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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended February 29, 2000
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period to
Commission file number: 000-24659
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CYBERIAN OUTPOST, INC.
(a/k/a OUTPOST.COM)
(Exact name of registrant as specified in its charter)
Delaware 06-1419111
(State or other (IRS Employer
jurisdiction Identification No.)
of incorporation or
organization)
23 North Main Street, PO Box 636
Kent, Connecticut 06757
(Address of principal (Zip Code)
executive offices)
(860) 927-2050
Registrant's telephone number, including area code
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Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value Per Share
(Title of Class)
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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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on May 1, 2000, was
$169,082,828 based on the last sale price as reported by the Nasdaq National
Market System.
As of May 1, 2000, the registrant had 28,474,710 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its 2000 annual
meeting of stockholders are incorporated by reference in Part III of this
report. With the exception of those portions that are specifically incorporated
by reference in this report, such proxy statement shall not be deemed to be
filed with this report or incorporated herein by reference.
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PART I
Item 1. BUSINESS
Overview
Outpost.com ("Cyberian Outpost, Inc.," or the "Company") is a leading global
Internet-only retailer featuring over 170,000 consumer technology and related
products for the home and office. As of February 29, 2000, we had 630,000
customers world-wide, the majority of which have shopped at Outpost.com duing
the last 24 months. We offer an online "superstore" at www.Outpost.com that
provides one-stop shopping for domestic and international customers, 24 hours a
day, seven days a week. Our superstore features computer hardware, software and
accessories. We work with the computer industry's foremost suppliers, and we
are an authorized Internet reseller for most leading manufacturers including
IBM, Apple, Compaq, Sony, Hewlett Packard, Acer and Toshiba. We also sell
software for leading publishers including Microsoft, Symantec, Adobe, Apple
Software and Intuit. Additionally, we offer downloadable software and online
licensing. We offer a full range of consumer electronics in the
Tweeter.Outpost.com store, unique and innovative consumer products in the
Brookstone.Outpost.com store and a wide selection of photographic equipment and
services offered via our unique partnership with Wolf Camera. Our online store
features;
. an easy to navigate, intuitive interface;
. outstanding twenty-four hour customer service seven days per week;
. free overnight delivery;
. extensive product information;
. powerful search capabilities;
. competitive pricing; and
. a flexible returns policy including pick-up from any location in the
U.S..
Since December 1998, our store has consistently received the top rating of 4
stars (out of 5) from Bizrate.com. Outpost.com has become one of the most
widely known and used e-commerce sites. We have the #1 ranking in the Computing
category of the Forrester PowerRankings, by Forrester Research. We were also
named Best of the Web by Fortune Magazine, Favorite Destination by PC Magazine,
and #1 Rated in Category by Fortune Magazine.
We have expanded our business beyond the online "superstore" targeted to
retail consumers to include our newly developed "Your Office at Outpost.com"
specifically to address the needs of small and medium size businesses. The B2b
sector of online retailing has distinct needs that diverge from the traditional
consumer in both the quantity and pricing of the selections that businesses
need to purchase. We have a dedicated team of customer service professionals to
assist corporate buyers in making their selections, creating accounts and
managing payment and leasing terms. Our free overnight delivery on most orders
and the newly offered same day delivery options are key features that encourage
businesses to consider using Outpost.com to fulfill their purchasing
requirements. Corporate customers always have the ability to order their
products directly online. Additionally, our newly formed eBusiness Services
unit, allows us to further diversify our revenue stream and create a new source
of customers and products for our businesses.
Our business has grown rapidly since we started in 1995. Net sales increased
from $1.9 million for our fiscal year ended February 29, 1996 to $189 million
for our fiscal year ended February 29, 2000. In addition, of the approximately
630,000 individual customers in over 150 countries who have purchased from us
since we started, nearly 338,000 have become customers since March 1, 1999.
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Our business model takes advantage of the unique characteristics of the
Internet, which has become an increasingly significant global medium for
commerce, communication and information. We believe that growth in Internet
usage has been fueled by a number of factors including:
. a large and growing installed base of PCs and Internet devices in the
workplace and home;
. advances in the performance and speed of PCs, Internet devices and
modems;
. improvements in network infrastructure;
. easier and cheaper access to the Internet; and
. increased awareness of the Internet.
Our Market Opportunity
The Internet retailing industry is characterized by a number of factors
which present unique challenges to retailers including, the limited
availability of many of the top selling products across a broad array of
categories, rapid product obsolescence and continuous new product
introductions. The unique flexibility of e-tailing enables us to fully address
these challenges in order to take full advantage of the growing worldwide
market for consumer technology, computer hardware and software.
We understand the key business challenges of the Internet retailing industry
and we use this unique environment to address those challenges. Our online
superstore was created to provide retail consumers, and now small businesses,
with a convenient, compelling and enjoyable shopping experience in a Web-based
retail environment. Key attributes of our business include:
. Efficient economics of our "virtual" store. As an Internet-only
merchant, we enjoy structural economic advantages that we believe will
ultimately allow us to achieve greater operating margins relative to
traditional computer retailers. These advantages include, low-cost
unlimited "shelf space"; lower personnel requirements; scaleable
technology; and our ability to serve a global customer base from a
single, domestic location.
. Broad array of product offerings. Our unlimited, low-cost "shelf space",
allows us to offer more than 170,000 products including, computer
hardware, software and accessory products, home electronic products
(televisions, DVD players, VCRs and high end audio electronics), and
sports and fitness equipment for both home and office use. We carry
products from the industry's foremost developers and manufacturers and
are an authorized Internet reseller for many leading vendors for both
their consumer and commercial product lines.
. The ability to reach a global customer base. The global reach of the
Internet allows us to deliver a broad selection of products to customers
in international, rural or other locations that cannot support large
scale physical stores or to which catalogs cannot be easily or cost
effectively distributed.
. The availability of value-added online content. To assist our customers,
valuable information, including extensive product descriptions, is
available on our Web site and through our free e-mail newsletter.
. Convenient 24-hour shopping. Our online superstore which is available 24
hours a day, seven days a week, may be reached from the customer's home
or office and features sophisticated browsing and search technology.
Business Strategy
Our goal is to become an e-commerce market leader for the Internet retail
sale of a broad array of consumer technology products for consumers and small
businesses, and to provide e-commerce solutions for a large cross section of
businesses that have the need to implement an e-commerce strategy. Outpost.com
has
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recently expanded its business model beyond Business to Consumer (B2C) to
target small businesses (B2b) and eBusiness Services (eBS). We intend to build
upon our current strengths by (a) expanding our efforts in online and off-line
brand development, (b) expanding our product offerings with new, but related
product categories (c) developing a customized, personalized and transparent
one-to-one marketing approach and (d) diversifying into additional areas of
Internet commerce. We believe that these steps support our strategy, which is
to build an internationally known Internet brand and provide a unique and
satisfying shopping experience for our domestic and international customers.
eBusiness Services--eBS
Through ebusiness services, Ouptost.com has been developing relationships
with some of the country's premier retailers as well as building alliances with
established Internet brands. We began our "Clicks & Mortar" partnership
strategy in 1999 by combining forces with Tweeter Home Entertainment Group,
Inc. in a joint venture company to sell consumer electronics on the Internet.
This type of relationship allows us to develop and provide either end to end
co-branded or private label sites. These partnerships include:
. Tweeter.Outpost.com: This site combines the strengths of two companies
dedicated to providing unparalleled customer service and offers elite
brands of consumer electronics products to customers that shop on the
Web. Tweeter Home Entertainment Group, Inc. operates 84 top quality
merchandise stores throughout the United States.
. Innovations By Brookstone: Brookstone, Inc. of Nashua, NH, with over 200
stores nationwide, is known for creating and marketing innovative
products that appeal to the strong demographic customer base we attract.
Brookstone is also an eBS client for whom we are preparing a complete
eCommerce solution (www.brookstone.com).
. Cameras by Wolf Camera: Wolf Camera, based in Atlanta, GA, will shortly
appear on the Outpost.com site providing a vast selection of digital and
traditional cameras as well as other photographic equipment and
accessories that can be found in their over 1,000 retail stores around
the country.
We are also focusing our efforts in developing lasting e-commerce extensions
on-line with established Internet companies. These extensions give us access to
a broad audience. Our on-line relationships include Sandbox.com and
Computer.com where Outpost.com delivers shopping content for these popular
Websites. Finally, through ebusiness services, we are always working to develop
additional stores within our site to provide exciting new products for our
customers.
Through our retail partnerships and e-commerce extensions, Outpost.com now
has relationships with a diverse group of leading retailers who give us access
to over 1,200 U.S. storefronts.
Our Web Site
We believe our attractive, intuitive and easy-to-shop online superstore
delivers a superior shopping experience and provides a competitive advantage
for our customers. Browsing, shopping and check-out are simple and
straightforward. As with a physical retail store, customers can browse the
departments of the store, search for specific needs, look at promoted products,
obtain product information, order products and ask for customer service. In
contrast to a physical retail store, however, the consumer can look at over
170,000 products and accomplish the shopping experience in the comfort and
convenience of his or her home or office. The key features of our online store
include:
Browsing. We have categorized the products that we currently offer into
tabs, departments and sub-departments. We have also developed a series of tabs
that are dedicated to products brought to us by our partners. Our convenient
store map lists all of our departments and product categories. By clicking on
the tab
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or department name, the consumer can quickly target products of interest.
Permanent categories, such as Computers, Games, Electronics by Tweeter,
Innovations by Brookstone, and Cameras by Wolf Camera are dedicated stores
displayed with tabs.
Searching. A primary feature of our Web site is its interactive search
engine. We provide a selection of search tools that allows customers to find
items based on pre-selected criteria such as product type, platform,
manufacturer or publisher. Customers are also able to use more complex and
precise search tools such as search queries.
Checkout. To purchase a product, a customer can simply click on a button to
add the product to their virtual shopping cart. Just as in a physical store, a
customer may add and/or subtract products as they browse through our
merchandise prior to making a final purchase decision. Once a customer is
finished shopping and clicks on the "Proceed to Checkout" button, we feature a
simple three-step checkout process. To complete the checkout process the
customer simply:
. enters his or her billing and shipping information;
. reviews the merchandise being purchased and chooses from the differing
shipping options; and
. enters credit card information for payment.
Once the checkout process is complete, the customer then clicks the "Submit
Order" button. Customers may also set up an Express Account with us using the
"Remember Me" feature with their email address and a password for quick
checkouts on return shopping trips.
Advertising. We have designated many feature locations on our home page and
throughout our store that are available to advertisers wishing to increase
their Internet presence and target our sophisticated user base. Our in-store
promotional banners advertise a variety of our manufacturers' and publishers'
products on a continual basis. Additional promotional opportunities are
available throughout our store in the form of sponsorships of products in
specialty shops, manufacturer showcases, featured product spots, targeted e-
mail offers, and banners and buttons for special offers.
Merchandising. We actively work with manufacturers to create special bundles
of products and to secure special offers exclusively for our customers. Such
specials are featured prominently throughout our Web site. Weekly, seasonal,
holiday and special promotions are displayed on banners or tabs and can also be
targeted directly to interested customers via e-mail.
Product Information. We provide detailed product information throughout our
store. After selecting a product, the customer is supplied with comprehensive
descriptions, system requirements, screen shots, product packaging and pricing
information. One of the unique advantages of an Internet retail store is the
ability to interweave editorial content and product information. We have a team
of writers that creates product information and other content for the site. We
believe that fresh, entertaining content adds to the customer experience,
increases conversion rate (the number of visitors to the site who make
purchases) and differentiates us from other online retailers. Throughout our
store we use "advisors" to help customers choose the correct component needed
for their individual system, such as laptop batteries, cables and memory
upgrades.
TruePrice SM. With TruePrice, we include free overnight delivery (up to $100
of shipping charges) to any location within the United States. This policy
assures our customers that the price they see is the price they pay. There are
no surprising shipping and handling costs added. International customers are
given the option of express courier delivery to overseas destinations. We also
provide a 30-day money back guarantee and for $10.00 will arrange for the pick
up of any product return from the location specified by the customer.
International Translations. We have translated portions of our home page and
the customer service and ordering information on our Web site into twelve
foreign languages. These pages are accessed by simply
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selecting the language of choice from a drop down menu. A currency converter is
also available to provide immediate local pricing information.
Our Customers
Since our inception, our customer base has grown dramatically. As of
February 28, 1998, the number of customers who had made a purchase from us was
81,000. Since that date, our number of customers grew as follows:
. to 280,000 customers for the fiscal year ended February 28, 1999;
. to 332,000 customers at the end of the first quarter ended May 31, 1999;
. to 391,000 customers at the end of the second quarter ended August 31,
1999;
. to 464,000 customers at the end of the third quarter ended November 30,
1999; and
. to 630,000 customers at the end of the fourth quarter ended February 29,
2000.
According to our Customer Satisfaction Survey, Outpost.com customers are
very satisfied with their shopping and purchase experience on our site. Nearly
9 out of 10 customers were "Extremely" or "Very" satisfied with the result of
their visit to Outpost.com whether they were just "shopping" or they actually
made a purchase. Our customers reported that Outpost.com strongly delivers on
the following qualities and features:
. fast, free, dependable delivery
. easy to place orders
. simple checkout
. offers brand name products
Marketing
Our marketing strategy is to promote and increase our brand awareness, cost
effectively acquire new customers, build customer loyalty, promote repeat
purchases and increase our market share. We are implementing this strategy
through the following channels:
. advertising on leading Web sites and through traditional media channels
worldwide;
. employing customer relationship marketing to retain existing and to
attract potential new customers;
. optimizing our affiliates network; and
. developing e-commerce vertical integrations with selected partners.
We believe that the use of multiple marketing channels reduces reliance on
any one source of customers, lowers customer acquisition costs and maximizes
brand awareness.
Online and Traditional Advertising. We have implemented a broad-based,
multi-media advertising campaign that includes both online and traditional
advertising, designed to drive high-value traffic to our Web site. Our current
online advertising focuses on a variety of Web sites that have a proven ability
to drive buyers to our site. We optimize the performance of our online efforts
through the use of dynamic tools.
Customer Relationship Marketing. Jupiter Communications, a market research
firm, projects that by 2002 consumer e-mail volume will rise by 58% to 576
million messages per day, up from 335 million per day in 1999. In order to
expand our customer retention and acquisition efforts, we have developed a
concentrated customer relationship marketing campaign. At Outpost.com, we
believe that e-mail direct marketing offers significant advantages over
traditional "snail" mail marketing including: ease of personalization; lower
cost; more rapid delivery and response.
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We developed and implemented technology-based systems that customize the
content of targeted e-mails based on order history, platform of choice and
other buying criteria. In addition, we are creating plans for increased loyalty
programs beyond our current efforts to maximize the lifetime value of our
customers. At times, we work in conjunction with our suppliers to notify our
customers of specific product opportunities that are available. We also send
our Gamer's Express newsletter to interested opt-in gaming enthusiasts.
We have implemented in-box promotions and advertising for every package that
we ship. In light of the fact that most all of our deliveries arrive at the
customers door or desk the following morning, we feel that one of the best
times to reach a customer is at the conclusion of a positive shopping
experience. In every package we include a thank you note, a free in-box gift
and a vendor sponsored promotional insert. We feel strongly that immediate
acknowledgement of the time a customer transacted business with us deserves our
immediate appreciation and will serve to increase a customer's loyalty to
shopping at Outpost.com.
Outpost Affiliate Network Program. The Outpost affiliate program is an
established network of Web sites that post links to Outpost.com and receive a
commission on sales they generate on a direct click through to Outpost.com. We
partner with LinkShare Corporation, a leading provider of affiliate program
management. We believe this partnership has helped make the Outpost Affiliate
Network one of the leading programs in the industry today. The affiliate
network program was launched in December 1997 and since that time has
experienced substantial growth. By the close of fiscal 2000, our network
membership had grown to more than 85,000. Through the Outpost Affiliate
Network, we feel that we are building brand awareness, reinforcing customer
loyalty and attracting new customers to our Web site.
Strategic Online Advertising Relationships. We continue to forge strategic
relationships with selected Internet sites including CNET, MSN Shopper and
DEJA.com to increase market share and attract new customers. We are also a
founding member of ShopperConnection (www.shopperconnection.com), a network
connecting some of the Internet's leading online specialty retailers and
services.
Market Intelligence and Research. We have created a group to study the
productivity and behavior of our customer base in order to determine the
effectiveness of our marketing efforts. The market intelligence program works
with both our internal data, mining session behavior and retention programs as
well as with syndicated third party data provided by research firms such as
Forrester, Biz Rate.com and NetRatings. We have commissioned proprietary
studies to gain better understanding of our customers and use data produced
from these studies to help determine the likelihood that our customers will
return to us to purchase again and again and to determine what other product
selections might appeal to our established customers.
Merchandising
Outpost.com is a destination for customers who embrace advances in
technology as soon as they are available. Our approach to merchandising allows
Outpost.com distinct advantages such as:
. dynamic pricing;
. the ability to offer a vast array of products;
. the potential to cross-sell and up-sell products;
. our virtually unlimited display and shelf space; and
. Instantaneous updates of "Hot" promotional items to our site.
Working with our eBS partners and clients, we purchase and maintain
inventory on many popular products that are difficult to obtain for Internet
resale. Many of our purchasing decisions in the non-computer categories are
guided by the experience and skills that have made our partners successful
traditional Brick and Mortar retailers. Because of our approach to
merchandising, we are able to realize pricing opportunities considerably more
quickly than traditional retailers. When prices from the manufacturer change,
we can immediately update
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the prices in our store. Additionally, we have the ability to test the
attractiveness of products and generate interest through unique product
bundling, feature and product presentation without the shelf-space limitations
that constrain catalog and traditional retail stores. The retail merchandise
display capabilities of our store allow us to carry an extraordinarily deep
product selection. Outpost.com is able to provide the full array of a
manufacturer's products, not just the top selling items. Our product
descriptions are very detailed and are continually updated with new
information. We believe we have strong relationships with our suppliers and by
providing entire lines of products, we are able to more solidly support our
customers with accessories and enhancements to the major purchases they make.
Our ability to cross-sell throughout our store bolsters cooperative association
with manufacturers. For example, we link related products with one another such
as combining laptop computers, leather carrying cases and extra batteries. Our
intention is to expose our customer to as much value added sales support as
possible.
At Outpost.com, we take advantage of special product purchasing
opportunities and joint advertising relationships with manufacturers and
distributors, both within our store and in other venues as well. We run weekly
merchandise specials on products that are specifically allocated by
manufactures to Outpost.com. Our home page has rotating feature spots that
attract attention to additional specials and specific product categories. We
believe we are skilled at marketing by theme. We tailor our home page from
season to season along traditional holiday themes, and we create our own
seasonal offerings such as Mother's and Father's day promotions, sport
championship sweepstakes and prizes. At times we have even created offerings
specializing in the latest blockbuster movie from Hollywood. Furthermore, our
strong relationships with product manufacturers enhance our ability to respond
quickly to world-wide events affecting technology, such as virus scares. We can
make solutions available to our customers extremely rapidly through
downloadable software updates.
Corporate Advertising
Our stores provide a compelling destination for shoppers and customers with
the highly attractive demographic profile that advertisers seek to reach.
During the fourth quarter of fiscal 2000, our average order size was more than
$240.00 and our revenue for the quarter exceeded $76 million. Advertisers can
place a variety of advertising formats on our site or in co-sponsored e-mail
distributions. We plan to develop innovative programs and dedicate more
resources to driving the lucrative revenue opportunities that are available
through opening up our site to nationally branded companies wishing to target
their messages to the Outpost.com audience.
Customer Service
Understanding and serving the customer is a core strength at Outpost.com.
Since December 1998, we have earned the top-ranking for customer service in the
computer hardware and software categories from BizRate.com, an independent
online rating service. Satisfying our customers is central to our strategy and
goals for the future. At Outpost.com, we concentrate on making shopping as
effortless and enjoyable as possible. We have implemented a broad array of
scaleable site management, customer interaction, transaction-processing and
fulfillment services and systems. The Customer Service area of our Web site
contains extensive information about shopping, ordering and returning products
as well as tracking the current status of orders. We are developing online
email "help" conversation ability in order to assist our customers while they
are in our site. In addition, TruePrice, payment and leasing options, and other
policies are clearly defined. Help buttons on every page of the site take
customers to the specific customer service topic they need.
Because Internet retail is new to many people, we prominently display our
toll-free number throughout our site. Our highly trained team of sales and
customer service agents are available 24 hours daily, seven days a week, to
answer customer questions about products, process orders, assist in tracking
shipments and streamline the entire shopping experience.
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Warehousing, Fulfillment and Distribution
Outpost.com offers free overnight delivery, our hallmark of customer
service, from our warehouse facility in Wilmington, Ohio located at the
Airborne Express Hub. This 120,000 square-foot facility contains our inventory,
warehousing and fulfillment operations. We have partnered with Airborne
Logistics Services to manage this operation for us. We have the ability to
expand our operations within this location upon demand. Our flexible customer
service and fulfillment systems allow us to accept orders for in-stock items
until midnight eastern time for next morning delivery in the United States and
two to three day international delivery.
We regularly "cross dock" (i.e., receive products from third party vendors
and distributors and ship those same products to customers the same day) and
are therefore able to deliver even non-inventoried products to customers
typically within two to three days We obtain our products from a network of
distributors, hardware manufacturers and software publishers. We carry a
limited amount of our most popular products (typically about 5,000 SKU's) in
inventory and rely to a large extent on rapid fulfillment to our warehouse from
major distributors and wholesalers that carry a broad selection of products and
titles. We purchase a substantial portion of our products from large
distributors such as Tech Data and Ingram Micro who have inventory at
distribution centers around the country. Due to our heavy sales volume in
certain products, we have established relationships with manufacturers, such as
Apple, that ship their products into our warehouse directly.
We have redundant dedicated connections to our information system. As a
result, we have real-time data on inventory receiving, shipping, quantities and
location. In addition, we offer a real-time order tracking system for our
customers on the Web. The moment a package is shipped and assigned an Airborne,
UPS or DHL airbill tracking number, the customer's order information is updated
and an e-mail notification of shipment is sent to the customer. Product return
processing is also handled using this system, allowing returned products to be
promptly returned to the manufacturer for credit.
We have negotiated attractive shipping terms with our major distributors.
Thus, most purchase orders placed with our major suppliers for in-stock items
are received within 48 hours of order. To help maintain our ability to turn
inventory quickly, we have established Electronic Data Interchange (EDI)
connections with our top vendors' inventory information. Such connections will
help to automate the ordering process, facilitate price comparisons between
vendors and allow us to provide real-time, online in-stock status information
to customers that details product availability not only in our warehouse, but
also at vendor locations.
Technology
In the fall of 1999, we launched an upgrade to our customer interface design
that was based on research of online shopping behavior and functionality. We
realize that there are many paths that can be taken to reach the same
destination and we have provided additional "intuitive" approaches to browsing
and shopping.
We have implemented a broad array of scaleable site management, search,
customer support, transaction processing and fulfillment services systems.
These systems use a combination of proprietary technologies and commercially
available, licensed technologies. Our transaction-processing systems are
integrated with our accounting and financial systems.
Our Web front-end is an integrated suite of commercially available software
packages. Most Web site interaction, including our personalization
functionality, is handled by software licensed from Netscape, Oracle,
BroadVision, Engage and Verity. The various software applications share
information according to a proprietary integration plan using internally
developed interfaces. This software runs on industry standard hardware
platforms, including Sun Ultra Sparc servers and the Solaris operating system.
Our system includes redundant hardware on mission critical components. Capacity
can be quickly and easily expanded without additional development. Our policy
is to run key systems at no more than 60% of capacity to support rapid growth.
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Smith-Gardner and Associates' MACS II system handles our back-end
transaction processing. MACS II is a mature, highly scaleable, widely used
application which handles order management, validation, inventory, purchasing,
shipping and accounting. The system handles multiple shipment methods, credit
card transaction processing and automated customer communications.
We subcontract the hosting of our Web servers to two Internet data center
specialists; Digital Island and Exodus Communications, Inc., both of whom have
extensive national network infrastructures. This gives the Company redundant
Internet connections to multiple Internet access points, a secure physical
environment, climate control and redundant power. In addition, these
specialists provide us with 24 hour, seven day a week system monitoring and
escalation and there is more than adequate available floor space to support
possible future expansion. Additionally, we are able to support a distributed,
redundant site by placing some of our servers in other locations around the
world.
Competition
We compete in a highly fragmented, rapidly evolving and intensely
competitive industry. Current and new competitors can launch new sites quickly
and inexpensively. In addition, Internet retail is highly competitive and the
industry is evolving and consolidating rapidly. Our current or potential
competitors include:
. traditional electronics such as CompUSA and Circuit City;
. mail-order retailers such as CDW, Micro Warehouse, Insight, PC
Connection and Creative Computers;
. Internet-only computer retailers including Egghead.com, Buy.com and
Crutchfield.com.
. manufacturers that sell directly over the Internet or by telephone such
as Dell and Gateway and many software companies;
. a number of online service providers including America Online and the
Microsoft Network that offer computer products directly or in
partnership with other retailers;
. some all purpose retailers such as Wal-Mart that sell a limited
selection of electronic products in their stores; and
. electronic products distributors that may develop direct channels to the
consumer market.
Many of these competitors have longer operating histories, larger customer
bases, greater brand recognition, and significantly greater financial,
marketing and other resources. We believe that the principal competitive
factors in our market include 24 X 7 customer service, brand recognition,
varied product selection, convenience, price and shipping costs.
Some of our competitors have adopted aggressive pricing policies. Moreover,
companies that control access to Internet commerce transactions through network
access or Web browsers currently promote, and will likely continue to promote,
some of our competitors. This could require us to establish pricing, marketing
and other programs or to seek out additional strategic alliances or
acquisitions that may be less favorable to us than we could otherwise establish
or obtain. This could have a material adverse effect on our business,
prospects, financial condition and results of operations.
In addition, as use of the Internet and other online services increases, we
believe that competition may increase as online retailers are acquired by,
receive investments from, or enter into other commercial relationships with,
large, well-established and well-financed companies. Such increased competition
may result in reduced operating margins, loss of market share and a diminished
brand franchise. This could have a material adverse effect on our business,
prospects, financial condition and results of operations.
10
Intellectual Property
We have registered United States service marks for "Cyberian Outpost" and
"Outpostauctions.com." We claim a common law trademark for our newsletter name
"Cyberian Express." We also use the following marks for which applications in
the United States Patent and Trademark Office are pending: our logo,
"TruePrice", "Outpost.com" and "Transparent Personalization." In addition, we
have trademark and service mark applications pending in foreign countries.
Government Regulation
We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. There are currently few laws
or regulations uniquely applicable to commercial online services or the
Internet. One such law, the Children's Online Privacy Protection Act ("COPPA")
recently went into effect. The COPPA regulates the collection, use, and/or
disclosure of personal information obtained from children under the age of 13.
Currently we fully comply with the provisions of COPPA. Due to the increasing
popularity and use of commercial online services and the Internet, it is
possible that additional of laws and regulations may be adopted. These laws and
regulations may cover issues including, for example, general user privacy,
pricing and characteristics and quality of products and services. Moreover, the
applicability to commercial online services and the Internet of existing laws
governing issues including, for example, property ownership, libel and personal
privacy is uncertain and could expose us to substantial liability. Any new
legislation or regulation or the application of existing laws and regulations
to the Internet could have a material and adverse effect on our business.
In addition, because our services and products are available over the
Internet anywhere in the world, multiple jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each of those
jurisdictions. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify. It is possible that state and foreign
governments might also attempt to regulate our transmissions of content on our
Web site or prosecute us for violations of their laws. There can be no
assurance that violations of local laws will not be alleged or charged by state
or foreign governments, that we might not unintentionally violate these laws or
that these laws will not be modified, or new laws enacted, in the future.
We do not currently collect sales or other similar taxes with respect to
shipments of goods into states other than Connecticut and Ohio, the only states
in which we have a physical presence. Any new operation by us in other states
could subject shipments into such states to state sales taxes. In October 1998,
Congress enacted the Internet Tax Freedom Act (ITFA). For a period of three
years, the ITFA effectively bars state or local governments from imposing taxes
that would subject online commerce transactions to taxation in multiple states.
The ITFA does not prohibit state or local taxation on online commerce products
or services that would otherwise be taxed, such as in states where a company
has a physical presence. The ITFA also provides for the establishment of a
commission to study online commerce and to recommend a fair method of taxing
Internet transactions. We cannot be certain that upon expiration of the ITFA,
we will not be subject to further taxation by state or local governments on the
sale of merchandise.
Employees
We believe our success depends, to a significant extent, on our ability to
attract and retain highly skilled management and employees. Accordingly, we
focus on incentive programs such as a company-wide employee stock option plan
and provide competitive compensation and benefits for our employees. We also
seek to foster a corporate culture that is challenging, rewarding and fun. As
of February 29, 2000, we had 234 full-time and five part-time employees. We
also employ a limited number of independent contractors and temporary employees
on a periodic basis. None of our employees is represented by a labor union and
we consider our labor relations to be good.
11
Item 2. PROPERTIES
We currently lease an aggregate of 44,900 square feet of office space in two
Connecticut towns. The following is a summary of the office space that we are
currently leasing by location:
Location Business Use Square Footage Lease Expiration
-------- ------------ -------------- ----------------
Kent, CT. Corporate Headquarters, 5,381 11/30/2001
Technology, Purchasing
and Marketing
Kent, CT. Corporate Headquarters, 1,374 11/30/2000
Technology, Purchasing
and Marketing
Kent, CT. Corporate Headquarters, 670 11/15/2000
Technology, Purchasing
and Marketing
Kent, CT. Corporate Headquarters, 18,000 11/15/2000
Technology, Purchasing
and Marketing
Kent, CT. Corporate Headquarters, 2,475 6/9/2000
Technology, Purchasing
and Marketing
Bethel, CT. Sales, Customer Service, 17,000 9/30/2004
Finance and Accounting
We also contract with Airborne Logistics Services who manages a 120,000 foot
facility that houses our inventory warehousing and fulfillment operations. We
believe that we have adequate space for our current needs. As we expand, we
expect that suitable additional space will be available on commercially
reasonable terms, although we cannot guarantee this. We do not own any real
estate. We continue to use a contract warehouse for our fulfillment and
logistics requirements.
Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of the year ended February 29, 2000.
12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock began trading on The Nasdaq Stock Market on July 31, 1998
under the symbol "COOL." The following table sets forth, for the periods
indicated, the high and low sales prices for the common stock, as reported by
the Nasdaq National Market since the common stock commenced public trading.
Common Stock
---------------
Fiscal Year Ended February 29, 2000 High Low
----------------------------------- ------- -------
First Quarter ended May 31, 1999......................... $ 22.50 $ 11.25
Second Quarter ended August 31, 1999..................... $ 13.50 $8.1875
Third Quarter ended November 30, 1999.................... $ 14.75 $ 7.81
Fourth Quarter ended February 29, 2000................... $13.063 $ 7.75
Fiscal Year Ended February 28, 1999
-----------------------------------
Second Quarter ended August 31, 1998 (from July 31,
1998)................................................... $ 25.00 $ 8.25
Third Quarter ended November 30, 1998.................... $ 45.50 $ 5.938
Fourth Quarter ended February 28, 1999................... $ 40.50 $15.375
Stockholders
As of May 1, 2000, there were approximately 438 registered stockholders.
Dividends
We have not paid cash dividends to our stockholders since our inception and
we do not plan to pay cash dividends in the foreseeable future. We currently
intend to retain earnings, if any, to finance our growth.
Unregistered Sales of Securities
None
Use of Proceeds
In connection with our initial public offering, we sold 4,000,000 shares of
our common stock, par value $.01 per share, and received net offering proceeds
of approximately $65.5 million. On July 30, 1998, the Securities and Exchange
Commission declared our Registration Statement on Form S-1 (File No. 333-55819)
effective. The following table sets forth our cumulative use of the net
offering proceeds as of February 29, 2000:
(in thousands)
Construction of plant, building and facilities.............. $ 1,900
Purchase and installation of machinery and equipment........ 9,100
Purchase of real estate..................................... --
Acquisition of other businesses............................. --
Repayment of indebtedness................................... 700
Working Capital............................................. 29,900
Temporary investments....................................... 7,700
Cash and cash equivalents................................... 13,300
Investment in joint venture................................. 2,700
All other purposes, net..................................... 200
The foregoing use of net proceeds does not represent a material change in
the use of net proceeds described in the registration statement.
13
Item 6. SELECTED FINANCIAL DATA
Years Ended
---------------------------------------------------
3/6/1995
thru
2/29/2000 2/28/1999 2/28/1998 2/28/1997 2/29/1996
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Statements of Operations
Data:
Net sales.................... $188,605 $ 85,203 $22,681 $10,790 $1,852
Cost of sales................ 166,847 76,919 20,525 9,535 1,689
-------- -------- ------- ------- ------
Gross profit............... 21,758 8,284 2,156 1,255 163
Operating expenses:
Sales and marketing........ 41,667 26,865 5,943 1,407 218
General and
administrative............ 10,809 5,214 1,623 805 259
Technology and
development............... 7,001 3,717 1,058 382 54
-------- -------- ------- ------- ------
Total operating
expenses................ 59,477 35,796 8,624 2,594 531
-------- -------- ------- ------- ------
Operating loss............. (37,719) (27,512) (6,468) (1,339) (368)
Other income (expense), net.. 2,103 2,292 (624) 1 (4)
-------- -------- ------- ------- ------
Net loss................... $(35,616) $(25,220) $(7,092) $(1,338) $ (372)
======== ======== ======= ======= ======
Net loss applicable to
common stockholders (1)... $(35,616) $(26,043) $(7,092) $(1,338) $ (372)
======== ======== ======= ======= ======
Basic and diluted net loss
per common share (1)........ $ (1.52) $ (1.64) $ (1.07) $ (0.22) $(0.07)
======== ======== ======= ======= ======
Weighted average basic and
diluted common shares
outstanding (1)............. 23,382 15,886 6,633 6,145 5,244
======== ======== ======= ======= ======
Pro forma basic and diluted
net loss per
common share (2)............ $ (1.52) $ (1.24) $ (0.86) $ (0.22) $(0.07)
======== ======== ======= ======= ======
Pro forma weighted average
basic and diluted
common shares outstanding
(2)......................... 23,382 20,312 8,260 6,145 5,244
======== ======== ======= ======= ======
As of
--------------------------------------------------------------
Proforma
2/29/2000(3) 2/29/2000 2/28/1999 2/28/1998 2/28/1997 2/29/1996
------------ --------- --------- --------- --------- ---------
(in thousands)
Balance Sheet Data:
Cash and cash
equivalents............ $48,618 $13,293 $26,828 $ 7,325 $ 119 $ 41
Short term investments.. 7,694 7,694 28,735 -- -- --
Working capital
(deficit).............. 46,359 11,033 52,854 824 (182) (1,336)
Total assets............ 73,963 52,843 71,464 10,940 525 755
Capital lease
obligations, excluding
current portion........ 718 718 778 136 -- 23
Redeemable convertible
preferred stock........ -- -- -- 5,991 -- --
Common stock............ 284 237 230 67 60 65
Total stockholders'
equity (deficit)....... $59,845 $24,520 $58,421 $(3,671) $ (33) $(1,161)
- --------
(1) See Note 1(k) to our financial statements for an explanation of the
determination of the number of common shares used in computing the amount
of basic and diluted net loss per common share and net loss applicable to
common stockholders.
(2) Pro forma net loss per share has been computed under SFAS No. 128, except
that it reflects the conversion of the convertible preferred stock as of
the beginning of the earliest period presented or date of issuance,
whichever is later. Therefore, the pro forma net loss per share does not
include the accretion of or dividends on the Series C Redeemable
Convertible Preferred Stock before it converted into common stock upon
completion of our initial public offering on August 5, 1998. The pro forma
weighted average shares outstanding includes the common stock resulting
from the conversion of the convertible stock as of the beginning of the
earliest period presented or the date of issuance, whichever is later.
(3) The Company completed a private equity placement shortly after year end
which is being presented in this proforma balance sheet. See Note 11 to
our financial statements for further explanation.
14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Outpost.com is a leading global Internet-only retailer featuring over
170,000 consumer technology and related products for the home and office. With
over 630,000 customers world-wide, we offer an online "superstore" at
www.Outpost.com that provides one-stop shopping for domestic and international
customers, 24 hours a day, seven days a week. Our superstore features computer
hardware, software, electronics and accessories.
Although we have grown rapidly since our inception in 1995, we continue to
incur significant net losses. We believe that in order to continue our growth
and expansion, operating expenses will increase as a result of the financial
commitments required to further develop multiple marketing channels and enhance
our Web site's features and functionality. As such, we expect to continue to
incur losses and generate negative cash flows from operations for the near
term. Since computer retailers typically have low product gross margins, our
ability to achieve profitability is dependent upon our ability to substantially
increase net sales and to broaden our range of product offerings to include
higher margin products. To the extent that our marketing efforts do not result
in significantly higher net sales, we will be materially adversely affected.
There can be no assurance that sufficient revenues will be generated from the
sale of our products to enable us to reach or maintain profitability on a
quarterly or annual basis. Although we have experienced significant revenue
growth since inception, such growth rates may not be sustainable in the future.
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our
operating results, including our gross profit and operating expenses as
percentage of net sales, are not necessarily meaningful and should not be
relied upon as an indication of future performance.
We anticipate that international sales will continue to represent a portion
of our overall revenue. Our international sales are denominated in U.S. dollars
and, therefore, those sales are not affected by foreign currency translation.
However, foreign currency fluctuations may affect demand for our products. In
addition, international sales are subject to diverse market factors such as the
economic conditions of a given country or region.
We believe that the key factor affecting our long-term financial success is
our ability to attract and retain customers in a cost effective manner.
Currently, we seek to expand our customer base and encourage repeat buying
through multiple sales and marketing programs. Such programs include: (i) brand
development, (ii) online and offline marketing and promotional campaigns, (iii)
linking programs with targeted Web sites, (iv) personalized direct marketing
programs designed to generate repeat sales from existing customers and (v)
alliances with Internet content providers and portal sites.
We expect to experience significant fluctuations in our future operating
results due to a variety of factors, many of which are outside our control.
Factors that may affect our operating results include the frequency of new
product releases, success of business alliances, mix of product sales and
seasonality of sales typically experienced by retailers. Sales in the computer
retail industry are significantly affected by the release of new products.
Infrequent or delayed new product releases, when they occur, negatively impact
the overall growth in computer retail sales. Gross profit margins for hardware,
software and accessories vary widely, with computer hardware generally having
the lowest gross profit margins. While we have some ability to affect our
product mix through effective upselling and cross-selling of high margin
products, our sales mix will vary from period to period and our gross margins
will fluctuate accordingly.
15
Results of Operations
The following table sets forth certain items from our statement of
operations data as a percentage of net sales for the periods indicated:
Years Ended
-----------------------------
2/29/2000 2/28/1999 2/28/1998
--------- --------- ---------
Net sales.................................... 100.0% 100.0% 100.0%
Cost of sales................................ 88.5 90.3 90.5
----- ----- -----
Gross profit............................. 11.5 9.7 9.5
Operating expenses:
Sales and marketing........................ 22.1 31.5 26.2
General and administrative................. 5.7 6.1 7.1
Technology and development................. 3.7 4.4 4.7
----- ----- -----
Total operating expenses............... 31.5 42.0 38.0
----- ----- -----
Operating loss........................... (20.0) (32.3) (28.5)
Other income (expense), net.................. 1.1 2.7 (2.8)
----- ----- -----
Net loss................................. (18.9)% (29.6)% (31.3)%
===== ===== =====
Year Ended February 29, 2000 Compared to the Year Ended February 28, 1999
Net Sales
Net sales are comprised of product sales, net of returns and allowances, and
advertising revenue derived from hardware manufacturers and software publishers
that pay for promotional placements on our Web site. Product sales are
comprised of computer hardware, software, accessories, electronics and high end
consumer products and are recognized when the products are shipped to
customers. The Company records a reserve for estimated sales returns at the
time of shipment based on historical return rates. The majority of our net
sales are merchandise to customers using credit cards. The remainder is to
customers that are invoiced directly under credit terms and amounts received
from vendors for advertising.
Net sales increased by $103.4 million to $188.6 million in fiscal 2000 from
$85.2 million in fiscal 1999. This increase was primarily a result of increases
in our customer base and repeat purchases from existing customers. At the end
of fiscal 2000, we had approximately 630,000 customer accounts. International
sales represented approximately 8% of net sales in fiscal 2000 compared to
approximately 14% in fiscal 1999. This decrease was primarily a result of an
increase in domestic sales attributable to the development and implementation
of certain domestic marketing programs during fiscal 2000.
Cost of Sales and Gross Profit
Cost of sales consists of the cost of the merchandise we sell. Cost of sales
increased $89.9 million to $166.8 million in fiscal 2000 from $76.9 million in
fiscal 1999. This increase was primarily the result of an increase in product
sales volume. Our gross profit increased by $13.5 million to $21.8 million in
fiscal 2000 from $8.3 million in fiscal 1999. This increase was a result of our
growth in revenues and improved margins on those revenues. As a percentage of
net sales, our gross profit increased to 11.5% in fiscal 2000 from 9.7% in
fiscal 1999. The increase in gross margin is attributable to our ability to
successfully market higher margin products than in the previous year.
Operating Expenses
Operating expenses consist of sales and marketing expenses, general and
administrative expenses and technology and development expenses. These are
further described as follows:
Sales and Marketing. Sales and marketing expense consists primarily of three
components;
16
Direct Selling Expenses. These expenses consist primarily of shipping
expense net of shipping revenue under our TruePrice program, contract warehouse
fulfillment expense and bank and credit card fees.
Advertising and Promotional Costs. This consists of both on-line and off-
line advertising. This includes advertising placement fees for strategic
partner alliances with major Internet content and portal sites. This also
consists of expenses related to building our brand, increasing customer
awareness and driving traffic to our web site. The types of expenses incurred
include costs to design and send personalized direct marketing e-mail campaigns
and maintenance of e-mail customer lists.
Sales, Marketing and Customer Service Personnel Costs. This includes the
salaries and benefits paid to personnel and the incidental expenses incurred
during the course of their business. We do not allocate any material amount of
common expenses to Sales and Marketing.
Sales and marketing expenses increased by $14.8 million to $41.7 million in
fiscal 2000 from $26.9 million in fiscal 1999. The increase in absolute dollars
is primarily the result of an increase in the variable direct selling expenses
described above. As part of our TruePrice program we provide free overnight
shipping on most purchases. Therefore, this expense will increase with
additional sales volume. As a percentage of net sales, sales and marketing
expense decreased from 31.5% in fiscal 1999 to 22.1% in fiscal 2000. The
percentage decrease resulted from our ability to leverage sales and marketing
expenses such that net sales increased at a higher rate than those expenses.
General and Administrative. General and administrative expense includes
administrative, finance and purchasing personnel and related costs, general
office and depreciation expenses, as well as professional fees. General and
administrative expense increased by $5.6 million to $10.8 million in fiscal
2000 from $5.2 million in fiscal 1999. The dollar increase in general and
administrative expense was due to the increases in both executive and
administrative personnel, office expenses associated with such personnel,
depreciation, and professional and consulting fees. As a percentage of net
sales, general and administrative expense decreased from 6.1% in fiscal 1999 to
5.7% in fiscal 2000. This percentage decrease was due to our ability to
increase revenue without a commensurate increase in corporate expenses.
Technology and Development. Technology and development expense includes
systems personnel and related costs, software support, technology development
costs, Web site hosting and communications expenditures. Technology and
development expense increased by $3.3 million to $7.0 million in fiscal 2000
from $3.7 million in fiscal 1999. The dollar increases in technology and
development expense was primarily a result of systems and software upgrades and
enhancements required to support the growth in visitors to our Web site, as
well as increases in systems personnel to maintain and improve our Web site and
technology infrastructure. As a percentage of net sales, technology and
development expense decreased from 4.4% in fiscal 1999 to 3.7% in fiscal 2000.
The percentage decrease resulted from our ability to leverage technology and
development expenses such that net sales increased at a higher rate than those
expenses.
Other Income (Expense), Net
Other income (expense), net consists of interest income we earned on short-
term investments and overnight investments of our cash balances in money market
accounts and equity in the net income of Tweeter@Outpost.com, LLC, offset by
interest expense attributable to lease financing agreements. Other income, net
decreased by $0.2 million to $2.1 million for the year ended February 29, 2000
from $2.3 million for the year ended February 28, 1999 primarily as a result of
lower interest income because of lower short-term investment balances during
the year.
Net Loss
As a result of the foregoing factors, we incurred a net loss of $35.6
million in fiscal 2000 compared to a net loss of $25.2 million in fiscal 1999.
17
Year Ended February 28, 1999 Compared to the Year Ended February 28, 1998
Net Sales
Net sales increased by $62.5 million to $85.2 million in fiscal 1999 from
$22.7 million in fiscal 1998 This increase was primarily a result of increases
in our customer base and repeat purchases from existing customers. At the end
of fiscal 1999, we had approximately 280,000 customer accounts. International
sales represented approximately 14% of net sales in fiscal 1999 compared to
approximately 36% in fiscal 1998. This decrease was primarily a result of an
increase in domestic sales due to our focus on the development and
implementation of certain domestic marketing programs during fiscal 1999.
Revenues from advertising and other sources in fiscal 1999 and 1998 were not
material.
Cost of Sales and Gross Profit
Cost of sales increased $56.4 million to $76.9 million in fiscal 1999 from
$20.5 million in fiscal 1998. This increase was primarily the result of an
increase in product sales volume. Our gross profit increased by $6.1 million to
$8.3 million in fiscal 1999 from $2.2 million in fiscal 1998 as a result of our
growth in revenues. As a percentage of net sales, our gross margin was 9.7% in
fiscal 1999 and 9.5% in fiscal 1998.
Sales and Marketing
Sales and marketing expenses increased by $20.9 million to $26.9 million in
fiscal 1999 from $5.9 million in fiscal 1998. As a percentage of net sales,
sales and marketing expense increased from 26.2% in fiscal 1998 to 31.5% in
fiscal 1999. This increase was primarily a result of costs associated with
increased advertising and promotion costs related to building brand recognition
and increasing sales, fixed monthly advertising and placement fees paid to
strategic partners and increased direct costs as well as the growth in sales
and marketing staff.
General and Administrative
General and administrative expense increased by $3.6 million to $5.2 million
in fiscal 1999 from $1.6 million in fiscal 1998. The dollar increase in general
and administrative expense was due to increases in both executive and
administrative personnel, office expenses associated with such personnel,
depreciation, and professional and consulting fees. As a percentage of net
sales, general and administrative expense decreased from 7.1% in fiscal 1998 to
6.1% in fiscal 1999. This percentage decrease was due to our ability to
increase revenue without a commensurate increase in corporate expenses.
Technology and Development
Technology and development expense increased by $2.6 million to $3.7 million
in fiscal 1999 from $1.1 million in fiscal 1998. As a percentage of net sales,
technology and development expense decreased from 4.7% in fiscal 1998 to 4.4%
in fiscal 1999. This percentage decrease in technology and development expense
primarily resulted from our installation in fiscal 1999 of a systems
infrastructure that allows us to increase our Web site capacity without a
corresponding increase in additional system resources.
Other Income (Expense), Net
Other income, net increased by $2.9 million to income of $2.3 million in
fiscal 1999 from an expense of $624,000 in fiscal 1998. This change was
primarily a result of interest income from short-term investment of our cash
balances from our sale of Redeemable Series C Convertible Preferred Stock in
February and March 1998 and common stock through our initial public offering on
August 5, 1998. All preferred stock was converted to common stock when we
completed our initial public offering.
18
Net Loss
As a result of the foregoing factors, we incurred a net loss of $25.2
million in fiscal 1999 compared to a net loss of $7.1 million in fiscal 1998.
Liquidity and Capital Resources
Cash Inflows and Outflows
During fiscal 2000 the net decrease in cash and cash equivalents was $13.5
million compared to a net increase of $19.5 million in fiscal 1999. Details of
the company's cash inflows and outflows are as follows:
Operating Activities: We used $25.0 million in cash to fund operations
during fiscal 2000. During this period, our principal operating cash
requirements were to fund our net loss and for increases in accounts
receivable, inventories, prepaid expenses and other assets, offset in part, by
increases in accounts payable and decreases in accrued expenses. The increase
in accounts receivable represents the increase in our on-account credit sales
to small business, college and university customers, as well as the increase in
receivables from our Web site advertisers.
Investing Activities: We generated $10.6 million in cash from investing
activities during fiscal 2000. This consists of proceeds from the sale and
maturities of short-term investments of $32.4 million offset by purchases of
short term securities for $11.5 million, purchases of property and equipment of
$7.8 million and an investment of $2.5 million in the joint venture
Tweeter@Outpost.com, LLC.
Financing Activities: We generated $0.9 million in cash from financing
activities during fiscal 2000. Financing activities included proceeds for
issuance of common stock of $1.6 million offset by repayment of capital lease
obligations in the amount of $0.6 million.
Cash, Cash Equivalents and Commitments
At February 29, 2000, we had $13.3 million in cash and cash equivalents
compared to $26.9 million at February 28, 1999. Our cash is currently invested
in A1/P1 or better grade commercial paper. Additionally, we also had $7.7
million invested in short term corporate bonds with a minimum AA rating.
As of February 29, 2000, our material capital commitments consisted of $1.4
million in obligations outstanding under capital leases.
In November 1999, our "flooring" credit agreement with Deutsche Financial
Services Corporation ("DFS") was increased from $7.0 million to $12.0 million.
Pursuant to this agreement, DFS may, at its option, extend credit to us from
time to time to purchase inventory from DFS approved vendors or for other
purposes. Under this agreement, we can purchase inventory from certain vendors
and elect to have these vendors invoice DFS instead of us. DFS pays this
invoice and in turn bills us on a periodic basis throughout the month. If we
pay this note within 30 days, we pay no interest. If the note remains
outstanding after 30 days, we must pay a.25% fee and interest accrues at a
variable rate based on the prime rate plus 2.5%. If the note remains
outstanding after 181 days, interest begins to accrue at the prime rate plus
6.5%. To date, we have paid all notes within 30 days and have incurred no
interest expense under this facility. As a result of increasing our line to
$12.0 million, the amount of cash instruments pledged was increased from $2.5
million to $5.5 million. This pledge, in addition to all of our assets, secures
this facility. For the years ended February 29, 2000 and February 28, 1999 we
had an outstanding balance of $8.5 million and $5.2 million, respectively,
under this facility. These amounts are included in accounts payable.
Subsequent to year end, in March 2000, the Company completed a private
equity placement and issued 4,702,900 shares of its common stock to
institutional investors at a price of $7.87 per share. The Company received
approximately $35.3 million of cash, net of the underwriting discount and
offering expenses. As of the date of this filing these shares were
unregistered.
19
We believe that our current cash and cash equivalents and short term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. If available
cash and cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity or
convertible debt securities could result in dilution to our stockholders. There
can be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all.
Recent Accounting Pronouncements
The AICPA Accounting Standards Executive Committee recently issued Statement
of Position ("SOP") 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software, and
is effective for fiscal years beginning after December 15, 1998. The statement
also requires that costs related to the preliminary project stage and post
implementation/operations stage in an internal-use computer software
development project be expensed as incurred. We have complied with the
provisions of SOP 98-1 in fiscal 1999 and 2000. The adoption of this SOP had no
material impact on our financial position or results of operations.
The AICPA Accounting Standards Executive Committee recently issued SOP 98-5,
Reporting on the Costs of Start-Up Activities. This statement requires that
costs incurred during start-up activities, including organization costs, be
expensed as incurred, and is effective for fiscal years beginning after
December 15, 1998. We have complied with the provisions of SOP 98-5 in fiscal
2000. The adoption of this SOP had no impact on our financial position or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which
provides guidance on the recognition, presentation, and disclosure of revenue
in financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Our revenue recognition policies
comply with the requirements of SAB 101.
In March 2000, Financial Accounting Standards Board Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation, was issued.
The interpretation clarifies, among other things, the application of APB
Opinion No. 25 for certain issues, including: (i) the definition of an
employee; (ii) the criteria for determining whether a plan qualifies as a non-
compensatory plan; (iii) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award; and (iv) the accounting
for an exchange of stock compensation awards in a business combination. This
interpretation generally is effective July 1, 2000, but certain conclusions in
the interpretation were effective for specific events that occurred after
either December 15, 1998, or January 12, 2000. The Company does not expect this
interpretation to have a material impact on its financial condition or its
results of operations.
Certain Factors That May Affect Our Results of Operations
This Annual Report on Form 10-K may contain forward-looking statements that
are subject to certain risks and uncertainties. These statements include
statements (i) the structural benefits of e-commerce, (ii) the expected
benefits of our systems in development that will customize our shopping
experience, (iii) our intention to pursue more branding and advertising
campaigns, (iv) our diversification into additional areas of Internet commerce,
(v) our expectation that our operating expenses will increase and that we will
continue to incur losses in the near term and (vi) the sufficiency of our cash,
cash equivalents and short term investments. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. We caution investors that there
can be no assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking statements
as a result of various factors, including, but not limited to, the following:
(i) our early stage of development, (ii) competition, (iii) our
20
ability to expand internationally, (iv) uncertainty regarding the continued
growth of the Internet and online commerce, (v) uncertainty regarding
governmental regulation and (vi) reliance on strategic alliances. For further
information, refer to the more specific risk and uncertainties discussed
throughout this discussion and analysis.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We did not have any derivative financial instruments as of February 29,
2000. However, we are exposed to interest rate risk. We employ policies and
procedures to manage our exposure to changes in the market risk of our cash
equivalents and short term investments, which are classified as available-for-
sale securities as of February 29, 2000. We believe that the market risk
arising from holdings of our financial instruments is not material.
21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CYBERIAN OUTPOST, INC.
Index to Financial Statements and Financial Statement Schedule
Page
Number
------
Financial Statements:
Independent Auditors' Report........................................... 23
Balance Sheets......................................................... 24
Statements of Operations............................................... 25
Statements of Redeemable Preferred Stock and Changes in Stockholders'
Equity................................................................ 26
Statements of Cash Flows............................................... 27
Notes to Financial Statements.......................................... 28
Schedule:
Independent Auditors' Report........................................... 41
Schedule II, Valuation and Qualifying Accounts......................... 42
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Cyberian Outpost, Inc:
We have audited the accompanying balance sheets of Cyberian Outpost, Inc. as
of February 29, 2000 and February 28, 1999, and the related statements of
operations, redeemable preferred stock and changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended February 29,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cyberian Outpost, Inc. as
of February 29, 2000 and February 28, 1999 and the results of its operations
and its cash flows for each of the years in the three-year period ended
February 29, 2000, in conformity with generally accepted accounting principles.
KPMG LLP
Providence, Rhode Island
March 17, 2000
23
CYBERIAN OUTPOST, INC.
BALANCE SHEETS
2/29/2000 2/28/1999
--------- ---------
(in thousands,
except share and
per share data)
Assets
Current assets:
Cash and cash equivalents................................ $ 13,293 $ 26,828
Short term investments (note 3).......................... 7,694 28,735
Accounts receivable, less allowance for doubtful accounts
of $525 in 2000 and $212 in 1999........................ 4,350 3,441
Inventories.............................................. 12,168 5,750
Prepaid expenses and other current assets................ 1,133 365
-------- --------
Total current assets................................... 38,638 65,119
Property and equipment, net (note 2)....................... 10,545 5,937
Investment in joint venture (note 10)...................... 2,709 --
Other assets (note 10)..................................... 951 408
-------- --------
Total assets........................................... $ 52,843 $ 71,464
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capital lease obligations (note
5(b))................................................... 666 501
Accounts payable (note 5(c))............................. 24,381 8,985
Accrued expenses......................................... 2,558 2,779
-------- --------
Total current liabilities.............................. 27,605 12,265
Capital lease obligations, excluding current portion (note
5(b))..................................................... 718 778
-------- --------
Total liabilities...................................... 28,323 13,043
======== ========
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 authorized, no
shares issued and outstanding............................. -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized, 23,765,117 shares issued and outstanding at
February 29, 2000 and 23,004,744 shares issued and
outstanding at February 28, 1999.......................... 237 230
Additional paid-in capital................................. 93,921 92,319
Accumulated other comprehensive loss....................... -- (106)
Accumulated deficit........................................ (69,638) (34,022)
-------- --------
Total stockholders' equity............................. 24,520 58,421
======== ========
Total liabilities and stockholders' equity............. $ 52,843 $ 71,464
======== ========
See accompanying notes to financial statements.
24
CYBERIAN OUTPOST, INC.
STATEMENTS OF OPERATIONS
Years Ended
-------------------------------
2/29/2000 2/28/1999 2/28/1998
--------- --------- ---------
(in thousands, except per
share data)
Net sales...................................... $188,605 $ 85,203 $22,681
Cost of sales.................................. 166,847 76,919 20,525
-------- -------- -------
Gross profit................................. 21,758 8,284 2,156
Operating expenses:
Sales and marketing.......................... 41,667 26,865 5,943
General and administrative................... 10,809 5,214 1,623
Technology and development................... 7,001 3,717 1,058
-------- -------- -------
Total operating expenses................... 59,477 35,796 8,624
-------- -------- -------
Operating loss............................... (37,719) (27,512) (6,468)
Other income (expense), net:
Interest expense............................. (132) (66) (658)
Interest income.............................. 2,021 2,354 --
Other, net................................... 214 4 34
-------- -------- -------
Other income (expense), net................ 2,103 2,292 (624)
-------- -------- -------
Net loss..................................... $(35,616) $(25,220) $(7,092)
Accretion of premium on preferred stock........ -- (210) --
Dividends applicable to preferred
stockholders.................................. -- (613) --
-------- -------- -------
Net loss applicable to common stockholders
(note 1(k))................................. $(35,616) $(26,043) $(7,092)
======== ======== =======
Basic and diluted net loss per common share.... $ (1.52) $ (1.64) $ (1.07)
======== ======== =======
Weighted average basic and diluted common
shares outstanding............................ 23,382 15,886 6,633
======== ======== =======
Pro forma basic and diluted net loss per common
share (note 1(k)) (unaudited)................. $ (1.52) $ (1.24) $ (0.86)
======== ======== =======
Pro forma weighted average basic and diluted
common shares outstanding (unaudited)......... 23,382 20,312 8,260
======== ======== =======
See accompanying notes to financial statements.
25
CYBERIAN OUTPOST, INC.
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND
CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Redeemable
Preferred Stock
--------------------
Shares Amount
---------- --------
Balance, February
28, 1997......... -- $ --
Issuance of
common stock
awards to
employees........ -- --
Issuance of
common stock for
services
rendered......... -- --
Sales of Series A
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. -- --
Value of warrants
issued in
connection with
Series A
Convertible
Preferred Stock.. -- --
Sales of Series B
Convertible
Preferred Stock,
net of expenses.. -- --
Value of warrants
issued in
connection with
marketing
agreement........ -- --
Value of warrants
issued in
connection with
bridge
financing........ -- --
Sales of Series C
Redeemable
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. 875,000 5,991
Warrants issued
in connection
with Series C
Redeemable
Convertible
Preferred Stock.. -- --
Contingent stock
purchase warrants
issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock.. -- --
Net loss......... -- --
---------- --------
Balance, February
28, 1998......... 875,000 5,991
Sales of Series C
Redeemable
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. 1,895,125 13,658
Warrants issued
in connection
with Series C
Redeemable
Convertible
Preferred Stock.. -- --
Contingent stock
purchase warrants
issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock.. -- --
Conversion of
Debenture to
Series B
Convertible
Preferred Stock.. -- --
Accretion on
Redeemable Series
C Convertible
Preferred Stock.. -- 210
Dividends on
Redeemable Series
C Convertible
Preferred Stock.. -- 613
Conversion of
Convertible
Preferred Stock
to common stock.. (2,770,125) (20,472)
Sale of common
stock at initial
public offering
net of expenses.. -- --
Issuance of stock
options.......... -- --
Exercise of
employee stock
options.......... -- --
Exercise of
common stock
warrants......... -- --
Comprehensive
loss
Net loss........ -- --
Change in
unrealized
holding loss in
available for
sale
securities...... -- --
Comprehensive
loss............ -- --
---------- --------
Balance, February
28, 1999......... -- --
Sale of common
stock, net of
expenses......... -- --
Issuance of stock
options.......... -- --
Exercise of
employee stock
options.......... -- --
Exercise of
common stock
warrants......... -- --
Comprehensive
loss
Net loss........ -- --
Change in
unrealized
holding loss in
available for
sale
securities...... -- --
Comprehensive
loss............ -- --
---------- --------
Balance, February
29, 2000......... -- $ --
========== ========
Stockholders' Equity (Deficit)
------------------------------------------------------------------------------------------
Accumulated Total
Preferred Stock Common Stock Additional Other Stockholders'
-------------------- ------------------ Paid-in Accumulated Comprehensive Equity
Shares Amount Shares Amount Capital Deficit Income (Loss) (Deficit)
----------- -------- ----------- ------ ---------- ----------- ------------- -------------
Balance, February
28, 1997......... -- $ -- 6,451,648 $ 65 $ 485 $ (1,710) $ -- $ (1,160)
Issuance of
common stock
awards to
employees........ -- -- 216,149 2 243 -- -- 245
Issuance of
common stock for
services
rendered......... -- -- 12,489 -- 14 -- -- 14
Sales of Series A
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. 682,738 1,949 -- -- -- -- -- 1,949
Value of warrants
issued in
connection with
Series A
Convertible
Preferred Stock.. -- -- -- -- 166 -- -- 166
Sales of Series B
Convertible
Preferred Stock,
net of expenses.. 163,043 665 -- -- -- -- -- 665
Value of warrants
issued in
connection with
marketing
agreement........ -- -- -- -- 704 -- -- 704
Value of warrants
issued in
connection with
bridge
financing........ -- -- -- -- 567 -- -- 567
Sales of Series C
Redeemable
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. -- -- -- -- -- -- -- --
Warrants issued
in connection
with Series C
Redeemable
Convertible
Preferred Stock.. -- -- -- -- 236 -- -- 236
Contingent stock
purchase warrants
issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock.. -- -- -- -- 35 -- -- 35
Net loss......... -- -- -- -- -- (7,092) -- (7,092)
----------- -------- ----------- ------ ---------- ----------- ------------- -------------
Balance, February
28, 1998......... 845,781 2,614 6,680,286 67 2,450 (8,802) -- (3,671)
Sales of Series C
Redeemable
Convertible
Preferred Stock,
net of expenses
and value of
warrants issued.. -- -- -- -- -- -- -- --
Warrants issued
in connection
with Series C
Redeemable
Convertible
Preferred Stock.. -- -- -- -- 474 -- -- 474
Contingent stock
purchase warrants
issued in
connection with
Series C
Redeemable
Convertible
Preferred Stock.. -- -- -- -- 71 -- -- 71
Conversion of
Debenture to
Series B
Convertible
Preferred Stock.. 163,043 750 -- -- -- -- -- 750
Accretion on
Redeemable Series
C Convertible
Preferred Stock.. -- -- -- -- (210) -- -- (210)
Dividends on
Redeemable Series
C Convertible
Preferred Stock.. -- -- -- -- (613) -- -- (613)
Conversion of
Convertible
Preferred Stock
to common stock.. (1,008,824) (3,364) 11,336,847 113 23,723 -- -- 20,472
Sale of common
stock at initial
public offering
net of expenses.. -- -- 4,000,000 40 65,451 -- -- 65,491
Issuance of stock
options.......... -- -- -- -- 378 -- -- 378
Exercise of
employee stock
options.......... -- -- 223,650 2 603 -- -- 605
Exercise of
common stock
warrants......... -- -- 763,961 8 (8) -- -- --
Comprehensive
loss
Net loss........ -- -- -- -- -- (25,220) -- (25,220)
Change in
unrealized
holding loss in
available for
sale
securities...... -- -- -- -- -- -- (106) (106)
-------------
Comprehensive
loss............ -- -- -- -- -- -- -- (25,326)
----------- -------- ----------- ------ ---------- ----------- ------------- -------------
Balance, February
28, 1999......... -- -- 23,004,744 230 92,319 (34,022) (106) 58,421
Sale of common
stock, net of
expenses......... -- -- 93,023 1 999 -- -- 1,000
Issuance of stock
options.......... -- -- -- -- 57 -- -- 57
Exercise of
employee stock
options.......... -- -- 287,506 3 524 -- -- 527
Exercise of
common stock
warrants......... -- -- 379,844 3 22 -- -- 25
Comprehensive
loss
Net loss........ -- -- -- -- -- (35,616) -- (35,616)
Change in
unrealized
holding loss in
available for
sale
securities...... -- -- -- -- -- -- 106 106
-------------
Comprehensive
loss............ -- -- -- -- -- -- -- (35,510)
----------- -------- ----------- ------ ---------- ----------- ------------- -------------
Balance, February
29, 2000......... -- $ -- $23,765,117 $237 $93,921 $(69,638) $ -- $ 24,520
=========== ======== =========== ====== ========== =========== ============= =============
See accompanying notes to financial statements.
26
CYBERIAN OUTPOST, INC.
STATEMENTS OF CASH FLOWS
Years Ended
-------------------------------
2/29/2000 2/28/1999 2/29/1998
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net loss....................................... $(35,616) $(25,220) $(7,092)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 3,954 1,111 145
Amortization of original issue discount on
bridge financing............................ -- -- 568
Issuance of common stock for services
rendered.................................... -- -- 14
Issuance of common stock awards to
employees................................... -- -- 245
Issuance of common stock warrants............ -- -- 704
Issuance of common stock options to
employees................................... 57 378 --
Equity in net income of joint venture........ (209) -- --
Provision for doubtful accounts.............. 760 228 69
Loss on disposal of property and equipment... -- -- 2
Loss on sales and maturities of short term
investments................................. 250 38 --
Increase in operating assets:
Accounts receivable........................ (1,669) (3,195) (346)
Inventories................................ (6,418) (4,339) (1,097)
Prepaid expenses and other assets.......... (1,311) (655) (115)
Increase (decrease) in operating liabilities:
Accounts payable........................... 15,396 5,565 1,876
Accrued expenses........................... (222) 573 2,069
-------- -------- -------
Net cash used in operating activities.... (25,028) (25,516) (2,958)
-------- -------- -------
Cash flows from investing activities:
Investment in joint venture.................... (2,500) -- --
Purchases of property and equipment............ (7,833) (4,200) (1,322)
Purchases of short term investments............ (11,481) (40,680) --
Proceeds from sales and maturities of short
term investments.............................. 32,379 11,801 --
Proceeds from the sale of property and
equipment..................................... -- -- 1
-------- -------- -------
Net cash provided by (used) in investing
activities.............................. 10,565 (33,079) (1,321)
-------- -------- -------
Cash flows from financing activities:
Proceeds from borrowings of notes payable...... -- -- 2,632
Repayment of notes payable..................... -- (2,000) (150)
Repayment of capital lease obligations......... (624) (201) (28)
Proceeds from issuance of preferred stock...... -- -- 2,114
Proceeds from issuance of redeemable preferred
stock......................................... -- 13,658 5,991
Proceeds from issuance of common stock
warrants...................................... -- 545 1,004
Proceeds from issuance of common stock......... 1,552 66,096 --
-------- -------- -------
Net cash provided by financing
activities.............................. 928 78,098 11,563
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents............................. (13,535) 19,503 7,284
Cash and cash equivalents at beginning of
period.................................. 26,828 7,325 41
-------- -------- -------
Cash and cash equivalents at end of
period.................................. $ 13,293 $ 26,828 $ 7,325
======== ======== =======
See accompanying notes to financial statements.
27
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Cyberian Outpost, Inc. ("Outpost.com", or the "Company") was incorporated in
the state of Connecticut on March 6, 1995 and reincorporated in the state of
Delaware on July 8, 1998. Outpost.com is a leading global Internet-only
retailer featuring over 170,000 consumer technology and related products for
the home and office. In December 1998, the Company dissolved a non-operating
subsidiary, Cyberian Merchant Solutions, Inc.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
investment instruments with original maturities of three months or less to be
cash equivalents. Cash equivalents at February 29, 2000 and February 28, 1999
included investments in overnight repurchase agreements, money market funds and
commercial paper.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method.
(e) Property and Equipment
Property and equipment are stated at cost. Equipment under capital lease
obligations is stated at the lesser of the present value of minimum rental and
other lease payments or fair value at the time of acquisition. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the assets, or over the term of the lease if shorter.
Estimated useful lives for financial reporting purposes are as follows:
Computers.................... 3 years
Software..................... 2-3 years
Office equipment............. 3 years
Furniture and fixtures....... 7 years
Leasehold improvements....... Shorter of lease term or useful life, currently
ranging from 2-7 years
In fiscal 1999, the Company adopted American Institute of Certified Public
Accountants Statement of Position ("SOP") 98-1, Accounting for Computer
Software Developed For or Obtained For Internal-Use. SOP 98-1 provides revised
guidance for the accounting treatment to all non-governmental entities for
software which is internally developed, acquired, or modified solely to meet
the entity's internal needs. SOP 98-1 did not have
28
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
a material effect on the Company's financial statements or results of
operations. Internal use software which has been capitalized under this SOP is
categorized as property and equipment on the balance sheets.
(f) Revenue Recognition
Net sales are comprised of product sales, net of returns and allowances,
and advertising revenue derived from hardware manufacturers and software
publishers that pay for promotional placements on our Web site. Product sales
are comprised of computer hardware, software, accessories, electronics and
high end consumer products and are recognized when the products are shipped to
customers. The Company records a reserve for estimated sales returns at the
time of shipment based on historical return rates. The majority of our net
sales are merchandise to customers using credit cards. The remainder is to
customers that are invoiced directly under credit terms and amounts received
from vendors for advertising. No revenue was derived from barter transactions.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in Financial
Statements. SAB No. 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Management believes the Company has complied with the provisions
of SAB No. 101.
(g) Sales and Marketing
Sales and marketing expense consists primarily of the following three
components;
Direct Selling Expenses. These expenses consist primarily of shipping
expense net of shipping revenue under our TruePrice program, contract
warehouse fulfillment expense and bank and credit card fees.
Advertising and Promotional Costs. This consists of both on-line and off-
line advertising. This includes advertising placement fees for strategic
partner alliances with major Internet content and portal sites. This also
consists of expenses related to building our brand, increasing customer
awareness and driving traffic to our web site. The types of expenses incurred
include costs to design and send personalized direct marketing e-mail
campaigns and maintenance of e-mail customer lists.
Sales, Marketing and Customer Service Personnel Costs. This includes the
salaries and benefits paid to personnel and the incidental expenses incurred
during the course of their business. We do not allocate any material amount of
common expenses to Sales and Marketing.
Advertising costs were $12.2 million, $8.4 million and $3.0 million in
2000, 1999 and 1998, respectively.
(h) Technology and Development
Technology and development expense includes systems personnel and related
costs, software support, technology development costs, Web site hosting and
communications expenditures.
(i) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
operations in the period that includes the enactment date.
29
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(j) Stock-based Compensation
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of stock-based
awards on the date of grant. For employee stock-based awards, SFAS No. 123
allows entities to continue to apply the provisions of Accounting Principles
Board ("APB") Opinion No. 25 and provide pro forma net earnings disclosures as
if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure of SFAS No. 123.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the grant date fair value of
the equity instruments issued, whichever is more reliably measurable.
(k) Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per share is presented under the provisions of
SFAS No. 128, Earnings per Share. In accordance with the pronouncement, the net
loss applicable to common stockholders includes the accretion of and dividends
on the Series C Redeemable Convertible Preferred Stock through August 5, 1998,
the date of conversion to Common Stock. Weighted average shares outstanding
includes the Common Stock resulting from the conversion of the Series A and
Series B Convertible Preferred Stock and Series C Redeemable Convertible
Preferred Stock ("Convertible Stock") from the date of conversion through the
end of the year.
As the Company has been in a net loss position for all periods presented,
common stock equivalents of 5,496,892, 5,243,790 and 9,807,206 for fiscal years
2000, 1999 and 1998, respectively, were excluded from the diluted net loss per
share calculation as they would be antidilutive. As a result, diluted net loss
per share is the same as basic net loss per share, and has not been presented
separately.
Unaudited pro forma net loss per share has been computed under SFAS No. 128,
except that it reflects the conversion of the Convertible Stock as of the
beginning of the earliest period presented or date of issuance, whichever is
later. Therefore, the pro forma net loss per share does not include the
accretion of or dividends on the Series C Redeemable Convertible Preferred
Stock. The pro forma weighted average shares outstanding includes the Common
Stock resulting from the conversion of the Convertible Stock as of the
beginning of the earliest period presented or the date of issuance, whichever
is later.
Net loss for the year ended February 28, 1999 has been increased by $823,000
to arrive at net loss applicable to common stockholders, to give effect to
$613,000 of dividends and $210,000 of accretion on the Redeemable Series C
Convertible Preferred Stock.
(l) Recapitalization
In May 1997, the Company effected a 100-for-1 stock split in the form of a
stock dividend and amended its Articles of Incorporation to increase the number
of authorized shares to 13,000,000, of which 10,000,000 shares were designated
as Common Stock and 3,000,000 shares were designated as Preferred Stock, both
without nominal or par value. In February 1998, the Company amended its
Articles of Incorporation to increase the number of authorized shares to
15,000,000, of which 10,000,000 shares were designated as Common Stock and
5,000,000 shares were designated as Preferred Stock, both without nominal or
par value. In July 1998, the Company effected a 3-for-1 stock split in the form
of a stock dividend and amended its Articles of Incorporation to increase the
number of authorized shares to 60,000,000, of which 50,000,000 shares were
30
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
designated as Common Stock and 10,000,000 shares were designated as Preferred
Stock, both with par values of $0.01. All references in the financial
statements to the number of shares and to per share amounts have been
retroactively restated to reflect these changes.
(m) Supplemental Disclosure of Non-Cash Investing and Financing Activities
During the year ended February 28, 1999, the Company (i) increased the
Redeemable Series C Convertible Preferred Stock and decreased additional paid-
in capital by $823,000 to record accumulated dividends of $613,000 and
accretion of $210,000 on the Redeemable Series C Convertible Preferred Stock,
(ii) converted the $750,000 debenture into 163,043 shares of Series B
Convertible Preferred Stock, (iii) converted all Convertible Stock to Common
Stock effective upon the consummation of the initial public offering, and (iv)
issued 763,961 shares of common stock for cashless exercises of warrants.
During the year ended February 29, 2000, the Company issued 370,422 shares
of common stock for the cashless exercise of a warrant.
The Company acquired office equipment, furniture and fixtures and leasehold
improvements by incurring capital lease obligations of $729,000, $1,242,000,
and $238,000 in the years ended February 29, 2000 and February 28, 1999 and
1998, respectively.
(n) Supplemental Disclosure of Cash Paid for Interest
During the years ended February 29, 2000 and February 28, 1999 and 1998, the
Company paid cash for interest of $132,000, $69,000 and $88,000, respectively.
(o) Comprehensive Income
On March 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net loss and net unrealized gains (losses) on
securities and is presented in the statements of redeemable preferred stock and
changes in stockholders' equity. SFAS No. 130 requires only additional
disclosures in the financial statements; it does not affect the Company's
financial position or results of operations.
(p) Investment Securities
Investment securities at February 29, 2000 and February 28, 1999 consist of
short term corporate and government-backed debt instruments with a minimum
rating of AA. The Company classifies its debt securities as available-for-sale.
Unrealized gains and losses, net of related tax effect, on holdings of
available-for-sale securities are excluded from earnings and are reported as a
separate component of other comprehensive income (loss) until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary, results in a reduction in the
carrying amount to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. Dividend and interest income are
recognized when earned.
31
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(q) Segment Reporting
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises
report selected information about operating segments in annual and interim
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
requires the use of the "management approach" in disclosing segment
information, based largely on how senior management generally analyzes business
operations. For the years ended February 29, 2000 and February 28, 1999 and
1998, the Company operated in only one segment.
(2) Property and Equipment
Property and equipment consist of the following at February 29, 2000 and
February 28, 1999:
2000 1999
------- ------
(in thousands)
Computers.................................................... $ 5,070 $2,020
Software..................................................... 7,353 2,721
Office equipment............................................. 570 268
Furniture and fixtures....................................... 801 561
Leasehold improvements....................................... 2,010 1,672
------- ------
15,804 7,242
Less accumulated depreciation and amortization............... 5,259 1,305
------- ------
$10,545 $5,937
======= ======
(3) Short Term Investments
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses, fair value for available-for-sale securities and their maturity dates
by major security type at February 29, 2000 and February 28, 1999 were as
follows:
Amortized Gross Unrealized Gross Unrealized Fair
Cost Holding Gains Holding Losses Value Maturity
--------- ---------------- ---------------- ------- -------------------
(in thousands)
At February 29, 2000
Commercial Paper........ $ 477 $ 19 $ -- $ 496 Due within one year
Corporate debt
securities............. 2,067 -- (19) 2,048 Due within one year
Municipal debt
securities............. 5,150 -- -- 5,150 Due within one year
------- ---- ----- -------
$ 7,694 $ 19 $ (19) $ 7,694
======= ==== ===== =======
At February 28, 1999
Government securities... $ 4,500 $-- $ (1) $ 4,499 Due within one year
Corporate debt
securities............. 16,091 -- (105) 15,986 Due within one year
Municipal debt
securities............. 8,250 -- -- 8,250 Due after ten years
------- ---- ----- -------
$28,841 $-- $(106) $28,735
======= ==== ===== =======
Proceeds from the sale of investment securities available for sale were $6.9
million and $10.3 million in fiscal years 2000 and 1999, respectively.
32
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Common Stock
(a) Common Stock Warrants
In December 1997, the Company issued a warrant to purchase 355,707 shares of
Common Stock at an exercise price of $2.6533 per share in connection with a
marketing agreement. The warrant expires in December 2007. Using the Black-
Scholes model, the Company calculated the fair value of the warrant for those
shares that vested immediately at $703,897. This amount was recorded as a
charge to marketing expense.
The contingent stock purchase warrants issued in fiscal 1998 and 1999 were
valued at $35,000 and $71,015, respectively, and recorded as a reduction to the
net proceeds of the Redeemable Series C Convertible Preferred Stock financing.
The contingent stock purchase warrants were cancelled upon the completion of
the Company's initial public offering. In July 1996, the Company issued a
warrant to purchase 180,000 shares of Common Stock at an exercise price of
$.0041 per share to a placement agent. Using the Black-Scholes model, the
warrant was valued at $60,000. This amount was recorded as an expense when
incurred since the placement agent was not successful in raising equity
financing for the Company. The warrant was exercised in August 1998 through a
net cashless exercise.
In January 1998, the Company issued a warrant to purchase 376,884.42 shares
of Common Stock at an exercise price of $2.6533 per share in connection with a
note payable. Using the Black-Scholes model, the warrant was valued at
$567,563. This amount was recorded as a reduction to the carrying value of the
note. The warrant was exercised in January 1999 through a net cashless
exercise.
In February 1998, the Company issued a warrant to purchase 157,500 shares of
Common Stock at an exercise price of $2.6667 per share to an investment banker
in connection with the Redeemable Series C Convertible Preferred Stock
financing. The warrant expires in February 2003. Using the Black-Scholes model,
the warrant was valued at $235,662. In March 1998 and also in connection with
the sale of the Redeemable Series C Convertible Preferred Stock, the Company
issued to an investment banker warrants to purchase 316,811.25 shares of Common
Stock at an exercise price of $2.6667 per share. Using the Black-Scholes model,
the warrants were valued at $474,035. These amounts were recorded as a
reduction in the carrying value of the Redeemable Series C Convertible
Preferred Stock and were amortized and included in the accretion to the
redemption value of the Redeemable Series C Convertible Preferred Stock through
August 5, 1998, the date the Redeemable Series C Convertible Preferred Stock
was converted to Common Stock. The warrant was exercised in July 1999 through a
net cashless exercise.
In connection with the Redeemable Series C Convertible Preferred Stock
financing, the Company issued contingent stock purchase warrants in fiscal 1998
and 1999 to the holders of the Redeemable Series C Convertible Preferred Stock
for the purchase of 393,750 shares and 852,806.25 shares, respectively, of
Common Stock at an exercise price of $3.3333 per share. The contingent warrants
were only exercisable upon the earlier of (i) the completion by the Company of
an initial public offering at a price per share of less than (x) 200% of the
then applicable conversion price if the initial public offering occurred within
12 months of the closing of the Redeemable Series C Convertible Preferred Stock
financing, or (y) 250% of the then applicable conversion price if the initial
public offering occurred after 12 months from the closing of such financing but
within 24 months of the closing, or (ii) the second anniversary of the closing
if the Company has not completed an initial public offering.
(b) Common Stock Options
During the year ended February 28, 1999, the Company's stockholders approved
the 1998 Employee, Director and Consultant Stock Plan that authorizes the grant
of options for up to 3,186,000 shares. During the
33
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
year ended February 28, 1998, the Company's stockholders approved the 1997
Stock Option Plan and the 1998 Stock Option Plan (collectively "the Plans").
The 1997 and 1998 Plans authorized the grant of options for up to 900,000
shares and 1,620,000 shares, respectively, of Common Stock. During the year
ended February 29, 2000 the Company's shareholders increased the amount of
shares reserved by the 1998 Employee, Director and Consultant Stock Plan by
2,000,000 to an aggregate reserve of 5,186,000.
Options granted under the Plans are either (a) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code of
1986 ("the Code") or (b) non-qualified options. Incentive stock options may be
granted under the Plans to employees of the Company. Non-qualified options may
be granted to consultants, directors and officers (whether or not they are
employees), or employees of the Company. Options granted under the Plans vest
over periods up to five years and are exercisable for a period not to exceed 10
years from the date of grant. In fiscal 1999, the Company granted stock options
below the fair market value to two employees. Compensation expense of $378,000
was charged to operations related to these stock options in fiscal 1999.
Had compensation cost for such plans been determined based on the fair value
at the grant dates for awards under these plans consistent with the provisions
of SFAS No. 123, the Company's net loss applicable to common stockholders and
basic and diluted net loss per common share would have been increased to the
pro forma amounts indicated below:
2000 1999 1998
-------- -------- -------
Net loss applicable to
common stockholders.... As reported $(35,616) $(26,043) $(7,092)
Pro forma for SFAS No. 123 $(47,478) $(35,938) $(7,125)
Basic and diluted loss
per share.............. As reported $ (1.52) $ (1.64) $ (1.07)
Pro forma for SFAS No. 123 $ (2.03) $ (2.26) $ (1.07)
The weighted average fair value of options granted during 2000, 1999 and
1998 was $7.23, 12.04 and $0.59 per share, respectively. The Company estimates
the fair value of each option as of the date of grant using the Black-Scholes
pricing model with the following weighted average assumptions:
2000 1999 1998
------- ------- -------
Expected volatility............................. 70% 70% 0%
Dividend yield.................................. 0% 0% 0%
Risk-free interest rate......................... 6.4% 5.5% 6.3%
Expected life................................... 7 years 7 years 8 years
A summary of the status of the Company's stock option plans as of February
29, 2000 and February 28, 1999 and 1998 and changes during the years then ended
is presented below:
2000 1999 1998
-------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- --------- --------
Outstanding at beginning
of year................ 4,404,350 $11.98 1,719,000 $1.49 -- --
Granted................. 2,816,050 9.59 3,054,800 16.81 1,719,000 1.49
Exercised............... (287,506) 1.83 (223,650) 2.71 -- --
Terminated.............. (1,791,709) 14.14 (145,800) 3.65 -- --
---------- --------- ---------
Outstanding at end of
year................... 5,141,185 10.40 4,404,350 11.98 1,719,000 1.49
========== ========= =========
Exercisable at end of
year................... 1,285,958 $11.99 391,981 $5.05 75,000 $1.13
========== ========= =========
Shares reserved at end
of year................ 116,150 932,200 801,000
========== ========= =========
34
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at February 29, 2000:
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Shares Life Exercise Shares Exercise
Range of Exercise Prices Outstanding (years) Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
$1.13 to $1.53........... 782,460 7.5 $ 1.39 269,809 $ 1.43
2.67..................... 65,150 7.6 2.67 21,950 2.67
7.65 to 11.44............ 2,802,275 9.2 9.12 316,899 8.94
12.58 to 19.56........... 1,454,300 8.0 17.68 669,900 17.83
25.50.................... 37,000 8.9 25.50 7,400 25.50
--------- --- ---------
5,141,185 8.6 $10.40 1,285,958 $11.99
========= === ====== ========= ======
(c) Common Stock
During the years ended February 28, 1999 and 1998, the Company issued
451,647 and 228,639 shares, respectively, of Common Stock to employees and
consultants in exchange for services. The Company recorded expense of $259,000
and $151,000, respectively, in the corresponding periods related to these stock
issuances.
(5) Commitments
(a) Operating Leases
The Company is obligated under several operating leases for space rented at
its corporate headquarters as well as its sales and customer service center.
The Company is also obligated for various vehicle and office equipment leases
that expire at various dates during the next seven years. The building leases
require the Company to pay certain costs such as maintenance and insurance.
Rental payments for the vehicle lease include minimum rentals plus contingent
rentals based on mileage. Rental expense for operating leases was $455,000,
$193,000, and $101,000 in 2000, 1999 and 1998, respectively.
Future minimum lease payments under noncancelable operating leases with
initial terms in excess of one year are as follows at February 29, 2000:
Fiscal year ending
------------------ (in thousands)
February 28, 2001............................................. $ 507
February 28, 2002............................................. 481
February 28, 2003............................................. 433
February 29, 2004............................................. 437
February 28, 2005 and thereafter.............................. 365
------
$2,223
======
(b) Capital Leases
The Company has capital lease arrangements for certain computers, furniture
and fixtures, and telephone equipment. The assets have an aggregate capitalized
cost of $2.2 million and related accumulated amortization of $0.9 million as of
February 29, 2000. Future minimum lease payments under capital lease
obligations are as follows at February 29, 2000:
35
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year ending
----------- (in thousands)
February 28, 2001............................................. $ 760
February 28, 2002............................................. 638
February 28, 2003............................................. 120
-----
Subtotal...................................................... 1,518
Less amount representing interest............................. 134
-----
Present value of future minimum lease payments................ 1,384
Less current portion.......................................... 666
-----
Long-term portion............................................. $ 718
=====
(c) Flooring Line
The Company had a flooring line in effect during the years ended February
29, 2000 and February 28, 1999. In November 1999, the flooring credit agreement
with Deutsche Financial Services Corporation ("DFS") was increased from $7.0
million to $12.0 million for seasonal inventory purchases. As of February 29,
2000, the available credit under the flooring line is $10.0 million. Pursuant
to this agreement, DFS may, at its option, extend credit from time to time to
purchase inventory from DFS approved vendors or for other purposes. Under this
agreement, the Company can purchase inventory from certain vendors and elect to
have these vendors invoice DFS instead of us. DFS pays this invoice and in turn
bills us on a periodic basis throughout the month. No interest is incurred if
the note is paid within 30 days. If the note remains outstanding after 30 days,
the Company must pay a .25% fee and interest accrues at a variable rate based
on the prime rate plus 2.5%. If the note remains outstanding after 181 days,
interest begins to accrue at the prime rate plus 6.5%. To date, the Company has
paid all notes within 30 days and have incurred no interest expense under this
facility. As a result of increasing the line to $12.0 million, the amount of
cash instruments pledged was increased from $2.5 million to $5.5 million. This
pledge, in addition to all of our assets, secures this facility. For the years
ended February 29, 2000 and February 28, 1999, the Company had outstanding
balances of $8.5 and $5.2 million, respectively, under this facility. These
amounts are included in accounts payable.
(d) Legal Proceedings
The Company, from time to time, is involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
(6) Income Taxes
There was no income tax expense for fiscal 2000, 1999 and 1998. This
differed from the expected tax benefit computed by applying the statutory rate
of 34 percent to the net loss before taxes as a result of the following:
2000 1999 1998
-------- ------- -------
(in thousands)
Computed "expected" tax benefit.................... $(12,109) $(8,575) $(2,411)
Increase (reduction) in income taxes resulting
from:
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax assets
allocated to income tax expense................. 13,149 10,211 2,877
State and local income taxes, net of federal
income tax benefit.............................. (1,083) (1,665) (468)
Other, net....................................... 43 29 2
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
36
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at February
29, 2000 and February 28, 1999 are presented below:
2000 1999
------- -------
(in thousands)
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts..................................... $ 193 $ 86
Inventories, principally due to reserves............... 38 62
Federal and state net operating loss carryforwards..... 26,222 13,297
Property and equipment, principally due to differences
in depreciation....................................... 117 22
Other assets........................................... 226 102
Other accrued liabilities.............................. 74 68
Stock-based compensation............................... 550 576
------- -------
Gross deferred tax assets............................ 27,420 14,213
Less valuation allowance against deferred tax assets... 27,326 14,177
------- -------
94 36
------- -------
Deferred tax liabilities:
Investment in joint venture............................ (77) --
Prepaid expenses....................................... (17) (36)
------- -------
Total deferred tax liabilities....................... (94) (36)
------- -------
Net deferred tax asset............................... $ -- $ --
======= =======
The valuation allowance for deferred tax assets as of February 29, 2000 and
February 28, 1999 was $27.3 million and $14.2 million respectively. The net
change in the total valuation allowance for the years ended February 29, 2000
and February 28, 1999 and 1998 was an increase of $13.1 million, $10.6 million
and $2.9 million, respectively. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Taxable loss for the years ended February 29, 2000 and
February 28, 1999 and 1998 was $34.3 million, $25.4 million and $6.1 million,
respectively. Based upon the historical taxable losses of the company, the
limitations imposed on the future utilization of such losses, and the
uncertainty of generating sufficient taxable income of an appropriate character
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will not realize the
benefits of these deductible differences at February 29, 2000.
Subsequent recognized tax benefits relating to the valuation allowance for
deferred tax assets as of February 29, 2000 will be allocated as follows:
(in thousands)
Income tax benefit that would be reported in the statement of
operations.................................................... $25,874
Additional paid-in capital..................................... 1,452
-------
$27,326
=======
At February 29, 2000, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $70.9 million which are
available to offset future federal taxable income, if any,
37
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
through 2019. At February 29, 2000, the Company also had net operating loss
carryforwards for state income tax purposes of approximately $29.9 million and
$6.5 million in Connecticut and Ohio, respectively, which are available to
offset future state taxable income, if any, through 2004 and 2014,
respectively. However, during the year ended February 28, 1998, the Company
experienced an ownership change, as defined by Section 382 of the Internal
Revenue Code, due to additional sales of Preferred Stock. The Company has not
yet assessed the Section 382 implications of the additional stock issuances,
but the change in control may limit the utilization of the net operating loss
carryforwards incurred prior to the ownership change.
(7) 401 (k) Savings Plan
The Company has established a retirement savings plan under Section 401(k)
of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers
substantially all employees of the Company who meet minimum age and service
requirements, and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the 401(k) Plan may
be made at the discretion of the Board of Directors. The Company has not made
any contributions to the 401(k) Plan for the three-year period ended February
29, 2000.
(8) International Sales and Geographic Information
During fiscal 1999, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. Prior-period amounts have
been restated in accordance with the provisions of No. SFAS 131. There were no
sales to any individual customer during any of the years in the three-year
period ended February 29, 2000 that represented 10% or more of net sales. The
Company has no material long-lived assets located in foreign countries. The
Company attributes net sales to an individual country based upon the location
of the customer.
The Company operates in one principal business segment across domestic and
international markets. International sales all emanate from the United States,
and represented approximately 8%, 14%, and 36% of net sales for the years ended
February 29, 2000, and February 28, 1999 and 1998, respectively.
Summary geographic net sales information is as follows:
Years ended,
-----------------------------
2/29/2000 2/28/1999 2/28/1998
--------- --------- ---------
(in thousands)
United States..................................... $173,821 $72,973 $14,423
All foreign countries............................. 14,784 12,230 8,258
-------- ------- -------
$188,605 $85,203 $22,681
======== ======= =======
38
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(9) Quarterly Results (Unaudited)
The following tables contain selected unaudited Statement of Operations data
for each quarter of fiscal years 2000 and 1999. The Company believes that the
following information reflects all normal recurring adjustments necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.
Year Ended February 29, 2000
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(in thousands, except loss per share)
Net sales.................. $32,680 $36,689 $43,167 $76,069
Gross profit............... 3,413 4,220 5,084 9,041
Net loss................... (8,855) (8,393) (8,543) (9,825)
Basic and diluted net loss
per share (1)............. $ (0.38) $ (0.36) $ (0.36) $ (0.41)
Shares used in computation
of basic and diluted net
loss per share............ 23,024 23,252 23,559 23,697
Year Ended February 28, 1999
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(in thousands, except loss per share)
Net sales.................. $11,562 $17,033 $23,515 $33,093
Gross profit............... 1,042 1,678 2,370 3,194
Net loss................... (4,156) (5,620) (7,629) (7,815)
Basic and diluted loss per
share (1)................. $ (0.69) $ (0.50) $ (0.34) $ (0.34)
Shares used in computation
of basic and diluted net
loss per share............ 6,680 12,036 22,298 22,748
- --------
(1) The sum of quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted average shares outstanding and the effects of rounding for each
period.
(10) Related Party Transactions
On October 1, 1999, the Company formed a joint venture, Tweeter@Outpost.com,
LLC with Tweeter Home Entertainment Group, Inc. ("Tweeter").
Tweeter@Outpost.com, LLC operates a fully authorized Internet consumer
electronics retail destination. The Company contributed $2.5 million in cash.
At February 29, 2000, both partners held 50% of the voting stock of the joint
venture and the Company had an ownership interest in the joint venture of
approximately 50%. There could be future dilution of the Company's interests if
further investments are made in the joint venture.
The investment is accounted for under the equity method of accounting with
profits and losses allocated in accordance with the joint venture agreement. As
of February 29, 2000, net income of $209,000 had been allocated to the Company
under the terms of the joint venture agreement. The Company has entered into
certain agreements with Tweeter@Outpost.com, LLC pursuant to which it will
provide services to, and act as an agent for, Tweeter@Outpost.com, LLC. Under
the terms of the agreements, these services are to be provided at cost plus an
overhead percentage. During fiscal 2000, the Company billed costs of $294,000
for marketing, technology and other services rendered. At February 29, 2000, a
receivable of $143,000 from Tweeter@Outpost.com, LLC was included in Other
Assets, net on the accompanying balance sheet.
As of March 1, 2000, the joint venture agreement between the Company and
Tweeter was amended. The effect of this amendment was to change certain
provisions of the Company's interest in the joint venture. As
39
CYBERIAN OUTPOST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
such, the Company will, as of March 1, 2000, begin consolidating the financial
statements of Tweeter@Outpost.com, LLC with those of Outpost.com as a
controlled subsidiary. All intercompany transactions will be eliminated.
(11) Subsequent Event
On March 7, 2000, the Company completed a private equity placement and
issued 4,702,900 shares of its common stock to institutional investors at a
price of $7.87 per share, reflecting a 5% discount of the market price at the
date of issue. The Company received approximately $35.3 million of proceeds,
net of the underwriting discount and offering expenses.
40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Cyberian Outpost, Inc:
Under date of March 17, 2000, we reported on the balance sheets of Cyberian
Outpost, Inc. as of February 29, 2000 and February 28, 1999, and the related
statements of operations, redeemable preferred stock and changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended February 29, 2000, as contained in the annual report on Form 10-K
for the fiscal year 2000. In connection with our audits of the aforementioned
financial statements, we also audited the related financial statement schedule
listed in Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
KPMG LLP
Providence, Rhode Island
March 17, 2000
41
SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Cost and End of
Description of Period Expenses Deductions Period
----------- ---------- ---------- ---------- ----------
(in thousands)
Year ended February 29, 2000....... $212 $760 $(447) $525
Year ended February 28, 1999....... $ 47 $228 $ (63) $212
Year ended February 28, 1998....... $ 4 $ 69 $ (26) $ 47
42
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Information About Directors and
Executive Officers" and "Other Matters--Section 16(a) Beneficial Ownership
Reporting Compliance" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders.
Item 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in our Proxy
Statement for the 2000 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Information About Cyberian Outpost Common
Stock Ownership" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Related Party Transactions" and
"Executive Compensation--Employment Contracts and Change of Control
Arrangements" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders.
43
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14(a). The following documents are filed as part of this annual report
on Form 10-K.
Item 14(a)(1) and (2). See "Index to Financial Statements and Financial
Statement Schedule" at Item 8 to this Annual Report on Form 10-K. Other
financial statement schedules have not been included because they are not
applicable or the information is included in the financial statements or notes
thereto.
Item 14(a)(3) Exhibits. The following is a list of exhibits filed as part of
this Annual Report on Form 10-K:
Exhibit
Number Description
------- -----------
+3.1 Restated Certificate of Incorporation (Exhibit 4.2).
****3.2 Restated By-laws of Cyberian Outpost (Exhibit 3.1).
*4.1 Form of Common Stock Certificate (Exhibit 4.1).
*10.1 Lease, dated December 2, 1997, between Barton Kent LLC and Cyberian
Outpost (Exhibit 10.1)
*10.2 Lease, dated December 2, 1997, between Barton Kent LLC and Cyberian
Outpost (Exhibit 10.2)
*10.3 Lease, dated February 16, 1998, between Barton Kent LLC and
Cyberian Outpost (Exhibit 10.3)
*10.4 Lease, dated May 4, 1998, between Barton Kent LLC and Cyberian
Outpost (Exhibit 10.4)
**10.5 Lease, dated May 29, 1998, between Housatonic Enterprises and
Cyberian Outpost (Exhibit 10.5)
10.6 Lease, dated September 9, 1999 between Berkshire Industrial
Corporation and Cyberian Outpost
+*10.7 1997 Incentive Stock Plan (Exhibit 10.5).
+*10.8 1998 Incentive Stock Plan (Exhibit 10.6).
+@10.9 Restated 1998 Employee, Director and Consultant Stock Plan (Exhibit
99).
+**10.10 Director Stock Option Policy, adopted by Cyberian Outpost on
February 11, 1999 (Exhibit 10.9).
+10.11 Director Stock Option Policy, adopted by Cyberian Outpost on June
15, 1999.
+***10.12 Employment Agreement, dated June 16, 1999, between Cyberian Outpost
, Inc. and Katherine N. Vick (Exhibit 10).
+****10.13 Employment Agreement, dated September 29, 1999, between Cyberian
Outpost, Inc. and Robert Bowman. (Exhibit 10.1).
11.1 Computation of Loss Per Share.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
- --------
+ Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, our Registration Statement filed on Form S-8, File No.
333-64403.
* Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, our Registration Statement filed on Form S-1, File No.
333-55819.
** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, our Annual Report on Form 10-K for the fiscal
year ended February 28, 1999.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, our Quarterly Report on Form 10-Q for the
quarter ended August 31, 1999.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, our Quarterly Report on Form 10-Q for the
quarter ended November 30, 1999.
@ Previously filed with the Commission as an Exhibit to and incorporated in
herein by reference from, our Registration Statement filed on Form S-8, File
No. 333-95899.
+ Management contract or compensatory plan, contract or agreement.
Where a document is incorporated by reference from a previous filing, the
Exhibit number of the document in that previous filing is indicated in
parentheses after the description of such document.
Item 14(b) Reports on Form 8-K.
We did not file any Current Reports on Form 8-K during the three months
ended February 29, 2000.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Kent,
Connecticut on May 17, 2000.
CYBERIAN OUTPOST, INC.
/s/ Robert A. Bowman
By:__________________________________
Robert A. Bowman
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert A. Bowman President, Chief Executive May 17, 2000
____________________________________ Officer and Director
Robert A. Bowman (Principal executive
officer)
/s/ Katherine N. Vick Executive Vice President and May 17, 2000
____________________________________ Director (Principal
Katherine N. Vick financial and accounting
officer)
/s/ Darryl Peck Chairman of the Board May 17, 2000
____________________________________
Darryl Peck
/s/ Charles H. Jackson, IV Director May 17, 2000
____________________________________
Charles H. Jackson, IV
/s/ William H. Lane, III Director May 17, 2000
____________________________________
William H. Lane, III
Director May 17, 2000
____________________________________
Michael Murray
/s/ James E. Preston Director May 17, 2000
____________________________________
James E. Preston
45