<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 2000
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _________
Commission file number 000-31299
PEOPLEPC, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4048510
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
100 Pine Street, Suite 1100, San Francisco, CA 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 732-4400
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. $.0001 par
value, as of September 30, 2000 was 115,154,068 shares.
<PAGE>
PEOPLEPC, INC.
FORM 10Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 [PAGE]
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2000 and 1999 (unaudited) [PAGE]
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 (unaudited) [PAGE]
Notes to the Condensed Consolidated Financial Statements
(unaudited) [PAGE]
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations [PAGE]
Item 3. Qualitative and Quantitative Disclosure about Market Risk [PAGE]
PART II. OTHER INFORMATION
Item 1. Legal Proceedings [PAGE]
Item 2. Changes in Securities and Use of Proceeds [PAGE]
Item 4. Submission of Matters to a Vote of Security Holders [PAGE]
Item 5. Other information [PAGE]
Item 6. Exhibits and Reports on Form 8-K [PAGE]
<PAGE>
PEOPLEPC, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 36,108 $ 88,182
Restricted cash 15,750 30,685
Accounts receivable, net of allowance for doubtful
accounts of $0 and $500 as of December 31, 1999
and September 30, 2000, respectively 311 58,862
Prepaid expenses and other current assets 66 696
-------- --------
Total current assets 52,235 178,425
Property and equipment, net 300 4,186
Capitalized web site development costs 144 146
Deposits and other assets 191 1,244
-------- --------
Total assets $ 52,870 $184,001
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 9,766 $ 17,413
Accrued and other liabilities 33,783 47,266
Current portion of deferred revenues, net 1,496 11,105
-------- --------
Total current liabilities 45,045 75,784
Other long term liabilities 236 0
Deferred revenues, net 2,825 18,067
-------- --------
Total liabilities 48,106 93,851
-------- --------
Commitments (Note 2)
Minority interest 0 49,007
Preferred stock 67,939 0
-------- --------
Stockholders' equity (deficit) (63,175) 41,143
-------- --------
Total liabilities and stockholders' equity (deficit) $ 52,870 $184,001
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PEOPLEPC, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 2000 1999 2000
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Membership revenues earned $ 0 $ 10,829 $ 0 $ 23,901
Other revenues 0 14,464 0 20,325
------- -------- -------- ---------
Total revenues 0 25,293 0 44,226
Cost of membership revenues earned 0 26,496 0 45,485
Cost of other revenues 0 13,353 0 19,223
------- -------- -------- ---------
Gross loss 0 (14,556) 0 (20,482)
Operating expenses:
Sales and marketing (exclusive of stock-based
compensation of $134 and $3,157 and $134 and $10,419
for the three and nine months ended September 30,
1999 and 2000, respectively) 4,428 19,167 4,430 78,113
General and administrative (exclusive of stock-based
compensation of $477 and $8,754 and $502 and $21,847 for
the three and nine months ended September 30, 1999
and 2000, respectively) 1,262 20,458 1,525 43,627
Amortization of deferred stock-based compensation 611 11,910 636 32,266
------- -------- -------- ---------
Total operating expenses 6,301 51,535 6,591 154,006
------- -------- -------- ---------
Loss from operations (6,301) (66,091) (6,591) (174,488)
Net interest, other income and minority share 36 1,918 45 3,317
------- -------- -------- ---------
Net loss $(6,265) $(64,173) $ (6,546) (171,171)
======= ======== ========
Dividend related to beneficial conversion feature of preferred
stock (18,209)
---------
Net loss attributable to common stockholders $(189,380)
=========
Pro forma basic and diluted net loss per share on an
as converted basis $ (0.11) $ (0.63) $ (0.14) $ (2.13)
Shares used in computing pro forma basic and diluted
net loss per share on an as converted basis 56,682 102,509 48,275 88,936
Basic and diluted net loss per share $ (0.19) $ (0.91) $ (0.20) $ (4.17)
Shares used in computing basic and diluted net loss per share 32,682 70,164 32,236 45,533
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PEOPLEPC, INC.
CONDENSED CONSOLIDATED STATEMENT CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 2000
------- ----------
<S> <C> <C>
Net cash used by operating activities $ 2,827 $(129,488)
------- ---------
Cash flows from investing activities:
Restricted cash (2,500) (14,935)
Purchase of property and equipment (126) (4,102)
Capitalized web site development costs (95) (96)
------- ---------
Net cash used by investing activities (2,721) (19,133)
------- ---------
Cash flows from financing activities:
Proceeds from issuance of Series C Preferred
Stock, net 0 49,615
Proceeds from initial public offering, net 0 79,050
Exercise of warrants for common stock 0 19,050
Proceeds from minority investment in PeoplePC Europe 0 50,000
Proceeds from issuance of Convertible Promissory Notes 3,000 0
Proceeds from issuance of Common Stock, net 5 2,980
------- ---------
Net cash provided by financing activities 3,005 200,695
------- ---------
Net increase in cash $ 3,111 $ 52,074
------- ---------
Cash and cash equivalents, beginning of period 0 36,108
------- ---------
Cash and cash equivalents, end of period $ 3,111 $ 88,182
======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PEOPLEPC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The Company
PeoplePC Inc. (the "Company"), provides an affordable and convenient
membership package that includes a brand-name computer, unlimited Internet
access, customer support and an in-home warranty. Members also have the
opportunity to benefit from discounts and special offers from merchants who
participate in PeoplePC's member commerce program (formerly referred to as
buyer's club). The Company also operates the PeoplePC Online program which
provides consumers who do not wish to purchase a computer with all of the
other benefits of a PeoplePC membership for a monthly fee. The Company was
incorporated in Delaware on March 2, 1999.
The consolidated financial statements include financial statements of the
Company's various sales and marketing subsidiaries the operations of which are
not material in the aggregate. The balance sheet as of September 30, 2000
reflects the effects of a $50 million investment by @viso in PeoplePC Europe.
Unaudited Interim Results
The accompanying unaudited interim condensed consolidated financial
statements of PeoplePC, Inc., a Delaware corporation, for the three and nine
months ended September 30, 2000, and September 30, 1999 reflect all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the results for the
interim periods presented. These financial statements have been prepared in
accordance with generally accepted accounting principles of 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.
These financial statements should be read in conjunction with our annual
audited financial statements for the year ended December 31, 1999, which are
included in our Registration Statement on Form S-1 (Reg. No. 333-34114) filed
with the Securities and Exchange Commission in connection with our initial
public offering.
Operating results for the three and nine month periods ended September 30,
2000 are not necessarily indicative of the results that may be expected for
the full year ending December 31, 2000.
Revenue recognition
Revenues and the related cost of revenues for the initial membership
package, which includes the personal computer, cost of shipping the personal
computer system, internet access for three years, in-home warranty and
participation in our member commerce program, are deferred and recognized over
the three-year term of the membership agreement.
Revenues from the PeoplePC Online program are recognized monthly.
PeoplePC Online agreements are renewable each month and the monthly fees are
not refundable.
The Company also offers peripherals and upgrades at the time of the initial
membership. As there are no future obligations with respect to the peripherals
and upgrades, the revenue and cost of revenues related to the sale of
peripherals and upgrades are recognized in the period shipped. These revenues
are included under the line item "Other revenues."
The initial membership package revenues, other revenues and the related
cost of revenues are not recognized until the expiration of a 7-day right of
return. The cost of providing Internet access and email services for all
members is expensed monthly as incurred over the life of a membership
contract.
In some instances, and in an effort to aggressively enroll new members to
build its brand, as well as to develop new channels of distribution, the
Company has offered pricing of its memberships and services that was less
than its total current and estimated future costs (primarily the cost of
providing Internet access and email services) of performing under its
membership agreements, resulting in an estimated gross margin loss over the
life of the contract. As a result, the Company is required to accrue for the
estimated loss related to this acquisition discount during the period in
which the member enrolled. These amounts will be amortized over the life of
the membership as an off-set to future expenses. The Company has recorded an
acquisition discount of $19.1 million through September 30, 2000. The
provision and related amortization is reflected in cost of membership
revenues earned on the income statement and included with the related net
deferred revenue on the balance sheet.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. The Company's accounts receivable are derived from revenue earned
from customers located in the U.S. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company maintains an allowance for
doubtful accounts receivable based upon the expected collectibility of
accounts receivable.
At September 30, 2000, two companies accounted for 39% and 26% of total
accounts receivable, respectively. The Company believes these amounts are
collectible. At December 31, 1999, no entity accounted for more than 10% of
accounts receivable.
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<PAGE>
Net loss per share
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per share is computed giving
effect to all dilutive potential common stock, including options, warrants and
preferred stock. Options, warrants, non-vested common stock and preferred
stock were not included in the computation of diluted net loss per share in
the periods reported because the effect would be antidilutive.
Antidilutive securities not included in net loss per share calculation for
the periods:
Period from
March 2, 1999
(Date of Inception) to Nine Months Ended
December 31, 1999 September 30, 2000
---------------------- ------------------
(unaudited)
Non vested common stock....... 934,446 6,795,383
Common stock options.......... 9,189,000 14,983,843
Warrants...................... -- 3,357,500
Convertible preferred stock... 53,816,514 --
---------- ----------
63,939,960 25,161,726
========== ==========
Pro forma net loss per share for the period from March 2, 1999 (date of
inception) to September 30, 1999 and the nine months ended September 30, 2000
is computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
Series A, Series B and Series C Preferred stock into shares of the Company's
common stock as contemplated upon the closing of the Company's initial public
offering as if such conversion occurred at the date of original issuance. The
resulting pro forma adjustment results in an increase in the weighted average
shares used to compute basic and diluted net loss per share of 16,039,000 and
43,503,000 shares for the period from March 2, 1999 (date of inception) to
September 30, 1999 and for the nine months ended September 30, 2000. Pro forma
common equivalent shares, composed of unvested restricted common stock and
incremental common shares issuable upon the exercise of stock options and
warrants, are not included in pro forma diluted net loss per share because
they would be antidilutive.
A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and diluted net loss per share follows:
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 2000
------------------ ------------------
Pro forma net loss per share,
basic and diluted:
Net loss............................ $ 6,546,000 $189,380,000
=========== ============
Shares used in computing net
loss per share, basic and
diluted............................ 32,236,000 45,433,000
Adjustment to reflect the effect
of the assumed conversion
of preferred stock................. 16,039,000 43,503,000
----------- ------------
Shares used in computing pro forma
net loss per share, basic
and diluted........................ 48,275,000 88,936,000
=========== ============
Pro forma net loss per share,
basic and diluted.................. $ 0.14 $ 2.13
=========== ============
Comprehensive loss
Comprehensive loss, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The Company has no comprehensive
income components other than its net loss.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company, to date,
has not engaged in derivative and hedging activities. The Company is currently
evaluating the impact of this pronouncement and will adopt SFAS No. 133 in
2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company is in compliance with this pronouncement.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
certain transactions involving stock compensation, an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 establishes guidance for the accounting for
stock option grants or modifications to existing stock option awards and is
effective for option grants made after June 30, 2000. FIN 44 also establishes
guidance for the repricing of stock options and determining whether a grantee
is an employee, for which the guidance is effective after December 15, 1998
and modifying a fixed option to add a reload feature, for which the guidance
is effective after January 12, 2000. The adoption of certain of the provisions
of FIN 44 prior to June 30, 2000 did not have a material effect on the
financial statements. The Company does not expect that the adoption of the
remaining provisions will have a material effect on the financial statements.
-7-
<PAGE>
2. COMMITMENTS
Purchase commitments
The Company relies on Ingram Micro (the "Distributor") to provide its
computer products, maintain inventory, process orders, prepare merchandise for
shipment and to distribute its products to customers in a timely and accurate
manner. The Distributor purchases inventory on behalf of the Company based on
sales projections made by the Company. The Company takes title to the
equipment just prior to shipment to the customer and relinquishes title to
the customer upon completion of the transaction. The Company is obligated to
purchase inventory held by the Distributor purchased on its behalf. At
September 30, 2000, the Company had approximately $40 million in
noncancelable purchase commitments with the Distributor, including certain
computers held by the Distributor which do not conform to specifications as
ordered by the Company. The Company has recorded a provision of $15.6
million relating to the cost of resolving any potential dispute over such
non-conforming computers. As of September 30, 2000, the Company is also
obligated to purchase approximately $20 million of products from IBM. The
Company expects to sell all products that it has committed to purchase from
the Distributor and IBM.
In July 2000, the Company reached an agreement with Ingram Micro to
liquidate the non-conforming computers, following which the Company will
split the losses associated with these computers so that it bears half of
the loss and Ingram Micro bears half of the loss. While the amount of the
aggregate loss following liquidation cannot be determined at this time, the
Company believes that the $15.6 million provision will be sufficient to
cover the Company's share of the losses.
3. COMMON STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 500,000,000 shares of $0.0001 par value Common Stock.
In August 2000, the Company sold 8.5 million of common shares in an initial
public offering. Net proceeds from the offering were $79 million. All shares
of preferred stock then outstanding were converted to common stock on a 1:1
ratio.
In January 2000, the Company entered into an agreement with Delta Air
Lines, Inc. ("Delta") to provide its products and services to Delta employees.
The Company also granted Delta a fully vested warrant exercisable for 0.5
million shares of the Company's Common Stock at an exercise price per share of
$6.225. This warrant expires six months after the closing of the initial
public offering or three years after the effective date of the contract. The
value of the warrant of $1.5 million is included in sales and marketing
expenses in the three months ended March 31, 2000 (unaudited), as Delta has no
performance requirements and the warrant is exercisable upon issuance.
The warrant was valued using the Black-Scholes Model with the following
assumptions: fair value of the underlying common stock $6.84; term of option:
3 years; expected dividend rate: 0; volatility: 50%; interest rate: 7%.
In connection with an agreement with Ford Motor Company ("Ford") to provide
products and services to its employees, Ford also purchased 4.7 million shares
of Series C Preferred Stock at $5.246 per share and had the right to purchase
up to 2% (on a fully diluted basis as of the closing of the Series C Preferred
Stock financing) of the Company's Common Stock at the initial offering price
paid by the public in the Company's Initial Public Offering of Common Stock
("IPO") (the "Right"), which Ford has exercised in full. In addition, Ford
received a warrant to purchase an additional 3% of the Company's Common
Stock (calculated in a similar manner) at the same price. The warrant became
exercisable upon the completion of the Company's initial public offering and
will expire 200 days after the IPO. The value of the Right, the warrant, and
the excess of the value of the Common Stock into which the Series C Preferred
Stock is convertible over the price paid for the Preferred Stock was charged
to marketing expense in the second quarter of 2000, as Ford has no performance
requirements and the rights and the warrant are exercisable upon issuance.
The right and the warrant were valued using the Black-Scholes Model with
the following assumptions:
Right Warrant
---------- -----------
Number of shares................................. 1,905,000 2,857,500
Fair value of common stock....................... $ 9.07 $ 13.00
Exercise price................................... $ 13.00 $ 13.00
Term............................................. 5 months 200 days
Dividend rate.................................... 0 0
Volatility....................................... 50% 50%
Interest rate.................................... 7% 7%
Total value...................................... $ 515,000 $6,113,000
The excess of the value of the common stock into which the series C
Preferred Stock is convertible over the price paid for the Preferred Stock
($17,944,000) was calculated using the fair value of common stock on the date
at which the terms and conditions of the preferred stock were agreed ($9.07).
-8-
<PAGE>
4. LINE OF CREDIT
As of July 18, 2000, the Company signed an agreement for a $50 million
revolving credit facility with Chase Manhattan Bank. The interest rate is
LIBOR or prime rate based at the option of the Company and dependent upon
notice to Chase Manhattan Bank. The maturity date is July 17, 2001. As of
September 30, 2000, the Company had no balance outstanding related to this
facility.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words
such as "expect", "anticipate", "estimate", "believe", "intend" and "plan".
Our actual results may differ materially from those discussed in these
statements. These statements include, but are not limited to, our intent to
pursue members through enterprise and consumer programs to increase membership
revenues; our expectations regarding enterprise agreements providing a
significant portion of membership revenues; our expectations regarding
increasing our revenues from merchants, content partners and suppliers; our
expectations regarding the costs of our member commerce programs; our
expectations to improve pricing and eliminate acquisition discounts; our
expectations regarding when the majority of Ford and Delta members will be
enrolled; our expectations regarding the amount of future acquisition discount
provisions; our intent to increase the offerings and revenues related to our
member commerce program; our intent to establish member web site operations in
foreign countries; our expectations regarding the cost of expanding our
international operations; our expectation to expend significant resources on
sales, marketing and general and administrative expenses; our expectations
regarding our ability to fund our operations for the next twelve months; and
our expectations regarding the costs of expanding our domestic operations and
sales and marketing.
The investment risks described in our recent Registration Statement on Form
S-1 (File No. 333-34114) that was declared effective by the SEC on August 15,
2000 continue to be risks for investors and potential investors in the
Company, and such investors should carefully review the Risk Factors section
in the Registration Statement before making an investment decision.
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and
notes to the financial statements included elsewhere in this report.
Overview
Our business model addresses the increasing need for people to access the
Internet, while offering merchants and other entities the opportunity to
establish customer relationships with our members. We believe that long-term
customer relationships are more valuable than the cost of providing customers
with the tools they need to participate in the digital economy.
We were incorporated in March 1999. We began offering our products and
services on a limited basis in September 1999 and on a commercial basis in
October 1999. Until September 1999, we had no revenues and our operating
activities consisted primarily of developing relationships with vendors,
suppliers and merchants.
Our members enter into a three-year contract and, if qualified, pay as
little as $24.95 per month plus a one-time shipping charge for a new brand-
name computer system (including a monitor and software), unlimited Internet
access, email services, a hosted Web site, customer support and in-home
warranty. Alternatively, our members may choose a higher performance computer
or laptop computer and pay a higher monthly payment. In addition, our members
receive additional benefits through our member commerce program. Customers who
do not wish to purchase a new computer system may use other computer systems
to obtain Internet access and email capabilities on a monthly subscription
basis as well as receive the discounts and special offers of our member
commerce program through our PeoplePC Online program for $9.95 per month. This
offering includes unlimited Internet access, participation in our member
commerce program, email services and a hosted Web site.
In addition to our offering to consumers, we offer programs through which
enterprises may make our products and services available to their employees,
customers and affiliated parties. We previously entered into agreements with
Ford Motor Company and Delta Air Lines, Inc. to provide our products and
services to the employees of Ford and Delta at negotiated rates. In their
programs, Ford and Delta subsidize the purchase of our products and services
by their employees. As Ford employees register to become PeoplePC members,
Ford pays us for the entire 36-month membership. As Delta employees register
to become PeoplePC members, Delta is obligated to pay us on a monthly basis
over the 36-month membership period. We have agreed to provide Ford and Delta
employees with several options to upgrade their computer systems for an
additional charge payable by the employee. We recognize these revenues and
associated costs over the three-year term of the relevant membership
agreement. We also entered into a letter of understanding with the National
Trades Union Congress in Singapore, or National Trades Union, to establish a
co-sponsored program to offer our products and services on an un-subsidized
basis to members of trade unions affiliated with the National Trades Union.
The National Trades Union is a party to the letter of understanding because
it will market our program to union members and arrange credit for union
members who wish to pay for a membership over time. We will contribute
$500,000 to the marketing budget for the program. We intend to sell our
products and services directly to union members, on either a cash or
installment purchase basis. The National Trades Union will not be a party to
the sales transaction. If a union member wishes to pay for a membership over
time in installments, the member will execute a credit sale agreement, which
will then be sold on a non-recourse basis to a National Trades Union
affiliate. In these transactions, the National Trades Union affiliate will
assume all risk of customer payment obligation default. To date, we have not
generated any revenues under this program.
We have entered into similar agreements with the New York Times and Ogilvy
& Mather to provide our products and services to their employees.
We have also entered into channel marketing agreements with Visa USA and
Highmark Blue Cross/Blue Shield through which Visa and Highmark will market
and promote PeoplePC products and services to their respective customers.
Membership revenues consist of revenues earned from the sale of membership
bundles; the related charges for shipping the systems; and revenues earned
from the sale of PeoplePC Online memberships which include all of our
-9-
<PAGE>
Internet related services but do not include a computer system. Although we
receive revenue from the sale of membership bundles at the time of the
member's enrollment, we defer the revenue and amortize it over the life of the
membership contract due to the three-year nature of the relationship. We
intend to continue to pursue members through enterprise agreements and our
consumer programs to increase our membership revenues. We expect that
memberships obtained through enterprise agreements will provide a significant
portion of membership revenues in the future.
Other revenues consist of revenues from the sale of upgraded monitors; the
sale of printers; additional shipping revenues related to upgraded monitors
and the sale of printers; and revenues from merchants, content partners and
suppliers. We have not yet generated material revenues from merchants, content
partners and suppliers. Other revenues are recorded in the period earned as
these products, which are not requested by all members, are separately
identifiable transactions and the related earnings process is completed at
that time. We expect to increase our revenues from merchants, content partners
and suppliers in the future.
The cost of membership revenues consists primarily of the cost of the
computer system (including software); the related cost to ship the system to
new members; and the cost of providing Internet access. Consistent with our
revenue recognition policy, these costs are deferred and amortized over the
three-year membership term.
The cost of other revenues consists of the cost of peripherals and the
incremental cost of upgrades; the cost of shipping peripherals and upgrades;
and other costs of revenues such as restocking fees. We anticipate that the
cost of our member commerce program revenues will be minimal. The cost of
other revenues is recorded in the period incurred.
The up-front revenue received from our $24.95 per month entry level bundle
and from the Ford and Delta enterprise programs is less than our estimated
total current and expected future cost of providing products and performing
under the applicable agreements. We have offered this introductory pricing to
rapidly build our membership base and establish relationships with our
members that we believe will provide the means for longer-term
profitability. As we build our membership base, brand awareness and member
loyalty, we expect to improve pricing and eliminate this acquisition
discount. We have recorded a net provision of $19.1 million as of September
30, 2000 that represents the amount, applicable to members added in each
fiscal period, by which our total current and expected future costs exceed
our membership revenues determined without regard to revenue from our member
commerce program. The acquisition discounts under the Ford and Delta
contracts are greater than those for members obtained through our consumer
membership bundle offering. Acquisition discounts under other enterprise
contracts may also be more than those produced under the consumer program.
We expect the majority of Ford and Delta employees who elect to become
members will be enrolled over the next two to three quarters. Accordingly,
we expect to recognize approximately $50.0 million of future provisions as
Ford, Delta and individual members enroll over that period. These future
provisions may be even higher than estimated if demand is greater than
expected. We may also recognize additional provisions due to the performance
of additional enterprise agreements. Unless we are able to build our
membership base, brand awareness and member loyalty, we may not be able to
improve pricing or eliminate subsidizations to individual members or under
enterprise agreements. The recordation of loss provisions in future periods
will have a negative impact on operating results and stockholders' equity.
Membership revenues earned also include revenues from members of PeoplePC
Online, our Internet access only service, which consists of monthly
subscription fees from our members. The cost of these revenues consists of the
cost to provide Internet access. Online members pay subscription fees monthly
and may cancel their membership at any time. Both revenues from the online
program and the cost of those revenues are recorded as received or incurred.
Revenues from our member commerce program are recognized in the period
when a transaction occurs. Our contracts with merchants and other entities are
typically structured so that we receive a percentage of sales revenues
generated by our members' purchases from our merchants or a fixed fee when a
member opens an account or executes his or her first transaction with a
merchant. In some cases, we receive both a fixed fee for generating new
customers and a percentage of subsequent sales revenues. In some cases, we
also receive referral fees for directing our members to other companies' Web
sites. Referral revenues are recognized as referrals are made to these Web
sites. Amounts earned through these agreements were $.5 million for the nine
months ended September 30, 2000. We intend to continue to expand the number
and variety of our merchants participating in our member commerce program to
provide our members with a broad range of product and service offerings. As
our membership base grows, we believe we will be able to negotiate more member
commerce programs for our members and increase the revenues we earn through
our merchant offerings.
We currently operate principally in the United States, the United Kingdom,
France and Singapore. We have begun or expect shortly to begin to sell
membership bundles through the Ford enterprise program to Ford employees in
the United Kingdom, Canada, Mexico, Philippines and Venezuela. In at least
some of these and other countries, we will be establishing localized
membership website operations. We have established subsidiaries in Australia,
British Virgin Islands, Canada, France, Germany, Mexico, the Netherlands,
the United Kingdom and Singapore to support our international operations. We
may establish additional subsidiaries in other countries, where operational,
tax or other considerations provide reason to do so. We expect to
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spend approximately $40 million during 2000 to expand our international
operations, which will be funded by the $50 million in proceeds received in
establishing our European joint venture.
The income or "benefits-in-kind" tax treatment of a program under which
enterprises provide computers to their employees on a subsidized basis is
uncertain with regard to both the enterprise and its employees and is a
country-by-country issue depending on a number of factors, including the
status of the employee with the company, the employee's country of
residence, the size, if any, of the employee's co-payment and the particular
structure of the program. Depending on the applicable tax rules, in order to
qualify for tax-free treatment, a subsidized enterprise employee program
would have to be structured in a manner that qualifies under the applicable
rules for tax-free fringe benefits. To the extent a program is not tax-free,
the entire amount of the subsidy could be considered taxable wages and be
subject to applicable withholding rules. If we are unable to structure an
enterprise program that is both tax-free in a particular country and
desirable to an enterprise could hinder our ability to enter into new
enterprise agreements, particularly outside the United States where we are
unfamiliar with, and have not operated under, the local tax laws. To
successfully structure an enterprise program in a particular country, we are
required to analyze the local tax law, determine whether there are any
adverse tax consequences of an enterprise program, and if so, identify a
structure for a program that minimizes the taxes. This process is difficult
and time consuming, and we cannot guarantee that we will find an acceptable
structure in each country. For example, in Germany there are ongoing
discussions with the taxing authorities to identify a satisfactory
structure. In countries where the tax cost of an employee program is too
high, local enterprises may be unwilling to enter into agreements with us.
If employees are required to pay tax on the benefit, our acceptance rates
may suffer, resulting in impractical economies of scale. As a result, we may
encounter difficulties in entering agreements with enterprises located
outside the United States and we may experience unexpected delays in
structuring and implementing our programs with Ford and Delta in foreign
jurisdictions.
To date, all of our sales and all of our purchases from our suppliers have
been made in U.S. dollars. As a result, changes in currency exchange rates do
not generally have a direct effect on our financial position.
In April 2000, we raised $49.7 million in gross proceeds from the sale of
9,468,252 shares of Series C preferred stock. Ford Motor Company purchased
4,765,650 shares of Series C preferred stock in connection with this financing
and other investors purchased 4,702,602 shares. Ford also received the right
to purchase 1,905,000 shares of common stock in a private placement effected
at the closing of our initial public offering at the same price per share as
our initial public offering. Ford exercised this right in full. Because Ford
exercised this right, Ford also received a warrant to purchase 2,857,500
shares of common stock, exercisable at the same price per share as our initial
public offering, $10.00 per share, at any time for a period of 200 days
following the closing date of our initial public offering, which was August
21, 2000. In relation to Ford, the value of the right, the warrant and the
excess of the value of the common stock into which the Series C preferred
stock is exercisable over the price paid for the Series C preferred stock is
$24.5 million and has been charged to sales and marketing expense in the
second quarter of 2000. These rights and equity have been granted to Ford in
order to gain access to Ford's employees as potential members and to encourage
Ford to purchase membership packages. As Ford has no future performance
requirements and no minimum purchase commitments with respect to the
membership packages, the charge has been expensed when incurred. The Series
C preferred stock converted into common stock on a 1-to-1 basis upon the
closing of our offering. In the nine months ended September 30, 2000, we
recorded a dividend of $18.2 million as a result of a beneficial conversion
feature of preferred stock issued to the other investors. This dividend has
been calculated as the difference between the price paid by the investors
and the offering price of $10.00 per share in our initial public offering.
Results of Operations
Three months ended September 30, 2000
Revenues
Membership Revenues Earned. Membership revenues earned include membership
revenues, related shipping revenues, revenues from PeoplePC Online
memberships, and recognition of membership revenues previously deferred. For
the three
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months ended September 30, 2000, gross membership revenues were $124.4
million. Because we recognize membership revenues over the 36-month term of
the membership agreement, $123.9 million of membership revenues was deferred.
For the three months ended September 30, 2000, membership revenues include the
recognition of $10.3 million in revenues previously deferred.
Other Revenues. Other revenues consist of sales of peripherals and the
incremental cost of upgrades, the related shipping revenues and revenues from
merchants, content partners and suppliers. Other revenues for the three
months ended September 30, 2000 were $14.5 million, $14 million of which
related to the sale of upgrades and peripherals.
Cost of Revenues
Cost of Membership Revenues Earned. Cost of membership revenues earned
consists primarily of the cost of the basic system hardware and software,
fulfillment and shipping costs and our cost of providing members with Internet
connectivity. For the three months ended September 30, 2000, cost of gross
membership revenue was $125.3 million. Because we recognize system hardware
and software cost of revenues over the 36-month term of the membership
agreement, $122.8 million of cost of membership revenues was deferred and $9.5
million of costs previously deferred was recognized. Cost of revenues for the
three months ended September 30, 2000 also includes a net provision of $14.6
million for the amount by which our estimated current and future cost of
memberships exceeds the related membership revenue.
Cost of Other Revenues. The cost of other revenues for the three months
ended September 30, 2000 was $13.4 million. Cost of other revenues primarily
consists of the cost of peripherals, the incremental cost of upgrades, and
the related shipping expense. Cost of other revenues also includes
incidental costs incurred such as restocking fees. These costs are not
significant for the three months ended September 30, 2000.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include fees paid to
third-party advertising sales agents, sales support functions, travel and
related expenses and related salaries and benefits. Sales and marketing costs
associated with increasing and servicing our membership base are expensed in
the period incurred. Sales and marketing expenses were $19.2 million for the
three months ended September 30, 2000, $17.7 million of which was related to
fees paid for third-party advertising In an effort to increase our revenues,
membership base, brand awareness and overall customer experience, we expect to
continue to expend significant resources on sales and marketing in the future.
General and Administrative. General and administrative expenses include
payroll and related expenses for management and administrative personnel,
expenses related to maintaining member relations, facilities costs,
professional service fees, travel and other general corporate expenses. We
previously included expenses related to maintaining member relations in sales
and market expense. These amounts have been reclassified as general and
administrative expense consistent with industry practice and total $6.8
million for the three months ended September 30, 2000. General and
administrative expenses were $20.5 million for the three months ended
September 30, 2000 and included approximately $1 million of facilities expense
and $8.9 million paid to outside consultants, contractors and other
professionals for services rendered. We anticipate that general and
administrative expenses will increase in absolute dollars due to increased
expenses associated with the addition of personnel and additional professional
fees, including costs associated with being a public company.
Net Interest, Other Income and Minority Share
Net interest, other income and minority share consists of interest income
from cash equivalents and short-term investments of $0.9 million and an
adjustment for the amount of net loss in the European subsidiary
attributable to the minority investor in the amount of $1.0 million for the
three months ended September 30, 2000.
Income Taxes
As a result of our operating losses and the uncertainties related to our
ability to recognize a benefit from our deferred tax assets, we have not
recorded a provision for income tax for the three months ended September 30,
2000. We have provided a full valuation allowance on our deferred tax assets.
Net Loss
Net loss for the three months ended September 30, 2000 was $64.2 million,
of which operating expenses were $39.6 million, including a non-cash item in
the amount of $11.9 million attributable to the amortization of deferred
stock-based compensation. Net loss also included non-cash provision for
acquisition discounts of $14.6 million.
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Nine months ended September 30, 2000
Revenues
Membership Revenues Earned. Membership revenues earned include revenues
derived from the sale of membership bundles, related shipping revenues,
revenues from PeoplePC Online memberships, and recognition of membership
revenues previously deferred. For the nine months ended September 30, 2000,
gross membership revenues were $200.2 million. Because we recognize membership
revenues over the 36-month term of the membership agreement, $194.9 million of
membership revenues was deferred. For the nine months ended September 30,
2000, membership revenues include the recognition of $18.6 million in revenues
previously deferred.
Other Revenues. Other revenues consist of sales of peripherals and the
incremental cost of upgrades, the related shipping revenues and revenues
from merchants, content partners and suppliers. Other revenues for the nine
months ended September 30, 2000 were $20.3 million, of which $19.8 million
was related to the sale of upgrades and peripherals.
Cost of Revenues
Cost of Membership Revenues Earned. Cost of membership revenues earned
consists primarily of the cost of the basic system hardware and software and
our cost of providing members with Internet connectivity. For the nine months
ended September 30, 2000, cost of gross membership revenue was $196.9 million.
Because we recognize system hardware and software cost of revenues over the
36-month term of the membership agreement, $187.5 million of cost of
membership revenues was deferred and $16.9 million of costs previously
deferred was recognized. Cost of revenues for the nine months ended September
30, 2000 also includes a provision of $19.1 million for the amount by which
our estimated current and future cost of memberships exceeds the related
membership revenue.
Cost of Other Revenues. The cost of other revenues for the nine months
ended September 30, 2000 was $19.2 million. Cost of other revenues primarily
consists of the cost of peripherals, the incremental cost of upgrades, and
the related shipping expense. Cost of other revenues also includes
incidental costs incurred such as restocking fees totaling $1.2 million for
the nine months ended September 30, 2000.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include fees paid to
third-party advertising sales agents, sales support functions, travel and
related expenses and related salaries and benefits. Sales and marketing costs
associated with increasing and servicing our membership base are expensed in
the period incurred. Sales and marketing expenses were $78.1 million for the
nine months ended September 30, 2000, $49.6 million of which was related to
fees paid for third-party advertising and $26.0 million of which was related
to a charge taken in connection with the warrants and rights granted to Ford
and Delta, as well as with the beneficial conversion feature related to the
issuance of preferred stock to Ford. In an effort to increase our revenues,
membership base, brand awareness and overall customer experience, we expect to
continue to expend significant resources on sales and marketing in the future.
General and Administrative. General and administrative expenses include
payroll and related expenses for management and administrative personnel,
expenses related to maintaining member relations, facilities costs,
professional service fees, travel and other general corporate expenses. We
previously included expenses related to maintaining member relations in sales
and marketing expense. These amounts have been reclassified as general and
administrative expense consistent with industry practice and total $16.0
million for the nine months ended September 30, 2000. General and
administrative expenses were $43.6 million for the nine months ended September
30, 2000 and included approximately $1.9 million of facilities expense and
$20.4 million paid to outside consultants, contractors and other professionals
for services rendered. We anticipate that general and administrative expenses
will increase in absolute dollars due to increased expenses associated with
the addition of personnel and additional professional fees, including costs
associated with being a public company.
Net Interest, Other Income and Minority Share
Net interest, other income and minority share consists of income from cash
equivalents and short-term investments of $2.3 million and an adjustment for
the amount of net loss in the European subsidiary attributable to the minority
investor in the amount of $1.0 million for the nine months ended September
30, 2000.
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Income Taxes
As a result of our operating losses and the uncertainties related to our
ability to recognize a benefit from our deferred tax assets, we have not
recorded a provision for income tax for the nine months ended September 30,
2000. We have provided a full valuation allowance on our deferred tax assets.
Net Loss
Net loss for the nine months ended September 30, 2000 was $189.4 million,
of which operating expenses were $154.0 million, including non-cash charges
in the amount of $32.3 million in amortization of deferred stock-based
compensation and $26.0 million related to the warrants and rights granted to
Ford and Delta. Net loss also includes a non-cash provision for acquisition
discounts of $19.1 million and a non-cash dividend related to the beneficial
conversion feature of preferred stock of $18.2 million.
Liquidity and Capital Resources
To date, we have financed our operations by the issuance of preferred stock
and our initial public offering of common stock on August 21, 2000. As of
September 30, 2000, our sources of liquidity consisted of $118.9 million in
cash and cash equivalents, including $30.7 million in restricted cash. Our net
accounts receivable balance as of September 30, 2000 was $58.9 million.
Net cash used in operating activities was $129.5 million for the nine
months ended September 30, 2000. Cash provided by operating activities for
this period consisted primarily of membership fees. Cash used in operating
activities for these periods consisted primarily of advertising expenses,
costs of our computer systems and peripherals, payroll and other employee-
related expenses, and an increase in accounts receivable net of allowance
for doubtful accounts of approximately $58.9 million.
Net cash used in investing activities was $19.1 million for the nine months
ended September 30, 2000. Net cash used in investing activities for this
period consisted primarily of an increase of $14.9 million in accounts
collateralizing letter of credit agreements (primarily securing future
inventory purchases) and $4.1 million for the purchase of property and
equipment.
Net cash provided by financing activities was $200.7 million for the
period from inception to September 30, 2000, and consisted of the proceeds
from our initial public offering, the issuance of a note and preferred
stock, and from an investment in our European subsidiary. In May 1999, we
sold 24,000,000 shares of our Series A preferred stock at $0.125 per share
for an aggregate purchase price of $3.0 million to venture capital
investors. In October 1999, we sold 29,816,514 shares of our Series B
preferred stock at $2.18 per share for an aggregate purchase price of $65.0
million to venture capital investors. In April 2000, we sold 9,468,252
shares of Series C preferred stock at a price of $5.246 per share for an
aggregate purchase price of $49.7 million to Ford and venture capital
investors. On August 21, 2000, we consummated our initial public offering
whereby we sold an aggregate of 8,500,00 shares of our common stock for an
aggregate purchase price of $85,000,000 before discounts, commissions and
expenses associated with the initial public offering. Contemporaneously with
our initial public offering on August 21, 2000, Ford Motor Company exercised
its right to purchase 1,905,000 shares of common stock in a private
placement effected at the closing of our initial public offering at $10.00
per share for an aggregate purchase price of $19,050,000. Because Ford
exercised the preceding right, Ford also received a warrant to purchase
2,857,500 shares of common stock, exercisable at $10.00 per share at any
time for a period of 200 days following the date of our initial public
offering on August 21, 2000. Each share of preferred stock converted into
common stock on a 1-to-1 basis upon the closing of our initial public
offering. In August and September 2000, @Viso purchased a minority interest
in our European subsidiary for $50 million.
We currently rely on MBNA America Bank, N.A. to provide a loan with 36
monthly payments to qualified members who wish to finance their membership
fees. The agreement is structured as an unsecured loan directly between MBNA
and the member. We receive the present value of the membership fees from MBNA
at the inception of the membership, less a percentage retained by MBNA which
has the effect of increasing the interest rate earned by MBNA on the loans to
our members. We then have no further obligation to MBNA. We do not bear any
credit risk in the event a member defaults on its payments to MBNA. We are not
involved in the approval, funding or collection of current or past due
payments on the loan. Members pay us directly for upgraded monitors, printers
and all shipping charges using a credit card, which is billed by us.
Approximately 90% of our individual members have obtained financing of their
memberships through MBNA through September 30, 2000. These members make their
monthly payments directly to MBNA. MBNA allows members to prepay their loan in
part or in whole at any time without penalty.
Except in cases whereby we contract directly with equipment manufacturers,
we rely on Ingram Micro to distribute computer systems and peripherals from
our suppliers to our customers. Our computer suppliers ship their products
directly to Ingram Micro's distribution centers around the country. When a
customer application is approved, products are picked from inventory, packed
and shipped to our customers from the distribution center closest to the
shipping address. Ingram Micro purchases inventory on our behalf based on
sales projections made by us. We are obligated to purchase inventory held by
Ingram Micro purchased on our behalf. Our agreement with Ingram Micro expires
on December 31,
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2000, and may be renewed for one-year terms by mutual written consent of the
parties. At September 30, 2000, we had approximately $40 million in
noncancelable purchase commitments with Ingram Micro, including
approximately 29,000 computers held by Ingram Micro which do not conform to
specifications as ordered by us, with respect to which we recorded a
contingent liability of $15.6 million. We have reached an agreement with
Ingram Micro to liquidate the non-conforming computers, following which we
will bear a portion of the losses not to exceed 50%. While the amount of the
aggregate loss following liquidation cannot be determined at this time, we
believe that our $15.6 million provision will be sufficient to cover our
share of the losses.
In June 2000, we formed a European subsidiary, PeoplePC N.V., a Netherlands
corporation (PPC Europe). We and PPC Europe entered into financing and related
agreements with @viso Limited, a partnership of SOFTBANK Corp. and Vivendi
S.A., a French corporation. In the financing, PPC Europe received $50.0
million from @viso payable over a two month period beginning on the closing
date in exchange for 35% of PPC Europe's outstanding capital stock in the form
of convertible preferred stock, and we retained 65% of PPC Europe's
outstanding capital stock in the form of common stock. We received our 65%
interest in exchange for our grant of an exclusive license to use and exploit
our technology and brand in Europe. We have retained the rights to our
technology and brand in the rest of the world. The financing closed in July
2000. We expect this $50.0 million to be used to expand our international
operations. In addition, PPC Europe will issue a warrant to acquire
convertible preferred stock to SOFTBANK Capital Partners LP representing 5% of
PPC Europe's shares outstanding as of the closing of the financing, and PPC
Europe intends to reserve approximately 15% of its shares outstanding as of
the closing of the financing for issuance under employee stock benefit plans.
PPC Europe can compel the exercise of the SOFTBANK warrant not sooner than six
months after the closing. PPC Europe has the exclusive right and obligation to
fulfill, market and sell PeoplePC products to and receive buyer's club
revenues from European members including the European employees of enterprises
such as Ford and Delta. We have comparable rights worldwide, including with
respect to any enterprise agreement entered into by PPC Europe with a European
multinational operation. PPC Europe will pay us, and we will pay PPC Europe
$100 for each member acquired in our respective territories as a result of the
other party entering into an enterprise agreement. @viso has the right to
designate two board members for PeoplePC Europe and we have the right to
designate the chief executive officer and the remaining five board members
(including the chief executive officer who serves on the board). We also
control the daily operating decisions of PeoplePC Europe. However, one of the
@viso designated board members must vote to approve transactions outside the
ordinary course of business.
In July 2000, we entered into a credit agreement with The Chase Manhattan
Bank providing for a $50 million revolving credit facility maturing in July
2001. Amounts borrowed under the credit agreement will bear interest at
variable rates, including as one of the rate options LIBOR plus 60 basis
points. We are required to pay fees to the lender for the loan commitment
and for underwriting and structuring. Our obligations under the credit
agreement will be secured by all accounts receivable under our agreement
with Ford. The availability of loans under the credit agreement is subject
to usual and customary closing conditions, as well as to a borrowing base
based on a percentage of invoiced receivables under the Ford agreement
meeting specified eligibility requirements. The credit agreement also
includes normal and customary covenants for transactions of this type,
including maintenance of corporate existence, properties and rights;
performance of obligations; various notice and information provisions;
compliance with laws and certain contracts; limitation on indebtedness;
limitation on liens; limitation on mergers and other fundamental changes;
limitation on investments and acquisitions; limitation on transactions with
affiliates; and limitations on restrictive agreements. As of September 30,
2000, there was no balance outstanding in regard to this credit facility.
In addition to the proceeds from our initial public offering, we may need
to raise additional capital to fund our future operations because we expect to
incur operating and net losses until at least 2003. We currently anticipate
that the combination of our available funds as of September 30, 2000, our
credit facility, the collection of short term accounts receivable and other
available sources of borrowed funds, will be sufficient to meet our
anticipated needs for the next twelve months.
If we need to raise additional funds through public or private financing,
we cannot be certain that additional financing will be available or that, if
available, it will be available on terms acceptable to us. Additional
financing may result to substantial and immediate dilution to existing
stockholders. If adequate funds are not available to satisfy either short- or
long-term capital requirements, we may be required to curtail our operations
significantly or to seek funds through arrangements with third parties that
may require us to relinquish material rights to certain of our services,
technologies or potential markets.
The non-cancellable purchase commitments at September 30, 2000 included
approximately $40 million to Ingram Micro and approximately $20 million to IBM
pursuant to a direct shipment program entered into with IBM. In the ordinary
course of our business we make commitments to purchase computers in order to
make timely deliveries to new members as they sign up for our membership
package. However, we normally pay for the computers no sooner than two days
after the time of shipment to the member, although we are required to
maintain a deposit at Ingram Micro, adjusted weekly, equal to approximately
25% of outstanding purchase orders. On September 30, 2000, this deposit
amounted to approximately $14 million. Under our typical consumer financing
arrangements, for instance the arrangement with MBNA, we receive promptly a
lump sum payment from MBNA that completely offsets the cost of the computer
and other equipment being purchased. This payment from MBNA is net of a
percentage retained by MBNA which has the effect of increasing the interest
rate earned by MBNA on the loans to our members. We receive this payment
from MBNA before we are obligated to pay our computer system suppliers.
Therefore, these arrangements enable us to use a relatively small amount of
capital because the number of computers purchased and not paid for or
financed at any given time will be only a fraction of the total purchase
commitment which will typically extend over several months. The Ford and Delta
programs depart from our typical practice as described above. In the Ford
program we collect the majority of the amount for which the employee is
responsible similarly to the process described above. Ford remits the portion
for which it pays semi-monthly. The Delta program involves monthly payments to
us rather than a lump sum payment. We are presently negotiating with lenders
to arrange financing for the Delta program.
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Other than approximately $60 million in non-cancelable purchase commitments
for computers at September 30, 2000, we do not have significant capital
commitments. During the year ended December 31, 2000, we intend to spend
approximately $40 million to expand our international operations,
approximately $20 million to expand our domestic operations, approximately $25
million for domestic sales and marketing, and approximately $15 million to
meet our obligation with respect to the approximately 29,000 non-conforming
computers currently held by Ingram Micro, and approximately $5 million to
purchase computers from Ingram Micro. In addition, we expect to use the
proceeds of our European joint venture financing for international operations.
Effects of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. We have not engaged in
derivative and hedging activities to date. We are currently evaluating the
impact of this pronouncement and will adopt SFAS No. 133 in 2001.
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements." SAB 101 summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We are in compliance with this pronouncement.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
certain transactions involving stock compensation, an interpretation of APB
Opinion No. 25" (FIN 44). FIN 44 establishes guidance for the accounting of
stock option grants or modifications to existing stock option awards and is
effective for option grants made after June 30, 2000. FIN 44 also establishes
guidance for the repricing of stock options and determining whether a grantee
is an employee, for which the guidance is effective after December 15, 1998,
and for modifying a fixed option to add a reload feature, for which the
guidance is effective after January 12, 2000. The adoption of certain of the
provisions of FIN 44 prior to June 30, 2000 did not have a material effect on
our financial statements. We do not expect that the adoption of the remaining
provisions will have a material effect on our financial statements.
Item 3. Qualitative and Quantitative Disclosure about Market Risk
We are exposed to fluctuations in interest rates and market values of our
investments. Our exposure to fluctuations in interest rates and market values
of our investments relates primarily to our short-term investment portfolio,
which is included in cash and cash equivalents and short-term investments. We
have not used derivative financial instruments in our investment portfolio. We
invest our excess cash in highly liquid commercial paper and U.S. Government
debt securities with maturities of less than one year, and, by policy, we
limit the amount of credit exposure to any one issuer. Due to the short-term
nature of our investments, the impact of interest rate changes would not
generally be expected to have a significant impact on the value of these
investments. The effect of interest rate and investment risk on us has not
been significant.
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.
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We have limited our investments to short-term, highly rated, fixed income
facilities such as repurchase agreements collateralized by government
securities and A-1/P-1 commercial paper. We intend to maintain our current
investment policy, which is designed to preserve principal while at the same
time maximizing the after-tax income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in
may be subject to market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents
and short-term investments in a variety of securities, including commercial
paper, money market funds, government and non-government debt securities.
We currently have no floating rate indebtedness, hold no derivative
instruments and do not earn significant foreign sourced income. Accordingly,
changes in interest rates or currency exchange rates do not generally have a
direct effect on our financial position. In addition, we have primarily
operated in the United States and all purchases and sales to date have been
made in U.S. dollars. Foreign currency exchange rates, however, may affect the
cost of our personal computers, printers and monitors purchased from our
foreign suppliers, thereby indirectly affecting consumer demand for our
products and our net revenues. In addition, to the extent that changes in
interest rates and currency exchange rates affect general economic conditions,
we would also be affected by such changes.
Risk Factors That May Affect Future Results
The investment risks described in our recent Registration Statement on Form
S-1 (File No. 333-34114) that was declared effective by the SEC on August 15,
2000 continue to be risks for investors and potential investors in the
Company, and such investors should carefully review the Risk Factors section
in the Registration Statement before making an investment decision.
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PART II
Item 1. Legal Proceedings
We may from time to time become a party to various legal proceedings
arising in the ordinary course of our business. We are not currently
involved in any material legal proceedings.
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
In the three months ended September 30, 2000, PeoplePC issued options
to purchase 2,629,625 shares of common at exercise prices ranging from
$6.19 to $12.00 per share to 96 employees and contractors. These
shares were exempt from registration under Rule 701 and/or section
4(2) of the Securities Act.
Contemporaneously with our initial public offering on August 21, 2000,
Ford Motor Company exercised its right to purchase 1,905,000 shares of
common stock in a private placement effected at the closing of our
initial public offering at $10.00 per share for an aggregate purchase
price of $19,050,000. Because Ford exercised the preceding right,
Ford also received a warrant to purchase 2,857,500 shares of common
stock, exercisable at $10.00 per share at any time for a period of 200
days following the date of our initial public offering on August 21,
2000. The securities issued to Ford were exempt from registration
under Rule 506 of the Securities Act because the sale was to an
accredited investor, as defined in Rule 501 of the Securities Act.
Use of Proceeds from Sales of Registered Securities
On August 21, 2000, the Company completed an initial public offering
of its common stock, $.0001 par value. The managing underwriters in
the offering were Chase Securities Inc., FleetBoston Robertson
Stephens Inc., J.P. Morgan Securities Inc. and Prudential Securities
Incorporated. The shares of common stock sold in the offering were
registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (File No. 333-34114) that was
declared effective by the SEC on August 16, 2000.
In addition, upon completion of the initial public offering, all
outstanding shares of preferred stock were automatically converted
into 63,284,766 shares of PeoplePC, Inc. common stock.
The offering commenced on August 16, 1999 after all 8,500,000 shares
of common stock registered under the Registration Statement were sold
at a price of $10.00 per share. The aggregate price of the offering
amount registered was $85,000,000. In connection with the offering, we
paid an aggregate of $5,950,000 in underwriting discounts and
commissions to the underwriters. In addition, the following table sets
forth the expenses incurred in connection with the offering, other
than underwriting discounts and commissions.
SEC Registration fee $ 48,880
NASD filing fee 19,015
Nasdaq National Market listing fee 95,000
Blue sky qualification fees and expenses 20,000
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Printing and engraving expenses 250,000
Legal fees and expenses 600,000
Accounting fees and expenses 400,000
Transfer agent and registrar fees 25,000
Miscellaneous expenses 92,105
Total $1,550,000
After deducting the underwriting discounts and commissions and the
estimated expenses related to the offering as described above, we
received net proceeds from the offering of approximately $77,500,000.
As of September 30, 2000, we have used the net proceeds from our
initial public offering of common stock for the following purposes:
. approximately $5 million to expand our international operations
including infrastructure and sales and marketing expenses;
. approximately $20 million to expand our domestic operations by
hiring additional employees, leasing additional office space and
expanding our infrastructure;
. approximately $19 million for domestic sales and marketing;
The remaining proceeds will be used for general corporate purposes,
including working capital, expansion of our sales and marketing
capabilities, and acquisitions of, or investments in, businesses,
products and technologies that are complementary to our business. None
of our net proceeds of the offering were paid directly or indirectly
to any director, officer, general partner of the Company or their
associates, persons owning 10% or more of any class of our equity
securities, or any of our affiliates.
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
10.1 Addendum to Master Services and Supply Agreement, dated
September 29, 2000 between PeoplePC and Ford Motor Company.
27.1 Financial data schedule
Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed and thereunto duly authorized, in the City of San Francisco, State
of California, on November 14, 2000.
PEOPLEPC, INC
By: /s/ NICK GROUF
-------------------------------------
Nick Grouf
President and Chief Executive Officer
By: /s/ JOHN ADAMS
-------------------------------------
John Adams
Chief Financial Officer
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