CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Summary of Significant Accounting Policies
|
The Company
CyberSource Corporation (CyberSource or the Company) provides secure electronic payment and risk management
solutions to organizations that process orders for goods and services over the Internet. CyberSources payment solutions allow eCommerce merchants to accept a wide range of online payment options, from credit cards and electronic checks, to
global payment options and emerging payment types. The Companys risk and compliance management tools address complexities common to online merchants such as credit card fraud, online tax requirements and export controls. The Companys
reporting and management tools facilitate the automation of the flow of complex eCommerce processes, such as recurring billing and payment reconciliation. The Company partners with and connects to a large network of payment processors and other
payment service providers to offer merchants a single source solution.
Basis of Presentation
The accompanying consolidated financial statements reflect the financial position and results of operations of the Company and its wholly owned
subsidiaries. All intercompany transactions and balances have been eliminated.
On November 1, 2007, the Company acquired
Authorize.Net Holdings, Inc. (Authorize.Net). The transaction has been accounted for using the purchase method of accounting. The balance sheet as of December 31, 2007 includes the net assets of Authorize.Net and the statement of
operations for the year ended December 31, 2007 includes the results of operations of Authorize.Net for the period from November 1, 2007, the date of acquisition, to December 31, 2007.
Foreign Currency Translation
The financial
statements of the Companys non-U.S. subsidiaries are translated into U.S. Dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. Assets and liabilities
of the Companys subsidiaries 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. Foreign currency translation adjustments are
recorded in other comprehensive income (loss). Gains and losses realized from foreign currency transactions denominated in currencies other than the subsidiarys functional currency were approximately $0.1 million in losses for the year ended
December 31, 2006 and approximately $0.1 million in gains for the year ended December 31, 2007.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
The Company derives its revenues primarily from monthly commerce transaction processing fees and global acquiring fees, support service fees and setup fees. The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (4) is based on managements judgments regarding the collectibility of those
fees.
Transaction revenues are recognized in the period in which the transactions occur. The Company derives a significant portion of its
transaction processing revenues from global acquiring fees charged to merchants for payment processing services. The Companys fees, which are primarily a percentage of the dollar amount of each transaction processed, are based upon the
merchants monthly charge volume and risk profile. In addition, the Company records revenues for miscellaneous services related to global acquiring, such as fees for processing credit card chargebacks. In accordance with Emerging Issues Task
Force 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent (EITF 99-19), the Company recognizes these fees on a gross basis as it is the primary agent in the transaction in the period the merchants transactions are
processed. Related interchange fees paid to card issuing banks and assessments paid to credit card associations are recognized in cost of revenues at that time.
Provisions are provided for sales returns and are based on historical experience and other known factors. For the years ended December 31, 2007, 2006 and 2005, no customer accounted for more than 10% of total
revenues.
36
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 Companys chief operating decision maker is the Chief Executive Officer (CEO). As of December 31, 2007, the Company views its operations as one segment,
commerce transaction services and support and manages the business based on the revenues of this segment.
Cash and 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, 2007 and 2006, cash equivalents consist primarily of investments in money market funds.
Short-term investments are classified as available-for-sale and are carried at fair market value. As of December 31, 2007, the Company had no short-term investments. As of December 31, 2006, short-term investments were primarily
composed of government and corporate bonds with an original maturity greater than three months and less than one year. Also included in short-term investments as of December 31, 2006 were approximately $6.1 million in auction rate securities
with final maturities ranging from 28 to 40 years. Although some maturities may extend beyond one year, these securities are available to be used for current operations and therefore, are classified as short-term investments as all of the
Companys auction rate securities had auction dates within one year of the prior auction date. Cash and cash equivalents and short-term investments consist of the following as of December 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value at
December 31,
2007
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Fair Market
Value at
December 31,
2007
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
31,432
|
|
$
|
|
|
$
|
|
|
|
$
|
31,432
|
Money market funds
|
|
|
8,961
|
|
|
|
|
|
|
|
|
|
8,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and short-term investments
|
|
$
|
40,393
|
|
$
|
|
|
$
|
|
|
|
$
|
40,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value at
December 31,
2006
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Fair Market
Value at
December 31,
2006
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,606
|
|
$
|
|
|
$
|
|
|
|
$
|
5,606
|
Commercial paper
|
|
|
1,051
|
|
|
|
|
|
|
|
|
|
1,051
|
Money market funds
|
|
|
15,044
|
|
|
|
|
|
|
|
|
|
15,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
21,701
|
|
|
|
|
|
|
|
|
|
21,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
6,061
|
|
|
|
|
|
|
|
|
|
6,061
|
Corporate bonds
|
|
|
2,011
|
|
|
1
|
|
|
|
|
|
|
2,012
|
U.S. Government and agency securities
|
|
|
2,033
|
|
|
|
|
|
(1
|
)
|
|
|
2,032
|
Commercial paper
|
|
|
23,164
|
|
|
|
|
|
(26
|
)
|
|
|
23,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
33,269
|
|
|
1
|
|
|
(27
|
)
|
|
|
33,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and short-term investments
|
|
$
|
54,970
|
|
$
|
1
|
|
$
|
(27
|
)
|
|
$
|
54,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no net unrealized losses on short-term investments, which represent the difference
between the fair market value and the amortized cost as of December 31, 2007. Net unrealized losses on short-term investments were $26,000 as of December 31, 2006. There were no realized gains or losses from the sale of short-term
investments during fiscal 2007, 2006 or 2005.
37
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable.
Cash and cash equivalents and short-term investments are invested in major financial institutions in the United States. Such deposits may
be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Companys investments are financially sound and, accordingly, minimal credit risk exists with respect
to these investments.
The accounts receivable of the Company and its subsidiaries are derived from sales to customers located primarily in
the United States and Europe. The Company performs ongoing credit evaluations of its customers. The Company generally does not require collateral.
An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. At December 31, 2007 and 2006, no customer accounted for 10% or more of the Companys
accounts receivable balance. At December 31, 2007 and 2006, the percentage of accounts receivable due from foreign customers was 14% and 15%, respectively.
The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other hedging arrangements.
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 to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease terms or the estimated useful lives. Depreciation expense was $2.4 million,
$1.4 million and $0.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Property and equipment consist of
the following (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Computer equipment and software
|
|
$
|
32,894
|
|
$
|
24,930
|
Furniture and fixtures
|
|
|
2,240
|
|
|
2,027
|
Office equipment
|
|
|
1,041
|
|
|
1,000
|
Leasehold improvements
|
|
|
3,041
|
|
|
2,793
|
Internally developed software
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,077
|
|
|
30,750
|
Less accumulated depreciation and amortization
|
|
|
29,413
|
|
|
27,132
|
|
|
|
|
|
|
|
|
|
$
|
10,664
|
|
$
|
3,618
|
|
|
|
|
|
|
|
Product Development
Product development expenditures are charged to operations as incurred. SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires capitalization of
certain software development costs subsequent to the establishment of technological feasibility. Based on the Companys product development process, technological feasibility is established upon the completion of a working model. To date, costs
incurred by the Company between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, the Company has charged all such costs to product development expense in the
period incurred.
Internal Use Software
The company follows the guidance set forth in Statement of Position No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use (SOP 98-1), in accounting for the development of
its on demand use systems. SOP 98-1 requires companies to capitalize qualifying computer software costs which are incurred during the application development stage, and to amortize them over the softwares estimated useful life. The Company
amortizes such costs when the
38
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
systems become operational. As a result of the acquisition of Authorize.Net, the Company acquired approximately $0.8 million of internal use software.
Approximately $0.1 million of this software was operational prior to the acquisition and is being amortized over its remaining useful life. Approximately $0.7 million of this software primarily relates to upgrades and enhancements to the
Authorize.Net proprietary billing system and was not placed in service as of December 31, 2007.
Advertising Expense
The cost of advertising is recorded as an expense when incurred. Advertising costs were approximately $31,000, $54,000 and $10,000 during the years ended
December 31, 2007, 2006 and 2005, respectively.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment (SFAS 123R), which the Company adopted as of January 1, 2006 (the Companys first fiscal quarter of 2006), using the modified prospective method. Total stock-based compensation expense recognized in the
consolidated statement of operations for the years ended December 31, 2007 and 2006 was $7.0 and $4.7 million, respectively, before income taxes. Prior to the January 1, 2006 adoption of SFAS 123R, the Company accounted for stock-based
compensation using Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation Transition and Disclosure (SFAS 148). SFAS 148 required disclosure of the effects of an entitys
accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. As permitted under SFAS 148, the Company adopted the disclosure only provisions and
continued to follow the intrinsic value method of accounting for employee stock options in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25).
The following table shows the effect on net earnings and earnings per share for the year ended December 31, 2005 had compensation cost been
recognized based upon the estimated fair value on the grant date of stock options, and employee stock purchase plan (ESPP) shares, in accordance with SFAS 123R, as amended by SFAS 148 (in thousands, except per share amounts):
|
|
|
|
|
|
|
2005
|
|
Net income, as reported
|
|
$
|
9,246
|
|
Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax
effects
|
|
|
(3,009
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
6,237
|
|
|
|
|
|
|
|
|
Basic net income per share, as reported
|
|
$
|
0.28
|
|
|
|
|
|
|
Pro forma basic net income per share
|
|
$
|
0.19
|
|
|
|
|
|
|
Diluted net income per share, as reported
|
|
$
|
0.26
|
|
|
|
|
|
|
Pro forma diluted net income per share
|
|
$
|
0.17
|
|
|
|
|
|
|
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 a total of 15,500,000 shares of common stock for issuance under the 1999 Option Plan. The provisions of the 1999 Option Plan are similar to those of the 1998 Option Plan.
39
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In October 1999, the Company adopted the 1999 Nonqualified Stock Option Plan (the 1999
Nonqualified Option Plan). The Company has reserved a total of 1,737,500 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 September 2000, the Company assumed the PaylinX Stock Option Plan as a result of its acquisition of PaylinX Corporation in September 2000. During 2004, the Company retired the unissued shares available for grant.
Options previously granted under this plan that have not yet expired or otherwise become unexercisable continue to be administered under such plan, and any portions that expire or become unexercisable for any reason shall be canceled and be
unavailable for future issuance.
Stock options to purchase the Companys common stock are granted at prices equal to the fair market
value on the date of grant. Options generally vest monthly over a four year period beginning from the date of grant and generally expire six to ten years from the date of grant. Options granted to non-employee directors generally become vested
nine months from the date of grant. Nearly all outstanding stock options are non-qualified stock options. As of December 31, 2007, 21.1 million shares are authorized for issuance under the Companys stock option plans.
A summary of the Companys stock option activity is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
average
exercise price
per
share
|
|
Weighted
average
remaining
contractual life
|
|
Aggregate
intrinsic
value
|
Outstanding as of December 31, 2006
|
|
7,500,916
|
|
|
|
7.37
|
|
|
|
|
|
Granted
|
|
2,639,354
|
|
|
|
11.79
|
|
|
|
|
|
Exercised
|
|
(1,330,898
|
)
|
|
|
5.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(320,752
|
)
|
|
|
11.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2007
|
|
8,488,620
|
|
|
$
|
8.95
|
|
4.92
|
|
$
|
78,764,265
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2007
|
|
7,815,140
|
|
|
$
|
8.80
|
|
4.89
|
|
$
|
73,930,313
|
Exercisable as of December 31, 2007
|
|
4,703,979
|
|
|
$
|
7.42
|
|
4.60
|
|
$
|
52,533,274
|
The following table summarizes information about options outstanding at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Number of
Options
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
Number of
Options
Exercisable
|
|
Weighted
Average
Exercise Price
|
$
|
0.05$ 4.96
|
|
1,825,934
|
|
$
|
3.08
|
|
4.43
|
|
1,765,954
|
|
$
|
3.04
|
$
|
4.99$ 7.01
|
|
1,764,282
|
|
$
|
5.97
|
|
5.38
|
|
1,363,256
|
|
$
|
6.02
|
$
|
7.07$10.46
|
|
2,424,871
|
|
$
|
9.34
|
|
4.38
|
|
862,366
|
|
$
|
8.88
|
$
|
10.53$15.60
|
|
2,202,783
|
|
$
|
12.93
|
|
5.84
|
|
466,153
|
|
$
|
11.72
|
$
|
15.74$64.63
|
|
270,750
|
|
$
|
31.86
|
|
2.47
|
|
246,250
|
|
$
|
33.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,488,620
|
|
$
|
8.95
|
|
|
|
4,703,979
|
|
$
|
7.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, 4,079,790 and 4,020,129 options were exercisable at a weighted
average exercise price of $6.59 and $6.30, respectively.
For stock options granted during 2007, 2006 and 2005, the Company determined the
fair value at the date of grant or purchase using the Black-Scholes option valuation model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Risk-free interest rate
|
|
4.34% - 4.74%
|
|
4.64% - 4.75%
|
|
4.37%
|
Dividend yield
|
|
|
|
|
|
|
Volatility
|
|
0.51 - 0.58
|
|
0.58 - 0.64
|
|
0.60
|
Expected life (years)
|
|
3.46
|
|
2.96
|
|
3.97
|
40
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The expected life of the options represents the estimated period of time until exercise and is based
on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of the Companys stock
over the expected life of the options. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues with an equivalent remaining expected life. The Company has not paid dividends in the past and does not plan to
pay any dividends in the near future. The weighted average fair value of options granted was $5.81, $4.80 and $2.81 per share for options granted during 2007, 2006 and 2005, respectively.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions used to
calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Companys experience. Options granted are valued using the single option valuation approach, and the resulting expense is
recognized on a straight-line basis over the vesting period of the option. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on the Companys historical experience
and future expectations. Prior to the adoption of SFAS 123R, the effect of forfeitures on the pro forma expense amounts was recognized as the forfeitures occurred.
As of December 31, 2007, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $18.4 million, which is expected to be recognized over a weighted average
period of approximately 2.8 years. During 2007, 2006 and 2005, the total intrinsic value of stock options exercised was approximately $11.8 million, $6.9 million and $3.5 million, respectively. During 2007, the total cash received from the exercise
of stock options was approximately $6.9 million.
During 2006, the Company granted 100,000 restricted shares at a weighted average grant
date fair value of $10.46. No shares have vested as of December 31, 2007.
Employee Stock Purchase Plan
In June 1999, the Companys Board of Directors and stockholders adopted the 1999 Employee Stock Purchase Plan (ESPP). The Company has
reserved a total of 700,000 shares of common stock for issuance under this plan. In accordance with Section 423 of the Internal Revenue Code, this plan permitted eligible employees to authorize payroll deductions of up to 10% of their base
compensation to purchase shares of the Companys 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. In July 2005, the Company amended the ESPP, permitting
eligible employees to authorize payroll deductions of up to 10% of their base compensation to purchase shares of the Companys common stock at 95% of the fair market value of the common stock on the purchase date. As a result of this amendment
and the provisions of SFAS 123R, shares granted under the ESPP are non-compensatory. During the year ended December 31, 2007, the Company issued 7,345 shares of common stock to employees under the terms of the plan. As of December 31,
2007, 139,071 shares remain available for purchase under the plan.
For ESPP shares purchased in 2005, the Company determined the fair
value at the date of purchase using the Black-Scholes option valuation model and weighted average assumptions for volatility of 0.44, expected life of 6 months and risk-free interest rate of 3.50%. The weighted average fair value for shares
purchased under the Companys ESPP was $0.33 per share during 2005.
Long-Lived Assets
Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS 142) requires that the
Company perform tests for impairment of its goodwill annually and between annual tests in certain circumstances. As of December 31, 2007, the Company had recorded goodwill in connection with its acquisition of Authorize.Net in November 2007,
with a carrying value of approximately $291.5 million. Significant judgments could be required to evaluate goodwill for impairment in the future including the determination of reporting units, estimating future cash flows, determining appropriate
discount rates and other assumptions. The Company will evaluate the goodwill related to the Authorize.Net acquisition on an annual basis as of July 31.
Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144) requires that the Company perform tests for impairment of its
intangible assets subject to amortization annually
41
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
and more frequently whenever events or circumstances suggest that its intangible assets may be impaired. As of December 31, 2007, the Company had
recorded intangible assets in connection with its acquisition of Authorize.Net with a carrying value of approximately $158.3 million.
To
evaluate potential impairment, SFAS 142 and SFAS 144 require the Company to assess whether the estimated fair value of its goodwill and intangible assets are greater than their respective carrying value at the time of the test. Accordingly, there
could be significant judgment in determining the fair values attributable to goodwill and intangible assets, including the determination of reporting units, estimating future cash flows, determining appropriate discount rates and other assumptions.
Net Income Per Share
In accordance
with Statement of Financial Accounting Standards No. 128, Earnings Per Share, basic and diluted net income per share has been computed using the weighted average number of shares of common stock outstanding during the period.
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 as well as the effects of net operating loss and credit carryforwards to determine deferred tax assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected to more likely than not be realized. Prior to the fourth quarter of 2005, the Company recorded a full valuation allowance to reserve for the benefit of its deferred tax
assets due to the uncertainty surrounding its ability to realize these assets.
During the fourth quarter of 2005, the Company recorded an
income tax benefit of approximately $3.1 million which included a $3.2 million reduction in the Companys valuation allowance against its deferred tax assets. During the fourth quarter of 2006, the Company recorded an income tax benefit of
approximately $11.0 million which included a $9.9 million reduction in the Companys valuation allowance against its deferred tax assets. During the fourth quarter of 2007, the Company recorded an income tax benefit of approximately $1.1
million which included a $1.0 million reduction in the Companys valuation allowance against its deferred tax assets.
Accumulated Other
Comprehensive Loss
The Companys comprehensive income consists of its net income and other comprehensive income (loss), including
unrealized gains or losses on available for sale securities and foreign currency translation gains or losses.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157), which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In December 2007, the FASB released a proposed FASB Staff Position (FSP FAS 157-bEffective Date of FASB Statement No. 157) which, if adopted as proposed, would
delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently
assessing the impact that SFAS 157 may have on our results of operations and financial position.
In February 2007, the FASB issued
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is
effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has elected not to adopt SFAS 159.
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable
42
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure
requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that the Company may pursue after its effective date.
2.
|
Authorize.Net Acquisition
|
On November 1,
2007, the Company completed the acquisition of Authorize.Net Holdings, Inc., a provider of products and services primarily for businesses that sell products and services online. The Company believes that CyberSource and Authorize.Nets
respective businesses complement each other and the acquisition will increase the scale and scope of the combined company, diversify the combined companys service offerings, and create opportunities for cost reductions through integration
savings.
Pursuant to the terms of the merger agreement, each Authorize.Net common share outstanding immediately prior to the consummation
of the merger was converted into the right to receive 1.1611 shares of CyberSource common stock and a pro-rata share of $125 million in cash. We issued approximately 33 million shares of CyberSource common stock and paid approximately $125
million of cash in exchange for all shares of Authorize.Net common stock outstanding immediately prior to the merger. The Company assumed outstanding Authorize.Net options to purchase approximately 800,000 shares of common stock. The total purchase
price was as follows (in thousands):
|
|
|
|
|
|
Amount
|
Cash
|
|
$
|
125,092
|
Fair value of CyberSource common shares issued
|
|
|
411,194
|
Fair value of fully vested stock options assumed
|
|
|
1,773
|
Acquisition-related costs
|
|
|
4,742
|
|
|
|
|
Total
|
|
$
|
542,801
|
|
|
|
|
The fair value of Authorize.Net stock options assumed was determined using a Black-Scholes option
valuation model. The use of the Black-Scholes option valuation model is consistent with our valuation of stock options in accordance with SFAS 123(R).
The acquisition has been accounted for using the purchase method of accounting. Under the purchase method of accounting, the total purchase price as shown in the table above is allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets
acquired is determined using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. The purchase price allocation was as follows (in thousands):
|
|
|
|
|
|
|
Amount
|
|
Cash and cash equivalents
|
|
$
|
137,154
|
|
Goodwill
|
|
|
291,456
|
|
Purchased intangible assets
|
|
|
162,400
|
|
Other tangible assets
|
|
|
11,357
|
|
Accrued severance costs
|
|
|
(29,416
|
)
|
Funds due to merchants
|
|
|
(11,006
|
)
|
Other liabilities assumed
|
|
|
(19,144
|
)
|
|
|
|
|
|
Total
|
|
$
|
542,801
|
|
|
|
|
|
|
Other tangible assets consist primarily of property and equipment, trade accounts receivable and
prepaid assets. Other liabilities assumed consist primarily of non-current tax liabilities, deferred revenue and accrued liabilities. The amount of goodwill that is expected to be tax deductible is approximately $46.3 million.
43
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Intangible assets related to the acquisition of Authorize.Net consist of the following (in
thousands):
|
|
|
|
|
|
|
|
Amount
|
|
Weighted-Average
Useful Life
(in years)
|
Partner contracts and related relationships
|
|
$
|
86,100
|
|
11
|
Merchant contracts and related relationships
|
|
|
49,300
|
|
4
|
Existing technology
|
|
|
21,900
|
|
5
|
Trade name
|
|
|
3,900
|
|
2
|
Processor relationships
|
|
|
1,200
|
|
5
|
|
|
|
|
|
|
Total
|
|
$
|
162,400
|
|
|
|
|
|
|
|
|
Partner contracts and related relationships represent Authorize.Nets network of independent
sales organizations and resellers. Merchant contracts and related relationships represent Authorize.Nets underlying merchant agreements and relationships with their installed customer base. Existing technology represents Authorize.Nets
payment gateway platform. Trade name represents Authorize.Nets brand and trademarks. Processor relationships represent Authorize.Nets electronic connectivity with various processing networks which allow their gateway to process
transactions for their merchants.
The value of the partner contracts and related relationships as well as the merchant contracts and
related relationships were derived by considering, among other factors, the expected income and discounted cash flows to be generated from such contracts and relationships. The value of the existing technology was derived by considering, among other
factors, the expected income and discounted cash flows to be generated, taking into account risks related to the characteristics and applications of the technology and assessments of the life cycle state of the technology. The value of the trade
name was derived by considering, among other factors, expected income and discounted cash flows to be generated, also taking into account the expected period in which the company intends to utilize the trade name. The value of the processor
relationships was derived by considering the expected cost that would be incurred to establish and build connections with the processors.
Intangible assets are being amortized over their respective estimated useful lives and have a total weighted average amortization period of approximately 8 years.
The components of acquired intangible assets as of December 31, 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Partner contracts and related relationships
|
|
$
|
86,100
|
|
$
|
18
|
|
$
|
86,082
|
Merchant contracts and related relationships
|
|
|
49,300
|
|
|
2,678
|
|
|
46,622
|
Existing technology
|
|
|
21,900
|
|
|
1,027
|
|
|
20,873
|
Trade name
|
|
|
3,900
|
|
|
321
|
|
|
3,579
|
Processor relationships
|
|
|
1,200
|
|
|
40
|
|
|
1,160
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
162,400
|
|
$
|
4,084
|
|
$
|
158,316
|
|
|
|
|
|
|
|
|
|
|
The consolidated statement of operations includes revenues and expenses of Authorize.Net for the
period from November 1, 2007, the date of acquisition, to December 31, 2007, including approximately $4.1 million of amortization expense related to the Authorize.Net intangible assets.
Estimated future amortization expense for the intangible assets recorded on the Companys December 31, 2007 balance sheet is as follows (in
thousands):
|
|
|
|
|
|
Amount
|
2008
|
|
$
|
28,674
|
2009
|
|
|
26,230
|
2010
|
|
|
21,777
|
2011
|
|
|
18,743
|
2012
|
|
|
12,903
|
Thereafter
|
|
|
49,989
|
|
|
|
|
Total
|
|
$
|
158,316
|
|
|
|
|
44
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As a result of the Companys acquisition of Authorize.Net, the Company acquired certain
restructuring accruals of approximately $1.8 million related to certain facilities that Authorize.Net had exited. Approximately $0.2 million of payments related to these facilities were made prior to December 31, 2007. In December 2007, the
Company also exited certain redundant office space in Marlborough, Massachusetts and recorded a restructuring accrual of approximately $0.1 million which represents future lease obligations, net of projected sublease rental income and approximately
$0.1 million of severance related to terminated employees.
The financial information in the table below summarizes the combined results of
operations of CyberSource and Authorize.Net, on a pro forma basis, as though the companies had been combined as of the beginning of each of the years presented. The unaudited pro forma financial information for fiscal 2007 combines the historical
results of operations of CyberSource for 2007, which include the results of operations of Authorize.Net subsequent to November 1, 2007, and the historical results of operations of Authorize.Net for the ten months ended October 31, 2007.
The unaudited pro forma financial information for 2006 combines the historical results of operations of CyberSource for 2006 with the historical results of operations of Authorize.Net for 2006. The unaudited pro forma results include adjustments to
reflect amortization of intangible assets and stock-based compensation expense.
This information is presented for informational purposes
only and is not indicative of the results of operations that would have been achieved if the acquisition of Authorize.Net had taken place at the beginning of each of the years presented.
The following table summarizes the unaudited pro forma financial information (in thousands, except per-share amounts):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
|
2006
|
Revenues
|
|
$
|
175,195
|
|
|
$
|
127,799
|
Net income (loss)
|
|
$
|
(7,992
|
)
|
|
$
|
17,496
|
Net income (loss) per sharebasic
|
|
$
|
(0.12
|
)
|
|
$
|
0.26
|
Net income (loss) per sharediluted
|
|
$
|
(0.12
|
)
|
|
$
|
0.25
|
3.
|
BidPay.com Acquisition
|
In March 2006, the Company
acquired BidPay.com, Inc. (BidPay), a payment service provider for online auctions. The Companys primary reason for the acquisition of BidPay is to expand its services into the payment market for online auctions. The aggregate
purchase price of approximately $3.0 million consisted of cash consideration of approximately $2.0 million, including $0.2 million of acquisition costs, and $1.0 million in deferred taxes related to the difference between the financial and tax basis
of the assets acquired, in exchange for BidPays proprietary technology, its databases, and certain intellectual property rights, including exclusive rights to the BidPay brand.
In accordance with Emerging Issues Task Force 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a
Business, the Company determined that it had acquired productive assets as opposed to a business. As a result, no amount of the purchase price was allocated to goodwill. The total purchase price of $3.0 million was allocated based on the fair
values presented below (in thousands):
|
|
|
|
|
|
|
|
Fair Market
Value
|
|
Straight-line
Amortization
|
Technology platform
|
|
$
|
269
|
|
3
|
Customer list
|
|
|
269
|
|
6
|
Trade name
|
|
|
2,419
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,957
|
|
|
|
|
|
|
|
|
The Company recorded approximately $0.1 million of amortization expense related to the BidPay
intangible assets in each of the years ended December 31, 2007 and 2006.
The pro forma results of operations have not been presented
for the acquisition of BidPay because the effect of this acquisition was not considered material.
45
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In December of 2007, the Company announced the closure of BidPay. As a result, the Company recorded a
restructuring charge of approximately $1.8 million in the fourth quarter of 2007. This charge included $1.6 million for the write-off of the remaining intangible assets related to BidPay, net of deferred tax liabilities, $0.1 million of severance
related to terminated employees and $0.1 million for the write-off of property and equipment.
Prepaid expenses and other
current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Prepaid expenses
|
|
$
|
2,649
|
|
$
|
1,253
|
Acquiring receivable
|
|
|
995
|
|
|
441
|
Other current assets
|
|
|
545
|
|
|
129
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
4,189
|
|
$
|
1,823
|
|
|
|
|
|
|
|
Other non-current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Prepaid rent
|
|
$
|
1,108
|
|
$
|
1,968
|
Deposits
|
|
|
502
|
|
|
225
|
Prepaid expenses, less current portion
|
|
|
510
|
|
|
16
|
Other non-current assets
|
|
|
221
|
|
|
41
|
|
|
|
|
|
|
|
Total other noncurrent assets
|
|
$
|
2,341
|
|
$
|
2,250
|
|
|
|
|
|
|
|
Prepaid rent represents the difference between the Companys rent expense on a straight-line
basis and its rent payments to date. Prepaid rent will increase if rent payments are higher than the rent expense on a straight-line basis and decrease if rent payments are lower than the rent expense on a straight-line basis.
Other accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Employee benefits and related expenses
|
|
$
|
5,269
|
|
$
|
3,167
|
Accrued cost of revenues
|
|
|
2,594
|
|
|
1,617
|
Accrued reseller residual payments
|
|
|
2,711
|
|
|
|
Other liabilities
|
|
|
3,723
|
|
|
1,272
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
14,297
|
|
$
|
6,056
|
|
|
|
|
|
|
|
Accrued reseller residual payments represent commissions due to third party sales agents that have
sold the Companys transaction services.
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 will expire when CyberSource K.K. achieves at least $2.0 million in quarterly revenue. 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, in accordance with the joint venture agreement, the Company will consolidate the financial position and results of operations
of CyberSource K.K. As of December 31, 2005, the Company had recognized losses to the extent of its historical
46
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
investment. In 2007 and 2006, the Company recognized joint venture income of approximately $0.2 million and $41,000, respectively.
6.
|
Accumulated Other Comprehensive Loss
|
The
components of accumulated other comprehensive loss are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Cumulative foreign currency translation adjustment
|
|
$
|
(5
|
)
|
|
$
|
(25
|
)
|
Unrealized loss on short-term investments
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(5
|
)
|
|
$
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
7.
|
Funds Due to Merchants
|
At December 31, 2007,
the Company was holding funds in the amount of $11.4 million due to merchants. The funds are included in cash and cash equivalents and funds due to merchants on the Companys consolidated balance sheet. The Company typically holds certain funds
related to certain electronic check transactions for approximately seven business days; the actual number of days depends on the contractual terms with each merchant. The Company also holds certain funds related to certain credit card and automated
clearing house transactions for approximately two to four business days; the actual number of days depends on the contractual terms with the financial institution through which the transactions are processed.
In addition, the Company has $0.5 million on deposit with a financial institution to cover any deficit account balance that could occur if the amount of
transactions returned or charged back exceeds the balance on deposit with the financial institution. This amount is classified as restricted cash in the Companys balance sheet. To date, the deposit has not been applied to offset any deficit
balance. The deposit will be held continuously for as long as the Company utilizes the certain processing services of the financial institution, and the amount of the deposit may increase as processing volume increases.
The Company leases its primary
facility and certain equipment under noncancelable operating leases. The lease agreement for the Companys primary facility expires in December 2011. Rental expense was approximately $2.2 million, $1.9 million and $1.8 million for the years
ended December 31, 2007, 2006 and 2005, respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 2007 are as follows (in thousands):
|
|
|
|
Year ending December 31,
|
|
Operating
Leases
|
2008
|
|
$
|
4,811
|
2009
|
|
|
4,536
|
2010
|
|
|
4,235
|
2011
|
|
|
3,889
|
2012
|
|
|
1,062
|
2013
|
|
|
118
|
|
|
|
|
Total minimum payments
|
|
$
|
18,651
|
|
|
|
|
The total of minimum rentals to be received in the future under noncancelable subleases is
approximately $5.8 million.
At December 31, 2007, the
Company has an unsecured letter of credit in the amount of $1.0 million per the terms of the operating lease related to the Burlington, Massachusetts office facility it acquired through the acquisition of Authorize.Net. The Company also has $1.0
million on deposit with the financial institution that issued the letter of credit to the Company. This amount is classified as restricted cash in the Companys balance sheet.
47
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Preferred Shares
The Company is authorized to issue 5,610,969 shares of preferred stock. The Companys Board of Directors has the ability to
determine the rights and preferences of the preferred stock and can issue the preferred stock without the approval of the holders of the common stock. As of December 31, 2007, there are no shares of preferred stock outstanding.
Common Shares
During 2007, the
Company amended its certificate of incorporation to increase the number of shares of authorized common stock from 50,000,000 to 125,000,000 in connection with the acquisition of Authorize.Net. 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, 2007 as follows:
|
|
|
1998 and 1999 Stock Option Plans:
|
|
|
Options outstanding
|
|
8,488,620
|
Options available for future grants
|
|
4,502,089
|
1999 Employee Stock Purchase Planshares available for future purchase
|
|
139,071
|
|
|
|
|
|
13,129,780
|
|
|
|
11.
|
Common Stock Repurchase Program
|
On
January 26, 2005, the Board of Directors authorized management to use up to $10.0 million over a twelve-month period beginning at February 1, 2005 to repurchase additional shares of the Companys common stock. During the twelve months
ending January 31, 2006, the Company repurchased 443,000 shares at an average price of $5.43 per share, including repurchase costs. All of the repurchased shares were cancelled and returned to the status of authorized, unissued shares.
On February 7, 2006, the Board of Directors authorized management to use up to $10.0 million over a twelve-month period beginning at
February 10, 2006 to repurchase additional shares of the Companys common stock. During the period beginning February 10, 2006 and ending December 31, 2006, the Company repurchased 268,005 shares at an average price of $9.18 per
share, including repurchase costs. All of the repurchased shares were cancelled and returned to the status of authorized, unissued shares.
On January 24, 2007, the Board of Directors authorized management to use up to $10.0 million over a twelve-month period beginning at January 30, 2007 to repurchase additional shares of the Companys common stock. During the
period beginning January 30, 2007 and ending December 31, 2007, the Company repurchased 420,800 shares at an average price of $11.96 per share, including repurchase costs. All of the repurchased shares were cancelled and returned to the
status of authorized, unissued shares. For the period beginning January 30, 2007 through February 9, 2007, the common stock repurchase program authorized on February 7, 2006 was superseded by the common stock repurchase program
authorized on January 24, 2007.
12.
|
Related Party Transactions
|
For the years ended
December 31, 2007, 2006 and 2005, legal fees of approximately $1.2 million, $0.4 million and $0.5 million, respectively, were paid to Morrison & Foerster LLP, a law firm in which a director of the Company is a partner. As of
December 31, 2007 and 2006, the Company had immaterial amounts of accounts payable due to Morrison & Foerster LLP.
The terms
of the Companys contracts with the above-related parties are consistent with its contracts with other independent parties.
13.
|
Litigation and Contingencies
|
In July and August
2001, various class action lawsuits were filed in the United States District Court, Southern District of New York, against the Company, its Chairman and CEO, a former officer, and four brokerage firms that served as underwriters in
48
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
its initial public offering. The actions were filed on behalf of persons who purchased the Companys stock issued pursuant to or traceable to the
initial public offering during the period from June 23, 1999 through December 6, 2000. The action alleges that the Companys underwriters charged secret excessive commissions to certain of their customers in return for
allocations of the Companys stock in the offering. The two individual defendants are alleged to be liable because of their involvement in preparing and signing the registration statement for the offering, which allegedly failed to
disclose the supposedly excessive commissions. On December 7, 2001, an amended complaint was filed in one of the actions to expand the purported class to persons who purchased the Companys stock issued pursuant to or traceable to the
follow-on public offering during the period from November 4, 1999 through December 6, 2000. The lawsuit filed against the Company is one of several hundred lawsuits filed against other companies based on substantially similar
claims. On April 19, 2002, a consolidated amended complaint was filed to consolidate all of the complaints and claims into one case. The consolidated amended complaint alleges claims that are virtually identical to the amended
complaint filed on December 7, 2001 and the original complaints. In October 2002, the claims against the Companys officer and a former officer that were named in the amended complaint were dismissed without prejudice. In July
2002, the Company, along with other issuer defendants in the case, filed a motion to dismiss the consolidated amended complaint with prejudice. On February 19, 2003, the court issued a written decision denying the motion to dismiss with
respect to CyberSource and the individual defendants. On July 2, 2003, a committee of the Companys Board of Directors approved a proposed partial settlement with the plaintiffs in this matter. The settlement would have provided,
among other things, a release of the Company and of the individual defendants for the alleged wrongful conduct in the Amended Complaint in exchange for a guarantee from the Companys insurers regarding recovery from the underwriter defendants
and other consideration from the Company regarding its underwriters. The plaintiffs have continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of focus cases
rather than in all of the 310 cases that have been consolidated. The Companys case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed
that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district courts class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs petition for rehearing. In
light of the Second Circuit opinion, the Company has informed the district court that this settlement cannot be approved because the defined settlement class, like the litigation class, cannot be certified. The Company cannot predict whether the
Company will be able to renegotiate a settlement that complies with the Second Circuits mandate. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. However, any direct
financial impact of the proposed settlement is expected to be borne by the Companys insurers.
On August 11, 2004, the Company
filed suit in the Northern District of California against Retail Decisions, Inc. (ReD US) and Retail Decisions Plc (ReD UK) (collectively, ReD), Case No. 3:04-CIV-03268, alleging that ReD infringes the
Companys U.S. Patent No. 6,029,154 (the 154 Patent). The Company served ReD US with the complaint on August 12, 2004, and the Company served ReD UK with the complaint on August 13, 2004. On September 30,
2004, ReD responded to the Companys complaint. ReD filed a motion to stay the case for 90 days pending a determination by the U.S. Patent and Trademark Office (PTO) as to whether it will grant ReDs request that the PTO
re-examine the 154 Patent. ReD also filed a motion for a more definite statement by the Company with respect to its allegation that ReD is willfully infringing the 154 Patent. In addition, ReD UK filed a motion to dismiss the action
against it on the ground that it is not subject to personal jurisdiction in the Northern District of California. On October 27, 2004, ReD filed a request for re-examination with the PTO, based on prior art ReD discovered that allegedly
invalidates the Patent. On October 28, 2004, the Company filed an opposition to ReDs motion to stay the case for 90 days and an opposition to ReDs motion for a more definite statement with respect to willful infringement. Based on
ReD UKs representation that ReD US is the sole entity that develops, operates, and distributes the eBitGuard service, the Company agreed to dismiss ReD UK while reserving the right to reinstitute action against ReD UK in the event the Company
later discovers that ReD UK is subject to the courts personal jurisdiction. In return, ReD UK agreed that if the Company later establishes that personal jurisdiction existed, the Company could re-file against ReD UK in this action without
prejudice to its damages claim. The Company also filed an amended complaint, removing ReD UK as a named defendant and restating the willful infringement claim. On November 16, 2004, the court granted ReDs motion to stay the proceedings
pending the PTOs decision as to whether it will grant ReDs request for re-examination. On December 30, 2004, the PTO granted ReDs request for a re-examination. On January 19, 2005, ReD filed a motion to dismiss the case
without prejudice or to extend the stay until completion of the re-examination process. On January 24, 2005, the court extended the stay pending the re-examination process, vacated ReDs motion to dismiss, and ordered quarterly updates as
to the status of the re-examination process. On April 25, 2005, the parties filed a joint status report that was approved by the court. On June 20, 2005, the PTO issued a preliminary office action rejecting all of the claims of the
154 Patent based on one of the prior art references cited by ReD. On July 14, 2005, the Company met with the PTO examiner handling the re-examination to distinguish the prior art from the claims of the 154 Patent. On August 9,
2006, the PTO issued a final office action rejecting all of the claims of the 154 Patent. On September 7, 2006, the
49
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Company filed a response to the office action requesting certain amendments to the claims. On October 10, 2006, the PTO filed a response rejecting the
amendments and extending the Companys deadline to file a notice of appeal. On October 30, 2006, the Company filed a notice of appeal. On December 22, 2006, the Company filed the appeal brief. On May 3, 2007, the PTO issued a
Notice of Intent to Issue Reexam Certificate, reversing its action of August 9, 2006. Accordingly, the patent has been re-validated and the Company expects to receive a new patent certificate shortly. While there can be no
assurances as to the outcome of the lawsuit, the Company does not presently believe that the lawsuit would have a material effect on its financial condition, results of operations, or cash flows.
The Company is currently party to various legal proceedings and claims which arise in the ordinary course of business. While the outcome of these matters
cannot be predicted with certainty, the Company does not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a material adverse effect on its consolidated financial position, results of operations or
cash flows.
The components of income before
income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
|
2006
|
|
2005
|
Domestic
|
|
$
|
(1
|
)
|
|
$
|
3,421
|
|
$
|
4,952
|
Foreign
|
|
|
2,111
|
|
|
|
1,300
|
|
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
2,110
|
|
|
$
|
4,721
|
|
$
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
The Companys (benefit) for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
319
|
|
|
$
|
22
|
|
|
$
|
80
|
|
State
|
|
|
99
|
|
|
|
12
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense
|
|
|
418
|
|
|
|
34
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,101
|
)
|
|
|
(7,458
|
)
|
|
|
(2,285
|
)
|
State
|
|
|
(301
|
)
|
|
|
(1,770
|
)
|
|
|
(403
|
)
|
Foreign
|
|
|
665
|
|
|
|
(496
|
)
|
|
|
(504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax benefit
|
|
|
(737
|
)
|
|
|
(9,724
|
)
|
|
|
(3,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit for income taxes
|
|
$
|
(319
|
)
|
|
$
|
(9,690
|
)
|
|
$
|
(3,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation between the tax provision computed at the statutory income tax rate of 35% in
2007 and 34% in 2006 and 2005, and the Companys actual effective income tax provision is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Tax provision at statutory rate
|
|
$
|
738
|
|
|
$
|
1,605
|
|
|
$
|
2,098
|
|
State income taxes
|
|
|
113
|
|
|
|
(1,160
|
)
|
|
|
(241
|
)
|
Other
|
|
|
16
|
|
|
|
87
|
|
|
|
25
|
|
Foreign operations
|
|
|
(218
|
)
|
|
|
(886
|
)
|
|
|
(870
|
)
|
Decrease in valuation allowance
|
|
|
(968
|
)
|
|
|
(9,336
|
)
|
|
|
(4,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(319
|
)
|
|
$
|
(9,690
|
)
|
|
$
|
(3,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During 2007, the Company recorded an income tax benefit of approximately $0.3 million. This benefit
included a $1.0 million reduction in the Companys valuation allowance related to a portion of its deferred tax assets that will more likely than not be realized. In addition, as a result of the acquisition of Authorize.Net, the Company
recorded as an adjustment to goodwill a $34.5 million reduction in the valuation allowance related to deferred tax assets established in purchase accounting. During 2006, the Company recorded an income tax benefit of approximately $9.7 million. This
benefit included a $9.9 million reduction in the Companys valuation allowance against its deferred tax assets, all of which was recorded as a benefit to the income tax provision. During 2005, the Company recorded an income tax benefit of
approximately $3.1 million. This benefit included a $3.2 million reduction in the Companys valuation allowance against its deferred tax assets, all of which was recorded as a benefit to the income tax provision. In evaluating its ability to
recover its deferred tax assets, the Company considers all available positive and negative evidence including its past operating results, the existence of cumulative losses and its forecast of future taxable income. In determining future taxable
income, the Company is responsible for assumptions utilized including the amount of state, federal and international per-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning
strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying businesses.
As of December 31, 2007, the Company had federal and state net operating loss carryforwards of approximately $196.3 million and $40.6 million,
respectively. Of these amounts, $15.2 million represent tax deductions from stock option compensation which will be recorded as an adjustment to additional paid-in capital when they reduce taxes payable. If the Company is not able to use them, the
federal and state net operating loss carryforwards will expire in 2013 through 2024. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of a corporations
ownership change, as defined in the Internal Revenue Code. The Companys ability to utilize net operating loss carryforwards may be limited if such an ownership change occurs.
As of December 31, 2007, the Company also has research and development tax credit carryforwards of approximately $3.9 million and $2.2 million for
federal and state income tax purposes, respectively. The federal carryforward will expire at various dates beginning in 2018 through 2027, if not utilized. The state carryforward can be carried forward indefinitely.
The Company has not provided for U.S. federal income and state income taxes on non-U.S. subsidiaries undistributed earnings as of December 31,
2006, because such earnings are intended to be reinvested in the operations and potential acquisitions of its international subsidiaries indefinitely. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be
subject to applicable U.S. federal and state income taxes.
The components of the net deferred tax assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
62,606
|
|
|
$
|
51,388
|
|
Tax credit carryforwards
|
|
|
6,011
|
|
|
|
1,816
|
|
Other, net
|
|
|
4,192
|
|
|
|
1,992
|
|
Depreciation differences
|
|
|
10,321
|
|
|
|
581
|
|
Non-deductible stock compensation charges
|
|
|
4,397
|
|
|
|
1,833
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
87,527
|
|
|
$
|
57,610
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Acquired intangibles
|
|
|
(63,870
|
)
|
|
|
(1,151
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
23,657
|
|
|
$
|
56,459
|
|
Valuation allowance
|
|
|
(10,288
|
)
|
|
|
(44,510
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
13,369
|
|
|
$
|
11,949
|
|
|
|
|
|
|
|
|
|
|
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. Due to the uncertainty surrounding the realization of the tax
attributes in tax returns, the Company has not
51
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
recorded certain deferred tax assets relating to stock option compensation. The valuation allowance decreased approximately $34.2 million from
December 31, 2006 to December 31, 2007.
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation clarifies the criteria for recognizing income tax benefits under SFAS 109 and requires additional disclosures about uncertain tax positions. Under FIN
48, the financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then
measured and recognized at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. Upon adoption of FIN 48 on January 1, 2007, the Company did not recognize any unrecognized tax benefits or
adjustments to the opening balance in retained earnings.
As of December 31, 2007, the Company has provided a $1.8 million liability
representing unrecognized tax benefits relating to various federal and state income tax matters as a result of the acquisition of Authorize.Net which is classified as other non-current tax liabilities in the Companys balance sheet. Of this
amount, the amount that would impact the Companys effective tax rate, if recognized, is $1.5 million. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next twelve months.
As of December 31, 2007, the Company has accrued $0.4 million of interest related to uncertain tax positions. The Company accounts
for interest related to uncertain tax positions as part of its provision for federal and state income taxes.
A reconciliation of the
beginning and ending balance of the consolidated liability for unrecognized income tax benefits during the year ended December 31, 2007 is as follows (in thousands):
|
|
|
|
|
|
Amount
|
Balance at January 1, 2007
|
|
$
|
|
Additions for tax positions of prior years
|
|
|
1,787
|
Additions for tax positions related to 2007
|
|
|
|
Reductions for tax positions of prior years
|
|
|
|
Settlements during 2007
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,787
|
|
|
|
|
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various
U.S. states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2001. With the exception of tax years 2001 and
2003 for the U.S. federal jurisdiction, all other tax years from 2001 through 2007 remain open to examination by U.S. federal, state and local, or non-U.S. tax jurisdictions.
15.
|
Employee Savings and Retirement Plan
|
The Company
maintains a defined contribution plan under Internal Revenue Service Code 401(k) (the 401(k) Plan). The 401(k) Plan provides for tax deferred salary deductions. Employees can elect to contribute to the 401(k) Plan up to 20% of their
salary, subject to current statutory limits. The Company is not required to contribute to the 401(k) Plan and has made no contributions since the inception of the 401(k) Plan.
52
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
16.
|
Net Income Per Share Computation
|
The following
table reconciles the numerators and denominators of the net income per share calculation for the years ended December 31, 2007, 2006 and 2005 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Basic net income per share computation:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,429
|
|
$
|
14,411
|
|
$
|
9,246
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
2,429
|
|
$
|
14,411
|
|
$
|
9,246
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
40,736
|
|
|
34,623
|
|
|
33,464
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share attributable to common stockholders
|
|
$
|
0.06
|
|
$
|
0.42
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share computation:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,429
|
|
$
|
14,411
|
|
$
|
9,246
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
2,429
|
|
$
|
14,411
|
|
$
|
9,246
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
40,736
|
|
|
34,623
|
|
|
33,464
|
Incremental shares attributable to the assumed exercise of outstanding options
|
|
|
2,489
|
|
|
1,970
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
Total diluted weighted average common shares
|
|
|
43,225
|
|
|
36,593
|
|
|
35,811
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share attributable to common stockholders
|
|
$
|
0.06
|
|
$
|
0.39
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
Options to purchase approximately 1,039,000, 361,000, and 1,230,000 shares of common stock were
outstanding during 2007, 2006, and 2005, respectively, but were not included in the computation of diluted earnings per share because the effect was antidilutive.
The Company from time to time enters
into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) certain real estate leases, under which the Company may be required to indemnify
property owners for environmental and other liabilities, and other claims arising from the Companys use of the applicable premises; and (ii) certain agreements with the Companys officers, directors and employees, under which the
Company may be required to indemnify such persons for liabilities arising out of their employment relationship.
The terms of such
obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated.
Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of December 31, 2007 or 2006.
53
CYBERSOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
18.
|
Quarterly Financial Information (Unaudited)
|
Summarized quarterly financial information for fiscal 2007 and 2006 is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal
Year
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
22,125
|
|
$
|
22,893
|
|
$
|
26,546
|
|
$
|
45,435
|
|
$
|
116,999
|
Gross profit
|
|
|
10,209
|
|
|
10,476
|
|
|
11,489
|
|
|
22,712
|
|
|
54,886
|
Net income
|
|
|
736
|
|
|
160
|
|
|
347
|
|
|
1,186
|
|
|
2,429
|
Basic net income per share
|
|
$
|
0.02
|
|
$
|
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.06
|
Diluted net income per share
|
|
$
|
0.02
|
|
$
|
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.06
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,584
|
|
$
|
16,398
|
|
$
|
17,359
|
|
$
|
20,909
|
|
$
|
70,250
|
Gross profit
|
|
|
8,439
|
|
|
8,694
|
|
|
8,586
|
|
|
9,904
|
|
|
35,623
|
Net income
|
|
|
875
|
|
|
790
|
|
|
286
|
|
|
12,460
|
|
|
14,411
|
Basic net income per share
|
|
$
|
0.03
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
0.36
|
|
$
|
0.42
|
Diluted net income per share
|
|
$
|
0.02
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
0.34
|
|
$
|
0.39
|
The fourth quarter fiscal 2007 and 2006 net income includes a reduction in the Companys
deferred tax asset valuation allowance of $1.0 million and $9.9 million, respectively. The fourth quarter fiscal 2007 net income includes restructuring and other non-recurring charges of approximately $1.8 million related to the closure of BidPay.
54