FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 0-23901
CYBERSHOP.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3979226
----------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
116 Newark Avenue, Jersey City, NJ 07302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 234-5000
Indicate by check mark whether 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 registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes /X/ No /_/
The number of shares of the Registrant's common stock, par value $.001 per
share, outstanding on November 5, 1999 was 9,398,012 shares.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor for Forward-Looking Statements
From time to time, the Company may publish statements which are not
historical fact, but are forward-looking statements relating to matters such as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical and anticipated results or other expectations
expressed in the Company's forward looking statements. Such forward-looking
statements may be identified by the use of certain forward-looking terminology,
such as "may," "will," "expect," "anticipate," "intend," "estimate," "believe,"
"goal," or "continue," or comparable terminology that involves risks or
uncertainties. Actual future results and trends may differ materially from
historical results or those anticipated depending on a variety of factors,
including, but not limited to those set forth under "Overview" and "Liquidity
and Capital Resources" included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations. Except as required by law, the
Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company has filed or files from time to time with the
Securities and Exchange Commission.
Overview
The Company is an online and direct to consumer retailer. The flagship
store located at www.cybershop.com (CyberShop) offers discounted designer and
brand-name apparel, electronics, home accessories, toys, gifts and watches all
at closeout prices. electronics.net, the Company's joint venture with Tops
Appliance City (Tops), located at www.electronics.net (electronics.net) ,offers
a broad assortment of consumer electronics, appliances and home office equipment
for sale online.
Beginning in the first quarter of the current year, the Company began
implementing several operating initiatives at its flagship store, cybershop.com,
designed to better serve its customers and streamline its operations. The
Company has completed a shift in its merchandising strategy to focus on offering
off-price branded merchandise such as that found in outlets and traditional
discount retailers. The Company initiated a significant overhaul of its
infrastructure, migrating its web-based order processing onto a new platform,
redesigning the web site and integrating it with a new order fulfillment system.
The transition to an inventory-based model was completed in the third quarter
with the development of a new distribution and fulfillment center. In addition,
the Company launched two new online auction sites. With this initiative, the
Company introduced the excitement of the online auction experience to all its
customers, complementing its existing product offerings. The initiative also
offers the Company a new way to attract customers, learn more about their
shopping preferences and provide an effective mechanism to manage excess
inventory.
Effective June 1, 1999 the Company acquired all of the outstanding common
stock of The Magellan Group, Inc. ("Magellan"), an online and direct response
retailer of high quality personal care, home and health related products, in
exchange for 1,000,000 shares of the Company's common stock and $5,000,000 in
cash. The acquisition was accounted for as a purchase with essentially all of
the $14,870,000 purchase price allocated to goodwill. The goodwill in the
accompanying consolidated
balance sheets is being amortized on a straight-line basis over five years. The
results of Magellan are included in the Company's consolidated financial results
beginning on the date of acquisition. In addition, the Company is required to
pay the former shareholders of Magellan earn-out payments based upon the
profitability of a particular product. As of September 30, 1999, $361,000 of
earnout payments have been made, and $102,000 are payable, to the former
shareholders, which are reflected as Acquisition related payable in the
accompanying consolidated balance sheet. Concurrent with the acquisition, one of
these former shareholders of Magellan was appointed a member of the Company's
board of directors.
Results of Operations
Three Months Ended September 30, 1999 compared to Three Months Ended September
30, 1998.
Revenues: Revenue is comprised of sales of products, net of returns, outbound
shipping and handling charges, advertising and vendor set-up fees. Total
revenues increased 458% in the third quarter, or $2,288,000, to $2,788,000 as
compared to $500,000 in the third quarter of 1998. This increase was primarily
attributable to greater marketing efforts, an expanded customer base, repeat
purchases from existing customers, acquisitions, and strong sales of four
products, which represented approximately 45% of total revenues in the three
months ended September 30, 1999. Advertising and set-up fees decreased by 73%,
or $22,000, to $8,000 in the third quarter of 1999 from $30,000 in the third
quarter of 1998, as a result of a decrease in emphasis on this revenue stream
and an increased focus on the Company's merchandising strategies. Revenues
attributable to CyberShop for the third quarter of 1999 totaled $358,000 as
compared to $500,000 for the same period of 1998. Revenues attributable to
electronics.net, the Company's joint venture with Tops, for the third quarter of
1999 totaled $504,000. electronics.net did not have revenues in the same period
of the prior year as it did not begin operations until the fourth quarter of
1998. Revenues for Magellan were $1,926,000 for the third quarter of 1999.
Cost of revenues: Cost of revenues consists of the cost of products sold to
customers and shipping costs. Costs of revenues increased by 408%, or
$1,468,000, to $1,828,000 in the third quarter of 1999 from $360,000 in the
third quarter of 1998. Gross profit margins were 34% in the third quarter of
1999 compared to 28% in the third quarter of 1998. The increase in gross margin
is the result of improvements in merchandise mix and pricing, and shipping
costs, offset by additional inventory allowances taken to reflect anticipated
future markdowns on closeout and auction related merchandise.
Sales and marketing: Sales and marketing primarily consists of advertising,
fulfillment, promotional costs and related payroll expenses. Sales and marketing
increased by 54%, or $286,000, to $812,000 in the third quarter of 1999 from
$526,000 in the third quarter of 1998. As a percentage of total revenues, Sales
and marketing was 29% in the third quarter of 1999 versus 105% in the third
quarter of 1998. This reflects the Company's strategy to optimize the
effectiveness of its marketing campaigns by regularly evaluating the return on
investment on marketing dollars spent versus increased customer traffic and
revenues. As a result of this ongoing evaluation, effective June 30, 1999 the
Company terminated its two-year agreement with Excite. The Company intends to
continue to evaluate new and existing marketing relationships in this manner and
may as a result increase or decrease its operating expenses to fund marketing
and advertising expenditures and to establish strategic relationships which
satisfy this evaluation and which are considered important to the success of the
Company. The Company expects to increase such advertising and marketing
expenditures significantly in the fourth quarter of 1999.
General and administrative: General and administrative expenses consist
primarily of payroll and payroll related expenses for administrative,
information technology, accounting, and management personnel, recruiting, legal
fees, and general corporate expenses. General and administrative expenses
increased by 62%, or $605,000 to $1,584,000 in the third quarter of 1999 from
$979,000 in the third quarter of 1998. The increase is primarily attributable to
increased payroll related expenses, recruiting, legal, and general corporate
expenses to support the Company's increased infrastructure. As a percentage of
total revenues, general and administrative expenses decreased to 57% in the
third quarter of 1999 from 196% in the third quarter of 1998.
Amortization of goodwill and other merger and acquisition related costs:
Amortization of goodwill and other merger and acquisition related costs consist
primarily of goodwill associated with the purchase of Magellan.
Interest income, net: Interest income decreased $197,000 to $15,000 in the third
quarter of 1999 from $212,000 in the third quarter of 1998. The decrease is
primarily the result of a decrease in average cash and cash equivalents to
$1,718,000 during the third quarter of 1999 as compared to $15,646,000 during
the third quarter of 1998.
Minority interest: Minority interest represents Tops' 49% interest in the losses
of the joint venture, electronics.net, which is 51% owned by the Company and
accounted for as a subsidiary in its consolidated financial statements.
Net loss: As a result of the factors discussed above, the Company reported a
consolidated net loss of $2,162,000 during the third quarter of 1999 compared
with a net loss of $1,153,000 during the third quarter of 1998. During the third
quarter, the net loss per common share, basic and diluted was ($0.25) per share
compared with a net loss of $(0.15) per share during the third quarter of 1998.
Pro forma results, reflecting the exclusion of amortization of goodwill and
other merger and acquisition related costs are as follows:
Three Months Three Months
Ended, Ended,
September 30 September 30,
1999 1998
-------------------- -------------------
Pro forma net loss $ (1,412,000) $ (1,153,000)
Pro forma net loss per share, basic and diluted $ (0.16) $ (0.15)
The Company expects that it will continue to incur net losses and generate
negative cash flow from operations for the foreseeable future as it continues to
develop its business and no assurance can be given as to when, if at all, the
Company will achieve profitability.
Nine Months Ended September 30, 1999 compared to Nine Months Ended September 30,
1998.
Revenues: Total revenues increased 298% during the nine months ended September
30, 1999, or $4,438,000, to $5,930,000 as compared to $1,492,000 during the
first nine months of 1998. This increase was primarily attributable to greater
marketing efforts, an expanded customer base, repeat purchases from existing
customers and strong sales of four products, which represented approximately 42%
of total revenues for the nine months ended September 30, 1999. Advertising and
set-up fees decreased by 57%, or $52,000, to $40,000 during the first nine
months of 1999 from $92,000 during the first nine months of 1998, as a result of
a decrease in emphasis on this revenue stream and an increased focus on the
Company's merchandising strategies. Revenues attributable to CyberShop for the
nine months ended September 30, 1999 totaled $1,645,000 as compared to
$1,492,000 for the same period of 1998. Revenues attributable to
electronics.net, the Company's joint venture with Tops, for the nine months
ended September 30, 1999 totaled $1,119,000. electronics.net did not have
revenues in the same period of the prior year as it did not begin operations
until the fourth quarter of 1998. Revenues for Magellan for the period beginning
on the date of acquisition through September 30, 1999 were $3,166,000.
Cost of revenues: Costs of revenues increased by 299%, or $3,150,000, to
$4,205,000 during the first nine months of 1999 from $1,055,000 during the first
nine months of 1998. Gross profit margins remained unchanged at 29% for both the
first nine months of 1999 and 1998. Gross profit margins have steadily improved
throughout the first three quarters of 1999, beginning at 14% in the first
quarter, rising to 30% in the second quarter and ending at 34% in the third
quarter. This trend is primarily the result of improving merchandise mix and
pricing resulting in a greater proportion of higher margin products, as well as
a proportional decrease in shipping costs.
Sales and marketing: Sales and marketing increased by 14%, or $269,000, to
$2,268,000 during the first nine months of 1999 from $1,999,000 during the first
nine months of 1998. As a percentage of total revenues, sales and marketing
expenses decreased to 38% during the first nine months of 1999 from 134% during
the first nine months of 1998, reflecting the Company's strategy of continuously
evaluating the productivity and return on investment of its marketing
expenditures. The Company expects to increase such advertising and marketing
expenditures significantly in the fourth quarter of 1999.
General and administrative: General and administrative expenses increased by
94%, or $2,321,000 to $4,804,000 during the first nine months of 1999 from
$2,483,000 during the first nine months of 1998. The increase is primarily
attributable to increased payroll related expenses, recruiting, legal and
general corporate expenses to support the Company's increased infrastructure
Amortization of goodwill and other merger and acquisition related costs:
Amortization of goodwill and other merger and acquisition related costs consist
primarily of goodwill associated with the purchase of Magellan.
Interest income, net: Interest income decreased $231,000 to $230,000 during the
first nine months of 1999 from $461,000 during the first nine months of 1998.
The decrease is primarily the result of a decrease in average cash and cash
equivalents to $6,599,000 during the first nine months of 1999 as compared to
$12,691,000 during the first nine months of 1998.
Minority interest: Minority interest represents Tops' 49% interest in the losses
of the joint venture, electronics.net, which is 51% owned by the Company and
accounted for as a subsidiary in its consolidated financial statements.
Net loss: As a result of the factors discussed above, the Company reported a
consolidated net loss of $5,873,000 for the nine months ended September 30, 1999
as compared with a net loss of $3,584,000 during the first nine months of 1998.
During the first nine months of 1999, the net loss per common share, basic and
diluted was ($0.73) per share compared with a net loss of $(0.56) per share
during the third quarter of 1998.
Pro forma results, reflecting the exclusion of amortization of goodwill and
other merger and acquisition related costs are as follows:
Nine Months Nine Months
Ended, Ended,
September 30 September 30,
1999 1998
-------------------- -------------------
Pro forma net loss $ (4,864,000) $ (3,584,000)
Pro forma net loss per share, basic and diluted $ (0.61) $ (0.56)
The Company expects that it will continue to incur net losses and generate
negative cash flow from operations for the foreseeable future as it continues to
develop its business and no assurance can be given as to when, if at all, the
Company will achieve profitability.
Liquidity and Capital Resources
On September 30, 1999 the Company completed a private placement of equity
securities raising gross proceeds of $5.1 million. The financing involved the
issuance of 784,616 shares of common stock at $6.50 per share and warrants to
purchase an aggregate of 156,922 shares of common stock at an exercise price of
$7.50 per share. The sale price of the Company's common stock and the exercise
price of the warrants issued in the private placement were both higher than the
last reported sale price of $5.81 on the Nasdaq National Market on September 30,
1999. As part of the financing another class of warrants was issued. These
warrants provide the investors with the right to receive additional shares if
the price of the Company's stock trades below certain levels. During each of
three consecutive 22 business day periods, after the effective date of a
registration statement filed with the SEC, a formula is applied to one-third of
the shares sold. That formula is based on determining the average of the twelve
lowest closing bid prices in the 22 business day period. This average lowest bid
price is divided into a number equal to one-third of the shares sold multiplied
by the difference between $7.56 and the average lowest bid price. If the average
lowest bid price is higher than $7.56 no additional shares will be issued. If
the average lowest bid price is less than $5.00 the Company has the option to
pay the cash economic equivalent instead of issuing shares. The Company agreed
to register with the SEC, at the Company's expense, on a Form S-3, the resale of
the 784,616 shares sold in addition to the shares underlying the warrants. None
of the investors, together with any affiliate thereof, may beneficially own
shares in excess of 4.999% of the outstanding shares of common stock following
such conversion. Such restrictions may be waived by each selling stockholder as
to itself upon not less than 61 days' notice to the company. The Company is
obligated to use its best efforts to keep the Form S-3 effective for up to two
years. The Company will incur substantial penalties if it fails to meet these
obligations.
Net cash used in operations increased $1,912,000 to $4,934,000 during the
first nine months of 1999 from $3,022,000 during the first nine months of 1998.
The net use of cash in operations in the current period is primarily attributed
to current period net losses of $5,873,000. Increases in inventories and
accounts receivable totaling $1,130,000 were largely offset by increases in
accounts payable and accrued liabilities totaling $817,000, during the first
nine months of 1999. Inventories increased $517,000 as the Company continued
stocking is new distribution and fulfillment center and began preparing for the
fourth quarter holiday selling season. Accounts receivable increased $613,000
reflecting both the significant period over period sales increase as well as the
effect of a customer installment payment plan on one of the Company's most
significant products. The increase in accounts payable and accrued liabilities
reflects the increase in inventory as well as an increased focus on cash
management.
Net cash used in investing activities during the first nine months of 1999
was $7,096,000 as compared to $1,960,000 in the same period of the prior year.
The current periods use of cash was primarily for two purposes. The first
consisted of $438,000 in purchases of property and equipment, primarily for
computer equipment and software to support the Company's expansion and increased
infrastructure. The second consisted of $6,658,000 related to business
acquisitions, primarily Magellan, $361,000 of which relates to earn-out payments
paid to the former shareholders of Magellan during the third quarter of 1999.
Earn-out payments are required to be paid to these former shareholders, as part
of the purchase agreement, based upon the profitability of a particular product.
As of September 30, 1999 $102,000 in earn-out payments are due to be paid in the
fourth quarter of 1999 to these former shareholders, and are reflected in the
accompanying consolidated balance sheets as Acquisition related payable.
On March 26, 1998, the Company completed its initial public offering
("IPO") of 3,220,000 shares of Common Stock at a price of $6.50 per share. Net
proceeds from the IPO, net of underwriting discounts and offering costs, were
$18,749,000. Prior to the IPO, the Company had financed its operations primarily
from capital contributions from private investors. At September 30, 1999, the
Company had cash and cash equivalents of $5,714,000, positive working capital of
$2,945,000, stockholders' equity of $18,736,000 and no debt. The Company
believes that its existing capital resources will enable it to maintain its
operations at existing levels at least through the first quarter of 2000. The
Company also has the option available to it, through the mutual agreement of the
Company and the investors in the September 30, 1999 private placement, to raise
an additional $9.9 million of equity financing. The Company is also considering
additional debt and/or equity financing through a public offering or other
private placements. There can be no assurance that any additional financing or
other sources of capital will be available to the Company upon acceptable terms,
if at all. The inability to obtain additional financing, when needed, would have
a material adverse effect on the Company's business, financial condition and
operating results, its ability to continue operating at existing levels, and
significantly slow the pace of both customer and revenue growth.
Subsequent event
In October 1999 Tops Appliance City, Inc. (TOPS), the Company's joint
venture partner in electronics.net LLC, announced that it was discontinuing the
sale of consumer electronics products. The products which are currently offered
by electronics.net are obtained from TOPS. We believe that electronics.net will
have sufficient inventory available to it from TOPS to fulfill customer orders
over the near term, however, the Company is currently considering long term
alternatives for electronics.net including alternative supplier arrangements.
Year 2000
The Company believes that its computer systems and software products are
fully year 2000 compliant. However, it is possible that certain computer systems
or software products of the Company's suppliers or customers may not accept
input of, store, manipulate and output dates in the year 2000 or thereafter
without error or interruption. The Company is querying its current suppliers as
to their progress in identifying and addressing problems that their computer
systems will face in correctly processing date information as the year 2000
approaches. However, there can be no assurance that all date-handling problems
of its suppliers will be identified by the Company or its suppliers in advance
of their occurrence, or that the Company or the suppliers will be able to
successfully remedy problems that are discovered. In the event that problems are
discovered with its current suppliers which cannot be remedied the Company
intends to seek alternative suppliers who are fully year 2000 compatible. The
Company believes that most of its current customers who access its website are
using software that is fully year 2000 compatible. The Company may, however, be
required to make significant expenditures to address or remedy any year 2000
problems of its customers or vendors which are not identified in advance, or to
satisfy liabilities to which the Company may become subject as a result of such
problems.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: February 24, 2000 By: /s/ Jeffrey S. Tauber
Jeffrey S. Tauber
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: February 24, 2000 By: /s/ Jeffrey A. Leist
Jeffrey A. Leist
Senior Vice President and Chief Operating
and Financial Officer
(Principal Financial and Accounting Officer)