONSOLIDATED FINANCIAL DATA
Period From
Years Ended December 31, March 20, 1996
--------------------------- (Inception) to
1999 1998 1997 December 31, 1996
-------- -------- ------- -----------------
(in thousands, except per share data)
Consolidated Statements of Op-
erations Data:
Revenues....................... $ 12,898 $ 3,384 $ 968 $ 144
Cost of revenues............... 10,835 3,471 324 137
-------- -------- ------- -------
Gross profit (loss)............ 2,063 (87) 644 7
Operating expenses:
Product development.......... 7,457 3,802 2,300 338
Sales and marketing.......... 14,552 4,184 1,988 425
General and administrative... 5,457 1,946 681 387
Deferred compensation
amortization................ 524 18 -- --
-------- -------- ------- -------
Total operating expenses... 27,990 9,950 4,969 1,150
-------- -------- ------- -------
Loss from operations........... (25,927) (10,037) (4,325) (1,143)
Interest income (expense),
net........................... 1,830 (48) (13) --
-------- -------- ------- -------
Net loss....................... $(24,097) $(10,085) $(4,338) $(1,143)
======== ======== ======= =======
Basic and diluted net loss per
share(1)...................... $ (1.70) $ (2.05)
======== ========
Shares used in computing basic
and diluted net loss per
share(1)...................... 14,191 4,918
======== ========
Pro forma basic and diluted net
loss per share(1)............. $ (1.25) $ (0.86)
======== ========
Shares used in computing pro
forma basic and diluted net
loss per share(1)............. 19,335 11,740
======== ========
Selected Non-Financial Operat-
ing Data:
Number of transactions
processed..................... 47,211 8,560
December 31,
------------------------------
1999 1998 1997 1996
-------- ------- ------ -----
(in thousands)
Consolidated Balance Sheet Data:
(in thousands)
Cash, cash equivalents and short-term
investments.................................. $140,249 $11,111 $2,000 $ --
Working capital (deficit)..................... 138,899 7,554 2,016 (61)
Total assets.................................. 153,774 14,975 3,735 106
Long-term obligations, net of current
portion...................................... 444 256 33 --
Redeemable convertible preferred stock........ -- 18,911 2,097 --
Total stockholders' equity (net capital
deficiency).................................. 147,205 (9,023) 1,037 421
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the number of shares used in computing per share amounts. Until December
31, 1997, the Company was operated as a division of Beyond.com Corporation
and had no outstanding common or preferred shares, and, therefore, there
are no loss per share amounts for the 1997 and 1996 periods.
15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this document.
Overview
We commenced operations in March 1996 as a division of Beyond.com. On
December 31, 1997, Beyond.com transferred assets and liabilities related to its
e-commerce transaction processing services division to CyberSource. Our
statements of operations and stockholders' equity for 1996 and 1997 reflect our
operations as a division of Beyond.com through December 31, 1997. Our
statements of operations for 1996 and 1997 include all revenues and costs
directly attributable to us, including a corporate allocation of the costs of
facilities, salaries and employee benefits. Additionally, incremental corporate
administration, finance and management costs were allocated to us. We have
incurred significant losses since our inception, and through December 31, 1999
had incurred cumulative losses of approximately $39.7 million. We expect to
continue to incur substantial operating losses for the foreseeable future.
We derive substantially all of our revenues from e-commerce monthly
transaction processing fees, and, to a lesser extent, support services,
professional services, and digital product rights management fees. Transaction
revenues and digital product rights management fees are recognized in the
period in which the transactions occur. Our e-commerce transaction processing
service revenues are derived from contractual relationships providing revenues
on a per transaction basis, generally subject to a monthly minimum or
maintenance fee. In general, these contractual relationships provide for a one-
year term with automatic renewal and can be cancelled by either party at any
time with sixty days prior notice. Support service fees and professional
services are recognized as the related services are provided and costs are
incurred. As our revenue grows, we expect e-commerce transaction processing
revenues to become an increasingly larger percentage of our total revenues. We
also expect that our professional services revenues will increase as a
percentage of total revenue.
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our revenues
and operating results, including our gross margin and operating expenses as a
percentage of total revenues, are not meaningful and should not be relied upon
as indications of future performance. Moreover, we do not believe that our
historical growth rates are indicative of future results. Even if our revenues
and number of transactions did continue to expand at a steady pace in absolute
numbers, our growth rate would decrease.
Results of Operations
Years Ended December 31, 1999 and 1998
Revenues. Revenues increased to $12.9 million in 1999, an increase of
approximately $9.5 million or 281.1% as compared to $3.4 million in 1998. This
increase is due to the addition of merchants and transaction volume increases
from existing merchants resulting from the increased market acceptance of e-
commerce. Our transactions processed increased to approximately 47.2 million in
1999 as compared to approximately 8.6 million in 1998. During 1999, Beyond.com
accounted for approximately 13.1% of our revenues. Given the continued increase
in our customer base, we expect Beyond.com's percentage of total revenues to
decrease in future periods as new customers increase our transaction volumes
and revenues.
Cost of Revenues. Cost of revenues consists primarily of costs incurred in
the delivery of e-commerce transaction services, including personnel costs in
our operations, professional services and merchant support functions,
depreciation of capital equipment used in our network infrastructure and costs
related to the hosting of our servers at third-party hosting centers in the
United States and United Kingdom. Cost of revenues increased to $10.8 million
or 84.0% of revenues in 1999 from $3.5 million or 102.6% of revenues in 1998.
The
16
increase in dollars is primarily due to an increase in operations, merchant
support and professional services personnel and related costs of approximately
$4.1 million and an increase in depreciation expense on capital equipment of
approximately $0.9 million. In addition, international cost of revenues
increased due to increased international transaction volumes associated with a
third party payment processing gateway in the U.K.
Product Development. Product development expenses consist primarily of
compensation and related costs of employees engaged in the research, design and
development of new services, and to a lesser extent, facility costs and related
overhead. Product development expenses increased to $7.5 million in 1999 from
$3.8 million in 1998. The increase is primarily due to higher personnel related
costs resulting from an increase in personnel. We expect product development
expenses to increase in absolute dollars as we hire additional personnel and
develop new services.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation of sales and marketing personnel, market research and advertising
costs, and, to a lesser extent, facility costs and related overhead. Sales and
marketing expenses increased to $14.6 million in 1999 from $4.2 million in
1998. The increase is primarily due to an increase in marketing and promotional
programs, higher personnel related costs resulting from an increase in
personnel and higher sales commissions resulting from an increase in sales. We
expect sales and marketing expenses to increase in absolute dollars as we
increase our sales and marketing personnel and marketing and promotional
programs.
General and Administrative. General and administrative expenses consist
primarily of compensation for administrative personnel, fees for outside
professional services and, to a lesser extent, facility costs and related
overhead. General and administrative expenses increased to $5.5 million in 1999
from $1.9 million in 1998. The increase is primarily due to higher personnel
related costs resulting from an increase in personnel. We expect general and
administrative expenses to increase in absolute dollars to support the expected
growth of our business including our expected relocation to a new facility in
April 2000.
Deferred Compensation Amortization. In 1999, we recorded aggregate unearned
compensation in the amount of $1.0 million in connection with the grant of
stock options with exercise prices less than the deemed fair value on the
respective dates of grant and amortized $0.5 million of deferred compensation
during that period.
Interest Income (Expense), Net. Interest income, which consists of interest
earnings on cash, cash equivalents and short-term investments, increased to
$2.1 million in 1999 from $0.1 million in 1998. This increase is primarily due
to an increase in cash, cash equivalents and short-term investments as a result
of equity financings completed during 1999, including our initial public
offering in June 1999 and second offering in November 1999. Interest expense
increased to $0.3 million in 1999 from $0.2 million in 1998. Interest expense
represents interest on an unsecured convertible note, which was converted into
Series E preferred stock in June 1999 and subsequently converted into common
stock upon the completion of our initial public offering, and interest on
capital lease obligations.
Income Taxes. No provision for federal and state income taxes was recorded
as we have incurred net operating losses since inception. As of December 31,
1999, we had federal and state net operating loss carryforwards of
approximately $26.5 million and $27.2 million, respectively. If we are not able
to use them, the federal and state net operating loss carryforwards will expire
in 2006 through 2019. The Tax Reform Act of 1986 imposes substantial
restrictions on the utilization of net operating losses and tax credits in the
event of a corporation's ownership change, as defined in the Internal Revenue
Code. Our ability to utilize net operating loss carryforwards may be limited as
a result of such an ownership change.
We have provided a full valuation allowance on our deferred tax assets
because of the uncertainty regarding their realization. Our accounting for
deferred taxes under Statement of Financial Accounting Standards No. 109
involves the evaluation of a number of factors concerning the reliability of
our deferred tax assets. In concluding that a full valuation allowance was
required, we considered such factors as our history of operating losses and
expected future losses and the nature of our deferred tax assets.
17
Years Ended December 31, 1998 and 1997
Revenues. Revenues increased to $3.4 million in 1998 from $1.0 million in
1997, an increase of approximately $2.4 million or 249.6%. The increase is a
result of the addition of merchants and increased transaction volumes from
existing customers resulting from the increased market acceptance of e-
commerce. Since we were a division of Beyond.com, no revenues were recorded
from Beyond.com transactions processed during 1997.
Cost of Revenues. Cost of revenues increased to $3.5 million or 102.6% of
revenues in 1998 from $0.3 million or 33.5% of revenues in 1997. The increase
in 1998 in dollars and as a percent of revenues is due to an increase of $1.6
million in operations, professional services and merchant support personnel and
related costs, an increase of $0.2 million in depreciation expense on capital
equipment as well as an increase of $0.3 million in costs related to the
hosting of our servers at third party hosting centers in the United States and
United Kingdom, which include costs for additional space, installation of
equipment and additional phone line requirements.
Product Development. Product development expenses increased to $3.8 million
in 1998 from $2.3 million in 1997. The addition of product development
personnel during 1998 primarily accounted for the increase.
Sales and Marketing. Sales and marketing expenses increased to $4.2 million
in 1998 from $2.0 million in 1997. The increase is primarily due to higher
personnel related costs and increased sales commissions.
General and Administrative. General and administrative expenses increased to
$1.9 million in 1998 from $0.7 million in 1997. The increase is primarily due
to higher personnel related costs resulting from the hiring of additional
personnel and, to a lesser extent, from salary increases.
Deferred Compensation Amortization. During the year ended December 31, 1998,
we recorded aggregate unearned compensation in the amount of $0.2 million in
connection with the grant of stock options during 1998 with exercise prices
less than the deemed fair value on the respective dates of grant.
Interest Income (Expense), Net. Interest income was approximately $0.1
million in 1998. Interest expense of $0.2 million in 1998 represents interest
on an unsecured convertible note and interest on capital leases.
Income Taxes. No provision for federal and state income taxes was recorded
as we have incurred net operating losses since inception.
Liquidity and Capital Resources
Our cash, cash equivalents and short-term investments increased by
approximately $129.1 million from December 31, 1998 to December 31, 1999. This
increase resulted from our receipt of approximately $158.0 million in proceeds
from the sale of equity securities which was partially offset by our net loss
during 1999 of $24.1 million as well as the acquisition of equipment used in
our network infrastructure. Our investment in property and equipment during
1999 was approximately $7.0 million, excluding approximately $1.2 million of
property and equipment financed under capital leases.
Net cash used in our operating activities was approximately $21.1 million in
1999 and approximately $8.9 million in 1998. Cash used in operations during
1999 and 1998 was primarily due to our net losses and increases in current
assets, offset by depreciation and amortization and increases in accounts
payable and accrued liabilities. Accounts payable and accrued liabilities
increased in those periods primarily due to the expansion of our operations and
the related costs and increases in accrued personnel costs related to headcount
growth.
18
Net cash used in investing activities was approximately $76.0 million in
1999 and approximately $1.4 million in 1998. This was comprised primarily of
purchases of furniture and equipment for new employees and capital equipment
used in our network infrastructure and, in 1999, $69.1 million in net purchases
of short-term investments. Our planned capital expenditures for 2000 are
approximately $15 million, primarily for leasehold improvements for our new
headquarter facility that we plan to occupy in April 2000, 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 $157.7 million
in 1999 and $19.4 million in 1998. Net cash provided by financing activities in
1999 was due primarily to proceeds from our initial and second public offerings
which total approximately $158.0 million. Net cash provided by financing
activities in 1998 was due primarily to proceeds from our issuance of a
convertible note payable of $3.0 million and proceeds from the issuance of
preferred stock of $16.5 million.
We believe that our cash and investment balances as of December 31, 1999
will be sufficient to meet our working capital and capital requirements for at
least the next twelve months. We expect that we will continue to use our cash
to fund expected operating losses as we hire additional personnel and continue
to expand our research and development, sales and marketing and general and
administrative activities. In addition, our future capital requirements will
depend on many factors including the level of investment we make in new
businesses, new products or new technologies. Other than our acquisition of
ExpressGold in January 2000 whereby we issued 1,538,475 shares of our common
stock in acquiring 100% of the outstanding common stock of ExpressGold, we
currently have no agreements or understandings with respect to any future
investments or acquisitions. To the extent that our existing cash resources and
future earnings are insufficient to fund our future activities, we may need to
obtain additional equity or debt financing. Additional funds may not be
available or, if available, we may not be able to obtain them on terms
favorable to our stockholders and us.
Year 2000
We utilize a number of computer software programs and operating systems
across our entire organization, including applications used in financial
business systems and various administrative functions. During 1999, we compiled
certifications and representations of Year 2000 compliance from publishers of
all operating systems and software utilized by our employees in the normal
course of business. We employed a team of internal personnel to test and update
the systems. We have experienced no problems to date related to the Year 2000.
We rely on two Internet service providers for our Internet access. In 1999,
both companies represented in their public filings with the Securities and
Exchange Commission that their systems were fully Year 2000 compliant or that
that they had processes in place to achieve full compliance prior to the Year
2000. We relied on these Internet service providers to achieve these tasks and
did obtain contractual commitments from them regarding Year 2000 issues. We
have experienced no problems to date related to the Year 2000.
We developed proprietary software to perform the Internet commerce services.
During 1999, we had completed all code reviews and modifications that we
believed were necessary to make our services Year 2000 compliant. We performed
testing prior to year end and determined that no additional modifications were
necessary. We have experienced no problems to date related to the Year 2000.
We are highly dependent on a few personal computer manufacturing companies
for our supply of desktop hardware and peripherals. In 1999, we had reviewed
our primary suppliers' plans for Year 2000 compliance to the extent that Year
2000 issues affect these suppliers' ability to deliver on schedule. Based on
our review, these suppliers appeared to have made the necessary modifications
to or replacement of their affected systems. We did not receive a contractual
commitment from our suppliers regarding Year 2000 issues. We have experienced
no problems to date related to the Year 2000.
19
In addition, we did not assess the Year 2000 readiness of our merchants.
Merchants who were not Year 2000 compliant may have been unable to utilize our
services. We are not aware of any of our merchants experiencing problems
related to the Year 2000.
Contingency Plans. We concluded that, if our suppliers were not Year 2000
compliant, the reasonably likely worst case would be that we would be unable to
receive desktop hardware and software from them on a timely basis which would
have disrupted employee productivity and could have materially adversely
affected our business. We had alternate suppliers in place in the event that
our current suppliers were not able to provide the necessary hardware and
software. Additionally, our IT, engineering, operations and merchants services
departments were fully staffed 24 hours a day from December 30, 1999 through
January 4, 2000 to address possible issues arising from non-compliance of our
services or of our merchants.
CAUTIONARY STATEMENTS
The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including, without limitation, statements regarding the Company's
expectations, objectives, anticipations, plans, hopes, beliefs, intentions or
strategies regarding the future. Forward-looking statements include, without
limitation, the statements regarding (a) the Company's objective to become the
leading worldwide provider of real-time e-commerce transaction services, (b)
the Company's intention to build upon the core transaction processing systems
to enhance and extend the suite of services and improve availability,
reliability and scalability, (c) the Company's intention to continue
considering strategic acquisitions of complementary technologies and companies
to supplement internal development efforts, (d) the Company's intention to
utilize or leverage existing relationships with its channel partners and other
strategic relationships to increase transaction volume and create new markets,
as well as to enter into additional relationships with other companies that
offer similar benefits, (e) the Company's intention to expand the availability
and brand recognition of the Company's services throughout the world, (f) the
Company's plan to enhance relationships and to continue building a sales,
marketing and operational presence outside of the United States to serve
merchants worldwide, (g) the Company's intention to continue to focus on the
needs of customers and build services and organization accordingly, under the
heading "Item 1, Business--Strategy"; the Company's belief that its new model
using a combination of neural networks and rules-based modeling technology is
the first to use card association reported fraud information to accurately
predict Internet fraud under the heading "Item 1, Business--Cybersource
Services--Risk Management Services"; statement of the Company's plan to offer a
variety of other pre-paid payment services and point programs under the heading
"Item 1, Business--Cybersource Services--Stored Value"; the Company's belief
that (a) a strong emphasis placed on analysis, design and rapid prototyping
early in the project lifecycle reduces the number and costs of defects that may
be found in later stages, (b) such approach shortens time-to-market without
compromising the Company's competitive position or product quality, under the
heading "Item 1, Business--Product Development"; the statements regarding (a)
the Company's expectation of intensified competition, (b) the Company's
expectation that the Company may compete with large Internet-centric companies
that derive a significant portion of their revenues from e-commerce and may
offer, or provide a means for others to offer, e-commerce transaction services,
(c) the Company's belief that, although the Company presently competes
favorably with respect to each of the listed competitive factors, the rapid
evolving market may adversely affect the Company's ability to compete
successfully against current and potential future competitors, under the
heading of "Item 1, Business--Competition"; statement regarding the Company's
efforts in implementing changes to the Company's systems and processes so that
the Company will be in compliance with the Fair Credit Reporting Act under the
heading of "Item 1, Business--Regulations"; statements regarding the Company's
expectation with respect to the growth of e-commerce transaction processing
revenues and professional services revenues as a percentage of total revenue
under the heading "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview"; the Company's expectation with
respect to the decrease of Beyond.com's percentage of total revenues under the
heading "Item 7, Management's Discussion and Analysis
20
of Financial Condition and Results of Operations--Results of Operation--Years
Ended December 31, 1999 and 1998"; statements regarding (a) the Company's
belief that there is sufficient cash and investment balances to meet the
Company's working capital and other capital requirements for at least the next
twelve months, (b) the Company's expectation to continue to use cash to fund
expected operation losses and to continue to expand research and development,
sales and marketing and general and administrative activities, (c) the
Company's expectation to obtain additional equity or debt financing if there
capital resources are insufficient to fund the Company's future activities,
under the heading "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations -Liquidity and Capital Resources"; the
Company's intention to sublease its current facility through the expiration of
its lease agreement or terminate the lease with the lessor upon the completion
of its relocation under the heading "Item 8, Financial Statements and
Supplementary Data--Notes to Consolidated Financial Statements--Note 4--
Commitments"; statements regarding (a) the Company's intention to vigorously
defend against the patent infringement claims, (b) the Company's belief that
there are no claims or actions pending or threatened against the Company, the
ultimate disposition of which would have a material impact on the Company's
financial position or results of operations, under the heading "Item 8,
Financial Statements and Supplementary Data--Notes to Consolidated Financial
Statements--Note 8--Litigations and Contingencies". All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. It is important to note that the Company's
actual results could differ materially from those included in such forward-
looking statements. These cautionary statements should be considered in the
context of the risk factors listed below, as well as those disclosed from time
to time in the Company's Reports on Forms 10-Q and 8-K.
Additional risks and uncertainties that could cause actual results to differ
materially from those described herein include the following:
We Have a Limited Operating History and Are Subject to the Risks Encountered by
Early-Stage Companies
We commenced operations in March 1996. From March 1996 until December 1997,
we operated as a division of Beyond.com. In December 1997, we were incorporated
as a separate legal entity and our company was spun off from Beyond.com.
Accordingly, we have a very limited operating history, and our business and
prospects must be considered in light of the risks and uncertainties to which
early-stage companies in rapidly evolving markets such as e-commerce are
particularly exposed. These risks include:
. risks that the intense competition and rapid technological change in our
industry could adversely affect market acceptance of all of our services;
. risks that we may not be able to expand our systems to handle increased
traffic, resulting in slower response times and other difficulties in
providing services to our merchant customers;
. risks that we may not be able to fully utilize relationships with our
strategic partners and indirect sales channels; and
. risks that any fluctuations in our quarterly operating results will be
significant relative to our revenues.
These risks are discussed in more detail below. We cannot assure you that
our business strategy will be successful or that we will successfully address
these risks and the risks detailed below.
We Have a History of Losses, Expect Future Losses and Cannot Assure You that We
Will Achieve Profitability
Although our revenues have increased on a quarterly basis since 1997, we
have not achieved profitability and cannot be certain that we will realize
sufficient revenues to achieve profitability. We have incurred significant net
losses since our inception. We incurred net losses of $4.3 million in 1997,
$10.1 million in 1998 and $24.1 million in 1999. As of December 31, 1999, we
had incurred cumulative losses of $39.7 million. You
21
should not consider recent quarterly revenue growth as indicative of our future
performance. We do not expect to sustain similar levels of growth in future
periods. We have continued to increase our sales and marketing, network
infrastructure, product development and general and administrative expenses in
1999 and plan to continue to do so in 2000. As a result, we will need to
generate significantly higher revenues in order to achieve profitability. If we
do achieve profitability, we may not be able to sustain it.
The Expected Fluctuations of Our Quarterly Results Could Cause Our Stock Price
to Fluctuate or Decline
We expect that our quarterly operating results will fluctuate significantly
in the future based upon a number of factors, many of which are not within our
control. We plan to further increase our operating expenses in order to expand
our sales and marketing activities, build our network infrastructure and
broaden our service capabilities. We base our operating expenses on anticipated
market growth and our operating expenses are relatively fixed in the short
term. As a result, if our revenues are lower than we expect, our quarterly
operating results may not meet the expectations of public market analysts or
investors, which could cause the market price of our common stock to decline.
Our quarterly results may fluctuate in the future as a result of many
factors, including the following:
. changes in the number of transactions effected by our merchants,
especially as a result of seasonality, success of each merchant's
business, general economic conditions or regulatory requirements
restricting our merchants;
. our ability to attract new customers and to retain our existing
merchants;
. customer acceptance of our pricing model;
. our success in expanding our sales and marketing programs; and
. an interruption with one or more of our gateway processors and channel
partners;
. 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.
We Could Lose a Significant Portion of Our Business Because We Do Not Have a
Long-Term Contract with Our Largest Customer, Beyond.com
Revenues from services provided to Beyond.com accounted for 13.1% of our
revenues in 1999 and 23.7% in 1998. No other customer accounted for more than
10% of our revenues in 1999 or 1998. Any significant decrease in revenues from
Beyond.com could materially adversely affect our operating results. We have no
long-term contract with Beyond.com that requires it to continue to use any of
our services. Accordingly, Beyond.com could cease using all or part of our
services on short notice without penalty.
The Demand for Our Services Could Be Negatively Affected by a Reduced Growth of
E-commerce or Delays in the Development of the Internet Infrastructure
Sales of goods and services over the Internet do not currently represent a
significant portion of overall sales of goods and services. We depend on the
growing use and acceptance of the Internet as an effective medium of commerce
by merchants and customers in the United States and internationally. Rapid
growth in the use of and interest in the Internet is a relatively recent
development. In particular, sales of goods and services
22
over the Internet have developed more slowly outside of the United States. We
cannot be certain that acceptance and use of the Internet will continue to
develop or that a sufficiently broad base of merchants and consumers will
adopt, and continue to use, the Internet as a medium of commerce.
The emergence of the Internet as a commercial marketplace may occur more
slowly than anticipated for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. If the
number of Internet users or their use of Internet resources continues to grow,
it may overwhelm the existing Internet infrastructure. Delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity could also have a detrimental effect.
These factors could result in slower response times or adversely affect usage
of the Internet, resulting in lower numbers of e-commerce transactions and
lower demand for our services.
Potential System Failures and Lack of Capacity Issues Could Negatively Affect
Demand for Our Services
Our ability to deliver services to our merchants depends on the
uninterrupted operation of our e-commerce transaction processing systems. Our
systems and operations are vulnerable to damage or interruption from:
. earthquake, fire, flood and other natural disasters;
. power loss, telecommunications or data network failure, operator
negligence, improper operation by employees, physical and electronic
break-ins and similar events; and
. computer viruses.
Despite the fact that we have implemented redundant servers in 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.
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
23
the storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage our reputation and expose us to a risk
of loss or litigation and possible liability. Our security measures may not
prevent security breaches, and failure to prevent security breaches may disrupt
our operations.
The Intense Competition in Our Industry Could Reduce or Eliminate the Demand
for Our Services
The market for our services is intensely competitive and subject to rapid
technological change. We expect competition to intensify in the future. Our
primary source of competition comes from online merchants who develop custom
systems. These online merchants who have made large initial investments to
develop custom systems may be less likely to adopt an outsourced transaction
processing strategy. We also face competition from developers of other systems
for e-commerce transaction processing such as Clear Commerce, CyberCash,
Digital River, Hewlett-Packard (VeriFone), HNC Software, Open Market, PaylinX,
ShopNow.com and Signio (a subsidiary of VeriSign). In addition, other
companies, including financial services and credit companies such as First Data
Corporation, AT&T and GE Capital, may enter the market for our services. In the
future, we may also compete with large Internet-centric companies that derive a
significant portion of their revenues from e-commerce and may offer, or provide
a means for others to offer, e-commerce transaction services.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. Competition could seriously impede our ability to sell additional
services on terms favorable to us. Our current and potential competitors may
develop and market new technologies that render our existing or future services
obsolete, unmarketable or less competitive. For example, Microsoft and
CyberCash have each introduced electronic-wallet solutions, that if widely
adopted by consumers, may result in reduced demand by our merchants for our
fraud screening services. Our current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with other solution providers, thereby increasing the ability of their
services to address the needs of our prospective customers. Our current and
potential competitors may establish or strengthen cooperative relationships
with our current or future channel partners, thereby limiting our ability to
sell services through these channels. We expect that competitive pressures will
require the reduction of the prices of our services and reduce our market
share, either of which could materially and adversely affect our business,
results of operations or financial condition.
If We Lose Key Personnel or Are Unable to Attract and Retain Additional
Qualified Personnel We May Not be Able to Successfully Manage Our Business and
Achieve Our Objectives
We believe our future success will depend upon our ability to retain our key
management personnel, including William S. McKiernan, our Chief Executive
Officer, and other key members of management because of their experience and
knowledge regarding the development, special opportunities and challenges of
our business. None of our key employees is subject to an employment contract.
We may not be successful in attracting and retaining key employees in the
future.
Our future success and our ability to expand our operations will also depend
in large part on our ability to attract and retain additional qualified
marketing, sales and technical personnel. Competition for these types of
employees is intense due to the limited number of qualified professionals. We
have in the past experienced difficulty in recruiting qualified marketing,
sales, engineering and support personnel. Failure to attract and retain
personnel, particularly marketing, sales and technical personnel could make it
difficult for us to manage our business and meet our objectives.
Difficulties We May Encounter Managing Our Growth Could Adversely Affect Our
Results of Operations
We have experienced a period of rapid and substantial growth that has placed
and, if such growth continues, will continue to place a strain on our
administrative infrastructure. We have increased the number of our
24
employees from 45 employees at December 31, 1997 to 127 employees at December
31, 1998 and 228 employees at December 31, 1999. This expansion is placing a
significant strain on our managerial and financial resources.
During 1998, we expended significant time and resources in developing our
management information and control systems and our business plan which was
completed towards the end of 1998. 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 have 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 may need to add additional key personnel in the near future who
will also need to be integrated into our management team.
Our Market is Subject to Rapid Technological Change and to Compete, We Must
Continually Enhance Our Systems to Comply with Evolving Standards
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. The Internet and the e-commerce industry are
characterized by rapid technological change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render our technology and systems obsolete. Our success will depend, in
part, on our ability to both internally develop and license leading
technologies to enhance our existing services and develop new services. We must
continue to address the increasingly sophisticated and varied needs of our
merchants, and respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis. The development
of proprietary technology involves significant technical and business risks. We
may fail to develop new technologies effectively or to adapt our proprietary
technology and systems to merchant requirements or emerging industry standards.
If we are unable to adapt to changing market conditions, merchant requirements
or emerging industry standards, our business would be materially harmed.
Our Current and Prior Overlapping Board Members with Beyond.com May Create
Conflicts of Interests and Result in Actions Inconsistent with Stockholder
Interests.
In connection with our spin-off from Beyond.com in December 1997, we entered
into agreements with Beyond.com to define the ongoing relationship between the
two companies. At the time these agreements were negotiated, all of our
directors were also directors of Beyond.com and other members of our management
team were also executive officers of Beyond.com. As a result, these agreements
were not the result of arms' length negotiations between us and Beyond.com.
Further, although we and Beyond.com are engaged in different
25
businesses, the two companies currently have no policies to govern the pursuit
or allocation of corporate opportunities, in the event they arise. Our business
could be adversely affected if the overlapping board members of the two
companies, of which there are currently two, William S. McKiernan and Bert
Kolde, pursue Beyond.com's interests over ours either in the course of
transactions between the companies or where the same corporate opportunities
are available to both companies.
We May Not Be Able to Adequately Protect Our Proprietary Technology and May Be
Infringing Upon Third-Party Intellectual Property Rights
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights.
As part of our confidentiality procedures, we enter into non-disclosure
agreements with our employees. Despite these precautions, third parties could
copy or otherwise obtain and use our technology without authorization, or
develop similar technology independently. Effective protection of intellectual
property rights may be unavailable or limited in foreign countries. We cannot
assure you that the protection of our proprietary rights will be adequate or
that our competitors will not independently develop similar technology,
duplicate our services or design around any patents or other intellectual
property rights we hold.
We also cannot assure you that third parties will not claim our current or
future services infringe upon their rights. We have not conducted any search to
determine whether any of our services or technologies may be infringing upon
patent rights of third parties. As the number of services in our market
increases and functionalities increasingly overlap, companies such as ours may
become increasingly subject to infringement claims. In addition, these claims
also might require us to enter into royalty or license agreements. Any
infringement claims, with or without merit, could cause costly litigation that
could absorb significant management time. If required to do so, we may not be
able to obtain royalty or license agreements, or obtain them on terms
acceptable to us. See "Business--Intellectual Property" for more information
relating to protecting our intellectual property rights and risks relating to
claims of infringement upon the intellectual property of others.
We May Not Be Able to Secure Funding in the Future Necessary to Operate Our
Business as Planned
We require substantial working capital to fund our business. We have had
significant operating losses and negative cash flow from operations since
inception and expect this to continue for the foreseeable future. We expect to
use the net proceeds of our 1999 equity financings to continue investments in
service development, to expand sales and marketing activities, to fund product
development, to fund continued operations and potentially to make future
acquisitions. We believe that our existing capital resources, will be
sufficient to meet our capital requirements for at least the next twelve
months. However, our capital requirements depend on several factors, including
the rate of market acceptance of our services, the ability to expand our
merchant base, the growth of sales and marketing and other factors. If capital
requirements vary materially from those currently planned, we may require
additional financing sooner than anticipated. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our
stockholders will be reduced, and these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
Additional financing may not be available when needed on terms favorable to us
or at all. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures.
We May Become Subject to Government Regulation and Legal Uncertainties That
Would Adversely Affect Our Financial Results
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
export control laws and laws or regulations directly
26
applicable to e-commerce. However, due to the increasing usage of the Internet,
it is possible that a number of laws and regulations may be applicable or may
be adopted in the future with respect to conducting business over the Internet
covering issues such as:
. taxes;
. user privacy;
. pricing;
. content;
. right to access personal data;
. copyrights;
. distribution; and
. characteristics and quality of services.
For example, we believe that some of our services may require us to comply
with the Fair Credit Reporting Act. As a precaution, we are implementing
changes to our systems and processes so that we will be in compliance with the
act. Complying with this act requires us to provide information about personal
data stored by us or our merchants. Failure to comply with this act could
result in claims being made against us.
Furthermore, the growth and development of the market for e-commerce may
prompt more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. The adoption of
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for our services and
increase our cost of doing business.
The applicability of existing laws governing issues such as property
ownership, copyrights, encryption and other intellectual property issues,
taxation, libel, export or import matters and personal privacy to the Internet
is uncertain. The vast majority of laws were adopted prior to the broad
commercial use of the Internet and related technologies. As a result, they do
not contemplate or address the unique issues of the Internet and related
technologies. Changes to these laws intended to address these issues, including
some recently proposed changes in the United States regarding taxation and
encryption and in the European Union regarding contract formation and privacy,
could create uncertainty in the Internet marketplace and impose additional
costs and other burdens. This uncertainty, costs and burden could reduce demand
for our services or increase the cost of doing business due to increased costs
of litigation or increased service delivery costs.
Our International Business Exposes Us to Additional Foreign Risks
Services provided to merchants outside the United States accounted for 23.1%
and 9.0% of our revenues in 1999 and 1998, respectively. We intend to expand
our international presence in the future. Conducting business outside of the
United States is subject to additional risks that may affect our ability to
sell our services and result in reduced revenues, including:
. changes in regulatory requirements;
. reduced protection of intellectual property rights;
. evolving privacy laws in Europe;
. the burden of complying with a variety of foreign laws; and
. political or economic instability or constraints on international trade.
In addition, some software exports from the United States are subject to
export restrictions as a result of the encryption technology in that software
and we may become liable to the extent we violate these restrictions.
27
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.
We Intend to Pursue Strategic Acquisitions and Our Business Could Be
Materially Adversely Affected if We Fail to Adequately Integrate Acquired
Businesses
As part of our overall business strategy, we intend to pursue strategic
acquisitions of complementary businesses or technologies that would provide
additional service offerings, additional industry expertise, a broader client
base or an expanded geographic presence. From time to time, we have engaged in
discussions with third parties concerning potential acquisitions of product
lines, technologies and businesses. Any future acquisition could result in the
use of significant amounts of cash, potentially dilutive issuances of equity
securities, or the incurrence of debt or amortization expenses related to
goodwill and other intangible assets, any of which could materially adversely
affect our business, operating results and financial condition. In addition,
acquisitions involve numerous risks, including:
. difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
. the diversion of management's attention from other business concerns;
. risks of entering markets in which we have no or limited prior
experience; and
. the potential loss of key employees of the acquired company.
Existing Stockholders May Exert Control Over Us to the Detriment of Minority
Stockholders
At December 31, 1999, our officers, directors and principal stockholders
(i.e., greater than 5% stockholders) together control approximately 52.2% of
our outstanding common stock. As a result, these stockholders, if they act
together, are able to control our management and affairs and all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change in control of
CyberSource and might affect the market price of our common stock.
Our Stock Price May Fluctuate Substantially
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.
28
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 December 31, 1999, there are no shares of preferred stock outstanding.
However, because the rights and preferences of any series of preferred stock
may be set by the Board of Directors in its sole discretion without approval of
the holders of the common stock, the rights and preferences of this preferred
stock may be superior to those of the common stock. Accordingly, the rights of
the holders of common stock may be adversely affected.
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We provide our services to customers primarily in the United States and, to
a lesser extent, in Europe and elsewhere throughout the world. As a result, our
financial results could be affected by factors, such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. All
sales are currently made in U.S. Dollars or Pound Sterling. A strengthening of
the U.S. 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 cash equivalents and
short-term investments, which are primarily money market funds and commercial
paper, we have concluded that there is no material market risk exposure.
29
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Ernst & Young LLP Independent Auditors........................ 31
Consolidated Financial Statements
Consolidated Balance Sheets............................................. 32
Consolidated Statements of Operations................................... 33
Consolidated Statement of Redeemable Convertible Preferred Stock,
Division Equity and Stockholders' Equity (Net Capital Deficiency)...... 34
Consolidated Statements of Cash Flows................................... 35
Notes to Consolidated Financial Statements.............................. 36
30
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CyberSource Corporation
We have audited the accompanying consolidated balance sheets of CyberSource
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, redeemable convertible preferred stock, division
equity and stockholders' equity (net capital deficiency), and cash flows of
CyberSource Corporation and its predecessor division of Beyond.com Corporation
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CyberSource
Corporation at December 31, 1999 and 1998, and the consolidated results of
operations and cash flows of CyberSource Corporation and its predecessor
division of Beyond.com Corporation for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
January 17, 2000
31
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 71,653 $ 11,111
Short-term investments................................... 68,596 --
Accounts receivable, net of allowances of $282 and $229
at December 31, 1999 and 1998........................... 3,194 863
Prepaid expenses and other current assets................ 1,581 411
-------- --------
Total current assets................................... 145,024 12,385
Property and equipment, net................................ 8,002 2,300
Other noncurrent assets.................................... 748 290
-------- --------
Total assets........................................... $153,774 $ 14,975
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable......................................... $ 1,101 $ 531
Other accrued liabilities................................ 3,902 969
Deferred revenue......................................... 461 120
Current obligations under capital leases................. 661 211
Convertible note payable to an officer and stockholder... -- 3,000
-------- --------
Total current liabilities.............................. 6,125 4,831
Noncurrent obligations under capital leases................ 444 256
Commitments and contingencies
Redeemable convertible preferred stock:
Designated shares--None in 1999 and 24,037,372 in 1998
Issued and outstanding shares--None in 1999 and
16,957,061 in 1998...................................... -- 18,911
Stockholders' equity (net capital deficiency):
Convertible preferred stock, $0.001 par value:
Authorized shares--4,988,842 in 1999 and 25,000,000 in
1998................................................... -- --
Common stock, $0.001 par value:
Authorized shares--50,000,000 Issued and outstanding
shares--24,056,234 in 1999 and 5,406,536 in 1998........ 24 5
Additional paid-in capital................................. 182,429 1,199
Deferred compensation...................................... (654) (142)
Accumulated other comprehensive loss....................... (412) --
Accumulated deficit........................................ (34,182) (10,085)
-------- --------
Total stockholders' equity (net capital deficiency).... 147,205 (9,023)
-------- --------
Total liabilities and stockholders' equity (net capital
deficiency)........................................... $153,774 $ 14,975
======== ========
See accompanying notes.
32
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
Revenues......................................... $ 12,898 $ 3,384 $ 968
Cost of revenues................................. 10,835 3,471 324
-------- -------- -------
Gross profit (loss).............................. 2,063 (87) 644
Operating expenses:
Product development............................ 7,457 3,802 2,300
Sales and marketing............................ 14,552 4,184 1,988
General and administrative..................... 5,457 1,946 681
Deferred compensation amortization............. 524 18 --
-------- -------- -------
Total operating expenses..................... 27,990 9,950 4,969
-------- -------- -------
Loss from operations............................. (25,927) (10,037) (4,325)
Interest income.................................. 2,117 108 --
Interest expense................................. (287) (156) (13)
-------- -------- -------
Net loss......................................... $(24,097) $(10,085) $(4,338)
======== ======== =======
Basic and diluted net loss per share............. $ (1.70) $ (2.05)
======== ========
Shares used in computing basic and diluted net
loss per share.................................. 14,191 4,918
======== ========
Pro forma basic and diluted net loss per share... $ (1.25) $ (0.86)
======== ========
Shares used in computing pro forma basic and
diluted net loss per share...................... 19,335 11,740
======== ========
See accompanying notes.
33
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
DIVISION EQUITY AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(In thousands, except share amounts)
Redeemable
Convertible Accumulated
Preferred Stock Common Stock Additional Deferred Other Accumu-
--------------------- Divisional ----------------- Paid in Compen- Comprehensive lated
Shares Amount Equity Shares Amount Capital sation Loss Defiacit Total
----------- -------- ---------- ---------- ------ ---------- -------- ------------- -------- --------
Balance at
December 31,
1996............ -- -- $ 421 -- $ -- $ -- $ -- $ -- $ -- $ --
Funding provided
by Beyond.com
Corporation..... -- -- 7,051 -- -- -- -- -- -- --
Net loss and
comprehensive
net loss........ -- -- (4,338) -- -- -- -- -- -- --
Incorporation of
CyberSource and
issuance of
redeemable
convertible
preferred stock
and common stock
in December 1997
upon capital
stock dividend
from Beyond.com
Corporation..... 7,022,558 $ 2,097 (3,134) 4,535,000 5 1,032 -- -- -- 1,037
----------- -------- ------- ---------- ----- -------- ------- ------ -------- --------
Balance at
December 31,
1997............ 7,022,558 2,097 -- 4,535,000 5 1,032 -- -- -- 1,037
Issuance of
common stock
under stock
option plan..... -- -- -- 871,536 -- 7 -- -- -- 7
Issuance of
Series D
redeemable
convertible
preferred stock,
net of issuance
costs of $20.... 1,851,850 1,980 -- -- -- -- -- -- -- --
Issuance of
Series E
redeemable
convertible
preferred stock,
net of issuance
costs of $114... 8,082,653 14,516 -- -- -- -- -- -- -- --
Issuance of
warrants to Visa
and GE Capital.. -- 318 -- -- -- -- -- -- -- --
Deferred
compensation
related to stock
option grants... -- -- -- -- -- 160 (160) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 18 -- -- 18
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- (10,085) (10,085)
----------- -------- ------- ---------- ----- -------- ------- ------ -------- --------
Balance at
December 31,
1998............ 16,957,061 18,911 -- 5,406,536 5 1,199 (142) -- (10,085) (9,023)
Common shares
issued for
services........ -- -- -- 22,500 -- 81 -- -- -- 81
Issuance of
common stock
under stock
option plan..... -- -- -- 321,405 1 226 -- -- -- 227
Deferred
compensation
related to stock
option grants... -- -- -- -- -- 1,036 (1,036) -- -- --
Conversion of
note payable
from Officer and
Stockholder into
Series E
preferred
stock........... 1,657,458 3,000 -- -- -- -- -- -- -- --
Net exercise of
warrants........ 774,512 -- -- -- -- -- -- -- -- --
Conversion of
preferred stock
into common
stock upon
Initial Public
Offering........ (19,389,031) (21,911) -- 11,705,793 12 21,899 -- -- -- 21,911
Issuance of
common stock in
Initial Public
Offering, net of
issuance costs
of $4,419....... -- -- -- 4,600,000 4 46,181 -- -- -- 46,185
Issuance of
common stock in
Second Offering,
net of issuance
costs of
$6,193.......... -- -- -- 2,000,000 2 111,807 -- -- -- 111,809
Amortization of
deferred
compensation.... -- -- -- -- -- -- 524 -- -- 524
Unrealized loss
on short-term
investments..... -- -- -- -- -- -- -- (412) (412)
Net loss........ -- -- -- -- -- -- -- -- (24,097) (24,097)
--------
Comprehensive
loss............ -- -- -- -- -- -- -- -- -- (24,509)
----------- -------- ------- ---------- ----- -------- ------- ------ -------- --------
Balance at
December 31,
1999............ -- $ -- $ -- 24,056,234 $ 24 $182,429 $ (654) $ (412) $(34,182) $147,205
=========== ======== ======= ========== ===== ======== ======= ====== ======== ========
34
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
(In thousands)
Operating activities
Net loss.......................................... $(24,097) $(10,085) $(4,338)
Adjustments to reconcile net loss to net cash used
in operating activities:
Common stock issued for services rendered....... 81 -- --
Depreciation and amortization................... 2,467 778 325
Amortization of deferred compensation........... 524 18 --
Changes in assets and liabilities:
Accounts receivable........................... (2,331) (397) (431)
Prepaid expenses and other current assets..... (1,170) (293) (48)
Other noncurrent assets....................... (458) -- --
Accounts payable.............................. 570 262 147
Other accrued liabilities..................... 2,933 841 109
Deferred revenue.............................. 341 (30) 124
-------- -------- -------
Net cash used in operating activities............. (21,140) (8,906) (4,112)
Investing activities
Purchases of property and equipment............... (7,015) (1,419) (927)
Purchases of short-term investments............... (73,934) -- --
Sale of short-term investments.................... 4,926 -- --
-------- -------- -------
Net cash used in investing activities............. (76,023) (1,419) (927)
Financing activities
Proceeds from issuance of convertible note payable
to an officer and stockholder.................... -- 3,000 --
Principal payments on capital lease obligations... (516) (67) (12)
Financing provided by Beyond.com Corporation...... -- -- 7,051
Loan to Beyond.com Corporation.................... -- (400) --
Repayment of loan by Beyond.com Corporation....... -- 400 --
Proceeds from issuance of redeemable convertible
preferred stock, net............................. -- 16,496 --
Proceeds from Public Offerings.................... 157,994 -- --
Proceeds from exercise of stock options........... 227 7 --
-------- -------- -------
Net cash provided by financing activities......... 157,705 19,436 7,039
-------- -------- -------
Net increase in cash and cash equivalents......... 60,542 9,111 2,000
Cash and cash equivalents at beginning of period.. 11,111 2,000 --
-------- -------- -------
Cash and cash equivalents at end of period........ $ 71,653 $ 11,111 $ 2,000
======== ======== =======
Supplemental schedule of cash flow information
Interest paid..................................... $ 287 $ 156 $ --
Supplemental schedule of noncash financing activi-
ties
Property and equipment acquired under capital
leases........................................... $ 1,154 $ 480 $ 66
Issuance of warrants to Visa and GE Capital....... $ -- $ 318 $ --
Deferred compensation related to stock option
grants........................................... $ 1,036 $ 160 $ --
Conversion of note payable to an officer and
stockholder into redeemable convertible preferred
stock............................................ $ 3,000 $ -- $ --
Conversion of redeemable convertible preferred
stock into common stock.......................... $ 21,911 $ -- $ --
See accompanying notes.
35
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
CyberSource Corporation (the Company) was incorporated in the state of
Delaware on December 30, 1997. Prior to its incorporation, the Company operated
as a division of Beyond.com Corporation (Beyond.com). The Company is a
developer and provider of real time e-commerce transaction services.
Basis of Presentation
The accompanying consolidated financial statements reflect the financial
position and results of operations of the Company and its wholly owned
subsidiary and the predecessor division of Beyond.com. All intercompany
transactions and balances have been eliminated.
On December 31, 1997, Beyond.com transferred assets and liabilities to its
wholly owned subsidiary, CyberSource Corporation. Upon this transfer,
Beyond.com distributed capital stock in the form of a dividend to all existing
stockholders of Beyond.com on a pro rata basis such that the stockholders of
the Company were the same as the stockholders of Beyond.com at the time of the
distribution (the Spin-off). The accompanying statements of operations and
stockholders' equity for fiscal 1997 reflect the operations of the Company as a
division of Beyond.com through December 31, 1997.
The statements of operations for fiscal 1997 include all revenue and costs
directly attributable to the Company, including a corporate allocation of the
costs of facilities, salaries, and employee benefits. Additionally, incremental
corporate administration, finance, and management costs were allocated to the
Company. See Note 7.
All of the allocations reflected in the 1997 financial statements are based
on assumptions that management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs that would have resulted if the Company had been operated on a stand-
alone basis in fiscal 1997 nor are they necessarily indicative of future costs
to support the operations of the Company.
Foreign Currency Translation
The financial statements of the Company's non-U.S. subsidiary are translated
into U.S. dollars in accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation." Assets and liabilities of the
Company's subsidiary are translated at the rates of exchange at the end of the
period. Revenues and expenses are translated using the average exchange rates
in effect during the period. Gains and losses from foreign currency translation
were not material through December 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from e-commerce service monthly transaction
processing fees, support service fees, professional services, and digital
product rights management fees. Individual transactions, monthly
36
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
transaction revenues, and digital product rights management fees are recognized
in the period in which the transactions occur. Support service fees and
professional services are recognized when the services are provided and the
related costs are incurred. For the years ended December 31, 1999 and 1998,
Beyond.com, a related party, accounted for 13.1% and 23.7% of revenues,
respectively. There were no customers which accounted for greater than 10% of
revenues in fiscal 1997.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an original
maturity from the date of purchase of three months or less to be cash
equivalents. As of December 31, 1999 and 1998, cash equivalents consist
primarily of investments in money market funds. To date, the Company has not
experienced losses on any of its investments.
Short-term investments are classified as available-for-sale and are carried
at fair market value. Short-term investments are comprised of commercial paper
with an original maturity greater than three months and less than one year.
Unrealized losses on short-term investments, which represents the difference
between the fair market value and the amortized cost, are approximately
$412,000 as of December 31, 1999 and are included in accumulated other
comprehensive loss. There were no realized gains or losses from the sale of
short-term investments during fiscal 1999.
Accounts Receivable and Concentration of Credit Risk
At December 31, 1999 and 1998, 11% and 13%, respectively, of accounts
receivable are due from Beyond.com. At December 31, 1999 and 1998, accounts
receivable due from foreign customers are 11% and 6%, respectively. The Company
generally does not require collateral. The Company maintains allowances for
potential credit losses.
Property and Equipment
Property and equipment are stated at cost and are depreciated on a straight-
line basis over estimated useful lives of three years. Leasehold improvements
are amortized on a straight-line basis over the shorter of the lease terms or
the estimated useful lives.
Property and equipment consist of the following (in thousands):
December 31,
--------------
1999 1998
------- ------
Computer equipment and software.............................. $10,195 $2,916
Furniture and fixtures....................................... 647 272
Office equipment............................................. 405 116
Leasehold improvements....................................... 370 144
------- ------
11,617 3,448
Less accumulated depreciation and amortization............... 3,615 1,148
------- ------
$ 8,002 $2,300
======= ======
37
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Product Development
Product development expenditures are charged to operations as incurred.
Advertising Expense
The cost of advertising is recorded as an expense when incurred. Advertising
costs were approximately $3,440,000 and $32,000 during the years ended December
31, 1999 and 1998, respectively.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and
related interpretations in accounting for its employee stock options because
the alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Net Loss Per Share and Pro Forma Net Loss Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," basic and diluted net loss per share has been computed
using the weighted average number of shares of common stock outstanding during
the period. Potentially dilutive securities have been excluded from the
computation as their effect is antidilutive. Because the Company was a division
of Beyond.com through December 31, 1997 and had no outstanding common or
preferred stock, there is no earnings or loss per share presented for 1997.
Pro forma basic and diluted net loss per share is as follows (in thousands,
except per share amounts):
Year Ended December 31,
------------------------
1999 1998
----------- -----------
Net loss.......................................... $ (24,097) $ (10,085)
=========== ===========
Shares used in computing basic and diluted net
loss per share................................... 14,191 4,918
Adjusted to reflect the effect of the assumed
conversion of redeemable convertible preferred
stock from the date of issuance.................. 5,144 6,822
----------- -----------
Weighted average shares used in computing pro
forma basic and diluted net loss per share....... 19,335 11,740
=========== ===========
Pro forma basic and diluted net loss per share.... $ (1.25) $ (0.86)
=========== ===========
If the Company had reported net income for the year ended December 31, 1999,
diluted earnings per share would have included the shares used in the
computation of net loss per share as well as additional common equivalent
shares related to outstanding options to purchase approximately 3,276,767
shares of common stock at December 31, 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
38
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
converted" method. If the Company had reported net income for the year ended
December 31, 1998, diluted earnings per share would have included additional
common equivalent shares related to approximately 1,001,000 outstanding options
and 1,527,000 shares issuable on conversion of the convertible note payable and
exercise of the outstanding warrants at December 31, 1998.
Income Taxes
Income taxes are calculated under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
SFAS 109, the liability method is used in accounting for income taxes, which
includes the effects of temporary differences between financial and taxable
amounts of assets and liabilities.
Comprehensive Income
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities, which were previously
reported separately in stockholders' equity, to be included in other
comprehensive income. Comprehensive income consists of net income and other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.
New 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 issued Statement of
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). The Company does not believe that the adoption of SAB 101 will materially
change its financial position or results of operations.
2. Balance Sheet Detail
Other accrued liabilities consist of the following (in thousands):
December
31,
-----------
1999 1998
------ ----
Employee benefits and related expenses.......................... $ 833 $310
Bonuses and commissions......................................... 508 101
Marketing expenses.............................................. 369 --
Employee stock purchase plan contributions...................... 313 --
Other liabilities............................................... 1,879 558
------ ----
Total other accrued liabilities............................... $3,902 $969
====== ====
3. Segment Information
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available that is evaluated by the
chief operating decision maker or decision making group to
39
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
make decisions about how to allocate resources and assess performance. The
Company's chief operating decision maker is the Chief Executive Officer.
Through December 31, 1999, the Company viewed its operations as principally two
segments, e-commerce transaction services (ECTS) and digital product sales and
rights management (DPR) for software and other digital products and manages the
business based on the revenues of these segments. Additionally, revenues from
outside the United States were 23% of revenues for the year ended December 31,
1999. In 1998 and 1997 the Company derived less than 10% of its revenues from
outside the United States.
The following tables presents revenues by the Company's two business units
for the years ended December 31, 1999, 1998 and 1997. There were no
interbusiness unit sales or transfers. The Company does not report operating
expenses, depreciation and amortization, interest income (expense), income
taxes, capital expenditures, or identifiable assets by its industry segments to
the Chief Executive Officer. The Company's Chief Executive Officer reviews the
revenues from each of the Company's reportable segments, and all of the
Company's expenses are managed by and reported to the Chief Executive Officer
on a consolidated basis. Revenues are as follows (in thousands):
December 31,
-------------------
1999 1998 1997
------- ------ ----
ETCS..................................................... $12,031 $2,708 $770
DPR...................................................... 867 676 198
------- ------ ----
Total.................................................. $12,898 $3,384 $968
======= ====== ====
4. Commitments
The Company leases its primary facility and equipment under noncancelable
operating leases. The lease agreement for the facility occupied by the Company
during 1999 expires periodically through 2001. In November 1999, the Company
entered into a lease agreement to occupy a new facility commencing January 2000
which expires in December 2006. The Company is planning to relocate to the new
facility in April 2000. Upon the completion of its relocation, the Company
intends to sublease its current facility through the expiration of its lease
agreement or terminate the lease with the lessor. Rental expense was
approximately $1,092,000, $459,000, and $144,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
The Company leases equipment under noncancelable lease agreements that are
accounted for as capital leases. Equipment under capital lease arrangements,
which is included in property and equipment, aggregated approximately
$1,699,000 and $546,000 at December 31, 1999 and 1998, respectively. Related
accumulated amortization was approximately $524,000 and $69,000 at December 31,
1999 and 1998, respectively. Amortization expense related to assets under
capital leases is included with depreciation expense.
40
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under noncancelable operating leases and
capital leases at December 31, 1999 are as follows (in thousands):
Operating Capital
Leases Leases
--------- -------
2000....................................................... $ 3,504 $ 758
2001....................................................... 2,419 406
2002....................................................... 2,419 62
2003....................................................... 2,506 --
2004 and thereafter........................................ 8,252 --
------- ------
Total minimum payments................................... $19,100 $1,226
=======
Less amount representing interest.......................... 121
------
1,105
Less current portion....................................... 661
------
$ 444
======
5. Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock at December 31, 1998 is as follows:
Designated Outstanding
Shares Shares
---------- -----------
Series A.............................................. 1,985,520 1,985,520
Series B.............................................. 2,500,000 2,037,038
Series C.............................................. 3,000,000 3,000,000
Sereis D.............................................. 1,851,852 1,851,850
Series E.............................................. 14,700,000 8,082,653
---------- ----------
Total............................................... 24,037,372 16,957,061
========== ==========
In June 1999, the Company completed an initial public offering and all
outstanding shares of the Company's preferred stock, including preferred stock
issued in June 1999 upon conversion of a convertible note and exercise of
warrants, were converted into 11,705,793 shares of common stock.
During 1998, in connection with the issuance of Series E preferred stock and
certain strategic marketing agreements with Visa and GE Capital, the Company
issued warrants to purchase 552,486, 442,910, and 401,243 shares of the
Company's Series E preferred stock at exercise prices of $1.81, $3.00, and
$4.00 per share, respectively. The warrants were fully exercisable upon the
date of issuance and expired three years from the original date of the
marketing services agreements. Preferred shares issued upon exercise of the
warrants are non-forfeitable.
The Company determined the fair value of the warrants at the time of
issuance to be $318,000 and recorded this amount as a cost of the strategic
marketing agreements. The determined value of the warrants was credited to
redeemable convertible preferred stock and is being amortized ratably over the
three year term of the strategic marketing agreements. The Company amortized
$79,000 and $28,000 of the value of the warrants to sales and marketing expense
in 1999 and 1998, respectively. In June 1999, all warrants were exercised
through a cashless net exercise into 774,512 shares of preferred stock.
41
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity
Common Shares
The Company is authorized to issue 50,000,000 shares of common stock. The
holders of common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders of the Company. Subject to the preferences
that may be applicable to any outstanding shares of preferred stock, the
holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors.
On April 30, 1999, the Company's Board of Directors approved a 1 for 2
reverse split of the Company's outstanding common stock, and on June 21, 1999,
the Company's stockholders approved the reverse split. The par value of the
common stock and the authorized shares of common stock were not adjusted as a
result of the reverse split. The conversion ratios of each series of preferred
stock were adjusted accordingly. The stock split is reflected in the
accompanying financial statements and footnotes on a retroactive basis for all
periods presented.
The Company completed its IPO on June 28, 1999. A total of 4,600,000 shares
of common stock was sold by the Company at a price of $11.00 per share. The
net proceeds to the Company were approximately $46.2 million after deducting
the underwriters discount and offering expenses.
The Company completed a second offering on November 10, 1999. A total of
2,000,000 shares of common stock was sold by the Company at a price of $59.00
per share. The net proceeds to the Company were approximately $111.8 million
after deducting the underwriters discount and offering expenses.
The Company has reserved shares of common stock for future issuance at
December 31, 1999 as follows:
1998 and 1999 Stock Option Plans:
Options outstanding............................................... 3,276,767
Options available for future grants............................... 1,030,292
1999 Employee Stock Purchase Plan--shares available for future
purchase........................................................... 500,000
---------
4,807,059
=========
Stock Options
In conjunction with the Spin-off of the Company on December 31, 1997,
employees of the Company, immediately following the Spin-off, maintained their
outstanding exercisable stock options in Beyond.com and in March 1998 were
granted additional incentive stock options in the Company. Employees of
Beyond.com were granted additional stock options in the Company in March 1998
based on the extent that the employees' original Beyond.com options were
exercisable on the date of the Spin-off. The exercise prices of the original
Beyond.com option grants and the additional Company stock option grants were
adjusted to reflect the allocation of the fair market value per share price
between the Company's and Beyond.com's common stock at December 31, 1997. The
adjustments to these options resulted in nonstapled options to the employees
of each entity and were accounted for and in compliance with the guidelines in
Emerging Issues Task Force Issue No. 90-9, and therefore, no compensation
expense has been recorded.
In March 1998, the Company adopted its 1998 Stock Option Plan (the 1998
Option Plan). There are 1,900,000 shares of common stock authorized for
issuance under the 1998 Option Plan. The 1998 Option Plan provides for the
issuance of common stock and the granting of options to employees, officers,
directors, consultants, independent contractors, and advisors of the Company.
The exercise price of a nonqualifying stock
42
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
option and an incentive stock option shall not be less than 85% and 100%,
respectively, of the fair value of the underlying shares on the date of grant.
Options granted under the 1998 Option Plan generally become exercisable over
five years at the rate of 20% per year from the grant date.
In January 1999, the Company adopted its 1999 Stock Option Plan (the 1999
Option Plan). The Company has reserved 2,500,000 shares of common stock for
issuance under the 1999 Option Plan. The provisions of the 1999 Plan are
similar to those of the 1998 Option Plan.
In October 1999, the Company adopted the 1999 Nonqualified Stock Option Plan
(the 1999 Nonqualified Option Plan). The Company has reserved 1,100,000 shares
of common stock for issuance under the 1999 Nonqualified Option Plan. The 1999
Nonqualified Option Plan provides for the granting of non-qualified stock
options to employees, consultants and directors. The other provisions of the
1999 Nonqualified Option Plan are similar to those of the 1999 and 1998 Stock
Option Plans. In March 2000, the Company reserved an additional 637,500 shares
of common stock for issuance under the 1999 Nonqualified Option Plan.
The following table summarizes information about the Company's stock option
activity under the 1998 Option Plan, the 1999 Option Plan and the 1999
Nonqualified Option Plan. Options granted prior to December 31, 1997 were
originated from options granted by Beyond.com and were granted by the Company
immediately following the adoption of the 1998 Option Plan.
Options
Outstanding
-------------------
Weighted
Average
Shares Number Of Exercise
Available Shares Price
---------- --------- --------
Shares reserved............................... 1,900,000 -- $ --
Option granted based upon Beyond.com option
grants prior to Spin-off..................... (1,227,183) 1,227,183 $ 0.16
Options granted............................... (679,575) 679,575 $ 0.47
Options exercised............................. -- (871,536) $ 0.01
Options canceled.............................. 34,521 (34,521) $ 0.38
---------- --------- ------
Balance at December 31, 1998.................. 27,763 1,000,701 $ 0.31
Additional shares reserved.................... 3,600,000 -- $ --
Options granted............................... (2,884,400) 2,884,400 $12.92
Options exercised............................. -- (321,405) $ 0.70
Options canceled.............................. 286,929 (286,929) $ 5.22
---------- --------- ------
Balance at December 31, 1999.................. 1,030,292 3,276,767 $10.95
========== ========= ======
In connection with certain stock options granted in 1999 and 1998, the
Company recorded deferred compensation for the estimated difference between the
exercise price of the options and the deemed fair value of $1,036,000, and
$160,000, respectively, which is being amortized on a graded method over the
four-year vesting period of the options. In fiscal 1999 and 1998, $524,000 and
$18,000 of this amount was amortized to compensation expense.
43
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options outstanding at
December 31, 1999:
Weighted Number of
Weighed Average Options Weighted
Number of Average Remaining Exercisable Average
Options Exercise Contractual Upon Exercise
Exercise Price Outstanding Price Life (Years) Issuance Price
-------------- ----------- -------- ------------ ----------- --------
$0.007--$0.20 239,873 $ 0.08 8.21 86,563 $0.05
$0.54 346,869 $ 0.54 8.68 74,937 $0.54
$3.62 1,208,975 $ 3.62 9.11 50,516 $3.62
$5.72--$7.20 193,750 $ 5.96 9.26 -- $ --
$9.00 743,000 $ 9.00 9.45 20,000 $ --
$22.44--$30.00 130,800 $25.60 9.59 -- $ --
$32.00--$66.25 413,500 $48.59 9.82 7,500 $ --
--------- -------
3,276,767 $10.95 239,516 $1.07
========= =======
At December 31, 1998 and 1997, 139,378 and 828,640 options were exercisable
at a weighted average exercise price of $0.06 and $0.004, respectively.
Employee Stock Purchase Plan
In June 1999, the Company's board of directors and stockholders adopted its
1999 Employee Stock Purchase Plan and reserved 500,000 shares of common stock
for issuance under this plan. In accordance with Section 423 of the Internal
Revenue Code, this plan permits eligible employees to authorize payroll
deductions of up to 10% of their base compensation to purchase shares of the
Company's common stock at the lower of 85% of the fair market value of the
common stock on the first day of the offering period or the purchase date. No
shares have been issued under this plan as of December 31, 1999.
Stock-Based Compensation
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using the black
scholes method in 1999 and the minimum value method in 1998 and 1997 with the
following weighted average assumptions: a risk-free interest rate of 5.55%,
5.15% and 6.16% for 1999, 1998, and 1997, respectively; no dividend yield; a
volatility factor of the expected market price of the Company's common stock of
1.13 for 1999 and no volatility factor for 1998 or 1997; and a weighted average
expected life of the option of four years.
44
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Had compensation cost
been determined using the fair value at the grant date for options granted
calculated using the black scholes or the minimum value method of SFAS 123, the
Company's actual net loss would have been increased to the pro forma amounts
indicated below:
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
Pro forma net loss (in thousands).............. $(26,707) $(10,088) $(4,339)
Pro forma and diluted net loss per share....... $ (1.88) $ (2.05)
The weighted average fair value of options granted, which is the value
assigned to the options under SFAS 123, was $2.51, $0.08 and $0.02 per share
for options granted during 1999, 1998 and 1997, respectively.
The pro forma impact of options on the net loss for the years ended December
31, 1999, 1998 and 1997 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of options
vesting as well as the impact of multiple years of stock option grants.
7. Related Party Transactions
Funding Prior to Spin-off
Through December 31, 1997, the Company utilized Beyond.com's centralized
cash management services and processes related to receivables, payables,
payroll, and other activities. Through December 31, 1997, the Company's net
cash requirements were funded by Beyond.com. Net financing provided by
Beyond.com to the Company in 1997 was approximately $7,051,000 including
funding related to expenditures for operations and investing activities and
corporate services provided, as described below. There were no intercompany
transfers and no amounts were paid to Beyond.com by the Company in repayment of
the financing. Through the date of the Spin-off, this amount was included in
division equity. The average balance financed by Beyond.com during fiscal 1997,
which did not bear interest, was approximately $6,000,000.
Corporate Services
In accordance with Staff Accounting Bulletin No. 55, additional allocations
have been reflected in these financial statements for 1997. These expenses have
included corporate communications, management, compensation and benefits
administration, payroll, accounts payable, income tax compliance, and other
administration and finance overhead. Allocations and charges were based on
either a direct cost pass-through for incremental corporate administration,
finance and management costs and a percentage allocation of costs for other
services provided based on factors such as net sales, headcount, and relative
expenditure levels. Such allocations and corporate charges totaled $688,500 for
the year ended December 31, 1997.
Management believes that the basis used for allocating corporate services is
reasonable. However, the terms of these transactions may differ from those that
would result from transactions among unrelated parties. The CEO of the Company
is Chairman of the Board of Beyond.com, and the companies also have one other
member of their Board of Directors in common. Pursuant to the terms of an
agreement entered into in
45
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
connection with the Spin-off from Beyond.com, the Company provides services to
Beyond.com on a nonexclusive basis. During 1999 and 1998, the Company recorded
approximately $1,687,000 and $801,000, respectively, of revenues related to
these services. As of December 31, 1999 and December 31, 1998, amounts
receivable from Beyond.com were approximately $354,000 and $147,000,
respectively.
In July 1999, the Company purchased a software license from Beyond.com for
$600,000 which is being amortized to cost of revenues over two years.
Note Receivable Issued to Beyond.com
On March 18, 1998, the Company loaned $400,000 to Beyond.com. The note was
repaid as of June 1998.
Convertible Note Payable to Officer and Stockholder
In August 1998, the Company issued an unsecured convertible one-year
promissory note to an officer and stockholder from whom it had borrowed an
aggregate of $3,000,000 in July 1998. The note, which was amended in October
1998, was payable in full on October 21, 1999 and bore interest at a rate of
10% per annum. The note converted into 1,657,458 shares of Series E redeemable
convertible preferred stock in June 1999, prior to the completion of the
Company's initial public offering.
8. Litigation and Contingencies
A former Vice President of Product Management filed a lawsuit against the
Company in the Superior Court of California in Santa Clara County on April 8,
1999 seeking monetary and equitable relief. The plaintiff alleged several
causes of action, including wrongful termination, defamation, fraud, and unfair
business practices arising out of her three month employment with the Company.
On November 2, 1999, the lawsuit was settled for an immaterial amount.
In November 1999, a lawsuit was filed against the Company alleging that the
company's payment services infringe upon two patents to certain automated
network payment, purchase and processing systems held by the plaintiff. While
there can be no assurances as to the outcome of this litigation, the Company
has obtained an opinion of patent counsel that the Company's payment services
do not infringe upon one of the plaintiff's patents and believes, based on
consultation with patent counsel, that its payment services do not infringe
upon the other patent. The Company intends to vigorously defend against the
claims asserted.
From time to time, the Company may be involved in other litigation relating
to claims arising out of its ordinary course of business. The Company believes
that there are no claims or actions pending or threatened against the Company,
the ultimate disposition of which would have a material impact on the Company's
financial position or results of operations.
9. Income Taxes
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $26,500,000 and $27,200,000, respectively.
As of December 31, 1999, the Company also had federal and state research credit
carryforwards of approximately $460,000 and $240,000, respectively.
The net operating loss and credit carryforwards will expire at various dates
beginning in 2006 through 2019, if not utilized. The utilization of the net
operating losses and credits may be subject to a substantial annual limitation
due to the "change in ownership" provisions of the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
46
CYBERSOURCE CORPORATION
and its predecessor division of Beyond.com Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net deferred tax asset has been fully offset by a valuation allowance.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes at December 31, are as follows (in thousands):
Deferred tax assets:
1999 1998
------------ -----------
Net operating loss carryforwards.................... $ 10,800,000 $ 3,400,000
Research credit carryforwards....................... 700,000 200,000
Other, net.......................................... 1,700,000 300,000
------------ -----------
Net deferred tax assets............................. $ 13,200,000 $ 3,900,000
Valuation allowance................................. $(13,200,000) $(3,900,000)
============ ===========
Net deferred tax assets............................. $ -- $ --
============ ===========
Under SFAS 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Based upon the weight of
available evidence, which includes the Company's historical operating
performance, the reported net losses in 1999 and 1998, and the uncertainties
regarding future results of operations of the Company, the Company has provided
a full valuation allowance against its net deferred tax assets as it is not
more likely than not that the deferred tax assets will be realized. The
valuation allowance increased by $9,300,000 during 1999 and increased by
$3,900,000 during 1998.
10. Subsequent Event
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, in exchange for 1,554,431 shares of the
Company's common stock. The business combination is intended to be accounted
for as a pooling of interests.
The following related results of operations would have been reflected if the
acquisition had occurred prior to December 31, 1999 (unaudited):
1999 1998
-------- --------
(in thousands)
Revenues................................................. $ 12,931 $ 3,384
Net loss................................................. $(29,845) $(10,247)
Net loss per share....................................... $ (1.95) $ (2.08)
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 eCommerce transaction services to the Japanese
market. The Company will maintain a majority controlling interest in
CyberSource K.K., subject to certain veto rights granted to the partners until
CyberSource K.K. achieves at least $2 million in quarterly revenue.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
47
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM S-8
(a) 1. Financial Statements
The following documents are filed as part of this Report:
Report of Ernst & Young LLP Independent Auditors........................ 31
Consolidated Balance Sheets............................................. 32
Consolidated Statements of Operations................................... 33
Consolidated Statement of Redeemable Convertible Preferred Stock,
Division Equity and Stockholders' Equity (Net Capital Deficiency)...... 34
Consolidated Statements of Cash Flows................................... 35
Notes to Consolidated Financial Statements.............................. 36
2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts is listed on page 48 of this
Annual Report on Form 10-K. All other schedules are omitted because they are
not applicable or the required information is shown in the Financial Statements
or the notes thereto.
3. Index to Exhibits
See Index to Exhibits on page 29.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of the fiscal year ended December 31, 1999.
48
CYBERSOURCE CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
December 31, 1997, 1998 and 1999
(In thousands)
Balance at Amounts Charged
beginning of to Revenue, Costs, Write-offs and Balance at
year or Expenses Recoveries End of Year
------------ ------------------ -------------- -----------
1997
Allowance for Doubtful
Accounts............. $-- $332 $-- $332
1998
Allowance for Doubtful
Accounts............. $332 $193 $296 $229
1999
Allowance for Doubtful
Accounts............. $229 $367 $314 $282
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in San Jose,
California on the 30th day of March, 2000.
CYBERSOURCE CORPORATION
/s/ William S. McKiernan
By: _________________________________
William S. McKiernan
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William S. McKiernan and Charles E. Noreen, and
each of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ William S. McKiernan Chief Executive Officer March 30, 2000
______________________________________
William S. McKiernan
/s/ Charles E. Noreen, Jr. Vice President of Finance March 30, 2000
______________________________________ and Chief Financial
Charles E. Noreen, Jr. Officer
/s/ Bert Kolde Director March 30, 2000
______________________________________
Bert Kolde
/s/ Linda Fayne Levinson Director March 30, 2000
______________________________________
Linda Fayne Levinson
/s/ Steven P. Novak Director March 30, 2000
______________________________________
Steven P. Novak
/s/ Richard Scudellari Director March 30, 2000
______________________________________
Richard Scudellari
50
EXHIBIT INDEX
Exhibit
Number Document
------- --------
3.1* Certificate of Incorporation of the Registrant, as amended.
3.2* Bylaws of the Registrant, as amended.
4.1 Reference is made to Exhibits 3.1 and 3.2.
Form of Indemnification Agreement between the Registrant and each
10.1*+ of its directors and officers.
10.2*+ 1998 Stock Option Plan.
10.3*+ 1999 Stock Option Plan.
Standard Office Lease dated August 20, 1996 by and between
California State Automobile Association Inter-Insurance Bureau as
10.4* Landlord and CyberSource Corporation as Tenant.
First Amendment to Lease dated October 20, 1997 by and between
California State Association Inter-Insurance Bureau as Landlord and
10.5* CyberSource Corporation as Tenant.
Assignment of Standard Office Lease dated December 31, 1997 by and
between CyberSource Corporation as Assignor and Internet Commerce
10.6* Services Corporation as Assignee.
Sublease dated July 1, 1998 by and between MultiGen Inc. of
10.7* California as Sublessor and CyberSource of California as Sublessee.
Second Amendment to Lease dated October 30, 1998 by and between
California State Automobile Association Inter-Insurance Bureau as
10.8* Landlord and CyberSource Corporation as Tenant.
Conveyance Agreement dated December 31, 1997 by and between
10.9*x CyberSource Corporation and Internet Commerce Service Corporation.
Amended and Restated Inter-Company Cross License Agreement dated
May 19, 1998 by and between Internet Commerce Services Corporation
10.10*x and software.net Corporation.
Internet Commerce Services Agreement dated April 23, 1998 by and
between Internet Commerce Services Corporation and software.net
10.11*x Corporation.
Amended and Restated Investors' Rights Agreement dated October 21,
10.12* 1998.
Amended and Restated Convertible Promissory Note, dated October 21,
10.13* 1998.
10.14*+ 1999 Employee Stock Purchase Plan.
Development and Marketing Agreement dated July 26, 1999 by and
10.15**x between CyberSource Corporation and VISA U.S.A., Inc.
CyberSource Internet Commerce Services Agreement dated May 1, 1999
10.16**x by and between CyberSource Corporation and Beyond.com.
10.17**x 1999 Nonqualified Stock Option Plan.
Software License Agreement dated June 30, 1999 by and between
10.18**x CyberSource Corporation and Beyond.com Corporation.
Lease Agreement dated November 3, 1999 by and between Shoreline
10.19 Investments V and CyberSource Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Powers of Attorney. Reference is made to Page 50.
27.1 Financial Data Schedule
51
- --------
* Previously filed as an exhibit, bearing the same number, to the Registrant's
registration statement on Form S-1 (No. 333-77565)
** Previously filed as an exhibit, bearing the same number, to the Registrant's
registration statement on Form S-1 (No. 333-89337).
x Confidential treatment granted as to portions of this exhibit.
+ Management contract or compensation plan, contract or arrangement.
52