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FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 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 SEPTEMBER 30, 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 OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3200 PATRICK HENRY DRIVE
SANTA CLARA, CALIFORNIA 95054
(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 October 31, 2000 was 40,715,948.
================================================================================
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEYOND.COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................... $ 14,483 $ 11,539
Short-term investments .............................. -- 54,774
Accounts receivable, net ............................ 19,327 13,843
Prepaid partnership agreements ...................... 686 5,151
Prepaid expenses and other current assets ........... 1,950 3,002
Cost of deferred revenue ............................ 13,061 9,388
--------- ---------
Total current assets ........................ 49,507 97,697
Non-current assets:
Property and equipment, net ........................... 13,037 13,077
Deposits and other non-current assets ................. 9,477 7,373
Goodwill and other intangible assets, net ............. 71,517 102,229
--------- ---------
Total assets ................................ $ 143,538 $ 220,376
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 12,846 $ 12,579
Accrued employee expenses ........................... 3,266 2,046
Other accrued liabilities ........................... 4,294 5,468
Current obligations under capital leases ............ -- 118
Deferred revenue .................................... 14,199 9,393
--------- ---------
Total current liabilities ................... 34,605 29,604
Non-current obligations under capital leases .......... -- 10
Convertible notes payable ............................. 17,514 63,250
Stockholders' equity:
Common stock ........................................ 298,739 295,814
Deferred compensation ............................... (167) (1,444)
Other comprehensive income .......................... (95) 269
Accumulated deficit ................................. (207,058) (167,127)
--------- ---------
Total stockholders' equity ............................ 91,419 127,512
--------- ---------
Total liabilities and stockholders' equity ............ $ 143,538 $ 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
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED,
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues ................................................. $ 29,082 $ 36,599 $ 91,085 $ 82,020
Cost of revenues ........................................... 25,013 32,285 78,749 70,809
-------- -------- -------- ---------
Gross profit ............................................... 4,069 4,314 12,336 11,211
Operating expenses:
Research and development ................................ 1,548 2,523 6,745 7,103
Sales and marketing ..................................... 8,450 24,178 35,329 61,359
General and administrative .............................. 2,452 3,500 9,321 8,390
Goodwill and deferred compensation
amortization .......................................... 9,128 12,069 29,841 25,105
Restructuring ........................................... -- -- 13,707 --
-------- -------- -------- ---------
Total operating expenses ........................... 21,578 42,270 94,943 101,957
-------- -------- -------- ---------
Loss from operations ....................................... (17,509) (37,956) (82,607) (90,746)
Other income (expense), net ................................ (1,523) 174 (2,500) (10)
-------- -------- -------- ---------
Loss before extraordinary item ............................. (19,032) (37,782) (85,107) (90,756)
Extraordinary gain on debt exchange ........................ 45,176 -- 45,176 --
-------- -------- -------- ---------
NET INCOME (LOSS) .......................................... $ 26,144 $(37,782) $(39,931) $ (90,756)
======== ======== ======== =========
Basic and diluted net income (loss) per share .............. $ 0.68 $ (1.05) $ (1.06) $ (2.73)
======== ======== ======== =========
Weighted average shares outstanding used in
computing basic and diluted per share amounts ........... 38,243 36,042 37,798 33,259
======== ======== ======== =========
</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>
NINE MONTHS ENDED,
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................................................... $ (39,931) $ (90,756)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................ 3,313 1,925
Accretion.................................................................... 556 --
Common shares issued for employee services................................... 1,147 --
Extraordinary gain on debt exchange.......................................... (45,176) --
Amortization of intangible assets and deferred compensation.................. 31,228 25,105
Changes in assets and liabilities:
Accounts receivable.......................................................... (5,484) (4,015)
Prepaid expenses and other current assets.................................... 5,517 (10,026)
Cost of deferred revenue..................................................... (3,673) (8,205)
Other noncurrent assets...................................................... 1,368 (2,379)
Accounts payable............................................................. 267 (3,265)
Accrued employee expenses.................................................... 1,220 1,190
Other accrued liabilities.................................................... (1,174) 704
Deferred revenue............................................................. 4,806 7,836
---------- -----------
Net cash used in operating activities................................... (46,016) (81,886)
INVESTING ACTIVITIES
Sales (purchases) of short-term investments, net................................ 54,228 (57,798)
Costs associated with the acquisition of BuyDirect.com.......................... -- (5,849)
Costs associated with investment in SoftGallery................................. (1,004) --
Purchases of property and equipment, net........................................ (3,035) (6,504)
---------- -----------
Net cash provided by (used in) investing activities..................... 50,189 (70,151)
FINANCING ACTIVITIES
Payments under capital leases................................................... (128) (92)
Costs related to debt exchange.................................................. (2,168) --
Net proceeds from sale of common stock and exercise of stock options............ 1,067 99,674
---------- -----------
Net cash provided by (used in) financing activities..................... (1,229) 99,582
----------- -----------
Net (decrease) increase in cash and cash equivalents.............................. 2,944 (52,455)
Cash and cash equivalents at beginning of period.................................. 11,539 81,548
---------- -----------
Cash and cash equivalents at end of period........................................ $ 14,483 $ 29,093
========== ===========
Supplemental disclosure of non-cash financing activities:
Common stock issued for acquisition of BuyDirect.com......................... -- $ 120,542
Common stock issued for investment in SoftGallery............................ $ 445 --
Issuance of stock for convertible debt....................................... 1,116 --
</TABLE>
See notes to Condensed Consolidated Financial Statements.
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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 Beyond.com Corporation ("Beyond" or the "Company") management, all
adjustments (consisting primarily of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 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 and 10-K/A 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, the Company 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, Network Associates, Roadrunner, Yahoo! and ZDNet. The restructuring
charges were comprised of approximately $10.1 million in termination fees and
associated prepaid and intangible assets write-offs related to the termination
of the marketing agreements, $2.0 million in employee termination costs,
$900,000 for the write-off of prepaid royalties and consultation expenses
related to the Company's change in business focus, and $700,000 for the
write-off of excess equipment and facilities consolidation.
The following table summarizes the Company's restructuring activities for
the nine months ended September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
BUSINESS
MARKETING SEVERANCE EXCESS DEVELOPMENT
AGREEMENTS AND BENEFITS FACILITIES EXPENSES 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 payments ..................................... (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
Cash payments ..................................... (2,842) (450) -- -- (3,292)
-------- ------- ----- ----- --------
Reserve balance as of June 30, 2000 ............... -- 222 -- -- 222
Cash payments ..................................... -- (222) -- -- (222)
-------- ------- ----- ----- --------
Reserve balance as of September 30, 2000 .......... $ -- $ -- $ -- $ -- $ --
======== ======= ===== ===== ========
</TABLE>
NOTE 3 -- CONVERTIBLE NOTE EXCHANGE
On September 11, 2000, the Company consummated an offer to exchange 10 7/8%
Convertible Subordinated Notes due December 1, 2003 (the "New Notes") for the
Company's outstanding 7 1/4% Convertible Subordinated Notes due December 1, 2003
(the "Old Notes"). On that date certain note holders exchanged approximately
$62.3 million of Old Notes for approximately $41.6 million of New Notes. The New
Notes were recorded at fair market value on the Company's balance sheet. The
fair market value of the New Notes was derived using the closing stock price of
$1.1875 on September 11, 2000. The difference between the face value of the New
Notes ($41.6 million) and the fair market value of the New Notes on the exchange
date ($17.2 million) is being accreted to increase notes payable and charge
interest expense over the term of the New Notes. In the quarter ended September
30, 2000, $556,000 was accreted and charged to interest expense. The exchange
resulted in an extraordinary gain of approximately $45.2 million, which was
recorded by the Company in the quarter ended September 30, 2000. The exchange
offer was effected on the basis of $2,000 principal
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amount of New Notes for each $3,000 principal amount of Old Notes validly
tendered and accepted for exchange in the exchange offer. The New Notes are
convertible at any time prior to maturity, unless previously redeemed, into
common stock of Beyond at a conversion price of $2.875 per share. The New Notes
will be redeemable at the option of the Company on or after December 6, 2001,
subject to certain conditions, and at the option of the holders in the event of
a change in control. As of November 6, 2000, approximately $13.8 million in face
value of New Notes had been converted to approximately 4.8 million shares of
common stock.
NOTE 4 -- BUYDIRECT.COM
On March 30, 1999, a wholly owned subsidiary of Beyond 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 in March 1999.
Upon the closing of this merger, Beyond 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 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 5 -- SOFTGALLERY SARL
On October 20, 1999, Beyond acquired SoftGallery SARL, a Paris, France
based, online software reseller of digitally downloadable software products.
Under the terms of the acquisition, Beyond 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 was 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 were only applicable if Beyond met certain
marketing and business development commitments in Europe. These shares were to
be held in escrow and were to be delivered in various intervals through October
2003 as SoftGallery met 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 was being amortized
over the estimated useful life of four years. On the date of the acquisition,
Beyond 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 were to be recorded as compensation
expense as the shares were earned pursuant to the terms of the agreement.
On April 25, 2000, the Company entered into an agreement to return 80.01% of
Beyond's ownership of SoftGallery to the previous SoftGallery stockholders.
Under the terms of this agreement, Beyond issued approximately 177,000
additional 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. Beyond's cost basis for its remaining 19.99% investment in
SoftGallery is $2.0 million which includes the net cost of the initial purchase
of approximately $1.4 million and the additional divestiture cost of
approximately $600,000. Beyond retained no significant influence over the
day-to-day operations of SoftGallery under the terms of this agreement. The
Company is accounting for its 19.99% investment in SoftGallery under the cost
method. The Company has a net investment of approximately $1,542,000 included in
deposits and other non-current assets as of September 30, 2000.
NOTE 6 -- 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" (SFAS
128). If Beyond had reported net income, diluted earnings per share for the
three and nine months ended September 30, 2000 and 1999 would have included the
shares used in the computation of basic and diluted net loss per share as well
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as additional common equivalent shares related to options to purchase
approximately 6,988,000 and 7,053,000 shares of common stock outstanding as of
September 30, 2000 and 1999, respectively. In addition, diluted earnings per
share for the three and nine month periods ended September 30, 2000 and 1999,
would have included approximately 13,556,000 additional common equivalent shares
related to the convertible notes payable (using the if-converted method).
NOTE 7 -- SEGMENT REPORTING
Under Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" (SFAS 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 its Chief Executive Officer.
At September 30, 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 segments for the
three and nine months ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------- --------- --------- ---------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues:
eStores.................................. $ 11,540 $ 7,333 $ 31,312 $ 16,816
Government Systems....................... 14,384 11,945 38,885 19,670
Website.................................. 3,158 17,321 20,888 45,534
--------- --------- --------- ---------
Total.......................... $ 29,082 $ 36,599 $ 91,085 $ 82,020
========= ========= ========= =========
Cost of revenues:
eStores.................................. $ 9,580 $ 6,247 $ 26,332 $ 14,010
Government Systems....................... 12,924 11,063 35,404 18,181
Website.................................. 2,509 14,975 17,013 38,618
--------- --------- --------- ---------
Total.......................... $ 25,013 $ 32,285 $ 78,749 $ 70,809
========= ========= ========= =========
</TABLE>
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 has accessed the potential
impact SFAS 133 will have on the Company's financial statements and does not
expect that the adoption of SFAS 133 will have a material effect on its
financial position or results of operations.
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 ending December 31, 2000. The Company has
accessed the potential impact SAB 101 will have on the Company's financial
statements and does not expect that the adoption of SAB 101 will have a material
effect on its financial position or results of operations.
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 and foreign currency
translation.
The components of comprehensive loss for the three and nine months ended
September 30, 2000 and 1999 are as follows (in thousands):
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<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED,
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)......................................... $ 26,144 $ (37,782) $ (39,931) $ (90,756)
Other comprehensive income (loss):
Change in unrealized gain (loss) on available-
for-sale investments................................. (199) 68 (269) 207
Change in unrealized gain (loss) on foreign
currency translation................................. 60 -- (95) --
--------- --------- --------- ---------
Comprehensive income (loss)............................... $ 26,005 $ (37,714) $ (40,295) $ (90,549)
========= ========= ========= =========
</TABLE>
NOTE 10 -- SOFTMAT LITIGATION
On July 7, 2000, Softmat, LLC ("Softmat") filed a complaint against the
Company in the United States District Court, Central District of California,
alleging that the Company's merchandising systems for computer software
infringes upon a patent held by Softmat. The complaint seeks monetary damages,
treble damages, injunctive relief and attorney's fees for willful infringement.
Trial has been scheduled for January 16, 2001. While it is difficult or
impossible to predict the outcome of a trial, we believe that the patent is not
valid, and that we do not infringe it.
NOTE 11 -- SUBSEQUENT EVENT - EQUITY LINE
On October 30, 2000, the Company entered into an agreement with a private
investment fund to provide the Company with up to $40 million in private equity
funding. This is a 12 month agreement that can be extended for an additional 12
months at the Company's discretion. Under the agreement, Beyond will have the
right (but not the obligation) to obtain as much as $40 million through the
issuance of common stock in a series of drawdowns. Each drawdown period will
consist of 22 trading days. A minimum of $100,000 and a maximum of $5,000,000
may be drawn in any drawdown period. The drawdowns are subject to the
satisfaction of a number of conditions, including the filing and effectiveness
of a registration statement with the Securities and Exchange Commission covering
the resale of the shares. Pricing will be based upon the volume weighted average
price of the Company's stock during the drawdown period. The Company intends to
use the funds for capital expenditures and working capital needs.
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
"expects," "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; whether we infringe third party patents; the
potential for higher gross margins; and the Company's ability to achieve
breakeven. Actual results could differ materially from those projected in any
forward-looking statements due to the business risks included in but not limited
to the risks described herein under the heading "Factors that may affect future
operating results" and in the other public reports and registration statements
filed by the Company with the Securities and Exchange Commission. For a more
detailed discussion of these and other risks, see our Annual Report filed with
the Commission on Form 10-K and Form 10-K/A pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 dated April 5, 2000 and May 1, 2000,
respectively.
OVERVIEW
At the end of the third quarter of 1999, Beyond.com Corporation ("Beyond" or
the "Company") 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, the Company has focused its resources and
expertise on its eStore and Government Systems Groups. The Company believes that
these two segments have substantial revenue growth and profit potential. While
the Company is still engaged in the sale of software and computer related
products via the Beyond.com website, the Company does not intend to spend
significant advertising dollars or company resources to attract new customers to
the website as it has in the past. As part of this refocus, Beyond reduced its
workforce by approximately 75 employees in January 2000, or approximately 20% of
total workforce, consolidated facilities and disposed of excess capital assets.
Additionally, Beyond has terminated marketing agreements focused on generating
consumer sales with AOL, CNET, Excite, Network Associates, Roadrunner, Yahoo!
and ZDNet at a cost of approximately $10.1 million in termination fees and
associated prepaid and intangible assets write-offs. These costs were recorded
as part of a restructuring charge of $13.7 million in the first quarter of 2000.
The workforce reduction, facilities consolidation and termination of marketing
agreements have lowered operating expenses and reduced cash obligations for the
remainder of fiscal 2000 as compared to the same
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period in fiscal 1999. As of September 30, 2000, the Company had reduced its
headcount by approximately 48% from 389 employees as of December 31, 1999. As of
September 30, 2000, the Company's operating expenses were over 49% less than
operating expenses in the same quarter a year ago. Management is committed to
business process and productivity improvement and thus expects to effect further
reductions in operating expenses and cash obligations.
eSTORE GROUP
Beyond's eStore Group designs, builds and manages online sites that enable
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. The Company's current eStore customers include
CADopia, Inprise/Borland, McAfee.com, Microsoft, Palm Computing, Symantec and
Telex.
We derive revenue for our eStore Group from two different business models.
The first 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 revenues per
transaction but a potential for higher 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. It is Beyond's policy to allow
each client to select which of the two business models, traditional reseller or
the transaction model, to use for their online store. This selection process
makes it difficult to forecast revenues and therefore, Beyond's management
intends to focus on gross margin dollars as the key metric in measuring the
sustainable growth of the Company.
GOVERNMENT SYSTEMS GROUP
Beyond's Government Systems Group provides digitally downloadable software,
digital asset management, and related services to a growing list of U.S.
Government agencies including the Internal Revenue Service, Office of the
Comptroller of the Currency, Bureau of Engraving and Printing, Office of Thrift
Supervision, Defense Logistics Agency, National Imagery and Mapping Agency,
Patent and Trademark Office, and the Department of Defense. Over 60% of the
Company's U.S. Government related revenues in the quarter ended September 30,
2000 were derived from multiple year contracts (one to five years) to supply
specific software at agreed upon pricing.
WEBSITE
Beyond's online store (www.beyond.com), offers customers a comprehensive
selection of software and computer related products, customer reviews, customer
service, and competitive prices. The Company delivers software to customers over
the Internet via digital download or by physically delivering the shrink-wrap
software package. De-emphasis on advertising to promote the Company's brand and
reallocation of resources to the eStore Group has resulted in reduced revenues
for the website segment of the business.
SITUATIONAL SUMMARY
Each year since inception, Beyond has incurred significant net losses. These
annual net losses increased from $5.5 million in 1997, to $31.1 million in 1998,
to $124.8 million in 1999. For the nine months ended September 30, 2000, net
loss was $39.9 million. Operating expenses are anticipated to continue to
decrease from 1999 levels in the remainder of fiscal 2000 as a result of
restructuring activities in the first quarter of 2000, lower headcount, reduced
advertising and business model transition.
In addition, as a result of the BuyDirect.com merger, the Company recorded a
significant amount of goodwill, the amortization of which will adversely affect
our earnings and profitability for the foreseeable future. Beyond recorded
goodwill and other intangible assets of approximately $137 million, to be
amortized through 2002. The Company believes it is likely that Beyond 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.
Beyond's ability to become profitable depends on its ability to manage
expenses and to generate and sustain higher gross margin dollars. If the Company
does achieve profitability, there can be no assurance that it will sustain or
increase profitability on a quarterly or annual basis in the future. Management
expects to achieve "break even" on its earnings before interest, taxes,
depreciation and amortization (EBITDA) by approximately the first quarter of
2002. Current and future expense levels, which are largely fixed, are
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based upon operating plans and estimates of future revenues. In view of the
rapidly evolving nature of the industries in which the Company is engaged, and
Beyond's limited operating history, it is difficult to reliably forecast
revenues. Therefore, management believes that period-to-period comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of the Company's future performance.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999
NET REVENUES. Revenues from the sale of software, net of estimated returns,
are 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 that the
service, support and performance are provided. Revenues derived from software
publishers for advertising and promotion are recognized as the services are
provided. Cost of deferred revenue relates to software licenses purchased from
software publishers for sales to U.S. Government agencies.
Beyond's revenues can be categorized into the following three segments:
eStore revenues improved by approximately 57%, to $11.5 million in the
quarter ended September 30, 2000, compared to $7.3 million in the quarter ended
September 30, 1999. The increase was primarily the result of the addition of new
eStore customers, including CADopia, Inprise/Borland, Microsoft, Palm Computing
and Telex. eStore revenues represented 39.7% of total revenues in the third
quarter 2000 compared to 20.0% of total revenues in the third quarter 1999.
eStore revenues improved by approximately 86%, to $31.3 million in the nine
months ended September 30, 2000, compared to $16.8 million in the nine months
ended September 30, 1999. The increase was primarily the result of the addition
of new eStore customers, including CADopia, Inprise/Borland, Microsoft, Palm
Computing, Symantec and Telex.
Government Systems revenues improved by approximately 20%, to $14.4 million
in the quarter ended September 30, 2000 compared to $11.9 million in the quarter
ended September 30, 1999. The increase in 2000 was primarily the result of the
expansion of existing U.S. Government agency contracts, including the National
Imagery and Mapping Agency. Government Systems revenues represented 49.5% of
total revenues in the quarter ended September 30, 2000 compared to 32.6% of
total revenues in the quarter ended September 30, 1999.
Government Systems revenues improved approximately 98%, to $38.9 million in
the nine months ended September 30, 2000 compared to $19.7 million in the nine
months ended September 30, 1999. The increase in 2000 was primarily the result
of the expansion of existing U.S. Government agency contracts, including the
Defense Logistics Agency, Internal Revenue Service, Patent and Trademark Office
and National Imagery and Mapping Agency.
Website revenues were $3.2 million in the quarter ended September 30, 2000,
down approximately 82% from $17.3 million in the quarter ended September 30,
1999. The decrease in 2000 was primarily the result of the change in our
business focus. Website revenues represented 10.9% of total revenues in the
third quarter 2000 compared to 47.3% of total revenues in the third quarter
1999.
Website revenues were $20.9 million in the nine months ended September 30,
2000, down approximately 54% from $45.5 million in the nine months ended
September 30, 1999. The decrease in 2000 was primarily the result of the change
in our business focus.
GROSS PROFIT AND GROSS MARGIN. Gross profit consists of revenues net of
direct costs of sales, which 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. Gross profit for the quarter ended
September 30, 2000 was marginally lower at $4.1 million compared to $4.3 million
for the same quarter in 1999, primarily due to the $14.2 million decrease in
website sales as referenced above, substantially offset by increasing sales in
the Company's eStores and Government Systems Groups, and a 2.2% increase in
overall gross margins.
Gross profit increased from $11.2 million in the nine months ended September
30, 1999 to $12.3 million in the nine months ended September 30, 1999, primarily
due to a $9.1 million increase in net revenues in the nine months ended
September 30, 2000 as compared to the same nine month period in 1999.
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Gross margin (gross profit as a percentage of net revenues) increased from
11.8% in the quarter ended September 30, 1999 to 14.0% in the quarter ended
September 30, 2000. This increase primarily resulted from an increase in higher
margin eStore business during the quarter ended September 30, 2000 and improved
margins in all three of the Company's segments as compared to the same quarter a
year ago.
Gross margin (gross profit as a percentage of net revenues) decreased from
13.7% in the nine months ended September 30, 1999 to 13.5% in the nine months
ended September 30, 2000. This decrease primarily resulted from a change in
sales mix, as the lower margin Government Systems sales business grew to a
larger overall portion of sales during the first nine months of fiscal 2000,
while higher margin website sales decreased.
RESEARCH AND DEVELOPMENT EXPENSES. 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.
Research and development expenses decreased from $2.5 million in the quarter
ended September 30, 1999 to $1.5 million in the quarter ended September 30,
2000, primarily as a result of a decrease in personnel related costs. These
expenses decreased as a percentage of net revenues from 6.9% in the quarter
ended September 30, 1999 to 5.3% in the quarter ended September 30, 2000.
Research and development expenses decreased from $7.1 million in the nine
months ended September 30, 1999 to $6.7 million in the nine months ended
September 30, 2000, primarily as a result of a decrease in personnel related
costs. These expenses decreased as a percentage of net revenues from 8.7% in the
nine months ended September 30, 1999 to 7.4% in the nine months ended September
30, 2000.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist primarily
of costs associated with promoting our eStore and Government Systems Groups,
including personnel related expenses. Sales and marketing expenses decreased
from $24.2 million in the quarter ended September 30, 1999 to $8.4 million in
the quarter ended September 30, 2000, primarily as a result of a decrease in
personnel related costs and the cancellation of certain marketing agreements in
the first quarter of 2000. These expenses also decreased as a percentage of net
revenues from 66.1% in the quarter ended September 30, 1999 to 29.1% in the
quarter ended September 30, 2000.
During the first quarter of 2000 the Company terminated its existing
marketing agreements with AOL, CNET, Excite, Network Associates, Roadrunner,
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.
Sales and marketing expenses decreased from $61.4 million in the nine months
ended September 30, 1999 to $35.3 million in the nine months ended September 30,
2000, primarily as a result of the cancellation of marketing agreements in the
first quarter of 2000. These expenses also decreased as a percentage of net
revenues from 74.8% in the nine months ended September 30, 1999 to 38.8% in the
nine months ended September 30, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel expenses, legal and accounting expenses and
corporate facility-related expenses. General and administrative expenses
decreased from $3.5 million in the quarter ended September 30, 1999 to $2.5
million in the quarter ended September 30, 2000, primarily as a result of a
decrease in personnel related costs. These expenses decreased as a percentage of
net revenues from 9.6% in the quarter ended September 30, 1999 to 8.4% in the
quarter ended September 30, 2000.
General and administrative expenses increased from $8.4 million in the nine
months ended September 30, 1999 to $9.3 million in the nine months ended
September 30, 2000, primarily associated with changes in personnel related
costs. These expenses were constant at 10.2% of net revenues in the nine months
ended September 30, 1999 and the nine months ended September 30, 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,
decreased from $12.1 million in the quarter ended September 30, 1999, to $9.1
million in the quarter ended September 30, 2000. This decrease was primarily the
result of assets with a one year life that have been fully amortized.
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 $25.1 million in the nine months ended
September 30, 1999, to $29.8 million in the nine months ended September 30,
2000. This increase was primarily the result of three full quarters of
amortization of goodwill in the fiscal 2000 period.
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The Company believes it is unlikely that Beyond will generate additional
earnings sufficient to offset the amount of goodwill and other intangible assets
associated with the acquisition of BuyDirect.com recorded during the period in
which they are amortized.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, primarily consists
of earnings on our cash and short-term investments, net of interest costs
related to our financing obligations. Other income (expense), net, decreased
from net income of $174,000 for the quarter ended September 30, 1999 to a net
expense of $1.5 million in the quarter ended September 30, 2000. In the quarter
ended September 30, 2000, interest expense includes approximately $877,000
related to the Company's 7 1/4% Convertible Subordinated Notes ("Old Notes").
Interest expense also includes $235,000 in interest expense related to the
Company's 10 7/8% Convertible Subordinated Notes ("New Notes"). Additionally,
interest expense also includes $556,000 in note accretion related to the
accretion of the New Notes from the initial recorded fair market value to the
face value at maturity. Interest expense in the quarter ended September 30, 2000
was offset partially by interest income totaling approximately $294,000 earned
on our cash and short-term investment balances. In the quarter ended September
30, 1999, interest expense totaling approximately $1,146,000 arose from our Old
Notes, offset by interest income totaling approximately $1,450,000 from our cash
balances.
Other income (expense), net, increased from a net expense of $10,000 for the
nine months ended September 30, 1999 to a net expense of $2.5 million in the
nine months ended September 30, 2000. In the nine months ended September 30,
2000, interest expense totaling approximately $3.2 million primarily arose from
our Old Notes. Interest expense in the nine months ended September 30, 2000 was
offset partially by interest income totaling approximately $1.8 million earned
on our cash and short-term investment balances. In the nine months ended
September 30, 1999, interest expense totaling approximately $3.4 million arose
from our Old Notes, offset by interest income totaling approximately $3.8
million 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 September 30, 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 $48.8 million from our initial public
offering and a concurrent sale of common stock to America On-Line. In 1998, we
also raised net cash proceeds totaling approximately $63.3 million through the
sale of our 7 1/4% Convertible Subordinated Notes ("Old Notes"). In April 1999
we received net proceeds of $98.5 million from our second public offering. On
September 11, 2000, the Company consummated an offer to exchange 10 7/8%
Convertible Subordinated Notes (the "New Notes") for the Company's outstanding
Old Notes. The exchanged resulted in approximately $62.3 million of Old Notes
being exchanged for approximately $41.6 million of New Notes. The New Notes were
recorded at fair market value on the Company's balance sheet.
As of September 30, 2000, we had approximately $14.5 million of cash and
cash equivalents compared with $66.3 million of cash, cash equivalents and
short-term investments at December 31, 1999. We believe that our cash and cash
equivalents at September 30, 2000 will be sufficient to meet our anticipated
needs for working capital and capital expenditures for at least the next four to
six months. To supplement our cash availability we obtained an equity line with
a private investment fund (the "Equity Line"). Under this facility, we have the
right (but not the obligation) to obtain up to $40 million over the next 24
months. Each drawdown period will consist of 22 trading days. A minimum of
$100,000 and a maximum of $5,000,000 may be drawn in any drawdown period. The
common stock issued pursuant to this facility will be based on the volume
weighted average price of the Company's stock during the drawdown period and
limited to a maximum share issuance of no more than 20% of the estimated trading
volume of the Company's common stock as measured by the preceding 30 trading
days. The Company has undertaken to file a registration statement in order to
qualify the shares issued to the fund for resale. Upon successful completion of
the registration, this Equity Line could provide enough funding to satisfy the
Company's cash requirement for the next 12 months or longer, depending on the
market price of the stock over that period of time. If the price of the stock
remains less than $1.00, the Company may not be able to sell enough shares
through this Equity Line to meet cash requirements over the coming year due to
the volume limitations noted above.
We used net cash of $46.0 million in operating activities in the nine months
ended September 30, 2000. Our cash used in operating activities in the nine
months ended September 30, 2000 was primarily comprised of the net effect of:
- a net loss of $39.9 million adjusted by non-cash charges for
depreciation and amortization, including amortization of goodwill and
deferred compensation of $31.2 million and an extraordinary gain on debt
retirement of $45.2 million;
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- an increase in accounts receivable totaling $5.5 million primarily
related to the U.S. Government agency receivables; and
- a decrease in prepaids of approximately $5.5 million associated
primarily with support contract renewals.
We received net cash of $50.2 million from investing activities primarily
related to sales of short-term investments for the nine months ended September
30, 2000.
We used net cash of $1.2 million in the nine months ended September 30, 2000
from financing activities primarily related costs associated with the debt
exchange offset by proceeds from stock option exercises and employee purchases
of the Company's stock.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q contains forward looking statements which
involve risks and uncertainties. Our actual results could differ materially from
those anticipated by such forward looking statements as a result of such
factors, including those set forth below.
POTENTIAL DELISTING OF OUR COMMON STOCK BY NASDAQ
Our common stock trades on the Nasdaq National Market which has certain
compliance requirements for continued listing of common stock. If the minimum
closing bid price per share is less than $1.00 for a period of 30 consecutive
business days, our shares may be delisted following a 90 day notice period
during which the minimum closing bid price must be $1.00 or above per share for
a period of 10 consecutive business days, if we do not file an appeal. As of the
close of business on November 13, 2000, our common stock closed at a minimum bid
price per share of $0.53, and has closed below $1.00 per share for 23
consecutive business days. We anticipate that we would appeal any determination
to delist our common stock from the Nasdaq National Market. The result of
delisting from the Nasdaq National Market could be a reduction in the liquidity
of any investment in our common stock or either of our convertible notes.
Delisting could also reduce the ability of holders of our common stock to
purchase or sell shares as quickly and as inexpensively as they have done
historically. This lack of liquidity would make it more difficult for us to
raise capital in the future.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND WE MAY BE UNABLE TO ACCESS OUR
EQUITY LINE
We currently anticipate that our available cash resources combined with the
maximum drawdown under the Equity Line will be sufficient to meet our
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, if our stock price and trading volume stay at
current levels, we will not be able to draw down all $40 million under the
Equity Line, and our available cash resources may meet our requirements for only
the next four to six months. Also, if our common stock is delisted from the
Nasdaq National Market, we may be prohibited from drawing down on the Equity
Line. In addition, business and economic conditions may not make it feasible to
draw down under the Equity Line at every opportunity. We may need to raise
additional capital to fund more rapid expansion, to develop new services and to
enhance existing services to respond to competitive pressures, and to acquire
complementary businesses or technologies. We may not be able to obtain
additional financing from other sources on terms favorable to us, if at all. If
adequate funds are not available or are not available on terms favorable to us,
we may not be able to continue to operate our business pursuant to our business
plan.
WE OPERATE IN A RELATIVELY NEW AND POTENTIALLY VOLATILE INDUSTRY
Historically, our business has focused primarily on the online resale of
commercial off-the-shelf computer software to consumers, small businesses and
large enterprises. In January 2000, we refocused our business from a consumer
oriented business model to an e-commerce services provider model that we refer
to as our eStore Group. This is a relatively new and potentially volatile
industry and as such, we cannot give any assurances that we will be able to
successfully build this business.
We must successfully execute our business strategy. This entails adding
significant new eStore clients in the software and computer peripherals markets
while adding additional high margin services that are valued by our customers.
We cannot be certain that we can accomplish these objectives or that our current
business strategy will be successful.
Because we have refocused our business model to an e-commerce services
provider model from a consumer oriented business model, our operating history
prior to the second quarter of this year does not provide meaningful information
upon which you may evaluate our business and prospects. We incurred net losses
of approximately $203.4 million from inception of our business in 1994
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through September 30, 2000. As of September 30, 2000, we had an accumulated
deficit of approximately $207.1 million. Although our operating losses have
significantly decreased quarter over quarter during the last two quarters, we
expect to continue to incur losses and negative cash flow for at least the next
five quarters on an EBITDA basis.
WE DEPEND ON THE CONTINUED SERVICE OF KEY PERSONNEL WHOSE EXPERTISE WOULD BE
DIFFICULT TO REPLACE AND WE MAY BE UNABLE TO RETAIN QUALIFIED PERSONNEL IN THE
FUTURE
Our future success depends on the continued service and performance of our
senior management and other key personnel, particularly, Ronald. S. Smith, our
Chief Executive Officer. Competition for qualified management personnel is
intense, particularly in the Silicon Valley area, and we may be unable to
successfully attract or retain sufficiently qualified personnel in the future.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS
Other parties may assert infringement or unfair competition claims against
us. In the past, other parties have sent us notice of claims of infringement of
proprietary rights, and we expect to receive other notices in the future. We
cannot predict whether others will assert claims of infringement against us, or
whether any past or future assertions or prosecutions will adversely affect our
business. If we are forced to defend against any such claims, whether they are
with or without merit or are determined in our favor, then we may face wasted
time, costly litigation, diversion of technical and management personnel, or
product shipment delays. As a result of such a dispute, we may have to develop
non-infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may be unavailable on terms
acceptable to us, or at all. If there is a successful claim of product
infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, it could
adversely affect our business.
WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING
On July 7, 2000, Softmat, LLC filed a complaint against us in the United
States District Court, Central District of California, alleging that our
merchandising systems for computer software infringes a patent held by Softmat.
The complaint seeks monetary damages, treble damages, injunctive relief and
attorney's fees for willful infringement. Trial has been scheduled for January
16, 2001. We believe that the patent is not valid, and that we do not infringe
it. However, the litigation process is inherently uncertain. Patent litigation
is particularly complex and can extend for a protracted time, which can
substantially increase the cost of such litigation. Regardless of the eventual
outcome, our defense of this litigation may be costly and time consuming. Should
the outcome of the litigation be adverse to us, we could be required to pay
significant monetary damages and could be enjoined from selling those of our
products that infringe Softmat's patent unless we are able to negotiate a
license from Softmat. In the event we obtain a license from Softmat, we would
likely be required to make royalty payments with respect to sales of our
products covered by the license. Any such payments would increase our cost of
revenues and reduce our gross profit. If we are required to pay significant
monetary damages, are enjoined from selling any of our products or are required
to make substantial royalty payments pursuant to any such license agreement, our
business would be significantly harmed.
WE MAY NOT BE ABLE TO COMPETE WITH MORE ESTABLISHED OR MORE SPECIALIZED
COMPANIES
Increased competition may cause us to reduce pricing or increase service and
marketing expenses that could reduce operating margins and funds available to
improve our technology, promote our business and continue operations. We cannot
assure that we can compete successfully against current and future competitors.
Failure to compete successfully against our current and future competitors could
materially hurt our business. We face competition primarily on two fronts:
e-commerce service vendors of various types and government resellers and systems
integrators.
OUR FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SECURE AND
MAINTAIN FUTURE CONTRACTS WITH U.S. GOVERNMENT AGENCIES
We have several contracts with U.S. Government agencies, which accounted
for approximately 14% of our net revenues in 1999 and 24% of our net revenues in
the nine months ended September 30, 2000. Each of these contracts is subject to
annual review and renewal by the government, and may be terminated at any time.
Each government contract, option and extension is only valid if the government
appropriates enough funds for expenditure on such contracts, options or
extensions. Accordingly, we might fail to derive any revenue from sales of
software to the U.S. Government in any given future period. If the U.S.
Government fails to renew or terminates any of these contracts it would
adversely affect our business and results of operations.
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OUR REVENUE GROWTH MAY BE ADVERSELY AFFECTED BY THE LOSS OF SOME OF OUR ESTORE
CLIENTS
Management intends to evaluate each of its current contracts with eStore
clients and to ensure that every eStore provides an acceptable contribution
margin to the Company. During this process the Company will seek to either
renegotiate any contract which is judged to provide an unacceptable contribution
margin, or to discontinue the business relationship at the end of its stated
term. Should the Company be unsuccessful in renegotiating any contract, thereby
losing a particular customer at the end of its contract term, or should a
customer choose not to renew a contract of their own accord, the result may not
have a material negative impact on the company's profitability goals, but such
an event may have a negative impact on the revenue and future revenue growth of
the company.
WE CONTINUE TO EVALUATE THE CARRYING AMOUNT OF OUR LONG-LIVED ASSETS, INCLUDING
GOODWILL, WHICH COULD RESULT IN DOWNWARD ADJUSTMENTS OF THE VALUE OF THOSE
ASSETS ON OUR BALANCE SHEET
We review our long-lived assets, including goodwill and other intangible
assets, for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. We believe that the
carrying value of our goodwill and intangible assets do not require adjustment
at this time. If future events or changes in circumstances occur that indicate
that the carrying value of these assets may not be recoverable, we may make
downward adjustments to the carrying value of these assets on our balance sheet
in the future.
WE MAY NOT ACCURATELY FORECAST OUR SALES AND REVENUES DUE TO A VARIETY OF
FACTORS, WHICH WILL CAUSE QUARTERLY FLUCTUATIONS IN OUR OPERATING RESULTS AND
MAY RESULT IN VOLATILITY IN OUR STOCK PRICE
Our revenues and operating results may fluctuate significantly from quarter
to quarter due to a number of factors, not all of which are in our control.
These factors include:
- our ability to attract and retain new customers and maintain customer
satisfaction;
- new websites, services and products introduced by us or by our
competitors;
- price competition;
- decreases in the growth, use or consumer acceptance of the Internet and
online services for the purchase of consumer products;
- the termination of contracts with major purchasers, particularly eStore
customers and U.S. Government agencies;
- technical difficulties or system downtime affecting the Internet or
online services, generally, and eStore websites for customers or the
operation of our website;
- the failure of Internet bandwidth to increase significantly over time
and/or an increase in the cost to consumers of obtaining or using
Internet bandwidth;
- the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and
infrastructure;
- government regulations related to use of the Internet for commerce or
sales and distribution of software; and
- general economic conditions and economic conditions specific to the
Internet, online commerce and the software industry.
OUR RESULTS FROM OPERATIONS ARE SUBJECT TO SEASONAL FLUCTUATIONS
Seasonal fluctuations in the software industry, Internet and commercial
online service usage, and traditional retail, government and corporate seasonal
spending patterns and advertising expenditures may affect our business. In
particular, Internet and online service usage and its rate of growth may decline
in the summer. These seasonal patterns may cause quarterly fluctuations in our
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operating results and could adversely and materially affect our financial
performance. Our gross margins are likely to fluctuate over time. A number of
factors may impact our gross margins, including:
- the mix of revenues between our eStores Group, Government Systems Group
and our website;
- the mix of transaction versus reseller revenue in our eStore business;
- the mix of revenues from sales of shrink-wrap products and products
delivered through digital download;
- the mix of revenues from sales of software products and computer
peripheral products (such as joysticks, personal organizers and related
products);
- the amount of advertising or promotional revenues we receive; and
- our ability to rapidly grow value added services for our eStore
business.
OUR COMMON STOCK PRICE IS VOLATILE
The market price for our common stock is volatile and has fluctuated
significantly to date. The trading price of our common stock is likely to
continue to be highly volatile and subject to wide fluctuations in response to
factors including the following:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations, new sales formats or new
products or services by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online commerce industries;
- changes in the economic performance and/or market valuations of other
Internet, online service or retail companies;
- announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel; and
- sales of common stock.
In addition, the securities market has experienced extreme price and volume
fluctuations, and the market prices of the securities of Internet-related and
technology companies have been especially volatile. These broad market and
industry factors may adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of stock, many companies have been the object
of securities class action litigation. If we were to be sued in a securities
class action, it could result in substantial costs and a diversion of
management's attention and resources.
OUR SUCCESS IS SUBJECT TO RISKS ASSOCIATED WITH DIGITAL DOWNLOAD
Our success will depend in part on our customers accepting digital download
as a method of buying software. We typically derive higher gross margins from
software sales to consumers via digital download than we do on shrink-wrap
software sales. Digital download is a relatively new method of selling software
products and its growth and market acceptance is highly uncertain and subject to
a number of factors, including:
- the availability of sufficient network bandwidth to enable purchasers to
rapidly download software;
- the impact of time-based Internet access fees;
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- the number of software titles that are available for purchase through
digital download as compared to those available through traditional
methods;
- the level of consumer comfort with the process of downloading software;
and
- the relative ease of this process and transaction security concerns.
We believe there is a maximum size of a software product that most
consumers are willing to purchase via digital download. We also believe that the
size of new software products will continue to increase and that these software
products will be unsuitable for digital download without significant increases
in network bandwidth. It will adversely affect our business if digital download
fails to achieve wide spread market acceptance. Even if digital download
achieves widespread acceptance, we might not overcome the substantial existing
and future technical challenges associated with electronically delivering
software reliably and consistently on a long-term basis. Our business
environment is characterized by rapid technological change, frequent new product
enhancements and uncertain product life cycles. If we are unable to enhance our
digital download technology in a timely and cost-effective manner, we may lose
customers to our competitors. This would also adversely affect our business.
OUR SYSTEMS ARE LOCATED IN A SINGLE FACILITY WHICH SUBJECTS US TO THE RISK OF
SYSTEM FAILURE
Our success, in particular our ability to successfully receive and fulfill
orders and provide high quality customer service, largely depends on the
efficient and uninterrupted operation of our computer and communications
systems. Substantially all of our development and management systems are in a
single facility we lease in Santa Clara, California.
Our systems and operations are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. We have no formal disaster recovery plan and carry insufficient
business interruption insurance to compensate us for losses that may occur.
Furthermore, our security mechanisms or those of our suppliers may not prevent
security breaches or service breakdowns. Despite our implementation of security
measures, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. These events could cause
interruptions or delays in our business, loss of data or render us unable to
accept and fulfill customer orders.
IF WE ARE UNABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE IN A TIMELY MANNER, WE
MAY LOSE CUSTOMERS TO OUR COMPETITORS
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online store. The Internet and
the online commerce industry are characterized by rapid technological change,
changes in user and customer requirements and preferences and frequent new
product and service introductions. If competitors introduce products and
services embodying new technologies or if new industry standards and practices
emerge, then our existing Website, proprietary technology and systems may become
obsolete. Our future success will depend on our ability to do the following:
- both license and internally develop leading technologies useful in our
business;
- enhance our existing services;
- develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective customers; and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
To develop our website, our eStore websites and other proprietary
technology entails significant technical and business risks. We may use new
technologies ineffectively, or we may fail to adapt our website, proprietary
technology and transaction processing systems to customer requirements or
emerging industry standards. If we face material delays in introducing new
services, products and enhancements then our customers may forego the use of our
services and use those of our competitors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We are exposed to the impact of interest rate changes, foreign currency
fluctuations, and change in the market values of our investments or liabilities
held in foreign currencies.
INTEREST RATE RISK. We have no cash flow exposure due to rate changes on
either of our Convertible Subordinated Notes and no other significant
investments or debt instruments are tied to variable interest rates.
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 may be exposed to risks associated with
fluctuations in foreign currencies during future periods.
INVESTMENT RISK. To date, we have not invested in equity instruments of
companies.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 7, 2000, Softmat, LLC filed a complaint against us in the United
States District Court, Central District of California, alleging that our
merchandising systems for computer software infringe a patent held by Softmat.
The complaint seeks monetary damages, treble damages, injunctive relief and
attorney's fees for willful infringement. Trial has been scheduled for January
16, 2001. While it is difficult or impossible to predict the outcome of a trial,
we believe that the patent is not valid, and that we do not infringe it.
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 September 7, 2000, we convened a meeting of the holders of our Common
Stock. At the meeting, the stockholders elected as directors: William S.
McKiernan (with 31,744,134 voting for and 366,566 against), Ronald S. Smith
(31,788,940 voting for and 331,760 against), Mark W. Bailey (31,777,433 voting
for and 333,267 against), Richard Scudellari (31,760,904 voting for and 349,796
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 from 70,000,000 shares to 120,000,000 shares
(with 31,293,040 shares voting for, 750,225 against and 67,435 abstaining).
The stockholders also ratified the appointment of Ernst & Young LLP as the
independent auditors for the Company for the year ending December 31, 2000 (with
31,897,712 shares voting for, 165,025 against and 47,963 abstaining).
ITEM 5. OTHER INFORMATION -- NOT APPLICABLE
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None.
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<PAGE> 19
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 November 14, 2000.
BEYOND.COM CORPORATION
By /s/ CURTIS A. CLUFF
-----------------------------------------
Curtis A. Cluff
Senior Vice President and CFO
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<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
20
