SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 000-24659
CYBERIAN OUTPOST, INC.
a/k/a OUTPOST.COM
(Exact name of registrant as specified in its charter)
Delaware 06-1419111
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
23 North Main Street-PO Box 636, Kent, Connecticut 06757
(Address of principal executive offices) (Zip Code)
(860) 927-2300
Registrant's telephone number, including area code
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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of January 4, 2001, the registrant had 31,665,191 shares of common stock,
par value $.01 per share, outstanding.
OUTPOST.COM
FORM 10-Q
For the Quarter Ended November 30, 2000
INDEX
Page No.
--------
Part I--Financial Information:
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets, November 30, 2000 (Unaudited) and February 29, 2000........ 3
Consolidated Statements of Operations, for the Three and Nine Months Ended
November 30, 2000 and 1999 (Unaudited).................................................. 4
Consolidated Statements of Cash Flows, for the Nine Months Ended
November 30, 2000 and 1999 (Unaudited).................................................. 5
Notes to Consolidated Financial Statements (Unaudited).................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 10
Part II--Other Information:
Item 6. Exhibits and Reports on Form 8-K........................................................ 17
Signature................................................................................................. 18
Exhibit Index............................................................................................. 19
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
OUTPOST.COM
Consolidated Balance Sheets
(In thousands)
November 30, February 29,
2000 2000
---- ----
(unaudited)
Assets
Current Assets:
Cash and cash equivalents...................................................... $ 24,468 $ 13,293
Short term investments......................................................... -- 7,694
Accounts receivable, net....................................................... 15,747 4,350
Inventories.................................................................... 29,229 12,168
Prepaid expenses and other current assets...................................... 910 1,133
-------- --------
Total current assets........................................................ 70,354 38,638
Property and equipment, net...................................................... 18,193 10,545
Investment in joint venture...................................................... -- 2,709
Goodwill, net.................................................................... 15,525 --
Other assets..................................................................... 894 951
-------- --------
Total assets................................................................ $104,966 $ 52,843
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of capital lease obligations................................... $ 689 $ 666
Line of credit................................................................. 424 --
Accounts payable............................................................... 41,715 24,381
Accrued expenses and other current liabilities................................. 6,815 2,558
-------- --------
Total current liabilities................................................... 49,643 27,605
Capital lease obligations, excluding current portions, and other long term debt.. 388 718
-------- --------
Total liabilities........................................................... 50,031 28,323
Minority interest................................................................ 3,189 --
Stockholders' equity:
Common stock................................................................... 317 237
Additional paid-in capital..................................................... 141,190 93,921
Accumulated deficit............................................................ (89,761) (69,638)
-------- --------
Total stockholders' equity.................................................. 51,746 24,520
-------- --------
Total liabilities and stockholders' equity.................................. $104,966 $ 52,843
======== ========
See accompanying notes to consolidated financial statements.
3
OUTPOST.COM
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
------------ ------------
2000 1999 2000 1999
------- ------- -------- --------
Net sales........................................................... $95,715 $43,167 $232,800 $112,536
Cost of sales....................................................... 81,339 38,083 199,715 99,819
------- ------- -------- --------
Gross profit...................................................... 14,376 5,084 33,085 12,717
Operating expenses:
Sales and marketing............................................... 14,222 9,556 36,049 27,071
General and administrative........................................ 3,486 1,736 9,379 5,616
Technology and development........................................ 2,485 2,611 8,428 7,375
Amortization of goodwill.......................................... 496 -- 496 --
------- ------- -------- --------
Total operating expenses....................................... 20,689 13,903 54,352 40,062
------- ------- -------- --------
Operating loss.................................................... (6,313) (8,819) (21,267) (27,345)
Other income, net................................................... 446 276 1,624 1,556
------- ------- -------- --------
Net loss before minority interest................................. (5,867) (8,543) (19,643) (25,789)
Minority interest................................................... (224) -- (480) --
------- ------- -------- --------
Net loss.......................................................... $(6,091) $(8,543) $(20,123) $(25,789)
======= ======= ======== ========
Basic and diluted net loss per share................................ $(0.19) $(0.36) $(0.69) $(1.11)
======= ======= ======== ========
Weighted average shares outstanding................................. 31,407 23,559 29,293 23,277
======= ======= ======== ========
See accompanying notes to consolidated financial statements.
4
OUTPOST.COM
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
November 30,
------------
2000 1999
-------- --------
Cash flows from operating activities:
Net loss...................................................................... $(20,123) $(25,789)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................ 3,881 2,730
Amortization of deferred compensation........................................ 36 51
Minority interest income..................................................... 480 (15)
Amortization of goodwill..................................................... 496 --
Loss on sales and maturities of short term investments....................... (9) 221
Decrease (increase) in operating assets:
Accounts receivable......................................................... (6,411) (56)
Inventories................................................................. (15,815) (8,281)
Prepaid expenses and other assets........................................... 464 (1,801)
Increase in operating liabilities:
Accounts payable............................................................ 10,407 9,497
Accrued expenses............................................................ 1,733 1,637
-------- --------
Net cash used in operating activities...................................... (24,861) (21,806)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment........................................... (11,020) (4,877)
Purchases of short term investments........................................... (20,997) (10,781)
Proceeds from sales and maturities of short term investments.................. 28,700 24,365
Investment in joint venture................................................... -- (2,500)
Cash acquired from consolidating joint venture................................ 5,706 --
-------- --------
Net cash provided by investing activities.................................. 2,389 6,207
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations and other long term debt............... (482) (444)
Repayment of line of credit................................................... (1,183) --
Proceeds from issuance of common stock........................................ 35,312 1,337
-------- --------
Net cash provided by financing activities.................................. 33,647 893
-------- --------
Net increase (decrease) in cash and cash equivalents....................... 11,175 (14,706)
-------- --------
Cash and cash equivalents at the beginning of period....................... 13,293 26,828
Cash and cash equivalents at the end of period............................. $ 24,468 $ 12,122
======== ========
Supplemental disclosure of cash paid for interest:............................ $ 318 $ 98
======== ========
Fair value of common stock issued in connection with the acquisition of a
business..................................................................... $ 12,000 $ --
======== ========
See accompanying notes to consolidated financial statements.
Supplemental disclosure of non-cash transactions:
During the nine-month periods ended November 30, 2000 and 1999, the Company
acquired office equipment by incurring capital lease obligations of
approximately $44,000 and $729,000, respectively.
5
OUTPOST.COM
Notes to Consolidated Financial Statements
(Unaudited)
November 30, 2000
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. In the opinion of
management, all adjustments (consisting primarily of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended November 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
February 28, 2001.
Note 2 - Description of the Business and Significant Accounting Policies
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 retailer
featuring over 200,000 consumer technology and related products for the home and
office. As of November 30, 2000, the Company had two subsidiaries,
Tweeter@Outpost.com, LLC, and OutpostPro.com, Inc. These results are
consolidated in the accompanying financial statements for the three and nine
month periods ended November 30, 2000.
Revenue Recognition
Net sales are primarily comprised of product sales net of returns and
allowances. Net sales also include advertising revenue derived from vendors that
pay for promotional placements on the Company's Web site and site management
fees derived from hosting and managing partners' Web sites. Product sales are
comprised of computers and accessories, software, consumer electronics, cameras,
and other high end consumer and business products. Product sales are recognized
as revenue 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 net sales are merchandise to customers using
credit cards. The remainder of net sales consists of product sales to customers
that are invoiced directly under credit terms, vendor advertising and partner
site management fees.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year's presentation.
Amortization of Goodwill
Goodwill is stated net of total accumulated amortization of $496,000 at
November 30, 2000. Goodwill is being amortized over a seven-year period. The
Company is finalizing the allocation of the purchase price to the net tangibles
and intangibles acquired. The result of this final appraisal may result in an
adjustment to goodwill.
6
OUTPOST.COM
Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
November 30, 2000
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133) establishes
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
SFAS 133 requires all companies to recognize derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after July 1, 2000. The Company does not believe that the
adoption of this statement will have a material effect on its financial position
or results of operations.
In December 1999 the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). In June 2000, the SEC amended
this bulletin as SAB 101B which extends the time required to adopt this
bulletin. The Company is required to adopt SAB 101B no later than its quarter
ended February 28, 2001. The Company does not believe that the adoption of this
bulletin will have a material effect on its financial position or results of
operations.
In March 2000 the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF Issue 00-2, "Accounting
for Web Site Development Costs." This consensus provides guidance on what types
of costs incurred to develop Web sites should be capitalized or expensed. The
consensus is effective for Web site development costs incurred for fiscal
quarters beginning after June 30, 2000. The adoption of this consensus did not
have a material impact on the Company's financial position or its results of
operations.
In September 2000 the EITF reached a consensus on EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." This consensus requires
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenue and should be classified as revenue. The
Company historically has classified shipping charges to customers as a reduction
of direct sales and marketing costs. The Company is required to adopt EITF Issue
No. 00-10 no later than its quarter ended February 28, 2001. As the Company does
not charge a shipping fee on the majority of its orders, it does not believe
that the adoption of this issue will have a material effect on its financial
position or results of operations. With respect to the classification of costs
related to shipping and handling incurred by the seller, the EITF determined
that the classification of such costs is an accounting policy decision that
should be disclosed. It also determined that if shipping costs or handling costs
are significant and are not included in cost of sales (that is, if those costs
are accounted for together or separately on other income statement line items),
a company should disclose both the amount(s) of such costs and the line item(s)
on the income statement that include them. The Company historically has
classified shipping and handling costs as direct sales and marketing costs.
Beginning with its quarter ended February 28, 2001, the Company will begin
disclosing the amounts of its shipping and handling costs included in its
financial statements.
In May 2000 the EITF reached a consensus on Issue No. 00-14, "Accounting for
Certain Sales Incentives." The Company is required to adopt EITF Issue No. 00-14
no later than its quarter ended February 28, 2001 and will require that certain
sales incentives be classified either as (i) a reduction of revenue (rebates
offered at the point of sale) or (ii) cost of sales (offers of free product).
The Company does not believe that the adoption of this consensus will have a
material impact on its results of operations.
In July 2000 the EITF reached a consensus on EITF Issue No. 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent." This consensus provides
guidance concerning under what circumstances a company should report revenue
based on (a) the gross amount billed to a customer because it has earned revenue
from the sale of the goods or services or (b) the net amount retained (that is,
the amount billed to the customer less the amount paid to a supplier) because it
has earned a commission or fee. The adoption of the provisions of this consensus
did not change the Company's existing accounting policies.
7
OUTPOST.COM
Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
November 30, 2000
Note 3 - Stockholders' Equity
In March 2000, the Company completed a private equity placement and issued
4,702,900 shares of its common stock to accredited investors at a price of $7.87
per share. The Company received approximately $35.3 million of proceeds, net of
the underwriting discount and offering expenses.
In September 2000 the Company issued approximately 3,137,000 shares of its
common stock in connection with the acquisition of CMPExpress.com, Inc. (see
Note 6).
Note 4 - Comprehensive Loss
Three Months Nine Months
Ended November 30, Ended November 30,
--------------------- ----------------------
2000 1999 2000 1999
------- ------- -------- --------
(In thousands) (In thousands)
The components of comprehensive loss, net of tax, are as
follows:
Net loss....................................................... $(6,091) $(8,543) $(20,123) $(25,789)
Other comprehensive loss, net of tax:
Change in unrealized holding loss in available for
sale securities..................................... -- 203 -- 63
------- ------- -------- --------
Comprehensive loss............................................. $(6,091) $(8,340) $(20,123) $(25,726)
======= ======= ======== ========
Note 5 - 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 and Tweeter each 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%.
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 a result,
effective March 1, 2000, the Company began consolidating the financial
statements of Tweeter@Outpost.com, LLC with those of Outpost.com as a controlled
subsidiary. All significant intercompany transactions have been eliminated.
8
OUTPOST.COM
Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
November 30, 2000
Note 6 - Business Combinations
On September 8, 2000, the Company completed the acquisition of CMPExpress.com,
Inc. ("CMPExpress"), a private Internet retailer of technology products to
medium and large businesses. The Company intends to operate the business of
CMPExpress as a new subsidiary of Outpost.com which has been named
OutpostPro.com, Inc. As a result of the acquisition, Outpost.com issued
3,090,000 shares of its common stock, valued at approximately $11.8 million. The
Company also issued 47,000 shares of its common stock, valued at approximately
$200,000, to the finder who faciliated this transaction. The excess of the
purchase price over the fair value of net assets acquired is included in
goodwill in the accompanying consolidated balance sheets and is being amortized
over seven years. The results of operations of the acquired companies are
included in the Company's consolidated financial results starting on the date of
acquisition. The acquisition will be accounted for under the purchase method of
accounting for business combinations. The results of operations of the acquired
companies are included in the Company's consolidated financial results starting
on the date of acquisition. The excess of the purchase price over the fair value
of net assets acquired is included in goodwill in the accompanying consolidated
balance sheets and is being amortized over seven years. The $12.0 million
purchase price was allocated to the Company's balance sheet based upon the fair
value on the date of acquisition, as follows:
(In thousands)
Goodwill............................................. $ 16,021
Property and equipment............................... 464
Line of credit....................................... (1,607)
Working capital deficit.............................. (2,878)
--------
Purchase price..................................... $(12,000)
========
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the business, results of operations, and liquidity
and capital resources should be read in conjunction with the Financial
Statements, including the Notes thereto, included elsewhere in this Form 10-Q.
Overview
Outpost.com, established in 1995, has three primary areas of focus for its
business: (i) an industry-leading business-to-consumer retail superstore located
at www.Outpost.com; (ii) Outpost Professional, a business-to-business reseller
of technology products; and (iii) eBusiness Services, which provides end-to-end
online commerce solutions for other retailers, manufacturers and Web sites.
The Company is a leading global Internet retailer featuring over 200,000
consumer technology and related products for the home and office. As of November
30, 2000, there were approximately 1,028,000 customers worldwide. The online
superstore features computers and accessories, software, consumer electronics,
cameras, and other high end consumer products for domestic and international
customers and operates 24 hours a day, seven days a week. The online store
features: (i) an easy to navigate, intuitive interface, (ii) outstanding twenty-
four by seven customer service, (iii) free overnight delivery on most orders,
(iv) extensive product information, (v) powerful search capabilities, (vi)
competitive pricing and (vii) a flexible return policy, including pick-up from
any location in the U.S.
The Company's retail business has recently been expanded beyond the online
superstore targeted to retail consumers to include a focus on the business-to-
business, or ("B2b"), sector. On September 8, 2000, the Company acquired
CMPExpress.com, Inc., which has been named Outpost Professional ("OutpostPro";
or "OutpostPro.com, Inc."). OutpostPro sells technology products to medium to
large size businesses and provides a strong foundation of B2b sales as well as a
dedicated team of sales and customer service professionals with experience in
assisting corporate buyers in making large scale purchases. Through OutpostPro
as well as through Outpost.com, the Company also resells its products to the
small office / home office market ("SOHO") and to government and university
customers.
The Company also provides eBusiness Services that offer end-to-end e-commerce
solutions for a variety of partners. These services include Web site design and
hosting, product merchandising, 24x7 customer service, and order processing and
fulfillment. Current eBusiness Services clients include leading retailers
Brookstone, Tweeter Home Entertainment Group and Wolf Camera. eBusiness
Services leverage Outpost.com's investments in operating systems and facilities
to generate new product and service revenue streams.
The Company anticipates that international sales will continue to represent a
portion of overall revenue. 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 products. In
addition, international sales are subject to diverse market factors such as the
economic conditions of a given country or region.
Although the Company has grown rapidly since inception in 1995, it continues
to incur significant net losses. In order to continue the growth and expansion,
operating expenses will increase as a result of the financial commitments
required to further develop marketing channels and enhance the Web site's
features and functionality. To the extent that marketing efforts do not result
in significantly higher net sales, results will be materially adversely
affected. There can be no assurance that sufficient revenues will be generated
from the sale of products to enable the Company to reach or maintain
profitability on a quarterly or annual basis. Although there has been
significant revenue growth since inception, such growth rates may not be
sustainable in the future. In view of the rapidly evolving nature of the
business and the limited operating history, period-to-period comparisons of
operating results, including gross profit and operating expenses as a percentage
of net sales, are not necessarily meaningful and should not be relied upon as an
indication of future performance.
The key factor affecting the Company's long-term financial success is the
ability to attract and retain customers in a cost effective manner. Currently,
the Company seeks to expand the customer base and encourage repeat buying
10
through multiple sales and marketing programs. Such programs include: (i) new
online and offline marketing and promotional strategies, (ii) linking programs
with targeted Web sites, (iii) personalized direct marketing programs designed
to generate repeat sales from existing customers, (iv) alliances with leading
brick and mortar retailers, (v) expanding the product offerings with new
categories and selections, (vi) diversifying into additional areas of Internet
commerce and (vii) brand development.
Significant fluctuations in future operating results may be experienced due to
a variety of factors, many of which are outside the Company's control. Factors
that may affect 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 of technology, electronic and high end
consumer products are significantly affected by new product releases. Infrequent
or delayed new product releases, when they occur, could negatively impact the
overall growth in sales. Gross profit margins for technology, consumer
electronic and high end consumer products vary widely, with computer hardware
generally having the lowest gross profit margins. While there is some ability to
affect the total gross margin through effective upselling and cross-selling of
high-margin products, the sales mix will vary from period to period and gross
margins will fluctuate accordingly.
11
Results of Operations: Three and Nine Months Ended November 30, 2000 and 1999
The following table sets forth certain items from the statement of operations
data as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
November 30, November 30,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 85.0 88.2 85.8 88.7
----- ------ ----- ------
Gross profit................................... 15.0 11.8 14.2 11.3
Operating expenses:
Sales and marketing............................ 14.9 22.1 15.5 24.1
General and administrative..................... 3.6 4.0 4.0 5.0
Technology and development..................... 2.6 6.1 3.6 6.5
Amortization of goodwill....................... 0.5 -- 0.2 --
----- ------ ----- ------
Total operating expenses.................... 21.6 32.2 23.3 35.6
----- ------ ----- ------
Operating loss................................. (6.6) (20.4) (9.1) (24.3)
Other income, net................................ 0.5 0.6 0.7 1.4
----- ------ ----- ------
Net loss before minority interest.............. (6.1) (19.8) (8.4) (22.9)
Minority interest................................ (0.2) -- (0.2) --
----- ------ ----- ------
Net loss....................................... (6.3)% (19.8)% (8.6)% (22.9)%
===== ====== ===== ======
Net Sales
Net sales are comprised of product sales net of returns and allowances. Net
sales also include advertising revenue derived from vendors that pay for
promotional placements on the Company's Web site and site management fees for
hosting and managing partners' Web sites. Product sales are comprised of
computers and accessories, software, consumer electronics, cameras, and other
high end consumer and business products. Product sales are recognized as revenue
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 net sales are merchandise to customers using credit
cards. The remainder of net sales consists of product sales to customers that
are invoiced directly under credit terms, vendor advertising and partner site
management fees.
Net sales increased by $52.5 million to $95.7 million in the quarter ended
November 30, 2000 from $43.2 million in the quarter ended November 30, 1999. In
addition, net sales increased by $120.3 million to $232.8 million in the nine
months ended November 30, 2000 from $112.5 in the nine months ended November 30,
1999. In both of these periods, these increases were primarily a result of
increases in new customer sales, the acquisition of CMP Express.com, repeat
purchases from existing customers, the introduction of new product lines and
increased revenue from advertising and site management fees. As of November 30,
2000, the Company had approximately 1,028,000 customer accounts. International
sales represented approximately 4% of net sales in the quarter ended November
30, 2000 compared to approximately 10% in the quarter ended November 30, 1999.
In addition, international sales represented approximately 5% of net sales in
the nine months ended November 30, 2000 compared to approximately 13% in the
nine months ended November 30, 1999. The decrease in international sales was
primarily the result of focusing marketing and promotional activities on the
domestic market.
Cost of Sales and Gross Profit
Cost of sales consists of the cost of the merchandise sold. Cost of sales
increased by $43.2 million to $81.3 million in the quarter ended November 30,
2000 from $38.1 million in the quarter ended November 30, 1999. This increase
was primarily the result of an increase in product sales volume. Gross profit
increased by $9.3 million to $14.4 million in the quarter ended November 30,
2000 from $5.1 million in the quarter ended November 30, 1999. This increase was
a result of growth in revenues from product sales, the acquisition of
CMPExpress, eBusiness
12
Services, advertising sales and improved margins on product revenues. As a
percentage of net sales, cost of sales decreased to 85.0% from 88.2% and gross
profit increased to 15.0% from 11.8% in the quarters ended November 30, 2000 and
November 30, 1999, respectively. The decrease in the cost of sales percentage
and the increase in gross profit is attributable to the following; higher
margins from existing product lines, introduction of new and higher margin
product lines and fees from eBusiness Services. Cost of sales increased by $99.9
million to $199.7 million in the nine month period ended November 30, 2000 from
$99.8 million in the nine month period ended November 30, 1999. This increase
was primarily the result of an increase in product sales volume. Gross profit
increased by $20.4 million to $33.1 million in the nine month period ended
November 30, 2000 from $12.7 million in the nine month period ended November 30,
1999. This increase was a result of growth in revenues from product sales,
advertising sales, eBusiness Services and business-to-business and improved
margins on those revenues. As a percentage of net sales, cost of sales decreased
to 85.8% from 88.7% and gross profit increased to 14.2% from 11.3% in the nine
months ended November 30, 2000 and November 30, 1999, respectively. The decrease
in the cost of sales percentage and the increase in gross profit is attributable
to the following; higher margins from existing product lines, introduction of
higher margin product lines and fees from eBusiness Services.
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;
Direct Selling Expenses. These expenses consist primarily of shipping expense
net of shipping revenue under the Company's TruePrice marketing program,
contract warehouse fulfillment expense and bank and credit card fees.
Advertising and Promotional Costs. This consists of both online and offline
advertising designed to build the Outpost.com brand, increase customer awareness
and drive traffic to the Web site. The types of expenses incurred include fees
paid to search engines to more prominently feature Outpost.com products, fees
paid to affiliates to refer customers to the Company's Web site, costs to design
and send personalized direct marketing e-mail campaigns, the costs associated
with maintenance of e-mail customer lists, as well as, to a lesser extent,
amounts paid for traditional offline advertising.
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. The Company does not allocate any material
amount of common expenses to Sales and Marketing.
Sales and marketing expenses increased by $4.7 million to $14.2 million in the
quarter ended November 30, 2000 from $9.5 million in the quarter ended November
30, 1999. As a percentage of net sales, sales and marketing expense decreased to
14.9% in the quarter ended November 30, 2000 from 22.1% in the quarter ended
November 30, 1999. Sales and marketing expenses increased by $8.9 million to
$36.0 million in the nine month period ended November 30, 2000 from $27.1
million in the nine month period ended November 30, 1999. As a percentage of net
sales, sales and marketing expense decreased to 15.5% in the nine months ended
November 30, 2000 from 24.1% in the nine months ended November 30, 1999. The
increases in absolute dollars in both periods were primarily the result of an
increase in the variable direct selling expenses described above. As part of the
TruePrice marketing program the Company provides free overnight shipping on most
purchases. Therefore, this expense increases with additional sales volume. The
percentage decreases in both periods resulted from the Company's 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, purchasing, and business development personnel and
related costs, depreciation of furniture, office equipment and leasehold
improvements, general office expenses, as well as professional fees. General and
administrative expense increased by $1.8 million to $3.5 million in the quarter
ended November 30, 2000 from $1.7 million in the quarter ended November 30,
1999. As a percentage of net sales, general and administrative expense decreased
to 3.6% in the quarter ended November 30, 2000 from 4.0% in the quarter ended
November 30, 1999. General and administrative expense increased by $3.8 million
to $9.4 million in the nine month period ended November 30, 2000 from $5.6
million in the nine month period ended November 30, 1999. As a percentage of net
sales, general and administrative
13
expense decreased to 4.0% in the nine months ended November 30, 2000 from 5.0%
in the nine months ended November 30, 1999. The dollar increases in general and
administrative expense in both periods were due to the increases in both
executive and administrative personnel, office expenses associated with such
personnel, depreciation, and professional and consulting fees. The percentage
decreases in both periods were the result of the Company's ability to increase
revenue without a commensurate increase in corporate expenses.
Technology and Development. Technology and development expense includes
depreciation of hardware and software, systems personnel and related costs,
software support, communications expenditures, technology development costs and
Web site hosting. Technology and development expense decreased by $0.1 million
to $2.5 million in the quarter ended November 30, 2000 from $2.6 million in the
quarter ended November 30, 1999. As a percentage of net sales, technology and
development expense decreased to 2.6% in the quarter ended November 30, 2000
from 6.1% in the quarter ended November 30, 1999. Technology and development
expense increased by $1.0 million to $8.4 million in the nine month period ended
November 30, 2000 from $7.4 million in the nine month period ended November 30,
1999. As a percentage of net sales, technology and development expense decreased
to 3.6% in the nine months ended November 30, 2000 from 6.5% in the nine months
ended November 30, 1999. The dollar decrease in the three month period is
attributable to less direct technology expenses and an increase in development
related technology activities which are capitalized in accordance with SOP 98-1;
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The Company expects to continue to add additional hardware,
systems and software as the business expands. As such, the dollar increases in
technology and development expense in the nine month period is attributable to
increased depreciation, maintainance costs and systems costs on hardware and
software. The percentage decreases in both periods resulted from the Company's
ability to leverage technology and development expenses such that net sales
increased at a higher rate than those expenses.
Amortization of Goodwill. Amortization of goodwill consists of amortization
of goodwill incurred in connection with the Company's September 8, 2000
acquisition of CMPExpress.com, Inc. ("CMPExpress"), a private Internet retailer
of technology products to medium and large businesses. This acquisition has been
accounted for under the purchase method of accounting for business combinations.
As a result of this acquisition, the Company anticipates that future
amortization associated with this acquisition will increase operating expenses
and thus the net loss by approximately $500,000 per quarter until related
goodwill is fully amortized. As the Company is finalizing the allocation of the
purchase price to the net tangible and intangibles acquired, the goodwill
recorded in connection with the acquisition may be adjusted.
Other Income, Net
Other income, net consists of interest income earned on short term investments
and overnight investments of cash balances in money market accounts, offset by
interest expense primarily attributable to lease financing agreements. Other
income, net increased by $170,000 to $446,000 in the quarter ended November 30,
2000 from $276,000 in the quarter ended November 30, 1999. Other income, net
increased by $68,000 to $1.6 million in the nine month period ended November 30,
2000 from $1.6 million in the nine month period ended November 30, 1999. These
changes were primarily a result of higher interest income during the current
year compared to the prior year.
Minority Interest
Minority interest consists of the joint venture partner's share (Tweeter Home
Entertainment Group, Inc.) of the net income of Tweeter@Outpost.com, LLC. These
results were consolidated as of March 1, 2000. The minority interest equaled
$224,000 and $480,000 in the three and nine month periods ended November 30,
2000, respectively, reflecting profitable operations of the joint venture.
Net Loss
As a result of the foregoing factors, a net loss was incurred of $6.1 million
and $20.1 million in the three and nine month periods ended November 30, 2000,
respectively, compared to a net loss of $8.5 million and $25.8 million in the
three and nine month periods ended November 30, 1999, respectively. As a
percentage of net sales, net loss for the quarter ended November 30, 2000
decreased to 6.3% compared to 19.8% for the quarter ended
14
November 30, 1999. As a percentage of net sales, net loss for the nine-month
period ended November 30, 2000 decreased to 8.6% compared to 22.9% in the nine-
month month period ended November 30, 1999.
Liquidity and Capital Resources
At November 30, 2000 the total cash and short term investment balance was
$24.5 million compared to $21.0 million at February 29, 2000.
Cash Inflows and Outflows
During the nine months ended November 30, 2000 the net increase in cash and
cash equivalents was $11.2 million. Details of the cash inflows and outflows are
as follows:
Operating Activities: Cash of $24.8 million was used to fund operations during
the nine months ended November 30, 2000. During this period, the principal
operating cash requirements were to fund a net loss of $20.1 million, increases
in inventories of $15.8 million, and increases in accounts receivable of $6.4
million, partially offset by a net increase in accounts payable and accrued
expenses of $12.2 million. The increase in accounts receivable represents an
increase in on-account credit sales to small and large businesses, college and
university customers and an increase in credit card sales outstanding as these
funds are not immediately received from the credit card processors as well as
the increase in receivables from Web site advertisers and business partners. The
increases in inventories and accounts payable were the result of increased
purchasing activity prior to the holiday season.
Investing Activities: Cash of $2.4 million was generated from investing
activities during the nine months ended November 30, 2000. This consists of
proceeds from the sales and maturities of short term investments of $28.7
million and cash acquired from the consolidation of the Tweeter joint venture of
$5.7 million, offset by purchases of short term securities of $21.0 million and
purchases of property and equipment of $11.0 million.
Financing Activities: Cash of $33.6 million was generated from financing
activities during the nine months ended November 30, 2000. Financing activities
included proceeds from issuance of common stock of $35.3 million, offset in part
by repayment of a line of credit of $1.2 million associated with the CMP Express
acquisition and repayment of capital lease obligations in the amount of
$482,000.
Cash, Cash Equivalents and Commitments
As of November 30, 2000 there was $24.5 million in cash and cash equivalents
compared to $13.3 million at February 29, 2000.
As of November 30, 2000 material capital commitments consisted of $1.1 million
in obligations outstanding under capital leases and other long term debt.
On March 10, 2000 a private equity placement was completed and 4,702,900
shares of common stock were issued to institutional investors at a price of
$7.87 per share. The Company received proceeds of approximately $35.3 million,
net of the placement agent fee and offering expenses.
As of November 30, 2000 the the Company had a ``flooring'' credit agreement
with Deutsche Financial Services Corporation ("DFS") with a credit limit $20.0
million. Pursuant to this agreement, DFS may, at its option, extend credit from
time to time to purchase inventory from DFS approved vendors. The approved
vendors will invoice DFS for these purchases and DFS will then invoice the
Company. The Company is required to pay DFS on certain due dates. If payment is
made after the required due date, the Company will incur an interest penalty of
up to the prime rate plus 6.5%. A pledge of all assets, including a specific
pledge of $12 million in a cash instrument, secures this credit facility. Assets
excluded from this pledge include Apple Computer products. This arrangement
between Apple, DFS and Outpost.com is further described below. For the periods
ended November 30, 2000 and
15
February 29, 2000 there was an outstanding balance of $4.9 million and $8.5
million, respectively, under this facility. These amounts are included in
accounts payable.
On August 9, 2000, a Collateral Subordination Agreement was entered into
between Apple Computer, Inc. ("Apple"), DFS and Outpost.com. This was done for
the purpose of securing a direct credit facility with Apple. Under the terms of
the Collateral Subordination Agreement, Apple has been granted a security
interest in certain assets.
The Company's current cash and cash equivalents and short term investments are
anticipated to be sufficient to meet 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 liquidity requirements,
selling additional equity or debt securities or obtaining a revolving credit
facility may be required. The sale of additional equity or convertible debt
securities could result in dilution to the Company's stockholders. There can be
no assurance that financing will be available in amounts or on acceptable terms,
if at all.
Forward-Looking Statements
This report may contain forward-looking statements. Such statements are based
on management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results or outcomes to differ materially
from those described or implied in such forward-looking statements. These
statements address or may address the following subjects: the belief that
operating expenses will increase; the expectation of significant fluctuations in
future operating results and gross margins; the anticipated effect of the
amortization of goodwill associated with the acquisition of CMPExpress.com on
operating expenses and net loss; and the sufficiency of cash and cash
equivalents. We caution investors that there can be no assurance that actual
results, outcomes or business conditions will not differ materially from those
projected or suggested in such forward-looking statements as a result of various
factors, including, among others, the Company's limited operating history,
unpredictability of future revenues and operating results, the continued growth
of online commerce, risks associated with international sales, system failure
and capacity constraints and competitive pressures. For further information,
refer to the more specific factors and uncertainties discussed throughout this
report.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Not Applicable
Item 2. Changes in Securities and Use of Proceeds. Not Applicable
Item 3. Defaults Upon Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable
Item 5. Other Information. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits
Exhibit No. 11 ..... Computation of Loss per Share
Exhibit No. 27 ..... Financial Data Schedule
(B) Reports on Form 8-K.
The Company filed with the Securities and Exchange Commission on September 21,
2000, a Current Report on Form 8-K for the September 8, 2000 event reporting the
acquisition of CMPExpress.com, Inc.
The Company filed with the Securities and Exchange Commission on November 17,
2000, a Current Report on Form 8-K for the November 17, 2000 event reporting,
among other things, the election of Katherine N. Vick as President.
The Company filed with the Securities and Exchange Commission on November 27,
2000, Amendment No. 1 to the Current Report on Form 8-K filed September 21, 2000
on Form 8-K/A to incorporate the financial statements of CMPExpress.com, Inc.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: January 11, 2001
CYBERIAN OUTPOST, INC.
By: /s/ Paul D. Williams, III
-------------------------
Paul D. Williams, III
Chief Financial Officer
18
EXHIBIT INDEX
Exhibit
- -------
11 Computation of Loss Per Share
27 Financial Data Schedule
19