<PAGE> 1
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 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 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 0-24457
BEYOND.COM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
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 July 30, 1999 was 35,968,702.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BEYOND.COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------ ------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash, cash equivalents and short-term investments $ 123,958 $ 81,548
Accounts receivable, net 18,884 8,785
Prepaid partnership agreements 8,906 4,091
Prepaid expenses and other current assets 3,708 2,110
Note receivable from a director - 270
Cost of deferred revenue 15,773 5,255
------------ ------------
TOTAL CURRENT ASSETS 171,229 102,059
NON-CURRENT ASSETS:
Property and equipment, net 7,395 3,150
Deposits and other non-current assets 5,325 4,695
Goodwill and other intangible assets 124,901 -
------------ ------------
TOTAL ASSETS $ 308,850 $ 109,904
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 22,179 $ 14,443
Other accrued liabilities 10,118 1,261
Accrued interest expense 382 483
Current obligation under capital leases 118 -
Deferred revenue 16,726 5,744
------------ ------------
TOTAL CURRENT LIABILITIES 49,523 21,931
Non-current obligations under capital leases 105 -
Convertible notes payable 63,250 63,250
STOCKHOLDER'S EQUITY:
Common stock 295,063 69,311
Deferred compensation (3,894) (2,226)
Unrealized gain on investments 139
Accumulated deficit (95,336) (42,362)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 195,972 24,723
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 308,850 $ 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.
<PAGE> 3
BEYOND.COM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED,
------------------------------- -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 26,319 $ 7,577 $ 45,421 $ 13,769
Cost of revenues 22,321 6,408 38,525 11,662
------------ ------------ ------------ ------------
Gross profit 3,998 1,169 6,896 2,107
Operating expenses:
Research and development 2,849 1,076 4,580 1,679
Sales and marketing 20,619 4,118 37,181 6,070
General and administrative 2,631 878 4,889 1,513
Goodwill and deferred compensation
amortization 12,304 494 13,036 494
------------ ------------ ------------ ------------
Total operating expenses 38,403 6,566 59,686 9,756
------------ ------------ ------------ ------------
Loss from operations (34,405) (5,397) (52,790) (7,649)
Other income (expense), net 226 (167) (184) (142)
------------ ------------ ------------ ------------
NET LOSS $ (34,179) $ (5,564) $ (52,974) $ (7,791)
------------ ------------ ------------ ------------
Accretion of premium of preferred stock - (25) - (51)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (34,179) $ (5,589) $ (52,974) $ (7,842)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.97) $ (0.47) $ (1.66) $ (0.75)
============ ============ ============ ============
Weighted average shares outstanding used in
computing basic and diluted net loss per share 35,283 11,863 31,843 10,471
============ ============
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE $ (0.25) $ (0.37)
============ ============
Weighted average shares outstanding used in
computing pro forma basic and diluted net loss
per share 22,197 21,224
============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 4
BEYOND.COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (52,974) $ (7,791)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,129 237
Amortization of intangible assets and deferred compensation 13,036 494
Changes in operating assets and liabilities:
Accounts receivable (9,929) (725)
Prepaid expenses and other current assets (5,230) (6,354)
Cost of deferred revenue (10,518) 4,857
Accounts payable 6,558 1,228
Other accrued liabilities (119) 1,896
Deferred revenue 10,978 (5,174)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (47,069) (11,332)
INVESTING ACTIVITIES
Purchases of short-term investments (52,485) -
Costs associated with the acquisition of BuyDirect.com (5,839) -
Purchases of property and equipment (4,078) (894)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (62,402) (894)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable - 4,800
Repayment of note payable to shareholder and director - (60)
Repayment of capital leases (45) (13)
Proceeds from sale of redeemable convertible preferred stock - 2,950
Net proceeds from sale of common stock 98,778 49,023
Proceeds from exercises of stock options 663 -
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 99,396 56,700
------------- -------------
Net decrease in cash and cash equivalents (10,075) 44,474
Cash and cash equivalents at beginning of period 81,548 2,571
------------- -------------
Cash and cash equivalents at end of period $ 71,473 $ 47,045
============= =============
Supplemental disclosure of non-cash Financing activities:
Common stock issued in acquisition of BuyDirect.com $ 120,542 $ --
</TABLE>
<PAGE> 5
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 and six-month periods ended June 30, 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.
NOTE 3 -SECONDARY PUBLIC OFFERING OF COMMON STOCK
On April 14, 1999, Beyond.com completed the sale of 4,000,000 shares of its
common stock in a public offering, which generated net proceeds of $98.5 million
to the Company. Under the terms of this offering, selling shareholders
liquidated 1,000,000 shares of common stock. No proceeds from this portion of
the offering benefited Beyond.com.
NOTE 4 - CONTRACT WITH INTELLISYS TECHNOLOGY CORPORATION TO SERVE INTERNAL
REVENUE SERVICE
On June 23, 1999, Beyond.com signed a contract with Intellisys Technology
Corporation whereby Beyond.com will be the reseller of electronically delivered
and shrink wrapped software applications to the United States Internal Revenue
Service, will design and implement specialized online software stores, and will
implement proprietary electronic download managers targeting 130,000 IRS
employees and agents. The 65-month agreement is renewable on an annual basis.
Beyond.com recognized an immaterial amount of revenue related to this contract
in the quarter ended June 30, 1999.
<PAGE> 6
NOTE 5 -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 our initial public offering.
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 6,122,555 and 6,946,366 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 6 - SEGMENT REPORTING
During the year ended December 31, 1998 the Company adopted Statement of
Financial Accounting 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 - RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years commencing after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
currently does not make use of derivatives and management anticipates that the
adoption of SFAS No. 133 will not have a significant effect on earning or the
financial position of the Company.
NOTE 8 - COMPREHENSIVE INCOME
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheet consists of the accumulated net unrealized gains and
losses on available-for-sale marketable securities.
The components of comprehensive income for the three months ended June 30, 1999
and June 30, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
=============================
1999 1998
========== ==========
<S> <C> <C>
Net income $ (34,179) $ (5,589)
Other comprehensive income
Change in unrealized gain (loss) on available-for-sale investments (139) --
========== ==========
Comprehensive income $ (34,318) $ (5,589)
========== ==========
</TABLE>
<PAGE> 7
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@Home 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 June 30, 1999 will be sufficient
to meet our anticipated needs for working capital and capital expenditures for
at least the next 14 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 filed on Form 10-K pursuant to Section 13 or 15(d)
of the Securities Act of 1934 dated March 31, 1999, 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 June 1998, we completed the initial public offering of our common stock. In
August 1998, we 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.
In March 1998, we expanded our third party sales channel by entering into
strategic relationships with America Online and Excite@Home, 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@Home and Yahoo!
agreements, we have the right to display banner advertisements and links to our
Web site on certain Excite@Home and Yahoo! screens. In addition, Excite@Home
cannot display paid promotional links or banner advertisements of any other
software reseller on specified Excite@Home screens related to software.
Under these agreements, America Online, Excite@Home 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 originally totaling approximately $21 million. In
addition, under the Excite@Home and Yahoo! agreements, we must make certain
fixed payments to Excite@Home 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@Home 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@Home agreement terminates when Excite@Home has delivered a certain number
of impressions, but no earlier than April 2001 and the Yahoo! agreement
terminates 18 months after initial activation.
We expect these arrangements with America Online, Excite@Home 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
<PAGE> 8
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@Home 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@Home or Yahoo! agreements.
Pursuant to our agreements with America Online, Excite@Home, Network
Associates, Yahoo!, Cnet, ZDNet, @Home, Roadrunner/Service Co. and Xoom we are
obligated to pay a total of approximately $33.7 million from June 30, 1999
through December 31, 2001, of which approximately $8.7 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.
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 $53 million in the six months ended June 30,
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; and
o assimilation of operations and personnel related to potential future
mergers and acquisitions.
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.
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, 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, checks, and wire
transfers;
<PAGE> 9
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,
hardware manufacturers, and other vendors for advertising and
promotion.
In addition, we also derive 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 AND SIX MONTHS ENDED JUNE 30, 1999
Net Revenues. Our net revenues increased from $7.6 million in the quarter
ended June 30, 1998 to $26.3 million in the quarter ended June 30, 1999. This
increase primarily resulted from increased sales to consumer and corporate
customers and as a result of new U.S. government contracts.
Our net revenues increased from $13.8 million in the six month period ended
June 30, 1998 to $45.4 million in the six month period ended June 30, 1999. This
increase primarily resulted from increased sales to consumer, corporate and
government customers.
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 $6.4 million in the quarter ended June 30, 1998 to $22.3 million in the
quarter ended June 30, 1999. This increase resulted from our increased software
sales.
Cost of revenues increased from $11.7 million in the six month period ended
June 30, 1998 to $38.5 million in the six month period ended June 30, 1999. This
increase was primarily the result of increased software sales.
Gross Margin. Our gross margin (gross profit as a percentage of net
revenues) decreased from 15.4% in the quarter ended June 30, 1998 to 15.2% in
the quarter ended June 30, 1999. This decrease primarily resulted from a higher
mix of lower margin sales to U.S. Government agencies and lower mix of higher
margin advertising and promotion revenues, partially offset by an increased mix
of consumer business and a $600,000 sale of software to CyberSource.
Our gross margin deceased from 15.3% in the six month period ended June 30,
1998 to 15.2% in the six month period ended June 30, 1999 primarily as a result
of a higher mix of lower margin sales to U.S. Government Agencies and lower mix
of higher margin advertising and promotion revenues partially offset by an
increased mix of consumer business and a $600,000 sale of software to
CyberSource. 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 $1.1 million in the quarter
ended June 30,
<PAGE> 10
1998 to $2.8 million in the quarter ended June 30, 1999. These expenses
decreased as a percentage of net revenues from 14.2% in the quarter ended June
30, 1998 to 10.8% in the quarter ended June 30, 1999. This increase in absolute
dollars primarily was the result of increases in our personnel and depreciation
on computer equipment.
Our research and development expenses increased from $1.7 million, or 12.2%
of net revenues, in the six months ended June 30, 1998 to $4.6 million, or 10.1%
of net revenues, in the six months ended June 30, 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 $4.1 million in the quarter ended June 30, 1998 to $20.6 million in the
quarter ended June 30, 1999. These expenses also increased significantly as a
percentage of net revenues from 54.3% in the quarter ended June 30, 1998 to
78.3% in the quarter ended June 30, 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.
Our sales and marketing expenses increased from $6.1 million, or 44.1% of
net revenues, in the six months ended June 30, 1998, to $37.2 million, or 81.9%
of net revenues, in the six months ended June 30, 1999. This increase both in
absolute dollars and as a percentage of net revenues was primarily the result of
costs associated with developing and maintaining our web site, a branding and
marketing campaign, and an increase in personnel to support increased sales.
We intend to continue to pursue aggressive branding, sales and marketing
campaigns. In addition, our current strategic marketing alliances with America
Online, Excite@Home, 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 June 30, 1999, approximately $33.7 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@Home 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 $878,000 in the quarter ended June 30, 1998 to $2.6 million in
the quarter ended June 30, 1999. These expenses decreased, as a percentage of
net revenues, from 11.6% in the quarter ended June 30, 1998 to 10.0% in the
quarter ended June 30, 1999. This decrease as a percentage of net revenues was
primarily the result of a relatively slower rate of hiring in the executive,
finance, and human resources functions. However, general and administrative
expenses increased in absolute dollars as a result of increased
personnel-related costs and facilities-related expenses.
Our general and administrative expenses increased from $1.5 million, or
11.0% of net revenues, in the six months ended June 30, 1998, to $4.9 million,
or 10.8% of revenues, for the six months ended June 30, 1999. This decrease as a
percentage of net revenues was primarily the result of a relatively slower rate
of hiring in the executive, finance, and human resources functions. However,
general and administrative expenses increased in absolute dollars as a 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.
<PAGE> 11
Amortization of Deferred Compensation and Other Intangible Assets. Expenses
associated with the amortization of deferred compensation and other intangible
assets related to the acquisition of BuyDirect.com in March 1999 and the grant
of stock options, increased from $494,000 in the quarter ended June 30, 1998, to
$12.3 million in the quarter ended June 30, 1999.
Expenses associated with the amortization of deferred compensation and
other intangible assets, increased from $494,000 in the six months ended June
30, 1998, to $13.0 million in the six months ended June 30, 1999. This increase
was primarily the result of the amortization of intangible assets related to the
acquisition of BuyDirect.com. We expect the amortization of goodwill and other
intangible assets to remain at these levels in future periods. Additionally, we
believe it is unlikely that we will generate additional earnings sufficient to
recover the amount of goodwill 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, increased from a net interest expense of
$167,000 in the quarter ended June 30, 1998 to net interest income of $226,000
in the quarter ended June 30, 1999. This increase was primarily a result of
interest income from higher average cash balances related to proceeds from our
follow-on equity offering.
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 $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 June 30, 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, the sale of our 7 1/4% Convertible
Subordinated Notes, and our follow-on public offering of 4,000,000 shares of our
common stock. 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. On April
14, 1999, we completed the sale of 4 million shares of our common stock in a
public offering, which generated net proceeds of $98.5 million.
As of June 30, 1999, we had approximately $124 million of cash compared
with $47 million at June 30, 1998. Our current strategic marketing alliances
provide for remaining payments of approximately $8.7 million in 1999,
approximately $16.4 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 $11.3 million in operating activities in the six months
ended June 30, 1998, and we used net cash of $47.1 million in operating
activities in the six months ended June 30, 1999. Our cash used in operating
activities in the six months ended June 30, 1999 was primarily comprised of the
net effect of:
o a net loss of $53 million;
o an increase in accounts receivable totaling $9.9 million related to
invoiced government contract revenues;
<PAGE> 12
o an increase in cost of deferred revenue and deferred revenue related
to the execution of our U.S. government contracts;
o an increase in accounts payable totaling $6.6 million related to costs
associated with our U.S. government contracts, and
o a non-cash charge of $13 million related to the amortization of
deferred compensation and other intangible assets.
We used net cash in investing activities in the six months ended June 30,
1999 of $62.4 million for acquisitions of leasehold improvements and computer
equipment, investments in short-term securities, as well as costs associated
with the acquisition of BuyDirect.com.
We received net cash of $99.4 million in the six months ended June 30, 1999
from financing activities, primarily from proceeds of our follow-on public
offering of our common stock and the exercise of stock options.
We believe that our cash at June 30, 1999 will be sufficient to meet our
anticipated needs for working capital and capital expenditures for at least the
next 14 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@Home, Yahoo!, 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.
<PAGE> 13
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 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 - NOT APPLICABLE
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
On April 30, 1999, we convened a meeting of the stockholders of our
Common Stock. At the meeting, the stockholders elected as directors: William S.
McKiernan (with 16,016,307 voting for and 6,367 against), Mark L. Breier (with
16,016,307 voting for and 6,367 against), Bert Kolde (with 16,016,107 voting for
and 6,567 against), Ronald S. Posner (with 16,016,107 voting for and 6,567
against), Douglas Carlston (with 16,016,107 voting for and 6,567 against), and
John S. Chen (with 16,016,107 voting for and 6,567 against).
The stockholders also approved an amendment to our Certificate of
Incorporation, as amended, to increase the number of shares of Common Stock
which we are authorized to issue form 50,000,000 shares to 70,000,000 shares
(with 15,944,133 shares voting for, 71,721 against, and 6,820 abstaining).
The stockholders also approved the Beyond.com Corporation 1999 Stock
Incentive Plan (with 14,435,732 shares voting for, 1,580,922 against and 6,020
abstaining) and the Beyond.com Corporation 1999 Employee Stock Purchase Plan
(with 15,999,660 shares voting for, 17,234 against, and 5,780 abstaining).
The stockholders also ratified the appointment of Ernst & Young LLP as the
independent auditors for the Company for the year ending December 31, 1999 (with
16,015,749 shares voting for, 3,127 against, and 3,798 abstaining).
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.
<PAGE> 14
ITEM 7: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*+ 10.1 Contract dated June 23, 1999 between registrant and Intellisys
Technology Corporation
27.1 Financial Data Schedule
</TABLE>
+ Confidential treatment has been requested as to certain portions of this
exhibit.
* To be filed by amendment.
(b) REPORTS ON FORM 8-K
None.
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 August 16, 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
<PAGE> 15
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
+*10.1 Contract dated June 23, 1999 between registrant and Intellisys
Technology Corporation
27.1 Financial Data Schedule
</TABLE>
+ Confidential treatment has been requested as to certain portions of this
exhibit.
* To be filed by amendment.
<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 JUNE 30, 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> APR-1-1999
<PERIOD-END> JUN-10-1999
<CASH> 71,473
<SECURITIES> 52,485
<RECEIVABLES> 18,884
<ALLOWANCES> (1,107)
<INVENTORY> 0
<CURRENT-ASSETS> 171,229
<PP&E> 7,395
<DEPRECIATION> (1,522)
<TOTAL-ASSETS> 308,850
<CURRENT-LIABILITIES> 49,523
<BONDS> 63,250
0
0
<COMMON> 295,063
<OTHER-SE> (99,091)
<TOTAL-LIABILITY-AND-EQUITY> 308,850
<SALES> 26,319
<TOTAL-REVENUES> 26,319
<CGS> 22,321
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 38,403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 226
<INCOME-PRETAX> (34,179)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,179)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,179)
<EPS-BASIC> (0.97)
<EPS-DILUTED> 0
</TABLE>
