<PAGE> 1
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 2000
================================================================================
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 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>
3200 PATRICK HENRY DRIVE
SANTA CLARA, CALIFORNIA 94054
(408) 855-3000
(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, 2000 was 38,040,631.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEYOND.COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments .... $ 50,145 $ 66,313
Accounts receivable, net ............................. 6,530 13,843
Prepaid partnership agreements ....................... 1,003 5,151
Prepaid expenses and other current assets ............ 2,191 3,002
Cost of deferred revenue ............................. 4,641 9,388
------------ ------------
Total current assets ................................... 64,510 97,697
Non-current assets:
Property and equipment, net ............................ 12,724 13,077
Deposits and other non-current assets .................. 6,823 7,373
Goodwill and other intangible assets, net .............. 89,647 102,229
------------ ------------
Total assets ........................................... $ 173,704 $ 220,376
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 8,181 $ 12,579
Accrued employee expenses ............................ 3,581 2,046
Other accrued liabilities ............................ 11,173 5,468
Current obligation under capital leases .............. 78 118
Deferred revenue ..................................... 4,049 9,393
------------ ------------
Total current liabilities .............................. 27,062 29,604
Non-current obligations under capital leases ........... -- 10
Convertible notes payable .............................. 63,250 63,250
Stockholders' equity:
Common stock ......................................... 296,924 295,814
Deferred compensation ................................ (622) (1,444)
Accumulated other comprehensive income ............... -- 269
Accumulated deficit .................................. (212,910) (167,127)
------------ ------------
Total stockholders' equity ............................. 83,392 127,512
------------ ------------
Total liabilities and stockholders' equity ............. $ 173,704 $ 220,376
============ ============
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date.
See notes to Condensed Consolidated Financial Statements.
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BEYOND.COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Net revenues ......................................... $ 31,339 $ 19,102
Cost of revenues ..................................... 27,162 16,204
------------ ------------
Gross profit ......................................... 4,177 2,898
Operating expenses:
Research and development ........................... 3,680 1,731
Sales and marketing ................................ 16,992 16,563
General and administrative ......................... 3,700 2,258
Goodwill and deferred compensation amortization .... 11,486 732
Restructuring ...................................... 13,707 --
------------ ------------
Total operating expenses ............................. 49,565 21,284
------------ ------------
Loss from operations ................................. (45,388) (18,386)
Other expenses, net .................................. (395) (410)
------------ ------------
NET LOSS ............................................. $ (45,783) $ (18,796)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE ................. $ (1.23) $ (0.66)
------------ ------------
Weighted average shares outstanding used in
computing basic and diluted net loss per share ..... 37,114 28,364
============ ============
</TABLE>
See notes to Condensed Consolidated Financial Statements.
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BEYOND.COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................................. $ (45,783) $ (18,796)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 326 464
Common shares issued for employee services ...................... 637 --
Goodwill and deferred compensation amortization ................. 12,871 755
Changes in assets and liabilities:
Accounts receivable ............................................. 7,313 5,091
Prepaid partnership agreements .................................. 4,148 (5,779)
Prepaid expenses and other current assets ....................... 811 (982)
Cost of deferred revenue ........................................ 4,747 778
Other noncurrent assets ......................................... 642 90
Accounts payable ................................................ (4,398) (9,310)
Accrued employee expenses ....................................... 1,535 289
Other accrued liabilities ....................................... 5,705 4,415
Deferred revenue ................................................ (5,344) (1,228)
------------ ------------
Net cash used in operating activities ......................... (16,790) (24,213)
INVESTING ACTIVITIES
Sale of short-term investments, net ................................ 22,820 --
Costs associated with the acquisition of BuyDirect.com ............. -- (5,839)
Purchases of property and equipment, net ........................... (65) (1,101)
------------ ------------
Net cash used in investing activities ......................... 22,755 (6,940)
FINANCING ACTIVITIES
Payments under capital leases ...................................... (50) --
Net proceeds from sale of common stock and exercise of stock
options ......................................................... 723 55
Proceeds from sale of common stock to employees .................... 283 --
------------ ------------
Net cash provided by financing activities ..................... 956 55
------------ ------------
Net increase (decrease) in cash and cash equivalents ................. 6,921 (31,098)
Cash and cash equivalents at beginning of period ..................... 11,539 81,548
------------ ------------
Cash and cash equivalents at end of period ........................... $ 18,460 $ 50,450
============ ============
Supplemental disclosure of non-cash financing activities - common
stock issued in acquisition of BuyDirect.com ..................... -- $ 120,542
</TABLE>
See notes to Condensed Consolidated Financial Statements.
4
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BEYOND.COM CORPORATION
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, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1999 filed with the Securities and Exchange
Commission.
Note 2 -- Restructuring Costs
During the quarter ended March 31, 2000, Beyond.com Corporation (the
"Company" or "Beyond.com") recorded a restructuring charge of $13.7 million.
This was a result of a plan to refocus the Company's business from a consumer
retail focused company to a business-to-business e-commerce services company. As
part of this refocus, the Company reduced its workforce by approximately 75
employees in January 2000, or approximately 20% of its total workforce,
consolidated facilities and disposed of excess capital assets. Additionally, the
Company terminated its existing marketing agreements focused on generating
consumer sales with AOL, CNET, Excite, Yahoo! and ZDNet during February and
March 2000. The restructuring charges were comprised of approximately $10.1
million in termination fees and associated prepaid and intangible assets
write-offs related to certain marketing agreements, $2.0 million in employee
termination costs, $700,000 for the write-off of excess equipment and facilities
consolidation, and $900,000 for the write-off of prepaid royalties and
consultation expenses related to the Company's change in business focus. As a
result of terminating the marketing agreements, employee terminations, and
write-offs of equipment, facilities and prepaid royalties, the Company estimates
that its operating expenses will be reduced by approximately $$6.0 million to
$8.0 million quarterly through fiscal 2000. The remaining restructuring reserve,
included in other accrued liabilities, as of March 31, 2000 of approximately
$3.5 million will be drawn down over the next nine months with cash payments
related to the termination of marketing agreements and employee severance and
benefit costs.
The following table summarizes the Company's restructuring activities
for the three months ended March 31, 2000:
<TABLE>
<CAPTION>
Excess
Marketing Severance Equipment and
In thousands Agreements and Benefits Facilities Other Total
--------- ------------ ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Restructuring reserve recorded in
quarter ended March 31, 2000 .... $ 10,123 $ 2,002 $ 693 $ 889 $ 13,707
Cash charges .................... (3,181) (1,330) - (348) (4,859)
Non-cash charges ................ (4,100) - (693) (541) (5,334)
-------- -------- -------- -------- --------
Reserve balance as
of March 31, 2000 ............... $ 2,842 $ 672 $ -- $ -- $ 3,514
======== ======== ======== ======== ========
</TABLE>
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Note 3 -- 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 of Beyond.com in March 1999.
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. The Company accounted for
the merger using the purchase method of accounting. The purchase consideration
of approximately $138.9 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 $5.8 million in
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 4 -- SoftGallery SARL
On October 20, 1999, Beyond.com acquired SoftGallery SARL, a Paris,
France based, online software reseller of digitally downloadable software
products. Under the terms of the acquisition, Beyond.com issued approximately
48,000 shares of its common stock to SoftGallery stockholders, paid cash of
$500,000 and assumed liabilities of $167,000. In addition, Beyond.com is
obligated to issue an additional 192,000 shares to SoftGallery stockholders,
subject to SoftGallery meeting specific European revenue targets and employment
contingencies. The European revenue contingencies are only applicable if
Beyond.com meets certain marketing and business development commitments in
Europe. These shares will be held in escrow and will be delivered in various
intervals through October 2003 as SoftGallery meets the revenue targets and
employment contingencies.
The common stock issued on the date of the acquisition that was not
subject to the revenue targets or employment contingencies was valued at
approximately $600,000, based on the closing price on the date of the
acquisition. The acquisition was accounted for using the purchase method of
accounting. The total purchase price was approximately $1.4 million and included
the fair value of the common shares issued of approximately $600,000, a cash
payment of $500,000, liabilities assumed of $167,000 and acquisition costs of
approximately $100,000. The purchase price was allocated to intangible assets
and is being amortized over the estimated useful life of four years. On the date
of the acquisition, Beyond.com did not record the value of the contingent
consideration to be issued because these amounts were not earned and were
subject to the revenue targets and employment contingencies. The value of the
remaining shares subject to the revenue targets and employment contingencies
will be recorded as compensation expense as the shares are earned pursuant to
the terms of the agreement. As of March 31, 2000, no contingent shares had been
earned (see Note 9).
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). If Beyond.com had reported net income, diluted earnings per share for the
three months ended March 31, 2000 and 1999 would have included the shares used
in the computation of basic and diluted net loss per share as well as additional
common equivalent shares related to options to purchase approximately 6,374,000
and 6,313,000 shares of common stock outstanding as of March 31, 2000 and 1999,
respectively. In addition, diluted earnings per share for the three-month
periods ended March 31, 2000 and 1999, would have included 3,449,000 additional
common equivalent shares related to the convertible notes payable (using the
if-converted method).
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Note 6 -- Segment Reporting
Under Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" (FAS 131), operating
segments are identified as components of an enterprise for which separate
discrete financial information is available that is evaluated by the chief
operating decision maker or decision making group to make decisions about how to
allocate resources and assess performance. The Company's chief operating
decision maker is the Chief Executive Officer.
At March 31, 2000, the Company reported its operations as three
segments: eStores, Government Systems and Website Groups. The following table
presents net revenues and cost of revenues of the Company's three segments for
the three months ended March 31, 2000 and 1999. There were no inter-business
unit sales or transfers. The Company does not report operating expenses,
depreciation and amortization, interest income (expense), income taxes, capital
expenditures, or identifiable assets by its industry segments to the Chief
Executive Officer. The Company's Chief Executive Officer reviews the revenues
from each of the Company's reportable segments, and all of the Company's
expenses are managed by and reported to the Chief Executive Officer on a
consolidated basis. Net revenues and cost of revenues are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Net revenues
eStores ................. $ 9,177 $ 3,444
Government Systems ...... 10,192 3,064
Website ................. 11,970 12,594
------------ ------------
Total ................... $ 31,339 $ 19,102
============ ============
Cost of revenues
eStores ................. $ 7,844 $ 2,711
Government Systems ...... 9,428 2,808
Website ................. 9,890 10,685
------------ ------------
Total ................... $ 27,162 $ 16,204
============ ============
</TABLE>
Note 7 -- Chairman Grant Program
In January 2000, the Company's Board of Directors adopted the Chairman
Grant Program and reserved 1,000,000 shares of common stock for issuance to
selected full-time employees under this plan. William S. McKiernan, the
Company's Chairman of the Board, agreed to contribute 1,000,000 shares of the
Company's common stock owned by him to the Plan over the one year term of the
Plan. Shares will be issued on a quarterly basis, in the total amount of
250,000 shares per quarter. The shares shall be awarded to selected full time
employees who have gone beyond normal expectations in their contributions to the
Company's success as a whole. During the first quarter of 2000, the Company
issued approximately 123,000 shares at a cost of approximately $637,000 and
accrued approximately $1.6 million for an additional 377,000 shares to be issued
related to employees service in the first quarter of 2000.
Note 8 -- Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133). SFAS 133 establishes
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
SFAS 133 requires all companies to recognize derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after July 1, 2000. The Company is currently assessing the
potential impact SFAS 133 will have on the Company's statement of financial
position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). The Company is required
to adopt SAB 101 no later than its quarter ended June 30, 2000. The Company does
not believe that the adoption of SAB 101 will have a material effect on its
financial position or results of operations.
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Note 9 -- Comprehensive Income
Accumulated other comprehensive income(loss) 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 loss for the three months ended March
31, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Net loss ................................. $ (45,783) $ (18,796)
Other comprehensive loss:
Change in unrealized gain (loss) on
available-for-sale investments ...... (269) --
------------ ------------
Comprehensive loss ....................... $ (46,052) $ (18,796)
============ ============
</TABLE>
Note 10 -- Subsequent Event - SoftGallery Divestiture
On April 25, 2000, the Company entered into an agreement to return
80.01% of Beyond.com's ownership of SoftGallery to the previous SoftGallery
stockholders. Under the terms of this agreement, Beyond.com issued approximately
177,000 shares of its common stock and paid cash of $125,000 to SoftGallery
shareholders in order to replace and supercede obligations associated with the
original acquisition (see Note 4). Beyond.com's cost basis for its remaining
19.99% investment in SoftGallery is $2.0 million which includes the cost of the
initial purchase of approximately $1.4 million and the additional divestiture
cost of approximately $600,000. Beyond.com retained no significant influence
over the day-to-day operations of SoftGallery under terms of this agreement.
Effective April 25, 2000, the Company will account for its investment in
SoftGallery under the cost method.
8
<PAGE> 9
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 the possibility of
substantial revenue growth and profit potential; lower future operating expenses
and reduced cash obligations; and the potential for higher gross margins. For a
more detailed discussion of these and other business risks, see our annual
report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Act
of 1934 dated April 5, 2000, filed with the Securities and Exchange Commission.
OVERVIEW
At the end of the third quarter of 1999, Beyond.com made a strategic
decision to refocus the Company's business from a consumer retail focused
company to a business-to-business e-commerce services company. With this new
direction, we plan to focus our resources and expertise in two areas that we
believe have substantial revenue growth and profit potential: our eStore and
Government Systems Groups. While we will still sell software and computer
related products via the Beyond.com website, we do not intend to spend
significant advertising dollars to attract new customers to the website as we
have done in the past. Notwithstanding our recent shift in focus, we intend to
continue to reassess our business and it is possible that, under certain
circumstances, portions of our business maybe sold to enable us to more narrowly
focus on our eStore Group. As part of this refocus, the Company reduced its
workforce by approximately 75 employees in January 2000, or approximately 20% of
its total workforce, and consolidated facilities and disposed of excess capital
assets. Additionally, the Company terminated its existing marketing agreements
focused on generating consumer sales with AOL, CNET, Excite, Yahoo! and ZDNet
during February and March 2000 at a cost of approximately $10.1 million in
termination fees and associated prepaid and intangible assets write-offs. The
Company recorded a restructuring charge of $13.7 million in the first quarter of
2000. Management expects the workforce reduction, facilities consolidation, and
termination of marketing agreements will lower future operating expenses and
reduce cash obligations for the remainder of fiscal 2000.
eStore Group
Beyond.com's eStore Group allows software publishers, hardware
manufacturers and systems OEMs to launch a full-service Web store at a
substantially lower total cost than they would incur if they had developed a
similar system internally. Businesses can choose from an array of services,
including website design and construction, transaction processing, physical and
electronic order fulfillment, customer support, marketing, merchandising
support, fraud management, tax payment, currency conversion and reporting. Our
current eStore customers include CADopia, Compaq Computer, Executive Software,
HP Shopping Village (a subsidiary of Hewlett Packard), McAfee.com, Microsoft,
Palm Computing, Symantec, Systran Software, Telex and Trend Micro.
We derive revenue for our eStore Group from two different business
models. One model, where we earn revenues by reselling the products of our
eStore customers, is a traditional reseller model that is characterized by
higher per transaction revenue but lower margins. The second model, where we are
paid fees based on the transactions we complete and the services we render, is a
transaction and services model which typically has lower revenue per transaction
but higher potential gross margins. In the near term, we expect our gross
margins will fluctuate around our current levels, depending on the mix of these
two models in any given quarter. We believe in the long term, as we migrate to a
higher percentage of customers under the transaction model and leverage our
merchandising expertise and digital service capabilities, our gross margins will
be higher than current levels.
Government Systems Group
Beyond.com's Government Systems Group provides digitally downloadable
software and related services to a growing list of U.S. Government agencies
including the Internal Revenue Service (IRS), Office of the Comptroller of the
Currency (OCC), Bureau of Engraving and Printing (BEP), Office of Thrift
Supervision (OTS), Defense Logistics Agency (DLA), National Imagery and Mapping
Agency (NIMA), Patent and Trademark Office (PTO), and the Department of Defense
(DoD).
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Website
Beyond.com's online store (www.beyond.com), offers customers a
comprehensive selection of software and computer related products, customer
reviews, customer service, and competitive prices. We deliver software to
customers by physically delivering the shrink-wrap software package, or over the
Internet via digital download. We carry approximately 177,000 software stock
keeping units and approximately 13,000 of these stock keeping units can be
delivered to customers via digital download.
Each year since inception, Beyond.com has incurred significant net
losses. These annual net losses have increased from $5.5 million in 1997, to
$31.1 million in 1998, to $124.8 million in 1999. For the three months ended
March 31, 2000 our net loss was $45.8 million. We anticipate our operating
expenses, net of goodwill and deferred compensation amortization, will decrease
from 1999 levels in the remainder of fiscal 2000 as a result of our
restructuring activities in the first quarter of 2000, lower headcount, reduced
advertising and business model transition. However, our de-emphasis on
advertising to promote our brand and our reallocation of resources to the eStore
Group could result in dramatically reduced revenues and increased losses, if the
market does not accept our eStore product or if sales of our eStore product grow
at a slower pace than we expect.
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.
As we currently have relatively low gross margins, our ability to become
profitable given our planned expenses depends on our ability to generate and
sustain 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 do not expect to achieve operating "break even" until at
least the fourth quarter of 2002. We have little experience forecasting our
revenues. 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 and our limited operating history, 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 affect our
business.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET REVENUES. The Company's revenues are primarily derived from two
sources: the operation of eStores and resale of computer software. Our revenues
include sales of software to customers using credit cards, to corporate
customers that are invoiced directly under credit terms, to U.S. Government
agencies pursuant to contractual arrangements and, to a lesser extent, amounts
received from software publishers for advertising and promotion. Revenue from
the sale of software, net of estimated returns, is recognized when persuasive
evidence of an arrangement exists, either shipment of the physical product or
delivery of the electronic product has occurred, fees are fixed and
determinable, and collectibility is considered probable. Sales of software under
contracts with the U.S. Government require continuing service, support and
performance by the Company. Accordingly, the related revenues and costs are
deferred and recognized over the period the service, support and performance are
provided. Revenues derived from software publishers for advertising and
promotion are recognized as the services are provided. Costs of deferred revenue
relate to software licenses purchased from software publishers for sales to U.S.
Government agencies. As our business model shifts away from aggressive
advertising promotion of our consumer business, we may not be able to develop
the eStore service to replace potential lost consumer revenues. This could have
a materially adverse affect on our business, and could adversely impact our
ability to meet our debt service obligations.
Beyond.com's revenues can be categorized into the following three
segments:
- eStore revenue was $9.2 million in the quarter ended March 31, 2000,
compared to $3.4 million in the quarter ended March 31, 1999. The increase was
primarily the result of the addition of a number of new eStore customers,
including Compaq Computer, HP Shopping Village, My Software and Symantec. eStore
revenue represented 29.3% of total revenue in the first quarter 2000 compared to
18.0% of total revenue in the first quarter 1999.
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<PAGE> 11
- Government Systems revenue was $10.2 million in the first quarter 2000
compared to $3.1 million in the first quarter 1999. The increase in 2000 was
primarily the result of the addition of a number of new contracts with U.S.
Government agencies including, the Bureau of Engraving and Printing (BEP),
Department of Defense (DoD), Internal Revenue Service (IRS), and Patent and
Trademark Office (PTO) as well as the expansion of existing contracts.
Government Systems revenue represented 32.5% of total revenue in the quarter
ended March 31, 2000 compared to 16.0% of total revenue in the quarter ended
March 31, 1999.
- Website revenue was $12.0 million in the first quarter 2000 compared
to $12.6 million in the first quarter 1999. The decrease in 2000 was primarily
the result of the change in the Company's business focus. Website revenue
represented 38.2% of total revenue in 2000 compared to 65.9% of total revenue in
1999.
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 U.S. Government agencies.
Beyond.com's cost of revenues can be categorized into the following
three segments:
- eStore's cost of revenues was $7.8 million in the first quarter 2000
compared to $2.7 million in the first quarter 1999. The increase in 2000 was
primarily the result of the addition of new eStore customers, including Compaq
Computer, HP Shopping Village, My Software and Symantec.
- Government Systems cost of revenues was $9.4 million in the first
quarter 2000 compared to $2.8 million in the first quarter 1999. The increase in
2000 was primarily the result of the addition of new contracts with U.S.
Government agencies, including, the BEP, DoD, IRS, and PTO as well as the
expansion of existing contracts.
- Website cost of revenues was $9.9 million in the first quarter 2000
compared to $10.7 million in the first quarter 1999. The decrease in 2000 was
primarily the result of the change in the Company's business focus.
GROSS MARGIN. Our gross margin (gross profit as a percentage of net
revenues) decreased from 15.2% in the first quarter 1999 to 13.3% in the first
quarter 2000. This decrease primarily resulted from a higher percentage of
lower margin government business in the first quarter of 2000 as compared to
the first quarter of 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
primarily consist of personnel and other expenses associated with developing and
enhancing our websites as well as associated facilities related expenses. Our
research and development expenses increased from $1.7 million in the first
quarter 1999 to $3.7 million in the first quarter 2000, primarily as a result of
an increase in personnel related costs. These expenses increased as a percentage
of net revenues from 9.1% in the quarter ended March 31, 1999 to 11.7% in the
quarter ended March 31, 2000.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses consist
primarily of costs associated with promoting our websites, including personnel
and related expenses. Our sales and marketing expenses increased from $16.6
million in the quarter ended March 31, 1999 to $17.0 million in the quarter
ended March 31, 2000. These expenses decreased as a percentage of net revenues
from 86.7% in the quarter ended March 31, 1999 to 54.2% in the quarter ended
March 31, 2000.
During the first quarter of 2000, the Company terminated its existing
marketing agreements with AOL, CNET, Excite, Yahoo!, and ZDNet for a cost of
approximately $10.1 million in termination fees and write-offs associated with
prepaid and intangible assets. As a result, the Company is no longer obligated
to make payments under these agreements in any future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses consist primarily of personnel expenses, legal and accounting expenses,
and corporate facility-related expenses. Our general and administrative expenses
increased from $2.3 million in the quarter ended March 31, 1999 to $3.7 million
in the quarter ended March 31, 2000. These expenses were constant as a
percentage of net revenues of 11.8% in the quarters ended March 31, 1999 and
2000.
AMORTIZATION OF GOODWILL AND DEFERRED COMPENSATION. Expenses associated
with the amortization of goodwill and deferred compensation related to the
acquisition of BuyDirect.com in March 1999 and the grant of stock options,
increased from $732,000 in the quarter ended March 31, 1999, to $11.5 million in
the quarter ended March 31, 2000. This increase was primarily the result of a
full quarter of amortization of goodwill related to the acquisition of
BuyDirect.com during the first quarter of 2000. 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.
11
<PAGE> 12
RESTRUCTURING. The $13.7 million of restructuring charges recorded in the
quarter ended March 31, 2000 were primarily comprised of approximately $10.1
million in termination fees and associated prepaid and intangible assets
write-offs related to certain marketing agreements, $2.0 million in employee
termination costs, $700,000 for the write-off of excess equipment and
facilities consolidation, and $900,000 of other expenses related to the
write-off of prepaid royalties and consultation expenses related to the
Company's change in business focus. No restructuring charges were recorded in
the quarter ended March 31, 1999.
OTHER EXPENSE, NET. Other expense, net, primarily consists of earnings
on our cash and short-term investments, net of interest costs related to our
financing obligations. Other expense, net, decreased from $410,000 for the
quarter ended March 31, 1999 to $395,000 in the quarter ended March 31, 2000. In
the first quarter 2000, interest expense totaling approximately $1,271,000
primarily arose from our 7 1/4% Convertible Subordinated Notes. Interest expense
in the first quarter 2000 was offset primarily by interest income totaling
approximately $867,000 earned on our cash and short-term investment balances. In
the first quarter 1999, interest expense totaling approximately $1,268,000 arose
from our 7 1/4% Convertible Subordinated Notes, offset by interest income
totaling approximately $858,000 from our cash balances.
INCOME TAXES. No provision for income taxes has been recorded due to
operating losses with no current tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 2000, we financed our operations
primarily through private sales of preferred stock, our initial public offering
in June 1998 of 5,750,000 shares of our common stock, our second public offering
in April of 1999 of 3,000,000 shares of our common stock, and the sale of
convertible notes in November and December 1998. 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
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. In
April 1999 we received net proceeds of $98.5 million from our second public
offering.
As of March 31, 2000, we had approximately $50.1 million of cash
compared with $66.3 million at December 31, 1999. We believe that our cash, cash
equivalents, and short-term investments at March 31, 2000 will be sufficient to
meet our anticipated needs for working capital and capital expenditures for at
least the next 12 months. Thereafter, we expect that the cash we generate from
operations likely will not be sufficient to satisfy our longer term cash needs.
We will need significant amounts of cash to make a variety of payments, in the
longer term including:
- payment of the principal and interest on 7 1/4% Convertible
Subordinated Notes when due;
- continued investment in technical infrastructure; and
- payment of ongoing operating 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 that financing will be
available in amounts or on terms acceptable to us, if at all.
We used net cash of $16.8 million in operating activities in the three
months ended March 31, 2000. Our cash used in operating activities in the three
months ended March 31, 2000 was primarily comprised of the net effect of:
o a net loss of $45.8 million offset by non-cash charges for
depreciation and amortization, including amortization of
goodwill and deferred compensation of $12.9 million;
o a decrease in accounts receivable totaling $7.3 million
primarily related to the collection of U.S. Government agency
receivables;
o a decrease in prepaid partnership agreements of approximately
$4.1 million associated primarily with write-offs related to the
restructuring;
o a decrease in accounts payable totaling $4.4 million; and
o an increase in accrued liabilities associated with the
restructuring.
12
<PAGE> 13
We received net cash of $22.8 million from investing activities
primarily related to sales of short-term investments for the three months ended
March 31, 2000.
We received net cash of $1.0 million in the three months ended March 31,
2000 from financing activities primarily related to proceeds from stock option
exercises and employee purchases of the Company's stock.
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
recent change in the century. If not corrected, many computer software
applications could fail or create erroneous results 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 identified all instances where date specific
information is required. We further investigated whether these date fields
contain two or four digits. 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. 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 our hardware
platform providers regarding Year 2000 compliance and researched the date
handling capabilities of applicable Internet protocols. We do not believe that
the underlying systems and protocols that operate in conjunction with our
software applications contain material Year 2000 deficiencies.
We use multiple software systems for our internal business purposes,
including accounting, email, development, human resources, customer service and
support, and sales tracking systems. 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, although we have not received
affirmative documentation in this regard from any of these vendors. To date, we
have not experienced any material Year 2000 problems with regards to our
proprietary software, internally developed systems, and hardware or software
platforms developed by external vendors.
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 -- 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 relate 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
13
<PAGE> 14
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 that have declined in market
value due to changes in interest rates. We have no cash flow exposure due to
rate changes for our $63.3 million Convertible Subordinated Notes.
FOREIGN CURRENCY RISK. To date we have not experienced material risks
associated with foreign currencies as a result of our operations. However, with
our expansion internationally, we will be exposed to risks associated with
fluctuations in foreign currencies during fiscal 2000.
INVESTMENT RISK. To date, we have not invested in equity instruments of
companies.
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>
- ----------
* Confidential treatment has been requested as to certain portions of this
exhibit.
+ To be filed by amendment.
(b) REPORTS ON FORM 8-K
None.
14
<PAGE> 15
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 Santa Clara, California, on May 12, 2000.
BEYOND.COM CORPORATION
By /s/ C. RICHARD NEELY, JR.
--------------------------------------------
C. Richard Neely, Jr.
CFO and Interim President and CEO
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
- ----------
* Confidential treatment has been requested as to certain portions of this
exhibit.
+ To be filed by amendment.
16
<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, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 18,460
<SECURITIES> 31,685
<RECEIVABLES> 7,507
<ALLOWANCES> (977)
<INVENTORY> 730
<CURRENT-ASSETS> 64,510
<PP&E> 16,560
<DEPRECIATION> (3,836)
<TOTAL-ASSETS> 173,704
<CURRENT-LIABILITIES> 27,062
<BONDS> 63,250
0
0
<COMMON> 296,924
<OTHER-SE> (213,532)
<TOTAL-LIABILITY-AND-EQUITY> 173,704
<SALES> 31,339
<TOTAL-REVENUES> 31,339
<CGS> 27,162
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (395)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (45,783)
<INCOME-TAX> 0
<INCOME-CONTINUING> (45,783)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,783)
<EPS-BASIC> (1.23)
<EPS-DILUTED> 0
</TABLE>
