SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 2000
Commission file number 000-22611
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MyTurn.com, Inc.
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Exact name of Small Business Issuer as Specified in Its Charter)
Delaware 11-3344575
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(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) No.)
1080 Marina Village Parkway, Alameda, California 94501
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(Address of principal executive offices)
Issuer's telephone number, including area code (510) 263-4800
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(Former Name, Former Address and Formal Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
---- ----
The number of shares outstanding of each of the issuer's classes of common
equity, as of November 1, 2000: 12,598,981
Transitional Small Business Disclosure Format (check one): Yes No X
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MyTurn.com, Inc. and Subsidiaries
- INDEX -
Page
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PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements
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Condensed Consolidated Balance Sheet - September 30, 2000 (unaudited) 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 (unaudited) 5
Notes to Interim Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
PART II - Other Information
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
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Part 1 Financial Information
Item 1. Condensed Consolidated Financial Statements
MyTurn.com, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
September 30, 2000
ASSETS (Unaudited)
Current assets:
Cash $ 665,601
Restricted cash 2,750,000
Receivables 302,199
Inventory, net of allowances 4,246,938
Prepaid expenses and other assets 246,392
Total current assets 8,211,130
Fixed assets, net 3,083,333
Goodwill, net 8,044,993
Software development costs, net 14,432,088
Licenses, net 1,616,686
Web-site development costs, net 380,245
Other assets 504,213
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Total assets $ 36,272,688
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 8,064,022
Net liabilities of discontinued operations 343,117
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Total current liabilities 8,407,139
Commitments and contingencies (Note 5)
Preferred stock, $.01 par value; 1,000,000 shares authorized
Series A convertible preferred --
Series B convertible preferred --
Subscription for preferred stock 12,856,000
Common stock, par value $.01, 60,000,000 shares authorized;
12,188,147 shares issued and outstanding 121,881
Additional paid-in-capital 173,191,398
Deferred stock based compensation (8,349,255)
Accumulated deficit (149,364,780)
Shareholder loan (84,313)
Less: treasury stock, 75,544 shares at cost (505,382)
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Total shareholders' equity 27,865,549
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Total liabilities and shareholders' equity $ 36,272,688
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See accompanying notes to condensed consolidated financial statements.
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MyTurn.com, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------------------- ----------------------------------------
2000 1999 2000 1999
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Product revenues $ 97,631 $ -- $ 97,631 $ - -
Internet subscription fees net of cost (37,240) (70,827) (73,579) 61,824
Product costs (1,352,997) -- (1,352,997) - -
----------- -------- ----------- ----------
Gross margin (1,292,606) (70,827) (1,328,945) 61,824
Operating expenses:
Sales and marketing 3,154,002 -- 3,473,905 - -
Research and development costs 80,153 -- 907,442 - -
General and administrative 5,385,107 1,086,464 11,506,197 1,787,954
General and administrative stock based 4,709,709 -- 106,374,518 - -
compensation (Note 2)
Depreciation and amortization expense 2,623,474 -- 4,850,779 - -
----------- --------- ----------- ----------
Total operating expenses 15,952,445 1,086,464 127,112,841 1,787,954
Interest and other, net 31,886 10,118 94,259 93,502
Loss on investment transaction -- (71,000) - (71,000)
Loss on abandonment of fixed assets -- -- (13,047) --
------------ ----------- ------------- ------------
Loss from continuing operations (17,213,165) (1,218,173) (128,360,574) (1,703,628)
Discontinued operations:
Loss from discontinued operations -- (1,005,917) -- (6,976,008)
Gain on sale of discontinued operations -- 537,732 -- 537,732
--------------- -------------- ------------- -------------
Net loss $ (17,213,165) $ (1,686,358) $(128,360,574) $ (8,141,904)
============= ============= ============= =============
Basic and diluted loss per common share:
Continuing operations $ (1.44) $ (0.29) $ (12.37) $ (0.44)
Discontinued operations $ -- $ (0.24) $ -- $ (1.79)
Gain on sale of discontinued operations $ -- $ 0.13 $ -- $ 0.14
------------------ ------------------ -------------------- ------------------
Basic and diluted loss per common - $ (1.44) $ (0.40) $ (12.37) $ (2.09)
share:
------------------- ------------------- --------------------- -------------------
Weighted average number of basic and 11,977,579 4,192,489 10,379,269 3,887,625
diluted common shares outstanding
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See accompanying notes to condensed consolidated financial statements.
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MyTurn.com, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
MyTurn.com, Inc. and Subsidiaries
(Unaudited)
For the nine Months Ended
September 30,
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2000 1999
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Cash Flows Used In Operating Activities:
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Net loss $ (128,360,574) $ (8,141,904)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss from discontinued operations -- 6,976,008
Write down of store displays 355,688 --
Gain on sale of discontinued operations -- (537,732)
Depreciation and amortization 4,850,779 12,269
Loss on settlement -- 71,000
Loss on sale of short term investments -- 36,818
General and administrative stock based compensation 106,374,518 212,800
Changes in assets and liabilities:
Increase in restricted cash (2,750,000) --
Increase in receivables (293,310) (21,949)
Increase in inventory (4,024,544) (64,832)
Increase in prepaid expenses and other assets (234,396) (32,027)
Increase in long term other assets (465,894) (28,293)
Increase in accounts payable and accrued expenses 6,831,565 651,900
Decrease in other payable -- (50,000)
Decrease in net liabilities of discontinued operations (169,080) --
Net cash used in continuing operations (17,885,249) (915,942)
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Net cash used in discontinued operations -- (3,471,702)
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Net cash used in operating activities (17,885,249) (4,387,644)
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Cash Flows Used In Investing Activities:
Loans to GlobalPC -- (611,573)
Purchases of fixed assets (3,928,117) --
Capital expenditures of discontinued operations -- (158,036)
Net proceeds from sales of network marketing customer lists -- 250,000
Net proceeds from sale of public satiety division -- 500,000
Shareholder loan (84,313) --
Capitalized software development costs (1,218,381) (157,676)
Net cash used in investing activities (5,230,811) (177,285)
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(Continued)
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MyTurn.com, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
For the nine Months Ended
September 30,
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2000 1999
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Cash Flows Provided by Financing Activities:
Capital lease payments of discontinued operations -- (19,294)
Payment of notes payable (22,408) --
Payment of other liabilities (3,633) --
Net proceeds from private placement -- 96,865
Subscription for preferred stock 12,856,000 --
Proceeds from exercise of warrants 3,024,611 --
Proceeds from exercise of stock options 6,472,670 471,050
Net cash provided by financing activities 22,327,240 548,621
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Net decrease in cash and cash equivalents (788,820) (4,016,308)
Cash and cash equivalents, beginning of period 1,454,421 4,378,400
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Cash and cash equivalents, end of period $ 665,601 $ 362,092
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See accompanying notes to condensed consolidated financial statements.
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MyTurn.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1: DESCRIPTION OF COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Introduction:
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MyTurn.com, Inc. and its wholly owned operating subsidiaries ("MyTurn.com")
is a provider of Internet related computing products and services. During the
quarter ended September 30, 2000, MyTurn.com introduced to four markets the
GlobalPC, a low cost personal computer system that targets first-time users. The
GlobalPC is based on the GEOS operating system that MyTurn.com licenses from
Geoworks Corporation. MyTurn.com has made or acquired improvements to this
operating system. The integrated software application suite includes word
processing, spreadsheet, database and home banking applications, an address
book, a calendar, games and Internet and email capability. The initial sales of
the GlobalPC are being made through mass merchant retailers. New marketing
efforts will focus primarily on infomercials, home shopping networks, direct TV
advertising and direct mail. MyTurn.com also plans to sell the GlobalPC through
institutional sales channels, network marketing companies and its website, as
well as continuing sales through mass merchant retailers.
History:
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Coastal Computer Systems, Inc., a New York corporation, was formed on June
30, 1983. On October 18, 1996 Coastal Computer Systems, Inc. was reincorporated
in Delaware under the name Compu-DAWN, Inc. On January 20, 2000 Compu-DAWN, Inc.
changed its name to MyTurn.com, Inc. From 1983, until January 1999, MyTurn.com
was primarily engaged in the business of designing, developing, licensing,
installing and servicing computer software products and systems predominantly
for public safety and law enforcement agencies.
On January 8, 1999, MyTurn.com's wholly owned subsidiaries, e.TV Commerce,
Inc. ("e.TV") acquired certain assets of LocalNet Communications, Inc.
("LocalNet") pursuant to a surrender of collateral to satisfy secured loans made
by MyTurn.com to LocalNet. From January 8, 1999 through June 1999, MyTurn.com,
through e.TV, operated in the Internet, e-commerce and telecommunications
business, marketing products and services primarily using a person-to-person
sales approach with the services of commissioned sales representatives in a
relationship-based referral marketing organization.
In June 1999, MyTurn.com adopted a plan to dispose of the assets that made
up the public safety software division and ceased selling products and services
through network marketing (e.TV) activities. In July 1999, MyTurn.com sold
primarily all of the assets that made up its public safety software division to
an unrelated third party.
From July 1999 through December 1999, MyTurn.com's focus was on fund
raising efforts and on finalizing the asset purchase transaction with Global PC,
Inc. ("Global PC"). On December 22, 1999, MyTurn.com acquired substantially all
the tangible and intangible assets of Global PC.
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From December 1999 through September 30, 2000, MyTurn.co has focused on
developing strategic business relationships and infrastructure essential to the
business, manufacturing a limited number of GlobalPCs for its Beta test phase,
manufacturing a limited number of GlobalPCs for its initial sales, and
initiating and managing a four-market rollout that commenced in July, 2000.
Basis of Presentation:
----------------------
The interim unaudited consolidated condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. Certain amounts have been reclassified to conform to the current
presentation. In the opinion of management, all adjustments, which consist only
of normal recurring adjustments, necessary to present fairly the financial
position at September 30, 2000 and the results of operations and cash flows for
the periods ended September 30, 2000 and 1999 are made. The interim unaudited
condensed consolidated financial statements should be read in conjunction with
MyTurn.com's consolidated financial statements and notes thereto contained in
MyTurn.com's Annual Report on Form 10-KSB for the year ended December 31, 1999.
The results of operations for the three months and nine months ended September
30, 2000 and 1999 are not necessarily indicative of the results to be expected
for any other interim period or for the full year.
The accompanying interim unaudited consolidated financial statements have
been prepared assuming that MyTurn.com will continue as a going concern. As of
September 30, 2000, MyTurn.com had approximately $665,601 in cash. As shown in
the interim unaudited consolidated financial statements, MyTurn.com has
experienced a substantial increase in operating expenses during the year in
connection with the growth of its operations and staffing.
The Company has determined that it must raise additional funds to support
its operations and implement its business strategy over the next 12 months, and
is undertaking efforts to raise additional capital. Although no assurances can
be given that the efforts to raise additional capital will be successful the
Company believes that it can successfully raise funds necessary to support its
plans for the next 12 months. MyTurn.com is currently relying, and if additional
funds are not raised, Myturn.com will rely, on its Chief Executive Officer and
Chairman of the Board to meet the Company's working capital needs through to
December 31, 2000 (Note 4).
Significant Accounting Policies:
--------------------------------
The accounting policies followed by MyTurn.com are set forth in Note 2 to
MyTurn.com's annual report filed on Form 10-KSB for the year ended December 31,
1999. Specific reference is made to this report for a description of
MyTurn.com's securities and the notes to the financial statements included
therein.
Basis of Consolidation:
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The consolidated condensed financial statements include the accounts of
MyTurn.com and all of its wholly and majority-owned subsidiaries. All
significant intercompany balances and
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transactions have been eliminated in the consolidated condensed financial
statements.
Use of Estimates:
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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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Restricted Cash:
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Restricted cash consists of $2,750,000 of certificate of deposits pledged
as collateral to a major financial institution in connection with a factoring
agreement between MyTurn.com and the major financial institution.
Revenue Recognition:
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MyTurn.com recognizes revenue from the sale of GlobalPCs only to the extent
that the return rights of end users have expired. To date, MyTurn.com has sold
its GlobalPC product only through mass merchant retailers. Due to the newness of
its product and lack of sales history, MyTurn.com is unable to make reasonable
and reliable estimates of returns and is therefore precluded from recognizing
revenue until the customer's return right lapses.
MyTurn.com receives a portion of the fees paid by MyTurn.com's customers to
Internet subscription providers. Due to minimum subscription terms in its
agreements with Internet subscription providers, Myturn.com's cost of providing
Internet connections to its customers exceeded its share of the associated
Internet subscription fees in the three months and nine months ended September
30, 2000 and the three months ended September 30, 1999.
Product Costs:
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Product costs consist of cost of inventory sold, fulfillment, inventory
write-downs, freight costs, technical support and warranty cost.
Inventories:
------------
Inventories consist of computer components, subassemblie and finished
product and are stated at the lower of cost, as determined using the first-in,
first-out method, or market.
Goodwill:
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Cost in excess of fair value of net assets acquired (Goodwill) is being
amortized on the straight-line method over three years. If it became probable
that the projected future undiscounted cash flows associated with the acquired
assets were less than the carrying value of the goodwill, the Company would
recognize an impairment loss in accordance with the provisions of Statement
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of Financial Accounting Standards No.121, "Accounting for the Impairment of Long
Lived Assets to be Disposed of. "
Intangibles:
------------
The Company's intangible assets include software development costs,
licenses and certain web-site development costs. Software development costs are
amortized on the units-of-production method based on the number of computer
devices manufactured. Licenses are being amortized on the straight-line method
over the life of the license agreement of 5 years. Web-site development costs
are being amortized on the straight-line method over their estimated useful life
of 2 years.
The Company reviews the carrying value of their intangible assets on a
quarterly basis to determine if there has been impairment. Should the review
indicate that an intangible asset is not recoverable, the Company's carrying
value of that intangible asset will be reduced. No impairment has been
recognized in 2000.
Software Development Costs:
---------------------------
The Company reflects costs incurred in establishing the technological
feasibility of computer software to be leased or sold, as research and
development costs, and expenses such costs in the period incurred.
The Company's policy is to capitalize software development costs after
technological feasibility of a product has been established. Capitalization of
computer software costs is discontinued when the product is available to be sold
or leased.
Stock-Based Compensation:
-------------------------
On April 3, 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44") which provides accounting rules for stock-based
compensation under APB Opinion No. 25. The new rules are effective July 1, 2000
and require that the change in intrinsic value of re-priced options be
calculated quarterly and any difference be recorded as a compensation charge
until the options are exercised or cancelled. The change in the intrinsic value
of re-priced options prior to July 1, 2000 is not recognized. As of September
30, 2000, MyTurn.com has 603,222 options outstanding with exercise prices of
$2.50 that are subject to variable pricing under FIN 44. Due to a decline in
MyTurn.com's stock price since July 1, 2000, MyTurn.com has not had compensation
charges under FIN 44 related to the variable accounting for these options.
Recently Issued Accounting Pronouncements:
------------------------------------------
In June 1998, the Financial Accounting Standards Board ( FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognizes all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, The FASB
issued Statement No. 137, in which it agreed to defer for one year the
implementation date of SFAS No. 133. SFAS
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No. 133, as amended, is effective for all fiscal years beginning after June 15,
2000. The Company is assessing the impact of SFAS No. 133 on its consolidated
condensed financial statements.
NOTE 2: CAPITAL STOCK AND EQUIVALENTS:
Unless otherwise noted, the Common Shares described belo were issued at
fair market value and the options and warrants described below provide for
exercise prices equal to fair market value on the date they were granted or
issued.
During 1999, MyTurn.com granted options to purchase 4,058,083 Common Shares
in excess of the 2,000,000 Common Shares authorized for issuance upon the
exercise of options grantable under MyTurn.com's 1996 Stock Option Plan. These
options, 193,500 of which were granted to non-employees, had exercise prices
ranging from $1.00 per share to $6.38 per share. Options to purchase 3,508,083
Common Shares were granted with an exercise price equal to fair market value and
the remainder were non-qualified options granted with exercise prices below fair
market value. Substantially all of these options vested on April 4, 2000.
On January 1, 2000, the Company granted options to purchase 2,072,500
Common Shares at an exercise price of $2.50 per share, to certain employees who
were retained in connection with the acquisition of assets of Global PC, Inc.,
which closed on December 22, 1999. These options were also for shares in excess
of the 2,000,000 shares originally authorized for issuance under MyTurn.com's
1996 Stock Option Plan. These employees were former employees of Global PC, Inc.
who MyTurn.com determined were integral to MyTurn.com's development, enhancement
and sale of the GlobalPC and related products and services. These options
provide for vesting in one- third increments in July 2000, January 2001 and
January 2002.
On January 20, 2000, the shareholders approved an amendment to the 1996
Stock Option Plan that increased the number of Common Shares available to be
issued upon exercise of options granted to 10,000,000 shares. In accordance with
generally accepted accounting principles, MyTurn.com is required to recognize a
non-cash compensation charge over the vesting period of the options granted in
excess of MyTurn.com's pre-amended 1996 Stock Option Plan, measured by the
difference between the exercise price of the options granted and fair market
value of the Company's Common Shares on January 20, 2000. As a result,
MyTurn.com recognized non-cash stock compensation charges of $3,976,912 and
$73,770,931 in the quarter and nine months ended September 30, 2000,
respectively, for options granted to employees and $(122,742) and $2,903,713 in
the quarter and nine months ended September 30, 2000, respectively, for options
granted to non-employees. Non-cash stock compensation charges of approximately
$8,349,000 will be recognized in future periods over the vesting period of those
options. This non-cash earnings charge will not impact MyTurn.com's cash flows
or net stockholders' equity.
On January 20, 2000, the shareholders approved an amendment to MyTurn.com's
Certificate of Incorporation to increase the number of authorized Common Shares
to 60,000,000 shares.
On January 4, 2000, MyTurn.com issued to nine designees of Joseph Charles &
Associates, Inc. warrants to purchase an aggregate of 90,000 Common Shares with
an exercise price of $6.375
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per share, vesting upon the date of issuance and exercisable for five years.
These warrants, valued at $115,454, were issued pursuant to an agreement
terminating an investment banking agreement.
On January 21, 2000, MyTurn.com issued non-transferable warrants to
purchase 1,000,000 Common Shares to a Director who subsequently became
MyTurn.com's Chairman of the Board and Chief Executive Officer. Warrants to
purchase 500,000 Common Shares have a below fair market value with an exercise
price of $5.00 per share and vested immediately. MyTurn.com recognized a stock
compensation charge of $5,343,750 in the first quarter of 2000 related to these
500,000 warrants. The original terms of remaining warrants to purchase 500,000
Common Shares provided for below fair market value exercise prices ranging from
$5.00 to $15.00 and vested based on certain performance goals. On April 4, 2000
these warrants were amended to provide for full vesting on April 4, 2000.
MyTurn.com recognized a stock compensation charge of $4,625,0000 in the second
quarter of 2000 related to these 500,000 warrants. All 1,000,000 warrants
described above are exercisable for a period expiring 5 years from the date of
issuance.
On January 3, 2000, MyTurn.com issued warrants to purchase 90,000 Common
Shares with an exercise price of $6.375 per share, pursuant to a consulting
agreement, valued at $461,569. These warrants vested immediately and expire on
January 3, 2005.
On January 21, 2000, MyTurn.com issued warrants to purchase 125,000 Common
Shares with a below fair market value exercise price of $5.00 per share, to a
new Class III director of MyTurn.com. Warrants to purchase 50,000 shares, vested
immediately, were valued at $68,750 and recognized in the first quarter. The
remaining warrants to purchase 75,000 shares vest based on certain performance
goals and will be recognized in future periods over the vesting period of those
warrants. These warrants are exercisable for a period expiring 5 years from the
date of issuance.
On January 21, 2000, MyTurn.com granted options to purchase 90,000 Common
Shares with exercise prices of $2.50 and $6.375 per share to a non-employee,
valued at $666,267. These options vest in one-third increments every six months
and expire on January 2, 2005.
On January 21, 2000, MyTurn.com granted options to purchase 10,000 Common
Shares with an exercise price of $16.625 per share to a non-employee, valued at
$133,823. These options vested immediately and are exercisable for a period
expiring 5 years from the date of grant.
In January 2000, holders of 1,370 Series B Preferred Shares converted such
shares into 256,075 Common Shares.
In January 2000, MyTurn.com issued 277,000 Common Shares from the Company's
treasury stock in payment of a previously accrued 1999 stock bonus valued at
$1,761,550.
On April 4, 2000, MyTurn.com issued non-transferable warrants to purchase
500,000 Common Shares with an exercise price of $20.25 per share, valued at
$8,153,000, to a Director at the time he became MyTurn.com's Chairman of the
Board and Chief Executive Officer. The 500,000 warrants which vested
immediately, were granted in connection with the individual's acceptance of the
positions of Chairman of the Board and Chief Executive Officer, commitment of
his time and resources to MyTurn.com, his personal commitment to provide
MyTurn.com up to
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$6,000,000, to support ongoing capital requirements of MyTurn.com and his
posting of $3,500,000 as security for the Company's line of credit with a
manufacturer. All 500,000 warrants described above are exercisable for a period
expiring 5 years from the date of issuance.
On April 4, 2000, MyTurn.com granted warrants to purchase 25,000 shares of
Common Stock at a price of $20.25 per share for public relations consulting
services, valued at $407,250. These warrants vested immediately and are
exercisable for a period expiring 5 years from the date of issuance.
On April 4, 2000, MyTurn.com issued 30,000 Common Shares valued at
$607,500, to an unaffiliated party in consideration for his involvement in
finding a placement agent for MyTurn.com's private offerings in 1999.
On April 4, 2000, the Board approved the acceleration of the vesting of
stock options issued to certain members of management, in excess of the
pre-amended 1996 Stock Option Plan, to be fully vested on April 4, 2000. Of the
$73,770,931 in stock based compensation charges recognized in 2000 related to
options issued to employees in excess of the pre-amended 1996 Stock Option Plan,
$7,326,153 of charges relate to the acceleration of these stock options issued
to certain members of management.
In June 2000, the Board of Directors adopted the 2000 Stock Option Plan
(the "2000 Plan") which provides for the award of a variety of stock based
compensation alternatives such as non- qualified stock options, incentive stock
options and stock appreciation rights. The 2000 Plan will be administered by the
Board of Directors or a committee of the Board of Directors and provides for the
granting of options to purchase up to 10,000,000 shares of the Company's Common
Stock. Persons eligible to participate in the 2000 Plan include officers,
directors, employees and certain non-employees, who in the judgment of the Board
of Directors, render significant service to the Company.
On June 8, 2000, the Company granted options to purchase 10,000 shares of
Common Stock to a non-employee for consulting services at an exercise price of
$17.32, valued at $24,216. These options vest in one-third increments on the
first, second and third anniversary of the date of grant and expire 5 years from
the date of grant.
On June 8, 2000, the Company issued warrants to purchase 75,000 shares of
Common Stock to Shanghai Industrial Investment (Group) Co., Ltd., (see Note 5)
at an exercise price of $17.32, valued at $1,050,750. These options vest
immediately and are exercisable for a period expiring 5 years from the date of
issuance.
The offering memorandum in connection with MyTurn.com's private placements
through Hornblower and Weeks in October and November 1999, provided that
investors would be granted certain registration rights. A form of registration
rights agreement which was an exhibit to the offering memorandum, which
agreement was not executed or delivered by MyTurn.com or any investor, provides
that if the registration statement is not filed 40 days after the closing,
and/or that registration statement is not declared effective within 180 days
after the closing, MyTurn.com is obligated to pay liquidated damages of five
percent of the amounts invested for each 30 days that the default continues.
MyTurn.com raised aggregate gross proceeds of $2,367,000 in these
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offerings. A registration statement was not filed in the time provided above. On
June 8, 2000, MyTurn.com entered into a settlement agreement related to this
matter, the terms of which included the issuance of 59,850 shares of Common
Stock, valued at $953,85 and the agreement to file a registration statement by
July 17, 2000, covering the resale of the Common Shares and underlying warrants
purchased, pursuant to the offering memorandum. MyTurn.com negotiated a further
agreement to extend the filing date to October 30, 2000. Myturn.com issued an
additional 59,850 shares of Common Stock, valued at $837,302, as consideration
for this second extension. Myturn.com filed the registration statement on
October 30, 2000.
On June 12, 2000, Myturn.com settled an action by Christopher Leng Smith .
Under the settlement, MyTurn.com issued Mr. Smith 630 Common Shares and the
parties agreed to extend the filing date and effective date to July 17, 2000 and
September 30, 2000, respectively, for the proposed registration statement
covering the resale of Mr. Smith's Common Shares, and Common Shares underlying
warrants, which were issued in a private placement in November 1999. MyTurn.com
did not file a registration statement by July 17, 2000. MyTurn.com and Mr. Smith
entered a further agreement to extend the filing date of the registration
statement to October 30, 2000 with no required effective date and the issuance
of an additional 630 Common Shares. Mr. Smith's 1,260 shares were valued at
$17,627. The registration statement was filed on October 30, 2000.
On June 22, 2000, MyTurn.com issued non-transferable warrants to purchase
500,000 Common Shares with an exercise price of $12.4375 per share, valued at
$5,005,000, to the Chairman of the Board and Chief Executive Officer. The
warrants vest immediately and are exercisable for a period expiring 5 years from
the date of issuance.
On June 28, 2000, GPC Acquisition Corp. ("GPC"), a wholly owned subsidiary
of MyTurn.com, Inc. ("MyTurn.com"), acquired certain assets of Breadbox Computer
Company ("Breadbox") pursuant to an Agreement and Plan of Reorganization (the
"Agreement") between GPC, MyTurn.com and Breadbox. The assets acquired by GPC
from Breadbox included, among other things, all of Breadbox's intellectual
property rights relating to or arising out of certain computer software, and
Breadbox's rights under various contracts, including among other things,
licenses of certain of Breadbox's technology to third parties, Breadbox's
license of certain technology from third parties. In consideration of the
assets, MyTurn.com issued an aggregate of 768,628 Common Shares valued at
$12,251,930.
For the nine months ended September 30, 2000, MyTurn.com issued 2,389,079
and 615,607 shares of Common Stock to option and warrant holders, respectively,
for which MyTurn.com received $9,497,281 in cash proceeds.
NOTE 3: SHAREHOLDER LOAN
On January 4, 2000, pursuant to an indemnification obligation, MyTurn.com
paid $232,000 on an officer's behalf in settlement of a legal action.
Additionally, MyTurn.com loaned the officer approximately $84,313 in connection
with the settlement. This loan bears interest at 10% per annum with interest and
principal payable in one balloon payment due on February 3, 2002.
14
<PAGE>
NOTE 4: SUBSCRIPTIONS BY SHAREHOLDER
As of September 30, 2000, the Chief Executive Officer an Chairman of the
Board has provided MyTurn.com $12,856,000 pursuant to his initial financia
commitment to fund working capital deficits of up to $500,000 per month for the
12 months beginning April, 2000. MyTurn.com recognizes these capital infusions
as subscriptions for Preferred Stock. The terms of the Preferred Stock, which
has not been issued as of September 30, 2000, have not yet been finalized. The
terms currently contemplate a face amount of $1,000 per share, and conversion of
the face amount per share into either shares of Common Stock based on the market
value per share at the time of each infusion, or securities issued in a future
private financing before December 31, 2000, based on the purchase price of such
securities. Other terms of the Preferred Stock are to be mutually determined.
Although MyTurn.com is exploring financing opportunities, it has not reached any
agreements or arrangements with respect to any financing. To the extent funding
is not available from any other source, the Chief Executive Officer and Chairman
of the Board has indicated that although he has exceeded his funding commitment,
he will continue to meet MyTurn.com's funding requirements, as determined by
management, through December 31, 2000.
NOTE 5: COMMITMENTS AND CONTINGENCIES
Effective February 1, 2000, MyTurn.com entered into an amended agreement
with Suissa Miller Advertising Agency to develop and execute advertising on
behalf of MyTurn.com. The initial term of the agreement will be for a period
from the effective date through December 31, 2000 with provision for automatic
annual extensions if neither party provides notice of intent to terminate.
Pursuant to the conditions of this agreement, MyTurn.com is obligated to pay a
monthly retainer of $40,909. Additional amounts will be paid if gross media
spending exceeds certain limits. The agreement also provides for
performance-based bonuses for each contract year during which the Agency's
senior management is entitled to a performance-based bonus. Warrants to purchase
100,000 shares of Common Stock will also be issued if MyTurn.com reaches a
certain level of retail shipments prior to December 31, 2000.
On March 8, 2000, MyTurn.com entered into a license agreement with CNN
Interactive, Inc. that established links between MyTurn.com's Internet portal
site and a CNN Internet site currently known as CNN Interactive. The term of the
agreement is for a period ending on June 15, 2001. Pursuant to the conditions of
the licensing agreement, MyTurn.com is obligated to pay an aggregate of $875,000
consisting of an $87,500 deposit and four quarterly payments of $196,875
commencing on April 15, 2000.
Effective March 1, 2000, MyTurn.com entered into a lease agreement for
office space in Alameda, California, with an initial term of 4.5 years, which
provides for base annual rental of $664,668 and annual increases to the base
rent of 3% per annum. Future minimum rentals for office space are as follows:
Fiscal Year Ending
------------------
2000 $ 166,167
2001 679,623
2002 700,012
2003 721,012
2004 555,620
---------
$ 3,184,289
===========
15
<PAGE>
Effective August 11, 2000 MyTurn.com entered into a leas agreement for
additional office space. The term of the agreement will be for a period from
November 1, 2000 through September 29, 2004. Annual base rental will be $420,538
with annual increases to the base rent of 4% per annum. Future minimum rentals
for this office space are as follows:
Fiscal Year Ending
------------------
2000 $ 70,090
2001 423,341
2002 440,275
2003 457,886
2004 354,786
---------
$ 1,746,377
===========
On May 1, 2000, MyTurn.com entered into an agreement wit Genuity to provide
Internet dial access service to users of the GlobalPC. The term of the agreement
is for 12 months from the earlier of the day on which installation and
configuration are completed plus 30 days or the day on which the first user uses
the Dial access service. Pursuant to the terms of the service agreement,
MyTurn.com is obligated to pay a monthly fee based on usage subject to a minimum
monthly fee of $200,000.
On May 23, 2000, MyTurn.com entered into an agreement with G2, LLC to
provide financial advisory services. The term of the agreement expires on April
25, 2001. Pursuant to the agreement, MyTurn.com is obligated to pay a monthly
retainer of $15,000. The agreement also provides for additional fees to be paid
on proceeds raised from capital sources introduced to MyTurn.com by G2, LLC.
Warrants to purchase 2,500 common shares will also be issued for each $1million
of the first capital investment raised, subject to a maximum of 200,000
warrants.
On June 1, 2000, MyTurn.com entered into an inventory management agreement
with FGI Print Management, Inc., to provide warehousing, fulfillment and
inventory management services. The term of the agreement is for a period of one
year from the effective date. Pursuant to the agreement, MyTurn.com will pay per
unit charges for order fulfillment services as well as for warehouse storage
services.
On June 13, 2000, MyTurn.com entered into a manufacturin agreement with
Shanghai Industrial Investment (Group) Co., Ltd. ("SIIG"), a Shanghai
manufacturer (see Note 2). The agreement provides for the manufacture, assembly
and shipment of MyTurn.com's consumer product, the GlobalPC. The term of the
agreement is for 36 months from the effective date. Within 90 days of the
effective date of the agreement, MyTurn.com was obligated to submit initial
purchase orders for at least 250,000 units and at least 705,000 units by
December 31, 2000. As of September 30, 2000, MyTurn.com has issued purchase
orders for a total of 119,900 units and has purchased a total of 21,600 units;
2,328 units have been shipped to retailers. Due to industry-wide material
shortage procurement and related quality control and other issues, MyTurn.com
has advised SIIG to temporarily suspend manufacturing additional units until
these issues can be addressed to MyTurn.com's satisfaction. Myturn.com believes
tha due to current inventory levels, the suspension of production will not
hinder its ability to fill the anticipated volume of orders from its customers.
MyTurn.com is currently exploring whether SIIG has been unable to meet its
obligations under the manufacturing agreement. If it has been determined that
SIIG has not complied with the agreement, MyTurn.com believes that it may no
longer be required to purchase
16
<PAGE>
the unit volume discussed above. As of September 30, 2000, Myturn.com has made
no accrual for this commitment.
Per our manufacturing agreement, the cost per unit for the first 100,000
units is fixed with subsequent pricing to be determined by mutual consent of
both parties. Payments will be made to SIIG in accordance with a factoring
agreement entered into between MyTurn.com and the Banc of America Commercial
Corporation ("BACC") entered into in June 2000. The agreement provides for BACC
to make payments to SIIG without recourse against MyTurn.com, for shipments of
GlobalPC's, made to those MyTurn.com customers that have been credit approved by
BACC. In return, MyTurn.com assigns its interest in all present and future
receivables to BAAC. Additionally, MyTurn.com will pay BACC a monthly commission
based on gross receivables subject to a minimum commission of at least $100,000
per year. In connection with the factoring agreement, as of September 30, 2000
MyTurn.com has pledged $2,750,000 of certificate of deposits as security to
BACC.
On July 24, 2000, MyTurn.com entered into a financial outsourcing services
agreement with ResourcePhoenix.com to provide financial and accounting services
The term of the agreement is for an undetermined period. After the first year,
with sixty days advance written notice either party may terminate the agreement
for convenience. The agreement may also be terminated in case of breach of
contract. The agreement provides for the implementation of new accounting
software as well as for monthly finance and accounting services. Pursuant to the
agreement, MyTurn.com is obligated to pay an implementation fee of $409,000 as
well as a monthly service fee.
On or around August 16, 2000, StarNet, Inc. ("StarNet") commenced an action
against MyTurn.com in the Chancery Division, County Department for the Circuit
Court of Cook County, Illinois (the "StarNet Action"). StarNet is a party to an
Agreement with the Company dated December 30,1999 (the "December 30, 1999
Agreement") by which Myturn.com agreed to satisfy its indebtedness to StarNet
for services rendered by StarNet through November 30, 1999. In the StarNet
Action, StarNet alleges that Myturn.com failed to timely file a registration
statement covering the Common Shares which were issued to it pursuant to the
December 30, 1999 Agreement. StarNet further alleges that, on June 19, 2000, the
parties agreed to extend the date by which the registration statement was
required to become effective, and that Myturn.com again failed to timely file
the registration statement required of it. StarNet is claiming damages in the
amount of $857,807, and seeks an award of attorney's fees and costs. Myturn.com
intends to reach a resolution of this matter, and failing that, plans to
vigorously defend against the allegations in the StarNet Action. Because of the
uncertainties inherent in litigation, the outcome of the action cannot be
predicted. As of September 30, 2000, no accrual has been made for this
contingency.
NOTE 6: INCOME (LOSS)
For the three months and nine months ended September 30, 2000, MyTurn.com
reflected a net loss of $17,213,165 and $128,360,574 or a $1.44 and $12.37 loss
per basic and diluted share, respectively. This compares to a net loss of
$1,686,358 and $8,141,904 or a $0.40 and $2.09 loss per basic and diluted share
for the same periods in 1999. Net loss per diluted share was the same as net
loss per basic share for each of the respective years as the effect of including
potentially dilutive securities in the computation of earnings per share is
anti-dilutive.
17
<PAGE>
NOTE 7: SUBSEQUENT EVENTS
As of October 11 MyTurn.com's Chairman and Interim Chief Executive Officer,
Michael Fuchs, assumed the position of full-time Chief Executive Officer.
On October 12, 2000, MyTurn.com announced the appointment of Steven A.
Burleson as Chief Financial Officer and Chief Operating Officer. Under his
employment agreement, Mr. Burleson was granted options to purchase 300,000 of
MyTurn.com's Common Shares under MyTurn.coms 2000 Stock Option Plan. These
options vest in 50%, 25%, and 25% increments on the first, second, and third
annual anniversary date of the grant, respectively. As part of Mr. Burleson's
employment agreement, MyTurn.com has agreed to loan him, on January 1, 2001,
$1,000,000 at the lowest applicable federal interest rate at that time.
Principal and interest are due the earlier of October 22, 2003, the date Mr.
Burleson voluntarily terminates his employment, or the date Mr. Burleson's
employment is terminated for cause. However, if Mr. Burleson exercises his
options prior to the repayment of his loan, he is obligated to repay on the loan
an amount equal to the difference between the then current market price and the
exercise price of options exercised, as of the date of exercise. Further, if Mr.
Burleson exercises his options and sells the underlying shares, or sells as many
underlying shares as the market will allow, prior to the maturity date of the
loan for an aggregate amount which is less than the unpaid amounts under the
loan, the shortfall will be forgiven.
As of October 26, 2000, the $2,750,000 of certificate of deposits pledged
as collateral to a major financial institution (see Note 1) were freed of this
restriction.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction:
-------------
Coastal Computer Systems, Inc., a New York corporation, was formed on June
30,1983. On October 18, 1996 Coastal Computer Systems, Inc. was reincorporated
in Delaware under the name Compu-DAWN, Inc. On January 20, 2000 Compu-DAWN, Inc.
changed its name to MyTurn.com, Inc. From 1983, until January 1999, MyTurn.com
was primarily engaged in the business of designing, developing, licensing,
installing and servicing computer software products and systems predominantly
for public safety and law enforcement agencies.
On January 8, 1999, MyTurn.com's wholly owned subsidiary e.TV Commerce,
Inc. ("e.TV"), acquired certain assets of LocalNet Communications, Inc.
("LocalNet") pursuant to a surrender of collateral to satisfy secured loans made
by MyTurn.com to LocalNet. From January 8, 1999 through June 1999, MyTurn.com,
through e.TV, operated in the Internet, e-commerce and telecommunications
business, marketing products and services primarily using a person to person
sales approach with the services of commissioned sales representatives in a
relationship-based referral marketing organization.
In May 1999, MyTurn.com adopted a plan to dispose of the assets that made
up the public safety software division and ceased selling products and services
through network marketing activities. In July 1999, MyTurn.com sold primarily
all of the assets that made up its public safety software division to an
unrelated third party.
From July 1999 through December 1999, MyTurn.com's focus was on fund
raising efforts and on finalizing the asset purchase transaction with Global PC,
Inc. On December 22, 1999, MyTurn.com acquired substantially all the tangible
and intangible assets of Global PC, Inc., and from December 1999 through
September 30, 2000, MyTurn.com focused on:
o developing strategic business relationships and infrastructure
essential to the business,
o the beta test phase of its low cost easy-to-use personal computer
known as the GlobalPC, and
o the four-market roll-out of the GlobalPC.
Results of Operations:
Three Months Ended September 30, 2000 compared to Three Months Ended
---------------------------------------------------------------------
September 30, 1999.
-------------------
Revenues:
---------
Revenues for the three months ended September 30, 2000 were $97,631 and
consisted primarily of initial sales of GlobalPCs. During the quarter ending
September 30, 2000, we sold 2,328 GlobalPCs to seven mass merchant retailers
located in four target markets at an average sales price of $243 per unit. After
deferral of revenue, we recognized $89,812 of product revenue from GlobalPC
sales.
19
<PAGE>
To date, we have sold our product only through mass merchant retailers. Due
to the newness of our product and lack of sales history, we are unable to make
reasonable and reliable estimates of returns and are therefore precluded from
recognizing revenue until the customer's return right lapses. For our mass
merchant retailers, customer return rights generally lapse in 30 days. For the
quarter ending September 30, 2000 and 1999, net revenues consisted of the
following.
For the Three Months Ended
September 30,
2000 1999
---------------- ---------------
Sales of GlobalPCs $ 565,578 $ --
Other software sales 7,820 --
Deferred sales (475,767) --
---------------- ---------------
Net revenues $ 97,631 $ --
================ ===============
Our goal in introducing the GlobalPC into four specific markets, with
differing customer characteristics, was to determine customer response to our
product. The four markets are Portland Oregon, Indianapolis Indiana, Minneapolis
Minnesota, and Tampa Florida. We believe customer feedback validated the
GlobalPC's appeal to first time computer buyers due to its affordability and
ease-of-use. However, the customer awareness of our product in our target
markets was relatively expensive to achieve. We have concluded that preceding
our entry into retail channels with marketing campaigns providing an extended
information format is essential to educating potential purchasers of the
GlobalPC's attributes and initially seeding the "ease of use" awareness within
our potential customers. This awareness is best gained via extended formats
resulting in continuing "word-of-mouth" advertising that will precede major
retail expansion.
As a result of these findings, we plan to enter a number of additional
channels of distribution. These channels include direct media marketing through
infomercials and home shopping networks, institutional, premium and affiliate
sales, sales through network marketing companies, and online sales generated
through TV advertising and direct mail. Infomercials for the GlobalPC are
currently in production. We believe that infomercials have proven to be an
effective form of advertising for many products and will be effective for ours
as well. The presentation format of this type of marketing offers us an
opportunity to demonstrate the GlobalPC to a mass audience of potential
customers. Infomercials will generally precede our retail expansion to assist in
market awareness. The live interactive involvement of hosts on home shopping
networks provides the consumer with information often unavailable in static or
shorter forms of media.
We intend to pursue enterprise, institutional, affiliate and premium
customers, such as large corporations, governments, municipalities,
associations, network marketers, unions and schools. Our strategy is to enter
into relationships with these entities to provide our offering to their
employees, customers, members, representatives and other affiliated parties. Our
value proposition, which provides an attractive price point, full Personal
Computer and Internet/e-mail functionality, with easy-to-follow instructions to
assist with the set-up and operation of their GlobalPC systems and Internet
access, should be an attractive selling point.
Product Costs:
--------------
The GlobalPC is manufactured, assembled, and shipped by an outside company
in Shanghai,
20
<PAGE>
China on a cost per unit basis (see Note 5). Product costs for the three months
ended September 30, 2000 of $1,352,997 consist of cost of inventory sold,
fulfillment costs, freight costs, technical support, warranty costs and
inventory write-downs. Because we sell our product at a per unit sales price
that is below our per unit manufacturing cost, product costs include write-downs
of unsold product inventories to net realizable value. During the quarter ended
September 30, 2000, we recorded approximately $514,000 of inventory write-downs.
Product costs also include the cost in excess of sales value of units shipped
but not recognized as sales due to deferral of revenue. Management intends to
recoup excess manufacturing cost through Internet subscription fees gained
through the sale of GlobalPCs. Warranty and technical support costs are accrued
based on the number of units sold; as of September 30, 2000, we accrued
approximately $210,000 for these anticipated costs.
Operating Expenses:
-------------------
Operating expenses increased $14,865,981 for the three months ended
September 30, 2000 from the same period in 1999. The increase was primarily
attributable to the following:
o Sales and marketing expenses of $3,154,002 associated with our initial roll
out of the GlobalPC in four test markets.
o An increase of $4,298,643 in general and administrative expenses, excluding
stock based compensation and depreciation and amortization, associated with
the general growth and expansion of our business. MyTurn.com's employee
headcount has increased from 33 at September 30, 1999 to 101 as of
September 30, 2000. General and administrative expenses for the three
months ended September 30, 1999 totaled $1,086,464. All other general and
administrative costs for this period were associated wit the discontinued
operations and are reflected in the loss from discontinued operations of
$1,005,917.
o A non-cash compensation amortization charge of $502,122 resulting from the
grant of options to employees, during 1999, in excess of the options
available under MyTurn.com's 1996 Stock Option Plan. These options were
valued using a measurement date of January 20, 2000, which was the day the
shareholders approved an amendment to increase the number of options
available for grant under MyTurn.com's 1996 Stock Option Plan. This
non-cash earnings charge will not impact MyTurn.com's cash flows or net
stockholders' equity.
o A non-cash compensation amortization charge of $3,474,790 resulting from
the grant of options to employees in January of 2000, having an exercise
price below the fair market value. These options were also in excess of the
options available under MyTurn.com's 1996 Stock Option Plan. The value of
these options was also measured on January 20, 2000, which was the
shareholder approval date. This non-cash earnings charg will not impact
MyTurn.com's cash flows or net stockholders' equity.
o A non-cash compensation charge of $855,540 resulting from the settlement in
stock of disputes with non-employees over registration of MyTurn.com stock
previously issued to them. This non-cash earnings charge will not impact
MyTurn.com's cash flows or net stockholders' equity.
o An increase in depreciation and amortization of $2,623,474 resulting from
amortization of goodwill related to the acquisition of assets of Global PC,
Inc., of $902,069, amortization of licensing fees of $95,100, amortization
of web-site development and domain name costs of
21
<PAGE>
$79,206, amortization of software development costs of $1,421,157 and
depreciation of fixed assets of $125,942. All depreciation and amortization
incurred in the prior year period is included in the loss from discontinued
operations for that period.
Income (Loss):
--------------
The consolidated loss from continuing operations, for th three months ended
September 30, 2000 was $17,213,165 compared to loss from continuing operations
of $1,218,173 for the same period in 1999. For the three months ended September
30, 2000, MyTurn.com incurred a net loss of $17,213,165 or a $1.44 loss per
basic and diluted share as compared to a net loss of $1,686,358 or a $.40 loss
per basic share for the same period in 1999. This increase in loss is primarily
the result of current period non-cash stock based compensation charges and that
of an increase in other operating expenses associated with the general growth
and expansion of our business.
Nine Months Ended September 30, 2000 compared to Nine Months Ended
------------------------------------------------------------------
September 30, 1999
------------------
Revenues:
---------
For the nine months ended September 30, 2000, revenues from continuing
operations are $97,631 and consist primarily of initial sales of GlobalPCs. For
the nine months ending September 30, 2000 and 1999, net revenues consisted of
the following.
For the Nine Months Ended
September 30,
2000 1999
---------------- ----------------
Sales of GlobalPCs $ 565,578 $ --
Other software sales 7,820 --
Deferred sales (475,767) --
---------------- ---------------
Net revenues $ 97,631 $ --
================ ===============
Product Costs:
--------------
The GlobalPC is manufactured, assembled, and shipped by an outside company
in Shanghai, China on a cost per unit basis (see Note 5). Product costs for the
nine months ended September 30, 2000 of $1,352,997 consist of cost of inventory
sold, fulfillment costs, freight costs, technical support, warranty costs and
inventory write-downs. Because we sell our product at a per unit sales price
below our per unit manufacturing cost, product costs include write downs of
unsold product inventories to net realizable value. During the nine months ended
September 30, 2000, we recorded approximately $514,000 of inventory write-downs.
Product costs also include the cost in excess of sales value of units shipped
but not recognized as sales due to deferral of revenue. Management intends to
recoup excess manufacturing cost through Internet subscription fees gained
through the sale of GlobalPCs. Warranty and technical support costs are accrued
based on the number of units sold; as of September 30, 2000, we accrued
approximately $210,000 for these anticipated costs.
Operating Expenses:
-------------------
Operating expenses increased $125,324,887 for the nine months ended
September 30, 2000 from the same period in 1999. The increase was primarily
attributable to the following:
22
<PAGE>
o Sales and marketing expenses of $3,473,905 associated with our initial roll
out of the GlobalPC in four test markets.
o An increase in research and development costs of $907,44 related to the
development of software to be used in the GlobalPC.
o An increase of $9,718,243 in general and administrative expenses, excluding
stock based compensation and depreciation and amortization, associated with
the general growth and expansion of our business. MyTurn.com's employee
headcount has increased from 33 at September 30, 1999 to 101 as of
September 30, 2000. General and administrative expenses for the nine months
ended September 30, 1999 totaled $1,787,954. All other general and
administrative costs in this period were associated with the discontinued
operations and are reflected with the loss from discontinued operations of
$6,976,008.
o Non-cash compensation amortization charge of $53,587,378 resulting from the
grant of options to employees, during 1999, in excess of the options
available under MyTurn.com's 1996 Stock Option Plan. These options were
valued using a measurement date of January 20, 2000, which was the day the
shareholders approved an amendment to increase the number of options
available for grant under MyTurn.com's 1996 Stock Option Plan. This
non-cash earnings charge will not impact MyTurn.com's cash flows or net
stockholders' equity.
o Non-cash compensation amortization charge of $20,183,55 resulting from the
grant of options to employees in January of 2000 that had an exercise price
below the fair market value. These options were also in excess of the
options available under MyTurn.com's 1996 Stock Option Plan. The value of
these options was also measured on January 20, 2000, which was the
shareholder approval date. This non-cash earnings charg will not impact
MyTurn.com's cash flows or net stockholders' equity.
o Non-cash compensation charge of $13,158,000 resulting from the issue of
non-transferable warrants to the Chairman of the Board and Chief Executiv
Officer that are valued using the Black-Scholes option-pricing model. This
non-cash earnings charge will not impact MyTurn.com's cash flows or net
stockholders' equity.
o Non-cash compensation charge of $5,412,500 resulting from the issue of
warrants to directors with an exercise price below the fair market value.
This non-cash earnings charge will not impact MyTurn.com's cash flows or
net stockholders' equity.
o Non-cash compensation charge of $4,625,000 resulting from the acceleration
of the vesting of non-transferable warrants issued to the Chief Executive
Officer and Chairman of the Board during the first quarter of 2000. This
non-cash earnings charge will not impact MyTurn.com's cash flows or net
stockholders' equity.
o Non-cash compensation charges of $6,991,189 resulting from the grant of
options and the issuance of warrants to non-employees which are valued
using the Black-Scholes option pricing model. This non-cash earnings charge
will not impact MyTurn.com's cash flows or net stockholders' equity.
o Non-cash compensation charges of $1,561,359 resulting from the issuance of
Common Stock to non-employees which are valued using the market price of
the stock on the date of issuance.
23
<PAGE>
This non-cash earnings charge will not impact MyTurn.com cash flows or net
stockholders' equity.
o A non-cash compensation charge of $1,809,399 resulting from the settlement
in stock of disputes with non-employees over registration of MyTurn.com
stock previously issued to them. This non-cash earnings charge will not
impact MyTurn.com cash flows or net stockholders' equity.
o An increase in depreciation and amortization of $4,850,779 resulting from
amortization of goodwill related to the acquisition of assets of Global PC,
Inc., of $2,706,207, amortization of licensing fees of $285,298,
amortization of web-site development and domain name costs of $204,214,
amortization of software development costs of $1,454,562, and depreciation
of fixed assets of $200,499.
Income (Loss):
--------------
The consolidated loss from continuing operations, for th nine months ended
September 30, 2000 was $128,360,574 compared to loss from continuing operations
of $1,703,628 for the same period in 1999. For the nine months ended September
30, 2000, MyTurn.com incurred a net loss of $128,360,574 or a $12.38 loss per
basic and diluted share as compared to a net loss of $8,141,904 or a $2.09 loss
per basic share for the same period in 1999. The increase in loss for the nine
months ended September 30, 2000 is primarily due to the large non-cash
compensation charges discussed above.
Liquidity and Capital Resources:
--------------------------------
Cash decreased $788,820 during the nine months ended September 30, 2000
from $1,454,421 to $665,601. At September 30, 2000, MyTurn.com had working a
capital deficit of $196,009 compared to a working capital deficit of $504,199 at
December 31, 2000.
Cash used in operating activities was $17,885,249 for th nine months ended
September 30, 2000, as compared to $4,387,644 for the same period in 1999. This
increase is primarily attributable to costs associated with developing strategic
business relationships and infrastructure essential to the business as well as
costs associated with the manufacture of a limited number of GlobalPCs for our
Beta test phase and costs associated with marketing, advertising, and
manufacturing additional units for the third quarter four market launch of the
GlobalPC.
Cash used in investing activities was $5,230,881 for the nine months ended
September 30, 2000, as compared to $177,285 for the same period in 1999. This
increase was primarily the result of capital expenditures of $3,928,117 as well
as software development costs of $1,218,381 during the nine months ended
September 30, 2000.
Cash provided by financing activities was $22,327,240 fo the nine months
ended September 30, 2000 as compared to $548,621 for the same period in 1999.
The increase in cash provided by financing activities is primarily the result of
subscriptions for preferred stock of $12,856,000 from our Chief Executive
Officer and Chairman of the Board and proceeds from the exercise of warrants and
options which aggregated $9,497,291. During the nine months ended September 30,
2000, options to purchase 2,327,969 Common Shares and warrants to purchase
615,607 Common Shares were exercised.
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MyTurn.com anticipates it will need additional capital t continue to
develop its business plan and sustain its business at current levels. MyTurn.com
believes obtaining additional funding is essential to the successful
implementation of both its short-term and long- range business plans.
In March 2000, MyTurn.com received a financial commitmen from its Chief
Executive Officer and Chairman of the Board to fund working capital deficits of
up to $500,000 per month for the 12 months beginning April, 2000 if proceeds
from operations or other fund raising efforts are not sufficient to meet
MyTurn.com's working capital needs. As of September 30, 2000, the Chief
Executive Officer and Chairman of the Board has funded our working capital needs
by providing $12,856,000 to the Company. In October 2000, he provided MyTurn.com
additional capital infusions aggregating $5,580,010. All capital infusions from
our Chief Executive Officer and Chairman of the Board have been recognized as
subscriptions for Preferred Stock. To the extent funding is not available from
any other source, the Chief Executive Officer and Chairman of the Board has
indicated that although he has exceeded his funding commitment, he will continue
to meet MyTurn.com's funding requirements, as determined by management, through
December 31, 2000.
MyTurn.com is continuing to explore sources of capital, including debt and
equity investments. There can be no assurance that any investor will make a debt
or equity investment in MyTurn.com or that any agreement to raise capital will
be reached. If future investments are made, MyTurn.com cannot assure that they
will be made on terms as favorable as MyTurn.com would like nor can MyTurn.com
predict at this time the size of such an investment. If MyTurn.com is unable to
secure additional financing, it may not be able to continue its current business
plan. Consequently, MyTurn.com will have to revise its business plan or scale
back its operations.
As previously reported in our June 30, 2000 Quarterly Report on Form-10QSB,
in March 2000, MyTurn.com received a commitment from certain members of
management who hold options to purchase up to 3,159,405 Common Shares that they
will exercise these options on or prior to June 30, 2000. Many of these
commitments remain unfulfilled. As of June 30, 2000, proceeds of $1,685,000 had
been raised from the exercise of options for 785,000 Common Shares. In the
quarter ending September 30, 2000, an additional $550,883 has been raised from
exercises of options for 217,134 Common Shares.
On June 13, 2000, MyTurn.com entered into a manufacturin agreement with
Shanghai Industrial Investment (Group) Co., Ltd. ("SIIG"), a Shanghai
manufacturer. The agreement provides for the manufacture, assembly and shipment
of MyTurn.co s consumer product, the GlobalPC. The term of the agreement is for
36 months from the effective date. Within 90 days of the effective date of the
agreement, MyTurn.com was obligated to submit initial purchase orders for at
least 250,000 units and at least 705,000 units by December 31 2000. As of
September 30, 2000, MyTurn.com has issued purchase orders for a total of 119,900
units and has purchased a total of 21,600 units; 2,328 units have been shipped
to retailers. Due t industry-wide material shortage procurement and related
quality control and other issues, MyTurn.com has advised SIIG to temporarily
suspend manufacturing additional units until these issues can be addressed to
MyTurn.com's satisfaction. Myturn.com believes that due to current inventory
levels, the suspension of production will not hinder its ability to fill the
anticipated volume of orders from its customers. MyTurn.com is currently
exploring whether SIIG has been unable to meet its obligations under the
manufacturing agreement. If it has been determined that SIIG has not complied
with the agreement, MyTurn.com believes that it may no longer be required to
purchase
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the unit volume discussed above. As of September 30, 2000, Myturn.com has made
no accrual for this commitment.
See Note 2 "Capital Stock and Equivalents" to the Consolidated Condensed
Financial Statements for discussion of non-cash stock compensation charges that
MyTurn.com recognized during the nine month period ended September 30, 2000.
MyTurn.com will recognize non-cash stock compensation charges of approximately
$8,349,000 in future periods, over the vesting period of the options. These
non-cash earnings charges will not impact MyTurn.com's cash flow or net
stockholders' equity.
Forward Looking Statements:
---------------------------
Certain information contained in the matters set forth above are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and is subject to the safe harbor created by that
act. MyTurn.com cautions readers that certain important factors may affect the
MyTurn.com's actual results and could cause such results to differ materially
from any forward-looking statements which may be deemed to have been made above
and elsewhere in this Quarterly Report or which are otherwise made by or on
behalf of MyTurn.com. For this purpose, any statements contained above and
elsewhere in this Quarterly Report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "could," "estimate," "plan," or "continue" or the
negative variations of those words or comparable terminology are intended to
identify forward-looking statements. Factors that may affect results include,
but are not limited to, the Internet and Internet related technology and
products, new technology developments, developments and regulation in the
telecommunications industry, the risk of loss of management and personnel, the
competitive environment within the Internet and telecommunications industries,
the ability of MyTurn.com to develop its infrastructure, the ability of
MyTurn.com to comply with its obligations under the manufacturing agreement for
the Global PC and related bank financing agreements, the continued manufacture
of MyTurn.com's GlobalPC meeting satisfactory quality standards, the rate at
which purchasers of the GlobalPC sign up for the MyTurn.com Internet service,
the ability of MyTurn.com to enter into arrangements to sell products through
the retail mass market and other sales channels, the success of MyTurn.com's
marketing strategy efforts, the ability of MyTurn.com to raise additional
capital which will be required to continue to develop and sustain business at
current levels and to implement MyTurn.com's business plan and generate revenue,
uncertainties inherent in litigation, the competence required and experience of
management, and economic conditions. MyTurn.com is also subject to other risks
detailed herein or detailed from time to time in MyTurn.com's Securities and
Exchange Commission filings
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On or around August 16, 2000, StarNet, Inc. ("StarNet") commenced an action
against MyTurn.com in the Chancery Division, County Department for the Circuit
Court of Cook County, Illinois (the "StarNet Action"). StarNet is a party to an
Agreement with the Company dated December 30,1999 (the "December 1999
Agreement") by which the Company agreed to satisfy its indebtedness to StarNet
for services rendered by StarNet through November 30, 1999. In the
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StarNet Action, StarNet alleges that the Company failed to timely file a
registration statement covering the Common Shares which were issued to it
pursuant to the December 30, 1999 Agreement. StarNet further alleges that, on
June 19, 2000, the parties agreed to extend the date by which the registration
statement was required to become effective, and that the Company again failed to
timely file the registration statement required of it. StarNet is claiming
damages in the amount of $857,807, and seeks an award of attorney's fees and
costs. We intend to reach a resolution of this matter, and failing that, we plan
to vigorously defend against the allegations in the StarNet Action. Because of
the uncertainties inherent in litigation, the outcome of the action cannot be
predicted.
Item 2. Changes in Securities
In the third quarter of 2000 MyTurn.com granted employee options to
purchase an aggregate of 1,453,000 Common Shares under its 2000 Stock Option.
The Options have exercise prices ranging from $7.03 to $17.88 per share and are
exercisable for five years from their respective dates of issuance. The options
vest on various dates during their respective exercise periods, ranging from the
date of grant to the third anniversary of the grant date.
In July 2000, MyTurn.com issued an aggregate of 59,850 Common Shares to 32
persons who were investors in MyTurn.com's private placements in October and
November 1999, under an agreement to extend the filing date and effective date
of a proposed registration statement covering the resale of Common Shares, and
Common Shares underlying the warrants, issued to them in those private
placements.
In the third quarter of 2000, MyTurn.com issued an aggregate of 30,604
Common Shares to 3 persons. The Common Shares were issued in a private offering
undertaken in connection with the MyTurn.com's acquisition of assets from
GlobalPC, Inc., which closed on December 22, 1999.
The above transactions were private transactions not involving public
offerings and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. Such issuances of
securities were without the use of an underwriter, and the certificates
evidencing such securities bear restrictive legends permitting the transfer
thereof only upon registration of such securities or pursuant to and exemption
under the Securities Act.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Description of Exhibit
2.1 Agreement of Merger between MyTurn.com and Coastal Computer
Systems, Inc., a New York corporation.*
3.1 Certificate of Incorporation of MyTurn.com.*
3.2 Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock, filed with the Secretary of State of
the State of Delaware on June 5, 1998.**
3.3 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock, filed with the Secretary of State of
the State of Delaware on September 2, 1998.***
3.4 Amended Certificate of Incorporation filed with the Secretary of
State of the State of Delaware on January 21, 2000
3.5 Amended and Restated By-Laws of MyTurn.com.****
4.1 Specimen Common Share Certificate.*
10.1 July 24, 2000 financial outsourcing services agreement with
ResourcePhoenix.com
10.2 Cybercash sublease
27 Financial Data Schedule
* Previously filed as an exhibit to MyTurn.com's Registration Statement on
Form SB-2, Registration No. 333-18667.
** Previously filed as an exhibit to Myturn.com's Quarterly Report on Form
10-QSB for the period ended June 30, 1998.
*** Previously filed as an exhibit to MyTurn.com's Quarterly Report on Form
10-QSB for the period ended September 30, 1998.
**** Previously filed as an exhibit to MyTurn.com's Annual Report on Form 10-KSB
for the period ended December 31, 1999.
(b) Reports on Form 8-K
MyTurn.com filed a current report on Form 8-K as follows:
Date of report: on July 13, 2000
Item reported: 2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused the Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2000 MYTURN.COM, INC.
By:/s/Michael Fuchs
--------------------------
Michael Fuchs
Chairman of the Board and Chief
Executive Officer
By: /s/Stephen Burleson
--------------------------
Stephen Burleson
Chief Financial Officer and Chief
Operating Officer
(Principal Financial and
Accounting Officer)
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