FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 0-23901
CYBERSHOP.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3979226
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
116 Newark Avenue, Jersey City, NJ 07302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 234-5000
Indicate by check mark whether 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 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 of the Registrant's common stock, par value $.001 per
share, outstanding on August 3, 1999 was 8,612,062 shares.
<PAGE>
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998 2
Consolidated Statements of Operations for the Three and
Six Months ended June 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1999 and 1998 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. - Financial Statements
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,721,000 $ 12,285,000
Accounts receivable, net of allowance for doubtful
accounts of $61,000 and $5,000, as of June 30, 1999
and December 31, 1998, respectively 691,000 176,000
Inventories 806,000 526,000
Prepaid expenses and other 695,000 375,000
------------ ------------
Total current assets 4,913,000 13,362,000
Property and equipment, net 1,806,000 1,944,000
Goodwill, net 14,508,000 --
Other assets 83,000 160,000
------------ ------------
Total assets $ 21,310,000 $ 15,466,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,679,000 $ 2,403,000
Accrued liabilities 1,336,000 1,953,000
Acquisition related payable 361,000 --
Deferred revenues 49,000 72,000
------------ ------------
Total current liabilities 5,425,000 4,428,000
Deferred rent 107,000 49,000
------------ ------------
Total liabilities 5,532,000 4,477,000
------------ ------------
Stockholders' equity:
Common stock, $.001 par value; 75,000,000 shares
authorized; 8,597,728 and 7,493,350 shares issued
and outstanding as of June 30, 1999 and
December 31, 1998, respectively 9,000 7,000
Additional paid-in capital 26,816,000 18,318,000
Accumulated deficit (11,047,000) (7,336,000)
------------ ------------
Total stockholders' equity 15,778,000 10,989,000
------------ ------------
Total liabilities and stockholders' equity $ 21,310,000 $ 15,466,000
============ ============
</TABLE>
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these balance sheets.
2
<PAGE>
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 2,058,000 $ 523,000 $ 3,110,000 $ 930,000
Advertising & set up fees 9,000 30,000 32,000 62,000
----------- ----------- ----------- -----------
Total revenues 2,067,000 553,000 3,142,000 992,000
Cost of revenues 1,457,000 394,000 2,377,000 695,000
----------- ----------- ----------- -----------
Gross profit 610,000 159,000 765,000 297,000
Operating expenses:
Sales and marketing 729,000 1,128,000 1,456,000 1,473,000
General and administrative 1,700,000 920,000 3,220,000 1,504,000
Merger and acquisition related
costs, including amortization
of goodwill 259,000 -- 259,000 --
----------- ----------- ----------- -----------
Total operating expenses 2,688,000 2,048,000 4,935,000 2,977,000
----------- ----------- ----------- -----------
Loss from operations (2,078,000) (1,889,000) (4,170,000) (2,680,000)
Interest income, net 93,000 242,000 215,000 249,000
Minority interest 112,000 -- 244,000 --
----------- ----------- ----------- -----------
Net loss $(1,873,000) $(1,647,000) $(3,711,000) $(2,431,000)
=========== =========== =========== ===========
Net loss per share, basic and diluted $ (0.24) $ (0.22) $ (0.48) $ (0.41)
Weighted average common shares
outstanding, basic and diluted 7,910,000 7,470,000 7,702,000 5,879,000
</TABLE>
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these consolidated statements.
3
<PAGE>
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,711,000) $ (2,431,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 344,000 75,000
Amortization of goodwill 240,000 --
Non-cash compensation expense 24,000 --
Minority interest (244,000) --
Increase (decrease) in cash from changes in:
Accounts receivable, net (515,000) 43,000
Inventories (280,000) (23,000)
Prepaid expenses and other (76,000) (162,000)
Other assets 77,000 138,000
Accounts payable 1,276,000 333,000
Accrued liabilities (598,000) (184,000)
Deferred revenues (23,000) (68,000)
Deferred rent 58,000 4,000
------------ ------------
Net cash used in operating activities (3,428,000) (2,275,000)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (206,000) (729,000)
Acquisitions of businesses, net of cash acquired (6,281,000) --
------------ ------------
Net cash used in investing activities (6,487,000) (729,000)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock -- 18,810,000
Proceeds from exercise of stock options 351,000 --
Proceeds of short-term loan -- 500,000
Repayment of short-term loan -- (500,000)
Payments of capital lease obligations -- (28,000)
------------ ------------
Net cash provided by financing activities 351,000 18,782,000
------------ ------------
Net increase (decrease) in cash (9,564,000) 15,778,000
Cash and cash equivalents, beginning of period 12,285,000 787,000
------------ ------------
Cash and cash equivalents, end of period $ 2,721,000 $ 16,565,000
============ ============
Supplemental cash flow information:
Common stock issued in connection with acquisition $ 8,125,000 --
</TABLE>
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these consolidated statements.
4
<PAGE>
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description of the Business and Basis of Presentation
During the second quarter 1999 stockholders voted to change the Company's
name from Cybershop International, Inc. to Cybershop.com, Inc. (the "Company").
The Company is an online and direct to consumer retailer. The flagship store
located at www.cybershop.com offers discounted designer and brand-name apparel,
electronics, home accessories, toys, gifts and watches all at closeout prices.
electronics.net, located at www.electronics.net, offers a broad assortment of
consumer electronics, appliances and home office equipment for sale online.
The information presented as of June 30, 1999 and 1998, and for the
six-month periods then ended, is unaudited, but, in the opinion of management of
the Company, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments) which
the Company considers necessary for the fair presentation of the Company's
financial position as of June 30, 1999, the results of its operations for the
three and six-month periods ended June 30, 1999 and 1998 and its cash flows for
the six-month periods ended June 30, 1999 and 1998. The consolidated financial
statements included herein have been prepared in accordance with generally
accepted accounting principles and the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and accompanying notes for
the year ended December 31, 1998, included in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
2. Business Combinations
Effective June 1, 1999 the Company acquired all of the outstanding common
stock of The Magellan Group, Inc. ("Magellan"), an online and direct response
retailer of high quality personal care, home and health related products, in
exchange for 1,000,000 shares of the Company's common stock and $5,000,000 in
cash. The acquisition was accounted for as a purchase with essentially all of
the $14,387,000 purchase price allocated to goodwill. The goodwill in the
accompanying consolidated balance sheets is being amortized on a straight line
basis over five years. The results of Magellan are included in the Company's
consolidated financial results beginning on the date of acquisition. In
addition, the Company is required to pay the former shareholders of Magellan
earn-out payments based upon the profitablity of a particular product. As of
June 30, 1999, $361,000 of earnout payments are payable to the former
shareholders, which are reflected as Acquisition Related Payable in the
accompanying consolidated balance sheet. Concurrent with the acquisition, one of
these former shareholders of Magellan was appointed a member of the Company's
board of directors.
5
<PAGE>
The pro forma combined consolidated financial information for the six
months ended June 30, 1999 and 1998, as though Magellan had been acquired on
January 1, 1998, would have resulted in net sales of $5,913,000 and $3,379,000,
net loss of $5,651,000 and $4,020,000, and basic and diluted net loss per share
of ($0.68) and ($0.58), respectively. The pro forma net loss includes
amortization of goodwill of $1,439,000 for the six months ended June 30, 1999
and 1998. This unaudited pro forma combined consolidated financial information
is presented for illustrative purposes only and is not necessarily indicative of
the consolidated results of operations in future periods or the results that
actually would have been realized had the Company and Magellan been a combined
company during the specified periods.
On March 24, 1999 the Company issued 250,000 shares of common stock in
exchange for all of the outstanding common stock of Dealaday, Inc ("Dealaday").
Dealaday, an internet retailer targeting off-price branded women's and
children's apparel and accessory products, began operations in February 1998.
The transaction was accounted for as a pooling of interests and, as a result,
the Company's financial statements have been restated for all periods presented.
Separate results for Dealaday included in the Company's results for the
periods prior to the acquisition consisted of net sales and net losses for the
current period of $90,000 and $42,000, respectively, and net sales and net
losses for the six-month period ending June 30, 1998 of $46,000 and $36,000,
respectively.
3. Advertising and Promotion Costs
The recognition of advertising costs is in accordance with the provisions
of the AICPA Statement of Position 93-7, Reporting of Advertising Costs.
Advertising costs other than direct response are expensed at the time the
initial advertising takes place. Direct response advertising costs are amortized
over the period, during which associated net revenues are expected, generally
approximating three months or less.
4. Commitments and Contingencies
Marketing Agreements
The Company has entered into certain marketing agreements, which include
fixed fees through the the end of the current year ending December 31, 1999. The
expenses associated with these agreements are recognized on a systematic basis
over the term of the related agreements as services are received. Future minimum
commitments under the terms of these agreements are $311,000 during the
remainder of 1999. During July 1999 the Company and an internet media company
providing promotions and advertising for the Company's stores, agreed to
terminate their existing agreement which as of June 30, 1999 had represented
future commitments of $375,000 through the year 2000.
5. Shareholders' Equity
At the Company's Annual Meeting of Stockholders held on June 3, 1999,the
Company's stockholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of shares of Common Stock that the Company
is authorized to issue from 25,000,000 to 75,000,000.
6
<PAGE>
6. Stock Option Plan
At the Company's Annual Meeting of Stockholders held on June 3, 1999 the
Company's stockholders approved an amendment to the Company's 1998 Stock Option
Plan (the Plan) increasing the number of shares available for issuance from
1,000,000 to 3,000,000. During the six months ended June 30, 1999, options to
purchase approximately 560,650 shares of the Company's Common Stock were
granted, at market value on date of grant, to employees under the Plan.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor for Forward-Looking Statements
From time to time, the Company may publish statements which are not
historical fact, but are forward-looking statements relating to matters such as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical and anticipated results or other expectations
expressed in the Company's forward looking statements. Such forward-looking
statements may be identified by the use of certain forward-looking terminology,
such as "may," "will," "expect," "anticipate," "intend," "estimate," "believe,"
"goal," or "continue," or comparable terminology that involves risks or
uncertainties. Actual future results and trends may differ materially from
historical results or those anticipated depending on a variety of factors,
including, but not limited to those set forth under "Overview" and "Liquidity
and Capital Resources" included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations. Except as required by law, the
Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company has filed or files from time to time with the
Securities and Exchange Commission.
Overview
The Company is an online and direct to consumer retailer. The flagship store
located at www.cybershop.com offers discounted designer and brand-name apparel,
electronics, home accessories, toys, gifts and watches all at closeout prices.
electronics.net, the Company's joint venture with Tops Appliance City (Tops),
located at www.electronics.net, offers a broad assortment of consumer
electronics, appliances and home office equipment for sale online.
Beginning in the first quarter of the current year, the Company began
implementing several operating initiatives at its flagship store, cybershop.com,
designed to better serve its customers and streamline its operations. The
Company has completed a shift in its merchandising strategy to focus on offering
off-price branded merchandise such as that found in outlets and traditional
discount retailers. The Company initiated a significant overhaul of its
infrastructure, migrating its web-based order processing onto a new platform,
redesigning the web site and integrating it with a new order fulfillment system.
The transition to an inventory-based model was completed in the second quarter
with the development of a new distribution and fulfillment center. In addition,
the Company launched two new online auction sites. With this initiative, the
Company introduced the excitement of the online auction experience to all its
customers, complementing its existing product offerings. The initiative also
offers the Company a new way to attract customers, learn more about their
shopping preferences and provide an effective mechanism to manage excess
inventory.
8
<PAGE>
Effective June 1, 1999 the Company acquired all of the outstanding common
stock of The Magellan Group, Inc. ("Magellan"), an online and direct response
retailer of high quality personal care, home and health related products, in
exchange for 1,000,000 shares of the Company's common stock and $5,000,000 in
cash. The acquisition was accounted for as a purchase with essentially all of
the $14,387,000 purchase price allocated to goodwill. The goodwill in the
accompanying consolidated balance sheets is being amortized on a straight line
basis over five years. The results of Magellan are included in the Company's
consolidated financial results beginning on the date of acquisition. In
addition, the Company is required to pay the former shareholders of Magellan
earn-out payments based upon the profitablity of a particular product.
Concurrent with the acquisition, one of these former shareholders of Magellan
was appointed a member of the Company's board of directors.
Results of Operations
Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998.
Revenues: Revenue is comprised of sales of products, net of returns, outbound
shipping charges and vendor set-up fees. Total revenues increased 274% in the
second quarter, or $1,514,000, to $2,067,000 as compared to $553,000 in the
second quarter of 1998. This increase was primarily attributable to greater
marketing efforts, an expanded customer base, repeat purchases from existing
customers, acquisitions, and strong sales of four products, which represented
approximately 49% of total revenues in the three months ended June 30, 1999.
Advertising and set-up fees decreased by 70%, or $21,000, to $9,000 in the
second quarter of 1999 from $30,000 in the second quarter of 1998, as a result
of a decrease in emphasis on this revenue stream and an increased focus on the
Company's merchandising strategies.
Cost of Revenues: Cost of revenues consists of the cost of products sold to
customers and shipping costs. Costs of revenues increased by 270%, or
$1,063,000, to $1,457,000 in the second quarter of 1999 from $394,000 in the
second quarter of 1998. Gross profit margins were 30% in the second quarter of
1999 compared to 29% in the second quarter of 1998. The increase in gross margin
is the result of improvements in merchandise mix and pricing, and outbound
freight costs, offset by a greater emphasis on consumer electronics which
typically yield lower gross profit margins, and an increase in inventory
allowances to reflect anticipated future markdowns on closeout and auction
related merchandise.
Sales and Marketing: Sales and marketing primarily consists of advertising,
fulfillment, promotional costs and related payroll expenses. Sales and marketing
decreased by 35%, or $399,000, to $729,000 in the second quarter of 1999 from
$1,128,000 in the second quarter of 1998. This reflects the Company's strategy
which has been to optimize the effectiveness of its marketing campaigns by
regularly evaluating the return on investment on marketing dollars spent versus
increased customer traffic and revenues. As a result of this ongoing evaluation,
effective June 30, 1999 the Company terminated its two-year agreement with
Excite. The Company intends to continue to evaluate new and existing marketing
relationships in this manner and may as a result increase or decrease its
operating expenses to fund marketing and advertising expenditures and to
establish strategic relationships which satisfy this evaluation and which are
considered important to the success of the Company.
9
<PAGE>
General and Administrative: General and administrative expenses consist
primarily of administrative, accounting, and management payroll related
expenses, recruiting, legal fees, and general corporate expenses. General and
administrative expenses increased by 85%, or $780,000 to $1,700,000 in the
second quarter of 1999 from $920,000 in the second quarter of 1998. The increase
is primarily attributable to increased payroll related expenses, recruiting,
legal, and general corporate expenses to support the Company's increased
infrastructure.
Merger and Acquisition Related Costs: Merger and acquisition related costs
consist primarily of goodwill associated with the purchase of Magellan.
Interest Income, net: Interest income decreased $149,000 to $93,000 in the
second quarter of 1999 from $242,000 in the second quarter of 1998. The decrease
is primarily the result of the decrease in cash and cash equivalents to
$2,721,000 as of June 30, 1999 from $12,285,000 as of December 31, 1998.
Minority Interest: Minority interest represents Tops' 49% interest in the
earnings of the joint venture, electronics.net, which is 51% owned by the
Company and accounted for as a subsidiary in its consolidated financial
statements.
Net Loss: As a result of the factors discussed above, the Company reported a
consolidated net loss of $1,873,000 during the second quarter of 1999 compared
with a net loss of $1,647,000 during the second quarter of 1998. During the
second quarter, the net loss per common share, basic and diluted was ($0.24) per
share compared with a net loss of $(0.22) per share during the second quarter of
1998.
Pro forma results, reflecting the exclusion of merger and acquisition related
costs are as follows:
<TABLE>
<CAPTION>
Quarter Ended, Quarter Ended,
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Pro forma net loss $ (1,614,000) $ (1,647,000)
Pro forma net loss per share, basic and diluted $ (0.20) $ (0.22)
</TABLE>
The Company expects that it will continue to incur net losses and generate
negative cash flow from operations for the foreseeable future as it continues to
develop its business and no assurance can be given as to when, if at all, the
Company will achieve profitability.
Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998.
Revenues: Total revenues increased 217% during the six months ended June 30,
1999, or $2,150,000, to $3,142,000 as compared to $992,000 during the first six
months of 1998. This increase was primarily attributable to greater marketing
efforts, an expanded customer base, repeat purchases from existing customers and
strong sales of four products, which represented approximately 40% of total
revenues for the six months ended June 30, 1999. Advertising and set-up fees
decreased by 48%, or $30,000, to $32,000 during the first six months of 1999
from $62,000 during the first six months of 1998, as a result of a decrease in
emphasis on this revenue stream and an increased focus on the Company's
merchandising strategies.
10
<PAGE>
Cost of Revenues: Costs of revenues increased by 242%, or $1,682,000, to
$2,377,000 during the first six months of 1999 from $695,000 during the first
six months of 1998. Gross profit margins were 24% during the first six months of
1999 compared to 30% during the first six months of 1998. The decrease in gross
margin is the result of higher promotional discounts, an unfavorable product mix
and a greater emphasis on lower profit margin consumer electronics during the
first quarter of 1999 and inventory allowances to reflect anticipated future
markdowns on closeout and auction related merchandise offset by a more favorable
merchandise mix, product pricing and outbound shipping costs in the second
quarter of 1999.
Sales and Marketing: Sales and marketing decreased by 1%, or $17,000, to
$1,456,000 during the first six months of 1999 from $1,473,000 during the first
six months of 1998. As a percentage of total revenues, sales and marketing
expenses decreased to 46% during the first six months of 1999 from 149% during
the first six months of 1998, reflecting the Company's strategy which has been
to continuously evaluate the productivity and return on investment of our
marketing expenditures.
General and Administrative: General and administrative expenses increased by
114%, or $1,716,000 to $3,220,000 during the first six months of 1999 from
$1,504,000 during the first six months of 1998. The increase is primarily
attributable to increased payroll related expenses, recruiting, legal, and
general corporate expenses to support the Company's increased infrastructure
Merger and Acquisition Related Costs: Merger and acquisition related costs
consist primarily of goodwill associated with the purchase of Magellan.
Interest Income, net: Interest income decreased $34,000 to $215,000 during the
first six months of 1999 from $249,000 during the first six months of 1998. The
decrease is primarily the result of the decrease in cash and cash equivalents to
$2,721,000 as of June 30, 1999 from $12,285,000 as of December 31, 1998.
Minority Interest: Minority interest represents Tops' 49% interest in the
earnings of the joint venture, electronics.net, which is 51% owned by the
Company and accounted for as a subsidiary in its consolidated financial
statements.
Net Loss: As a result of the factors discussed above, the Company reported a
consolidated net loss of $3,711,000 for the six months ended June 30, 1999 as
compared with a net loss of $2,431,000 during the first six months of 1998.
During the first six months of 1999, the net loss per common share, basic and
diluted was ($0.48) per share compared with a net loss of $(0.41) per share
during the second quarter of 1998.
Pro forma results, reflecting the exclusion of merger and acquisition related
costs are as follows:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Pro forma net loss $ (3,452,000) $ (2,431,000)
Pro forma net loss per share, basic and diluted $ (0.45) $ (0.41)
</TABLE>
The Company expects that it will continue to incur net losses and generate
negative cash flow from operations for the foreseeable future as it continues to
develop its business and no assurance can be given as to when, if at all, the
Company will achieve profitability.
11
<PAGE>
Liquidity and Capital Resources
Net cash used in operations increased $1,153,000 to $3,428,000 during the
first six months of 1999 from $2,275,000 during the first six months of 1998.
The net use of cash in operations in the current period is primarily
attributable to current period net losses of $1,280,000, and a $280,000 increase
in inventory levels as the Company began migrating towards an inventory based
model and continued stocking its new distribution and fulfillment center.
Additionally, accounts receivable increased $515,000 reflecting an increase in
sales late in the second quarter of 1999 and the availability of a customer
installment payment plan on one of the Company's products. Offsetting these
increases in current assets is a net increase in accounts payable and accrued
liabilities of $678,000.
Net cash used in investing activities during the first six months of 1999
of $6,487,000 represents capital expenditures, primarily for computer equipment
and software to support the Company's expansion and increased infrastructure and
the acquisition of Magellan. Net used in investing activities during the first
six months of 1998 of $729,000 represents capital expenditures primarily for
computer equipment and software.
Additionally, the Company is required to pay the former shareholders of
Magellan earn-out payments related to the profitablity of a particular product
from the date of the acquisition through June 30, 1999 of $361,000. These
amounts are payable in the third quarter of 1999.
On March 26, 1998, the Company completed its initial public offering
("IPO") of 3,220,000 shares of Common Stock at a price of $6.50 per share. Net
proceeds from the IPO, net of underwriting discounts and offering costs, were
$18,749,000. Prior to the IPO, the Company had financed its operations primarily
from capital contributions from private investors. At June 30, 1999, the Company
had cash and cash equivalents of $2,721,000, negative working capital of
$(512,000), stockholders' equity of $15,778,000 and no debt. The Company
believes that its existing capital resources will enable it to maintain its
operations at existing levels for at least the next six months. The Company is
seeking additional debt and/or equity financing through a public offering or
private placement. There can be no assurance that any additional financing or
other sources of capital will be available to the Company upon acceptable terms,
if at all. The inability to obtain additional financing, when needed, would have
a material adverse effect on the Company's business, financial condition and
operating results, its ability to continue operating at existing levels, and
significantly slow the pace of both customer and revenue growth.
12
<PAGE>
Year 2000
The Company believes that its computer systems and software products are
fully year 2000 compliant. However, it is possible that certain computer systems
or software products of the Company's suppliers or customers may not accept
input of, store, manipulate and output dates in the year 2000 or thereafter
without error or interruption. The Company is querying its current suppliers as
to their progress in identifying and addressing problems that their computer
systems will face in correctly processing date information as the year 2000
approaches. However, there can be no assurance that all date-handling problems
of its suppliers will be identified by the Company or its suppliers in advance
of their occurrence, or that the Company or the suppliers will be able to
successfully remedy problems that are discovered. In the event that problems are
discovered with its current suppliers which cannot be remedied the Company
intends to seek alternative suppliers who are fully year 2000 compatible. The
Company believes that most of its current customers who access its website are
using software that is fully year 2000 compatible. The Company may, however, be
required to make significant expenditures to address or remedy any year 2000
problems of its customers or vendors which are not identified in advance, or to
satisfy liabilities to which the Company may become subject as a result of such
problems.
13
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Use of Proceeds:
On March 20, 1998 the Company's Registration Statement on Form S-1 (File
No. 333-42707) was declared effective by the Securities and Exchange Commission.
Pursuant to the Registration Statement the Company registered and sold 3,220,000
shares of Common Stock at a price of $6.50 per share. The managing underwriters
were C.E. Unterberg, Towbin and Fahnestock & Co. Inc. The aggregate price of the
amount offered and sold was $20,930,000.
The net offering proceeds to the Company after deducting underwriting
discounts and commissions and other expenses was $18,749,000.
From the effective date of the Registration Statement through June 30,
1999 the Company used the following amounts from the net offering proceeds for
the purposes set forth below:
Construction of plant $ --
Building, facilities and leasehold improvements $ 349,000
Purchase and installation of machinery, equipment and software $1,767,000
Purchase of real estate $ --
Acquisition of other business $6,281,000
Repayment of indebtedness $ 500,000
Working capital $8,096,000
Temporary investments $1,756,000
The use of proceeds set forth above does not represent a material change
in the use of proceeds described in the Registration Statement.
Changes in Securities
Increase in Authorized Shares: At the Company's Annual Meeting of Stockholders
held on June 3, 1999 the Company's shareholders approved an amendment to the
Company's Amended Certificate of Incorporation to increase the number of shares
of Common Stock, par value $.001 per share, that the Company is authorized to
issue from 25,000,000 to 75,000,000. The additional authorized shares will
provide the Company with flexibility in connection with possible future stock
splits, equity financings, joint ventures and acquisitions, in raising
additional capital, for grants and as incentives to employees, officers,
directors and consultants of the Company, and other general corporate purposes.
14
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on June 3, 1999. At the
close of business on the record date for the meeting (which was April 9,1999),
there were 7,565,047 shares of Common Stock issued and outstanding and entitled
to vote at the meeting. Holders of 6,143,590 shares of Common Stock
(representing a like number of votes) were present at the meeting, either in
person or by proxy. The following individuals were elected to the Company's
Board of Directors to hold office for a term until the next annual meeting of
stockholders and until their respective successors are duly elected and
qualified.
Nominee In Favor Withheld
- -------- -------- ---------
Michael Kempner 6,114,916 28,674
Robert Matluck 6,114,916 28,674
Warren Struhl 6,114,916 28,674
Jeffrey Tauber 6,114,916 28,674
The results of the voting on the following items were as follows:
Approval of an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of Common Stock from 25,000,000 to
75,000,000.
In Favor Against Abstained
- -------- ------- ---------
6,003,428 124,824 15,338
Approval of an amendment to the 1998 Stock Option Plan increasing the
number of shares available for issuance from 1,000,000 to 3,000,000.
In Favor Against Abstained
- -------- ------- ---------
2,777,218 134,181 20,227
Ratification of the selection of Arthur Andersen, LLP as independent
certified public accountants for the fiscal year ending December 31, 1999.
In Favor Against Abstained
- -------- ------- ---------
6,109,474 20,058 14,058
Approval of an amendment to the Company's Certificate of Incorporation
changing the corporate name.
In Favor Against Abstained
- -------- ------- ---------
6,106,874 26,466 10,250
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. The following is a list of exhibits filed as part of this Form 10-Q:
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession: None
3. Articles of Incorporation:
3.1 Certificate of Incorporation, as amended and as currently in effect
(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-42707).
3.2 Certificate of Amendment of The Certificate of Incorporation of
Cybershop International, Inc.
By-Laws:
3.3 By-Laws as currently in effect (Incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 (File No.
333-42707).
Material Contracts:
10.1 Agreement and Plan of Merger by and among Cybershop International,
Inc., MG Acquisition Corp., The Magellan Group, Inc., Ian S.
Phillips and Howard J. Kuntz III dated as of June 1, 1999
(incorporated by reference to Exhibit 2.1 of the Registrant's
Current Report on Form 8-K. File No. 0-23901)
10.2 Employment Agreement dated June 1, 1999, by and between Ian S.
Phillips and MG Acquisition Corp which is a wholly owned subsidiary
of Cybershop International, Inc.
10.3 Employment Agreement dated June 1, 1999, by and between Howard J.
Kuntz III and MG Acquisition Corp which is a wholly owned subsidiary
of Cybershop International, Inc.
11. Statement re computation of per share earnings: Statement regarding
computation of per share earnings is not required because the computation
can be readily determined from the material contained in the financial
statements included herein.
15. Letter re unaudited financial information: None
16. Letter re change in accounting principles: None
19. Report furnished to security holders: None
22. Published report regarding matters submitted to vote of security holders:
None
23. Consents of Experts and Counsel: None
24. Power of Attorney: None
16
<PAGE>
27. Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only
99. Additional Exhibits: None
b. Reports on Form 8-K, 1999.
On June 17, 1999, the Company filed a Current Report on Form 8-K reporting
the acquisition of The Magellan Group, Inc.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 13, 1999 By: /s/ Jeffrey S. Tauber
Jeffrey S. Tauber
President, Chief Executive Officer and Chairman
of the Board of Directors
(Principal Executive Officer)
Date: August 13, 1999 By: /s/ Jeffrey Leist
Jeffrey Leist
Senior Vice President and Chief Operating and
Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
Exhibit Index
3.2 Certificate of Amendment of The Certificate of Incorporation of Cybershop
International, Inc.
10.2 Employment Agreement dated June 1, 1999, by and between Ian S. Phillips
and MG Acquisition Corp which is a wholly owned subsidiary of Cybershop
International, Inc.
10.3 Employment Agreement dated June 1, 1999, by and between Howard J. Kuntz
III and MG Acquisition Corp which is a wholly owned subsidiary of
Cybershop International, Inc.
27. Financial Data Schedule.
19
Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF
CYBERSHOP INTERNATIONAL, INC.
---------------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
---------------------------------------------
CYBERSHOP INTERNATIONAL, INC., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify as follows:
FIRST: Resolutions setting forth a proposed amendment to the Certificate
of Incorporation of the Corporation, declaring said amendment to be advisable
and directing that said amendment be considered by the stockholders of the
Corporation entitled to vote thereon were duly adopted at a meeting of the Board
of held on April 14, 1999.
SECOND:Thereafter, said amendment was approved by the stockholders of the
Corporation entitled to vote thereon at the Annual Meeting of Stockholders held
on June 3, 1999.
THIRD: Said amendment would amend the Certificate of Incorporation of the
Corporation by deleting the Article FIRST and the first paragraph of Article
FOURTH thereof and substituting in lieu thereof the following:
"FIRST: The name of the Corporation is Cybershop.com, Inc."
; and
"FOURTH: The total number of shares of capital stock which may be issued
by the Corporation is Eighty Million (80,000,000), seventy-five million
(75,000,000) of which shall be Common Stock, having a par value of $.001
and five million (5,000,000) of which shall be preferred stock, having a
par value of $.001."
FOURTH: Said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by its Chairman, Chief Executive Officer and President this ___ day of
June, 1999.
CYBERSHOP INTERNATIONAL, INC.
By: /s/ Jeffrey S. Tauber
Jeffrey S. Tauber
Chairman, Chief Executive Officer
and President
Exhibit 10.2
EMPLOYMENT AGREEMENT
AGREEMENT ("Agreement") made as of this 1st day of June, 1999 (the
"Effective Date"), by and between MG Acquisition Corp., a Delaware
corporation (hereinafter "Employer"), and Ian S. Phillips (hereinafter
"Executive"). Employer is a wholly-owned subsidiary of Cybershop
International, Inc. ("CYSP") which has guaranteed the performance of all
obligations of Employer hereunder.
W I T N E S S E T H:
WHEREAS, Employer wishes Executive to serve as an officer and executive of
Employer; and
WHEREAS, Executive wishes to be so employed;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereto agree as follows:
1. Effective Date and Duties. Commencing as of the Effective Date,
and throughout the Term, as herein defined, Employer employs Executive as Chief
Executive Officer to perform the duties normally incident to such position.
Subject to the approval of the Chairman of the Board of Employer, who initially
is Jeffrey S. Tauber, during the Term Executive shall have and shall be entitled
to exercise the complete authority, functions, duties, powers and
responsibilities of the Chief Executive Officer of the Employer and in such
capacity (i) to engage the services of and to determine the principal terms of
employment of, and compensation payable to the employees of the Employer; (ii)
to establish and implement Employer's policies and practices, consistent with an
approved budget, with respect to product selection and pricing, choice of
advertising media and terms
<PAGE>
of insertion, production of advertising illustrations and copy, and ancillary
activities related thereto; (iii) to develop and implement budgets for the
operations of the Employer; and (iv) to engage professional services on behalf
of the Employer including legal counsel and accountants.
2. Responsibilities. Executive agrees to devote all of Executive's
business time, efforts, skills and attention to fulfill Executive's duties and
responsibilities hereunder faithfully and diligently. Notwithstanding the
foregoing, the Executive shall be permitted to engage in not-for-profit
activities which do not interfere with the performance of his duties hereunder.
On the Effective Date, Executive shall be appointed to the Board of Directors of
CYSP and shall serve so long as he shall be employed by the Employer.
3. Term. The term of this Agreement shall commence on the Effective
Date and shall expire two (2) years thereafter, unless sooner terminated as
hereinafter provided.
4. Place of Employment. Executive shall render his services
hereunder at the principal executive offices of Employer, 137 Rowayton Avenue,
Rowayton, Connecticut, or such other location of Employer within a 20-mile
radius thereof.
5. Compensation. Employer shall pay to Executive as compensation for
all services to be rendered by Executive hereunder the following:
(a) A salary at the rate of Two Hundred Twenty-Five Thousand
<PAGE>
($225,000) Dollars per annum which will be paid during normal pay periods.
Such salary is hereinafter referred to as the Base Salary.
(b) Executive shall be eligible for bonuses consistent with the
bonus plans offered to other senior executives of Employer and CYSP, at
such time and in such amounts as shall be determined at the discretion of
the Board of Directors based on its assessment of Executive's performance
of Executive's duties and on the financial performance of Employer.
(c) Employer will reimburse Executive for all reasonable travel and
business expenses incurred by Executive in connection with Executive's
services hereunder in accordance with the usual practices and policies of
Employer in effect from time to time, upon presentation of vouchers.
(d) Employer will make available to Executive health benefits as are
currently in effect or as modified during the term of this Agreement
consistent with the health benefits offered to other senior executives of
Employer and CYSP. In addition, Executive will be eligible for and will be
offered participation in any and all group insurance, hospital, dental,
major medical and disability benefits and stock option plans, 401(k) plan
or other fringe benefits which are currently offered or may hereafter be
offered to other senior executives of Employer and CYSP during the term of
this Agreement.
6. Termination on Death. In the event of Executive's death during the term
of this Agreement, this Agreement shall terminate immediately, provided,
<PAGE>
however, that Executive's legal representatives shall be entitled to receive the
Base Salary which would otherwise have been due Executive had he worked through
the end of the month in which Executive died plus (i) unreimbursed business
expenses, (ii) a portion of the bonus or incentive compensation program then in
effect, prorated through the end of the month of death, (iii) any insurance
benefits to which Executive (or his estate) is entitled and (iv) all Earnout
amounts provided in the Agreement and Plan of Merger ("APM") dated the date
hereof. Such later payments to be made at the time and in the manner set forth
in the APM. Such termination on death shall not affect any vested benefits which
Executive shall have at the time of his death.
7. Termination on Disability. If during the term of this Agreement,
Executive is unable to perform Executive's duties hereunder on account of
illness or other incapacity, and such illness or other incapacity shall continue
for an aggregate of more than 90 days during any six (6) month period, Employer
shall have the right, on thirty (30) days' notice to Executive, given after such
period, to terminate this Agreement. In the event of any such termination
Employer shall be obligated to pay to Executive the Base Salary which would
otherwise be due to Executive until the expiration of the month of employment
during which the termination occurred plus (i) three (3) additional months of
the Base Salary for the three months following the month in which Executive was
terminated (or such lesser time to the End of the Term), (ii) a portion of the
bonus or incentive compensation program then in effect, prorated through the end
of the month of disability, (iii) any insurance benefits to
<PAGE>
which Executive is entitled and (iv) all Earnout amounts provided in the APM.
Such later payments to be made at the time and in the manner set forth in the
APM. If, prior to the date specified on such notice, Executive shall have taken
up the performance of Executive's duties thereunder, Executive shall be entitled
to resume Executive's employment hereunder as though such notice had not been
given. The Board of Directors (the "Board") of Employer shall determine in good
faith, upon consideration of medical evidence satisfactory to it, whether
Executive by reason of physical or mental disability shall be unable to perform
the services required of Executive hereunder. Any dispute as to disability shall
be resolved by the decision of a medical doctor designated by Employer and
reasonably acceptable to Executive.
8. Termination for Cause. If Employer shall terminate Executive's
employment hereunder for Cause this Agreement shall terminate immediately and
Employer shall pay to Executive an amount equal to the Base Salary hereunder
through the date of such termination plus unreimbursed expenses. Executive shall
continue to be entitled to receive Earnout Payments under the APM as earned.
Cause shall mean (i) conviction of any crime (whether or not involving Employer)
constituting a felony in the jurisdiction involved; (ii) gross misconduct in the
performance of Executive's duties hereunder which results in demonstrable
material injury to Employer; (iii) continuous failure or refusal to perform any
material obligation of Executive set forth in this agreement (provided that
performance of such obligation (a) is reasonably capable of being performed by
Executive, (b) would
<PAGE>
not result in a violation of law and (c) is not contrary to a written direction
of the Board); (iv) material breach of any provision of this Agreement by
Executive, or (v) the voluntary termination by Executive of his employment,
Termination for Cause must be effected by written notice delivered to Executive
with specific description of the alleged breach. With respect to termination for
Cause based upon Executive's continuous failure or refusal to perform or for his
material breach, Executive shall have 20 days to cure such breach commencing on
the date that such notice thereof is delivered.
9. Termination by Executive for Good Reason. If one or more of
the following events occur and is not cured as herein provided ("Good Reason")
(i) there is a material decrease in Executive's responsibility or authority or
Executive is assigned duties inconsistent with his office and title; (ii)
Executive is required to report to anyone other than the Chairman of Employer;
(iii) there is a reduction in Executive's Base Salary or in any employee benefit
(unless resulting from an Employer and CYSP-wide reduction affecting fringe
benefits of all senior executives); (iv) monies due to Executive under this
Agreement shall not have been paid when due; or (v) Executive is required to
relocate his office beyond a 20 mile radius of the existing office, or (vi)
Employer or CYSP shall default making the Earnout payments due under the APM.
Employer shall have 20 days after receipt of written notice from Executive of
the existence of any event, to cure such breach. If such breach is not so cured,
Executive shall have the right to terminate the Agreement for Good Reason and
Executive shall be entitled to receive, as liquidated
<PAGE>
damages, Base Compensation through the balance of the Term, payable in
accordance with Employer's payroll practices then in effect plus continuation
(at Employer's expense) through the balance of the Term (and without prejudice
to COBRA rights thereafter) of all fringe benefits including life insurance and
medical health plans, unless Executive replaces them at a comparable level at
his subsequent employer. Executive shall not be required to seek other
employment to mitigate damages.
10. Confidentiality. Executive covenants and agrees with Employer
that Executive will not, during the term of this Agreement and thereafter
directly or indirectly use, communicate, disclose or disseminate to anyone
(except to the extent reasonably necessary for Executive to perform Executive's
duties hereunder, except as required by law or except if generally available to
the public otherwise than through use, communication, disclosure or
dissemination by Executive) any Confidential Information (as hereinafter
defined) concerning the businesses or affairs of Employer which Executive may
have acquired in the course of or as incident to Executive's employment or prior
dealings with Employer.
"Confidential Information" shall mean (a) all knowledge, information and
material concerning any of Employer's business or the business of any of its
affiliates or subsidiaries that shall become known to Executive as a consequence
of Executive's relationship with Employer, (b) all information that has been
disclosed to Employer by any third party under an agreement or circumstances
requiring such information to be kept confidential, and (c) all knowledge,
information or material concerning inventions that are, under this Agreement,
owned by Employer or assigned by Executive to Employer; provided, that
Confidential Information shall not include knowledge, information or material
that is or becomes generally known or available to others in businesses engaged
in by Employer to the public (other than through unauthorized disclosure).
Confidential Information shall include without limitation (a) information of a
technical nature, such as information regarding past, present and future
research, financial data, product information, marketing plans, computer
programs (whether in source or object code form or other form and whether
contained on program listings, magnetic tape, magnetic disks, CD ROMs or other
media), logic, flow charts, specifications, documentation and ideas relating to
the
<PAGE>
activities of Employer, (b) information of a business nature, such as
information regarding past, present and future client development, strategies,
procurement specifications, cost and financial data, contracts, quotations and
names of actual and prospective clients or customers, and (c) all documents,
drawings, reports, customer lists (including, without limitation, those relating
to the acquired business of Employer), and other physical embodiments of all
such information.
11. Non-Competition. Executive acknowledges that Executive's
services and responsibilities are of particular significance to Employer and
that Executive's position with Employer has given and will give Executive close
knowledge of Employer's policies and trade secrets.
Since Employer is in a creative and competitive business, Executive's
continued and exclusive service to Employer under this Agreement is of a high
degree of importance.
Executive covenants and agrees with Employer that Executive will
not, during the term of this Agreement and for a period of twenty-four months
after the termination of Executive's employment hereunder, in any manner,
directly or indirectly, (i) induce or attempt to influence any present or future
officer, employee, lessor, lessee, licensor or licensee of Employer to leave its
employment or solicit or divert or service any of the customers or clients that
Employer has or had in the one (1) year previous to the date of termination of
this Agreement, (ii) engage, in North America or any other territory in which
Employer does business, in any businesses presently engaged in or to be engaged
in by Employer during the term of this Agreement, and (iii) except for ownership
of no more than 1% of the capital stock, be a stockholder of any corporation, or
directly or indirectly own, manage, operate, conduct, control or participate in
the ownership, management, operation, conduct, control of, accept employment
with, or be connected in any other manner with, any business which engages in
any direct competitive activity in any of the product categories in which
Employer currently sells or shall sell at any time during the Term
<PAGE>
in any such geographic region. The non-competition restrictions continued in
this paragraph 11 shall also apply to any activities of CYSP in which Executive
engages on behalf of Employer or CYSP. Notwithstanding the foregoing if
Executive is terminated without cause or terminates his employment for Good
Reason, the non-competition provisions contained in this paragraph 11 shall
terminate as of the effective date of such termination.
12. Remedies. Executive acknowledges that the remedy at law for any
breach or threatened breach by Executive of the covenants contained in
paragraphs 10 and 11 would be wholly inadequate, and therefore Employer shall be
entitled to preliminary and permanent injunctive relief and specific performance
thereof. Paragraphs 10 and 11 constitute independent and separable covenants
that shall be enforceable notwithstanding rights or remedies that Employer may
have under any other provision of this Agreement, or otherwise. If any or all of
the foregoing provisions of paragraphs 10 and 11 are held to be unenforceable
for any reason whatsoever, it shall not in any way invalidate or affect the
remainder or this Agreement which shall remain in full force and effect. If the
period of time or geographical areas specified in paragraphs 10 and 11 are
determined to be unreasonable in any judicial proceeding, the period of time or
areas of restriction shall be reduced so that this Agreement may be enforced in
such areas and during such period of time as shall be determined to be
reasonable.
13. Full Review. Executive has carefully read and considered the
provisions hereof, and having done so, agrees that restrictions and remedies set
<PAGE>
forth in paragraphs 10, 11 and 12 (including, but not limited to, the time
periods of restrictions) are fair and reasonable and are reasonably required for
the protection of the interests of Employer.
14. Representation. Executive represents and warrants to Employer
that Executive is not now under any obligation of a contractual or other nature
to any person, firm or corporation which is inconsistent or in conflict with
this Agreement, or which would prevent, limit or impair in any way the execution
of this Agreement or the performance by Executive of Executive's obligations
hereunder and Executive will indemnify and hold harmless Employer, its
directors, officers and employees against and in respect of all liability, loss,
damage, expense or deficiency resulting from any material misrepresentation or
material breach of this paragraph 14 by Executive.
15. Waiver. The waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach thereof.
16. Notices. Any and all notices referred to herein shall be
sufficient if furnished in writing and sent by confirmed fax, by nationally
recognized overnight courier with delivery receipt confirmed, or by certified
mail, return receipt requested, to the respective parties at the addresses set
forth below, or such other address as either party may from time to time
designate in writing.
To Executive:
<PAGE>
Ian S. Phillips
c/o The Magellan Group
137 Rowayton Avenue
Rowayton, CT 06853
Fax: 203-831-9147
with a copy to:
Feltman Karesh Major & Farbman, LLP
Carnegie Towers
152 West 57th Street
New York, NY 10019
Attention: Stephen Gross, Esq.
Fax: 212-586-0951
To Employer:
c/o CyberShop International, Inc.
116 Newark Avenue
Jersey City, New Jersey 07302
Attention: Jeffrey S. Tauber, Chairman
Fax: (201) 234-5052
With copy to:
Davis & Gilbert LLP
1740 Broadway
New York, New York 10019
Attention: Walter M. Epstein, Esq.
Fax: (212) 468-4888
17. Assignability. This Agreement shall be binding upon, and shall
inure to the benefit of, Employer and its successors and assigns, and Executive
and Executive's legal representatives, heirs, legatees and distributees, but
neither this Agreement nor any duties hereunder shall be delegable. No
assignment by Employer shall be effective unless and until CYSP or its successor
specifically agrees to guarantee the payment and performance of all obligations
of Employer or its assignee hereunder and a copy of such assumption has been
received by Executive.
<PAGE>
18. Entire Agreement. This Agreement supersedes any and all prior
written or oral agreements between Employer and Executive and constitutes the
entire agreement between the parties hereto with respect to the subject matter
hereof and no modification, amendment or waiver of any of the provisions of this
Agreement shall be effective unless in writing and signed by both parties
hereto.
19. Applicable Law. This Agreement shall be construed and enforced
in accordance with the laws of the State of New York.
20. Miscellaneous. To the extent that Executive performs his duties
for Employer in good faith and in a manner Executive reasonably believes to be
in or not opposed to be the best interests of Employer and not to contravention
of the terms of this Agreement, Employer agrees to promptly indemnify Executive
against expenses (including but not limited to final judgments and amounts paid
in settlement to which Employer has consented in writing, which consent shall
not be unreasonably withheld or delayed) in connection with litigation against
Executive arising out of the performance of his duties hereunder. Executive
shall provide the Employer with prompt notice of the commencement of any such
litigation and Employer will provide defense counsel selected by it absent the
existence of any conflict of interest. In the event that a party hereto
institutes any legal action (including any proceedings in a bankruptcy court) to
enforce his or its rights under, or to recover damages for breach of, this
Agreement, the prevailing party in such an action shall be entitled, in addition
to such relief as may be granted, to recover from the other party any reasonable
attorneys' fees and expenses incurred by reason of
<PAGE>
or related to such action including any appeals thereof.
21. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
22. Severability. If any provision or part of any provision of this
Agreement is held for any reason to be unenforceable, the remainder of this
Agreement shall nevertheless remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
MG Acquisition Corp. d/b/a
THE MAGELLAN GROUP, INC.
By:_________________________________
Jeffrey S. Tauber
Chairman of the Board
____________________________________
Ian S. Phillips
CYSP as the sole owner of Employer and in order to induce Executive to enter
into the Agreement hereby guarantees the performance of all obligations of
Employer hereunder to Executive, including without limitation, the payment of
all compensation payable hereunder.
CYBERSHOP INTERNATIONAL, INC.
By:_________________________________
Jeffrey S. Tauber
Chairman of the Board
Exhibit 10.3
EMPLOYMENT AGREEMENT
AGREEMENT ("Agreement") made as of this 1st day of June, 1999 (the
"Effective Date"), by and between MG Acquisition Corp., a Delaware corporation
(hereinafter "Employer"), and Howard J. Kuntz III (hereinafter "Executive").
Employer is a wholly-owned subsidiary of Cybershop International, Inc. ("CYSP")
which has guaranteed the performance of all obligations of Employer hereunder.
W I T N E S S E T H:
WHEREAS, Employer wishes Executive to serve as an officer and executive of
Employer; and
WHEREAS, Executive wishes to be so employed;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereto agree as follows:
23. Effective Date and Duties. Commencing as of the Effective Date,
and throughout the Term, as herein defined, Employer employs Executive as Chief
Operating Officer to perform the duties normally incident to such position.
Subject to the approval of the Chairman of the Board of Employer, who initially
is Jeffrey S. Tauber, during the Term Executive shall have and shall be entitled
to exercise the complete authority, functions, duties, powers and
responsibilities of the Chief Executive Officer of the Employer and in such
capacity (i) to engage the services of and to determine the principal terms of
employment of, and
<PAGE>
compensation payable to the employees of the Employer; (ii) to establish and
implement Employer's policies and practices, consistent with an approved budget,
selection and pricing, choice of advertising media and terms of insertion,
production of advertising illustrations and copy, and ancillary activities
related thereto; (iii) to develop and implement budgets for the operations of
the Employer; and (iv) to engage professional services on behalf of the Employer
including legal counsel and accountants.
24. Responsibilities. Executive agrees to devote all of Executive's
business time, efforts, skills and attention to fulfill Executive's duties and
responsibilities hereunder faithfully and diligently. Notwithstanding the
foregoing, the Executive shall be permitted to engage in not-for-profit
activities which do not interfere with the performance of his duties hereunder.
In the event that Ian S. Phillips is no longer a director of CYSP and Executive
is then employed by Employer, Executive shall be appointed to the Board of CYSP
to serve so long as he shall remain an employee of Employer.
25. Term. The term of this Agreement shall commence on the Effective
Date and shall expire two (2) years thereafter, unless sooner terminated as
hereinafter provided.
26. Place of Employment. Executive shall render his services
hereunder at the principal executive offices of Employer, 137 Rowayton Avenue,
Rowayton, Connecticut, or such other location of Employer within a 20 mile
radius thereof.
<PAGE>
27. Compensation. Employer shall pay to Executive as compensation
for all services to be rendered by Executive hereunder the following:
(a) A salary at the rate of Two Hundred Twenty-Five Thousand
($225,000) Dollars per annum which will be paid during normal pay periods.
Such salary is hereinafter referred to as the Base Salary.
(b) Executive shall be eligible for bonuses consistent with the
bonus plans offered to other senior executives of Employer and CYSP, at
such time and in such amounts as shall be determined at the discretion of
the Board of Directors based on its assessment of Executive's performance
of Executive's duties and on the financial performance of Employer.
(c) Employer will reimburse Executive for all reasonable travel and
business expenses incurred by Executive in connection with Executive's
services hereunder in accordance with the usual practices and policies of
Employer in effect from time to time, upon presentation of vouchers.
(d) Employer will make available to Executive health benefits as are
currently in effect or as modified during the term of this Agreement
consistent with the health benefits offered to other senior executives of
Employer and CYSP. In addition, Executive will be eligible for and will be
offered participation in any and all group insurance, hospital, dental,
major medical and disability benefits and stock option plans, 401(k) plan
or other fringe benefits which are currently offered or may hereafter be
offered to other
<PAGE>
senior executives of Employer and CYSP during the term of this Agreement.
28. Termination on Death. In the event of Executive's death during
the term of this Agreement, this Agreement shall terminate immediately,
provided, however, that Executive's legal representatives shall be entitled to
receive the Base Salary which would otherwise have been due Executive had he
worked through the end of the month in which Executive died plus (i)
unreimbursed business expenses, (ii) a portion of the bonus or incentive
compensation program then in effect, prorated through the end of the month of
death, (iii) any insurance benefits to which Executive (or his estate) is
entitled and (iv) all Earnout amounts provided in the Agreement and Plan of
Merger ("APM") dated the date hereof. Such later payments to be made at the time
and in the manner set forth in the APM. Such termination on death shall not
affect any vested benefits which Executive shall have at the time of his death.
29. Termination on Disability. If during the term of this Agreement,
Executive is unable to perform Executive's duties hereunder on account of
illness or other incapacity, and such illness or other incapacity shall continue
for an aggregate of more than 90 days during any six (6) month period, Employer
shall have the right, on thirty (30) days' notice to Executive, given after such
period, to terminate this Agreement. In the event of any such termination
Employer shall be obligated to pay to Executive the Base Salary which would
otherwise be due to Executive until the expiration of the month of employment
during which the termination occurred plus (i) three (3) additional months of
the Base Salary for the three months following the
<PAGE>
month in which Executive was terminated (or such lesser time to the End of the
Term), (ii) a portion of the bonus or incentive compensation program then in
effect, prorated through the end of the month of disability, (iii) any insurance
benefits to which Executive is entitled and (iv) all Earnout amounts provided in
the APM. Such later payments to be made at the time and in the manner set forth
in the APM. If, prior to the date specified on such notice, Executive shall have
taken up the performance of Executive's duties thereunder, Executive shall be
entitled to resume Executive's employment hereunder as though such notice had
not been given. The Board of Directors (the "Board") of Employer shall determine
in good faith, upon consideration of medical evidence satisfactory to it,
whether Executive by reason of physical or mental disability shall be unable to
perform the services required of Executive hereunder. Any dispute as to
disability shall be resolved by the decision of a medical doctor designated by
Employer and reasonably acceptable to Executive.
30. Termination for Cause. If Employer shall terminate Executive's
employment hereunder for Cause this Agreement shall terminate immediately and
Employer shall pay to Executive an amount equal to the Base Salary hereunder
through the date of such termination plus unreimbursed expenses. Executive shall
continue to be entitled to receive Earnout Payments under the APM as earned.
Cause shall mean (i) conviction of any crime (whether or not involving Employer
constituting a felony in the jurisdiction involved; (ii) gross misconduct in the
performance of Executive's duties hereunder which results in demonstrable
material
<PAGE>
injury to Employer; (iii) continuous failure or refusal to perform any material
obligation of Executive set forth in this agreement (provided that performance
of such obligation (a) is reasonably capable of being performed by Executive,
(b) would not result in a violation of law and (c) is not contrary to a written
direction of the Board); (iv) material breach of any provision of this Agreement
by Executive, or (v) the voluntary termination by Executive of his employment,
Termination for Cause must be effected by written notice delivered to Executive
with specific description of the alleged breach. With respect to termination for
Cause based upon Executive's continuous failure or refusal to perform or for his
material breach, Executive shall have 20 days to cure such breach commencing on
the date that such notice thereof is delivered.
31. Termination by Executive for Good Reason. If one or more of the
following events occur and is not cured as herein provided ("Good Reason") (i)
there is a material decrease in Executive's responsibility or authority or
Executive is assigned duties inconsistent with his office and title; (ii)
Executive is required to report to anyone other than the Chairman of Employer;
(iii) there is a reduction in Executive's Base Salary or in any employee benefit
(unless resulting from an Employer and CYSP-wide reduction affecting fringe
benefits of all senior executives); (iv) monies due to Executive under this
Agreement shall not have been paid when due; or (v) Executive is required to
relocate his office beyond a 20 mile radius of the existing office, or (vi)
Employer or CYSP shall default making the Earnout payments due under the APM.
Employer shall have 20 days after receipt
<PAGE>
of written notice from Executive of the existence of any event, to cure such
breach. If such breach is not so cured, Executive shall have the right to
terminate the Agreement for Good Reason and Executive shall be entitled to
receive, as liquidated damages, Base Compensation through the balance of the
Term, payable in accordance with Employer's payroll practices then in effect
plus continuation (at Employer's expense) through the balance of the Term (and
without prejudice to COBRA rights thereafter) of all fringe benefits including
life insurance and medical health plans, unless Executive replaces them at a
comparable level at his subsequent employer. Executive shall not be required to
seek other employment to mitigate damages.
32. Confidentiality. Executive covenants and agrees with Employer
that Executive will not, during the term of this Agreement and thereafter
directly or indirectly use, communicate, disclose or disseminate to anyone
(except to the extent reasonably necessary for Executive to perform Executive's
duties hereunder, except as required by law or except if generally available to
the public otherwise than through use, communication, disclosure or
dissemination by Executive) any Confidential Information (as hereinafter
defined) concerning the businesses or affairs of Employer which Executive may
have acquired in the course of or as incident to Executive's employment or prior
dealings with Employer.
"Confidential Information" shall mean (a) all knowledge, information and
material concerning any of Employer's business or the business of any of its
affiliates or subsidiaries that shall become known to Executive as a consequence
of Executive's relationship with Employer, (b) all information that has been
disclosed to Employer by any third party under an agreement or circumstances
requiring such information to be kept confidential, and (c) all knowledge,
information or material concerning inventions that are, under this Agreement,
owned by Employer or assigned by Executive to Employer; provided,
<PAGE>
that Confidential Information shall not include knowledge, information or
material that is or becomes generally known or available to others in businesses
engaged in by Employer to the public (other than through unauthorized
disclosure). Confidential Information shall include without limitation (a)
information of a technical nature, such as information regarding past, present
and future research, financial data, product information, marketing plans,
computer programs (whether in source or object code form or other form and
whether contained on program listings, magnetic tape, magnetic disks, CD ROMs or
other media), logic, flow charts, specifications, documentation and ideas
relating to the activities of Employer, (b) information of a business nature,
such as information regarding past, present and future client development,
strategies, procurement specifications, cost and financial data, contracts,
quotations and names of actual and prospective clients or customers, and (c) all
documents, drawings, reports, customer lists (including, without limitation,
those relating to the acquired business of Employer), and other physical
embodiments of all such information.
33. Non-Competition. Executive acknowledges that Executive's
services and responsibilities are of particular significance to Employer and
that Executive's position with Employer has given and will give Executive close
knowledge of Employer's policies and trade secrets.
Since Employer is in a creative and competitive business, Executive's
continued and exclusive service to Employer under this Agreement is of a high
degree of importance.
Executive covenants and agrees with Employer that Executive will
not, during the term of this Agreement and for a period of twenty-four months
after the termination of Executive's employment hereunder, in any manner,
directly or indirectly, (i) induce or attempt to influence any present or future
officer, employee, lessor, lessee, licensor or licensee of Employer to leave its
employment or solicit or divert or service any of the customers or clients that
Employer has or had in the one (1) year previous to the date of termination of
this Agreement, (ii) engage, in North America or any other territory in which
Employer does business, in any businesses presently engaged in or to be engaged
in by Employer during the term of this Agreement, and (iii) except for ownership
of no more than 1% of the capital stock, be a stockholder of any corporation, or
directly or indirectly own, manage, operate, conduct,
<PAGE>
control or participate in the ownership, management, operation, conduct, control
of, accept employment with, or be connected in any other manner with, any
business which engages in any direct competitive activity in any of the product
categories in which Employer currently sells or shall sell at any time during
the Term in any such geographic region. The non-competition restrictions
continued in this paragraph 11 shall also apply to any activities of CYSP in
which Executive engages on behalf of Employer or CYSP. Notwithstanding the
foregoing if Executive is terminated without cause or terminates his employment
for Good Reason, the non-competition provisions contained in this paragraph 11
shall terminate as of the effective date of such termination.
34. Remedies. Executive acknowledges that the remedy at law for any
breach or threatened breach by Executive of the covenants contained in
paragraphs 10 and 11 would be wholly inadequate, and therefore Employer shall be
entitled to preliminary and permanent injunctive relief and specific performance
thereof. Paragraphs 10 and 11 constitute independent and separable covenants
that shall be enforceable notwithstanding rights or remedies that Employer may
have under any other provision of this Agreement, or otherwise. If any or all of
the foregoing provisions of paragraphs 10 and 11 are held to be unenforceable
for any reason whatsoever, it shall not in any way invalidate or affect the
remainder or this Agreement which shall remain in full force and effect. If the
period of time or geographical areas specified in paragraphs 10 and 11 are
determined to be unreasonable in any judicial proceeding, the period of time or
areas of restriction shall be reduced so that this Agreement may be enforced in
such areas and during
<PAGE>
such period of time as shall be determined to be reasonable.
35. Full Review. Executive has carefully read and considered the
provisions hereof, and having done so, agrees that restrictions and remedies set
forth in paragraphs 10, 11 and 12 (including, but not limited to, the time
periods of restrictions) are fair and reasonable and are reasonably required for
the protection of the interests of Employer.
36. Representation. Executive represents and warrants to Employer
that Executive is not now under any obligation of a contractual or other nature
to any person, firm or corporation which is inconsistent or in conflict with
this Agreement, or which would prevent, limit or impair in any way the execution
of this Agreement or the performance by Executive of Executive's obligations
hereunder and Executive will indemnify and hold harmless Employer, its
directors, officers and employees against and in respect of all liability, loss,
damage, expense or deficiency resulting from any material misrepresentation or
material breach of this paragraph 14 by Executive.
37. Waiver. The waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach thereof.
38. Notices. Any and all notices referred to herein shall be
sufficient if furnished in writing and sent by confirmed fax, by nationally
recognized overnight courier with delivery receipt confirmed, or by certified
mail, return receipt requested,
<PAGE>
to the respective parties at the addresses set forth below, or such other
address as either party may from time to time designate in writing.
To Executive:
Howard J. Kuntz III
c/o The Magellan Group
137 Rowayton Avenue
Rowayton, CT 06853
Fax: 203-831-9147
with a copy to:
Feltman Karesh Major & Farbman LLP
Carnegie Towers
152 West 57th Street
New York, NY 10019
Attention: Stephen Gross, Esq.
Fax: 212-586-0951
To Employer:
c/o CyberShop International, Inc.
116 Newark Avenue
Jersey City, New Jersey 07302
Attention: Jeffrey S. Tauber, Chairman
Fax: (201) 234-5052
With copy to:
Davis & Gilbert LLP
1740 Broadway
New York, New York 10019
Attention: Walter M. Epstein, Esq.
Fax: (212) 468-4888
39. Assignability. This Agreement shall be binding upon, and shall
inure to the benefit of, Employer and its successors and assigns, and Executive
and Executive's legal representatives, heirs, legatees and distributees, but
neither this Agreement nor any duties hereunder shall be delegable. No
assignment by Employer shall be effective unless and until CYSP or its successor
specifically
<PAGE>
agrees to guarantee the payment and performance of all obligations of Employer
or its assignee hereunder and a copy of such assumption has been received by
Executive.
40. Entire Agreement. This Agreement supersedes any and all prior
written or oral agreements between Employer and Executive and constitutes the
entire agreement between the parties hereto with respect to the subject matter
hereof and no modification, amendment or waiver of any of the provisions of this
Agreement shall be effective unless in writing and signed by both parties
hereto.
41. Applicable Law. This Agreement shall be construed and enforced
in accordance with the laws of the State of New York.
42. Miscellaneous. To the extent that Executive performs his duties
for Employer in good faith and in a manner Executive reasonably believes to be
in or not opposed to be the best interests of Employer and not to contravention
of the terms of this Agreement, Employer agrees to promptly indemnify Executive
against expenses (including but not limited to final judgments and amounts paid
in settlement to which Employer has consented in writing, which consent shall
not be unreasonably withheld or delayed) in connection with litigation against
Executive arising out of the performance of his duties hereunder. Executive
shall provide the Employer with prompt notice of the commencement of any such
litigation and Employer will provide defense counsel selected by it absent the
existence of any conflict of interest. In the event that a party hereto
institutes any legal action (including any proceedings in a bankruptcy court) to
enforce his or its rights under,
<PAGE>
or to recover damages for breach of, this Agreement, the prevailing party in
such an action shall be entitled, in addition to such relief as may be granted,
to recover from the other party any reasonable attorneys' fees and expenses
incurred by reason of or related to such action including any appeals thereof.
43. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
44. Severability. If any provision or part of any provision of this
Agreement is held for any reason to be unenforceable, the remainder of this
Agreement shall nevertheless remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
MG Acquisition Corp d/b/a
THE MAGELLAN GROUP, INC.
By:______________________________________
Jeffrey S. Tauber
Chairman of the Board
_________________________________________
Howard J. Kuntz III
CYSP as the sole owner of Employer and in order to induce Executive to enter
into the Agreement hereby guarantees the performance of all obligations of
Employer hereunder to Executive, including without limitation, the payment of
all compensation payable hereunder.
CYBERSHOP INTERNATIONAL, INC.
By:______________________________________
Jeffrey S. Tauber
Chairman of the Board
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<PERIOD-START> JAN-01-1999
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<RECEIVABLES> 144,000
<ALLOWANCES> (61,000)
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<COMMON> 9,000
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<SALES> 3,110,000
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<CGS> 2,377,000
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