FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-23901
CYBERSHOP INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3979226
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
116 Newark Avenue, Jersey City, NJ 07302
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 234-5000
----------------
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
The number of shares of the Registrant's common stock, par value $.001 per
share, outstanding on November 10, 1998 was 7,220,000 shares.
CYBERSHOP INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 2
Consolidated Statements of Operations for the Three Months
and Nine Months ended September 30, 1998 and 1997
(unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1998 and 1997 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 9
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
PART I. FINANCIAL INFORMATION
Item 1. - Financial Statements
CYBERSHOP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
ASSETS September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 14,726,000 $ 787,000
Accounts receivable, net 46,000 66,000
Inventories 8,000 31,000
Prepaid expenses and other 261,000 --
------------ -----------
Total current assets 15,041,000 884,000
Property and equipment, net 1,946,000 132,000
Other assets 104,000 211,000
------------ -----------
Total assets $ 17,091,000 $ 1,227,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,585,000 $ 740,000
Accrued liabilities 109,000 324,000
Deferred revenues 60,000 135,000
Current portion of capital lease obligations -- 13,000
------------ -----------
Total current liabilities 1,754,000 1,212,000
Deferred rent 20,000 5,000
Capital lease obligations -- 15,000
Minority interest 86,000 --
------------ -----------
Total liabilities 1,860,000 1,232,000
------------ -----------
Stockholders' equity (deficit):
Members capital interest -- 3,139,000
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.001 par value; 25,000,000 shares authorized;
7,220,000 shares issued and outstanding at June 30, 1998 7,000 --
Additional paid-in capital 18,107,000 --
Accumulated deficit (2,883,000) (3,144,000)
------------ -----------
Total stockholders' equity (deficit) 15,231,000 (5,000)
------------ -----------
Total liabilities and stockholders' equity (deficit) $ 17,091,000 $ 1,227,000
============ ===========
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these consolidated statements.
2
CYBERSHOP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues:
Product sales $ 424,000 $ 165,000 $ 1,308,000 $ 496,000
Set up fees 30,000 40,000 92,000 151,000
----------- ----------- ----------- -----------
Total revenues 454,000 205,000 1,400,000 647,000
Cost of revenues 337,000 120,000 1,008,000 365,000
----------- ----------- ----------- -----------
Gross profit 117,000 85,000 392,000 282,000
Operating expenses 1,459,000 425,000 4,378,000 1,313,000
----------- ----------- ----------- -----------
Loss from operations (1,342,000) (340,000) (3,986,000) (1,031,000)
Other, net 224,000 9,000 473,000 15,000
----------- ----------- ----------- -----------
Net loss $(1,118,000) $ (331,000) $(3,513,000) $(1,016,000)
=========== =========== =========== ===========
Net loss per share, basic and diluted $ (0.15) $ (0.08) $ (0.57) $ (0.28)
=========== =========== =========== ===========
Weighted average common shares
outstanding, basic and diluted 7,220,000 4,000,000 6,206,297 3,691,069
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these consolidated statements.
3
CYBERSHOP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
------------ -----------
Cash flows from operating activities:
Net loss $ (3,513,000) $(1,016,000)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 122,000 55,000
Minority interest (12,000) --
Increase (decrease) in cash from changes in:
Accounts receivable, net 20,000 (28,000)
Inventories 23,000 --
Prepaid expenses and other (261,000) --
Other assets 107,000 --
Accounts payable 845,000 (69,000)
Accrued liabilities (215,000) (102,000)
Deferred revenues (75,000) (71,000)
Deferred rent 15,000 3,000
------------ -----------
Net cash used in operating activities (2,944,000) (1,228,000)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (1,936,000) (81,000)
------------ -----------
Cash flows from financing activities:
Net proceeds from sale of common stock 18,749,000 1,550,000
Minority capital contribution in joint venture 98,000 --
Proceeds of short-term loan 500,000 --
Repayment of short-term loan (500,000) --
Payments of capital lease obligations (28,000) --
------------ -----------
Net cash provided by financing activities 18,819,000 1,550,000
------------ -----------
Net increase (decrease) in cash 13,939,000 241,000
Cash and cash equivalents, beginning of period 787,000 510,000
------------ -----------
Cash and cash equivalents, end of period $ 14,726,000 $ 751,000
============ ===========
The accompanying notes to the unaudited consolidated financial
statements are an integral part of these consolidated statements.
4
CYBERSHOP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description of the Business and Basis of Presentation.
CyberShop International, Inc. and subsidiaries (the "Company") is an
online retailer that offers brand name products from manufacturers to customers
on the Company's websites on the World Wide Web at cybershop.com,
electronics.net and egift.com and from its store that resides on America Online
("AOL").
On March 18, 1998, the members of CyberShop L.L.C. contributed all of
their members capital interests in exchange for 4,000,000 shares of common stock
of CyberShop International, Inc. Both entities were under common control, which
resulted in the transaction being accounted for comparable to a pooling of
interests. This contribution resulted in a transfer of the balances of members
capital interests and accumulated deficit to common stock and additional paid in
capital at the time of the contribution.
The information presented for September 30, 1998 and 1997, and for the
three and nine-month periods then ended, is unaudited, but, in the opinion of
the management of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for the fair presentation of
the Company's financial position as of September 30, 1998, the results of its
operations for the three and nine-month periods ended September 30, 1998 and
1997 and its cash flows for the nine month periods ended September 30, 1998 and
1997. The consolidated financial statements included herein have been prepared
in accordance with generally accepted accounting principles and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year ended
December 31, 1997, which were included as part of the Company's Form S-1, as
amended, as filed with the Securities and Exchange Commission (the "SEC").
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
2. Public Offering of Common Stock.
On March 26, 1998, the Company completed its initial public offering of
3,220,000 shares of common stock at a price of $6.50 per share. Net proceeds
from this offering, net of underwriting discounts and offering costs, were
$18,749,000.
3. Short-Term Loan.
On March 19, 1998, the Trustees of General Electric Pension Trust loaned
the Company $500,000 at an interest rate of 15% per annum. The proceeds of the
loan were utilized by the Company for working capital purposes. Jeffrey S.
Tauber pledged 172,500 of his shares of Common Stock as security for the loan.
The loan was repaid on March 27, 1998.
5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Safe Harbor for Forward-Looking Statements
From time to time, the Company may publish statements which are not
historical fact, but are forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements.
These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical and anticipated results or other expectations expressed in the
Company's forward looking statements. Such forward-looking statements may be
identified by the use of certain forward-looking terminology, such as "may,"
"will," "expect," "anticipate," "intend," "estimate," "believe," "goal," or
"continue," or comparable terminology that involves risks or uncertainties.
Actual future results and trends may differ materially from historical results
or those anticipated depending on a variety of factors, including, but not
limited to those set forth under "Overview" and "Liquidity and Capital
Resources" included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations. Particular attention should be paid to the
cautionary statements involving the Company's limited operating history, the
unpredictability of its future revenues, the unpredictable and evolving nature
of its key markets, the intensely competitive on-line commerce environment, the
Company's dependence on its strategic alliances and key suppliers and
distributors, and the risks associated with capacity constraints, systems
development, and the management of growth. Except as required by law, the
Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company has filed or files from time to time with the SEC.
Overview
CyberShop was in a test period from its inception in December 1994 until
it commenced its operations in September 1995 and is still in the early stages
of development. The Company did not have revenues, cost of revenues or gross
profit from inception on December 1, 1994 through December 31, 1994. In 1995 and
throughout most of 1996, the Company's primary activities related to
establishing relationships with manufacturers, which resulted in the payment of
set up fees by certain manufacturers to display products in the Company's
on-line stores, and developing the Company's proprietary systems operating
procedures. The Company has been selling merchandise on the Internet since
September 1995 and on AOL since November 1996. Accordingly, the Company has a
limited operating history and is still in the early stages of development.
In June 1998, the Company signed a definitive agreement forming a joint
venture to develop a new web site with Tops Appliance City ("TOPS"), a leading
consumer electronics, appliance and computer retailer. The Company owns 51% of
the joint venture with TOPS owning the remaining 49%. The new site,
electronics.net, began selling consumer electronics, appliances and computers on
the Internet on October 29, 1998.
The Company recognizes product revenues when goods are shipped to the
customer. Typically, the Company receives payment from the customer's credit
card through a financial institution within two to four business days. The
amount received by the Company is net of any credit card transaction fees
deducted by the financial institution. The Company carries minimal inventory and
typically pays its vendors for goods within 30 to 60 days.
The Company intends to increase its operating expenses to fund increased
marketing and advertising, to enhance existing stores and to establish strategic
relationships important to the success of the Company. The Company expects that
it will continue to incur net losses and generate negative cash flow from
operations for the foreseeable future as it continues to develop its business
and no assurance can be given as to when, if at all, the Company will achieve
profitability.
6
Results of Operations
Three Months Ended September 30, 1998 compared to Three Months Ended September
30, 1997.
Revenues: Revenue is comprised of sales of products offered in the Company's
on-line stores and vendor set-up fees. Total revenues increased by 121%, or
$249,000, from $205,000 in the third quarter of 1997 to $454,000 in the third
quarter of 1998. Product sales increased by 157%, or $259,000, from $165,000 in
the third quarter of 1997 to $424,000 in the third quarter of 1998. This
increase was primarily attributable to increased marketing efforts, an expanded
customer base and repeat purchases from existing customers. Set-up fees
decreased by 25%, or $10,000, from $40,000 in the third quarter of 1997 to
$30,000 in the third quarter of 1998, as a result of a decrease in emphasis on
charging set-up fees and an increase in emphasis on product sales.
Cost of Revenues: Cost of revenues consists primarily of the cost of products
sold to customers, including shipping and handling. Costs of revenues increased
by 181%, or $217,000, from $120,000 in the third quarter of 1997 to $337,000 in
the second quarter of 1998, primarily due to increased product sales. Gross
profit margins related to product sales were 20.5% in the third quarter of 1998
compared to 27.3% in the third quarter of 1997. The decrease from 1997 to 1998
is primarily attributed to higher promotional discounts and an unfavorable
change in product mix, as the consumer electronics category, which typically
yields lower than average gross profit margins, represented a higher percentage
of total sales in 1998 than in 1997.
Operating Expenses: Operating expenses consist primarily of personnel expenses,
on-line, radio and print advertising, public relations and other promotional
expenses, including payments to AOL, and general corporate expenses. Operating
expenses increased by 243%, or $1,034,000, from $425,000 in the third quarter of
1997 to $1,459,000 in the third quarter of 1998. The increases were primarily
attributable to higher advertising and promotional expenses, several strategic
marketing agreements began in 1998, and fees to AOL increased significantly from
the prior year. In addition, personnel and general corporate costs related to
the increased infrastructure of the Company increased significantly.
Other, net: The increase from 1997 to 1998 is primarily due to the interest
income earned on the remaining net proceeds from the Company's IPO in March 1998
and $12,000 of minority interest income attributable to the electronics.net
joint venture.
Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30,
1997.
Revenues: Revenue is comprised of sales of products offered in the Company's
on-line stores and vendor set-up fees. Total revenues increased by 116%, or
$753,000, from $647,000 in the first nine months of 1997 to $1,400,000 in the
first nine months of 1998. Product sales increased by 164%, or $812,000, from
$496,000 in the first nine months of 1997 to $1,308,000 in the first nine months
of 1998. This increase was primarily attributable to increased marketing
efforts, an expanded customer base and repeat purchases from existing customers.
Set-up fees decreased by 39%, or $59,000, from $151,000 in the first nine months
of 1997 to $92,000 in the first nine months of 1998, as a result of a decrease
in emphasis on charging set-up fees and an increase in emphasis on product
sales.
Cost of Revenues: Cost of revenues consists primarily of the cost of products
sold to customers, including shipping and handling. Costs of revenues increased
by 176%, or $643,000, from $365,000 in the first nine months of 1997 to
$1,008,000 in the first nine months of 1998, primarily due to increased product
sales. Gross profit margins related to product sales were 22.9% in the first
nine months of 1998 compared to 26.4% in the first nine months of 1997. The
decrease from 1997 to 1998 is primarily attributed to higher promotional
discounts and an unfavorable change in product mix, as the consumer electronics
category, which typically yields lower than average gross profit margins,
represented a higher percentage of total sales in 1998 than in 1997.
7
Operating Expenses: Operating expenses consist primarily of personnel expenses,
on-line, radio and print advertising, public relations and other promotional
expenses, including payments to AOL, and general corporate expenses. Operating
expenses increased by 233%, or $3,065,000, from $1,313,000 in the first nine
months of 1997 to $4,378,000 in the first nine months of 1998. The increases
were primarily attributable to higher advertising and promotional expenses, an
increase in AOL fees, and higher personnel and general corporate costs related
to the increased infrastructure of the Company.
Other, net: The increase from 1997 to 1998 is primarily due to the interest
income earned on the remaining net proceeds from the Company's IPO in March 1998
and $12,000 of minority interest income attributable to the electronics.net
joint venture.
Liquidity and Capital Resources
On March 26, 1998, the Company completed its initial public offering
("IPO") of 3,220,000 shares of Common Stock at a price of $6.50 per share. Net
proceeds from the IPO, net of underwriting discounts and offering costs, were
$18,749,000. Prior to the IPO, the Company had financed its operations primarily
from capital contributions from private investors. At September 30, 1998, the
Company had cash and cash equivalents of $14,726,000, working capital of
$13,287,000, stockholders' equity of $15,231,000 and no debt. The Company
believes that its existing capital resources will enable it to maintain its
operations for at least the next twelve months.
Net cash used in operations in the first nine months of 1998 was
$2,944,000, primarily due to the $3,513,000 net loss.
Capital expenditures, primarily for computer equipment and software to
support the Company's expansion and increased infrastructure and leasehold
improvements, furniture and equipment relating to the Company's new office space
in Jersey City, New Jersey, were $1,936,000 in the first nine months of 1998. In
1998, the Company entered into agreements to purchase and install new state of
the art integrated electronic commerce and accounting software for approximately
$1,400,000, of which $1,032,000 was purchased through September 30, 1998. The
remaining balance will be purchased in the fourth quarter of 1998. In addition,
in June 1998, the Company entered into a 10-year lease for space in Jersey City,
New Jersey. The Company made capital expenditures for leasehold improvements,
furniture and equipment relating to this space of approximately $575,000 in the
third quarter of 1998. The Company moved into the new space in late August,
1998. No other material commitments for capital expenditures are currently
outstanding or contemplated.
The Company believes that its computer systems and software products
including its new software described above are fully year 2000 compatible.
However, it is possible that certain computer systems or software products of
the Company's suppliers or customers may not accept input of, store, manipulate
and output dates in the year 2000 or thereafter without error or interruption.
The Company is querying its current suppliers as to their progress in
identifying and addressing problems that their computer systems will face in
correctly processing date information as the year 2000 approaches. However,
there can be no assurance that all date-handling problems of its suppliers will
be identified by the Company or its suppliers in advance of their occurrence, or
that the Company or the suppliers will be able to successfully remedy problems
that are discovered. In the event that problems are discovered with its current
suppliers which cannot be remedied the Company intends to seek alternative
suppliers who are fully year 2000 compatible. The Company believes that most of
its current customers who access its website are using software which is fully
year 2000 compatible. The Company may, however, be required to make significant
expenditures to address or remedy any year 2000 problems of its customers or
vendors which are not identified in advance, or to satisfy liabilities to which
the Company may become subject as a result of such problems.
8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On March 20, 1998 the Company's Registration Statement on Form S-1 (File
No. 333-42707) was declared effective by the SEC. Pursuant to the Registration
Statement the Company registered and sold 3,220,000 shares of Common Stock at a
price of $6.50 per share. The managing underwriters were C.E. Unterberg, Towbin
and Fahnestock & Co. Inc. The aggregate price of the amount offered and sold was
$20,930,000.
The following sets forth the Company's reasonable estimates of the total
expenses incurred by the Company, from the effective date of the Registration
Statement through September 30, 1998, in connection with the issuance and
distribution of the securities registered.
(i) underwriting discounts and commissions $1,465,000
(ii) finders' fees --
(iii) expenses paid to or for underwriters --
(iv) other expenses 716,000
----------
Total $2,181,000
==========
None of the above payments were direct or indirect payments to the
Company's officers or directors, persons owning 10% or more of the Common Stock,
affiliates of the Company or other persons.
The net offering proceeds to the Company after deducting the total
expenses set forth above were $18,749,000.
From the effective date of the Registration Statement through September
30, 1998 the Company used the following amounts from the net offering proceeds
for the purposes set forth below:
Construction of plant $ --
Building, facilities and leasehold
improvements 349,000
Purchase and installation
of machinery, equipment and software 1,506,000
Purchase of real estate --
Acquisition of other business --
Repayment of indebtedness 500,000
Working capital 1,668,000
Temporary investments $14,726,000
On March 19, 1998, the Trustees of General Electric Pension Trust loaned
the Company $500,000 at an interest rate of 15% per annum. The proceeds of the
loan were utilized by the Company for working capital purposes. Jeffrey S.
Tauber pledged 172,500 of his shares of Common Stock as security for the loan.
The loan was repaid on March 27, 1998.
The use of proceeds set forth above does not represent a material change
in the use of proceeds described in the Registration Statement.
9
Item 6. Exhibits and Reports on Form 8-K
a. The following is a list of exhibits filed as part of this Form 10-Q:
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession: None
3. Articles of Incorporation:
3.1 Certificate of Incorporation, as amended and as currently in effect
(Incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-42707).
By-Laws:
3.2 By-Laws as currently in effect (Incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 (File No.
333-42707).
10. Material Contracts: None
11. Statement re computation of per share earnings: Statement regarding
computation of per share earnings is not required because the computation
can be readily determined from the material contained in the financial
statements included herein.
15. Letter re unaudited financial information: None
16. Letter re change in accounting principles: None
19. Report furnished to security holders: None
22. Published report regarding matters submitted to vote of security holders:
None
23. Consents of Experts and Counsel: None
24. Power of Attorney: None
27. Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only
99. Additional Exhibits: None
b. Reports on Form 8-K, 1998.
None.
10
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 11, 1998 By: /s/ Jeffrey S. Tauber
-----------------------
Jeffrey S. Tauber
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 11, 1998 By: /s/ Gary S. Finkel
-----------------------
Gary S. Finkel
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
11
Exhibit Index
27. Financial Data Schedule.
12