<PAGE> 1
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 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 JUNE 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 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF 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 July 31, 2000 was 38,137,210.
===============================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEYOND.COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................... $ 12,217 $ 11,539
Short-term investments .......................... 30,382 54,774
Accounts receivable, net ........................ 20,970 13,843
Prepaid partnership agreements .................. 845 5,151
Prepaid expenses and other current assets ....... 2,318 3,002
Cost of deferred revenue ........................ 18,892 9,388
--------- ---------
Total current assets .............................. 85,624 97,697
Non-current assets:
Property and equipment, net ....................... 13,101 13,077
Deposits and other non-current assets ............. 7,274 7,373
Goodwill and other intangible assets, net ......... 80,626 102,229
--------- ---------
Total assets ...................................... $ 186,625 $ 220,376
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 30,656 $ 12,579
Accrued employee expenses ....................... 3,443 2,046
Other accrued liabilities ....................... 5,010 5,468
Current obligations under capital leases ........ 28 118
Deferred revenue ................................ 20,113 9,393
--------- ---------
Total current liabilities ......................... 59,250 29,604
Non-current obligations under capital leases ...... -- 10
Convertible notes payable ......................... 63,250 63,250
Stockholders' equity:
Common stock .................................... 297,710 295,814
Deferred compensation ........................... (427) (1,444)
Other comprehensive income ...................... 44 269
Accumulated deficit ............................. (233,202) (167,127)
--------- ---------
Total stockholders' equity ........................ 64,125 127,512
--------- ---------
Total liabilities and stockholders' equity ........ $ 186,625 $ 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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<PAGE> 3
BEYOND.COM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED,
---------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues .................................... $ 30,664 $ 26,319 $ 62,003 $ 45,421
Cost of revenues ............................... 26,574 22,321 53,736 38,525
-------- -------- -------- --------
Gross profit .................................... 4,090 3,998 8,267 6,896
Operating expenses:
Research and development ................... 1,517 2,849 5,197 4,580
Sales and marketing ........................ 9,887 20,619 26,879 37,181
General and administrative ................. 3,169 2,631 6,869 4,889
Goodwill and deferred compensation
amortization ............................. 9,227 12,304 20,713 13,036
Restructuring .............................. -- -- 13,707 --
-------- -------- -------- --------
Total operating expenses ........................ 23,800 38,403 73,365 59,686
-------- -------- -------- --------
Loss from operations ............................ (19,710) (34,405) (65,098) (52,790)
Other income (expense), net ..................... (582) 226 (977) (184)
-------- -------- -------- --------
NET LOSS ........................................ $(20,292) $(34,179) $(66,075) $(52,974)
======== ======== ======== ========
Basic and diluted net loss per share ............ $ (0.53) $ (0.97) $ (1.75) $ (1.66)
======== ======== ======== ========
Weighted average shares outstanding used in
computing basic and diluted net loss per share .. 38,014 35,283 37,818 31,843
======== ======== ======== ========
</TABLE>
See notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
BEYOND.COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30,
2000 1999
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................................. $(66,075) $ (52,974)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................... 1,788 1,129
Common shares issued for employee services ...................... 1,039 --
Goodwill and deferred compensation amortization ................. 22,099 13,036
Changes in assets and liabilities:
Accounts receivable ............................................. (7,127) (9,929)
Prepaid expenses and other current assets ....................... 4,990 (4,427)
Cost of deferred revenue ........................................ (9,504) (10,518)
Other noncurrent assets ......................................... 1,578 (803)
Accounts payable ................................................ 18,077 6,558
Accrued employee expenses ....................................... 1,397 702
Other accrued liabilities ....................................... (458) (821)
Deferred revenue ................................................ 10,720 10,978
-------- ---------
Net cash used in operating activities ......................... (21,476) (47,069)
INVESTING ACTIVITIES
Sales (purchases) of short-term investments (net) .................. 23,985 (52,485)
Costs associated with the acquisition of BuyDirect.com ............. -- (5,839)
Costs associated with investment in SoftGallery .................... (995) --
Purchases of property and equipment, net ........................... (1,758) (4,078)
-------- ---------
Net cash used in investing activities ......................... 21,232 (62,402)
FINANCING ACTIVITIES
Payments under capital leases ...................................... (100) (45)
Net proceeds from sale of common stock and exercise of stock
options .......................................................... 1,022 99,441
Net cash provided by financing activities ..................... 922 99,396
-------- ---------
Net (decrease) increase in cash and cash equivalents ................. 678 (10,075)
Cash and cash equivalents at beginning of period ..................... 11,539 81,548
-------- ---------
Cash and cash equivalents at end of period ........................... $ 12,217 $ 71,473
======== =========
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 --
</TABLE>
See notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
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 six-month period ended June 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 for the year ending 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, 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, 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 certain 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 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 and six months ended June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Business
Marketing Severance Development Excess
Agreements and Benefits Expenses Facilities 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
======== ======= ===== ===== ========
</TABLE>
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.
5
<PAGE> 6
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 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.com 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 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 was 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 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.com's ownership of SoftGallery to the previous SoftGallery stockholders.
Under the terms of this agreement, Beyond.com 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.com'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.com retained no significant influence
over the day-to-day operations of SoftGallery under 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 $1,553,000 included in
deposits and other non-current assets as of June 30, 2000.
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
six months ended June 30, 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 7,805,477
and 6,962,032 shares of common stock outstanding as of June 30, 2000 and 1999,
respectively. In addition, diluted earnings per share for the three and six
month periods ended June 30, 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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<PAGE> 7
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 June 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 six
months ended June 30, 2000. 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 Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues
eStores ............... $10,595 $ 6,039 $19,772 $ 9,483
Government Systems .... 14,309 4,661 24,501 7,725
Website ............... 5,760 15,619 17,730 28,213
------- ------- ------- -------
Total ................. $30,664 $26,319 $62,003 $45,421
======= ======= ======= =======
Cost of revenues
eStores ............... $ 8,908 $ 5,052 $16,752 $ 7,763
Government Systems .... 13,052 4,311 22,480 7,119
Website ............... 4,614 12,958 14,504 23,643
------- ------- ------- -------
Total ................. $26,574 $22,321 $53,736 $38,525
======= ======= ======= =======
</TABLE>
Note 7 -- 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 financial statements.
However, the Company 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 ended December 31, 2000. The Company is
currently assessing the potential impact SAB 101 will have on the Company's
financial statements. However, the Company does not expect that the adoption of
SAB 101 will have a material effect on its financial position or results of
operations.
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Note 8 -- 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 quarter and six months ended
June 30, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended, Six Months Ended,
----------------------- ------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss .......................... $(20,292) $(34,179) $(66,075) $(52,974)
Other comprehensive loss:
Change in unrealized gain
(loss) on available-for-sale
investments .................... 138 139 (70) 139
Change in unrealized gain
(loss) on foreign currency
translation..................... (94) -- (155) --
-------- -------- -------- --------
Comprehensive loss ................ $(20,248) $(34,040) $(66,300) $(52,835)
======== ======== ======== ========
</TABLE>
Note 9 -- Subsequent Event -- 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.
The Company has yet to formally respond to Softmat's complaint and has consulted
outside counsel and intends to defend Softmat's lawsuit vigorously. However, the
litigation is in the preliminary stage, and the Company cannot predict its
outcome with any certainty.
Note 10 -- Subsequent Event -- Convertible Note Exchange
On August 8, 2000 the Company announced an offer to exchange 10 7/8%
Convertible Subordinated Notes due December 1, 2003 for the Company's
outstanding 7 1/4% Convertible Subordinated Notes due December 1, 2003. The
exchange offer commenced on August 9, 2000 and is scheduled to expire on
September 6, 2000, unless extended. The exchange offer will be effected on the
basis of $2,000 principal amount of exchange notes for each $3,000 principal
amount of existing notes validly tendered and accepted for exchange in the
exchange offer. The aggregate principal amount of the existing notes is $63.25
million. The exchange notes will be convertible at any time following issuance
and prior to maturity, unless previously redeemed, into common stock of
Beyond.com Corporation at a conversion price of $2.875 per share. The exchange
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. The exchange is not expected to be effective until
September 2000.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this Quarterly Report on Form 10-Q are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended.
When used in this report or elsewhere by management from time to time, the words
"believes," "anticipates," "intends," plans," estimates," and similar
expressions are forward-looking statements. Such forward-looking statements
contained herein include statements relating to the possibility of substantial
revenue growth and profit potential; lower future operating expenses and reduced
cash obligations and the potential for higher gross margins. Actual results
could differ materially from those projected in any forward-looking statements
due to the business risks set forth 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 ON FORM 10-K/A PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 DATED MAY 1, 2000, WITH THE 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 or company resources 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 may be sold or discontinued to enable us
to strategically focus on our eStore Group. As part of this refocus, we reduced
our workforce by approximately 75 employees in January 2000, or approximately
20% of our total workforce, and consolidated facilities and disposed of excess
capital assets. Additionally, we terminated our marketing agreements focused on
generating consumer sales with AOL, CNET, Excite, Yahoo!, Roadrunner and ZDNet
at a cost of approximately $10.1 million in termination fees and associated
prepaid and intangible assets write-offs. We 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), Inprise/Borland, McAfee.com,
Microsoft, Palm Computing, Symantec, Systran Software, and Telex.
We will 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.
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, 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.
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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.
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 six months ended June 30,
2000 our net loss was $66.1 million. We anticipate our operating expenses 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 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 effect our business and cause us to go out of business.
RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 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 an adverse affect on our business and
could impact our ability to meet our debt service payments.
Beyond.com's revenues can be categorized into the following three segments:
eStore revenue was $10.6 million in the quarter ended June 30, 2000, compared
to $6.0 million in the quarter ended June 30, 1999. The increase was primarily
the result of the addition of a number of new eStore customers, including
CADopia, Compaq Computer, Executive Software, HP Shopping Village,
Inprise/Borland, Microsoft, Palm Computing, Systran, Telex and Symantec, and the
fact that our eStore service was relatively new in 1999. eStore revenue
represented 34.6% of total revenue in the second quarter 2000 compared to 22.9%
of total revenue in the second quarter 1999.
eStore revenue was $19.8 million in the six months ended June 30, 2000,
compared to $9.5 million in the six months ended June 30, 1999. The increase was
primarily the result of the addition of a number of new eStore customers,
including CADopia, Compaq
10
<PAGE> 11
Computer, Executive Software, HP Shopping Village, Inprise/Borland, Microsoft,
Palm Computing, Systran, Telex and Symantec, and the fact that our eStore
service was relatively new in 1999.
Government Systems revenue was $14.3 million in the quarter ended June 30,
2000 compared to $4.7 million in the quarter ended June 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, and Patent and Trademark Office contracts. Government Systems revenue
represented 46.7% of total revenue in the quarter ended June 30, 2000 compared
to 17.7% of total revenue in the quarter ended June 30, 1999.
Government Systems revenue was $24.5 million in the six months ended June 30,
2000 compared to $7.7 million in the six months ended June 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, and Patent and Trademark Office contracts.
Website revenue was $5.8 million in the quarter ended June 30, 2000 compared
to $15.6 million in the quarter ended June 30, 1999. The decrease in 2000 was
primarily the result of the change in our business focus. Website revenue
represented 18.8% of total revenue in the second quarter 2000 compared to 59.3%
of total revenue in the second quarter 1999.
Website revenue was $17.7 million in the six months ended June 30, 2000
compared to $28.2 million in the six months ended June 30, 1999. The decrease in
2000 was primarily the result of the change in our business focus.
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 $8.9 million in the quarter ended June 30, 2000
compared to $5.1 million in the quarter ended June 30, 1999. The increase in
2000 was primarily the result of the addition of a number of new eStore
customers including CADopia, Compaq Computer, Executive Software, HP Shopping
Village, Inprise/Borland, Microsoft, Palm Computing, Systran, Telex and
Symantec; and the fact that our eStore service was relatively new in 1999.
eStore's cost of revenues was $16.8 million in the six months ended June 30,
2000 compared to $7.8 million in the six months ended June 30, 1999. The
increase in 2000 was primarily the result of the addition of a number of new
eStore customers including CADopia, Compaq Computer, Executive Software, HP
Shopping Village, Inprise/Borland, Microsoft, Palm Computing, Systran, Telex and
Symantec; and the fact that our eStore service was relatively new in 1999.
Government Systems cost of revenues was $13.1 million in the quarter ended
June 30, 2000 compared to $4.3 million in the quarter ended June 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, and Patent and Trademark Office contracts.
Government Systems cost of revenues was $22.5 million in the six months ended
June 30, 2000 compared to $7.1 million in the six months ended June 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, and Patent and Trademark Office contracts.
Website cost of revenues was $4.6 million in the quarter ended June 30, 2000
compared to $13.0 million in the quarter ended June 30, 1999. The decrease in
2000 was primarily the result of the change in business focus.
Website cost of revenues was $14.5 million in the six months ended June 30,
2000 compared to $23.6 million in the six months ended June 30, 1999. The
decrease in 2000 was primarily the result of the change in our business focus.
GROSS MARGIN. Our gross margin (gross profit as a percentage of net revenues)
decreased from 15.2% in the quarter ended June 30, 1999 to 13.3% in the quarter
ended June 30, 2000. This decrease primarily resulted from an increase in lower
margin government business during 2000.
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<PAGE> 12
Our gross margin (gross profit as a percentage of net revenues) decreased
from 15.2% in the six months ended June 30, 1999 to 13.3% in the six months
ended June 30, 2000. This decrease primarily resulted from an increase in lower
margin government business during 2000.
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 decreased from $2.8 million in the quarter
ended June 30, 1999 to $1.5 million in the quarter ended June 30, 2000,
primarily as a result of a decrease in personnel related costs. These expenses
also decreased as a percentage of net revenues from 10.8% in the quarter ended
June 30, 1999 to 4.9% in the quarter ended June 30, 2000.
Our research and development expenses increased from $4.6 million in the six
months ended June 30, 1999 to $5.2 million in the six months ended June 30,
2000, primarily as a result of an increase in personnel related costs. These
expenses decreased as a percentage of net revenues from 10.1% in the six months
ended June 30, 1999 to 8.4% in the six months ended June 30, 2000.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses consist
primarily of costs associated with promoting our eStore and Government Systems
Groups, including personnel and related expenses. Our sales and marketing
expenses decreased from $20.6 million in the quarter ended June 30, 1999 to $9.9
million in the quarter ended June 30, 2000, primarily as a result of the
cancellation of marketing agreements in Q1 2000. These expenses also decreased
as a percentage of net revenues from 78.3% in the quarter ended June 30, 1999 to
32.2% in the quarter ended June 30, 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
prepaid and intangible assets. As a result, the Company is no longer obligated
to make payments under these agreements in any future periods.
Our sales and marketing expenses decreased from $37.2 million in the six
months ended June 30, 1999 to $26.9 million in the six months ended June 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 81.9% in the six months ended June 30, 1999 to 43.4% in the six
months ended June 30, 2000.
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 $2.6 million in the quarter ended June 30, 1999 to $3.2 million
in the quarter ended June 30, 2000, primarily as a result of an increase in
personnel related costs. These expenses increased as a percentage of net
revenues from 10.0% in the quarter ended June 30, 1999 to 10.3% in the quarter
ended June 30, 2000.
Our general and administrative expenses increased from $4.9 million in the
six months ended June 30, 1999 to $6.9 million in the six months ended June 30,
2000. These expenses increased as a percentage of net revenues from 10.8% in the
six months ended June 30, 1999 to 11.1% in the six months ended June 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 $12.3 million in the quarter ended June 30, 1999, to $9.2 million
in the quarter ended June 30, 2000. This decrease was primarily the result of
assets with a one year life that have been fully amortized. 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.
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 $13.0 million in the six months ended
June 30, 1999, to $20.7 million in the six months ended June 30, 2000. This
increase was primarily the result of two full quarters of amortization of
goodwill in the fiscal 2000 period. 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.
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 net income of $226,000 for the
quarter ended
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<PAGE> 13
June 30, 1999 to a net expense of $582,000 in the quarter ended June 30, 2000.
In the quarter ended June 30, 2000, interest expense totaling approximately
$1,270,000 primarily arose from our 7 1/4% Convertible Subordinated Notes.
Interest expense in the quarter ended June 30, 2000 was offset partially by
interest income totaling approximately $688,000 earned on our cash and
short-term investment balances. In the second quarter 1999, interest expense
totaling approximately $1,272,000 arose from our 7 1/4% Convertible Subordinated
Notes, offset by interest income totaling approximately $1,502,000 from our cash
balances.
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, increased from a net expense of $184,000 for the six months ended
June 30, 1999 to a net expense of $977,000 in the six months ended June 30,
2000. In the six months ended June 30, 2000, interest expense totaling
approximately $2.5 million primarily arose from our 7 1/4% Convertible
Subordinated Notes. Interest expense in the six months ended June 30, 2000 was
offset partially by interest income totaling approximately $1.6 million earned
on our cash and short-term investment balances. In the six months ended 1999,
interest expense totaling approximately $2.5 million arose from our 7 1/4%
Convertible Subordinated Notes, offset by interest income totaling approximately
$2.4 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 June 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. In April 1999 we received net
proceeds of $98.5 million from our second public offering.
As of June 30, 2000, we had approximately $42.6 million of cash, cash
equivalents, and short-term investments compared with $66.3 million at December
31, 1999. We believe that our cash, cash equivalents, and short-term investments
at June 30, 2000 will be sufficient to meet our anticipated needs for working
capital and capital expenditures for at least the next seven to nine 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 $21.5 million in operating activities in the six months
ended June 30, 2000. Our cash used in operating activities in the six months
ended June 30, 2000 was primarily comprised of the net effect of:
o a net loss of $66.1 million offset by non-cash charges for depreciation
and amortization, including amortization of goodwill and deferred
compensation of $22.1 million;
o an increase in accounts receivable totaling $7.1 million primarily related
to the U.S. Government agency receivables;
o a decrease in prepaids of approximately $5.0 million associated primarily
with support contract renewals; and
o an increase in accounts payable totaling $18.1 million.
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<PAGE> 14
We received net cash of $21.2 million from investing activities primarily
related to sales of short-term investments for the six months ended June 30,
2000.
We received net cash of $922,000 in the six months ended June 30, 2000 from
financing activities primarily related to 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 alternative
compliance requirements for continued listing of common stock. The requirements
affecting us include (i) a minimum closing bid price of at least $5.00 per
share, or (ii) net tangible assets of at least $4,000,000. At June 14, 2000, our
common stock had traded below $5.00 for more than 20 consecutive trading days.
Similarly, at June 14, 2000, our net tangible assets were less than $4,000,000.
On June 14, 2000, we received a letter from Nasdaq indicating that unless the
minimum bid price for our common stock returned to at least $5.00 per share for
at least 10 consecutive trading days prior to September 12, 2000, our shares
will be delisted from the Nasdaq National Market on September 14, 2000. Thus, if
we cannot meet the preceding test, or if we cannot raise our net tangible assets
to at least $4,000,000 by September 12, 2000, our shares could be delisted from
Nasdaq National Market on September 14, 2000, if we do not file an appeal. The
result of delisting from the Nasdaq National Market could be a reduction in the
liquidity of any investment in our common stock, the existing notes, or the
exchange 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 also makes it more difficult for us to
raise capital in the future.
IF WE DO NOT SECURE ADDITIONAL CAPITAL TO FUND OUR BUSINESS WE WILL BE UNABLE TO
CONTINUE OUR OPERATIONS
We require substantial working capital to fund our business in the near and
longer term. We expect operating losses and negative cash flow to continue for
the foreseeable future. We will have to raise additional funds to finance our
operations and to make interest payments to holders of our existing notes and
exchange notes. We may elect to seek additional funds at any time. The actual
amount and timing of our longer-term future capital requirements may differ
materially from our estimates. In particular, our estimates may be inaccurate as
a result of changes and fluctuations in our revenues, operating costs and
development expenses.
Our revenues and costs depend upon factors that we cannot control. These
factors include changes in technology and regulations, increased competition and
factors such as Web integrity, seasonality, and performance by third parties in
connection with our operations. Because of these factors, our actual revenues
and costs are uncertain and may vary considerably. These variations may
significantly affect our future need for capital. We may be unable to raise
financing sufficient for our needs, either on suitable terms or at all. If this
should occur, we will be unable to continue operating.
OUR LIMITED EXPERIENCE MAKES IT DIFFICULT TO ASSESS WHETHER WE CAN SUCCESSFULLY
IMPLEMENT OUR NEW BUSINESS MODEL
Historically, our business has focused primarily on the online resale of
commercial off-the-shelf computer software to consumers, small businesses and
large enterprises. We recently refocused our business from a consumer oriented
business model to an e-commerce services provider model that we refer to as our
eStore Group. We must launch and operate our eStore business model successfully
and generate adequate revenue and gross margin to replace an expected decrease
in revenue we may incur in the consumer market as we scale back on our consumer
marketing efforts. We have limited experience in operating our eStore business
and cannot give any assurances that we will be able to successfully build this
business.
IF WE DO NOT OBTAIN SUBSTANTIAL AMOUNTS OF CAPITAL FOR DEBT SERVICE, WE MAY NOT
BE ABLE TO REPAY OUR CONVERTIBLE SUBORDINATED NOTES IN 2003
By selling the convertible subordinated notes in November and December
1998, we incurred $63,250,000 principal amount of indebtedness. Unless we are
able to successfully secure additional financing, we will not have sufficient
cash to fund scheduled payments of principal and interest on our notes. We will
not be able to meet these cash requirements out of cash flow from operations. We
also may be unable to obtain alternative financing. A lack of adequate financing
may adversely affect our ability to:
- respond to changing business and economic conditions;
- make future acquisitions;
- absorb negative operating results; or
- fund capital expenditures or increased working capital requirements.
We could attempt to refinance our outstanding notes if our cash flow from
operations is insufficient to repay them at maturity. However, a refinancing
might not be available on terms acceptable to us, or at all. If we fail to make
necessary payments on the notes, we will be in default under the terms of the
notes, and may also be in default under agreements controlling our other
indebtedness, if any. Any default by us under the notes or on other indebtedness
would adversely affect our financial condition and operations.
IF WE DO NOT SUCCESSFULLY EXECUTE OUR NEW ESTORE BUSINESS STRATEGY, OUR BUSINESS
WILL SUFFER
We must successfully execute our new eStore 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.
In addition, we must successfully maintain the Beyond.com brand. We cannot be
certain that we can accomplish these objectives or that our business strategy
will be successful.
IF WE DECIDE TO DISCONTINUE OUR ONLINE STORE, OUR BUSINESS MAY SUFFER
As part of the implementation of our new strategy to focus on our eStore
Group, we may decide that it is in our best interests to discontinue the
operation of our online store. We cannot predict with any certainty if our focus
on our eStore Group and the discontinuance of our online store will be
profitable. If our financial projections regarding the discontinuance of our
online store are not attained, our business may suffer.
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 William S. McKiernan,
Chairman of our Board of Directors and Ronald S. Smith, our Chief Executive
Officer, subject to approval of his visa application. We have recently
experienced the loss of some senior executive officers and anticipate we may
lose more members of our management team in the near future. Ronald S. Smith,
John Barratt and Bonnie Charboneau-Fowler have accepted positions with us and
our board of directors has approved their respective appointments as President
and Chief Executive Officer, Senior Vice President and Chief Operating Officer
and Vice President, Business Operations. However, Messrs. Smith and Barratt and
Ms. Charboneau-Fowler are not U.S. citizens and their employment with us is
subject to the approval of their visa applications to the U.S. Immigration and
Naturalization Service or similar governmental requirements in order to be
permitted to work in the U.S. If our key employees are denied permission to work
in the U.S., our business may suffer. Competition for qualified management
personnel is intense, particularly in the Silicon Valley area, and we may be
unable to successfully attract, assimilate, or retain sufficiently qualified
personnel in the future.
WE ANTICIPATE SIGNIFICANT OPERATING LOSSES AND NEGATIVE CASH FLOW WHICH MAY
CAUSE US TO GO OUT OF BUSINESS
We expect significant operating losses and negative cash flow to continue
for the foreseeable future. Because we have planned expenses and relatively low
gross margins, our ability to become profitable 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 base our current and future expense levels, which are largely fixed, on
our operating plans and estimates of future revenues. We find sales and
operating results difficult to forecast, because they generally depend on the
volume and timing of the orders we receive. As a result, we may be unable to
adjust our spending in a timely manner to compensate for any unexpected revenue
shortfall. A shortfall in revenues will significantly harm our business and
operating results. In view of the rapidly evolving nature of our business,
proposed and possible future acquisitions, we have difficulty 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 flow from operations, we may be
unable to meet our debt service obligations or working capital requirements,
which would adversely affect our business and may cause us to go out of
business.
WE HAVE INCURRED NET LOSSES SINCE INCEPTION AND EXPECT TO INCUR NET LOSSES FOR
THE FORESEEABLE FUTURE
Because we have refocused our business model to an e-commerce services
provider model from a consumer oriented business model, our prior operating
history does not provide meaningful information upon which you may evaluate our
business and prospects. We incurred net losses of approximately $229.5 million
from inception of our business in 1994 through June 30, 2000. As of June 30,
2000, we had an accumulated deficit of approximately $233.2 million. We expect
to continue to incur significant net operating losses for the foreseeable
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. We have yet to formally respond to
Softmat's complaint. We have consulted outside counsel and we intend to defend
Softmat's lawsuit vigorously. However, the litigation is in the preliminary
stage, and we cannot predict its outcome with any certainty. 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. This litigation has also diverted and is expected to continue
to divert the efforts and attention of some of our key management and technical
personnel. Thus, 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.
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 infringes a patent held by Softmat.
The complaint seeks monetary damages, treble damages, injunctive relief and
attorney's fees for willful infringement. We have yet to formally respond to
Softmat's complaint. We have consulted outside counsel and we intend to defend
Softmat's lawsuit vigorously. However, the litigation is in the preliminary
stage, and we cannot predict its outcome with any certainty.
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
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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>
10.1 Contract dated June 16, 1999 between registrant and Intellisys
Technology Corporation (incorporated by reference to the Company's
registration statement on Form S-3, file no. 333-39024).
10.2 Amended and Restated Electronic Software Reseller/Website Services
Agreement dated May 17, 1999, between Beyond.com Corporation and
Network Associates Inc. (incorporated by reference to the Company's
registration statement on Form S-3, file no. 333-39024).
10.3 Offer letter for Ronald S. Smith
10.4 Offer letter for Curtis A. Cluff
10.5 Offer letter for John P. Barrett
10.6 Offer letter for Bonnie Charbonneau-Fowler
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None.
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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 August 14, 2000.
BEYOND.COM CORPORATION
By /s/ CURTIS A. CLUFF
-----------------------------------
Curtis A. Cluff
Senior Vice President and CFO
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Contract dated June 16, 1999 between registrant and Intellisys
Technology Corporation (incorporated by reference to the Company's
registration statement on Form S-3, file no. 333-39024).
10.2 Amended and Restated Electronic Software Reseller/Website Services
Agreement dated May 17, 1999, between Beyond.com Corporation and
Network Associates Inc. (incorporated by reference to the Company's
registration statement on Form S-3, file no. 333-39024).
10.3 Offer letter for Ronald S. Smith
10.4 Offer letter for Curtis A. Cluff
10.5 Offer letter for John P. Barrett
10.6 Offer letter for Bonnie Charbonneau-Fowler
27.1 Financial Data Schedule
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17
