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 March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-23901
CYBERSHOP 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 May 7, 1999 was 7,612,062 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 March 31, 1999
(unaudited) and December 31, 1998 2
Consolidated Statements of Operations for the
Three Months ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1999 and 1998 (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 10
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
PART I. FINANCIAL INFORMATION
Item 1. - Financial Statements
CYBERSHOP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 10,674,000 $ 12,285,000
Accounts receivable, net of allowance for doubtful accounts
of $45,000 and $5,000, as of March 31, 1999 and
December 31, 1998, respectively 99,000 176,000
Inventories 655,000 526,000
Prepaid expenses and other 536,000 375,000
------------ ------------
Total current assets 11,964,000 13,362,000
Property and equipment, net 1,934,000 1,944,000
Other assets 97,000 160,000
------------ ------------
Total assets $ 13,995,000 $ 15,466,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,305,000 $ 2,403,000
Accrued liabilities 1,285,000 1,953,000
Deferred revenues 56,000 72,000
------------ ------------
Total current liabilities 4,646,000 4,428,000
Deferred Rent 78,000 49,000
------------ ------------
Total liabilities 4,724,000 4,477,000
------------ ------------
Stockholders' equity:
Common stock, $.001 par value; 25,000,000 shares authorized; 7,539,322 and
7,493,350 shares issued and outstanding as of
March 31, 1999 and December 31, 1998, respectively 8,000 7,000
Additional paid-in capital 18,437,000 18,318,000
Accumulated deficit (9,174,000) (7,336,000)
------------ ------------
Total stockholders' equity 9,271,000 10,989,000
------------ ------------
Total liabilities and stockholders' equity $ 13,995,000 $ 15,466,000
============ ============
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
(UNAUDITED)
Three Months Ended March 31,
---------------------------
1999 1998
----------- -----------
Revenues:
Product sales $ 1,052,000 $ 407,000
Advertising & set up fees 23,000 32,000
----------- -----------
Total revenues 1,075,000 439,000
Cost of revenues 920,000 301,000
----------- -----------
Gross profit 155,000 138,000
Operating expenses 2,247,000 929,000
----------- -----------
Loss from operations (2,092,000) (791,000)
Interest income, net 122,000 7,000
Minority interest 132,000 --
----------- -----------
Net loss $(1,838,000) $ (784,000)
=========== ===========
Net loss per share, basic and diluted $ (0.25) $ (0.18)
Weighted average common shares outstanding, basic and diluted 7,493,000 4,287,000
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
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
Net Loss $ (1,838,000) $ (784,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 162,000 32,000
Non-cash compensation expense 12,000 --
Minority interest (132,000) --
Increase (decrease) in cash from changes in:
Accounts receivable, net 77,000 39,000
Inventories (129,000) (6,000)
Prepaid expenses and other (29,000) (64,000)
Other assets 63,000 182,000
Accounts payable 902,000 (54,000)
Accrued liabilities (668,000) (165,000)
Deferred revenues (16,000) (55,000)
Deferred rent 29,000 2,000
------------ ------------
Net cash used in operating activities (1,567,000) (873,000)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (152,000) (90,000)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock -- 18,893,000
Proceeds from exercise of stock options 108,000 --
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 108,000 18,865,000
------------ ------------
Net increase (decrease) in cash (1,611,000) 17,902,000
Cash and cash equivalents, beginning of period 12,285,000 787,000
------------ ------------
Cash and cash equivalents, end of period $ 10,674,000 $ 18,689,000
============ ============
Supplemental cash flow information:
Cash paid for interest $ 3,000 $ 3,000
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 to customers on the Company's
websites on the World Wide Web at cybershop.com, electronics.net and from its
store that resides on America Online ("AOL").
The information presented as of March 31, 1999 and 1998, and for the
three-month periods then ended, is unaudited, but, in the opinion of 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 March 31, 1999, the results of its operations for the
three-month periods ended March 31, 1999 and 1998 and its cash flows for the
three-month periods ended March 31, 1999 and 1998. 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 and accompanying notes for
the year ended December 31, 1998, included in the Company's annual report on
Form 10-K as filed with the Securities and Exchange Commission. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
2. Business Combination
On March 24, 1999 the Company issued 250,000 shares of common stock in
exchange for all of the outstanding common stock of Dealaday, Inc ("Dealaday").
Dealaday, an internet retailer targeting off-price branded women's and
children's apparel and accessory products, began operations in February, 1998.
The transaction was accounted for as a pooling of interests and, as a result,
the Company's financial statements have been restated for all periods presented.
Net sales and net losses for Dealaday were $90,000 and $42,000 for the
three-month period ending March 31, 1999, and $17,000, and $9,000 for the
three-month period ending March 31, 1998.
3. Commitments and Contingencies
Marketing Agreements
The Company has entered into certain marketing agreements, which include
fixed fees through the year 2000. The expenses associated with these agreements
are recognized on a systematic basis over the term of the related agreements as
services are received. Future minimum commitments under the terms of these
agreements are $873,000 during the remainder of 1999 and $125,000 during 2000.
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 matters such as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical and anticipated results or other expectations
expressed in the Company's forward looking statements. Such forward-looking
statements may be identified by the use of certain forward-looking terminology,
such as "may," "will," "expect," "anticipate," "intend," "estimate," "believe,"
"goal," or "continue," or comparable terminology that involves risks or
uncertainties. Actual future results and trends may differ materially from
historical results or those anticipated depending on a variety of factors,
including, but not limited to those set forth under "Overview" and "Liquidity
and Capital Resources" included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations. Except as required by law, the
Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company has filed or files from time to time with the
Securities and Exchange Commission.
Overview
The Company sells brand name merchandise through it's online stores
located on the World Wide Web at cybershop.com and electronics.net, and in the
Department Store Area of the America Online ("AOL") Shopping Channel. The
Company has been selling merchandise at cybershop.com since September 1995, on
AOL since November 1996, and on electronics.net since June 1998. Accordingly,
the Company has a limited operating history.
electronics.net is the result of a joint venture formed 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 offers a wide selection of consumer electronics,
appliances and computers.
6
The Company has pursued strategic alliances that are intended to generate
additional referral traffic to each online store. Aside from the joint venture
with TOPS, the Company has established marketing agreements with premier
internet companies such as AOL, Excite, MSN and E*TRADE. Additionally, during
the first quarter, the Company signed new strategic marketing agreements with
Yahoo! for a term expiring on December 31, 1999 and infoseek for a term expiring
on June 15, 1999.
The Company also announced, during the first quarter, its intention to
shift its merchandising strategy, targeting off-price branded merchandise found
in outlets and traditional discount retailers. The Company initiated a
significant overhaul of its infrastructure, migrating its web-based order
processing onto a new platform, redesigning the web site and integrating it with
a new order fulfillment system. In addition, the Company launched its new online
auction, CyberShop Auctions http://auctions.cybershop.com. With this initiative,
the Company introduced the excitement of the online auction experience to all
its customers, complementing its existing product offerings. The initiative also
offers the Company a new way to attract customers, learn more about their
shopping preferences and provide an outlet for excess inventory.
Recognizing the importance of customer satisfaction, beginning in the
first quarter of 1999 the Company began its transition to an inventory-based
model, developing a new distribution and fulfillment center in the first
quarter. This facility enables orders to be shipped within 24 hours. It is
anticipated that during the remainder of 1999 the Company will continue to
increase the amount of inventory maintained for immediate shipment to customers.
It is also anticipated that significant emphasis will be placed on the offering
of a more limited range of brand name first quality merchandise at substantial
discounts.
The Company intends to increase its operating expenses to continue 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.
Results of Operations
Three Months Ended March 31, 1999 compared to Three Months Ended March 31, 1998.
Revenues: Revenue is comprised of sales of products offered in the Company's
on-line stores and vendor set-up fees. 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. Total revenues increased
by 145%, or $636,000, from $439,000 in the first quarter of 1998 to $1,075,000
in the first quarter of 1999. Product sales increased by 159%, or $645,000, from
$407,000 in the first quarter of 1998 to $1,052,000 in the first quarter of
1999. This increase was primarily attributable to increased marketing efforts,
an expanded customer base, repeat purchases from existing customers and strong
sales of one product, which represented approximately 21% of total revenues in
the three months ended March 31, 1999. Advertising and set-up fees decreased by
28%, or $9,000, from $32,000 in the first quarter of 1998 to $23,000 in the
first quarter of 1999, as a result of a decrease in emphasis on charging set-up
fees and an increase in emphasis on product sales.
7
Cost of Revenues: Cost of revenues consists primarily of the cost of products
sold to customers, including shipping costs. Costs of revenues increased by
206%, or $619,000, from $301,000 in the first quarter of 1998 to $920,000 in the
first quarter of 1999, primarily due to increased product sales and a change in
merchandise mix. Gross profit margins related to product sales were 12.5% in the
first quarter of 1999 compared to 26.0% in the first quarter of 1998. The
decrease from 1998 to 1999 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 1999 than in 1998.
Operating Expenses: Operating expenses consist primarily of personnel expenses,
on-line, radio and print advertising, public relations and other promotional
expenses and general corporate expenses. Operating expenses increased by 142%,
or $1,318,000, from $929,000 in the first quarter of 1998 to $2,247,000 in the
first quarter of 1999. The increase is primarily attributable to higher
advertising and promotional expenses, including a full quarters effect in 1999
of several strategic marketing agreements begun in 1998, including increases in
fees such as those to AOL, and also the effect of new agreements entered into
during the first quarter of 1999. In addition, personnel and general corporate
costs related to the increased infrastructure of the Company increased
significantly.
Interest Income, net: The increase from 1998 to 1999 is primarily due to the
interest income earned on the remaining net proceeds from the Company's initial
public offering of common stock in March 1998.
Minority Interest: Minority interest of $132,000 in the first quarter of 1999
represents 49% of the net loss attributable to electronics.net, a 51% owned
subsidiary.
Liquidity and Capital Resources
Net cash used in operations was $1,567,000 and $873,000 during the first
quarter of 1999 and 1998, respectively. The increase in cash used in the first
quarter of 1999 is primarily attributable to the additional net loss as well as
a $129,000 increase in inventory levels as the Company began migrating towards
an inventory based model and started stocking its new distribution and
fulfillment center, offset by a $234,000 increase in accounts payable and
accrued liabilities.
Capital expenditures, primarily for computer equipment and software to
support the Company's expansion and increased infrastructure were $152,000
during the first quarter of 1999. No other material commitments for capital
expenditures are currently outstanding or contemplated.
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 March 31, 1999, the
Company had cash and cash equivalents of $10,674,000, working capital of
$7,318,000, stockholders' equity of $9,271,000 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.
8
Year 2000
The Company believes that its computer systems and software products are
fully year 2000 compliant. However, it is possible that certain computer systems
or software products of the Company's suppliers or customers may not accept
input of, store, manipulate and output dates in the year 2000 or thereafter
without error or interruption. The Company is querying its current suppliers as
to their progress in identifying and addressing problems that their computer
systems will face in correctly processing date information as the year 2000
approaches. However, there can be no assurance that all date-handling problems
of its suppliers will be identified by the Company or its suppliers in advance
of their occurrence, or that the Company or the suppliers will be able to
successfully remedy problems that are discovered. In the event that problems are
discovered with its current suppliers which cannot be remedied the Company
intends to seek alternative suppliers who are fully year 2000 compatible. The
Company believes that most of its current customers who access its website are
using software that is fully year 2000 compatible. The Company may, however, be
required to make significant expenditures to address or remedy any year 2000
problems of its customers or vendors which are not identified in advance, or to
satisfy liabilities to which the Company may become subject as a result of such
problems.
9
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 Securities and Exchange Commission.
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 net offering proceeds to the Company after deducting underwriting
discounts and commissions and other expenses was $18,749,000.
From the effective date of the Registration Statement through March 31,
1999 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 $1,713,000
Purchase of real estate $ --
Acquisition of other business $ --
Repayment of indebtedness $ 500,000
Working capital $6,235,000
Temporary investments $9,952,000
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 used 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.
10
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:
10.1 Stock Purchase Agreement dated March 24, 1999, by and between Edward
Mufson and Cybershop International, Inc.
10.2 Employment Agreement dated March 24, 1999, by and between Edward
Mufson and Cybershop International, Inc.
10.3 Employment Agreement dated February 7, 1999, by and between Jeffrey
Leist and Cybershop International, Inc.
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, 1999.
None.
11
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: May 17, 1999 By: /s/ Jeffrey S. Tauber
--------------------------------------------
Jeffrey S. Tauber
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: May 17, 1999 By: /s/ Jeffrey Leist
--------------------------------------------
Jeffrey Leist
Senior Vice President and Chief Operating
and Financial Officer (Principal Financial
and Accounting Officer)
12
Exhibit Index
27. Financial Data Schedule.
13