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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 0-21379
ROWECOM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3370008
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 ABERDEEN AVENUE, CAMBRIDGE, MA 02138
(Address of principal executive office)
(617) 588-2800
(Registrant's telephone number, including area code)
15 SOUTHWEST PARK, WESTWOOD, MA 02090
(Former name, former address and former
fiscal year, if changed since last report)
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 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 outstanding of the registrant's common stock as of
July 31, 2000 was 12,397,561
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ROWECOM INC.
INDEX
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
------ ------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROWECOM INC.
Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 .................... 3
Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and June 30, 1999....................................................... 4
Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and June 30, 1999................................................................ 5
Notes to Consolidated Financial Statements ............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................. 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................... 14
Item 4. Submission of Matters to a Vote of Security Holders...................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................ 15
Signatures.............................................................................. 16
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ROWECOM INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
2000 1999
------------------ ----------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 10,130 $ 13,264
Accounts receivable (net of allowance for doubtful accounts of
$1,801 and $1,847) 52,602 137,512
Other current assets 6,085 12,306
------------------ ----------------------
Total current assets 68,817 163,082
Property and equipment, net 10,743 10,787
Goodwill, net 6,094 7,411
Intangible and other assets, net 42,427 34,328
------------------ ----------------------
Total assets $ 128,081 $ 215,608
================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable 25,138 51,595
Accrued expenses 7,096 9,005
Accrued compensation 1,867 2,511
Customer advances 20,368 20,095
Deferred revenue 24,443 11,187
Loans payable 6,956 61,060
------------------ ----------------------
Total current liabilities 85,868 155,453
Stockholders' equity:
Common stock, $.01 par value per share, 34,000,000 shares authorized,
12,393,625 and 10,377,559 shares issued and
outstanding, respectively 124 104
Additional paid-in capital 107,761 89,907
Treasury stock, at cost (53) (53)
Accumulated deficit (63,500) (29,338)
Accumulated other comprehensive loss (2,119) (465)
------------------ ----------------------
Total stockholders' equity 42,213 60,155
------------------ ----------------------
Total liabilities and stockholders' equity $ 128,081 $ 215,608
================== ======================
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are
an integral part of these statements.
3
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ROWECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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>
Revenues $ 38,855 $ 1,981 $ 90,642 $ 3,680
Cost of revenues 34,836 1,868 82,176 3,395
------------ ------------ ------------ ------------
Gross profit 4,019 113 8,466 285
Operating expenses:
Sales and marketing 9,737 2,653 18,408 4,547
Research and development 2,908 1,027 5,869 1,844
General and administrative 3,442 1,172 7,604 1,898
Amortization of goodwill and intangibles 1,855 204 3,468 204
------------ ------------ ------------ ------------
Total operating expenses 17,942 5,056 35,349 8,493
------------ ------------ ------------ ------------
Loss from operations (13,923) (4,943) (26,883) (8,208)
Interest and other income, net (902) 817 (2,723) 1,068
------------ ------------ ------------ ------------
Loss before income taxes and
extraordinary item (14,825) (4,126) (29,606) (7,140)
Provision for income taxes 249 55 469 55
------------ ------------ ------------ ------------
Loss before extraordinary item (15,074) (4,181) (30,075) (7,195)
Extraordinary loss (4,087) - (4,087) -
------------ ------------ ------------ ------------
Net loss (19,161) (4,181) (34,162) (7,195)
Accretion of dividends on redeemable preferred stock - - - 370
------------ ------------ ------------ ------------
Net loss to common stockholders $ (19,161) $ (4,181) $ (34,162) $ (7,565)
============ ============ ============ ============
Basic and diluted net loss per share
Historical
Net loss applicable to common stockholders
(before extraordinary loss) $ (15,074) $ (4,181) $ (30,075) $ (7,565)
Net loss applicable to common stockholders
(after extraordinary loss) $ (19,161) $ (4,181) $ (34,162) $ (7,565)
Basic and diluted net loss per share to common
stockholders (before extraordinary loss) $ (1.34) $ (.41) $ (2.78) $ (1.10)
Basic and diluted net loss per share to common
stockholders (after extraordinary loss) $ (1.71) $ (.41) $ (3.16) $ (1.10)
Weighted average shares used in computing basic and
diluted net loss per share 11,212 10,090 10,799 6,873
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are
an integral part of these statements.
4
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ROWECOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------
JUNE 30, 2000 JUNE 30, 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (34,162) $ (7,195)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,947 412
Amortization of discount on convertible notes 2,449 -
Loss on disposal of intangibles 2 -
Changes in operating assets and liabilities:
Accounts receivable 82,656 1,374
Other current and long term assets 639 562
Accounts payable (24,878) 301
Income taxes payable 108 -
Accrued expenses and accrued compensation (2,271) (782)
Customer advances 4,281 -
Deferred revenue 13,330 -
---------------- ----------------
Net cash provided by (used in) operating activities 47,101 (5,328)
Cash flows from investing activities:
Purchase of property and equipment (1,663) (826)
Purchase of marketable securities - (12,487)
Purchase of intangible assets - (2)
Cash paid to acquire business, net of cash acquired (672) (5,620)
Cash paid for debt issuance costs (11) -
Investment in subsidiary (5) -
---------------- ----------------
Net cash used in investing activities (2,351) (18,935)
Cash flows from financing activities:
Net proceeds from the issuance of common stock - 51,681
Loan repayments (101,432) (1,412)
Loan proceeds 53,216 -
---------------- ----------------
Net cash (used in) provided by financing activities (48,216) 50,269
Effect of exchange rates on cash 332 (36)
Net (decrease) increase in cash and cash equivalents (3,134) 25,970
Cash and cash equivalents, beginning of period 13,264 16,051
---------------- ----------------
Cash and cash equivalents, end of period $ 10,130 $ 42,021
================ ================
SUPPLEMENTARY INFORMATION:
Accretion of preferred stock $ - $ 370
Issuance of common stock in connection with a purchase acquisition $ 10,690 $ 250
Issuance of common stock in connection with the conversion of outstanding debt $ 4,720 -
Warrant discount $ 2,314 -
Income taxes paid $ 244 $ 99
Interest paid $ 1,551 $ 30
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are
an integral part of these statements.
5
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ROWECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
The consolidated financial statements include the accounts of RoweCom Inc.
("RoweCom") and its wholly owned subsidiaries. All significant intercompany
accounts and transactions between RoweCom and its subsidiaries, included in the
accompanying financial statements, have been eliminated.
2. INTERIM RESULTS
As permitted by the rules of the Securities and Exchange Commission applicable
to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain
all the disclosures required by generally accepted accounting principles.
Reference should be made to the consolidated financial statements and related
notes included in RoweCom's Annual Report on Form 10-K for the year ended
December 31, 1999, as filed with the Securities and Exchange Commission on March
16, 2000.
In the opinion of the management of RoweCom, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting primarily
of normal recurring accruals) considered necessary for a fair statement of the
results for the interim periods.
The results disclosed in the Consolidated Statement of Operations for the three
and six months ended June 30, 2000, and the Consolidated Statement of Cash Flows
for the six months ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
The preparation of the 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
disclosure of the contingent assets and liabilities at the date of the financial
statements and the reported amounts of expense during the reporting period.
Actual results could differ from those estimates.
3. NET LOSS PER COMMON SHARE
Basic net loss per share excludes the effect of any dilutive options, warrants
or convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were issued,
exercised or converted into common stock. Dilutive common share equivalents
consist of stock options and warrants calculated using the treasury stock
method.
The pro forma net loss per common share is computed based upon the weighted
average number of common shares and common equivalent shares (using the treasury
stock method) outstanding after certain adjustments described below. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive. In the computation of pro
forma net loss per share, accretion of preferred stock to the mandatory
redemption amount is not included as an increase to net loss. Also, the pro
forma net loss per common share gives effect to the exchange of all outstanding
preferred stock of RoweCom Canada into preferred stock of RoweCom, the mandatory
conversion of all outstanding shares of preferred stock into shares of common
stock and the exercise of all outstanding stock purchase warrants.
6
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The following is a calculation of net loss per share:
(dollars in thousands, except per share data)
<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>
Historical
Basic and diluted:
Net loss to common stockholders (before
extraordinary loss) $ (15,074) $ (4,181) $ (30,075) $ (7,565)
Net loss to common stockholders (after
extraordinary loss) $ (19,161) $ (4,181) $ (34,162) $ (7,565)
Weighted average number of common shares 11,212 10,090 10,799 6,873
Net loss per common share--basic and diluted
(before extraordinary loss) $ (1.34) $ (.41) $ (2.78) $ (1.10)
Net loss per common share--basic and diluted
(after extraordinary loss) $ (1.71) $ (.41) $ (3.16) $ (1.10)
Pro forma
Basic and diluted:
Proforma net loss to common stockholders
(before extraordinary loss) $ (15,074) $ (4,181) $ (30,075) $ (7,195)
Proforma net loss to common stockholders
(after extraordinary loss) $ (19,161) $ (4,181) $ (34,162) $ (7,195)
Weighted average number of common shares 11,212 10,090 10,799 6,873
Weighted average assumed number of shares - - - 1,877
upon conversion of preferred stock and the net
exercise of all outstanding stock purchase
warrants
Total weighted average number of shares used in 11,212 10,090 10,799 8,750
Basic and diluted pro forma net loss per common
Share (before extraordinary loss) $ (1.34) $ (.41) $ (2.78) $ (.82)
Basic and diluted pro forma net loss per common
Share (after extraordinary loss) $ (1.71) $ (.41) $ (3.16) $ (.82)
</TABLE>
Options to purchase shares of RoweCom's common stock totaling 1,210,679 and
750,367 at June 30, 2000 and 1999, respectively, and warrants to purchase common
stock totaling 841,500 and 224,000 at June 30, 2000 and 1999, respectively, were
outstanding but were not included in the computation of diluted earnings per
share as the inclusion of these shares would have been antidilutive.
7
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4. COMPREHENSIVE LOSS
<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 $ (19,161) $ (4,181) $ (34,162) $ (7,195)
Other comprehensive loss:
Foreign currency translation adjustment (1,286) (16) (1,654) (17)
------------- ------------- ------------- ------------
Comprehensive loss $ (20,447) $ (4,197) $ (35,816) $ (7,212)
============= ============= ============= ============
</TABLE>
5. DAWSON PURCHASE PRICE FINALIZATION
In accordance with the Dawson purchase agreement, an additional 465,300
shares were issued in May 2000, which were valued at approximately $10.7
million. The value of the shares issued increased the intangible assets
associated with the Dawson purchase.
6. EXTRAORDINARY LOSS
During June 2000, RoweCom redeemed $16.1 million of convertible notes. In
connection with this redemption, RoweCom recorded an extraordinary loss of
$4.1 million, primarily attributable to a $1.1 million premium paid on the
redemption, and $2.7 million related to the remaining unamortized debt
issuance costs at the time of conversion.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTE
This quarterly report on Form 10-Q may contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
This Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact made in this Form 10-Q are forward looking. In
particular, the statements herein regarding industry prospects and future
results of operations or financial position are forward-looking statements.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. Actual results may differ materially from the results
discussed in or implied by the forward-looking statements. Factors that might
cause such a difference include, but are not limited to the risks and
uncertainties described or discussed in the section "Business-Additional
Factors that may Affect Future Results" in the Form 10-K of RoweCom filed on
March 16, 2000. These risks include, among others, the following:
-Risks relating to RoweCom's limited operating history.
-Risks pertaining to RoweCom's reliance on a single service.
-Risks that uncertainty in RoweCom's ability to maintain existing strategic
alliances and enter into new alliances may negatively impact RoweCom's
operating results.
-Risks of increased competition in the knowledge resource sales market.
-Risks relating to reliance on a small number of clients and industries for
substantially all of RoweCom's revenues.
-Risks that RoweCom will have trouble operating successfully internationally
as RoweCom integrates its foreign acquisitions.
8
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OVERVIEW OF ROWECOM'S OPERATIONS AND FINANCIAL PERFORMANCE
RoweCom provides businesses and their employees with an e-commerce solution for
purchasing and managing the acquisition of magazines, newspapers, journals,
e-journals, books and other knowledge resources through a corporate intranet or
the Internet. We offer our clients access to the largest catalog of magazines,
newspapers, journals, e-journals, books and other knowledge resources on the
Internet. RoweCom allows employees to purchase knowledge resources easily and
conveniently from their desktop computers and provides businesses with a highly
effective means of managing and controlling purchases of knowledge resources and
reducing costs. Our target clients are in knowledge-intense industries, such as
corporate and financial services; biomedical; academic; and the federal
government.
RoweCom's services initially focused on academic libraries and centralized
purchasing groups. Beginning in 1998, we have increasingly focused our sales and
marketing efforts on corporate clients and on desktop purchases by individuals
rather than centralized purchasing groups. We believe that an increase in the
number of desktop purchasers at a client would increase the amount of revenue
generated by such client.
To date, a substantial majority of our revenues have been generated in the
fourth quarter of each year, primarily because most subscriptions are purchased
or renewed in that quarter, with subscriptions generally beginning on January
1st of each year. For the e-commerce portion of the business, as purchases by
individual employees increase as a percentage of total revenues, the seasonality
described above has begun to decrease because desktop purchases are generally
made as required, and thus are more evenly distributed throughout the year.
Dawson Subscription Business, which was acquired by RoweCom in October 1999 by
the purchase of certain assets of UK-based Dawson Information Services and all
of the issued and outstanding capital stock of Dawson, Inc., has experienced
similar seasonality.
In June 1999, RoweCom acquired all of the issued and outstanding capital stock
of Corporate Subscription Services, Inc. for $5,726,000 in cash, subject to
certain post-closing adjustments, and 16,260 shares of RoweCom's common stock,
which were valued at approximately $250,000.
In August 1999, RoweCom acquired all of the issued and outstanding capital stock
of International Subscription Agencies Pty. Ltd. for $1,486,596 in cash.
In October 1999, RoweCom acquired all of the issued and outstanding capital
stock of Dawson, Inc., a Delaware corporation, and certain assets of United
Kingdom-based Dawson Information Services for $34.0 million cash and issued
approximately 97,000 shares of RoweCom's common stock, which were valued at
approximately $1.7 million. In accordance with the purchase agreement, an
additional 465,300 shares were issued in May 2000, which were valued at
approximately $10.7 million. The value of the shares issued increased the
intangible assets associated with the Dawson purchase.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 (THE "2000 THREE MONTH
PERIOD") WITH THE THREE MONTHS ENDED JUNE 30, 1999 (THE "1999 THREE MONTH
PERIOD")
REVENUES. Revenues for the 2000 Three Month Period were $38.9 million, as
compared to $2.0 million for the 1999 Three Month Period, an increase of $36.9
million. Transaction volumes for the 2000 Three Month Period also increased
significantly from the 1999 Three Month Period from 15,000 to 247,000
transactions. These increases resulted primarily from growth in our client base,
particularly related to the acquisition of Dawson.
COST OF REVENUES. Cost of revenues in the 2000 Three Month Period was $34.8
million as compared to $1.9 million during the 1999 Three Month Period, an
increase of $32.9 million. As a percentage of revenues,
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cost of revenues decreased to 90% during the 2000 Three Month Period as compared
to 94% in the 1999 Three Month Period. This improvement was primarily due to
actions taken to rationalize pricing.
SALES AND MARKETING. Sales and marketing expenses increased to $9.7 million
during the 2000 Three Month Period from $2.7 million in the 1999 Three Month
Period, an increase of $7.0 million or 267%. This growth is primarily due to an
increase in personnel as a result of the Dawson acquisition. Personnel expenses
increased to approximately $5.9 million in the 2000 Three Month Period from $1.6
million in the 1999 Three Month Period.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $2.9
million in the 2000 Three Month Period from $1.0 million in the 1999 Three Month
Period, an increase of $1.9 million or 183%, primarily as a result of costs
incurred in an effort to integrate new content into our catalog, to enhance the
user interface and functionality of the kStore, and to develop the transaction
processing systems.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$3.4 million in the 2000 Three Month Period compared to $1.2 million in the 1999
Three Month Period, an increase of $2.2 million or 194%. This increase can be
primarily attributed to growth in average headcount in the administrative,
finance and human resources departments related to the Dawson acquisition.
AMORTIZATION OF GOODWILL AND INTANGIBLES. Amortization of goodwill and
intangibles was $1.9 million in the 2000 Three Month Period compared to $204,000
in the 1999 Three Month Period. As a result of the acquisitions of Corporate
Subscription Services, Inc., International Subscription Agencies Pty. Ltd. and
Dawson's Subscription Business, approximately $56.4 million in goodwill and
intangibles were recorded and are being amortized over a range of 3 to 11 years
from the date of the acquisitions.
INTEREST AND OTHER INCOME, NET. Interest expense was $902,000 in the 2000 Three
Month Period, as compared to interest income of $817,000 in the 1999 Three Month
Period. This expense is primarily a result of the interest paid on the
outstanding lines of credit.
EXTRAORDINARY ITEM. During June 2000, RoweCom redeemed $16.1 million of
convertible notes. In connection with this redemption, RoweCom recorded an
extraordinary loss of $4.1 million, primarily attributable to a $1.1 million
premium paid on the redemption, and $2.7 million related to the remaining
unamortized debt issuance costs at the time of conversion.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 (THE "2000 SIX MONTH PERIOD")
WITH THE SIX MONTHS ENDED JUNE 30, 1999 (THE "1999 SIX MONTH PERIOD")
REVENUES. Revenues for the 2000 Six Month Period were $90.6 million, as compared
to $3.7 million for the 1999 Six Month Period, an increase of $86.9 million.
Transaction volumes for the 2000 Six Month Period also increased significantly
from the 1999 Six Month Period from 30,000 to 581,000 transactions. These
increases resulted primarily from growth in our client base, particularly
related to the acquisition of Dawson.
COST OF REVENUES. Cost of revenues in the 2000 Six Month Period was $82.2
million as compared to $3.4 million during the 1999 Six Month Period, an
increase of $78.8 million. As a percentage of revenues, cost of revenues
decreased to 91% during the 2000 Six Month Period as compared to 92% in the 1999
Six Month Period.
SALES AND MARKETING. Sales and marketing expenses increased to $18.4 million
during the 2000 Six Month Period from $4.5 million in the 1999 Six Month Period,
an increase of $13.9 million or 305%. This growth is
10
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primarily due to an increase in personnel as a result of the Dawson acquisition.
Personnel expenses increased to approximately $11.2 million in the 2000 Six
Month Period from $2.7 million in the 1999 Six Month Period.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $5.9
million in the 2000 Six Month Period from $1.8 million in the 1999 Six Month
Period, an increase of $4.1 million or 218%, primarily as a result of costs
incurred in an effort to integrate new content into our catalog, to enhance the
user interface and functionality of the kStore, and to develop the transaction
processing systems.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$7.6 million in the 2000 Six Month Period compared to $1.9 million in the 1999
Six Month Period, an increase of $5.7 million or 301%. This increase can be
primarily attributed to growth in average headcount in the administrative,
finance and human resources departments related to the Dawson acquisition.
AMORTIZATION OF GOODWILL AND INTANGIBLES. Amortization of goodwill and
intangibles was $3.5 million in the 2000 Six Month Period. As a result of the
acquisitions of Corporate Subscription Services, Inc., International
Subscription Agencies Pty. Ltd. and Dawson's Subscription Business,
approximately $56.4 million in goodwill and intangibles were recorded and are
being amortized over a range of 3 to 11 years from the date of the acquisitions.
INTEREST AND OTHER INCOME, NET. Interest expense was $2.7 million in the 2000
Six Month Period, as compared to interest income of $1.1 million in the 1999 Six
Month Period. This expense is primarily a result of the interest paid on the
outstanding lines of credit.
EXTRAORDINARY ITEM. During June 2000, RoweCom redeemed $16.1 million of
convertible notes. In connection with this redemption, RoweCom recorded an
extraordinary loss of $4.1 million, primarily attributable to a $1.1 million
premium paid on the redemption, and $2.7 million related to the remaining
unamortized debt issuance costs at the time of conversion.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $36.4 million for the 2000 Six
Month Period as compared to $5.3 million of cash used in for the 1999 Six
Month Period. Cash provided for the 2000 Six Month Period resulted primarily
from a decrease in accounts receivable of $82.7 million and an increase in
deferred revenue of $13.3 million. This was partially offset by a net loss of
$34.2 million and a $24.9 million decrease in accounts payable. Cash used in
operating activities for the 1999 Six Month Period was primarily from a net
loss of $7.2 million, partially offset by a $1.4 million decrease in accounts
receivables, a $562,000 decrease in other current assets, $301,000 increase
in accounts payable, a $782,000 decrease in accrued expenses and $412,000 in
depreciation and amortization expense.
Net cash used in investing activities for the 2000 Six Month Period was $2.4
million, substantially all of which was used to purchase property and
equipment, as compared to $18.9 million for the 1999 Six Month Period. Cash
used to purchase marketable securities totaled $12.5 million in the 1999 Six
Month Period. In addition, cash used for the acquisition of CSS, net of cash
acquired, was $5.6 million in the 1999 Six Month Period.
Net cash used in financing activities was $37.5 million for the 2000 Six Month
Period, as compared to cash provided by financing activities of $50.3 million
for the 1999 Six Month Period. Repayments on loans were
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$108.6 million, offset by loan proceeds of $53.2 million and net proceeds from
the issuance of common stock of $17.9 million. During the 1999 Six Month Period,
net proceeds from the IPO, net of underwriting discounts and offering costs,
were $51.7 million, of which $1.4 million was used to pay down existing credit
facilities. At June 30, 2000, RoweCom had cash and cash equivalents of $10.1
million, debt of $7.0 million and stockholders' equity of $42.2 million.
RoweCom has historically funded its operations through sales of its preferred
stock, our initial public offering and limited borrowings from third-party
financing sources. During 1999, RoweCom entered into additional financing
arrangements including the sale of convertible promissory notes and domestic
and foreign credit facilities. During May 2000, RoweCom issued one-year
promissory notes to certain RoweCom directors and shareholders for proceeds
of approximately $6.2 million. RoweCom currently believes that its existing
cash balances and credit facilities will be sufficient to meet anticipated
cash requirements in the near term but that additional financing will be
required to fund operations beyond late Q1 2001. RoweCom is actively involved
in pursuing additional financing and has retained the services of J.P. Morgan
to assist in evaluating several financing proposals. RoweCom's capital
requirements may change depending on numerous factors, however, and RoweCom
cannot assure you that additional capital beyond the amounts currently
forecasted by RoweCom will not be required nor that any required additional
capital will be available on reasonable terms, if at all, at the time it may
be required.
SALE OF CONVERTIBLE NOTES AND COMMON STOCK PURCHASE WARRANTS. On October 13,
1999, RoweCom entered into a Securities Purchase Agreement with two investors
under which RoweCom issued and sold notes convertible into RoweCom common stock
in the aggregate principal amount of $20.0 million and warrants to purchase up
to 224,000 shares of RoweCom's common stock at an exercise price of
approximately $27.50 per share. The sale of the convertible notes and the
warrants generated net proceeds of approximately $19.2 million for RoweCom.
RoweCom also granted the investors certain rights to require the registration
under applicable securities laws of the shares of RoweCom common stock issuable
upon conversion of the notes and exercise of the warrants. RoweCom filed a
short-form registration on Form S-3 on March 16, 2000, which was effective on
April 20, 2000.
Between May 23 and May 26, 2000, the two holders converted approximately $5.7
million of principal and interest into an aggregate of approximately 1,499,893
million shares. On May 30, RoweCom negotiated an agreement with the two holders
of the convertible notes to redeem their outstanding balances. On June 12, 2000,
RoweCom completed the redemption of the convertible notes. A portion of the
$16.1 million used to redeem the notes, including conversion premium and accrued
interest, came from the issuance of promissory notes.
On May 26, 2000, certain RoweCom shareholders and directors made available
funds to repay the convertible notes' principal through the issuance of
one-year promissory notes with an aggregate principal amount of $6,175,000.
Additionally, 617,500 stock purchase warrants were issued with an exercise
price of $5.00. The warrants vest immediately and expire 10 years from
issuance. The one-year promissory notes are carried net of the warrant
discount of approximately $2.3 million. Amortization of the warrant discount,
which is recorded as interest expense, will total approximately $578,000 per
quarter.
EURO CURRENCY ISSUES
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
currencies and one common currency (the "euro"). The euro trades on currency
exchanges and is used in business transactions. Beginning in January 2002, bills
and coins denominated in the euro will be issued and existing currencies will be
withdrawn from circulation. RoweCom foreign subsidiaries do not expect to
transact a material portion of their business in the euro until fiscal 2001.
Also, RoweCom's foreign subsidiaries are not yet required to prepare reports to
local regulatory agencies using the euro. Management expects that IT systems
used by RoweCom's foreign subsidiaries will
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be repaired or replaced in a timely manner to facilitate business transactions
and reporting to local government agencies. Cost to repair and/or replace IT
systems are not expected to be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EXCHANGE RATE RISK MANAGEMENT
RoweCom enters into forward currency contracts primarily in European and
Canadian currencies to hedge its foreign currency exposures. Forward currency
contracts have maturities of less than one year. These contracts are used to
reduce RoweCom's risk associated with exchange rate movements, as gains and
losses on these contracts are intended to offset exchange losses and gains on
underlying exposures. RoweCom does not engage in currency speculation. At June
30, 2000 the face amount of outstanding forward currency contracts to buy and
sell U.S dollars and British pound sterling for non-U.S. currencies was
$771,000. A 10% decrease in exchange rates for these currencies would decrease
the fair value by approximately $140,000. However, since these contracts hedge
non-U.S. currency transactions, any change in fair value of the contracts would
be offset by changes in the underlying value of the transactions being hedged.
The hypothetical movement was estimated by calculating the fair value of the
forward currency contracts at June 20, 2000 and comparing that with those
calculated using hypothetical forward currency exchange rates.
INTEREST RATE RISK MANAGEMENT
Due to its short-term duration, the fair value of RoweCom's borrowings at June
30, 2000 approximated carrying value. Interest rate risk was estimated as the
potential increase in fair value resulting from a hypothetical 10% increase in
interest rates. The resulting hypothetical fair value was not materially
different from the quarter-end carrying value.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. We will adopt SFAS No. 133 as required
by SFAS No. 137, "Deferral of the effective date of the FASB Statement No. 133,"
in fiscal year 2001. We do not expect the adoption of SFAS 133 to have material
impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application
of the guidance in SAB 101 will be required in RoweCom's fourth quarter of
fiscal year 2000. The effects of applying this guidance, if any, will be
reported as a cumulative effect adjustment resulting from a change in
accounting principle. RoweCom does not expect the adoption of SAB 101 to have
a material effect on their financial statements; however, the final
evaluation of SAB 101 is not yet complete.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. RoweCom does not expect the
application of FIN 44 to have a material impact on the RoweCom's financial
position or results of operations.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 16, 2000 in connection with RoweCom's issuance of convertible notes and
warrants, a Registration Statement on Form S-3 was filed with the SEC. See "SALE
OF CONVERTIBLE NOTES AND COMMON STOCK PURCHASE WARRANTS" on page 12 within this
document. The registration statement was declared effective on April 20, 2000.
Between May 23 and May 26, 2000, RoweCom issued 1,499,893 shares of common
stock as a result of the conversion of the convertible notes. See "SALE OF
CONVERTIBLE NOTES AND COMMON STOCK PURCHASE WARRANTS" on page 12 within this
document.
On June 30, 2000 in connection with RoweCom's issuance of promissory notes and
warrants, a Registration Statement on Form S-3 was filed with the SEC. See "SALE
OF CONVERTIBLE NOTES AND COMMON STOCK PURCHASE WARRANTS" on page 12 within this
document. The registration statement was declared effective on July 13, 2000.
On May 20, 2000, under the terms of the purchase agreement, RoweCom issued
465,300 shares of common stock to Dawson, Inc., at a price per share of
approximately $22.98, as part of the purchase price for the acquisition.
325,000 options were granted to purchase common stock under RoweCom's Amended
and Restated 1998 Stock Incentive Plan during the 2000 Three Month Period. The
grants of options were made in reliance on the exemptions from registration
under the Securities Act of 1933, as amended (the "Securities Act") provided by
Rule 701 there under. 11,721 stock options were exercised during the 2000 Three
Month Period.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2000 Annual Meeting of Shareholders of RoweCom (the "Annual Meeting") on
May 31, 2000, the following matters were acted upon by the shareholders of
RoweCom:
1. The election of two Class 1 Directors for a one year term, two
Class 2 Directors for a two year term and two Class 3 Directors
for a three year term;
2. The approval of the issuance of convertible notes and warrants;
and
3. The approval of an amendment of RoweCom's Amended and Restated
1998 Stock Incentive Plan.
The number of shares of common stock issued and outstanding to vote as of the
record date of April 14, 2000 was 10,399,208. The results of the voting on each
of the matters presented to shareholders at the Annual Meeting are set forth
below:
<TABLE>
<CAPTION>
VOTES VOTES BROKERS
VOTES FOR WITHELD AGAINST ABSTENTIONS NON-VOTES
--------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1. Election of Directors
Dr. Richard R. Rowe 7,700,682 52,959 - - -
John Kennedy 7,707,812 45,829 - - -
Thomas Lemberg 7,707,512 46,029 - - -
Donald A.B. Lindberg, MD 7,701,513 52,129 - - -
Jerome Rubin 7,701,462 52,179 - - -
Philippe Villers 7,690,772 62,869 - - -
2. Approval of the issuance of convertible
notes and warrants 3,537,943 - 207,685 21,892 3,986,121
3. Approval of amendment of RoweCom's
Amended and Restated 1998 Stock Incentive
Plan 7,342,866 - 385,384 25,391 -
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 -- Certificate of Incorporation RoweCom*
3.2 -- By-laws of RoweCom*
11 -- Computation of Loss per Share***
27 -- Financial Data Schedule
(b) Reports on Form 8-K
On June 2, 2000 RoweCom filed a Current Report on Form 8-K in
connection the conversion of Promethean notes.
----------------------------
(*) Incorporated by reference to the same numbered exhibit to the Company's
registration statement on Form S-1. (Reg. No. 333-68761)
(***) Statement regarding computation of per share earnings is not required
because the computation can be readily determined from the material
contained in the financial statements included herein.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROWECOM INC.
August 14, 2000 By: /s/ Paul Burmeister
-------------------------------------------------
Paul Burmeister
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
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