<PAGE> 1
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 0-24457
BEYOND.COM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7375 94-3212136
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1195 WEST FREMONT AVENUE
SUNNYVALE, CALIFORNIA 94087
(408) 616-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the registrant's Common Stock, $.001 par value
per share, outstanding as of April 30, 1999 was 35,745,957.
================================================================================
<PAGE> 2
INDEX
BEYOND.COM CORPORATION
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Page NO.
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PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) 2
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999
(UNAUDITED) AND 1998 3
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) 4
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 13
Item 2. CHANGES IN SECURITIES 13
Item 3. DEFAULTS UPON SENIOR SECURITIES 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 13
Item 5. OTHER INFORMATION 14
Item 6. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 14
Item 7. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES
EXHIBIT INDEX
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BEYOND.COM
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
------------------------------
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
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Net revenues $ 19,102 $ 6,192
Cost of revenues 16,204 5,254
-------- --------
Gross profit 2,898 938
Operating expenses:
Research and development 1,731 602
Sales and marketing 16,563 1,953
General and administrative 2,258 635
Intangible assets and deferred compensation
amortization 732 --
-------- --------
Total operating expenses 21,284 3,190
-------- --------
Loss from operations (18,386) (2,252)
Interest income (expense), net (410) 25
-------- --------
NET LOSS (18,796) (2,227)
Accretion of premium of preferred stock -- (25)
-------- --------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(18,796) $ (2,252)
======== ========
-------- --------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.66) $ (0.25)
======== ========
Weighted average shares outstanding used in computing basic
and diluted net loss per share 28,364 9,080
--------
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE $ (0.11)
========
Weighted average shares outstanding used in computing pro
forma basic and diluted net loss per share 20,252
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 4
BEYOND.COM
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
DECEMBER 31,
MARCH 31, 1998
1999 (NOTE)
----------- -----------
(UNAUDITED)
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ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 50,450 $ 81,548
Accounts receivable, net 3,864 8,785
Prepaid partnership agreement expenses 11,509 4,091
Other prepaid expenses and current assets 3,194 2,110
Note receivable from a director 270 270
Cost of deferred revenue 4,477 5,255
--------- ---------
73,764 102,059
NON-CURRENT ASSETS:
Property and equipment, net 4,994 3,150
Deposits and other long term assets 4,497 4,695
Goodwill and other intangible assets 136,196 --
--------- ---------
TOTAL ASSETS $ 219,451 $ 109,904
========= =========
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable $ 6,311 $ 14,443
Other accrued liabilities 13,717 1,261
Accrued interest expense 1,629 483
Current obligations under capital leases 163 --
Deferred revenue 4,519 5,744
--------- ---------
TOTAL CURRENT LIABILITIES 26,339 21,931
Non-current obligations under capital leases 105 --
Convertible notes payable 63,250 63,250
STOCKHOLDERS' EQUITY
Common stock 197,223 69,311
Deferred compensation (6,308) (2,226)
Accumulated deficit (61,158) (42,362)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 129,757 24,723
========= =========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 219,451 $ 109,904
========= =========
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1998 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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BEYOND.COM
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
-------- --------
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OPERATING ACTIVITIES
Net loss $(18,796) $ (2,227)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 554 51
Amortization of intangible assets and deferred compensation 732 --
Changes in operating assets and liabilities
Accounts receivable 5,091 (604)
Prepaid expenses and other current assets (6,761) (415)
Cost of deferred revenue 778 2,428
Accounts payable (9,310) (164)
Other accrued liabilities 4,727 548
Deferred revenue (1,228) (2,355)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (24,213) (2,738)
INVESTING ACTIVITIES
Costs associated with the acquisition of BuyDirect.com (5,839) --
Purchases of property and equipment (1,101) (165)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,940) (165)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- 400
Repayment of note payable to related party -- (60)
Repayment of capital leases -- (7)
Proceeds from sale of redeemable convertible preferred stock -- 2,231
Proceeds from exercise of stock options 55 --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 55 2,564
-------- --------
Net decrease in cash and cash equivalents (31,098) (339)
Cash and cash equivalents at beginning of period 81,548 2,571
-------- --------
Cash and cash equivalents at end of period $ 50,450 $ 2,232
======== ========
Supplemental disclosure of non-cash Financing activities
Common stock issued in acquisition of BuyDirect.com $120,542 $ --
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of Management, all adjustments (consisting primarily of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K dated March 31, 1999 filed with the Securities and Exchange Commission.
NOTE 2 -ACQUISITION OF BUYDIRECT.COM
On March 30, 1999, a wholly owned subsidiary of Beyond.com merged with
and into BuyDirect.com, an online software retailer for consumers and business
customers. BuyDirect.com was originally launched as a service of CNET and became
a wholly owned subsidiary in March 1998.
Upon the closing of this merger, Beyond.com issued 4,930,123 shares of
its common stock to BuyDirect.com's stockholders in exchange for their
outstanding shares of BuyDirect.com common and preferred stock. Beyond.com
assumed options to purchase 281,757 shares of its common stock in connection
with the merger. The common stock issued was valued at $120.5 million based on
the average closing price of the common stock for the five trading days
immediately preceding the announcement of the acquisition and the five trading
days following the announcement of the acquisition. We accounted for the merger
using the purchase method of accounting. The purchase price of approximately
$143.5 million included the fair market value of the common stock of $120.5
million, the fair value of the fully vested options assumed of $2.7 million,
liabilities assumed of $13.0 million and the acquisition costs incurred in
connection with the merger. The fair value of the unvested options assumed of
$4.6 million has been recorded as deferred compensation.
The Company has allocated the purchase price to assets and liabilities
based on management's best estimates of the respective fair values with the
excess cost over the net assets acquired allocated to goodwill as follows
(amounts in millions):
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Current assets $ 1.6
Property and equipment $ 1.1
Unvested options assumed/Liabilities assumed $ 4.6
Marketing agreements $ 2.0
Customer base $ 2.0
Assembled workforce $ 1.1
Technology $ 1.6
Covenants not to compete $ 6.5
Goodwill $123.0
------
Total purchase price $143.5
</TABLE>
The intangible assets are being amortized to expense over the estimated
useful lives of one to three and one half years.
Fifteen percent of the shares issued to the BuyDirect.com stockholders
are being held in escrow for a period not to exceed fifteen months after the
date of the closing of the merger to secure these indemnification obligations of
the BuyDirect.com stockholders.
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The operating activities of BuyDirect.com had an immaterial effect on
our results of operations for the quarter ended March 31, 1999 as presented
herein.
NOTE 3 - AGREEMENT WITH YAHOO! INC.
In February 1999, Beyond.com entered into a non-exclusive agreement with Yahoo!
Inc., a global Internet media company that offers a branded network of
comprehensive information, communication and shopping services. Under the
agreement, Yahoo! will:
o promote and advertise Beyond.com as a premier software merchant
by delivering page views across Yahoo!'s branded network of
sites; and
o place promotions and advertisements, with links to the
Beyond.com Web site, on the Yahoo! home page, My Yahoo! ,
and relevant categories and search result pages in the Yahoo!
directory.
NOTE 4 - LOSS PER SHARE
Net loss per share is presented in accordance with the requirements of
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS
128). Pro forma net loss per share has been computed under FAS 128 and also
gives effect to the conversion of redeemable convertible preferred stock not
included in net loss per share that converted upon completion of the IPO.
If Beyond.com had reported net income, diluted earnings per share would have
included the shares used in the computation of basic and diluted net loss per
share and pro forma basic and diluted net loss per share as well as an
additional approximately common equivalent shares related to the outstanding
options and warrants (determined using the treasury stock method) for the three
months ended March 31, 1998 and 1999, respectively, and an additional 3,449,000
shares in the three months ended March 31, 1999 related to the convertible notes
payable (using the if-converted method)
NOTE 5 - LITIGATION
From time to time, Beyond.com has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. In
November 1998, a third party that appears to hold a registered United States
trademark for "A Better Way to Buy Software" sent us a letter asserting that our
use of that phrase up to such time infringed its trademark rights. Beyond.com
disputes the validity of this assertion. To date, no further correspondence has
been received from this third party regarding their assertion.
NOTE 6 - SEGMENT REPORTING
During the year ended December 31, 1998 the Company adopted Statement of
Financial Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which establishes standards for reporting information
regarding operating segments in annual financial statements and requires
selected information for those segments to be presented in interim financial
statements. For all periods presented, we have viewed our operations as
principally one segment, Software sales. As a result, all of the financial
information presented represents all financial information related to our
principal operating segment.
NOTE 7 -SUBSEQUENT EVENT
On April 14, 1999, Beyond.com completed the sale of 4 million shares of its
common stock in a public offering 3,000,000 of which shares were sold by
Beyond.com and 1,000,000 of which shares were sold by selling shareholders.
Beyond.com's sale of 3,000,000 shares of its common stock generated net
proceeds of $98.5 million.
6
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this Quarterly Report on Form 10-Q are forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended.
When used in this report or elsewhere by management from time to time, the words
"believes," "anticipates," "intends," plans," estimates," and similar
expressions are forward looking statements. Such forward-looking statements
contained herein include statements relating to our expectations and beliefs
that arrangements with America Online, Excite and Yahoo! will represent
significant distribution channels for our products, that research and
development expenses will continue to increase in both absolute dollars and as a
percentage of revenue, and that our cash as of March 31, 1999, including net
proceeds from the sale of 3,000,000 shares of our Common Stock effected in a
public offering closed in April 1999, will be sufficient to meet our anticipated
needs for working capital and capital expenditures for at least the next 18
months, and are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements. Such risks include the risk that
actual benefits of arrangements with our strategic partners will be inconsistent
with anticipated benefits, that we cannot meet our anticipated needs for working
capital and capital expenditures as expected and that we will not be able to
access additional capital if required on terms acceptable to us. For a more
detailed discussion of these and other business risks, see our Annual Report on
Form 10-K filed pursuant to Section 13 or 15(d) of the Securities Act of 1934
dated March 31, 1999, as well as other reports and registrations filed with the
Commission.
OVERVIEW
We are a leading online reseller of commercial off-the-shelf computer
software to the consumer, small business and large enterprise markets. Through
our online store (www.beyond.com), we offer customers a comprehensive selection
of software as well as related computer peripheral products, helpful customer
service, a convenient shopping experience and competitive prices. We believe
that our Beyond.com Web site is one of the most widely known and used sites on
the World Wide Web for the purchase of software. We deliver software to
customers one of two ways: either we physically deliver the shrink-wrap software
package or we deliver the software over the Internet through digital download.
We launched our Web site in November 1994 under the name CyberSource Corporation
and maintained a Web site named software.net. In December 1997, we spun-off our
e-commerce services business and changed our name to software.net Corporation.
In August 1998, we started doing business as "Beyond.com."
In March 1998, we expanded our third party sales channel by entering
into strategic relationships with America Online and Excite, and in February
1999, we further expanded our third party sales channel by entering into a
relationship with Yahoo!. Under the America Online agreement, we are the
exclusive reseller of software on certain screens on the America Online service
and America Online's Web site, aol.com. On other America Online screens we are a
semi-exclusive reseller of software. Under the Excite and Yahoo! agreements, we
have the right to display banner advertisements and links to our Web site on
certain Excite and Yahoo! screens. In addition, Excite cannot display paid
promotional links or banner advertisements of any other software reseller on
specified Excite screens related to software.
Under these agreements, America Online, Excite and Yahoo! are obligated
to deliver minimum numbers of screen views with links to our Web site. We call
these screen views "Impressions." Under the America Online agreement, we must
make fixed payments totaling approximately $21 million. In addition, under the
Excite and Yahoo! agreements, we must make certain fixed payments to Excite and
Yahoo!, respectively, over the three-year and 18-month terms of the respective
agreements. We also have agreed to pay America Online and Excite a percentage of
certain transactional revenues and, in the case of America Online, advertising
revenues we earn in excess of specified thresholds. In addition, we have agreed
to make certain performance-based payments to Yahoo! The America Online
agreement terminates in August 2001, the Excite agreement terminates when Excite
has delivered a certain number of impressions, but no earlier than April 2001
and the Yahoo! agreement terminates 18 months after initial activation.
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We expect these arrangements with America Online, Excite and Yahoo!, to
represent significant distribution channels for our products. If we, or the
other party to any of these agreements, elect to terminate any of the agreements
it likely would have a material adverse effect on our business. We cannot assure
that we will achieve sufficient online traffic or generate sufficient revenue to
justify our payment obligations to America Online, Excite and Yahoo!, nor can we
assure that we will achieve sufficient online traffic or generate sufficient
revenue to satisfy our contractual obligations necessary to prevent termination
of the America Online, Excite or Yahoo! agreements.
Pursuant to our agreements with America Online, Excite, Network
Associates, Yahoo!, Cnet, ZDNet, @Home, Roadrunner/Service Co. and Xoom we are
obligated to pay a total of approximately $37.9 million from March 31, 1999
through December 31, 2001, of which approximately $13.7 million must be paid
during the remainder of 1999.
Over the past 18 months we entered into various agreements with Network
Associates concerning the online sale of software and the management of Network
Associates' Web sites. Network Associates is a developer of electronic commerce
locations and publisher of certain products marketed under the McAfee and other
names. Our agreements include a Co-Hosting Agreement and a Web Site Services
Agreement entered into in September 1998. Under these agreements, we agreed to
co-host Web sites with Network Associates and agreed to resell Network
Associates' products on Network Associates' Web site at www.mcafeestore.com. We
must make substantial payments to Network Associates for exclusive positioning
of links to our Web site on certain screens on Network Associates' Web sites,
and for rights to resell Network Associates products. If we or they terminate
one or all of these agreements, it would likely have a material adverse effect
on our business. We cannot guarantee that the volume of online traffic,
customers or revenues we obtain as a result of this relationship will justify
our significant fixed financial obligations to Network Associates.
In April 1998, we changed our name to software.net Corporation. In June
1998, we completed the initial public offering of our common stock. In August
1998, we began doing business as "Beyond.com" and initiated an aggressive
regional radio and national print advertising campaign to promote the brand. In
November 1998, we completed the offering of $63.25 million aggregate principal
amount of our 7 1/4% Convertible Subordinated Notes. In December 1998, we
initiated a regional television advertising campaign and we changed our legal
corporate name to Beyond.com Corporation. We intend to continue an aggressive
advertising campaign to promote our brand in 1999.
Each year since inception, we have incurred increasingly larger net
losses. These annual net losses increased from $1.5 million in 1996 to $5.4
million in 1997, $31.1 million in 1998 and $18.8 million in the quarter ended
March 31, 1999. We anticipate our losses will increase significantly from
current levels because we expect to incur additional costs and expenses related
to:
o brand development, marketing, and promotion;
o Web site content development;
o strategic relationship development and maintenance;
o technology and operating infrastructure development, including
improved digital download capabilities;
o increased headcount, facilities and infrastructure as a result
of the BuyDirect.com.merger; and
o assimilation of operations and personnel of BuyDirect.com.
In addition, as a result of the BuyDirect.com merger, we recorded a
significant amount of goodwill, the amortization of which will adversely affect
our earnings and profitability for the foreseeable future. We recorded goodwill
and other intangible assets of approximately $137 million, to be amortized
through 2002. We believe it is likely that we will not generate additional
earnings sufficient to recover the amount of goodwill and other intangible
assets recorded during the period in which they are amortized.
Because we have relatively low gross margins, our ability to become
profitable given our planned expenses depends on our ability to generate and
sustain substantially higher net revenues. If we do achieve profitability, we
cannot be certain that we can sustain or increase profitability on a quarterly
or annual basis in the future.
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We base our current and future expense levels, which are largely fixed,
on our operating plans and estimates of future revenues. In view of the rapidly
evolving nature of our business, proposed and possible future acquisitions and
our limited operating history of selling software online, we have little
experience forecasting our revenues. Therefore, we believe that period-to-period
comparisons of our financial results are not necessarily meaningful and you
should not rely upon them as an indication of our future performance. If we
cannot achieve and sustain operating profitability or positive cash flows from
operations, we may be unable to meet our debt service obligations or working
capital requirements, which would adversely effect our business.
We derive our revenues primarily from four sources:
o sales of software to customers using credit cards;
o sales of software to corporate customers that are invoiced
directly under credit terms;
o sales of software to various government agencies pursuant to
contractual arrangements; and
o to a lesser extent, amounts received from software publishers
for advertising and promotion.
In addition, we also derive limited revenues from the sale of certain
computer peripherals and accessories. We recognize our revenues from the sale of
software, net of estimated returns, either upon shipment of the physical product
or delivery of the electronic product via digital download. We defer net
revenues associated with the sale of software pursuant to contracts with the
U.S. government that require us to provide continuing service, support, and
performance and recognize these revenues over the period that we provide
service, support, and performance. We recognize revenues derived from software
publishers for advertising and promotional activities as the services are
provided. Our U.S. government contracts are subject to annual review and renewal
by the applicable government agency. Although all such contracts presently
remain in full force and effect, the applicable U.S. government agency may
terminate such contracts without cause or prior notice. Because the government
contracts may be terminated without cause or prior notice, we cannot be certain
that we will generate any revenues from U.S. government contracts in any future
period. We recognize revenue from sales of computer peripherals and accessories
upon the shipment of the physical product, at which time collectibility is
probable and we have no remaining obligations.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999
Net Revenues. Our net revenues increased from $6.2 million in the
quarter ended March 31, 1998 to $19.1 million in the quarter ended March 31,
1999. This increase primarily resulted from increased sales to consumer and
corporate customers and as a result of new U.S. government contracts.
Cost of Revenues. Our cost of revenues consists primarily of the costs
of software and software licenses sold to consumer and corporate customers,
related credit card processing fees and the costs of software licenses and
software updates provided to the U.S. government. Our total cost of revenues
increased from $5.3 million in the quarter ended March 31, 1998 to $16.2 million
in the quarter ended March 31, 1999. This increase resulted from our increased
software sales.
Gross Margin. Our gross margin (gross profit as a percentage of net
revenues) increased from 15.1% in the quarter ended March 31, 1998 to 15.2% in
the quarter ended March 31, 1999. This increase primarily resulted from a shift
in our revenue mix as we received an increased percentage of higher margin
consumer business. In the future, we may expand or increase the discounts we
offer to customers or otherwise alter our pricing structures and policies. If we
take such an action, it may have an adverse impact on gross margin in future
periods. Further, although we intend to increase the percentage of higher margin
consumer business, higher margin digital download revenues and higher margin
advertising and promotional revenues as a percentage of our total net revenues
in future periods, there is no guarantee that we will be able to do so. In
future periods our gross margin may decline if the revenues we generate from
sales to the U.S. government or sales to large enterprise customers increase as
a percentage of our total net revenues.
Research and Development Expenses. Our research and development expenses
primarily consist of personnel and other expenses associated with developing and
enhancing our Web sites as well as associated facilities related expenses. Our
research and development expenses increased from $602,000 in the quarter ended
March 31, 1998 to $1.7 million in the quarter ended March 31, 1999. These
expenses decreased as a percentage of net revenues from 9.7% in the quarter
ended March 31, 1998 to 9.1% in the
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quarter ended March 31, 1999. This increase in absolute dollars primarily was
the result of increases in our personnel and depreciation on computer equipment.
We anticipate that our research and development expenses will continue to
increase in absolute dollars in future periods. Additionally, we anticipate that
our research and development expenses will increase as a percent of revenue in
future periods.
Sales and Marketing Expenses. Our sales and marketing expenses consist
primarily of promotional expenditures and costs associated with operating our
Web sites, including personnel and related expenses. In addition, we include the
expenditures associated with our strategic marketing alliances under sales and
marketing expenses. Our sales and marketing expenses increased significantly
from $2.0 million in the quarter ended March 31, 1998 to $16.6 million in the
quarter ended March 31, 1999. These expenses also increased significantly as a
percentage of net revenues from 31.5% in the quarter ended March 31, 1998 to
86.7% in the quarter ended March 31, 1999. This increase both in absolute
dollars and as a percentage of net revenues was primarily the result of costs
associated with:
o developing and maintaining our strategic marketing alliances;
o a branding and marketing campaign (including expenses associated
with our re-branding efforts); and
o an increase in personnel to support increased sales and
marketing and advertising expenditures.
We intend to continue to pursue aggressive branding, sales and marketing
campaigns. In addition, our current strategic marketing alliances with America
Online, Excite, Netscape and Yahoo!, in addition to the alliances with Cnet,
ZDNet, @Home, Roadrunner/Service Co. and Xoom in the BuyDirect.com merger,
require us to make payments totaling approximately $55.6 million over the terms
of those agreements. As of March 31, 1999, approximately $37.9 million of this
amount remained to be paid. We are expensing the costs associated with the
America Online and Netscape agreements ratably over the terms of the respective
agreements. We are expensing the costs associated with the Excite agreement as
costs are incurred and payments become due. We are expensing the minimum payment
amounts over the three-year term of the Co-Hosting Agreement with Network
Associates. We may enter into similar strategic marketing alliances requiring
significant minimum payments in the future and, as a result, we may
substantially increase our sales and marketing expenditures. Due to our planned
aggressive branding, sales and marketing efforts and our current and potential
financial commitments in connection with our strategic marketing alliances, we
expect sales and marketing expenses to increase significantly in absolute
dollars in future periods.
General and Administrative Expenses. Our general and administrative
expenses primarily consist of personnel expenses, legal and accounting expenses,
and corporate facility-related expenses. Our general and administrative expenses
increased from $635,000 in the quarter ended March 31, 1998 to $2.3 million in
the quarter ended March 31, 1999. These expenses also increased, as a percentage
of net revenues, from 10.2% in the quarter ended March 31, 1998 to 11.8% in the
quarter ended March 31, 1999. This increase in both absolute dollars and as a
percentage of net revenues was primarily the result of increased
personnel-related costs and facilities-related expenses. We anticipate that
these expenses will continue to grow in absolute dollars as we incur additional
expenses associated with operating as a public company and transitioning from a
single site operation to multiple site operations.
Amortization of Deferred Compensation and Other Intangible Assets. We
recognized expenses associated with the amortization of deferred compensation
and other intangible assets related to the acquisition of BuyDirect.com in March
1999 in the amount of $732,000 in the quarter ended March 31, 1999. We expect
the amortization of deferred compensation and other intangible assets to
increase significantly in future periods. Additionally, we believe it is
unlikely that we will generate additional earnings sufficient to recover the
amount of deferred compensation and other intangible assets recorded during the
period in which they are amortized.
Interest Income and Expense, net. Interest income, net, consists of
earnings on our cash investments, net of interest costs related to our financing
obligations. Interest income, net, decreased from $25,000 in the quarter ended
March 31, 1998 to a net interest expense of $410,000 in the quarter ended March
31, 1999. This decrease was primarily a result of increased interest expenses
related to our 7 1/4% convertible subordinated notes offset by interest income
from higher average cash balances.
Income Taxes. No provision for income taxes has been recorded due to
operating losses with no current tax benefit.
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $37,000,000 and $31,000,000, respectively.
The Company also had federal and state research credit carryforwards of
approximately $314,000 and
10
<PAGE> 12
$268,000, respectively. The net operating losses and credit carryforwards will
expire at various dates beginning in 2002 through 2018, if not utilized. The net
operating loss carryforwards differ from the accumulated deficit primarily as a
result of the accounting for the Spin-off of CyberSource to the Company's
preferred and common stockholders on December 31, 1997.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1999, we financed our operations
primarily through private sales of preferred stock, our initial public offering
of 5,750,000 shares of our common stock and the sale of our 7 1/4% Convertible
Subordinated Notes. We raised cumulative net cash proceeds totaling $14.8
million through private sales of preferred stock. In June 1998, we received net
proceeds of $46.8 million from our initial public offering. We raised an
additional $2.0 million at the closing of our initial public offering through
the sale of common stock to America Online pursuant to a Common Stock and
Warrant Subscription Agreement entered into in March 1998. In May 1998, we
received $4.8 million through a credit agreement that we entered into with
Deutsche Bank AG. We repaid all monies borrowed under that credit agreement in
November 1998. In November and December 1998, we raised net cash proceeds
totaling approximately $63.3 million through the sale of our 7 1/4% Convertible
Subordinated Notes.
As of March 31, 1999, we had approximately $50.4 million of cash
compared with $2.2 million at March 31, 1998. Our current strategic marketing
alliances provide for remaining payments of approximately $13.7 million in 1999,
approximately $16.5 million in 2000 and approximately $7.7 million in 2001.
Currently, we have no other material commitments other than those under our
operating leases and the U.S. government contracts.
We used net cash of $2.7 million in operating activities in the quarter
ended March 31, 1998, and we used net cash of $24.2 million in operating
activities in the quarter ended March 31, 1999. Our cash used in operating
activities in the quarter ended March 31, 1998 was primarily comprised of the
net effect of:
o a net loss of $18.8 million;
o an increase in prepaid expenses totaling $6.8 million related to
prepaid partnership agreements;
o an increase in deferred revenue related to the execution of the
new U.S. government contract; and
o a decrease in accounts payable totaling $9.3 million related to
our growth.
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<PAGE> 13
We used net cash in investing activities in the quarter ended March 31,
1999 of $6.9 million for acquisitions of leasehold improvements and computer
equipment, as well as costs associated with the acquisition of BuyDirect.com.
We received net cash of $55,000 in the quarter ended March 31, 1999 from
financing activities, primarily from the exercise of stock options.
We believe that our cash at March 31, 1999, along with the net proceeds
of $98.5 million from the sale by us of 3,000,000 shares of our common stock
offered in a public offering which closed in April 1999, will be sufficient to
meet our anticipated needs for working capital and capital expenditures for at
least the next 18 months. Thereafter, we expect that the cash we generate from
operations likely will not be sufficient to satisfy our cash needs. We will need
significant amounts of cash to make a variety of payments, including:
o payment of the principal and interest on 7 1/4% Convertible
Subordinated Notes when due;
o payment of our financial obligations to America Online, Network
Associates, Excite, Yahoo!, @Home, CNET, XOOM, ZDNet and
others; and
o payment of increasing sales and marketing expenses.
We may need to sell additional equity or debt securities to raise cash
to meet these obligations. Such sales likely would result in additional dilution
to our stockholders. In addition, we cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
YEAR 2000 RISK MAY ADVERSELY AFFECT OUR COMPANY
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the Year
2000. We assessed our proprietary software and our internally developed systems,
which permit the sale, order, processing and delivery of off-the-shelf software
to our customers to determine Year 2000 compliance. We searched through software
code for each of these applications and believe that we have identified all
instances where date specific information is required. We further investigated
whether these date fields contain two or four digits. Based on our review and
the results of limited testing, we believe our other proprietary software and
internally developed systems are Year 2000 compliant.
In addition to our proprietary software and internally developed
systems, we utilize software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the Year 2000
phenomenon. For example, we are dependent on the institutions involved in
processing our members' credit card payments for Internet services. We are also
dependent on telecommunications vendors and leased point-of-purchase vendors to
maintain network reliability.
Our software applications run on several hardware platforms and
associated operating systems, primarily those provided by Sun Microsystems. In
addition, our software operates in accordance with several external Internet
protocols, such as HTTP and NNTP. Our software is therefore dependent upon the
correct processing of dates by these systems and protocols. We reviewed
information made publicly available by Sun Microsystems and our other hardware
platform providers regarding Year 2000 compliance and researched the date
handling capabilities of applicable Internet protocols. Based on this research,
we do not believe that the underlying systems and protocols that operate in
conjunction with our software applications contain material Year 2000
deficiencies. However, we have not conducted our own tests to determine to what
extent our software running on any of our hardware platforms and in accordance
with any of our supported Internet protocols fails to properly recognize Year
2000 dates.
We use multiple software systems for our internal business purposes,
including accounting, e-mail, development, human resources, customer service and
support, and sales tracking systems. All of these applications have been
purchased within the preceding 12 months. We have made inquiries of vendors of
the systems that we believe are mission critical to our business regarding their
Year 2000 readiness. Each of these vendors has indicated to us that it believes
its applications are Year 2000 compliant. However, we have not received
affirmative documentation in this regard from any of these vendors, and we have
not performed any
12
<PAGE> 14
operational tests on its internal systems. We anticipate that our systems,
including components thereof provided by third-party vendors, will be Year 2000
compliant by the Year 2000.
However, our software applications and the underlying hardware systems
and protocols running the software may contain undetected errors or defects
associated with Year 2000 date functions. Our software applications directly and
indirectly interact with a large number of other hardware and software systems.
We are unable to predict to what extent our business may be affected if our
software or the systems that operate in conjunction with our software experience
a material Year 2000 failure. Known or unknown errors or defects that affect the
operation of our software could result in delay or loss of revenue, interruption
of shopping services, cancellation of customer contracts, interference with
digital download, diversion of development resources, damage to our reputation,
costs, and litigation costs, any of which could adversely affect our business,
financial condition and results of operation. Further, the spending and
purchasing patterns of customers or potential customers may be affected by the
Year 2000 issue as individuals, corporation and government agencies expend
significant resources to correct or update their current system for Year 2000
compliance or delay purchases of new software until after the Year 2000. At this
time, the expenses associated with our assessment and potential remediation plan
cannot be determined. Further, at this time, we do not have enough information
to determine the most reasonably likely worst case scenario. Therefore, we do
not have in place a contingency plan to handle the most reasonably likely worst
case scenarios. We do not intend to create one.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In November 1998, a third party that appears to hold a registered United
States trademark for "A Better Way to Buy Software" sent us a letter asserting
that our use of that phrase up to such time infringed its trademark rights. We
dispute the validity of this assertion. To date, no further correspondence has
been received from this third party regarding their assertion.
ITEM 2: CHANGES IN SECURITIES - NOT APPLICABLE
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
ITEM 6: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations, and change in the market values of our investments.
INTEREST RATE RISK. Our exposure to market rate risk for changes in interest
rates relates primarily to our investment portfolio. We have not used derivative
financial instruments in our investment portfolio. We invest our excess cash in
debt instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers and, by policy, limit the amount of credit exposure to any one
issuer. We protect and preserve our invested funds by limiting default, market
and reinvestment risk. Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates. We may suffer
losses in principal if forced to sell securities which have declined in market
value due to changes in interest rates.
FOREIGN CURRENCY RISK. To date we have not experienced risks associated with
foreign currencies as a result of our operations. However, we intend to expand
internationally and will be exposed to risks associated with fluctuations in
foreign currencies at such time.
INVESTMENT RISK. To date, we have not invested in equity instruments of
companies.
13
<PAGE> 15
ITEM 7: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
During the quarter ended March 31, 1999, we (i) filed with the
Securities and Exchange Commission (the "Commission") on January 21,
1999, a Current Report on Form 8-K reporting under Item 5 thereof our
financial results for the quarter ended December 31, 1998, and (ii)
filed with the Commission on March 3, 1999 a Current Report on Form 8-K
reporting under Item 5 thereof the signing of a definitive agreement to
acquire BuyDirect.com.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this quarterly
report on Form 10-Q to be signed on its behalf by the undersigned, thereunto
duly authorized, in Sunnyvale, California, on May 17, 1999.
Beyond.com Corporation
By /s/ Mark L. Breier
-------------------------------------
Mark L. Breier
President, Chief Executive Officer
and Director
By /s/ Michael J. Praisner
-------------------------------------
Michael J. Praisner
Vice President,
Finance and Administration
and Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BEYOND.COM CORPORATION FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 50,450
<SECURITIES> 0
<RECEIVABLES> 3,864
<ALLOWANCES> (917)
<INVENTORY> 0
<CURRENT-ASSETS> 73,764
<PP&E> 4,994
<DEPRECIATION> (945)
<TOTAL-ASSETS> 219,451
<CURRENT-LIABILITIES> 26,339
<BONDS> 63,250
0
0
<COMMON> 197,223
<OTHER-SE> (67,466)
<TOTAL-LIABILITY-AND-EQUITY> 219,451
<SALES> 19,102
<TOTAL-REVENUES> 19,102
<CGS> 16,204
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (410)
<INCOME-PRETAX> (18,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,796)
<EPS-PRIMARY> (0.66)<F1>
<EPS-DILUTED> 0
<FN>
<F1>For purposes of this exhibit, Primary means Basic and Diluted.
</FN>
</TABLE>
