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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
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, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
________________
CYBERSOURCE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 7374 77-0472961
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification Number)
Organization) Code Number)
1295 Charleston Road
Mountain View, California 94043
(650) 965-6000
(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
________________
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 16, 2001 was approximately $73.8
million (based on a closing sale price of $2.3125 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 16, 2001 was 35,163,502.
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PART I
ITEM 1: BUSINESS
Overview
CyberSource Corporation is a leading developer and provider of online
commerce transaction processing services, software and consulting expertise. Our
solutions include those for payment, risk management systems, tax, stored value
and delivery assurance. Businesses engage CyberSource to enhance online commerce
transaction efficiency across multiple business units with varying processing
requirements.
Industry
During 2000, the market for online commerce infrastructure products and
services changed significantly. The requirements for success changed from
enabling Internet businesses to sell online, to enabling traditional businesses
to implement online commerce transaction processing capabilities throughout
multiple sales channels, i.e., multiple business units within the organization
with varying processing requirements: Internet, call center, Interactive Voice
Response Units, kiosks, point-of-sale, etc. Companies that conducted business
exclusively on the Internet originally fueled demand for online commerce
infrastructure. Traditional businesses began leveraging business operations
across multiple sales channels to reclaim customers, demonstrating both the
power, and challenges, of diversified online commerce operations.
While CyberSource was born as a result of the growth of Internet commerce,
our business success is not tied to just companies doing business exclusively on
the Internet. Our value is providing products and services that enable and
increase online commerce transaction efficiency for companies that conduct
business exclusively on the Internet as well as for traditional companies. In
fact, the challenges and complexities of integrating multiple sales channels
serve to increase the need for CyberSource solutions and strengthen our value
proposition in the eyes of traditional businesses.
To satisfactorily serve customers, businesses with multiple sales
channels must unify the customer experience and streamline online commerce
operations. This can require implementation and consolidation of online commerce
transaction infrastructure (payment systems, risk management systems, tax
systems, stored value systems and reporting capabilities) across the multiple
sales channels. Further, these transaction systems must integrate with internal
business systems and processes unique to each enterprise function, including
finance, customer service, sales and marketing, administration and distribution.
This complex, integrated environment presents significant business opportunities
for companies such as CyberSource.
The CyberSource Solution
We are a leading developer and provider of online commerce transaction
processing services, software and consulting expertise. Our offerings are
designed for medium and large enterprise customers. Our solutions include on-
site or outsourced systems to support electronic payment, risk management,
stored value (gift certificates and promotional incentive programs), tax
calculation, address correction and standardization and export compliance. Key
benefits of our solutions include:
. Faster time-to-market and operating flexibility. Our solutions are based
on transaction services, software and professional services. They can be
managed in-house or outsourced. Customers choose the strategy that best
fits their business strategy, skills and resources. Interfaces to our
software and services come pre-configured with popular commerce server,
customer relationship management and enterprise resource planning
applications, thus decreasing development time.
. Support for Multiple Sales Channels. Our solutions are designed to
support online commerce transaction processing across multiple sales
channels, including Internet, call center, Interactive Voice Response
Units, kiosks and point-of-sale systems. Customers can reduce operating
expense and improve efficiencies by integrating and consolidating online
commerce infrastructure based on CyberSource solutions and consulting
expertise.
2
. Support for Multiple Platform. Online commerce infrastructure impacts
nearly every business system and function, and many of these systems
operate using different technology platforms. CyberSource solutions are
designed to operate within many technology environments, thus providing
flexibility to integrate commerce infrastructure across business
functions and evolve with changes in operating platforms. Supported
environments include Unix (Sun Solaris, HP UX, IBM AIX, SCO), NT, Linux,
and Java. Pre-configured integrations with commerce server, call center,
Interactive Voice Response Unit and enterprise software platforms
include: Aspect, ATG, Blue Martini, BroadVision, Great Plains, IBM,
Intershop, Lucent, Microsoft, Oracle, PeopleSoft, SAP and Siebel.
. Global. Our solutions are used by businesses in many countries
throughout the world. Our transaction services are available via data
centers located in the United States, the United Kingdom and Japan, and
a network of virtual network access points in 18 countries on 5
continents. Our payment gateways currently support over 150 currencies
and our payment software supports connections to major processors
located throughout the world. Our stored value technologies support
multiple currencies, and our sales tax/value added tax calculation
service supports Canadian provinces and all countries in the European
Union, in addition to all United States jurisdictions. In addition, we
maintain a global professional services organization to serve customers
worldwide.
. Financial Flexibility. Because we offer solutions based on software,
services or a combination of the two, CyberSource offers customers the
ability to choose how they will finance their commerce infrastructure as
their business evolves or market conditions change. Customers can choose
from variable cost, fixed cost or capital expense-based finance
strategies.
. Scale Without Disruption. CyberSource offers online commerce
infrastructure expertise, gained from working with some of the largest
brick and mortar and Internet businesses. CyberSource professional
services can help customers design and implement commerce infrastructure
in a way that allows them to avoid implementation errors and scale their
business (volume, channels, markets and technology migration) without
major disruption. CyberSource software is designed for enterprise
scalability, with our payment software having the ability to scale
across multiple payment types, business channels and gateway
connections, all underpinned by multi-threaded processing technology
that supports high volume transaction operations. Similarly, our fault
tolerant data centers operate with excess capacity, allowing customers
to comfortably scale transaction volume and accommodate spikes in order
activity.
Strategy
Our objective is to be the leading worldwide provider of online commerce
transaction infrastructure solutions for enterprise customers. Several key
initiatives were completed in 2000, which enhance our solution capabilities and
expand our global presence. In 2001 we plan to continue pursuing similar
alliances, development relationships, and distribution strategies that allow us
to further penetrate our target markets and broaden our solution capabilities.
We believe the following actions in 2000 enhance our position in the
emerging multi-channel market environment, including:
. ExpressGold Acquisition. In January 2000, we purchased ExpressGold,
Inc., a leading developer and provider of Internet stored value
technology and services, such as private-label, Internet-based gift
certificates and promotional vehicles. This acquisition has further
enhanced the attractiveness of our value proposition to retailers and
catalogers seeking multi-channel solutions for gift certificate and
promotional coupon issuance and redemption.
. CyberSource KK. CyberSource launched its Japanese joint venture,
CyberSource K.K., in March 2000. CyberSource K.K. strengthens
CyberSource's global presence and is intended to capture new revenue
streams resulting from Japan's rapidly growing online markets.
. Professional Services Expansion. In April 2000, we hired approximately
35 consulting professionals to expand our custom solution capabilities
and strengthen our legacy system integration expertise to meet the needs
of multi-channel commerce. The growth of our professional services
capabilities has delivered new sources of revenue and served to maximize
the depth and breadth of our business relationships with customers.
. PaylinX Acquisition. In September 2000, CyberSource acquired PaylinX
Corporation, a developer of enterprise payment and fraud detection
software. This acquisition is strategically important for two reasons.
First, it speeds our time-to-market with products designed to support
multiple sales channels. Second, it enables us to present an 'insource,
outsource or both' operating model to customers, thus increasing sales
potential regardless of the customer's operating model preference.
3
Key Business Strategies
Monitor and Target Key Industries. We believe the online commerce market
will continue to challenge vendors to provide comprehensive online commerce
infrastructure solutions --not just provide technology. To provide such value,
CyberSource has begun to monitor and focus our efforts to better understand
industries we believe represent the greatest business potential and to develop
solutions to better address their online commerce needs. During the second half
of 2000, we began to focus our marketing, sales, and development efforts on
traditional retail, manufacturing and insurance industries.
Market Total Solutions. CyberSource has developed recognized competencies
in five areas of online commerce infrastructure: payment, risk management,
stored value, tax and delivery assurance systems. These competencies are built
on a combination of transaction services and software-based technologies, as
well as professional services. We intend to continue building upon these
competencies to enhance their value. For example, in 2000 we not only leveraged
our relationship with Visa U.S.A. to incorporate advanced neural network
modeling expertise into our credit card risk scoring service, but also marketed
professional services to assess risk management processes, and those to
implement and 'tune' risk management systems. Further, our acquisition of
PaylinX extended our payment solution capabilities to include enterprise payment
software able to be utilized across multiple sales channels.
Utilize Strategic and Sales Alliances to Drive Business. We intend to
utilize or leverage our relationships with strategic and sales alliances to
increase market penetration. These alliances span strategic, sales and referral
and technical relationships, including those with GE Capital's Equity Capital
Group, Visa, Bank of America, First Data Corporation, Paymentech, Vital
Processing Services, Microsoft, Intershop, Blue Martini, ATG, BroadVision,
Aspect, Avaya and IBM. In 2001, we intend to further refine our alliance
strategies by developing distinct programs and strategies to develop additional
corporate-level relationships, as well as sales and technical alliances.
4
CyberSource Solutions
CyberSource currently offers online commerce infrastructure products and
services in five key areas: payment, risk management, stored value, tax and
delivery assurance. In addition, during 2000 we focused our product and services
offerings to address multi-channel, enterprise class customers. Key products
include:
Payment CyberSource supplies real-time, electronic payment solutions
that enable the acceptance of credit cards, electronic
checks, and new 'alternative payment' types (such as
MagnaCash and Cardinal Commerce), as well as automated
clearinghouse payments. Credit card services support all
major credit cards, including consumer, corporate,
procurement cards and private-label cards and enable real-
time payment in over 100 currencies worldwide. CyberSource
also offers Smart Authorization, an enhanced credit card
authorization service with built-in fraud detection. Our
array of software and service offerings allow customers to
manage payment systems in-house, or outsource them, or both
and we offer an array of professional services offerings to
assist with implementation, consolidation and integration of
payment services.
Risk Management Our risk management technology is built on a combination of
enterprise software, services, and professional services
that increase customers' ability to automatically screen for
credit card fraud and streamline exception processing. Our
CyberSource Fraud Manager software allows customers to
establish customized rules for order acceptance, scoring and
review. This software, in conjunction with our Internet
fraud screening service, which uses artificial intelligence,
and an extensive transaction history database to return a
predictive risk score in fewer than three seconds, allows
businesses to accurately predict and control fraud. These
products, combined with our professional services to assess
risk management operations, integrate and maintain required
systems and train personnel, comprise a robust risk
management offering.
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 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, was enhanced in
February 2000 and enhanced again in September 2000. These
enhancements feature use of neural networks and rules-based
modeling technology, and we believe they are the first to
use card association reported fraud information to
accurately predict Internet fraud. Improved accuracy
translates into lower operational costs, because businesses
can rely more heavily on automated methods of order
screening with lower risk of rejecting valid sales or
accepting fraudulent purchases. The service enhancements
also allow us to return 'Risk Profile Codes' which allow
customer support service personnel to quickly determine the
reasons for risk being assigned to an order and more
efficiently attempt resolution.
Our acquisition of PaylinX included PaylinX Fraud DefenZ
software, providing CyberSource the technology platform
necessary to extend our risk management solutions to include
local merchant rules management and case management, in
addition to our Internet Fraud Screen service. We expect
these added software elements to play a significant role in
our future risk management product architecture.
Tax Our tax service calculates sales and use taxes for over
60,000 taxing jurisdictions in the United States and Canada,
and supports Value Added Tax (VAT) in 28 countries. Our
professional services personnel are available to support
integration and development of reporting systems.
Stored Value Stored Value is the technology underlying the issuance and
redemption of gift certificates, promotional coupons,
points-based incentive programs and similar applications. We
currently provide gift certificates and promotional gift
certificate offerings, inclusive of professional services,
that allow customers to implement private-label and multi-
merchant gift certificates and promotional program vehicles
that work across sales channels (Web, call center, POS,
kiosk, etc.).
5
Delivery Assurance Our delivery assurance solutions help businesses reduce
the costs associated with mis-shipment by validating
and standardizing address information while customers
are still online or on the phone, as well as automating
checks for compliance with United States export
regulations. Professional services are available to
support the implementation and integration of each.
Perfect Address. This service is designed to prevent
businesses from shipping goods to incorrect physical
addresses in the United States and Canada, as well as
'standardizing' the address format to minimize shipping
time and help reduce shipping costs. The service
identifies undeliverable addresses while the customer
is still online or on the phone 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, that streets and street addresses are
valid, and automatically standardizes the address
format, including zip codes. Perfect Address is United
States Postal Service CASS certified and Canadian Post
Corporation SERP certified.
Export Control. Through this service we help to ensure
that businesses comply in real-time 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.
Professional Services In addition to the professional services specific to
our competency areas, we also provide services to
support enterprise business process analysis and cross-
function commerce infrastructure integration. We offer
both business and technical consulting services:
Business Consulting: includes technology selection,
sales and customer service process/systems impact,
finance and administrative process/systems impact,
process analysis, transaction cost analysis, ongoing
support and maintenance.
Technical Consulting: includes database sizing, systems
installation and integration, custom reporting, system
optimization, disaster recovery, capacity planning,
scalability and security.
For the year ended December 31, 2000, revenues derived from transaction
services and related support, professional services and enterprise software were
approximately 67%, 30% and 3% of total revenues, respectively, compared to 91%,
9% and 0% of total revenues, respectively, for the year ended December 31, 1999.
Merchants and Markets
We have a broad customer base from a variety of industry groups, including
retailers and consumer product manufacturers, as well as insurance,
telecommunications, utilities, government and education accounts. During 2000,
CyberSource increased penetration of large, traditional businesses.
For the year ended December 31, 2000, one customer accounted for 12% of
revenue. For the years ended December 31, 1999 and 1998, Beyond.com, a related
party, accounted for 13% and 24% of revenues, respectively. Revenues from
outside the United States were less than 10% for the year ended December 31,
2000 and 1998. For the year ended December 31, 1999, revenues from outside the
United States were 23% of total revenues.
Sales and Marketing
Target customers for commerce infrastructure solutions include medium and
large enterprise customers, typically operating with multiple sales channels.
The industries represented by these customers include retail, wholesale,
manufacturing, telecommunications, utilities and insurance. We reach these
businesses worldwide through a direct sales force as well as through sales
alliances that leverage existing sales and marketing infrastructures developed
by our resellers and referral partners. In addition to our direct and indirect
sales efforts, we work with several strategic partners to promote our solutions.
As of December 31, 2000, we had a total of 113 employees in sales and marketing
worldwide, excluding our professional service consultants, which totaled 56
persons as of December 31, 2000. In the first quarter of 2001, the Company
recorded a restructuring charge and reduced its sales and marketing personnel by
approximately 63 employees.
6
Direct Sales. Our direct sales force is comprised of dedicated sales
professionals that target medium-to-large businesses, typically with annual
revenues in excess of $300 million. Our direct sales organization consists of
account executives and account managers. These individuals work together to
manage accounts in their territory, with account executives (sales managers and
principals) primarily working in the field and account managers providing inside
sales support. Sales representatives are compensated in a manner that promotes
new customer acquisition as well as the up-sell and cross selling of solutions
to the installed base of accounts.
Sales Alliances. Our indirect sales channel is divided into "resellers,"
"managed commerce providers," and "referral allies." These companies have
contractual relationships that vary from referral relationships to reselling
software and services.
. Resellers. Our resellers provide our software and services as a part of
their larger offering portfolio and facilitate the sale and billing of
our services. Resellers are authorized to sell our software, transaction
services and support services. Our resellers include banks and payment
services providers such as Bank of America, National Westminster Bank,
Paymentech and Wells Fargo Bank.
. Managed Commerce Providers. Managed Commerce Providers typically host
customized and turnkey storefronts for online businesses, which include
our transaction services or enterprise software. Managed Commerce
Providers own the entire customer relationship including operations
support and billing, and include Internet service providers, application
service providers or specialized systems integrators.
. Referral Allies. These companies have a referral agreement with
CyberSource, structured with or without monetary incentives. These
allies include companies from the payment industry, independent software
vendors, integrators and consulting firms.
Other Alliances. In addition to channel and referral relationships, we
aggressively pursue both technical and strategic alliances. These alliances
result in leveraged product development efforts, streamlined integration
capabilities and leveraged marketing efforts.
. Technical. Our technical alliances serve to increase the availability of
pre-packaged integration options for our customers. These alliances
span commerce server vendors and Interactive Voice Response Unit vendors
to enterprise software vendors. Current technical alliance relationships
include: ATG, Avaya, Blue Martini, BroadVision, IBM, Intershop and
Microsoft.
. Strategic. Our strategic alliances include our relationship with Visa.
We work together with our strategic partners to enhance our existing
solutions portfolio, develop new services and drive the adoption of
industry standards.
The agreement we entered into in July 1999 with Visa U.S.A. to jointly
develop and promote the CyberSource Internet Fraud Screen enhanced by
Visa for use in the United States continues in effect. The agreement has
an initial term lasting until August 2001 and will be automatically
extended thereafter until terminated by either party. Visa has agreed to
promote and market the Internet Fraud Screen enhanced by Visa 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 products and 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 co-marketing programs including
advertising, telemarketing, public relations activities, referral programs, co-
branded initiatives and trade shows.
7
Customer Support
We provide a range of customer activation and sustaining support services
to ensure a high level of performance, reliability and customer satisfaction.
These services help in-house developers get solutions implemented quickly, as
well as provide the support necessary to identify and effectively resolve
operations issues. Our services support both transaction and software solutions.
Our support offerings range from basic account activation and online web-based
support reference materials for transaction services through 24/7 support with
priority response from dedicated merchant support engineers and assigned account
managers.
Through toll-free telephone numbers, our customers can reach our support
desk professionals around the clock. As of December 31, 2000, 53 of our
employees were dedicated to customer support. In the first quarter of 2001, the
Company recorded a restructuring charge and reduced its customer support
personnel by 17 employees.
Technology
CyberSource develops and provides software and transaction services
technologies.
Enterprise Software
During 2000, we completed our acquisition of PaylinX Corporation. This
acquisition enhanced our technology and intellectual property portfolio by
adding the PaylinX server, renamed the CyberSource Payment Manager. Adding
CyberSource Payment Manager enhanced our product suite, allowing our sales and
professional services employees to sell CyberSource Payment Manager as a stand-
alone application server product, capable of processing high-volumes of secure
payment transactions for multiple sales channel enterprises.
Modular Systems Architecture
The CyberSource Payment Manager product is based on a modular systems
architecture that allows this server to be installed into a very large customer
installation where a dedicated payment gateway interface will be used.
CyberSource Payment Manager is designed as a three-layer software architecture
that is well-suited for enterprise deployment. These layers include multiple
sales channel interface, core server, and database. The multiple sales channel
interface and core server platform are based on the Microsoft Windows NT
operating system.
Multiple Sales Channel Interface
The CyberSource Payment Manager core server supports a common programming
interface that can be adapted to multiple sales channel enterprise systems.
These sales systems might be for a call center to accept orders, through an
Interactive Voice Response Unit, from a Web server using hypertext transfer
protocol, point-of-sale terminal, or from a wireless application protocol
device. This architecture strongly supports our belief that enterprises will
demand a payment server capable of supporting multiple, independent sales
channels and that the enterprise sees significant benefit in being able to
manage and control a single transaction payment platform.
CyberSource Payment Manager Database
The database layer is based on a standard structured query language (SQL)
interface and allows the enterprise deploying the CyberSource Payment Manager
the choice of implementing with any of the standard relational database
management systems (RDBMS) on the market. The current installed base of database
platforms include Oracle RDBMS, Microsoft SQL Server and Sybase RDBMS.
Transaction Services
Our proprietary transaction processing system employs a modular
architecture that was designed to scale rapidly and handle the transaction
processing demands of our customers. 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 Transaction Databases, the Commerce Engine, the 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' 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.
8
Transaction Database Architecture
Two primary databases form the core of our transaction processing system:
the transaction process database, which maintains information necessary to
process each individual transaction and the decision support database, which
processes reports and provides detailed information about customers'
transactions. 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.
Commerce Engine
Our Commerce Engine manages workflow 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 Commerce Engine is designed to meet the
transaction processing demands of our customers in a secure, fast, efficient,
reliable, scalable and interoperable manner. Our Commerce Engine was designed to
scale rapidly to handle peak transaction processing loads. Separate Commerce
Engine servers share the transaction load from our customers and provide for
immediate backup services should any Commerce Engine server fail. Additional
Commerce Engine servers can be readily added to our data centers to accommodate
increased customer demand.
Commerce Services Applications
We have developed a set of software applications that perform the services
included in our commerce solutions. These services include global payment
processing, fraud prevention, tax calculation, export compliance, delivery
address verification and stored value. These applications contain the rules and
logic necessary to provide our transaction services to customers. The
applications share resources with the Commerce Engine and databases which allow
us to efficiently add new application services to meet our customers' needs. A
project is underway to redesign our payment services so that the underlying
software technology used is the same as that of the CyberSource Payment Manager.
This will allow us to streamline and leverage development efforts across payment
services and payment software offerings.
Simple Commerce Messaging Protocol
We have developed the Simple Commerce Messaging Protocol (SCMP) to enable
efficient and secure connections between our Commerce Engine 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 commerce 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 popular platforms or integrated by using
our developer kit. Our software libraries 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 Commerce Engine 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, London, England and Tokyo, Japan. 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 customers 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.
9
Product Development
Our product development team is responsible for the design, development and
release of our core infrastructure and services. We have a well-defined software
development methodology that we believe enables us to deliver services that
satisfy real business needs for the global market while meeting commercial
quality expectations. We emphasize quality assurance throughout our software
development lifecycle. We believe that a strong emphasis placed on analysis,
design and rapid prototyping early in the project lifecycle reduces the number
and costs of defects that may be found in later stages. Our development
methodology focuses on delivery of product to a global market, enabling
localization into multiple languages, multi-currency payment processing, global
fraud detection and local regulatory compliance from a single code base. As of
December 31, 2000, we employed 132 persons in our product development
organization. In the first quarter of 2001, the Company recorded a restructuring
charge and reduced its product development personnel by 24 employees.
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 Commerce Engine, an unauthorized third-party may
nevertheless gain unauthorized access to our services or pirate our software. We
are unable to determine the extent to which piracy of our intellectual property
or software exists. Software piracy is a prevalent problem in our industry.
Effective protection of intellectual property rights may be unavailable or
limited in foreign countries. We cannot assure you that the protection of our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology, duplicate our services or design
around any intellectual property rights we hold.
From time to time we may receive notice of claims of infringement of other
parties' intellectual property rights. As the number of services in our market
increases and functionalities overlap, companies such as ours may become
increasingly subject to infringement claims. Any infringement claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel or require us to develop
non-infringing technology or enter into licensing agreements. Such licensing
agreements, if required, may not be available on acceptable terms, if at all. In
the event of a successful claim of infringement and our failure or inability to
develop non-infringing technology or license the proprietary rights on a timely
basis, our business, operating results and financial condition could be
materially adversely affected.
10
Competition
The market for our products and 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 businesses that develop
custom systems. These businesses that have made large initial investments to
develop custom systems may be less likely to adopt outside services or vendor
developed online commerce transaction processing software.
We also face competition from developers of other systems for online
commerce transaction processing such as Clear Commerce, CyberCash, Digital
River, E-One Global (an affiliate of First Data Corporation), Hewlett-Packard
(VeriFone), HNC Software, Open Market, Payments Plus, TrinTech, VeriSign and
XiPay. In addition, companies, including financial services and credit companies
such as First Data Corporation, AT&T and GE, may enter the market.
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 products and
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 commerce infrastructure providers,
thereby increasing the ability of their solutions 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 offerings, 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 and product reliability;
. product performance;
. expertise;
. environments supported
. ease of implementation and integration;
. 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 solutions is still rapidly evolving,
and we may not be able to compete successfully against current and future
competitors.
Employees
As of December 31, 2000, we had a total of 448 employees, including 169
employees in professional services, sales and marketing, 132 employees in
product development, 93 employees in operations and customer support and 54
employees in general and administrative services. In the first quarter of 2001,
the Company terminated approximately 123 employees of which 63 were in
professional services, sales and marketing, 24 were in product development, 24
were in operations and customer support and 12 were in general and
administrative services. None of our employees is represented by a labor union
and we consider employee relations to be positive.
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.
11
Regulations
The following regulations may adversely affect 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 using 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 72,000 square feet of
space in Mountain View, California, under a lease expiring in December 2006. We
also occupy approximately 44,000 square feet of space in St. Louis, Missouri
under a lease expiring in October 2004. In addition, we occupy field sales
offices in various cities throughout the United States. We also maintain sales
and support offices in leased space in Weybridge, United Kingdom.
ITEM 3: LEGAL PROCEEDINGS
In November 1999, a lawsuit was filed against the Company alleging that our
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, we have obtained opinions of
patent counsel that our payment services do not infringe upon either of the
plaintiff's patents. Initial Discovery has been completed and we filed a motion
to specify how certain claims in the patents should be construed, for which the
court held a hearing on February 1, 2001. The court has not yet rendered a
decision on the motion. We intend to vigorously defend against the claims
asserted.
On September 1, 2000, an action now entitled Daragh Crowley v. CyberSource
Corp. and Amazon.com, Inc. Civil Action No. C-00-3180 (WHO), was filed by
plaintiffs on behalf of themselves and, purportedly, a class of all other
similarly situated persons in the United States District Court of Northern
California. In February 2001, plaintiffs amended their complaint to allege that
the action purports to be a class action on belief of "all persons who entered
into online transactions with Amazon.com prior to August 31, 2000 whose personal
and private information was secretly transmitted, used and/or disclosed" by
defendants allegedly without those persons' authorization or consent. Plaintiffs
allege violations by us of a federal statute prohibiting the interception and
disclosure of electronic communications, as well as common law violations of
unjust enrichment, invasion of privacy, negligence, and fraudulent concealment.
Plaintiffs seek statutory and other unspecified damages and seek to enjoin the
allegedly unlawful practices. We are moving to dismiss the complaint for failure
to state a legal claim against us. Discovery has not yet begun, and no trial
date had been set. While there can be no assurances as to the outcome of this
litigation, management believes that the claims alleged are without merit and
plans to defend the action vigorously.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
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
Year ended December 31, 2000 High Low
---------------------------- ---------- --------
First Quarter.............................. $56 1/2 $26
Second Quarter............................. $37 1/16 $12 3/8
Third Quarter.............................. $18 1/4 $6 11/16
Fourth Quarter............................. $11 1/4 $1 1/2
The Company had approximately 600 shareholders of record as of December 31,
2000. 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 $68.7 million of net proceeds from the second public
offering in November 1999, the Company acquired $3.2 million of property and
equipment and used $15.3 million to fund operations during the three months
ended December 31, 2000. The remaining $50.2 million of net proceeds was held in
various cash and cash equivalent accounts as of December 31, 2000. Our Board of
Directors has authorized the use of up to $20.0 million of the remaining $50.2
million of net proceeds for the repurchase of shares of our common stock. The
purchases will be made in the open market from time to time over the next twelve
months as market and business conditions warrant. In addition, all purchases are
subject to the availability of shares and, accordingly, there is no guarantee as
to the timing or number of shares to be repurchased.
In connection with the acquisition of PaylinX Corporation in September
2000, we issued 8,807,788 shares of the Company's common stock to the former
PaylinX Corporation stockholders. In exchange for the September issuance, we
acquired all of the outstanding capital stock of PaylinX Corporation. The
issuance was made, without general solicitation or advertising, pursuant to the
exemption from registration provided by Section 3(a)(10) of the Securities Act
of 1933. Section 3(a)(10) grants an exemption from registration for shares
issued in exchange for one or more bona fide outstanding securities as long as
the terms and conditions are approved after a hearing upon the fairness of the
issuance and exchange at which recipients of the securities have right to appear
held by an official state agency expressly authorized by law to grant such an
approval. After a hearing before the California Department of Corporations at
which the terms and conditions were deemed fair, a permit to issue securities
was granted and the shares were issued under the applicable exemption.
13
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
2000(3) 1999(2) 1998(2) 1997 December 31, 1996
------- -------- -------- ------- ------------------
(In thousands, except per share data)
Consolidated Statements of Op-
erations Data:
Revenues....................... $29,924 $ 12,931 $ 3,384 $ 968 $ 144
Cost of revenues............... 23,161 10,948 3,471 324 137
------- -------- -------- ------- -------
Gross profit (loss)............ 6,763 1,983 (87) 644 7
Operating expenses:
Product development.......... 16,103 7,807 3,831 2,300 338
Sales and marketing.......... 29,400 15,110 4,184 1,988 425
General and administrative... 13,532 6,023 2,079 681 387
In-process research and
development................. 14,500 -- -- -- --
Amortization of goodwill and
other intangible assets..... 12,961 -- -- -- --
Acquisition related costs.... 834 -- -- -- --
Deferred compensation
amortization................ 1,521 4,716 18 -- --
------- -------- -------- ------- -------
Total operating expenses... 88,851 33,656 10,112 4,969 1,150
------- -------- -------- ------- -------
Loss from operations........... (82,088) (31,673) (10,199) (4,325) (1,143)
Interest income (expense),
net........................... 7,304 1,828 (48) (13) --
Loss on investment in joint
venture....................... (200) -- -- -- --
------- -------- ------- ------- -------
Net loss....................... $(74,984) $(29,845) (10,247) $(4,338) $(1,143)
======== ======== ======= ======= =======
Basic and diluted net loss per
share(1)...................... $ (2.63) $ (1.95) $ (2.08)
======== ======== ========
Shares used in computing basic
and diluted net loss per
share(1)...................... 28,472 15,267 4,924
======== ======== ========
14
December 31,
----------------------------------------------
2000(3) 1999(2) 1998(2) 1997 1996
-------- -------- -------- ------- -------
(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments................................ $92,003 $140,269 $11,422 $2,000 $ --
Working capital (deficit)................... 87,668 137,951 7,814 2,016 (61)
Total assets................................ 261,855 154,122 15,389 3,735 106
Long-term obligations, net of current
portion.................................... 65 444 256 33 --
Redeemable convertible preferred stock...... -- -- 18,911 2,097 --
Total stockholders' equity (net capital
deficiency)................................ 247,033 146,559 (8,668) 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.
(2) The 1999 and 1998 Selected Consolidated Financial Data has been restated to
include the balance sheet and operating results of ExpressGold.com, Inc., which
was acquired on January 10, 2000 and is being accounted for as a pooling of
interests transaction.
(3) The 2000 Selected Consolidated Financial Data includes the balance sheet of
PaylinX Corporation as of December 31, 2000 and the operating results of PaylinX
Corporation for the period from September 18, 2000, the date of acquisition, to
December 31, 2000.
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
commerce transaction processing services division to CyberSource. Our statements
of operations and stockholders' equity for 1997 reflect our operations as a
division of Beyond.com through December 31, 1997. Our statements of operations
for 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, 2000 had incurred cumulative losses of approximately
$83.9 million. We expect to continue to incur substantial operating losses for
the foreseeable future.
The Company derives its revenues from monthly commerce transaction
processing fees, support service fees, professional services and the sale of
enterprise software licenses and related maintenance. Transaction revenues are
recognized in the period in which the transactions occur. Professional services
revenue and support service fees are recognized as the related services are
provided and costs are incurred. Enterprise software license and maintenance
revenue is recognized when all elements of a contract have been delivered. The
Company does not have vendor-specific objective evidence for license or
maintenance revenue. For enterprise software arrangements where maintenance is
the only undelivered element, the Company recognizes the entire contract ratably
over the term of the maintenance period. For the year ended December 31, 2000,
one customer accounted for 12% of revenue.
15
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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations reflects the acquisition of ExpressGold.com, Inc. (ExpressGold) which
was completed in January 2000 and was accounted for as a pooling of interests as
well as the acquisition of PaylinX Corporation (PaylinX) for the period from
September 18, 2000, the date of acquisition, which was accounted for under
purchase accounting.
Results of Operations
Years Ended December 31, 2000 and 1999
Revenues. Revenues increased to $29.9 million in 2000, an increase of
approximately $17.0 million or 131.4% as compared to $12.9 million in 1999.
Transaction and support revenues increased to $19.9 million in 2000, an increase
of approximately 68.7% as compared to $11.8 million in 1999. This increase is
due to the addition of customers as well as transaction volume increases from
existing customers resulting from the increased market acceptance of e-commerce.
Our number of transactions processed were approximately 162.5 million in 2000 as
compared to approximately 47.2 million in 1999. Professional services revenues
increased to $9.0 million in 2000, an increase of approximately 714.7% as
compared to $1.1 million in 1999, due to an increase in the number and dollar
magnitude of professional services projects during 2000. Enterprise software
license and maintenance revenues were $1.0 million in 2000. This revenue was
generated following our acquisition of PaylinX on September 18, 2000. We expect
enterprise software license and maintenance revenues to increase as a percentage
of total revenues.
Cost of Revenues. Transaction and support cost of revenues consists
primarily of costs incurred in the delivery of e-commerce transaction services,
including personnel costs in our operations and customer support functions,
depreciation of capital equipment used in our network infrastructure and costs
related to the hosting of our servers at third-party hosting centers in the
United States and the United Kingdom. Transaction and support cost of revenues
increased to $15.9 million or 79.9% of transaction and support revenues in 2000
from $10.0 million or 84.1% of transaction and support revenues in 1999. The
increase in absolute dollars is primarily due to an increase in operations and
customer support personnel and related costs of approximately $1.8 million, an
increase in depreciation expense on capital equipment of approximately $1.5
million, an increase in data center costs of approximately $0.5 million and an
increase in technical support expense of approximately $0.3 million.
Professional services cost of revenues consist principally of personnel related
costs and expenses and a portion of allocated overhead costs related to
providing professional services. Professional services cost of revenues
increased to $5.8 million or 64.6% of professional services revenues for 2000 as
compared to $1.0 million or 90.4% of professional services revenues for 1999.
The increase in absolute dollars is due to higher personnel and contractor
related costs resulting from an increase in personnel and contractor usage
necessary to support our increase in professional services projects. The
decrease in professional services cost of revenues as a percentage of
professional services revenues is due to the economies of scale resulting from
the increase in professional services projects. Enterprise software cost of
revenues is comprised of customer support personnel costs and fulfillment costs.
Enterprise software cost of revenues was $1.4 million or 143.9% of enterprise
software revenues for 2000. Included in enterprise software cost of revenues in
2000 is $1.0 million of amortized developed technology resulting from the
acquisition of PaylinX.
Product Development. Product development expenses consist primarily of
compensation and related costs of employees engaged in the research, design and
development of new services, and to a lesser extent, facility costs and related
overhead. Product development expenses increased to $16.1 million in 2000
compared to $7.8 million in 1999. The increase is primarily due to higher
personnel related costs, which increased by approximately $5.4 million in 2000
as compared to 1999.
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 $29.4 million in 2000 from $15.1 million in
1999. The increase is primarily due to higher sales and marketing personnel
related costs which increased by approximately $11.7 million in 2000 as compared
to 1999. In addition, sales commissions increased by approximately $1.3 million
in 2000 as compared to 1999 due to the increase in sales in 2000.
16
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 $13.5 million in 2000
from $6.0 million in 1999. The increase is primarily due to higher personnel
related costs, which increased by approximately $2.0 million in 2000 as compared
to 1999. In addition, bad debt expense, legal and accounting fees and technical
support expenses related to our new enterprise resource planning system and
customer relationship management system increased by $1.8 million, $0.6 million
and $0.1 million, respectively, in 2000 as compared to 1999.
In-process Research and Development. In September 2000, we recorded $14.5
million in a one-time write-off of in-process research and development costs as
a result of our acquisition of PaylinX. Amounts allocated to in-process
technology were calculated using established valuation techniques in the high
technology industry. In-process technology consisted of enhancements to
PaylinX's payment and fraud products, which were estimated to be approximately
80% and 50% complete, respectively, as of the date of acquisition. These
enhancements have since been completed. In-process technology was expensed in
the quarter ended September 30, 2000, when the acquisition was consummated,
because technological feasibility of the in-process technology had not been
achieved and no alternative future uses had been established. In-process
technology was computed using a discounted cash flow analysis on the anticipated
income stream to be generated by the purchased technology.
Amortization of Goodwill and Other Intangible Assets. During 2000, we
recorded $13.0 million of amortization of goodwill and other intangible assets
primarily as a result of our acquisition of PaylinX. Goodwill and other
intangible assets are being amortized on a straight-line basis over the
estimated useful lives of three to five years.
Acquisition Related Costs. Acquisition related costs in the amount of $0.8
million consist of costs incurred related to our acquisition of ExpressGold in
January 2000 which was accounted for as a pooling of interests.
Deferred Compensation Amortization. During 2000, we recorded aggregate
unearned compensation of $5.1 million, of which $4.6 million was recorded in
connection with our acquisition of PaylinX. Amortization expense related to
deferred compensation was $1.5 million in 2000 as compared to $0.5 million in
1999.
Interest Income (Expense), Net. Interest income, which consists of interest
earnings on cash, cash equivalents and short-term investments increased to $7.3
million 2000 from $2.1 million in 1999. This increase is primarily due to an
increase in average cash, cash equivalents and short-term investments during
2000 as compared to 1999 as a result of equity financings completed during 1999,
including our initial public offering in June 1999 and second offering in
November 1999. We expect interest income to decrease in 2001 due to a lower
cash, cash equivalents and short-term investment balance and lower interest
rates. Interest expense decreased to $0.2 million in 2000 from $0.3 million in
1999. Interest expense represents 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,
2000, we had federal and state net operating loss carryforwards of approximately
$78 million and $55 million, respectively. If we are not able to use them, the
federal and state net operating loss carryforwards will expire in 2005 through
2020. 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.
Years Ended December 31, 1999 and 1998
Revenues. Revenues increased to $12.9 million in 1999, an increase of
approximately $9.5 million or 282.1% as compared to $3.4 million in 1998.
Transaction and support revenues increased to $11.8 million in 1999, an increase
of 263.7% as compared to $3.3 million in 1998. This increase is due to the
addition of customers and transaction volume increases from existing customers
resulting from the increased market acceptance of e-commerce. Our number of
transactions processed increased to approximately 47.2 million in 1999 as
compared to approximately 8.6 million in 1998. Professional services revenues
increased to $1.1 million in 1999, an increase of 735.6% as compared to $0.1
million in 1998 due to an increase in demand for our professional services.
Cost of Revenues. Transaction and support cost of revenues increased to
$10.0 million or 84.1% of transaction and support revenues in 1999 from $3.3
million or 101.0% of transaction and support revenues in 1998. The increase in
dollars is primarily due to an increase in operations, customer 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. Professional services cost of revenues
increased to $1.0 million or 90.4% of professional services revenues in 1999
from $0.2 million or 140.2% of professional services revenues in 1998.
17
Product Development. Product development expenses increased to $7.8 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.
Sales and Marketing. Sales and marketing expenses increased to $15.1
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.
General and Administrative. General and administrative expenses increased
to $6.0 million in 1999 from $2.1 million in 1998. The increase is primarily due
to higher personnel related costs resulting from an increase in personnel.
Deferred Compensation Amortization. In 1999, we recorded aggregate unearned
compensation in the amount of $1.2 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 and recorded a one-time compensation charge of $4.2 million related to
our acquisition of ExpressGold.
Interest Income (Expense), Net. Interest income 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.
Liquidity and Capital Resources
Our cash, cash equivalents and short-term investments decreased by
approximately $48.3 million from December 31, 1999 to December 31, 2000. This
decrease resulted from recording a $75.0 million net loss and $16.5 million of
purchases of property and equipment, offset by the recording of non-cash charges
of $14.5 million of in-process research and development acquired from PaylinX
and $13.0 million of amortization of goodwill and other intangible assets. In
addition, we acquired $11.0 million of cash upon completion of our acquisition
of PaylinX.
Net cash used in our operating activities was approximately $43.7 million
in 2000 and approximately $22.3 million in 1999. Net cash used in operations
during 2000 consists primarily of our net loss of $75.0 million, increases in
current assets and decreases in current liabilities, offset by the recording of
a $14.5 million non-cash in-process research and development charge in
connection with our acquisition of PaylinX, depreciation and amortization
expense and an increase in deferred revenue primarily related to the sale of
enterprise software and related software maintenance. Cash used in operations in
1999 consists primarily of our net loss of $29.8 million and increases in
current assets, offset by the recording of a $4.3 million non-cash compensation
charge in connection with our acquisition of ExpressGold, depreciation and
amortization expense and increases in accounts payable and accrued liabilities.
Net cash used in investing activities was approximately $3.2 million in
2000 and approximately $76.3 million in 1999. Net cash used in investing
activities in 2000 resulted from $16.5 million purchases of furniture and
equipment for new employees and capital equipment used in our network
infrastructure and the recording of $0.8 million representing our interest in
our Japanese joint venture's net loss, offset by net proceeds from the sale of
short-term investments of $3.1 million and $11.0 million of cash acquired as a
result of our acquisition of PaylinX. Net cash used in investing activities in
1999 is comprised of $69.1 million of net purchases of short-term investments
and $7.3 million of purchases of property and equipment. Our planned capital
expenditures for 2001 are approximately $3.0 million primarily for capital
equipment used in our network infrastructure and implementation costs for our
customer relationship management system.
Net cash provided by financing activities was approximately $1.4 million in
2000 and $158.9 million in 1999. Net cash provided by financing activities in
2000 consists primarily of $2.0 million of proceeds from the exercise of
employee stock options and the issuance of common stock under the Employee Stock
Purchase Plan, offset by $0.6 million of principal payments on capital lease
obligations. Net cash provided by financing activities in 1999 of $158.9 million
consists primarily of proceeds from our initial and second public offerings
which total approximately $158.0 million.
18
We believe that our cash and short-term investment balances as of December
31, 2000 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. 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. 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.
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 our expectations,
objectives, anticipations, plans, hopes, beliefs, intentions or strategies
regarding the future. Forward-looking statements include, without limitation:
(a) the statements under "Item 1; Business" regarding (i) our opinion that
recent developments have resulted in a complex, intergrated environment that
presents significant business opportunities for companies such as CyberSource,
(ii) our statement that companies can reduce operating expense and improve
efficiencies by integrating and consolidating commerce infrastructure based on
CyberSource solutions and consulting expertise, (iii) our belief that
CyberSource professional services can help customers design and implement
commerce infrastructure in a way that allows them to avoid implementation errors
and scale their business (volume, channels, markets and technology migration)
without major disruption, (iv) our statement that our fault tolerant data
centers operate with excess capacity, allowing customers to comfortably scale
transaction volume and accommodate spikes in order activity, (v) our objective
to become the leading worldwide provider of commerce transaction infrastructure
solutions for enterprise customers, (vi) our plan to pursue alliances,
relationships and strategies that allow us to penetrate target markets and
broaden our solution capabilities, (vii) our belief that actions taken in 2000
enhance our position in the emerging multi-channel market environment, (viii)
our belief that the PaylinX acquisition will speed our time-to-market with
products designed to support multiple channels and enables us to present an
'insource, outsource or both' operating model to customers thus maximizing sales
potential regardless of the customer's operating model preference or state of
commerce infrastructure maturity, (ix) our belief that we will be able to
provide not only the technologies, but also the extended consulting and
integration services necessary to command superior value for stockholders and
deliver the greatest benefit to our customers, (x) our expectation that focusing
our marketing, sales, and development efforts on retail, manufacturing and
insurance industries will be both a key differentiator and the foundation for
revenue streams built on solution offerings rather than technology alone, (xi)
our expectation that focusing our marketing, sales, and development efforts on
retail, manufacturing and insurance industries will strengthen our customer
relationships and provide greater revenue opportunity, allowing us to play the
role of a trusted advisor, rather than simply a vendor, (xii) our intention to
continue building upon competencies in five areas of real-time commerce
infrastructure: payment, risk management, stored value, tax and pre-shipment
verification systems to enhance their value, as well as developing new
offerings, (xiii) our intention to continue enhancing our solutions
capabilities, through development, acquisition, and alliances, with a focus on
enabling and enhancing enterprise-class, multi-channel commerce, (ix) our plan
to utilize or leverage our relationships with strategic and sales alliances to
increase market penetration and continue to weave CyberSource `into the fabric
of the industry', (xv) our plan to further refine our alliance strategies by
developing distinct programs and strategies to develop additional corporate-
level relationships, as well as sales and technical alliances, (xvii) our
expectation that software elements acquired in connection with the acquisition
of PaylinX will play a significant role in our future risk management product
architecture; (xviii) our statement that the project to redesign payment
services will allow us to streamline and leverage development efforts across
payment services and payment software offerings, (xix) our belief that we have a
well-defined software development methodology that enables us to deliver
services that satisfy real business needs for the global market while meeting
commercial quality expectations, (b) the statements under "Item 7; Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding (i) our expectation that we will continue to incur substantial
operating losses for the foreseeable future, (ii) our expectation that
enterprise software license and maintenance revenues will increase as a
percentage of total revenues, (iii) our expectation that interest income will
decrease in 2001 due to a lower cash, cash equivalents and short-term investment
balance and lower interest rates, (iv) the extent and allocation of our planned
capital expenditures for 2001, (v) our belief that cash and short term
investment balances as of December 31, 2000 will be sufficient to fund working
capital and capital requirements for the following twelve months, (vi) our
expectation that we will continue to use our cash to fund expected operating
losses, (c) the statements under "Item 8, Financial Statements and Supplementary
Data--Notes to Consolidated Financial Statements" regarding (i) our intention to
vigorously defend against the patent infringement claims, (ii) our belief that
claims against us are without merit and will be defended vigorously, (iii) our
belief that we may be involved in litigation from time to time arising in the
ordinary course of business, and (iv) our belief that there are no claims or
actions pending or threatened against us, the ultimate disposition of which
would have a material impact on the Company's financial position or results of
operations. All forward-looking statements included in this document are based
on information available to us on the date hereof, and the we assume no
obligation to update any such forward-looking statements. It is important to
note that our 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 our 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 are particularly exposed. These risks include:
19
. 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; and
. risks that we may not be able to adequately integrate acquired
businesses, including PaylinX, which was acquired on September 18, 2000.
These risks are discussed in more detail below. We cannot assure you that
our business strategy will be successful or that we will successfully address
these risks and the risks detailed below.
We Have a History of Losses, Expect Future Losses and Cannot Assure You that We
Will Achieve Profitability
Although our revenues have increased on a quarterly basis since 1997, we
have not achieved profitability and cannot be certain that we will realize
sufficient revenues to achieve profitability. We have incurred significant net
losses since our inception. We incurred net losses of $10.2 million in 1998,
$29.8 million in 1999 and $75.0 million in 2000. As of December 31, 2000, we had
incurred cumulative losses of $120.6 million. You should not consider recent
quarterly revenue growth as indicative of our future performance. We do not
expect to sustain similar levels of growth in future periods. We have continued
to increase our sales and marketing, network infrastructure, product development
and general and administrative expenses in 2000. As a result, we will need to
generate significantly higher revenues in order to achieve profitability. If we
do achieve profitability, we may not be able to sustain it.
The Expected Fluctuations of Our Quarterly Results Could Cause Our Stock Price
to Fluctuate or Decline
We expect that our quarterly operating results will fluctuate significantly
in the future based upon a number of factors, many of which are not within our
control. We plan to further increase our operating expenses as we integrate
PaylinX, expand our sales and marketing activities 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 affected by our customers,
especially as a result of seasonality, success of each customer's
business, general economic conditions or regulatory requirements
restricting our customers;
. our ability to attract new customers and to retain our existing
merchants;
. customer acceptance of our pricing model;
. customer acceptance of our software and our professional services
offerings;
. the success of our sales and marketing programs;
. an interruption with one or more of our gateway processors and channel
partners;
. seasonality of the retail sector; and
. continued softening of the general U.S. economy and the lack of
available capital for our customers and potential future customers.
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.
20
Revenues from Professional Services in the Year Ended December 31, 2000 May Not
be Sustainable
In the year ended December 31, 2000, we experienced strong growth in the
demand for our professional services and were engaged to complete a large
project with related revenue in the amount of approximately $3.7 million. In
order to satisfy this demand, we committed internal resources, hired a
significant number of additional professional services personnel and hired
independent contractors. We may not be engaged for additional projects of
similar or larger size and the demand for professional services may decrease.
For instance, professional services revenue decreased from $1.8 million for the
three months ended December 31, 2000 as compared to $2.6 million during the
three months ended September 30, 2000. In addition, if we are engaged for
additional projects of similar or larger size, we may not be able to hire the
resources necessary to meet future demand. As a result, our revenues from
professional services could decrease significantly. During the year ended
December 31, 2000, one customer for which we performed a non-recurring
professional services engagement accounted for 12% of our revenues.
We May Have an Accounts Receivable Concentration Risk at Times
Our professional services business was a larger percentage of our total
revenue in 2000 compared to 1999. Some of our professional services engagements
are large projects and result in higher concentration of our accounts receivable
balance at times. For example, as of June 30, 2000, approximately 25% of our
accounts receivable balance was due from one professional services customer. No
customer accounted for more than 10% of our accounts receivable balance as of
December 31, 2000. We expect to continue to experience this concentration risk
in connection with our professional services business.
Some of Our Larger Customers Have Businesses That Focus on the Internet and May
Not Be Able to Obtain Necessary Funding
A significant number of our customers have Internet based business models.
Some of these customers are among our largest customers. Many of these customers
may require substantial working capital to operate their businesses, may not
have adequate funds available and may be dependent upon the capital markets for
funding. Our customers may not be able to raise the additional capital required
to fund their businesses and, as a result, we may experience a decrease in our
customer base, a reduction in recurring revenue and an increase in our bad debt
expense.
We Intend to Pursue Strategic Acquisitions and Our Business Could Be Materially
Adversely Affected if We Fail to Adequately Integrate Acquired Businesses
As part of our overall business strategy, we intend to pursue strategic
acquisitions of complementary businesses or technologies that would provide
additional service offerings, additional industry expertise, a broader client
base or an expanded geographic presence. For instance, in September 2000 we
completed our acquisition of PaylinX, a developer of a payment server platform
for real-time credit card transactions. We have no experience in integrating or
operating a payment server business and cannot give assurance that we will be
successful in integrating and operating this business into CyberSource. If we do
not successfully integrate PaylinX, or if the benefits of the PaylinX
transaction do not meet the expectation of financial or industry analysts, the
market price of our common stock may decline. Any future acquisition could
result in the use of significant amounts of cash, dilutive issuances of equity
securities, or the incurrence of debt or amortization expenses related to
goodwill and other intangible assets, any of which could materially adversely
affect the business, operating results and financial condition. In addition,
acquisitions involve numerous risks, including:
. difficulties in assimilating the operations, technologies, products and
personnel of PaylinX or another acquired company;
. the diversion of management's attention from other business concerns;
. risks of entering markets in which we have no or limited prior
experiences such as the enterprise software market;
. the potential loss of key employees of PaylinX or another acquired
company.
The Demand for Our Services Could Be Negatively Affected by a Reduced Growth of
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, the sale of goods and services over the Internet has gained
acceptance 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.
21
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 the use of Internet resources by existing users, 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 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 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 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, we 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. 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 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 Commerce Security Measures Could Reduce Demand for Our Services
A requirement of the continued growth of 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 most secure cryptographic protection
available and thereby expose us to an increased risk of data interception. A
party who is able to circumvent security measures could misappropriate
proprietary information or interrupt our operations. Any compromise or
elimination of security could reduce demand for our services.
We may be required to expend significant capital and other resources to
protect against security breaches and to address any problems they may cause.
Concerns over the security of the Internet and other online transactions and the
privacy of users may also inhibit the growth of the Internet and other online
services generally, and the Web in particular, especially as a means of
conducting commercial transactions. Because our activities involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches, and failure to prevent security breaches may disrupt our
operations.
22
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 that 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 commerce transaction processing such as Clear Commerce, CyberCash, Digital
River, E-One Global (an affiliate of First Data Corporation), Hewlett-Packard
(VeriFone), HNC Software, Open Market, ShopNow.com and VeriSign. In addition,
other companies, including financial services and credit companies such as First
Data Corporation, AT&T and GE, may enter the market and provide similar
services. In the future, we may also compete with large Internet-centric
companies that derive a significant portion of their revenues from commerce and
may offer, or provide a means for others to offer, 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
reduce demand 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 their ability to address the needs of our existing or 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 result in the reduction of our prices or our market
share or both, 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 current 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 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 Managing Our Growth Could Adversely Affect Our Results of
Operations
We have experienced a period of rapid and substantial growth that has
placed a strain on our administrative infrastructure. We have increased the
number of employees from 45 employees at December 31, 1997 to 127 employees at
December 31, 1998, 228 employees at December 31, 1999 and 448 at December 31,
2000. This expansion placed a significant strain on our managerial and financial
resources. In addition, in the first quarter of 2001, we reduced the number of
employees by approximately 123 as we restructured and realigned our resources to
better manage and control our business.
During 1998, we expended significant time and resources in developing our
management information and control systems and business plan, which was
completed toward the end of 1998. During 2000, we implemented an enterprise
resource planning system and a customer relationship management system. In the
future, we may not be able to enhance our management information and control
systems in an efficient and timely manner, and our current or planned personnel,
systems, procedures and controls may not be adequate to support our future
operations. In addition, we may not be able to hire, train, retain, motivate and
manage required personnel or to successfully identify, manage and exploit
existing and potential market opportunities. If we are unable to manage growth
effectively, our business, results of operations and financial condition would
be materially adversely affected.
23
If We Are Not Able to Fully Utilize Relationships With Our Sales Alliances, 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 sales alliances that 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 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.
Our new employees include a number of key managerial, technical and operations
personnel. In addition, our Chief Financial Officer left the Company in March
2001 and we are currently searching for a replacement. We may also 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 Corporation May
Create Conflicts of Interests and Result in Actions Inconsistent with
Stockholder Interests
In connection with our spin-off from Beyond.com Corporation ("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 businesses, the two companies currently have no policies to govern the
pursuit or allocation of corporate opportunities, in the event they arise. Our
business could be adversely affected if the overlapping board members of the two
companies, of which there are currently two, William S. McKiernan and Richard
Scudellari, pursue Beyond.com's interests over ours either in the course of
transactions between the companies or where the same corporate opportunities are
available to both companies.
We May Not Be Able to Adequately Protect Our Proprietary Technology and May Be
Infringing Upon Third-Party Intellectual Property Rights
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights.
As part of our confidentiality procedures, we enter into non-disclosure
agreements with our employees. Despite these precautions, third parties could
copy or otherwise obtain and use our technology without authorization, or
develop similar technology independently. Effective protection of intellectual
property rights may be unavailable or limited in foreign countries. We cannot
assure you that the protection of our proprietary rights will be adequate or
that our competitors will not independently develop similar technology,
duplicate our services or design around any patents or other intellectual
property rights we hold.
24
We also cannot assure you that third parties will not claim that the
technology employed in providing 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 absorb significant management time and lead to costly litigation.
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" and "Legal Proceedings" 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 applicable to
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.
25
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. These uncertainties, costs and burdens could reduce demand
for our services or increase the cost of doing business due to increased
litigation costs or increased service delivery costs.
Our International Business Exposes Us to Additional Foreign Risks
Services provided to merchants outside the United States accounted for
5.4%, 23.1% and 9.0% of our revenues in 2000, 1999 and 1998, respectively. In
March 2000, we entered into a joint venture agreement with Japanese partners
Marubeni Corporation and Trans-Cosmos, Inc. and established CyberSource K.K. to
provide commerce transaction services to the Japanese market. We intend to
expand our international presence in the future. Conducting business outside of
the United States is subject to additional risks that may affect our ability to
sell our services and result in reduced revenues, including:
. changes in regulatory requirements;
. reduced protection of intellectual property rights;
. evolving privacy laws in Europe;
. the burden of complying with a variety of foreign laws; and
. political or economic instability or constraints on international trade.
In addition, some software contains encryption technology that renders it
subject to export restrictions and we may become liable to the extent we violate
these restrictions. We might not successfully market, sell and distribute our
services in local markets and we cannot be certain that one or more of these
factors will not materially adversely affect our future international
operations, and consequently, our business, financial condition and operating
results.
Also, sales of our services conducted through our subsidiary in the United
Kingdom are denominated in Pounds Sterling. We may experience fluctuations in
revenues or operating expenses due to fluctuations in the value of the Pound
Sterling relative to the U.S. Dollar. We do not currently enter into
transactions with the specific purpose to hedge against currency exchange
fluctuations.
Existing Stockholders May Exert Control Over Us to the Detriment of Minority
Stockholders
At December 31, 2000, our officers, directors and principal stockholders
(i.e., greater than 5% stockholders) together control approximately 15.3% 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.
26
In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been unrelated
to the operating performance. These factors and fluctuations, as well as general
economic, political and market conditions may materially adversely affect the
market price of our common stock.
The Anti-Takeover Provisions in Our Certificate of Incorporation Could Adversely
Affect the Rights of the Holders of Our Common Stock
Anti-takeover provisions of Delaware law and our Certificate of
Incorporation may make a change in control of CyberSource more difficult, even
if a change in control would be beneficial to the stockholders. These provisions
may allow the Board of Directors to prevent changes in the management and
control of CyberSource. Under Delaware law, our Board of Directors may adopt
additional anti-takeover measures in the future.
One anti-takeover provision that we have is the ability of our Board of
Directors to determine the terms of preferred stock and issue preferred stock
without the approval of the holders of the common stock. Our Certificate of
Incorporation allows the issuance of up to 4,988,842 shares of preferred stock.
As of December 31, 2000, there are no shares of preferred stock outstanding.
However, because the rights and preferences of any series of preferred stock may
be set by the Board of Directors in its sole discretion without approval of the
holders of the common stock, the rights and preferences of this preferred stock
may be superior to those of the common stock. Accordingly, the rights of the
holders of common stock may be adversely affected.
Our Partnership Agreement With Visa U.S.A. Expires in August 2001 and Visa
U.S.A. May Elect to Terminate the Partnership Agreement
The agreement we entered into in July 1999 with Visa U.S.A. to jointly
develop and promote CyberSource Internet Fraud Screen enhanced by Visa for use
in the United States expires in August 2001. The agreement 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.
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.
27
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CYBERSOURCE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Ernst & Young LLP Independent Auditors................. 29
Consolidated Balance Sheets...................................... 30
Consolidated Statements of Operations............................ 31
Consolidated Statement of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency).......... 32
Consolidated Statements of Cash Flows............................ 33
Notes to Consolidated Financial Statements....................... 35
28
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, 2000 and 1999, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' equity (net capital deficiency), and cash flows of CyberSource
Corporation for each of the three years in the period ended December 31, 2000.
Our audit also included the financial statement schedule in the Index at
14(a)(2). 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ Ernst & Young LLP
San Jose, California
January 17, 2001
29
CYBERSOURCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
-------------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 26,129 $ 71,673
Short-term investments................................. 65,874 68,596
Accounts receivable, net of allowances of $2,080 and
$282 at December 31, 2000 and 1999.................... 8,689 3,212
Prepaid expenses and other current assets.............. 1,733 1,589
--------- ---------
Total current assets................................. 102,425 145,070
Goodwill and other intangible assets..................... 136,570 --
Property and equipment, net.............................. 21,554 8,300
Investment in joint venture.............................. 560 --
Other noncurrent assets.................................. 746 752
--------- ---------
Total assets......................................... $ 261,855 $ 154,122
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 1,108 $ 1,311
Other accrued liabilities.............................. 9,922 4,086
Deferred revenue....................................... 3,312 461
Current obligations under capital leases............... 415 661
Note payable to related party.......................... -- 600
--------- ---------
Total current liabilities............................ 14,757 7,119
Noncurrent obligations under capital leases.............. 65 444
Commitments and contingencies
Common stock, $0.001 par value:
Authorized shares--50,000,000
Issued and outstanding shares--35,039,560 in 2000
and 25,594,709 in 1999................................ 35 26
Additional paid-in capital............................... 366,526 187,828
Deferred compensation.................................... (4,413) (791)
Accumulated other comprehensive loss..................... (39) (412)
Accumulated deficit...................................... (115,076) (40,092)
--------- ---------
Total stockholders' equity........................... 247,033 146,559
--------- ---------
Total liabilities and stockholders' equity........... $ 261,855 $ 154,122
========= =========
See accompanying notes.
30
CYBERSOURCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Transaction and support....................... $ 19,950 $ 11,828 $ 3,252
Professional services......................... 8,986 1,103 132
Enterprise software........................... 988 -- --
-------- -------- --------
Total revenues............................... 29,924 12,931 3,384
Cost of revenues:
Transaction and support....................... 15,933 9,951 3,286
Professional services......................... 5,806 997 185
Enterprise software........................... 421 -- --
Amortization of developed technology.......... 1,001 -- --
-------- -------- --------
Total cost of revenues....................... 23,161 10,948 3,471
Gross profit (loss).............................. 6,763 1,983 (87)
Operating expenses:
Product development............................ 16,103 7,807 3,831
Sales and marketing............................ 29,400 15,110 4,184
General and administrative..................... 13,532 6,023 2,079
In-process research and development............ 14,500 -- --
Amortization of goodwill and other intangible
assets........................................ 12,961 -- --
Acquisition related costs...................... 834 -- --
Deferred compensation amortization............. 1,521 4,716 18
-------- -------- --------
Total operating expenses..................... 88,851 33,656 10,112
-------- -------- --------
Loss from operations............................. (82,088) (31,673) (10,199)
Interest income.................................. 7,304 2,123 108
Interest expense................................. (200) (295) (156)
-------- -------- --------
Net loss......................................... $(74,984) $(29,845) $(10,247)
======== ======== ========
Basic and diluted net loss per share............. $ (2.63) $ (1.95) $ (2.08)
======== ======== ========
Shares used in computing basic and diluted net
loss per share.................................. 28,472 15,267 4,924
======== ======== ========
See accompanying notes.
31
CYBERSOURCE CORPORATION
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(In thousands, except share amounts)
Redeemable
Convertible Accumulated
Preferred Stock Common Stock Additional Deferred Other Accumu-
--------------------- ------------------- Paid in Compen- Comprehensive lated
Shares Amount Shares Amount Capital sation Loss Deficit Total
----------- -------- --------- --------- ------ --------- --------- --------- -------
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
Sale of
common stock......... -- -- 717,572 1 502 -- -- -- 503
Common shares
issued for
services............. -- -- 19,570 -- 14 -- -- -- 14
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.................. -- -- -- -- -- -- -- (10,247) (10,247)
--------- ------- --------- ------ ------- ------ ------ ------- --------
Balance at
December 31,
1998.................. 16,957,061 18,911 6,143,678 6 1,715 (142) -- (10,247) (8,668)
Common shares
issued for
services.............. -- -- 100,782 -- 678 -- -- -- 678
Issuance of
common stock
under stock
option plans.......... -- -- 321,405 1 226 -- -- -- 227
Sale of
common stock.......... -- -- 723,051 1 554 -- -- -- 555
Compensation
related to common
stock issued to
an employee........... -- -- -- -- 3,580 -- -- -- 3,580
Deferred
compensation
related to stock
option grants......... -- -- -- -- 1,188 (1,188) -- -- --
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......... -- -- -- -- -- 539 -- -- 539
Unrealized loss
on short-term
investments.......... -- -- -- -- -- -- (412) -- (412)
Net loss............. -- -- -- -- -- -- -- (29,845) (29,845)
-------
Comprehensive
loss................. -- -- -- -- -- -- -- -- (30,257)
----------- -------- ---------- ----- -------- ----- ----- ------- -------
Balance at
December 31,
1999................. -- -- 25,594,709 26 187,828 (791) (412) (40,092) 146,559
Issuance of
common stock
under stock
option plans........... -- -- 550,088 -- 1,214 -- -- -- 1,214
Issuance of
common stock
under employee
stock purchase
plan................... -- -- 71,019 -- 810 -- -- -- 810
Conversion of
accrued interest
on related party
note payable into
common stock........... -- -- 15,956 -- 731 -- -- -- 731
Deferred
compensation
related to stock
option grants.......... -- -- -- -- 524 (524) -- -- --
Common stock issued
in the acquisition
of PaylinX
Corporation............ -- -- 8,807,788 9 170,800 -- -- -- 170,809
Deferred
compensation
related to the
acquisition of
PaylinX Corporation -- -- -- -- 4,619 (4,619) -- -- --
Amortization of
deferred
compensation........... -- -- -- -- -- 1,521 -- -- 1,521
Unrealized gain on
short-term
investments............ -- -- -- -- -- -- 412 -- 412
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (39) -- (39)
Net loss -- -- -- -- -- -- -- (74,984) (74,984)
------------
Comprehensive loss..... -- -- -- -- -- -- -- -- (74,611)
------ ------ ---------- ----- -------- ------- ----- --------- ------------
Balance at
December 31,
2000................... -- -- 35,039,560 $ 35 $366,526 $(4,413 $ (39) $(115,076) $ 247,033
====== ====== ========== ====== ======== ======= ===== ========= ============
See accompanying notes.
32
CYBERSOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------
2000 1999 1998
--------- -------- --------
(In thousands)
Operating activities:
Net loss.......................................... $ (74,984) $(29,845) $(10,247)
Adjustments to reconcile net loss to net cash used
in operating activities:
In-process research and development............. 14,500 -- --
Amortization of developed technology............ 1,001 -- --
Common stock issued for services rendered and as
compensation................................... -- 4,258 14
Depreciation.................................... 5,452 2,549 795
Amortization of deferred compensation........... 1,521 539 18
Amortization of goodwill and other intangible
assets......................................... 12,961 -- --
Changes in assets and liabilities:
Accounts receivable........................... (4,305) (2,349) (397)
Prepaid expenses and other current assets..... (37) (1,173) (302)
Other noncurrent assets....................... 510 (458) --
Accounts payable.............................. (271) 737 306
Other accrued liabilities..................... (1,960) 3,101 857
Deferred revenue.............................. 1,861 341 (30)
-------- -------- -------
Net cash used in operating activities............. (43,751) (22,300) (8,986)
Investing activities:
Purchases of property and equipment............... (16,512) (7,301) (1,531)
Investment in joint venture....................... (760) --
Purchases of short-term investments............... (117,866) (73,934) --
Sale of short-term investments.................... 121,000 4,926 --
Cash acquired from PaylinX Corporation............ 10,985 -- --
-------- -------- -------
Net cash used in investing activities............. (3,153) (76,309) (1,531)
Financing activities:
Proceeds from issuance of notes payable to
related parties.................................. -- 600 3,000
Principal payments on capital lease obligations... (625) (516) (67)
Loan to Beyond.com Corporation.................... -- -- (400)
Repayment of loan by Beyond.com Corporation....... -- -- 400
Proceeds from issuance of stock, net.............. -- 555 16,999
Proceeds from Public Offerings.................... -- 157,994 --
Proceeds from exercise of stock options and
issuance of common stock under the Employee
Stock Purchase Plan............................... 2,024 227 7
-------- -------- -------
Net cash provided by financing activities......... 1,399 158,860 19,939
-------- -------- -------
Effect of exchange rates on cash.................. (39) -- --
-------- -------- -------
Net increase (decrease)in cash and cash
equivalents...................................... (45,544) 60,251 9,422
Cash and cash equivalents at beginning of period.. 71,673 11,422 2,000
-------- -------- -------
Cash and cash equivalents at end of period........ $ 26,129 $ 71,673 $ 11,422
======== ======== =======
Supplemental schedule of cash flow information:
Interest paid..................................... $ 109 $ 295 $ 156
Supplemental schedule of noncash financing
activities
Common stock issued in the acquisition of
PaylinX Corporation .............................. $170,809 $ -- $ --
33
Property and equipment acquired under capital
leases........................................... $ -- $ 1,154 $ 480
Issuance of warrants to Visa and GE Capital....... $ -- $ -- $ 318
Deferred compensation related to stock option
grants........................................... $ 524 $ 1,188 $ 160
Deferred compensation related to the acquisition
of PaylinX Corporation........................... $ 4,619 $ -- $ --
Conversion of note payable and related accrued
interest into common stock....................... $ 731 $ -- $ --
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.
34
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
CyberSource Corporation ("the Company") is a leading developer and provider
of online commerce transaction processing services, software and consulting
expertise. Our solutions include those for payment, risk management systems,
tax, stored value and delivery assurance. Businesses engage the Company to
enhance online commerce transaction efficiency across multiple business units
with varying processing requirements.
Basis of Presentation
The accompanying consolidated financial statements reflect the financial
position and results of operations of the Company and its wholly owned
subsidiary. All intercompany transactions and balances have been eliminated.
On January 10, 2000, the Company acquired ExpressGold.com, Inc., a
privately held South Dakota Corporation ("ExpressGold"). The transaction is
being accounted for as a pooling of interests. The consolidated financial
statements have been restated to reflect the acquisition of ExpressGold as a
pooling of interests.
On September 18, 2000, the Company acquired PaylinX Corporation, a
privately held Missouri Corporation ("PaylinX"). The transaction has been
accounted for using the purchase method of accounting. The balance sheet as of
December 31, 2000 includes the net assets of PaylinX and the statement of
operations for the year ended December 31, 2000 includes the results of
operations of PaylinX for the period from September 18, 2000 to December 31,
2000.
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, 2000.
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 monthly commerce transaction
processing fees, support service fees, professional services and the sale of
enterprise software licenses and related maintenance. Transaction revenues are
recognized in the period in which the transactions occur. Professional services
revenue and support service fees are recognized as the related services are
provided and costs are incurred. Enterprise software license and maintenance
revenue is recognized when all elements of a contract have been delivered. The
Company does not have vendor-specific objective evidence for license or
maintenance revenue. For enterprise software arrangements where maintenance is
the only undelivered element, the Company recognizes the entire contract ratably
over the term of the maintenance period. For the year ended December 31, 2000,
one customer accounted for 12% of revenue. For the years ended December 31, 1999
and 1998, Beyond.com, a related party, accounted for 13% and 24% of revenues,
respectively.
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, 2000 and 1999, cash equivalents consist
primarily of investments in money market funds. To date, the Company has not
recognized 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 immaterial as of
December 31, 2000 and 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 2000 or 1999.
35
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts Receivable and Concentration of Credit Risk
At December 31, 2000, no customer accounted for 10% or more of the
Company's accounts receivable balance. At December 31, 1999, 11% of accounts
receivable were due from Beyond.com Corporation, a related party. At December
31, 2000 and 1999, accounts receivable due from foreign customers were 4% and
11%, 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,
------------------
2000 1999
-------- -------
Computer equipment and software.............................. $ 22,159 $10,462
Furniture and fixtures....................................... 2,299 647
Office equipment............................................. 1,331 523
Leasehold improvements....................................... 4,931 382
-------- -------
30,720 12,014
Less accumulated depreciation and amortization............... 9,166 3,714
-------- -------
$ 21,554 $ 8,300
======== =======
Asset Impairment
The Company periodically assesses the carrying value of its long-lived
assets, including goodwill and other intangible assets, and recognizes
impairment losses if it is determined the carrying values are not recoverable.
To date, the Company has not recognized any impairment losses.
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 $1,802,000, $3,601,000 and $32,000 during
the years ended December 31, 2000, 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.
36
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
If the Company had reported net income for the year ended December 31,
2000, diluted earnings per share would have included the shares used in the
computation of net loss per share as well as additional common equivalent shares
related to outstanding options to purchase approximately 920,308 shares of
common stock at December 31, 2000. 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 3,123,267 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 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. Comprehensive income consists of net income and other
comprehensive income.
37
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 established 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 balance sheet and measure those instruments at fair value. This statement
is effective for all fiscal quarters in fiscal years beginning after July 1,
2000. The Company does not believe that the adoption of SFAS 133 will materially
change its financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements
and is effective in the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The Company adopted SAB 101 in the quarter ended December 31,
2000. The adoption of SAB 101 did not have a material impact on the Company's
statement of financial position or results of operations.
2. Acquisition of ExpressGold
On January 10, 2000, the Company acquired ExpressGold, a developer of an
Internet Stored Value platform that allows customers to offer gift certificates,
promotional certificates and corporate incentives to businesses and consumers.
Under the terms of the acquisition agreement, the Company issued 1,554,431
shares of CyberSource common stock in exchange for all of ExpressGold's common
stock. In addition, the Company issued 12,067 stock options in exchange for
ExpressGold's previously outstanding stock options. The number of shares of
CyberSource shares was calculated using an exchange ratio of approximately 1.3
shares of CyberSource for each share of ExpressGold common stock. The
transaction was accounted for as a pooling of interests, and accordingly, the
historical condensed consolidated financial statements of the Company have been
restated to include the financial position, results of operations and cash flows
of ExpressGold for all periods presented.
The following represents the results of operations for the years ended
December 31, 1999 and 1998 for the Company and ExpressGold prior to the
restatement resulting from the acquisition (in thousands):
Year Ended December 31, 1999 Year Ended December 31, 1998
---------------------------- ----------------------------
CyberSource ExpressGold CyberSource ExpressGold
----------- ----------- ----------- -----------
Revenues....................... $ 12,898 $ 33 $ 3,384 $ --
Net loss....................... $ (24,097) $ (5,748) $ (10,085) $ (162)
3. Acquisition of PaylinX
On September 18, 2000, the Company acquired all of the outstanding common
shares of PaylinX, a developer of a payment server platform for real-time credit
card transactions. Upon the closing of the acquisition, the Company issued
8,807,788 shares of its common stock to PaylinX stockholders, of which 880,726
remained in an escrow account as of December 31, 2000. In addition, the Company
issued 2,609,370 stock options in exchange for PaylinX's previously outstanding
stock options. The purchase price consists of approximately $143.0 million of
common stock issued to PaylinX stockholders, $27.8 million of stock options
assumed, $4.6 million of deferred compensation and $4.0 million of costs
incurred related to the acquisition.
The acquisition has been accounted for using the purchase method of
accounting. The Company has allocated the purchase price to assets and
liabilities based on management's best estimates of the respective fair values
with the excess cost over the net assets acquired allocated to goodwill as
follows (in thousands):
Fair value of net assets acquired...................... $ 13,700
Assembled workforce.................................... 3,500
Customer base.......................................... 13,000
Developed technology................................... 10,600
In-process technology.................................. 14,500
38
Covenants-not-to-compete............................... 5,000
Goodwill............................................... 114,500
Deferred compensation.................................. 4,600
---------
Total $ 179,400
The balance sheet as of December 31, 2000 includes the net assets of
PaylinX and the statement of operations includes the revenues and expenses of
PaylinX for the period from September 18, 2000, the date of acquisition, to
December 31, 2000. Goodwill and other intangible assets are being amortized on a
straight-line basis over the estimated useful lives of three to five years.
Goodwill and other intangible assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. The $14.5 million allocated to in-process research and
development was included in the Company's operating expenses during the year
ended December 31, 2000. Tangible assets of PaylinX acquired in the acquisition
principally include cash and cash equivalents, accounts receivable and property
and equipment. Liabilities of PaylinX assumed in the acquisition principally
include accounts payable and other liabilities.
The Company calculated amounts allocated to in-process technology using
established valuation techniques in the high technology industry and expensed
such amounts in the quarter ended September 30, 2000, when the acquisition was
consummated, because technological feasibility of the in-process technology had
not been achieved and no alternative future uses had been established. In-
process technology consisted of enhancements to PaylinX's payment and fraud
products, which were estimated to be approximately 80% and 50% complete,
respectively, as of the date of acquisition. These enhancements have since been
completed. The Company computed its valuation of purchased in-process technology
using a discounted cash flow analysis on the anticipated income stream to be
generated by the purchased technology.
The pro forma consolidated statement of operations data for the years ended
December 31, 2000 and 1999 set forth below gives effect to the acquisition of
PaylinX as if it occurred on January 1, 2000 and 1999, respectively. The
unaudited pro forma results include an adjustment to reflect amortization of
goodwill, intangible assets and deferred compensation and exclude the in-process
research and development expense recorded in conjunction with the acquisition.
The basic and diluted net loss per share amounts are computed using the weighted
average number of shares of common stock outstanding after the issuance of the
Company's common stock to acquire the outstanding shares of PaylinX.
Year Ended December 31,
---------------------------
(In thousands, except per share amounts) 2000 1999
----------------------------------------- ----------- -----------
Revenues................................. $ 36,896 $ 16,091
Net loss................................. $(105,790) $ (98,496)
Basic and diluted net loss per share..... $ (3.07) $ (4.09)
39
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Balance Sheet Detail
Other accrued liabilities consist of the following (in thousands):
December 31,
---------------
2000 1999
------ ------
Employee benefits and related expenses.............. $3,510 $1,341
Acquisition related expenses........................ 1,486 --
Employee stock purchase plan contributions.......... 505 313
Marketing expenses.................................. 85 369
Other liabilities................................... 4,336 2,063
------ ------
Total other accrued liabilities................... $9,922 $4,086
====== ======
5. Investment in Joint Venture
On March 1, 2000, the Company entered into a joint venture agreement with
Japanese partners Marubeni Corporation and Trans-Cosmos, Inc. to establish
CyberSource K.K. to provide commerce 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 which expire when
CyberSource K.K. achieves at least $2.0 million in quarterly revenue. As of
December 31, 2000, the Company contributed $761,000 to the joint venture. The
joint venture is being accounted for under the equity method of accounting until
the veto rights granted to the partners as described above expire. After such
date, the Company expects to consolidate the financial position and results of
operations of CyberSource K.K. As of December 31, 2000, the Company recorded a
loss from investment in the joint venture of approximately $200,000.
6. 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 make decisions
about how to allocate resources and assess performance. The Company's chief
operating decision maker is the Chief Executive Officer. The Company views its
operations as principally three segments, e-commerce transaction services and
support, professional services and enterprise software and manages the business
based on the revenues and cost of revenues of these segments. Additionally,
revenues from outside the United States were less than 10% for the years ended
December 31, 2000 and 1998. For the year ended December 31, 1999, revenues from
outside the United States were 23% of total revenues. For the year ended
December 31, 2000, one customer accounted for 12% of revenue. For the years
ended December 31, 1999 and 1998, Beyond.com Corporation, a related party,
accounted for 13% and 24% of revenues, respectively.
The following tables presents revenues and cost of revenues by the
Company's three business units for the years ended December 31, 2000, 1999 and
1998. 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 and cost of 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 and
cost of revenues are as follows (in thousands):
December 31,
---------------------------
2000 1999 1998
------- ------- -------
Revenues:
Commerce transaction services and support................ $19,950 $11,828 $ 3,252
Professional services.................................... 8,986 1,103 132
Enterprise software...................................... 988 -- --
------- ------- -------
Total revenues......................................... $29,924 $12,931 $ 3,384
======= ======= =======
Cost of revenues:
Commerce transaction services and support................ $15,933 $ 9,951 $ 3,286
Professional services.................................... 5,806 997 185
Enterprise software...................................... 1,422 -- --
------- ------- -------
Total cost of revenues................................. $23,161 $10,948 $ 3,471
======= ======= =======
40
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Comprehensive Loss
The components of accumulated other comprehensive loss are as follows (in
thousands):
Year Ended December 31,
--------------------------
2000 1999
---------- ----------
Unrealized loss on short-term
investments................................. $ -- $ (412)
Cumulative translation adjustment............. (39) --
--------- ---------
Accumulated other comprehensive loss.......... $ (39) $ (412)
========= =========
8. Commitments
The Company leases its primary facility and certain equipment under
noncancelable operating leases. The lease agreement for the Company's primary
facility expires in December 2006. Rental expense was approximately $3,459,000,
$1,143,000 and $467,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
The Company leases certain 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 at December 31, 2000 and 1999, respectively. Related
accumulated amortization was approximately $1,184,000 and $524,000 at December
31, 2000 and 1999, respectively. Amortization expense related to assets under
capital leases is included with depreciation expense.
Future minimum lease payments under noncancelable operating leases and
capital leases at December 31, 2000 are as follows (in thousands):
Operating Capital
Leases Leases
--------- -------
2001....................................................... $ 2,934 $ 460
2002....................................................... 2,891 45
2003....................................................... 2,974 -
2004....................................................... 3,023 -
2005 and thereafter........................................ 6,049 -
------- ------
Total minimum payments................................... $17,871 $ 505
=======
Less amount representing interest.......................... 25
------
Less current portion....................................... 415
------
$ 65
======
41
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stockholders' Equity
Preferred Shares
The Company is authorized to issue 4,988,842 shares of preferred stock. As
of December 31, 2000, there are no shares of preferred stock outstanding.
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.
The Company has reserved shares of common stock for future issuance at
December 31, 2000 as follows:
1998 and 1999 Stock Option Plans:
Options outstanding............................................... 8,881,409
Options available for future grants............................... 3,365,022
1999 Employee Stock Purchase Plan--shares available for future
purchase........................................................... 428,981
----------
12,675,412
==========
Warrants
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
$106,000, $106,000 and $28,000 of the value of the warrants to sales and
marketing expense in 2000, 1999 and 1998, respectively. In June 1999, all
warrants were exercised through a cashless net exercise into 774,512 shares of
preferred stock which were converted into 387,256 shares of the Company's common
stock immediately prior to the consummation of the Company's initial public
offering in June 1999.
42
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
In March 1998, the Company adopted its 1998 Stock Option Plan (the 1998
Option Plan). There are 1,900,000 shares of common stock authorized for issuance
under the 1998 Option Plan. The 1998 Option Plan provides for the issuance of
common stock and the granting of options to employees, officers, directors,
consultants, independent contractors, and advisors of the Company. The exercise
price of a nonqualifying stock option and an incentive stock option shall not be
less than 85% and 100%, respectively, of the fair value of the underlying shares
on the date of grant. Options granted under the 1998 Option Plan generally
become exercisable over four years at the rate of 25% 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
Additional shares reserved.................... 8,489,460 -- $ --
Options granted............................... (7,659,649) 7,659,649 $13.89
Options exercised............................. -- (550,088) $ 2.22
Options canceled.............................. 1,504,919 (1,504,919) $16.15
---------- --------- ------
3,365,022 8,881,409 $13.14
Balance at December 31, 2000.................. ========== ========= ======
In connection with certain stock options granted in 2000, 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 $524,000,
$1,188,000, and $160,000, respectively, which is being amortized on a graded
method over the four-year vesting period of the options. In fiscal 2000, 1999
and 1998, $1,521,000, $539,000 and $18,000 of this amount was amortized to
compensation expense, respectively.
43
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options outstanding at
December 31, 2000:
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
-------------- ----------- -------- ------------ ----------- --------
$0.015--$0.83 920,308 $ 0.64 8.89 569,913 $ 0.67
$2.469--$3.62 783,573 $ 3.52 8.38 269,582 $ 3.57
$3.9375--$6.25 1,815,494 $ 6.13 9.71 1,620,507 $ 6.21
$6.375--$6.75 1,300,091 $ 6.74 9.62 80,886 $ 6.75
$7.00--$10.75 1,343,026 $ 9.51 9.10 254,230 $ 9.01
$11.187--$16.312 581,350 $14.07 9.42 1,898 $15.25
$16.5--$28.5 923,550 $27.41 9.27 3,242 $21.91
$29.875--$66.25 1,214,017 $38.90 9.06 210,352 $39.46
--------- ---------
8,881,409 $13.14 3,010,610 $ 7.52
========= =========
At December 31, 1999 and 1998, 246,039 and 145,901 options were exercisable
at a weighted average exercise price of $1.07 and $0.09, 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.
During the year ended December 31, 2000, the Company issued 71,019 shares of
common stock to employees under the terms of the plan.
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 2000 and 1999 and the minimum value method in 1998 with
the following weighted average assumptions: a risk-free interest rate of 6.15%,
5.55% and 5.15% for 2000, 1999, and 1998, respectively; no dividend yield; a
volatility factor of the expected market price of the Company's common stock of
1.40 for 2000, 1.13 for 1999 and no volatility factor for 1998; and a weighted
average expected life of the option of four years.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Had compensation cost
been determined using the fair value at the grant date for options granted
calculated using the 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,
---------------------------
2000 1999 1998
-------- -------- -------
Pro forma net loss (in thousands).............. $(99,294) $(32,607) $(10,250)
Pro forma and diluted net loss per share....... $ (3.51) $ (2.14) $ (2.08)
44
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of options granted, which is the value
assigned to the options under SFAS 123, was $16.91, $2.51 and $0.08 per share
for options granted during 2000, 1999 and 1998, respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 2000, 1999 and 1998 is not representative of the effects on net
income (loss) for future years, as future years will include the effects of
options vesting as well as the impact of multiple years of stock option grants.
10. Related Party Transactions
The CEO of the Company is the Chairman of the Board of Beyond.com, and the
companies also have one other member of their Board of Directors in common As of
December 31, 2000 and 1999, the Company had accounts receivable due from
Beyond.com of approximately $329,000 and $354,000, respectively.
For the year ended December 31, 2000, legal fees of approximately $863,000
were paid to Morrison & Foerster L.L.P., a law firm in which a director of the
Company is a partner. As of December 31, 2000, the Company had accounts payable
due Morrison & Foerster L.L.P. of approximately $3,000.
ExpressGold had a note payable to its majority shareholder totaling
$600,000 at December 31, 1999. The note accrues interest at 11% and is
unsecured. In conjunction with the acquisition of ExpressGold by the Company,
the note was cancelled in exchange for 15,956 shares of the Company's common
stock.
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.
11. Litigation and Contingencies
In November 1999, a lawsuit was filed against the Company alleging that the
Company's payment services infringe upon two patents to certain automated
network payment, purchase and processing systems held by the plaintiff. While
there can be no assurances as to the outcome of this litigation, the Company has
obtained opinions of patent counsel that the Company's payment services do not
infringe upon either of the plaintiff's patents. Initial Discovery has been
completed and we filed a motion to specify how certain claims in the patents
should be construed, for which the court held a hearing on February 1, 2001. The
court has not yet rendered a decision on the motion. The Company intends to
vigorously defend against the claims asserted.
On September 1, 2000, an action now entitled Daragh Crowley v. CyberSource
Corp. and Amazon.com, Inc. Civil Action No. C-00-3180 (WHO), was filed by
plaintiffs on behalf of themselves and, purportedly, a class of all other
similarly situated persons in the United States District Court of Northern
California. In February 2001, plaintiffs amended their complaint to allege that
the action purports to be a class action on belief of "all persons who entered
into online transactions with Amazon.com prior to August 31, 2000 whose personal
and private information was secretly transmitted, used and/or disclosed" by
defendants allegedly without those persons' authorization or consent. Plaintiffs
allege violations by the Company of a federal statute prohibiting the
interception and disclosure of electronic communications, as well as common law
violations of unjust enrichment, invasion of privacy, negligence, and fraudulent
concealment. Plaintiffs seek statutory and other unspecified damages and seek to
enjoin the allegedly unlawful practices. The Company is moving to dismiss the
complaint for failure to state a legal claim against the Company. Discovery has
not yet begun, and no trial date had been set. While there can be no assurances
as to the outcome of this litigation, management believes that the claims
alleged are without merit and plans to defend the action vigorously.
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.
12. Income Taxes
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $78,000,000 and $55,000,000, respectively.
As of December 31, 2000, the Company also had federal and state research credit
carryforwards of approximately $700,000 and $600,000, respectively.
The net operating loss and credit carryforwards will expire at various
dates beginning in 2005 through 2020, 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.
45
CYBERSOURCE 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:
2000 1999
----------- -----------
Net operating loss carryforwards.................... $ 29,600 $ 10,800
Research credit carryforwards....................... 1,100 700
Other, net.......................................... 6,860 1,700
----------- -----------
Deferred tax assets................................. $ 37,560 $ 13,200
Deferred tax liability.............................. $ (14,426) --
----------- -----------
Net deferred tax assets............................. $ 23,134 $ 13,200
Valuation allowance................................. (23,134) (13,200)
----------- -----------
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 2000 and 1999, 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 $9,934,000 during 2000 and increased by $9,300,000 during 1999.
13. Subsequent Event (Unaudited)
During the first quarter of 2001, the Company will incur up to $5.0 million
in restructuring charges, primarily relating to a reduction of approximately 123
employees and the write-off of excess equipment, as the Company restructured and
realigned its resources to better manage and control its business.
46
CYBERSOURCE CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA -- UNAUDITED
(In thousands, except share amounts)
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
------------- -------------- ------------- -------------- -----------
Fiscal 2000
- -----------
Revenues $ 6,750 $ 7,088 $ 7,760 $ 8,326 $ 29,924
Gross profit 1,408 1,683 2,009 1,663 6,763
Net loss (9,140) (10,467) (27,009) (28,368) (74,984)
Basic and diluted
net loss per share $ (0.36) $ (0.40) $ (0.99) $ (0.81) $ (2.63)
Fiscal 1999
- -----------
Revenues $ 1,713 $ 2,536 $ 3,644 $ 5,038 $ 12,931
Gross profit 208 291 520 964 1,983
Net loss (4,373) (7,133) (7,008) (11,331) (29,845)
Basic and diluted
net loss per share $ (0.70) $ (1.06) $ (0.30) $ (0.46) $ (1.95)
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 2001 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 2001 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 2001 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 2001 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........................ 29
Consolidated Balance Sheets............................................. 30
Consolidated Statements of Operations................................... 31
Consolidated Statement of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Net Capital Deficiency)....................... 32
Consolidated Statements of Cash Flows................................... 33
Notes to Consolidated Financial Statements.............................. 35
2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts is listed on page 49 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 51.
(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, 2000.
48
CYBERSOURCE CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS December 31, 1998, 1999 and 2000
(In thousands)
Balance at Amounts Charged
Beginning of to Revenue, Costs, Write-offs and Balance at
Year or Expenses Recoveries End of Year
------------ ------------------ -------------- -----------
1998
Allowance for Doubtful
Accounts............. $332 $193 $296 $229
1999
Allowance for Doubtful
Accounts............. $229 $367 $314 $282
2000
Allowance for Doubtful
Accounts............. $282 $2,775 $977 $2,080
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, 2001.
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 Steven D.
Pellizzer, 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, 2001
- --------------------------------------
William S. McKiernan
/s/ Steven D. Pellizzer Corporate Controller March 30, 2001
- --------------------------------------
Steven D. Pellizzer
/s/ Linda Fayne Levinson Director March 30, 2001
- --------------------------------------
Linda Fayne Levinson
/s/ John J. McDonnell, Jr. Director March 30, 2001
- --------------------------------------
John J. McDonnell, Jr.
/s/ Steven P. Novak Director March 30, 2001
- --------------------------------------
Steven P. Novak
/s/ Richard Scudellari Director March 30, 2001
- --------------------------------------
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.
10.1*+ Form of Indemnification Agreement between the Registrant and each
of its directors and officers.
10.2*+ 1998 Stock Option Plan.
10.3*+ 1999 Stock Option Plan.
10.4* Standard Office Lease dated August 20, 1996 by and between
California State Automobile Association Inter-Insurance Bureau as
Landlord and CyberSource Corporation as Tenant.
10.5* First Amendment to Lease dated October 20, 1997 by and between
California State Association Inter-Insurance Bureau as Landlord and
CyberSource Corporation as Tenant.
10.6* Assignment of Standard Office Lease dated December 31, 1997 by and
between CyberSource Corporation as Assignor and Internet Commerce
Services Corporation as Assignee.
10.7* Sublease dated July 1, 1998 by and between MultiGen Inc. of
California as Sublessor and CyberSource of California as Sublessee.
Second Amendment to Lease dated October 30, 1998 by and between
10.8* California State Automobile Association Inter-Insurance Bureau as
Landlord and CyberSource Corporation as Tenant.
10.9*x Conveyance Agreement dated December 31, 1997 by and between
CyberSource Corporation and Internet Commerce Service Corporation.
10.10*x Amended and Restated Inter-Company Cross License Agreement dated
May 19, 1998 by and between Internet Commerce Services Corporation
and software.net Corporation.
10.11*x Internet Commerce Services Agreement dated April 23, 1998 by and
between Internet Commerce Services Corporation and software.net
Corporation.
10.12* Amended and Restated Investors' Rights Agreement dated October 21,
1998.
10.13* Amended and Restated Convertible Promissory Note, dated October 21,
1998.
10.14*+ 1999 Employee Stock Purchase Plan.
10.15**x Development and Marketing Agreement dated July 26, 1999 by and
between CyberSource Corporation and VISA U.S.A., Inc.
10.16**x CyberSource Internet Commerce Services Agreement dated May 1, 1999
by and between CyberSource Corporation and Beyond.com.
10.17**x 1999 Nonqualified Stock Option Plan.
10.18**x Software License Agreement dated June 30, 1999 by and between
CyberSource Corporation and Beyond.com Corporation.
10.19*** Lease Agreement dated November 3, 1999 by and between Shoreline
Investments V and CyberSource Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Powers of Attorney. Reference is made to Page 50.
- --------
* 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).
*** Previously filed as an exhibit, bearing the same number, to the Registrant's
Form 10-K for year 1999 (No. 000-26477).
x Confidential treatment granted as to portions of this exhibit.
+ Management contract or compensation plan, contract or arrangement.
51