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Previous: ACADIA GROUP INC, NT 10-Q, 2000-05-15 |
Next: PREMIER RESEARCH WORLDWIDE LTD, 10-Q, 2000-05-15 |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 000-29184
EGGHEAD.COM, INC. (Exact name of Registrant as specified in its Charter)
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1350 Willow Road
Menlo Park, California 94025
(Address of Principal Executive Offices including Zip Code)
(650) 470-2400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
As of April 30, 2000, there were 40,315,310 shares of the Registrant's common stock outstanding.
EGGHEAD.COM, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. Financial Statements |
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| Consolidated Balance Sheets at March 31, 2000 (Unaudited) and December 31, 1999 |
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Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 (Unaudited) |
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Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 (Unaudited) |
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| Notes to Consolidated Financial Statements (Unaudited) |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| PART II. OTHER INFORMATION |
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| Item 1. Legal Proceedings |
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| Item 2. Changes in Securities and Use of Proceeds |
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| Item 3. Defaults Upon Senior Securities |
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| Item 4. Submission of Matters to a Vote of Security Holders |
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| Item 5. Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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PART I
Egghead.com, Inc.
Consolidated Balance Sheets
(In thousands, except par value and share data)
March 31, December 31,
2000 1999
---------- ----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents............................... $52,529 $68,223
Short-term investments.................................. 12,354 18,000
Accounts receivable, net of allowances
of $3,105 and $2,320.................................... 18,124 12,782
Merchandise inventory................................... 14,002 17,900
Prepaid expenses and other current assets............... 2,404 1,461
---------- ----------
Total current assets.................................. 99,413 118,366
Property and equipment, net.............................. 9,483 9,513
Investment in joint venture.............................. 599 799
Other assets............................................. 530 452
---------- ----------
Total assets.......................................... $110,025 $129,130
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................ $22,876 $34,512
Accrued expenses........................................ 25,318 29,168
Deferred revenue........................................ 5,756 7,646
Reserves and liabilities related to restructuring....... 2,112 2,336
---------- ----------
Total current liabilities............................. 56,062 73,662
Long-term liabilities.................................... 2,046 2,046
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
2,000,000 shares authorized: no shares issued
and outstanding........................................ -- --
Common stock, $0.001 par value; 98,000,000 shares
authorized; 40,293,623 and 37,199,240 shares
issued and outstanding, respectively................... 40 37
Additional paid-in capital.............................. 345,512 321,961
Accumulated deficit..................................... (293,635) (268,576)
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Total stockholders' equity............................ 51,917 53,422
---------- ----------
Total liabilities and stockholders' equity............ $110,025 $129,130
========== ==========
The accompanying notes are an integral part of these financial statements.
Egghead.com, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
Three Months Ended March 31,
2000 1999
------------------ ------------------
Revenue:
Online.............................. $143,109 $107,714
Commission and other revenue........ 4,674 2,389
------------------ ------------------
Total revenue.................... 147,783 110,103
------------------ ------------------
Cost of online revenue.............. 138,937 99,714
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Gross profit:
Online.............................. 4,172 8,000
Commission and other revenue........ 4,674 2,389
------------------ ------------------
Total gross profit............... 8,846 10,389
------------------ ------------------
Operating expenses:
Sales and marketing................. 21,907 20,603
General and administrative.......... 6,702 5,156
Engineering......................... 3,906 3,951
Amortization of goodwill............ -- 430
Merger costs........................ 2,488 --
------------------ ------------------
Total operating expenses......... 35,003 30,140
------------------ ------------------
Loss from operations.................. (26,157) (19,751)
Equity in net loss of joint venture... (200) (50)
Interest and other income, net........ 1,298 1,466
------------------ ------------------
Loss before income taxes.............. (25,059) (18,335)
Provision for income taxes............ -- --
------------------ ------------------
Net loss.............................. ($25,059) ($18,335)
================== ==================
Net loss per share:
Basic and diluted................... ($0.67) ($0.54)
================== ==================
Weighted average common shares:
Basic and diluted................... 37,496 34,020
================== ==================
The accompanying notes are an integral part of these financial statements.
Egghead.com, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
March 31,
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss....................................... ($25,059) ($18,335)
Adjustments to reconcile net loss to
net cash used in operating activities:
Equity in net loss of joint venture........ 200 50
Interest on long-term liabilities.......... -- 8
Depreciation and amortization.............. 924 2,133
Changes in assets and liabilities:
Accounts receivable, net................. (5,342) (1,751)
Merchandise inventory.................... 3,898 2,366
Prepaid expenses and other assets........ (1,021) (48)
Accounts payable......................... (11,636) 873
Accrued expenses......................... (3,850) 1,373
Deferred revenue......................... (1,890) (100)
Reserves and liabilities related
to restructuring........................ (224) (1,386)
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Net cash used in operating activities... (44,000) (14,817)
------------ ------------
Cash flows from investing activities:
Purchases of short-term available-for-sale
investments.................................. -- (2,495)
Proceeds from sales of short-term
available-for-sale investments............... 5,646 8,014
Purchase of property and equipment............. (894) (4,349)
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Net cash used in investing activities............ 4,752 1,170
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Cash flows from financing activities:
Proceeds from issuance of common stock and
exercise of warrants, net..................... 23,554 76,926
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Net cash provided by financing activities........ 23,554 76,926
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Net increase (decrease) in cash and cash
equivalents..................................... (15,694) 63,279
Cash and cash equivalents at beginning of
period.......................................... 68,223 85,025
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Cash and cash equivalents at end of period....... $52,529 $148,304
============ ============
The accompanying notes are an integral part of these financial statements.
Egghead.com, Inc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(unaudited)
1. - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows of Egghead.com, Inc. ("Egghead" or the "Company") for the periods presented. These financial statements should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The results of operations for the three-month period ended March 31, 2000 are not necessarily indicative of the results to be expected for any subsequent period.
On November 19, 1999 Onsale, Inc. ("Old Onsale") acquired Egghead.com, Inc. ("Old Egghead") and changed its name to Egghead.com, Inc. The acquisition was accounted for as a pooling of interests. The consolidated statements of operations and cash flows for the three months ended March 31, 1999 have been restated to include the results of operations and cash flows as if Old Egghead was a wholly-owned subsidiary of the Company for the period presented. Old Egghead used a 52/53 week fiscal year ending on the Saturday closest to March 31; for convenience, Old Egghead's fiscal quarter ended April 3, 1999 is referred to as ending March 31, 1999. The consolidated statement of operations and cash flows for the quarter ended March 31, 1999 includes the results of operations and cash flows for Old Egghead for the three months ended March 31, 1999.
2. - CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash on deposit with banks and highly liquid investments with an original maturity of three months or less from the date of purchase. The Company's short-term investments consist of certificates of deposit, commercial paper and debt securities with remaining maturities between 90 and 365 days. The Company classifies all short-term investments as available-for-sale in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires the Company to account for its investments at fair market value as of the balance sheet date and record unrealized gains and losses in stockholders' equity. Realized gains and losses and permanent declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. As of March 31, 2000 and December 31, 1999 the Company had restricted cash of approximately $1.6 million and $1.8 million, respectively, primarily represented by security deposits for the Company's Vancouver, Washington office.
3. - STOCKHOLDERS' EQUITY
On February 17, 2000 the Company entered into an equity financing agreement with Acqua Wellington North American Equities Fund, Ltd. ("Acqua Wellington") under which the Company may sell up to 5 million shares of its common stock over a nine-month period beginning February 18, 2000. The agreement provides that the minimum price at which the Company will sell its common stock is $10.00 per share, before discount, unless a lower minimum is mutually agreed to by both parties. On March 6, 2000, we issued approximately 700,000 shares of common stock at an average price of $10.67, reflecting a 5.6% discount from market prices, resulting in net proceeds of approximately $7.4 million. On March 29, 2000, we amended this agreement to provide for the sale of an additional 2.3 million shares of common stock for $6.75 per share, reflecting a 2.7% discount from the closing market price on that date, which resulted in net proceeds of approximately $15.5 million.
4. - BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is calculated in accordance with the provisions of SFAS 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the Company to report both basic earnings per share and diluted earnings per share. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and potentially dilutive common equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation if their effect is antidilutive.
During the quarters ended March 31, 2000 and 1999, options to
purchase approximately 5.4 million and 3.5 million shares, respectively,
were outstanding but were not included in the computation because they
are antidilutive
Item 2. 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 the consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements typically refer to future events or financial results, including statements in the future tense and statements indicating that "we believe," "we expect," "we anticipate" or "we intend" certain events may occur or certain trends may continue, that involve risks and uncertainties. Although these statements reflect the current judgment of our management, we can only base such statements on facts and factors that we currently know. Our actual results could differ materially from those anticipated in these forward-looking statements. Factors that might cause those differences include those set forth under "Risk Factors."
Company Overview
We were incorporated in July 1994 as Onsale, Inc. and began auctioning products on the Internet in May 1995. In November 1999 we acquired Egghead.com, Inc. ("Old Egghead") and changed our name to Egghead.com, Inc. ("Egghead"). Old Egghead's operations were integrated with our operations in November 1999, following shareholder approval of the merger.
The acquisition of Old Egghead was accounted for as a pooling of interests. Accordingly, our financial statements have been restated to reflect our results of operations and cash flows for the three months ended March 31, 1999 as if Old Egghead was our wholly-owned subsidiary. Old Egghead used a 52/53 week fiscal year that ended on the Saturday nearest March 31; for convenience the Old Egghead fiscal quarter ended April 3, 1999 is referred to as ending "March 31" 1999. The following discussion relates to the consolidated financial statements of the combined company.
Business Overview
We are an Internet retailer selling retail and wholesale goods to businesses, resellers and consumers. We sell merchandise online through our "superstore" and "auction and smart deals" pages on our web site.
Superstores. Through the superstores, we offer businesses, resellers and consumers a broad selection of new, current-version computers and related products. Old Egghead operated its superstores starting in the first quarter of 1998, selling the products at a low margin. In January 1999 we introduced our superstore, Onsale atCost, where we sold products at prices equal to the amount invoiced by our vendors, plus charges for payment processing, shipping and handling and sales tax where appropriate. Effective with the merger, we sell products at competitive prices through our superstores.
Auctions and Smart Deals. Through auctions and smart deals, we sell excess merchandise and services, including refurbished and close-out products. Merchandise and services that we offer on these web pages include computers and related products, sports and fitness equipment, consumer electronics, and vacation and travel packages. We also derive revenues from commissions on goods sold through our online auctions.
Results of Operations
The following table summarizes selected results for the quarters
ended March 31, 2000 and 1999. The operating results in any periods are
not necessarily indicative of the results to be expected for any future
period.
Egghead.com, Inc.
Quarter Ended March 31,
(Dollars in thousands)
2000 1999
--------------------- ---------------------
Amount % Amount %
------------ ------- ------------ -------
Revenue:
Online.............................. $143,109 96.8 $107,714 97.8
Commission and other revenue........ 4,674 3.2 2,389 2.2
------------ ------- ------------ -------
Total revenue.................... 147,783 100.0 110,103 100.0
============ ======= ============ =======
Gross profit:
Online.............................. 4,172 2.9 8,000 7.4
Commission and other revenue........ 4,674 100.0 2,389 100.0
------------ ------- ------------ -------
Total gross profit............... 8,846 6.0 10,389 9.4
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Operating expenses:
Sales and marketing................. 21,907 14.8 20,603 18.7
General and administrative.......... 6,702 4.5 5,156 4.7
Engineering......................... 3,906 2.6 3,951 3.6
Amortization of goodwill............ -- -- 430 0.4
Merger related costs................ 2,488 1.7 -- --
------------ ------- ------------ -------
Total expenses................... 35,003 23.7 30,140 27.4
------------ ------- ------------ -------
Loss from operations.................. (26,157) (17.7) (19,751) (17.9)
Equity in net loss of joint venture... (200) (0.1) (50) --
Interest and other income, net........ 1,298 0.9 1,466 1.3
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Loss from continuing operations before
taxes............................... (25,059) (17.0) (18,335) (16.7)
Provision for income taxes............ -- -- -- --
------------ ------- ------------ -------
Net loss from continuing operations... ($25,059) (17.0) ($18,335) (16.7)
============ ======= ============ =======
Revenue
Our revenue consists of online revenue and commission and other revenue. Online revenue consists of sales of merchandise and services, net of returns. Online revenue represents sales of merchandise acquired on a purchase or consignment basis where; we charge the customer's credit card and either we or the vendor ships the merchandise to the customer; and we assume the credit and return risk. Commission and other revenue consists of 1) commissions on auction sales of suppliers' products, where the supplier charges the customers credit card, maintains title to the inventory and ships the product and 2) advertising revenue from vendors and other businesses.
Sources of Revenue Growth. Online revenue increased $35.4 million, or 32.9%, for the quarter ended March 31, 2000 compared with the quarter ended March 31, 1999. The increase in online revenue was attributable primarily to the following factors: (1) growth of our online customer base due primarily to investments in marketing programs designed to promote and maintain awareness of our brand; (2) the opening of our Onsale atCost web site in January 1999 and; (3) increases in the amounts and types of merchandise obtained from vendors for sale over our superstore and auction web pages. Commission and other revenue increased $2.3 million or 95.6% for the three months ended March 31, 2000 compared to the same three month period in 1999, primarily due to increased advertising revenue.
Constraints on Revenue Growth. Our ability to increase revenue may be constrained by our inability to obtain products from vendors who supply products for our auction and smart deals web pages, the unavailability of high demand product sold through our superstores, and our desire to increase product margins. Superstore sales during the first quarter of 2000 were constrained due to our efforts to increase product margin which rose 0.9% overall from the fourth quarter of 1999 and the unavailability of high demand product. These types of revenue growth constraints may continue during future quarters.
Superstores vs. Auctions and Smart Deals. For the quarter ended March 31, 2000, revenue from our online superstores and revenue from our auction and smart deal web pages constituted 44% and 53% respectively, of our total revenue. For the comparable period in 1999, revenue from our superstores and auction and smart deal web pages were 13% and 85%, respectively, of our total revenue. The increase in superstore revenue as a percentage of total revenue was due to the opening of our Onsale atCost web site in January 1999 and an increase in sales in the Old Egghead superstore.
Gross Profit
Gross profit is total revenue minus cost of revenue. Cost of online revenue consists of the cost of the merchandise sold to customers, inventory reserve adjustments and net shipping (shipping and handling revenue minus shipping costs). There is no significant cost of commission and other revenue. Gross margin is gross profit as a percentage of total revenue. Gross margins for online revenue and commission and other revenue for each quarter in 1999 and the quarter ended March 31, 2000 were:
3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
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% % % % %
--- --- --- --- ---
Gross Margin:
Online 2.9 2.0 2.4 1.6 7.4
Commission and other revenue 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------
Total Gross Margin 6.0 4.1 4.3 4.3 9.4
========= ========= ========= ========= =========
Gross margin for online revenue was 2.9% and 7.4%, respectively, for the quarters ended March 31, 2000 and March 31, 1999. The decline in online margin from 7.4% to 1.6% in the quarter ended June 30, 1999 resulted from intense competition, a general decrease in selling prices of computers and related merchandise, and lower margins associated with auction and smart deals merchandise. A decrease in margins associated with our auction and smart deals merchandise sales resulted from our efforts to increase auction sales and market share by increasing the quantities of products available for bid at any one time, which tends to lower final sales prices on these sales. Gross margin for online sales throughout the rest of 1999 remained fairly stable, fluctuating between 2% and 2.4%. We raised margins in the first quarter of 2000 over the fourth quarter of 1999 by raising prices and limiting the availability of auction merchandise, resulting in a reversal of the downward trend experienced through much of 1999.
We will continue our efforts to improve margin balanced with the competing goal of revenue growth. Increasing margins may be difficult due to intense ongoing industry-wide competitive price pressures and our continuing efforts to maintain or increase our market share. Some competitors are selling current-version goods that are in high demand at or below the cost of the products. We have responded to these competitive pressures by reducing the selling prices on some of our products. We have re-instituted a flat-fee shipping charge on Superstores' orders, however in the future, we may waive all or part of the shipping and handling fee for limited periods of time.
Operating Expenses
Our operating expenses as a percentage of revenue, excluding merger costs, were 22.0% and 27.4% for the quarters ended March 31, 2000 and March 31, 1999 respectively. Operating expenses in the quarter ended March 31, 1999 reflected the cost of operating two separate businesses prior to the merger with Old Egghead. Although we believe our operating expenses will be lower than operating two separate companies, we expect to maintain a high level of spending to expand our operations and promote our brand name.
Sales and Marketing. Sales and marketing expenses consist primarily of advertising expenditures, payroll and related expenses for sales, customer service, marketing and merchandise acquisition personnel, distribution and credit card processing costs. Sales and marketing expenses as a percentage of revenue were 14.8% and 18.7% for the quarters ended March 31, 2000 and March 31, 1999 respectively. The decrease from 1999 to 2000 was primarily attributable to elimination of duplicate costs and efficiencies resulting from our merger with Old Egghead.
General and Administrative. General and administrative expenses consist primarily of payroll and related expenses for executive, accounting and administrative personnel, bad debt expense, facilities expenses, recruiting and other general corporate expenses. General and administrative expenses as a percentage of revenue were 4.5% and 4.7%, respectively, for the quarters ended March 31, 2000 and March 31, 1999. The decrease from 1999 to 2000 was due primarily to the higher volume of sales, experienced during that same period offset in part by continuing duplicative costs and the establishment of reserve provisions. We expect the dollar amount of general and administrative expenses to decrease in 2000 due to the elimination of duplicate operations in the combined company.
Engineering. Engineering expenses consist primarily of payroll and related expenses for engineering personnel and consultants who develop, enhance, manage, operate and monitor our web site and related systems, as well as related equipment costs, other than those that are capitalized. Engineering expenses as a percentage of total revenue were 2.6% in the quarter ended March 31, 2000 compared with 3.6% in the quarter ended March 31, 1999. The decrease in the quarter ended March 31, 2000 was due to leveraging partially fixed expenses with higher sales. We expect the dollar amount of engineering expenses to remain relatively constant in 2000 and to increase thereafter as we add staff to maintain, enhance and modify our web site and other systems.
Prior to 1998, all engineering costs were expensed as incurred. In 1998, we adopted the American Institute of Certified Public Accountants' ("AICPA") Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") and, accordingly, capitalized some engineering costs related to internally-developed software. We did not capitalize any software in the three months ended March 31, 2000. However, in the three months ended March 31, 1999 we capitalized approximately $565,000 of software of which $265,000 was related to engineering costs for internally- developed software.
Merger-Related Costs. In connection with the acquisition of Old Egghead, we recorded merger-related expenses of approximately $2.5 million during the quarter ended March 31, 2000. These expenses primarily consist of costs related to the abandonment of some Old Egghead advertising agreements, severance benefits and additional merger costs.
Equity in Net Loss of Joint Venture
On May 15, 1998, we entered into a joint venture agreement with Softbank Corporation to perform on-line auctions for the Japanese market, resulting in the formation of Onsale Japan K.K., which commenced operations in the third quarter of 1998. We own a 40% interest in the joint venture and account for our interest using the equity method of accounting. Accordingly, we recognize our share of net profits or losses of the joint venture as an adjustment to our initial investment amount. Our share of the net loss of the joint venture was $200,000 and $50,000 for the three months ended March 31, 2000 and 1999, respectively.
Interest and Other Income, Net
Our interest and other income, net, was $1.3 million and $1.4 million for the three months ended March 31, 2000 and 1999, respectively.
Income Taxes
We had net losses of $25.1 million and $18.3 million for the three months ended March 31, 2000 and 1999 respectively, therefore we did not record any provision for income taxes for these periods.
Liquidity and Capital Resources
Cash Inflows and Outflows
Financing Activities. Net cash provided by financing activities of approximately $23.6 million for the three months ended March 31, 2000 resulted primarily from the issuance of common stock under an equity financing agreement with Acqua Wellington, which resulted in net proceeds of approximately $23 million and from the issuance of common stock under our stock option and employee stock purchase plans, which resulted in net proceeds of approximately $600,000.
Net cash provided by financing activities of $76.9 million for the three months ended March 31, 1999 consists of the issuance of Old Egghead common stock in a secondary public offering, which resulted in net proceeds of approximately $72.9 million and the issuance of common stock under our stock option and employee stock purchase plans, which resulted in net proceeds of approximately $4 million.
Operating Activities. Net cash used in operating activities for the three months ended March 31, 2000 was approximately $44.0 million, primarily consisting of our net loss of $25.1 million, an increase of $5.3 million in accounts receivable and decreases in accounts payable and accrued expenses of $11.6 million and $3.9 million, respectively. These uses of cash were partially offset by a $3.9 million reduction in inventory. The reductions in accounts payable and accrued expenses reflect the payment of approximately $6.0 million in merger-related costs and approximately $8.0 million of non-recurring pay downs of accounts payable.
Net cash used in operating activities for the three months ended March 31, 1999 was approximately $14.8 million, primarily attributable to our net loss of $18.3 million, increases of $1.8 million in accounts receivable and a $1.4 million reduction in reserves and liabilities related to restructuring. These uses of cash were partially offset by depreciation and amortization expense of $2.1 million, a decrease in merchandise inventory of $2.4 million and increases in accounts payable and accrued expenses of $2.2 million.
Investing Activities. Net cash provided by investing activities of $4.8 million for the three months ended March 31, 2000 results from proceeds from short term marketable securities of approximately $5.7 million offset by an investment of $894,000 in property and equipment. Net cash provided by investing activities of $1.2 million for the three months ended March 31, 1999 primarily reflects our net proceeds from short-term marketable securities of $5.5 million offset by investments of $4.3 million in property and equipment, principally related to the upgrading of the Website software platforms and related hardware.
Cash, Cash Equivalents and Commitments
Cash and Cash Equivalents. As of March 31, 2000 we had approximately $52.5 million of cash and cash equivalents and $12.4 million of short-term available-for-sale investments. We have credit lines totaling $10.0 million available for the financing of inventory. As of March 31, 2000, we had no borrowings outstanding under these lines of credit.
Commitments. As of March 31, 2000:
Old Egghead offered credit to some of its business customers and we began offering credit to business customers on our site in the fourth quarter of 1999 and may require additional cash to support the anticipated growth in accounts receivable. We expect our operating expenses to remain high as we continue our marketing efforts, software development efforts, and continue to support the infrastructure required to grow our business. As a result, we expect to experience quarterly net losses through at least the year 2001, and thus we will need to finance our increased inventory, accounts receivable, capital expenditures and some portion of our operating expenses from our current cash and cash equivalents balance.
We believe that our current cash and cash equivalent balance will meet our anticipated cash needs for working capital expenditures for at least the next 12 months. In February 2000, we entered into an equity financing agreement under which we may sell up to 5 million shares of our common stock over a nine month period beginning February 18, 2000. This agreement provides that the minimum price at which we will sell the common stock is $10.00 per share before discount, unless a lower minimum is mutually agreed to by both parties. On March 6, 2000, we sold approximately 700,000 shares of common stock at an average price of $10.67 per share, reflecting a 5.6% discount on market prices, which resulted in net proceeds to us of approximately $7.4 million. On March 29, 2000, we amended this agreement to provide for the sale of an additional 2.3 million shares of common stock for $6.75 per share, reflecting a discount of 2.7% to the closing market price of our common stock on that date, which resulted in net proceeds to us of an additional $15.5 million. The sale of additional equity or convertible debt securities will result in dilution in our stockholders' ownership interest. Recent declines in the trading price of our common stock could make it more difficult for us to obtain financing through the issuance of equity or convertible securities. Therefore, financing described above or additional financing may not be available to us in amounts or on terms acceptable to us.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Because we do not use derivatives, the new standard is expected to have no material impact on our financial position or results of operations. SFAS No. 133 will be effective for fiscal 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Our revenue recognition policies comply with the requirements of SAB 101.
In April 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25 ("FIN 44"). Among other issues, FIN 44 clarifies (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in the interpretation cover specific events that occur after either December 15, 1998 or January 12, 2000. To the extent that this interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000, but be for the effective date of July 1, 2000, the effects of applying this interpretation are recognized on a prospective basis from July 1, 2000. The Company is currently reviewing stock grants to determine the impact, if any, that may arise from implementation of FIN 44, although management does not expect the impact, if any, to be material to the financial statements.
Factors That May Affect Future Operating Results
An investment in our common stock involves a high degree of risk. You should consider the risks described below and the other information in this report carefully. The risks described below are not the only ones we face. Additional risks that we are aware of or that we currently believe are immaterial may become important factors that affect our business. If any of the following risks occur, or if others occur, our business, operating results and financial condition could be seriously harmed. The trading price of our common stock could decline due to any of these risks.
We expect to incur net losses for the foreseeable future.
Based on historical financial statements adjusted to reflect the pooling of our results with those of Old Egghead, we incurred net losses since 1995. As of March 31, 2000, we had a combined net accumulated deficit of approximately $294 million. We expect to experience substantial quarterly net losses into 2001, due primarily to the following factors:
We may seek additional financing and may not be able to secure it.
We expect to raise additional funds within the next 12 months. Recent declines in the trading price of our common stock will likely make it more difficult for us to obtain financing through the issuance of equity or convertible securities. Under an agreement with Acqua Wellington, we raised approximately 23 million by issuing shares representing approximately 7.4% of our outstanding shares of common stock as of March 31, 2000. Additional financing may not be available on terms favorable to us, or may not be available to us at all. Additional financing arrangements will result in further dilution of your ownership interest. Additionally, we could issue securities that have rights senior to the rights of common stockholders.
Due to competitive pressures and our efforts to expand and maintain market share, our profit margins may remain low for the foreseeable future.
Some of our competitors sell products that are commonly available from major distributors at or near their purchase price. This may cause us to reduce our selling prices on the same or similar goods, which would reduce profit margins.
We plan to make aggressive efforts to expand and maintain our market share, and our profit margins may continue to be negatively affected as a result. We may attempt to expand our market share for auctioned goods by increasing the quantity of products available for bid at any one time, which tends to decrease revenues per unit. We may also use promotional pricing and enhanced customer service to increase our market share for current version sales. One of the effects of these strategies may be low margins, and we may not be successful in increasing or maintaining our market share in either or both lines of business. Even if we are successful in increasing our market share, continued competition and customer expectations may make it difficult to improve profit margins in the future. Accordingly, our profits and stock price may be harmed.
Our operating results may fluctuate significantly and may be difficult to predict.
Prior to the merger the operating results of Onsale and Old Egghead fluctuated, and we expect our operating results to continue to fluctuate in the future, due to a number of factors, many of which are outside our control. These factors include:
Due to these factors, factors discussed elsewhere in this document, or unforeseen factors, in some future quarter our operating results may not meet the expectations of securities analysts and investors, in which event the trading price of our common stock may decline.
If we are unable to manage our growth, our business could be harmed.
We expect to continue to expand our operations, and in order to manage our growth, we face many challenges, including:
We depend on key employees.
Our future performance depends upon contributions from members of our senior management and other key personnel. Most of our key personnel do not have long-term employment agreements, and we do not maintain any key person life insurance. Competition for attracting and retaining personnel in our industry is intense, especially in the San Francisco Bay area where our headquarters and one of our operating sites are located, and we may fail to attract and retain the personnel we will need to succeed in the future. If one or more of our key personnel leaves us or joins a competitor, our business could be harmed.
The expected benefits of our merger with Old Egghead might not be realized.
The potential benefits that we expect to achieve as a result of our merger with Old Egghead may be more difficult to achieve than expected, or may not be achievable at all. For example:
We operate in an extremely competitive market and we could lose revenue and customers to our competitors.
Existing competitors. The electronic commerce market, particularly over the Internet, is new, rapidly evolving and competitive, and we expect competition to intensify in the future. We compete with many other companies which either offer the same types of merchandise or provide the same or a similar type of sales format to customers. Refer to the section titled "Business - Competition" in our annual report on Form 10-K for a list of our competitors.
New competitors. It is not difficult to enter the online commerce market, and current and new competitors can launch new online commerce web sites at relatively low cost. Competition in online commerce will increase further if retailers, suppliers, manufacturers and direct marketers who have not traditionally sold computer products and consumer goods directly to consumers through the Internet enter this market segment. Increased competition may result in price reductions, fewer customer orders, reduced gross margins, increased marketing costs or loss of market share, or any combination of these problems.
New competitors may emerge and rapidly acquire market share in several ways, including through mergers or by alliances among competitors and vendors. Through such alliances, competitors may also obtain exclusive or semi-exclusive sources of merchandise. In addition, manufacturers may elect to liquidate their products directly over the Internet. Companies that primarily conduct online person-to-person auctions, such as eBay Inc., may develop into direct competitors in the future.
We may not be successful in competing against competitors. Many of these competitors have greater financial, marketing, customer support, technical and other resources than we do. As a result, they may be able to secure merchandise from suppliers on more favorable terms than us, and they may be able to respond more quickly to changes in customer preference or to devote greater resources to the development, promotion and sale of their merchandise than we can. If competition increases and our branding efforts are not successful, we may not be able to command higher margins on the products we sell, or we may lose revenue and customers to our competitors.
If we cannot continue to build strong brand loyalty, our business will be harmed.
We believe that development and awareness of the Egghead.com brand is critical to our success in attracting customers. Furthermore, we believe that brand loyalty will become increasingly important as low barriers to entry encourage the proliferation of web sites. If we are unsuccessful in continuing to build strong brand loyalty, our business will be harmed.
In order to attract and retain consumers and advertisers, and to promote and maintain the Egghead.com brand in response to competitive pressures, we intend to increase our online and offline marketing and advertising. We believe that advertising rates generally, and the cost of online advertising campaigns in particular, could increase substantially in the future. Despite our efforts, consumers or advertisers may not perceive our web site or the Egghead.com brand as superior to the web sites or brands of our competitors.
We have a limited operating history as an online commerce company, which makes our business difficult to evaluate.
We have a limited operating history as an online commerce company. We were incorporated in 1994 and did not generate any revenues until July 1995. Old Egghead was incorporated in 1984 but changed its business model from a chain of retail stores to an online commerce web site beginning in February 1998. Our prospects will therefore be subject to the risks, expenses and uncertainties frequently encountered by young companies that operate in the new and rapidly evolving markets for Internet products and services. These risks include:
We face risks associated with purchasing and carrying our own inventory.
We purchase inventory from vendors. Risks of carrying inventory include:
If we manage our inventory poorly, we may be forced to sell our inventory at a discount or loss.
We rely on merchandise vendors for supply, shipping and quality of products.
Supply. We rely on vendors to supply us with merchandise. For the three months ended March 31, 2000, purchases from Tech Data, a distributor of computers and related products, accounted for approximately 43% of our aggregate merchandise purchases. We have no long-term contracts or arrangements with our vendors that guarantee the availability of merchandise. We may not be able to obtain sufficient quality and quantities of merchandise at competitive prices. Also, the quality of service provided by such parties may fall below the standard needed to enable us to conduct our business effectively. We cannot assure you that our current vendors will continue to supply merchandise or that we will be able to establish new vendor relationships that will ensure that merchandise will be available.
Customer service--shipping and quality of products (returns). We rely on some of our vendors to ship merchandise directly to customers. Consequently, we have limited control over the goods shipped by these vendors, and shipments of goods may be subject to delays and shipment errors. In addition, we may accept returns from customers for which we will not receive reimbursements from manufacturers or vendors. If the quality of service provided by such vendors falls below a satisfactory standard or if our level of returns exceeds expectations, this could harm our business.
We rely on other third parties in conducting our operations.
In conducting our operations, we depend on several other third parties, including the following:
We may not be able to maintain satisfactory relationships with any of the above parties on acceptable commercial terms, and the quality of services that they provide may not remain at the levels needed to enable us to conduct our business effectively.
Our online commerce systems are vulnerable to interruption.
Customer access to our web site will directly affect the volume of orders and thus affect our revenues. System interruptions may make our web site unavailable or prevent us from fulfilling orders efficiently, reducing the volume of goods we sell and the attractiveness of our products and services. We may need to add hardware and software and further develop and upgrade our existing technology, transaction- processing systems and network infrastructure to accommodate increased traffic on our web site and increased sales volume. We maintain substantially all of our computer and communications hardware at two facilities, in Menlo Park, California and Vancouver, Washington. Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, network break-ins, earthquake and similar events. Our backup systems and disaster recovery plan may not be adequate, and we may not have sufficient business interruption insurance to compensate us for losses from a major interruption. Computer viruses, physical or electronic break-ins, deliberate attempts by third parties to exceed the capacity of our systems and similar disruptions could cause system interruptions, delays and loss of critical data, and could prevent us from providing services and accepting and fulfilling customer orders.
We depend on continued improvements in the Internet infrastructure and in our own systems.
We depend upon the number of visitors who use our web site and the volume of orders we fulfill through our web sites. We use an internally developed system for our web site and several aspects of transaction processing, including billing, shipping and tracking. We may be required to add additional hardware and software and further develop and upgrade our existing technology, transaction-processing systems and network infrastructure to accommodate increased traffic on our web site and increased sales volume through our transaction-processing systems. Any failure to do so may cause unanticipated systems disruptions, slower response times, degradation in levels of customer service, impaired quality and speed of order fulfillment or delays in reporting accurate financial information.
We could face litigation risks.
Intellectual property rights. Our business activities may infringe upon the proprietary rights of others, and we have in the past received, and may in the future receive, notices from third parties claiming infringement by our software or other aspects of our business. Any of these claims, with or without merit, could result in significant litigation costs and diversion of resources and management attention, and could require us to enter into royalty and licensing agreements (which may not be available on terms acceptable to us or at all). Successful litigation could result in invalidation of our proprietary rights or significant liability for damages, which could harm our business.
Products liability and consumer protection. Our sale of products through our web sites could subject us to product liability claims or consumer protection regulation, and states and other jurisdictions other than California and Washington may interpret their products liability or consumer protection laws to apply to Internet commerce providers such as us that enter into transactions with their residents. While we carry liability insurance, this may not be adequate to compensate for substantial claims, and these claims could have a harmful effect on our business.
Liability for information transmitted over our online services. The law relating to the liability of online services companies for information carried on or disseminated through our services is currently unsettled. Claims could be made against us under both United States and foreign law for defamation, libel, invasion of privacy, negligence, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated through our services. Several private lawsuits seeking to impose such liability on other online services companies are currently pending. In addition, legislation has been proposed that imposes liability for or prohibits the transmission over the Internet of certain types of information. The potential imposition of liability on online services companies for information carried on or disseminated through their services could require us to alter our service offerings.
We expect our stock price to be volatile.
The market price of the shares of our common stock has been, and we expect it to continue to be, subject to wide fluctuations in response to several factors, such as:
The stock markets generally, and the Nasdaq National Market in particular, have experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and that often have been unrelated or disproportionate to the operating performance of such companies. These market fluctuations, as well as general economic, political and market conditions such as recessions, interest rates or international currency fluctuations, may adversely affect the market price of our common stock. In the past, stockholders have instituted securities class action litigation against several companies following periods of volatility in the market price of their securities. Such litigation, if instituted against us, could result in diversion of our management's attention and resources and substantial financial costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk, for changes in interest rates, relates primarily to our investment portfolio and long term debt. We do not use derivative financial instruments in our investment portfolio. We consider investments in highly liquid instruments purchased with an original maturity of 90 days or less to be cash equivalents. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer, and type of investment. All of our cash equivalents and short-term investments, consisting principally of commercial paper, debt securities and governmental securities, are classified as available-for-sale as of March 31, 2000. We do not expect any material loss with respect to our investment portfolio.
The table below presents principal (or notional) amounts and related weighted average interest rates by year of maturity for our investment portfolio.
(In thousands, except interest rates) 2000 ---- Cash Equivalents........................................... $ 47,960 Fixed Interest Rate................................ 5.72% Investments................................................ $ 12,354 Fixed Interest Rate................................ 5.90%
We also have market risk related to our long-term debt obligation, which matures in 2002. The principal amount of this obligation is $2.0 million and has a variable rate of interest which is equal to the prime rate of the Dai-ichi Kangyo Bank in Tokyo, Japan. At March 31, 2000 this prime rate was 1.375%.
PART II
Item 1. Legal Proceedings.
From time to time, we are subject to litigation in the ordinary course of our business. We believe that none of the currently pending litigation will have a material adverse effect on our business, results of operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
In January, 2000 Jeffrey Sheahan became our President, in addition to continuing his role as Chief Operating Officer. S. Jerrold Kaplan continues to serve as our Chief Executive Officer.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are being filed as part of this report:
Exhibit Incorporated by Reference Filed
Number Exhibit Description Form File No. Exhibit Filing Date Herewith
------- --------------------------------------------- ---- -------- ------- ----------- --------
10.01 Common Stock Purchase Agreement between the 8-K 1.01 02/23/00
Registrant and Acqua Wellington North American
Equities Fund, Ltd., dated February 17, 2000.
10.02 Letter Agreement dated March 29, 2000 between 8-K 99.01 04/04/00
Registrant and Acqua Wellington North American
Equities Fund, Ltd.
27.01 Financial data schedule X
(b) Reports on Form 8-K
On January 31, 2000, we filed a current report on Form 8-K/A under Item 7 to include pro forma financial information and Management Discussion and Analysis of financial condition and results of operations. This report amended our report filed on December 1, 1999 under Item 2 with respect to the merger between Onsale and Egghead.
On February 23, 2000, we filed a current report on Form 8-K under Item 5 announcing that we had entered into an equity financing agreement with Acqua Wellington North American Equities Fund, Ltd., providing for the sale of up to 5 million shares of our common stock over a nine-month period.
On April 4, 2000, we filed a current report on Form 8-K under Item 5 announcing that we had entered into a letter agreement with Acqua Wellington, providing for the sale of approximately 2.3 million shares of our common stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 15, 2000 By: /s/ John E. Labbett
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John E. Labbett
Executive Vice President and
Chief Financial Officer
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